-----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, TubFAfcVZYBkCqG44+GKbsOcD+4xgXI/JQY8hhn5TfwhxQtRPgNU7GLWyoFsby+H aHWjLM75cKJi1K5YIOLpBA== 0000075129-98-000005.txt : 19980331 0000075129-98-000005.hdr.sgml : 19980331 ACCESSION NUMBER: 0000075129-98-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: OTTER TAIL POWER CO CENTRAL INDEX KEY: 0000075129 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 410462685 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-00368 FILM NUMBER: 98578515 BUSINESS ADDRESS: STREET 1: 215 S CASCADE ST STREET 2: PO BOX 496 CITY: FERGUS FALLS STATE: MN ZIP: 56538-0496 BUSINESS PHONE: 2187398200 10-K 1 10-K FOR 1997 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 (fee required) For the fiscal year ended December 31, 1997 OR ( ) Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (no fee required) For the transition period from _______to_______ Commission File Number 0-368 OTTER TAIL POWER COMPANY (Exact name of registrant as specified in its charter) MINNESOTA 41-0462685 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 215 S. CASCADE ST., BOX 496, FERGUS FALLS, MN 56538-0496 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (218) 739-8200 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered NONE NONE Securities registered pursuant to Section 12(g) of the Act: COMMON SHARES, par value $5.00 per share PREFERRED SHARE PURCHASE RIGHTS CUMULATIVE PREFERRED SHARES, without par value (Title of class) 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 the 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. (X) 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. (Yes X No ) State the aggregate market value of the voting stock held by nonaffiliates of the registrant. $441,675,411 as of February 28, 1998 Indicate the number of shares outstanding of each of the registrant's classes of Common Stock, as of the latest practicable date: 11,661,397 Common Shares ($5 par value) as of February 28, 1998 Documents Incorporated by Reference: 1997 Annual Report to Shareholders - Portions incorporated by reference into Parts I and II Proxy Statement dated March 13, 1998 - Portions incorporated by reference into Part III PART I Item 1. BUSINESS -------- (a) General Development of Business ------------------------------- Otter Tail Power Company (the "Company") is an operating public utility incorporated in 1907 under the laws of the State of Minnesota. The Company's principal executive office is located at 215 South Cascade Street, Box 496, Fergus Falls, Minnesota 56538-0496; its telephone number is (218) 739-8200. The Company's primary business is the production, transmission, distribution and sale of electric energy. The Company, through its subsidiaries, is also engaged in other businesses which are referred to as Manufacturing, Health Services and Other Business Operations. Manufacturing Operations is made up of businesses acquired beginning in 1990 involved in the production of agricultural equipment, automobile and truck frame straightening equipment, plastic pipe extrusion, and metal parts stamping and fabrication. Health Services Operations consists of certain businesses acquired beginning in 1993, which are involved in the sale, service, rental, refurbishing, and operation of medical imaging equipment and the sale of related supplies and accessories to various medical institutions. Other Business Operations include businesses involved in such areas as electrical and telephone construction contracting, radio broadcasting, waste incinerating, and telephone/cable TV utility. The Company continues to investigate acquisitions of additional non- electric businesses and expects continued growth in this area. On January 2, 1997, the Company's telecommunications subsidiary, North Central Utilities, Inc. ("NCU"), acquired The Peoples Telephone Co. of Bigfork ("Peoples"), with 1,903 access lines serving five communities in Northern Minnesota. On June 30, 1997, the Company's subsidiary, Mid-States Development, Inc. ("Mid-States"), acquired Chassis Liner Corporation ("Chassis Liner"), a manufacturer of auto and truck frame straightening equipment. Both acquisitions were accounted for under the pooling-of-interest method. For a discussion of the Company's results of operations, see "Management's discussion and analysis of financial condition and results of operations," which is incorporated by reference to pages 22 through 30 of the Company's 1997 Annual Report to Shareholders, filed as an Exhibit hereto. (b) Financial Information About Industry Segments --------------------------------------------- The Company and its subsidiaries are engaged in businesses that have been classified into four segments: Electric Operations, Manufacturing Operations, Health Services Operations, and Other Business Operations. Financial information about the Company's industry segments is incorporated by reference to note 2 of "Notes to consolidated financial statements" on page 39 of the Company's 1997 Annual Report to Shareholders, filed as an Exhibit hereto. (c) Narrative Description of Business --------------------------------- ELECTRIC OPERATIONS ------------------- General - ------- The Company derived 52% of its consolidated operating revenues from the electric segment during 1997; 54% during 1996; and 62% during 1995. During 1997 the Company derived approximately 53.4% of its electric revenues from Minnesota, 38.7% from North Dakota, and 7.9% from South Dakota. The territory served by the Company is predominantly agricultural, including a part of the Red River Valley. Although there are relatively few large customers, sales to commercial and industrial customers are significant. By customer category, 34.4% of 1997 electric revenue was derived from commercial customers, 32.2% from residential customers, 20.2% from industrial customers, and 13.2% from other sources, including municipalities, farms and power pools. No customer accounted for more than 10% of electric revenues in 1997. Power pool sales to other utilities, which accounted for 14.5% of total 1997 kwh sales, decreased from 15.3% in 1996. Activity in short-term energy sales is subject to change based on a number of factors and the Company is unable to predict the 1998 level of activity. The Company's other sales of electricity for resale are insignificant. The aggregate population of the Company's retail service area is approximately 230,000. In this service area of 423 communities and adjacent rural areas and farms, approximately 123,600 people live in communities having a population of more than 1,000, according to the 1990 census. The only communities served which have a population in excess of 10,000 are Jamestown, North Dakota (15,571); Fergus Falls, Minnesota (12,362); and Bemidji, Minnesota (11,245). Since 1990 when the customer count was at a low of 121,277, the Company has experienced an increase in customers. By year end 1997 total customers had increased to 125,191. During 1997, the Company experienced a net increase of 409 customers, with the majority of growth in residential and commercial customers. Competition - ----------- The Company's electric sales are subject to competition in some areas from municipally owned systems, rural cooperatives and, in certain respects, from on-site generators and cogenerators. The Company's electricity also competes with other forms of energy. The degree of competition may vary from time to time depending on relative costs and supplies of other forms of energy. The Company may also face competition as the restructuring of the electric industry evolves. Proposals that are being considered by various states and at the federal level, along with the National Energy Policy Act of 1992 ("NEPA"), are expected to bring more competition into the electric industry. The NEPA reduces restrictions on operation and ownership of independent power producers ("IPPs"). It also allows IPPs and other wholesale suppliers and purchasers increased access to transmission lines. The NEPA prohibits retail wheeling ordered by the Federal Energy Regulatory Commission, but it does not address the states' authority to order retail wheeling. In 1996 the Federal Energy Regulatory Commission ("FERC") issued two closely related final rules. FERC Order No. 888 opened wholesale power sales to competition by requiring public utilities who own, control, or operate transmission lines, to file nondiscriminatory proforma open access tariffs that offer others the same transmission service they provide themselves. FERC Order No. 889 requires utilities to post or make available information about their transmission system for their own wholesale power transactions, such as capacity availability, by the same means as their competitors would via an Open Access Same-time Information System ("OASIS"), as well as separate their wholesale marketing and transmission operation functions. In 1997 FERC issued Orders No. 888-A and -B which reaffirmed its basic determinations in Order No. 888 and clarified certain terms. For the status of other regulatory initiatives relating to competition, see "General Regulation". The Company is taking a number of steps to position itself for success in a competitive marketplace. It has initiated the process of functionally unbundling its energy supply, energy delivery, and energy services operations by setting up distinct separate business units in each of these areas. The Company is developing the necessary accounting systems to capture costs and determine the profitability of each of these units and to identify areas for improvement and opportunities for increased profitability. The Company has established an energy services business unit to promote the energy related products and services that have always been offered to its customers and to develop new products and services to be offered to current and potential customers in order to distinguish itself from the competition. Furthermore, with the goal of alleviating state tax inequities in the electric industry, the Company is working with other utilities to develop tax reform proposals and testimony for a legislative committee developed to study competition. As the electric industry evolves, the Company may also have opportunities to increase its market share. The Company's generation capacity appears well positioned for competition. A comparison of the Company's electric retail rates to the rates of other investor-owned utilities, cooperatives, and municipals in the states the Company serves indicates that the Company's rates are competitive. In addition, the Company would attempt more flexible pricing strategies under an open, competitive environment. Capability and Demand - --------------------- At December 31, 1997, the Company had base load net plant capability totaling 560,401 kw, consisting of 251,551 kw from the Big Stone Plant (the Company's 53.9% share), 154,025 kw from the Hoot Lake Plant, 149,450 kw from the Coyote Plant (the Company's 35% share), and under contract 5,375 kw from the Potlatch Co-generation Plant near Bemidji, Minnesota. In addition to its base load capability, the Company has combustion turbine and small diesel units, used chiefly for peaking and standby purposes, with a total capability of 91,208 kw, and 4,374 kw of hydroelectric capability. During 1997, the Company generated about 69% of its total kwh sales and purchased the balance. The Company has made arrangements to help meet its future base load requirements, and continues to investigate other means for meeting such requirements. The Company has an exchange agreement with another utility for the annual exchange of 75,000 kw of seasonal diversity capacity which runs through 2004. The Company also has agreements to purchase 60,000 kw of capacity for the summers of 1998-1999 and 50,000 kw of year-round capacity which runs through April 30, 2005. The Company also has a direct control load management system which provides some flexibility to the Company to effect reductions of peak load. The Company is a member of the Mid-Continent Area Power Pool ("MAPP"). The objective of MAPP is to coordinate the planning and operation of generation and interconnecting transmission facilities to provide reliable and economic electric service to members' customers. Customers served by MAPP members may, therefore, benefit from the regional high voltage interconnections which are capable of transferring large blocks of energy between systems. Also, high voltage interconnections permit companies to engage in power transactions with each other. The operating agreement for MAPP was restated in 1996 to open membership to organizations outside the original Upper Midwest boundaries, to establish a Regional Transmission Group ("RTG") and to add energy market functions. RTGs, as proposed by the FERC, coordinate planning of transmission grids on regional levels. The Company traditionally experiences its peak system demand during the winter season. For the calendar year 1997, the Company established a new system peak demand of 635,529 kw on January 7, 1997. The highest previous sixty-minute peak demand was 635,320 kw on November 26, 1996. Taking into account additional capacity available to it in January 1997 under power purchase contracts (including short-term arrangements), as well as its own generating capacity, the Company's capability of then meeting system demand, including reserve requirements computed in accordance with accepted industry practice, amounted to 774,610 kw. The Company's additional capacity available under power purchase contracts (as described above), combined with the Company's generating capability and load management control capabilities, is expected to meet 1998 system demand, including industry reserve requirements. Fuel Supply - ----------- Coal is the principal fuel burned by the Company at its Big Stone, Coyote, and Hoot Lake generating plants. Coyote, a mine-mouth facility, burns North Dakota lignite coal. Hoot Lake has burned primarily western subbituminous coal since 1988, and Big Stone switched from North Dakota lignite to western subbituminous coal in August of 1995. The following table shows for 1997 the sources of energy used to generate the Company's net output of electricity: Net Kilowatt % of Total Hours Kilowatt Generated Hours Sources (Thousands) Generated ------- ----------- --------- Subbituminous Coal. . . . . . . . . . . . . . 2,167,219 73.8% Lignite Coal. . . . . . . . . . . . . . . . . 733,276 25.0 Hydro . . . . . . . . . . . . . . . . . . . . 26,399 .9 Oil . . . . . . . . . . . . . . . . . . . . . 7,353 .3 --------- ----- Total . . . . . . . . . . . . . . . . . . . . 2,934,247 100.0% ========= ====== The Company has a coal supply agreement with Westmoreland Resources, Inc. of Billings, Montana, for supply of subbituminous coal to Big Stone Plant from mid-1995 through 1999. The coal comes from the Absaloka Mine near Hardin, Montana. The Company has purchase agreements for fixed quantities of subbituminous coal with Kennecott Energy as needed for Hoot Lake Plant. The lignite coal contract with Knife River Coal Mining Company for the Coyote Plant expires in 2016, with a 15-year renewal option subject to certain contingencies, and is expected to provide the plant's lignite coal requirements during the term of the contract. Knife River Coal Mining Company is an affiliate of Montana-Dakota Utilities Co., which is a co-owner of the Big Stone and Coyote Plants. In September 1996 three of the four co-owners of the Coyote generating plant filed a Demand and Notice of Arbitration complaint against Knife River Coal Mining Company and MDU Resources Group, Inc. The three co-owners contend that the 14-year-old pricing mechanism outlined in the original coal supply contract has been abandoned by all parties over the past 7 years and no longer results in fair, equitable, and competitive prices for the lignite coal used to generate electricity at the plant. The co-owners expect resolution of this case in 1998. It is the Company's practice to maintain minimum 30-day inventories (at full output) of coal at Big Stone, a 20-day inventory at Coyote Plant, and a 10-day inventory at Hoot Lake Plant. In November 1996, Big Stone Plant put new aluminum coal cars, leased by the three plant owners, into service transporting coal to the plant. The Company has a coal transportation agreement with Burlington Northern Railroad for transportation services to the Big Stone Plant. This contract began in 1995 and runs through 1999. The aluminum coal cars and current coal and freight agreements result in lower delivered coal prices at the Big Stone Plant which is returned to the Company's retail customers through the Cost of Energy Adjustment clause. The Company has a subbituminous coal transportation agreement with Northern Coal Transportation Company, effective January 1993, covering coal moved from Kennecott Energy's Spring Creek mine to Hoot Lake Plant. That agreement was renewed in January 1996 for an additional three years. The average cost of coal consumed (including handling charges to the plant sites) per million BTU for each of the three years 1997, 1996, and 1995, was $.958, $.944, and $.969, respectively. The Company is permitted by the State of South Dakota to burn some alternative fuels, including tire and refuse derived fuel, at its Big Stone Plant. The quantity of alternative fuel burned during 1997, 3.0% of total fuel burned at Big Stone Plant, and expected to be burned in 1998, is insignificant when compared to the total annual coal consumption at Big Stone Plant. Rate Regulation - --------------- The Company is subject to electric rate regulation as follows: Year Ended December 31, 1997 ----------------- % of Electric % of kwh Rates Regulation Revenues Sales - ------ ---------- -------- ------- MN retail sales MN Public Utilities Commission 48.7% 45.9% ND retail sales ND Public Service Commission 38.0 33.0 SD retail sales SD Public Utilities Commission 7.5 6.4 Transmission & sales FERC for resale 5.8 14.7 ---- ---- 100.0% 100.0% ===== ===== The following table summarizes the electric rate proceedings with the Minnesota Public Utilities Commission ("MPUC"), the South Dakota Public Utilities Commissions ("SDPUC"), the North Dakota Public Service Commission ("NDPSC"), and FERC since January 1, 1993: Increase (Decrease) Granted ------------------ Commission Date Amount % - ---------- ---- ------ ----- (Thousands) Minnesota Last Proceeding was July 1, 1987 North Dakota (1) September 22, 1993 ($ 449) (0.6%) South Dakota Last Proceeding was November 1, 1987 FERC (2) March 25, 1997 (3) May 29, 1997 (1) An agreement for incentive regulation reached between the Company and the NDPSC provided for sharing equally between ratepayers and shareholders any amount earned in 1993 over or under a benchmark overall rate of return. A liability of $449,000 resulting from sharing earnings above this benchmark for 1993 was returned to customers in 1994. (2) On March 25, 1997, FERC issued an order approving a settlement agreement in the Company's Open Access Transmission Tariff filing of July 9, 1996. This settlement sets the rates the Company can charge under its Open Access Transmission Tariff. (3) On May 29, 1997, FERC issued an order approving a request for waiver of the standards of conduct under Order 889. In 1994 the Company filed a petition with the MPUC for approval of an annual recovery mechanism for demand-side management related costs, under Minnesota's Conservation Improvement Programs. An intervenor, on behalf of the Large General Service Group, filed comments against the petition and requested the MPUC to order a general rate case to review the Company's earnings levels. In the interest of rate stability the Company reached an agreement, which was approved by the MPUC, resulting in an annual cost of approximately $2,200,000 in 1995, 1996, and 1997, and $1,000,000 thereafter. In 1997 the MPUC approved the Company's 1996 financial incentive filing along with a 1.75 percent surcharge on all Minnesota customers' bills starting on July 1, 1997, for the recovery of conservation-related costs over and above those being recovered in current rates. The approved surcharge in effect from July 1, 1996, through June 30, 1997, was 1.25 percent and the approved surcharge in effect from July 1, 1995, through June 30, 1996, was .5030 percent. The current surcharge rate will be in place until June 30, 1998, when it will be revised for subsequent years' program results. Under Minnesota law, the MPUC must allow implementation of an interim rate increase, subject to refund with interest, 60 days after the initial filing date of a rate increase request, except that the MPUC is not required to allow implementation of the interim rate increase until four months after the effective date of a previous rate order. The amount of the interim rate increase will be calculated using the proposed test year cost of capital, the rate of return on common equity most recently granted to the Company by the MPUC, and rate base and expense items allowed by a currently effective MPUC order. In addition, if the MPUC fails to make a final determination regarding any rate request within ten months after the initial request is filed, then the requested rate is deemed to be approved, except if (I) an extension of the procedural schedule (in case of a contested rate increase request) has been granted, in which case the schedule of rates will be deemed to have been approved by the MPUC on the last day of the extended period of suspension of the rate increase, or (II) a settlement has been submitted to and rejected by the MPUC, and the MPUC does not make a final determination concerning the schedule of rates, in which case the schedule of rates will be deemed to have been approved 60 days after the initial or, if applicable, the extended period of suspension of the rate increase. Rate requests filed with the NDPSC become effective 30 days after the date of filing unless suspended by the NDPSC. Within seven months after the date of suspension, the NDPSC must act on the request, and during the period of consideration by the NDPSC a suspended rate can be implemented only with the approval of the NDPSC. South Dakota law provides that a requested rate increase can be implemented 30 days after the date of filing, unless its effectiveness is suspended by the SDPUC. The SDPUC may suspend the effectiveness of the proposed rate change for a period not longer than 90 days beyond the time when the rate change would otherwise go into effect, unless the SDPUC finds that a longer time is required, in which case the SDPUC may extend the suspension for a period not to exceed a total of 12 months. A public utility may not put a proposed rate change into effect until at least 45 days after the SDPUC has made a determination concerning any previously filed rate change. In the event that a requested rate change is suspended by the SDPUC, such requested rate change can be implemented by the public utility six months after the date of filing (unless previously authorized by the SDPUC), subject to refund with interest. The Company's wholesale power sales and transmission rates are subject to the jurisdiction of the FERC under the Federal Power Act of 1935. Filed rates are effective after a one-day suspension period, subject to ultimate approval by the FERC. Power pool sales are conducted continuously through MAPP on the basis of generating costs, in accordance with schedules filed by MAPP with the FERC. In rate cases, a forward test year procedure enables cost increases to be recovered more promptly than use of an historic test year. The MPUC has established by regulation a forward test year procedure. North Dakota law allows a forward test year. The SDPUC uses an historic test year with adjustments for known and measurable changes occurring within 24 months of the last month of the test year. The Company has obtained approval from the regulatory commissions in all three states which it serves for lower rates for residential demand control and controlled service, and in North Dakota and South Dakota for bulk interruptible rates. Each of these special rates is designed to improve efficient use of Company facilities, while encouraging use of electricity instead of other fuels and giving customers more control over the size of their electric bill. All of the Company's electric rate schedules now in effect, except for wheeling, certain municipal and area lighting services and certain interruptible rates, provide for adjustments in rates based upon the cost of fuel delivered to the Company's generating plants, as well as for adjustments based upon the cost of the energy charge for electric power purchased by the Company. Such adjustments are presently based upon a two-month moving average in Minnesota and under the FERC, a three-month moving average in South Dakota, and a four-month moving average in North Dakota and are applied to the next billing after becoming applicable. General Regulation - ------------------ Minnesota: Under the Minnesota Public Utilities Act, the Company is subject to the jurisdiction of the MPUC with respect to rates, issuance of securities, depreciation rates, public utility services, construction of major utility facilities, establishment of exclusive assigned service areas, contracts and arrangements with subsidiaries and other affiliated interests, and other matters. The MPUC has the authority to assess the need for large energy facilities and to issue or deny certificates of need, after public hearings, within six months of an application to construct such a facility. The Minnesota Department of Public Service ("DPS") is responsible for investigating all matters subject to the jurisdiction of the DPS or the MPUC, and for the enforcement of MPUC orders. Among other things, the DPS is authorized to collect and analyze data on energy and the consumption of energy, develop recommendations as to energy policies for the Governor and the Legislature of Minnesota and evaluate policies governing the