MANAGEMENT'S DISCUSSION AND ANALYSIS
NORTHWESTERN CORPORATION
NorthWestern Corporation ('Corporation') is a provider of services and
solutions to customers across North America. The Corporation provides
electric and natural gas service to Midwestern customers through our energy
division, NorthWestern Public Service. In addition, the Corporation holds
interests in Blue Dot Services Inc. ('Blue Dot'), a national provider of
heating, ventilation, air conditioning, plumbing and related services
('HVAC'); CornerStone Propane Partners, L.P. (NYSE:CNO) ('CornerStone'),
the nation's fourth largest retail propane distributor and also is a
wholesale distributor of energy-related commodities; and Expanets, Inc.
('Expanets'), a national provider of networked communications and data
solutions to mid-sized business customers. The Corporation is also engaged
in other service and nonenergy-related businesses.
RESULTS OF OPERATIONS
EARNINGS AND DIVIDENDS
Consolidated earnings for 1999 on common shares were $37.9 million, an
increase of $10.8 million or 40% over 1998 earnings of $27.1 million. The
diluted earnings per share increased 13% from $1.44 in 1998 to $1.62,
primarily from the additional investments in the HVAC and communications
business segments in 1999 along with the full year impact of acquisitions
made during 1998. Earnings per share is reflective of the aforementioned
40% consolidated earnings improvement, after allowing for the 24% increase
in average shares outstanding from 1998 to 1999. Consolidated earnings for
1998 were $3.7 million more than 1997 earnings of $23.4 million, reflecting
the initiation of our investments in the HVAC and communications segments
in 1998. Diluted earnings per share in 1998 of $1.44 increased 10% over
1997 diluted earnings per share of $1.31 due to the increased earnings
offset partially by the 5% increase in average shares outstanding in 1998.
Dividends increased from an annual rate of $1.03 per share to $1.11 per
share in November 1999, a 7.8% increase. Dividends were increased by 6.2%
in 1998 to $1.03 per share from $.97 per share in 1997. Future dividend
policy will be contingent upon the Board's evaluation of the Corporation's
financial condition and competitive changes in the industries in which the
Corporation operates.
CONSOLIDATED OPERATING RESULTS
In reviewing the consolidated operating results, the reader is reminded
that there is disparity in financial operating relationships amongst the
segments, particularly as it relates to the wholesale propane operations.
Furthermore, the propane, HVAC and communications segments experienced
significant acquisition growth during 1998 and 1999, along with related
infrastructure development. Accordingly, a meaningful understanding of the
operating results must include a thorough review of the segment information
discussion which follows.
Operating revenues in 1999 rose to $3.0 billion compared to 1998 revenues
of $1.2 billion, representing an increase of 153%.
The majority of the increase, approximately $1.5 billion, was due to the
increase in revenues generated by the propane segment, both through
internal growth and acquisitions, of which approximately 95% of the
increase was from the wholesale operations. The
propane growth was combined with continued growth in HVAC and
communications segments, both internal and through acquisitions, and
improved performance in the natural gas and electric segments. HVAC and
communications acquisitions contributed to the increase with a full year
impact of operations from acquisitions completed in 1998 and partial year
impact of new acquisitions in 1999. Revenues for 1998 increased $269.1
million over 1997 to $1.2 billion. HVAC and communications segments
acquisitions combined contributed to 93% of the increase.
Cost of sales in 1999 of $2.5 billion increased $1.6 billion over 1998,
primarily due to the propane segment. The $1.4 billion increase in propane
reflects principally the increased wholesale activity in that segment
(wholesale sales experience lower gross margins than retail sales), which
contributed substantially all of the segment increase. Expansions through
internal growth and continued acquisitions in the HVAC and communications
segments contributed to the remainder of the increase as the other segments
remained relatively stable. Cost of sales for 1998 increased $144.7 million
over 1997 costs of $695.0 million. The acquisitions in the communications
and HVAC segments added $70.0 million and $75.8 million, respectively,
offsetting the decline in electric and natural gas costs resulting from
weather fluctuations.
Gross margins in 1999 increased, rising from $347.4 million or 29% (50%
excluding wholesale propane) in 1998 to $536.6 million or 18% (47%
excluding wholesale propane) in 1999, principally due to growth in the
HVAC, communications and propane segments, which caused the increase in
absolute terms while the aforementioned increase in wholesale revenues was
the primary cause of the decreased gross margin percentage. Gross margins
in 1998 of $347.4 million increased $124.4 million over 1997 margins. The
growth from the HVAC and communications segments contributed a combined
$105.5 million to gross margins. The propane segment provided the remainder
of the increase as the other segments remained relatively constant.
Operating expenses reflect the growth in the segments and the costs
associated with business expansion. Expenses rose 63% from $279.9 million
in 1998 to $457.0 million in 1999. Operating expenses during 1999 rose at a
rate less than the increase in revenues due principally to the
aforementioned increase in wholesale propane revenues. Selling, general and
administrative expenses account for the majority of operating expenses and
increased $152.5 million over 1998. The HVAC and communications segments
were the principal components of the increase as their expenses increased a
combined $114.0 million. This was due to a full year of expenses for 1998
acquisitions, the partial year impact of 1999 acquisitions and incurrence
of additional infrastructure costs to support the increased size of
business operations. Depreciation and amortization expense rose $24.7
million to $68.3 million in 1999. This increase is reflective of the full
year of depreciation and amortization expense from acquisitions made in
1998, along with the partial year impact of 1999 acquisitions in the HVAC,
communications and propane segments. Operating expenses rose 71% over 1997
expenses of $164.0 million to $279.9 million in 1998. Selling, general and
administrative expenses grew $103.4 million in 1998 primarily from the
growth in the HVAC and communications segments. Propane segment growth was
responsible for the remainder of the increase. Depreciation and
amortization increased $12.4 million from $31.2 million in 1997 as a result
of the growth in HVAC, communications and propane segments.
Consolidated operating income improved 18% over 1998 to $79.6 million for
1999. The increase is a result of the aforementioned propane,
communications and HVAC business segments growth in both gross and
operating margins. Operating income in 1998 increased $8.5 million over
1997 income of $59.0 million and is attributable to the HVAC and
communications segments offset by decreases in the propane, electric and
natural gas segments due mainly from adverse weather patterns in 1998.
Propane
CornerStone provides retail propane to business and residential customers
in the U.S. and wholesale energy-related commodities to businesses in the
U.S. and Canada. The Corporation owned an effective combined 30% interest
of CornerStone, comprised of general partner interests and subordinated
units, as of December 31, 1999.
Retail propane is mainly sold for heating purposes and, as a result, sales
are extremely sensitive to weather. The coldest months are during the first
and fourth quarters of the year, and are, therefore, the largest revenue
and profit generating months. The weather for 1999 averaged 12% warmer than
normal in CornerStone's main market areas, negatively impacting sales
volumes and revenues. While weather factors generally measure the
directional impact of temperatures on the business, other factors such as
product prices and geographic mix can also impact sales.
Revenues for 1999 increased $1.5 billion over 1998 revenues of $767.7
million, primarily due to expansion of the wholesale business, which
accounted for 95% of the increase in revenues. This expansion is
attributable to internal growth and the acquisitions of Propane
Continental, Inc. ('PCI'), which had retail and wholesale operations, and
two wholesale companies. These acquisitions, which were completed in late
1998 and during 1999, combined with organic growth, contributed to more
than tripling the size of the wholesale operations. Retail sales increased
30% from $234.6 million in 1998 to $303.9 million in 1999. Of the $69.3
million increase, approximately 79% was due to 1998 and 1999 acquisitions
and the remainder to internal growth. Retail volumes increased accordingly
with retail gallons rising from 231.4 million to 281.6 million or a 22%
increase. Total revenues in 1998 showed a modest increase of $24.7 million
over 1997, reflecting the warmer than normal weather and the low growth in
wholesale activity. Retail revenues in 1998 decreased $9.0 million versus
1997 as a result of lower product costs combined with warmer than normal
weather partially offset by increased volumes to a larger customer base.
Retail volumes increased from 220.1 million gallons in 1997 to 231.4
million gallons in 1998. Wholesale revenues increased $33.7 million or 7%
in 1998 due to internal growth.
Cost of sales increased from $618.8 million in 1998 to $2.0 billion in
1999. These statistics reflect the increased wholesale activity as well as
the impact of retail and wholesale acquisitions closed in
1998 and 1999. As noted above, wholesale revenues increased dramatically,
but there are substantially higher costs associated with wholesale sales.
Cost of sales for wholesale business in 1999 increased $1.4 billion to $1.9
billion, a rise of 270% versus the related sales increase of 264%. High
crude oil prices increased the price of energy-related commodities in 1999
which caused the cost of sales to increase at a slightly higher pace than
revenues. Retail costs grew $29.5 million from $103.6 million in 1998 to
$133.1 million in 1999. This increase of 28% is due to the increased volume
of business from new acquisitions and internal growth in 1999 and reflects
margin improvement relative to the 30% increase in retail revenues. Total
cost of sales in 1998 increased $6.4 million over 1997 to $618.8 million,
reflecting costs associated with the increased wholesale activity in 1998
partially offset by the lower product prices for retail and wholesale
sales.
Gross margins in 1999 increased $58.7 million over 1998. Although wholesale
activity contributed the majority of the increase in revenues and cost of
sales, the retail business accounts for approximately 82% of the total
gross margins and for 68% of the increase as a result of the higher
inherent margins in retail sales. Conversely, the significant increase in
the relatively lower margin wholesale business has reduced overall margin
percentages. Wholesale margins grew $18.8 million, more than doubling 1998
margins, a reflection of the wholesale acquisitions and internal growth
noted above. Gross margins in 1998 increased $18.2 million over 1997 to
$149.0 million. This 14% increase was caused by a larger decline in retail
cost of sales over revenues offsetting warm weather and acquisitions.
Operating expenses for 1999 increased approximately 37% or $46.0 million
from 1998. Selling, general and administrative expenses for 1999 were
$137.9 million, an increase of $32.4 million or 31% over 1998. This
increase resulted from acquisitions, which added $23.5 million in expenses,
along with additional costs incurred necessary to support the internal
growth. Depreciation and amortization increased from 1998 expenses of $20.2
million to $33.8 million. 1999 expenses reflect a full year of expense
associated with the 1998 acquisitions as well as some additional costs from
1999 acquisitions. Selling, general and administrative expenses in 1998
were $15.2 million higher than 1997 expenses of $90.3 million. This
increase was due to internal growth as well as the impact of acquisitions.
