NORTHWESTERN PUBLIC SERVICE CO - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
[No fee required]
For the transition period from _______________ to _______________

COMMISSION FILE NO. 0-692

NORTHWESTERN PUBLIC SERVICE COMPANY
(Exact name of registrant as specified in its charter)

Delaware 46-0172280
(State of (IRS Employer
Incorporation) Identification No.)

33 Third Street SE 57350-1605
Huron, South Dakota (Zip Code)
(Address of principal office)

605-352-8411
(Registrant's telephone number)

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, $1.75 par value and
related Common Stock Purchase Rights New York Stock Exchange
Company Obligated Mandatorily Redeemable New York Stock Exchange
Security of Trust Holding Solely Parent
Debentures, $25.00 liquidation amount
Common Stock Purchase Rights New York Stock Exchange

(Title of each class) (Name of each exchange
on which registered)

Securities registered pursuant to Section 12(g) of the Act:

PREFERRED STOCK, PAR VALUE $100
(Title of Class)

Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. [ X ] Yes [ ] No

2

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. [ X ]

State the aggregate market value of the voting stock held by
nonaffiliates of the registrant.

$410,378,052 as of February 18, 1998

Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of the latest practicable date:

COMMON STOCK, PAR VALUE $1.75
17,842,524 SHARES OUTSTANDING AT FEBRUARY 18, 1998

DOCUMENTS INCORPORATED BY REFERENCE:

1997 Annual Report to Stockholders . . . . .Parts I and II
Proxy Statement for 1998 Annual Meeting . . . . .Part III

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PART I

ITEM 1. BUSINESS

GENERAL DEVELOPMENT OF BUSINESS

Northwestern Public Service Company (Company) is a nationwide
diversified energy, telecommunications and related services provider.
The Company generates and distributes electric energy to 56,000
customers in eastern South Dakota. The Company also purchases,
distributes, sells, and transports natural gas to 79,000 customers in
central Nebraska and eastern South Dakota.

Through its subsidiaries, the Company operates a nationally
recognized retail and wholesale propane distribution business. In
1996, Northwestern expanded the propane operations with the
acquisition of eight additional propane companies, including Empire
Energy Corporation in October, then the eighth largest retail marketer
of propane in the U.S., and CGI Holdings, Inc., then the eighteenth
largest retail marketer of propane in the U.S. in December. Also, in
December 1996, Northwestern combined all of its propane businesses
into Cornerstone Propane Partners, L.P. (Cornerstone), a publicly
traded master limited partnership which sold 9.8 million common units
to the public on December 17, 1996, at a price of $21 per unit.
Cornerstone is the fifth largest retail propane marketer in the U.S.,
serving approximately 360,000 customers from 298 service centers in 27
states. At December 31, 1997, the Company's majority owned
subsidiaries owned all 6,597,619 subordinated units and an aggregate
2% general partner interest in the partnership, or a combined 38.5%.
In January 1998, Cornerstone sold an additional 1,960,000 units to the
public. After the secondary offering, the Company, through its
subsidiary, owns a combined 34.8% effective interest in the
Partnership.

Through its other subsidiaries, the Company is engaged in
additional nonregulated operations as more fully discussed in the
section entitled "Nonregulated Operations". The Company was
incorporated under the laws of the state of Delaware in 1923 and is
qualified to conduct its utility business in the states of South
Dakota, Nebraska, Iowa, and North Dakota. The Company does not
currently serve any utility customers in North Dakota or Iowa. The
Company has its principal office at 33 Third Street SE, Huron, South
Dakota 57350-1318. Its telephone number is 605-352-8411.

FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

Financial information about industry segments is incorporated by
reference to Note 12 of the "Notes to Consolidated Financial
Statements" of the Company's 1997 Annual Report to Stockholders, filed
as an Exhibit 13 hereto.

4

NARRATIVE DESCRIPTION OF BUSINESS

Weather patterns have a material impact on the Company's
operating performance for all three segments of its energy business.
This impact is particularly relevant for natural gas and propane.
Because natural gas and propane are heavily used for residential and
commercial heating, the demand for these products depends upon weather
patterns throughout the Company's service area. With a larger
proportion of its operations related to seasonal natural gas and
propane sales, a significantly greater portion of the Company's
operating income is recognized in the first and fourth quarters
related to higher revenues from the heating season.

PROPANE BUSINESS

The Company's retail and wholesale propane distribution business
is competing against a number of other distributors in an unregulated
business. There are, however, certain inherent barriers for
customers to overcome in switching from one propane delivery service
provider to another. The Company believes that its ownership of
propane storage tanks installed at customers' premises, together with
safety regulations which prohibit other propane distributors from
filling the propane tanks and cylinders at the customers' premises,
promotes long-standing relationships which are typical in the retail
propane industry. The cost and inconvenience of switching tanks tend
to minimize the switching by customers among suppliers on the basis of
minimal price variations. Conversely, it also makes it more difficult
for the Company to acquire new customers, other than through
acquisitions, in areas where there are existing relationships between
potential customers and other distributors.

Through its subsidiaries, the Company operates a nationally
recognized retail and wholesale propane distribution business.
Propane complements the Company's electric and natural gas
distribution businesses and adds geographical diversity to its
operations.

On October 7, 1996, the Company completed the acquisition of
Empire Energy Corporation (Energy), a retail distributor of propane.
Energy maintained 168 retail branches serving approximately 130,000
customers in 10 states, primarily in southeast and midwest regions of
the United States.

On December 17, 1996, a wholly owned subsidiary of Northwestern
Growth Corporation acquired CGI Holdings, Inc. (Coast). Immediately
after the acquisition the Company combined the propane distribution
businesses of Coast, Energy, Myers and Synergy into Cornerstone. As
part of an IPO on the same date, Cornerstone sold a total of 9,821,000
Common Units at a price to the public of $21 a unit. At December 31,
1997, Cornerstone's capital consists of 11,127,000 Common Units,
6,597,619 subordinated units (Subordinated Units) representing limited
partner interests and a 2% general partner interest. The Company's
majority owned subsidiaries own all 6,597,619 Subordinated Units and
an aggregate 2% general partner interest in the Partnership, or a
combined 38.5% effective interest in the Partnership. In January

5

1998, Cornerstone sold an additional 1,960,000 units at a price to the
public of $22.125 per unit. After the secondary offering the Company,
through its subsidiary, owns a combined 34.8% effective interest in
the Partnership.

The net proceeds from the sale of 9,821,000 Common Units of
Cornerstone and the net proceeds from the issuance of Cornerstone
Senior Notes were used to repay term and revolving debt of Coast,
Energy and Synergy, including accrued interest and any prepayment
premiums which were assumed by the Partnership. In addition, the
preferred stock of Synergy was redeemed at a premium. As a result of
these repayments, the Company recorded a one-time after tax gain of
$.09 per share from the prepayment of the term debt and redemption of
preferred stock investment in Synergy.

Additional information regarding the acquisitions is incorporated
by reference to Note 2 of the "Notes to Consolidated Statements" of
the Company's 1997 Annual Report to Stockholders, filed as an Exhibit
13 hereto.

SALES. On a consolidated basis, 81% of the Company's 1997 operating
revenues were from the sale of propane.

Similar to its electric and natural gas businesses, no single
customer accounts for a significant portion of the Company's propane
sales. Propane sales were 32% retail and 68% to wholesale customers.

Agricultural uses of propane include tobacco curing, crop drying,
and poultry breeding. Other customers include industrial customers
who use propane to fire furnaces, as a cutting gas, and in other
process applications. Other industrial customers include large scale
heating accounts, local gas utility customers who maintain a standby
propane capability for use during peak demand periods, and customers
who use propane as a feedstock in manufacturing processes.