establishment of rates and prices for energy as related to energy conservation. The DPS acts as a state advocate in matters heard before the MPUC. The DPS also has the power to prepare and adopt regulations to conserve and allocate energy in the event of energy shortages and on a long-term basis. Under Minnesota law, every public utility that furnishes electric service must make annual investments and expenditures in energy conservation improvements, or make a contribution to the State's energy and conservation account, in an amount equal to at least 1.5% of its gross operating revenues from service provided in Minnesota. The DPS may require the Company to make investments and expenditures in energy conservation improvements whenever it finds that the improvement will result in energy savings at a total cost to the utility less than the cost to the utility to produce or purchase an equivalent amount of a new supply of energy. Such DPS orders are appealable to the MPUC. Investments made pursuant to such orders generally are recoverable costs in rate cases, even though ownership of the improvement may belong to the property owner rather than the utility. In 1995 the MPUC approved an automatic recovery mechanism which allows the Company to begin collecting from customers any conservation-related expenditures not included in base rates. The MPUC requires the submission of a 15-year advance integrated resource plan by utilities serving at 10,000 customers, either directly or indirectly, and having at least 100 megawatts of load. The MPUC's findings and orders with respect to these submissions is binding for jurisdictional utilities. The Company's most recent plan was submitted to the MPUC in 1996, and was approved as submitted in its entirety. The MPUC granted the Company a one year waiver in submitting the next plan, which is now due in 1999. The Minnesota legislature has enacted a statute that favors conservation over the addition of new resources. In addition, it has mandated the use of renewable resources where new supplies are needed, unless the utility proves that a renewable energy facility is not in the public interest. It has effectively prohibited the building of new nuclear facilities. The environmental externality law requires the MPUC, to the extent practicable, to quantify the environmental costs of each type of generation, and to use such monetized values in evaluating resource plans. The MPUC must disallow any nonrenewable rate base additions (whether within or without the state) or any rate recovery therefrom, and shall not approve any nonrenewable energy facility in an integrated resource plan, unless the utility proves that a renewable energy facility is not in the public interest. The state has prioritized the acceptability of new generation with wind and solar ranked first and coal and nuclear ranked fifth, the lowest ranking. Whether these state policies are preempted by federal law has not been determined. Pursuant to the Minnesota Power Plant Siting Act, the Minnesota Environmental Quality Board ("EQB") has been granted the authority to regulate the siting in Minnesota of large electric power generating facilities in an orderly manner compatible with environmental preservation and the efficient use of resources. To that end, the EQB is empowered, after study, evaluation, and hearings, to select or designate in Minnesota sites for new electric power generating plants (50,000 kw or more) and routes for transmission lines (200 kv or more) and to certify such sites and routes as to environmental compatibility. North Dakota: The Company is subject to the jurisdiction of the NDPSC with respect to rates, services, certain issuances of securities and other matters. The North Dakota Energy Conversion and Transmission Facility Siting Act grants the NDPSC the authority to approve sites in North Dakota for large electric generating facilities and high voltage transmission lines. This Act is similar to the Minnesota Power Plant Siting Act described above and affects new electric power generating plants of 50,000 kw or more and new transmission lines of more than 115 kv. The Company is required to submit a ten-year plan to the NDPSC annually. South Dakota: The South Dakota Public Utilities Act subjects the Company to the jurisdiction of the SDPUC with respect to rates, public utility services, establishment of assigned service areas, and other matters. The Company is currently exempt from the jurisdiction of the Commission with respect to the issuance of securities. Under the South Dakota Energy Facility Permit Act, the SDPUC has the authority to approve sites in South Dakota for large energy conversion facilities (100,000 kw or more) and transmission lines of 115 kv or more. FERC: The Company is also subject to regulation by the FERC, successor to the Federal Power Commission, created pursuant to the Federal Power Act of 1935, as amended. The FERC is an independent agency which has jurisdiction over rates for sales for resale, transmission and sale of electric energy in interstate commerce, interconnection of facilities, and accounting policies and practices. General: The United States Congress ended its 1997 legislative session without taking action on proposed electric industry restructuring legislation. Federal restructuring legislation in 1998, a Congressional election year, is also unlikely due to the complexities of issues involved with federal intervention. The MPUC issued its Wholesale Competition Report in 1996 and its Retail Competition Report in 1997 and continues to work on specific topics in the areas of potential stranded costs, unbundled rates and affiliated transactions. The Minnesota Legislature is not expected to adopt deregulation legislation until 1999 at the earliest. In 1997 the North Dakota Legislature created a subcommittee to investigate the impact of electric utility industry restructuring on North Dakota. In view of the legislative effort, the NDPSC closed its investigative docket. The SDPUC has not taken any action with regards to industry restructuring or retail competition. The Company is subject to various federal and state laws, including the Federal Public Utility Regulatory Policies Act and the Energy Policy Act of 1992, which are intended to promote the conservation of energy and the development and use of alternative energy sources. The Company is unable to predict the impact on its operations resulting from future regulatory activities by any of the above agencies, from any future legislation or from any future tax which may be imposed upon the source or use of energy. Environmental Regulation - ------------------------ Impact of Environmental Laws: The Company's existing generating plants are subject to stringent standards and regulations regarding, among other things, air, water and solid waste pollution, by agencies of the federal government and the respective states where the Company's plants are located. The Company estimates that it has expended in the five years ended December 31, 1997, approximately $2,210,000 for environmental control facilities. Included in the 1998-2002 construction budget are approximately $1,780,000 for environmental improvements for existing and new facilities, including $440,000 for 1998. Air Quality: Pursuant to the Federal Clean Air Act of 1970, the Clean Air Act Amendments of 1990 and other amendments thereto (collectively the "Act"), the United States Environmental Protection Agency ("EPA") has promulgated national primary and secondary standards for certain air pollutants. All primary fuel burned by the Company at its steam generating plants is North Dakota lignite or western subbituminous coal with sulfur content averaging less than one percent. Electrostatic precipitators have been installed at the Company's principal units at the Hoot Lake Plant and at the Big Stone Plant. A fabric filter to collect particulates from stack gases has been installed on a smaller unit at Hoot Lake Plant. As a result, the Company's units at Big Stone and Hoot Lake currently meet all federal and state air quality and emission standards presently applicable. The Coyote Plant is substantially the same design as the Big Stone Plant, except for site-related items and the inclusion of sulfur dioxide removal equipment. The removal equipment--referred to as a dry scrubber-- consists of a spray dryer, followed by a fabric filter, and is designed to desulphurize hot gases from the stack without producing sludge, an unwanted by-product of the conventional wet scrubber system. The Coyote Plant is currently operating within all presently applicable federal and state air quality and emission standards. The Clean Air Act Amendments of 1990, in addressing acid deposition, will impose new requirements on power plants in an effort to reduce national emissions of sulfur dioxide ("SO2") and nitrogen oxide ("NOx"). The national SO2 emission reduction goals are to be achieved through a new market-based system under which power plants are to be allocated "emissions allowances" that will require plants to either reduce their emissions or acquire allowances from others to achieve compliance. The SO2 emission reduction requirements are being imposed in two phases, the first phase was imposed in 1995 and the second phase will be imposed in 2000. The phase one requirements do not apply to any of the Company's plants. The phase two standards apply to the Company's plants in the year 2000. The Company believes that its current use of low sulfur coal at the Hoot Lake Plant and the dry scrubbers installed at the Coyote Plant will enable the facilities to comply with anticipated phase two limitations with regards to SO2. The Company has a subbituminous coal contract for Big Stone Plant which runs through December 1999. The subbituminous coal replaced lignite, which had been used since inception of plant operation in 1975 as the primary fuel. The Company intends that the Big Stone Plant will maintain current levels of operation and meet phase two requirements either by burning low sulfur subbituminous coal or by the acquisition of SO2 allowances. The cost of subbituminous coal in 2000 and beyond may be higher than the current market price but would likely not adversely affect the Company's power plant operations. The national NOx emission reduction goals are to be achieved by imposing mandatory emissions standards on individual sources. The NOx emissions regulations that were issued by the EPA in 1995 apply to phase one boilers of the same design as those used at the Company's Hoot Lake Plant units 2 and 3. The Act allowed EPA to either retain the standard as it currently applies to phase one boilers or adopt more stringent standards for such phase two boilers by January 1, 1997. More stringent standards were adopted on December 19, 1996. The Company had the option to either comply with the phase one standards beginning on January 1, 1997, under EPA's early opt-in provision, or comply with any revised standard for phase two units. The Company elected the early opt-in provision for Hoot Lake Plant unit 2. The unit is governed by the phase one standard until January 1, 2008. The Company has not elected the early opt-in provision for Hoot Lake Plant unit 3. The Company currently anticipates that the cost of complying with the limitations applicable to Hoot Lake Plant unit 3 will not be material. On December 19, 1996, the EPA also adopted NOx emissions regulations that would be applicable to cyclone-fired boilers such as those used at Big Stone and Coyote. The regulations require that the emission standard be met by cyclone boilers beginning on January 1, 2000. The Utility Air Regulatory Group ("UARG") filed a Petition for Review in the Court of Appeals for the District of Columbia regarding the EPA adopted NOx emission regulations. As a member of UARG, the Company participated in the Petition, which was rejected by the Court of Appeals on February 13, 1998. The Company is currently evaluating the Big Stone and Coyote NOx emissions with respect to the December 19, 1996 rules. Existing emissions monitoring data indicate that Coyote meets the emission requirements. During 1997, the Company conducted tests at Big Stone to determine if emissions can be reduced through modifications to existing equipment. The tests were successful and the modifications will be completed at a nominal cost. The Clean Air Act Amendments of 1990 contain a list of toxic air pollutants to be regulated. The list includes certain substances believed to be emitted by the Company's plants. The Act calls for EPA studies of the effects of emissions of the listed pollutants by electric utility steam generating plants. Because promulgation of rules by the EPA has not been completed, it is not possible to assess at this time whether, or to what extent, this legislation will ultimately impact the Company. Water Quality: The Federal Water Pollution Control Act Amendments of 1972, and amendments thereto, provide for, among other things, the imposition of effluent limitations to regulate discharges of pollutants, including thermal discharges, into the waters of the United States, and the EPA has established effluent guidelines for the steam electric power generating industry. Discharges must also comply with state water quality standards. The Company has all federal and state water permits presently necessary for the operation of its Big Stone Plant. A water discharge permit for the Hoot Lake Plant was renewed in 1997 for a five-year term. A permit for the Coyote Plant was renewed in 1993 also for a five-year term. The Company owns five small dams on the Otter Tail River which are subject to FERC licensing requirements. A license for all five dams was issued on December 5, 1991. Total nameplate rating of the five dams is 3,450 kw (net unit capability of 3,514 kw at December 31, 1997). Solid Waste: Permits for disposal of ash and other solid wastes have been issued for the Company's Big Stone and Coyote Plants. A renewal permit is pending for the Company's Hoot Lake Plant and the Company anticipates that it will obtain this renewal in due course. The EPA has promulgated various solid and hazardous waste regulations and guidelines pursuant to, among other laws, the Resource Conservation and Recovery Act of 1976, the Solid Waste Disposal Act Amendments of 1980, and the Hazardous and Solid Waste Amendments of 1984, which provide for, among other things, the comprehensive control of various solid and hazardous wastes from their generation to final disposal. The states of Minnesota, North Dakota and South Dakota have also adopted rules and regulations pertaining to solid and hazardous waste. The total impact on the Company of the various solid and hazardous waste statutes and regulations enacted by the Federal Government or the states of Minnesota, North Dakota and South Dakota is not certain at this time. To date the Company has incurred no significant costs as a result of these laws. In 1980 the United States enacted the Comprehensive Environmental Response, Compensation and Liability Act, commonly known as the Federal Superfund law, and in 1986 reauthorized and amended the 1980 Act. In 1983 Minnesota adopted the Minnesota Environmental Response and Liability Act, commonly known as the Minnesota Superfund law. In 1988 South Dakota enacted the Regulated Substance Discharges Act, commonly called the South Dakota Superfund law. In 1989 North Dakota enacted the Environmental Emergency Cost Recovery Act. Among other requirements the federal and state acts establish environmental response funds to pay for remedial actions associated with the release or threatened release of certain regulated substances into the environment. These federal and state Superfund laws also establish liability for cleanup costs and damage to the environment resulting from such release or threatened release of regulated substances. The Minnesota Superfund law also creates liability for personal injury and economic loss under certain circumstances. The Company is unable to determine the total impact of the Superfund laws on its operations at this time but has not incurred any significant costs to date related to these laws. The Federal Toxic Substances Control Act of 1976 regulates, among other things, polychlorinated byphenyls ("PCBs"). The EPA has enacted regulations concerning the use, storage and disposal of PCBs. The Company completed a program for removal of all PCB-filled transformers and capacitors by the end of 1987 and received Certificates of Disposal in 1989. The Company completed removal of PCB-contaminated mineral oil dielectric fluid from all substation transformers in 1991 and continues to remove such oil from voltage regulators as well as other electrical equipment. Health Effects of Electric and Magnetic Fields ("EMF"): In 1996 the National Research Council of the National Academy of Sciences, after evaluating more than 500 studies on the effects of EMF, found insufficient evidence to consider electric and magnetic fields a threat to human health. Although research conducted to date has found no conclusive evidence that electric and magnetic fields affect health, a few studies have suggested a possible connection with cancer. The utility industry continues to fund studies. The ultimate impact, if any, of this issue on the Company and the utility industry is impossible to predict. Capital Expenditures - -------------------- The Company is continually expanding, replacing and improving its electric utility facilities. During 1997 the Company invested approximately $26,489,000 for additions to its electric utility properties. During the five years ended December 31, 1997, the Company had gross electric property additions, including construction work in progress, of approximately $141,769,000 and gross retirements of approximately $39,862,000. The Company estimates that during the five years 1998 through 2002 it will invest for electric utility construction approximately $117,000,000. The Company continuously reviews options for increasing its generating capacity, but at this time has no firm plans for additional base load generating plant construction. The majority of electric utility expenditures for the five-year period 1998 through 2002 will be for work related to the Company's transmission and distribution system. Franchises - ---------- At December 31, 1997, the Company had franchises in all but one of the 371 incorporated municipalities which it serves. All franchises are nonexclusive and generally were obtained for 20-year terms, with varying expiration dates. No franchises are required to serve unincorporated communities in any of the three states which the Company serves. MANUFACTURING OPERATIONS ------------------------ General - ------- Manufacturing Operations consists of businesses involved in the following manufacturing activities: PVC pipe, sugar beet processing equipment, metal stamping, contract machining, and frame straightening racks and accessories used by the auto body industry. Initial acquisitions of businesses in this segment were made in 1990. On June 30, 1997, Mid-States acquired Chassis Liner in a pooling-of-interests transaction. The Company derived 21% of its consolidated operating revenues from this segment in 1997, 17% in 1996, and 12% in 1995. The following is a brief description of each of these businesses: Precision Machine of North Dakota, Inc., located in West Fargo, ND, uses computer controlled lathes and milling machines to produce precision parts for manufacturers. Dakota Machine, Inc., located in West Fargo, ND, is primarily engaged in metal fabrication of large equipment that handles or processes sugar beets. Dakota Engineering, Inc., a subsidiary of Dakota Machine, Inc., was formed in 1995 and is engaged in design engineering and construction management, primarily in the sugar industry. Glendale Machining, Inc., located in Pelican Rapids, MN, uses computer controlled lathes and milling machines to produce parts for manufacturers. BTD Manufacturing, Inc. ("BTD"), located in Detroit Lakes, MN, is a metal stamping and tool and die manufacturer. BTD stamps, machines, and assembles metal parts according to manufacturers' specifications primarily for the snowmobile/recreation vehicle industry. Northern Pipe Products, Inc., located in Fargo, ND, manufactures poly- vinyl-chloride (PVC) pipe for municipal, rural water, irrigation and other uses in a sixteen-state area. Chassis Liner Corporation, located in Alexandria and Lucan, MN, manufactures vehicle frame-straightening equipment and accessories used by the auto body industry. Competition - ----------- The markets in which the Company's manufacturing entities compete are characterized by intense competition. The various markets the companies compete in have many established manufacturers with broader product lines, greater distribution capabilities, greater capital resources and larger marketing, research and development staffs and facilities than the Company. The Company believes the principal competitive factors in its manufacturing segment are product performance, quality, price, ease of use, technical innovation, cost effectiveness, customer service and breadth of product line. The Company intends to continue to compete on the basis of its high performance products, innovative technologies, cost effective manufacturing techniques, close customer relations and support and its strategy to increase offerings of products. Capital Expenditures - -------------------- During 1997 capital expenditures of approximately $6,300,000 were made in Manufacturing Operations, Plant and Equipment. Total capital expenditures for Manufacturing Operations during the five-year period 1998-2002 are estimated to be approximately $13,000,000. HEALTH SERVICES OPERATIONS -------------------------- General - ------- Health Services Operations consists of businesses involved in the sale, service, rental, refurbishing and operation of medical imaging equipment and the sale of related supplies and accessories to various medical institutions primarily in the Midwest United States. The Company derived 17% of its consolidated operating revenues from this segment in 1997, 17% in 1996, and 16% in 1995. Subsidiaries comprising Health Services Operations include the following: Diagnostic Medical Systems, Inc. ("DMS"), located in Fargo, ND, sells, services and refurbishes diagnostic medical imaging equipment manufactured primarily by Philips Medical Systems ("Philips"), including fluoroscopic, radiographic and mammography equipment, along with ultrasound, computerized tomography ("CT") scanners, magnetic resonance imaging ("MRI") scanners, cardiac cath labs, and radiation therapy equipment for the treatment of cancer. DMS is also a distributor of x- rays supplies and accessories to health care facilities. DMS subsidiaries are DMS Imaging, Inc. and DMS Leasing, Inc. In 1994 DMS entered into a five-year dealer agreement with Philips, which can be terminated by Philips upon certain circumstances. DMS is also a supplier for Kodak, DuPont, Imation, and Fuji in the medical film and accessory business. DMS markets mainly to hospitals, clinics and mobile service companies in North Dakota, South Dakota, Minnesota, Montana and Wyoming. Almost 80% of the hospitals served by DMS have 50 or fewer beds. DMS Imaging, Inc., a subsidiary of DMS located in Fargo, ND and Bemidji MN, provides mobile and fixed diagnostic medical equipment and related services to health care providers in a nineteen state area, including diagnostic nuclear medicine, ultrasound, mammography, computerized axial tomography, and magnetic resonance imaging. Northern Medical Imaging, Inc., acquired in April 1996 and Imaging Plus, Inc. were combined in January 1997 to form DMS Imaging, Inc. Combined, the Health Service subsidiaries cover the three basics of the medical imaging industry: (1) operating technologists who do the imaging of patients of hospitals and clinics; (2) the equipment function that sells, owns, rents, refurbishes and maintains the imaging machines; and (3) central office specialists who provide scheduling, billing and administrative support. Each of the subsidiaries described above under Health Services Operations and Manufacturing Operations are owned by Mid-States, which is a wholly owned subsidiary of Minnesota Dakota Generating Company ("MDG"). MDG is a wholly owned subsidiary of the Company. Competition - ----------- The market for selling, servicing and operating diagnostic imaging services and imaging systems is highly competitive. In addition to direct competition from other contract providers, the Company competes with free-standing imaging centers and health care providers that have their own diagnostic imaging systems and with equipment manufacturers that sell imaging equipment to health care providers for full-time installation. Some of the Company's direct competitors which provide contract MRI services have access to greater financial resources than the Company. In addition, some of the Company's customers are capable of providing the same services to their patients directly, subject only to their decision to acquire a high-cost diagnostic imaging system, assume the financial and technology risk, and employ the necessary technologies. The Company competes against other contract providers on the basis of quality of services, quality and magnetic field strength of imaging systems, price, availability and reliability. Capital Expenditures - -------------------- During 1997 capital expenditures of approximately $3,800,000 were made in Health Services. Total capital expenditures during the five-year period 1998-2002 are estimated to be $34,000,000. OTHER BUSINESS OPERATIONS ------------------------- General - ------- The Company's Other Business Operations consists of businesses that are diversified in such areas as electrical and telephone construction contracting, radio broadcasting, waste incinerating, and telephone/cable TV utility. On January 2, 1997, NCU acquired Peoples in a pooling-of-interests transaction. The Company derived 10% of its consolidated operating revenues from these diversified businesses during 1997, 12% in 1996, and 10% during 1995. The following is a brief description of each of these businesses: Moorhead Electric, Inc., located in Moorhead, MN, provides commercial and industrial wiring of large buildings, constructs and maintains telecommunications and power distribution systems, and installs computer network cable. Aerial Contractors, Inc., located in West Fargo, ND, installs overhead and underground utility lines. KFGO, Inc., located in Fargo, ND, operates two AM and four FM commercial radio stations along with a video production facility. Western Minnesota Broadcasting Company, located in Morris, MN, operates an AM and FM commercial radio station. Quadrant Co. ("Quadrant") operates a municipal waste burning facility located in Perham, MN. In 1997 Quadrant began processing solid waste for three Minnesota counties under the terms of a new waste incineration agreement. Since operating under the new agreement, Quadrant has experienced a reduction in revenue of approximately fifty percent, as compared to 1996. New pollution rules for Minnesota waste incinerators have been issued. The costs to be in compliance with the new pollution rules by the year 2000 in conjunction with reduced operating revenues threaten the economic viability of the plant. However, Quadrant is currently generating positive cash flows from the operation of its plant which had a net undepreciated book value of approximately $2.45 million on December 31, 1997. The Company intends to operate the Quadrant plant as long as positive cash flows can be maintained but will continue to evaluate its investment in Quadrant for asset impairment on a quarterly basis. Midwest Information Systems, Inc.