-----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, HFEmd7Lq91wUfdvPb6RqE7mPOmJBQ/UBAd7G6x1VqYvVx4QlK6cMtbcheSqKryIp uyn8imJb3Vw8lWyw3o/9vw== 0000075129-97-000006.txt : 19970329 0000075129-97-000006.hdr.sgml : 19970329 ACCESSION NUMBER: 0000075129-97-000006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 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: 1934 Act SEC FILE NUMBER: 000-00368 FILM NUMBER: 97567584 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 1996 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, 1996 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. $365,961,842 as of February 28, 1997 Indicate the number of shares outstanding of each of the registrant's classes of Common Stock, as of the latest practicable date: 11,417,647 Common Shares ($5 par value) as of February 28, 1997 Documents Incorporated by Reference: 1996 Annual Report to Shareholders - Portions incorporated by reference into Parts I and II Proxy Statement dated March 14, 1997 - 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 Health Services, Manufacturing and Other Business Operations. Health Services Operations consists of certain businesses acquired beginning in 1993, that sell, service, lease and operate diagnostic medical imaging equipment and associated supplies and accessories. Manufacturing Operations includes businesses acquired beginning in 1990 in such areas as metal parts stamping and fabrication, agricultural equipment, and plastic pipe extrusion. 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. In February 1996, the Company's subsidiary, Mid-States Development, Inc. ("Mid-States"), acquired a Montana-based supplier of X-ray supplies and accessories. In April 1996, Mid-States acquired a mobile medical diagnostic services company located in Bemidji, Minnesota. In 1996, Mid-States also acquired four radio stations in the Fargo, North Dakota/Moorhead, Minnesota, market. The Company's telecommunications subsidiary, North Central Utilities, Inc. ("NCU"), acquired two small cable TV systems in 1996 that serve the communities of Milbank, South Dakota, and Carlos, Minnesota. The total acquisition price for all these businesses was $11,060,000. On January 2, 1997, NCU acquired The Peoples Telephone Co. of Bigfork ("Peoples") to be accounted for under the pooling-of-interests method. Peoples, with 1,903 access lines serving five communities in Northern Minnesota, had 1996 revenues of $1.6 million. 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 25 through 32 of the Company's 1996 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, Health Services, Manufacturing, 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 41 of the Company's 1996 Annual Report to Shareholders, filed as an Exhibit hereto. (c) Narrative Description of Business --------------------------------- ELECTRIC OPERATIONS ------------------- General - ------- The Company derived 55% of its consolidated operating revenues from the electric segment during 1996; 62% during 1995; and 69% during 1994. During 1996 the Company derived approximately 53.0% of its electric revenues from Minnesota, 39.3% from North Dakota, and 7.7% 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, 35.5% of 1996 electric revenue was derived from commercial customers, 33.5% from residential customers, 18.8% from industrial customers, and 12.2% from other sources, including municipalities, farms and power pools. No customer accounted for more than 10% of electric revenues in 1996. Power pool sales to other utilities, which accounted for 15.3% of total 1996 kwh sales, decreased from 25.3% in 1995. Activity in short-term energy sales is subject to change based on a number of factors and the Company is unable to predict the 1997 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 lived 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 1996 total customers had increased to 124,782. During 1996, the Company experienced a net increase of 711 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 business. 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 and a Notice of Proposed Rulemaking ("NOPR"). 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. Order 889 requires utilities to obtain 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 the wholesale marketing and transmission operation functions. The NOPR proposes that each public utility will replace the Open Access rule proforma tariff with a capacity reservation tariff by December 31, 1997. As of year-end 1996, the company had taken the necessary steps to comply with these orders. 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 generation, transmission, distribution 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 is establishing 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. 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 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 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, 1996, the Company had base load net plant capability totaling 552,134 kw, consisting of 241,256 kw from the Big Stone Plant (the Company's 53.9% share), 156,203 kw from the Hoot Lake Plant, 149,450 kw from the Coyote Plant (the Company's 35% share), and under contract 5,225 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 91,123 kw, and 4,353 kw of hydroelectric capability. During 1996, the Company generated about 61% 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. In addition, for the 1996-1997 winter season, the Company has 50,000 kw capacity available for purchase from other utilities. The Company also has agreements to purchase 60,000 kw of capacity for the summers of 1997- 1999 and 50,000 kw of year-round capacity for the May 1, 1997 through April 30, 2005 period. 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"). On November 1, 1996, the MAPP Agreement expired and was replaced by the MAPP Restated Agreement which resulted in a new organization. A Regional Transmission Group ("RTG") and power and energy market functions were added. RTGs, as proposed by the FERC, coordinate planning of transmission grids on regional levels. Through its Restated Agreement, MAPP opened its membership to organizations outside the Upper Midwest boundaries first established in 1972. The objective of MAPP is to coordinate planning and operation of generating 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 Company traditionally experiences its peak system demand during the winter season. For the calendar year 1996, the Company established a new system peak demand of 614,961 kw on February 1, 1996. The highest previous sixty-minute peak demand was 594,350 kw on December 11, 1995. Taking into account additional capacity available to it in February 1996 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 723,875 kw. In 1997 the Company expects moderate growth in peak demand as compared to 1996. 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 1997 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. 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 1996 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 ------- ------------ ---------- Lignite Coal . . . . . . . . . . . . . 1,630,601 61.9% Subbituminous Coal . . . . . . . . . . 981,841 37.3 Hydro . . . . . . . . . . . . . . . . . 21,890 .8 Oil . . . . . . . . . . . . . . . . . . 1,073 - --------- ----- Total . . . . . . . . . . . . . . . . . 2,635,405 100.0% ========= ===== 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 replaced the Big Stone Plant's coal stockpile in 1995 with subbituminous coal from Kennecott Energy's Spring Creek Mine. 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. 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 steel coal cars owned by the plant's joint owners were sold in September 1996. 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 new coal cars and new coal and freight agreements result in lower delivered coal prices at the Big Stone Plant being 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. Coyote Plant is a mine-mouth plant located in western North Dakota. There are no coal transportation costs, giving Coyote Plant the lowest delivered fuel costs on a per tonnage basis as compared to other Company units. North Dakota imposes a severance tax on lignite at a flat rate of $.75 per ton, plus an additional $.02 per ton which is deposited in a lignite research fund. The lignite coal used by the Company at its plants is surface mined. The North Dakota laws relating to surface mining and the Federal Surface Mining Control and Reclamation Act will continue to adversely affect the price of lignite to the Company. Any changes in fuel costs result in adjustments to retail rates through the provisions in the Company's rate schedules. The average cost of coal consumed (including handling charges to the plant sites) per million BTU for each of the three years 1996, 1995, and 1994, was $.944, $.969, and $1.003, 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 1996, 3.0% of total fuel burned at Big Stone Plant, and expected to be burned in 1997, is insignificant when compared to the total annual coal consumption at Big Stone Plant. General Regulation - ------------------ The Company is subject to electric rate regulation as follows: Year Ended December 31, 1996 --------------------- % of Electric % of kwh Rates Regulation Revenues Sales ----- ---------- -------- -------- MN retail sales MN Public Utilities Commission 48.6% 45.2% ND retail sales ND Public Service Commission 38.3 32.7 SD retail sales SD Public Utilities Commission 7.6 6.5 Transmission & sales FERC for resale 5.5 15.6 ----- ----- 100.0% 100.0% ===== ===== The following table summarizes the electric rate proceedings with the Minnesota and the South Dakota Public Utilities Commissions, the North Dakota Public Service Commission, and the Federal Energy Regulatory Commission since January 1, 1992: Increase (Decrease) Granted ------------------- Commission Date Amount % - ---------- ---- ---------- ------ (Thousands) Minnesota Last Proceeding was July 1, 1987 North Dakota (1)September 9, 1992 ($1,000) (1.5%) (2)September 22, 1993 ($ 449) (0.6%) South Dakota Last Proceeding was November 1, 1987 FERC Last Proceeding was July 1, 1987 (1) A voluntary settlement agreement reached between the Company and the North Dakota Commission pursuant to which the Company made a refund of $1,000,000 to its North Dakota customers. This settlement does not require a permanent reduction in rates charged by the Company to customers in North Dakota. (2) An agreement for incentive regulation reached between the Company and the North Dakota Commission 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. In 1994 the Company filed a petition with the Minnesota Public Utilities Commission 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 Commission 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 Commission, resulting in costs of approximately $2,200,000 each year for three years which must be absorbed in current rates starting in 1995. Under Minnesota law, the Minnesota Commission 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 Commission 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 Commission, and rate base and expense items allowed by a currently effective Commission order. In addition, if the Commission 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 Commission 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 Commission, and the Commission 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 North Dakota Public Service Commission become effective 30 days after the date of filing unless suspended by the Commission. Within seven months after the date of suspension, the North Dakota Commission must act on the request, and during the period of consideration by the Commission a suspended rate can be implemented only with the approval of the Commission. 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 South Dakota Public Utilities Commission. The Commission 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 Commission finds that a longer time is required, in which case the Commission 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 Commission has made a determination concerning any previously filed rate change. In the event that a requested rate change is suspended by the Commission, such requested rate change can be implemented by the public utility six months after the date of filing (unless previously authorized by the Commission), subject to refund with interest. The Company's wholesale power sales and transmission rates are subject to the jurisdiction of the Federal Energy Regulatory Commission 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 the Mid-Continent Area Power Pool ("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 Minnesota Public Utilities Commission has established by regulation a forward test year procedure. North Dakota law allows a forward test year. The South Dakota Public Utilities Commission 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. Under the Minnesota Public Utilities Act, the Company is subject to the jurisdiction of the Minnesota Public Utilities Commission ("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 jurisdictional utilities. The most recent plan was submitted to the MPUC in 1996. The Company is presently awaiting a decision on that plan. 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. The Company is subject to the jurisdiction of the Public Service Commission of North Dakota with respect to rates, services, certain issuances of securities and other matters. The North Dakota Energy Conversion and Transmission Facility Siting Act grants the North Dakota Commission 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 North Dakota Commission annually. The South Dakota Public Utilities Act subjects the Company to the jurisdiction of the South Dakota Public Utilities Commission 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 South Dakota Commission 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. The state utility commissions in Minnesota and North Dakota are currently investigating the impact of electric utility industry restructuring and the prospects for reregulation and retail competition in their respective jurisdictions. To date, the MPUC and the NDPSC have issued no new policies or rulemakings regarding this issue. The South Dakota PUC has not taken any action with regards to industry restructuring or retail competition. The Company is also subject to regulation by the Federal Energy Regulatory Commission, 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. 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, 1996, approximately $3,059,000 for environmental control facilities (excluding allowance for funds used during construction). Included in the 1997-2001 construction budget are approximately $3,079,000 for environmental improvements for existing and new facilities, including $504,000 for 1997. 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 will be imposed in two phases, the first phase in 1995 and the second phase 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 new 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 by burning low sulfur subbituminous coal. 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") has filed a Petition for Review in the Court of Appeals for the District of Columbia. As a member of UARG, the Company is participating in the Petition. The Company is currently evaluating the Big Stone and Coyote NOx emissions with respect to the December 19, 1996 rules. Existing emissions monitoring data indicates that Coyote meets the emission requirements. At Big Stone, emissions are currently above the required level. During 1997, the Company will be conducting tests at Big Stone to determine if emissions can be reduced through modifications to existing equipment. Future modifications may be required at an undetermined cost, since compliance costs will depend on the regulations that are ultimately adopted and the cost of available technologies. 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 1992 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 3,493 kw at December 31, 1996). 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 1996 the Company invested approximately $36,221,000 (including allowance for funds used during construction) for additions to its electric utility properties. During the five years ended December 31, 1996, the Company had gross electric property additions, including construction work in progress, of approximately $135,666,000 and gross retirements of approximately $36,859,000. The Company estimates that during the five years 1997 through 2001 it will invest for electric utility construction approximately $127,000,000 (including allowance for funds used during construction). 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 1997 through 2001 will be for work related to the Company's transmission and distribution system. Franchises - ---------- At December 31, 1996, the Company had franchises in all 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. HEALTH SERVICES OPERATIONS -------------------------- General - ------- Health Services Operations consists of businesses acquired beginning in 1993 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. Two mobile diagnostic medical services companies were acquired in 1996.. The Company derived 17% of its consolidated operating revenues from this segment in 1996, 16% in 1995, and 16% in 1994. 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 subsidiaries are DMS Leasing, Inc. and Radiographic Supply, Inc. In 1994 DMS entered into a five-year dealer agreement with Philips, which can be terminated by Philips upon eighteen months' notice and certain other circumstances. DMS is also a supplier for Kodak, DuPont, 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 also offers, through its subsidiaries, mobile CT and MRI service in the Upper Midwest and Central United States. DMS Imaging, Inc., a subsidiary of DMS located in Fargo, ND and Bemidji MN, provides mobile diagnostic medical services, including use of diagnostic nuclear medicine, diagnostic ultrasound, diagnostic mammography, computerized axial tomography, and magnetic resonance imaging, and is a distributor of x-ray supplies and accessories to health care facilities throughout the Midwest and Pacific Northwest. Northern Medical Imaging, Inc., acquired in April 1996 and Imaging Plus, Inc. were combined in 1996 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. 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 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 1996 capital expenditures of approximately $16,000,000 were made in Health Services. These capital expenditures were primarily for diagnostic imaging equipment purchased to service mobile imaging routes. Total capital expenditures during the five-year period 1997-2001 are estimated to be $18,000,000. MANUFACTURING OPERATIONS ------------------------ General - ------- Manufacturing Operations consists of businesses involved in the production of agricultural equipment, plastic pipe extrusion, and metal parts stamping and fabrication. Initial acquisitions of businesses in this segment were made in 1990. No additional companies were acquired in 1996. The Company derived 16% of its consolidated operating revenues from this segment in 1996, 12% in 1995, and 5% in 1994. The following is a brief description of each of these businesses: Precision Machine of North Dakota, Inc., located in West Fargo, ND, uses computer numerically controlled lathes and milling machines to produce 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 numerically 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. 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. Each of the subsidiaries described above under Health Services and Manufacturing Operations are owned by Mid-States Development, Inc., which is a wholly owned subsidiary of Minnesota Dakota Generating Company ("MDG"). MDG is a wholly owned subsidiary of the Company. 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 1996 capital expenditures of approximately $4,600,000 were made in Manufacturing. Total capital expenditures for Manufacturing during the five-year period 1997-2001 are estimated to be approximately $12,000,000. 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. In 1996 Mid-States Development, Inc. acquired four radio stations in the Fargo, North Dakota/Moorhead, Minnesota market area. The Company's telecommunications subsidiary, North Central Utilities, Inc. ("NCU"), acquired two small cable TV systems. On January 2, 1997, NCU acquired The Peoples Telephone Co. of Bigfork in a pooling-of-interests transaction. The Company derived 12% of its consolidated operating revenues from these diversified businesses during 1996, 10% in 1995, and 10% during 1994. 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, constructs and maintains overhead and underground electric, telecommunications, and cable television lines. KFGO, Inc., located in Fargo, ND, operates an AM and FM commercial radio station. MSB, Inc., located in Fargo, ND, operates one AM and three 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. Quadrant continues to provide primary service to one of its two steam customers under an agreement which can be terminated by either party upon one year's prior written notice, and is currently providing backup service to its other steam customer under an agreement that commenced on June 1, 1996 and terminates on May 31, 1998, subject to earlier termination by either party upon 90 days' written notice. Quadrant also continues to burn municipal solid waste for three Minnesota counties under a contract extension which expires April 1, 1997. Two Minnesota counties, representing about 40% of Quadrant's processing capacity, did not renew or extend their contracts for waste incineration which expired in September 1996. Quadrant is in the process of negotiating new waste incineration agreements with the remaining counties and is pursuing additional incineration contracts. The Company has invested approximately $3.2 million in plant and equipment in Quadrant. Quadrant represented approximately $2.5 million in sales for 1996 and an insignificant impact on consolidated operating income for the Company. The outcome of current incineration contract negotiations could result in an impairment issue under SFAS 121. The Company is working to obtain prospects for new incineration contracts. The price ranges being considered for the contracts result in a wide variance in estimates of future cash flows, making it difficult to accurately calculate an impairment value at this time. See "Environmental Regulation" below. Midwest Information Systems, Inc.("MIS"), headquartered in Parkers Prairie, MN, owns two operating telephone companies serving over 4,000 customers and a cable television company serving approximately 600 customers. MIS is also involved in long-distance transport, 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 North Central Utilities, Inc., a subsidiary of MDG formed for the purpose of acquiring utility companies. Each of the other subsidiaries described above are owned by Mid-States Development, Inc., 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 Minnesota 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 contacts 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 1996 capital expenditures of approximately $5,000,000 were made in Other Business Operations. Capital expenditures during the five-year period 1997-2001 are estimated to be approximately $12,000,000 for Other Business Operations. FINANCING --------- The Company estimates that funds internally generated, 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 the majority of its estimated 1997-2001 consolidated capital project expenditures. Additional short-term or long-term financing will be required in the period 1997-2001 in connection with a portion of the Company's estimated capital project expenditures, maturity of First Mortgage Bonds ($18,800,000 in 1997) and a Long-Term Lease Obligation ($2,200,000 in 1998), 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, 1996, the Company had unutilized net fundable property available for the issuance of more than $36,000,000 principal amount of additional First Mortgage Bonds and also was entitled to issue in excess of $102,000,000 principal amount of additional Bonds on the basis of 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, 1996, the Company and subsidiaries had unused credit lines totaling $21,700,000. The Company had $25,600,000 in short-term borrowings as of December 31, 1996. The subsidiary companies had $7,000,000 of credit lines in use at December 31, 1996, 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 1,629 full-time employees at December 31, 1996. A total of 505 employees are represented by local unions of the International Brotherhood of Electrical Workers, of which 430 are employees of the Electrical 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 30 through 32 of the Company's 1996 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 Station, 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, 1996, 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; 573 miles of 115 kv lines; and 4,272 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. Item 3. LEGAL PROCEEDINGS ----------------- Not Applicable. 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, 1996. Item 4A. EXECUTIVE OFFICERS OF THE REGISTRANT (AS OF MARCH 1, 1997) ---------------------------------------------------------- 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 (57) 4/8/91 Present: Chairman, President and Chief Executive Officer Andrew E. Anderson (57) 4/8/96 Present: Vice President, Finance and Treasurer 4/10/95 Vice President, Finance Prior to 4/10/95 Controller Marlowe E. Johnson (52) 4/12/93 Present: Vice President, Customer Service, North Dakota Prior to 4/12/93 Division Manager, Jamestown Douglas L. Kjellerup (55) 4/12/93 Present: Vice President, Marketing and Development Prior to 4/12/93 Vice President, Planning and Development LeRoy S. Larson (51) 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 (58) 4/8/96 Present: Senior Vice President, Corporate Services Prior to 4/8/96 Vice President, Corporate Services Jay D. Myster (58) 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 (47) 4/10/95 Present: Vice President, Electrical Prior to 4/10/95 Director, Information Services Ward L. Uggerud (47) 4/10/89 Present: Vice President, Operations Jeffrey J. Legge(40) 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 "Stock listing" on Page 52, to "Selected consolidated financial data" on Page 24 and to "Quarterly information" on Page 49, of the Company's 1996 Annual Report to Shareholders, filed as an Exhibit hereto. In the April 1, 1996, acquisition of Northern Medical Imaging, Inc. ("NMI"), a Company subsidiary exchanged 107,633 shares of the Company's common stock acquired on the open market and $1,000,000 for all of the outstanding voting common shares of NMI. The issuance of shares of common stock 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. Item 6. SELECTED FINANCIAL DATA ----------------------- The information required by this Item is incorporated by reference to "Selected consolidated financial data" on Page 24 of the Company's 1996 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 25 through 32 of the Company's 1996 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 49 and the Company's audited financial statements on Pages 33 through 49 of the Company's 1996 Annual Report to Shareholders excluding "Report of Management" on Page 33, 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 14, 1997. 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 14, 1997. 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 14, 1997. 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: No reports on Form 8-K have been filed during the quarter ended December 31, 1996. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. OTTER TAIL POWER COMPANY By A. E. Anderson ------------------------------- A. E. Anderson Vice President, Finance and Treasurer Dated: March 28, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: 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 A. E. Anderson (principal accounting officer) ) --------------------------- ) A. E. Anderson ) Pro Se and Attorney-in-Fact ) Dated March 28, 1997 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, 1996 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, 1996: Page in Annual Report to Shareholders ------------ Financial Statements: Independent Auditors' Report ........................................ 33 Consolidated Balance Sheets, December 31, 1996 and 1995 ........ 34 & 35 Consolidated Statements of Income for the Three Years Ended December 31, 1996 ............................................. 36 Consolidated Statements of Retained Earnings for the Three Years Ended December 31, 1996 ................................. 36 Consolidated Statements of Cash Flows for the Three Years Ended December 31, 1996 ............................................. 37 Consolidated Statements of Capitalization, December 31, 1996 and 1995 .......................................... 38 Notes to Consolidated Financial Statements ....................... 39-49 Selected Consolidated Financial Data for the Five Years Ended December 31, 1996 ............................................. 24 Quarterly Data for the Two Years Ended December 31, 1996 ................................................... 49 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, 1996 Previously Filed ------------------------- As Exhibit File No. No. -------- ------- 3-A --Restated Articles of 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-6 --Thirty-First Supplemental Indenture dated as of February 1, 1973. 4-D-4 33-32499 4-D-7 --Thirty-Second Supplemental Indenture dated as of January 18, 1974. 4-D-5 2-66914 2-L-13 --Thirty-Ninth Supplemental Indenture dated as of October 15, 1979. 4-D-6 33-46070 4-D-11 --Forty-Second Supplemental Indenture dated as of December 1, 1990. 4-D-7 33-46070 4-D-12 --Forty-Third Supplemental Indenture dated as of February 1, 1991. 4-D-8 33-46070 4-D-13 --Forty-Fourth Supplemental Indenture dated as of September 1, 1991 4-D-9 8-K dated 4-D-15 --Forty-Fifth Supplemental 7/24/92 Indenture dated as of July 1, 1992 4-D-10 8-A dated 1 --Rights Agreement, dated as of 1/28/97 January 28, 1997, between the Company and Norwest Bank Minnesota, National Association 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 Association 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 Integrated Transmission Agreement between Cooperative Power Association and the Company. 10-C-1 2-55813 5-E --Contract dated July 1, 1958, between Central Power Electric 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 superseded 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 Supplement Seven. 10-C-5 10-K for year 10-C-5 --Amendment No. 3 dated ended 12/31/92 June 18, 1992, to Supplement Seven. 10-C-6 10-K for year 10-C-6 --Amendment No. 4 dated ended 12/31/93 January 18, 1994, to Supplement 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. 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 Northwestern Public Service Company (dated as of January 7, 1970). 10-F-1 10-K for year 10-F-1 --Letter of Intent for purchase ended 12/31/89 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). 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-G-3 10-Q for quarter 19-D --Big Stone Plant Tire Derived ended 6/30/93 Fuel Agreement by and between the Company and BFI Tire Recyclers of Minnesota (dated as of November 2, 1992). 10-G-4 10-Q for quarter 19-E --Big Stone Plant Tire Derived ended 6/30/93 Fuel Agreement by and between the Company and National Tire Services (dated as of November 2, 1992). 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. 10-H-4 10-K for year 10-H-4 --Agreement dated as of Sept. 5, 1985, ended 12/31/92 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 ended 12/31/92 March 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. 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 --Second Amendment dated as of 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 ended 12/31/94 Supplemental Retirement Plan, as amended.