Management's Discussion and Analysis
Northwestern Public Service is a diversified energy distribution company
with core operations engaged in the propane, electric and natural gas
industries.
Northwestern generates and distributes electric energy to 56,000 customers
in eastern South Dakota and purchases and distributes natural gas to 77,000
customers in eastern South Dakota and four communities in Nebraska.
The Company acquired Synergy Group Incorporated, a major retail propane
distributor in August 1995. In 1996, Northwestern acquired eight
additional propane companies, including Empire Energy Corporation in
October, then the eighth largest retail marketer of propane in the U.S.,
and CGI Holdings, Inc., then the eighteenth largest retail marketer of
propane in the U.S. in December. Also in December 1996, Northwestern
combined all of its propane businesses into Cornerstone Propane Partners,
L.P., (Cornerstone) a publicly traded master limited partnership which sold
9.8 million common units to the public on December 17, 1996, at a price of
$21 per unit. Net proceeds from the offering of common units, together
with the concurrent sale of $220 million of senior secured notes by a
subsidiary partnership, were used to redeem preferred stock of the combined
propane entities and repay acquisition loans and existing debt.
Northwestern's majority-owned subsidiaries hold 6.9 million subordinated
units or 41.4% of Cornerstone, while public unitholders, own 58.6% of the
Partnership. Cornerstone is the fifth largest retail propane marketer in
the U.S., serving approximately 360,000 customers from 312 service centers
in 26 states.
Weather
- -------
Weather patterns have a significant impact on the Company's operating
performance. Because propane and natural gas are heavily used for
residential and commercial heating, the demand for these products depends
upon weather patterns throughout the Company's market areas. With a larger
proportion of its operations related to seasonal propane and natural gas
sales in 1997, the distribution of the Company's quarterly operating
performance will be different than in historical periods. A greater portion
of the Company's future operating income is expected to be recognized in
the first and fourth quarters related to higher revenues from the winter
heating season.
Earnings
- --------
Earnings for 1996 were $22.9 million or $2.56 per share, compared to $18.0
million or $2.21 per share for 1995. Earnings per share for 1996 included
$.19 related to a one-time gain from proceeds received related to the
Cornerstone refinancing transactions. Earnings from ongoing operations
were $2.37 per share, up 7.2% from $2.21 per share in 1995. The earnings
increase was primarily due to slightly colder weather, propane
acquisitions, improved natural gas returns and increased investment income.
Earnings per share in 1995 were $2.21 compared to $2.00 in 1994. The
increase was primarily due to greater electric retail sales, modest gas
rate relief, and increased contributions from nonregulated businesses,
principally propane. Earnings for 1995 included propane operations since
August 1995.
Dividends
- ---------
In November 1995, the Company's Board of Directors elected to increase
annual dividends per share from $1.70 to $1.76. Subsequently, in November
1996, the Board approved an eight cent per share increase in annual
dividends from $1.76 to $1.84. The Company's financial strength, operating
performance, the success of its growth strategies and competitive changes
in the industry will be factors considered by the Company's Board of
Directors when evaluating future dividend payments.
- -------------------------
Business Segment Summary
- -------------------------
Year Ended Increase Increase
December 31 1996 1995 (Decrease) 1994 (Decrease)
(thousands of dollars)
-------- ------- --------------- -------- ------------
REVENUES
Propane $175,102 $38,883 $136,219 350.3% - $38,883 -
Electric 73,417 74,857 (1,440) (1.9%) $73,077 1,780 2.4%
Natural Gas 72,269 64,483 7,786 12.1% 62,141 2,342 3.8%
Manufacturing 23,221 26,747 (3,526)(13.2%) 22,047 4,700 21.3%
OPERATING INCOME
Propane $ 18,947 $ 5,604 $ 13,343 238.1% - $ 5,604 -
Electric 24,475 26,003 (1,528) (5.9%) $25,662 341 1.3%
Natural Gas 5,684 3,862 1,822 47.2% 2,540 1,322 52.0%
Manufacturing 1,312 2,628 (1,316)(50.1%) 2,334 294 12.6%
OPERATING DATA
Propane sales-
(000 gallons) 160,005 37,805 122,200 323.2% - 37,805 -
Electric sales-retail
(000 mwh) 1,083 1,071 12 1.1% 1,019 52 5.1%
Natural Gas throughput
(000 mmbtu) 16,321 15,204 1,117 7.3% 14,750 454 3.1%
- ---------------------
Results of Operations
- ---------------------
PROPANE
(graph of information in following table)
Revenue Growth (000's)
Propane Electric Natural Gas Manufacturing
-------- --------- ----------- -------------
1994 - 73,077 62,141 22,047
1995 38,883 74,858 64,483 26,747
1996 175,102 73,417 72,269 23,221
(end of graph)
Propane operations include revenues from Cornerstone since December 18,
1996, Empire Energy Corporation since October 7, 1996, and Synergy Group
Incorporated for all of 1996. Weather throughout Synergy's propane service
area was about 5% colder than normal while weather throughout Empire
Energy's area was about 3% colder than normal since acquisition. Because
of the heavy use of propane for heating, propane sales are extremely
weather sensitive. The majority of propane revenues occur in the first and
fourth quarters when propane is heavily sold for residential and commercial
heating.
Operating revenue from propane sales increased in 1996 to $175.1 from $38.9
million in 1995. Operating income increased in 1996 to $18.9 million from
$5.6 million in 1995. The large increases in sales and operating income
are primarily due to a full year of operations for Synergy which was
acquired in August 1995, the acquisition of Empire Energy in October 1996
and the formation of Cornerstone in December 1996. The increases are also
partly due to slightly colder than normal weather in the Company's propane
market areas.
In accordance with the Company's plans, substantial changes are being made
in the management and operation of the acquired propane businesses in order
to achieve improvement in the results of operations. Among the cost
efficiency measures being put into place to reduce operating, selling and
administrative expenses is the consolidation of corporate functions of all
the acquired propane businesses.
ELECTRIC
(graph of information in following table)
Electric Retail Sales
(000 kwh)
-------------------------------
1994 1,018,509
1995 1,071,328
1996 1,082,704
(end of graph)
In 1996, retail electric mwh sales grew by 1% even though weather during
the summer was approximately 20% cooler than the previous year. Electric
revenues decreased slightly due to a decline in wholesale sales. Operating
income decreased due to the slight decrease in revenues combined with
increases in growth-related costs in expanded energy services, marketing
functions and property taxes. Property taxes increased significantly in
1996 due primarily to changes in South Dakota's tax regulations.
1995 vs. 1994. In 1995, revenue increases were related to a 5.1% increase
in retail kwh sales over 1994. In 1995, the Company set a new record for
peak electric demand during the summer exceeding the previous peak record
set in 1991 by 8%. The increase in electric operating income reflects the
higher retail sales, offset by slightly higher operating expenses.
Maintenance expense declined slightly while depreciation and property taxes
reflect the increase in depreciable plant.
NATURAL GAS
(graph of information in following table)
Gas Throughput
000 mmbtu
----------------------------
1994 14,750
1995 15,204
1996 16,321
(end of graph)
One of the predominant factors affecting the Company's natural gas
operations is weather patterns during the winter heating season. Because
natural gas is heavily used for residential and commercial heating, the
demand for this product depends upon weather conditions. In 1996, the
increase in natural gas revenues over 1995 reflects the effects of cooler
weather, higher market prices for natural gas supply which are passed on to
customers through the purchased gas adjustment mechanism and a slight
increase in customers.
The increase in gas operating income reflects a 7.3% increase in
throughput, offset by slightly higher operating expenses. The increase in
other operating expenses was primarily due to growth-related costs in the
expanded energy services and marketing functions. Maintenance expense
decreased slightly while property taxes increased due to changes in South
Dakota tax regulations.
1995 vs. 1994. Cooler weather patterns during the heating season resulted
in a 3.8% increase in gas revenues. Natural gas revenues include an
overall rate increase in South Dakota implemented on November 15, 1994, and
an overall increase in Nebraska effective April 1, 1995. The increase in
operating income was related to a 3.1% increase in throughput and effects
of rate increases, offset by slightly higher operating expenses.
