-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VqUOFzJbJgYZgQgzHq4DdimLNnsD1kvattgib8tmG87ElfBp1eRCktZNe/1sQvhs K8bAJiDKRJp7/TDA4l19uw== 0000073088-97-000005.txt : 19970401 0000073088-97-000005.hdr.sgml : 19970401 ACCESSION NUMBER: 0000073088-97-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTHWESTERN PUBLIC SERVICE CO CENTRAL INDEX KEY: 0000073088 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 460172280 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-10499 FILM NUMBER: 97571717 BUSINESS ADDRESS: STREET 1: 33 THIRD ST SE STREET 2: PO BOX 1318 CITY: HURON STATE: SD ZIP: 57350-1318 BUSINESS PHONE: 6053528411 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) ( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 or ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________ Commission File No. 0-692 NORTHWESTERN PUBLIC SERVICE COMPANY (Exact name of registrant as specified in its charter) Delaware 46-0172280 (State of Incorporation) (IRS Employer Identification No.) 33 Third Street SE Huron, South Dakota 57350-1318 (Address of principal office) (Zip Code) 605-352-8411 (Registrant's telephone number) Securities registered pursuant to Section 12(b) of the Act: Common Stock, $3.50 par value New York Stock Exchange Company Obligated Mandatorily Redeemable New York Stock Exchange Security of Trust Holding Solely Parent Debentures, $25.00 liquidation amount (Title of each class) (Name of each exchange on which registered) Securities registered pursuant to Section 12(g) of the Act: Preferred Stock, Par Value $100 (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ( X ) Yes ( ) No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( ) State the aggregate market value of the voting stock held by nonaffiliated of the registrant: $334,023,000 as of February 18, 1997 Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: Common Stock, Par Value $3.50 8,922,632 shares outstanding at February 18, 1997 DOCUMENTS INCORPORATED BY REFERENCE: 1996 Annual Report to Stockholders . . . . . . . . Parts I and II Proxy Statement for 1997 Annual Meeting . . . . . . . . Parts I and III PART I ITEM 1. BUSINESS GENERAL DEVELOPMENT OF BUSINESS Northwestern Public Service Company (Company) is a diversified energy distribution company with core operations engaged in the electric, natural gas, and propane businesses. The Company generates and distributes electric energy to 56,000 customers in eastern South Dakota. The Company also purchases, distributes, sells, and transports natural gas to 77,000 customers in Central Nebraska and eastern South Dakota. 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. Through its other subsidiaries, the Company is engaged in additional nonregulated operations as more fully discussed in the section entitled "Nonregulated Operations". The Company was incorporated under the laws of the State of Delaware in 1923 and is qualified to conduct its utility business in the states of South Dakota, Nebraska, Iowa, and North Dakota. The Company does not serve any utility customers in North Dakota or Iowa. The Company has its principal office at 33 Third Street SE, Huron, South Dakota 57350-1318. Its telephone number is 605-352-8411. FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS Financial information about industry segments is incorporated by reference to Note 12 of the "Notes to Consolidated Financial Statements" on page 19 of the financial section of the Company's 1996 Annual Report to Stockholders, filed as an Exhibit hereto. NARRATIVE DESCRIPTION OF BUSINESS Pursuant to the South Dakota Public Utilities Act, the South Dakota Public Utilities Commission (PUC) assigned as the Company's electric service territory the communities and adjacent rural areas in which the Company provides electric service in South Dakota. The Company has the right to provide electric service to present and future electric customers in its assigned service territory for so long as the service provided is deemed adequate. Under the South Dakota Public Utilities Act, effective July 1, 1976, the Company is not required to obtain or renew municipal franchises to provide electric service within its assigned service territory. The Company has nonexclusive municipal franchises to provide gas service in the Nebraska and South Dakota communities in which it provides such service. The maximum term permitted under Nebraska law for such franchises is 25 years while the maximum term permitted under South Dakota law is 20 years. The Company's policy is to seek renewal of a franchise in the last year of its term. The Company has never been denied the renewal of any of these franchises and does not anticipate that any future renewals would be withheld. Unlike the Company's electric and natural gas businesses, propane distribution rates and service areas are unregulated. In an unregulated business such as propane, the Company is competing against a number of other distributors. There are, however, certain inherent barriers for customers to overcome in switching from one propane delivery service provider to another. The Company believes that its ownership of propane storage tanks installed at customers' premises, together with safety regulations which prohibit other propane distributors from filling the propane tanks and cylinders at the customers' premises, promotes long- standing relationships which are typical in the retail propane industry. The cost and inconvenience of switching tanks tend to minimize the switching by customers among suppliers on the basis of minimal price variations. Conversely, it also makes it more difficult for the Company to acquire new customers, other than through acquisitions, in areas where there are existing relationships between potential customers and other distributors. Weather patterns have a material impact on the Company's operating performance for all three segments of its energy business. This impact is particularly relevant for natural gas and propane. 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 the future, 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 significantly less than historical periods. ELECTRIC BUSINESS ELECTRIC SALES. On a consolidated basis, 21% of the Company's 1996 operating revenues were from the sale of electric energy. All of the Company's electric revenues are derived from customers in South Dakota. The Company has relatively few large customers in its service territory. By customer category, 37% of 1996 total electric sales was from residential sales, 55% was from commercial and industrial sales, 1% was from street lighting and sales to public authorities, and 7% was from sales for resale. Sales for resale primarily include power pool sales to other utilities. Power pool sales fluctuate from year to year depending on a number of factors including the Company's availability of excess short-term generation and the ability to sell the excess power to other utilities in the power pool. The Company also sells power and energy at wholesale to certain municipalities for resale and to various governmental agencies. In 1996, these sales accounted for less than 1% of total electric sales. CAPABILITY AND DEMAND. The Company shares in the ownership of the Big Stone Generating Plant (Big Stone), located near Big Stone City in northeastern South Dakota. In North Dakota, the Company maintains transmission facilities to interconnect with electric transmission lines of other utilities and shares in the ownership of the Coyote I Electric Generating Plant (Coyote), located near Beulah, North Dakota. In Iowa, the Company shares in the ownership of Neal Electric Generating Unit #4 (Neal), located near Sioux City, Iowa. At December 31, 1996, the aggregate net summer peaking capacity of all Company-owned electric generating units was 306,572 kw, consisting of 102,703 kw from Big Stone (the Company's 23.4% share), 42,700 kw from Coyote (the Company's 10.0% share), 54,169 kw from Neal (the Company's 8.7% share), and 107,000 kw from internal combustion turbine units and small diesel units, used primarily for peaking purposes. In addition to those plant facilities, the Company entered into an agreement in 1995 to purchase up to 14,950 kw of firm capacity from Basin Electric Cooperative to assist in meeting peak capacity demands. The Company has also contracted with Nebraska Public Power District to purchase various amounts of firm capacity to further assist in supplying peak energy demands. The Company is a summer peaking utility. The 1996 peak demand of 260,159 kw occurred on June 27, 1996. Total system capability at the time of peak was 321,522 kw. The reserve margin for 1996 was 19%. The minimum reserve margin requirement as determined by the members of the Mid- Continent Area Power Pool (MAPP), of which the Company is a member, is 15%. MAPP is an area power pool arrangement consisting of utilities and power suppliers having transmission interconnections located in a 9-state area in the North Central region of the United States and in two Canadian provinces. The objective of MAPP is to accomplish coordination of planning and operation of generation and interconnecting transmission facilities to provide reliable and economical electric service to members' customers, consistent with reasonable utilization of natural resources and protection of the environment. While benefiting from the advantages of the planning, coordination, and operations of MAPP, each member has the right and obligation to own or otherwise provide the facilities to meet its own requirements. The terms and conditions of the MAPP agreement and transactions between MAPP members are subject to the jurisdiction of the Federal Energy Regulatory Commission (FERC). The MAPP agreement was accepted for filing by the FERC effective 1972. The Company also has interconnections with the transmission facilities of Otter Tail Power Company, Montana-Dakota Utilities Co., Northern States Power Company, and Western Area Power Administration; and has emergency interconnections with transmission facilities of East River Electric Cooperative, Inc. and West Central Electric Cooperative. These interconnections and pooling arrangements enable the Company to arrange purchases or sales of substantial quantities of electric power and energy with other pool members and to participate in the benefits of pool arrangements. The Company has finalized an integrated resource plan to identify how it will meet the energy needs of its customers. The plan includes estimates of customer usage and programs to provide for economic, reliable, and timely supplies of energy. The plan does not anticipate the need for additional baseload generating capacity for at least the next ten years. FUEL SUPPLY. Lignite and sub-bituminous coal were utilized by the Company as fuel for virtually all of the electric energy generated during 1996. North Dakota lignite is the primary fuel at Coyote. The Company burned Montana sub-bituminous coal at Big Stone during 1996. During 1996, the average heating value of lignite burned was 6,974 BTU per pound at Coyote. The sulfur content of this lignite is typically between 0.8% and 1.2%. The Montana sub-bituminous coal burned at Big Stone contained an average heating value of 8,825 BTU per pound and a sulfur content between 0.55% and 0.75%. Neal burned Wyoming sub-bituminous coal which had an average heating value of 8,491 BTU per pound during 1995. Typically, the sulfur content of this coal is between 0.30% and 0.40%. The Company's fuel costs have remained relatively stable. The average cost by type of fuel burned is shown below for the periods indicated: Cost Per Million BTU % of 1996 Year Ended December 31 Megawatt ---------------------- Hours Fuel Type 1994 1995 1996 Generated ----- ----- ---- --------- Lignite - Big Stone $1.10 $1.09 - 0% Sub-bituminous-Big Stone - 1.00 $.95 46% Lignite - Coyote** .86 .83 .86 26% Sub-bituminous-Neal .74 .76 .75 28% Natural Gas 2.21 1.80 2.24 * Oil 3.90 3.96 4.65 * *Combined for approximately one percent. **Includes pollution control reagent. During 1996, the average delivered cost per ton of lignite was $11.25 to Coyote. The average cost per ton of sub-bituminous coal received at Big Stone for 1996 was $16.91. The average cost for coal delivered to Neal was $12.08 per ton for 1996. Such amounts include severance taxes imposed by the states of North Dakota and Montana and a production tax imposed by the state of Wyoming. While the effect on the Company's fuel costs of future changes in severance or production taxes cannot be predicted, any changes in the Company's fuel costs may be passed on to its customers through the operation of the fuel adjustment clause. This feature of the Company's electric rates is more fully discussed in the section entitled "Regulation". The continued delivery of lignite and sub-bituminous coal to the three large steam generating units in which the Company is part owner is reasonably assured by contracts covering various periods of the operating lives of these units. The contract for delivery of Montana sub-bituminous coal to Big Stone expires in 1999, further evaluations will be conducted during the contract term to select a coal supply for periods beyond 1999. The contract for delivery of lignite to Coyote, which expires in 2016, provides for an adequate fuel supply for the estimated economic life of that plant. Neal receives Wyoming sub-bituminous coal under a long-term contract which expires in 1998. In the near future, the Company, along with the other owners of Neal, will begin to study options for the supply of coal for periods beyond the expiration date. Following test burns in 1990 and 1991, the owners of the Big Stone Plant received approval from the South Dakota Department of Environment and Natural Resources to burn tire derived fuel (TDF) and refuse derived fuel (RDF). The quantity of TDF and RDF that was burned in 1996 is insignificant when compared to total coal consumption at the plant. The fossil fuel supplies for Big Stone and Neal are delivered via unit trains belonging to the respective plants' owners and locomotives of the Burlington Northern Railroad and the Union Pacific Railroad, respectively. The lignite supply for Coyote is delivered via conveyor at this "mine- mouth" plant. In early 1996, the Company and its partners at Big Stone executed a fifteen year operating lease agreement for unit train cars. This agreement was effective late in 1996. The prior unit train cars were sold to another third party independent of the leasing transaction. While the Company has no firm contract for diesel fuel for its other electric generating plants, it has been able to purchase its diesel fuel requirements in recent years from local suppliers and currently has in storage an amount adequate to satisfy its normal requirements for such fuel. Additional information relating to jointly owned plants is incorporated by reference to Note 8 of the "Notes to Consolidated Statements" on page 17 of the financial section of the Company's 1996 Annual Report to Stockholders filed as an Exhibit hereto. NATURAL GAS BUSINESS NATURAL GAS SALES AND DEMAND. On a consolidated basis, 21% of the Company's 1996 operating revenues were from the sale of natural gas energy. During 1996, the Company derived 55% of its natural gas revenues from South Dakota and 45% from Nebraska. The Company's peak daily sendout was 134,072 MMBTU. CAPABILITY AND SUPPLY. The Company owns and operates natural gas distribution systems serving 38,023 customers in eastern South Dakota. In 1996 the Company completed construction of a new natural gas pipeline in northern South Dakota which increased internal capacity by 15,000 MMBTU per day. In 1995, the Company executed a service agreement with Cibola Energy Services Corporation (Cibola) whereby Cibola coordinates supply and transportation services. The agreement with Cibola and Northern Natural Gas pipeline and storage capacity, supplemented with peak shaving capacity allows the Company to meet its peak day system needs. This agreement provides for firm deliverable pipeline capacity of approximately 49,300 MMBTU per day in South Dakota. In Nebraska, the Company owns and operates natural gas distribution systems serving 39,455 retail customers in the village of Alda and the cities of Grand Island, Kearney, and North Platte, Nebraska. The Company purchases all of its natural gas for these systems through KN Gas Marketing, Inc. (KN) under a service agreement entered in 1995 whereby KN coordinates supply and transportation services. This agreement provides for firm deliverable pipeline capacity of approximately 58,000 MMBTU per day in Nebraska. In 1992, FERC issued Order 636. Order 636 requires, among other provisions, that all companies with natural gas pipelines separate natural gas supply or production services from transportation service and storage businesses. This allows gas distribution companies, such as the Company, and individual customers to purchase gas directly from producers, third parties, and various gas marketing entities and transport it through the suppliers' pipelines. The Company has operated under the restructured environment during the past three years. To supplement firm gas supplies, the Company's service agreements with Cibola and KN also provide for underground natural gas storage services to meet the heating season and peak day requirements of its gas customers. In addition, the Company also owns and operates six propane-air plants with a total rated capacity of 18,000 MMBTU per day, or approximately 17% of peak day requirements. The propane-air plants provide an economic alternative to pipeline transportation charges to meet the peaks caused by customer demand on extremely cold days. A few of the Company's industrial customers purchase their natural gas requirements directly from gas marketing firms for transportation and delivery through the Company's distribution system. The transportation rates have been designed to make the Company economically indifferent as to whether the Company sells and transports gas or only transports gas. PROPANE BUSINESS Effective August 15, 1995, the Company acquired Synergy Group, Inc. (Synergy), a retail propane distributor with operations in the eastern and south-central regions of the United States. Synergy was acquired through a subsidiary (SYN Inc.) formed for this purpose. Late in 1995, two smaller propane companies were acquired: Western Gas on November 20 and Myers Propane Gas Company on December 7. Propane complements the Company's electric and natural gas distribution businesses and adds geographical diversity to its operations. On October 7, 1996, the Company completed the acquisition of Empire Energy Corporation (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. On December 17, 1996, a wholly owned subsidiary of Northwestern Growth Corporation acquired CGI Holdings, Inc. (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 from the sale of 9,821,000 Common Units of Cornerstone and the net proceeds from the issuance 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. Additional information regarding the acquisitions is incorporated by reference to Note 2 of the "Notes to Consolidated Statements" on page 13 of the financial section of the Company's 1996 Annual Report to Stockholders, filed as an Exhibit hereto. SALES. On a consolidated basis, 51% of the Company's 1996 operating revenues were from the sale of propane. Operating revenues recorded of $175.1 million on sales of 160 million gallons do not reflect a full year of operations