** 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 1996 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. - ------------ *Confidential information has been omitted from such Exhibit and filed separately with the Commission pursuant to a confidential treatment request under Rule 24b-2. ** Management contract or compensatory plan or arrangement required to be filed pursuant to Item 601(b)(10)(iii)(A) of Regulation S-K. EX-3 2 RESTATED ARTICLES RESTATED ARTICLES OF INCORPORATION OF OTTER TAIL POWER COMPANY (restated as of October 17, 1988) ARTICLE I. The name of the corporation shall be Otter Tail Power Company. ARTICLE II. The purposes of the corporation shall be as follows: (a) To generate, produce, buy or in any manner acquire, and to sell, dispose of, and distribute electricity for light, heat and power and other purposes, and to carry on the business of furnishing, supplying, manufacturing, and selling light, heat, power, gas, water, and steam, and any and all business incidental thereto; and to build, construct, develop, improve, buy, acquire by condemnation or otherwise, hold, own, lease, maintain and operate plants, facilities, systems, and works for the manufacture, generation, production, accumulation, transmission, and distribution of electricity, gas, water, and steam, and to exercise rights of condemnation and eminent domain in connection with the doing of any of its purposes as herein set forth so far as may be permissible by law. (b) To produce, mine, buy, sell, store, market, deal in, and prospect for, coal, oil and minerals of all kinds and the products and by-products thereof. (c) To manufacture, buy, sell, trade, and deal in goods, wares, merchandise, property, and commodities of any and every class and description. (d) To purchase, acquire, and lease, and to sell, lease, and dispose of water, water rights, and power privileges for power, light, heat, mining, milling, irrigation, agricultural, domestic or any other use or purpose. (e) To acquire, hold, mortgage, pledge, or dispose of the shares, bonds, securities, and other evidences of indebtedness of any domestic or foreign corporation. (f) To endorse or guarantee the promissory notes, checks, drafts, evidences of indebtedness or obligations of whatsoever nature of any corporation, domestic or foreign, of which the corporation shall own or control, directly or indirectly a majority of the stock then entitled to elect directors, or a majority thereof. (g) To do or perform any and all lawful business necessary, essential or expedient to the proper conduct of any of the purposes aforesaid. ARTICLE III. The period of duration of the corporation shall be perpetual. ARTICLE IV. The location and post-office address of the registered office of the corporation in Minnesota is 215 Cascade Street South, Fergus Falls, Minnesota 56537. ARTICLE V. The total authorized number of shares of the corporation is 17,500,000, divided into three classes; namely, 1,500,000 Cumulative Preferred Shares without par value (the "Cumulative Preferred Shares"); 1,000,000 Cumulative Preference Shares without par value (the "Cumulative Preference Shares"); and 15,000,000 Common Shares of the par value of $5 per share (the "Common Shares"). No fractional shares of any class or series shall be issued by the corporation. ARTICLE VI. The designations, relative rights, voting power, preferences and restrictions of the Cumulative Preferred Shares, the Cumulative Preference Shares and the Common Shares, respectively, shall be as set forth in Division I through Division VI, inclusive, of this Article VI. The term "subordinate shares," when hereinafter in this Article VI used with reference to shares junior to the Cumulative Preferred Shares, means the Cumulative Preference Shares, the Common Shares and shares of any other class, which may hereafter be authorized, ranking junior to the Cumulative Preferred Shares with respect to the payment of dividends or the distribution of assets; and when hereinafter used with reference to shares junior to the Cumulative Preference Shares, means the Common Shares and shares of any other class, which may hereafter be authorized, ranking junior to the Cumulative Preference Shares with respect to the payment of dividends or the distribution of assets. DIVISION I Provisions Relating to Cumulative Preferred Shares A. Issue in Series. The Cumulative Preferred Shares may be issued from time to time in one or more series, each of which series shall have such designation and such relative rights, voting power, preferences and restrictions as are hereinafter provided and, to the extent hereinafter permitted, as are determined and stated by the Board of Directors in the resolution or resolutions authorizing the creation of shares of such series. All Cumulative Preferred Shares shall be of equal rank and shall be identical, except in respect of their relative voting power (determined as hereinafter provided in Division IV) and the particulars that may be determined by the Board of Directors as hereinafter provided; and each share of each series shall be identical in all respects with the other shares of such series, except as to the dates from which dividends thereon shall be cumulative. Cumulative Preferred Shares shall be issued only as fully paid and nonassessable shares. Subject to the provisions of the last paragraph of this Subdivision A, authority is hereby expressly granted to the Board of Directors to authorize the issuance of Cumulative Preferred Shares in one or more series, and to determine and state, by the resolution or resolutions authorizing the creation of each series: (i) the designation of the series and the number of shares which shall constitute such series, which number may be altered from time to time by like action of the Board of Directors in respect of shares then unallotted; (ii) the annual rate of dividends payable on shares of such series; (iii) the price or prices per share at which the shares of such series shall be redeemable; (iv) the amount payable on shares of such series in the event of any dissolution, liquidation or winding up of the affairs of the corporation, which amount may differ in the case of a voluntary or involuntary dissolution, liquidation or winding up of such affairs; (v) the conversion rights, if any, with respect to the conversion of shares of such series into Common Shares of the corporation; and (vi) the sinking or purchase fund provisions, if any, for the mandatory redemption or purchase of shares of such series. In the case of each series of Cumulative Preferred Shares created after April 1, 1977, the amount (in addition to accrued and unpaid dividends, if any) which the holders of shares of such series shall be entitled to receive in the event of any dissolution, liquidation or winding up of the affairs of the corporation which shall be involuntary shall be equal to the gross consideration received by the corporation upon the issuance thereof (without regard to any premium received or any underwriting discount or commission, private placement fee or other expense incurred by the corporation in connection with the issuance thereof). B. Dividends. Before any dividends on any subordinate shares shall be paid or declared and set apart for payment, the holders of the Cumulative Preferred Shares of each series shall be entitled to receive, when and as declared by the Board of Directors, out of any funds legally available for such purpose, cash dividends at the annual rate for such series theretofore fixed by the Board of Directors as hereinbefore provided, and no more, payable quarterly on such dates as may be fixed in the resolution or resolutions adopted by the Board of Directors authorizing the creation of such series. Such dividends shall be paid to shareholders of record on the respective dates, not exceeding twenty (20) days prior to such payment dates, fixed by the Board of Directors for such purpose. Such dividends shall be cumulative, in the case of shares of each particular series: (1) if issued prior to the record date for the first dividend on shares of such series, then from and including the date fixed for such purpose by the Board of Directors in the resolution or resolutions creating such series; (2) if issued during the period commencing immediately after the record date for a dividend on shares of such series and terminating at the close of the payment date for such dividend, then from and including such last mentioned dividend payment date; (3) otherwise from and including the quarterly dividend payment date next preceding the date of issue of such shares. No dividend shall be paid, or declared and set apart for payment, upon any Cumulative Preferred Shares of any series for any quarterly dividend period unless at the same time a like proportionate dividend for the same or comparable quarterly period, ratable in proportion to the respective annual dividend rates fixed therefor, shall be paid, or declared and set apart for payment, upon all Cumulative Preferred Shares of all series then issued and outstanding. In no event shall any dividend be paid or declared, nor shall any distribution be made, on any subordinate shares, nor shall any subordinate shares be purchased, redeemed or otherwise acquired by the corporation for value, nor shall any moneys be paid to or set aside or made available for a purchase fund or sinking fund for the purchase or redemption of any subordinate shares, unless (i) all dividends on the Cumulative Preferred Shares of all series for all past quarterly dividend periods and for the then current quarterly dividend period shall have been paid or declared and a sum sufficient for the payment thereof set apart for payment; and (ii) the corporation shall not be in default or deficient under any requirement of a sinking or purchase fund established with respect to outstanding Cumulative Preferred Shares of any series for any period then elapsed. Subject to the provisions of this Article VI, and not otherwise, dividends may be declared by the Board of Directors and paid from time to time, out of any funds legally available therefor, upon the then outstanding subordinate shares, and the holders of the Cumulative Preferred Shares shall not be entitled to participate in any such dividends. C. Redemption of Cumulative Preferred Shares. Subject to the limitations stated in Subdivision D of this Division I, the Cumulative Preferred Shares of any or all series may be redeemed, as a whole at any time or in part from time to time, at the option of the corporation by resolution of the Board of Directors, at the applicable redemption price for the shares of such series as determined by the Board of Directors in the resolution or resolutions authorizing the creation of such series, together with an amount (hereinafter referred to as "accrued dividends to the redemption date") in the case of each share, computed at the annual dividend rate for the series of which the particular share is a part, from and including the date on which dividends on such shares become cumulative to and including the date of redemption, less the aggregate amount of all dividends which have theretofore been paid thereon or which have been declared thereon and for which moneys for payment have been set apart and remain available for payment. To the extent that Cumulative Preferred Shares of any series are redeemed through the operation of a sinking or purchase fund provided for in the resolution or resolutions of the Board of Directors creating such series, such shares shall be redeemed by resolution of the Board of Directors at the time and at the applicable redemption price specified for redemption of shares of such series pursuant to such sinking or purchase fund by the resolution or resolutions creating such series. If less than all the outstanding Cumulative Preferred Shares of any series are to be redeemed, the shares to be redeemed shall be determined by lot in such manner as the Board of Directors may prescribe. Notice of every redemption of Cumulative Preferred Shares shall be mailed, addressed to the holders of record of the shares to be redeemed at their respective addresses as they shall appear on the stock books of the corporation, not less than thirty (30) days and not more than sixty (60) days prior to the date fixed for redemption. If notice of redemption shall have been duly given as aforesaid, and if, on or before the redemption date specified in the notice, all funds necessary for the redemption shall have been deposited in trust with a bank or trust company in good standing and doing business at any place within the United States, having capital, surplus and undivided profits aggregating at least $1,000,000 and designated in the notice of redemption, for the pro rata benefit of the holders of the shares so called for redemption, so as to be and continue to be available therefor, then from and after the date of such deposit, notwithstanding that any certificate for Cumulative Preferred Shares so called for redemption shall not have been surrendered for cancellation, the shares represented thereby shall no longer be deemed outstanding, the dividends thereon shall cease to accumulate from and after the date fixed for redemption, and all rights with respect to the Cumulative Preferred Shares so called for redemption shall forthwith on the date of such deposit cease and terminate, except only the right of the holders thereof to receive the redemption price of the shares so redeemed, including accrued dividends to the redemption date, but without interest. Any funds deposited by the corporation pursuant to this paragraph and unclaimed at the end of six (6) years after the date fixed for redemption shall be repaid to the corporation upon its request expressed in a resolution of its Board of Directors, after which repayment the holders of the shares so called for redemption shall look only to the corporation for the payment thereof. All Cumulative Preferred Shares converted, redeemed or purchased voluntarily or pursuant to any sinking fund or purchase fund for the mandatory redemption or purchase of shares shall be retired and cancelled and shall have the status of authorized but unissued Cumulative Preferred Shares of the corporation and may be reissued in the same manner as authorized but unissued Cumulative Preferred Shares undesignated as to series. D. Limitations on Purchase and Redemption of Cumulative Preferred Shares. No Cumulative Preferred Shares of any series shall be purchased, redeemed or otherwise acquired by the corporation for value, nor shall any moneys be paid to or set aside or made available for a purchase fund or sinking fund for the purchase or redemption of Cumulative Preferred Shares of any series, unless all dividends on the Cumulative Preferred Shares of all series for all past quarterly dividend periods and for the current quarterly period shall have been paid or declared and a sum sufficient for the payment thereof set apart for payment, except in the event all of the Cumulative Preferred Shares shall be called for redemption. E. Liquidation Preferences. In the event of any dissolution, liquidation or winding up of the affairs of the corporation, before any distribution or payment shall be made to the holders of any subordinate shares, the holders of the shares of each series of Cumulative Preferred Shares shall be entitled to be paid in full the respective amounts fixed by the Board of Directors in the resolution or resolutions authorizing the issue of such series, together with a sum, in the case of each share, computed at the annual dividend rate for the series of which the particular share is a part, from the date on which dividends on such shares became cumulative to and including the date fixed for such distribution or payment, less the aggregate amount of all dividends which have theretofore been paid thereon or which have been declared thereon and for which moneys have been set apart and remain available for payment. If such distribution or payment shall have been made to the holders of the Cumulative Preferred Shares, or moneys made available for such payment in full, the remaining assets and funds of the corporation shall be distributed among the holders of the classes of subordinate shares, according to their respective rights and preferences and in each case according to their respective shares. If the assets available are not sufficient to pay in full the amounts so payable to the holders of all outstanding Cumulative Preferred Shares, the holders of all series of such shares shall share ratably in any distribution of assets in proportion to the full amounts to which they would otherwise be respectively entitled. The consolidation or merger of the corporation into or with any other corporation or corporations pursuant to the statutes of the State of Minnesota providing for consolidation or merger shall not be deemed a liquidation, dissolution or winding up of the affairs of the corporation within the meaning of any of the provisions of this Subdivision E. F. Voting and Restrictions on Certain Corporate Action. The holders of the Cumulative Preferred Shares shall not be entitled to vote at any meetings of the shareholders of the corporation, except as required by law or as hereinafter otherwise provided in this Subdivision F and in Division IV: (1) So long as any Cumulative Preferred Shares of any series are outstanding, the corporation shall not without the consent (given by vote at a special meeting of shareholders called for the purpose) of the holders of at least two-thirds (2/3) of the aggregate voting power (determined as hereinafter provided in Division IV) vested in the Cumulative Preferred Shares of all series then outstanding: (a) Create, authorize or issue any shares of any class ranking prior to, or any securities of any kind or class convertible into shares of any class ranking prior to, the Cumulative Preferred Shares as to dividends or assets; or (b) Amend the Articles of Incorporation so as to affect adversely any of the preferences or other rights of the holders of the Cumulative Preferred Shares, provided, however, that if any such amendment would affect adversely the holders of one or more, but not all, of the series of Cumulative Preferred Shares at the time outstanding, consent only of the holders of at least two-thirds (2/3) of the aggregate voting power (determined as hereinafter provided in Division IV) vested in the shares of each series so adversely affected shall be required. (2) So long as any Cumulative Preferred Shares of any series are outstanding, the corporation shall not without the consent (given by vote at a special meeting of shareholders called for the purpose) of the holders (i) of at least a majority of the aggregate voting power (determined as hereinafter provided in Division IV) vested in the Cumulative Preferred Shares of all series then outstanding, or (ii) in case of the negative vote at such meeting of the holders of more than one-fourth (1/4) of the aggregate voting power (determined as hereinafter provided in Division IV) vested in the Cumulative Preferred Shares of all series then outstanding, of at least two-thirds (2/3) of aggregate voting power (determined as hereinafter provided in Division IV) vested in the Cumulative Preferred Shares of all series then outstanding: (a) Increase the authorized number of Cumulative Preferred Shares, or create, authorize or issue any shares of any class ranking on a parity with the Cumulative Preferred Shares as to dividends or assets, or any securities of any kind or class convertible into Cumulative Preferred Shares or shares of any class on a parity with the Cumulative Preferred Shares; or (b) Issue any Cumulative Preferred Shares of any series if as a result thereof more than 60,000 Cumulative Preferred Shares of all series will then be outstanding, unless: (i) The corporation's "Adjusted Income Available for Interest," as hereinafter defined, shall be at least equal to one-and-one-half (1- 1/2) times the corporation's "Adjusted Interest and Preferred Charges," as hereinafter defined; and (ii) The corporation's "Adjusted Income Available for Preferred Dividends," as hereinafter defined, shall be at least equal to two-and-one- half (2-1/2) times the corporation's "Adjusted Preferred Charges," as hereinafter defined; and (iii) The corporation's "Common Share Equity," as hereinafter defined, shall equal at least one-fourth (1/4) of the corporation's "Total Capitalization," as hereinafter defined; or (c) Declare, pay or set apart for payment any dividend on any subordinate shares, or purchase, redeem or otherwise acquire for value any subordinate shares, or pay or set aside or make available any moneys for a purchase fund or sinking fund for the purchase or redemption of any such subordinate shares, unless after giving effect to the payment of such dividend or such purchase, redemption or other acquisition of such payment or setting aside of moneys in a purchase fund or sinking fund, (i) The "Common Share Equity," as hereinafter defined, shall equal at least one- fourth (1/4) of the "Total Capitalization," as hereinafter defined; and (ii) The earned surplus of the corporation shall be not less than $831,398. (d) Consolidate or merge into or with any other corporation or corporations pursuant to the statutes of the State of Minnesota providing for consolidation or merger, unless, immediately after such consolidation or merger shall become effective: (i) The Cumulative Preferred Shares of the corporation outstanding immediately prior to such consolidation or merger shall remain outstanding or be constituted as shares of the corporation resulting from such consolidation or merger in the same number and with the same relative rights, voting power, preferences and restrictions as theretofore, the authorized number thereof shall not be increased, there shall be no shares of the resulting corporation outstanding or authorized ranking prior to or on a parity with the Cumulative Preferred Shares, except shares of the corporation outstanding or authorized immediately prior to such consolidation or merger, and the indebtedness for borrowed money of the resulting corporation immediately after such consolidation or merger shall be no greater than the indebtedness for borrowed money of the corporation immediately preceding such consolidation or merger; or (ii) (aa) The "Adjusted Income Available for Interest," as hereinafter defined, of the resulting corporation shall be at least equal to one-and-one-half (1-1/2) times its "Adjusted Interest and Preferred Charges," as hereinafter defined; and (bb) The "Adjusted Income Available for Preferred Dividends," as hereinafter defined, of the resulting corporation shall be at least equal to two-and-one-half (2-1/2) times its "Adjusted Preferred Charges," as hereinafter defined; and (cc) The "Common Share Equity," as hereinafter defined, of the resulting corporation shall equal at least one-fourth (1/4) of its "Total Capitalization," as hereinafter defined. (e) Sell, lease or exchange all or substantially all of its property and assets, unless, after the completion of such transaction, the fair value of the assets of the corporation shall at least equal the preference on voluntary liquidation of all Cumulative Preferred Shares of all series then outstanding and of all shares then outstanding of a class on parity with the Cumulative Preferred Shares, after first deducting an amount equal to all then existing indebtedness of the corporation and an amount equal to the preference on voluntary liquidation of all shares ranking prior to the Cumulative Preferred Shares. (3) For the purposes of the foregoing provisions of this Subdivision F: (a) The term "Adjusted Income Available for Interest" shall mean the gross income of the corporation for a period of twelve (12) consecutive calendar months selected by the corporation out of the fifteen (15) calendar months immediately preceding the proposed issuance of additional Cumulative Preferred Shares, or the proposed consolidation or merger, determined in accordance with such system of accounts as may be prescribed by governmental authorities having jurisdiction in the premises or, in the absence thereof, in accordance with generally accepted accounting practice, available for the payment of interest, but after deduction of taxes of all kinds (including taxes based on income) including for a like period such gross income (similarly computed and with similar deductions and eliminating any duplication of income) of any property which was or will have been an operating unit or a part of an operating unit preceding its acquisition by the corporation and which has been acquired within the past twelve (12) months immediately preceding or is to be acquired by the corporation substantially contemporaneously with the proposed issuance of additional Cumulative Preferred Shares, or the proposed consolidation or merger. (b) The term "Adjusted Interest and Preferred Charges" is hereby defined as the sum of (i) the interest charges for one year upon all interest bearing indebtedness of the corporation outstanding at the time of issuance of such Cumulative Preferred Shares or of the proposed consolidation or merger, including that, if any, proposed to be issued or assumed substantially contemporaneously, or to which property theretofore acquired or to be acquired substantially contemporaneously is or will be subject (adjusted for all amortization of debt discount and expense, or of premium on debt, as the case may be), and (ii) the dividend requirements for one year on all outstanding Cumulative Preferred Shares, and on all other shares of a class ranking prior to or on a parity with the Cumulative Preferred Shares as to dividends or assets, outstanding at the time of issuance of such additional Cumulative Preferred Shares, or of such consolidation or merger, including all such shares proposed to be issued, or all such shares of the resulting corporation, as the case may be. (c) The term "Adjusted Income Available for Preferred Dividends" is hereby defined as the "Adjusted Income Available for Interest" for the aforesaid twelve (12) months' period, less the interest charges for one year and the dividend requirements for one year on any shares ranking prior to the Cumulative Preferred Shares, included in determining the "Adjusted Interest and Preferred Charges." (d) The term "Adjusted Preferred Charges" is hereby defined as the "Adjusted Interest and Preferred Charges" for one year determined at the time of issuance of such Cumulative Preferred Shares or of the proposed consolidation or merger, less the interest charges for one year and the dividend requirements for one year on any shares ranking prior to the Cumulative Preferred Shares, included in determining the "Adjusted Interest and Preferred Charges." (e) The term "Common Share Equity" is hereby defined as the sum of (i) the stated capital of the corporation applicable to its Common Shares and to all other subordinate shares (including shares, if any, proposed to be issued substantially contemporaneously or any additional such shares of the resulting corporation, as the case may be), (ii) capital surplus to the extent of premium on Common Shares and on all other subordinate shares (including premium, if any, on shares proposed to be issued substantially contemporaneously or any additional such shares of the resulting corporation, as the case may be), (iii) contributions in aid of construction, and (iv) earned surplus, all determined in accordance with such system of accounts as may be prescribed by governmental authorities having jurisdiction in the premises or, in the absence thereof, in accordance with generally accepted accounting practice. (f) The term "Total Capitalization" is hereby defined as the sum of (i) the Common Share Equity, (ii) the involuntary liquidation preference of all Cumulative Preferred Shares and all other shares prior to or on a parity with the Cumulative Preferred Shares to be outstanding after the proposed event, and (iii) the principal amount of all interest bearing debt (including debt to which property theretofore acquired or to be acquired substantially contemporaneously is or will be subject) to be outstanding after the proposed event, excluding, however, all indebtedness maturing by its terms within one year from the time of creation thereof unless the corporation, without the consent of the lender, has the right to extend the maturity of such indebtedness for a period or periods which, with the original period of such indebtedness, aggregates one year or more. DIVISION II Provisions Relating to Cumulative Preference Shares A. Issue in Series. The Cumulative Preference Shares may be issued from time to time in one or more series, each of which series shall have such designation and such relative rights, voting power, preferences and restrictions as are hereinafter provided and, to the extent hereinafter permitted, as are determined and stated by the Board of Directors in the resolution or resolutions authorizing the creation of shares of such series. All Cumulative Preference Shares shall be of equal rank and shall be identical, except in respect of their relative voting power (determined as hereinafter provided in Division IV) and the particulars that may be determined by the Board of Directors as hereinafter provided; and each share of each series shall be identical in all respects with the other shares of such series, except as to the dates from which dividends thereon shall be cumulative. Cumulative Preference Shares shall be issued only as fully paid and nonassessable shares. Subject to the provisions of the last paragraph of this Subdivision A, authority is hereby expressly granted to the Board of Directors to authorize the issuance of Cumulative Preference Shares in one or more series, and to determine and state, by the resolution or resolutions authorizing the creation of each series: (i) the designation of the series and the number of shares which shall constitute such series, which number may be altered from time to time by like action of the Board of Directors in respect of shares then unallotted; (ii) the annual rate of dividends payable on shares of such series; (iii) the price or prices per share at which the shares of such series shall be redeemable; (iv) the amount payable on shares of such series in the event of any dissolution, liquidation or winding up of the affairs of the corporation, which amount may differ in the case of a voluntary or involuntary dissolution, liquidation or winding up of such affairs, provided that the amount in the case of an involuntary dissolution, liquidation or winding up of such affairs shall be determined as provided in the following paragraph; (v) the conversion rights, if any, with respect to the conversion of shares of such series into Common Shares of the corporation; and (vi) the sinking or purchase fund provisions, if any, for the mandatory redemption or purchase of shares of such series. The amount (in addition to accrued and unpaid dividends, if any) which the holders of Cumulative Preference Shares of each series shall be entitled to receive in the event of any dissolution, liquidation or winding up of the affairs of the corporation which shall be involuntary shall be equal to the gross consideration received by the corporation upon the issuance thereof (without regard to any premium received or any underwriting discount or commission, private placement fee or other expense incurred by the corporation in connection with the issuance thereof). B. Dividends. Subject to the preferential rights of the holders of Cumulative Preferred Shares with respect to payment of dividends as set forth in Subdivision B of Division I, the holders of the Cumulative Preference Shares of each series shall be entitled to receive, when and as declared by the Board of Directors, out of any funds legally available for such purpose, cash dividends at the annual rate for such series theretofore fixed by the Board of Directors as hereinbefore provided, and no more, payable quarterly on such dates as may be fixed in the resolution or resolutions adopted by the Board of Directors authorizing the creation of such series. Such dividends shall be paid to shareholders of record on the respective dates, not exceeding twenty (20) days prior to such payment dates, fixed by the Board of Directors for such purpose. Such dividends shall be cumulative from and including the date or dates fixed for such purpose by the Board of Directors in the resolution or resolutions authorizing the creation of such series. No dividend shall be paid, or declared and set apart for payment, upon any Cumulative Preference Shares of any series for any quarterly dividend period unless at the same time a like proportionate dividend for the same or comparable quarterly period, ratable in proportion to the respective annual dividend rates fixed therefor, shall be paid, or declared and set apart for payment, upon all Cumulative Preference Shares of all series then issued and outstanding. In no event shall any dividend be paid or declared, nor shall any distribution be made, on any subordinate shares, other than a dividend or distribution payable solely in subordinate shares, nor shall any subordinate shares be purchased, redeemed or otherwise acquired by the corporation for value, nor shall any moneys be paid to or set aside or made available for a purchase fund or sinking fund for the purchase or redemption of any subordinate shares, unless (i) all dividends on the Cumulative Preference Shares of all series for all past quarterly dividend periods and for the then current quarterly dividend period shall have been paid or declared and a sum sufficient for the payment thereof set apart for payment; and (ii) the corporation shall not be in default or deficient under any requirement of a sinking or purchase fund established with respect to outstanding Cumulative Preference Shares of any series for any period then elapsed. Subject to the provisions of this Article VI, and not otherwise, dividends may be declared by the Board of Directors and paid from time to time, out of any funds legally available therefor, upon the then outstanding subordinate shares, and the holders of the Cumulative Preference Shares shall not be entitled to participate in any such dividends. C. Redemption of Cumulative Preference Shares. Subject to the limitations stated in Subdivision B of Division I and in Subdivision D of this Division II, the Cumulative Preference Shares of any or all series may be redeemed, as a whole at any time or in part from time to time, at the option of the corporation by resolution of the Board of Directors, at the applicable redemption price for the shares of such series as determined by the Board of Directors in the resolution or resolutions authorizing the creation of such series, together with an amount (hereinafter referred to as "accrued dividends to the redemption date") in the case of each share, computed at the annual dividend rate for the series of which the particular share is a part, from and including the date on which dividends on such share became cumulative to and including the date of redemption, less the aggregate amount of all dividends which have theretofore been paid thereon or which have been declared thereon and for which moneys for payment have been set apart and remain available for payment. Each such redemption shall be effected upon the same notice as provided in Subdivision C of Division I in respect of the redemption of Cumulative Preferred Shares, and all other provisions of said Subdivision C with respect to the method and effect of redemption of Cumulative Preferred Shares shall be applicable to the redemption of Cumulative Preference Shares in the same manner and with the same force and effect as though such provisions were set forth in full in this Subdivision C. All Cumulative Preference Shares converted, redeemed or purchased voluntarily or pursuant to any sinking fund or purchase fund for the mandatory redemption or purchase of shares shall be retired and cancelled and shall have the status of authorized but unissued Cumulative Preference Shares of the corporation and may be reissued in the same manner as authorized but unissued Cumulative Preference Shares undesignated as to series. D. Limitation on Purchase and Redemption of Cumulative Preference Shares. No Cumulative Preference Shares of any series shall be purchased, redeemed or otherwise acquired by the corporation for value, nor shall any moneys be paid to or set aside or made available for a purchase fund or sinking fund for the purchase or redemption of Cumulative Preference Shares of any series, unless all dividends on the Cumulative Preference Shares of all series for all past quarterly dividend periods and for the current quarterly period shall have been paid or declared and a sum sufficient for the payment thereof set apart for payment, except in event all of the Cumulative Preference Shares shall be called for redemption. E. Liquidation Preferences. In the event of any dissolution, liquidation or winding up of the affairs of the corporation, before any distribution or payment shall be made to the holders of any class of subordinate shares, the holders of the shares of each series of Cumulative Preference Shares shall be entitled to be paid in full the respective amounts fixed by the Board of Directors in the resolution or resolutions authorizing the creation of such series together with an amount, in the case of each share, computed at the annual dividend rate for the series of which the particular share is a part, from and including the date on which dividends on such share became cumulative to and including the date fixed for such payment, less the aggregate amount of all dividends which have theretofore been paid thereon or which have been declared thereon and for which moneys have been set apart and remain available for payment; provided, however, that no such payment to the holders of Cumulative Preference Shares shall be made until payment in full shall have been made to the holders of Cumulative Preferred Shares, or moneys made available for such payment in full, in accordance with the provisions of Subdivision E of Division I. If such payment shall have been made to the holders of the Cumulative Preference Shares, or moneys made available for such payment in full, the remaining assets and funds of the corporation shall be distributed among the holders of the classes of subordinate shares according to their respective rights and preferences and in each case according to their respective shares. If the assets available are not sufficient to pay in full the amounts so payable to the holders of all outstanding Cumulative Preference Shares, the holders of all series of such shares shall share ratably in any distribution of assets in