Maintenance expense declined slightly while depreciation and property taxes
reflect the increase in depreciable plant.
MANUFACTURING
Manufacturing revenues and operating income are related to the Company's
ownership interest in Lucht Inc., a company that manufactures photographic
processing and imaging equipment used by high-volume photo processing
laboratories. Operating income in 1996 decreased when compared to 1995 due
to decreased sales resulting from manufacturing delays in product
development. Operating income in 1995 increased by 12.6% over 1994 due to
acquisitions and an increase in sales of existing product lines.
OTHER INCOME STATEMENT ITEMS
Other income increased in 1996 over 1995 primarily due to a one-time gain
realized by the Company related to the Cornerstone transaction. The gain
is attributed to various prepayment and redemption premiums realized when
propane assets and liabilities were contributed to Cornerstone. Other
income also includes the gain on the sale of a portion of a common stock
investment.
- -------------------------------
Liquidity and Capital Resources
- -------------------------------
During 1996, cash flow from operations, net of dividends paid, together
with proceeds from the Cornerstone equity and debt offerings and other
external financing activities, provided the funds for propane and other
acquisition activities, construction expenditures and other requirements.
Operating Activities
- --------------------
(graph of information in following table)
Cash Flows From
Operating Activities
-------------------------
1994 26,268,921
1995 35,366,960
1996 60,903,017
(end of graph)
Cash flow from operating activities in 1996 increased 66% from 1995
primarily due to propane acquisitions and growth in the Company's earnings.
Liquidity is also provided from the availability of substantial cash and
investment balances. Cash equivalents and marketable securities totaled
$179.9 million, $44.7 million and $39.2 million at December 31, 1996, 1995
and 1994.
Investment Activities - Financing Activities
- ---------------------------------------------
The Company's principal investments and capital requirements in 1996 were
related to the acquisition of retail propane distributors Empire Energy
Corporation and CGI Holdings, Inc. which were refinanced by the Cornerstone
equity and debt offerings. The Cornerstone partnership sold 9.8 million
common units to the public with net proceeds of approximately $192 million
and also issued, in conjunction with the partnership public offering, $220
million of nonrecourse 7.53% series senior mortgage notes maturing in 2010
with eight equal annual installments beginning in the year 2003.
Working capital and other financial resources are also provided by unused
lines of credit which are generally used to support commercial paper
borrowings, a primary source of short-term financing. At December 31,
1996, the Company had no outstanding borrowings under its lines of credit
or commercial paper borrowings. Unused short-term lines of credit totaled
$24 million at December 31, 1996. In addition, the Company's nonregulated
businesses maintain credit agreements with various banks for revolving and
term loans.
The Company will continue to review the economics of retiring or refunding
long-term debt and preferred stock to minimize long-term financing costs.
The Company's financial coverages are at levels in excess of those required
for the issuance of additional debt and preferred stock.
- --------------------
Capital Requirements
- --------------------
The Company's primary capital requirements include the funding of its
energy business construction and expansion programs, the funding of debt
and preferred stock retirements, sinking fund requirements and the funding
of its corporate development and investment activities.
The emphasis of the Company's construction activities is to undertake those
projects that most efficiently serve the expanding needs of its customer
base, enhance energy delivery and reliability capabilities through system
replacement and provide for the reliability of energy supply. Capital
expenditure plans are subject to continual review and may be revised as a
result of changing economic conditions, variations in sales, environmental
requirements, investment opportunities and other ongoing considerations.
Expenditures for construction activities for 1996, 1995 and 1994 were $35.2
million, $29.6 million and $22.7 million. Construction expenditures during
the last three years included expenditures related to an operations center
expected to provide enhanced customer service capability, cost savings and
operating efficiencies through consolidation of activities and the
expansion of the Company's natural gas system in eastern South Dakota. In
addition, 1996 and 1995 included $9.8 million and $4.7 million of capital
expenditures related to propane operations. Total expenditures for 1997,
excluding propane operations, are estimated to be $14.5 million. The
majority of the projected expenditures will be spent on enhancements of the
electric and gas distribution systems. Estimated electric and natural gas
related construction expenditures for the years 1997 through 2001 are
expected to be $69.1 million. Nonregulated maintenance capital
expenditures for 1997 are estimated to be $4.8 million. Estimated
nonregulated maintenance capital expenditures for the years 1997 through
2001 are expected to be $18.8 million. Capital requirements for the
mandatory retirement of long-term debt and mandatory preferred stock
sinking fund redemption totaled $400,000, $600,000, and $600,000 for the
years ended 1996, 1995 and 1994, respectively. It is expected that such
mandatory retirements will be $1.2 million in 1997, $21.5 million in 1998,
$14.0 million in 1999, $6.5 million in 2000 and $6.5 million in 2001. The
Company anticipates that future capital requirements will be met by
existing investments and marketable securities, internally generated cash
flows and available external financing.
- -----------------------------
Competition and Business Risk
- -----------------------------
The electric and natural gas industries continue to undergo numerous
transformations, and the Company is operating in an increasingly
competitive marketplace. The passage of the National Energy Policy Act of
1992 has accelerated competition in the electric business by promoting
competition in the industry at the wholesale level. Competition in the
Company's gas business was accelerated with the passage of the Federal
Energy Regulatory Commission's (FERC) Order 636 which resulted in an
unbundling of gas supply and services to customers, or separately-priced
sale and transportation services.
The changes in the electric business are expected to be similar to those
experienced in the natural gas business over the last few years. The FERC,
which regulates interstate and wholesale electric transactions, has opened
up transmission grids and mandated that utilities must allow others equal
access to utility transmission systems. Various state regulatory bodies
are also supporting initiatives to redefine the electric energy market and
are experimenting with retail wheeling which gives some retail customers
the ability to choose their supplier of electricity. Traditionally,
utilities have been vertically integrated, providing bundled energy
services to customers. The potential for continued unbundling of energy
services exists, allowing customers to buy their own electricity and
natural gas on the open market and having it delivered by the local
utility.
The growing pace of competition in the energy industry has been a primary
focus of management over the last few years. The Company's future financial
performance will be dependent on the effective execution of operating
strategies to address a more competitive and changing energy marketplace.
Business strategies focus on enhancing the Company's competitive position,
on expanding energy sales and markets with new products and services for
customers and increasing shareholder value. The Company has realigned all
areas of the business to support energy services and marketing functions.
A new marketing plan, an expanded line of energy products and services,
additional staff and new technologies are part of the Company's strategy
for providing responsive and superior customer service.
To strengthen the Company's competitive position, new technologies were
added that enable employees to better serve customers. The company is
centralizing activities to improve efficiency and customer responsiveness,
and business processes are being reengineered to apply best-practices
methodologies. Long-term supply contracts have been renegotiated to lower
customers' energy costs, and new alliances help reduce expenses and add
innovative work approaches.
As described in Note 1 to the consolidated financial statements, the
Company complies with the provisions of Statement of Financial Accounting
Standards No. 71 (SFAS 71), "Accounting for the Effects of Certain Types of
Regulation". SFAS 71 provides for the financial reporting requirements of
the Company's regulated electric and natural gas operations which requires
specific accounting treatment of certain costs and expenses that are
related to the Company's regulated operations. Criteria that could give
rise to the discontinuance of SFAS 71 include (1) increasing competition
that restricts the Company's ability to establish prices to recover
specific costs and (2) a significant change in the manner in which rates
are set by regulators from cost-based regulation to another form of
regulation. The Company periodically reviews these criteria to ensure the
continuing application of SFAS 71 is appropriate. Based on a current
evaluation of the various factors and conditions that are expected to
impact future cost recovery, the Company believes that its regulatory
assets, including those related to generation, are probable of future
recovery.