due to various acquisitions. Similar to its electric and natural gas businesses, no single customer accounts for a significant portion of the Company's propane sales. By customer category, propane sales were 50% residential, 21% commercial and industrial, 13% agriculture related, 4% other, and 12% to wholesale customers. Agricultural uses of propane include tobacco curing, crop drying, and poultry breeding. Other customers include industrial customers who use propane to fire furnaces, as a cutting gas, and in other process applications. Other industrial customers include large scale heating accounts, local gas utility customers who maintain a standby propane capability for use during peak demand periods, and customers who use propane as a feedstock in manufacturing processes. SUPPLY AND DISTRIBUTION. The Company purchased propane from various suppliers, including major domestic oil companies and independent producers of gas liquid and oil and made occasional spot market transactions. The majority of the propane purchases were on a contractual basis under one- year agreements subject to annual renewal. The largest supplier provided approximately 13% of the total volumes purchased under contract. The percentage of contract purchases may vary from year to year depending on a number of factors. Supply contracts generally provide for pricing in accordance with posted prices at the time of delivery or contract prices established at major storage points, and some contracts include a pricing formula that typically is based on such market prices. The Company has established relationships with a number of suppliers and believes it will have ample sources of supply under comparable terms to draw upon to meet the necessary propane requirements if it were to discontinue purchasing propane from its two largest suppliers. The Company has not experienced a shortage that has prevented it from satisfying its own customers' needs and does not foresee any significant shortage in the supply of propane that would cause a disruption in meeting the needs of the Company's customers as well. The Company primarily uses common carriers and railroad tank cars to transport propane from refineries, natural gas processing plants or pipeline terminals to the Company's bulk storage plants. The transportation of propane requires specialized equipment. The trucks and railroad cars utilized for this purpose carry specialized steel tanks that maintain the propane in a liquefied state. Propane delivery to customers is made by means of 917 bulk delivery tank trucks owned by the Company. Propane is stored by the customers on their premises in stationary steel tanks generally ranging in capacity from 120 to 1,000 gallons, with large users having tanks with a capacity of 30,000 gallons. A majority of the propane storage tanks used by the Company's residential and commercial customers are owned by the Company. In addition, a certain number of Company owned tanks are provided to customers under a leasing agreement. COMPETITION Although the Company's electric service territory is assigned according to the South Dakota Public Utilities Act, and the Company has the right to provide electric service to present and future electric customers in its assigned service area for so long as the service provided is deemed adequate, the energy industry in general has become increasingly competitive. Electric service also competes with other forms of energy and the degree of competition may vary from time to time depending on relative costs and supplies of other forms of energy. The National Energy Policy Act of 1992 (Energy Act) was designed to promote energy efficiency and increased competition in the electric wholesale markets. The Energy Act also allows the FERC to order wholesale wheeling by public utilities to provide utility and nonutility generators access to public utility transmission facilities. The provision allows the FERC to set prices for wheeling, which will allow utilities to recover certain costs from the companies receiving the services, rather than the utilities' retail customers. Many states are currently considering retail wheeling, which aims to provide all customers with the right to choose their electricity supplier. No regulatory proposals with respect to retail wheeling have yet been formally introduced in South Dakota. Federal Energy Regulatory Commission Order 636 requires, among other provisions, that all companies with natural gas pipelines separate natural gas supply or production services from transportation service and storage businesses. This allows gas distribution companies, such as the Company, and individual customers to purchase gas directly from producers, third parties, and various gas marketing entities and transport it through the suppliers' pipelines. While Order 636 had positive aspects by providing for more diversified supply and storage options, it also required the Company to assume responsibility for the procurement, transportation, and storage of natural gas. The alternatives now available under Order 636 create additional pressure on all distribution companies to keep gas supply and transportation pricing competitive, particularly for large customers. 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. REGULATION The Company is a "public utility" within the meaning of the Federal Power Act and the South Dakota Public Utilities Act and, as such, is subject to the jurisdiction of, and regulation by, FERC with respect to issuance of securities, the PUC with respect to electric service territories, and both FERC and the PUC with respect to rates, service, accounting records, and in other respects. The State of Nebraska has no centralized regulatory agency which has jurisdiction over the Company's operations in that state; however, the Company's natural gas rates are subject to regulation by the municipalities in which it operates. Under the South Dakota Public Utilities Act, effective July 1, 1976, a requested rate increase may be implemented by the Company 30 days after the date of its filing unless its effectiveness is suspended by the PUC and, in such event, can be implemented subject to refund with interest six months after the date of filing, unless sooner authorized by the PUC. The Company's electric rate schedules provide that it may pass along to all classes of customers qualified increases or decreases in the cost of fuel used in its generating stations and in the cost of fuel included in purchased power. A purchased gas adjustment provision in its gas rate schedules permits the Company to pass along to gas customers increases or decreases in the cost of purchased gas. The Company filed no electric rate cases in South Dakota during the three years ended December 31, 1996. A natural gas increase was implemented in South Dakota on November 15, 1994. Effective April 1, 1995, the Company implemented increased rates related to its Nebraska natural gas service area as a result of a negotiated settlement with representatives of the four communities in which the Company operates. These new rates will generate additional annual revenues of $2.3 million, based on normal weather, or an overall increase of 8.3%. On April 24, 1996, FERC issued its final rule (Order No. 888) on wholesale electric transmission open access and recovery of stranded costs. On July 9, 1996, the Company filed proposed tariffs with FERC in compliance with Order 888. Under the proposed tariffs, which became effective on July 10, 1996, eligible transmission service customers can choose to purchase transmission services from a variety of options ranging from full use of the transmission network on a firm long-term basis to a fully interruptible service available on an hourly basis. The proposed tariffs also include a full range of ancillary services necessary to support the transmission of energy while maintaining reliable operations of the Company's transmission system. The Company is awaiting final approval of the proposed tariffs by FERC. On August 27, 1996, the Company filed a Request for Waiver of the requirements of FERC Order No. 889 as it relates to the Standards of Conduct. The Standards of Conduct require companies to physically separate their transmission operations/reliability functions from their marketing/merchant functions. The Request for Waiver is based on criteria established by FERC, exempting small public utilities as defined by the United States Small Business Administration. The Request for Waiver was approved by FERC on November 26, 1996. ENVIRONMENTAL MATTERS The Company is subject to regulation with regard to air and water quality, solid waste disposal, and other environmental considerations by Federal, state, and local governmental authorities. The application of governmental requirements to protect the environment involves or may involve review, certification, issuance of permits, or similar action by government agencies or authorities, including the United States Environmental Protection Agency (EPA), the South Dakota Department of Environment and Natural Resources (DENR), the North Dakota State Department of Health, and the Iowa Department of Environmental Quality, as well as compliance with decisions of the courts. CLEAN AIR ACT. The Clean Air Act Amendments of 1990 (the Clean Air Act) which stipulate limitations on sulfur dioxide and nitrogen oxide emissions from certain coal-fired power plants will require the purchase of additional emission allowances or a reduction in sulfur dioxide emissions beginning in the year 2000 from Big Stone. The Company believes Big Stone can most economically meet the sulfur dioxide emission requirements of the Clean Air Act by changing its fuel source from North Dakota lignite to low- sulfur western sub-bituminous coal available in the region as evidenced by the switch made to Montana sub-bituminous coal in August 1995. The Company's other baseload plants, Coyote and Neal, are expected to comply with the sulfur dioxide emission limitations through the use of existing flue gas scrubbing and low sulfur coal without the need for additional emission allowances. With regard to the Clean Air Act's nitrogen oxide emission requirements, the Neal wall-fired boiler is expected to meet the emission limitations for such boilers. The Clean Air Act does not yet specify nitrogen oxide limitations for boilers with cyclone burners such as those used at Big Stone and Coyote because practical low-nitrogen oxide cyclone burner technology does not exist. It requires the EPA to establish nitrogen oxide emission limitations before 1997 for cyclone boilers including taking into account that the cost to accomplish such limits be comparable to retrofitting low-nitrogen oxide burner technology to other types of boilers. In addition, it also requires future studies to determine what controls, if any, should be imposed on coal-fired boilers to control emissions of certain air toxics other than sulfur and nitrogen oxides. Because of the uncertain nature of cyclone boiler nitrogen oxide and air toxic emission limits, the Company cannot now determine the additional costs, if any, it may incur due to these provisions of the Clean Air Act. PCBs. The Company has met or exceeded the removal and disposal requirements of equipment containing polychlorinated biphenyls (PCBs) as required by state and Federal regulations. The Company will use some PCB- contaminated equipment for its remaining useful life, and dispose of the equipment according to pertinent regulations that govern that use and disposal of this equipment. PCB-contaminated oil is burned for energy recovery at a permitted facility. STORAGE TANKS. The South Dakota DENR and the EPA adopted regulations imposing requirements upon the owners and operators of above ground and underground storage tanks. The Company's fuel oil storage facilities at its generating plants in South Dakota are affected by the above ground tank regulations, and the Company has instituted procedures for compliance. SITE REMEDIATION. The Company conducted an investigation of a manufactured gas plant (MGP) site and took remedial action during 1995 by permanently removing the residues contained in the soil through a thermal desorption process. In May 1996, EPA Region VIII (which includes South Dakota, North Dakota, Colorado, Utah, Wyoming, and Montana) selected the Company to receive an Outstanding Achievement Award for Leadership and Innovation. EPA Region VIII chose recipients who had demonstrated protection and enhancement of Region VIII's environment. Adjustments of the Company's natural gas rates to reflect the costs associated with the remediation were approved by the South Dakota Public Utilities Commission. The Company is pursuing recovery from insurance carriers. Any recovery from insurance regarding the MGP soil remediation costs, less costs of insurance recovery, will be passed back to customers. OTHER. In addition to the Clean Air Act, the Company is also subject to other environmental regulations. The Company believes that it is in compliance with all presently applicable environmental protection requirements and regulations. However, the Company is unable to forecast the effect which future environmental regulations may ultimately have upon the cost of its utility related facilities and operations. No administrative or judicial proceedings involving the Company are now pending or known by the Company to be contemplated under presently effective environmental protection requirements. SITING. The states of South Dakota, North Dakota, and Iowa have enacted laws with respect to the siting of large electric generating plants and transmission lines. The South Dakota PUC, the North Dakota Public Service Commission, and the Iowa Utilities Board have been granted authority in their respective states to issue site permits for nonexempt facilities. PROPANE TRANSPORTATION AND SAFETY MATTERS. The Company's propane operations are subject to various Federal, state, and local laws governing the transportation, storage and distribution of propane, occupational health and safety, and other matters. All states in which the Company operates have adopted fire safety codes that regulate the storage and distribution of propane. In some states, these laws are administered by state agencies, and in others they are administered on a municipal level. Certain municipalities prohibit the underground installation of propane furnaces and appliances, and certain states are considering the adoption of similar regulations. The Company currently meets and exceeds Federal regulations requiring that all persons employed in the handling of propane gas be trained in proper handling and operating procedures. All employees have participated, or will participate within 90 days of their employment date, in hazardous materials training. The Company has established ongoing training programs in all phases of product knowledge and safety including participation in the National Propane Gas Association's (NPGA) Certified Employee Training Program. CAPITAL SPENDING AND FINANCING The Company's primary ongoing 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 capabilities, expand its current customer base, and provide for the reliability of energy supply. Capital expenditure plans are subject to continual review and may be revised as a result of changing economic conditions, variations in sales, environmental requirements, investment opportunities, and other ongoing considerations. Expenditures for construction activities for 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 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, 1996 and 1995 included $9.8 million and $4.7 million of capital expenditures related to propane. Construction expenditures for 1997, excluding propane, 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 capital expenditures for 1997 are estimated to be $4.8 million. Estimated nonregulated 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 both internally generated cash flows, available investments and available external financing. The Company plans to continue to evaluate and pursue opportunities to enhance shareholder return through nonregulated business investments. Nonregulated projects are expected to be financed from the existing investment portfolio and from other available financing options. Information relating to capital resources and liquidity is incorporated by reference to "Management's Discussion and Analysis" on pages 1 - 6 of the financial section of the Company's 1996 Annual Report to Stockholders, filed as an Exhibit hereto. NONREGULATED OPERATIONS GRANT, INC. Grant, Inc., which holds title to property not used in the Company's utility business, was incorporated in South Dakota in 1972. NORTHWESTERN ENERGY CORPORATION. Northwestern Energy Corporation markets natural gas and energy related services, and has interests in nonregulated energy holdings. NORTHWESTERN GROWTH CORPORATION (NGC). NGC was incorporated under the laws of South Dakota in 1994 to pursue and manage nonutility investments and development activities. NGC owns majority common stock control of SYN Inc., the entity created to acquire Synergy and Western Gas. Other NGC assets include a portfolio of marketable securities and the investments of two subsidiaries: Northwestern Networks, Inc., which holds a common stock investment in LodgeNet Entertainment Corporation, a provider of television entertainment and information systems to hotels and motels, and Northwestern Systems, Inc., which owns 100% of the common stock of Lucht Inc., a firm that develops, manufactures, and markets multi-image photographic printers and other related equipment. Although the primary focus of NGC's investment program will be to continue to seek growth opportunities in the energy, energy equipment, and energy services industries, NGC will also continue to pursue opportunities in existing and emerging growth entities in non-energy industries that meet return and capital gain requirements. Additional information relating to nonregulated business is incorporated by reference to "Management's Discussion and Analysis" on pages 1 - 6 of the financial section of the Company's 1996 Annual Report to Stockholders, filed as an Exhibit hereto. EMPLOYEES At December 31, 1996, the Company had 436 utility employees. A three- year collective bargaining agreement which expires June 30, 1998, covers 239 operating and clerical employees. The Company has never experienced a work stoppage or strike and considers its relationship with its employees to be very good. At December 31, 1996, the Company had 1,995 employees involved in its propane operations. None of these employees are represented by unions. The Company has not experienced any work stoppage or other significant labor problems and believes it has a good relationship with its employees. At December 31, 1996, the Company had 150 employees involved in its manufacturing operations. None of these employees are represented by unions. The Company has not experienced any work stoppage or other significant labor problems and believes it has a good relationship with its employees. EXECUTIVE OFFICERS OF THE REGISTRANT R. A. Wilkens, Chairman of the Board, age 68 Chairman of the Board of Directors since February 1994. Formerly Chief Executive Officer from 1990-1994; President from 1980-1994. M. D. Lewis, President and Chief Executive Officer, age 49 President and Chief Executive Officer since February 1994; formerly Executive Vice President from May 1993, to February 1994; Executive