("MIS"), headquartered in Parkers Prairie, MN, owns three operating telephone companies serving over 6,300 customers and two cable television companies serving approximately 1,200 customers. MIS is also involved in long-distance telephone, fiber-optic transmission facilities, and the sale of direct broadcast satellite television programming and equipment. With the exception of Quadrant, which was founded by the Company in 1985, each of these businesses was acquired by the Company since 1989. Quadrant is a wholly owned subsidiary of MDG, which in turn is a wholly owned subsidiary of the Company. MIS is a wholly owned subsidiary of NCU, a subsidiary of MDG formed for the purpose of acquiring utility companies. Each of the other subsidiaries described above are owned by Mid-States, which is also a wholly owned subsidiary of MDG. General Regulation - ------------------ The Company's operating telephone subsidiaries are subject to the regulatory authority of the MPUC regarding rates and charges for telephone services, as well as other matters. The operating telephone subsidiaries must keep on file with the DPS schedules of such rates and charges, and any requests for changes in such rates and charges must be filed for approval by the MPUC. The telephone industry is also subject generally to rules and regulations of the Federal Communications Commission ("FCC"). The Company's operating cable television subsidiary is regulated by federal and local authorities. The Company's radio broadcasting subsidiaries are regulated by the FCC. Environmental Regulation - ------------------------ In recent years, facilities such as Quadrant that burn municipal solid waste have been subjected to increasing state and federal environmental regulation. The Minnesota Pollution Control Agency promulgated rules relating to ash in 1993 and air emissions in 1994. In late 1996, the U.S. Court of Appeals for the District of Columbia Circuit vacated air emission regulations recently adopted by the EPA. EPA has petitioned for a rehearing of the case. Quadrant continues to operate under an expired air emission permit with the permission of the Minnesota Pollution Control Agency and submitted its application for a new air emission permit in April of 1995. Historically the terms of Quadrant's contracts with customers have enabled Quadrant to pass on to its customers much of the cost of environmental compliance. The increasing cost of environmental compliance may adversely affect Quadrant's ability to successfully negotiate the renewal of the contracts discussed above. Competition - ----------- Each of the businesses in Other Business Operations is subject to competition, as well as the effects of general economic conditions, in their respective industries. Capital Expenditures - -------------------- During 1997 capital expenditures of approximately $3,000,000 were made in Other Business Operations. Capital expenditures during the five-year period 1998-2002 are estimated to be approximately $9,000,000 for Other Business Operations. FINANCING --------- The Company estimates that funds internally generated net of forecasted dividend payments, combined with funds on hand, will be sufficient to meet all sinking fund payments for First Mortgage Bonds in the next five years and to provide for its estimated 1998-2002 consolidated capital expenditures. Additional short-term or long-term financing will be required in the period 1998-2002 for the maturity of First Mortgage Bonds and other long-term debt, in the event the Company decides to refund or retire early any of its presently outstanding debt or Cumulative Preferred Shares, or for other corporate purposes. The foregoing estimates of capital expenditures and funds internally generated may be subject to substantial changes due to unforeseen factors, such as changed economic conditions, competitive conditions, technological changes, new environmental and other governmental regulations, tax law changes, and rate regulation. As of December 31, 1997, the Company had unutilized net fundable property available for the issuance of more than $39,000,000 principal amount of additional First Mortgage Bonds and also was entitled to issue in excess of $131,000,000 principal amount of additional First Mortgage Bonds on the basis of First Mortgage Bonds theretofore retired. The Company's operating subsidiaries have been responsible for obtaining their own financing after the Company's initial equity investment and have developed financing arrangements with various banks. Historically, the Company has not made or guaranteed loans to its subsidiaries, loaned any subsidiary money or cosigned on any of their borrowing. The Company has access to short-term borrowing resources. As of December 31, 1997, the Company and subsidiaries had unused credit lines totaling $52,285,000. The Company had $2,100,000 in short-term borrowings as of December 31, 1997. The subsidiary companies had $3,115,000 of credit lines in use at December 31, 1997, a portion classified as current maturities and a portion classified as long-term debt depending on the terms and nature of use. EMPLOYEES --------- The Company and its subsidiaries had approximately 1,884 full-time employees at December 31, 1997. A total of 484 employees are represented by local unions of the International Brotherhood of Electrical Workers, of which 412 are employees of the Electric Operations segment and are covered by a three-year labor contract that was renewed in 1996 and expires November 1, 1999. The Company has never experienced any strike, work stoppage, or strike vote, and regards its present relations with employees as very good. Forward Looking Information - Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995 In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 (the "Act"), the Company has filed cautionary statements identifying important factors that could cause the Company's actual results to differ materially from those discussed in forward-looking statements made by or on behalf of the Company. When used in this Form 10-K and in future filings by the Company with the Securities and Exchange Commission, in the Company's press releases and in oral statements, words such as "may", "will", "expect", "anticipate", "continue", "estimate", "project", "believes" or similar expressions are intended to identify forward-looking statements within the meaning of the Act. Factors that might cause such differences include, but are not limited to, the factors discussed under "Factors affecting future earnings" on pages 28 through 30 of the Company's 1997 Annual Report to Shareholders, filed as an exhibit hereto. These factors are in addition to any other cautionary statements, written or oral, which may be made or referred to in connection with any such forward- looking statement or contained in any subsequent filings by the Company with the Securities and Exchange Commission. Item 2. PROPERTIES ---------- The Coyote Plant, which commenced operation in 1981, is a 414,000 kw (nameplate rating) mine-mouth plant located in the lignite coal fields near Beulah, North Dakota and is jointly owned by the Company, Northern Municipal Power Agency, Montana-Dakota Utilities Co. and Northwestern Public Service Company. The Company has a 35% interest in the plant and was the project manager in charge of construction. Montana-Dakota Utilities Co., in whose service territory the plant is located, is the operating manager of the plant. The Company, jointly with Northwestern Public Service Company and Montana-Dakota Utilities Co., owns the 414,000 kw (nameplate rating) Big Stone Plant in northeastern South Dakota which commenced operation in 1975. The Company, for the benefit of all three utilities, was in charge of construction and is now in charge of operations. The Company owns 53.9% of the plant. Located near Fergus Falls, Minnesota, the Hoot Lake Plant is comprised of three separate generating units with a combined rating of 127,000 kw. The oldest Hoot Lake Plant generating unit was constructed in 1948 (7,500 kw nameplate rating) and a subsequent unit was added in 1959 (53,500 kw nameplate rating). A third unit was added in 1964 (66,000 kw nameplate rating) and later modified during 1988 to provide cycling capability, allowing this unit to be more efficiently brought on-line from a standby mode. At December 31, 1997, the Company's transmission facilities, which are interconnected with lines of other public utilities, consisted of 48 miles of 345 kv lines; 363 miles of 230 kv lines; 633 miles of 115 kv lines; and 4,120 miles of lower voltage lines, principally 41.6 kv. The Company owns the uprated portion of the 48 miles of the 345 kv line, with Minnkota Power Cooperative retaining title to the original 230 kv construction. All of the Company's electric utility properties, with minor exceptions, are subject to the lien of the Company's Indenture of Mortgage dated July 1, 1936, as amended and supplemented, securing its First Mortgage Bonds. All of the common shares of the companies owned by Mid-States are pledged to secure indebtedness of Mid-States. Item 3. LEGAL PROCEEDINGS ----------------- Patricia C. Reimel v, John C. MacFarlane, et al, and Otter Tail Power Company This suit was filed on July 1, 1997, in United States District Court for the District of Minnesota by Pactricia C. Reimel, individually and derivatively as a shareholder of the Company. The suit names as defendants the Company, each member of the Company's Board of Directors and certain executive officers of the Company. The allegations made by the plaintiff relate to the Company's Shareholder Rights Plan, which was adopted by the Company's Board of Directors in January 1997. Claims for relief include modification or elimination of the Company's Shareholder Rights Plan, as well as damages in an unspecified amount. The Company believes the suit is procedurally inappropriate and has requested that the Court dismiss the suit because the plaintiff failed to make a demand on the Board of Directors of the Company prior to seeking to resolve the alleged claims through litigation. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- No matters were submitted to a vote of security holders during the three months ended December 31, 1997. Item 4A. EXECUTIVE OFFICERS OF THE REGISTRANT (AS OF MARCH 1, 1998) ---------------------------------------------------------- Set forth below is a summary of the principal occupations and business experience during the past five years of executive officers of the Company: DATES ELECTED ------------- NAME AND AGE TO OFFICE PRESENT POSITION AND BUSINESS EXPERIENCE - ------------ --------- ---------------------------------------- John C. MacFarlane (58) 4/8/91 Present: Chairman, President and Chief Executive Officer Andrew E. Anderson (58) 4/08/96 Present: Vice President, Finance and Treasurer 4/10/95 Vice President, Finance Prior to 4/10/95 Controller Marlowe E. Johnson (53) 4/12/93 Present: Vice President, Customer Service, North Dakota Prior to 4/12/93 Division Manager, Jamestown Douglas L. Kjellerup (56) 4/12/93 Present: Vice President, Marketing and Development Prior to 4/12/93 Vice President, Planning and Development LeRoy S. Larson (52) 4/12/93 Present: Vice President, Customer Service, Minnesota and South Dakota 4/13/92 Vice President, Division Operations, Minnesota and South Dakota Prior to 4/13/92 Division Manager, Morris Richard W. Muehlhausen (59) 4/8/96 Present: Senior Vice President, Corporate Services Prior to 4/8/96 Vice President, Corporate Services Jay D. Myster (59) 4/8/96 Present: Senior Vice President, Governmental and Legal, and Corporate Secretary Prior to 4/8/96 Vice President, Governmental and Legal, and Corporate Secretary Rodney C.H. Scheel (48) 4/10/95 Present: Vice President, Electrical Prior to 4/10/95 Director, Information Services Ward L. Uggerud (48) 4/10/89 Present: Vice President, Operations Jeffrey J. Legge (41) 4/10/95 Present: Controller Prior to 4/10/95 Manager, Tax Department The term of office of each of the officers is one year, and there are no arrangements or understanding between individual officers or any other persons pursuant to which he was selected as an officer. No family relationships exist between any officers of the Company. PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER ----------------------------------------------------------------- MATTERS ------- The information required by this Item is incorporated by reference to the first sentence under "Otter Tail Power Company Stock listing" on Page 48, to "Selected consolidated financial data" on Page 21 and to "Quarterly information" on Page 45, of the Company's 1997 Annual Report to Shareholders, filed as an Exhibit hereto. In the January 2, 1997, acquisition of Peoples, a Company subsidiary exchanged 163,758 newly issued shares of the Company's common stock and $209,000 in cash for all of the outstanding stock of Peoples. In the June 30, 1997, acquisition of Chassis Liner a Company subsidiary exchanged 157,646 newly issued shares of the Company's common stock for all of the outstanding common stock of Chassis Liner. The issuance of shares of common stock for both acquisitions did not involve a public offering and therefore was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended (the "Act"). On January 8, 1997, the Company issued 2,630 shares of its common stock as a bonus to a consultant. The issuance of such shares did not constitute a "sale" within the meaning of Section 2(3) of the Act. Item 6. SELECTED FINANCIAL DATA ----------------------- The information required by this Item is incorporated by reference to "Selected consolidated financial data" on Page 21 of the Company's 1997 Annual Report to Shareholders, filed as an Exhibit hereto. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS --------------------- The information required by this Item is incorporated by reference to "Management's discussion and analysis of financial condition and results of operations" on Pages 22 through 30 of the Company's 1997 Annual Report to Shareholders, filed as an Exhibit hereto. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ------------------------------------------- The information required by this Item is incorporated by reference to "Quarterly information" on Page 45 and the Company's audited financial statements on Pages 31 through 44 of the Company's 1997 Annual Report to Shareholders excluding "Report of Management" on Page 32, filed as an Exhibit hereto. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND --------------------------------------------------------------- FINANCIAL DISCLOSURE -------------------- None. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT -------------------------------------------------- The information required by this Item is incorporated by reference from the information under "Nominees for Election as Directors" in the Company's definitive Proxy Statement dated March 13, 1998. The information regarding executive officers is set forth in Item 4A hereto. Item 11. EXECUTIVE COMPENSATION ---------------------- The information required by this Item is incorporated by reference from the information under "Summary Compensation Table," "Pension and Supplemental Retirement Plans," "Severance Agreements," and "Directors' Compensation" in the Company's definitive Proxy Statement dated March 13, 1998. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT -------------------------------------------------------------- The information required by this Item is incorporated by reference from the information under "Outstanding Voting Shares" and "Security Ownership of Management" in the Company's definitive Proxy Statement dated March 13, 1998. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ---------------------------------------------- None. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K --------------------------------------------------------------- (a) List of documents filed: (1) and (2) See Table of Contents on Page 22 hereof. (3) See Exhibit Index on Pages 23 through 29 hereof. Pursuant to Item 601(b)(4)(iii) of Regulation S-K, copies of certain instruments defining the rights of holders of certain long-term debt of the Company are not filed, and in lieu thereof, the Company agrees to furnish copies thereof to the Securities and Exchange Commission upon request. (b) Reports on Form 8-K: The Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on November 20, 1997, regarding the Company's issuance of $50,000,000 aggregate principal amount of its Senior Debentures, 6.375% Series due 2007. 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. OTTER TAIL POWER COMPANY By /s/A. E. Anderson A. E. Anderson Vice President, Finance and Treasurer Dated: March 26, 1998 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: Signature and Title - ------------------- John C. MacFarlane ) Chairman, President and ) Chief Executive Officer ) (principal executive officer) ) and Director ) ) A. E. Anderson ) Vice President, Finance and Treasurer ) (principal financial officer) ) ) Jeffrey J. Legge ) Controller ) By /s/A. E. Anderson (principal accounting officer) ) A. E. Anderson ) Pro Se and Attorney-in-Fact ) Dated March 26, 1998 Thomas M. Brown, Director ) ) Dayle Dietz, Director ) ) Dennis R. Emmen, Director ) ) Maynard D. Helgaas, Director ) ) Arvid R. Liebe, Director ) ) Kenneth L. Nelson, Director ) ) Nathan I. Partain, Director ) ) Robert N. Spolum, Director ) OTTER TAIL POWER COMPANY TABLE OF CONTENTS ----------------- FINANCIAL STATEMENTS, SUPPLEMENTARY FINANCIAL DATA, SUPPLEMENTAL FINANCIAL SCHEDULES INCLUDED IN ANNUAL REPORT (FORM 10-K) FOR THE YEAR ENDED DECEMBER 31, 1997 The following items are included in this annual report by reference to the registrant's Annual Report to Shareholders for the year ended December 31, 1997: Page in Annual Report to Shareholders ------------ Financial Statements: Independent Auditors' Report.............................................33 Consolidated Balance Sheets, December 31, 1997 and 1996.............32 & 33 Consolidated Statements of Income for the Three Years Ended December 31, 1997..................................................31 Consolidated Statements of Changes in Equity for the Three Years Ended December 31, 1997......................................34 Consolidated Statements of Cash Flows for the Three Years Ended December 31, 1997..................................................35 Consolidated Statements of Capitalization, December 31, 1997 and 1996.................................................................36 Notes to Consolidated Financial Statements............................37-45 Selected Consolidated Financial Data for the Five Years Ended December 31, 1997..................................................21 Quarterly Data for the Two Years Ended December 31, 1997........................................................45 Schedules 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. Exhibit Index to Annual Report on Form 10-K For Year Ended December 31, 1997 Previously Filed ---------------- As Exhibit File No. No. -------- ------- 3-A 10-K for year 3-A --Restated Articles of ended 12/31/96 Incorporation, as amended (including resolutions creating outstanding series of Cumulative Preferred Shares). 3-C 33-46071 4-B --Bylaws as amended through April 11, 1988. 4-D-1 2-14209 2-B-1 --Twenty-First Supplemental Indenture from the Company to First Trust Company of Saint Paul and Russel M. Collins, as Trustees, dated as of July 1, 1958. 4-D-2 2-14209 2-B-2 --Twenty-Second Supplemental Indenture dated as of July 15, 1958. 4-D-3 33-32499 4-D-7 --Thirty-Second Supplemental Indenture dated as of January 18, 1974. 4-D-4 33-46070 4-D-12 --Forty-Third Supplemental Indenture dated as of February 1, 1991. 4-D-5 33-46070 4-D-13 --Forty-Fourth Supplemental Indenture dated as of September 1, 1991 4-D-6 8-K dated 4-D-15 --Forty-Fifth Supplemental 7/24/92 Indenture dated as of July 1, 1992 4-D-7 8-A dated 1 --Rights Agreement, dated as of 1/28/97 January 28, 1997, between the Company and Norwest Bank Minnesota, National Association Previously Filed ---------------- As Exhibit File No. No. -------- ------- 10-A 2-39794 4-C --Integrated Transmission Agreement dated August 25, 1967, between Cooperative Power Association and the Company. 10-A-1 10-K for year 10-A-1 --Amendment No. 1, dated as ended 12/31/92 of September 6, 1979, to Integrated Transmission Agreement, dated as of August 25, 1967, between Cooperative Power Associa- tion and the Company. 10-A-2 10-K for year 10-A-2 --Amendment No. 2, dated as of ended 12/31/92 November 19, 1986, to Integ- rated Transmission Agreement between Cooperative Power Association and the Company. 10-C-1 2-55813 5-E --Contract dated July 1, 1958, between Central Power Elec- tric Corporation, Inc., and the Company. 10-C-2 2-55813 5-E-1 --Supplement Seven dated November 21, 1973. (Supplements Nos. One through Six have been super- seded and are no longer in effect.) 10-C-3 2-55813 5-E-2 --Amendment No. 1 dated December 19, 1973, to Supplement Seven. 10-C-4 10-K for year 10-C-4 --Amendment No. 2 dated ended 12/31/91 June 17, 1986, to Supple- ment Seven. 10-C-5 10-K for year 10-C-5 --Amendment No. 3 dated ended 12/31/92 June 18, 1992, to Supple- ment Seven. 10-C-6 10-K for year 10-C-6 --Amendment No. 4 dated ended 12/31/93 January 18, 1994, to Supple- ment Seven. 10-D 2-55813 5-F --Contract dated April 12, 1973, between the Bureau of Reclamation and the Company. 10-E-1 2-55813 5-G --Contract dated January 8, 1973, between East River Electric Power Cooperative and the Company. 10-E-2 2-62815 5-E-1 --Supplement One dated February 20, 1978. Previously Filed ---------------- As Exhibit File No. No. -------- ------- 10-E-3 10-K for year 10-E-3 --Supplement Two dated ended 12/31/89 June 10, 1983. 10-E-4 10-K for year 10-E-4 --Supplement Three dated ended 12/31/90 June 6, 1985. 10-E-5 10-K for year 10-E-5 --Supplement No. Four, dated ended 12/31/92 as of September 10, 1986. 10-E-6 10-K for year 10-E-6 --Supplement No. Five, dated ended 12/31/92 as of January 7, 1993. 10-E-7 10-K for year 10-E-7 --Supplement No. Six, dated ended 12/31/93 as of December 2, 1993. 10-F 10-K for year 10-F --Agreement for Sharing ended 12/31/89 Ownership of Generating Plant by and between the Company, Montana-Dakota Utilities Co., and North- western Public Service Company (dated as of January 7, 1970). 10-F-1 10-K for year 10-F-1 --Letter of Intent for pur- ended 12/31/89 chase of share of Big Stone Plant from Northwestern Public Service Company (dated as of May 8, 1984). 10-F-2 10-K for year 10-F-2 --Supplemental Agreement No. 1 ended 12/31/91 to Agreement for Sharing Ownership of Big Stone Plant (dated as of July 1, 1983). 10-F-3 10-K for year 10-F-3 --Supplemental Agreement No. 2 ended 12/31/91 to Agreement for Sharing ownership of Big Stone Plant (dated as of March 1, 1985). 10-F-4 10-K for year 10-F-4 --Supplemental Agreement No. 3 ended 12/31/91 to Agreement for Sharing ownership of Big Stone Plant (dated as of March 31, 1986). 10-F-5 10-K for year 10-F-5 --Amendment I to Letter of ended 12/31/92 Intent dated May 8, 1984, for purchase of share of Big Stone Plant. 10-G 10-Q for quarter 10-A --Big Stone Plant Coal Agrmnt ended 9/30/94 by and between the Company, Montana-Dakota Utilities Co., Northwestern Public Service Company, and Westmoreland Resources, Inc. (dated as of June 30, 1994). Previously Filed ---------------- As Exhibit File No. No. -------- ------- 10-G-1 10-Q for quarter 10-B --Big Stone Coal Transp. ended 9/30/94 Agreement by and between the Company, Montana-Dakota Utilities, Northwestern Public Service Co., and Burlington Northern Railroad Company (dated as of July 18, 1994). 10-G-2 10-K for year 10-G-2 --Amendment No. 1, dated as of ended 12/31/95 December 27, 1995, to Big Stone Coal Transportation Agreement (dated as of July 18, 1994). 10-H 2-61043 5-H --Agreement for Sharing Owner- ship of Coyote Station Generating Unit No. 1 by and between the Company, Minnkota Power Cooperative, Inc., Montana-Dakota Utilities Co., Northwestern Public Service Company, and Minnesota Power & Light Company (dated as of July 1, 1977). 