SUPPLY AND DISTRIBUTION. The Company purchases propane from various
suppliers, including major domestic oil companies and independent
producers of natural gas liquid and oil and made occasional spot
market transactions. The majority of the propane purchases were on a
contractual basis under one-year agreements subject to annual renewal.
The largest supplier provided approximately 13% of the total volumes
purchased under contract. The percentage of contract purchases may
vary from year to year depending on a number of factors. Supply
contracts generally provide for pricing in accordance with posted
prices at the time of delivery or contract prices established at major
storage points, and some contracts include a pricing formula that
typically is based on such market prices. The Company has established
relationships with a number of suppliers and believes it will have
ample sources of supply under comparable terms to draw upon to meet
the necessary propane requirements if it were to discontinue
purchasing propane from its largest suppliers. The Company has not
experienced a shortage that has prevented it from satisfying its own
customers' needs and does not foresee any significant shortage in the
supply of propane that would cause a disruption in meeting the needs
of the Company's customers as well.

6

The Company primarily uses common carriers and railroad tank cars
to transport propane from refineries, natural gas processing plants or
pipeline terminals to the Company's bulk storage plants. The
transportation of propane requires specialized equipment. The trucks
and railroad cars utilized for this purpose carry specialized steel
tanks that maintain the propane in a liquefied state.

Propane delivery to customers is made by means of bulk delivery
tank trucks owned by the Company. Propane is stored by the customers
on their premises in stationary steel tanks generally ranging in
capacity from 120 to 1,000 gallons, with large users having tanks
with a capacity of 30,000 gallons. A majority of the propane storage
tanks used by the Company's residential and commercial customers are
owned by the Company. In addition, a certain number of Company owned
tanks are provided to customers under a leasing agreement.

ELECTRIC BUSINESS

Pursuant to the South Dakota Public Utilities Act, the South
Dakota Public Utilities Commission (PUC) assigned as the Company's
electric service territory the communities and adjacent rural areas in
which the Company provides electric service in South Dakota. The
Company has the right to provide electric service to present and
future electric customers in its assigned service territory for so
long as the service provided is deemed adequate. Under the South
Dakota Public Utilities Act, effective July 1, 1976, the Company is
not required to obtain or renew municipal franchises to provide
electric service within its assigned service territory.

ELECTRIC SALES. On a consolidated basis, 8% of the Company's
1997 operating revenues were from the sale of electric energy. All of
the Company's electric revenues are derived from customers in South
Dakota.

The Company has relatively few large customers in its service
territory. By customer category, 33% of 1997 total electric sales was
from residential sales, 50% was from commercial and industrial sales,
1% was from street lighting and sales to public authorities, and 16%
was from sales for resale.

Sales for resale primarily include power pool sales to other
utilities. Power pool sales fluctuate from year to year depending on
a number of factors including the Company's availability of excess
short-term generation and the ability to sell the excess power to
other utilities in the power pool. The Company also sells power and
energy at wholesale to certain municipalities for resale and to
various governmental agencies. In 1997, these sales accounted for
less than 1% of total electric sales.

CAPABILITY AND DEMAND. The Company shares in the ownership of
the Big Stone Generating Plant (Big Stone), located near Big Stone
City in northeastern South Dakota. In North Dakota, the Company
maintains transmission facilities to interconnect with electric
transmission lines of other utilities and shares in the ownership of
the Coyote I Electric Generating Plant (Coyote), located near Beulah,

7

North Dakota. In Iowa, the Company shares in the ownership of Neal
Electric Generating Unit #4 (Neal), located near Sioux City, Iowa.

At December 31, 1997, the aggregate net summer peaking capacity
of all Company-owned electric generating units was 310,259 kw,
consisting of 106,390 kw from Big Stone (the Company's 23.4% share),
42,700 kw from Coyote (the Company's 10.0% share), 54,169 kw from Neal
(the Company's 8.7% share), and 107,000 kw from internal combustion
turbine units and small diesel units, used primarily for peaking
purposes. In addition to those plant facilities, the Company entered
into an agreement in 1995 to purchase up to 14,950 kw of firm capacity
from Basin Electric Cooperative to assist in meeting peak capacity
demands. The Company has also contracted with Nebraska Public Power
District to purchase various amounts of firm capacity to further
assist in supplying peak energy demands.

The Company is a summer peaking utility. The 1997 peak demand of
270,089 kw occurred on July 16, 1997. Total system capability at the
time of peak was 325,209 kw. The reserve margin for 1996 was 17%.
The minimum reserve margin requirement as determined by the members of
the Mid-Continent Area Power Pool (MAPP), of which the Company is a
member, is 15%.

MAPP is an area power pool arrangement consisting of utilities
and power suppliers having transmission interconnections located in a
9-state area in the North Central region of the United States and in
two Canadian provinces. The objective of MAPP is to accomplish
coordination of planning and operation of generation and
interconnecting transmission facilities to provide reliable and
economical electric service to members' customers, consistent with
reasonable utilization of natural resources and protection of the
environment. While benefiting from the advantages of the planning,
coordination, and operations of MAPP, each member has the right and
obligation to own or otherwise provide the facilities to meet its own
requirements. The terms and conditions of the MAPP agreement and
transactions between MAPP members are subject to the jurisdiction of
the Federal Energy Regulatory Commission (FERC). The Company also has
interconnections with the transmission facilities of Otter Tail Power
Company, Montana-Dakota Utilities Co., Northern States Power Company,
and Western Area Power Administration; and has emergency
interconnections with transmission facilities of East River Electric
Cooperative, Inc. and West Central Electric Cooperative. These
interconnections and pooling arrangements enable the Company to
arrange purchases or sales of substantial quantities of electric power
and energy with other pool members and to participate in the benefits
of pool arrangements.

The Company has finalized an integrated resource plan to identify
how it will meet the electric energy needs of its customers. The plan
includes estimates of customer usage and programs to provide for
economic, reliable, and timely supplies of energy. The plan does not
anticipate the need for additional baseload generating capacity for at
least the next ten years.

8

FUEL SUPPLY. Lignite and sub-bituminous coal were utilized by
the Company as fuel for virtually all of the electric energy generated
during 1997. North Dakota lignite is the primary fuel at Coyote. The
Company burned Montana sub-bituminous coal at Big Stone during 1997.
During 1997, the average heating value of lignite burned was 6,949 BTU
per pound at Coyote. The sulfur content of this lignite is typically
between 0.8% and 1.2%. The Montana sub-bituminous coal burned at Big
Stone contained an average heating value of 8,734 BTU per pound and a
sulfur content between 0.55% and 0.75%. Neal burned Wyoming sub-
bituminous coal which had an average heating value of 8,457 BTU per
pound during 1997. Typically, the sulfur content of this coal is
between 0.30% and 0.40%.

The Company's fuel costs have remained relatively stable. The
average cost by type of fuel burned is shown below for the periods
indicated:

Cost Per Million BTU % of 1997
Year Ended December 31 Megawatt
----------------------- Hours
Fuel Type 1995 1996 1997 Generated
---- ---- ---- ---------

Lignite - Big Stone $1.09 - - 0%
Sub-bituminous - Big Stone 1.00 $.95 .93 56%
Lignite - Coyote** .83 .86 .91 16%
Sub-bituminous - Neal .76 .75 .71 28%
Natural Gas 1.80 2.24 2.33 *

Oil 3.96 4.65 4.64 *

* Combined for approximately one percent.
** Includes pollution control reagent.

During 1997, the average delivered cost per ton of lignite was
$11.66 to Coyote. The average cost per ton of sub-bituminous coal
received at Big Stone for 1997 was $15.99. The average cost for coal
delivered to Neal was $11.56 per ton for 1997. Such amounts include
severance taxes imposed by the states of North Dakota and Montana and
a production tax imposed by the state of Wyoming. While the effect on
the Company's fuel costs of future changes in severance or production
taxes cannot be predicted, any changes in the Company's fuel costs may
be passed on to its customers through the operation of the fuel
adjustment clause. This feature of the Company's electric rates is
more fully discussed in the section entitled "Regulation".

The continued delivery of lignite and sub-bituminous coal to the
three large steam generating units in which the Company is part owner
is reasonably assured by contracts covering various periods of the
operating lives of these units. The contract for delivery of Montana
sub-bituminous coal to Big Stone expires in 1999, further evaluations
will be conducted during the contract term to select a coal supply for
periods beyond 1999. The contract for delivery of lignite to Coyote,
which expires in 2016, provides for an adequate fuel supply for the

9

estimated economic life of that plant. Neal receives Wyoming sub-
bituminous coal under a long-term contract which expires in 1998. The
Company, along with the other owners of Neal, is studying options for
the supply of coal for periods beyond the expiration date.