Vice President-Corporate Services 1992-1993; Vice President-Corporate Services 1987-1992; Assistant Corporate Secretary 1982-1993. Mr. Lewis also serves as Chairman and Chief Executive Officer of Northwestern Growth Corporation since September 1994. Mr. Lewis is also a member of the board of directors of Cornerstone Propane Partners, Lucht, Inc. and Northwestern Energy Corporation. Mr. Lewis has been elected to serve as Chairman of the Board of Northwestern Public Service effective May 1, 1997. R. R. Hylland, Executive Vice President, age 36 Executive Vice President - Strategic Development since November 1995; formerly Vice President-Strategic Development from August 1995 to November 1995; Vice President Corporate Development from 1993-1995; Vice President-Finance from 1991-1995; Treasurer from 1990-1994; Mr. Hylland also serves as President and Chief Operating Officer of Northwestern Growth Corporation since September 1994. Mr. Hylland is also a member of the board of directors of Northwestern Public Service, Northwestern Growth Corporation, LodgeNet Entertainment Corporation, Lucht, Inc., Cornerstone Propane Partners and Franklin Industries. A. D. Dietrich, Vice President - Administration and Corporate Secretary, age 46 Vice President-Administration since November 1994; Corporate Secretary since October 1989; formerly Vice President-Legal May 1990-November 1994. A. R. Donnell, Vice President - Energy Operations, age 53 Vice President-Energy Operations since November 1994; formerly Vice President-Electric Operations July 1987-November 1994. T. A. Gulbranson, Vice President - Energy Services, age 49 Vice President - Energy Services since January 1996; formerly Vice President November 1994-January 1996; Vice President-Corporate Services May 1993-November 1994; Vice President-Community Development 1988-1993. R. F. Leyendecker, Vice President - Market Development, age 51 Vice President-Market Development since January 1996; formerly Vice President-Energy Services November 1994-January 1996; Vice President- Rates & Regulation 1987-November 1994. W. K. Lotsberg, Vice President - Public Affairs, age 54 Vice President-Public Affairs since May 1994; formerly Vice President- Consumer Affairs March 1989-May 1994. D. K. Newell, Vice President - Finance, age 40 Vice President - Finance since July 1995. Joined the Company in July 1995. Formerly CFO, Vice President - Finance and Treasurer with Energy Fuels Corporation. Mr. Newell also serves as Executive Vice President of Northwestern Growth Corporation since July 1995. Mr. Newell also is a member of the board of directors of Northwestern Growth Corporation, Cornerstone Propane Partners, Lucht, Inc. and Franklin Industries. D. C. Oberlander, Assistant Vice President, age 51 Assistant Vice President since May 1994; formerly Controller April 1991-May 1994; Assistant Controller December 1990-April 1991; Manager- Information Systems 1979-1990. R. A. Thaden, Vice President - Communications and Treasurer, age 45 Vice President-Communications since February 1997; Treasurer since November 1994; formerly Manager-Corporate Accounting 1987-November 1994. Ms. Thaden also serves as Vice President and Treasurer of Northwestern Growth Corporation since September 1995. All of the executive officers of the registrant serve at the discretion of the Board and are elected annually by the Board of Directors following the Annual Meeting of Stockholders. No family relationships exist between any officers of the Company. ITEM 2. PROPERTIES ELECTRIC PROPERTY The Company's electric properties consist of an interconnected and integrated system. The Company, Otter Tail Power Company (Otter Tail), and Montana-Dakota Utilities Co. (MDU) jointly own Big Stone, a 455,783 kilowatt (kw) nameplate capacity coal-fueled electric generating plant and related transmission facilities. Big Stone is operated by Otter Tail for the benefit of the owners. The Company owns 23.4% of the Big Stone Plant. The Company is one of four power suppliers which jointly own Coyote, a 455,782 kw nameplate capacity lignite-fueled electric generating plant and related transmission facilities located near Beulah, North Dakota. The Company has a 10% interest in Coyote, which is operated by MDU for the benefit of the owners. The Company is one of 14 power suppliers which jointly own Neal, a 639,999 kw nameplate capacity coal-fueled electric generating plant and related transmission facilities located near Sioux City, Iowa. MidAmerican Energy Company is principal owner of Neal and is the operator of the unit. The Company has an 8.7% interest in Neal. The Company has an undivided interest in these jointly owned 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. Each participant finances its own investment. 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. In addition to its interest in Big Stone, Coyote and Neal, the Company owns and operates 19 fuel oil and gas-fired units for peaking and reserve capacity. As of December 31, 1996, the aggregate nameplate capacity of all Company-owned electric generating units was 327,419 kw, with an aggregate net summer peaking capacity of 306,572 kw and a net winter peaking capacity of 327,449 kw. In addition to owned capacity, the Company entered into two contractual agreements to purchase firm capacity to assist in meeting peak energy needs. The Company's interconnected transmission system consists of 321.8 miles operating at 115 kilovolts (kv) and 897.6 miles operating at 69 kv and 34.5 kv. The Company also owns three segments of transmission line, which are not tied to its internal system, in connection with its joint ownership in the three large steam generating plants. These lines consist of 18.2 miles of 230 kv line from Big Stone, 25.4 miles of 345 kv line from Neal, and 23.1 miles of 345 kv line from Coyote. In addition to these lines, the Company owns 1,732.3 miles of distribution lines serving customers in more than 100 communities and adjacent rural areas. The Company owns 38 transmission substations with a total rated capacity of 1,111,417 kilovolt amperes (kva), two mobile substations with a total rated capacity of 5,500 kva and 78 distribution substations with a total rated capacity of 350,949 kva. GAS PROPERTY On December 31, 1996, the Company owned 1,017 miles of distribution mains and appurtenant facilities in South Dakota. The Company also owns propane-air facilities in Aberdeen, Brookings, Huron, and Mitchell, South Dakota, having a total rated capacity of 15,280 MMBTU per day, which are operated for standby and peak shaving purposes only. On December 31, 1996, the Company owned 659 miles of distribution mains and appurtenant facilities in Nebraska. The Company also owns propane-air facilities at Kearney and North Platte, Nebraska, having a total rated capacity of 9,380 MMBTU per day, which are operated for standby and peak shaving purposes only. PROPANE PROPERTY The Company operates 312 service centers consisting of appliance showrooms, bulk storage plants, warehousing space, maintenance facilities, garages, and storage depots of large propane tanks with associated distribution equipment. These service center facilities are located in 26 states comprised of Texas, New Mexico, Oklahoma, Mississippi, Tennessee, Arkansas, Missouri, Vermont, New Hampshire, New York, Maryland, New Jersey, Virginia, North Carolina, South Carolina, Ohio, Florida, California, Alaska, Nevada, Utah, Indiana, Illinois, Georgia, Alabama, and Kentucky. CHARACTER OF OWNERSHIP All mortgage bonds issued under the Company's General Mortgage Indenture and Deed of Trust dated as of August 1, 1993 (the "Indenture") are secured by a first mortgage lien on the Company's properties used in the generation, production, transmission or distribution of electric energy or the distribution of natural gas in any form and for any purpose, with certain exceptions expressly provided in the Indenture. The principal offices and properties of the Company are held in fee and are free from other encumbrances, subject to minor exceptions, none of which is of such a nature as substantially to impair the usefulness to the Company of such properties. In general, the electric lines and natural gas lines and mains are located on land not owned in fee, but are covered by necessary consents of various governmental authorities or by appropriate rights obtained from owners of private property. These consents and rights are deemed adequate for the purposes for which they are being used. ITEM 3. LEGAL PROCEEDINGS The Company is a party to various pending proceedings and suits, but in the judgment of management after consultation with counsel for the Company, the nature of such proceedings and suits, and the amounts involved do not depart from the routine litigation and proceedings incident to the kind of business conducted by the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No issues were submitted to a vote of security holders during the last quarter of the period covered by this report. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information required by this Item 5 is incorporated by reference to page 21 of the Company's 1996 Annual Report to Stockholders, filed as an Exhibit hereto. ITEM 6. SELECTED FINANCIAL DATA The information required by this Item 6 is incorporated by reference to "Financial Statistics" on page 21 of the financial section of the Company's 1996 Annual Report to Stockholders, filed as an Exhibit hereto. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The information required by this Item 7 is incorporated by reference to "Management's Discussion and Analysis" on pages 1 - 6 of the financial section of the Company's 1996 Annual Report to Stockholders, filed as an Exhibit hereto. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this Item 8 is incorporated by reference to the Company's financial statements and related footnotes on pages 11 - 20, of the financial section of the Company's 1996 Annual Report to Stockholders, filed as an Exhibit hereto. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no changes in accountants or disagreements on accounting principles or practices or financial statement disclosures. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (a) IDENTIFICATION OF DIRECTORS The information regarding directors required by this Item 10 and paragraphs (a) and (e) of Item 401 of Regulation S-K is incorporated by reference to the information under "Election of Directors" in the Company's definitive Proxy Statement dated March 15, 1997, and filed with the Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934 within 120 days after the close of the Company's fiscal year ended December 31, 1996. The information relating to the Company's executive officers is set forth in Part I of this Annual Report on Form 10-K. Reports to the Securities and Exchange Commission The information required by Item 405 of Regulation S-K is incorporated by reference to the information under "Reports to the Securities and Exchange Commission" in the Company's definitive Proxy Statement dated March 15, 1997 and filed with the Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934 within 120 days after the close of the Company's fiscal year ended December 31, 1996. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item 11 is incorporated by reference to the information under "Compensation of Directors and Executive Officers" in the Company's definitive Proxy Statement dated March 15, 1997, and filed with the Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934 within 120 days after the close of the Company's fiscal year ended December 31, 1996. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item 12 is incorporated by reference to the information under "Securities Ownership by Directors and Officers" in the Company's definitive Proxy Statement dated March 15, 1997, and filed with the Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934 within 120 days after the close of the Company's fiscal year ended December 31, 1996. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company has no relationships or transactions covered by this item. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) DOCUMENTS FILED AS PART OF THIS REPORT 1. Financial Statements The following items are included in this annual report by reference to the registrant's Annual Report to Stockholders for the year ended December 31, 1996: Page in financial section of Annual Report to Stockholders FINANCIAL STATEMENTS: Report of Independent Public Accountants 7 Consolidated Statements of Income and Retained Earnings for the Three Years Ended December 31, 1996 8 Consolidated Statement of Cash Flows for the Three Years Ended December 31, 1996 9 Consolidated Balance Sheets, December 31, 1996 and 1995 10 Notes to Consolidated Financial Statements 11-20 Quarterly Unaudited Financial Data for the Two Years Ended December 31, 1996 20 2. Financial Statement Schedules The following supplemental financial data included herein should be read in conjunction with the financial statements referenced above: Page in Form 10-K ---------- Report of Independent Public Accountants 26 Schedule II - Valuation and Qualifying Accounts 27 Schedules other than those listed above are omitted because of the absence of the conditions under which they are required or because the information required is included in the financial statements or the notes thereto. 3. Exhibits The exhibits listed on the Exhibit Index beginning on page 28 of this Annual Report on Form 10-K are filed herewith or are incorporated herein by reference to other filings. (b) REPORTS ON FORM 8-K No reports on Form 8-K have been filed during the quarter ended December 31, 1996. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NORTHWESTERN PUBLIC SERVICE COMPANY (Registrant) /s/ M. D. Lewis M. D. Lewis, Director and President and Chief Executive Officer March 15th, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ R. A. Wilkens - ------------------------------- R. A. Wilkens, Chairman of the Board of Directors /s/ M. D. Lewis - ------------------------------- M. D. Lewis, Director and President and Chief Executive Officer /s/ R. R. Hylland - ------------------------------- R. R. Hylland, Director and Executive Vice President /s/ D. K. Newell - ------------------------------- D. K. Newell, Vice President-Finance (Principal Financial Officer) /s/ Rogene A. Thaden - ------------------------------- Rogene A. Thaden, Vice President-Communications and Treasurer (Principal Accounting Officer) /s/ Jerry W. Johnson - ------------------------------- Jerry W. Johnson, Director /s/ Aelred J. Kurtenbach - ------------------------------- Aelred J. Kurtenbach, Director /s/ Herman Lerdal - ------------------------------- Herman Lerdal, Director /s/ Larry F. Ness - ------------------------------- Larry F. Ness, Director /s/ Raymond M. Schutz - ------------------------------- Raymond M. Schutz, Director /s/ Bruce I. Smith - ------------------------------- Bruce I. Smith, Director /s/ Gary Olson - ------------------------------- Gary Olson, Director REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Northwestern Public Service Company: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in Northwestern Public Service Company's annual report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated January 31, 1997. Our audit was made for the purpose of forming an opinion on those financial statements taken as a whole. The schedule listed in the table of contents of financial statements is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Minneapolis, Minnesota, January 31, 1997 NORTHWESTERN PUBLIC SERVICE COMPANY AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E - ---------------------------- ----------- --------------------- --------- ----------- Additions Balance --------------------- Beginning Charged to Charged Balance of Period Costs and to Other Deductions End Description Expenses Expenses of Period - ---------------------------- ------------ ----------- --------- ------------ ----------- FOR THE YEAR ENDED DECEMBER 31, 1996 - ------------------------------------ RESERVES DEDUCTED FROM APPLICABLE ASSETS: Uncollectible accounts $ 8,704,698 $3,109,374 $ $(6,445,418) $ 5,368,654 =========== =========== ======== ============ =========== OTHER DEFERRED CREDITS: Reserve for decommissioning costs $ 7,788,482 $ 511,341 $ $ $ 8,299,823 =========== =========== ======== ============ =========== FOR THE YEAR ENDED DECEMBER 31, 1995 - ------------------------------------ RESERVES DEDUCTED FROM APPLICABLE ASSETS: Uncollectible accounts $ 5,907,675 $ 827,909 $ $ (310,681) $ 6,424,903 =========== =========== ======== ============ =========== OTHER DEFERRED CREDITS: Reserve for decommissioning costs $ 7,278,173 $ 510,309 $ $ $ 7,788,482 =========== =========== ======== ============ =========== FOR THE YEAR ENDED DECEMBER 31, 1994 - ------------------------------------ RESERVES DEDUCTED FROM APPLICABLE ASSETS: Uncollectible accounts $ 400,000 $ 129,039 $ $ (129,039) $ 400,000 =========== =========== ======== ============ =========== OTHER DEFERRED CREDITS: Reserve for decommissioning costs $ 6,769,631 $ 508,542 $ $ $ 7,278,173 =========== =========== ======== ============ =========== The beginning balance for 1996 and 1995 were restated to reflect propane acquisitions that occurred during those periods. All deductions from reserves were for purposes for which such reserves were created.