Weather conditions have a significant impact on the demand for propane for
both heating and agricultural purposes. Many customers of Cornerstone rely
heavily on propane as a heating fuel. Actual weather conditions can vary
substantially from year to year, significantly affecting Cornerstone's
financial performance. Furthermore, variations in weather in one or more
regions in which Cornerstone operates can significantly affect the total
volumes sold by Cornerstone and the margins realized on such sales and,
consequently Cornerstone's results of operations.
The retail propane business is a margin-based business in which gross
profits depend on the excess of sales prices over propane supply costs.
Consequently, Cornerstone's profitability will be sensitive to changes in
wholesale propane prices. Propane is a commodity, the market price of
which can be subject to volatile changes in response to changes in supply
or other market conditions. As it may not be possible immediately to pass
on to customers rapid increases in the wholesale cost of propane, such
increases could reduce Cornerstone's gross profits.
Cornerstone's profitability is affected by the competition for customers
among all participants in the retail propane business. Some of
Cornerstone's competitors are larger or have greater financial resources
than Cornerstone. Should a competitor attempt to increase market share by
reducing prices, Cornerstone's financial condition and results of
operations could be materially adversely affected. In addition, propane
competes with other sources of energy, some of which are less costly for
equivalent energy value.
Energy distribution growth will be increasingly important to the Company in
the future. In addition to maintaining a strong competitive position in
electric, natural gas and propane distribution businesses, the Company
intends to seek new investments and acquisitions that have long-term growth
potential. While such investments and acquisitions can involve increased
risk in comparison to the Company's energy distribution businesses, they
offer the potential for enhanced investment returns.
Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995: The statements included in this Annual Report to Shareholders which
are not historical facts and which are forward looking statements involve
risks and uncertainties detailed in the Company's Securities and Exchange
Commission filings.
Report of Management
The management of Northwestern Public Service Company is responsible for
the integrity and objectivity of the financial information contained in
this annual report. The consolidated financial statements, which
necessarily include some amounts which are based on informed judgments and
estimates of management, have been prepared in conformity with generally
accepted accounting principles.
In meeting this responsibility, management maintains a system of internal
accounting controls which is designed to provide reasonable assurance that
the assets of the Company are safeguarded and that transactions are
executed in accordance with management's authorization and are recorded
properly for the preparation of financial statements. This system is
supported by written policies, selection and training of qualified
personnel, an appropriate segregation of responsibilities within the
organization and a program of internal auditing. The Board of Directors,
through its Audit Committee which is comprised entirely of outside
directors, oversees management's responsibilities for financial reporting.
The Audit committee meets regularly with management, the internal auditors
and the independent public accountants to make inquiries as to the manner
in which each is performing its responsibilities. The independent public
accountants and the internal audit staff have unrestricted access to the
Audit committee, without management's presence, to discuss auditing,
internal accounting control and financial reporting matters.
Arthur Andersen LLP, an independent public accounting firm, has been
engaged annually to perform an audit of the Company's financial statements.
Their audit is conducted in accordance with generally accepted auditing
standards and includes examining, on a test basis, supporting evidence,
assessing the Company's accounting principles and significant estimates
made by management, and evaluating the overall financial statement
presentation to the extent necessary to allow them to report on the
fairness, in all material respects, of the operating results and financial
condition of the Company.
Merle D. Lewis
President and Chief Executive Officer
Richard R. Hylland
Executive Vice President
Report of Independent Public Accountants
To the Stockholders and Board of Directors of Northwestern Public Service
Company:
We have audited the accompanying consolidated balance sheets of
NORTHWESTERN PUBLIC SERVICE COMPANY (a Delaware corporation) AND
SUBSIDIARIES as of December 31, 1996 and 1995, and the related consolidated
statements of income and retained earnings and cash flows for each of the
three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Northwestern Public
Service Company and Subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
Minneapolis, Minnesota
January 31, 1997
CONSOLIDATED STATEMENT OF CASH FLOWS
Years Ended December 31
1996 1995 1994
--------------- --------------- --------------
Operating Activities:
Net income $ 26,053,800 $ 19,305,569 $ 15,440,208
Items not affecting cash:
Depreciation and amortization 19,414,065 14,633,154 12,438,501
Deferred income taxes 5,830,313 2,540,385 1,509,619
Investment tax credits (561,278) (563,311) (564,801)
Changes in current assets and
liabilities, net of
effects from acquisitions:
Trade accounts receivable (332,902) (3,897,932) (1,057,563)
Inventories (4,374,494) (327,160) (1,447,191)
Other current assets (4,308,027) (2,641,018) (259,826)
Accounts payable 15,712,431 (1,718,666) 2,699,294
Accrued taxes 4,621,014 937,553 (1,487,575)
Accrued interest 23,477 1,741,160 (30,991)
Other current liabilities (143,168) 3,328,632 421,690
Other, net (1,032,214) 2,028,594 (1,392,444)
--------------- --------------- --------------
Cash flows from operating
activities 60,903,017 35,366,960 26,268,921
--------------- --------------- --------------
Investment Activities:
Property additions (35,170,026) (29,636,745) (22,680,856)
Purchase of noncurrent
investments, net (107,425,554) (5,669,229) (1,386,178)
Purchase of net assets, net
of cash acquired (24,481,000) (109,528,168) -
Purchase of working capital
adjustments, net - (10,607,114) -
Acquisition related costs (2,040,000) (5,405,328) -
--------------- --------------- --------------
Cash flows for investment
activities (169,116,580) (160,846,584) (24,067,034)
--------------- --------------- --------------
Financing Activities:
Dividends on common and
preferred stock (16,346,762) (14,463,389) (12,940,868)
Minority interest on preferred
securities of subsidiary trust (2,722,232) (1,056,250) -
Issuance of long-term debt 21,653,811 86,599,820 1,100,000
Repayment of long-term debt (339,958) (3,156,699) (677,500)
Issuance of preferred securities
of subsidiary trust - 31,213,261 -
Issuance of preferred stock - 3,650,000 -
Retirement of preferred stock (10,000) (30,000) (30,000)
Issuance of common stock - 31,022,182 -
Short term borrowings
(repayments) 35,500,000 (6,300,000) 9,800,000
--------------- --------------- --------------
Cash flows from (for)
financing activities 37,734,859 127,478,925 (2,748,368)
--------------- --------------- --------------
Cornerstone Propane Partners
Formation Transactions:
Acquisition of CGI Holdings,
net of $2,568,000 of cash
acquired (68,962,482) - -
Issuance of Cornerstone Propane
Partners common units 191,804,130 - -
Issuance of long-term debt 220,000,000 - -
Repayment of long-term debt
and short-term borrowings (229,570,969) - -
Other fees and expenses (10,553,650) - -
--------------- --------------- --------------
Cash flows from Cornerstone
Propane Partners formation
transactions 102,717,029 - -
--------------- --------------- --------------
Increase (Decrease) in Cash and
Cash Equivalents 32,238,325 1,999,301 (546,481)
Cash and Cash Equivalents,
beginning of year 4,551,913 2,552,612 3,099,093
--------------- --------------- --------------
Cash and Cash Equivalents,
end of year $ 36,790,238 $ 4,551,913 $ 2,552,612
=============== =============== ==============
Supplemental Cash Flow Information:
Cash paid during the year for:
Income taxes $ 6,271,000 $ 5,972,200 $ 7,382,119
Interest $ 18,644,802 $ 8,381,217 $ 8,887,901
Noncash transactions during the year for:
Assumption of debt as part of
acquisitions $ 149,516,144 $ 2,344,603 $ -