Following test burns in 1990 and 1991, the owners of the Big
Stone Plant received approval from the South Dakota Department of
Environment and Natural Resources to burn tire derived fuel (TDF) and
refuse derived fuel (RDF). The quantity of TDF and RDF that was
burned in 1996 is insignificant when compared to total coal
consumption at the plant.

The fossil fuel supplies for Big Stone and Neal are delivered via
unit trains belonging to the respective plants' owners and locomotives
of the Burlington Northern Railroad and the Union Pacific Railroad,
respectively. The lignite supply for Coyote is delivered via conveyor
at this "mine-mouth" plant. In early 1996, the Company and its
partners at Big Stone executed a fifteen year operating lease
agreement for unit train cars. This agreement was effective late in
1996. The prior unit train cars were sold to another third party
independent of the leasing transaction.

While the Company has no firm contract for diesel fuel for its
other electric generating plants, it has been able to purchase its
diesel fuel requirements in recent years from local suppliers and
currently has in storage an amount adequate to satisfy its normal
requirements for such fuel.

Additional information relating to jointly owned plants is
incorporated by reference to Note 8 of the "Notes to Consolidated
Statements" of the Company's 1997 Annual Report to Stockholders filed
as an Exhibit 13 hereto.

NATURAL GAS BUSINESS

The Company has nonexclusive municipal franchises to provide gas
service in the Nebraska and South Dakota communities in which it
provides such service. The maximum term permitted under Nebraska law
for such franchises is 25 years while the maximum term permitted under
South Dakota law is 20 years. The Company's policy is to seek renewal
of a franchise in the last year of its term. The Company has never
been denied the renewal of any of these franchises and does not
anticipate that any future renewals would be withheld.

NATURAL GAS SALES AND DEMAND. On a consolidated basis, 8% of the
Company's 1997 operating revenues were from the sale of natural gas.
During 1997, the Company derived 57% of its natural gas revenues from
South Dakota and 43% from Nebraska. The Company's peak daily sendout
was 125,279 MMBTU.

CAPABILITY AND SUPPLY. The Company owns and operates natural gas
distribution systems serving 38,829 customers in eastern South Dakota.
In 1996 the Company completed construction of a new natural gas
pipeline in northern South Dakota which increased capacity by 15,000
MMBTU per day. In 1995, the Company executed a service agreement with

10

Cibola Energy Services Corporation (Cibola) whereby Cibola coordinates
supply and transportation services. The pipeline and storage capacity
is provided under service agreements with Northern Natural Gas
Company. These agreements provide for firm deliverable pipeline
capacity of approximately 57,200 MMBTU per day in South Dakota.

In Nebraska, the Company owns and operates natural gas
distribution systems serving 39,702 retail customers in the village of
Alda and the cities of Grand Island, Kearney, and North Platte. The
Company purchases all of its natural gas for these systems through KN
Gas Marketing, Inc. (KN) under a service agreement entered in 1995
with all supply and transportation services coordinated through a
subsidiary of the Company. These agreements provide for firm
deliverable pipeline capacity of approximately 58,000 MMBTU per day in
Nebraska.

In 1992, FERC issued Order 636. Order 636 required, among other
provisions, that all companies with natural gas pipelines separate
natural gas supply or production services from transportation service
and storage businesses. This allowed gas distribution companies, such
as the Company, and individual customers to purchase gas directly from
producers, third parties, and various gas marketing entities and
transport it through the suppliers' pipelines. The Company has
operated under the restructured environment during the past three
years.

To supplement firm gas supplies, the Company's service agreements
with Cibola and KN also provide for underground natural gas storage
services to meet the heating season and peak day requirements of its
gas customers. In addition, the Company also owns and operates five
propane-air plants with a total rated capacity of 14,000 MMBTU per
day, or approximately 10% of peak day requirements. The propane-air
plants provide an economic alternative to pipeline transportation
charges to meet the peaks caused by customer demand on extremely cold
days.

A few of the Company's industrial customers purchase their
natural gas requirements directly from gas marketing firms for
transportation and delivery through the Company's distribution system.
Transportation rates have been designed to make the Company
economically indifferent as to whether the Company sells and
transports gas or only transports gas.

HVAC, TELECOMMUNICATIONS AND RELATED SERVICES

The Company, through its subsidiary Northwestern Growth
Corporation, has a preferred stock investment in the unconsolidated
affiliate companies, ServiCenter USA and Communication Systems USA.
ServiCenter USA is a premier provider of heating, ventilating, air
conditioning, plumbing and related services for residential and
business customers in the U.S. Communication Systems USA is a leading
provider of telecommunication and data services to business customers.

11

COMPETITION AND BUSINESS RISK

The Company's strategy centers upon the development, acquisition
and expansions of operations offering integrated energy,
telecommunications and related products and services within the
Northwestern companies. In addition to maintaining a strong
competitive position in electric, natural gas and propane distribution
businesses, the Company intends to pursue development and acquisitions
that have long-term growth potential. While such investments and
acquisitions can involve increased risk in comparison to the Company's
energy distribution businesses, they offer the potential for enhanced
investment returns.

Propane
-------

Weather conditions have a significant impact on propane demand
for both heating and agricultural purposes. The majority of
Cornerstone's customers rely heavily on propane as a heating fuel.
Actual weather conditions can vary substantially from year to year,
significantly affecting Cornerstone's financial performance.
Furthermore, variations in weather in one or more regions in which
Cornerstone operates can significantly affect the total volumes sold
by Cornerstone and the margins realized on such sales and
consequently, Cornerstone's results of operations. These conditions
may also impact Cornerstone's ability to meet various debt covenant
requirements and affect Cornerstone's ability to pay distributions on
the subordinated units and to the general partners.

The retail propane business is a margin-based business in which
gross profits depend on the excess of sales prices over propane supply
costs. Consequently, Cornerstone's profitability is sensitive to
changes in wholesale propane prices. Propane is a commodity, the
market price of which can be subject to volatile changes in response
to changes in supply or other market conditions. As it may not be
possible to immediately pass on to customers rapid increases in the
wholesale cost of propane, such increases could reduce Cornerstone's
gross profits.

Cornerstone's profitability is affected by the competition for
customers among all participants in the retail propane business. Some
of Cornerstone's competitors are larger or have greater financial
resources than Cornerstone. Should a competitor attempt to increase
market share by reducing prices, Cornerstone's financial condition and
results of operations could be materially adversely affected. In
addition, propane competes with other sources of energy, some of which
may be less costly per equivalent energy value.

Electric and Natural Gas
------------------------

The electric and natural gas industries continue to undergo
numerous transformations, and the Company is operating in an
increasingly competitive marketplace. The FERC, which regulates
interstate and wholesale electric transmissions, opened up

12

transmission grids and mandated that utilities must allow others equal
access to utility transmission systems. Various state regulatory
bodies are supporting initiatives to redefine the electric energy
market and are experimenting with retail wheeling, which gives some
retail customers the ability to choose their supplier of electricity.
Traditionally, utilities have been vertically integrated, providing
bundled energy services to customers. The potential for continued
unbundling of customer services exists, allowing customers to buy
their own electricity and natural gas on the open market and having it
delivered by the local utility.

The growing pace of competition in the energy industry has been a
primary focus of management over the last few years. The Company's
future financial performance will be dependent on the effective
execution of operating strategies to address a more competitive and
changing energy marketplace. Business strategies focus on enhancing
the Company's competitive position, on expanding energy sales and
markets with new products and services for customers and increasing
shareholder value. The Company has realigned various areas of its
business to support customer services and marketing functions. A new
marketing plan, an expanded line of integrated customer products and
services, additional staff and new technologies are part of the
Company's strategy for providing responsive and superior customer
service. To strengthen the Company's competitive position, new
technologies have and will be added that enable employees to better
serve customers. The Company is centralizing activities to improve
efficiency and customer responsiveness and business processes are
being reengineered to apply best-practices methodologies. Long-term
supply contracts have been renegotiated to lower customers' energy
costs and new alliances help reduce expenses and add innovative work
approaches.