proportion to the full amounts to which they would otherwise be respectively entitled. The consolidation or merger of the corporation into or with any other corporation or corporations pursuant to the statutes of the State of Minnesota providing for consolidation or merger shall not be deemed a liquidation, dissolution or winding up of the affairs of the corporation within the meaning of any of the provisions of this Subdivision E. F. Voting and Restrictions on Certain Corporate Action. The holders of the Cumulative Preference Shares shall not be entitled to vote at any meetings of the shareholders of the corporation, except as required by law or as hereinafter otherwise provided in this Subdivision F and in Division IV: (1) So long as any Cumulative Preference Shares of any series are outstanding, the corporation shall not, without the consent (given by vote at a special meeting of shareholders called for the purpose) of the holders of at least two-thirds (2/3) of the aggregate voting power (determined as hereinafter provided in Division IV) vested in the Cumulative Preference Shares of all series then outstanding: (a) Create or authorize any shares of any class (other than the Cumulative Preferred Shares, whether now or hereafter authorized) ranking prior to the Cumulative Preference Shares as to dividends or assets; or (b) Amend the Articles of Incorporation so as to affect adversely any of the preferences or other rights of the holders of the Cumulative Preference Shares, provided, however, that if any such amendment would affect adversely the holders of one or more, but not all, of the series of Cumulative Preference Shares at the time outstanding, consent only of the holders of at least two-thirds (2/3) of the aggregate voting power (determined as hereinafter provided in Division IV) vested in the shares of each series so adversely affected shall be required. (2) So long as any Cumulative Preference Shares of any series are outstanding, the corporation shall not, without the consent (given by vote at a special meeting of shareholders called for the purpose) of the holders (i) of at least a majority of the aggregate voting power (determined as hereinafter provided in Division IV) vested in the Cumulative Preference Shares of all series then outstanding, or (ii) in case of the negative vote at such meeting of the holders of more than one-fourth (1/4) of the aggregate voting power (determined as hereinafter provided in Division IV) vested in the Cumulative Preference Shares of all series then outstanding, of at least two-thirds (2/3) of the aggregate voting power (determined as hereinafter provided in Division IV) vested in the Cumulative Preference Shares of all series then outstanding: (a) Increase the authorized number of Cumulative Preference Shares, or create or authorize any shares of any class ranking on a parity with the Cumulative Preference Shares as to dividends or assets; or (b) Consolidate or merge into or with any other corporation or corporations pursuant to the statutes of the State of Minnesota providing for consolidation or merger unless, immediately after such consolidation or merger shall become effective, the Cumulative Preference Shares of the corporation outstanding immediately prior to such consolidation or merger shall remain outstanding or be constituted as shares of the corporation resulting from such consolidation or merger in the same number and with the same relative rights, voting power, preferences and restrictions as theretofore, the authorized number thereof shall not be increased, and there shall be no shares of the resulting corporation outstanding or authorized ranking prior to or on a parity with the Cumulative Preference Shares, except shares of the corporation outstanding or authorized immediately prior to such consolidation or merger; or (c) Sell, lease or exchange all or substantially all of its property and assets, unless, after the completion of such transaction, the fair value of the assets of the corporation shall at least equal the preference on voluntary liquidation of all Cumulative Preference Shares of all series then outstanding and of all shares then outstanding of a class on a parity with the Cumulative Preference Shares, after first deducting an amount equal to all then existing indebtedness of the corporation and an amount equal to the preference on voluntary liquidation of all shares ranking prior to the Cumulative Preference Shares. DIVISION III Provisions Relating to Common Shares A. Dividends. Subject to the preferential rights of the holders of the Cumulative Preferred Shares and the Cumulative Preference Shares with respect to the payment of dividends, as set forth in Subdivision B of Division I and Subdivision B of Division II, respectively, holders of the Common Shares shall be entitled to receive dividends, out of any funds legally available therefor, when and as declared by the Board of Directors. B. Liquidation Preferences. In the event of any dissolution, liquidation or winding-up of the affairs of the corporation, whether voluntary or involuntary, holders of the Common Shares shall be entitled to receive ratably, in accordance with the numbers of shares held by them respectively, the assets of the corporation available for payment to shareholders remaining after payment in full shall have been made to holders of the Cumulative Preferred Shares and the Cumulative Preference Shares in accordance with the provisions of Subdivision E of Division I and Subdivision E of Division II, respectively. DIVISION IV Voting Rights and Other Provisions Relating to Cumulative Preferred Shares, Cumulative Preference Shares and Common Shares A. Voting Rights of Common Shares. Except as otherwise expressly set forth in this Article VI and as provided by law, the holders of Common Shares shall have the sole voting rights of shareholders of the corporation and shall be entitled to one vote for each share held, and the holders of a majority of the Common Shares outstanding shall have power to authorize the sale, lease, exchange or other disposal of all, or substantially all, of the property and assets of the corporation, including its good will, to adopt or reject an agreement of consolidation or merger and to amend the Articles of Incorporation. B. Voting Rights of Cumulative Preferred Shares. (1) After an amount equivalent to four (4) full quarterly dividend installments on the Cumulative Preferred Shares of any series outstanding shall be in default, the holders of Cumulative Preferred Shares of all series at the time outstanding, voting separately as a class, shall, at any annual meeting of the shareholders or any special meeting of the shareholders called as herein provided occurring during such period, elect three members of the Board of Directors, and the holders of the Common Shares, voting separately as a class, shall, subject to any rights of the holders of Cumulative Preference Shares to elect directors as provided in Subdivision C of this Division IV, elect the remaining directors of the corporation. (2) After an amount equivalent to twelve (12) full quarterly dividend installments on the Cumulative Preferred Shares of any series outstanding shall be in default, the holders of Cumulative Preferred Shares of all series at the time outstanding, voting separately as a class, shall at any annual meeting of the shareholders or any special meeting of the shareholders called as herein provided occurring during such period, elect the smallest number of directors necessary to constitute a majority of the full Board of Directors, and the holders of the Common Shares, voting separately as a class, shall, subject to any rights of the holders of Cumulative Preference Shares to elect directors as provided in Subdivision C of this Division IV, elect the remaining directors of the corporation. (3) At any annual meeting or special meeting of the shareholders for the election of directors occurring after all dividends then in default on the Cumulative Preferred Shares then outstanding shall be paid (and such dividends shall be declared and paid out of any funds legally available therefor as soon as reasonably practical), the Cumulative Preferred Shares shall thereupon be divested of any special rights with respect to the election of directors provided in paragraphs (1) and (2) of this Subdivision B, but always subject to the same provisions for the vesting of such voting power in the holders of the Cumulative Preferred Shares in the case of a future like default or defaults in dividends thereon. (4) Voting power vested in the holders of the Cumulative Preferred Shares as provided in paragraphs (1) and (2) of this Subdivision B may be exercised at any annual meeting of shareholders or at a special meeting of shareholders held for such purpose, which special meeting of shareholders shall be called by the proper officers of the corporation at any time when such voting power shall be so vested, within twenty (20) days after written request therefor signed by the holders of not less than five percent (5%) of the aggregate voting power (determined as hereinafter provided in Subdivision D of this Division IV) vested in the Cumulative Preferred Shares of all series then outstanding, the date of such special meeting to be not more than forty (40) days from the date of giving of notice thereof. (5) Notice of any annual or special meeting of shareholders for the election of directors held when voting powers as aforesaid shall be vested in the holders of Cumulative Preferred Shares shall be given to all holders of Cumulative Preferred Shares not less than fifteen (15) days prior to said meeting, and such notice shall describe with particularity the voting rights of the holders of each series of Cumulative Preferred Shares. (6) At any such annual or special meeting the presence in person or by proxy of the holders of a majority of the aggregate voting power (determined as hereinafter provided in Subdivision D of this Division IV) vested in the Cumulative Preferred Shares of all series then outstanding shall be required to constitute a quorum of the holders of the Cumulative Preferred Shares for the election by them of the directors whom they are entitled to elect; provided, however, that the holders of a majority of the aggregate voting power (determined as hereinafter provided in Subdivision D of this Division IV) vested in the Cumulative Preferred Shares who are present in person or by proxy shall have power to adjourn such meeting for the election of directors by the holders of the Cumulative Preferred Shares from time to time, without notice other than announcement at the meeting. C. Voting Rights of Cumulative Preference Shares. (1) After an amount equivalent to four (4) full quarterly dividend installments on the Cumulative Preference Shares of any series outstanding shall be in default, the holders of Cumulative Preference Shares of all series at the time outstanding, voting separately as a class, shall, at any annual meeting of the shareholders or any special meeting of the shareholders called as herein provided occurring during such period, elect two members of the Board of Directors, and the holders of the Common Shares, voting separately as a class, shall, subject to any rights of the holders of Cumulative Preferred Shares to elect directors as provided in Subdivision B of this Division IV, elect the remaining directors of the corporation. (2) At any annual meeting or special meeting of the shareholders for the election of directors occurring after all dividends then in default on the Cumulative Preference Shares then outstanding shall be paid (and such dividends shall be declared and paid out of any funds legally available therefor as soon as reasonably practical), the Cumulative Preference Shares shall thereupon be divested of any special rights with respect to the election of directors provided for in paragraph (1) of this Subdivision C, but always subject to the same provisions for the vesting ofsuch voting power in the holders of the Cumulative Preference Shares in the case of a future like default or defaults in dividends thereon. (3) All provisions of paragraphs (4), (5) and (6) of Subdivision B of this Division IV with respect to the method of exercising the special voting rights of the holders of Cumulative Preferred Shares shall be applicable to the special voting rights of the holders of Cumulative Preference Shares in the same manner and with the same force and effect as though such provisions were set forth in full in this Subdivision C. D. Number of Votes Applicable to Each Cumulative Preferred Share and to Each Cumulative Preference Share. For the purpose of each vote or consent under the Articles of Incorporation or pursuant to applicable law, the number of votes to which each Cumulative Preferred Share and each Cumulative Preference Share shall be entitled shall be determined as follows: (a) In voting by holders of Cumulative Preferred Shares, separately as a class, or by series, each Cumulative Preferred Share entitled to receive the smallest fixed amount (in addition to accrued and unpaid dividends, if any) in the event of any dissolution, liquidation or winding-up of the affairs of the corporation which shall be involuntary shall have one vote, and each Cumulative Preferred Share entitled to receive a greater fixed amount (in addition to accrued and unpaid dividends, if any) in any such event shall have the number of votes which is in the same proportion as such greater amount shall be to such smallest amount; (b) In voting by holders of Cumulative Preference Shares, separately as a class, or by series, each Cumulative Preference Share entitled to receive the smallest fixed amount (in addition to accrued and unpaid dividends, if any) in the event of any dissolution, liquidation or winding up of the affairs of the corporation which shall be involuntary shall have one vote, and each Cumulative Preference Share entitled to receive a greater fixed amount (in addition to accrued and unpaid dividends, if any) in any such event shall have the number of votes which is in the same proportion as such greater amount shall be to such smallest amount; and (c) In voting by holders of Cumulative Preferred Shares and/or Cumulative Preference Shares and/or holders of Common Shares, together as a single class, each Common Share shall have one vote, each Cumulative Preferred Share and each Cumulative Preference Share entitled to receive $100 (in addition to accrued and unpaid dividends, if any) in the event of any dissolution, liquidation or winding up of the affairs of the corporation which shall be involuntary shall have one vote and each Cumulative Preferred Share and each Cumulative Preference Share entitled to receive a different fixed amount (in addition to accrued and unpaid dividends, if any) in such event shall be entitled to such greater or lesser number of votes which is in the same proportion as such different amount shall be to $100. E. Number and Term of Directors and Manner of Election. (1) Except at such times as the holders of Cumulative Preferred Shares and/or Cumulative Preference Shares shall have voting rights for the election of directors, (a) the Board of Directors shall consist of such number of persons, not less than seven (7) nor more than nine (9), as may be determined by the shareholders from time to time at annual meetings thereof (subject to the authority of the Board of Directors to increase or decrease the number of directors as permitted by law), (b) the term of office of each director other than directors elected to fill vacancies shall be for the period ending at the third annual meeting following his election and until his successor is elected and qualified, (c) vacancies in the Board of Directors occurring by reason of death, resignation, removal or disqualification shall be filled for the unexpired term of the director with respect to whom the vacancy occurred by a majority of the remaining directors of the Board of Directors, although less than a quorum, and (d) vacancies in the Board of Directors occurring by reason of newly created directorships resulting from an increase in the authorized number of directors by action of the Board of Directors as permitted by these Articles of Incorporation and the Bylaws of the corporation shall be filled by a majority vote of the directors serving at the time of such increase, each director so elected to a newly created directorship to serve for the appropriate term so as to maintain, as near as may be, an equal division between the classes of directors. Notwithstanding any other provisions of these Articles of Incorporation or the Bylaws of the corporation or the fact that a lesser percentage may be specified by law, these Articles of Incorporation or the Bylaws of the corporation, the affirmative vote of the holders of at least 75% of the voting power of the then outstanding Common Shares shall be required to amend, alter, adopt any provision inconsistent with or repeal this paragraph (1) of Subdivision E of this Division IV unless the Board of Directors, if all such directors are Continuing Directors, as defined in this Article VI, shall unanimously recommend such amendment, alteration, adoption or repeal. (2) If at any time the holders of Cumulative Preferred Shares and/or Cumulative Preference Shares of the corporation shall, under the provisions of paragraph (1) of Subdivision B of this Division IV or of paragraph (1) of Subdivision C of this Division IV, become entitled to elect any directors, then the terms of all incumbent directors shall expire at the time of the first annual meeting thereafter at which such holders of Cumulative Preferred Shares and/or Cumulative Preference Shares are so entitled to elect directors. If at any time the holders of Cumulative Preferred Shares of the corporation shall, under the provisions of paragraph (2) of Subdivision B of this Division IV, become entitled to elect a majority of the Board of Directors, the terms of all incumbent directors shall expire whenever such majority has been duly elected and qualified. During any period during which the holders of Cumulative Preferred Shares and/or Cumulative Preference Shares of the corporation shall have voting rights with respect to directors under the provisions of this Division IV, the Board of Directors shall consist of eleven (11) persons and the entire number of persons composing such Board shall be elected at each annual or special meeting of shareholders for the election of directors and shall serve until the next such annual or special meeting or until their successors have been elected and qualified, provided, however, that whenever the holders of Cumulative Preferred Shares and/or Cumulative Preference Shares acquire voting rights under paragraph (1) of Subdivision B of this Division IV or under paragraph (1) of Subdivision C of this Division IV, and exercise such rights at a special meeting called therefor, the terms of office of directors theretofore elected by the holders of Common Shares will not expire until the next annual meeting. If a vacancy or vacancies in the Board of Directors shall exist with respect to a director or directors who shall have been elected by the holders of either Cumulative Preferred Shares or Cumulative Preference Shares, the remaining directors elected by the holders of Cumulative Preferred Shares or Cumulative Preference Shares, as the case may be, by affirmative vote of a majority thereof, or the remaining director so elected if there be but one, may elect a successor or successors to hold office for the unexpired term of the director or directors whose place or places shall be vacant. Likewise, if a vacancy or vacancies shall exist with respect to a director or directors who shall have been elected by the holders of Common Shares, the remaining directors elected by the holders of Common Shares, by affirmative vote of a majority thereof, or the remaining director so elected if there be but one, may elect a successor or successors to hold office for the unexpired term of the director or directors whose place or places shall be vacant. (3) Whenever the Cumulative Preferred Shares shall be divested of voting powers with respect to the election of directors as provided in paragraph (3) of Subdivision B of this Division IV, the terms of all incumbent directors, other than directors elected by the holders of Cumulative Preference Shares pursuant to Subdivision C of this Division IV, shall expire upon the election of their successors by the holders of the Common Shares at the next annual or special meeting of shareholders for the election of directors. A special meeting shall be called for such purpose within twenty (20) days after the written request therefor signed by the holders of not less than five percent (5%) of the Common Shares outstanding, the date of such special meeting to be not more than forty (40) days from the date of giving of notice thereof. Upon the election and qualification of directors by the holders of Common Shares as aforesaid the provisions of paragraph (1) of Subdivision E of this Division IV shall again control, unless at that time the holders of Cumulative Preference Shares have voting rights for the election of directors. (4) Whenever the Cumulative Preference Shares shall be divested of voting powers with respect to the election of directors as provided in paragraph (2) of Subdivision C of this Division IV, the terms of all incumbent directors, other than directors elected by the holders of Cumulative Preferred Shares pursuant to Subdivision B of this Division IV, shall expire on the election of their successors by the holders of the Common Shares at the next annual or special meeting of shareholders for the election of directors. A special meeting shall be called for such purpose within twenty (20) days after the written request therefor signed by the holders of not less than five percent (5%) of the Common Shares outstanding, the date of such special meeting to be not more than forty (40) days from the date of giving of notice thereof. Upon the election and qualification of directors by the holders of Common Shares as aforesaid, the provisions of paragraph (1) of Subdivision E of this Division IV shall again control, unless at that time the holders of Cumulative Preferred Shares have voting rights for the election of directors. F. Cumulative Voting. The holders of Common Shares of the corporation shall have no right to cumulate votes in the election of directors. If notice in writing is given by any holder of Cumulative Preferred Shares or Cumulative Preference Shares to any officer of the corporation before a meeting for the election of directors at which such shareholder is entitled to vote, or to the presiding officer at such meeting at any time before the election of directors takes place, that he intends to cumulate his votes in such election, each holder of shares of the class with respect to which such notice has been given shall have the right to multiply the number of votes to which he may be entitled by the number of directors to be elected by the holders of shares of such class, and he may cast all such votes for one candidate or distribute them among any two or more candidates. In such case, it shall be the duty of the presiding officer, before the election of directors at the meeting, to announce that all shareholders of the class with respect to which such notice has been given shall cumulate their votes. G. Preemptive Rights. No holder of shares of the corporation of any class or of any security or obligation convertible into, or of any warrant, option or right to purchase, subscribe for or otherwise acquire, shares of any class of the corporation, whether now or hereafter authorized, shall, as such holder, have any preemptive or preferential right whatsoever to purchase, subscribe for or otherwise acquire shares of any class of the corporation or of any security or obligation convertible into, or of any warrant, option or right to purchase, subscribe for or otherwise acquire, shares of any class of the corporation, whether now or hereafter authorized, other than such rights of subscription, if any, as the Board of Directors may from time to time determine. DIVISION V Voting Rights of Common Shares Relating To Certain Business Combinations A. In addition to any other affirmative vote required by law or these Articles of Incorporation, and except as otherwise expressly provided in Subdivision B of this Division V, 1. any merger or consolidation of the corporation or any Subsidiary (as hereinafter defined) with (a) an Interested Shareholder (as hereinafter defined) or (b) any other corporation (whether or not itself an Interested Shareholder) which is, or after such merger or consolidation would be, an Affiliate or Associate (as such terms are hereinafter defined) of an Interested Shareholder, or 2. any sale, lease, exchange, mortgage, pledge, grant of a security interest, transfer or other disposition (in one transaction or a series of transactions), other than in the ordinary course of business, to or with (a) an Interested Shareholder or (b) any other person (whether or not itself an Interested Shareholder) which is, or after such sale, lease, exchange, mortgage, pledge, grant of a security interest, transfer or other disposition would be, an Affiliate or Associate of an Interested Shareholder, directly or indirectly, of all or any Substantial Part (as hereinafter defined) of the assets of the corporation (including, without limitation, any voting securities of a Subsidiary) or any Subsidiary, or both, or 3. the issuance or transfer by the corporation or any Subsidiary (in one transaction or a series of transactions) of any securities (except pursuant to stock dividends, stock splits or similar transactions which would not have the effect of increasing the proportionate voting power of an Interested Shareholder) of the corporation or any Subsidiary, or both, to (a) an Interested Shareholder or (b) any other person (whether or not itself an Interested Shareholder) which is, or after such issuance or transfer would be, an Affiliate or Associate of an Interested Shareholder, or 4. the adoption of any plan or proposal for the liquidation or dissolution of the corporation proposed by or on behalf of an Interested Shareholder or any Affiliate or Associate of an Interested Shareholder, or 5. any reclassification of securities (including any reverse stock split), or recapitalization of the corporation, or any merger or consolidation of the corporation with any of its Subsidiaries or any other transaction (whether or not with or into or otherwise involving an Interested Shareholder) which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of equity or convertible securities of the corporation or any subsidiary directly or indirectly beneficially owned by (a) an Interested Shareholder or (b) any other person (whether or not itself an Interested Shareholder) which is, or after such reclassification, recapitalization, merger or consolidation or other transaction would be, an Affiliate or Associate of an Interested Shareholder, shall not be consummated unless such consummation shall have been approved by the affirmative vote of the holders of at least 75% of the voting power of the then outstanding Common Shares. Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage may be specified, by law, in these Articles of Incorporation or in any agreement with any national securities exchange or otherwise. B. The provisions of Subdivision A of this Division V shall not be applicable to any particular Business Combination (as hereinafter defined) and such Business Combination shall require only such affirmative vote as is required by law and any other provision of these Articles of Incorporation, if the Business Combination shall have been approved by a majority of the Continuing Directors (as hereinafter defined) or all of the following conditions shall have been met: 1. The transaction constituting the Business Combination shall provide for a consideration to be received by all holders of Common Shares in exchange for all their Common Shares, and the aggregate amount of the cash and the Fair Market Value as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by holders of Common Shares in such Business Combination shall be at least equal to the higher of the following: (a) (if applicable) the highest per-share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid in order to acquire any Common Shares beneficially owned by an Interested Shareholder (i) within the two-year period immediately prior to the Announcement Date (as hereinafter defined), (ii) within the two-year period immediately prior to the Determination Date (as hereinafter defined) or (iii) in the transaction in which it became an Interested Shareholder, whichever is highest; or (b) the Fair Market Value per Common Share on the Announcement Date or on the Determination Date, whichever is higher. 2. The consideration to be received by holders of Common Shares shall be in cash or in the same form as was previously paid in order to acquire the Common Shares that are beneficially owned by an Interested Shareholder and, if an Interested Shareholder beneficially owns Common Shares that were acquired with varying forms of consideration, the form of consideration for such Common Shares shall be either cash or the form used to acquire the largest number beneficially owned by it. The price determined in accordance with paragraph 1 of this Subdivision B shall be subject to appropriate adjustment in the event of any recapitalization, stock dividend, stock split, combination of shares or similar event. 3. After such Interested Shareholder has become an Interested Shareholder and prior to the consummation of such Business Combination: (a) except as approved by a majority of the Continuing Directors, there shall have been no failure to declare and pay at the regular date therefor the full amount of any dividends (whether or not cumulative) payable on any outstanding Cumulative Preferred Shares or Cumulative Preference Shares; (b) there shall have been (i) no reduction in the annual rate of dividends paid on the Common Shares (except as necessary to reflect any subdivision of the Common Shares) other than as approved by a majority of the Continuing Directors and (ii) an increase in such annual rate of dividends as necessary to prevent any such reduction in the event of any reclassification (including any reverse stock split), recapitalization, reorganization or any similar transaction which has the effect of reducing the number of outstanding Common Shares, unless the failure so to increase such annual rate is approved by a majority of the Continuing Directors; and (c) such Interested Shareholder shall not have become the beneficial owner of any additional Common Shares except as part of the transaction in which it became an Interested Shareholder. 4. After such Interested Shareholder has become an Interested Shareholder, such Interested Shareholder shall not have received the benefit, directly or indirectly (except proportionately as a shareholder), of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided by the corporation, whether in anticipation of or in connection with such Business Combination or otherwise; and 5. A proxy or information statement describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act of 1934 and the rules and regulations thereunder (or any subsequent provisions replacing such Act, rules or regulations) shall be mailed to the shareholders of the corporation, no later than the earlier of (a) 30 days prior to any vote on the proposed Business Combination or (b) if no vote on such Business Combination is required, 60 days prior to the consummation of such Business Combination (whether or not such proxy or information statement is required to be mailed pursuant to such Act or subsequent provisions). Such proxy statement shall contain at the front thereof, in a prominent place, any recommendations as to the advisability (or inadvisability) of the Business Combination which the Continuing Directors, or any of them, may have furnished in writing and, if deemed advisable by a majority of the Continuing Directors, an opinion of a reputable investment banking firm as to the fairness (or lack of fairness) of the terms of such Business Combination, from the point of view of the holders of the Common Shares other than an Interested Shareholder (such investment banking firm to be selected by a majority of the Continuing Directors, to be furnished with all information it reasonably requests and to be paid a reasonable fee for its services upon receipt by the corporation of such opinion). C. For the purposes of this Division V: 1. "Business Combination" shall mean any transaction that is referred to in any one or more of paragraphs 1 through 5 of Subdivision A of this Division V. 2. "Person" shall mean any individual, firm, trust, partnership, association, corporation or other entity. 3. "Interested Shareholder" shall mean any person (other than the corporation or any Subsidiary) who or which: (a) is the beneficial owner, directly or indirectly, of more than 10% of the voting power of the then outstanding Common Shares; or (b) is an Affiliate of the corporation and at any time within the two-year period immediately prior to the date in question was the beneficial owner, directly or indirectly, of more than 10% of the voting power of the then outstanding Common Shares; or (c) is an assignee of or has otherwise succeeded to the beneficial ownership of any Common Shares which were, at any time within the two-year period immediately prior to the date in question, beneficially owned by an Interested Shareholder, unless such assignment or succession shall have occurred pursuant to a Public Transaction (as hereinafter defined) or any series of transactions involving a Public Transaction. For the purpose of determining whether a person is an Interested Shareholder, the number of Common Shares deemed to be outstanding shall include shares deemed owned through application of paragraph 5 below, but shall not include any other Common Shares that may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise. 4. "Public Transaction" shall mean any (a) purchase of shares offered pursuant to an effective registration statement under the Securities Act of 1933 or (b) open- market purchase of shares on a national securities exchange or in the over-the-counter market if, in either such case, the price and other terms of sale are not negotiated by the purchaser and the seller of the beneficial interest in the shares. 5. A person shall be a "beneficial owner" of any Common Shares: (a) which such person or any of its Affiliates or Associates beneficially owns, directly or indirectly; or (b) which such person or any of its Affiliates or Associates has (i) the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise or (ii) the right to vote or to direct the voting thereof pursuant to any agreement, arrangement or understanding; or (c) which is beneficially owned, directly or indirectly, by any other person with which such person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any Common Shares. 6. "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on January 1, 1986. 7. "Subsidiary" shall mean any corporation of which a majority of any class of equity security (as defined in Rule 3all-1 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on January 1, 1986) is owned, directly or indirectly, by the corporation; provided, however, that, for purposes of the definition of Interested Shareholder set forth in paragraph 3, the term "Subsidiary" shall mean only a corporation of which a majority of each class of equity security is owned, directly or indirectly, by the corporation. 