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K FOR YEAR ENDED DECEMBER 31, 1996 (3) ARTICLES OF INCORPORATION AND BY-LAWS 3(a)(1) Registrant's Restated Certificate of Incorporation, dated February 7, 1990, is incorporated by reference to Exhibit 3(a)(1) to Form 10-K for the year ended December 31, 1989, Commission File No. 0-692. 3(a)(2) Certificate of Retirement of Preferred Stocks, dated January 13, 1992, is incorporated by reference to Exhibit 3(a)(2) to Form 10-K for the year ended December 31, 1991, Commission File No. 0-692. 3(a)(3) Certificate of Amendment of Restated Certificate of Incorporation, dated May 16, 1996. 3(a)(4) Certificate of Retirement of Preferred Stocks, dated June 20, 1996. 3(b) Registrant's By-Laws, as amended, dated August 7, 1996. (4) INDENTURES AND POLLUTION CONTROL FACILITY OBLIGATIONS 4(a)(1) General Mortgage Indenture and Deed of Trust, dated as of August 1, 1993, from the Company to The Chase Manhattan Bank (National Association), as Trustee, is incorporated by reference to Exhibit 4(a) of Form 8-K, dated August 16, 1993, Commission File No. 0-692. 4(a)(2) Supplemental Indenture, dated August 15, 1993, from the Company to The Chase Manhattan Bank (National Association), as Trustee, is incorporated by reference to Exhibit 4(b) of Form 8-K, dated August 16, 1993, Commission File No. 0-692. 4(a)(3) Letter Agreement, dated July 28, 1995, from the Company to The Chase Manhattan Bank (National Association), as Trustee, the Travelers Insurance Company, and Metropolitan Life Insurance Company pursuant to which each party agreed to amend the 1940 Mortgage Indenture and allow bonds issued under the 1940 Indenture be exchanged for comparable bonds under the 1993 General Mortgage Indenture and Deed of Trust. 4(a)(4) Supplemental Indenture, dated August 1, 1995, from the Company to The Chase Manhattan Bank (National Association), as Trustee, is incorporated by reference to Exhibit 4(b) of Form 8-K, dated August 30, 1995, Commission File No. 0-692. 4(a)(5) Supplemental Indenture, dated September 1, 1995, from the Company to The Chase Manhattan Bank (National Association), as Trustee, concerning the New Mortgage Bonds, 6.99% Series due 2002. 4(a)(6) Supplemental Indenture, dated September 1, 1995, from the Company to The Chase Manhattan Bank (National Association), as Trustee, concerning the New Mortgage Bonds, 8.824% Series due 1998. 4(a)(7) Supplemental Indenture, dated September 1, 1995, from the Company to The Chase Manhattan Bank (National Association), as Trustee, concerning the New Mortgage Bonds, 8.90% Series due 1999. 4(b)(1) Preferred Securities Guarantee Agreement, dated August 3, 1995, between the Company and Wilmington Trust Company is incorporated by reference to Exhibit 1(d) of Form 8-K, dated August 30, 1995, Commission File No. 0-692. 4(b)(2) Declaration of Trust of NWPS Capital Financing I is incorporated by reference to Exhibit 4(d) of Form 8-K, dated August 30, 1995, Commission File No. 0-692. 4(b)(3) Amended and Restated Declaration of Trust of NWPS Capital Financing I is incorporated by reference to Exhibit 4(e) of Form 8-K, dated August 30, 1995, Commission File No. 0-692. 4(b)(4) Subordinated Debt Securities Indenture, dated August 1, 1995, between the Company and The Chase Manhattan Bank (National Association), as Trustee, is incorporated by reference to Exhibit 4(f) of Form 8-K, dated August 30, 1995, Commission File No. 0-692. 4(b)(5) First Supplemental Indenture, dated August 1, 1995, to the Subordinated Debt Securities Indenture is incorporated by reference to Exhibit 4(g) of Form 8-K, dated August 30, 1995, Commission File No. 0-692. 4(c)(1) Copy of Sale Agreement between Company and Mercer County, North Dakota, dated June 1, 1993, related to issuance of Pollution Control Refunding Revenue Bonds (Northwestern Public Service Company Project) Series 1993, is incorporated by reference to Exhibit 4(b)(1) of Registrant's report on Form 10-Q for the quarter ending June 30, 1993, Commission File No. 0-692. 4(c)(2) Copy of Loan Agreement between Company and Grant County, South Dakota, dated June 1, 1993, related to issuance of Pollution Control Refunding Revenue Bonds (Northwestern Public Service Company Project) Series 1993A, is incorporated by reference to Exhibit 4(b)(2) of Registrant's report on Form 10-Q for the quarter ending June 30, 1993, Commission File No. 0-692. 4(c)(3) Copy of Loan Agreement between Company and Grant County, South Dakota, dated June 1, 1993, related to issuance of Pollution Control Refunding Revenue Bonds (Northwestern Public Service Company Project) Series 1993B, is incorporated by reference to Exhibit 4(b)(3) of Registrant's report on Form 10-Q for the quarter ending June 30, 1993, Commission File No. 0-692. 4(c)(4) Copy of Loan Agreement between Company and City of Salix, Iowa, dated June 1, 1993, related to issuance of Pollution Control Refunding Revenue Bonds (Northwestern Public Service Company Project) Series 1993, is incorporated by reference to Exhibit 4(b)(4) of Registrant's report on Form 10-Q for the quarter ending June 30, 1993, Commission File No. 0-692. (10) MATERIAL CONTRACTS 10(a)(1) Supplemental Income Security (Retirement) Plan for Directors, Officers and Managers, as amended January 1, 1997. 10(a)(2) Deferred Compensation Plan for Non-employee Directors adopted November 6, 1985, is incorporated by reference to Exhibit 10(g)(2) to Form 10-K for the year ended December 31, 1988, Commission File No. 0-692. 10(a)(3) Pension Equalization Plan, dated August 5, 1987, is incorporated by reference to Exhibit 10(g)(4) to Form 10-K for the year ended December 31, 1988, Commission File No. 0-692. 10(a)(4) Director Retirement Plan, dated November 4, 1987, as amended May 3, 1995, is incorporated by reference to Exhibit 10(a)(4) to Form 10-K for the year ended December 31, 1995, Commission File No. 0-692. 10(a)(5) Long-term Incentive Compensation Plan (Phantom Stock Unit Plan) for Directors and Officers, dated February 1, 1989, as amended May 3, 1996. 10(a)(6) Form of Severance Agreement for Officers, dated November 1, 1995, is incorporated by reference to Exhibit 10(a)(6) to Form 10-K for the year ended December 31, 1995, Commission File No. 0-692. 10(a)(7) Annual Performance Incentive Plan (NorthSTAR Plan) for all eligible employees, as amended May 1, 1996. (13) REPORT FURNISHED TO SECURITY HOLDERS 13(a) Annual Report for fiscal year ended December 31, 1996, furnished to stockholders of record on March 11, 1997 (exhibit filed herewith). (21) SUBSIDIARIES OF REGISTRANT State of Jurisdiction of Incorporation Name or Limited Partnership - ------------------------------------- ---------------------- Northwestern Public Service Company Delaware Grant, Inc. South Dakota Northwestern Growth Corporation South Dakota Northwestern Networks, Inc. South Dakota Northwestern Systems, Inc. South Dakota Lucht Inc. Delaware Cornerstone Propane GP, Inc. California SYN Inc. (1) Delaware Cornerstone Propane Delaware - Partners, L.P.(2) Limited Partnership Northwestern Energy Corporation South Dakota Nekota Resources Inc. South Dakota (1) Cornerstone Propane GP, Inc. owns 82.5% of the common stock of SYN Inc. (2) Cornerstone Propane GP, Inc. and SYN Inc. own a combined partnership interest of 41.4% of Cornerstone Propane Partners, L.P. EX-3 2 Exhibit 3(a)(3) CERTIFICATE OF AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION OF NORTHWESTERN PUBLIC SERVICE COMPANY Northwestern Public Service Company, a corporation organized and existing under the laws of the State of Delaware (hereinafter called the "Company"), by its Chairman of the Board of Directors and its Corporate Secretary, does hereby certify as follows: 1. That the Board of Directors of the Company at a meeting of said Board duly called, convened and held on February 7, 1996, proposed six amendments to the Restated Certificate of Incorporation of the Company, as previously amended, which amendments affected Article Fourth of said Restated Certificate of Incorporation, and at said meeting adopted a resolution setting forth the amendments proposed, unanimously declaring their advisability, and directing that, at the Annual Meeting of Stockholders to be held on May 1, 1996, two amendments (the first of which is the first amendment below) be submitted to the holders of Common Stock of the Company, and four amendments (set forth as the second, third, fourth, and fifth amendments below) be submitted to the holders of Common Stock and the holders of Cumulative Preferred Stock of the Company, those being the only classes of stock of the Company having voting rights in respect of said proposed amendments and that the amendments so proposed and declared advisable by the Board of Directors of the Company which were approved (another proposed amendment presented to the holders of Common Stock failed to receive a favorable vote from a majority of the shares outstanding) are as follows: AMENDMENT ONE That the first paragraph of Article Fourth of the Restated Certificate of Incorporation of Northwestern Public Service Company (the "Company"), as heretofore amended, is hereby amended to increase the total authorized capital stock of the Company by increasing to 1,000,000 the number of authorized shares of Preference Stock, of the par value of $50 per share, of the Company. AMENDMENT TWO That the first paragraph of Article Fourth of the Restated Certificate of Incorporation of Northwestern Public Service Company (the "Company"), as heretofore amended, is hereby amended to increase the total authorized capital stock of the Company by increasing to 1,000,000 the number of authorized shares of Cumulative Preferred Stock, of the par value of $100 per share, of the Company (such Cumulative Preferred Stock being also called "New Preferred Stock" in said Restated Certificate of Incorporation). AMENDMENT THREE That the Restated Certificate of Incorporation of Northwestern Public Service Company, as heretofore amended, is hereby amended by deleting therefrom in its entirety subparagraph (c)(i) in subdivision 6-I of Division A of Article Fourth therein. AMENDMENT FOUR That the Restated Certificate of Incorporation of Northwestern Public Service Company, as heretofore amended, is hereby amended by deleting therefrom in its entirety subparagraph (a) in subdivision 6-II of Division A of Article Fourth. AMENDMENT FIVE That the Restated Certificate of Incorporation of Northwestern Public Service Company, as heretofore amended, is hereby amended by deleting therefrom in its entirety Section 2 of Division B of Article Fourth. 2. That the first paragraph of Article Fourth of the Restated Certificate of Incorporation of Northwestern Public Service Company, if restated to reflect Amendment One and Amendment Two, as stated above, would read as follows: The total authorized capital stock of the Company is (i) 1,000,000 shares of Cumulative Preferred Stock, of the par value of $100 per share (hereinafter called the "New Preferred Stock"), (ii) 1,000,000 shares of Preference Stock, if the par value of $50 per share, and (iii) 20,000,000 shares of Common Stock, of the par value of $3.50 per share. 3. That subdivision 6-I of Division A of Article Fourth of the Restated Certificate of Incorporation of Northwestern Public Service Company, if restated to reflect Amendment Three, as stated above, would read as follows: I. So long as any shares of New Preferred Stock are outstanding, the Company shall not, without the affirmative vote given at a stockholders' meeting whereat the New Preferred Stock shall vote separately as a class, or without the written consent, of the record holders of two-thirds of the outstanding shares of New Preferred Stock: (a) Amend the provisions of the Certificate of Incorporation of the Company, as then in effect, so as to create or authorize any stock ranking prior in any respect to the shares of the New Preferred Stock then outstanding, or as to create or authorize any stock convertible into stock ranking prior in any respect to the shares of New Preferred Stock then outstanding, or issue any such prior- ranking stock or stock convertible into such prior-ranking stock; or (b) Change, by amendment of the Certificate of Incorporation of the Company, as then in effect, or otherwise, the terms and provisions of the New Preferred Stock so as to affect adversely the rights and preferences of the holders thereof; provided, however, that if any such amendment is adverse to the rights and preferences of the holders of one or more, but less than all, of the series of New Preferred Stock at the time outstanding, the vote or consent only of the holders of at least two-thirds of the total number of shares of each series so adversely affected shall be required; or (c) Issue any shares of New Preferred Stock or shares of any stock ranking pari passu with the New Preferred Stock as to dividends or liquidation rights, or any securities convertible into shares of New Preferred Stock or stock ranking pari passu with the New Preferred Stock as to dividends or liquidation rights, otherwise than in exchange for or for the purpose of effecting the redemption or other retirement of, not less than an equal number of shares of New Preferred Stock or shares of any stock ranking pari passu with the New Preferred Stock as to dividends or liquidation rights, at the time outstanding, unless the Common Stock equity as defined in subdivision 2 of Division B hereof shall be not less than the aggregate par value of all shares of New Preferred Stock and the aggregate par value or stated value of all other shares of stock, if any, ranking prior to or pari passu with the New Preferred Stock as to dividends or liquidation rights, which will be outstanding after the issue of the shares or convertible securities proposed to be issued. 4. That subdivision 6-II of Division A of Article Fourth of the Restated Certificate of Incorporation of Northwestern Public Service Company, if restated to reflect Amendment Four, as stated above, would read as follows: So long as any shares of New Preferred Stock are outstanding, the Company shall not, without the affirmative vote given at a stockholders' meeting whereat the New Preferred Stock shall vote separately as a class, or without the written consent, of the record holders of a majority of the outstanding shares of New Preferred Stock: (a) Merge or consolidate the Company with or into any other corporation or corporations (provided that this provision shall not apply to a purchase or other acquisition by the Company of franchises or assets of another corporation in any manner which does not involve a statutory merger or consolidation); or (b) Sell, lease or exchange all or substantially all of the property and assets of the Company. No vote or consent of the holders of the New Preferred Stock shall be required under the provisions of this subdivision 6, if at or prior to the taking of any action described in this subdivision 6, provision is made for the retirement, by redemption or otherwise, of all shares of New Preferred Stock then outstanding. 5. That Division B of Article Fourth of the Restated Certificate of Incorporation of Northwestern Public Service Company, if restated to reflect Amendment Five, as stated above, would read as follows: DIVISION B -- COMMON STOCK 1. Voting Rights The holders of the Common Stock shall be entitled to one vote for each share of such stock held by them at any meeting of stockholders for any purpose or matter submitted to a vote at a meeting of the stockholders. Any action required or permitted to be taken by the holders of the Common Stock shall be taken only at an annual meeting or special meeting of such holders and shall not be taken without a meeting by a consent in writing. Special meetings of stockholders of the corporation may be called at any time by the Chairman of the Board of Directors, by the President, by any one of the Vice Presidents, by the Secretary or upon the written request of the holders of a majority of the capital stock of the corporation outstanding at the time and entitled to vote on the matter or matters to be presented at the meeting, on at least ten days' notice to each stockholder by mail at such stockholder's last known post office address, specifying the time, place and object of the special meeting. 2. Distribution of Assets In the event of any liquidation, dissolution or winding up of the Company or any reduction of its capital resulting in any distribution of its assets to its stockholders, after there shall have been paid to or set apart for the holders of the New Preferred Stock and the Preference Stock the full preferential amounts to which they are entitled, the holders of the Common Stock shall be entitled to receive pro rata all of the remaining assets of the Company available for distribution to its stockholders. 6. That thereafter pursuant to the aforesaid resolution of its Board of Directors, at the Annual Meeting of Stockholders of the Company duly held on May 1, 1996, and completed following an adjournment to May 8, 1996, holders of the necessary number of shares of Common Stock, as required by statute and the Restated Certificate of Incorporation of the Company, as amended, voted in favor of the first amendment hereinbefore set forth; and the holders of necessary of shares of Common Stock voting separately as a class and holders of the necessary number of shares of Cumulative Preferred Stock, all series thereof voting together as a single class, all as required by statute and the Restated Certificate of Incorporation of the Company, as amended, each voted in favor of the second, third, fourth, and fifth of such amendments. 7. That accordingly, the amendments of the Restated Certificate of Incorporation of the Company, as hereinbefore set out, have been duly adopted in accordance with the provisions of Section 242 of Title 8 of the Delaware Code. 8. The capital of the Company will not be reduced under or by reason of the amendments. IN WITNESS WHEREOF, said Northwestern Public Service Company has caused its corporate seal to be hereunto affixed and this certificate to be signed by R. A. Wilkens, its Chairman of the Board of Directors, and attested by Alan D. Dietrich, its Corporate Secretary, this 16th day of May, 1996. NORTHWESTERN PUBLIC SERVICE COMPANY By /s/ R. A. Wilkens ___________________________________ R. A. Wilkens Chairman of the Board of Directors Attest: /s/ Alan D. Dietrich ______________________________ Alan D. Dietrich, Corporate Secretary (Corporate Seal) Northwestern Public Service Company 1923 Delaware EX-3 3 Exhibit 3(a)(4) NORTHWESTERN PUBLIC SERVICE COMPANY CERTIFICATE OF RETIREMENT OF PREFERRED STOCKS Northwestern Public Service Company (the "Company"), a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Law") hereby certifies as follows: 1. The Company, in compliance with the provisions of its Restated Certificate of Incorporation and resolutions of its Board of Directors, has, on the dates shown below redeemed 1300 shares of Company's issued and outstanding 5 1/4% Cumulative Preferred Stock (1961 Series), par value $100 each, as follows: 300 shares redeemed on June 1, 1992 300 shares redeemed on June 1, 1993 300 shares redeemed on June 1, 1994 300 shares redeemed on June 1, 1995 100 shares redeemed on June 1, 1996 2. Pursuant to the provisions of Section 243 of the Law, said redeemed shares have the status of retired shares, and the Restated Certificate of Incorporation of the Company prohibits the reissue of said shares as part of the same series when so redeemed so that such shares resume the status of authorized and unissued shares of the class, but not of the series, to which they belong. Upon this Certificate becoming effective as provided by law, the Restated Certificate of Incorporation of the Company shall hereby be further amended so as to reduce the number of authorized shares of the series to which such redeemed and retired shares belong, by the number of shares redeemed and retired as stated above. 