As described in Note 1 to the consolidated financial statements,
the Company complies with the provisions of Statement of Financial
Accounting Standards No. 71 (SFAS 71), "Accounting for the Effects of
Certain Types of Regulation". SFAS 71 provides for the financial
reporting requirements of the Company's regulated electric and natural
gas operations which requires specific accounting treatment of certain
costs and expenses that are related to the Company's regulated
operations. Criteria that could give rise to the discontinuance of
SFAS 71 include (1) increasing competition that restricts the
Company's ability to establish prices to recover specific costs and
(2) a significant change in the manner in which rates are set by
regulators from cost-based regulation to another form of regulation.
The Company periodically reviews these criteria to ensure the
continuing application of SFAS 71 is appropriate. Based on a current
evaluation of the various factors and conditions that are expected to
impact future cost recovery, the Company believes that its regulatory
assets, including those related to generation, are probable of future
recovery. This evaluation of recovery must be updated for any change
which might occur in the Company's current regulatory environment.

13

HVAC, Telecommunications and Related Services
---------------------------------------------

The markets served by ServiCenter USA for residential and
commercial heating, ventilating, air conditioning, plumbing and other
related services are highly competitive. The principal competitive
factors in these segments of the industry are (1) timeliness,
reliability and quality of services provided, (2) range of products
and services provided, (3) name recognition and market share and (4)
pricing. Many of ServiCenter's competitors in the HVAC business are
small, owner-operated companies typically located and operated in a
single geographic area. There are only a small number of national
companies engaged in providing residential and commercial services in
the service lines, which the Company intends to focus. Future
competition in both the residential and commercial service lines may
be encountered from other newly formed or existing public or private
service companies with aggressive acquisition programs, the
unregulated business segments of regulated gas and electric utilities
or from newly deregulated utilities in those industries entering into
various service areas.

The market served by Communication Systems USA in the
telecommunications and data services industry is also a highly
competitive market. The Company believes that (1) market acceptance
of the Company's products and services, (2) pending and future
legislation affecting the telecommunications and data industry, (3)
name recognition and market share, (4) larger competitors and (5) the
Company's ability to provide integrated communication and data
solutions for customers in a dynamic industry area all factors that
could affect the Company's future operating results.

Other
-----

The Company utilizes software and various technologies throughout
its business that will be affected by the date change in the year
2000. The Company has assessed and is continuing to assess the impact
of the year 2000 issue on its reporting systems and operations. The
majority of the Company's financial reporting and operational systems
are year 2000 compliant. The cost of the modifications of the
remaining systems is not expected to be material.

REGULATION

The Company is a "public utility" within the meaning of the
Federal Power Act and the South Dakota Public Utilities Act and, as
such, is subject to the jurisdiction of, and regulation by, FERC with
respect to issuance of securities, the PUC with respect to electric
service territories, and both FERC and the PUC with respect to rates,
service, accounting records, and in other respects. The State of
Nebraska has no centralized regulatory agency which has jurisdiction
over the Company's operations in that state; however, the Company's
natural gas rates are subject to regulation by the municipalities in
which it operates.

14

Under the South Dakota Public Utilities Act, effective July 1,
1976, a requested rate increase may be implemented by the Company 30
days after the date of its filing unless its effectiveness is
suspended by the PUC and, in such event, can be implemented subject to
refund with interest six months after the date of filing, unless
sooner authorized by the PUC. The Company's electric rate schedules
provide that it may pass along to all classes of customers qualified
increases or decreases in the cost of fuel used in its generating
stations and in the cost of fuel included in purchased power. A
purchased gas adjustment provision in its gas rate schedules permits
the Company to pass along to gas customers increases or decreases in
the cost of purchased gas.

The Company filed no electric rate cases in South Dakota during
the three years ended December 31, 1997. A natural gas increase was
implemented in South Dakota on November 15, 1994. Effective April 1,
1995, the Company implemented increased rates related to its Nebraska
natural gas service area as a result of a negotiated settlement with
representatives of the four communities in which the Company operates.

On April 24, 1996, FERC issued its final rule (Order No. 888) on
wholesale electric transmission open access and recovery of stranded
costs. On July 9, 1996, the Company filed proposed tariffs with FERC
in compliance with Order 888. Under the proposed tariffs, which
became effective on July 10, 1996, eligible transmission service
customers can choose to purchase transmission services from a variety
of options ranging from full use of the transmission network on a firm
long-term basis to a fully interruptible service available on an
hourly basis. The proposed tariffs also include a full range of
ancillary services necessary to support the transmission of energy
while maintaining reliable operations of the Company's transmission
system. The Company is awaiting final approval of the proposed
tariffs by FERC.

FERC has approved the Company's Request for Waiver of the
requirements of FERC Order No. 889 as it relates to the Standards of
Conduct. The Standards of Conduct require companies to physically
separate their transmission operations/reliability functions from
their marketing/merchant functions. The Request for Waiver is based
on criteria established by FERC, exempting small public utilities as
defined by the United States Small Business Administration.

ENVIRONMENTAL MATTERS

The Company is subject to regulation with regard to air and water
quality, solid waste disposal, and other environmental considerations
by Federal, state, and local governmental authorities. The
application of governmental requirements to protect the environment
involves or may involve review, certification, issuance of permits, or
similar action by government agencies or authorities, including the
United States Environmental Protection Agency (EPA), the South Dakota
Department of Environment and Natural Resources (DENR), the North
Dakota State Department of Health, and the Iowa Department of
Environmental Quality, as well as compliance with decisions of the
courts.

15

CLEAN AIR ACT. The Clean Air Act Amendments of 1990 (the Clean
Air Act) stipulate limitations on sulfur dioxide and nitrogen oxide
emissions from coal-fired power plants which will require the purchase
of additional emission allowances or a reduction in sulphur dioxide
emissions beginning in the year 2000 from the Big Stone Plant. The
Company believes it can economically meet the sulfur dioxide emission
requirements of the Clean Air Act by the required compliance dates.

With regard to the Clean Air Act's nitrogen oxide emission
requirements, the Neal wall-fired boiler is expected to meet the
emission limitations for such boilers. The Clean Air Act does not yet
specify nitrogen oxide limitations for boilers with cyclone burners
such as those used at Big Stone and Coyote because practical low-
nitrogen oxide cyclone burner technology does not exist. It requires
the EPA to establish nitrogen oxide emission limitations for cyclone
boilers including taking into account that the cost to accomplish such
limits be comparable to retrofitting low-nitrogen oxide burner
technology to other types of boilers. In addition, the Clean Air Act
also requires future studies to determine what controls, if any,
should be imposed on coal-fired boilers to control emissions of
certain air toxics other than sulfur and nitrogen oxides. Because of
the uncertain nature of cyclone boiler nitrogen oxide and air toxic
emission limits, the Company cannot now determine the additional
costs, if any, it may incur due to these provisions of the Clean Air
Act.

PCBs. The Company has met or exceeded the removal and disposal
requirements of equipment containing polychlorinated biphenyls (PCBs)
as required by state and Federal regulations. The Company will use
some PCB-contaminated equipment for its remaining useful life, and
dispose of the equipment according to pertinent regulations that
govern that use and disposal of this equipment. PCB-contaminated oil
is burned for energy recovery at a permitted facility.

STORAGE TANKS. The South Dakota DENR and the EPA adopted
regulations imposing requirements upon the owners and operators of
above ground and underground storage tanks. The Company's fuel oil
storage facilities at its generating plants in South Dakota are
affected by the above ground tank regulations, and the Company has
instituted procedures for compliance.

SITE REMEDIATION. The Company conducted an investigation of a
manufactured gas plant (MGP) site and took remedial action during 1995
by permanently removing the residues contained in the soil through a
thermal desorption process. In May 1996, EPA Region VIII (which
includes South Dakota, North Dakota, Colorado, Utah, Wyoming, and
Montana) selected the Company to receive an Outstanding Achievement
Award for Leadership and Innovation. EPA Region VIII chose recipients
who had demonstrated protection and enhancement of Region VIII's
environment. Adjustments of the Company's natural gas rates to
reflect the costs associated with the remediation were approved by the
PUC.