Depreciation and amortization expense increased $3.4 million due to the
depreciation and amortization of established operations as well as some
additional expense from acquisitions.
Operating income in 1999 of $36.0 million is a $12.7 million or 55%
increase over 1998, reflecting revenue growth that outpaced directly
related cost of sales and the added expense from expanding operations,
however, overall profitability was negatively impacted by weather.
Operating income in 1998 decreased $300,000 from 1997 operating income of
$23.6 million. The decrease was attributable mainly to warmer than normal
weather and normal fluctuations in overall operating expenses.
Electric
Electricity is generated, transmitted and distributed to over 56,000
customers in South Dakota by NorthWestern Public Service, a division of the
Corporation. Electricity is used year round by individuals and businesses,
but use is dependent upon the weather as overall demand is higher during
the summer months for air conditioning.
Electric revenues increased 7% in 1999 from $78.4 million in 1998 to $83.9
million for 1999. Retail electric revenues reflected a modest growth
despite a 1% decline in total mwh usage and a slightly cooler summer
season. The growth is a result of slight increases in power costs and a
customer base increase of 2% in 1999. Wholesale revenues helped to minimize
the effects of cooler summer weather with sales increasing $2.5 million
over 1998 to reach $6.8 million. Wholesale mwh were 61% higher in 1999 as a
result of higher off-system sales. 1998 revenues increased $1.7 million
over 1997 revenues to $78.4 million. This increase was caused primarily by
increased wholesale activity as retail revenues increased only $.6 million
while wholesale revenues increased $1.1 million.
Cost of sales for 1999 grew $3.1 million to $18.5 million. As noted above,
wholesale activity was up substantially in 1999 and is reflected in the
increased costs. Cost of sales for wholesale electricity increased $1.0
million over 1998 costs of $2.3 million. Retail cost of sales grew by 15%
due to increased sales activity and power costs adjustments from prior
years. 1998 cost of sales of $15.4 million were reflective of a 6% increase
over 1997 cost of sales of $14.6 million. This increase was due almost
entirely to the increased wholesale activity in 1998. Retail cost of sales
remained relatively flat with only a 2% increase.
Gross margins in 1999 of $65.5 million reflect a 4% growth over 1998 gross
margins of $63.0 million. The 4% growth in gross margins is slightly less
than the aforementioned 7% revenue increase due to the increase in
wholesale revenues, which carry a lower gross margin. Gross margins for
1998 grew by $800,000 over 1997. Both increased wholesale activity and a
proportional increase in retail revenues and cost of sales caused the rise.
Operating expenses decreased slightly for the electric segment from 1998
expenses of $37.4 million to $36.7 million due to efficiency improvements.
Expenses in 1998 were $2.4 million higher than 1997 expenses. The change
was due to slight increases in administrative expenses for salaries and
benefits.
Operating income for 1999 of $28.8 million reflects a 12% increase over
1998 operating income. This increase resulted from an increase in gross
margins (excess of revenues over cost of sales) due to price adjustments,
increased customer base, increased wholesale revenues and the slight
decrease in operating expenses. 1998 operating income declined $1.6 million
from 1997 operating income of $27.2 million. The decline reflected the
effects of the increased operating expenses over gross margins that
experienced lower growth.
Natural Gas
Natural gas revenues for the Corporation are predominately derived from
residential and commercial sales for heating purposes to approximately
80,000 customers in South Dakota and Nebraska. This reliance upon heating
as a primary use makes the segment extremely sensitive to weather patterns
during the winter heating season.
Revenues in 1999 increased $1.0 million or 2% over 1998 revenues, a
reflection of the comparable heating seasons between the years, stable
natural gas supply prices, and a static customer base. Heating degree-days
and average temperatures during the heating seasons for 1999 and 1998 were
virtually unchanged, being approximately 13% below normal in both years.
Revenues in 1998 were $67.2 million, a decrease of $10.3 million or 13%
from 1997 revenues. The decline was due to a warmer than average heating
season. First quarter 1998 temperatures were 18% warmer than 1997 and
fourth quarter temperatures were 14% warmer.
Cost of sales also remained stable in 1999, with a slight decrease of
$150,000 from 1998 to $47.1 million. This stability is a reflection of the
comparable weather patterns between the years and the absence of market
price fluctuations for natural gas supply. In 1998, natural gas cost of
sales decreased $7.8 million or 14% from 1997. This decrease was due to
unusually warm temperatures and resulting decreased revenues, as noted
above.
Gross margins for 1999 were $21.2 million, an increase of $1.2 million or
6% over 1998. The increase is a product of slightly lower cost of sales and
an increase in revenues over 1998. As noted above, weather patterns were
comparable between the years, resulting in little change in cost of sales
or revenues. 1998 gross margins were 11% lower than 1997, falling to $20.0
million from $22.5 million in 1997. This decline was a reflection of the
impact of warmer weather in 1998, which decreased both revenues and the
associated costs, as noted above.
Operating expenses in 1999 increased slightly from $14.8 million to $15.2
million as a result of normal business fluctuations. Operating expenses in
1998 were $500,000 less than 1997 expenses of $15.3 million, reflective of
the stable business operations.
Natural gas operating income increased 14% over 1998 to $6.0 million. This
increase is due to the slight rise in gross margins, which exceeded the
increase in expenses. The effects of warm weather adversely impacted 1998
operating income. 1998 operating income decreased $2.0 million from 1997 to
$5.2 million. The weather caused lower revenues and cost of sales,
partially offset by a decrease in administrative and other overhead costs,
the net of which resulted in lower income.
Communications
Expanets was formed in 1998 to provide integrated communications, data and
network services to business customers. As of December 31, 1999, the
Corporation has invested $152.0 million in Expanets to acquire 26
companies. During 1999, the Corporation invested $43.3 million in Expanets
in connection with the acquisition of eight companies representing
approximately $37.8 million in revenues ($76 million on a pro forma
annualized basis).
Revenues in 1999 were $294.9 million, representing an increase of $168.4
million or 133% over 1998 revenues. The inclusion of a full year of
revenues for companies acquired during 1998 was the principal driver of the
increase combined with internal growth and the partial year impact of
companies acquired in 1999.
Cost of sales for 1999 increased $98.9 million or 141% over 1998 costs of
$70.0 million. A full year of operations for companies acquired in 1998,
combined with internal growth, accounted for $72.1 million of the increase.
Companies acquired in 1999 accounted for the remaining increase.
Gross margins for 1999 increased to $126.0 million, an increase of $70.0
million or 123% as compared to 1998. This increase is primarily due to a
full year of operations for companies acquired in 1998 combined with
internal growth and is in line with the revenue growth. The partial year
impact of 1999 acquisitions accounted for $11.0 million of the increase in
gross margins.
Selling, general and administrative expenses of $102.5 million in 1999
increased $56.8 million or 124% as compared to 1998 expenses of $45.7
million. The full year of operations for companies acquired in 1998
combined with internal growth were the primary contributors of the increase
and is slightly less than the growth in revenues. Corporate expenses
increased in 1999 as compared to 1998 to build infrastructure in supporting
the high growth of communications operations. The partial year impact of
companies acquired in 1999 accounted for $9.2 million of the increase.
Depreciation and amortization expense increased to $10.5 million in 1999 as
compared to $4.9 million in 1998. The increase is due principally to the
full year of expense for companies acquired in 1998, with 1999 acquisitions
for the period owned contributing $1.0 million of the increase.
Operating income in 1999 increased $7.1 million or 121% over 1998 operating
income of $5.9 million. The increase represents a full year of operations
for the companies acquired in 1998 combined with internal growth and the
partial year impact of new acquisitions in 1999 partially offset by
increased infrastructure building at the corporate level.
HVAC
Blue Dot, established in late 1997, provides heating, ventilation, air
conditioning, plumbing and related services to residential and business
customers. As of December 31, 1999, the Corporation has invested $155.4
million for the acquisition of 62 companies. During 1999, $68.0 million was
invested for the acquisition of 34 companies representing approximately
$68.2 million in revenues ($136 million on a pro forma annualized basis).
Operating revenues increased $168.9 million or 135% over 1998 revenues of
$124.9 million, resulting primarily from the inclusion of a full year of
revenues for companies acquired in 1998 combined with internal growth and
the partial year impact of companies acquired in 1999.
Cost of sales for 1999 increased $105.4 million or 139% to $181.3 million,
primarily due to a full year of operations for companies acquired in 1998
combined with internal growth. The partial year impact of companies
acquired in 1999 accounted for $41.2 million of the increase in cost of
sales.
Gross margins in 1999 grew to $112.5 million, an increase of $63.4 million
or 129% over 1998. The full year of activity for 1998 acquisitions and
internal growth were the primary contributors of the growth. The partial
year impact of 1999 acquisitions accounted for $27.0 million of the
increase in gross margins.
Selling, general and administrative expenses increased $57.2 million or
146% as compared to 1998 expenses of $39.3 million, primarily due to the
full year of operations from companies acquired in 1998 combined with
internal growth and increases in corporate resource infrastructure to
support the rapidly growing HVAC organization. The addition of 34 companies
during 1999 and the additional corporate resources necessary to handle the
continual expansion of the business accounted for 32% of the expenses in
1999. Depreciation and amortization expense increased $5.0 million as
compared to 1998 due primarily to a full year of depreciation and
amortization expense for companies acquired in 1998 combined with
additional partial year expense from 1999 acquisitions.
Operating income of $7.3 million for 1999 increased $1.1 million or 18% as
compared to 1998 operating income of $6.2 million, principally due to a
full year of operations for companies acquired in 1998 combined with
internal growth and the partial year impact of 1999 acquisitions offset in
part by the increased corporate infrastructure costs.
Other
This segment consists of the financial results of other service and
nonenergy-related business activities of the Corporation along with the
unallocated corporate costs of the Corporation.
Revenues decreased $5.3 million from 1998 revenues of $22.5 million,
principally due to the sale of the Corporation's ownership interest in
Lucht Inc. ('Lucht') in November 1998, offset partially by a full year of
operations from an acquisition combined with internal growth. Revenues in
1998 were $1.7 million higher than 1997 revenues. This increase was due to
internal growth within the businesses.