3. The shares of the 5 1/4% Cumulative Preferred Stock (1961 Series) of the Company redeemed and retired as stated above constitute all of the outstanding shares of the series to which said shares belong. IN WITNESS WHEREOF, the Company has caused this Certificate to be signed by M. D. Lewis, its President and Chief Executive Officer, and attested by Alan D. Dietrich, its Corporate Secretary, this 20th day of June, 1996. NORTHWESTERN PUBLIC SERVICE COMPANY By /s/ M.D. Lewis ______________________________________ M. D. Lewis, President & CEO Attest: /s/ Alan D. Dietrich ______________________________ Alan D. Dietrich, Corporate Secretary (Corporate Seal) EX-3 4 Exhibit 3(b) NORTHWESTERN PUBLIC SERVICE COMPANY BY-LAWS (As Amended to and Including August 7, 1996) ARTICLE I Section 1. Principal Office. The principal office of the Company shall be located in the City of Wilmington, County of New Castle, and State of Delaware, and the name of the agent therein and in charge thereof, and upon whom legal process against the corporation may be served (until otherwise determined by the Board of Directors) is the CORPORATION TRUST COMPANY OF AMERICA. Section 2. Other Offices. Offices of the Company where meetings of the stockholders and directors may be held, shall be and are hereby, established in the City of Huron, Beadle County, South Dakota, or such other places within or without the State of Delaware, as may from time to time be established by the Board of Directors. ARTICLE II Section 1. Annual Meeting. The annual meeting of stockholders for the election of directors and for such other business as may properly be conducted at such meeting shall be held at such time and date as the Board of Directors shall designate from time to time and set forth in the notice of the meeting. Such meeting shall be held at the office of the corporation in the City of Wilmington, Delaware, or at the office of the corporation in the City of Huron, South Dakota, or at such other place within or without the State of Delaware, as may be designated in the notice of the meeting. Section 2. Special Meetings. Special meetings of the stockholders may be called by the Chairman of the Board, the President or any Vice President, or by order of the Board of Directors whenever they deem it necessary, and it shall be their duty to order and call such meetings whenever persons holding a majority of the outstanding capital stock of the corporation entitled to be voted at such meeting, shall in writing request the same. Such special meetings shall be held at the office of the corporation in the City of Wilmington, Delaware, or at the office of the corporation in the City of Huron, South Dakota, or at such other place within or without the State of Delaware, as may be designated in the notice of the meeting, and the business of such special meeting shall be confined to the objects stated in the notice thereof. Section 3. Notice of Meetings. Notice of the time and place of the annual, and of any special meeting of the stockholders, shall be given by the Corporate Secretary to each of the stockholders entitled to vote at such meetings by posting the same in postage prepaid letters, addressed to each such stockholder at the address left with the Corporate Secretary of the Corporation, or at his last known address, or by delivering same personally, at least ten days prior to such meeting. The notice of a special meeting shall also set forth the objects of the meeting. Any or all of the stockholders may waive notice of the annual or any special meeting, and the presence of a stockholder at any meeting, in person or by proxy, shall be deemed a waiver of notice thereof by him. Meetings of the stockholders may be held at any time and place and for any purpose without notice, when all of the stockholders entitled to vote at such meetings are present in person or by proxy, or when all of such stockholders waive notice and consent to the holding of such meeting. Section 4. Voting at Stockholders' Meetings. At all meetings of stockholders each holder of stock having voting power or entitled to vote at such meetings shall be entitled to one vote for each share of stock held by him at the time of the closing of the transfer books for said meeting, or on the record date fixed by the Board of Directors for that purpose as provided in Section 2 of Article VI of these By-laws, and if such transfer books shall not have been closed or any record date fixed, then for each share of stock standing registered in his name at the time of the meeting; provided, always, that except when the transfer books have been closed or a record date fixed, as aforesaid, no share of stock shall be voted at any election which has been transferred on the books of the corporation within twenty days next preceding such election. Such vote may be given personally or by proxy authorized in writing. Only the persons in whose names shares of stock shall stand on the books of the corporation at the time aforesaid shall be entitled to vote in person or by proxy upon the shares of stock standing in their name. No proxy shall be voted on after three years from its date. Section 5. Quorum. The holders for the time being of a majority of the total number of shares of stock issued and outstanding and entitled to be voted at any meetings represented in person or by proxy, shall constitute a quorum for the transaction of business at such meetings unless the representation of a larger number shall be required by law. In the absence of a quorum, the stockholders attending or represented at the time and place at which a meeting shall have been called, may adjourn the meeting from time to time until a quorum shall be present. At any such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted by a quorum of the stockholders at the meeting as originally convened. Section 6. Presiding Officer and Secretary. The Chairman of the Board, or in the Chairman's absence the President, or in the President's absence a Vice President, shall call meetings of the stockholders to order and shall act as chairman of such meetings. The Board of Directors may appoint any stockholder to act as chairman at any meeting in the absence of the Chairman of the Board, the President and Vice Presidents, and, in default of any appointment by the Board of Directors of a chairman, the stockholders may elect a chairman to preside at the meeting. The Corporate Secretary, or an Assistant Corporate Secretary, of the corporation shall act as Secretary at all meetings of the stockholders, but in their absence the stockholders or presiding officer may appoint any person to act as Secretary of the meeting. Section 7. Business at Annual Meeting. No business may be transacted at an annual meeting of stockholders, other than business that is either (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors (or any duly authorized committee thereof), (b) otherwise properly brought before the annual meeting by or at the direction of the Board of Directors (or any duly authorized committee thereof) or (c) otherwise properly brought before the annual meeting by any stockholder of the corporation (i) who is a stockholder of record on the date of the giving of the notice provided for in this Section 7 of this Article and on the record date for the determination of stockholders entitled to vote at such annual meeting and (ii) who complies with the notice procedure set forth in this Section 7. In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a stockholder, such stockholder must have given timely notice thereof in proper written form to the Corporate Secretary. To be timely, a stockholder's notice to the Corporate Secretary must be delivered to or mailed and received at the principal office of the Company not less than 90 days nor more than 120 days prior to the date of the annual meeting of stockholders, provided, however, that in the event that less than 100 days' notice or prior public disclosure of the date of the meeting is given to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the tenth (10th) day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure of the date of the annual meeting was made, whichever first occurs. To be in proper written form, a stockholder's notice to the Corporate Secretary must set forth as to each matter such stockholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and record address of such stockholder, (iii) the class or series and number of shares of capital stock of the Company that are owned beneficially or of record by such stockholder, (iv) a description of all arrangements or understandings between such stockholder and any other person or persons (including their names) in connection with the proposal of such business by such stockholder and any material interest of such stockholder in such business and (v) a representation that such stockholder intends to appear in person or by proxy at the annual meeting to bring such business before the meeting. No business shall be conducted at the annual meeting of stockholders except business brought before the annual meeting in accordance with the procedures set forth in this Section 7, provided, however, that, once business has been properly brought before the annual meeting in accordance with such procedures, nothing in this Section 7 shall be deemed to preclude discussion by any stockholder of any such business. If the chairman of an annual meeting determines that business was not properly brought before the annual meeting in accordance with the foregoing procedures, the chairman of the meeting shall declare to the meeting that the business was not properly brought before the meeting and such business shall not be transacted. ARTICLE III BOARD OF DIRECTORS Section 1. Election, Qualification and Filling of Vacancies. The business and affairs of the Company shall be managed by or under the direction of a Board of Directors. The number of Directors shall be no less than nine (9) and no greater than twelve (12). Within the limits specified above, the number of Directors constituting the Board of Directors of the Company shall be fixed from time to time by or pursuant to a resolution passed by the Board of Directors. However, no decrease in the number of Directors shall have the effect of shortening the term of any incumbent Director. The number of Directors of the Company may exceed twelve (12) when and to the extent needed to permit the holders of shares of the New Preferred Stock to elect a majority of Directors under subdivision 5 of Division A of Article Fourth of the Company's Restated Certificate of Incorporation. The Board of Directors shall be and is divided into three classes, Class I, Class II and Class III, which shall be as nearly equal in number as possible. Each Director shall serve for a term ending on the date of the third annual meeting of stockholders following the annual meeting of stockholders at which such Director was elected; provided, however, that each initial Director in Class I shall hold office until the annual meeting of stockholders in 1986; each initial Director in Class II shall hold office until the annual meeting of stockholders in 1987; and each initial Director in Class III shall hold office until the annual meeting of stockholders in 1988. Directors elected at the annual meeting of stockholders shall be elected by a plurality of the votes cast for election of Directors. In the event of any increase or decrease in the number of Directors, (i) each Director then serving as such shall nevertheless continue as a Director of the class of which he is a member until the expiration of his current term, or his prior death, retirement, resignation, or removal, and (ii) the newly created or eliminated directorships resulting from such increase or decrease shall be apportioned by the Board of Directors among the three classes of Directors so as to maintain such classes as nearly equal in number as possible. Notwithstanding any of the foregoing provisions of this Section, each Director shall serve until his successor is elected and qualified or until his death, resignation or removal. Should a vacancy occur or be created, whether arising through death, resignation or removal of a Director or through an increase in the number of Directors, such vacancy shall be filled by a majority vote of the remaining Directors of all classes though less than a quorum of the Board of Directors. A Director so elected to fill a vacancy shall serve for the remainder of the then present term of office of the class to which he was elected. Any Director or the entire Board of Directors may be removed; however, such removal must be for cause and must be approved as set forth in this paragraph. Removal for cause must be approved by at least a majority of the total number of Directors or by at least a majority vote of the shares of the corporation then entitled to be voted at an election for that Director. For purposes of this paragraph, the total number of Directors will not include the Director who is the subject of the removal determination, nor will such Director be entitled to vote thereon. Section 2. Place of Meeting. Any meetings of the Board of Directors may be held either within or without the State of Delaware. Section 3. Annual, Regular and Special Meetings. The annual meeting of the Board of Directors shall be held in each year immediately following and at the same place as the annual meeting of stockholders, for the election of officers and the transaction of such other business as may come before the Board; and regular meetings of the Board shall be held on the first Wednesday in the months of February, August and November in each year at the hour of 10 o'clock a.m. at the office of the Company in the City of Huron, South Dakota, or at such other time of day or such other place as may from time to time be established by resolution of the Board or as may be specified by the Chairman of the Board or the President with respect to each such meeting. Special meetings of the Board may be called by the Chairman of the Board, the President, or any two Directors, and shall be held at such time and place as may be specified by the officer or Directors calling the meeting, or in the absence of such specification as to place, at the office of the Company in the City of Huron, South Dakota. Notice stating the place, date, and hour of each meeting of the Board (other than the annual meeting, as to which no notice need be given) shall be given to each Director either by mail to his residence or place of business not less than forty-eight (48) hours before the date of the meeting, or personally by telephone, telegram, telecopy, electronic mail, or similar means of communication on twenty-four (24) hours' notice. All or any of the Directors may waive notice of any meeting, and the presence of a Director at any meeting of the Board shall be deemed a waiver of notice thereof by him. Section 3A. Action on Written Consent Without Meetings. Unless otherwise restricted by the Certificate of Incorporation or these By-laws, any action required or permitted to be taken at any meeting of the Board of Directors may be taken without a meeting, if prior to such action a written consent thereto is signed by all members of the Board and such written consent is filed with the minutes of proceedings of the Board. Section 4. Quorum and Adjournment. A majority of the Directors in office at a meeting regularly called, shall constitute a quorum. In the absence of a quorum, the Directors present at the time and place at which a meeting shall have been duly called, may adjourn the meeting from time to time and place to place until a quorum shall be present. Section 5. Submission of Acts to Approval of Stockholders. The Board of Directors, in its discretion, may submit any contract or act for approval or ratification at any annual meeting of the stockholders, or at any special meeting of the stockholders called for that purpose, and any contract or act that shall be approved or ratified by the vote of the holders of a majority of the capital stock of the Company which is represented in person or by proxy at such meeting, provided that a lawful quorum of stockholders be there represented in person or by proxy, shall be as valid and binding upon the corporation and upon all the stockholders as if it had been approved or ratified by every stockholder of the Company. Section 6. Compensation. Directors shall be entitled to receive such fees and expenses, if any, for attendance at meetings of the Board of Directors, and/or such fixed salaries for services as Directors, as may be fixed from time to time by resolution of the Board. Nothing herein contained shall be construed to preclude any Director from serving the Company in any other capacity as an officer, committee member, agent or otherwise, and receiving compensation therefor. Section 7. Nomination of Directors. Only persons who are nominated in accordance with the following procedures shall be eligible for election as Directors of the Company except as may be otherwise expressly provided in the Restated Certificate of Incorporation of the Company with respect to the right of the holders of New Preferred Stock and Preference Stock to nominate and elect a specified number of directors in certain circumstances. Nominations of persons for election to the Board of Directors may be made at any annual meeting of stockholders (a) by or at the direction of the Board of Directors (or any duly authorized committee thereof) or (b) by any stockholder of the Company (i) who is a stockholder of record on the date of the giving of the notice provided for in this Section 7 and on the record date for the determination of stockholders entitled to vote at such annual meeting and (ii) who complies with the notice procedures set forth in this Section 7. In addition to any other applicable requirements, for a nomination to be made by a stockholder, such stockholder must have given timely notice thereof in proper written form to the Corporate Secretary. To be timely, a stockholder's notice to the Corporate Secretary must be delivered to or mailed and received at the principle office of the Company not less than 90 days nor more than 120 days prior to the date of the annual meeting of stockholders; provided, however, that in the event that less than 100 days' notice or prior public disclosure of the date of the meeting is given to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the tenth (10th) day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure of the date of the annual meeting was made, whichever first occurs. To be in proper written form, a stockholder's notice to the Corporate Secretary must set forth (a) as to each person whom the stockholder proposes to nominate for election as a Director (i) the name, age, business address and residence address of the person, (ii) the principal occupation or employment of the person, (iii) the class or series and number of shares of capital stock of the Company that are owned beneficially or of record by the person and (iv) any other information relating to the person that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations promulgated thereunder; and (b) as to the stockholder giving this notice (i) the name and record address of such stockholder, (ii) the class or series and number of shares of capital stock of the Company that are owned beneficially or of record by such stockholder, (iii) a description of all arrangements or understandings between such stockholder and each proposed nominee and any other persons (including their names) pursuant to which the nomination(s) are to be made by such stockholder, (iv) a representation that such stockholder intends to appear in person or by proxy at the meeting to nominate the persons named in its notice and (v) any other information relating to such stockholder that would be required to be disclosed in a proxy statement or other filings required to be made in connection with the solicitations of proxies for election of Directors pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder. Such notice must be accompanied by a written consent of each proposed nominee to being named as a nominee and to serve as a director if elected. No person shall be eligible for election as a Director of the Company unless nominated in accordance with the procedures set forth in this Section 7. If the chairman of the meeting determines that a nomination was not made in accordance with the foregoing procedures, the chairman shall declare to the meeting that the nomination was defective and such defective nomination shall be disregarded. ARTICLE IV OFFICERS Section 1. Designation, Term and Vacancies. The officers of the corporation shall be a Chairman of the Board, a President, one or more Vice Presidents, a Corporate Secretary and a Treasurer, all of whom shall be elected by the Board of Directors. The Board of Directors may elect one or more Assistant Vice Presidents, who shall have such authority and shall perform such duties as may from time to time be prescribed by the Board. The Board of Directors may appoint one or more Assistant Corporate Secretaries and one or more Assistant Treasurers, and