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
Years Ended December 31
1996 1995 1994
------------- ------------- -------------
Operating Revenues:
Propane $ 175,102,363 $ 38,883,031 $ -
Electric 73,416,994 74,857,501 73,077,431
Natural Gas 72,269,047 64,482,943 62,141,382
Manufacturing 23,220,737 26,746,847 22,047,241
------------- ------------- -------------
344,009,141 204,970,322 157,266,054
------------- ------------- -------------
Operating Expenses:
Propane gas sold 101,359,989 18,527,061 -
Fuel and purchased power 13,347,461 14,304,791 14,552,637
Purchased natural gas sold 51,170,517 46,430,023 46,351,422
Manufacturing cost of goods sold 14,547,866 17,162,626 13,996,217
Other operating expenses 80,555,962 43,190,237 27,117,519
Maintenance 5,919,354 6,019,601 6,169,895
Depreciation and amortization 19,414,065 14,633,154 12,438,501
Property and other taxes 7,275,925 6,605,660 6,103,903
------------- ------------- -------------
293,591,139 166,873,153 126,730,094
------------- ------------- -------------
Operating Income:
Propane 18,947,261 5,604,307 -
Electric 24,474,634 26,003,006 25,661,632
Natural Gas 5,683,585 3,861,608 2,540,091
Manufacturing 1,312,522 2,628,248 2,334,237
------------- ------------- -------------
50,418,002 38,097,169 30,535,960
Interest Expense, net (18,668,279) (11,694,483) (9,669,829)
Investment Income and Other 9,719,236 3,029,376 2,443,420
------------- ------------- -------------
Income Before Income Taxes 41,468,959 29,432,062 23,309,551
Income Taxes (15,415,159) (10,126,493) (7,869,343)
------------- ------------- -------------
Net Income 26,053,800 19,305,569 15,440,208
Minority Interest on Preferred
Securities of Subsidiary Trust (2,722,232) (1,056,250) -
Dividends on Cumulative Preferred
Stock (468,945) (258,939) (119,888)
------------- ------------- -------------
Earnings on Common Stock 22,862,623 17,990,380 15,320,320
Retained Earnings, beginning of year 59,159,042 55,373,112 52,873,772
Dividends on Common Stock (15,877,817) (14,204,450) (12,820,980)
------------- ------------- -------------
Retained Earnings, end of year $ 66,143,848 $ 59,159,042 $ 55,373,112
============= ============= =============
Average Shares Outstanding 8,920,122 8,130,581 7,677,232
Earnings Per Average Common Share $ 2.56 $ 2.21 $ 2.00
============= ============= =============
Dividends Declared Per Average
Common Share $ 1.780 $ 1.746 $ 1.670
============= ============= =============
See Notes to Consolidated Financial Statements
CONSOLIDATED BALANCE SHEETS
December 31
1996 1995
---------------- ----------------
ASSETS
Property:
Electric $ 350,419,398 $ 336,961,117
Natural Gas 80,905,454 73,546,150
Propane 248,555,861 74,815,533
Manufacturing 2,141,553 2,048,725
---------------- ----------------
682,022,266 487,371,525
Less-Accumulated depreciation (162,908,836) (150,469,310)
---------------- ----------------
519,113,430 336,902,215
---------------- ----------------
Current Assets:
Cash and cash equivalents 36,790,238 4,551,913
Trade accounts receivable, net 89,258,503 28,190,389
Inventories 43,826,307 21,645,758
Deferred gas costs 7,006,445 2,925,865
Other 20,806,825 33,305,776
---------------- ----------------
197,688,318 90,619,701
---------------- ----------------
Other Assets:
Investments 159,332,695 51,907,141
Deferred charges and other 40,260,445 30,240,083
Goodwill and other intangibles, net 197,320,839 49,052,343
---------------- ----------------
396,913,979 131,199,567
---------------- ----------------
$ 1,113,715,727 $ 558,721,483
================ ================
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock equity $ 163,805,137 $ 152,678,191
Nonredeemable cumulative preferred stock 2,600,000 2,600,000
Redeemable cumulative preferred stock 1,150,000 1,160,000
Company obligated mandatorily redeemable
security of trust holding solely
parent debentures 32,500,000 32,500,000
Long-term debt 183,850,000 183,850,000
---------------- ----------------
383,905,137 372,788,191
Preferred stock of subsidiary 2,500,000 2,500,000
Minority interest in subsidiaries 186,713,663 -
Long-term debt of subsidiaries 240,562,549 28,990,224
---------------- ----------------
813,681,349 404,278,415
---------------- ----------------
Commitments and Contingencies (Notes 8, 9, 10)
Current Liabilities:
Commercial Paper - 3,500,000
Long-term debt due within one year 1,244,220 570,000
Accounts payable 99,393,912 15,564,985
Accrued taxes 11,834,153 7,689,592
Accrued interest 4,761,720 4,738,243
Other 35,532,721 26,698,414
---------------- ----------------
152,766,726 58,761,234
---------------- ----------------
Deferred Credits:
Accumulated deferred income taxes 70,893,910 43,666,229
Unamortized investment tax credits 9,460,241 10,021,519
Other 66,913,501 41,994,086
---------------- ----------------
147,267,652 95,681,834
---------------- ----------------
$ 1,113,715,727 $ 558,721,483
================ ================
See Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
(1) Significant Accounting Policies -
Nature of Operations:
- ---------------------
Northwestern Public Service Company is an investor-owned diversified
energy distribution company with core operations engaged in the propane,
electric and natural gas industries. The Company is engaged in the
regulated utility business of production, purchase, transmission,
distribution and sale of electricity and the delivery of natural gas. The
Company serves 55,600 electric customers in eastern South Dakota and 77,478
natural gas customers in eastern South Dakota and central Nebraska. To
provide baseload electric power, the Company jointly owns three coal-fired
generating plants with other utilities. Through the acquisitions of Synergy
Group Incorporated (Synergy) and Myers Propane Gas Company (Myers) in 1995
and Empire Energy Corporation (Energy) in 1996, the Company engaged in
retail propane distribution business located throughout the United States.
On December 17, 1996, a wholly owned subsidiary acquired CGI Holdings,
Inc., (Coast) and combined the propane distribution businesses of Coast,
Energy, Myers and Synergy (the Partnership Formation) into Cornerstone
Propane, L.P., (the Operating Partnership), a Delaware limited partnership
and a subsidiary of Cornerstone Propane Partners, L.P. (Cornerstone), a
Delaware limited partnership, formed to acquire and operate these propane
businesses and assets. Cornerstone and the Operating Partnership are
collectively referred to herein as the Partnership. On December 17, 1996,
as part of an initial public offering (IPO), Cornerstone sold a total of
9,821,000 common units (Common Units) representing limited partner
interests. The Company through its majority owned subsidiaries retained an
effective 2% general partner interest and a 39% limited partnership
interest in the Partnership. A wholly owned subsidiary of the Company
serves as the general partner (General Partner) of the Partnership and
manages and operates the Partnership's business. (For a detailed
description of the Partnership Formation and related transactions, see Note
2). The Company's manufacturing operations are comprised of Lucht Inc., a
wholly owned subsidiary that develops, manufactures and markets multi-image
photographic printers and other related equipment.
Basis of Consolidation:
- -----------------------
The accompanying consolidated financial statements include the
accounts of Northwestern Public Service Company and all wholly and majority
owned subsidiaries, including the Partnership. All significant intercompany
balances and transactions have been eliminated from the consolidated
financial statements. The Company's regulated businesses are subject to
various state and federal agency regulation. The public unitholders'
interest in Cornerstone's net assets subsequent to the Partnership
Formation is reflected as a minority interest in the consolidated balance
sheets. For purposes of determining the minority interest in Cornerstone,
all 9,821,000 Common Units held by the public are considered to be
outstanding as of December 31, 1996.
Use of Estimates:
- -----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Revenue Recognition and Gas Costs:
- ----------------------------------
Electric and natural gas revenues are based on billings rendered to
customers rather than on meters read or energy delivered. Customers are
billed monthly on a cycle basis. Revenues from propane sales are
recognized principally when fuel products are shipped or delivered to
customers. Manufacturing revenue is recognized as equipment is shipped or
delivered to customers.
The commodity cost portion of natural gas purchased from wholesale
suppliers but not yet billed to customers is charged to deferred gas costs.