Cost of sales increased in 1999 to $13.4 million, an increase of $800,000
over 1998. Costs increased due to a different product and service mix
combined with internal growth partially offset by the sale of Lucht. Cost
of sales in 1998 were $12.6 million or $500,000 less than 1997. This
decrease resulted partially from the sale of Lucht in November 1998 offset
by internal growth.
Gross margins were $6.1 million less in 1999 as compared to 1998 due to the
different mix of service lines provided, of which Lucht was not a part of
in 1999. 1998 gross margins were $9.9 million or $2.3 million higher than
1997 gross margins. The increase was a result of internal growth.
Total operating expenses increased $6.7 million to $15.2 million in 1999 as
compared to $8.5 million in 1998. The increase is a result of additional
personnel and associated costs principally for the corporate office, to
better support and leverage current and potential growth strategies,
combined with a different mix of service businesses. 1998 expenses were
$8.5 million compared to $6.6 million in 1997. The $1.9 million increase
was a result of higher costs principally at Lucht.
Operating income decreased $12.8 million as compared to 1998. This is a
reflection of the aforementioned infrastructure growth of the corporate
office combined with the sale of the Lucht. Operating income for 1998 was
$1.3 million, which was an increase of $.3 million over 1997. The increase
was due to the slight growth in gross margins offset by the increase in
operating expenses principally from Lucht.
Other Income Statement Items
Interest expense rose in 1999 to $53.2 million, a 48% increase over 1998,
due to additional expense incurred in 1999 as a result of the November 1998
debt offering of $105 million by the Corporation and increased expense from
propane's additional nonrecourse borrowings in 1998 and 1999 to fund
acquisitions and general corporate purposes. 1998 interest expense of $35.9
million was an increase of $4.4 million over 1997 expense. Nonrecourse
propane working capital and acquisition borrowings were the primary reasons
for the increase.
Investment income and other increased from $5.7 million in 1998 to $9.8
million in 1999. Investment of excess proceeds from the November 1998
equity and debt offerings was the primary contributor to the increase. 1998
investment income and other was $5.9 million less than 1997 investment
income and other of $11.6 million. The decrease was principally due to
utilization of funds for Expanets and Blue Dot acquisitions rather than
investments.
Income taxes in 1999 of $14.5 million are $3.3 million or 29% greater than
1998 tax expense of $11.2 million. This is directly related to the growth
in HVAC and communications segments and the consequential increase in
taxable income and nondeductible goodwill amortization. Income taxes
between 1997 and 1998 remained relatively stable with an increase of only
$.1 million over 1997 to $11.2 million.
Changes in minority interest are a direct result of the performance of the
HVAC, communications and propane segments and represents the portion of the
net income or loss after preferred dividends related to the Corporation's
investments in Blue Dot and Expanets and earnings attributable to the
CornerStone public common unitholders, which are allocable to other equity
holders of the applicable minority interests. Minority interest losses were
$22.9 million in 1999 compared to $4.2 million in 1998. The HVAC and
communications segments are principally responsible for the increase, as
net losses after preferred dividends were $10.4 million and $14.4 million,
respectively, offset partially by the propane segment minority interests.
Minority interest losses of $4.2 million in 1998 increased by $5.9 million
over 1997, which is directly attributable to the formation of the HVAC and
communications segments offset in part by the propane segment minority
interests.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
Cash flows from operating activities increased to $71.7 million in 1999
versus $69.9 million in 1998. The increase is due to growing operations at
all of the Corporation's businesses, partially offset by increased working
capital needs of the Blue Dot and Expanets operations. Cash flows from
operations, combined with proceeds from long-term debt offerings, short-
term borrowings and excess cash from 1998 financing transactions provided
the funds necessary for general business purposes and the continued
acquisition, growth and maintenance activities in 1999. The Corporation
held $125.7 million in cash, cash equivalents and marketable securities at
December 31, 1999, and $157.3 million and $108.6 million at December 31,
1998 and 1997, respectively. These cash and investment balances, combined
with available lines of credit, provide the resources necessary to support
continued business operations.
INVESTING AND FINANCING ACTIVITIES
The main focus of the Corporation's investment activities for 1999 was the
continued strategic growth and development of Blue Dot and Expanets. To
enable the Corporation to continue these investment strategies and help
provide funding for general business purposes, $11.0 million of commercial
paper and $58.0 million of the line of credit were drawn and outstanding at
December 31, 1999. The Corporation retired $5.0 million of 6.99% series
general mortgage bonds in 1999. The Corporation's unused lines of credit
are $125.5 million at December 31, 1999.
CornerStone issued $45.0 million of Senior Notes in June 1999 to help fund
acquisitions and provide funds for general business use. In addition,
CornerStone had $9.2 million outstanding from their working capital portion
of the Bank Credit Facility and no outstanding borrowings on the
acquisitions portion at December 31, 1999. The CornerStone Bank Credit
Facility provides for combined working capital and acquisition borrowings
of up to $110 million. This Facility is subject to certain covenants and
other limitations. CornerStone's combined outstanding working capital and
acquisition borrowings at December 31, 1998, were $1.7 million. Blue Dot's
Credit Facility provides for up to $135.0 million to fund acquisitions and
for general business purposes. The Facility is subject to certain covenants
and various other limitations. Blue Dot had $28.2 million outstanding at
December 31, 1999, and no borrowings outstanding as of December 31, 1998.
Expanets has $14.7 million outstanding at December 31, 1999, from their
$15.0 million line of credit. The funds have been used for general business
use and to help fund acquisitions. At December 31, 1998, $8.5 million was
outstanding. All debt of Blue Dot, CornerStone and Expanets is nonrecourse
to the Corporation.
CAPITAL REQUIREMENTS
The Corporation's primary capital requirements include funding the growth
of its business segments, maintenance and expansion programs; the funding
of debt and preferred stock retirements; sinking fund requirements; the
funding of its corporate development and investment activities; payment of
common dividends; and the distributions to propane common unitholders.
Maintenance capital expenditure plans are subject to continual review and
may be revised as a result of changing economic conditions, variation in
sales, investment opportunities and other factors. Expenditures for
maintenance capital activities for 1999, 1998 and 1997 were $32.6 million,
$22.6 million and $22.4 million, respectively. Consolidated maintenance
capital expenditures for 2000 and 2001 are estimated to be $36.9 million
and $38.0 million, respectively.
Capital requirements for the mandatory retirement of long-term debt totaled
$12.3 million, $7.8 million and $1.2 million for the years ended 1999, 1998
and 1997, respectively. It is expected that such mandatory retirements for
the recourse debt will be $5.0 million in 2000, $5.0 million in 2001 and
$63.0 million in 2002. Future retirements of nonrecourse debt will be $19.2
million in 2000, $18.0 million in 2001, $33.4 million in 2002, $45.7
million in 2003 and $44.2 million in 2004. The Corporation anticipates that
existing investment and marketable securities, internally generated cash
flows and available external financing will be sufficient to meet future
capital requirements.
The Corporation will continue to review the economics of retiring or
refunding remaining long-term debt and preferred stock to minimize long-
term financing costs. The Corporation may continue to make investments in
Blue Dot and Expanets. Also, the Corporation may make other significant
acquisition investments in related industries that might require the
Corporation to raise additional equity and/or incur debt financings, which
are therefore subject to certain risks and uncertainties.
COMPETITION and BUSINESS RISK
NorthWestern and its partner entities are leading providers of value-added,
integrated services and solutions to over one million residential and
business customers nationwide. Our strategy will continue to focus on the
expansion of our existing growth initiatives, both through internal growth
and acquisitions and through the integration of other value-added services.
We also intend to seek investment opportunities in other existing or
emerging growth industries within the service and solutions sector. While
these strategic development and acquisition activities can involve
increased risk, we believe they offer the potential for enhanced investment
returns. The Corporation's growth strategy will be subject to certain risks
and uncertainties, including the future availability of market capital to
fund development and acquisitions, our ability to develop new growth
initiatives, our responses to increased competition, our ability to
attract, retain and train skilled team members, our ability to develop
national service brands in our business sectors, governmental regulations
and general economic conditions, some of which factors are discussed in
further detail below. Our acquisition activities involve the risks of
identifying suitable acquisition candidates, successfully integrating and
managing acquired companies, including addressing the adequacy and
efficiency of information systems, business processes and related support
functions and retaining acquired customer bases. Our ability to generate
internal growth in our businesses will depend in part on our ability to
retain and expand our customer base through effective marketing and
promotional activities and the introduction of expanded service offerings.
The Corporation has taken and continues to take steps to address and
mitigate such risks. There are no assurances that such efforts will be
sufficient to meet the future needs of the Corporation. Future changes in
accounting rules and regulations, particularly those related to purchase
accounting, could also have a material impact upon the Corporation's future
financial statement presentation, results from operations and financial
position.
PROPANE
The retail propane business is a margin-based business in which gross
profits depend on the excess of sales prices over propane supply costs.
Consequently, CornerStone's profitability will be sensitive to changes in
wholesale propane prices. Propane is a commodity, the market price of which
can be subject to volatile changes in response to changes in supply or
other market conditions. In both the retail and wholesale businesses,
CornerStone engages in hedging of product cost and supply through common
hedging practices pursuant to risk management policies monitored by
management. 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.
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, which could adversely affect CornerStone's ability to pay
common and subordinated unit distributions and fund future growth and
acquisitions.
Propane competes with other sources of energy, some of which are less
costly for equivalent energy value. Propane distributors compete for
customers against suppliers of electricity, fuel oil and natural gas,
principally on the basis of price, service, availability and portability.
Electricity is a competitor of propane, but propane generally enjoys a
competitive price advantage over electricity for space heating, water
heating and cooking. Propane serves as an alternative to natural gas in
rural and suburban areas where natural gas is unavailable or portability of
product is required. Natural gas is generally a less expensive source of
energy than propane, although in areas where natural gas is available,
propane is used for certain industrial and commercial applications. The
gradual expansion of the nation's natural gas distribution systems has
resulted in the availability of natural gas in some areas that previously
depended upon propane. However, natural gas pipelines are not present in
many regions of the country where propane is sold for heating and cooking
purposes.