8. "Continuing Director" shall mean any member of the Board of Directors of the corporation who (1) is not an Affiliate or Associate of, and not a nominee of, an Interested Shareholder having any interest, direct or indirect, in the proposed Business Combination and (2) was a member of the Board of Directors prior to the time that such Interested Shareholder became an Interested Shareholder, and any successor of a Continuing Director who is not an Affiliate or Associate of, and not a nominee of, such Interested Shareholder and is recommended to succeed a Continuing Director by a majority of Continuing Directors then on the Board of Directors. 9. "Announcement Date" shall mean the date of the first public announcement of the proposed Business Combination. 10. "Determination Date" shall mean the date on which an Interested Shareholder became an Interested Shareholder. 11. "Fair Market Value" shall mean: (a) in the case of stock, the highest closing sale price during the 30-day period immediately preceding the date in question of a share of such stock on the Composite Tape for New York Stock Exchange-Listed Stocks, or, if such stock is not quoted on the Composite Tape, on the New York Stock Exchange, or, if such stock is not listed on such Exchange, on the principal United States securities exchange registered under the Securities Exchange Act of 1934 on which such stock is listed, or, if such stock is not listed on any such exchange, the highest closing bid quotation or last reported sale price, whichever is applicable, with respect to a share of such stock during the 30-day period preceding the date in question on the National Association of Securities Dealers, Inc. Automated Quotations System or any system then in use, or if no such quotations are available, the fair market value on the date in question of a share of such stock as determined by a majority of the Continuing Directors in good faith; and (b) in the case of property other than cash or stock, the fair market value of such property on the date in question as determined by a majority of the Continuing Directors in good faith. 12. "Substantial Part" shall mean more than 30% of the fair market value of the total assets of the corporation as of the end of its most recent fiscal year ending prior to the time the determination is being made. D. A majority of the Continuing Directors shall have the power and duty to determine for the purposes of this Division V, on the basis of information known to them after reasonable inquiry, all facts necessary to determine compliance with this Division V, including, without limitation, (1) whether a person is an Interested Shareholder, (2) the number of Common Shares beneficially owned by any person, (3) whether a person is an Affiliate or Associate of another, (4) whether the assets which are the subject of any Business Combination constitute a Substantial Part of the assets of the corporation or the Subsidiary, or both, (5) whether the requirements of Subdivision B of this Division V have been met, and (6) such other matters with respect to which a determination is required under this Division V. The good faith determination of a majority of the Continuing Directors on such matters shall be conclusive and binding for all purposes of this Division V. E. Nothing contained in this Division V shall be construed to relieve an Interested Shareholder from any fiduciary obligation imposed by law. F. Notwithstanding any other provisions of these Articles of Incorporation or the Bylaws of the corporation or the fact that a lesser percentage may be specified by law, these Articles of Incorporation or the Bylaws of the corporation, the affirmative vote of the holders of at least 75% of the voting power of the then outstanding Common Shares, shall be required to amend, alter, adopt any provision inconsistent with or repeal this Division V unless the Board of Directors, if all such directors are Continuing Directors, shall unanimously recommend such amendment, alteration, adoption or repeal. DIVISION VI Provisions Relating to Purchases Of Common Shares Of The Corporation A. Except as otherwise expressly provided in this Division VI, the corporation may not purchase any Common Shares at a per- share price in excess of the Fair Market Price (as hereinafter defined) as of the time of such purchase from a person known by the corporation to be a Substantial Shareholder (as hereinafter defined), unless such purchase has been approved by the affirmative vote of the holders of at least two-thirds (2/3) of the Common Shares voted thereon held by Disinterested Shareholders (as hereinafter defined). Such affirmative vote shall be required notwithstanding the fact that no vote may be required or that a lesser percentage may be specified by law, in these Articles of Incorporation or in any agreement with any national securities exchange or otherwise. B. The provisions of this Division VI shall not apply to (1) any purchase pursuant to an offer to purchase which is made on the same terms and conditions to the holders of all of the outstanding Common Shares or (2) any open market purchase that constitutes a Public Transaction (as hereinafter defined). C. For the purposes of this Division VI: 1. The terms "Continuing Director," "Person," "Public Transaction," "Affiliate" and "Associate" shall have the meanings given to them in Division V of this Article VI. 2. "Substantial Shareholder" shall mean any person (other than any employee benefit plan or trust of the corporation or any similar entity) who or which: (a) is the beneficial owner of more than 10% of the voting power of the then outstanding Common Shares, the acquisition of any shares of which has occurred within the two-year period immediately prior to the date on which the corporation purchases any such shares; or (b) is an assignee of or has otherwise succeeded to the beneficial ownership of any Common Shares beneficially owned by a Substantial Shareholder, unless such assignment or succession shall have occurred pursuant to a Public Transaction or any series of transactions involving a Public Transaction and, with respect to all Common Shares owned by such person, such person has been the beneficial owner of any such shares for a period of less than two years (including, for these purposes, the holding period of the Substantial Shareholder from whom such person acquired shares). For the purposes of determining whether a person is a Substantial Shareholder, the number of Common Shares deemed to be outstanding shall include shares deemed owned through application of paragraph 5 below, but shall not include any other Common Shares which may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise. 3. "Disinterested Shareholders" shall mean those holders of Common Shares who are not Substantial Shareholders. 4. "Fair Market Price" shall mean the highest closing sale price on the Composite Tape for New York Stock Exchange-Listed Stocks during the 30-day period immediately preceding the date in question of a Common Share or, if such Common Shares are not quoted on the Composite Tape, on the New York Stock Exchange or, if such Common Shares are not listed on such Exchange, on the principal United States securities exchange registered under the Securities Exchange Act of 1934 on which such Common Shares are listed, or, if such Common Shares are not listed on any such exchange, the highest closing bid quotation with respect to a Common Share during the 30-day period preceding the date in question on the National Association of Securities Dealers, Inc. Automated Quotations System or any system then in use, or, if no such quotations are available, the fair market value on the date in question of a Common Share, as determined by a majority of the Board of Directors in good faith. 5. A person shall be a "beneficial owner" of any Common Shares: (a) which such person or any of its Affiliates or Associates beneficially owns, directly or indirectly; or (b) which such person or any of its Affiliates or Associates has (i) the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise or (ii) the right to vote or to direct the voting thereof pursuant to any agreement, arrangement or understanding; or (c) which is beneficially owned, directly or indirectly, by any other person with which such person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any Common Shares. D. A majority of the Board of Directors shall have the power and duty to determine for the purposes of this Division VI, on the basis of information known to them after reasonable inquiry, all facts necessary to determine compliance with this Division VI, including without limitation, (1) whether a person is a Substantial Shareholder, (2) the number of Common Shares beneficially owned by any person, (3) whether a person is an Affiliate or Associate of another, (4) whether a price is in excess of the Fair Market Price, (5) whether a purchase constitutes a Public Transaction, and (6) such other matters with respect to which a determination is required under this Division VI. The good faith determination of a majority of the Board of Directors on such matters shall be conclusive and binding for all purposes of this Division VI. E. Nothing contained in this Division VI shall be construed to relieve a Substantial Shareholder from any fiduciary obligation imposed by law. F. Notwithstanding any other provisions of these Articles of Incorporation or the Bylaws of the corporation or the fact that a lesser percentage may be specified by law, these Articles of Incorporation or the Bylaws of the corporation, the affirmative vote of the holders of at least 75% of voting power of the then outstanding Common Shares shall be required to amend, alter, adopt any provision inconsistent with or repeal this Division VI unless the Board of Directors, if all such directors are Continuing Directors, shall unanimously recommend such amendment, alteration, adoption or repeal. ARTICLE VII. The Board of Directors of the corporation shall have authority to accept or reject subscriptions for shares. ARTICLE VIII. Except as herein otherwise limited or qualified, the corporation reserves the right to amend, alter, change or repeal any of the terms or provisions of these Articles of Incorporation, all in the manner now or hereafter prescribed by the laws of the State of Minnesota, and all rights conferred herein upon officers, directors and shareholders of the corporation are granted subject to this reservation. ARTICLE IX. The Board of Directors shall have the power, to the extent permitted by law, to adopt, amend or repeal the Bylaws of the corporation, subject to the power of the shareholders to adopt, amend or repeal such Bylaws. Bylaws fixing the number of directors or their classifications, qualifications, or terms of office, or prescribing procedures for removing such directors may be adopted, amended or repealed only by (i) the Board of Directors, to the extent permitted by law, or (ii) the affirmative vote of the holders of 75% of the outstanding Common Shares of the corporation or such lesser percentage of the outstanding Common Shares as may from time to time be provided in such Bylaws. Notwithstanding any other provisions of these Articles of Incorporation or the Bylaws of the corporation or the fact that a lesser percentage may be specified by law, these Articles of Incorporation or the Bylaws of the corporation, the affirmative vote of the holders of at least 75% of the voting power of the then outstanding Common Shares shall be required to amend, alter, adopt any provision inconsistent with, or repeal this Article IX unless the Board of Directors, if all such directors are Continuing Directors, as defined in Article VI of the Articles of Incorporation, shall unanimously recommend such amendment, alteration, adoption or repeal. ARTICLE X. A director of the corporation shall not be personally liable to the corporation or its shareholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the corporation or its shareholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) under Sections 302A.559 or 80A.23 of the Minnesota Statutes; (iv) for any transaction from which the director derived an improper personal benefit; or (v) for any act or omission occurring prior to the date when this Article X became effective. Any repeal or modification of the foregoing provisions of this Article X shall not adversely affect any right or protection of a director of the corporation existing at the time of such repeal or modification. RESOLUTIONS OF BOARD OF DIRECTORS ESTABLISHING SERIES OF CUMULATIVE PREFERRED SHARES $3.60 Cumulative Preferred Shares The Board of Directors of the corporation adopted the following resolution on August 12, 1946, which was filed with the Secretary of State of Minnesota on August 13, 1946: Resolution Pursuant to authority conferred on the Board of Directors of Otter Tail Power Company, a Minnesota corporation, by Article VI of the Articles of Incorporation, as amended, BE IT RESOLVED that an initial series of Cumulative Preferred Shares be and it hereby is created as follows: A. The designation of such series shall be "$3.60 Cumulative Preferred Shares," and the number of shares of such series shall be sixty thousand (60,000); B. The rate of dividends payable on the $3.60 Cumulative Preferred Shares shall be Three & 60/100 Dollars -- ($3.60) per annum, payable quarterly on the first days of March, June, September and December in each year and such dividends shall be cumulative and accrue in the case of shares issued prior to the record date for the first dividend thereon from and including September 1, 1946; C. The $3.60 Cumulative Preferred Shares shall be redeemable at One Hundred Two & 25/100 dollars -- ($102.25) per share, together, as provided in said Articles of Incorporation, with accrued dividends to the redemption date; D. The amount payable on $3.60 Cumulative Preferred Shares, in the event of any dissolution, liquidation or winding up of the affairs of the corporation which shall be voluntary, shall be the sum of One Hundred Two & 25/100 Dollars ($102.25) per share, and the amount payable on $3.60 Cumulative Preferred Shares, in the event of any dissolution, liquidation or winding up of the affairs of the corporation which shall be involuntary, shall be One Hundred Dollars ($100) per share, together in either event, as provided in said Articles of Incorporation, with a sum, in the case of each share, computed at the annual dividend rate for the $3.60 Cumulative Preferred Shares, from the date on which dividends on such share become cumulative to and including the date fixed for such distribution or payment, less the aggregate amount of all dividends which have theretofore been paid thereon or which have been declared thereon and for which moneys for payment have been set apart and remain available for payment. $4.40 Cumulative Preferred Shares The Board of Directors of the corporation adopted the following resolution on March 6, 1950, which was filed with the Secretary of State of Minnesota on March 8, 1950: Resolution Pursuant to authority conferred on the Board of Directors of Otter Tail Power Company, a Minnesota corporation, by Article VI of its Articles of Incorporation, as amended, BE IT RESOLVED that a second series of Cumulative Preferred Shares be and it hereby is created as follows: A. The designation of such series shall be "$4.40 Cumulative Preferred Shares," and the number of shares of such series shall be twenty-five thousand (25,000); B. The rate of dividends payable on the $4.40 Cumulative Preferred Shares shall be $4.40 per share per annum, payable quarterly on the first days of March, June, September and December of each year and such dividends shall be cumulative and accrue in the case of shares issued prior to the record date for the first dividend thereon from and including March 15, 1950; C. The $4.40 Cumulative Preferred Shares shall be redeemable at $104 per share if redeemed on or before March 15, 1955; at $103 if redeemed thereafter and on or before March 15, 1960; and at $102 per share if redeemed thereafter, together, as provided in said Articles of Incorporation, in each instance with accrued dividends to the redemption date; D. The amount payable on $4.40 Cumulative Preferred Shares in the event of any dissolution, liquidation or winding up of the affairs of the corporation which shall be voluntary, shall be the price at which said shares are at the time redeemable, and the amount payable on $4.40 Cumulative Preferred Shares in the event of any dissolution, liquidation or winding up of the affairs of the Company which shall be involuntary, shall be One Hundred Dollars ($100.00) per share together in either event as provided in said Articles of Incorporation, with a sum, in the case of each share, computed at the annual dividend rate for the $4.40 Cumulative Preferred Shares from the date on which dividends on such share become cumulative to and including the date fixed for such distribution or payment, less the aggregate amount of all dividends which have heretofore been paid thereon or which have been declared thereon and for which moneys for payment have been set apart and remain available for payment. $4.65 Cumulative Preferred Shares The Board of Directors of the corporation adopted the following resolution on March 24, 1964, which was filed with the Secretary of State of Minnesota on March 25, 1964: Resolution Pursuant to authority conferred on the Board of Directors of Otter Tail Power Company, a Minnesota corporation, by Article VI of its Articles of Incorporation, as amended, BE IT RESOLVED that a third series of Cumulative Preferred Shares be, and it hereby is, created as follows: A. The designation of such series shall be "$4.65 Cumulative Preferred Shares," and the number of shares of such series shall be thirty thousand (30,000); B. The rate of dividends payable on the $4.65 Cumulative Preferred Shares shall be $4.65 per share per annum, payable quarterly on the first days of March, June, September and December of each year, and such dividends shall be cumulative and accrue in the case of shares issued prior to the record date for the first dividend thereon from and including the date of issuance thereof; C. The $4.65 Cumulative Preferred Shares shall be redeemable at $107.50 per share if redeemed on or before April 1, 1969; at $106.00 per share if redeemed thereafter and on or before April 1, 1974; at $104.50 per share if redeemed thereafter and on or before April 1, 1979; at $103.00 per share if redeemed thereafter and on or before April 1, 1984; and at $101.50 per share if redeemed thereafter together, as provided in said Articles of Incorporation, in each instance, with accrued dividends to the redemption date; and D. The amount payable on $4.65 Cumulative Preferred Shares in the event of any dissolution, liquidation or winding up of the affairs of the corporation which shall be voluntary shall be the price at which said shares are at the time redeemable, and the amount payable on $4.65 Cumulative Preferred Shares in the event of any dissolution, liquidation or winding up of the affairs of the Company which shall be involuntary shall be One Hundred Dollars ($100.00) per share together in either event as provided in said Articles of Incorporation, with a sum, in the case of each share, computed at the annual dividend rate for the $4.65 Cumulative Preferred Shares from the date on which dividends on such share become cumulative to and including the date fixed for such distribution or payment, less the aggregate amount of all dividends which have heretofore been paid thereon or which have been declared thereon and for which moneys for payment have been set apart and remain available for payment. $9.50 Cumulative Preferred Shares The Board of Directors of the corporation adopted the following resolution on August 9, 1971, which was filed with the Secretary of State of Minnesota on August 20, 1971: Resolution Pursuant to authority conferred on the Board of Directors of Otter Tail Power Company, a Minnesota corporation, by Article VI of its Articles of Incorporation, as amended, BE IT RESOLVED that a fourth series of Cumulative Preferred Shares be, and it hereby is, created as follows: A. The designation of such series shall be "$9.50 Cumulative Preferred Shares," and the number of shares of such series shall be forty thousand (40,000); B. The rate of dividends payable on the $9.50 Cumulative Preferred Shares shall be $9.50 per share per annum, payable quarterly on the first days of March, June, September and December of each year, commencing December 1, 1971, and such dividends shall be cumulative and accrue in the case of shares issued prior to the record date for the first dividend thereon from and including the date of issuance thereof; C. The $9.50 Cumulative Preferred Shares shall be redeemable at $109.50 per share if redeemed before September 1, 1979 and, if redeemed thereafter, at a redemption price which shall decrease by $0.50 on September 1, 1979 and on each succeeding September 1 to and including September 1, 1997, on and after which date the redemption price shall be $100.00 per share, together, as provided in said Articles of Incorporation, in each instance, with accrued dividends to the redemption date; provided, however, that the $9.50 Cumulative Preferred Shares shall not be redeemable, in whole or in part, prior to September 1, 1978 as a part of or in contemplation of any refunding operation including the application, directly or indirectly, of money borrowed or the proceeds of preferred stock sold at an interest or dividend cost to the corporation (calculated in accordance with generally accepted financial practice) of less than 9 1/2% per annum; and D. The amount payable on the $9.50 Cumulative Preferred Shares in the event of any dissolution, liquidation or winding up of the affairs of the corporation which shall be voluntary shall be the price at which said shares are at the time redeemable, and the amount payable on the $9.50 Cumulative Preferred Shares in the event of any dissolution, liquidation or winding up of the affairs of the corporation which shall be involuntary shall be One Hundred dollars ($100.00) per share, together, as provided in said Articles of Incorporation, in either event, with a sum, in the case of each share, computed at the annual dividend rate for the $9.50 Cumulative Preferred Shares from the date on which dividends on such share became cumulative to and including the date fixed for such distribution or payment, less the aggregate amount of all dividends which shall have theretofore been paid thereon or which shall have been declared thereon and for which moneys for payment shall have been set apart and remain available for payment. $11.50 Cumulative Preferred Shares 1 The Board of Directors of the corporation adopted the following resolution on July 28, 1975, which was filed with the Secretary of State of Minnesota on July 28, 1975: Resolution BE IT FURTHER RESOLVED That, pursuant to authority conferred on the Board of Directors of Otter Tail Power Company, a Minnesota corporation, by Article VI of its Articles of Incorporation, as amended, a fifth series of Cumulative Preferred Shares be, and it hereby is, created as follows: A. The designation of such series shall be "$11.50 Cumulative Preferred Shares," and the number of shares of such series shall be one hundred thousand (100,000). B. The rate of dividends payable on the $11.50 Cumulative Preferred Shares shall be $11.50 per share per annum, payable quarterly on the first day of March, June, September and December of each year, commencing September 1, 1975, and such dividends shall be cumulative and accrue in the case of shares issued prior to the record date for the first dividend thereon from and including the date of issuance thereof. C. The $11.50 Cumulative Preferred Shares shall be redeemable (otherwise than with respect to any redemption effected through or by the sinking funds hereafter described in subdivision E below) at $111.50 per share if redeemed before June 1, 1976, and at the following redemption prices per share if redeemed thereafter: If redeemed during the twelve months' period beginning Redemption Redemption June 1 Price June 1 Price 1976 $110.86 1985 $105.11 1977 $110.22 1986 $104.48 1978 $109.58 1987 $103.83 1979 $108.94 1988 $103.19 1980 $108.31 1989 $102.56 1981 $107.77 1990 $101.92 1982 $107.03 1991 $101.28 1983 $106.39 1992 $100.64 1984 $105.75 1993 $100.00 together, as provided in said Articles of Incorporation, in each instance, with accrued dividends to the redemption date; ____________________ 1 The $11.50 Cumulative Preferred Shares were redeemed in their entirety on March 1, 1986. provided, however, that, except for redemptions effected through or by the sinking funds described in subdivision E below, the $11.50 Cumulative Preferred Shares shall not be redeemable, in whole or in part, prior to July 15, 1985, as a part of or in contemplation of any refunding operation including the application, directly or indirectly, of (i) the proceeds from the sale of common shares of the Company, or (ii) money borrowed or the proceeds of preferred or preference shares of the Company sold at an interest or dividend cost to the Company (calculated in accordance with generally accepted financial practice) of less than 11.5% per annum. D. The amount payable on the $11.50 Cumulative Preferred Shares in the event of any dissolution, liquidation or winding up of the affairs of the Company which shall be voluntary shall be the price at which said shares are at the time redeemable (as set forth in subdivision C above), and the amount payable on the $11.50 Cumulative Preferred Shares in the event of any dissolution, liquidation or winding up of the affairs of the Company which shall be involuntary shall be One Hundred Dollars ($100.00) per share, together, as provided in said Articles of Incorporation, in either event, with a sum, in the case of each share, computed at the annual dividend rate for the $11.50 Cumulative Preferred Shares from the date on which dividends on such share became cumulative to and including the date fixed for such distribution or payment, less the aggregate amount of all dividends which shall have theretofore been paid thereon or which shall have been declared thereon and for which moneys for payment shall have been set apart and remain available for payment. E. So long as any of the $11.50 Cumulative Preferred Shares remain outstanding, after all dividends on all Cumulative Preferred Shares of all series for all past quarterly dividend periods and for the current quarterly period shall have been paid or declared and a sum sufficient for the payment thereof set apart for payment, the Company shall, as and for a mandatory sinking fund for the benefit of the $11.50 Cumulative Preferred Shares, redeem, in the manner and upon the notice and with the effect provided in Section C of Article VI of said Articles of Incorporation, on June 1, 1979, and on each succeeding June 1 to and including June 1, 1993 (each such June 1 being hereinafter called a "sinking fund redemption date"), 6.50% of the maximum number of $11.50 Cumulative Preferred Shares which shall theretofore have been issued, and on June 1, 1994, the balance of the $11.50 Cumulative Preferred Shares then outstanding (such required redemptions being hereinafter called the "mandatory sinking fund requirement"). The price at which the $11.50 Cumulative Preferred Shares shall be redeemed in satisfaction of the mandatory sinking fund requirement shall be $100.00 per share, together, as provided in said Articles of Incorporation, in each instance, with accrued dividends to the redemption date. The mandatory sinking fund requirement for the $11.50 Cumulative Preferred Shares shall be cumulative so that if, in any year, the Company shall not satisfy in full the sinking fund requirement for such year, the amount of the deficiency shall be added to the mandatory sinking fund requirement for succeeding years until the deficiency shall have been fully satisfied. In addition to the mandatory sinking fund requirement of the immediately preceding paragraph, the Company may, at its option, redeem, in the manner and upon the notice and with the effect provided in Section C of Article VI of said Articles of Incorporation, on any sinking fund redemption date $11.50 Cumulative Preferred Shares not in excess of 6.50% of the maximum number of $11.50 Cumulative Preferred Shares which shall theretofore have been issued at the mandatory sinking fund redemption price hereinbefore specified in this subdivision E. The privilege of so redeeming $11.50 Cumulative Preferred Shares shall not be cumulative and shall not relieve the Company to any extent from its obligation to redeem shares pursuant to the mandatory sinking fund requirement. $8.30 Cumulative Preferred Shares The Board of Directors of the corporation adopted the following resolution on March 30, 1977, which was filed with the Secretary of State of Minnesota on March 30, 1977: Resolution BE IT FURTHER RESOLVED That, pursuant to authority conferred on the Board of Directors of Otter Tail Power Company, a Minnesota corporation, by Article VI of its Articles of Incorporation, as amended, a sixth series of Cumulative Preferred Shares be, and it hereby is, created as follows: A. The designation of such series shall be "$8.30 Cumulative Preferred Shares," and the number of shares of such series shall be forty-five thousand (45,000). B. The rate of dividends payable on the $8.30 Cumulative Preferred Shares shall be $8.30 per share per annum, payable quarterly on the first day of March, June, September and December of each year, commencing June 1, 1977, and such dividends shall be cumulative and accrue in the case of shares issued prior to the record date for the first dividend thereon from and including the date of issuance thereof. C. The $8.30 Cumulative Preferred Shares shall be redeemable (otherwise than with respect to any redemption effected through or by the sinking funds hereafter described in subdivision E below) at $108.30 per share if redeemed before March 1, 1978, and at the following redemption prices per share if redeemed thereafter: If redeemed during the twelve months' period beginning Redemption Redemption March 1 Price March 1 Price 1978 $107.95 1990 $103.80 1979 $107.61 1991 $103.46 1980 $107.26 1992 $103.11 1981 $106.92 1993 $102.77 1982 $106.57 1994 $102.42 1983 $106.23 1995 $102.08 1984 $105.88 1996 $101.73 1985 $105.53 1997 $101.38 1986 $105.19 1998 $101.04 1987 $104.84 1999 $100.69 1988 $104.50 2000 $100.35 1989 $104.15 2001 $100.00 together, as provided in said Articles of Incorporation, in each instance, with accrued dividends to the redemption date; provided, however, that, except for redemptions effected through or by the sinking funds described in subdivision E below, the $8.30 Cumulative Preferred Shares shall not be redeemable, in whole or in part, prior to March 1, 1987 as a part of, or in contemplation of, any refunding operation including the application, directly or indirectly, of the proceeds of (i) indebtedness for money borrowed by the Company or any affiliate if such indebtedness (a) has an effective interest cost (computed in accordance with generally accepted financial practice) of less than 8.30% per annum or (b) has a Weighted Average Life to Maturity, at the time of such redemption, of less than the remaining Weighted Average Life to Maturity of the $8.30 Cumulative Preferred Shares or (ii) the issue or sale of preferred or preference shares of the Company or any affiliate if such shares have an effective dividend rate (based on the proceeds to the Company or such affiliate from such issue or sale net of any discount or commission to underwriters) of less than 8.30% per annum. The term "Weighted Average Life to Maturity" shall mean, at any date, the number of years obtained by dividing the then Remaining Dollar-years of such indebtedness or the $8.30 Cumulative Preferred Shares by the then outstanding principal amount of such indebtedness or by the product of $100.00 times the number of $8.30 Cumulative Preferred Shares which are then outstanding, as the case may be; and for the purpose of this definition, the term "Remaining Dollar-years" of any indebtedness or the $8.30 Cumulative Preferred Shares shall mean, at any date, the total of the products obtained by multiplying (i) the amount of each then remaining installment, mandatory sinking fund, serial maturity or other required payment, including payment at final maturity, in respect thereof by (ii) the number of years (calculated to the nearest one-twelfth) which will elapse between such date and the date on which such payment is required to be made. D. The amount payable on the $8.30 Cumulative Preferred Shares in the event of any dissolution, liquidation or winding up of the affairs of the Company which shall be voluntary shall be the price at which said shares are at the time redeemable (as set forth in subdivision C above), and the amount payable on the $8.30 Cumulative Preferred Shares in the event of any dissolution, liquidation or winding up of the affairs of the Company which shall be involuntary shall be $100.00 per share, together, as provided in said Articles of Incorporation, in either event, with a sum, in the case of each share, computed at the annual dividend rate for the $8.30 Cumulative Preferred Shares from the date on which dividends on such share became cumulative to and including the date fixed for such distribution or payment, less the aggregate amount of all dividends which shall have theretofore been paid thereon or which shall have been declared thereon and for which moneys for payment shall have been set apart and remain available for payment. E. So long as any of the $8.30 Cumulative Preferred Shares remain outstanding, after all dividends on all Cumulative Preferred Shares of all series for all past quarterly dividend periods and for the current quarterly dividend period shall have been paid or declared and a sum sufficient for the payment thereof set apart for payment, the Company shall, as and for a mandatory sinking fund for the benefit of the $8.30 Cumulative Preferred Shares, redeem, in the manner and upon the notice and with the effect provided in Section C of Article VI of said Articles of Incorporation, (i) on March 1, 1983, and on each succeeding March 1 to and including March 1, 1997, 4% of the maximum number of $8.30 Cumulative Preferred Shares which shall theretofore have been issued, (ii) on March 1, 1998, and on each succeeding March 1 to and including March 1, 2001, 8% of the maximum number of $8.30 Cumulative Preferred Shares which shall theretofore have been issued (each March 1 referred to in clause (i) or (ii) above of this sentence being hereinafter called a "sinking fund redemption date") and (iii) on March 1, 2002, the balance of the $8.30 Cumulative Preferred Shares then outstanding (such required redemptions being hereinafter called the "mandatory sinking fund requirement"). The price at which the $8.30 Cumulative Preferred Shares shall be redeemed in satisfaction of the mandatory sinking fund requirement shall be $100.00 per share, together, as provided in said Articles of Incorporation, in each instance, with accrued dividends to the redemption date. The mandatory sinking fund requirement for the $8.30 Cumulative Preferred Shares shall be cumulative so that if, in any year, the