10-H-1 10-K for year 10-H-1 --Supplemental Agreement No. ended 12/31/89 One dated as of November 30, 1978, to Agreement for Sharing Ownership of Coyote Generating Unit No. 1. 10-H-2 10-K for year 10-H-2 --Supplemental Agreement No. ended 12/31/89 Two dated as of March 1, 1981, to Agreement for Sharing Ownership of Coyote Generating Unit No. 1 and Amendment No. 2 dated March 1, 1981, to Coyote Plant Coal Agreement. 10-H-3 10-K for year 10-H-3 --Amendment dated as of ended 12/31/89 July 29, 1983, to Agreement for Sharing Ownership of Coyote Generating Unit No. 1. Previously Filed ---------------- As Exhibit File No. No. -------- ------- 10-H-4 10-K for year 10-H-4 --Agreement dated as of Sept. ended 12/31/92 5, 1985, containing Amendment No. 3 to Agreement for Sharing Ownership of Coyote Generating Unit No.1, dated as of July 1, 1977, and Amendment No. 5 to Coyote Plant Coal Agreement, dated as of January 1, 1978. 10-I 2-63744 5-I --Coyote Plant Coal Agreement by and between the Company, Minnkota Power Cooperative, Inc., Montana-Dakota Utilities Co., Northwestern Public Service Company, Minnesota Power & Light Company, and Knife River Coal Mining Company (dated as of January 1, 1978). 10-I-1 10-K for year 10-I-1 --Addendum, dated as of March ended 12/31/92 10, 1980, to Coyote Plant Coal Agreement. 10-I-2 10-K for year 10-I-2 --Amendment (No. 3), dated as ended 12/31/92 of May 28, 1980, to Coyote Plant Coal Agreement. 10-I-3 10-K for year 10-I-3 --Fourth Amendment, dated as ended 12/31/92 of August 19, 1985, to Coyote Plant Coal Agreement. 10-I-4 10-Q for quarter 19-A --Sixth Amendment, dated as of ended 6/30/93 February 17, 1993, to Coyote Plant Coal Agreement. 10-K 10-K for year 10-K --Diversity Exchange Agreement ended 12/31/91 by and between the Company and Northern States Power Company, (dated as of May 21, 1985) and amendment thereto (dated as of August 12, 1985). 10-K-1 10-Q for quarter 10 --Purchased Power and ended 6/30/94 Interconnection Agreement between the Company and Potlatch Corporation dated as of June 8, 1994. 10-K-2 10-K for year 10-K-4 --Capacity & Energy Agreement ended 12/31/94 by and between the Company and Minnkota Power Coop. Inc. dated as of May 27, 1994. 10-K-3 10-K for year 10-K-5 --Interchange Agreement by and ended 12/31/92 between the Company and Wisconsin Power and Light Company dated as of February 21, 1992. Previously Filed ---------------- As Exhibit File No. No. -------- ------- 10-K-4 10-K for year 10-K-6 --Interchange Agreement by and ended 12/31/92 between the Company and Wisconsin Electric Power Co. dated as of June 26, 1992. 10-K-5 10-Q for quarter 19-B --Interchange Agreement by and ended 6/30/93 between the Company and Wisconsin Public Service Corp dated as of January 20, 1993. 10-L 10-K for year 10-L --Integrated Transmission ended 12/31/91 Agreement by and between the Company, Missouri Basin Municipal Power Agency and Western Minnesota Municipal Power Agency (dated as of March 31, 1986). 10-L-1 10-K for Year 10-L-1 --Amendment No. 1, dated as ended 12/31/88 of December 28, 1988, to Integrated Transmission Agreement (dated as of March 31, 1986). 10-M-1 10-K for year 10-M-1 --Hoot Lake Plant Coal ended 12/31/89 Agreement dated as of October 1, 1980, by and between the Company and Knife River Coal Mining Company. 10-M-2 10-K for year 10-M-2 --First Amendment dated as of ended 12/31/89 August 14, 1985, to Hoot Lake Plant Coal Agreement. 10-M-3 10-K for year 10-M-10 --Hoot Lake Coal Transp. ended 12/31/92 Agreement dated January 15, 1993 by and between the Company and Northern Coal Transportation Co. 10-M-4 10-Q for quarter 19-C --First Amendment dated as of ended 6/30/93 January 20, 1993 to Hoot Lake Coal Transportation Agreement dated January 15, 1993. 10-M-5 10-K for year 10-M-5 --Second Amendment dated as of ended 12/31/96 May 21, 1996 to Hoot Lake Coal Transportation Agreement dated January 15, 1993. 10-N-1 10-K for year 10-N --Deferred Compensation Plan ended 12/31/91 for Directors, dated April 9, 1984.* 10-N-2 10-K for year 10-N-2 --Executive Survivor and Sup- ended 12/31/94 plemental Retirement Plan, as amended.* Previously Filed ---------------- As Exhibit File No. No. -------- ------- 10-N-3 10-K for year 10-P --Form of Severance Agrmnt.* ended 12/31/92 10-N-4 10-K for year 10-N-5 --Nonqualified Profit Sharing ended 12/31/93 Plan.* 10-N-5 10-K for year 10-N-6 --Nonqualified Retirement ended 12/31/93 Savings Plan.* 10-O 10-K for year 10-O --Dealer Agreement by and ended 12/31/93 between DMS and Philips Medical Systems North America Company dated January 18, 1994. 13-A --Portions of 1997 Annual Report to Shareholders incorporated by reference in this Form 10-K. 21-A --Subsidiaries of Registrant 23 --Consent of Deloitte & Touche LLP 24-A --Powers of Attorney. 27 --Financial Data Schedule. 27-1 --Restated Financial Data Schedules. Restated Financial Data Schedules for 1996 interim and year end consolidated financial statements. Exhibit 27.1 contains restated summary financial information extracted from the restated consolidated financial statements for the affected periods. 27-2 --Restated Financial Data Schedule Restated Financial Data Schedules for 1997 interim consolidated financial statements. Exhibit 27.2 contains restated summary financial information extracted from the restated consolidated financial statements for the affected periods. - -------- * Management contract or compensatory plan or arrangement required to be filed pursuant to Item 601(b)(10)(iii)(A) of Regulation S-K. EX-13 2 Exhibit 13-A Selected consolidated financial data - ---------------------------------------------------------------------------------------------------------- 1997 1996(1) 1995 1994 1993 1992 1987 -------- -------- -------- -------- -------- -------- -------- (thousands except per-share data) Revenues Electric Residential $ 66,102 $ 66,295 $ 64,355 $ 62,687 $ 62,167 $ 59,038 $ 60,339 Commercial and farms 74,520 74,355 71,487 69,060 66,286 63,257 62,271 Industrial 41,323 37,453 37,952 38,354 36,442 35,607 30,898 Sales for resale 11,117 10,238 19,110 19,066 18,107 11,126 9,066 Other electric 12,059 11,004 11,021 9,645 9,288 8,077 7,705 -------- -------- -------- -------- -------- -------- -------- Total electric $205,121 $199,345 $203,925 $198,812 $192,290 $177,105 $170,279 Manufacturing 81,543 64,568 38,690 13,083 8,473 -- -- Health services 66,185 61,697 50,896 45,555 32,068 -- -- Other business operations 41,430 45,323 32,818 29,276 32,396 32,433 -- -------- -------- -------- -------- -------- -------- -------- Total operating revenues $394,279 $370,933 $326,329 $286,726 $265,227 $209,538 $170,279 Net income $ 32,346 $ 30,624 $ 28,945 $ 28,475 $ 27,369 $ 26,538 $ 21,566 Cash flow from operations $ 69,398 $ 68,611 $ 58,077 $ 51,832 $ 53,255 $ 44,866 N/A Total assets $655,441 $669,704 $609,196 $578,972 $563,905 $530,456 $463,504 Long-term debt $189,973 $163,176 $168,261 $162,196 $166,563 $159,295 $124,485 Redeemable preferred $ 18,000 $ 18,000 $ 18,000 $ 18,000 $ 18,000 $ 18,000 $ 17,035 Common shares outstanding (2) (thousands) 11,731 11,536 11,180 11,180 11,180 11,180 11,968 Number of common shareholders (3) 13,753 13,829 13,933 14,115 13,634 13,812 14,305 Basic and diluted earnings per share (4) $ 2.58 $ 2.46 $ 2.38 $ 2.34 $ 2.23 $ 2.17 $ 1.60 Dividends per common share $ 1.86 $ 1.80 $ 1.76 $ 1.72 $ 1.68 $ 1.64 $ 1.46 - ---------------------------------------------------------------------------------------------------------- Notes: (1) Restated to reflect the effects of two 1997 acqusitions accounted for under the pooling of interests method. The impact of the poolings on years prior to 1996 is not material. (2) Number of shares outstanding at year-end. (3) Holders of record at year-end. (4) Based on average number of shares outstanding.
Management's discussion and analysis of financial condition and results of operations Management's major financial objective is to increase shareholder value by continuing to earn a reasonable return on the Company's capital. This will enable the Company to preserve and enhance its financial capability by maintaining acceptable capitalization ratios, maintaining a strong interest coverage position, providing a reasonable return to the common shareholder, maintaining an above average level of internal cash generation, and preserving strong credit ratings on outstanding securities to the benefit of both the Company's customers and its shareholders. Liquidity: Liquidity is the ability to generate adequate amounts of cash to meet the Company's needs, both short-term and long-term. Historically, the Company's liquidity has been a function of its capital expenditures and debt service requirements, its net internal funds generation and its access to long-term securities markets and credit facilities for external capital. Over the years the Company has achieved a high degree of long-term liquidity by maintaining desired capitalization ratios through timely stock and debt issuances or repurchases, maintaining strong bond ratings, implementing cost-containment programs, evaluating operations and projects on a cost-benefit approach, investing in projects that enhance shareholder value, and implementing sound tax reduction strategies. Cash provided by operating activities of $69,398,000 as shown on the Consolidated Statement of Cash Flows for the year ended December 31, 1997, combined with funds on hand of $2,130,000 at December 31, 1996, allowed the Company to pay dividends, meet sinking fund payment requirements on its outstanding First Mortgage Bonds and finance its consolidated capital expenditures in 1997. In November 1997 the Company sold $50 million of Senior Debentures, 6.375% Series Due 2007, at 98.581 percent of their face value. The net proceeds from the sale were used to repay $20 million in short-term debt outstanding at the time of the sale and to repay or retire early three outstanding series of the Company's First Mortgage Bonds (8.75% Series of 1997, 7.625% Series of 2003, and 8.125% Coyote Project Series B of 2009) at the aggregate redemption price of $29 million. The Senior Debentures, which mature on December 1, 2007, are unsecured obligations of the Company and rank on a parity with all other unsecured and unsubordinated debt of the Company. In 1997 the Company issued 161,831 common shares under its Automatic Dividend Reinvestment and Share Purchase Plan, and 30,561 common shares to its leveraged employee stock ownership plan generating proceeds of $6.4 million. The proceeds were used to reduce short-term debt. Also in 1997, the Company issued 321,404 unregistered common shares to effect two acquisitions accounted for under the pooling of interests method. (See notes 2 and 4 to financial statements for more information.) In November 1997 the Company's subsidiary, Mid-States Development, Inc. (Mid-States), borrowed $22.5 million under a term note for 10 years with a fixed interest rate of 7.8 percent. The proceeds were loaned to various subsidiaries of Mid-States to be used to repay certain variable and fixed- rate debt. Mid-States also secured a new line of credit of $17.5 million which it is using to finance its subsidiaries' working capital needs; interest on the credit line borrowings will be based on LIBOR plus 1.75 percent% (7.6 percent at December 31, 1997). The note and credit line borrowings are secured by a pledge of all of the common stock of the companies owned by Mid-States. Also in November 1997 Mid-States' medical imaging services subsidiary entered into a sale/leaseback transaction whereby $16 million of diagnostic medical equipment was sold for net book value and leased back under two operating leases. Certain proceeds from the sale were used to repay loans collateralized by the equipment sold. This transaction reduced the level of fixed assets and debt on the subsidiary's balance sheet. The Company estimates that funds internally generated net of forecasted dividend payments, combined with funds on hand, will be sufficient to meet all sinking fund payments for First Mortgage Bonds in the next five years and to provide for its estimated 1998-2002 consolidated capital expenditures. Additional short-term or long-term financing will be required in the period 1998-2002 for the maturity of First Mortgage Bonds and other long-term debt and in the event the Company decides to refund or retire early any of its presently outstanding debt or cumulative preferred shares or for other corporate purposes. Capital Requirements: The Company's consolidated capital requirements include periodic and timely replacement of technically obsolete or worn out equipment, new equipment purchases, and plant upgrades to accommodate anticipated growth. The electric segment has a construction and capital investment program to provide facilities necessary to meet forecasted customer demands and provide reliable service. The construction program is subject to continuing review and is revised annually in light of changes in demands for energy, environmental laws, technology, the costs of labor, materials and equipment, and the Company's financial condition (including cash flow and earnings). Capital expenditures for the years 1997, 1996, and 1995 were $42 million, $65 million, and $37 million, respectively. An initiative by the Company to reduce capital expenditures, in part as a response to the changing regulatory environment, is reflected in the decreased level of expenditures in 1997, as compared to 1996. Actual 1996 cash expenditures in excess of 1995 actual expenditures reflect: 1) reductions in capital related payables at year-end 1996, compared to year-end 1995, at the electric utility, 2) $8 million in diagnostic medical equipment purchases by the health services subsidiary acquired in April 1996, 3) accelerated replacement of equipment at another of the Company's health services subsidiaries, 4) the purchase and expansion of a building formerly being leased by a manufacturing subsidiary, and 5) the purchase of a building by the Company's radio broadcasting subsidiary. The estimated capital expenditures for 1998 are $37 million and the total expenditures for the five-year period 1998-2002 are expected to be approximately $173 million. The breakdown of 1997 actual and 1998-2002 estimated capital project expenditures by segment is as follows: 1997 1998 1998-2002 ---- ---- --------- (in millions) Electric utility $ 27 $ 22 $117 Manufacturing 6 3 13 Health services 4 10 34 Other business operations 5 2 9 ---- ---- ---- Total $ 42 $ 37 $173 In addition to these capital requirements, funds totaling approximately $55,288,000 will be needed during the five-year period 1998 through 2002 to retire First Mortgage Bonds and other long-term obligations, including subsidiary long-term obligations, at maturity and through sinking fund payments. Capital Resources: Financial flexibility is provided by unused lines of credit, financial coverages in excess of the minimum levels required for issuance of securities, strong credit ratings, the pledging of assets owned by the Company, and alternative financing arrangements such as leasing. On August 30, 1996, the Company filed a shelf registration statement with the Securities and Exchange Commission for the issuance of up to 1,000,000 common shares pursuant to the Company's Automatic Dividend Reinvestment and Share Purchase Plan (the Plan), which permits shares purchased by shareholders, employees, or customers who participate in the Plan to be either new issue common shares or common shares purchased on the open market. The Company estimates that it will raise approximately $5.3 million in capital through the issuance of common shares to fulfill the requirements of the Plan in 1998. Proceeds from newly issued common shares will be used for general corporate purposes. As of December 31, 1997, the Company had $5.3 million in cash and cash equivalents and $52.3 million in unused lines of credit available to meet interim financing of working capital and other capital requirements, if needed. The Company had $2.1 million in short-term borrowings outstanding as of December 31, 1997. The subsidiary companies had $3.1 million of credit lines in use at December 31, 1997, classified as current maturities and long-term debt. (See note 9 to financial statements for further information.) The Company's coverage ratios remained stable in 1997 compared to 1996. The fixed charge coverage ratio after taxes was 3.0 for both 1997 and 1996 and the long-term debt interest coverage ratio before taxes was 4.0 for 1997, as compared to 3.9 for 1996. The Company expects these coverages to increase in 1998 as a result of decreasing its overall level of debt and securing lower fixed rate financing in the fourth quarter of 1997. The Company's credit ratings affect its access to the capital market. The current credit ratings for the Company's First Mortgage Bonds are as follows: Moody's Investors Service Aa3 Duff and Phelps AA Fitch Investors Service AA- Standard and Poor's AA- In 1997 Moody's Investors Service reaffirmed its Aa3 rating and Duff and Phelps reaffirmed its AA rating, while Fitch Investors Service downgraded its rating from AA to AA-. Standard and Poor's reaffirmed its AA- rating but revised its ratings outlook on the Company from stable to negative sighting growth in the level of nonutility earnings relative to overall Company earnings as a reason for the revision. The Company's disclosure of these security ratings is not a recommendation to buy, sell, or hold the Company's securities. As of December 31, 1997, the Company had the capacity under its Indenture of Mortgage to issue an additional $171 million principal amount of First Mortgage Bonds. (See note 7 to financial statements for further information.) Results of operations: Electric operations - ------------------- (bar graph of information in following table) Electric operating income (millions) ------------------------- 1995 $47.9 1996 $45.3 1997 $45.0 (end of graph) Otter Tail Power Company provides electrical service to nearly 125,000 customers in a service territory of over 50,000 square miles. 1997 1996 1995 -------- -------- -------- (in thousands) Operating revenues $205,121 $199,345 $203,925 Production fuel 31,362 27,913 31,559 Purchased power 24,420 28,378 30,591 Other operation and maintenance expenses 72,112 66,401 63,777 Depreciation and amortization 21,442 19,880 19,448 Property taxes 10,819 11,494 10,634 -------- -------- -------- Operating income $ 44,966 $ 45,279 $ 47,916 The 2.9 percent increase in electric operating revenues in 1997, as compared to 1996, reflects increases of 1.0 percent in revenue from retail kwh sales, 56.5 percent in other electric revenue, and 8.6 percent in revenue from power pool sales. The increase in retail revenue is mainly due to increases in kwh sales to industrial customers and increases in cost-of- energy revenue related to power purchased for sale to retail customers in the first half of 1997. The increase in other electric revenue reflects the recognition of Minnesota Conservation Improvement Program (CIP) lost margins recovery approved by the Minnesota Public Utilities Commission (MNPUC) in the second quarter of 1997. Increases in transmission service charge revenue and electric property rental income also contributed to the increase in other electric revenue. Power pool sales increased as a result of strong sales in the fourth quarter of 1997, which offset lower sales earlier in the year. Electric operating revenues decreased 2.2 percent in 1996, as compared to 1995, despite a 4.0 percent increase in retail kwh sales as a result of lower prices and a decline in the volume of noncontractual power pool sales. The reduction in retail kwh sales prices in 1996 is related to lower fuel costs at Big Stone Plant being passed on to customers through the cost of energy adjustment clause and lower rates charged to one of the Company's largest industrial customers under the Company's Large General Service Time-of-Use Rider. A number of external factors contributed to the decrease in noncontractual power pool sales. Midcontinent Area Power Pool (MAPP) transmission service charges made it less economical to ship energy over long distances. The summer of 1996 was milder than the summer of 1995 and high water levels in the summer of 1996 furnished MAPP's hydro generators with an excess of low-priced electricity to market. In addition to external factors, lower plant availability in 1996 due to scheduled outages at both Hoot Lake Unit 3 and Big Stone Plant also contributed to the decrease in noncontractual power pool sales. Heating degree days, which generally correlate to increases or decreases in the use of electricity by residential customers, were 9,628 for 1997, 10,349 for 1996, and 9,326 for 1995. Increases or decreases in fuel and purchased power costs arising from changing prices results in adjustments to the Company's rate schedules through the cost of energy adjustment clause. Over the last five years this has resulted in savings of nearly $41 million to the Company's customers. Production fuel expense increased 12.4 percent in 1997, as compared to 1996, while purchased power expense decreased 13.9 percent over the comparable periods for a net decrease in production fuel and purchased power expenses of 0.9 percent. The net reduction in production fuel and purchased power expenses in 1997, as compared to 1996, was achieved despite a slight increase in total kwh sales of 0.4 percent mainly as a result of having Big Stone Plant, the Company's lowest cost generating unit, available for generation during all of 1997, as compared to 1996, when it was shut down two months for a major overhaul. In 1997 Big Stone Plant generated a record net output of 3,166,398 mwh for a single year exceeding its previous record output by 515,627 mwh. The increase in generation at Big Stone Plant contributed to a decrease in purchased power in 1997 and helped alleviate a shortage in available generation caused by the scheduled maintenance shutdown of Coyote Plant in the Spring of 1997. The 11.6 percent decrease in production fuel expense in 1996 is the result of declines in fuel expenses at all three of the Company's major power plants due to decreases in fuel costs per kwh at Big Stone and Hoot Lake and decreases in net generation at Big Stone and Coyote. Two factors contributing to the decrease in system wide generation in 1996 were lower demand as a result of fewer noncontractual power pool sales and scheduled maintenance shutdowns at Hoot Lake and Big Stone Plants. The 7.2 percent decrease in purchased power in 1996 reflects a 45 percent decrease in kwh purchases for resale partially offset by a 21 percent increase in purchases for system use. The decrease in purchases for resale correlates to the decrease in noncontractual power pool sales. The purchase of replacement generation for planned plant outages was the major factor contributing to the increase in purchases for system use. The primary contributors to the 8.6 percent increase in other electric operation and maintenance expense in 1997 are the overhaul of the Coyote Plant in the second quarter of 1997 and increased expenditures for outside and contracted services in 1997. Other operation and maintenance expenses showed an increase of 4.1 percent for 1996. Other operation expenses were up in 1996 mainly due to increases in benefit costs as a result of a revision to actuarial assumptions related to the Company's Executive Survivor and Supplemental Retirement Plan (see note 8 to financial statements for further information). Also, there was an increase in payments for contracted services in 1996, offset by a decrease in economic development expenditures from the increased levels recorded in 1995. Production plant maintenance expenses were also up in 1996. Hoot Lake Unit 3 was down for scheduled maintenance in February and March of 1996 and had a turbine rebuild and steam chest replacement in July 1996. Big Stone Plant underwent a scheduled ten-week major overhaul in September, October and November of 1996. The 7.9 percent increase in depreciation and amortization expense in 1997 is the result of property additions including upgrades made to Big Stone Plant in the latter part of 1996. The increase in depreciation and amortization expense of 2.2 percent in 1996 is attributable to additions to plant in service from capital expenditures. The decrease in property taxes of 5.9 percent in 1997 reflects reductions in Minnesota property taxes as a result of legislative action affecting Minnesota commercial and industrial property class rates for 1997 and lower assessed values on Minnesota utility property. The 8.1 percent increase in property taxes in 1996 was due to a 10 percent increase in the assessed value of the Company's South Dakota utility property compounded by a 14 percent increase in the mill rates applied to that property. Manufacturing operations - ------------------------ (bar graph of information in following table) Manufacturing operating income (millions) ------------------------- 1995 $3.3 1996 $6.5 1997 $7.9 (end of graph) Manufacturing operations is made up of businesses involved in the production of agricultural equipment, automobile and truck frame straightening equipment and accessories, plastic pipe extrusion, and metal parts stamping and fabrication. Initial acquisitions of businesses in this segment were made in 1990. On June 30, 1997, Mid-States acquired Chassis Liner Corporation (Chassis Liner) in a pooling of interests transaction. (See note 2 to financial statements for more information.) 