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 Corporation is operating in an increasingly
competitive marketplace. The Federal Energy Regulatory Commission ('FERC'),
which regulates interstate and wholesale electric transmissions, has issued
final rules designed to open up transmission grids and mandate owners of
transmission assets to allow others equal access to utility transmission
systems and prompts the formation of regional transmission organizations
('RTOs') to control and operate interstate transmission facilities. 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. These
and other developments are expected to increase competition in the
wholesale and retail electricity markets. 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 Corporation's future financial performance will be dependent on the
effective execution of operating strategies to address a more competitive
and changing energy marketplace. The Corporation is exploring new energy
products and services, utilizing new technologies, centralizing activities
to improve efficiency and customer responsiveness and business processes
are being reengineered to apply best-practices methodologies.
Weather conditions have a significant impact on electric and natural gas
demand for heating and cooling purposes. Actual weather conditions can vary
substantially from year to year, significantly affecting the Corporation's
financial performance.
Natural gas is a commodity that can be subject to volatile changes in
price. The Corporation engages in hedging of product cost and supply
through common hedging practices pursuant to risk management policies
monitored by management.
As described in Note 1 to the consolidated financial statements, the
Corporation 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 Corporation's regulated electric and natural gas
operations, which requires specific accounting treatment of certain costs
and expenses that are related to the Corporation's regulated operations.
Criteria that could give rise to the discontinuance of SFAS 71 include 1)
increasing competition that restricts the Corporation'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 Corporation 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 Corporation 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 Corporation's current regulatory
environment.
HVAC
The markets served by Blue Dot for residential and commercial heating,
ventilation, air conditioning, plumbing and related services are highly
competitive. The principal competitive factors in these segments of the
industry are 1) the timeliness, reliability and quality of services
provided, 2) the range of products and services provided, 3) name
recognition and market share and 4) pricing. Many of
Blue Dot's competitors in the HVAC business are small, owner-operated
companies typically located and operated in a single geographic area.
Certain of these smaller competitors may have lower overhead cost
structures and, consequently, may be able to charge lower rates for their
services. There are a small number of larger national companies engaged in
providing residential and commercial services in the service lines in which
Blue Dot 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
and marketing programs, from HVAC equipment manufacturers, the unregulated
business segments of regulated gas and electric utilities, or newly
deregulated utilities in those industries entering into various service
areas. Certain of Blue Dot's competitors may have greater financial
resources to finance acquisition and internal growth opportunities and may
be willing to pay higher prices than Blue Dot for acquisition
opportunities. Blue Dot's business is subject to seasonal variations in
certain areas of its service lines, with demand for residential HVAC
services generally higher in the second and third quarters. HVAC systems
are subject to various environmental regulations, and certain local, state
or federal laws may impose licensing standards on technicians. There can be
no assurance that the regulatory environment in which Blue Dot operates
will not change significantly in the future.
COMMUNICATIONS
The market served by Expanets in the communications, data services and
network solutions industry is a highly competitive market. The principal
competitive factors include 1) market accept-ance of the products, services
and technology solutions Expanets provides, 2) pending and future
legislation affecting the communications and data industry, 3) name
recognition and market share, and 4) Expanets' ability to provide
integrated communications and data solutions for customers in a dynamic
industry. Many of Expanets' competitors in the communications business are
generally small, owner-operated companies typically located and operated in
a single geographic area. Certain of these smaller competitors may have
lower overhead cost structures and, consequently, may be able to charge
lower rates for their services. There are a number of large, integrated
national companies engaged in providing commercial services in the service
lines in which Expanets intends to focus, some of which also manufacture
and sell directly the products that Expanets services and sells. Future
competition may be encountered from other newly formed or existing public
or private service companies with aggressive acquisition and marketing
programs. Certain of Expanets' competitors may have greater financial
resources to finance acquisition and internal growth opportunities and may
be willing to pay higher prices than Expanets for acquisition
opportunities. Certain products and services offered by Expanets are
manufactured or supplied by others and involve the risk of partial reliance
upon third party systems and services, as well as risks associated with the
need to integrate services and solutions across networks, platforms and
equipment manufactured or supplied by various companies.
YEAR 2000 READINESS
The year 2000 issue is a result of computer programs, which were written
using two digits (rather than the actual four) to identify the year in the
date field. This old approach was intended to save processing time and
storage space within computers and was continued in use until the mid
1990s. If not corrected, affected systems and devices containing computer
chips or clocks may roll back to 1900 instead of moving forward to 2000.
Some systems and devices may continue to function even if this occurs.
Others may experience interruptions in service, processes or obtain
erroneous results.
The Corporation assembled a diverse oversight and advisory team from all
businesses with experienced information systems, legal, communications and
operating leadership to work on our enterprise-wide year 2000 program. The
initiative covered not only the Corporation's information technology
systems and computer applications, but also considered hardware, embedded
systems and components internal and external to our organizations. The
Corporation's program considered not only our businesses and technology
areas but also those of our customers and suppliers. The Corporation spent
approximately $2 million in 1999 related to the year 2000 issue which was
expensed as incurred or capitalized in accordance with our accounting
policy for software development costs.
As a result of year 2000 readiness efforts, the Corporation's mission
critical information technology systems did not experience any material
adverse application failures on January 1, 2000, and we are not aware of
any material adverse impacts to our suppliers or customers. We do not
believe that year 2000 issues have had any material impact on customer
spending patterns for our services and solutions. The Corporation will
continue to monitor its mission critical computer applications throughout
the year 2000 to ensure that any potential year 2000 issues that may arise
are addressed promptly. The Corporation cannot provide assurance that our
suppliers or customers have not been affected by a year 2000 issue in a
manner that is not yet apparent.
Statements made in this Annual Report, including the letter to shareholders
and Management's Discussion and Analysis, such as those relating to
expectation of future financial performance, continued growth, dividend
policy, liquidity, absence of year 2000 problems and the impact of changes
in interest rates and commodity prices, are forward-looking statements that
involve inherent risks and uncertainties. A number of important factors
which are difficult to predict and many of which are beyond the control of
the Corporation, could cause actual results to differ materially from those
implied by the forward-looking statements. These factors include, but are
not limited to, the adverse impact of unseasonal weather, developments in
the federal and state regulatory environment, the rate of growth in the
service territories of the Corporation and its subsidiaries, the speed and
degree to which competition enters the Corporation's businesses, the timing
and extent of changes in interest rates, commodity prices and currency
exchange rates, risks associated with acquisitions and integration of
acquired companies, changes in customer usage patterns and preferences,
changes in technology, reliance on strategic partners, uncertainty of
litigation, as well as changing conditions in the economy, capital markets
and other factors identified from time to time in the Corporation's filings
with the Securities and Exchange Commission. This Annual Report should be
read in conjunction with the consolidated financial statements and notes
thereto included elsewhere herein.
REPORT OF MANAGEMENT
The management of NorthWestern is responsible for the integrity and
objectivity of the financial information contained in this Annual Report.
The consolidated financial statements, which necessarily include some
amounts which are based on informed judgments and estimates of management,
have been prepared in conformity with generally accepted accounting
principles.
In meeting this responsibility, management maintains a system of
internal accounting controls, which is designed to provide reasonable
assurance that the assets of the Corporation are safeguarded and that
transactions are executed in accordance with management's authorization and
are recorded properly for the preparation of financial statements. This
system is supported by written policies, selection and training of
qualified personnel, an appropriate segregation of responsibilities within
the organization, other internal accounting controls, and direct management
monitoring and review. The Board of Directors, through its Audit Committee,
which is comprised entirely of outside directors, oversees management's
responsibilities for financial reporting. The Audit Committee meets
regularly with management and the independent public accountants to make
inquiries as to the manner in which each is performing its
responsibilities. The independent public accountants have unrestricted
access to the Audit Committee, without management's presence, to discuss
auditing, internal accounting controls and financial reporting matters.
Arthur Andersen LLP, an independent public accounting firm, has been
engaged annually to perform an audit of the Corporation's financial
statements. Their audit is conducted in accordance with generally accepted
auditing standards and includes examining, on a test basis, supporting
evidence, assessing the Corporation's accounting principles and significant
estimates made by management, reviewing financial controls and evaluating
the overall financial statement presentation to the extent necessary to
allow them to report on the fairness, in all material respects, of the
operating results and financial condition of the Corporation.