This account is subsequently credited in future periods as customers are
billed for natural gas used in prior periods. This method has the
approximate effect of matching costs with revenues in any financial
reporting period. The demand cost portion of natural gas costs, which is
comprised of numerous components, is expensed as incurred. The Company and
its subsidiaries have propane and natural gas supply agreements with
various suppliers for the purchase of these products in the normal course
of their operations
Allowance for Funds Used During Construction:
- ---------------------------------------------
The allowance for funds used during construction includes the costs of
equity and borrowed funds used to finance construction which are
capitalized in accordance with rules prescribed by the Federal Energy
Regulatory Commission (FERC). In 1996, 1995 and 1994, allowance for equity
funds was $95,000, $134,000 and $17,000. Allowance for borrowed funds for
1996, 1995 and 1994 was $83,000, $362,000 and $39,000.
Cash Equivalents:
- -----------------
The Company generally considers all highly liquid investments
purchased with a maturity of three months or less to be cash equivalents.
Depreciation and Maintenance:
- -----------------------------
Depreciation is computed using the straight-line method based on the
estimated useful lives of the various classes of property. Depreciation
provisions, as a percentage of the average balance of depreciable property,
were 4.20% in 1996, 3.61% in 1995 and 3.39% in 1994. The percentages for
1996 and 1995 include propane related depreciation provision and
depreciable property whose estimated useful lives principally range from 5
to 40 years.
Depreciation rates include a provision for the Company's share of the
estimated costs to decommission three coal-fired generating plants at the
end of the useful life of each plant. The annual provision for such costs
is included in depreciation expense, while the accumulated provisions are
included in other deferred credits.
The costs of maintenance, repairs and replacements of minor property
items are charged to maintenance expense accounts. Costs of renewals and
betterments of electric and natural gas property units are charged to
property accounts. The costs of units of electric and natural gas property
removed from service, net of removal costs and salvage, are charged to
accumulated depreciation. No profit or loss is recognized in connection
with ordinary retirements of depreciable electric and natural gas property.
Goodwill and Other Intangibles:
- -------------------------------
The excess of the cost of businesses acquired over the fair market
value of all tangible and intangible assets acquired, net of liabilities
assumed, has been recorded as goodwill which is being amortized on a
straight-line basis over 40 years. Other intangibles, consisting
principally of costs of covenants not to compete, are being amortized over
the estimated periods benefited which do not exceed 10 years. Goodwill and
other intangibles are reflected net of accumulated amortization at December
31, 1996 and 1995, of $1,199,000 and $1,188,000.
It is the Company's policy to review property, goodwill, and other
intangible assets for possible impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be
recoverable. If such review indicates that the carrying amount is not
recoverable, it is the Company's policy to reduce the carrying amount of
these assets to fair value.
Investments and Fair Value of Financial Instruments:
- ----------------------------------------------------
The Company's investments consist primarily of short maturity fixed
income securities and corporate preferred and common stocks. In addition,
the Company has investments in privately held entities and ventures, safe
harbor leases and various money market and tax exempt investment programs.
These investments are accounted for in accordance with Statement of
Financial Accounting Standards No. 115 (SFAS 115), "Accounting for Certain
Investments in Debt and Equity Securities". SFAS 115 requires that certain
investments in debt and equity securities be reported at fair value.
The Company's securities are classified under the provisions of SFAS
115. As of December 31, 1996, the fair value, cost and the gross
unrealized gain of the Company's available for sale investments were
$31,742,000, $31,740,000 and $2,000 for preferred stock investments and
$16,264,000, $1,118,000 and $15,146,000 for marketable securities. As of
December 31, 1995, the fair value, cost and the gross unrealized gain of
the Company's available for sale investments were $37,746,000, $37,592,000
and $154,000 for preferred stock investments and $9,892,000, $1,271,000 and
$8,621,000 for marketable equity securities. The unrealized gain, net of
tax, at December 31, 1996 and 1995, was $9,846,000 and $5,704,000,
respectively. Held to maturity securities are reported at cost, which
approximated fair value and at December 31, 1996 and 1995 was $111,327,000
and $4,269,000.
The Company uses the specific identification method for determining
the cost basis of its investments in available for sale securities. Gross
proceeds and realized gains and losses on sales of its available for sale
securities were not material in 1996 and 1995.
Based on current market rates for debt of similar credit quality and
remaining maturities or quoted market prices for certain issues, the face
value of the Company's long-term debt approximates its market value.
Income Taxes:
- -------------
Deferred income taxes relate primarily to the difference between book
and tax methods of depreciating property, taxable income derived from safe
harbor leases, the difference in the recognition of revenues for book and
tax purposes, and natural gas costs which are deferred for book purposes
but expensed currently for tax purposes.
For book purposes, investment tax credits were deferred and are being
amortized as a reduction of income tax expense over the useful lives of the
property which generated the credits.
Regulatory Assets and Liabilities
- ---------------------------------
The Company is subject to the provisions of Statement of Financial
Accounting Standards No. 71 (SFAS 71), "Accounting for the Effects of
Certain Types of Regulations". Regulatory assets represent probable future
revenue to the Company associated with certain costs which will be
recovered from customers through the ratemaking process. Regulatory
liabilities represent probable future reductions in revenues associated
with amounts that are to be credited to customers through the ratemaking
process.
If all or a separable portion of the Company's operations becomes no
longer subject to the provisions of SFAS 71, an evaluation of future
recovery from related regulatory assets and liabilities would be necessary.
In addition, the Company would determine any impairment to the carrying
costs of deregulated plant and inventory assets.
Reclassifications:
- ------------------
Certain 1995 and 1994 amounts have been reclassified to conform to the
1996 presentation. Such reclassifications had no impact on net income or
common stock equity as previously reported.
(2) Master Limited Partnership Offering and Business Acquisitions -
Master Limited Partnership Offering:
- ------------------------------------
On December 17, 1996, a wholly owned subsidiary of Northwestern Growth
Corporation acquired Coast. Immediately after the acquisition the Company
combined the propane distribution businesses of Coast, Energy, Myers and
Synergy into Cornerstone. As part of an IPO on the same date, Cornerstone
sold a total of 9,821,000 Common Units at a price to the public of $21 a
unit. Cornerstone's capital consists of 9,821,000 Common Units, 6,597,619
subordinated units (Subordinated Units) representing limited partner
interests and a 1% general partner interest. The Company's majority owned
subsidiaries own all 6,597,619 Subordinated Units and an aggregate 2%
general partner interest in the Partnership, or a combined 41.4% effective
interest in the Partnership.
The net proceeds of $191.8 million from the sale of 9,821,000 Common
Units of Cornerstone and the net proceeds from the issuance of $220 million
face value of Cornerstone Senior Notes were used to repay term and
revolving debt of Coast, Energy and Synergy, including accrued interest and
any prepayment premiums which were assumed by the Partnership. In
addition, the preferred stock of Synergy was redeemed at a premium. As a
result of these repayments, the Company recorded a one-time after tax gain
of $.19 per share from the prepayment of the term debt and redemption of
preferred stock investment in Synergy.
The Partnership makes distributions to its partners with respect to
each fiscal quarter of the Partnership in an aggregate amount equal to its
Available Cash for such quarter. Available Cash generally means, with
respect to any fiscal quarter of the Partnership, all cash on hand at the
end of such quarter plus all additional cash on hand as of the date of
determination resulting from borrowings subsequent to the end of such
quarter, less the amount of cash reserves established by the General
Partner in its reasonable discretion for future cash requirements. These
reserves are retained for the proper conduct of the Partnership's business,
for the payment of debt principal and interest and for distributions during
the next four quarters.
Distributions by the Partnership, in an amount equal to 100% of its
Available Cash, will generally be made 98% to the Common and Subordinated
unitholders and 2% to the General Partners. Distributions are subject to
the payment of incentive distributions in the event Available Cash exceeds
the Quarterly Distribution of $.594 on all units. To the extent there is
sufficient Available Cash, the holders of Common Units have the right to
receive the Minimum Quarterly Distribution, plus any arrearages, prior to
the distribution of Available Cash to holders of Subordinated Units.
Common Units will not accrue arrearages for any quarter after the
Subordination Period (as defined below), and Subordinated Units will not
accrue any arrearages with respect to distributions for any quarter.