OTHER. In addition to the Clean Air Act, the Company is also
subject to other environmental regulations. The Company believes that

16

it is in compliance with all presently applicable environmental
protection requirements and regulations. However, the Company is
unable to forecast the effect which future environmental regulations
may ultimately have upon the cost of its utility related facilities
and operations. No administrative or judicial proceedings involving
the Company are now pending or known by the Company to be contemplated
under presently effective environmental protection requirements.

SITING. The states of South Dakota, North Dakota, and Iowa have
enacted laws with respect to the siting of large electric generating
plants and transmission lines. The South Dakota PUC, the North Dakota
Public Service Commission, and the Iowa Utilities Board have been
granted authority in their respective states to issue site permits for
nonexempt facilities.

PROPANE TRANSPORTATION AND SAFETY MATTERS. The Company's propane
operations are subject to various Federal, state, and local laws
governing the transportation, storage and distribution of propane,
occupational health and safety, and other matters. All states in
which the Company operates have adopted fire safety codes that
regulate the storage and distribution of propane. In some states,
these laws are administered by state agencies, and in others they are
administered on a municipal level. Certain municipalities prohibit
the underground installation of propane furnaces and appliances, and
certain states are considering the adoption of similar regulations.

The Company currently meets or exceeds Federal regulations
requiring that all persons employed in the handling of propane gas be
trained in proper handling and operating procedures. All employees
have participated, or will participate within 90 days of their
employment date, in hazardous materials training. The Company has
established ongoing training programs in all phases of product
knowledge and safety including participation in the National Propane
Gas Association's (NPGA) Certified Employee Training Program.

CAPITAL SPENDING AND FINANCING

The Company's primary ongoing capital requirements include the
funding of its energy business construction and expansion programs,
the funding of debt and preferred stock retirements and sinking fund
requirements, and the funding of its corporate development and
investment activities.

The emphasis of the Company's construction activities is to
undertake those projects that most efficiently serve the expanding
needs of its customer base, enhance energy delivery capabilities,
expand its current customer base, and provide for the reliability of
energy supply. Capital expenditure plans are subject to continual
review and may be revised as a result of changing economic conditions,
variations in sales, environmental requirements, investment
opportunities, and other ongoing considerations. Expenditures for
maintenance and construction activities for 1997, 1996, and 1995 were
$22.4 million, $35.2 million, and $29.6 million, respectively.
Capital expenditures during 1997 included maintenance expenditures
related to Cornerstone propane operations. Construction expenditures

17

during 1996 and 1995 included expenditures related to an operations
center expected to provide cost savings and operating efficiencies
through consolidation of activities, and the expansion of the
Company's natural gas system into additional communities in eastern
South Dakota. In addition, 1997, 1996 and 1995 included $4.1 million,
$7.3 million and $4.7 million, respectively, of maintenance capital
expenditures related to propane. Total capital expenditures for 1998,
excluding propane operations, are estimated to be $13.8 million. The
majority of the projected expenditures will be spent on enhancements
of the electric and gas distribution systems. Estimated electric and
natural gas related expenditures for the years 1998 through 2002 are
expected to be $61.5 million. Nonregulated maintenance capital
expenditures for 1998 are estimated to be $3.8 million. Estimated
nonregulated maintenance capital expenditures for the years 1998
through 2002 are expected to be $19.0 million. Capital requirements
for the mandatory retirement of long-term debt and mandatory preferred
stock sinking fund redemption totaled $1,244,000, $400,000, and
$600,000 for the years ended 1997, 1996, and 1995, respectively. It
is expected that such mandatory retirements will be $7.8 million in
1998, $7.8 million in 1999, $8.9 million in 2000, $8.5 million in
2001, and $8.3 million in 2002. The balance on the Cornerstone
working capital facility was reduced in January, 1998 using the
proceeds of a secondary offering of 1,960,000 units which were sold to
the public at a price of $22.125 per unit, resulting in net proceeds
of $40.7 million. The Company anticipates that future capital
requirements will be met by both internally generated cash flows,
available investments and available external financing.

The Company plans to continue to evaluate and pursue
opportunities to enhance shareholder return through nonregulated
business investments. Nonregulated projects are expected to be
financed from the existing investment portfolio and from other
available financing options.

Information relating to capital resources and liquidity is
incorporated by reference to "Management's Discussion and Analysis" of
the Company's 1997 Annual Report to Stockholders, filed as an Exhibit
13 hereto.

NONREGULATED OPERATIONS

NORTHWESTERN GROWTH CORPORATION (NGC). NGC was incorporated
under the laws of South Dakota in 1994 to pursue and manage nonutility
investments and development activities. NGC owns the controlling
general partner of Cornerstone. Other NGC assets include a portfolio
of marketable securities and the investments of subsidiaries:
Northwestern Networks, Inc., which holds a common stock investment in
LodgeNet Entertainment Corporation, a provider of television
entertainment and information systems to hotels and motels, and
Northwestern Systems, Inc., which owns 100% of the common stock of
Lucht Inc., a firm that develops, manufactures, and markets multi-
image photographic printers and other related equipment, and Franklin
Industries Co., a remanufacturer of steel products. In 1997, NGC
formed ServiCenter USA to acquire heating, ventilating, air
conditioning, plumbing and related services to companies in the U. S.

18

Also in late 1997, Northwestern formed Communication Systems USA to
acquire and consolidate companies providing telecommunications and
data services to business customers. Although the primary focus of
NGC's investment program will be to continue to seek growth
opportunities in the energy, energy equipment, and energy services
industries, NGC will also continue to pursue opportunities in existing
and emerging growth entities in non-energy industries that meet the
Company's return on investments and capital gain requirements.

NORTHWESTERN SERVICES CORPORATION (NSC) was incorporated under
the laws of South Dakota in 1997 to market integrated residential and
commercial products and services.

NORTHWESTERN ENERGY CORPORATION. Northwestern Energy Corporation
markets natural gas and energy related services, and has interests in
nonregulated energy holdings.

GRANT, INC. Grant, Inc., which holds title to property not used
in the Company's utility business, was incorporated in South Dakota in
1972.

Additional information relating to nonregulated business is
incorporated by reference to "Management's Discussion and Analysis" of
the Company's 1997 Annual Report to Stockholders, filed as an Exhibit
13 hereto.

EMPLOYEES

At December 31, 1997, the Company had 444 utility employees. A
three-year collective bargaining agreement which was negotiated in
1997, covers operating and clerical employees. The Company has never
experienced a work stoppage or strike and considers its relationship
with its employees to be very good.

At December 31, 1997, the Company had 2,206 employees involved in
its propane operations. Approximately 30 of these employees are
represented by unions. Cornerstone has not experienced any work
stoppage or other significant labor problems and believes it has a
good relationship with its employees.

At December 31, 1997, the Company had 145 employees involved in
its manufacturing operations. None of these employees is represented
by unions. The Company has not experienced any work stoppage or other
significant labor problems and believes it has a good relationship
with its employees.

EXECUTIVE OFFICERS OF THE REGISTRANT

M. D. Lewis, Chairman, President and Chief Executive Officer, age 50

Chairman since May 1, 1997; President and Chief Executive Officer
since February 1994; formerly Executive Vice President from May
1993, to February 1994; Executive Vice President-Corporate
Services 1992-1993; Vice President-Corporate Services 1987-1992;
Assistant Corporate Secretary 1982-1993. Mr. Lewis also serves

19

as Chairman of Northwestern Growth Corporation, Cornerstone
Propane GP, Inc., ServiCenter USA, Communication Systems USA,
Northwestern Energy Corporation and Northwestern Services
Corporation.