Company shall not satisfy in full the mandatory sinking fund requirement for such year, the amount of the deficiency shall be added to the mandatory sinking fund requirement for succeeding years until the deficiency shall have been fully satisfied. In addition to the mandatory sinking fund requirement, the Company may, at its option, redeem, in the manner and upon the notice and with the effect provided in Section C of Article VI of said Articles of Incorporation, on any sinking fund redemption date $8.30 Cumulative Preferred Shares in an amount not to exceed the number of $8.30 Cumulative Preferred Shares which shall be redeemed on such sinking fund redemption date through the mandatory sinking fund requirement at the mandatory sinking fund redemption price hereinbefore specified in this subdivision E. The privilege of so redeeming $8.30 Cumulative Preferred Shares shall not be cumulative and shall not relieve the Company to any extent from its obligation to redeem shares pursuant to the mandatory sinking fund requirement. $8.375 Cumulative Preferred Shares The Board of directors of the corporation adopted the following resolution on March 6, 1978, which was filed with the Secretary of State of Minnesota on March 21, 1978: Resolution BE IT FURTHER RESOLVED That, pursuant to authority conferred on the Board of Directors of Otter Tail Power Company, a Minnesota corporation, by Article VI of its Articles of Incorporation, as amended, a seventh series of Cumulative Preferred Shares be, and it hereby is, created as follows: A. The designation of such series shall be "$8.375 Cumulative Preferred Shares," and the number of shares of such series shall be one hundred thousand (100,000). B. The rate of dividends payable on the $8.375 Cumulative Preferred Shares shall be $8.375 per share per annum, payable quarterly on the first day of March, June, September and December of each year, commencing June 1, 1978. Such dividends shall be cumulative and accrue in the case of each share from and including the date of original issuance thereof; and the amount of the dividend for any period of less than a full quarter shall be computed on the basis of a 360-day year of twelve 30-day months. C. The $8.375 Cumulative Preferred Shares shall be redeemable (otherwise than with respect to any redemption effected through or by the sinking funds hereafter described in subdivision E below) at $108.375 per share if redeemed on or before June 1, 1979, and at the following redemption prices per share if redeemed thereafter: If redeemed during the twelve months' period ending Redemption Redemption June 1 Price June 1 Price 1980 $108.026 1992 $103.839 1981 $107.677 1993 $103.490 1982 $107.329 1994 $103.141 1983 $106.979 1995 $102.792 1984 $106.630 1996 $102.443 1985 $106.281 1997 $102.094 1986 $105.932 1998 $101.745 1987 $105.583 1999 $101.396 1988 $105.234 2000 $101.047 1989 $104.886 2001 $100.698 1990 $104.537 2002 $100.349 1991 $104.188 2003 $100.000 together, as provided in said Articles of Incorporation, in each instance, with accrued dividends to the redemption date; provided, however, that, except for redemptions effected through or by the sinking funds described in subdivision E below, the $8.375 Cumulative Preferred Shares shall not be redeemable, in whole or in part, prior to June 1, 1988 as a part of, or in contemplation of, any refunding operation including the application, directly or indirectly, of the proceeds of (i) indebtedness for money borrowed by the Company or any affiliate if such indebtedness (a) has an effective interest cost (computed in accordance with generally accepted financial practice) of less than 8.375% per annum or (b) has a Weighted Average Life to Maturity, at the time of such redemption, of less than the remaining Weighted Average Life to Maturity of the $8.375 Cumulative Preferred Shares or (ii) the issue or sale of shares of the Company ranking prior to or on a parity with the $8.375 Cumulative Preferred Shares as to dividends or on liquidation if such shares have an effective dividend rate (based on the proceeds to the Company from such issue or sale net of any discount or commission to underwriters) of less than 8.375% per annum. The term "Weighted Average Life to Maturity" shall mean, at any date, the number of years obtained by dividing the then Remaining Dollar-years of such indebtedness or the $8.375 Cumulative Preferred Shares by the then outstanding principal amount of such indebtedness or by the product of $100.00 times the number of $8.375 Cumulative Preferred Shares which are then outstanding, as the case may be; and for the purpose of this definition, the term "Remaining Dollar-years" of any indebtedness or the $8.375 Cumulative Preferred Shares shall mean, at any date, the total of the products obtained by multiplying (i) the amount of each then remaining installment, mandatory sinking fund, serial maturity or other required payment, including payment at final maturity, in respect thereof by (ii) the number of years (calculated to the nearest one-twelfth) which will elapse between such date and the date on which such payment is required to be made. D. The amount payable on the $8.375 Cumulative Preferred Shares in the event of any dissolution, liquidation or winding up of the affairs of the Company which shall be voluntary shall be the price at which said shares are at the time redeemable (as set forth in subdivision C above), and the amount payable on the $8.375 Cumulative Preferred Shares in the event of any dissolution, liquidation or winding up of the affairs of the Company which shall be involuntary shall be $100.00 per share, together, as provided in said Articles of Incorporation, in either event, with a sum, in the case of each share, computed at the annual dividend rate for the $8.375 Cumulative Preferred Shares from the date on which dividends on such share became cumulative to and including the date fixed for such distribution or payment, less the aggregate amount of all dividends which shall have theretofore been paid thereon or which shall have been declared thereon and for which moneys for payment shall have been set apart and remain available for payment. E. So long as any of the $8.375 Cumulative Preferred Shares remain outstanding, after all dividends on all Cumulative Preferred Shares of all series for all past quarterly dividend periods and for the current quarterly dividend period shall have been paid or declared and a sum sufficient for the payment thereof set apart for payment, the Company shall, as and for a mandatory sinking fund for the benefit of the $8.375 Cumulative Preferred Shares, redeem, in the manner and upon the notice and with the effect provided in Section C of Article VI of said Articles of Incorporation (i) on June 1, 1984, and on each succeeding June 1 to and including June 1, 1993, 2% of the maximum number of $8.375 Cumulative Preferred Shares which shall theretofore have been issued, (ii) on June 1, 1994, and on each succeeding June 1 to and including June 1, 2002, 6.67% of the maximum number of $8.375 Cumulative Preferred Shares which shall theretofore have been issued (each June 1 referred to in clause (i) or (ii) above of this sentence being hereinafter called a "sinking fund redemption date") and (iii) on June 1, 2003, the balance of the $8.375 Cumulative Preferred Shares then outstanding (such required redemptions being hereinafter called the "mandatory sinking fund requirement"). The price at which the $8.375 Cumulative Preferred Shares shall be redeemed in satisfaction of the mandatory sinking fund requirement shall be $100.00 per share, together, as provided in said Articles of Incorporation, in each instance, with accrued dividends to the redemption date. The mandatory sinking fund requirement for the $8.375 Cumulative Preferred Shares shall be cumulative so that if, in any year, the Company shall not satisfy in full the mandatory sinking fund requirement for such year, the amount of the deficiency shall be added to the mandatory sinking fund requirement for succeeding years until the deficiency shall have been fully satisfied. In addition to the mandatory sinking fund requirement, the Company may, at its option, redeem, in the manner and upon the notice and with the effect provided in Section C of Article VI of said Articles of Incorporation, on any sinking fund redemption date $8.375 Cumulative Preferred Shares in an amount not to exceed the number of $8.375 Cumulative Preferred Shares which shall be redeemed on such sinking fund redemption date through the mandatory sinking fund requirement at the mandatory sinking fund redemption price hereinbefore specified in this subdivision E. The privilege of so redeeming $8.375 Cumulative Preferred Shares shall not be cumulative and shall not relieve the Company to any extent from its obligation to redeem shares pursuant to the mandatory sinking fund requirement. $8.90 Cumulative Preferred Shares The Board of directors of the corporation adopted the following resolution on July 23, 1979, which was filed with the Secretary of State of Minnesota on July 26, 1979: Resolution BE IT FURTHER RESOLVED That, pursuant to authority conferred on the Board of Directors of Otter Tail Power Company, a Minnesota corporation, by Subdivision A of Division I of Article VI of its Articles of Incorporation, as amended, an eighth series of Cumulative Preferred Shares be, and it hereby is, created as follows: A. The designation of such series shall be "$8.90 Cumulative Preferred Shares," and the number of shares of such series shall be seventy thousand (70,000). B. The rate of dividends payable on the $8.90 Cumulative Preferred Shares shall be $8.90 per share per annum, payable quarterly on the first day of March, June, September and December of each year, commencing September 1, 1979. Such dividends shall be cumulative and accrue in the case of each share from and including the date of original issuance thereof; and the amount of the dividend for any period of less than a full quarter shall be computed on the basis of a 360-day year of twelve 30-day months. C. The $8.90 Cumulative Preferred Shares shall be redeemable (otherwise than with respect to any redemption effected through or by the sinking funds hereafter described in subdivision E below) at $108.90 per share if redeemed on or before September 1, 1980, and at the following redemption prices per share if redeemed thereafter: If redeemed during the twelve months' period ending Redemption Redemption September 1 Price September 1 Price 1981 $108.529 1993 $104.079 1982 $108.158 1994 $103.708 1983 $107.788 1995 $103.338 1984 $107.417 1996 $102.967 1985 $107.046 1997 $102.596 1986 $106.675 1998 $102.225 1987 $106.304 1999 $101.854 1988 $105.933 2000 $101.483 1989 $105.563 2001 $101.113 1990 $105.192 2002 $100.742 1991 $104.821 2003 $100.371 1992 $104.450 2004 $100.000 together, as provided in subdivision C of said Division I, in each instance, with accrued dividends to the redemption date; provided, however, that, except for redemptions effected through or by the sinking funds described in subdivision E below, the $8.90 Cumulative Preferred Shares shall not be redeemable, in whole or in part, prior to September 1, 1989 as a part of, or in contemplation of, any refunding operation including the application, directly or indirectly, of the proceeds of (i) indebtedness for money borrowed by the Company or any affiliate if such indebtedness (a) has an effective interest cost (computed in accordance with generally accepted financial practice) of less than 8.90% per annum or (b) has a Weighted Average Life to Maturity, at the time of such redemption, of less than the remaining Weighted Average Life to Maturity of the $8.90 Cumulative Preferred Shares or (ii) the issue or sale of shares of the Company ranking prior to the Common Shares of the Company as to dividends or on liquidation if such shares have an effective dividend rate (based on the proceeds to the Company from such issue or sale net of any discount or commission to underwriters) of less than 8.90% per annum. The term "Weighted Average Life to Maturity" shall mean, at any date, the number of years obtained by dividing the then Remaining Dollar-years of such indebtedness or the $8.90 Cumulative Preferred Shares by the then outstanding principal amount of such indebtedness or by the product of $100.00 times the number of $8.90 Cumulative Preferred Shares which are then outstanding, as the case may be; and for the purpose of this definition, the term "Remaining Dollar-years" of any indebtedness or the $8.90 Cumulative Preferred Shares shall mean, at any date, the total of the products obtained by multiplying (i) the amount of each then remaining installment, mandatory sinking fund, serial maturity or other required payment, including payment at final maturity, in respect thereof by (ii) the number of years (calculated to the nearest one- twelfth) which will elapse between such date and the date on which such payment is required to be made. D. The amount payable on the $8.90 Cumulative Preferred Shares in the event of any dissolution, liquidation or winding up of the affairs of the Company which shall be voluntary shall be the price at which said shares are at the time redeemable (as set forth in subdivision C above), and the amount payable on the $8.90 Cumulative Preferred Shares in the event of any dissolution, liquidation or winding up of the affairs of the Company which shall be involuntary shall be $100.00 per share, together, as provided in subdivision E of said Division I, in either event, with a sum, in the case of each share, computed at the annual dividend rate for the $8.90 Cumulative Preferred Shares from the date on which dividends on such share became cumulative to and including the date fixed for such distribution or payment, less the aggregate amount of all dividends which shall have theretofore been paid thereon or which shall have been declared thereon and for which moneys for payment shall have been set apart and remain available for payment. E. So long as any of the $8.90 Cumulative Preferred Shares remain outstanding, after all dividends on all Cumulative Preferred Shares of all series for all past quarterly dividend periods and for the current quarterly dividend period shall have been paid or declared and a sum sufficient for the payment thereof set apart for payment, the Company shall, as and for a mandatory sinking fund for the benefit of the $8.90 Cumulative Preferred Shares, redeem, in the manner and upon the notice and with the effect provided in subdivision C of said Division I, (i) on September 1, 1985, and on each succeeding September 1 to and including September 1, 1994, 2 1/2% of the maximum number of $8.90 Cumulative Preferred Shares which shall theretofore have been issued, (ii) on September 1, 1995, and on each succeeding September 1 to and including September 1, 2003, 7.5% of the maximum number of $8.90 Cumulative Preferred Shares which shall theretofore have been issued (each September 1 referred to in clause (i) or (ii) above of this sentence being hereinafter called a "sinking fund redemption date") and (iii) on September 1, 2004, the balance of the $8.90 Cumulative Preferred Shares then outstanding (such required redemptions being hereinafter called the "mandatory sinking fund requirement"). The price at which the $8.90 Cumulative Preferred Shares shall be redeemed in satisfaction of the mandatory sinking fund requirement shall be $100.00 per share, together, as provided in subdivision C of said Division I, in each instance, with accrued dividends to the redemption date. The mandatory sinking fund requirement for the $8.90 Cumulative Preferred Shares shall be cumulative so that if, in any year, the Company shall not satisfy in full the mandatory sinking fund requirement for such year, the amount of the deficiency shall be added to the mandatory sinking fund requirement for succeeding years until the deficiency shall have been fully satisfied. In addition to the mandatory sinking fund requirement, the Company may, at its option, redeem, in the manner and upon the notice and with the effect provided in subdivision C of said Division I, on any sinking fund redemption date $8.90 Cumulative Preferred Shares in an amount not to exceed the number of $8.90 Cumulative Preferred Shares which shall be redeemed on such sinking fund redemption date through the mandatory sinking fund requirement at the mandatory sinking fund redemption price hereinbefore specified in this subdivision E; provided that not more than 30% of the maximum number of $8.90 Cumulative Preferred Shares which shall theretofore have been issued may be so redeemed. The privilege of so redeeming $8.90 Cumulative Preferred Shares shall not be cumulative and shall not relieve the Company to any extent from its obligation to redeem shares pursuant to the mandatory sinking fund requirement. $11.50 Cumulative Preferred Shares (Series A) 1 The Board of Directors of the corporation adopted the following resolution on June 18, 1980, which was filed with the Secretary of State of Minnesota on June 20, 1980: Resolution BE IT FURTHER RESOLVED That, pursuant to authority conferred on the Board of Directors of Otter Tail Power Company, a Minnesota corporation, by subdivision A of Division I of Article VI of its Articles of Incorporation, as amended, a ninth series of Cumulative Preferred Shares be, and it hereby is, created as follows: A. The designation of such series shall be "$11.50 Cumulative Preferred Shares (Series A)," and the number of shares of such series shall be eighty thousand (80,000). B. The rate of dividends payable on the $11.50 Cumulative Preferred Shares (Series A) shall be $11.50 per share per annum, payable quarterly on the first day of March, June, September and December of each year, commencing September 1, 1980. Such dividends shall be cumulative and accrue in the case of each share from and including the date of original issuance thereof; and the amount of the dividend for any period of less than a full quarter shall be computed on the basis of a 360-day year of twelve 30-day months. C. The $11.50 Cumulative Preferred Shares (Series A) shall be redeemable (otherwise than with respect to any redemption effected through or by the sinking funds hereafter described in subdivision E below) at $111.50 per share if redeemed on or before June 1, 1981, and at the following redemption prices per share if redeemed thereafter: If redeemed during the twelve months' period ending Redemption Redemption June 1 Price June 1 Price 1982 $111.02 1994 $105.27 1983 $110.54 1995 $104.79 1984 $110.06 1996 $104.31 1985 $109.58 1997 $103.83 1986 $109.10 1998 $103.35 1987 $108.63 1999 $102.88 1988 $108.15 2000 $102.40 1989 $107.67 2001 $101.92 1990 $107.19 2002 $101.44 1991 $106.71 2003 $100.96 ________________ 2 The $11.50 Cumulative Preferred Shares (Series A) were redeemed in their entirety on March 1, 1996 1992 $106.23 2004 $100.48 1993 $105.75 2005 $100.00 together, as provided in subdivision C of said Division I, in each instance, with accrued dividends to the redemption date; provided, however, that, except for redemptions effected through or by the sinking funds described in subdivision E below, the $11.50 Cumulative Preferred Shares (Series A) shall not be redeemable, in whole or in part, prior to June 1, 1990 as a part of, or in contemplation of, any refunding operation including the application, directly or indirectly, of the proceeds of (i) indebtedness for money borrowed by the Company or any affiliate if such indebtedness (a) has an effective interest cost (computed in accordance with generally accepted financial practice) of less than 11.50% per annum or (b) has a Weighted Average Life to Maturity, at the time of such redemption, of less than the remaining Weighted Average Life to Maturity of the $11.50 Cumulative Preferred Shares (Series A) or (ii) the issue or sale of shares of the Company ranking prior to the Common Shares of the Company as to dividends or on liquidation if such shares have an effective dividend rate (based on the proceeds to the Company from such issue or sale net of any discount or commission to underwriters) of less than 11.50% per annum. The term "Weighted Average Life to Maturity" shall mean, at any date, the number of years obtained by dividing the then Remaining Dollar-years of such indebtedness or the $11.50 Cumulative Preferred Shares (Series A) by the then outstanding principal amount of such indebtedness or by the product of $100.00 times the number of $11.50 Cumulative Preferred Shares (Series A) which are then outstanding, as the case may be; and for the purpose of this definition, the term "Remaining Dollar-years" of any indebtedness or the $11.50 Cumulative Preferred Shares (Series A) shall mean, at any date, the total of the products obtained by multiplying (i) the amount of each then remaining installment, mandatory sinking fund, serial maturity or other required payment, including payment at final maturity, in respect thereof by (ii) the number of years (calculated to the nearest one-twelfth) which will elapse between such date and the date on which such payment is required to be made. D. The amount payable on the $11.50 Cumulative Preferred Shares (Series A) in the event of any dissolution, liquidation or winding up of the affairs of the Company which shall be voluntary shall be the price at which said shares are at the time redeemable (as set forth in subdivision C above), and the amount payable on the $11.50 Cumulative Preferred Shares (Series A) in the event of any dissolution, liquidation or winding up of the affairs of the Company which shall be involuntary shall be $100.00 per share, together, as provided in Subdivision E of said Division I, in either event, with a sum, in the case of each share, computed at the annual dividend rate for the $11.50 Cumulative Preferred Shares (Series A) from the date on which dividends on such share became cumulative to and including the date fixed for such distribution or payment, less the aggregate amount of all dividends which shall have theretofore been paid thereon or which shall have been declared thereon and for which moneys for payment shall have been set apart and remain available for payment. E. So long as any of the $11.50 Cumulative Preferred Shares (Series A) remain outstanding, after all dividends on all Cumulative Preferred Shares of all series for all past quarterly dividend periods and for the current quarterly dividend period shall have been paid or declared and a sum sufficient for the payment therof set apart for payment, the Company shall, as and for a mandatory sinking fund for the benefit of the $11.50 Cumulative Preferred Shares (Series A), redeem, in the manner and upon the notice and with the effect provided in subdivision C of said Division I, (i) on June 1, 1986, and on each succeeding June 1 to and including June 1, 2004 (each such June 1 being hereinafter called a "sinking fund redemption date"), 5% of the maximum number of $11.50 Cumulative Preferred Shares (Series A) which shall theretofore have been issued and (ii) on June 1, 2005, the balance of the $11.50 Cumulative Preferred Shares (Series A) then outstanding (such required redemptions being hereinafter called the "mandatory sinking fund requirement"). The price at which the $11.50 Cumulative Preferred Shares (Series A) shall be redeemed in satisfaction of the mandatory sinking fund requirement shall be $100.00 per share, together, as provided in subdivision C of said Division I, in each instance, with accrued dividends to the redemption date. The mandatory sinking fund requirement for the $11.50 Cumulative Preferred Shares (Series A) shall be cumulative so that if, in any year, the Company shall not satisfy in full the mandatory sinking fund requirement for such year, the amount of the deficiency shall be added to the mandatory sinking fund requirement for succeeding years until the deficiency shall have been fully satisfied. In addition to the mandatory sinking fund requirement, the Company may, at its option, redeem, in the manner and upon the notice and with the effect provided in subdivision C of said Division I, on any sinking fund redemption date $11.50 Cumulative Preferred Shares (Series A) in an amount not to exceed the number of $11.50 Cumulative Preferred Shares (Series A) which shall be redeemed on such sinking fund redemption date through the mandatory sinking fund requirement at the mandatory sinking fund redemption price hereinbefore specified in this subdivision E; provided that not more than 25% of the maximum number of $11.50 Cumulative Preferred Shares (Series A) which shall theretofore have been issued may be so redeemed. The privilege of so redeeming $11.50 Cumulative Preferred Shares (Series A) shall not be cumulative and shall not relieve the Company to any extent from its obligation to redeem shares pursuant to the mandatory sinking fund requirement. CERTIFICATE The undersigned, D. R. EMMEN and JAY D. MYSTER, do hereby certify that we are duly elected, qualified and acting as the Senior Vice President, Finance and Treasurer and the Vice President, Governmental and Legal and Secretary, respectively, of Otter Tail Power Company, a Minnesota corporation (the "Company"), and that the following is a true and correct copy of a resolution duly adopted at a meeting of the Board of Directors of the Company duly called and held on April 13, 1992, at which a quorum was present and acted throughout: BE IT RESOLVED That, pursuant to authority conferred on the Board of Directors of Otter Tail Power Company, a Minnesota corporation, by subdivision A of Division I of Article VI of its Articles of Incorporation, as amended, a tenth series of Cumulative Preferred Shares be, and it hereby is, created as follows: A. The designation of such series shall be "$9.00 Exchangeable Cumulative Preferred Shares," and the number of shares of such series shall be fifty-three thousand three hundred eleven (53,311). B. The rate of dividends payable on the $9.00 Exchangeable Cumulative Preferred Shares shall be $9.00 per share per annum, payable quarterly on the first day of March, June, September and December of each year, commencing on the first day of the first such month following the date of original issuance of the $9.00 Exchangeable Cumulative Preferred Shares. Such dividends shall be cumulative and accrue in the case of each share from and including the date of original issuance thereof; and the amount of the dividend for any period of less than a full quarter shall be computed on the basis of a 360-day year of twelve 30-day months. C. The $9.00 Exchangeable Cumulative Preferred Shares shall be redeemable at any time on or after the seventh anniversary of the date of original issuance thereof at $100.00 per share together, as provided in subdivision C of said Division I, in each instance, with accrued dividends to the redemption date; provided, however, that the holder of any $9.00 Exchangeable Cumulative Preferred Shares to be redeemed pursuant to this Section C shall have the right, at such holder's option, to exchange any or all of the $9.00 Exchangeable Cumulative Preferred Shares held by such holder and so to be redeemed into Common Shares (as defined below) pursuant to, and subject to and upon compliance with, the provisions of Section E hereof. D. The amount payable on the $9.00 Exchangeable Cumulative Preferred Shares in the event of any dissolution, liquidation or winding up of the affairs of the Company, whether voluntary or involuntary, shall be $100.00 per share, together, as provided in subdivision E of said Division I, with a sum, in the case of each share, computed at the annual dividend rate for the $9.00 Exchangeable Cumulative Preferred Shares from the date on which dividends on such share became cumulative to and including the date fixed for such distribution or payment, less the aggregate amount of all dividends which shall have theretofore been paid thereon or which shall have been declared thereon and for which moneys for payment shall have been set apart and remain available for payment. E. (1) Subject to and upon compliance with the provisions of this Section E, each holder of $9.00 Exchangeable Cumulative Preferred Shares shall have the right, at each such holder's option, at any time on or after the seventh anniversary of the date of original issuance thereof, to exchange any or all of the $9.00 Exchangeable Cumulative Preferred Shares held by each such holder into either (a) cash in the amount of $100.00 per each $9.00 Exchangeable Cumulative Preferred Share so exchanged, together, in each instance, with accrued dividends to the Exchange Date (as defined below), or (b) the number of fully paid and nonassessable Common Shares obtained by dividing (i) the sum of (A) the $100.00 liquidation value of a $9.00 Exchangeable Cumulative Preferred Share and (B) any accrued dividends to the Exchange Date with respect to the $9.00 Exchangeable Cumulative Preferred Share to be exchanged, by (ii) the Fair Market Value (as defined below) of a Common Share, and multiplying such resulting number by the number of $9.00 Exchangeable Cumulative Preferred Shares to be so exchanged (rounding such product, for the purpose of determining the amount of any cash payments provided for under subsection (3) of this Section E, to the nearest 1/100 Common Share, with 1/200 of a Common Share being rounded upward), and in the case of either clause (a) or (b), by surrender of such $9.00 Exchangeable Cumulative Preferred Shares to be so exchanged, such surrender to be made in the manner provided in subsection (2) of this Section E. For purposes of this Section E, the term "Common Shares" shall mean the Common Shares of the Company as the same exists at the date of original issue of the $9.00 Exchangeable Cumulative Preferred Shares or as such shares may be constituted from time to time thereafter. For purposes of this Section E, the term "Exchange Date" shall mean (x), if the $9.00 Exchangeable Cumulative Preferred Shares are being exchanged for cash, the date which is 10 calendar days after the date such shares have been duly surrendered to the Registrar or (y), if the $9.00 Exchangeable Cumulative Preferred Shares are being exchanged for Common Shares, the date which is 60 Trading Days (as defined below) after the date such shares have been duly surrendered to the Registrar, or, in the case of either clause (x) or (y), if such day is not a business day, the next succeeding business day. For purposes of this Section E, the term "Fair Market Value" with respect to the Common Shares shall mean the average of the reported last sale prices for the 60 consecutive Trading Days immediately preceding the relevant Exchange Date. The reported last sale price for each Trading Day shall be the reported last sale price, regular way, or, in case no sale takes place on such day, the average of the reported closing bid and asked prices, regular way, in either case as reported on the New York Stock Exchange Composite Tape or, if the Common Shares are not listed or admitted to trading on the New York Stock Exchange, in the principal national securities exchange on which the Common Shares are listed or admitted to trading or, if not listed or admitted to trading on any national securities exchange, on the National Market System of the National Association of Securities Dealers, Inc. Automated Quotations System ("NASDAQ") or, if the Common Shares are not quoted on such National Market System, the average of the closing bid and asked prices on such day in the over-the- counter market as reported by NASDAQ or, if bid and asked prices for Common Shares on each such day shall not have been reported through NASDAQ, the average of the bid and asked prices for such day as furnished by any New York Stock Exchange member firm regularly making a market in the Common Shares selected for such purpose by the Company and if no such quotations are available, the fair market value of the Common Shares as determined by a New York Stock Exchange member firm regularly making a market in the Common Shares selected for such purpose by the Company. For purposes of this Section E, the term "Trading Day" means (x), if the Common Shares are listed or admitted for trading on the New York Stock Exchange or another national securities exchange, a day on which the New York Stock Exchange or such other national securities exchange is open for business or (y), if the Common Shares are quoted on the National Market System of NASDAQ, a day on which trades may be made on such National Market System or (z), otherwise, any day other than a Saturday or Sunday or a day on which banking institutions in the State of New York are authorized or obligated by law or executive order to close. (2) In order to validly exercise the exchange privilege pursuant to this Section E, the holder of each $9.00 Exchangeable Cumulative Preferred Share to be exchanged shall surrender the certificate representing such share at the office of the Registrar for the $9.00 Exchangeable Cumulative Preferred Shares in Fergus Falls, Minnesota, appointed for such purpose by the Company (which may be the Company), with the Notice of Election to Exchange on the back of such certificate completed and signed. Unless the shares issuable on exchange are to be issued in the same name as the name in which the share to be exchanged is registered, each share surrendered for exchange shall be accompanied by instruments of transfer, in form satisfactory to the Registrar, duly executed by the holder or the holder's duly authorized attorney, and by an amount sufficient to pay any transfer or similar tax. If the $9.00 Exchangeable Cumulative Preferred Shares have been called for redemption and are being surrendered for exchange pursuant to the proviso contained in Section C hereof, then the certificate representing such shares must be duly surrendered, as aforesaid, to the Registrar on or before the twentieth day following the date of the notice of redemption relating to such shares in order for the exchange privilege to be validly exercised, and any such shares with respect to which the exchange privilege is not validly exercised shall be redeemed on the redemption date. On or before the Exchange Date, the Company shall deliver at the office of the Registrar, for the account of each holder of $9.00 Exchangeable Cumulative Preferred Shares surrendered for exchange on such Exchange Date, (i) if such $9.00 Exchangeable Cumulative Preferred Shares are being exchanged for cash, funds in the amount provided in clause (a) of subsection (1) of this Section E, or (ii) if such $9.00 Exchangeable Cumulative Preferred Shares are being exchanged for Common Shares, a certificate or certificates for the number of full Common Shares issuable upon the exchange of such shares in accordance with the provisions of clause (b) of subsection (1) of this Section E, and funds for the settlement of any fractional interest in respect of a Common Share arising upon such exchange as provided in subsection (3) of this Section E. At the option of the Company, the Common Shares so delivered may be newly issued shares, treasury shares or shares reacquired by or on behalf of the Company, including shares purchased in the open market at any time in the sole discretion of the Company. Each holder of $9.00 Exchangeable Cumulative Preferred Shares acknowledges by acceptance thereof that (i) the Common Shares deliverable upon any exchange of $9.00 Exchangeable Cumulative Preferred Shares will not be registered under the Securities Act of 1933, as amended, or any applicable state securities laws and that any such