Merle D. Lewis
Chairman and
Chief Executive Officer
Richard R. Hylland
President and
Chief Operating Officer
Daniel K. Newell
Senior Vice President - Finance and
Chief Financial Officer
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors
of NorthWestern Corporation:
We have audited the accompanying consolidated balance sheets of
NORTHWESTERN CORPORATION (a Delaware corporation) AND SUBSIDIARIES as of
December 31, 1999 and 1998, and the related consolidated statements of
income, cash flows and shareholders' equity for each of the three years in
the period ended December 31, 1999. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of NorthWestern
Corporation and Subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three
years in the period ended December 31, 1999, in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Minneapolis, Minnesota
February 4, 2000
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31 1999 1998 1997
(In thousands except per share amounts)
Operating Revenues $3,004,340 $1,187,187 $918,070
Cost of Sales 2,467,765 839,787 695,045
---------- ---------- --------
Gross Margins 536,575 347,400 223,025
---------- ---------- --------
Operating Expenses:
Selling, general and administrative
expenses 388,717 236,222 132,793
Depreciation and other amortization 49,204 31,078 25,748
Goodwill amortization 19,098 12,558 5,487
---------- ---------- --------
Total operating expenses 457,019 279,858 164,028
---------- ---------- --------
Operating Income 79,556 67,542 58,997
Interest Expense (53,154) (35,867) (31,476)
Investment Income and Other 9,800 5,700 11,564
--------- ---------- --------
Income Before Income Taxes and Minority
Interests 36,202 37,375 39,085
Provision for Income Taxes (14,466) (11,222) (11,111)
--------- ---------- --------
Income Before Minority Interests 21,736 26,153 27,974
Minority Interests 22,927 4,238 (1,710)
--------- ---------- --------
Net Income 44,663 30,391 26,264
Minority Interests on Preferred Securities
of Subsidiary Trusts (6,601) (3,114) (2,641)
Dividends on Cumulative Preferred Stock (191) (191) (212)
--------- ----------- ---------
Earnings on Common Stock $37,871 $27,086 $23,411
======= ======= =======
Average Common Shares Outstanding 23,094 18,660 17,843
Earnings Per Average Common Share
Basic $1.64 $1.45 $1.31
Diluted $1.62 $1.44 $1.31
Dividends Declared Per Average Common
Share $1.050 $0.985 $0.933
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31 1999 1998 1997
(In thousands)
Operating Activities:
Net income $44,663 $30,391 $26,264
Items not affecting cash:
Depreciation 42,968 29,547 25,438
Amortization 25,334 14,089 5,797
Deferred income taxes (9,518) 1,548 4,439
Minority interests in net income
(loss)of consolidated
subsidiaries (22,927) (4,238) 1,710
Investment tax credits (563) (562) (559)
Changes in current assets and
liabilities, net of acquisitions:
Accounts receivable (27,193) 26,388 (363)
Inventories (34,704) 24,715 8,325
Other current assets 6,071 (8,682) -
Accounts payable 33,113 (19,484) (11,364)
Accrued expenses 15,848 (30,427) 6,945
Other, net (1,369) 6,605 (3,965)
-------- -------- --------
Cash flows provided by operating
activities 71,723 9,890 62,667
-------- -------- -------
Investment Activities:
Property, plant and equipment
additions (32,599) (22,625) (22,400)
Sale (purchase) of noncurrent
investments, net 34,198 (60,990) 36,621
Acquisitions and growth
expenditures (209,122) (326,097) (58,936)
--------- -------- --------
Cash flows used in investing
activities (207,523) (409,712) (44,715)
--------- -------- --------
Financing Activities:
Dividends on common and preferred
stock (24,447) (19,092) (16,852)
Minority interests on preferred
securities of subsidiary trusts (6,601) (3,114) (2,641)
Subsidiary payment of common unit
distributions (37,003) (29,145) (17,708)
Proceeds from issuance of common units (971) 95,592 -
Issuance of nonrecourse subsidiary
debt 148,308 84,723 29,499
Repayment of nonrecourse subsidiary
debt (7,267) (37,107) (7,544)
Issuance of long-term debt - 97,161 -
Repayment of long-term debt (5,000) (5,000) (22,500)
Issuance of preferred securities of
subsidiary trusts - 49,816 -
Issuance of common stock - 107,813 -
Repurchase of minority interests (6,210) - -
Proceeds from exercise of warrants 1,657 3,177 -
Line of credit borrowings 58,000 - -
Short-term borrowings - nonrecourse 3,146 11,554 -
Retirement of subsidiary preferred stock - - (2,687)
Short-term borrowings 11,000 - -
-------- -------- -------
Cash flows provided by (used in)
financing activities 134,612 356,378 (40,433)
-------- -------- -------
Increase (Decrease) in Cash and Cash
Equivalents (1,188) 16,556 (22,481)
Cash and Cash Equivalents, beginning of
year 30,865 14,309 36,790
-------- -------- ------
Cash and Cash Equivalents, end of year $29,677 $30,865 $14,309
======= ======= =======
See Notes to Consolidated Financial Statements
CONSOLIDATED BALANCE SHEETS
Years Ended December 31 1999 1998
(In thousands)
ASSETS
Current Assets:
Cash and cash equivalents $29,677 $30,865
Accounts receivable, net 205,378 131,541
Inventories 104,099 72,805
Other 44,444 31,957
------- -------
Total current assets 383,598 267,168
------- -------
Property, Plant and Equipment, Net 681,663 629,278
Goodwill and Other Intangible Assets, Net 742,010 618,251
------- -------
Other Assets:
Investments 96,056 152,470
Other 53,434 61,307
------- -------
Total other assets 149,490 213,777
======= =======
Total assets $1,956,761 $1,728,474
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt $24,170 $20,060
Short-term debt 11,000 -
Short-term debt - nonrecourse 14,700 11,554
Accounts payable 157,959 113,036
Accrued expenses 61,218 64,779
------- -------
Total current liabilities 269,047 209,429
------- -------
Long-term Debt 309,350 256,350
Long-term Debt of Subsidiaries
- nonrecourse 473,757 332,525
Deferred Income Taxes 64,855 74,072
Other Noncurrent Liabilities 86,797 94,795
------- -------
Commitments and Contingencies
(Notes 2, 6, 7, 12)
Minority Interests 361,549 387,952
------- -------
Preferred Stock, Preference Stock and
Preferred Securities:
Preferred stock - 4 1/2% series 2,600 2,600
Redeemable preferred stock-6 1/2% series 1,150 1,150
Preference stock - -
Corporation obligated mandatorily
Redeemable preferred securities of
subsidiary trusts 87,500 87,500
------- -------
91,250 91,250
------- -------
Shareholders' Equity:
Common stock 40,438 40,279
Paid-in capital 160,028 158,530
Retained earnings 94,715 81,100
Accumulated other comprehensive income 4,975 2,192
------- -------
300,156 282,101
------- -------
Total liabilities and shareholders'
Equity $1,956,761 $1,728,474
========== ==========
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated
Number of Other Total
Common Common Paid-in Retained Comprehensive Shareholders'
Shares Stock Capital Earnings Income Equity
(In thousands)
Balance at December 31, 1996 17,840 $31,220 $56,595 $66,144 $9,846 $163,805
Comprehensive income:
Net income - - - 26,264 - 26,264
Other comprehensive income,
net of tax: Unrealized
loss on marketable
securities net of
reclassification adjustment - - - - (3,984) (3,984)
-------
22,280
Common stock issued 3 4 - - - 4
Distributions declared on
minority interests in
preferred securities of
subsidiary trusts - - - (2,641) - (2,641)
Dividends declared on preferred
stock - - - (212) - (212)
Dividends declared on common
stock - - - (16,640) - (16,640)
----- ------ ------ ------- ----- --------
Balance at December 31, 1997 17,843 31,224 56,595 72,915 5,862 166,596
Comprehensive income:
Net income - - - 30,391 - 30,391
Other comprehensive income,
net of tax:
Unrealized loss on
marketable securities
net of reclassification
adjustment - - - - (3,670) (3,670)
-------
26,721
Common stock issued 5,000 8,750 99,063 - - 107,813
Proceeds from exercise of
warrants 174 305 2,872 - - 3,177
Distributions declared on
minority interests in
preferred securities of
subsidiary trusts - - - (3,114) - (3,114)
Dividends declared on
preferred stock - - - (191) - (191)
Dividends declared on common
stock - - - (18,901) - (18,901)
------ ----- ----- ------- ----- --------
Balance at December 31, 1998 23,017 40,279 158,530 81,100 2,192 282,101
Comprehensive income:
Net income - - - 44,663 - 44,663
Other comprehensive income,
net of tax:
Foreign currency translation
adjustments - - - - (78) (78)
Unrealized gain on
marketable securities
net of reclassification
adjustment - - - - 2,861 2,861
------
47,446
Proceeds from exercise of
warrants 92 159 1,498 - - 1,657
Distributions declared on
minority interests
in preferred securities of
subsidiary trusts - - - (6,601) - (6,601)
Dividends declared on
preferred stock - - - (191) - (191)
Dividends declared on
common stock - - - (24,256) - (24,256)
----- ----- ----- ------- ----- ---------
Balance at December 31,
1999 23,109 $40,438 $160,028 $94,715 $4,975 $300,156
====== ======= ======== ======= ====== ========
See Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies
Nature of Operations
NorthWestern Corporation ('Corporation') is a service and solutions company
providing integrated energy, communications, air conditioning, heating,
ventilating, plumbing and related services and solutions to residential and
business customers throughout North America. A division of the Corporation
is engaged in the regulated energy business of production, purchase,
transmission, distribution and sale of electricity and the delivery of
natural gas to Midwestern customers. Through CornerStone Propane Partners,
L.P. ('CornerStone'), the Corporation is engaged in the retail propane and
wholesale energy-related commodities distribution business throughout North
America. CornerStone is a publicly traded Delaware master limited
partnership, formed to acquire and operate propane businesses and assets. A
wholly owned subsidiary of the Corporation serves as the general partner of
CornerStone and manages and operates CornerStone's business. At December
31, 1999, the Corporation owns a combined 30% effective interest in
CornerStone. Through Blue Dot Services Inc. ('Blue Dot'), the Corporation
is becoming a national provider of heating, ventilating, air conditioning,
plumbing and related services ('HVAC') through internal growth and by
acquiring existing companies throughout the U.S. Through Expanets, Inc.
('Expanets'), the Corporation is becoming a national provider of integrated
communications, data solutions and network services to business customers
through internal growth and by acquiring companies throughout the U.S.
Basis of Consolidation
The accompanying consolidated financial statements include the accounts of
the Corporation and all wholly and majority-owned or controlled
subsidiaries, including CornerStone, Blue Dot and Expanets. All significant
intercompany balances and transactions have been eliminated from the
consolidated financial statements. The public unitholders' interest in
CornerStone's net assets subsequent to CornerStone's formation is reflected
as a minority interest in the consolidated financial statements. Equity
interests of the former owners of companies acquired by Blue Dot and
Expanets who continue to hold an interest in Blue Dot and Expanets are
reflected as minority interests in the consolidated financial statements.
Losses allocable to minority interests in the future may increase or
decrease depending upon the level of losses in these business segments, the
amount of preferred dividends and the remaining minority interest basis
available to absorb losses.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash Equivalents
The Corporation generally considers all highly liquid investments purchased
with a maturity of three months or less to be cash equivalents.
Accounts Receivable, net
Accounts receivable is stated net of allowance for doubtful accounts of
$7.3 million and $6.1 million at December 31, 1999 and 1998, respectively.
Investments and Fair Value of Financial Instruments
The Corporation's investments consist primarily of short-maturity, fixed-
income securities and corporate preferred and common stocks. In addition,
the Corporation has investments in privately held entities and ventures,
safe harbor leases and various money market and tax exempt investment
programs. These investments are accounted for in accordance with Statement
of Financial Accounting Standards No. 115 ('SFAS 115'), 'Accounting for
Certain Investments in Debt and Equity Securities.' SFAS 115 requires that
certain investments in debt and equity securities be reported at fair
value.