The Subordination Period will generally extend until the first day of
any quarter beginning on or after December 31, 2001, in respect of which
(a) distributions of Available Cash from operating surplus equal or exceed
the Minimum Quarterly Distribution on each of the outstanding Common and
Subordinated units for each of the three consecutive four-quarter periods
immediately preceding such date, (b) the adjusted operating surplus
generated during each of the three consecutive four-quarter periods
immediately preceding such date equals or exceeds the Minimum Quarterly
Distribution on each of the Common and Subordinated units and the related
distribution on the general partner interests in the Partnership during
such periods and (c) there are no outstanding Common Unit arrearages.
In addition, 1,649,405 Subordinated Units will convert into Common
Units for any quarter ending on or after December 31, 1999, and an
additional 1,649,405 Subordinated Units will convert into Common Units for
any quarter ending on or after December 31, 2000, if (a) distributions of
Available Cash from operating surplus on each of the outstanding Common and
Subordinated units equal or exceed the Minimum Quarterly Distribution for
each of the three consecutive four-quarter periods immediately preceding
such date, (b) the adjusted operating surplus generated during the
immediately preceding two consecutive four-quarter periods equals or
exceeds the Minimum Quarterly Distribution on all of the Common and
Subordinated units outstanding during that period and (c) there are no
arrearages on the Common Units.
The Partnership will make distributions of its Available Cash
approximately 45 days after the end of each quarter ending March, June,
September and December to holders of record on the applicable record dates.
Business Acquisitions:
- ----------------------
On August 15, 1995, the Company completed the acquisition of Synergy,
a retail distributor of propane. Synergy maintained 152 retail branches
serving approximately 200,000 customers in 23 states, primarily in suburban
and rural areas of the eastern and south-central regions of the United
States. In conjunction with the acquisition, the Company sold certain
retail property outlets to Energy, which was later acquired in October
1996.
The Synergy transaction represented an initial cash investment by the
Company of approximately $137.5 million, but after the sale of certain
retail property outlets, the total net cash acquisition investment by the
Company was $105.6 million. The Company made debt and preferred stock
investments in SYN Inc., the entity created to acquire Synergy.
Northwestern Growth Corporation, one of the Company's wholly owned
subsidiaries, owned control of SYN Inc. common stock. The acquisition was
accounted for under the purchase method of accounting. The total net
purchase price was comprised of consideration paid of $105.6 million cash,
issuance of $1.25 million in long-term debt and the assumption of certain
liabilities and other long-term debt. The cost in excess of the fair value
of the net tangible and intangible assets acquired and the costs related to
arranging the debt financing for the acquisition of $31.7 million have been
recorded as intangible assets and are being amortized on a straight-line
method over 40 years. The allocation of the purchase price to the acquired
assets and liabilities of Synergy was based on fair value of the related
assets and liabilities. The Company has asserted claims under the
acquisition agreement for post-closing adjustments related to the
acquisition of Synergy. If these claims are successful, an adjustment in
the consideration paid for the acquisition could result.
The Company's investments in SYN Inc. were funded primarily by
financings undertaken in 1995. During the third quarter of 1995, the
Company issued $60 million of 7.10% general mortgage bonds due August 1,
2005, 1.3 million shares of 8 1/8% preferred securities of subsidiary trust
and 1.2 million shares of common stock.
On December 7, 1995, the Company acquired majority control of Myers
through the issuance of 42,890 shares of common stock and 11,500 shares of
6 1/2% redeemable cumulative preferred stock. Myers is a retail
distributor of propane serving approximately 4,500 customers in and around
Sandusky, Ohio. The total purchase price of $4.8 million was comprised of
the securities issued by the Company seller financing. The acquisition was
accounted for under the purchase method of accounting. The cost in excess
of fair value of the net assets acquired of $1.9 million has been
classified as goodwill and is being amortized on a straight-line method
over 40 years.
On October 7, 1996, the Company completed the acquisition of Energy, a
retail distributor of propane. Energy maintained 168 retail branches
serving approximately 130,000 customers in 10 states, primarily in
southeast and midwest regions of the United States. The total purchase
price of $120 million was comprised of cash, assumption of certain
liabilities including long-term debt of $94 million, and transaction
related costs. The cost in excess of the fair value of the net tangible
assets acquired has been classified as goodwill and is being amortized on a
straight-line method over 40 years. The allocation of the purchase price
to the acquired assets and liabilities of Energy was based on fair value of
the related assets and liabilities.
Had the acquisitions of Coast, Energy, Myers, and Synergy and the
Partnership Formation occurred on January 1, 1995, combined unaudited pro
forma results for the years ended December 31, 1996 and 1995, as prescribed
under Accounting Principles Board Opinion No. 16 (APB 16), "Business
Combinations", would have been: Revenues $770,031,000 and $620,887,000,
net income $18,771,000 and $16,437,000 and earnings per share $2.10 and
$1.84. The pro forma disclosures required under APB 16 are not indicative
of past or future operating results. Since the acquisitions and
Partnership Formation, the Company has implemented significant cost
reduction measures principally related to elimination of certain employee
positions, corporate administrative expenses and other specifically
identified operating expenses that have not been reflected in the pro forma
information under the provisions of APB 16.
(3) Short-Term Borrowings -
The Company may issue short-term debt in the form of bank loans and
commercial paper as interim financing for general corporate purposes. The
bank loans may be obtained under short-term lines of credit. The Company's
aggregate lines of credit available are $24 million at December 31, 1996.
The Company pays an annual fee equivalent to 1/4% of the unused lines.
There were no line of credit borrowings outstanding at December 31, 1996
and 1995. At December 31, 1996, the Company had no outstanding commercial
paper borrowings. At December 31, 1995, the Company had outstanding $3.5
million of commercial paper.
(4) Long-Term Debt -
Substantially all of the Company's electric and gas utility plant is
subject to the lien of the indentures securing its general mortgage bonds
and pollution control obligations. General mortgage bonds of the Company
may be issued in amounts limited by property, earnings and other provisions
of the mortgage indenture. The following table summarizes the Company's
general mortgage bonds and pollution control obligations at December 31 (in
thousands):
Series Due 1996 1995
----------------------- -------- -------- --------
General mortgage bonds -
8.824% 1998 $ 15,000 $ 15,000
8.9% 1999 7,500 7,500
6.99% 2002 25,000 25,000
7.10% 2005 60,000 60,000
7% 2023 55,000 55,000
Pollution control obligations -
5.85%, Mercer Co., ND 2023 7,550 7,550
5.90%, Salix, IA 2023 4,000 4,000
5.90%, Grant Co., SD 2023 9,800 9,800
-------- --------
$183,850 $183,850
======== ========
In conjunction with the Partnership Formation in December 1996, the
Partnership issued $220 million in First Mortgage Notes (Notes). These
Notes are collateralized by substantially all of the assets of the
Partnership and ranks pari passu with the Bank Credit Facility. The Notes
bear interest at a fixed rate of 7.53% payable semi-annually and mature in
the year 2010 with eight equal annual installments beginning in the year
2003. The Partnership may, at its options and under certain circumstances
following the disposition of assets be required to offer to prepay the
Notes, in whole or in part. The Note agreement contains restrictive
covenants applicable to the Partnership, including (a) restrictions on the
incurrence of additional indebtedness, (b) restrictions on the ratio of
consolidated cash flow to consolidated interest expense of the Partnership,
as defined, and (c) restrictions on certain liens, loans and investments,
payments, mergers, consolidations, sales of assets and other transactions.
Generally, as long as no default exists or would result, the Partnership is
permitted to make cash distributions not more frequently than quarterly in
an amount not to exceed available cash, as defined, for the immediately
preceding calendar quarter.