1997 1996 1995 -------- -------- -------- (in thousands) Operating revenues $ 81,543 $ 64,568 $ 38,690 Cost of goods sold 61,361 48,269 29,884 Operating expenses 12,237 9,795 5,536 -------- -------- -------- Operating income $ 7,945 $ 6,504 $ 3,270 The increase in manufacturing operating revenue of 26.3 percent in 1997, reflects increased sales at all six of the Company's manufacturing subsidiaries. The 66.9 percent increase in manufacturing operating revenues in 1996 reflects revenues from Northern Pipe Products, acquired in October 1995, and increased sales at BTD Manufacturing. Additionally, 1996 results were restated to include Chassis Liner's $7,700,000 in operating revenues, $4,524,000 in cost of goods sold, and $2,095,000 in operating expenses as a result of the pooling. The pro forma effect of the pooling on 1995 consolidated results is considered to be too insignificant to warrant restatement. The increases of 27.1 percent in manufacturing cost of goods sold and 24.9 percent in manufacturing operating expenses in 1997, as compared to 1996, correspond to the increase in sales over the same comparable periods. The increase in cost of goods sold also reflects increases in prices for resins used in the manufacture of PVC pipe. The 61.5 percent increase in manufacturing cost of goods sold and 76.9 percent increase in operating expenses in 1996 were directly related to the increase in manufacturing revenue. The increases in manufacturing revenues for 1997 and 1996 more than offset the increases in manufacturing cost of goods sold and operating expenses for the same comparable periods resulting in increases in manufacturing operating income in both 1997 and 1996. Health services operations - -------------------------- (bar graph of information in following table) Health services operating income (millions) ------------------------- 1995 $3.6 1996 $5.1 1997 $4.3 (end of graph) Health services operations include businesses involved in the sale, service, rental, refurbishing, and operation of medical imaging equipment and the sale of related supplies and accessories to various medical institutions, primarily in the Midwest. Initial acquisitions of businesses in this segment were made in 1993. Two companies were acquired in 1996: one in February, and a second more significant acquisition in April. (See note 2 to financial statements for more information.) 1997 1996 1995 -------- -------- -------- (in thousands) Operating revenues $ 66,185 $ 61,697 $ 50,896 Cost of goods sold 36,872 34,032 31,576 Operating expenses 25,018 22,528 15,739 -------- -------- -------- Operating income $ 4,295 $ 5,137 $ 3,581 A reclassification of $6,192,000 from health services cost of goods sold to health services operating expenses was made for 1996 related to the medical imaging services companies acquired in 1996, in order to report these costs and expenses in a manner consistent with previously acquired medical imaging services companies. The increases in health services operating revenue of 7.3 percent in 1997 and 21.2 percent in 1996, and increases in health services operating expenses of 11.1 percent in 1997 and 43.1 percent in 1996, are all related to the 1996 acquisitions of two medical imaging services companies. The increase in health services cost of goods sold in 1997, as compared to 1996, is due to valuation adjustments related to equipment held for sale and increased costs associated with customer service contracts. Other business operations - ------------------------- (bar graph of information in following table) Other business operations operating income (millions) ------------------------- 1995 $3.5 1996 $2.5 1997 $1.8 (end of graph) The Company's other business operations include telephone utilities and businesses involved in electrical and telephone construction contracting, radio broadcasting, and waste incinerating. In 1996 Mid-States acquired four radio stations; North Central Utilities, Inc. (NCU), the Company's telecommunications subsidiary, acquired two small cable TV systems. On January 2, 1997, NCU acquired The Peoples Telephone Co. of Bigfork (Peoples) in a pooling of interests transaction. (See note 2 to financial statements for more information.) 1997 1996 1995 -------- -------- -------- (in thousands) Operating revenues $ 41,430 $ 45,323 $ 32,818 Cost of goods sold 23,393 28,297 18,954 Operating expenses 16,210 14,574 10,333 -------- -------- -------- Operating income $ 1,827 $ 2,452 $ 3,531 The 8.6 percent decrease in other business operations operating revenue in 1997, as compared to 1996, is due to a decline in revenue and reductions in material cost pass through billings at the Company's construction subsidiaries, offset slightly by increases in media and telecommunications revenue due to the acquisition of several radio stations in 1996. The decrease in construction activity and material cost pass through billings are the main factors contributing to the 17.3 percent decrease in cost of goods sold in 1997. The 38.1 percent increase in other business operations operating revenue in 1996, as compared to 1995, reflects material cost pass through billings by the Company's construction subsidiaries on material intensive jobs. The increase in material costs billed in 1996 is also reflected in the 49.3 percent increase in cost of goods sold for 1996. Increases in operating expenses from other business operations of 11.2 percent in 1997 and 41.0 percent in 1996 reflect the acquisitions of four radio stations during 1996. Operating expenses for 1996, as compared to 1995, were also up as a result of increased construction activity and nonrecurring expenses related to the radio station acquisitions. Additionally, 1996 results were restated to include Peoples' $1,493,000 in operating revenue and $1,428,000 in operating expenses as a result of the pooling. Results for 1995 were not restated for Peoples because the pro forma effect was not material. Consolidated other income and deductions--net - --------------------------------------------- A gain on the sale of a Direct Broadcast Satellite franchise, in which the Company's telecommunications subsidiary, Midwest Information Systems, Inc., held a one-third ownership interest, accounted for $1.8 million of the increase in other income and deductions--net in 1997, as compared to 1996. Realized gains on sales of investments of $751,000 and an increase of $1,322,000 in miscellaneous nonoperating income, including compensation for the abandonment of certain microwave frequencies licensed to the Company, also contributed to the 1997 increase in other income and deductions--net. The remainder of the increase in other income and deductions--net for 1997 reflects an increase in revenue recognition related to Minnesota CIP financial incentives of $307,000. The increase in other income and deductions--net in 1996, as compared to 1995, reflects a reduction in miscellaneous expenses at the health services subsidiaries in 1996 and losses on marketable securities recognized in 1995 related to the Company's preferred stock investment program which ended in October of 1995. Consolidated interest charges - ----------------------------- Interest charges increased 9.8 percent in 1997 and 11.9 percent in 1996 as a result of increased debt at the Company's subsidiaries due to acquisitions and growth and increased use of short-term debt at the parent- company level. Consolidated income taxes - ------------------------- The increase of 2.1 percent in 1997 income taxes over 1996 income taxes is mainly due to an increase in income before income taxes for the same comparable periods. Part of the increase in taxes on increased operating income was offset by an increase in affordable housing tax credits earned in 1997 over 1996. Also, because Chassis Liner was an S corporation prior to being acquired, income before income taxes for 1997 and 1996 includes net income, not subject to income taxes, from Chassis Liner of $703,000 and $1,049,000, respectively. Income taxes for 1996 also reflects reductions related to deferred tax adjustments. The 13.3 percent decrease in income taxes in 1996, compared to 1995, was the result of net capital losses realized in 1995 on the sale of marketable securities not generating tax savings, the initial recording of affordable housing tax credits in 1996, and the reversal of taxes previously deferred at rates higher than current tax rates. (See note 11 and "Investments" under note 1 to financial statements for more information.) Impact of inflation - ------------------- The Company operates under regulatory provisions that allow price increases in the cost of fuel and purchased power to be passed to customers through automatic adjustments to its rate schedules under the cost of energy adjustment clause. Other increases in the cost of electric service must be recovered through timely filings for rate relief with the appropriate regulatory agency. The Company's health services, manufacturing and other business operations consist almost entirely of unregulated businesses. Increased operating costs are reflected in product or services pricing with any limitations on price increases determined by the marketplace. (three bar graphs of information in following tables) Other income and deductions (millions) ------------------------- 1995 $1.9 1996 $2.1 1997 $6.1 Interest charges (millions) ------------------------- 1995 $15.1 1996 $16.9 1997 $18.5 Income taxes (millions) ------------------------- 1995 $16.2 1996 $14.0 1997 $14.3 (end of graphs) Factors affecting future earnings: Growth of electric revenue - -------------------------- The results of operations discussed above are not necessarily indicative of future earnings. Anticipated higher operating costs and carrying charges on increased investment in plant, if not offset by proportionate increases in operating revenues and other income (either by appropriate rate increases, increases in unit sales, or increases in nonelectric operations), will affect future earnings. Growth in electric sales will be subject to a number of factors, including the volume of power pool sales to other utilities, the effectiveness of demand-side management programs, weather, competition, and the rate of economic growth or decline in the Company's service area. The Company's electric business is primarily dependent upon the use of electricity by customers in our service area. Percentage changes in the Company's electric kwh sales to retail customers over the prior year for the last three years showed increases of 1.4 percent in 1997, 4.0 percent in 1996, and 3.4 percent in 1995. Market factors beyond the Company's control such as mergers and acquisitions, geographical location, transmission costs and uncertainty about the effects of deregulation could have a negative impact on noncontractual power pool sales. However, the relative effect of any decrease in noncontractual power pool sales on earnings is less than its proportionate effect on the decrease in electric revenues due to the relatively low margin of profits on these sales. Rates of return earned on utility operations are subject to review by the various state commissions that have jurisdiction over the electric rates charged by the Company. These reviews may result in future revenue reductions when actual rates of return are deemed by regulators to be in excess of allowed rates of return. Demand-side management - ---------------------- Demand-side management (DSM) efforts will continue in all jurisdictions served by the Company. The goal of DSM is to encourage the wise and efficient use of electricity by customers. Currently, Minnesota is the only jurisdiction that mandates investments in DSM. In 1997 the MPUC approved the Company's 1996 financial incentive filing along with a 1.75 percent surcharge on all Minnesota customers' bills starting on July 1, 1997, for the recovery of conservation-related costs over and above those being recovered in current rates. The approved surcharge in effect from July 1, 1996, through June 30, 1997, was 1.25 percent and the approved surcharge in effect from July 1, 1995, through June 30, 1996, was .5030 percent. The current surcharge rate will be in place until June 30, 1998, when it will be revised for subsequent years' program results. (See note 3 to financial statements for more information.) Energy adjustment clause - ------------------------ The Company began purchasing subbituminous coal for Big Stone Plant in August 1995 under a contract that runs through December 1999. Price reductions, in addition to plant efficiency gains due to switching from lignite to higher-Btu subbituminous coal, have resulted in cost reductions. The majority of these reductions, which enhance the Company's competitive position, are passed on to retail electric customers through the cost of energy adjustment clause. In November 1995 the Company and two other Coyote Plant owners initiated a lawsuit against Knife River Coal Mining Company and its parent, MDU Resources Group, in an attempt to resolve disputes over the pricing mechanism included in the Coyote coal agreement. The case was remanded to arbitration in 1997 and a resolution is still pending. Any fuel cost savings that may result from resolution of this dispute will be passed on to customers through the cost of energy adjustment clause. Regulation and legislation - -------------------------- Under current regulations the Federal Clean Air Act (the Act) is not expected to have a significant impact on future capital requirements or operating costs. However, proposed or future regulations under the Act, changes in the future coal supply market, and/or other laws and regulations could impact such requirements or costs. It is anticipated that, under current regulatory principles, any such costs could be recovered through rates. The Company's plants are not subject to the Act's phase one requirements. Phase two standards of the Act must be met by the year 2000. The Company intends that Big Stone Plant will maintain current levels of operation and meet phase two requirements for sulfur dioxide emissions by burning subbituminous coal and/or purchasing sulfur dioxide emission allowances. As stated previously, Big Stone Plant's new coal contract expires at the end of 1999. The cost of subbituminous coal in 2000 and beyond probably will be higher than the current market price but likely will not affect the Company's power plant operations adversely. Under EPA regulations, modifications would be required at Big Stone Plant by 2000 to satisfy nitrogen oxide emission standards. During 1997 the Company conducted tests at Big Stone Plant to determine if nitrogen oxide emissions could be reduced through modifications to existing equipment. The results of the tests were positive and the modifications will be completed at a nominal cost. The Company is a member of the Utility Air Regulatory Group (UARG), which has filed a petition in Federal Court for reconsideration of the standards based on inconsistencies in current laws. The petitioners are awaiting the Court's decision. The Company's Coyote Plant is equipped with sulfur dioxide removal equipment. Compliance with the phase two requirements is not expected to significantly impact operations at that plant. Hoot Lake Plant already uses low-sulfur subbituminous coal. Minor modifications may be required at Hoot Lake Plant to meet the phase two nitrogen oxide emission requirements by 2000. In 1995 the Federal Energy Regulatory Commission (FERC) issued a Notice of Proposed Rulemaking (NOPR) to promote competition and deregulation in wholesale electric markets by requiring owners of transmission facilities to offer nondiscriminatory open-access transmission and ancillary services to wholesale sellers and purchasers of electric energy in interstate commerce. On April 24, 1996, the FERC issued two final rules, Order Nos. 888 and 889, which may have a potentially significant impact on wholesale markets. Order No. 888, effective July 9, 1996, requires electric utilities and other transmission providers to abide by, and to offer to other transmission users, terms, conditions and pricing comparable to those they use for themselves in transmitting power. The Company filed its initial transmission tariff on July 9, 1996, as required by Order No. 888. A revised rate schedule became effective in the first quarter of 1997. Order No. 889, which became effective January 3, 1997, requires public utilities to implement Standards of Conduct and an Open Access Same-Time Information System (OASIS). These rules require transmission personnel to provide information about their transmission systems to all customers, including their marketing associates within their respective companies, through the OASIS. The FERC issued orders after rehearing, 888A and B, further clarifying its intent to prevent any discriminatory abuse of market power by utilities controlling both transmission and generation assets. The U.S. Congress ended its 1997 legislative session without taking action on proposed electric industry restructuring legislation. Federal restructuring legislation in 1998, a Congressional election year, is also unlikely due to the complexities of issues involved with federal intervention. The Minnesota Public Utilities Commission issued its Wholesale Competition Report in 1996 and its Retail Competition Report in 1997 and continues to work on specific topics in the areas of potential stranded costs, unbundled rates and affiliated transactions. The Minnesota Legislature will most likely deal with removing tax obstacles to electric utility deregulation in 1998 with an actual deregulation bill not likely until 1999. In 1997 the North Dakota Legislature created a subcommittee to investigate the impact of electric utility industry restructuring on North Dakota. In view of the legislative effort, the North Dakota Public Service Commission closed its investigative docket. The South Dakota PUC has not taken any action with regards to industry restructuring or retail competition. Competition - ----------- The Company is taking a number of steps to position itself for success in a competitive marketplace. It has initiated the process of functionally unbundling its energy supply, energy delivery, and energy services operations by establishing separate operating business units for each of these functions. The Company is developing the necessary accounting systems to capture costs and determine the profitability of each of these business units and to identify areas for improvement and opportunities for increased profitability. The Company has established an energy services business unit to promote the energy related products and services that have always been offered to its customers and to develop new products and services to be offered to current and potential customers in order to distinguish itself from the competition. In January 1998 the Company announced a voluntary early retirement program for all nonunion employees age 55 and over. Incentives include elimination of early retirement benefit reductions, a credit of five years of additional service for calculating pension and other postretirement benefits, and a monthly supplement for medical coverage until the retiree reaches age sixty-two. The Company expects approximately 40 of the 67 employees eligible for the program to accept the offer, which would result in an estimated one-time noncash charge of approximately $4 million ($2.4 million net-of-tax) to the Company's income statement in the first quarter of 1998. Most of the cost of the program will be funded through the Company's pension plan. The Company anticipates that most of the staff reductions will be permanent, resulting in enhanced future earnings through reduced payroll expenses. The Company also announced that it will begin recording unbilled revenue in Minnesota and South Dakota, subject to notification of the respective state regulatory bodies, in the first quarter 1998. This would be consistent with how the Company is currently recording North Dakota unbilled revenues under an order from the North Dakota PSC. The accounting change will result in a one-time noncash increase in earnings of approximately $6.4 million ($3.8 million net-of-tax) in 1998. As the electric industry evolves and becomes more competitive, the Company believes it is well positioned to maintain its customer base and may have opportunities to increase its market share. The Company's generation capacity appears poised for competition due to unit heat rate improvements and reductions in fuel and freight costs. A comparison of the Company's electric retail rates to the rates of other investor-owned utilities, cooperatives, and municipals in the states the Company serves indicates that its rates are competitive. In addition, the Company would attempt more flexible pricing strategies under an open, competitive environment. The year 2000 (millennium) bug - ------------------------------ The Company does not expect to incur significant costs over the next two years to modify software programs to accommodate the year 2000 because coding standards used when the programs were written have enabled the Company to programmatically identify and locate the code that needs to be changed on all programs written in-house. The Company anticipates that it will be able to cover any conversion costs within current operating budget levels. Additionally, the Company has replaced or is in the process of updating or replacing a number of its financial application and other operating programs within the normal course of business. The new software will accommodate the millennium change. Diversification - --------------- The Company continues to investigate acquisitions of additional businesses (both utility and nonutility) and expects continued growth in this area. The success of these businesses and any future business purchases will affect future earnings. In 1997 Quadrant Co. (Quadrant) began processing solid waste for three Minnesota counties under the terms of a new waste incineration agreement. Since operating under the new agreement, Quadrant has experienced a reduction in revenue of approximately 50 percent, as compared to 1996. New pollution rules for Minnesota waste incinerators have been issued. The costs to be in compliance with the new pollution rules by the year 2000 in conjunction with reduced operating revenues threaten the economic viability of the plant. However, Quadrant is currently generating positive cash flows from the operation of its plant which had a net undepreciated book value of approximately $2.45 million on December 31, 1997. The Company intends to operate the Quadrant plant as long as positive cash flows can be maintained but will continue to evaluate its investment in Quadrant for asset impairment on a quarterly basis. Accounting pronouncements: In June 1997 the FASB issued Statement of Financial Accounting Standards (SFAS) 131 - Disclosures about Segments of an Enterprise and Related Information, effective for financial statements issued for periods beginning after December 15, 1997. SFAS 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. In general, SFAS 131 requires financial information to be reported on the basis that it is used internally for evaluating performance and deciding how to allocate resources. Except for the electric utility the Company is comprised of many smaller businesses that tend to operate with a high degree of autonomy with respect to management and strategic decision-making. Because of this, no single entity may meet the threshold requirements for segment reporting. As a result the Company may aggregate two or more entities with similar economic characteristics into a single segment for reporting purposes, much the same as the Company is currently doing for segment reporting purposes. Adoption of SFAS 131 in 1998 is not expected to result in significant changes to the operating segments presently disclosed. However, structural changes within the electric utility business related to the functional unbundling of defined business units may result in segment reporting changes in the future. In 1997 the Company adopted SFAS 128 and SFAS 130 (see footnote 1 to financial statements for further information.) Cautionary Statements for Purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995 - ------------------------------------------------------------------ The information in this annual report includes forward-looking statements. Important risks and uncertainties that could cause actual results to differ materially from those discussed in such forward-looking statements are set forth above under "Factors affecting future earnings." Other risks and uncertainties may be detailed from time to time in the Company's future Securities and Exchange Commission filings. Otter Tail Power Company Consolidated Statements of Income For the Years Ended December 31 1997 1996 1995 - ---------------------------------------------------------------------------------------- ( in thousands, except per share amounts) Operating revenues: Electric $205,121 $199,345 $203,925 Manufacturing 81,543 64,568 38,690 Health services 66,185 61,697 50,896 Other business operations 41,430 45,323 32,818 -------- -------- -------- Total operating revenues 394,279 370,933 326,329 Operating expenses: Production fuel 31,362 27,913 31,559 Purchased power 24,420 28,378 30,591 Electric operation and maintenance expenses 72,112 66,401 63,777 Cost of goods sold 121,626 110,598 80,414 Other nonelectric expenses 49,325 43,351 29,111 Depreciation and amortization 25,536 23,387 21,909 Property taxes 10,865 11,533 10,670 -------- -------- -------- Total operating expenses 335,246 311,561 268,031 Operating income: Electric 44,966 45,279 47,916 Manufacturing 7,945 6,504 3,270 Health services 4,295 5,137 3,581 Other business operations 1,827 2,452 3,531 -------- -------- -------- Total operating income 59,033 59,372 58,298 Other income and deductions -- net 6,140 2,125 1,881 Interest charges 18,519 16,863 15,075 -------- -------- -------- Income before income taxes 46,654 44,634 45,104 Income taxes 14,308 14,010 16,159 -------- -------- -------- Net income 32,346 30,624 28,945 Preferred dividend requirements 2,358 2,358 2,358 -------- -------- -------- Earnings available for common shares $ 29,988 $ 28,266 $ 26,587 ======== ======== ======== Average number of common shares outstanding 11,639 11,503 11,180 Basic and diluted earnings per share $2.58 $2.46 $2.38 Dividends per common share $1.86 $1.80 $1.76 See accompanying notes to consolidated financial statements.