Common Shares may not be resold except pursuant to an exemption from such Act and all such applicable laws or pursuant to registrations thereunder; (ii) such Common Shares may not be sold, transferred or otherwise disposed of in any manner without first obtaining (a) an opinion of counsel reasonably acceptable to the Company, both as to opinion and as to counsel, that such proposed sale, transfer or other disposition can lawfully be made without registration pursuant to the Securities Act of 1933, as then amended, and applicable state securities laws, or (b) such registrations (it being expressly understood that the Company shall not have any obligation to register such securities for such purpose); (iii) certificates representing such Common Shares may bear a legend stating that such Common Shares have not been registered under the Securities Act of 1933, as amended, and applicable state securities laws and referring to the foregoing restrictions on transferability of such Common Shares; and (iv) the Company may place stop transfer orders or notations on the Company's stock record referring to such restrictions on transferability. All Common Shares delivered upon exchange of the $9.00 Exchangeable Cumulative Preferred Shares pursuant to this Section E will, upon delivery, be duly and validly issued and fully paid and nonassessable, free of all liens and charges and not subject to any preemptive rights. Each exchange of $9.00 Exchangeable Cumulative Preferred Shares pursuant to this Section E shall be deemed to have been effected immediately prior to the close of business on the Exchange Date. Until such time on the Exchange Date, any $9.00 Exchangeable Cumulative Preferred Shares which have been surrendered for exchange with respect to such Exchange Date shall be treated as outstanding and the person or persons in whose name or names a certificate for any such shares is registered (or any prior holder who was the holder of record of such shares on the relevant record date) shall remain the holder of record for the purpose of voting such shares and receiving any dividends paid with respect to such shares prior to such time on the Exchange Date, notwithstanding that such shares might have been redeemed on a date prior to the Exchange Date but for the exercise of the right to exchange such shares pursuant to the proviso contained in Section C hereof. At such time on such Exchange Date, the person or persons in whose name or names any certificate or certificates for Common Shares shall be deliverable upon such exchange shall be deemed to have become the holder or holders of record of the Common Shares represented thereby unless the stock transfer books of the Company are closed on such date, in which event such person or persons shall be deemed to have become such holder or holders of record at the close of business on the next succeeding day on which such stock transfer books are open. (3) In connection with the exchange of any $9.00 Exchangeable Cumulative Preferred Shares for Common Shares pursuant to this Section E, no fractional Common Share or scrip representing fractions of a Common Share shall be issued. Instead of any fractional interest in a Common Share which would otherwise be deliverable upon the exchange of $9.00 Exchangeable Cumulative Preferred Shares, the Company shall pay to the holder of such $9.00 Exchangeable Cumulative Preferred Shares an amount in cash (computed to the nearest cent, with one-half cent being rounded upward) equal to the Fair Market Value of a Common Share multiplied by the fraction of a Common Share represented by such fractional interest. (4) The number of $9.00 Exchangeable Cumulative Preferred Shares which may be exchanged pursuant to this Section E in any twelve-month period shall be limited to a total of 10,662 $9.00 Exchangeable Cumulative Preferred Shares, and the Company shall have no obligation to exchange any shares surrendered in excess of that amount; provided, however, that $9.00 Exchangeable Cumulative Preferred Shares called for redemption and surrendered for exchange pursuant to the proviso contained in Section C hereof shall not be subject to the limitation set forth in this subsection (4) and shall not be counted for purposes of determining the limitation set forth in this subsection (4) as it applies to shares otherwise surrendered for exchange. (5) On any Exchange Date, the Company shall have no obligation to exchange for Common Shares, whether pursuant to the proviso contained in Section C hereof or otherwise, $9.00 Exchangeable Cumulative Preferred Shares held by any holder unless either (i) the total number of $9.00 Exchangeable Cumulative Preferred Shares surrendered for exchange by such holder with respect to such Exchange Date equals or exceeds 500 or (ii) the total number of $9.00 Exchangeable Cumulative Preferred Shares surrendered for exchange by all holders of $9.00 Exchangeable Cumulative Preferred Shares with respect to such Exchange Date equals or exceeds 500. IN WITNESS WHEREOF, the undersigned have hereunto set their hands as the Senior Vice President, Finance and Treasurer and the Vice President, Governmental and Legal and Secretary, respectively, of Otter Tail Power Company and have affixed the seal of Otter Tail Power Company this 10th day of August, 1992. D. R. Emmen D. R. Emmen Senior Vice President, Finance and Treasurer Jay D. Myster Jay D. Myster Vice President, Governmental and Legal and Secretary [CORPORATE SEAL] STATE OF MINNESOTA ) ) SS COUNTY OF OTTER TAIL) ON this 10th day of August, 1992 before me a Notary Public and for said County and State, personally appeared D. R. EMMEN and JAY D. MYSTER, to me personally known to be the Senior Vice President, Finance and Treasurer and the Vice President, Governmental and Legal and Secretary, respectively, of Otter Tail Power Company, who, being by me duly sworn, did say that they are, respectively, the Senior Vice President, Finance and Treasurer and the Vice President, Governmental and Legal and Secretary of said corporation, and that the seal affixed to the within certificate is the corporate seal of said corporation, and that said certificate was signed and sealed in behalf of said corporation by authority of its Board of Directors, and said D. R. EMMEN and JAY D. MYSTER acknowledged said certificate to be the free act and deed of said corporation. Raymond J. Holmgren [NOTARIAL SEAL] CERTIFICATE The undersigned, D. R. EMMEN and JAY D. MYSTER, do hereby certify that we are duly elected, qualified and acting as the Senior Vice President, Finance and Treasurer and the Vice President, Governmental and Legal and Secretary, respectively, of Otter Tail Power Company, a Minnesota corporation (the "Company"), and that the following is a true and correct copy of a resolution duly adopted by a Written Action of the Pricing Committee of the Board of Directors of the Company, dated September 29, 1992, executed by all the members of said Pricing Committee, duly established by the Board of Directors of the Company at a meeting thereof duly called and held on February 3, 1992, at which a quorum was present and acted throughout, to act for the Board of Directors with respect to the matters set forth in said Written Action: RESOLUTION BE IT RESOLVED That, pursuant to authority conferred on the Board of Directors of Otter Tail Power Company, a Minnesota corporation, by subdivision A of Division I of Article VI of its Articles of Incorporation, as amended, an eleventh series of Cumulative Preferred Shares be, and it hereby is, created as follows: A. The designation of such series shall be "$6.35 Cumulative Preferred Shares," and the number of shares of such series shall be one hundred eighty thousand (180,000). B. The rate of dividends payable on the $6.35 Cumulative Preferred Shares shall be $6.35 per share per annum, payable quarterly on the first day of March, June, September and December of each year, commencing December 1, 1992. Such dividends shall be cumulative and accrue in the case of each share from and including the date of original issuance thereof; and the amount of the dividend for any period of less than a full quarter shall be computed on the basis of a 360-day year of twelve 30-day months. C. The $6.35 Cumulative Preferred Shares shall be redeemable (otherwise than with respect to any redemption effected through or by the sinking fund hereafter described in subdivision E below), at the option of the Company, in whole or in part, at $103.175 per share if redeemed before December 1, 1998, and at the following redemption prices per share if redeemed thereafter: If redeemed during the twelve months' period beginning: Redemption December 1 Price 1998 . . . . . . . . . . . . . . . . . $102.540 1999 . . . . . . . . . . . . . . . . . $101.905 2000 . . . . . . . . . . . . . . . . . $101.270 2001 . . . . . . . . . . . . . . . . . $100.635 2002 and thereafter . . . . . . . . . $100.000 together, as provided in subdivision C of said Division I, in each instance, with accrued dividends to the redemption date; provided, however, that the $6.35 Cumulative Preferred Shares shall not be redeemable, in whole or in part, prior to December 1, 1997. D. The amount payable on the $6.35 Cumulative Preferred Shares in the event of any dissolution, liquidation or winding up of the affairs of the Company which shall be voluntary shall be $106.350 per share prior to December 1, 1993, and will decrease by $0.635 per share on December 1, 1993 and on each December 1 thereafter to $100.00 per share on December 1, 2002, and the amount payable on the $6.35 Cumulative Preferred Shares in the event of any dissolution, liquidation or winding up of the affairs of the Company which shall be involuntary shall be $100.00 per share, together, as provided in subdivision E of said Division I, in either event, with a sum, in the case of each share, computed at the annual dividend rate for the $6.35 Cumulative Preferred Shares from the date on which dividends on such share became cumulative to and including the date fixed for such distribution or payment, less the aggregate amount of all dividends which shall have theretofore been paid thereon or which shall have been declared thereon and for which moneys for payment shall have been set apart and remain available for payment. E. So long as any of the $6.35 Cumulative Preferred Shares remain outstanding, after all dividends on all Cumulative Preferred Shares of all series for all past quarterly dividend periods and for the current quarterly dividend period shall have been paid or declared and a sum sufficient for the payment thereof set apart for payment, the Company shall, as and for a mandatory sinking fund for the benefit of the $6.35 Cumulative Preferred Shares, redeem, in the manner and upon the notice and with the effect provided in subdivision C of said Division I, (i) on December 1, 2002, and on each succeeding December 1 to and including December 1, 2006, 5% of the maximum number of $6.35 Cumulative Preferred Shares which shall theretofore have been issued and (ii) on December 1, 2007, the balance of the $6.35 Cumulative Preferred Shares then outstanding (such required redemptions being hereinafter called the "mandatory sinking fund requirement"). The price at which the $6.35 Cumulative Preferred Shares shall be redeemed in satisfaction of the mandatory sinking fund requirement shall be $100.00 per share, together, as provided in subdivision C of said Division I, in each instance, with accrued dividends to the redemption date. The mandatory sinking fund requirement for the $6.35 Cumulative Preferred Shares shall be cumulative so that if, in any year, the Company shall not satisfy in full the mandatory sinking fund requirement for such year, the amount of the deficiency shall be added to the mandatory sinking fund requirement for succeeding years until the deficiency shall have been fully satisfied. IN WITNESS WHEREOF, the undersigned have hereunto set their hands as the Senior Vice President, Finance and Treasurer and the Vice President, Governmental and Legal and Secretary, respectively, of Otter Tail Power Company and have affixed the seal of Otter Tail Power Company this 1st day of October, 1992. D. R. Emmen D. R. Emmen Senior Vice President, Finance and Treasurer Jay D. Myster Vice President, Governmental and Legal and Secretary [CORPORATE SEAL] STATE OF MINNESOTA ) )SS COUNTY OF OTTER TAIL) On this 1st day of October, 1992, before me a Notary Public within and for said County and State, personally appeared D. R. EMMEN and JAY D. MYSTER, to me personally known to be the Senior Vice President, Finance and Treasurer and the Vice President, Governmental and Legal and Secretary, respectively, of Otter Tail Power Company, who, being by me duly sworn, did say that they are, respectively, the Senior Vice President, Finance and Treasurer and the Vice President, Governmental and Legal and Secretary of said corporation, and that the seal affixed to the within certificate is the corporate seal of said corporation, and that said certificate was signed and sealed in behalf of said corporation by authority of its Board of Directors, and said D. R. EMMEN and JAY D. MYSTER acknowledged said certificate to be the free act and deed of said corporation. Larry W. Marquard [NOTARIAL SEAL] CERTIFICATE The undersigned, D. R. EMMEN and JAY D. MYSTER, do hereby certify that we are duly elected, qualified and acting as the Senior Vice President, Finance and Treasurer and the Vice President, Governmental and Legal and Secretary, respectively, of Otter Tail Power Company, a Minnesota corporation (the "Company"), and that the following is a true and correct copy of a resolution duly adopted by a Written Action of the Pricing Committee of the Board of Directors of the Company, dated October 11, 1993, executed by all the members of said Pricing Committee, duly established by the Board of Directors of the Company at a meeting thereof duly called and held on February 3, 1992, at which a quorum was present and acted throughout, to act for the Board of Directors with respect to the matters set forth in said Written Action: RESOLUTION BE IT RESOLVED That, pursuant to authority conferred on the Board of Directors of Otter Tail Power Company, a Minnesota corporation, by subdivision A of Division I of Article VI of its Articles of Incorporation, as amended, a twelfth series of Cumulative Preferred Shares be, and it hereby is, created as follows: A. The designation of such series shall be "$6.75 Cumulative Preferred Shares," and the number of shares of such series shall be forty thousand (40,000). B. The rate of dividends payable on the $6.75 Cumulative Preferred Shares shall be $6.75 per share per annum, payable quarterly on the first day of March, June, September and December of each year, commencing December 1, 1993. Such dividends shall be cumulative and accrue in the case of each share from and including the date of original issuance thereof; and the amount of the dividend for any period of less than a full quarter shall be computed on the basis of a 360-day year of twelve 30-day months. C. The $6.75 Cumulative Preferred Shares shall be redeemable at the option of the Company, in whole or in part, at $103.375 per share if redeemed before December 1, 2004, and at the following redemption prices per share if redeemed thereafter: If redeemed during the twelve months' period beginning: Redemption December 1 Price 2004 . . . . . . . . . . . . . . . . . $103.0375 2005 . . . . . . . . . . . . . . . . . $102.7000 2006 . . . . . . . . . . . . . . . . . $102.3625 2007 . . . . . . . . . . . . . . . . . $102.0250 2008 . . . . . . . . . . . . . . . . . $101.6875 2009 . . . . . . . . . . . . . . . . . $101.3500 2010 . . . . . . . . . . . . . . . . . $101.0125 2011 . . . . . . . . . . . . . . . . . $100.6750 2012 . . . . . . . . . . . . . . . . . $100.3375 2013 and thereafter . . . . . . . . . $100.0000 together, as provided in subdivision C of said Division I, in each instance, with accrued dividends to the redemption date; provided, however, that the $6.75 Cumulative Preferred Shares shall not be redeemable, in whole or in part, prior to December 1, 2003. D. The amount payable on the $6.75 Cumulative Preferred Shares in the event of any dissolution, liquidation or winding up of the affairs of the Company which shall be voluntary shall be $106.75 per share prior to December 1, 1994, and will decrease by $0.3375 per share on December 1, 1994 and on each December 1 thereafter to $100.00 per share on December 1, 2013, and the amount payable on the $6.75 Cumulative Preferred Shares in the event of any dissolution, liquidation or winding up of the affairs of the Company which shall be involuntary shall be $100.00 per share, together, as provided in subdivision E of said Division I, in either event, with a sum, in the case of each share, computed at the annual dividend rate for the $6.75 Cumulative Preferred Shares from the date on which dividends on such share became cumulative to and including the date fixed for such distribution or payment, less the aggregate amount of all dividends which shall have theretofore been paid thereon or which shall have been declared thereon and for which moneys for payment shall have been set apart and remain available for payment. IN WITNESS WHEREOF, the undersigned have hereunto set their hands as the Senior Vice President, Finance and Treasurer and the Vice President, Governmental and Legal and Secretary, respectively, of Otter Tail Power Company and have affixed the seal of Otter Tail Power Company this 11th day of October, 1993. D. R. Emmen D. R. Emmen Senior Vice President, Finance and Treasurer Jay D. Myster Jay D. Myster Vice President, Governmental and Legal and Secretary [CORPORATE SEAL] STATE OF MINNESOTA ) )SS COUNTY OF OTTER TAIL) On this 11th day of October, 1993, before me a Notary Public within and for said County and State, personally appeared D. R. EMMEN and JAY D. MYSTER, to me personally known to be the Senior Vice President, Finance and Treasurer and the Vice President, Governmental and Legal and Secretary, respectively, of Otter Tail Power Company, who, being by me duly sworn, did say that they are, respectively, the Senior Vice President, Finance and Treasurer and the Vice President, Governmental and Legal and Secretary of said corporation, and that the seal affixed to the within certificate is the corporate seal of said corporation, and that said certificate was signed and sealed in behalf of said corporation by authority of its Board of Directors, and said D. R. EMMEN and JAY D. MYSTER acknowledged said certificate to be the free act and deed of said corporation. Larry W. Marquard [NOTARIAL SEAL] ARTICLES OF AMENDMENT OF RESTATED ARTICLES OF INCORPORATION OF OTTER TAIL POWER COMPANY 1. The name of the corporation is Otter Tail Power Company, a Minnesota corporation. 2. The following is the full text of the amendment to the Restated Articles of Incorporation of Otter Tail Power Company: BE IT RESOLVED That Article V of the Restated Articles of Incorporation of Otter Tail Power Company, a Minnesota corporation, as heretofore amended, shall be amended in its entirety to read as follows: ARTICLE V. The total authorized number of shares of the corporation is 27,500,000, divided into three classes; namely, 1,500,000 Cumulative Preferred Shares without par value (the "Cumulative Preferred Shares"); 1,000,000 Cumulative Preference Shares without par value (the "Cumulative Preference Shares"); and 25,000,000 Common Shares of the par value of $5 per share (the "Common Shares"). No fractional shares of any class or series shall be issued by the corporation. 3. The amendment was adopted by the shareholders pursuant to Section 302A.135 of the Minnesota Business Corporation Act on April 11, 1994. IN WITNESS WHEREOF, the undersigned, the Vice President, Governmental and Legal and Secretary of Otter Tail Power Company, being duly authorized on behalf of Otter Tail Power Company, has executed this document this 11th day of April, 1994. Jay D. Myster Jay D. Myster Vice President, Governmental and Legal and Secretary CERTIFICATE OF DESIGNATION OF SERIES A JUNIOR PARTICIPATING PREFERRED SHARES OF OTTER TAIL POWER COMPANY The undersigned hereby certifies that the Board of Directors of Otter Tail Power Company (the "Corporation"), a corporation organized and existing under the Minnesota Business Corporation Act, duly adopted the following resolution on January 27, 1997: RESOLVED, that a series of preferred shares of the Corporation is hereby created, and the designation and amount thereof and the relative rights and preferences of the shares of such series, are as follows: Section 1. Designation and Amount. The shares of such series shall be designated as "Series A Junior Participating Preferred Shares" (the "Preferred Shares") and the number of shares constituting the Preferred Shares shall be 250,000. Such number of shares may be increased or decreased by resolution of the Board of Directors and any necessary shareholder approval; provided, however, that no decrease shall reduce the number of Preferred Shares to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Corporation convertible into Preferred Shares. Section 2. Dividends and Distributions. (a) Subject to the rights of the holders of any series of preferred shares (or any similar stock) ranking prior and superior to the Preferred Shares with respect to dividends, the holders of Preferred Shares, in preference to the holders of common shares, par value $5.00 per share (the "Common Shares"), of the Corporation, and of any other junior stock, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the first day of March, June, September and December in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a Preferred Share or fraction of a Preferred Share, in an amount per share (rounded to the nearest cent) equal to the greater of (i) $0.01 or (ii) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions, other than a dividend payable in Common Shares or a subdivision of the outstanding Common Shares (by reclassification or otherwise), declared on the Common Shares since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any Preferred Share or fraction of a Preferred Share. In the event the Corporation shall at any time after February 7, 1997, declare or pay any dividend on the Common Shares payable in Common Shares, or effect a subdivision or combination or consolidation of the outstanding Common Shares (by reclassification or otherwise) into a greater or lesser number of Common Shares, then in each such case the amount to which holders of Preferred Shares were entitled immediately prior to such event under clause (ii) of the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of Common Shares outstanding immediately after such event and the denominator of which is the number of Common Shares that were outstanding immediately prior to such event. (b) The Corporation shall declare a dividend or distribution on the Preferred Shares as provided in paragraph (a) of this Section- immediately after it declares a dividend or distribution on the Common Shares (other than a dividend payable in Common Shares or a subdivision of the outstanding Common Shares); provided that, in the event no dividend or distribution shall have been declared on the Common Shares during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $0.01 per share on the Preferred Shares shall nevertheless be payable, out of funds legally available for such purpose, on such subsequent Quarterly Dividend Payment Date. (c) Dividends shall begin to accrue and be cumulative on outstanding Preferred Shares from their date of issue. Accrued but unpaid dividends shall not bear interest. Dividends paid on the Preferred Shares in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of Preferred Shares entitled to receive payment of a dividend or distribution declared thereon, which record date shall be not more than 60 days prior to the date fixed for the payment thereof. Section 3. Certain Restrictions. (a) Whenever quarterly dividends or other dividends or distributions payable on the Preferred Shares as provided in Section2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on Preferred Shares outstanding shall have been paid in full, the Corporation shall not: (i) declare or pay dividends, or make any other distributions, on any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Preferred Shares; (ii) declare or pay dividends, or make any other distributions, on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Preferred Shares, except dividends paid ratably on the Preferred Shares and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Preferred Shares; provided, however, that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Preferred Shares; or (iv) redeem or purchase or otherwise acquire for consideration any Preferred Shares, or any stock ranking on a parity with the Preferred Shares, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (b) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (a) of this Section3, purchase or otherwise acquire such shares at such time and in such manner. Section 4. Reacquired Shares. Any Preferred Shares purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of preferred stock and may be reissued as part of a new series of preferred shares subject to the conditions and restrictions on issuance set forth herein, in the Articles of Incorporation, or in any other certificate of designation creating a series of preferred stock or any similar stock or as otherwise required by law. Section 5. Liquidation, Dissolution or Winding Up. Upon any liquidation, dissolution or winding up of the Corporation, no distribution shall be made (1) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Preferred Shares unless, prior thereto, the holders of Preferred Shares shall have received the greater of (i) $100 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, or (ii) an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount to be distributed per share to holders of Common Shares, or (2) to the holders of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Preferred Shares, except distributions made ratably on the Preferred Shares and all such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. In the event the Corporation shall at any time after February 7, 1997, declare or pay any dividend on the Common Shares payable in shares of Common Shares, or effect a subdivision or combination or consolidation of the outstanding Common Shares (by reclassification or otherwise) into a greater or lesser number of Common Shares, then in each such case the aggregate amount to which holders of shares of Preferred Shares were entitled immediately prior to such event under clause (1)(ii) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of Common Shares outstanding immediately after such event and the denominator of which is the number of Common Shares that were outstanding immediately prior to such event. Section 6. Consolidation, Merger, etc. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the Common Shares are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each Preferred Share shall at the same time be similarly exchanged or changed into an amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each Common Share is changed or exchanged. In the event the Corporation shall at any time after February 7, 1997, declare or pay any dividend on the Common Shares payable in Common Shares, or effect a subdivision or combination or consolidation of the outstanding Common Shares (by reclassification or otherwise) into a greater or lesser number of Common Shares, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of Preferred Shares shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of Common Shares outstanding immediately after such event and the denominator of which is the number of Common Shares that were outstanding immediately prior to such event. Section 7. No Redemption. The Preferred Shares shall not be redeemable. Section 8. Rank. The Preferred Shares shall rank, with respect to the payment of dividends and the distribution of assets, junior to all other series of the Corporation's preferred shares. Section 9. Fractional Shares. Preferred Shares may be issued in fractions of a share which are integral multiples of one one-hundredth of a share which shall entitle the holder, in proportion to such holder's fractional shares, to receive dividends, participate in distributions and to have the benefit of all other rights of holders of Preferred Shares. Section 11. Amendment. The Articles of Incorporation of the Corporation shall not be amended in any manner which would materially alter or change the powers, preferences or rights of the Preferred Shares so as to affect them adversely without the affirmative vote of the holders of at least two-thirds of the outstanding Preferred Shares, voting together as a single class. IN WITNESS WHEREOF, I have subscribed my name this 27th day of January 1997. OTTER TAIL POWER COMPANY By A. E. Anderson____________ Its Vice President, Finance and Treasurer EX-10 3 COAL TRANSPORTATION AGREEMENT SECOND AMENDMENT TO COAL TRANSPORTATION AGREEMENT This Second Amendment to Coal Transportation Agreement on this ____21st________ day of May 1996 (this "Second Amendment), by NORTHERN COAL TRANSPORTATION COMPANY ("NCTC") and OTTER TAIL POWER COMPANY ("OTP"). WHEREAS, OTP and NCTC are parties to a Coal Transportation Agreement dated January 14, 1993; and WHEREAS, OTP and NCTC desire to extend the term of the Original Agreement; and WHEREAS, OTP and NCTC desire to amend the Original Agreement to provide for revised coal transportation rates and minimum volume requirements to Otter Tail Power Company's Hoot Lake Plant located near Fergus Falls, MN; and WHEREAS, OTP and NCTC desire to amend the Original Agreement to include provisions for dispatch-based pricing designed to increase electrical generation at the Hoot Lake plant; and WHEREAS, NCTC is providing its railcars for coal haulage to OTP and will purchase rail transportation services from the Burlington Northern Santa Fe Railroad Company ("BNSF") and is, in turn, selling these rail transportation services to OTP. NOW, THEREFORE, in consideration of the premises, covenants, and considerations set out herein, the parties hereto agree as follows: ARTICLE I Effective Date and Term of Agreement Section 1. Effective Date and Term of the Second Amendment This Second Amendment shall be effective on the date entered above which will be the date last signed. In accordance with agreement of the parties, the terms of this Second Amendment shall apply on all trains of coal tendered on or after January 1, 1996. The term of this Second Amendment shall end on December 31, 1998. Section 2. Extension of Original Agreement Section 1. Term, of the Original Agreement shall be amended to change the expiration date from January 15, 1996 to December 31, 1998. Article II Definitions As used throughout this Second Amendment, the terms noted below shall be defined as follows. 1. "Dispatch-Based Discount" A predetermined discount, expressed as dollars per net ton, which OTP may apply against its Contract Rates for purposes of varying its generating costs at the Hoot Lake Plant. This discount may be used, if necessary, to assist OTP in avoiding energy purchases from other utilities or in making wholesale sales to other utilities. 2. "Dispatch-Based Tons" Any tons of coal purchased by OTP as a result of OTP utilizing the Dispatch-Based Discount. Such tons shall be determined on a monthly basis subject to verification by NCTC and BNSF. 3. "Dispatch-Based Credit" A credit applicable to monthly billings for coal and coal transportation, determined as the product of the Dispatch-Based Discount and the Dispatch-Based Tons for that month. 4. "Avoided Energy Purchase" Electrical energy generated at OTP's Hoot Lake Plant which allowed OTP to avoid purchasing energy from another utility. 5. "Wholesale Energy Sales" Electrical energy generated at OTP's Hoot Lake Plant which was sold to another utility for resale to the purchasing utility's customers. Article III Modification of Transportation Rates, Calculation of the Dispatch-Based Credit and Minimum Volume Requirement Section 1. Modification of Transportation Rates The rates shown in Section 3.01., Transportation costs, of the Original Agreement shall be deleted in its entirety and will be changed to the following. 1. For Base Tons: $(*) per net ton in NCTC and BNSF Railcars 2. Dispatch-Based Discount $(*) per net ton Base Tons shall be defined as those tons shipped to satisfy the Minimum Volume Requirement as noted below in Section 3. The rates shown above for Base Tons shall be subject to quarterly adjustment as described in Section 3.03 of the Original Agreement, with the first such quarterly adjustment to become effective on April 1, 1996. The adjusted rate shall then be the Contract Rate for billing purposes, provided that at no time will the Contract Rate fall below the Base Rates shown above. The Contract Rates will normally be utilized as a component in determining OTP's generation costs at its Hoot Lake plant for purposes of ongoing comparisons and evaluations of energy purchases from other suppliers and wholesale power transactions to other utilities. NCTC and BNSF agree, however, that OTP may evaluate its generation costs at its Hoot Lake plant incorporating the Dispatch-Based Discount shown above. Any tons of coal shipped under this Second Amendment as a result of OTP utilizing the Dispatch- Based Discount to generate energy at its Hoot Lake Plant rather than make energy purchases from others, or to make a wholesale power sale to another utility, shall be referred to as "Dispatch-Based Tons." OTP shall be required to provide documentation on a monthly basis to support the amounts of Dispatch-Based Tons for which OTP determined the discount was required. This documentation shall be in the form as shown in Exhibit 1 to this Second Amendment. OTP agrees to provide the documentation, including OTP's calculation of the applicable credit, to NCTC within 10 days after the end of a calendar month in which Dispatch-Based Tons were shipped. Any credit supported by such documentation will be paid to OTP by check within 20 days of receipt of such documentation. The total number of OTP tons available to OTP for designation as Dispatch-Based Tons shall be limited as noted below in Section 2. The amount of the Dispatch-Based Discount, including the necessity of a Dispatch-Based Discount, if any, for the following year shall be determined through negotiation between NCTC, OTP, and BNSF by November 1 of each year of this Second Amendment. Section 2. Calculation of the Dispatch-Based Credit A credit for Dispatch-Based Tons will be calculated and paid by NCTC to OTP based upon documentation provided by OTP to NCTC and the following formula: Dispatch-Based Tons = (Avoided Energy Purchases + Wholesale Energy Sales) x 0.60 Dispatch-Based Credit = (Dispatch-Based Tons) x (Dispatch-Based Discount) For purposes of the above calculations, Avoided Energy Purchases and Wholesale Energy Sales shall be expressed in megawatt hours ("MWh"). The conversion factor for MWh of electrical energy to tons of coal (0.60) is derived as the reciprocal of the ratio of the defined heating value for Spring Creek coal (18.70 MMbtu/ton) and the defined heat rate for the Hoot Lake Plant (11.20 MMbtu/MWh). This conversion factor shall remain fixed for the term of this Second Amendment. Section 3. Minimum Volume Requirement Section 3.04, Minimum Tonnage - Base Freight Component of the Original Agreement and Section 3.05 Tonnage - Base Railcar Cost of the First Amendment of the Original Agreement shall be deleted in their entirety and replaced with the following. This Agreement is subject to a Minimum Volume Requirement of 600,000 tons to be shipped during the term of this Agreement. In addition to the Minimum Volume Requirement, 400,000 additional tons may be tendered and shipped as Dispatch-Based Tons as defined in Article II, Section 1 of the Second Amendment. Any tons tendered and shipped above an aggregate total of 1,000,000 tons shall be considered to be Base Tons for billing purposes. OTP will use reasonable efforts to tender tons to NCTC in even increments during the term of this Agreement. If, at the end of this Agreement, OTP has been prevented from tendering the coal in quantities sufficient to meet the Minimum Volume Requirement other than due to an event of Force Majeure, OTP shall pay to NCTC an amount equal to twenty-five percent (25%) of the last effective rate in place at the time this Agreement expires. Article IV General Nothing is this Second Amendment shall alter the rights or obligations of the parties except as specifically set forth above. IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to be executed by their duly authorized representatives on the day and year first written above. OTTER TAIL POWER COMPANY By Ward Uggerud Its V.P. Operations NORTHERN COAL TRANSPORTATION CO. By Malcolm R. Thomas Its V.P. Marketing & Sales (*) Confidential information has been omitted and filed separately with the Commission pursuant ot Rule 24b-2. EX-13 4 EXHIBIT 13-A