The Partnership also entered into a Bank Credit Facility in December
1996 with a group of commercial banks. The Bank Credit Facility consists
of a $50 million Working Capital Credit Facility and a $75 million
Acquisition Facility to finance propane business acquisitions. There were
$10,445,000 of borrowings outstanding under Working Capital Facility at
December 31, 1996. There were no outstanding borrowings on the Acquisition
Facility at December 31, 1996. The Bank Credit Facility bears interest at
a variable rate tied to a certain Eurodollar index or prime rate, plus a
variable margin for either rate which depends upon the Partnership's ratio
of consolidated debt to consolidated cash flow. The Bank Credit Facility
matures in December 1999. The Bank Credit Facility is collateralized by
substantially all the assets of the Partnership and ranks pari passu with
the First Mortgage Notes. The Bank Credit Facility contains restrictive
covenants applicable to the Partnership, including (a) restrictions on the
incurrence of additional indebtedness, (b) restrictions on the ratio of
consolidated cash flow to consolidated interest expense of the Partnership,
as defined, and (c) restrictions on certain liens, loans and investments,
payments, mergers, consolidations, sales of assets and other transactions.
They also require that the Partnership maintain a ratio of total funded
indebtedness to consolidated cash flow, as defined. Generally, as long as
no default exists or would result, the Partnership is permitted to make
cash quarterly distributions in an amount not to exceed Available Cash, as
defined.
Lucht Inc. has a credit agreement with a bank whereby it may borrow up
to $8 million in revolving and term loans. Balances of $3,290,000 and
$4,802,500 were outstanding under the revolving and term loan as of
December 31, 1996 and 1995, at a weighted average interest rate of 8%.
Borrowings under the agreement are collateralized by all receivables,
inventories, property and other assets of Lucht, and are nonrecourse to the
Company.
SYN Inc. had a credit agreement with a bank whereby it could borrow up
to $30 million in revolving loans. The facility was repaid in conjunction
with the Partnership Formation. A balance of $21,342,320 was outstanding
under the facility as of December 31, 1995.
The balance of other nonrecourse debt is comprised of the remaining
debt assumed and issued from Coast, Energy, Myers and Synergy acquisitions
of $8,072,000 and $3,415,000 at December 31, 1996 and 1995.
Annual scheduled consolidated retirements of long-term debt during the
next five years are $1,244,000 in 1997, $21,500,000 in 1998, $14,000,000 in
1999, $6,500,000 in 2000 and $6,500,000 in 2001.
(5) Capital Stock Transactions and Retained Earnings Availability -
As part of financing the Synergy acquisition, the Company issued 1.2
million shares of common stock. The Company also issued 1.3 million shares
of 8 1/8% preferred securities of subsidiary trust which mature in
September 2025. In financing the Myers acquisition, the Company issued
42,890 shares of common stock and 11,500 shares of redeemable cumulative
preferred stock. Preferred stock transactions for the three years ended
December 31, 1996, have also included redemptions to satisfy mandatory
sinking fund requirements. The following table summarizes the capital
stock transactions that occurred during the year: (in thousands)
Preferred Common Additional
Stock Stock Paid in Capital
--------- --------- ---------------
Balance 12-31-95 $ 6,260 $31,220 $56,595
Mandatory sinking fund
redemption (10) - -
--------- --------- ---------------
Balance 12-31-96 $ 6,250 $31,220 $56,595
========= ========= ===============
The preferred stock of subsidiary is redeemable at the option of the
Company. There were 2,500 shares of preferred stock outstanding at
December 31, 1996 and 1995. The preferred stock was redeemed in January
1997.
In December 1996, the Company's Board of Directors declared, pursuant to a
stockholders' rights plan, a dividend distribution of one Right on each
outstanding share of the Company's common stock. Each Right becomes
exercisable, upon the occurrence of certain events, at an exercise price of
$100 per share, subject to adjustment. The Rights are currently not
exercisable and will be exercisable only if a person or group of affiliated
or associated persons (Acquiring Person) either acquires ownership of 15%
or more of the Company's common stock or commences a tender or exchange
offer than would result in ownership of 15% or more. In the event the
Company is acquired in a merger or other business combination transaction
or 50% or more of its consolidated assets or earnings power are sold, each
Right entitles the holder to receive such number of shares of common stock
of the Acquiring Person having a market value of two times the then current
exercise price of the Right. The Rights, which expire in December 2006,
are redeemable in whole, but not in part, at a price of $.01 per Right, at
the Company's option at any time until any Acquiring Person has acquired
15% or more of the Company's common stock.
(6) Common and Preferred Stock Equity -
The following table summarizes the Company's common and preferred stock
equity at December 31 (dollars in thousands, except par value):
1996 1995
---------- ---------
Common Stock Equity:
Common stock, $3.50 par value,
20,000,000 share authorized;
8,920,122 shares outstanding $ 31,220 $ 31,220
Additional paid-in capital 56,595 56,595
Retained earnings 66,144 59,159
Unrealized gain on
investments, net 9,846 5,704
-------- --------
$163,805 $152,678
======== ========
Cumulative Preferred Stock:
$100 par value, 1,000,000 shares
authorized; 37,600 shares outstanding
Nonredeemable-4 1/2% Series $2,600 $2,600
Redeemable-
5 1/4% Series - 10
6 1/2% Series 1,150 1,150
-------- --------
$3,750 $3,760
======== ========
(7) Income Taxes -
Income tax expense is comprised of the following (in thousands):
1996 1995 1994
-------- -------- --------
Federal income -
Current tax expense $ 9,174 $7,849 $6,522
Deferred tax
expense 5,830 2,540 1,509
Investment tax credit (561) (563) (565)
State income 972 300 403
-------- -------- --------
$15,415 $10,126 $7,869
======== ======== ========
The following table reconciles the Company's effective income tax
rate to the federal statutory rate:
1996 1995 1994
-------- -------- --------
Federal statutory rate 35% 35% 35%
State income, net of
federal benefit 2 - -
Amortization of
investment tax credit (1) (2) (2)
Dividends received
deduction (1) (5) (3)
Other, net 2 6 4
-------- -------- --------
37% 34% 34%
======== ======== ========
The components of the net deferred federal income tax liability
recognized in the Company's Consolidated Balance Sheet are related to the
following temporary differences at December 31 (in thousands):
1996 1995
---------- ---------
Excess tax depreciation $(77,032) $(26,252)
Safe harbor leases (5,630) (7,060)
Property basis and life differences(6,480) (7,526)
Asset sales (3,967) (4,366)
Regulatory assets (3,489) (4,052)
Regulatory liabilities 4,189 4,189
Unbilled revenue 3,596 3,857
Unamortized investment tax credit 3,491 3,491
Unrealized gain on investments (5,302) (3,071)
Other, net 19,730 (2,876)
----------- ----------
$(70,894) $(43,666)
=========== ==========
(8) Jointly Owned Plants -
The Company has an ownership interest in three major electric
generating plants, all of which are operated by other utility companies.
The Company has an undivided interest in these facilities and is
responsible for its proportionate share of the capital and operating costs
while being entitled to its proportionate share of the power generated.
The Company's interest in each plant is reflected in the Consolidated
Balance Sheet on a pro rata basis, and its share of operating expenses is
reflected in the Consolidated Statement of Income and Retained Earnings.
The participants each finance their own investment.
The Company has long-term coal contracts for delivery of lignite coal
to Coyote I and sub-bituminous coal to Neal #4. The lignite coal contract
for Big Stone expired inmid-1995, and the plant owners have negotiated and
secured a contract for minimum annual purchases of 1.2 million tons of
Montana sub-bituminous coal for the period of mid-1995 through 1999. The
lignite contract for Coyote I is a total requirements contract with a
minimum obligation of 30,000 tons per week except during scheduled or
forced outages. Neal #4 has a contract for delivery of sub-bituminous coal
with an annual minimum purchase requirement of 1.8 million tons.