Otter Tail Power Company Consolidated Balance Sheets, December 31 1997 1996 - ---------------------------------------------------------------------------------------- (in thousands) Assets Plant: Electric plant in service $758,551 $742,065 Subsidiary companies 89,716 101,789 -------- -------- Total 848,267 843,854 Less accumulated depreciation and amortization 350,647 330,379 -------- -------- Plant - net of accumulated depreciation and amortization 497,620 513,475 Construction work in progress 12,146 11,470 -------- -------- Net plant 509,766 524,945 -------- -------- Investments 20,048 20,549 -------- -------- Intangibles--net 20,911 21,954 -------- -------- Other assets 5,932 6,553 -------- -------- Current assets: Cash and cash equivalents 5,301 2,130 Accounts receivable: Trade (less accumulated provision for uncollectible accounts: 1997, $1,026,000; 1996, $690,000) 33,304 32,845 Other 6,796 5,021 Materials and supplies: Fuel 3,425 3,219 Inventory, materials and operating supplies 24,160 24,273 Deferred income taxes 4,738 4,550 Accrued utility revenues 4,271 5,349 Other 3,795 4,525 -------- -------- Total current assets 85,790 81,912 -------- -------- Deferred debits: Unamortized debt expense and reacquisition premiums 4,187 4,270 Regulatory assets 5,060 5,866 Other 3,747 3,655 -------- -------- Total deferred debits 12,994 13,791 -------- -------- Total $655,441 $669,704 ======== ======== See accompanying notes to consolidated financial statements.
Otter Tail Power Company Consolidated Balance Sheets, December 31 1997 1996 - ---------------------------------------------------------------------------------------- (in thousands) Liabilities Capitalization (page 36): Common shares, par value $5 per share -- authorized, 25,000,000 shares; outstanding, 1997 11,731,078; 1996 11,536,056 shares $ 58,655 $ 57,680 Premium on common shares 35,196 29,885 Retained earnings 115,942 107,864 Accumulated other comprehensive income 363 619 -------- -------- Total common equity 210,156 196,048 Cumulative preferred shares: Subject to mandatory redemption 18,000 18,000 Other 20,831 20,831 Long-term debt 189,973 163,176 -------- -------- Total capitalization 438,960 398,055 -------- -------- Current liabilities: Short-term debt 2,100 25,600 Sinking fund requirements and current maturities 12,324 42,587 Accounts payable 28,427 27,330 Accrued salaries and wages 3,835 3,847 Federal and state income taxes accrued 2,572 2,031 Other taxes accrued 11,122 12,055 Interest accrued 3,339 3,653 Other 2,980 2,829 -------- -------- Total current liabilities 66,699 119,932 -------- -------- Noncurrent liabilities 17,805 16,688 -------- -------- Commitments (note 6) -- -- -------- -------- Deferred credits: Accumulated deferred income taxes 97,583 99,131 Accumulated deferred investment tax credit 18,666 19,852 Regulatory liabilities 12,121 13,283 Other 3,607 2,763 -------- -------- Total deferred credits 131,977 135,029 -------- -------- Total $655,441 $669,704 ======== ======== See accompanying notes to consolidated financial statements.
Independent Auditors' Report To the Shareholders of Otter Tail Power Company: We have audited the accompanying consolidated balance sheets and statements of capitalization of Otter Tail Power Company and its subsidiaries (the Company) as of December 31, 1997, and 1996, and the related consolidated statements of income, changes in equity, and cash flows for each of the three years in the period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 1997, and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP February 2, 1998 Minneapolis, Minnesota Otter Tail Power Company Consolidated Statements of Changes in Equity - ---------------------------------------------------------------------------------------------------------- accumulated common par value premium on other shares common common retained comprehensive total outstanding shares shares earnings income equity ----------- ----------------------------------------------------- ( in thousands, except common shares outstanding) Balance, December 31, 1994 11,180,136 $ 55,901 $ 30,335 $ 91,096 $ (684) $176,648 Comprehensive income: Net income 28,945 28,945 Reversal of previously recorded unrealized loss on available-for- sale securities sold in 1995 684 684 -------- Total comprehensive income 29,629 Cumulative preferred dividends at required annual rates (2,358) (2,358) Common dividends (19,677) (19,677) ----------- ---------------------------------------------------- Balance, December 31, 1995 11,180,136 $ 55,901 $ 30,335 $ 98,006 $ -- $184,242 Effects of pooling transactions, January 1, 1996: Peoples Telephone 163,758 819 (798) 2,058 216 2,295 Chassis Liner 157,646 788 (588) 381 581 Common stock issuances 34,516 172 936 1,108 Comprehensive income: Net income 30,624 30,624 Unrealized gains on available-for-sale securities 403 403 -------- Total comprehensive income 31,027 Cumulative preferred dividends at required annual rates (2,358) (2,358) Common dividends (20,124) (20,124) Distributions by pooled entities (723) (723) ----------- ---------------------------------------------------- Balance, December 31, 1996 11,536,056 $ 57,680 $ 29,885 $107,864 $ 619 $196,048 Cash portion of Peoples pooling transaction, January 1, 1997 (209) (209) Common stock issuances 195,022 975 5,520 6,495 Comprehensive income: Net income 32,346 32,346 Unrealized gains on available-for-sale securities 103 103 Reversal of previously recorded unrealized gains on available-for- sale securities sold in 1997 (359) (359) -------- Total comprehensive income 32,090 Cumulative preferred dividends at required annual rates (2,358) (2,358) Common dividends (21,496) (21,496) Distributions by pooled entities (414) (414) ----------- ---------------------------------------------------- Balance, December 31, 1997 11,731,078 $ 58,655 $ 35,196 $115,942 $ 363 $210,156 - ---------------------------------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements.
Otter Tail Power Company Consolidated Statements of Cash Flows For the Years Ended December 31 1997 1996 1995 - --------------------------------------------------------------------------------------------------- (in thousands) Cash flows from operating activities: Net income $ 32,346 $ 30,624 $ 28,945 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 39,302 35,305 28,602 Deferred investment tax credit--net (1,186) (1,186) (1,177) Deferred income taxes (3,155) (5,277) 751 Change in deferred debits and other assets 1,204 3,679 (1,792) Change in noncurrent liabilities and deferred credits 1,960 3,389 4,560 Allowance for equity (other) funds used during construction -- (325) (229) (Gain)/loss on investments in and disposal of noncurrent assets (1,722) 555 946 Cash provided by (used for) current assets and current liabilities: Change in receivables, materials, and supplies (2,270) 396 (1,035) Change in other current assets 1,752 (922) (1,349) Change in payables and other current liabilities 908 867 1,436 Change in interest and income taxes payable 259 1,506 (1,581) -------- -------- -------- Net cash provided by operating activities 69,398 68,611 58,077 -------- -------- -------- Cash flows from investing activities: Gross capital expenditures (41,973) (64,823) (37,134) Proceeds from disposal of noncurrent assets 20,802 4,734 2,417 Proceeds from the sales of marketable securities 785 -- 17,043 Purchase of subsidiaries, net of cash acquired -- (10,006) (5,808) Change in temporary cash investments -- 2,208 (1,817) Change in other investments (470) (10,640) (3,892) -------- -------- -------- Net cash used in investing activities (20,856) (78,527) (29,191) -------- -------- -------- Cash flows from financing activities: Change in short-term debt--net issuances (23,500) 25,600 (2,900) Proceeds from issuance of long-term debt 178,272 118,083 54,482 Proceeds from issuance of common stock 6,286 1,719 -- Payments for debt and common stock issuance expense (244) (22) -- Payments for retirement of long-term debt (181,917) (111,957) (58,418) Dividends paid (24,268) (23,244) (22,035) -------- -------- -------- Net cash (used in)/provided by financing activities (45,371) 10,179 (28,871) -------- -------- -------- Net change in cash and cash equivalents 3,171 263 15 Cash and cash equivalents at beginning of year 2,130 1,867 1,852 -------- -------- -------- Cash and cash equivalents at end of year $ 5,301 $ 2,130 $ 1,867 ======== ======== ======== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest (net of amount capitalized) $ 18,203 $ 16,650 $ 14,160 Income taxes $ 18,057 $ 18,832 $ 18,286 See accompanying notes to consolidated financial statements.
Otter Tail Power Company Consolidated Statements of Capitalization, December 31 1997 1996 - ---------------------------------------------------------------------------------------- (in thousands) Total common shareholders' equity $210,156 $196,048 -------- -------- Cumulative preferred shares -- without par value (stated and liquidating value $100 a share) -- authorized 1,500,000 shares; outstanding: Series subject to mandatory redemption: $6.35, 180,000 shares; 9,000 shares due 2002-06; 135,000 shares due 2007 18,000 18,000 -------- -------- Other series: $3.60, 60,000 shares 6,000 6,000 $4.40, 25,000 shares 2,500 2,500 $4.65, 30,000 shares 3,000 3,000 $6.75, 40,000 shares 4,000 4,000 $9.00, 53,311 shares 5,331 5,331 -------- -------- Total other preferred 20,831 20,831 -------- -------- Cumulative preference shares -- without par value, authorized 1,000,000 shares; outstanding: none Long-term debt: First mortgage bond series: 8.75%, due December 15, 1997 -- 18,800 7.25%, due August 1, 2002 19,000 19,200 7.625%, due February 1, 2003 -- 9,240 8.75%, due September 15, 2021 18,800 19,000 8.25%, due August 1, 2022 28,500 28,800 Pollution control series: 6.20-6.80%, due February 1, 2006, Big Stone project 5,367 5,427 8.125%, due August 1, 2009, Coyote project, series B -- 830 6.20-6.90%, due February 1, 2019, Coyote project 21,499 21,734 -------- -------- Total first mortgage bond series 93,166 123,031 Senior debentures 6.375%, due December 1, 2007 50,000 -- Long-term lease obligation (5.625% pollution control revenue bonds due July 1, 1998) 2,200 2,200 Industrial development refunding revenue bonds 5.00% due December 1, 2002 3,010 3,010 Pollution control refunding revenue bonds variable 4.20% at December 31, 1997, due December 1, 2012 10,400 10,400 Obligations of Mid-States Development, Inc.: 7.80% ten-year term note 22,500 -- various at 2.90% to 11.38% at December 31, 1997 10,775 56,900 Obligations of North Central Utilities, Inc. variable 7.13% to 7.28% at December 31, 1997 11,542 10,867 Other 6 1 -------- -------- Total 203,599 206,409 Less: Current maturity 11,329 41,462 Sinking fund requirement 995 1,125 Unamortized debt discount and premium -- net 1,302 646 -------- -------- Total long-term debt 189,973 163,176 -------- -------- Total capitalization $438,960 $398,055 ======== ======== See accompanying notes to consolidated financial statements.
Otter Tail Power Company Notes to consolidated financial statements For the three years ended December 31, 1997 1. Summary of accounting policies System of accounts - In 1997 the Company implemented an activity based costing system along with an entirely new account code structure that will enable it to capture costs to facilitate decision-making in a less regulated and more competitive electric industry. For regulatory reporting purposes, all new account code combinations can be translated into the accounts of the Uniform System of Accounts prescribed by the Federal Energy Regulatory Commission (FERC), the Public Service Commission of North Dakota, and the Public Utilities Commissions of Minnesota and South Dakota. Principles of consolidation -- The consolidated financial statements include the accounts of the Company and all wholly owned subsidiaries. Profits on sales from the regulated electric utility company to nonregulated affiliates are eliminated. However, profits on sales to the regulated electric utility company from nonregulated affiliates are not eliminated, in accordance with the requirements of Statement of Financial Accounting Standards (SFAS) No. 71 - Accounting for the Effects of Certain Types of Regulation. Plant, retirements, and depreciation -- Utility plant is stated at original cost. The cost of additions includes contracted work, direct labor and materials, allocable overheads, and allowance for funds used during construction. The cost of depreciable units of property retired plus removal costs less salvage is charged to the accumulated provision for depreciation. Maintenance, repairs, and replacement of minor items of property are charged to operating expenses. Repairs to property made necessary by storm damage are charged to the reserve therefor. The provisions for utility depreciation for financial reporting purposes are made on the straight-line method based on the estimated service lives of the properties. Such provisions as a percent of the average balance of depreciable electric utility property were 3.08 percent in 1997, 3.00 percent in 1996, and 2.97 percent in 1995. Property and equipment of nonutility and subsidiary operations are carried at historical cost, or at the current appraised value if acquired in a business combination accounted for under the purchase method of accounting, and are depreciated on a straight-line basis over the useful lives (3 to 40 years) of the related assets. Upon sale or retirement of property and equipment, the cost and related accumulated depreciation are eliminated from the respective accounts and the resulting gain or loss is included in the consolidated financial statements. Jointly owned plants -- The consolidated financial statements include the Company's 53.9 percent and 35 percent ownership interests in the assets, liabilities and expenses of Big Stone Plant and Coyote Plant, respectively. Amounts at December 31, 1997 and 1996, included in Plant in Service for Big Stone were $108,273,000 and $109,521,000, respectively, and the accumulated provision for depreciation and amortization was $61,650,000 and $59,078,000, respectively. Amounts at December 31, 1997 and 1996, included in Plant in Service for Coyote were $145,720,000 and $145,542,000, respectively, and the accumulated provision for depreciation and amortization was $61,820,000 and $58,436,000, respectively. The Company's share of direct expenses of the jointly owned plants in service is included in the corresponding operating expenses in the statement of income. Allowance for funds used during construction (AFC) -- AFC, a noncash item, is included in construction work in progress. In 1997 the average level of short-term borrowing exceeded the average level of construction work in progress; consequently, 1997 AFC was based entirely on the year's average short-term debt borrowing rate. In 1996 and 1995 AFC was based on a composite rate that assumes funds used for construction were provided by borrowed funds and equity funds. The AFC included in construction work in progress will ultimately be included in the rate base used in establishing rates for utility services. The rate for AFC was 5.67 percent for 1997, 8.50 percent for 1996, and 9.50 percent for 1995. Income taxes -- Comprehensive interperiod income tax allocation is used for substantially all book and tax temporary differences. Deferred income taxes arise for all temporary differences between the book and tax basis of assets and liabilities. Deferred taxes are recorded using the tax rates scheduled by tax law to be in effect when the temporary differences reverse. The Company amortizes the investment tax credit over the estimated lives of the related property. Operating revenues -- Electric customers' meters are read and bills are rendered on a cycle basis. Prior to 1993 the Company recorded electric revenues based on billing dates in all of its jurisdictions. Effective January 1, 1993, due to a North Dakota Public Service Commission (NDPSC) order, the Company changed its method of revenue recognition in North Dakota from billing dates to energy delivery dates. The North Dakota unbilled revenue amount as of January 1, 1993, ($4.4 million) was amortized to electric revenues over 36 months as required by the order. The change in method of revenue recognition resulted in additional net income of $984,000 in 1995. The impact on 1995 earnings per share was $.09. The Company will begin recording unbilled revenue in Minnesota and South Dakota, subject to notification of the respective state regulatory bodies, in 1998. The accounting change will result in a one-time noncash increase in earnings of approximately $6.4 million ($3.8 million net-of-tax) in 1998. The Company's rate schedules applicable to substantially all customers include a cost of energy adjustment clause under which the rates are adjusted to reflect changes in average cost of fuels and purchased power. Since July 1, 1995, rate schedules applicable to Minnesota customers also include a surcharge for recovery of conservation-related expenses: 1.75 percent as of July 1, 1997, 1.25 percent from July 1, 1996, through June 30, 1997, and .5030 percent from July 1, 1995, through June 30, 1996. (See further discussion under note 3.) Health services' operating revenues on major equipment and installation contracts are recorded using the percentage-of-completion method. Amounts received in advance under customer service contracts are deferred and recognized on a straight-line basis over the contract period. Manufacturing operating revenues are recorded when products are shipped, when services are rendered, and on a percentage-of-completion basis for large items that are assembled over several months. Other business operations' operating revenues are recorded when services are rendered or products are shipped. In the case of construction contracts, the percentage-of-completion method is used. Storm damage provision -- The Company is required under its Indenture of Mortgage to make annual provisions for storm damage of not less than 0.5 percent gross electric operating revenues. Provisions for loss have been used in determining rates approved by the applicable regulatory commissions. Provisions for 1997, 1996, and 1995 were $1,423,000, $1,247,000, and $1,800,000, respectively. Employee incentive plan -- The Company has a gain sharing plan for all electric utility company employees. The total compensation received by all electric utility company employees for 1997, 1996, and 1995 was $817,000, $778,000, and $870,000, respectively. Mid-States' companies have incentive plans for certain employees that are based on certain levels of sales and profits. Total amounts accrued for these incentive plans in 1997, 1996, and 1995 were $2,658,000, $1,998,000 and $1,891,000, respectively. North Central Utilities, Inc. companies have incentive plans for all employees based on levels of profitability and returns. Amounts accrued related to these plans for 1997, 1996, and 1995 were $351,105, $34,094, and $16,380, respectively. Use of estimates -- In recording transactions and balances resulting from business operations, the Company uses estimates based on the best information available. Estimates are used for such items as plant depreciable lives, tax provisions, uncollectible accounts, environmental loss contingencies, unbilled revenues, service contract maintenance costs and actuarially determined benefit costs. As better information becomes available (or actual amounts are determinable) the recorded estimates are revised. Consequently, operating results can be affected by revisions to prior accounting estimates. Reclassifications -- Certain prior year amounts have been reclassified to conform to 1997 presentation. Such reclassification had no impact on net income and shareholders' equity. Cash equivalents -- The Company considers all highly liquid debt instruments purchased with a maturity of 90 days or less to be cash equivalents. Consolidated Statements of Cash Flows -- The combined 1996 beginning cash balance of $589,000 of the two companies acquired in 1997 pooling of interests transactions is included under proceeds from the issuance of common stock in 1996; this treatment is required because financial statements prior to 1996 are not being restated to reflect the effect of the poolings due to their insignificant impact on the Company's consolidated financial statements prior to 1996. Cash used of $209,000 to acquire shares of minor shareholders in one of the 1997 pooling acquisitions is netted against proceeds from the issuance of common stock in 1997. Debt reacquisition premiums -- In accordance with regulatory treatment, the Company defers debt redemption premiums and amortizes such costs over the original life of the reacquired bonds. Investments -- At December 31, 1997 and 1996, the Company had noncurrent investments of $6,761,000 and $6,163,000, respectively, in limited partnerships that invest in tax-credit qualifying affordable housing projects. These investments, accounted for under the equity method, provided the Company with tax credits of $1,057,000 and $593,000, in 1997 and 1996, respectively. At December 31, 1997 and 1996, the Company had $703,000 and $1,211,000, respectively, invested in marketable equity securities classified as available-for-sale and recorded at market value. The balance of investments at December 31, 1997, consists of $5,571,000 in additional investments accounted for under the equity method, and $7,013,000 in financial instruments, with $2,070,000 related to participation in economic development loan pools. The balance of investments at December 31, 1996, consists of $8,722,000 in additional investments accounted for under the equity method, and $4,453,000 in financial instruments, with approximately $2,000,000 related to participation in economic development loan pools. (See further discussion under note 10.) Inventories -- The electric operation inventories are reported at average cost. The health service, manufacturing and other business operation inventories are stated at the lower of cost (first-in, first-out) or market. Short-term debt -- The composite interest rate on short-term debt outstanding as of December 31, 1997 and 1996, was 6.15 percent and 5.77 percent, respectively. The average interest rate paid on short-term debt during 1997 and 1996 was 5.67 percent and 5.65 percent, respectively. Intangible assets -- The majority of the Company's intangible assets consist of goodwill associated with the acquisition of subsidiaries. Intangible assets are amortized on a straight-line basis over periods of 40 years for the telephone company and 15 years or less for all other intangibles. The Company periodically evaluates the recovery of intangible assets based on an analysis of undiscounted future cash flows. Total intangibles as of December 31 are as follows: 1997 1996 -------- -------- (in thousands) Goodwill on telephone company $ 7,749 $ 7,749 Other intangible assets 20,594 19,870 ------- ------- Total 28,343 27,619 Less accumulated amortization 7,432 5,665 ------- ------- Intangibles-net $20,911 $21,954 Adoption of new accounting pronouncements -- In February 1997 the FASB issued SFAS 128 - Earnings Per Share, effective for financial statements issued for periods ending after December 15, 1997. SFAS 128 requires certain public companies to present both basic and diluted earnings per share (EPS) on the face of their income statements. Diluted EPS reflects the dilution that could occur if securities or other contracts to issue common stock (options, warrants, convertible debt or preferred stock, contingent share arrangements, etc.) were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Other than the Company's outstanding $9.00 exchangeable cumulative preferred shares, which are not redeemable or exchangeable until after August 9, 1999, the Company has no financial instruments outstanding similar to those mentioned above. Additionally, if the outstanding $9.00 preferred shares were exchanged for shares of the Company's common stock, the effect on the Company's 1997 EPS would be antidilutive. Therefore, the Company's basic and diluted EPS are the same and are effectively disclosed on the face of the Company's 1997, 1996 and 1995 consolidated statements of income included in this report. In June 1997 the FASB issued SFAS 130 - Reporting Comprehensive Income, effective for fiscal years beginning after December 15, 1997, with earlier application permitted. SFAS 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements and requires that all items required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS 130 requires an enterprise to classify items of other comprehensive income by their nature in a financial statement and to display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. The Company has elected early application of the requirements of SFAS 130 with the display of elements of other comprehensive income in the consolidated statements of changes in equity. The statement of changes in equity not only provides for the display of elements of other comprehensive income pursuant to the requirements of SFAS 130 but it also allows for the elimination of the consolidated statements of retained earnings from the Company's financial statements and it provides for the presentation of changes in equity related to recent issuances of the Company's common stock. 