such other officers as may be deemed necessary, who shall have such authority and shall perform such duties as may from time to time be prescribed by the Board. Vacancies occurring among the officers of the corporation shall be filled by the Board of Directors. Officers elected by the Board shall hold office until the next annual meeting of the Directors and until their successors are elected and qualified, provided that any officer may be removed at any time by the affirmative vote of a majority of the whole Board. All other officers, agents and employees shall hold office during the pleasure of the Board or the officer appointing them. Any two or more offices may be held by the same person, with the exception that the Chairman of the Board of Directors and the President shall not also hold the office of Secretary or Treasurer. Section 1A. Chairman of the Board. The Chairman of the Board shall preside at all meetings of stockholders and of the Board of Directors. Except as otherwise provided in these By-laws or ordered by the Board of Directors, he shall appoint all committees of the Board of Directors. He shall inform himself on the general conduct of the Company's business and shall act as consultant to the Board of Directors on the Company's affairs. He shall advise and assist the other officers of the Company in the evolvement of policies which may require ultimate consideration or action by the Board of Directors and in dealing with problems on which his experience may be helpful. He shall exercise such other powers and perform such other duties as may from time to time be assigned to him by the Board of Directors or be prescribed by these By-laws. Section 2. President. The President shall be chosen from among the Directors and shall be the chief executive officer of the Company. In the absence of the Chairman of the Board he shall preside at all meetings of stockholders and of the Board of Directors. Subject to the control and direction of the Board, he shall have general charge of the affairs and business of the Company and general charge and supervision of all the officers, agents, and employees of the Company. He may sign, with the Corporate Secretary or an Assistant Corporate Secretary, any or all certificates for shares of stock of the Company. He may sign and execute in the name of the Company all deeds, mortgages, bonds, contracts, or other instruments authorized by the Board, except in cases where the signing and execution thereof shall be expressly delegated by the Board or by these By- laws to some other officer or agent of the Company, and he may, without previous authority of the Board, make, in the name of the Company, such contracts, leases, and other agreements as the ordinary conduct of the Company's business requires; and may sign and endorse notes, drafts, and checks. He shall have power to select and appoint all necessary officers and servants, except those elected or appointed or required to be elected or appointed by the Board, and shall also have power to remove all such officers and servants and to make appointments to fill the vacancies. In general, he shall exercise all powers and perform all duties incident to the principal executive office of the Company and such other powers and duties as may from time to time be assigned to him by the Board or be prescribed by these By-laws. He may delegate any of his powers to any Vice President of the Company. Section 3. Vice Presidents. Each Vice President shall exercise such powers and perform such duties as may from time to time be assigned to him by the Board of Directors or the President. In the absence or disability of the President a Vice President shall exercise the powers and perform the duties of the President. Section 4. Treasurer. The Treasurer shall have custody of such funds and securities of the Company as may come to his hands or be committed to his care by the Board of Directors. When necessary or proper, he shall endorse on behalf of the Company, for collection, checks, notes, or other obligations, and shall deposit the same to the credit of the Company, in such bank or banks or depositories as the Board of Directors, or the President, may designate. He may sign receipts or vouchers for payments made to the Company, and the Board of Directors may require that such receipts or vouchers shall also be signed by some other officer to be designated by them. Whenever required by the Board of Directors, he shall render a statement of his cash accounts and such other statements respecting the affairs of the Company as may be requested. He shall keep proper and accurate accounts of receipts and disbursements and other matters pertaining to his office. He shall perform all acts incident to the office of Treasurer, subject to the control of the Board. In the discretion of the Board of Directors, he may be required to give a bond in such amount and containing such conditions as the Board of Directors may approve, and such bond may be the undertaking of a surety company, and the premium therefor may be paid by the Company. Section 5. Corporate Secretary. The Corporate Secretary shall be sworn to the faithful discharge of his duties. He shall record the votes and proceedings of the stockholders and of the Board of Directors in a book or books kept for that purpose, and shall attend all meetings of the Directors and stockholders. He shall keep in safe custody the seal of the Company, and, when required by the Board of Directors, or when any instrument shall have been signed by the President, or any other officer duly authorized to sign the same, or when necessary to attest any proceedings of the stockholders or Directors, shall affix it to any instrument requiring the same, and shall attest the same with his signature. He shall attend to the giving and serving of notices of meetings. He shall have charge of such books and papers as properly belong to his office or as may be committed to his care by the Board of Directors. He shall perform such other duties as appertain to his office or as may be required by the Board of Directors. In the absence of the Corporate Secretary, or an Assistant Corporate Secretary, from any meeting of the Board, the proceedings of such meeting shall be recorded by such other person as may be appointed at the meeting for that purpose. Section 5A. Assistant Vice President. Each Assistant Vice President shall exercise such powers and perform such duties as may be assigned to him by the Board of Directors. Section 6. Assistant Corporate Secretary. Each Assistant Corporate Secretary shall be vested with the same powers and duties as the Corporate Secretary, and any act may be done or duty performed by an Assistant Corporate Secretary with like effect as though done or performed by the Corporate Secretary. He shall have such other powers and perform such other duties as may be assigned to him by the Board of Directors. Section 7. Assistant Treasurer. Each Assistant Treasurer shall be vested with the same powers and duties as the Treasurer, and any act may be done or duty performed by an Assistant Treasurer with like effect as though done or performed by the Treasurer. He shall have such other powers and perform such other duties as may be assigned to him by the Board of Directors. Section 8. Execution of Checks, etc. The funds of the Company shall be deposited in such banks or trust companies as the Board of Directors from time to time shall designate and shall be withdrawn only on checks or drafts of the Company for the purposes of the Company. All checks, drafts, notes, acceptances and endorsements of the Company shall be signed in such manner and by such officer or officers or such individual or individuals as the Board of Directors from time to time by resolution shall determine. If and to the extent so authorized by the Board of Directors, such signature or signatures may be facsimile. Only checks, drafts, notes, acceptances and endorsements signed in accordance with such resolution or resolutions shall be the valid checks, drafts, notes, acceptances or endorsements of the Company. ARTICLE V INDEMNIFICATION OF DIRECTORS, OFFICERS AND EMPLOYEES The corporation shall, to the fullest extent to which it is empowered to do so by the General Corporation Law of Delaware, or any other applicable laws, as from time to time in effect, and in the manner therein provided, indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was a director or officer of the corporation, or is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, against all expenses (including attorney's fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding. Expenses incurred by an officer or director of the corporation in defending a civil or criminal action, suit or proceeding shall be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount of it shall ultimately be determined that he or she is not entitled to be indemnified as authorized by the General Corporation Law of the State of Delaware. Expenses incurred in defending a civil or criminal action, suit or proceeding by any other person entitled to claim indemnification under the preceding paragraph may be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon such terms and conditions as the Board of Directors of the corporation deems appropriate. The provisions of this Article shall be deemed to be a contract between the corporation and each director or officer who serves in any such capacity at any time while this Article and the relevant provisions of the General Corporation Law of Delaware, or other applicable law, if any, are in effect, and any repeal or modification of any such law shall not affect any rights or obligations then existing with respect to any state of facts then or theretofore existing or any action, suit or proceeding theretofore or thereafter brought or threatened based in whole or in part upon any such state of facts. Persons who are not covered by the foregoing provisions of this Article and who are employees or agents of the corporation, or are serving at the request of the corporation as employees or agents of another corporation, partnership, joint venture, trust or other enterprise, may be indemnified to the extent authorized at any time or from time to time by the Board of Directors of the corporation. The indemnification and advancement of expenses provided or permitted by this Article shall not be deemed exclusive of any other rights to which those indemnified or entitled to advancement of expenses may be entitled under any other by-law or any agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. The corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of this Article. ARTICLE VI SHARES OF STOCK Section 1. Certificates of Stock. All certificates for shares of the capital stock of the Company shall be in such form, not inconsistent with the Certificate of Incorporation of the Company, as shall be approved by the Board of Directors, and shall be signed by the Chairman of the Board of Directors, the President, or a Vice President, and Treasurer or an Assistant Treasurer, or the Corporate Secretary or an Assistant Corporate Secretary of the Company, and shall not be valid unless so signed; provided, however, that where such certificate is signed (1) by a transfer agent or an assistant transfer agent or (2) by a transfer clerk acting on behalf of the Company and a registrar, the signature of any such Chairman of the Board of Directors, President, Vice President, Treasurer, Assistant Treasurer, Corporate Secretary or Assistant Corporate Secretary, may be facsimile. In case any officer or officers who shall have signed, or whose facsimile signature or signatures shall have been used on, any such certificate or certificates, shall cease to be such officer or officers of the Company, whether because of death, resignation, or otherwise, before such certificate or certificates shall have been delivered by the Company, such certificate or certificates may nevertheless be adopted by the Company and be issued and delivered as though the person or persons who signed such certificate or certificates or whose facsimile signature or signatures shall have been used thereon had not ceased to be such officer or officers of the Company. All certificates shall be consecutively numbered and the name of the person owning the shares represented thereby, with the number of such shares, and the date of issue, shall be entered on the Company's books. All certificates surrendered shall be cancelled, and no new certificates issued until the former certificates for the same number of shares shall have been surrendered and cancelled, except in cases provided for in Section 4 of this Article. Section 2. Transfer of Shares. (a) Transfers of stock shall be made upon the books of the Company by the holder in person or by attorney, upon the surrender and cancellation of the certificate or certificates for such shares. But the Board of Directors may appoint one or more suitable banks and/or trust companies as transfer agents and/or registrars of transfers, for facilitating transfers of any class of stock of the Company by the holders thereof under such regulations as the Board of Directors may from time to time prescribe. Upon such appointment being made, all certificates of stock of such class thereafter issued shall be countersigned by one of such transfer agents and/or one of such registrars of transfer, and shall not be valid unless so countersigned. (b) The stock transfer books may be closed, by order of the Board of Directors, for a period not exceeding fifty (50) days preceding the date of any meeting of stockholders or the date for the payment of any dividend or the date for the allotment of rights or the date when any change or conversion or exchange of capital stock shall go into effect or for a period of not exceeding fifty (50) days in connection with obtaining the consent of stockholders for any purpose; provided, however, that, in lieu of closing the stock transfer books as aforesaid, the Board of Directors, in its discretion, may fix and is hereby authorized to fix in advance a date, not exceeding sixty (60) days preceding the date of any meeting of stockholders or the date for the payment of any dividend or the date for the allotment of rights or the date when any change or conversion or exchange of capital stock shall go into effect or a date in connection with obtaining such consent, as a record date, for the determination of the stockholders entitled to notice of and to vote at any such meeting and any adjournment thereof, or entitled to receive payment of any such dividend, or to any such allotment of rights, or to exercise the rights in respect of any such change, conversion or exchange of capital stock, or to give such consent, and in such case such stockholders and only such stockholders as shall be stockholders of record on the date so fixed shall be entitled to such notice of and to vote at such meeting and any adjournment thereof, or to receive payment of such dividend, or to receive such allotment of rights, or to exercise such rights, or to give such consent, as the case may be, notwithstanding any transfer of any stock on the books of the corporation after any such record date fixed as aforesaid. Section 3. Addresses of Stockholders. Every stockholder shall furnish the Corporate Secretary with an address to which notices of meetings and all other notices may be served upon or mailed to him, and in default thereof notices may be addressed to him at his last known address or at the office of the Company in Huron, South Dakota. Section 4. Lost and Destroyed Certificates. The Board of Directors may direct that a new certificate or certificates may be issued in place of any certificate or certificates theretofore issued by the Company, alleged to have been lost or destroyed, and the Board of Directors, when authorizing the issuance of such new certificate or certificates, may, in their discretion, and as a condition precedent thereto, require the owner of such lost or destroyed certificate or certificates or his legal representatives to give to the Company a bond in such sum as they may direct, as indemnity against any claim that may be made against the Company. Section 5. Regulations. The Board of Directors shall have power and authority to make all such rules and regulations as they may deem expedient concerning the issue, transfer and registration of certificates for shares of the capital stock of the Company. ARTICLE VII DIVIDENDS AND WORKING CAPITAL The Board of Directors may declare dividends from the surplus or net profits of the corporation over and above the amount which from time to time may be fixed by the Board of Directors as the amount to be reserved as a working capital, as they may in their discretion, from time to time determine. Such dividends may be declared by the Board at any meeting, either regular or special, at which a quorum is present. The dividends upon the preferred stock, if and when declared, shall be payable quarterly on the first days of December, March, June and September in each year. Any dividends so declared upon the common stock shall be payable upon such dates as may from time to time be fixed by the Board. The power to fix the working capital of the corporation shall be, and is hereby conferred upon the Board of Directors, and the Board of Directors may from time to time fix the sum which shall be set aside or reserved, over and above the corporation's capital stock paid in, as a working capital for the corporation, and from time to time may increase, diminish and vary the same in their absolute discretion. ARTICLE VIII SEAL The common corporate seal is, and until otherwise ordered, and directed by the Board of Directors shall be, an impression upon paper or wax, bearing the name of the corporation and the words "Corporate Seal - Delaware." One or more duplicate dies for impressing such seal may be kept and used. ARTICLE IX AMENDMENT TO BY-LAWS These By-laws may be altered, amended or repealed by a vote of a majority of all the Directors at any regular or special meeting of the Board, provided notice of such proposed alteration, amendment or repeal shall have been included in the notice of such meeting or shall have been waived by all the Directors. These By-laws may also be altered, amended or repealed at any annual meeting of the stockholders, or at any special meeting of the stockholders, provided notice of the proposed alteration, amendment or repeal shall have been included in the notice of such special meeting or shall have been waived by all the stockholders. EX-10 5 Exhibit 10(a)(1) NORTHWESTERN PUBLIC SERVICE COMPANY SUPPLEMENTAL INCOME SECURITY PLAN ARTICLE I DEFINITIONS AND INTERPRETATIONS 1.1 Definitions. When the following terms are used herein with initial capital letters, they shall mean: (a) Administrator. The Company or such individual or committee as the Company shall designate from time to time. The Administrator shall have the authority to administer the Plan and to construe its provisions, and the decisions of the Administrator shall be final and binding on all parties. The Administrator shall constitute the "administrator" and "named fiduciary" of the Plan within the meaning of the Employee Retirement Income Security Act of 1974 ("ERISA"). (b) Company. Northwestern Public Service Company. (c) Disability. The total and permanent disability as determined by a doctor of medicine approved by the Company, which event will be deemed to have occurred on the date of delivery of such doctor's certificate to such effect to the Company. In lieu of such certification, the Company may accept, as proof of total and permanent disability, proof of the Participant's eligibility for disability benefits under the Federal Social Security Act, as amended from time to time. (d) Earnings. The amount of salary paid by the Company to a Participant for services rendered, excluding any commissions and bonuses. (e) Earnings Level. Earnings within a prescribed range as shown on the attached Schedule A. (f) Employee. An individual who customarily works a regularly scheduled work week with the Company of at least twenty (20) hours per week. (g) Participant. An Employee who has become eligible to participate in the Plan in accordance with Article II. (h) Plan Anniversary. The first day of a Plan Year which is July 1 of each year. (i) Plan Year. The twelve (12) month period beginning on July 1 and ending on June 30. (j) Retirement Date. The later of the Employee's or Director's 65th birthday or retirement from the Company. 