R. R. Hylland, Executive Vice President, age 37

Executive Vice President since May, 1996. Formerly Executive
Vice President - Strategic Development November 1995-May 1996;
Vice President-Strategic Development from August 1995 to November
1995; Vice President Corporate Development from 1993-1995; Vice
President-Finance from 1991-1995; Treasurer from 1990-1994; Mr.
Hylland also serves as Vice Chairman and Chief Executive Officer
of Northwestern Growth Corporation and Vice Chairman of
ServiCenter USA, Communication Systems USA and Cornerstone
Propane GP, Inc., since January, 1998. Formerly President and
Chief Operating Officer of Northwestern Growth Corporation,
September 1994-January 1998. Mr. Hylland is also a member of the
board of directors of Northwestern Public Service, Northwestern
Growth Corporation, LodgeNet Entertainment Corporation, and
Lucht, Inc.

A. D. Dietrich, Vice President - Administration and Corporate
Secretary, age 47

Vice President-Administration since November 1994; Corporate
Secretary since October 1989; formerly Vice President-Legal May
1990-November 1994.

A. R. Donnell, Vice President - Energy Operations, age 54

Vice President-Energy Operations since November 1994; formerly
Vice President-Electric Operations July 1987-November 1994.

T. A. Gulbranson, Vice President - Energy Services, age 50

Vice President - Customer Services since January 1996; Mr.
Gulbranson also serves as President and Chief Operating Officer
of Northwestern Services Corporation since May 1997; formerly
Vice President November 1994-January 1996; Vice President-
Corporate Services May 1993-November 1994; Vice President-
Community Development 1988-1993. Mr. Gulbranson also is a member
of the board of directors of Northwestern Growth Corporation and
Lucht, Inc.

R. F. Leyendecker, Vice President - Market Development, age 52

Vice President-Market Development since January 1996; Mr.
Leyendecker also serves as President and Chief Operating Officer
of Northwestern Energy Corporation since September 1996; formerly
Vice President-Energy Services November 1994-January 1996; Vice
President-Rates & Regulation 1987-November 1994. Mr. Leyendecker
also is a member of the board of directors of Northwestern Growth
Corporation and Lucht, Inc.

20

W. K. Lotsberg, Vice President - Public Affairs, age 55

Vice President-Public Affairs since May 1994; formerly Vice
President-Consumer Affairs March 1989-May 1994.

D. K. Newell, Chief Financial Officer and Vice President - Finance,
age 41

Chief Financial Officer and Vice President - Finance since July
1996. Formerly Vice President - Finance, July 1995-June 1996.
Prior to joining the Company in July 1995, Mr. Newell served as
CFO, Vice President - Finance and Treasurer with Energy Fuels
Corporation. Mr. Newell also has served as President and COO of
Northwestern Growth Corporation since January 1998. Formerly
Executive Vice President of Northwestern Growth Corporation July
1995 - January 1998. Mr. Newell also is a member of the board of
directors of Northwestern Growth Corporation, Cornerstone Propane
GP, Inc., ServiCenter USA and Communication Systems USA, Lucht,
Inc. and Franklin Industries.

R. A. Thaden, Vice President - Communications and Treasurer, age 46

Vice President-Communications since February 1997; formerly
Treasurer November 1994 - May 1997; Manager-Corporate Accounting
1987-November 1994. Ms. Thaden also has served as Vice President
of Northwestern Growth Corporation since September 1995.
Formerly Treasurer of Northwestern Growth Corporation September
1995-May 1997.

D. A. Monaghan, Controller and Treasurer, age 30

Controller and Treasurer since June 1997. Mr. Monaghan also
serves as Treasurer of Northwestern Growth Corporation,
Northwestern Services Corporation and Northwestern Energy
Corporation. Formerly Controller November 1996-May 1997. Prior
to joining the Company in November 1996, Mr. Monaghan was an
audit and consulting manager with the regional public accounting
firm Baird, Kurtz & Dobson.

All of the executive officers of the registrant serve at the
discretion of the Board and are elected annually by the Board of
Directors following the Annual Meeting of Stockholders. No family
relationships exist between any officers of the Company.

ITEM 2. PROPERTIES

PROPANE PROPERTY

As of December 31, 1997 the Company operated 298 service centers
consisting of appliance showrooms, bulk storage plants, warehousing
space, maintenance facilities, garages, and storage depots of large
propane tanks with associated distribution equipment. These service
center facilities are located in 27 states comprised of Texas, New
Mexico, Oklahoma, Mississippi, Tennessee, Arkansas, Missouri, Vermont,
New Hampshire, New York, Maryland, New Jersey, Virginia, North

21

Carolina, South Carolina, Ohio, Florida, California, Alaska, Kansas,
Utah, Indiana, Arizona, Georgia, Alabama, Kentucky, and Louisiana.

ELECTRIC PROPERTY

The Company's electric properties consist of an interconnected
and integrated system. The Company, Otter Tail Power Company (Otter
Tail), and Montana-Dakota Utilities Co. (MDU) jointly own Big Stone, a
455,783 kilowatt (kw) nameplate capacity coal-fueled electric
generating plant and related transmission facilities. Big Stone is
operated by Otter Tail for the benefit of the owners. The Company
owns 23.4% of the Big Stone Plant.

The Company is one of four power suppliers which jointly own
Coyote, a 455,783 kw nameplate capacity lignite-fueled electric
generating plant and related transmission facilities located near
Beulah, North Dakota. The Company has a 10% interest in Coyote, which
is operated by MDU for the benefit of the owners.

The Company is one of 14 power suppliers which jointly own Neal,
a 639,999 kw nameplate capacity coal-fueled electric generating plant
and related transmission facilities located near Sioux City, Iowa.
MidAmerican Energy Company is principal owner of Neal and is the
operator of the unit. The Company has an 8.7% interest in Neal.

The Company has an undivided interest in these jointly owned
facilities and is responsible for its proportionate share of the
capital and operating costs while being entitled to its proportionate
share of the power generated. Each participant finances its own
investment. The Company's interest in each plant is reflected in the
Consolidated Balance Sheet on a pro rata basis, and its share of
operating expenses is reflected in the Consolidated Statement of
Income and Retained Earnings.

In addition to its interest in Big Stone, Coyote and Neal, the
Company owns and operates 19 fuel oil and gas-fired units for peaking
and reserve capacity.

As of December 31, 1997, the aggregate nameplate capacity of all
Company-owned electric generating units was 327,419 kw, with an
aggregate net summer peaking capacity of 310,259 kw and a net winter
peaking capacity of 331,969 kw. In addition to owned capacity, the
Company entered into two contractual agreements to purchase firm
capacity to assist in meeting peak energy needs.

The Company's interconnected transmission system consists of
321.8 miles operating at 115 kilovolts (kv) and 900.6 miles operating
at 69 kv and 34.5 kv. The Company also owns three segments of
transmission line, which are not tied to its internal system, in
connection with its joint ownership in the three large steam
generating plants. These lines consist of 18.2 miles of 230 kv line
from Big Stone, 25.4 miles of 345 kv line from Neal, and 23.1 miles of
345 kv line from Coyote. In addition to these lines, the Company owns
1,758.6 miles of distribution lines serving customers in more than 100
communities and adjacent rural areas. The Company owns 40

22

transmission substations with a total rated capacity of 1,111,417
kilovolt amperes (kva), two mobile substations with a total rated
capacity of 5,500 kva and 80 distribution substations with a total
rated capacity of 350,949 kva.

GAS PROPERTY

On December 31, 1997, the Company owned 1,111 miles of
distribution mains and appurtenant facilities in South Dakota. The
Company also owns propane-air facilities in Aberdeen, Brookings,
Huron, and Mitchell, South Dakota, having a total rated capacity of
15,280 MMBTU per day, which are operated for standby and peak shaving
purposes only.

On December 31, 1997, the Company owned 673 miles of distribution
mains and appurtenant facilities in Nebraska. The Company also owns
propane-air facilities at Kearney and North Platte, Nebraska, having a
total rated capacity of 9,380 MMBTU per day, which are operated for
standby and peak shaving purposes only.