2. Business combinations and segment information On January 2, 1997, the Company's telecommunications subsidiary, North Central Utilities, Inc., (NCU) acquired all of the outstanding common stock of The Peoples Telephone Co. of Bigfork (Peoples), a telephone company with 1,903 access lines serving five communities in Northern Minnesota, in exchange for 163,758 newly issued shares of the Company's common stock and $209,000 in cash. On June 30, 1997, the Company's subsidiary, Mid-States Development, Inc., (Mid-States) acquired all of the outstanding common stock of Chassis Liner Corporation (Chassis Liner), a manufacturer of auto and truck frame straightening equipment with facilities in Alexandria and Lucan, Minnesota, in exchange for 157,646 newly issued shares of the Company's common stock. These acquisitions have been accounted for under the pooling of interests method of accounting. There were no transactions between the Company, Peoples and Chassis Liner prior to the acquisitions. Costs incurred to effect these mergers were not significant. The Company's 1996 consolidated financial statements have been restated to include both Peoples and Chassis Liner. However, the Company's 1995 consolidated financial statements and other financial information for 1995 and prior years presented herein have not been restated to reflect the effects of the poolings because the impact of the poolings on those years is not material. The results of operations of the separate companies and the combined amounts included in the consolidated financial statements are presented in the table below. Otter Tail Power Pooled Company Entities Combined -------- -------- -------- (in thousands, except per share amounts) For the year ended December 31, 1996: Changes in common equity: Common shares, par value $ 56,073 $ 1,607 $ 57,680 Premium on common shares 31,271 (1,386) 29,885 Retained earnings 105,479 2,385 107,864 Accumulated other comprehensive income 403 216 619 -------- -------- -------- Total common equity $193,226 $ 2,822 $196,048 ======== ======== ======== Operating revenues $361,739 $ 9,194 $370,933 Net Income (1) $ 29,955 $ 669 $ 30,624 Earnings available for common shares $ 27,597 $ 669 $ 28,266 Average common shares outstanding 11,182 321 11,503 Basic and diluted earnings per share $ 2.47 $ 2.46 For the three months ended March 31, 1997:(2) Operating revenues $ 91,770 $ 2,519 $ 94,289 Net Income (1) $ 10,234 $ 456 $ 10,690 Earnings available for common shares $ 9,645 $ 456 $ 10,101 Average common shares outstanding 11,412 157 11,569 Basic and diluted earnings per share $ .85 $ .87 (1)Prior to being acquired, Chassis Liner was an S Corporation and, consequently, was not subject to federal or state income taxes. The pro forma income tax provision for Chassis Liner that would have been reported by the Company as an additional provision to its historical tax expense had Chassis Liner not been an S Corporation prior to the acquisition is $182,000 for the three month period ended March 31, 1997, $281,000 for the year ended December 31, 1997, and $420,000 for year ended December 31, 1996, based on a tax rate of 40 percent. (2)Chassis Liner only. In 1996 Mid-States purchased a Montana-based supplier of X-ray supplies and accessories in February, a mobile medical diagnostic services company located in Minnesota in April, and four radio stations located in the Fargo, North Dakota/ Moorhead, Minnesota, market area: two in June, one in October, and one in December. NCU acquired two small cable TV systems in 1996. Mid-States purchased a manufacturing company and three diagnostic imaging companies in January 1995, and another manufacturing company in October 1995. In the 1996 and 1995 acquisitions, the purchase method of accounting was used and the acquisitions would have had no significant pro forma effect on the Company's operating revenues, net income, or earnings per share for 1996 and 1995. The total price for the businesses acquired was $11,060,000 in 1996 and $10,820,000 in 1995. The Company's business operations, which are based mainly in Minnesota, North Dakota, and South Dakota, principally in the region known as the "Red River Valley of the North," are broken down into four segments. Electric operations includes the electric utility only. Health services operations consists of businesses involved in the sale, service, rental, refurbishing and operations of medical imaging equipment and the sale of related supplies and accessories to various medical institutions located primarily in the Midwestern United States. Manufacturing operations includes production of agricultural equipment, plastic pipe, automobile and truck frame straightening equipment and accessories, and fabricated metal parts. Other business operations consists of businesses diversified in such areas as electrical and telephone construction contracting, radio broadcasting, waste incinerating, and telecommunications. Information for the business segments for 1997, 1996 and 1995 is presented in the table below: 1997 1996 1995 -------- -------- -------- (in thousands) Operating revenue Electric $205,121 $199,345 $203,925 Manufacturing 81,543 64,568 38,690 Health services 66,185 61,697 50,896 Other business operations 41,430 45,323 32,818 -------- -------- -------- Total $394,279 $370,933 $326,329 Operating income Electric $ 44,966 $ 45,279 $ 47,916 Manufacturing 7,945 6,504 3,270 Health services 4,295 5,137 3,581 Other business operations 1,827 2,452 3,531 -------- -------- -------- Total $ 59,033 $ 59,372 $ 58,298 Depreciation and amortization Electric $ 21,442 $ 19,880 $ 19,448 Manufacturing 542 594 344 Health services 638 585 517 Other business operations 2,914 2,328 1,600 -------- -------- -------- Total $ 25,536 $ 23,387 $ 21,909 Capital expenditures Electric $ 26,603 $ 38,224 $ 27,443 Manufacturing 6,264 4,787 3,879 Health services 3,800 16,230 4,020 Other business operations 5,306 5,582 1,792 -------- -------- -------- Total $ 41,973 $ 64,823 $ 37,134 Identifiable assets Electric $526,679 $523,509 $509,588 Manufacturing 40,814 34,354 27,270 Health services 35,738 65,140 41,623 Other business operations 52,210 46,701 30,715 -------- -------- -------- Total $655,441 $669,704 $609,196 SFAS 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. In general, SFAS 131 requires financial information to be reported on the basis that it is used internally for evaluating performance and deciding how to allocate resources. Adoption of SFAS 131 in 1998 is not expected to result in significant changes to the operating segments presently disclosed. 3. Rate matters On July 1, 1995, the Company began charging all Minnesota customers a .5030 percent surcharge on their electric service statements for recovery of conservation-related costs exceeding the amount already included in base rates. On July 1, 1996, the rate was increased to 1.25 percent and on July 1, 1997, the rate was increased to 1.75 percent. The conservation-related costs being recovered through the surcharge and in base rates include Conservation Improvement Program (CIP) expenditures, carrying charges on costs incurred in excess of costs currently being recovered, lost margins on avoided kilowatt-hour sales, and bonus incentives related to energy savings. The MPUC approved recovery of 1996, 1995 and 1994 lost margins and bonus incentives in 1997, 1996 and 1995, respectively. The Company recorded revenues related to 1997, 1996, and 1995 lost margins and bonus incentives of $1,150,000, $1,266,000, and $766,000, respectively. As these costs are recovered through the monthly billing process, the amounts billed are offset by the amortization of deferred CIP charges. 4. Common shares New issuances -- On August 30, 1996, the Company filed a shelf registration statement with the Securities and Exchange Commission for the issuance of up to 1,000,000 common shares pursuant to the Company's Automatic Dividend Reinvestment and Share Purchase Plan (the Plan), which will permit shares purchased by shareholders, employees, or customers who participate in the Plan to be either new issue common shares or common shares purchased on the open market. In December 1996 the Company began issuing newly issued common shares under the Plan; 161,831 common shares were issued in 1997 and 34,516 shares were issued in 1996. Additional common stock issuances in 1997 included 321,404 unregistered shares to effect the pooling acquisitions, 30,561 shares to the Company's leveraged employee stock ownership plan and 2,630 shares issued as a bonus to a consultant. Shareholder Rights Plan -- On January 27, 1997, the Company's Board of Directors declared a dividend of one preferred share purchase right (Right) for each outstanding common share held of record as of February 10, 1997. One Right was also issued with respect to each common share issued after February 10, 1997. Each Right entitles the holder to purchase from the Company one one-hundredth of a share of newly created Series A Junior Participating Preferred Stock at a price of $70, subject to certain adjustment. The Rights are exercisable when, and are not transferable apart from the Company's common shares until, a person or group has acquired 15 percent or more, or commenced a tender or exchange offer for 15 percent or more, of the Company's common shares. If the specified percentage of the Company's common shares is acquired, each right will entitle the holder (other than the acquiring person or group) to receive, upon exercise, common shares of either the Company or the acquiring company having value equal to two times the exercise price of the Right. The Rights are redeemable by the Company's Board of Directors in certain circumstances and expire on January 27, 2007. 5. Retained earnings restriction The Company's Indenture of Mortgage and Articles of Incorporation, as amended, contain provisions that limit the amount of dividends that may be paid to common shareholders. Under the most restrictive of these provisions, retained earnings at December 31, 1997, were restricted by $10,055,000. 6. Commitments At December 31, 1997, the Company had commitments under contracts in connection with construction programs aggregating approximately $3,551,000. For capacity requirements the Company has agreements extending through April 2005, at annual costs of approximately $4,700,000 in 1998, $4,800,000 in 1999, $2,300,000 in each year of 2000 through 2004 and $760,000 in 2005. The Company also has several long-term coal contracts in which it is responsible for making payment only upon the delivery of the coal. The risk of loss from nonperformance of the contracts is considered nominal because of the availability of other suppliers and the expected continued reliability of the current fuel suppliers. Furthermore, the cost of energy adjustment provision in the rate-making process lessens the risk of loss (in the form of increased costs) from market price changes because it assures recovery of almost all fuel costs. At December 31, 1997, Midwest Information Systems, Inc., (MIS) had an investment of $88,000 in a wireless communications limited liability company (LLC) accounted for under the equity method. MIS may be required to make additional capital contributions of $549,000. MIS has also guaranteed $480,000 of the LLC's debt. In 1996 the Big Stone Plant joint owners entered into operating leases for 250 new aluminum coal cars for transporting coal to Big Stone Plant. The terms of the leases are 15 years. The new cars began transporting coal in October 1996. In November 1997 Mid-States' medical imaging services subsidiary entered into a sale/leaseback transaction whereby $16,000,000 of diagnostic medical equipment was sold and leased back under two operating leases with terms of three and four years. The amounts of future operating lease payments are as follows: Electric Subsidiary utility companies Total -------- ---------- ------- (in thousands) 1998 $ 939 $ 8,447 $ 9,386 1999 939 7,742 8,681 2000 939 7,249 8,188 2001 939 5,623 6,562 2002 939 1,913 2,852 Later Years 4,851 552 5,403 Rent expense was $6,714,000, $6,288,000, and $4,987,000 for 1997, 1996, and 1995, respectively. 7. Long-term obligations Preferred shares -- The $6.35 cumulative preferred shares are redeemable in whole or in part at the option of the Company after December 1, 1997, at $103.175, declining linearly to $100.00 at December 31, 2002. The $9.00 exchangeable cumulative preferred shares are redeemable in whole or in part at the option of the Company after August 9, 1999, for $100.00 per share payable in cash or, at the holder's election, common shares. Subject to certain conditions, such shares are exchangeable at the option of the holder after August 9, 1999, for $100.00 per share in cash or common shares. Long-term debt -- All utility property, with certain minor exceptions, is subject to the lien of the Indenture of Mortgage of the Company securing its First Mortgage Bonds. The Company is required by the Indenture to make annual payments (exclusive of redemption premiums) for sinking fund purposes, except that the requirement with respect to certain series may be satisfied by the delivery of bonds of such series of equal principal amount. The Company issued First Mortgage Bonds of its pollution control series to secure payment of a like principal amount of revenue bonds that were issued by local governmental units to finance facilities leased or purchased and that the Company has capitalized. Mid-States' ten year term note and credit line borrowings are secured by a pledge of all of the common stock of the companies owned by Mid-States. The aggregate amounts of maturities and sinking fund requirements on bonds outstanding and other long-term obligations at December 31, 1997, for each of the next five years are $12,324,000 for 1998, $5,858,000 for 1999, $5,658,000 for 2000, $5,283,000 for 2001, and $26,165,000 for 2002. 8. Pension plan and other postretirement benefits The Company's noncontributory funded pension plan covers substantially all electric utility employees. The plan provides 100 percent vesting after 5 vesting years of service and for retirement compensation at age 65, with reduced compensation in cases of retirement prior to age 62. The Company reserves the right to discontinue the plan, but no change or discontinuance may affect the pensions theretofore vested. The Company's policy is to fund pension costs accrued. All past service costs have been provided for. The total pension cost was $1,104,000 for 1997, $1,292,000 for 1996, and $1,009,000 for 1995. The pension plan has a trustee who is responsible for pension payments to retirees. Five investment managers are responsible for managing the plan's assets. In addition, an independent actuary performs the necessary actuarial valuations for the plan. Net periodic pension cost for 1997, 1996, and 1995 includes the following components: 1997 1996 1995 -------- -------- -------- (in thousands) Service cost--benefit earned during the period $ 2,385 $ 2,273 $ 1,908 Interest cost on projected benefit obligation 7,131 6,754 6,511 -------- -------- -------- $ 9,516 $ 9,027 $ 8,419 (Gain) on return on assets (21,119) (15,738) (26,509) Plus: net deferral and amortization 12,707 8,003 19,099 -------- -------- -------- Net periodic pension cost $ 1,104 $ 1,292 $ 1,009 ======== ======== ======== The plan assets consist of common stock and bonds of public companies, U.S. Government Securities, cash and cash equivalents. The funded status of the plan and amounts recognized on the balance sheet at December 31, 1997 and 1996, are as follows: 1997 1996 -------- -------- (in thousands) Actuarial present value of benefit obligation: Vested benefits $ 77,303 $ 72,243 Nonvested benefits 10,370 9,688 -------- -------- Accumulated benefit obligation $ 87,673 $ 81,931 ======== ======== Projected benefit obligation $107,356 $100,664 Plan assets at fair value 137,560 121,506 -------- -------- Funded status $ 30,204 $ 20,842 Unrecognized transition asset (1,015) (1,251) Unrecognized prior service cost 10,593 9,916 Unrecognized net actuarial (gain) (37,152) (25,773) -------- -------- Net pension asset $ 2,630 $ 3,734 ======== ======== The assumptions used for actuarial valuations were: 1997 1996 -------- -------- Discount rate 7.25% 7.25% Rate of increase in future compensation level 4.25% 4.25% Long-term rate of return on assets 8.50% 8.50% In addition to providing pension benefits to all electric utility employees, the Company has an unfunded, nonqualified benefit plan for executive officers and certain key management employees. This plan provides defined benefit payments to these employees upon their retirements or to their beneficiaries upon their deaths for a 15-year period. Life insurance carried on the plan participants is payable to the Company upon the employee's death. The net periodic pension cost of this program in 1997, 1996 and 1995 was $482,000, $485,000, and $412,000, respectively. In the second quarter of 1996 actuary reports for the Company's Executive Survivor and Supplemental Retirement Program amended July 1, 1994, were revised to reflect assumption changes regarding expected retirement age and projected benefits under the July 1, 1994 plan amendment, which expanded the plan to include nonofficer upper level management employees. The restatement resulted in an expense adjustment of an additional $2,590,000, and a reduction in earnings per share of $0.14 in 1996. The funded status of the plan and amounts recognized on the balance sheet at December 31, 1997 and 1996, are as follows: 1997 1996 -------- -------- (in thousands) Actuarial present value of benefit obligation: Vested benefits $ 5,051 $ 4,322 Nonvested benefits 448 686 -------- -------- Accumulated benefit obligation $ 5,499 $ 5,008 ======== ======== Projected benefit obligation $ 6,964 $ 6,636 Plan assets at fair value -- -- -------- -------- Funded Status $ (6,964) $ (6,636) Unrecognized transition obligation 62 82 Unrecognized prior service cost 1,647 1,774 Unrecognized net actuarial loss 615 487 Additional liability (715) (715) -------- -------- Accrued benefit liability $ (5,355) $ (5,008) ======== ======== The assumptions used for actuarial valuations for 1997 and 1996 were a discount rate of 7.25 percent and a salary scale rate increase of 5.0 percent. In addition to providing pension benefits, the Company provides a portion of health insurance benefits for retired employees. Substantially all of the Company's electric utility employees may become eligible for health insurance benefits if they reach age 55 and have 10 years of service. Upon adoption of SFAS 106 - Employers' Accounting for Postretirement Benefits Other Than Pensions - in January 1993, the Company elected to recognize its transition obligation related to postretirement benefits earned of approximately $14,964,000 over a period of 20 years. The net postretirement benefit cost for 1997, 1996, and 1995 includes the following components: 1997 1996 1995 -------- -------- -------- (in thousands) Service cost - benefit earned during the period $ 578 $ 484 $ 411 Interest cost on accumulated postretirement benefit obligation 1,159 1,132 1,187 Amortization of transition obligation 748 748 881 Amortization of experience (gain) (251) (210) (311) Plan amendment prior service cost -- -- 2,155 Life insurance curtailment gain -- (749) -- ------- ------- ------- Net postretirement benefit cost $ 2,234 $ 1,405 $ 4,323 ======= ======= ======= The funded status of the plan and the amounts recognized on the balance sheet at December 31, 1997 and 1996, are as follows: 1997 1996 -------- -------- (in thousands) Actuarial present value of benefit obligation: Retirees $ 10,209 $ 9,096 Fully eligible plan participants 4,483 4,582 Other active plan participants 3,015 2,645 -------- -------- Accumulated postretirement benefit obligation $ 17,707 $ 16,323 Plan assets at fair value -- -- -------- -------- Funded status $(17,707) $(16,323) Unrecognized (gain) (3,449) (4,038) Unrecognized transitional obligation 11,223 11,971 -------- -------- Postretirement benefit liability $ (9,933) $ (8,390) ======== ======== The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation as of December 31, 1997, was 7.5 percent for 1998, decreasing linearly each successive year until it reaches 5.0 percent in 2003, after which it remains constant. The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation as of December 31, 1996, was 7.0 percent for 1997, decreasing linearly each successive year until it reaches 5.0 percent in 2001, after which it remains constant. The assumed discount rate used in determining the accumulated postretirement benefit obligation as of December 31, 1997 and 1996, was 7.25 percent. A one-percentage-point increase in the assumed health care cost trend rate for each year would increase the accumulated postretirement obligation as of December 31, 1997, by approximately 10.7 percent and the service and interest cost components of the net postretirement health care cost in 1997 by approximately 16.5 percent. The Company has a leveraged employee stock ownership plan (ESOP) for the benefit of all its electric utility employees. Contributions made by the Company were $1,055,000 for 1997, $1,010,000 for 1996, and $993,000 for 1995. 9. Compensating balances and short-term borrowings The Company maintains formal bank lines of credit for its electric utility operations separate from lines and letters of credit maintained by the subsidiary companies. They make available to the Company bank loans for short-term financing and provide backup financing for commercial paper notes. At December 31, 1997, the Company maintained no compensating balances to support formal bank lines of credit. The Company's bank lines of credit for electric utility operations totaled $40,000,000 of which $2,100,000 was used at December 31, 1997. The subsidiary companies' bank lines and letters of credit, which require no compensating balances, totaled $17,500,000 of which $3,115,000 was used at December 31, 1997. Based on the terms and nature of use of the subsidiaries' lines, outstanding amounts are reflected in long-term debt and current maturities on the Company's consolidated balance sheets. 10. Fair value of financial instruments The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and short-term investments -- The carrying amount approximates fair value because of the short-term maturity of those instruments. Other investments -- The carrying amount approximates fair value. A portion of other investments is in financial instruments that have variable interest rates that reflect fair value. The remainder of other investments is accounted for by the equity method which, in the case of operating losses, results in a reduction of the carrying amount. Redeemable preferred stock -- The fair value is estimated based on the current rates available to the Company for the issuance of redeemable preferred stock. Long-term debt -- The fair value of the Company's long-term debt is estimated based on the current rates available to the Company for the issuance of debt. About $26 million of the Company's long term debt, which is subject to variable interest rates, approximates fair value. 1997 1996 -------------------- -------------------- (in thousands) Carrying Fair Carrying Fair amount value amount value -------- -------- -------- -------- Cash and short-term investments $ 5,301 $ 5,301 $ 2,130 $ 2,130 Other investments 20,048 20,048 20,549 20,549 Redeemable preferred stock (18,000) (19,619) (18,000) (18,000) Long-term debt (189,973) (207,063) (163,176) (170,483) The Company's marketable securities are included in investments on the balance sheet and are classified as available for sale. These securities are recorded at fair value with any unrealized gain or loss included in accumulated other comprehensive income in the equity section of the balance sheet net of deferred income taxes of $257,000 at year-end 1997 and $431,000 at year-end 1996. Realized gains and losses are computed on each specific investment sold. The amounts recognized on the balance sheet as of December 31, 1997 and 1996, and amounts sold for each year are as follows: 1997 1996 -------- -------- Available for sale - securities (in thousands) Cost $ 83 $ 161 Gross unrealized gain 620 1,050 Gross unrealized loss -- -- ------- ------- Fair value $ 703 $ 1,211 ======= ======= Proceeds from sale $ 785 $ -- Gross realized gains 707 -- Gross realized losses -- -- 11. Income taxes The total income tax expense differs from the amount computed by applying the federal income tax rate (35 percent in 1997, 1996 and 1995) to net income before total income tax expense for the following reasons: 1997 1996 1995 -------- -------- -------- (in thousands) Tax computed at federal statutory rate $16,329 $15,378 $15,786 Increases (decreases) in tax from: State income taxes net of federal income tax benefit 2,224 1,835 2,097 Investment tax credit amortization (1,186) (1,186) (1,177) Depreciation differences -- flow-through method reversal 408 (138) 222 Differences reversing in excess of federal rates (994) (1,030) (754) Dividend received/paid deduction (620) (604) (872) Affordable housing tax credits (1,057) (593) (93) Permanent and other differences (796) 348 950 ------- ------- ------- Total Income tax expense $14,308 $14,010 $16,159 ======= ======= ======= Overall effective federal and state income tax rate 30.7% 31.4% 35.8% Income tax expense includes the following: Charges (credits) related to operations: Current federal income taxes $17,123 $18,014 $13,840 Current state income taxes 3,300 3,608 3,201 Deferred federal income taxes (3,410) (4,657) 603 Deferred state income taxes (205) (480) 117 Investment tax credit amortization (1,186) (1,186) (1,177) ------- ------- ------- Total $15,622 $15,299 $16,584 ------- ------- ------- Charges (credits) related to other income and deductions: Current federal income taxes (645) (430) (176) Affordable housing tax credits (1,057) (593) (93) Current state income taxes 19 (103) (21) Deferred federal and state income taxes 369 (163) (135) ------- ------- ------- Total Income tax expense $14,308 $14,010 $16,159 ======= ======= ======= The Company's deferred tax assets and liabilities were composed of the following on December 31, 1997 and 1996: 1997 1996 ---------- ---------- (in thousands) Deferred tax assets Amortization of tax credits $ 12,258 $ 13,021 Vacation accrual 1,121 1,039 Unbilled/unearned revenue 4,105 4,452 Operating reserves 7,890 6,872 Nondeductible land - plant abandonment -- 1,134 Transfer to regulatory asset (61) (617) Other 1,747 1,646 --------- --------- Total deferred tax assets $ 27,060 $ 27,547 Deferred tax liabilities Differences related to property (111,300) (114,090) Excess tax over book - pensions (1,043) (1,481) Transfer to regulatory asset (4,999) (4,012) Transfer to regulatory liability (188) 204 Other (2,375) (2,749) --------- --------- Total deferred tax liabilities $(119,905) $(122,128) --------- --------- Deferred income taxes $ (92,845) $ (94,581) ========= ========= 12. Property, plant and equipment 1997 1996 -------- -------- (December 31, in thousands) Electric Plant: Production $305,147 $305,472 Transmission 141,956 137,539 Distribution 227,463 217,825 General 83,985 81,229 -------- -------- Electric plant 758,551 742,065 Less accumulated depreciation and amortization 315,011 301,380 -------- -------- Electric plant net of accumulated depreciation 443,540 440,685 Construction work in progress 12,146 11,470 -------- -------- Net electric plant $455,686 $452,155 -------- -------- Subsidiary companies plant $ 89,716 $101,789 Less accumulated depreciation and amortization 35,636 28,999 -------- -------- Net subsidiary companies plant $ 54,080 $ 72,790 -------- -------- Net plant $509,766 $524,945 ======== ======== 13. Quarterly information (unaudited) The quarterly data shown below reflects seasonal and timing variations that are common in the utility industry. Three Months Ended March 31 June 30 September 30 December 31 -------------- -------------- --------------- --------------- 1997 1996 1997 1996 1997 1996 1997 1996 ------ ------ ------ ------ ------- ------ ------- ------ (in thousands except per share data) Operating revenues $94,289 $90,568 $91,096 $91,874 $101,858 $95,276 $107,036 $93,215 Operating income $19,741 $19,057 $ 9,798 $12,642 $ 13,753 $12,868 $ 15,742 $14,805 Net income $10,690 $10,195 $ 5,393 $ 6,273 $ 7,785 $ 6,739 $ 8,478 $ 7,417 Earnings available for common shares $10,101 $ 9,605 $ 4,803 $ 5,684 $ 7,195 $ 6,149 $ 7,889 $ 6,828 Basic and diluted earnings per share $ .87 $ .84 $ .41 $ .49 $ .62 $ .53 $ .67 $ .59 Dividends paid per common share $ .465 $ .45 $ .465 $ .45 $ .465 $ .45 $ .465 $ .45 Price range: High $34 3/4 $38 5/8 $34 1/4 $38 5/8 $34 1/2 $34 1/2 $38 3/8 $34 1/4 Low $31 1/2 $35 1/4 $30 $32 $31 1/2 $31 3/4 $32 1/8 $32 Average number of common shares outstanding 11,569 11,502 11,621 11,502 11,661 11,502 11,704 11,509 Initially the Company did not intend to restate prior year's consolidated financial statements for the Peoples' pooling because its impact alone on 1996 consolidated results was not considered significant. However, the Chassis Liner pooling in June of 1997 was considered to have a significant enough pro forma effect on 1996 consolidated results to warrant restatement. For reasons of consistency, the Company's 1996 consolidated financial statements presented herein have been restated to include both Peoples and Chassis Liner. However, the Company's 1995 consolidated financial statements and other financial information for 1995 and prior years presented herein have not been restated to reflect the effects of the poolings because the impact of the poolings on those years is not material. (See note 2 to financial statements for more information.)