1.2 Gender and Number. The pronouns "he", "him" and "his", referring to an Employee, Participant or Beneficiary, shall also refer to and include females as well as males, and the singular shall include the plural, and the plural the singular, except when the context or otherwise requires. ARTICLE II ELIGIBILITY 2.1 Eligibility. Senior management employees who are selected by the Chief Executive Officer of the Company ("Eligible Employee") and all outside members of the Board of Directors of the Company shall be eligible to participate in this Plan as of the date he has satisfied such requirement. To be an Eligible Employee, one must: (a) Be under age 65; (b) Be credited with six months or more of service in a qualifying position; and (c) Be actively at work on the Plan Anniversary Date. (d) Be in a state of health that would meet customary requirements at reasonable standard insurance rates. 2.2 Special State of Health Rule. Participation in the Plan shall be limited to those Eligible Employees and Directors whose state of health and safety at the time of their entry into the Plan is determined to the satisfaction of the Administrator to be normal for their age group, on the basis of standards comparable to those customarily employed in the insurance industry for setting standard premium rates; provided, however, that the Administrator in its sole discretion may permit participation by an Eligible Employee or Director whose state of health or safety does not meet this requirement, on the condition that the amount of benefits provided to him or his Beneficiary may be reduced, at the Administrator's discretion, from that which would otherwise apply to him under the terms of this Plan. An Eligible Employee or Director who participates in the Plan under this section shall be advised by the Administrator in a written notice no later than sixty (60) days after the determination of his state of health and safety as required herein, of the dollar amount of benefits to be provided to him (or his Beneficiary) under the Plan. 2.3 Forfeiture of Eligibility. No benefits shall apply to a terminated Participant who, prior to the occurrence of a Change in Control or Major Transaction, is discharged from his employment with the Company on account of dishonesty or misconduct. ARTICLE III BENEFITS 3.1 Death Benefits. Upon the death of a Participant, the Participant's Beneficiary shall be entitled to receive Death Benefits in the form of a monthly income in the amount applicable to the Participant's executed certificate on file (Earnings Level for Eligible Employees) as shown on the attached Schedule A. 3.2 Retirement Benefits. Subject to the provisions of Article II, an Eligible Employee shall upon his retirement, be eligible to receive a Retirement Benefit on his Retirement Date. The amount of benefit shall be based on the Participant's executed certificate on file as shown on the attached Schedule A. An election for Retirement Benefits by an Eligible Employee must be made within thirty (30) days of Retirement. At the time of the election, the Eligible Employee may elect to receive all or part of the retirement benefit in 25% increments. Once this election is made, it cannot be changed. 3.3 Increase in Benefits. Subject to the provisions of Article II, a Participant whose Earnings increase to the extent that he enters a higher Earnings Level shall become entitled to the amount of benefits of such higher Earnings Level, as of the Plan Anniversary coincident with or next following such increase in Earnings provided, that he is actively employed by the Company on such Plan Anniversary, that he is credited with six months or more of service in a qualifying position (under 2.1) and provided further that if the state of health and safety of such a Participant is not then determined to the satisfaction of the Administrator to be normal for his age group, on the basis of standards comparable to those customarily employed in the insurance industry in setting standard or reasonable premium rates, such increase in benefits shall apply only to the extent authorized by the Administrator. The Administrator shall advise any such Participant, in a written notice no later than sixty (60) days after the determination of his state of health and safety as required herein, of the dollar amount of benefits to be provided to him (or his Beneficiary) under the Plan, which dollar amount shall in no event be less than that to which he was entitled prior to such notice. 3.4 Payment of Benefits. Retirement benefits will be eligible for payment on the first of the month following the Participant's Retirement Date. Death Benefits will be paid to the participant's named beneficiary on the first of the month following the Participant's date of death. All Retirement and Death benefit payments shall be made in monthly installments and shall continue for fifteen (15) years from the date of the initial monthly payment. ARTICLE IV PORTABILITY AND ELIGIBILITY FOR BENEFITS IN THE EVENT OF TERMINATION 4.1 Subject to, in the cases of clauses (a), (b) and (c) only, the provisions of Article II, an Eligible Employee whose employment has terminated will be eligible for benefits if: (a) The Eligible Employee retires under the Company's Pension Plan; (b) The termination is due to total disability; (c) The Eligible Employee terminates for reasons other than 4.1(a), 4.1(b) or 4.1(d) and has beenemployed by the Company for ten (10) or more consecutive years or has five (5) years of Plan participation; or (d) The Eligible Employee is terminated following a Change in Control or Major Transaction (each as defined in Section 4.2 hereof) and such employee was employed by the Company prior to such Change in Control or Major Transaction. 4.2 Definitions of Change in Control and Major Transaction (a) Change in Control. For purposes of the Plan, a Change in Control of the Company shall occur upon the happening of the earliest to occur of the following: 1. any Person (as defined below) is or becomes the Beneficial Owner (as defined below), directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates) representing 20% or more of the combined voting power of the Company's then outstanding securities; or 2. during any period of not more than two consecutive years (not including any period prior to August __, 1995), individuals who at the beginning of such period constitute the Board and any new director (other than a director designated by a Person who has entered into an agreement with the Company to effect a transaction described in clause (I) of this paragraph or clauses (I), (II) or (III) of paragraph (b) below) whose election by the Board or nomination for election by the Company's shareholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved or recommended, cease for any reason to constitute a majority thereof. (b) Major Transaction. For purposes of the Plan, a Major Transaction shall occur upon the happening of the earliest to occur of the following: 1. the shareholders of the Company approve a merger or consolidation of the Company with any corporation or business trust, other than (i) a merger or consolidation which would result in the individuals who prior to such merger or consolidation constitute the Board constituting at least two-thirds (2/3) of the board of directors of the Company or the surviving or succeeding entity immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person acquires more than 20% of the combined voting power of the Company's then outstanding securities; or 2. the shareholders of the Company approve a plan of complete liquidation of the Company; or 3. the shareholders of the Company approve an agreement for the sale or disposition by the Company of all or substantially all the Company's assets, other than a sale or disposition which would result in the individuals who prior to such sale or disposition constitute the Board constituting at least two-thirds (2/3) of the board of directors of the Person purchasing such assets immediately after such sale or disposition. For purposes of the Plan, "Beneficial Owner" shall have the meaning defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof; however, a Person shall not include (i) the Company, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of shares of the Company. ARTICLE V DESIGNATION OF BENEFICIARY 5.1 General. Beneficiary shall mean the person or persons designated by a Participant in writing, in a form acceptable to the Administrator, to receive benefits in the event of the Participant's death. Such a designation may be revoked in writing by the Participant at any time, and the last such designation executed by the Participant and filed with the Administrator shall control. A Participant may, by completing and filing with the Administrator a form provided by the Administrator for the purpose, waive entirely his right to designate a Beneficiary hereunder, or irrevocably assign such right to either the Company or the Beneficiary. 5.2 Plan Designations. If there is no designated Beneficiary to receive any amount that becomes payable to a Beneficiary, or in the event a designated Beneficiary has predeceased the Participant, or if the Participant designated distribution according to the Plan ("Per Plan"), such balance shall be paid in equal shares to the person or persons in the first surviving class of the following classes of preference Beneficiaries: (a) Participant's surviving spouse, with a balance of payments that may be payable in the event that the spouse dies before the end of the fixed payment period, to be paid in order of preference to those designated in classes (b), (c) or (d) hereafter, or as my spouse may validly designate during his or her lifetime, (b) Participant's surviving issue, (including legally adopted issue), per stirpes and not per capita, (c) Participant's surviving parents, (d) Participant's estate. 5.3 Interpretations. Any ambiguity in the interpretation of the Beneficiary designation shall be determined by the Administrator. ARTICLE VI CLAIMS A Participant or Beneficiary who has become entitled to Benefits and who wishes payment to commence shall submit a claim to the Administrator in writing, in such form and with such supporting documents and authorizations as the Administrator may require. If a Participant's or a Beneficiary's claim for benefits is denied in whole or in part, he shall be entitled to a written explanation form the Administrator setting forth the specific reasons for the denial, and to a full and fair review by the Administrator of the decision denying the claim. ARTICLE VII EXCLUSIONS AND LIMITATIONS 7.1 General. No benefits shall be payable under the Plan: (a) on account of a Participant's death by suicide within two (2) years of his entry into the Plan, or (b) to a Participant (or his Beneficiary) within two (2) years after the Participant has materially misrepresented the state of his health or safety to the Company, or to any party designated by the Company, on the occasion of his entry into the Plan. In the case of a Participant who has become eligible for an increase in benefits under Section 3.3, no such increase shall apply: (a) in the event of the Participant's suicide within two (2) years after such increase becomes effective, or (b) within two (2) years following the Participant's material misrepresentation of the state of his health or safety to the Company, or to any party designated by the Company, on the occasion of his becoming eligible for an increase in benefits. No benefits shall be payable to a Participant (or his Beneficiary) who has materially misrepresented his age to the Company, except as the Administrator shall authorize in its sole discretion. 7.2 Benefits as stated in Executed Certificate. No benefits shall apply to a terminated Participant except as shall be set forth in a valid Executed Certificate of Eligibility issued to him by the Administrator, according to such reasonable rules and procedures as the Administrator may establish. 7.3 Employee Cooperation. The right of any Eligible Employee to participate in the Plan is conditioned upon and subject to his cooperation with the efforts of the Administrator to determine the state of his health and safety. ARTICLE VIII GENERAL PROVISIONS 8.1 Obligation of the Company. Benefits under the Plan will be paid solely from the general assets of the Company. No funds or assets will be segregated or set aside by the Company for the payment of benefits, and no trust or escrow of any kind will be created with respect to the Plan by the Company. 8.2 Amendments or Termination. This Plan may be amended or terminated at any time by affirmative vote of the Board of Directors of the Company; provided, however, that such amendment or termination shall not effect any Participant's right to benefits which arises prior to such amendment or termination. This Plan, as revised, has been executed on the behalf of the Company on the 2nd day of January, 1997. NORTHWESTERN PUBLIC SERVICE COMPANY By /s/ Merle D. Lewis _____________________________________ Merle D. Lewis, President & CEO EX-10 6 Exhibit 10(a)(5) NORTHWESTERN PUBLIC SERVICE COMPANY PHANTOM STOCK UNIT PLAN 1. Objectives The objective of the Northwestern Public Service Company Phantom Stock Unit Plan (the "Plan") is to assist officers and directors ("Eligible Individuals") in building financial security through capital accumulation by providing them with deferred remuneration based upon the award of Phantom Stock Units, the value of which is related to the value of the common stock ("Common Stock") of Northwestern Public Service Company ("Company"). The Plan is also intended to: (1) create incentives to participating Eligible Individuals related to the long-term performance of the Common Stock, (2) encourage continued employment with, or service on the Board of Directors ("Board") of, the Company, and (3) promote awareness of the performance of the Common Stock. 2. Administration The Plan shall be administered by the Company. Subject to the provisions of the Plan, the Board shall have exclusive power to select the Eligible Individuals to be granted Phantom Stock Units, to determine the number of Phantom Stock Units to be granted as described in Section 3, to determine the time or times when Phantom Stock Units will be granted and to determine such terms and conditions, in addition to the terms and conditions set forth in the Plan, that shall apply to the grant of Phantom Stock Units. The authority granted to the Board by the preceding sentence will be exercised based upon annual recommendations received from the Nominating and Compensation Committee ("Committee") of the Board. In determining the number of Phantom Stock Units to be granted to an Eligible Individual, the Board shall consider an Eligible Individual's position and responsibilities, the nature and value to the Company of an Eligible Individual's services, an Eligible Individual's present and potential contribution to the Company's success, and the Company's financial performance. Determinations by the Board shall be made by majority vote and shall be final and binding on all parties with respect to all matters relating to the Plan. The Committee shall have authority to interpret the Plan, to adopt and revise rules and regulations relating to the Plan, and to make any other determinations which it believes necessary or advisable for the administration of the Plan. 3. Grants Eligible Individuals to whom Phantom Stock Units are granted shall hereafter be referred to as "Participants." Phantom Stock Units shall be granted at the meeting of the Board in May, each year to Participants who are Executive Officers of the Company in such amounts as the Board shall determine based on the recommendations of the Committee. The Committee shall recommend awards, in amounts based upon the criteria set forth in paragraph 2 above, up to a maximum of 35% of base salary for the Chairman of the Board, the President and Chief Executive Officer and the Executive Vice President and up to a maximum of 15% of base salary for the other Executive Officer Participants. The award shall be made in Phantom Stock units at the closing price of the Company's Common Stock on the date of the award. Annual awards of 200 units shall be made to each of the Director Participants who are not Executive Officers of the Company. 4. Phantom Stock Units and Dividend Equivalents (a) Phantom Stock Units granted to a Participant shall be credited to a Phantom Stock Unit Account ("Account") established and maintained for such Participant on the books of the Company. The Account of a Participant, which shall be the record of Phantom Stock Units granted to him under the Plan, and dividend equivalents related thereto, is solely for accounting purposes and shall not require a segregation of any Company assets. Each grant of Phantom Stock Units under the Plan to a Participant shall be communicated by the Board in writing to the Participant within thirty (30) days after the date of grant. (b) Additional credits will be made to each Participant's Account in amounts equal to the dividends the Participant would have received from time to time had he been the owner on the record dates with respect thereto of the number of shares of Common Stock equal to the number of Phantom Stock Units in his Account on such dates. Such dividend credit amounts shall be converted to Phantom Stock Units at the closing price of the Common Stock on the New York Stock Exchange on the date that dividends are paid. 5. Vesting (a) A Participant shall have a nonforfeitable right to the Phantom Stock Units granted in a given year and dividend equivalents thereon on May 1st of the year five years following the date that such Phantom Stock Units were granted (the "Fifth Anniversary Date"). (b) A Participant shall have a nonforfeitable right to one hundred percent (100%) of the Phantom Stock Units and other amounts credited to his Account upon the Participant's termination of employment with the Company due to death, permanent disability or retirement on or after the age of sixty-five (65) years or such earlier date as the Board, in its discretion, shall designate. The Participant or his Beneficiary may choose vesting under paragraph 5(a) or the full vesting under the preceding sentence. (c) For purposes of this Section 5 a Participant will be considered to terminate employment by reason of "permanent disability" if, in the determination of the Board, he is subject to a physical or mental condition which is expected to render the Participant unable to perform his usual duties or any comparable duties for the Company. 