CHARACTER OF OWNERSHIP

All mortgage bonds issued under the Company's General Mortgage
Indenture and Deed of Trust dated as of August 1, 1993 (the
"Indenture") are secured by a first mortgage lien on the Company's
properties used in the generation, production, transmission or
distribution of electric energy or the distribution of natural gas in
any form and for any purpose, with certain exceptions expressly
provided in the Indenture. The principal offices and properties of
the Company are held in fee and are free from other encumbrances,
subject to minor exceptions, none of which is of such a nature as
substantially to impair the usefulness to the Company of such
properties. In general, the electric lines and natural gas lines and
mains are located on land not owned in fee, but are covered by
necessary consents of various governmental authorities or by
appropriate rights obtained from owners of private property. These
consents and rights are deemed adequate for the purposes for which
they are being used.

ITEM 3. LEGAL PROCEEDINGS

The Company is a party to various pending proceedings and suits,
but in the judgment of management after consultation with counsel for
the Company, the nature of such proceedings and suits, and the amounts
involved do not depart from the routine litigation and proceedings
incident to the kind of business conducted by the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No issues were submitted to a vote of security holders during the
last quarter of the period covered by this report.

23

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS

The Company's common stock, which is traded under the ticker
symbol NPS, is listed on the New York Stock Exchange. The following
are the high and low sale prices for the common stock for each full
quarterly periods with the two most recent years and the dividends
paid per share during each such period:

QUARTERLY COMMON STOCK DATA

Prices Cash
------ Dividends
Declared
High Low --------
---- ---
1996
----
First Quarter $ 15-1/8 $ 13-3/4 $ .22
Second Quarter 14-13/16 13-3/8 .22
Third Quarter 15-9/16 13-7/16 .22
Fourth Quarter 18-1/4 15 .23

1997
----
First Quarter $19-3/4 $16-15/16 $ .23
Second Quarter 22-1/4 18-5/16 .23
Third Quarter 21-1/4 17-3/4 .23
Fourth Quarter 23-1/2 18-7/16 .2425

Certain other information required by this Item 5 is incorporated
by reference to Note 13 of the "Notes to Consolidated Financial
Statements" of the Company's 1997 Annual Report to Stockholders, filed
as an Exhibit 13 hereto.

ITEM 6. SELECTED FINANCIAL DATA

The information required by this Item 6 is incorporated by
reference to "Financial Statistics" on the Company's 1997 Annual
Report to Stockholders, filed as an Exhibit 13 hereto.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The information required by this Item 7 is incorporated by
reference to "Management's Discussion and Analysis" of the Company's
1997 Annual Report to Stockholders, filed as an Exhibit 13 hereto.

24

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this Item 8 is incorporated by
reference to the Company's financial statements and related footnotes,
of the Company's 1997 Annual Report to Stockholders, filed as an
Exhibit 13 hereto.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE

There have been no changes in accountants or disagreements on
accounting principles or practices or financial statement disclosures.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE
OFFICERS OF THE REGISTRANT

(a) IDENTIFICATION OF DIRECTORS

The information regarding directors required by this Item 10 is
incorporated by reference to the information under "Election of
Directors" and "Reports to the Securities and Exchange Commission" in
the Company's definitive Proxy Statement dated March 20, 1998, filed
with the Commission pursuant to Regulation 14A under the Securities
Exchange Act of 1934.

The information relating to the Company's executive officers
required by this Item 10 is set forth under the caption "Executive
Officers of the Registrant" following Item 1 of this Annual Report on
Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item 11 is incorporated by
reference to the information under "Compensation of Directors and
Executive Officers" in the Company's definitive Proxy Statement dated
March 20, 1998, and filed with the Commission pursuant to Regulation
14A under the Securities Exchange Act of 1934.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT

The information required by this Item 12 is incorporated by
reference to the information under "Securities Ownership by Directors
and Officers" in the Company's definitive Proxy Statement dated March
20, 1998, and filed with the Commission pursuant to Regulation 14A
under the Securities Exchange Act of 1934.

25

ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS

The Company has no relationships or transactions covered by this
item.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K

(a) DOCUMENTS FILED AS PART OF THIS REPORT

1. Financial Statements

Report of Independent Public Accountants

Consolidated Statements of Income and
Retained Earnings for the Three Years
Ended December 31, 1997

Consolidated Statement of Cash Flows for the
Three Years Ended December 31, 1997

Consolidated Balance Sheets,
December 31, 1997 and 1996

Notes to Consolidated Financial Statement

Quarterly Unaudited Financial Data for the
Two Years Ended December 31, 1997

2. Financial Statement Schedules

The following supplemental financial data included herein should
be read in conjunction with the financial statements referenced above:

Report of Independent Public Accountants
Schedule II - Valuation and Qualifying Accounts

Schedules other than those listed above are omitted because of
the absence of the conditions under which they are required or because
the information required is included in the financial statements or
the notes thereto.

3. Exhibits

The exhibits listed on the Exhibit Index of this Annual Report on
Form 10-K are filed herewith or are incorporated herein by reference.

(b) REPORTS ON FORM 8-K

No reports on Form 8-K were filed during the quarter ended
December 31, 1997.

26

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.

NORTHWESTERN PUBLIC SERVICE COMPANY (Registrant)

/s/ M. D. Lewis
-------------------------------------
M. D. Lewis, Chairman,
President and Chief Executive Officer
March 20th, 1998

Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.

/s/ M. D. Lewis March 20, 1998
-------------------------------------
M. D. Lewis, Chairman, President
and Chief Executive Officer

/s/ R. R. Hylland March 20, 1998
-------------------------------------
R. R. Hylland, Director and
Executive Vice President

/s/ D. K. Newell March 20, 1998
-------------------------------------
D. K. Newell, Vice President-Finance
(Principal Financial Officer)

/s/ David A. Monaghan March 20, 1998
------------------------------------
David A. Monaghan, Controller
and Treasurer
(Principal Accounting Officer)

/s/ Jerry W. Johnson March 20, 1998
-------------------------------------
Jerry W. Johnson, Director

/s/ Aelred J. Kurtenbach March 20, 1998
-------------------------------------
Aelred J. Kurtenbach, Director

27

/s/ Herman Lerdal March 20, 1998
-------------------------------------
Herman Lerdal, Director

/s/ Larry F. Ness March 20, 1998
-------------------------------------
Larry F. Ness, Director

/s/ Raymond M. Schutz March 20, 1998
-------------------------------------
Raymond M. Schutz, Director

/s/ Bruce I. Smith March 20, 1998
-------------------------------------
Bruce I. Smith, Director

/s/ Gary Olson March 20, 1998
-------------------------------------
Gary Olson, Director

/s/ Gary G. Drook March 20, 1998
-------------------------------------
Gary G. Drook, Director

/s/ Randy G. Darcy March 20, 1998
-------------------------------------
Randy G. Darcy Director

28

ARTHUR ANDERSEN LLP

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Northwestern Public Service Company:

We have audited in accordance with generally accepted auditing
standards, the consolidated financial statements included in
Northwestern Public Service Company's annual report to shareholders
incorporated by reference in this Form 10-K, and have issued our
report thereon dated January 30, 1998. Our audit was made for the
purpose of forming an opinion on those financial statements taken as a
whole. The schedule listed in the table of contents of financial
statements is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and are not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in
the audit of the basic financial statements and, in our opinion,
fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements
taken as a whole.

/s/ Arthur Andersen LLP

Minneapolis, Minnesota,
January 30, 1998

29

SCHEDULE II

NORTHWESTERN PUBLIC SERVICE COMPANY AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

Column C
Column A Column B Additions Column D Column E
-------- -------- --------- -------- --------
Balance
Beginning Charged to Charged Balance
of Period Costs and to Other Deductions End
Description (F1) Expenses Expenses (F2) of Period
----------- --------- ---------- -------- ---------- ---------

FOR THE YEAR ENDED DECEMBER 31, 1997
------------------------------------
RESERVES DEDUCTED
FROM APPLICABLE ASSETS:

Uncollectible accounts $5,368,654 $1,521,846 $ - $(2,578,189) $4.312.311
========== ========== ========== ============ ==========

OTHER DEFERRED CREDITS:
Reserve for decommissioning costs $8,299,823 $ 512,850 $ - $ - $8,812,673
========== ========== ========== ========== ==========

FOR THE YEAR ENDED DECEMBER 31, 1996
------------------------------------
RESERVES DEDUCTED
FROM APPLICABLE ASSETS:
Uncollectible accounts $8,704,698 $3,109,374 $ - $(6,445,418) $5,368,654
========== ========== ========== ============ ==========

OTHER DEFERRED CREDITS:
Reserve for decommissioning costs $7,788,482 $ 511,341 $ - $ - $8,299,823
========== ========== ========== ============ ==========

FOR THE YEAR ENDED DECEMBER 31, 1995
------------------------------------
RESERVES DEDUCTED
FROM APPLICABLE ASSETS:
Uncollectible accounts $5,907,675 $ 827,909 $ - $ (310,681) $6,424,903
========== ========== ========== ============ ==========

OTHER DEFERRED CREDITS:
Reserve for decommissioning costs $7,278,173 $ 510,309 $ - $ - $7,788,482
========== ========== ========== ============ ==========

(F1) The beginning balance for 1996 and 1995 were restated to reflect
the propane acquisitions that occurred during those periods.