The Corporation's available for sale securities are classified under the
provisions of SFAS 115 as follows:
Unrealized
(In thousands) Fair Value Cost Gain
December 31, 1999
Preferred stocks $35,482 $38,662 $(3,180)
Marketable securities 41,358 30,405 10,953
December 31, 1998
Preferred stocks $41,547 $39,560 $1,987
Marketable securities 30,045 27,376 2,669
The combined unrealized gain, net of tax, at December 31, 1999 and 1998,
was $5.1 million and $2.2 million. Held to maturity securities are reported
at cost, which approximated fair value and at December 31, 1999 and 1998,
was $17.4 million and $80.9 million.
The Corporation uses the specific identification method for determining the
cost basis of its investments in available for sale securities. Gross
proceeds and realized gains and losses on sales of its available for sale
securities were not material in 1999, 1998 and 1997.
Based on current market rates for debt of similar credit quality and
remaining maturities or quoted market prices for certain issues, the face
value of the Corporation's long-term debt approximates its market value.
CornerStone routinely uses commodity futures contracts to reduce the risk
of future price fluctuations for natural gas and liquefied petroleum gas
('LPG') inventories and contracts. Gains and losses on futures contracts
purchased as hedges are deferred and recognized in cost of sales as a
component of the product cost for the related hedged transaction. Net
realized gains and losses on these contracts are generally not material.
Revenue Recognition
Electric and natural gas revenues are based on billings rendered to
customers rather than on meters read or energy delivered. Customers are
billed monthly on a cycle basis. Revenues from propane sales are recognized
principally when fuel products are shipped or delivered to customers. HVAC
and communications revenues are recognized as goods are delivered to
customers or services are performed.
Property, Plant and Equipment
Property, plant and equipment are stated at cost of acquisition less
depreciation. Depreciation is computed using the straight-line method based
on the estimated useful lives of the various classes of property.
Depreciable property has estimated useful lives, which range from three to
40 years.
Depreciation rates include a provision for the Corporation's share of the
estimated costs to decommission three coal-fired generating plants at the
end of the useful life of each plant. The annual provision for such costs
is included in depreciation expense, while the accumulated provisions are
included in other noncurrent assets.
When property for the propane, HVAC or communications interests are retired
or otherwise disposed, the cost and related accumulated depreciation is
removed from the accounts, and the resulting gain or loss is credited or
charged to operations. No profit or loss is recognized in connection with
ordinary retirements of depreciable electric and natural gas property.
Maintenance and repairs are expensed as incurred, while replacements and
betterments that extend estimated useful lives are capitalized. Property,
plant and equipment at December 31 consisted of the following:
(In thousands) 1999 1998
Land and improvements $17,260 $19,871
Building and improvements 69,064 66,941
Storage, distribution,
transmission and generation 667,823 611,052
Other equipment 163,964 128,002
Less accumulated depreciation (236,448) (196,588)
-------- --------
$681,663 $629,278
======== ========
Computer Software Costs
The Corporation includes in property, plant and equipment external and
incremental internal costs associated with computer software we develop for
use in our businesses. Capitalization begins when the costs of the
preliminary stage of the project is completed. These costs are amortized on
a straight-line basis over an estimated useful life once the installed
software is ready for its intended use.
Goodwill and Other Intangibles
The excess of the cost of businesses acquired over the fair value of all
tangible and intangible assets acquired, net of liabilities assumed, has
been recorded as goodwill. Other intangibles consist principally of costs
of covenants not to compete and deferred financing costs. Intangibles and
goodwill are being amortized over the estimated periods benefited, which
range from three to 40 years. Financing costs are amortized over the term
of the applicable debt.
The Corporation's policy is to review property, goodwill and other
intangible assets for possible impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be
recoverable. If such review indicates that the carrying amount is not
recoverable, the Corporation's policy is to reduce the carrying amount of
these assets to fair value.
(In thousands) 1999 1998
Goodwill $725,124 $597,561
Noncompete agreements 26,534 17,585
Financing costs 20,506 21,936
Other intangibles 9,591 1,508
------- -------
781,755 638,590
Less accumulated amortization (39,745) (20,339)
------- -------
$742,010 $618,251
======== ========
Income Taxes
Deferred income taxes relate primarily to the difference between book and
tax methods of depreciating property, the difference in the recognition of
revenues for book and tax purposes, and certain natural gas costs, which
are deferred for book purposes but expensed currently for tax purposes.
For book purposes, deferred investment tax credits are being amortized as a
reduction of income tax expense over the useful lives of the property which
generated the credits.
Regulatory Assets and Liabilities
The regulated operations of the Corporation are subject to the provisions
of Statement of Financial Accounting Standards No. 71 ('SFAS 71'),
'Accounting for the Effects of Certain Types of Regulations.' Regulatory
assets represent probable future revenue to the Corporation associated with
certain costs, which will be recovered from customers through the
ratemaking process. Regulatory liabilities represent probable future
reductions in revenues associated with amounts that are to be credited to
customers through the ratemaking process.
If all or a separable portion of the Corporation's operations becomes no
longer subject to the provisions of SFAS 71, an evaluation of future
recovery-related regulatory assets and liabilities would be necessary. In
addition, the Corporation would determine any impairment to the carrying
costs of deregulated plant and inventory assets.
New Accounting Standards
Statement of Financial Accounting Standards No. 133 ('SFAS 133'),
'Accounting for Derivative Instruments and Hedging Activities', establishes
accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments imbedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS 133 requires changes in the derivative's
fair value be recognized currently in earnings unless specific hedge
accounting criteria are met. SFAS 133, as amended, is effective for fiscal
years beginning after June 15, 2000. The Corporation is evaluating the
impacts of adopting SFAS 133 on its financial statements. The impact of
SFAS 133 will depend upon the extent of use of derivative instruments and
their designation and effectiveness as hedges of market risk.
Reclassifications
Certain 1997 and 1998 amounts have been reclassified
to conform to the 1999 presentation. Such reclassifications had no impact
on net income or shareholders' equity as previously reported.
supplemental Cash Flow Information
(In thousands) 1999 1998 1997
Cash paid during the year for
Income taxes $24,020 $17,629 $8,940
Interest 49,591 35,162 30,090
Noncash transactions
during the year for
Assumption of debt as
part of acquisitions 25,506 28,572 1,551
2. Business Combinations and Acquisitions
Master Limited Partnership Offering and Acquisitions
On December 11, 1998, CornerStone acquired the operations of Propane
Continental, Inc. ('PCI'), a retail propane and wholesale energy-related
commodities distributor for approximately $121 million, including assumed
debt. The acquisition was financed with Common Unit equity and long-term
debt. The acquisition was accounted for under the purchase method of
accounting. PCI operated 34 retail propane customer service centers in 11
states. Through Tri Power Fuels, PCI's wholesale business, PCI distributed
propane and other natural gas liquids to independent dealers, resellers and
end users predominately in the West, Midwest and Northeast sections of the
country.
At December 31, 1999, CornerStone's capital consisted of 16,788,894 Common
Units, 6,597,619 Subordinated Units representing limited partner interests
and a 2% aggregate general partner interest. At December 31, 1999, the
Corporation's wholly and majority-owned subsidiaries owned all 6,597,619
Subordinated Units and an aggregate 2% general partner interest in
CornerStone, or a combined 30% effective interest.
Blue Dot Services Inc.
In 1997, the Corporation formed Blue Dot to acquire and operate HVAC
companies in the U.S. At December 31, 1999,
Blue Dot had acquired 62 companies in 23 states with a total investment by
the Corporation of $155.4 million. At December 31, 1999, the Corporation
owned a 96.9% voting interest in Blue Dot through preferred and common
stock ownership.
Expanets, Inc.
In 1998, the Corporation formed Expanets to acquire and operate
communications companies in the U.S. At December 31, 1999, Expanets had
acquired 26 companies in 32 states with a total investment by the
Corporation of $152.0 million. At December 31, 1999, the Corporation owned
a 95.8% voting interest in Expanets through preferred and common stock
ownership.
During 1999, the Corporation formed a private equity investment limited
liability company in which certain members of management were provided the
opportunity to make personal investments. The limited liability company is
controlled and substantially owned by the Corporation and enables
management investors to participate in long-term value creation in selected
growth initiatives, including increases in the value of the Corporation's
interests in CornerStone, Blue Dot and Expanets. The Corporation has the
right to acquire the limited liability company interests of the investors
under specified circumstances.
The acquisitions made by Blue Dot and Expanets were effected utilizing a
combination of cash and stock (of Blue Dot or Expanets) and generally with
a combination of both. In connection with certain acquisitions, both Blue
Dot and Expanets entered into exchange agreements with the sellers that
typically do not exceed two years. Under such agreements, the seller can
elect to exchange the stock of Blue Dot or Expanets that they received in
connection with the acquisition back to the Corporation for, at the
Corporation's option, either stock of the Corporation or cash at a
predetermined exchange rate.
The acquisitions made by CornerStone, Blue Dot and Expanets have been
accounted for using the purchase method of accounting and, accordingly, the
assets acquired and liabilities assumed have been recorded at their fair
values as of the dates of acquisitions. The excess of the purchase price
over the fair value of the assets acquired and liabilities assumed has been
recorded as goodwill. The assets acquired and liabilities assumed in the
current year acquisitions have been recorded based upon preliminary
estimates of fair value as of the dates of acquisition. The Corporation
does not believe the final allocation of purchase price will be materially
different from preliminary allocations. Any changes to the preliminary
estimates will be reflected as an adjustment to goodwill. At December 31,
1999, liabilities for approximately $12.7 million for costs associated with
the shutdown and consolidation of certain acquired facilities and $3.8
million in severance costs are recorded on the consolidated balance sheet.
At December 31, 1998, liabilities for approximately $19.7 million for costs
associated with the shutdown and consolidation of certain acquired
facilities and $12.5 million in severance costs are recorded on the
consolidated balance sheet. Results of operations for these acquisitions
have been included in the accompanying consolidated financial statements
since the dates of acquisition. The accompanying unaudited consolidated pro
forma results of operations for the years ended December 31, 1998 and 1999
give effect to the acquisitions as if such transactions had occurred at the
beginning of the period:
(In thousands except per share amounts) 1999 1998
Revenues $3,113,396 $2,009,436
Net income 45,376 41,113
Diluted earnings per share $1.65 $1.48
The unaudited pro forma consolidated financial information does not purport
to represent what the Corporation's financial position or results of
operations would actually have been if these transactions had occurred at
such dates or to project the Corporation's future results of operations.