Selected consolidated financial data - ---------------------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 1991 1986 -------- -------- -------- -------- -------- -------- -------- (thousands except per-share data) Revenues Electric Residential $ 66,295 $ 64,355 $ 62,687 $ 62,167 $ 59,038 $ 61,844 $ 64,123 Commercial and farms (1) 74,355 71,487 69,060 66,286 63,257 64,122 64,019 Industrial (1) 37,453 37,952 38,354 36,442 35,607 34,408 29,981 Sales for resale 10,238 19,110 19,066 18,107 11,126 11,330 6,330 Other electric 11,004 11,021 9,645 9,288 8,077 7,752 7,768 -------- -------- -------- -------- -------- -------- -------- Total electric $199,345 $203,925 $198,812 $192,290 $177,105 $179,456 $172,221 Health services 61,697 50,896 45,555 32,068 -- -- -- Manufacturing 56,868 38,690 13,083 8,473 -- -- -- Other business operations 43,829 32,818 29,276 32,396 32,433 20,389 -- -------- -------- -------- -------- -------- -------- -------- Total operating revenues $361,739 $326,329 $286,726 $265,227 $209,538 $199,845 $172,221 Net income $ 29,955 $ 28,945 $ 28,475 $ 27,369 $ 26,538 $ 26,096 $ 24,013 Cash flow from operations $ 67,145 $ 58,077 $ 51,832 $ 53,255 $ 44,866 $ 46,667 N/A Total assets $662,287 $609,196 $578,972 $563,905 $530,456 $491,633 $480,621 Long-term debt $160,492 $168,261 $162,196 $166,563 $159,295 $146,326 $130,032 Redeemable preferred $ 18,000 $ 18,000 $ 18,000 $ 18,000 $ 18,000 $ 13,150 $ 18,145 Common shares outstanding (2) (thousands) 11,215 11,180 11,180 11,180 11,180 11,185 11,961 Number of common shareholders (3) 13,829 13,933 14,115 13,634 13,812 13,928 14,994 Earnings per common share (4) $2.47 $2.38 $2.34 $2.23 $2.17 $2.15 $1.78 Dividends per common share $1.80 $1.76 $1.72 $1.68 $1.64 $1.60 $1.42 - ---------------------------------------------------------------------------------------------------------- Notes: (1) Customer classifications were redefined in 1996. Customers with demand less than 1000 kw previously classified as industrial are now classified as commercial. (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 project 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 and strong bond ratings, implementing cost-containment programs, evaluating operations and projects on a cost-benefit approach, investing in projects that enhance shareholder value, and obtaining adequate depreciation rates. Cash provided by operating activities of $67,145,000 along with net proceeds from the issuance of short-term debt of $25,600,000 as shown on the Consolidated Statement of Cash Flows for the year ended December 31, 1996, combined with funds on hand of $4,075,000 at December 31, 1995, allowed the Company to finance its capital expenditures, pay dividends, and provide for a majority of its investments in additional nonutility businesses. Proceeds from the issuance of long-term debt net of payments for the retirement of long-term debt of $5,700,000 for the year ended December 31, 1996, were used to finance equipment purchases at the Company's medical and manufacturing subsidiaries and to finance a portion of the investments in additional nonutility businesses. The Company had $1.2 million in cash, cash equivalents and temporary cash investments at December 31, 1996, along with $21,725,000 available in unused lines of credit which could be used to supplement cash needs. 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 a majority of its estimated 1997-2001 consolidated capital project expenditures. Additional short-term or long-term financing will be required in the period 1997-2001 in connection with the following items: - - A portion of the Company's estimated capital project expenditures. - - Maturity of First Mortgage Bonds, $18,800,000 in 1997, and Long-Term Lease Obligation, $2,200,000 in 1998. - - In the event the Company decides to refund or retire early any of its presently outstanding debt or cumulative preferred shares. - - Other corporate purposes. Capital Requirements: The Company has a construction and capital investment program to provide facilities necessary to meet forecasted customer demands and provide reliable service in the capital intensive electric utility business. This includes improvements to existing power plants, acquisition or construction of additional generating capacity, and upgrading or replacing portions of the distribution and transmission systems and other buildings and equipment. The construction program is subject to continuing review and is revised annually in light of changes in demands for energy, environmental laws, technology affecting the electric utility industry, the costs of labor, materials and equipment, and the Company's financial condition (including cash flow and earnings). The subsidiaries capital requirements include periodic and timely replacement of technically obsolete or worn out equipment, new equipment purchases, and plant upgrades to accommodate anticipated growth. Capital project expenditures for the years 1996, 1995, and 1994 were $64 million, $37 million, and $30 million, respectively. Actual 1996 cash expenditures in excess of previously reported accrual-based estimates, and 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 1997 are $39 million, and the total expenditures for the five-year period 1997-2001 are expected to be approximately $169 million. The breakdown of 1996 actual and 1997-2001 estimated capital project expenditures by segment is as follows: 1996 1997 1997-2001 ---- ---- --------- (in millions) Electric utility $38 $25 $127 Health services 16 6 18 Manufacturing 5 4 12 Other business operations 5 4 12 In addition to these capital requirements, funds totaling approximately $84,808,000 will be needed during the five-year period 1997 through 2001 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, and strong credit ratings. On August 30, 1996, the Company filed a shelf registration statement with the Securities and Exchange Commission for the issuance of up to $50,000,000 of its debt securities, which may be sold from time to time in one or more series, the proceeds of which will be used to repay short-term and other indebtedness, to redeem one or more of the outstanding series of the Company's First Mortgage Bonds and for general corporate purposes. On August 30, 1996, the Company also 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 to fulfill the requirements of the Plan, resulting in the issuance of 34,516 common shares and proceeds to the Company of $1,130,000 in 1996. The Company estimates that it could raise approximately $6 million per year in new capital if new issue common shares are used to fulfill all requirements of the Plan in 1997 and beyond. Proceeds from newly issued common shares will be used for general corporate purposes. The Company also plans to fulfill part of the share purchase requirements of its leveraged employee stock ownership plan (ESOP) in 1997, and possibly in 1998, and 1999, with newly issued common shares, which could provide the Company with up to $2.8 million of capital each year. As of December 31, 1996, unused credit lines totaling $21.7 million were available to meet interim financing of working capital and other capital requirements, if needed. The Company had $25,600,000 in short-term borrowings outstanding as of December 31, 1996. The subsidiary companies had $7 million of credit lines in use at December 31, 1996, classified as current maturities and long-term debt. (See note 9 to financial statements for further information.) During 1996 the Company's coverage ratios declined slightly from 1995 levels. The fixed charge coverage ratio after taxes was 3.0 for 1996, as compared to 3.2 in 1995. The long-term debt interest coverage ratio before taxes was 3.9 for 1996, as compared to 4.3 in 1995. The Company expects these coverages to increase slightly in 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- 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, 1996, the Company had the capacity under its Indenture of Mortgage to issue an additional $138 million principal amount of First Mortgage Bonds. Results of operations: Electric operations: Otter Tail Power Company provides electrical service to nearly 125,000 customers in a service territory of over 50,000 square miles. Operating revenues - ------------------ The change in revenues may be summarized as follows: Revenue increase(decrease) from prior year 1996 1995 1994 ------ ------ ------ (in thousands) Volume variance (1) $ (499) $ 5,419 $ 6,979 Price variance (2) (3,985) (1,517) (492) Other (96) 1,211 35 ------- ------- ------- Total Electric $(4,580) $ 5,113 $ 6,522 (1) Derived for each customer class by multiplying year-to-year change in units sold by the average revenue per kwh for the prior year. (2) Derived for each customer class by multiplying the year-to-year change in average revenue per kwh by the units sold during the year. The 1996 volume variance was mainly due to a decrease in noncontractual power pool kwh sales partially offset by a 4% increase in retail kwh sales. A number of factors contributed to the decrease in noncontractual power pool sales. Midcontinent Area Power Pool (MAPP) transmission service charges have 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. The 1995 volume variance was due to a 3.4% increase in retail kwh sales. The increase in retail kwh sales was due to increased sales in each customer class: residential, commercial, and industrial. Total power pool sales decreased by 1% from the previous year. Noncontractual power pool sales increased due to a combination of warmer weather and greater plant availability in 1995 which resulted in more opportunity sales. This increase was offset by a 53.7% decrease in contractual power pool sales. The 1994 volume variance was due to a 3.6% increase in retail kwh sales. The increase in retail kwh sales was principally due to increased sales to commercial and industrial customers. Power pool sales remained at the same level as in the previous year. Noncontractual power pool sales declined in 1994 because of the exceptionally high level of sales in 1993. However, contractual power pool sales were up significantly in 1994 because of a large sale to another utility. Heating degree days, which generally correlate to increases or decreases in usage by residential customers, were 10,349 for 1996, 9,326 for 1995, and 9,204 for 1994. The average revenue per retail kilowatt-hour was 5.35 cents in 1996, 5.45 cents in 1995, and 5.50 cents in 1994. The 1996 price variance relates 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 recently developed Large General Service Time-of-Use Rider. The 1995 price variance was primarily attributed to residential and commercial sales, sales to a large industrial customer, and the cost of energy adjustment clause. The negative variance in these categories was partially offset by a positive price variance in contractual power pool sales. The increase in contractual power pool sales revenue per kwh sold resulted from spreading a fixed demand charge over a decrease in kwh sales. The 1994 price variance was essentially due to increased sales to industrial customers and increased contractual power pool sales. The decrease in contractual power pool sales revenue per kwh sold resulted from spreading a fixed demand charge over an increase in kwh sales. The change in electric revenue attributed to factors other than price and volume variances in 1996 reflects an increase in conservation program revenues recognized in 1996, offset by a decrease of $614,000 in North Dakota unbilled revenues as a result of the three year phase-in period for the initial recognition of these revenues ending in 1995. (See note 1 to financial statements for further information.) The increase in electric revenue related to other factors in 1995 reflects an increase in unbilled revenue of $388,000 over 1994 and the initial recognition of conservation program revenues and wheeling service fees in 1995. Expenses - -------- The percentage changes in operating expenses may be summarized as follows: Percentage increase (decrease) from prior year 1996 1995 1994 ---- ---- ---- Production fuel (12) (2) 3 Purchased power (7) 7 5 Electric operation expenses 3 13 2 Electric maintenance 8 (11) 6 Depreciation and amortization 2 3 4 Property taxes 8 (6) 6 Production fuel and purchased power expense - ------------------------------------------- The 12% decrease in production fuel expense in 1996 was 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. In 1995 the cost of steam production fuel per kwh generated decreased by 4.1% while the total kwhs generated increased by 1.6%, which, in combination, contributed to the 2% decrease in 1995 production fuel expense compared to 1994. The decrease in fuel cost per unit of generation in 1996 and 1995 resulted mainly from switching fuels at Big Stone Plant from lignite to higher-Btu subbituminous coal in August 1995. The 3% increase in production fuel in 1994 resulted chiefly from a 3.2% increase in generation. The 7% decrease in purchased power in 1996 reflects a 45% decrease in kwh purchases for resale partially offset by a 21% 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 7% increase in purchased power in 1995 was due to increased kwh purchases for system use, which correlates to the increase in retail sales. Purchased power increased 5% in 1994 essentially because of an increase in cost per kwh purchased. The bulk of the increase in cost per kwh purchased resulted from an increase in replacement generation cost for plant outages. The increase or decrease 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 $39 million to the Company's customers. Electric operation and maintenance expenses - ------------------------------------------- The 3% increase in electric operation expenses for 1996 was mainly due to increased benefit costs resulting from revised actuarial assumptions for the Company's Executive Survivor and Supplemental Retirement Plan (see note 8 to financial statements for further information) and increased payments for contracted services offset by a decrease in economic development expenditures that were lower than the increased levels recorded in 1995. The increase in electric operating expense of 13% in 1995 was primarily due to a settlement with the Minnesota Public Utilities Commission requiring recovery of Conservation Improvement Program costs in current rates starting in 1995 and an increase in postretirement health-care benefit costs resulting from a plan amendment which reduces the health insurance contribution requirements for surviving spouses of retired employees. (See notes 3 and 8 to financial statements for further information.) Storm- related expenses in the summer and fall of 1995 along with 1995 economic development expenditures and wage and salary increases also contributed to the increase in electric operating expense. The 1994 increase of 2% in electric operating expense resulted principally from increases in customer account expenses and payroll expenses. The majority of the increase in electric maintenance expense of 8% in 1996 was due to increased production plant maintenance expenses. 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 11% decrease in electric maintenance expense in 1995 was mainly due to significant reductions in power plant maintenance expenses. Coyote Plant, which had a major overhaul in the spring of 1994 but no major overhauls in 1995, was the primary contributor to the reduction in maintenance expenses. Lower maintenance expenses on Hoot Lake Plant Unit 2, which underwent major repairs in the summer of 1994, also contributed to the decrease. The increase in electric maintenance expense of 6% in 1994 was due to increases in production and distribution maintenance. Production maintenance increased because of boiler repairs at Coyote Plant. Distribution maintenance increased due to more tree-trimming expenses. Depreciation and amortization - ----------------------------- The increases in depreciation and amortization expense of 2% in 1996, 3% in 1995 and 4% in 1994 were attributable to additions to plant in service from capital expenditures. Property taxes - -------------- The 8% increase in property taxes in 1996 was due to a 10% increase in the assessed value of the Company's South Dakota utility property compounded by a 14% increase in the mill rates applied to that property. The 6% decrease in property taxes in 1995 was mainly due to decreased property tax rates in Minnesota and valuation decreases in South Dakota. The increase in property taxes of 6% for 1994 was due to property additions and increased mill rates. Health services operations: Health services operations include businesses 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, 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.) 1996 1995 1994 ------ ------ ------ (in thousands) Operating revenues $61,697 $50,896 $45,555 Cost of goods sold 40,224 31,576 28,690 Operating expenses 16,336 15,739 14,379 ------- ------- ------- Operating income $ 5,137 $ 3,581 $ 2,486 The increases in health services revenue of 21% and cost of goods sold of 27% in 1996, as compared to 1995, were due to acquisitions of two health services companies. The 12% increase in health services operating revenues in 1995 was due to increased sales of medical equipment in 1995 compared to 1994. The acquisition of three additional diagnostic imaging companies in January 1995 also contributed to the increase in operating revenues. The increase in cost of goods sold in 1995 compared to 1994 was directly related to the 1995 increase in equipment sales. Manufacturing operations: Manufacturing operations is made up of businesses involved in the production of agricultural equipment, plastic pipe extrusion, and metal parts stamping and fabrication. Initial acquisitions of businesses in this segment were made in 1990. No additional companies were acquired in 1996. 1996 1995 1994 ------ ------ ------ (in thousands) Operating revenues $56,868 $38,690 $13,083 Cost of goods sold 43,745 29,884 9,167 Operating expenses 7,700 5,536 1,475 ------- ------- ------- Operating income $ 5,423 $ 3,270 $ 2,441 The 47% increase in manufacturing operating revenues in 1996 reflects revenues from Northern Pipe Products, acquired in October of 1995, and increased sales at BTD Manufacturing. The 46% increase in manufacturing cost of goods sold and 39% increase in operating expenses in 1996 were directly related to the increase in manufacturing revenue. The increases in 1995 operating revenues and 1995 cost of goods sold and operating expenses resulted principally from the acquisitions of Northern Pipe Products and BTD Manufacturing in 1995 and sales in expanded product lines of companies acquired prior to 1995. Other business operations: The Company's other business operations include a telephone utility and businesses involved in electrical and telephone construction contracting, radio broadcasting, and waste incinerating. In 1996 the Company's subsidiary, Mid-States Development, Inc., acquired four radio stations, and the Company's telecommunications subsidiary, North Central Utilities, Inc. (NCU), 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. Peoples, with 1,903 access lines serving five communities in Northern Minnesota, had 1996 revenues of $1.6 million. (See note 2 to financial statements for more information.) 1996 1995 1994 ------ ------ ------ (in thousands) Operating revenues $43,829 $32,818 $29,276 Cost of goods sold 28,297 18,954 16,903 Operating expenses 13,145 10,333 9,247 ------- ------- ------- Operating income $ 2,387 $ 3,531 $ 3,126 The 34% increase in 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 is also reflected in the 49% increase in cost of goods sold from other business operations. The increase of 27% in 1996 operating expenses as compared to 1995 was due to increased construction activity and non- recurring expenses associated with the acquisition of four radio stations in 1996. (See note 2 to financial statements for more information.) Operating revenues increased 12% in 1995, of which half was attributable to increased construction revenues related to material cost billings on large projects with a commensurate increase in cost of goods sold. The remaining increases in revenues and operating income were due to modest contributions from all other businesses in 1995. Consolidated other income and deductions--net: 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 10% in 1996 as a result of increased debt at the Company's subsidiaries due to acquisitions and growth and to an increase in the use of short-term debt at the parent-company level. Interest charges increased 11% in 1995 due to new business acquisitions. Consolidated income taxes: The 13% 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 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: For an electric utility, the regulatory process limits the amount of depreciation expense included in the Company's revenue allowance and limits electric utility plant in the rate base to original cost. Such amounts produce cash flows that are inadequate to replace such property in the future or preserve the purchasing power of common equity capital previously invested. Under continuation of the current regulatory process, the Company expects that it will be able to establish rates that will cover the increased costs of new plant when such costs are incurred. 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. For the past eight years this has resulted in lower retail electric rates. 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. 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 were increases of 4.0% in 1996, 3.4% in 1995, and 3.6% in 1994. Market factors beyond the Company's control such as mergers and acquisitions, geographical location, transmission costs and uncertainty about the impact of deregulation may contribute to a continued decline in noncontractual power pool sales. However, the relative effect of the 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 1994 the Company filed a petition with the Minnesota Public Utilities Commission (MPUC) for approval of an annual recovery mechanism for DSM- related costs under Minnesota's Conservation Improvement Programs (CIP). 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 costs to the Company of approximately $2.2 million each year for three years being absorbed in current rates starting in 1995. In 1996 the MPUC approved the Company's 1995 financial incentive filing along with a 1.25% surcharge on all Minnesota customers' bills starting on July 1, 1996, for the recovery of conservation-related costs over and above those being recovered in current rates. The approved surcharge in effect from July 1, 1995, through June 30, 1996, was .5030%. The surcharge approvals resulted in earnings of approximately $655,000 in 1996 and $620,000 in 1995 due to recognition of revenue related to CIP impacts on 1996, 1995, and 1994 energy consumption. The current surcharge rate will be in place until June 30, 1997, when it will be revised for subsequent years' program results. Energy adjustment clause - ------------------------ The Company began purchasing subbituminous coal for Big Stone Plant in August 1995 under a new coal 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 have been, and continue to be, passed on to retail electric customers through the cost of energy adjustment clause, which enhances the Company's competitive position. In November 1995 the Company and two other Coyote Plant partners 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 has been remanded to arbitration to determine if the items under dispute are arbitrable. 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. Environmental regulation - ------------------------ 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, which is much lower in sulfur emissions than lignite. 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 will probably be higher than the current market price but will likely not adversely affect the Company's power plant operations. Under recently proposed regulations, modifications would be required at Big Stone Plant by 2000 to satisfy proposed nitrogen oxide emission standards. 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. Compliance costs will depend on the regulations that are ultimately adopted and the cost of available technologies. 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. Competition - ----------- 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 users to abide by comparable terms, conditions and pricing in transmitting power. The Company filed its initial transmission tariff on July 9, 1996, as required by Order No. 888. A revised rate schedule will become 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 associates within their respective companies, through the OASIS. The state utility commissions in Minnesota and North Dakota are currently investigating the impact of electric utility industry restructuring and the prospects for reregulation and retail competition in their respective jurisdictions. To date, the MPUC and the NDPSC have issued no new policies or rulemakings regarding this issue. The South Dakota PUC has not taken any action with regards to industry restructuring or retail 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 generation, transmission, distribution 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 is establishing 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. 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 with 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 three 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. Quadrant Co., the Company's waste incineration subsidiary, continues to provide primary service to one of its two steam customers under an agreement which can be terminated by either party upon one year's prior written notice. Quadrant is currently providing backup service to its other steam customer under an agreement that commenced on June 1, 1996 and terminates on May 31, 1998, subject to earlier termination by either party upon 90 days' written notice. Quadrant also continues to burn municipal solid waste for three Minnesota counties under a contract extension which expires April 1, 1997. Two Minnesota counties, representing about 40% of Quadrant's processing capacity, did not renew or extend their contracts for waste incineration which expired in September 1996. Quadrant is in the process of negotiating new waste incineration agreements with the remaining counties and is pursuing additional incineration contracts. New pollution rules for Minnesota municipal waste incinerators have recently been issued. The costs to be in compliance with the new rules by the year 2000, combined with a decline in future revenues from decreased steam sales and the loss of the two counties' waste streams threaten the economic viability of the plant. Quadrant is currently generating positive cash flows from the operation of its plant, which had a net undepreciated book value of approximately $3.2 million on December 31, 1996. However, the outcome of current incineration contract negotiations could result in an impairment issue under SFAS 121. Prospects for new incineration contracts are positive but the range of prices being considered results in a wide variance in estimates of future cash flows, making it impossible to accurately calculate an impairment value at this time. The majority of the subsidiary companies' long-term debt is variable interest rate debt. Any increase in prime lending rates would result in increased interest expense and have a negative impact on future earnings. Accounting pronouncements - ------------------------- In March 1995 the Financial Accounting Standards Board issued SFAS 121 - Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which became effective for the Company's financial statements in 1996. The nature of utility regulation generally provides for the recovery of amounts invested in utility assets used to serve customers, over a specified period of time, through approved service rates and allowed rates of return on rate base. Currently, most of the Company's utility revenues are subject to regulation. The Company has determined that the carrying amounts of all its long-lived assets and identifiable intangibles at December 31, 1996, for both its utility and subsidiary operations are recoverable through expected future cash flows from the use of those assets. In October 1995 the Financial Accounting Standards Board issued SFAS 123 - Accounting for Stock-Based Compensation, which became effective for the Company's financial statements in 1996. The statement establishes financial accounting and reporting standards for stock-based employee compensation. As of December 31, 1996, the Company had no stock-based employee compensation programs that are subject to SFAS 123 reporting requirements. 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. 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, 1996, and 1995, and the related consolidated statements of income, retained earnings, and cash flows for each of the three years in the period ended December 31, 1996. 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, 1996, and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP January 29, 1997 Minneapolis, Minnesota Otter Tail Power Company
Consolidated Balance Sheets, December 31 1996 1995 - ---------------------------------------------------------------------------------------- (in thousands) Assets Plant: Electric plant in service $742,065 $715,305 Subsidiary companies 93,975 54,266 -------- -------- Total 836,040 769,571 Less accumulated depreciation and amortization 327,672 308,174 -------- -------- 508,368 461,397 Construction work in progress 11,470 16,285 -------- -------- Net plant 519,838 477,682 -------- -------- Investments 19,880 12,716 -------- -------- Intangibles--net 21,954 18,902 -------- -------- Other assets 6,553 7,732 -------- -------- Current assets: Cash and cash equivalents 1,229 1,867 Temporary cash investments -- 2,208 Accounts receivable: Trade (less accumulated provision for uncollectible accounts: 1996, $690,000; 1995, $398,000) 32,590 31,184 Other 5,018 8,276 Materials and supplies: Fuel 3,220 3,322 Inventory, materials and operating supplies 23,778 19,408 Deferred income taxes 4,550 3,754 Accrued utility revenues 5,349 4,328 Other 4,537 4,427 -------- -------- Total current assets 80,271 78,774 -------- -------- Deferred debits: Unamortized debt expense and reacquisition premiums 4,270 4,687 Regulatory assets 5,866 5,727 Other 3,655 2,976 -------- -------- Total deferred debits 13,791 13,390 -------- -------- Total $662,287 $609,196 ======== ========
See accompanying notes to consolidated financial statements. Otter Tail Power Company
Consolidated Balance Sheets, December 31 1996 1995 - ---------------------------------------------------------------------------------------- (in thousands) Liabilities Capitalization (page 38): Common shares, par value $5 per share -- authorized, 25,000,000 shares; outstanding, 1996 11,214,652; 1995 11,180,136 shares $ 56,073 $ 55,901 Premium on common shares 31,271 30,335 Retained earnings 105,882 98,006 -------- -------- Total 193,226 184,242 Cumulative preferred shares: Subject to mandatory redemption 18,000 18,000 Other 20,831 20,831 Long-term debt 160,492 168,261 -------- -------- Total capitalization 392,549 391,334 -------- -------- Current liabilities: Short-term debt 25,600 -- Sinking fund requirements and current maturities 42,136 13,733 Accounts payable 26,587 27,828 Accrued salaries and wages 3,847 3,703 Federal and state income taxes accrued 2,031 393 Other taxes accrued 12,043 11,356 Interest accrued 3,622 3,509 Other 2,822 6,752 -------- -------- Total current liabilities 118,688 67,274 -------- -------- Noncurrent liabilities 16,688 13,498 -------- -------- Commitments (note 6) -- -- -------- -------- Deferred credits: Accumulated deferred income taxes 98,498 99,398 Accumulated deferred investment tax credit 19,818 20,994 Regulatory liabilities 13,283 14,500 Other 2,763 2,198 -------- -------- Total deferred credits 134,362 137,090 -------- -------- Total $662,287 $609,196 ======== ========
See accompanying notes to consolidated financial statements. Otter Tail Power Company
Consolidated Statements of Income For the Years Ended December 31 1996 1995 1994 - ---------------------------------------------------------------------------------------- (in thousands, except per share amounts) Operating revenues: Electric $199,345 $203,925 $198,812 Health services 61,697 50,896 45,555 Manufacturing 56,868 38,690 13,083 Other business operations 43,829 32,818 29,276 -------- -------- -------- Total operating revenues 361,739 326,329 286,726 Operating expenses: Production fuel 27,913 31,559 32,311 Purchased power 28,378 30,591 28,717 Electric operation and maintenance expenses 66,401 63,777 59,409 Cost of goods sold 112,266 80,414 54,760 Other nonelectric expenses 34,126 29,111 22,842 Depreciation and amortization 22,904 21,909 21,190 Property taxes 11,525 10,670 11,318 -------- -------- -------- Total operating expenses 303,513 268,031 230,547 Operating income: Electric 45,279 47,916 48,126 Health services 5,137 3,581 2,486 Manufacturing 5,423 3,270 2,441 Other business operations 2,387 3,531 3,126 -------- -------- -------- Total operating income 58,226 58,298 56,179 Other income and deductions -- net 2,370 1,881 1,864 Interest charges 16,601 15,075 13,687 -------- -------- -------- Income before income taxes 43,995 45,104 44,356 Income taxes 14,040 16,159 15,881 -------- -------- -------- Net income 29,955 28,945 28,475 Preferred dividend requirements 2,358 2,358 2,358 -------- -------- -------- Earnings available for common shares $ 27,597 $ 26,587 $ 26,117 ======== ======== ======== Average number of common shares outstanding 11,182 11,180 11,180 Earnings per average common share $2.47 $2.38 $2.34 Dividends per common share $1.80 $1.76 $1.72
See accompanying notes to consolidated financial statements.