(F2) All deductions from reserves were for purposes for which such
reserves were created.

30

EXHIBIT INDEX
-------------

(3) ARTICLES OF INCORPORATION AND BY-LAWS

3(a)(1)

Registrant's Restated Certificate of Incorporation, dated February 7,
1990, is incorporated by reference to Exhibit 3(a)(1) to Form 10-K for
the year ended December 31, 1989, Commission File No. 0-692.

3(a)(2)

Certificate of Retirement of Preferred Stocks, dated January 13, 1992,
is incorporated by reference to Exhibit 3(a)(2) to Form 10-K for the
year ended December 31, 1991, Commission File No. 0-692.

3(a)(3)

Certificate of Amendment of Restated Certificate of Incorporation,
dated May 16, 1996, is incorporated by reference to Exhibit 3(a)(3) to
Form 10-K for the year ended December 31, 1996, Commission File No. 0-
692.

3(a)(4)

Certificate of Retirement of Preferred Stocks, dated June 20, 1996, is
incorporated by reference to Exhibit 3(a)(4) to Form 10-K for the year
ended December 31, 1996, Commission File No. 0-692.

3(b)

Registrant's By-Laws, as amended, dated August 7, 1996, are in
incorporated by reference to Exhibit 3(b) to Form 10-K for the year
ended December 31, 1996, Commission File No. 0-692.

(4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING
INDENTURES

4(a)(1)

General Mortgage Indenture and Deed of Trust, dated as of August 1,
1993, from the Company to The Chase Manhattan Bank (National
Association), as Trustee, is incorporated by reference to Exhibit 4(a)
of Form 8-K, dated August 16, 1993, Commission File No. 0-692.

4(a)(2)

Supplemental Indenture, dated August 15, 1993, from the Company to The
Chase Manhattan Bank (National Association), as Trustee, is
incorporated by reference to Exhibit 4(b) of Form 8-K, dated August
16, 1993, Commission File No. 0-692.

31

4(a)(4)

Supplemental Indenture, dated August 1, 1995, from the Company to The
Chase Manhattan Bank (National Association), as Trustee, is
incorporated by reference to Exhibit 4(b) of Form 8-K, dated August
30, 1995, Commission File No. 0-692.

4(a)(5)

Supplemental Indenture, dated September 1, 1995, from the Company to
The Chase Manhattan Bank (National Association), as Trustee,
concerning the New Mortgage Bonds, 6.99% Series due 2002, is
incorporated by reference to Exhibit (4)(a)(5) to Form 10-K for the
year ended December 31, 1995, Commission File No. 0-692.

4(b)(1)

Preferred Securities Guarantee Agreement, dated August 3, 1995,
between the Company and Wilmington Trust Company is incorporated by
reference to Exhibit 1(d) of Form 8-K, dated August 30, 1995,
Commission File No. 0-692.

4(b)(2)

Declaration of Trust of NWPS Capital Financing I is incorporated by
reference to Exhibit 4(d) of Form 8-K, dated August 30, 1995,
Commission File No. 0-692.

4(b)(3)

Amended and Restated Declaration of Trust of NWPS Capital Financing I
is incorporated by reference to Exhibit 4(e) of Form 8-K, dated August
30, 1995, Commission File No. 0-692.

4(b)(4)

Subordinated Debt Securities Indenture, dated August 1, 1995, between
the Company and The Chase Manhattan Bank (National Association), as
Trustee, is incorporated by reference to Exhibit 4(f) of Form 8-K,
dated August 30, 1995, Commission File No. 0-692.

4(b)(5)

First Supplemental Indenture, dated August 1, 1995, to the
Subordinated Debt Securities Indenture is incorporated by reference to
Exhibit 4(g) of Form 8-K, dated August 30, 1995, Commission File No.
0-692.

4(c)(1)

Copy of Sale Agreement between Company and Mercer County, North
Dakota, dated June 1, 1993, related to issuance of Pollution Control
Refunding Revenue Bonds (Northwestern Public Service Company Project)
Series 1993, is incorporated by reference to Exhibit 4(b)(1) of

32

Registrant's report on Form 10-Q for the quarter ending June 30, 1993,
Commission File No. 0-692.

4(c)(2)

Copy of Loan Agreement between Company and Grant County, South Dakota,
dated June 1, 1993, related to issuance of Pollution Control Refunding
Revenue Bonds (Northwestern Public Service Company Project) Series
1993A, is incorporated by reference to Exhibit 4(b)(2) of Registrant's
report on Form 10-Q for the quarter ending June 30, 1993, Commission
File No. 0-692.

4(c)(3)

Copy of Loan Agreement between Company and Grant County, South Dakota,
dated June 1, 1993, related to issuance of Pollution Control Refunding
Revenue Bonds (Northwestern Public Service Company Project) Series
1993B, is incorporated by reference to Exhibit 4(b)(3) of Registrant's
report on Form 10-Q for the quarter ending June 30, 1993, Commission
File No. 0-692.

4(c)(4)

Copy of Loan Agreement between Company and City of Salix, Iowa, dated
June 1, 1993, related to issuance of Pollution Control Refunding
Revenue Bonds (Northwestern Public Service Company Project) Series
1993, is incorporated by reference to Exhibit 4(b)(4) of Registrant's
report on Form 10-Q for the quarter ending June 30, 1993, Commission
File No. 0-692.

4(c)(5)

Copy of Rights Agreement, dated as of December 11, 1996, between the
Company and Norwest Bank Minnesota, N.A. as Rights Agent, is
incorporated by reference to Exhibit I, to Form 8-A, dated December
13, 1996, Commission File No. 0-692.

(10) MATERIAL CONTRACTS

10(a)(1)*

Supplemental Income Security (Retirement) Plan for Directors, Officers
and Managers, as amended January 1, 1997, is incorporated by reference
to Exhibit 10(a)(1) to Form 10-K for the year ended December 31, 1996,
Commission File No. 0-692.

10(a)(2)*

Deferred Compensation Plan for Non-employee Directors adopted November
6, 1985, is incorporated by reference to Exhibit 10(g)(2) to Form 10-K
for the year ended December 31, 1988, Commission File No. 0-692.

33

10(a)(3)*

Pension Equalization Plan, dated August 5, 1987, is incorporated by
reference to Exhibit 10(g)(4) to Form 10-K for the year ended December
31, 1988, Commission File No. 0-692.

10(a)(5)*

Long-term Incentive Compensation Plan (Phantom Stock Unit Plan) for
Directors and Officers, dated February 1, 1989, as amended May 7,
1997, is incorporated by reference to Exhibit 10(a)(i) to Form 10-Q
for the quarter ended March 31, 1997, Commission File No. 0-692.

10(a)(7)*

Annual Performance Incentive Plan (NorthSTAR Plan) for all eligible
employees, as amended February 4, 1998.

(13) REPORT FURNISHED TO SECURITY HOLDERS

Annual Report for fiscal year ended December 31, 1997, furnished to
stockholders of record on March 9, 1998.

21 SUBSIDIARIES OF THE REGISTRANT

Subsidiaries of the Registrant

27

Financial Data Schedule

______________

* Management contract or compensatory plan or arrangement.