3. Short-Term Borrowings
The Corporation may issue short-term debt in the form of bank loans and
commercial paper as interim financing for general corporate purposes. The
bank loans may be obtained under short-term lines of credit. At December
31, 1999, the Corporation's aggregate lines of credit available were $24.5
million. The Corporation pays an annual fee generally equivalent to .1% to
.25% of the unused lines. At December 31, 1999, there were $11.0 million of
commercial paper borrowings outstanding. No line of credit borrowings or
commercial paper was outstand-ing at December 31, 1998.
Expanets entered into a Bank Credit Facility in June 1998 with a commercial
bank. Expanets' Bank Credit Facility consists of a $15 million Working
Capital Facility. There were $14.7 million and $8.5 million of borrowings
outstanding under Expanets' Facility at December 31, 1999 and 1998.
Expanets' Credit Facility bears interest at a variable rate tied to the
Eurodollar or prime rate plus a stated margin for each rate. Expanets'
Credit Facility matured on December 31, 1999. Expanets has received an
extension on this facility while it negotiates an increase and certain
other changes to the Facility. The Facility is not secured, however,
Expanets is subject to restrictive covenants which include a) restrictions
on other indebtedness, b) limits on mergers, acquisitions and dispositions,
and c) minimum investment in Expanets by the Corporation. The Expanets'
Facility is nonrecourse to the Corporation.
4. Long-Term Debt
Substantially all of the Corporation's electric and natural gas utility
plant is subject to the lien of the indentures securing its general
mortgage bonds and pollution control obligations. General mortgage bonds of
the Corporation may be issued in amounts limited by property, earnings and
other provisions of the mortgage indenture. As part of a financing
transaction in November 1998, the Corporation issued $105 million of
6.95%, 30-year senior unsecured debt. The proceeds were used to repay short-
term indebtedness and for general corporate purposes. The Corporation
entered into an unsecured Bank Credit Facility with a group of commercial
banks in June 1999. The Bank Credit Facility is used for general corporate
purposes including acquisitions. There were $58 million of borrowings
outstanding and $112 million available under the Bank Credit Facility at
December 31, 1999. The Bank Credit Facility bears interest at a variable
rate tied to certain Eurodollar index or prime rate plus a variable margin,
which depends upon the total borrowings outstanding on the facility. The
Bank Credit Facility matures in June 2002. The Bank Credit Facility
contains restrictive covenants, which require the Corporation to maintain a
minimum net worth and a maximum debt to equity ratio. The following table
summarizes the Corporation's long-term obligations at December 31:
(In thousands) Due 1999 1998
Long-Term Debt
Senior unsecured debt - 6.95% 2028 $105,000 $105,000
General mortgage bonds -
6.99% 2002 15,000 20,000
7.10% 2005 60,000 60,000
7% 2023 55,000 55,000
Pollution control obligations -
5.85%, Mercer Co., ND 2023 7,550 7,550
5.90%, Salix, IA 2023 4,000 4,000
5.90%, Grant Co., SD 2023 9,800 9,800
Bank credit facility 2002 58,000 -
Less current maturities (5,000) (5,000)
---------- ---------
$309,350 $256,350
========== =========
The CornerStone First Mortgage Notes ('Mortgage Notes') are collateralized
by substantially all of the assets of CornerStone and rank pari passu with
the Bank Credit Facility. The Mortgage Notes mature in the year 2010 with
eight equal annual installments beginning in the year 2003. CornerStone
may, at its option and under certain circumstances following the
disposition of assets, be required to offer to prepay the Mortgage Notes in
whole or in part. The Mortgage Notes agreement contains restrictive
covenants applicable to CornerStone including a) restrictions on the
incurrence of additional indebtedness, b) restrictions on the ratio of
consolidated cash flow to consolidated interest expense of CornerStone, as
defined, and c) restrictions on certain liens, loans and investments,
payments, mergers, consolidations, sales of assets and other transactions.
Generally, as long as no default exists or would result, CornerStone is
permitted to make cash distributions not more frequently than quarterly in
an amount not to exceed available cash, as defined, for the immediately
preceding calendar quarter.
CornerStone also has a Bank Credit Facility with a group of commercial
banks. The Bank Credit Facility consists of a combined $110 million Working
Capital and Acquisition Facilities to finance propane business
acquisitions. There were $9.2 million and $1.7 million of combined
borrowings outstanding under the Working Capital and Acquisition Facilities
at December 31, 1999 and 1998. Total available under the Bank Credit
Facility is $81.8 million as an additional $19.0 million is required to be
held as collateral for the Bank Credit Facility borrowings. The Bank Credit
Facility bears interest at a variable rate tied to a certain Eurodollar
index or prime rate plus a variable margin for either rate, which depends
upon the Partnership's ratio of consolidated debt to consolidated cash
flow. The Bank Credit Facility matures in November 2001. The Bank Credit
Facility is collateralized by substantially all the assets of the
Partnership and ranks pari passu with the Mortgage Notes. The Bank Credit
Facility contains restrictive covenants similar to those under the Mortgage
Notes and also requires that CornerStone maintain a ratio of total funded
indebtedness to consolidated cash flow, as defined. Generally, as long as
no default exists or would result, CornerStone is permitted to make cash
quarterly distributions in an amount not to exceed Available Cash, as
defined.
Blue Dot entered into a Bank Credit Facility with a group of commercial
banks in February 1999 providing for advances up to $135.0 million. The
Bank Credit Facility is used for working capital and to finance business
acquisitions. There were $28.2 million of borrowings outstanding and $106.8
million available under the Bank Credit Facility at December 31, 1999. The
Bank Credit Facility bears interest at a variable rate tied to certain
Eurodollar rates or prime rate plus a variable margin, which depends upon
Blue Dot's interest coverage rates. The Bank Credit Facility matures in
February 2002 and is collateralized by substantially all the assets of Blue
Dot. The Bank Credit Facility contains restrictive covenants which require
Blue Dot to a) maintain a minimum net worth, b) maintaining certain EBITDA
and capitalization ratios when compared to total indebtedness, c) maintain
certain fixed charge ratios, d) limit the size of acquisitions and volume
of acquisitions, and e) limit annual capital expenditures. Blue Dot is in
compliance with the covenants as amended.
The balance of other nonrecourse debt is generally comprised of the debt
assumed and issued in conjunction with acquisitions of $36.3 million and
$40.9 million at December 31, 1999 and 1998.
Annual scheduled consolidated retirements of long-term debt during the next
five years are $24.2 million in 2000, $23.0 million in 2001, $96.4 million
in 2002, $45.7 million in 2003 and $44.2 million in 2004.
The following table summarizes the long-term nonrecourse obligations of
subsidiaries:
(In thousands) Due 1999 1998
Long-Term Debt of Subsidiaries-nonrecourse
First mortgage notes -
7.33% to 7.53% 2010 $419,200 $305,000
Bank credit facility (CornerStone) 2001 9,220 1,700
Bank credit facility (Blue Dot) 2002 28,176 -
Other term debt 36,331 40,885
Less current maturities (19,170) (15,060)
--------- --------
$473,757 $332,525
========= ========
5. Income Taxes
Income tax expense is comprised of the following:
(In thousands) 1999 1998 1997
Federal income
Current tax expense $22,079 $11,233 $4,620
Deferred tax expense (benefit) (9,179) (1,069) 6,512
Investment tax credit (benefit) (562) (562) (559)
State income 2,128 1,620 538
------- ------ ------
$14,466 $11,222 $11,111
======= ======= =======
The following table reconciles the Corporation's effective income tax rate
to the federal statutory rate:
1999 1998 1997
Federal statutory rate 35% 35% 35%
State income,
net of federal benefit 4 3 1
Amortization of
investment tax credit (1) (1) (2)
Dividends received deduction (2) (6) (2)
Other, net 4 (1) 1
40% 30% 33%
The components of the net deferred income tax liability recognized in the
Corporation's Consolidated Balance Sheets are related to the following
temporary differences at December 31:
(In thousands) 1999 1998
Excess tax depreciation $(78,402) $(80,556)
Safe harbor leases (929) (4,192)
Property basis and life differences (11,120) (11,027)
Asset sales (3,567) (3,967)
Regulatory assets (2,407) (2,732)
Regulatory liabilities 3,738 4,125
Unbilled revenue 6,323 2,360
Unamortized investment tax credit 3,279 3,385
Unrealized gain on investments (2,794) (3,308)
Other, net 21,024 21,840
$(64,855) $(74,072)
6. Team Member Benefit Plans
The Corporation maintains a noncontributory defined benefit pension plan
for team members of corporate and the regulated utility division. The
benefits to which a team member is entitled under the plan are derived
using a formula based on the number of years of service and compensation
levels, as defined. The Corporation determines the annual funding for its
plan using the frozen initial liability cost method. The Corporation's
annual contribution is funded in accordance with the requirements of ERISA.
Assets of the plan consist primarily of debt and equity securities.
Following is a reconciliation of the changes in the plan's benefit
obligations and fair value of assets over the two-year period ending
December 31, 1999, and a statement of the funded status as of December 31,
of both years:
(In thousands) 1999 1998
Reconciliation of Benefit Obligation
Obligation at January 1 $56,717 $54,656
Service cost 1,149 1,012
Interest cost 3,682 3,689
Actuarial (gain) loss (254) 1,009
Benefits paid (3,745) (3,649)
Benefit obligation at end of year 57,549 56,717
Reconciliation of Fair Value of Plan Assets
Fair value of plan assets at January 1 73,447 64,389
Actual return on plan assets 14,433 12,707
Benefits paid (3,745) (3,649)
Fair value of plan assets at end of year 84,135 73,447
Funded Status
Funded status at December 31 26,587 16,730
Unrecognized transition amount 928 1,083
Unrecognized net actuarial gain (24,711) (16,755)
Unrecognized prior service cost 2,819 3,320
Prepaid (accrued) benefit cost $5,623 $4,378
The following table provides the components of net periodic benefit cost
for the plans for 1999, 1998 and 1997:
in thousands 1999 1998 1997
Service cost $1,149 $1,012 $981
Interest cost 3,682 3,689 3,499
Expected return on plan assets (6,059) (5,307) (4,681)
Amortization of
transition obligation 155 155 155
Amortization of prior service cost 501 500 278
Amortization of net gain (672) (302) (106)
Net periodic
benefit (income) cost $(1,244) $(253) $126
The prior service costs are amortized on a straight-line basis over the
average remaining service period of active participants. Gains and losses
in excess of 10% of the greater of the benefit obligation and the market-
related value of assets are amortized over the average remaining service
period of active participants.