6. Payment for Phantom Stock Units (a) Upon a Fifth Anniversary Date the Participant shall be entitled to receive from the Company an amount equal to the sum of (1) the total value (as determined by the Board pursuant to Section 7) of the Phantom Stock Units credited to his Account that vest on such Date and (2) related reinvested dividend equivalents credited to his Account pursuant to Section 4 as of such Date. Upon the date the Participant vests in 100% of the Phantom Stock Units and related amounts credited to his Account pursuant to paragraph 5(b) (the "Automatic Vesting Date"), the Participant shall be entitled to receive from the Company an amount equal to the sum of (1) the total value (as determined by the Board pursuant to Section 7) of the Phantom Stock Units credited to the Participant's Account as of the Automatic Vesting Date, and (2) the value of dividend equivalents thereon credited to his Account pursuant to Section 4, as of the Automatic Vesting Date. (b) Payment to a Participant of any amount set forth in paragraph 6(a) shall be made in cash in a lump sum within thirty (30) days after the applicable Fifth Anniversary Date and, unless otherwise elected by the Participant or his Beneficiary, after the Automatic Vesting Date. (c) Notwithstanding any other provision of the Plan, all Phantom Stock Units and other amounts credited to the Account of a Participant, and all right to any payment hereunder to the Participant, will be forfeited, and the Company will have no further obligation hereunder to such Participant, if any of the following circumstances occur: (i) The Participant at any time is discharged from employment with the Company for cause ("Cause"). "Cause" shall mean (A) a Participant's conviction of any criminal violation involving dishonesty, fraud, or breach of trust, or (B) a Participant's willful engagement in any misconduct in the performance of his duty that materially injures the Company, or (C) failure to adequately perform his duties; or (ii) The Participant at any time prior to the Fifth Anniversary Date or the Automatic Vesting Date voluntarily terminates employment with the Company. The Board shall have sole discretion with respect to the application of the provisions of this paragraph (c) and such exercise of discretion shall be conclusive and binding upon the Participant, and all other persons. (d) Notwithstanding any other provision of the Plan, one-half of the payment under paragraph 6(a) for Participants who are active Executive Officers of the Company will be used to purchase Common Stock of the Company. Those Participants may elect to make such purchase in a lump sum at the time of award payout each year, through payroll deduction during the year, or a combination thereof. 7. Valuation of Phantom Stock Units For all purposes of the Plan other than for the purposes of paragraph 4(b), the value of a Phantom Stock Unit upon a Fifth Anniversary Date or the Automatic Vesting Date for purposes of Section 6 will be an amount equal to the average of the closing prices of the Common Stock on the Composite Tape of the New York Stock Exchange for the ten (10) consecutive trading days immediately preceding such Date; or 8. Changes in Capital and Corporate Structure In the event of any change in the outstanding shares of Common Stock of the Company by reason of an issuance of additional shares, recapitalization, reclassification, reorganization, stock split, reverse stock split, combination of shares, stock dividend or similar transaction, the Board shall proportionately adjust, in an equitable manner, the number of Phantom Stock Units held by Participants under the Plan. The foregoing adjustment shall be made in a manner that will cause the relationship between the aggregate appreciation in outstanding Common Stock and earnings per share of the Company and the increase in value of each Phantom Stock Unit granted hereunder to remain unchanged as a result of the applicable transaction. 9. Non-Transferability Phantom Stock Units granted under the Plan, and other amounts credited to a Participant's Account, and any rights and privileges pertaining thereto, may not be transferred, assigned, pledged or hypothecated in any manner, by operation of law or otherwise, other than by will or by the laws of descent and distribution, and shall not be subject to execution, attachment or similar process. 10. Death of a Participant In the event of a Participant's death, payment of any amount due under the Plan shall be made to the Participant's designated Beneficiary. In the event the Participant has not designated a Beneficiary, or if no designated Beneficiary is living at the date of death of the Participant, payment of any amount due under the Plan shall be paid as promptly as practicable to the duly appointed and qualified executor or administrator of the Participant's estate. "Beneficiary" shall mean the individual, corporation, partnership, association, trust or unincorporated organization designated by a Participant in writing filed with the Company as the recipient of any payment to be made to a Participant hereunder in the event of the Participant's death prior to payment. Such designation may be changed by a Participant at any time by writing filed with the Company without the consent of or notice to any Beneficiary previously designated. 11. Withholding The Company shall have the right to deduct from all amounts paid pursuant to the Plan any taxes required by law to be withheld with respect to such amounts. 12. Voting and Dividend Rights Except as provided in Sections 4, 6, and 8, no Participant shall be entitled to any voting rights or to receive any dividends or other distributions with respect to the Common Stock of the Company as a result of his participation in the Plan. 13. Miscellaneous Provisions (a) No Participant or other person shall have any claim or right to be granted an award under the Plan. Neither the Plan nor any action taken hereunder shall be construed as giving any Participant any right to be retained in the employ of the Company or to continue to serve as a member of the Board. (b) The Plan shall at all times be entirely unfunded and no provisions shall at any time be made with respect to segregating assets of the Company for payment of any benefits hereunder. No Participant or other person shall have any interest in any particular assets of the Company by reason of the right to receive a benefit under the Plan and any such Participant or other person shall have only the rights of a general unsecured creditor of the Company with respect to any rights under the Plan. (c) Except when otherwise required by the context, any masculine terminology in this document shall include the feminine, and any singular terminology shall include the plural. (d) This Plan shall be governed by the laws of the State of South Dakota. 14. Effectiveness and Term of Plan The effective date of the Plan shall be May 3, 1989, and the Plan shall terminate with awards made in May, 1999. No Phantom Stock Units shall be granted pursuant to the Plan after the date of termination of the Plan, although after such date payments shall be made with respect to Phantom Stock Units granted prior to the date of termination. IN WITNESS WHEREOF, the Company has executed this Plan as of the 1st day of May, 1996. NORTHWESTERN PUBLIC SERVICE COMPANY By /s/ M. D. Lewis ______________________________________ M. D. Lewis President & CEO By /s/ Aelred J. Kurtenbach ______________________________________ Aelred J. Kurtenbach, Chairman Nominating and Compensation Committee EX-10 7 Exhibit 10(a)(7) NORTHWESTERN PUBLIC SERVICE COMPANY NorthSTAR PLAN I. Objective The Northwestern Public Service Company NorthSTAR Plan ("Plan") is established to accomplish the following objectives: (1) to motivate and reward outstanding performance by Northwestern Public Service Company (the "Company") and its employees by providing additional compensation to eligible employees who influence the profitability of the Company; (2) to compare the Company's performance with a group of regional utilities; (3) to compare the Company's performance to established annual objectives; (4) to compare individual performance to established annual objectives; (5) to focus on stockholder and ratepayer interests and (6) to support long-term objectives by achieving short-term goals. II. Administration The Plan shall be administered by the Company. The Compensation Committee ("Committee") of the Company's Board of Directors ("Board"), shall have responsibility and authority with respect to the Plan, including the following: (1) approving performance measures, the measurement scale used, and the comparison utilities selected; (2) reviewing eligibility for Plan participation; (3) approving the size of the performance fund ("Performance Fund") and individual levels of award opportunities; and (4) reviewing and approving awards for all Executive Officers. III. Eligibility for Participation Employees eligible to participate in the Plan are those full-time employees who have completed one year of service with the Company. To be eligible for an award, an employee must be employed with the Company on December 31st of the year for which the award is based, except as hereafter provided in Subsection (b). All Participants will be eligible to participate in the Plan for that calendar year unless any of the following circumstances occur: (a) The Participant at any time is discharged from employment with the Company for cause ("Cause"). "Cause" shall mean (i) a Participant's conviction of any criminal violation involving dishonesty, fraud, or breach of trust, or (ii) a Participant's willful engagement in any misconduct in the performance of his duty that materially injures the Company, or (iii) failure to adequately perform his duties; or (b) The Participant's employment with the Company has terminated for any reason other than death, permanent disability, or retirement on or after the age of sixty-five (65) years or such earlier date as the Board, in its discretion, shall designate. For the purposes of this Section, a Participant will be considered to terminate employment by reason of "permanent disability" if, in the determination of the Board, he is subject to a physical or mental condition which is expected to render the Participant unable to perform his usual duties or any comparable duties for the Company. In the event that an eligible Participant is not employed for an entire plan year, or for the first year of eligibility, his award shall be pro-rated to reflect the proportionate part of the plan year during which he was actually employed or eligible. IV. Determination of Performance Award Amounts (a) A Performance Award ("Award") shall be awarded under the Plan to each Participant, within the Range of Award Opportunities set forth on Exhibit I attached hereto, based on performance for the applicable calendar year which shall be determined by reference to the measures of performance for that year and weighting as set forth on Exhibit II attached hereto and detailed as follows: (i) Company Performance vs. Peer Utilities (50% weight) The Company will compare itself against peer utilities set forth on Exhibit II for (1) Change in Average Rates, defined as total retail revenues, divided by retail sales in kilowatt-hours, for electric operations, and total revenue from ultimate customers, divided by volume of gas sold to ultimate customers, for gas operations, and for (2) Change in Operating Expenses, defined as total operating expenses per unit of energy furnished to customers. The results of both electric and gas computations, in relation to a peer group, will be weighted in proportion to the Company's operating income from each source. The Company will rank itself percentile-wise against the peer utilities in terms of each of the above two measures. The average percentile ranking will determine the overall degree of achievement of peer-based goals and the degree to which this portion of the annual incentive is earned. If the average percentile ranking is fifty percent (50%), the target award level will be earned on the peer-based measures. If the Company ranks first among peers in terms of both measures (100th percentile), then the maximum award will be earned. If the average percentile ranking is twenty-five percent (25%), then the threshold award level will be earned with respect to the peer-based portion of the annual incentive. A ranking below the twenty-fifth percentile will eliminate this portion of the bonus. (ii) Company Performance vs. Annual Objective (25% Weight) Under this objective, Earnings Per Share, will be the primary earnings per share of the Company as it appears in the approved budget for the Company. Company management will develop a schedule for translating results of the objective into threshold, target and maximum achievement levels. This schedule must be approved by the Compensation Committee. (iii) Performance vs. Individual Objectives (25% Weight) Each year, Participants will establish three or four major individual and department goals for review and approval by their supervisor and by the Chief Executive Officer. At the end of each year, Participants will provide to their supervisor and to the Chief Executive Officer an explanation regarding the degree to which each goal has been achieved. The supervisor and the Chief Executive Officer will review the Participant's explanations and will then determine the achievement level for each Participant. (b) At the end of each calendar year, percentages will be computed and totaled for each Participant for each of the Measures of Performance in Exhibit II. Each Participant will receive an Award for the applicable calendar year equal to a percentage of his base salary as shown on Exhibit I. Threshold is defined as a composite twenty-five percentage level, Target as a composite fifty percentage level, and Maximum as a composite one hundred percentage level. The total amount of all awards made to Participants shall not exceed seven percent (7%) of the Company's net after tax income for that year. (c) All Executive Officer Awards shall be reviewed, and must be approved, by the Compensation Committee. All Awards for other Company employees shall be reviewed, and must be approved, by the Chief Executive Officer of the Company. (d) Annual base salary adjustments, as appropriate, will continue to be made by the Company to individual employees predicated on merit, performance, cost-of-living and such other factors as the Company normally has considered without regard to Awards awarded under the Plan. (e) Awards shall be paid to each Participant in a single sum as promptly as practicable after approved. V. Participant's Death (a) In the event of the death of the Participant, any unpaid Award held for the Participant shall be paid as promptly as practicable in a single sum to the Participant's designated Beneficiary. (b) In the event the Participant has not designated a Beneficiary, or if no designated Beneficiary is living at the date of death of the Participant, the unpaid Award shall be paid as promptly as practicable in a single sum to the duly appointed executor or administrator of the Participant's estate. (c) For purposes of this Section, "Beneficiary" shall mean any individual, corporation, partnership, association, trust or unincorporated organization designated by a Participant in writing filed with the Company as the recipient of the Participant's Award in the event of the Participant's death prior to its payment. Such designation may be changed by the Participant at any time in writing filed with the Company without the consent of or notice to any Beneficiary previously designated. VI. Continuity of the Plan Although it is the present intention of the Company to continue the Plan in effect for an indefinite period of time, the Board reserves the right to terminate the Plan in its entirety as of the end of any calendar year or other fiscal year of the Company or to modify the Plan as it exists from time to time, provided that no such action shall adversely affect any Awards previously awarded under the Plan. VII. Miscellaneous Provisions (a) No Award payable under the Plan shall be subject in any manner to transfer, assignment, pledge, or hypothecation in any manner by operation of law or otherwise, other than by will or by the laws of descent and distribution nor be subject to execution, attachment or similar process. (b) Neither the Plan nor any action taken hereunder shall be construed as giving any Participant any right to be retained in the employ of the Company. (c) The Plan shall at all times be entirely unfunded and no provision shall at any time be made with respect to segregating assets of the Company for payment of any Awards hereunder. No Participant or any other person shall have any interest in any particular assets of the Company by reason of the right to receive an Award under the Plan and any such Participant or any other person shall have only the rights of a general unsecured creditor of the Company with respect to any rights under the Plan. (d) Except when otherwise required by the context, any masculine terminology in this document shall include the feminine, and any singular terminology shall include the plural. (e) This Plan shall be governed by the laws of the State of South Dakota. IN WITNESS WHEREOF, the Company has executed this revised Annual Performance Incentive Plan as of the 1st day of May, 1996. NORTHWESTERN PUBLIC SERVICE COMPANY By /s/ M. D. Lewis ______________________________________ M. D. Lewis President & CEO By /s/ Raymond M. Schutz ______________________________________ Raymond M. Schutz, Chairman Nominating and Compensation Committee EXHIBIT I May 1, 1996 Range of Award Opportunities (% of Base Salary) Position Threshold Target Maximum Group I: President & CEO 20% 25% 30% Executive Vice President Group II: Senior Executive Officers* 15% 20% 25% Group III: Other Executive Officers 10% 15% 20% Group IV: Manager Level Employees 5% 10% 15% Group V: Salaried-Non Manager 2.5% 5% 7.5% Group VI: Hourly 2% 4% 6% * Vice President - Energy Services, Vice President - Energy Operations, Vice President - Administration, Vice President - Market Development and Vice President - Finance EXHIBIT II May 3, 1995 MEASURES OF PERFORMANCE Performance will be measured in the following three ways for purposes of determining awards under the Plan, with weightings placed on each as indicated. 1. Company performance vs. peer utilities* (50% weight) 2. Company performance vs. annual objectives (25% weight) 3. Individual performance vs. objectives (25% weight) * Peer Utility Companies Black Hills Corporation IES Industries, Inc. Interstate Power Company Madison Gas & Electric Company MDU Resources Group, Inc. Midwest Resources Minnesota Power Otter Tail Power Company St. Joseph Light & Power Company Southern Indiana Gas & Electric Company EX-13 8 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. EX-27 9
UT 12-MOS DEC-31-1996 DEC-31-1996 PER-BOOK 519,113,430 159,332,695 197,688,318 237,581,284 0 1,113,715,727 31,220,427 56,594,914 75,989,796 163,805,137 0 6,250,000 424,412,549 0 0 0 1,244,220 0 0 0 518,003,821 1,113,715,727 344,009,141 15,415,159 293,591,139 309,006,298 35,002,843 9,716,236 44,719,079 18,668,279 26,053,800 3,191,177 22,862,623 15,877,817 13,104,475 60,903,017 2.56 0
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