Consolidated Statements of Retained Earnings For the Years Ended December 31 1996 1995 1994 - ---------------------------------------------------------------------------------------- (in thousands) Retained earnings at beginning of year $ 98,006 $ 90,412 $ 84,209 Net income 29,955 28,945 28,475 Other 403 684 (684) -------- -------- -------- Total 128,364 120,041 112,000 -------- -------- -------- Dividends paid: Cumulative preferred shares at required annual rates 2,358 2,358 2,358 Common shares 20,124 19,677 19,230 -------- -------- -------- Total 22,482 22,035 21,588 -------- -------- -------- Retained earnings at end of year $105,882 $ 98,006 $ 90,412 ======== ======== ========
See accompanying notes to consolidated financial statements. Otter Tail Power Company
Consolidated Statements of Cash Flows For the Years Ended December 31 1996 1995 1994 - --------------------------------------------------------------------------------------------------- (in thousands) Cash flows from operating activities: Net income $ 29,955 $ 28,945 $ 28,475 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 34,788 28,602 25,899 Deferred investment tax credit--net (1,177) (1,177) (1,347) Deferred income taxes (5,276) 751 1,386 Change in deferred debits and other assets 3,679 (1,792) (1,016) Change in noncurrent liabilities and deferred credits 3,389 4,560 1,016 Allowance for equity (other) funds used during construction (325) (229) (146) (Gain)/loss on investments in and disposal of noncurrent assets 308 946 (201) Cash provided by (used for) current assets and current liabilities: Change in receivables, materials, and supplies 660 (1,035) (10,712) Change in other current assets (957) (1,349) (339) Change in payables and other current liabilities 548 1,436 6,720 Change in interest and income taxes payable 1,553 (1,581) 2,097 -------- -------- -------- Net cash provided by operating activities 67,145 58,077 51,832 -------- -------- -------- Cash flows from investing activities: Gross capital expenditures (63,951) (37,134) (30,411) Proceeds from disposal of noncurrent assets 4,649 2,417 2,574 Purchase of subsidiaries, net of cash acquired (10,006) (5,808) (286) Change in temporary cash investments 2,208 (1,817) 60 Change in marketable securities and other investments (10,609) 13,151 (1,630) -------- -------- -------- Net cash used in investing activities (77,709) (29,191) (29,693) -------- -------- -------- Cash flows from financing activities: Change in short-term debt---net issuances 25,600 (2,900) 2,900 Proceeds from issuance of long-term debt 117,083 54,482 6,433 Proceeds from issuance of common stock 1,130 -- -- Payments for debt and common stock issuance expense (22) -- (56) Payments for retirement of long-term debt (111,383) (58,418) (11,784) Dividends paid (22,482) (22,035) (21,588) -------- -------- -------- Net cash used In financing activities 9,926 (28,871) (24,095) -------- -------- -------- Net change in cash and cash equivalents (638) 15 (1,956) Cash and cash equivalents at beginning of year 1,867 1,852 3,808 -------- -------- -------- Cash and cash equivalents at end of year $ 1,229 $ 1,867 $ 1,852 ======== ======== ======== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest (net of amount capitalized) $ 16,375 $ 14,160 $ 13,160 Income taxes $ 18,759 $ 18,286 $ 14,058
See accompanying notes to consolidated financial statements. Otter Tail Power Company
Consolidated Statements of Capitalization, December 31 1996 1995 - ---------------------------------------------------------------------------------------- (in thousands) Total common shareholders' equity $193,226 $184,242 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 -------- -------- Total 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 19,000 7.25%, due August 1, 2002 19,200 19,400 7.625%, due February 1, 2003 9,240 9,360 8.75%, due September 15, 2021 19,000 19,200 8.25%, due August 1, 2022 28,800 29,100 Pollution control series: 6.10-6.80%, due February 1, 2006, Big Stone project 5,427 5,487 8.125%, due August 1, 2009, Coyote project, series B 830 840 6.10-6.90%, due February 1, 2019, Coyote project 21,734 21,969 -------- -------- Total 123,031 124,356 Subsidiary and other long-term debt: 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, 1996, due December 1, 2012 10,400 10,400 Industrial development revenue bond (Quadrant Co. project) -- 200 Obligations of Mid-States Development, Inc. rates 2.90% to 11.38% at December 31, 1996 56,606 33,496 Obligations of North Central Utilities, Inc. variable 6.90% to 7.05% at December 31, 1996 8,026 9,013 Other 1 8 -------- -------- Total 203,274 182,683 Less: Current maturity 41,011 12,408 Sinking fund requirement 1,125 1,325 Unamortized debt discount and premium -- net 646 689 -------- -------- Total long-term debt 160,492 168,261 -------- -------- Total capitalization $392,549 $391,334 ======== ========
See accompanying notes to consolidated financial statements. Otter Tail Power Company Notes to consolidated financial statements For the three years ended December 31, 1996 1. Summary of accounting policies System of accounts -- The accounting records of the Company conform to 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. All significant intercompany transactions have been eliminated. 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 property were 3.00% in 1996, 2.97% in 1995, and 2.98% in 1994. 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, 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% and 35% ownership interests in the assets, liabilities and expenses of Big Stone and Coyote Plants, respectively. Amounts at December 31, 1996 and 1995, included in Plant in Service for Big Stone were $109,251,000 and $108,577,000, respectively, and the accumulated provision for depreciation and amortization was $59,078,000 and $62,486,000, respectively. Amounts at December 31, 1996 and 1995, included in Plant in Service for Coyote were $145,542,000 and $143,748,000, respectively, and the accumulated provision for depreciation and amortization was $58,436,000 and $54,441,000, 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 based on a composite rate that assumes that funds used for construction were provided by borrowed funds and equity funds. The AFC so included in construction work in progress will ultimately be included in the rate base used in establishing rates for utility services. The composite rate for AFC was 8.50% for 1996, 9.50% for 1995, and 10.25% for 1994. 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 in all of its jurisdictions recorded electric revenues based on billing dates. 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. (See note 3 for further information on the order.) 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 and $751,000 in 1994. The impact on earnings per share was $.09 in 1995 and $.07 in 1994. 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: 1.25% as of July 1, 1996 and .5030% 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 reserve -- The Company is required under its Indenture of Mortgage to make annual provisions for storm damage of not less than .5% of gross electric operating revenues. Provisions for loss have been used in determining rates approved by the applicable regulatory commissions. Provisions for 1996, 1995, and 1994 were $1,247,000, $1,800,000, and $995,000, respectively; repairs charged to these reserves were $1,304,000, $1,597,000, and $1,269,000, respectively. Accrued liabilities included $1,003,000 and $1,060,000 for storm damage at December 31, 1996 and 1995, respectively. Employee incentive plan -- The Company has a gain sharing plan for the benefit of all electric utility company employees. The totals received by all electric utility company employees for 1996, 1995, and 1994 were $778,000, $870,000, and $1,314,000, 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 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. Recent changes in anticipated retirement ages have resulted in changes to actuarial assumptions used in the cost calculations for postretirement benefits related to the Company's Executive Survivor and Supplemental Retirement Plan. Also, the depreciable lives of certain plant assets are reviewed and, if appropriate, revised each year, as discussed previously. (See note 8 for more information on the effects of these changes in estimates.) Reclassifications -- Certain prior year amounts have been reclassified to conform to the 1996 presentation format. 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 -- Excluded from the Consolidated Statements of Cash Flows, are the following noncash transactions. In September 1995 the Company recorded a $3.5 million passive investment in the form of a delayed equity contribution to a limited liability company. As of December 31, 1996 and 1995, $13,000 and $3,033,000, respectively, remained to be paid on the obligation. In 1995 the Company recorded an investment of $2 million in the form of a delayed equity contribution in a limited partnership that invests in tax-credit qualifying affordable housing. The $780,000 balance of the obligation remaining to be paid at December 31, 1995, was paid in the second quarter of 1996. 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, 1996 and 1995, the Company had noncurrent investments of $6,163,000 and $4,491,000, 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 $593,000 and $92,000, in 1996 and 1995, respectively. At December 31, 1996, the Company had $820,000 invested in marketable equity securities classified as available-for- sale and recorded at market value. The balance of investments at December 31, 1996, consists of $8,722,000 in additional investments accounted for under the equity method, and $3,916,000 in financial instruments, primarily related to participation in economic development loan pools. The Company's temporary cash investments consist of money market funds recorded at cost, which approximates market. (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, 1996, was 5.77%. The average interest rate paid on short-term debt during 1996 was 5.65%. 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: 1996 1995 -------- -------- (in thousands) Goodwill on telephone company $ 7,749 $ 7,749 Other intangible assets 19,870 15,797 ------- ------- Total 27,619 23,546 Less accumulated amortization 5,665 4,644 ------- ------- Intangibles-net $21,954 $18,902 2. Segment information The Company's wholly owned subsidiary Mid-States Development, Inc. (Mid- States) purchased a Montana-based supplier of X-ray supplies and accessories in February of 1996, a mobile medical diagnostic services company located in Bemidji, MN in April of 1996, and four radio stations located in the Fargo, North Dakota/Moorhead, Minnesota, market area, two in June, one in October, and one in December 1996. Mid-States purchased two additional manufacturing companies and three small diagnostic imaging companies in 1995, and one additional business in 1994. Of the companies purchased in 1995, one manufacturing company and all three diagnostic imaging companies were purchased in January, and the other manufacturing company was purchased in October. The Company's telecommunications subsidiary North Central Utilities, Inc. (NCU) acquired two cable TV systems in 1996 that serve the communities of Milbank, South Dakota, and Carlos, Minnesota. In all 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, 1995, and 1994. The total price for all businesses acquired was $11,060,000 in 1996, $10,820,000 in 1995, and $575,000 in 1994. On January 2, 1997, NCU completed the acquisition of The Peoples Telephone Co. of Bigfork (Peoples). The acquisition will be accounted for under the pooling-of-interests method. This acquisition will have no significant pro forma effect on the Company's operating revenues, net income, or earnings per share for 1996, 1995, and 1994. 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 primarily in the Midwestern United States. Manufacturing operations includes production of agricultural equipment, plastic pipe, 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 1996, 1995 and 1994 is presented in the table below: 1996 1995 1994 -------- -------- -------- (in thousands) Operating revenue Electric $199,345 $203,925 $198,812 Health services 61,697 50,896 45,555 Manufacturing 56,868 38,690 13,083 Other business operations 43,829 32,818 29,276 -------- -------- -------- Total $361,739 $326,329 $286,726 Operating income Electric $ 45,279 $ 47,916 $ 48,126 Health services 5,137 3,581 2,486 Manufacturing 5,423 3,270 2,441 Other business operations 2,387 3,531 3,126 -------- -------- -------- Total $ 58,226 $ 58,298 $ 56,179 Depreciation and amortization Electric $ 19,880 $ 19,448 $ 18,970 Health services 585 517 455 Manufacturing 551 344 227 Other business operations 1,888 1,600 1,538 -------- -------- -------- Total $ 22,904 $ 21,909 $ 21,190 Capital expenditures Electric $ 38,224 $ 27,443 $ 25,693 Health services 16,230 4,020 2,544 Manufacturing 4,575 3,879 357 Other business operations 4,922 1,792 1,817 -------- -------- -------- Total $ 63,951 $ 37,134 $ 30,411 Identifiable assets Electric $523,509 $509,588 $505,291 Health services 65,140 41,623 26,415 Manufacturing 32,474 27,270 7,215 Other business operations 41,164 30,715 40,051 -------- -------- -------- Total $662,287 $609,196 $578,972 3. Rate matters On July 1, 1995, the Company began charging all Minnesota customers a .5030% 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%. 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 1995 and 1994 lost margins and bonus incentives in 1996 and 1995, respectively. The Company recorded revenues related to 1996, 1995, and 1994 lost margins and bonus incentives of $800,000, $766,000, and $537,000, respectively. As these costs are recovered through the monthly billing process, the amounts billed are offset by the amortization of deferred CIP charges. In 1994 the Company filed a petition with the MPUC for approval of an annual recovery mechanism for DSM-related costs, under Minnesota's CIP. 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 costs of approximately $2.2 million each year for three years being absorbed in current rates beginning in 1995. 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, which resulted in the issuance of 34,516 common shares in 1996. On January 2, 1997, the Company issued 163,758 unregistered common shares to effect the acquisition of Peoples. On February 7, 1997, the Company issued 30,561 common shares to its leveraged employee stock ownership plan. 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% or more, or commenced a tender or exchange offer for 15% 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, 1996, were restricted by $10,089,000. 6. Commitments At December 31, 1996, the Company had commitments under contracts in connection with construction programs aggregating approximately $4,600,000. For capacity requirements the Company has agreements extending through April 2005, at annual costs of approximately $5,100,000 in 1997, $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. 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 and the Company's share of lease payments is approximately $539,000 per year. The new cars began transporting coal in October 1996. The Company has no other significant operating leases. 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 and industrial development 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. The aggregate amounts of maturities and sinking fund requirements on bonds outstanding and other long-term obligations at December 31, 1996, for each of the next five years are $42,136,000 for 1997, $17,197,000 for 1998, $10,628,000 for 1999, $10,457,000 for 2000, and $4,390,000 for 2001. 8. Pension plan and other postretirement benefits The Company's noncontributory funded pension plan covers substantially all electric utility employees. The plan provides 100% 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 $1,292,000 for 1996, $1,009,000 for 1995, and $1,356,000 for 1994. A portion of the pension cost is capitalized as a part of utility plant construction. 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 1996, 1995, and 1994 includes the following components: 1996 1995 1994 -------- -------- -------- (in thousands) Service cost--benefit earned during the period $ 2,273 $ 1,908 $ 2,076 Interest cost on projected benefit obligation 6,754 6,511 6,209 -------- -------- -------- $ 9,027 $ 8,419 $ 8,285 (Gain)/loss on return on assets (15,738) (26,509) 3,234 Plus/(less): net deferral and amortization 8,003 19,099 (10,163) -------- -------- -------- Net periodic pension cost $ 1,292 $ 1,009 $ 1,356 ======== ======== ======== 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, 1996 and 1995, are as follows: 1996 1995 -------- -------- (in thousands) Actuarial present value of benefit obligation: Vested benefits $ 72,243 $ 69,340 Nonvested benefits 9,688 8,594 -------- -------- Accumulated benefit obligation $ 81,931 $ 77,934 ======== ======== Projected benefit obligation $100,664 $ 95,359 Plan assets at fair value 121,506 110,728 -------- -------- Funded status $ 20,842 $ 15,369 Unrecognized transition asset (1,251) (1,486) Unrecognized prior service cost 9,916 9,200 Unrecognized net actuarial (gain) or loss (25,773) (18,057) -------- -------- Net pension asset $ 3,734 $ 5,026 ======== ======== The assumptions used for actuarial valuations were: 1996 1995 -------- -------- 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 1996, 1995 and 1994 was $485,000, $412,000, and $271,000, 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, along with a $711,000 reduction in the $1,426,000 additional minimum liability reflected on the Company's December 31, 1995, balance sheet. The funded status of the plan and amounts recognized on the balance sheet at December 31, 1996 and 1995, are as follows: 1996 1995 -------- -------- (in thousands) Actuarial present value of benefit obligation: Vested benefits $ 4,322 $ 3,067 Nonvested benefits 686 583 ------- ------- Accumulated benefit obligation $ 5,008 $ 3,650 ======= ======= Projected benefit obligation $ 6,636 $ 3,650 Plan assets at fair value -- -- ------- ------- Funded Status $(6,636) $(3,650) Unrecognized transition obligation 82 102 Unrecognized prior service cost 1,774 1,177 Unrecognized net actuarial (gain) or loss 487 1,018 Additional liability (715) (1,426) ------- ------- Accrued benefit liability $(5,008) $(2,779) ======= ======= The assumptions used for actuarial valuations for 1996 and 1995 were a discount rate of 7.25%, and a salary scale rate increase of 5%. 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 Statement of Financial Accounting Standards No. 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 twenty years. During the second quarter of 1996 actuary valuations for postretirement benefits other than pensions were computed to reflect a change in assumptions related to group life insurance. The change in actuarial assumptions resulted in a reduction in 1996 expenses related to a reduction in expected postretirement benefit obligations. The plan was amended during the fourth quarter of 1995 to reduce the contribution required of an employee's surviving spouse for health insurance. This amendment increased benefit costs by $2,155,000 in 1995 because most of the prior service cost was related to retired employees' spouses for which the Company has no current economic benefit. The Company estimates this amendment will have a service cost of approximately $200,000 per year in future years. The net postretirement benefit cost for 1996, 1995, and 1994 includes the following components: 1996 1995 1994 -------- -------- -------- (in thousands) Service cost - benefit earned during the period $ 484 $ 411 $ 596 Interest cost on accumulated postretirement benefit obligation 1,132 1,187 1,412 Amortization of transition obligation 748 881 881 Amortization of experience (gain)/loss (210) (311) -- Plan amendment prior service cost -- 2,155 -- Life insurance curtailment gain (749) -- -- ------ ------ ------ Net postretirement benefit cost $1,405 $4,323 $2,889 ====== ====== ====== The funded status of the plan and the amounts recognized on the balance sheet at December 31, 1996 and 1995, are as follows: 1996 1995 -------- -------- (in thousands) Actuarial present value of benefit obligation: Retirees $ 9,096 $ 10,276 Fully eligible plan participants 4,582 5,000 Other active plan participants 2,645 2,607 -------- -------- Accumulated postretirement benefit obligation $ 16,323 $ 17,883 Plan assets at fair value -- -- -------- -------- Funded status $(16,323) $(17,883) Unrecognized (gain)/loss (4,038) (4,662) Unrecognized transitional obligation 11,971 14,976 -------- -------- Postretirement benefit liability $ (8,390) $ (7,569) ======== ======== The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation as of December 31, 1996, was 7.0% for 1997, decreasing linearly each successive year until it reaches 5% in 2001, after which it remains constant. The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation as of December 31, 1995, was 9.5% for 1996, decreasing linearly each successive year until it reaches 5% in 2001, after which it remains constant. The assumed discount rate used in determining the accumulated postretirement benefit obligation as of December 31, 1996 and 1995, was 7.25%. 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, 1996, by approximately 11% and the service and interest cost components of the net postretirement health care cost in 1996 by approximately 17%. The Company has a leveraged employee stock ownership plan (ESOP) for the benefit of all its employees. Contributions made by the Company were $1,010,000 for 1996, $993,000 for 1995, and $970,000 for 1994. 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, 1996, 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 $30,000,000 of which $25,600,000 was used at December 31, 1996. The subsidiary companies' bank lines and letters of credit, which require no compensating balances, totaled $24,357,000 of which $7,032,000 was used at December 31, 1996. 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. Marketable securities -- The fair value of investments are estimated based on quoted market prices. 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 $42 million of the Company's long term debt, which is subject to variable interest rates, approximates fair value. 1996 1995 -------------------- -------------------- (in thousands) Carrying Fair Carrying Fair amount value amount value --------- --------- --------- --------- Cash and short-term investments $ 1,229 $ 1,229 $ 4,075 $ 4,075 Marketable securities 820 820 -- -- Other investments 19,060 19,060 12,716 12,716 Redeemable preferred stock (18,000) (18,000) (18,000) (18,650) Long-term debt (160,492) (167,799) (168,261) (183,099) 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 as a separate component in the retained earnings on the balance sheet. Realized gains and losses are computed on each specific investment sold. The amounts recognized on the balance sheet as of December 31, 1996 and 1995, and amounts sold for each year are as follows: 1996 1995 -------- -------- (in thousands) Available for sale - securities Cost $ 133 $ -- Gross unrealized gain 687 -- Gross unrealized loss -- -- ------- ------- Fair value $ 820 $ -- ======= ======= Proceeds from sale $ -- $90,774 Gross realized gains -- 1,591 Gross realized losses -- (2,816) 11. Income tax expense The total income tax expense differs from the amount computed by applying the federal income tax rate (35% in 1996, 1995 and 1994) to net income before total income tax expense for the following reasons: 1996 1995 1994 -------- -------- -------- (in thousands) Tax computed at federal statutory rate $15,398 $15,786 $15,525 Increases (decreases) in tax from: State income taxes net of federal income tax benefit 1,835 2,097 2,088 Investment tax credit amortization (1,177) (1,177) (1,347) Depreciation differences--flow-through method reversal (137) 222 617 Differences reversing in excess of federal rates (1,030) (754) (707) Dividend received/paid deduction (604) (872) (889) Permanent and other differences and affordable housing tax credits (245) 857 594 ------- ------- ------- Total Income tax expense $14,040 $16,159 $15,881 ======= ======= ======= Overall effective federal and state income tax rate 31.9% 35.8% 35.8% Income tax expense includes the following: Charged (credited) to operations: Current federal income taxes $18,034 $13,840 $12,892 Current state income taxes 3,608 3,201 2,935 Deferred federal income taxes (4,656) 603 1,185 Deferred state income taxes (480) 117 266 Investment tax credit amortization (1,177) (1,177) (1,347) ------- ------- ------- Total $15,329 $16,584 $15,931 Charged (credited) to other income and deductions: Current federal income taxes (1,023) (269) 115 Current state income taxes (103) (21) 50 Deferred federal and state income taxes (163) (135) (215) ------- ------- ------- Total Income tax expense $14,040 $16,159 $15,881 ======= ======= ======= The Company's deferred tax assets and liabilities were composed of the following on December 31, 1996 and 1995: 1996 1995 -------- -------- (in thousands) Deferred tax assets Amortization of tax credits $ 13,021 $ 13,782 Vacation accrual 1,039 953 Unbilled/unearned revenue 4,452 3,886 Reserves 6,872 5,137 Nondeductible land - plant abandonment 1,134 1,134 Transfer to regulatory asset (617) (689) Other 1,646 1,364 --------- --------- Total deferred tax assets $ 27,547 $ 25,567 Deferred tax liabilities Differences related to property (113,450) (114,081) Excess tax over book - pensions (1,481) (1,994) Transfer to regulatory asset (4,012) (2,563) Transfer to regulatory liability 204 649 Other (2,756) (3,222) --------- --------- Total deferred tax liabilities $(121,495) $(121,211) --------- --------- Deferred income taxes $ (93,948) $ (95,644) ========= ========= 12. Property, plant and equipment 1996 1995 -------- -------- (December 31, in thousands) Electric Plant: Production $305,472 $302,601 Transmission 137,539 132,031 Distribution 217,825 207,248 General 81,229 73,425 -------- -------- 742,065 715,305 Less accumulated depreciation and amortization 301,380 291,740 -------- -------- 440,685 423,565 Construction work in progress 11,470 16,285 -------- -------- Net electric plant $452,155 $439,850 -------- -------- Subsidiary companies plant $ 93,975 $ 54,266 Less accumulated depreciation and amortization 26,292 16,434 -------- -------- Net subsidiary companies plant $ 67,683 $ 37,832 -------- -------- Net plant $519,838 $477,682 ======== ======== 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 -------------- -------------- -------------- -------------- 1996 1995 1996 1995 1996 1995 1996 1995 ------ ------ ------ ------ ------ ------ ------ ------ (in thousands except per share data) Operating revenues $88,390 $83,250 $89,588 $73,433 $92,866 $80,585 $90,895 $89,061 Operating income $18,831 $17,648 $12,293 $11,814 $12,273 $14,910 $14,829 $13,926 Net income $10,032 $ 8,707 $ 5,980 $ 5,337 $ 6,207 $ 7,147 $ 7,736 $ 7,754 Earnings available for common shares $ 9,442 $ 8,118 $ 5,391 $ 4,747 $ 5,617 $ 6,557 $ 7,147 $ 7,165 Earnings per common share $ .84 $ .73 $ .48 $ .42 $ .50 $ .59 $ .64 $ .64 Dividends paid per common share $ .45 $ .44 $ .45 $ .44 $ .45 $ .44 $ .45 $ .44 Price range: High $38 5/8 $35 $38 5/8 $35 $34 1/2 $35 1/4 $34 1/4 $37 3/4 Low $35 1/4 $31 3/4 $32 $30 3/4 $31 3/4 $32 1/4 $32 $34 1/8 Average number of common shares outstanding 11,180 11,180 11,180 11,180 11,180 11,180 11,187 11,180
Exhibit 13-A 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 5 LISTING OF SUBSIDIARIES Exhibit 21-A OTTER TAIL POWER COMPANY Subsidiaries of the Registrant March 1, 1997 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 MSB, Inc. North Dakota Western Minnesota Broadcasting Company Minnesota Diagnostic Medical Systems, Inc. North Dakota DMS Imaging, Inc. North Dakota DMS Leasing Corporation North Dakota Radiographic Supply, Inc. Montana BTD Manufacturing, Inc. Minnesota Northern Pipe Products, Inc. North Dakota Northern Micro, Inc. North Dakota Fargo Baseball, LLC Minnesota Fargo Sports Concession LLC Minnesota *Inactive EX-23 6 EXHIBIT 23 Exhibit 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 33-46071 and 333-11145 of Otter Tail Power Company on Form S-3 of our report dated January 29, 1997, incorporating by reference in this Annual Report on Form 10-K of Otter Tail Power Company for the year ended December 31, 1996. Deloitte & Touche LLP Minneapolis, Minnesota March 28, 1997 EX-24 7 POWERS OF ATTORNEY 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, 1996, 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: _______1/2_____________, 1997. _______Jeffrey J. Legge____________ Jeffrey J. Legge In Presence of: _______Cheryl Enderle____________ ______Anita Anderson________________ 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, 1996, 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: ______1/2 _________, 1997. _______John C. MacFarlane____________ John C. MacFarlane In Presence of: _______Dee Fletcher________________ _______Rodney C. H. Scheel_________ 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, 1996, 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: _____1/6__________, 1997 ______Robert N.Spolum________________ Robert N. Spolum In Presence of: _______Linda Brenzel_______________ _______Michele Pingel______________ 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, 1996, 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: ______1/6___________, 1997. ______Nathan I. Partain______________ Nathan I. Partain In Presence of: ______Karent Keating____________________ _______Ellen Reimts____________ 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, 1996, 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: ______1/13___________, 1997. ______Dayle Dietz____________________ Dayle Dietz In Presence of: _______Owen E. Jensen__________ ________Diane Pederson_____________ 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, 1996, 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: ________1/6_______, 1997. ______Arvid R. Liebe_________________ Arvid R. Liebe In Presence of: _________Melogy Kunde_______________ _________Renee Thomas__________ 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, 1996, 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: _______1/6________, 1997. _____Thomas M. Brown_________________ Thomas M. Brown In Presence of: ____Donna M. Hull__________________ _____Kimmy K. Schmidt_______________ 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, 1996, 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: ________1/3_______, 1997. ______Maynard D. Helgaas_____________ Maynard D. Helgaas In Presence of: _______Ronald Herraas______________ _______Penny Mosher_____________ 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, 1996, 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: ___1/8_____________, 1997 _____Kenneth L. Nelson_____ Kenneth L. Nelson In Presence of: _____Mike Holper___________________ _____Wayne Langley___________________ 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, 1996, 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: ______1/13___________, 1997 ______Dennis R. Emmen________________ Dennis R.Emmen In Presence of: _______Becky Luhning_______________ _______Penny Mosher________________ 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, 1996, 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: ______1/2___________, 1997. _____A. E. Anderson__________________ A. E. Anderson In Presence of: ______Penny Mosher_________________ ______Lori D. Dawkins_____________ 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, 1996, 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: _______1/3__________, 1997. ______Jay D. Myster__________________ Jay D. Myster In Presence of: _______Becky Luhning_______________ _______Lori D. Dawkins________________ EX-27 8 FINANCIAL DATA SCHEDULE
UT This schedule contains summary financial information extracted from the Consolidated Balance Sheet as of December 31, 1996, and the Consolidated Statement of Income for the twelve months ended December 31, 1996, and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS DEC-31-1996 DEC-31-1996 PER-BOOK 452,155 116,070 80,271 13,791 0 662,287 56,073 31,271 105,882 193,226 18,000 20,831 160,492 7,200 0 18,400 42,136 0 0 0 202,002 662,287 361,739 14,040 303,513 317,553 44,186 2,370 46,556 16,601 29,955 2,358 27,597 20,124 15,952 67,145 2.47 2.47
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