Information relating to the Company's ownership interest in these
facilities at December 31, 1996, is as follows (dollars in thousands):
Big Stone Neal #4 Coyote I
--------- ------- --------
Utility plant in service $44,658 $34,986 $45,687
Accumulated depreciation $25,243 $16,970 $19,295
Construction work in
progress $ 4,171 $ 461 $ 327
Total plant capacity - mw 449 624 427
Company's share 23.4% 8.7% 10.0%
In-service date 1975 1979 1981
Coal contract
expiration date 1999 1998 2016
(9) Employee Retirement Benefits -
The Company maintains a noncontributory defined benefit pension plan
covering substantially all employees. The benefits to which an employee is
entitled under the plan are derived using a formula based on the number of
years of service and compensation levels as defined. The Company
determines the annual funding for its plan using the frozen initial
liability cost method. The Company's annual contribution is funded in
accordance with the requirements of ERISA. Assets of the plan consist
primarily of debt and equity securities.
The components of net periodic pension cost for the years ended
December 31, 1996, 1995 and 1994 were as follows (in thousands):
1996 1995 1994
-------- -------- --------
Service cost $ 958 $ 755 $ 948
Interest cost on projected
benefit obligation 3,506 3,144 3,176
Actual return on assets (5,745) (10,082) 586
Net amortization
and deferral 1,608 6,475 (4,391)
-------- -------- --------
Net periodic pension cost $ 327 $ 292 $ 319
======== ======== ========
The following table reflects the funded status of the Company's
pension plan as of December 31, 1996, 1995 and 1994 (in thousands):
1996 1995 1994
-------- -------- --------
Actuarial present value of:
Accumulated benefit obligation -
Vested $43,950 $39,946 $34,436
Nonvested 1,577 1,417 1,197
-------- -------- --------
45,527 41,363 35,633
Provision for future
pay increases 4,531 5,488 3,993
-------- -------- --------
Projected benefit
obligation 50,058 46,851 39,626
Plan assets at fair value 56,507 52,762 44,501
-------- -------- --------
Projected benefit obligation
less than plan assets (6,449) (5,911) (4,875)
Unrecognized transition
obligation (1,392) (1,547) (1,702)
Unrecognized net gain 4,821 5,381 5,365
-------- -------- --------
Prepaid pension cost $(3,020) $(2,077) $(1,212)
======== ======== ========
The assumptions used in calculating the projected benefit obligation
for 1996, 1995 and 1994 were as follows:
1996 1995 1994
-------- -------- --------
Discount rate 7.25% 7.75% 8.50%
Expected rate of return
on assets 8.50% 8.50% 8.50%
Long-term rate of increase
in compensation levels 3% 3% 4%
The Company provides an employee savings plan which permits all
employees to defer receipt of compensation as provided in Section 401(k) of
the Internal Revenue Code. Under the plan, any employee may elect to
direct up to twelve percent of their gross compensation be contributed to
the plan. The Company contributes 50 cents for every one dollar
contributed by the employee, up to a maximum Company contribution of three
percent of the employee's gross compensation. Costs incurred under the
plan were $594,000, $479,000, and $468,000 in 1996, 1995 and 1994. The
Company also provides an Employee Stock Ownership Plan (ESOP) for full-time
employees. The ESOP is funded primarily with federal income tax savings
which arise from tax laws applicable to such employee benefit plans.
Certain Company contributions and shares of stock acquired by the ESOP are
allocated to participants' accounts in proportion to the compensation of
employees during the particular year for which allocation is made. Costs
incurred under the plan were $849,000, $810,000 and $705,000 in 1996, 1995
and 1994.
The Company also has various supplemental retirement plans for outside
directors and selected management employees. The plans are nonqualified
defined benefit plans that provide for certain amounts of salary
continuation in the event of death before or after retirement, or certain
supplemental retirement benefits in lieu of any death benefits. In
addition, the Company provides life insurance benefits to beneficiaries of
all eligible employees who represent a reasonable insurable risk. To
minimize the overall cost of plans providing life insurance benefits, the
Company has obtained life insurance coverage that is sufficient to fund
benefit obligations. Costs incurred under the plans were $1,291,000,
$648,000 and $552,000 in 1996, 1995 and 1994.
Cornerstone provides employee savings plans which permits all
employees to defer receipt of compensation as provided in Section 401(k) of
the Internal Revenue Code. Under the plans, any employee may elect to
direct a percentage of their gross compensation be contributed to the
plans. Cornerstone at its discretion may match a portion of the employee
contribution and may also make a profit sharing contribution.
(10) Environmental Matters -
The Company is subject to environmental regulations from numerous
entities. The Clean Air Act Amendments of 1990 (the Act) stipulate
limitations on sulfur dioxide and nitrogen oxide emissions from coal-fired
power plants. The Company believes it can economically meet such sulfur
dioxide emission requirements at its generating plants by the required
compliance dates and that it is in compliance with all presently applicable
environmental protection requirements and regulations. The Company is also
subject to other environmental regulations including matters related to
former manufactured gas plant sites. During 1995, the Company remediated a
site located at Huron, South Dakota through thermal desorption of residues
in the soil. Adjustments of the Company's natural gas rates to reflect the
costs associated with the remediation were approved through the regulatory
process. The Company is pursuing recovery from insurance carriers. No
administrative or judicial proceedings involving the Company are now
pending or known by the Company to be contemplated under present
environmental protection requirements.
(11) Cumulative Preferred Stock and Preference Stock -
The provisions of the 6 1/2% Series stock contain a five-year put
option exercisable by the holders of the securities and a 10 year
redemption option exercisable by the Company. In any event, redemption
will occur at par value. The cumulative preferred stock, 4 1/2% Series,
may be redeemed in whole or in part at the option of the Board of Directors
at any time upon at least 30 days notice at $110.00 per share, plus accrued
dividends.
In the event of involuntary dissolution, all Company preferred stock
outstanding would have a preferential interest of $100 per share, plus
accumulated dividends, before any distribution to common stockholders.
The Company is also authorized to issue a maximum of 1,000,000 shares
of preference stock at a par value of $50 per share. No preference shares
have ever been issued.
(12) Segments of Business -
The four primary segments of the Company's business are its electric,
natural gas distribution, propane and manufacturing operations. The
following table summarizes certain information specifically identifiable
with each segment as of or for the years ended December 31 (in thousands):
1996 1995 1994
-------- -------- --------
Depreciation and
Amortization Expense:
Electric $ 10,620 $ 10,503 $ 10,115
Natural Gas 2,492 2,185 1,996
Propane 5,730 1,562 -
Manufacturing 572 383 328
-------- -------- --------
$ 19,414 $ 14,633 $ 12,439
-------- -------- --------
Capital Expenditures:
Electric $ 19,598 $ 17,868 $ 16,023
Natural Gas 8,172 6,521 6,425
Propane 7,349 4,726 -
Manufacturing 51 522 233
-------- -------- --------
$ 35,170 $ 29,637 $ 22,681
-------- -------- --------
Assets:
Identifiable -
Electric $223,262 $218,006 $210,872
Natural Gas 66,213 59,384 52,008
Propane 611,707 173,665 -
Manufacturing 14,946 16,409 13,843
Corporate assets 197,588 91,257 82,343
-------- -------- --------
$1,113,716 $558,721 $359,066
----------- -------- --------
Identifiable assets include all assets that are used directly in each
business segment. Corporate assets consist of assets not directly
assignable to a business segment, i.e., cash, investments, certain accounts
receivable, prepayments and other miscellaneous current and deferred
assets.
(13) Quarterly Financial Data (unaudited) -
First Second Third Fourth
------- ------- ------- --------
(thousands except per share amounts)
1996: Operating revenues $97,219 $56,681 $49,705 $140,404
Operating income 23,813 6,436 4,652 15,517
Net income 13,309 3,353 1,301 8,091
Average shares 8,920 8,920 8,920 8,920
Earnings per average
common share $ 1.40 $ .29 $ .06 $ .81
------- ------- ------- --------
1995: Operating revenues $50,754 $40,107 $45,548 $ 68,561
Operating income 12,929 6,679 6,908 11,581
Net income 7,103 3,049 3,140 6,014
Average shares 7,677 7,677 8,277 8,889
Earnings per average
common share $ .92 $ .39 $ .32 $ .59
======= ======= ======= ========
The 1995 quarterly earnings per average common share do not total to
1995 annual earnings per average common share due to the effect of
common stock issuances during the year.