- ----------------------------------------------------------------------- Stock listing - ------------- Otter Tail common stock is traded on The Nasdaq Stock Market's National Market. (Nasdaq: National Association of Securities Dealers Automated Quotation.) EX-21 3 Exhibit 21-A OTTER TAIL POWER COMPANY Subsidiaries of the Registrant March 1, 1998 Company State of Organization Minnesota Dakota Generating Company Minnesota Otter Tail Realty Company Minnesota Otter Tail Management Corporation* Minnesota ORD Corporation* Minnesota Quadrant Co. Minnesota North Central Utilities, Inc. Minnesota Midwest Information Systems, Inc. Minnesota Midwest Telephone Co. Minnesota Osakis Telephone Company Minnesota Peoples Telephone of Bigfork Minnesota Data Video Systems, Inc. Minnesota Otter Tail Communications SD, Inc. South Dakota MIS Investments, Inc. Minnesota Mid-States Development, Inc. Minnesota Glendale Machining, Inc. Minnesota Precision Machine of North Dakota, Inc. North Dakota Dakota Machine, Inc. North Dakota Dakota Engineering, Inc. North Dakota Aerial Contractors, Inc. North Dakota Moorhead Electric, Inc. Minnesota KFGO, Inc. North Dakota Western Minnesota Broadcasting Company Minnesota Diagnostic Medical Systems, Inc. North Dakota DMS Imaging, Inc. North Dakota DMS Leasing Corporation North Dakota BTD Manufacturing, Inc. Minnesota Northern Pipe Products, Inc. North Dakota Northern Micro, Inc. North Dakota Fargo Baseball, LLC Minnesota Fargo Sports Concession LLC Minnesota Chassis Liner Corporation Minnesota Otter Tail Energy Services Company, Inc. Minnesota Mid-States Testing Company Minnesota *Inactive EX-23 4 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 333-11145 on Form S-3 and 333-25261 on Form S-8 of Otter Tail Power Company of our report dated February 2, 1998, incorporated by reference in this Annual Report on Form 10-K of Otter Tail Power Company for the year ended December 31, 1997. Deloitte & Touche LLP Minneapolis, Minnesota March 26, 1998 EX-24 5 Exhibit 24-A POWER OF ATTORNEY __________ I, JEFFREY J. LEGGE, do hereby constitute and appoint JOHN C. MAC FARLANE, A. E. ANDERSON, JAY D. MYSTER, C. E. BRUNKO, and BEVERLY A. NORLIN, or any one of them, my Attorney-in-Fact for the purpose of signing, in my name and on my behalf as Controller and Principal Accounting Officer of Otter Tail Power Company, the Annual Report of Otter Tail Power Company on Form 10-K for its fiscal year ended December 31, 1997, and any and all amendments to said Annual Report, and to deliver on my behalf said Annual Report and any and all amendments thereto, as each thereof is so signed, for filing with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended. Date: January 8, 1998. ____Jeffrey J. Legge____ Jeffrey J. Legge In Presence of: Anita Anderson __________________ Denise Herness __________________ POWER OF ATTORNEY __________ I, JOHN C. MAC FARLANE, do hereby constitute and appoint A. E. ANDERSON, JAY D. MYSTER, C. E. BRUNKO, and BEVERLY A. NORLIN, or any one of them, my Attorney-in-Fact for the purpose of signing, in my name and on my behalf as President and Chief Executive Officer, Principal Executive Officer and Director of Otter Tail Power Company, the Annual Report of Otter Tail Power Company on Form 10-K for its fiscal year ended December 31, 1997, and any and all amendments to said Annual Report, and to deliver on my behalf said Annual Report and any and all amendments thereto, as each thereof is so signed, for filing with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended. Date: January 9, 1998. ____John C. MacFarlane____ John C. MacFarlane In Presence of: Dee Fletcher __________________ Tom Hoxie __________________ POWER OF ATTORNEY _________ I, ROBERT N. SPOLUM, do hereby constitute and appoint JOHN C. MAC FARLANE, A. E. ANDERSON, JAY D. MYSTER, C. E. BRUNKO, and BEVERLY A. NORLIN, or any one of them, my Attorney-in-Fact for the purpose of signing, in my name and on my behalf as Director of Otter Tail Power Company, the Annual Report of Otter Tail Power Company on Form 10-K for its fiscal year ended December 31, 1997, and any and all amendments to said Annual Report, and to deliver on my behalf said Annual Report and any and all amendments thereto, as each thereof is so signed, for filing with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended. Date: January 13, 1998 ____Robert N. Spolum____ Robert N. Spolum In Presence of: Ilene Berg __________________ Dave Fining __________________ POWER OF ATTORNEY __________ I, NATHAN I. PARTAIN, do hereby constitute and appoint JOHN C. MAC FARLANE, A. E. ANDERSON, JAY D. MYSTER, C. E. BRUNKO, and BEVERLY A. NORLIN, or any one of them, my Attorney-in-Fact for the purpose of signing, in my name and on my behalf as Director of Otter Tail Power Company, the Annual Report of Otter Tail Power Company on Form 10-K for its fiscal year ended December 31, 1997, and any and all amendments to said Annual Report, and to deliver on my behalf said Annual Report and any and all amendments thereto, as each thereof is so signed, for filing with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended. Date: January 16, 1998. ____Nathan I. Partain____ Nathan I. Partain In Presence of: Connie M. Lueche __________________ Ellen Rember __________________ POWER OF ATTORNEY __________ I, DAYLE DIETZ, do hereby constitute and appoint JOHN C. MAC FARLANE, A. E. ANDERSON, JAY D. MYSTER, C. E. BRUNKO, and BEVERLY A. NORLIN, or any one of them, my Attorney-in-Fact for the purpose of signing, in my name and on my behalf as Director of Otter Tail Power Company, the Annual Report of Otter Tail Power Company on Form 10-K for its fiscal year ended December 31, 1997, and any and all amendments to said Annual Report, and to deliver on my behalf said Annual Report and any and all amendments thereto, as each thereof is so signed, for filing with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended. Date: January 16, 1998. ____Dayle Dietz____ Dayle Dietz In Presence of: Leo Johnson __________________ Janet L. Johnson __________________ POWER OF ATTORNEY __________ I, ARVID R. LIEBE, do hereby constitute and appoint JOHN C. MAC FARLANE, A. E. ANDERSON, JAY D. MYSTER, C. E. BRUNKO, and BEVERLY A. NORLIN, or any one of them, my Attorney-in-Fact for the purpose of signing, in my name and on my behalf as Director of Otter Tail Power Company, the Annual Report of Otter Tail Power Company on Form 10-K for its fiscal year ended December 31, 1997, and any and all amendments to said Annual Report, and to deliver on my behalf said Annual Report and any and all amendments thereto, as each thereof is so signed, for filing with the Securities and ExchangeCommission pursuant to the Securities Exchange Act of 1934, as amended. Date: January 9, 1998. ____Arvid R. Liebe____ Arvid R. Liebe In Presence of: Renee Thomas __________________ Sheri Hammer __________________ POWER OF ATTORNEY __________ I, THOMAS M. BROWN, do hereby constitute and appoint JOHN C. MAC FARLANE, A. E. ANDERSON, JAY D. MYSTER, C. E. BRUNKO, and BEVERLY A. NORLIN, or any one of them, my Attorney-in-Fact for the purpose of signing, in my name and on my behalf as Director of Otter Tail Power Company, the Annual Report of Otter Tail Power Company on Form 10-K for its fiscal year ended December 31, 1997, and any and all amendments to said Annual Report, and to deliver on my behalf said Annual Report and any and all amendments thereto, as each thereof is so signed, for filing with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended. Date: January 9, 1998. ____Thomas M. Brown____ Thomas M. Brown In Presence of: Donna M. Hull __________________ Cheryl A. Fields __________________ POWER OF ATTORNEY __________ I, MAYNARD D. HELGAAS, do hereby constitute and appoint JOHN C. MAC FARLANE, A. E. ANDERSON, JAY D. MYSTER, C. E. BRUNKO, and BEVERLY A. NORLIN, or any one of them, my Attorney-in-Fact for the purpose of signing, in my name and on my behalf as Director of Otter Tail Power Company, the Annual Report of Otter Tail Power Company on Form 10-K for its fiscal year ended December 31, 1997, and any and all amendments to said Annual Report, and to deliver on my behalf said Annual Report and any and all amendments thereto, as each thereof is so signed, for filing with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended. Date: January 8, 1998. ____Maynard D. Helgaas____ Maynard D. Helgaas In Presence of: Tom Schneider __________________ Becky Luhning __________________ POWER OF ATTORNEY __________ I, KENNETH L. NELSON, do hereby constitute and appoint JOHN C. MAC FARLANE, A. E. ANDERSON, JAY D. MYSTER, C. E. BRUNKO, and BEVERLY A. NORLIN, or any one of them, my Attorney-in-Fact for the purpose of signing, in my name and on my behalf as Director of Otter Tail Power Company, the Annual Report of Otter Tail Power Company on Form 10-K for its fiscal year ended December 31, 1997, and any and all amendments to said Annual Report, and to deliver on my behalf said Annual Report and any and all amendments thereto, as each thereof is so signed, for filing with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended. Date: January 19, 1998 ____Kenneth L. Nelson____ Kenneth L. Nelson In Presence of: Mike Holper __________________ Wayne Cagheny __________________ POWER OF ATTORNEY __________ I, DENNIS R. EMMEN, do hereby constitute and appoint JOHN C. MAC FARLANE, A. E. ANDERSON, JAY D. MYSTER, C. E. BRUNKO, and BEVERLY A. NORLIN, or any one of them, my Attorney-in-Fact for the purpose of signing, in my name and on my behalf as Director of Otter Tail Power Company, the Annual Report of Otter Tail Power Company on Form 10-K for its fiscal year ended December 31, 1997, and any and all amendments to said Annual Report, and to deliver on my behalf said Annual Report and any and all amendments thereto, as each thereof is so signed, for filing with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended. Date: January 9, 1998 ____Dennis R. Emmen____ Dennis R. Emmen In Presence of: Penny Mosher __________________ Lori Dawkins __________________ POWER OF ATTORNEY __________ I, A. E. ANDERSON, do hereby constitute and appoint JOHN C. MAC FARLANE, JAY D. MYSTER, C. E. BRUNKO, and BEVERLY A. NORLIN, or any one of them, my Attorney-in-Fact for the purpose of signing, in my name and on my behalf as Vice President, Finance of Otter Tail Power Company, the Annual Report of Otter Tail Power Company on Form 10-K for its fiscal year ended December 31, 1997, and any and all amendments to said Annual Report, and to deliver on my behalf said Annual Report and any and all amendments thereto, as each thereof is so signed, for filing with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended. Date: January 15, 1998. ____A. E. Anderson____ A. E. Anderson In Presence of: Penny Mosher __________________ Nancy D. Tollerson __________________ POWER OF ATTORNEY __________ I, JAY D. MYSTER, do hereby constitute and appoint JOHN C. MAC FARLANE, A. E. ANDERSON, BEVERLY A. NORLIN, and C. E. BRUNKO, or any one of them, my Attorney-in-Fact for the purpose of signing, in my name and on my behalf as Vice President, Governmental & Legal and Corporate Secretary of Otter Tail Power Company, the Annual Report of Otter Tail Power Company on Form 10-K for its fiscal year ended December 31, 1997, and any and all amendments to said Annual Report, and to deliver on my behalf said Annual Report and any and all amendments thereto, as each thereof is so signed, for filing with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended. Date: January 29, 1998. ____Jay D. Myster____ Jay D. Myster In Presence of: Penny Mosher __________________ Becky Luhning __________________ EX-27 6
UT Exhibit 27 This schedule contains summary financial information extracted from the Consolidated Balance Sheet as of December 31, 1997, and the Consolidated Statement of Income for the twelve months ended December 31, 1997, and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS DEC-31-1997 DEC-31-1997 PER-BOOK 455,687 100,970 85,790 12,994 0 655,441 58,655 35,196 116,305 210,156 18,000 20,831 189,973 2,100 0 0 12,324 0 0 0 202,057 655,441 394,279 14,308 335,246 349,554 44,725 6,140 50,865 18,519 32,346 2,358 29,988 21,496 16,941 69,398 2.58 2.58
EX-27 7
UT Exhibit 27-1 Restated summary information extracted from the restated Consolidated Balance Sheets as of 3-31-96, 6-30-96, 9-30-96, 12-31-96, and the restated Consolidated Statements of Income for the 3, 6, 9, and 12-month periods ended 3-31-96, 6-30-96, 9-30-96, and 12-31-96, respectively. 1,000 3-MOS 6-MOS 9-MOS 12-MOS DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996 MAR-31-1996 JUN-30-1996 SEP-30-1996 DEC-31-1996 PER-BOOK PER-BOOK PER-BOOK PER-BOOK 440,439 447,250 449,718 452,155 87,015 107,707 116,613 121,846 84,940 86,175 81,140 81,912 12,069 11,514 11,428 13,791 0 0 0 0 624,463 652,646 658,899 669,704 57,508 57,508 57,508 57,680 28,949 28,949 28,949 29,885 105,236 105,764 106,653 107,864 191,693 192,221 193,110 195,429 18,000 18,000 18,000 18,000 20,831 20,831 20,831 20,831 172,777 183,846 189,702 163,176 0 2,450 4,650 7,200 0 0 0 0 0 10,300 15,700 18,400 20,014 25,131 18,859 42,587 0 0 0 0 0 0 0 0 0 0 0 0 201,148 199,867 198,047 204,081 624,463 652,646 658,899 669,704 90,568 182,442 277,718 370,933 5,619 8,365 10,337 14,010 71,512 150,743 233,151 311,561 77,131 159,108 243,488 325,571 13,437 23,334 34,230 45,362 492 905 1,091 2,125 13,929 24,239 35,321 47,487 3,734 7,771 12,114 16,863 10,195 16,468 23,207 30,624 590 1,179 1,769 2,358 9,605 15,289 21,438 28,266 5,031 10,062 15,093 20,124 3,675 7,635 11,774 16,026 14,602 26,322 49,682 69,398 0.84 1.33 1.86 2.46 0.84 1.33 1.86 2.46
EX-27 8
UT Exhibit 27-2 Restated summary financial information extracted from the restated Consolidated Balance Sheets as of 3-31-97, 6-30-97, and 9-30-97, respectively. 1,000 3-MOS 6-MOS 9-MOS DEC-31-1997 DEC-31-1997 DEC-31-1997 MAR-31-1997 JUN-30-1997 SEP-30-1997 PER-BOOK PER-BOOK PER-BOOK 453,025 456,082 456,926 120,683 121,443 117,798 86,170 84,700 90,158 12,633 13,810 13,666 0 0 0 672,511 676,035 678,548 58,052 58,251 58,462 31,788 32,856 34,036 112,688 111,977 113,754 202,528 203,084 206,252 18,000 18,000 18,000 20,831 20,831 20,831 164,862 162,726 162,687 800 2,400 4,400 0 0 0 16,400 25,800 24,700 48,076 46,449 43,905 0 0 0 0 0 0 0 0 0 201,014 196,745 197,773 672,511 676,035 678,548 94,289 185,385 287,243 5,631 7,142 10,953 74,548 155,847 243,952 80,179 162,989 254,905 14,110 22,396 32,338 1,122 2,825 5,397 15,232 25,221 37,735 4,542 9,138 13,867 10,690 16,083 23,868 589 1,179 1,769 10,101 14,904 22,099 5,309 10,637 16,058 4,187 8,414 12,679 16,080 25,519 42,872 0.87 1.29 1.90 0.87 1.29 1.90
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