The assumptions used in calculating the projected benefit obligation for
1999, 1998 and 1997 were as follows:
1999 1998 1997
Discount rate 6.75% 6.75% 7.00%
Expected rate of return on assets 8.50% 8.50% 8.50%
Long-term rate of increase in
compensation levels 3.00% 3.00% 3.00%
During 1999, the Corporation made available to eligible
team members the option to convert their pension plan benefit to a cash
balance plan. All elections were made prior to December 31, 1999, and are
effective January 1, 2000. Eligible new team members hired after December
31, 1999, will automatically be enrolled in the cash balance plan as there
will be no new participants in the pension plan after December 31, 1999.
The result of team members choosing the cash balance plan will not
materially impact the Corporation's 2000 financial statements. The pension
plan will continue for those eligible team members who did not elect the
cash balance plan.
The Corporation also provides an Employee Stock Ownership Plan ('ESOP') for
full-time team members of corporate and the regulated utility division. The
ESOP is funded primarily with federal income tax savings, which arise from
tax laws applicable to such team member benefit plans. Certain Corporation
contributions and shares of stock acquired by the ESOP are allocated to
participants' accounts in proportion to the compensation of team members
during the particular year for which allocation is made. Costs incurred
under the plan were $1.0 million, $1.0 million and $.9 million in 1999,
1998 and 1997.
The Corporation also has various supplemental retirement plans for outside
directors and selected management team members. The plans are nonqualified
defined benefit plans that provide for certain amounts of salary
continuation in the event of death before or after retirement or certain
supplemental retirement benefits in lieu of any death benefits. In
addition, the Corporation provides life insurance benefits to beneficiaries
of eligible team members who represent a reasonable insurable risk. To
minimize the overall cost of plans providing life insurance benefits, the
Corporation has obtained life insurance coverage that is sufficient to fund
benefit obligations. Costs incurred under the plans were $1.3 million,
$1.5 million and $1.2 million in 1999, 1998 and 1997.
CornerStone has a Restricted Unit Plan ('Restricted Unit Plan'), which
authorizes the issuance of Common Units with an aggregate value of $17.5
million to directors, executives, managers and selected supervisors of the
Partnership. The value of the Restricted Common Unit is established by the
market price of the Common Unit at the date of grant. As of December 31,
1999, Restricted Common Units with a face value of $16.1 million have been
awarded.
The Corporation, CornerStone, Blue Dot and Expanets provide various team
member savings plans, which permit team members to defer receipt of
compensation as provided in Section 401(k) of the Internal Revenue Code.
Under the plans, the team member may elect to direct a percentage of their
gross compensation to be contributed to the plans. The Corporation
contributes 50 cents for every one dollar contributed by the team member,
up to a maximum Corporation contribution of 3% of the team member's gross
compensation. CornerStone, Blue Dot and Expanets match a portion of the
team member contributions. Costs incurred under all of these plans were
$3.0 million, $1.5 million and $.7 million in 1999, 1998 and 1997,
respectively.
7. Jointly Owned Plants
The Corporation has an ownership interest in three electric generating
plants, all of which are coal fueled and operated by other utility
companies. The Corporation has an undivided interest in these facilities
and is responsible for its proportionate share of the capital and operating
costs while being entitled to its proportionate share of the power
generated. The Corporation's interest in each plant is reflected in the
Consolidated Balance Sheets on a pro rata basis, and its share of operating
expenses is reflected in the Consolidated Statements of Income. The
participants each finance their own investment.
Information relating to the Corporation's ownership interest in these
facilities at December 31, 1999, is as follows:
Big Stone Neal #4 Coyote I
(In thousands) (South Dakota) (Iowa) (North Dakota)
Plant in service $48,348 $34,182 $47,097
Accumulated depreciation $27,266 $19,310 $22,794
8. Operating Leases
The Corporation leases office, office equipment and warehouse facilities
under various long-term operating leases. At December 31, 1999, future
minimum lease payments under noncancelable lease agreements are as follows
in thousands:
2000 $13,919
2001 11,880
2002 10,101
2003 7,475
2004 5,095
Thereafter 3,533
Lease and rental expense incurred were $13.8 million, $6.6 million and $6.1
million in 1999, 1998 and 1997, respectively.
9. Stock Options and Warrants
In May 1998, the Corporation adopted the NorthWestern Stock Option and
Incentive Plan ('Plan'). Under the Plan, the Corporation has reserved
2,750,000 shares for issuance to officers, key team members and directors
as either incentive-based options or nonqualified options. The Nominating
and Compensation Committee of the Corporation's Board of Directors
administers the Plan. Unless established differently by the Committee, the
per share option exercise price shall be the fair market value of the
Corporation's common stock at the grant date. The options are outstanding
for 10 years following the date of grant. In addition, the Corporation
issued 1,279,476 warrants to purchase shares of NorthWestern common stock
in connection with a previous acquisition. A summary of the activity of
stock options and warrants are as follows:
Stock Options
Shares Range Weighted
Balance December 31, 1997 - - -
Issued 225,463 23.00-24.88 23.11
Balance December 31, 1998 225,463 23.00-24.88 23.11
Issued 403,453 23.13-26.13 25.16
Canceled (11,000) 26.13 26.13
Balance December 31, 1999 617,916 23.00-26.13 24.39
Stock Warrants
Exercise
Shares Price
Balance December 31, 1997 - -
Issued 1,279,476 $18.225
Exercised 174,318 18.225
Balance December 31, 1998 1,105,158 18.225
Exercised 90,896 18.225
Balance December 31, 1999 1,014,262 $18.225
The Corporation follows Accounting Principles Board Opinion 25,
'Accounting for Stock Issued to Employees,' to account for stock option
plans. No compensation cost is recognized because the option exercise price
is equal to the market price of the underlying stock on the date of grant.
An alternative method of accounting for stock options is SFAS 123,
'Accounting for Stock-Based Compensation.' Under SFAS 123, team member
stock options are valued at grant date using the Black-Scholes valuation
model and compensation cost is recognized ratably over the vesting period.
Had compensation cost for the Corporation's stock option plan been
determined based on the Black-Scholes value at the grant dates for awards
as prescribed by SFAS 123, the pro forma information for 1999 and 1998
would have been as follows:
in thousands except per share amounts 1999 1998
Earnings on common stock
As reported $37,871 $27,086
Pro forma $36,750 $26,607
Diluted earnings per share
As reported $ 1.62 $ 1.44
Pro forma $ 1.57 $ 1.41
The weighted average Black-Scholes value of options granted under the stock
option plan during 1999 and 1998 was $4.39 and $3.91. The 1999 value was
estimated using an expected life of eight years, 3.8% dividend yield,
volatility of 16.9% and risk-free interest rate of 5.08%.
10. Earnings Per Share
Basic earnings per share is computed on the basis of the weighted average
number of common shares outstanding. Diluted earnings per share is computed
on the basis of the weighted average number of common shares outstanding
plus the effect of the outstanding stock options and warrants. The
following table presents the shares used in computing the basic and diluted
earnings per share for 1999, 1998 and 1997:
1999 1998 1997
Average common
shares outstanding for
basic computation 23,094 18,660 17,843
Dilutive effect of
Stock options 14 5 -
Stock warrants 264 151 -
Average common
shares outstanding for
diluted computation 23,372 18,816 17,843
11. CornerStone Distributions
CornerStone makes distributions to its partners with respect to each fiscal
quarter of the Partnership in an aggregate amount equal to its Available
Cash, as defined in its partnership agreement. Distributions will generally
be made 98% to the Common and Subordinated Unitholders and 2% to the
general partner. To the extent there is sufficient Available Cash, the
holders of Common Units have the right to receive the Minimum Quarterly
Distribution, plus any arrearages, prior to the distribution of Available
Cash to holders of Subordinated Units. Common Units will not accrue
arrearages for any quarter after the Subordination Period (as defined
below), and Subordinated Units will not accrue any arrearages with respect
to distributions for any quarter.
The Subordination Period will generally extend until the first day of any
quarter beginning on or after December 31, 2001, in respect of which a)
distributions of Available Cash from operating surplus equal or exceed the
Minimum Quarterly Distribution on each of the outstanding Common and
Subordinated Units for each of the three consecutive four-quarter periods
immediately preceding such date, b) the adjusted operating surplus
generated during each of the three consecutive four-quarter periods
immediately preceding such date equals or exceeds the Minimum Quarterly
Distribution on each of the Common and Subordinated Units and the related
distribution on the general partner interests in the Partnership during
such periods, and c) there are no outstanding Common Unit arrearages.
In addition, 1,649,405 Subordinated Units may convert into Common Units for
any quarter ending on or after December 31, 1999, and an additional
1,649,405 Subordinated Units may convert into Common Units for any quarter
ending on or after December 31, 2000, if a) distributions of Available Cash
from operating surplus on each of the outstanding Common and Subordinated
Units equal or exceed the Minimum Quarterly Distribution for each of the
three consecutive four-quarter periods immediately preceding such date, b)
the adjusted operating surplus generated during the immediately preceding
two consecutive four-quarter periods equals or exceeds the Minimum
Quarterly Distribution on all of the Common and Subordinated Units
outstanding during that period and c) there are no arrearages on the Common
Units.
The Partnership will make distributions of its Available Cash approximately
45 days after the end of each quarter ending March, June, September and
December to holders of record on the applicable record dates. For all
quarters ended after December 31, 1997, CornerStone and the Corporation
have elected to forgo the Subordinated Unit distributions, continuing the
support for the Common Unitholders.
12. Environmental Matters
The Corporation is subject to numerous state and federal environmental
regulations. The Clean Air Act Amendments of 1990 (the Act) stipulate
limitations on sulfur dioxide and nitrogen oxide emissions from coal-fired
power plants. The Corporation believes it can economically meet such sulfur
dioxide emission requirements at its generating plants and that it is in
compliance with all presently applicable environmental protection
requirements and regulations. The Corporation is also subject to other
environmental statues and regulations including matters related to former
manufactured gas plant sites. No administrative or judicial proceedings
involving the Corporation are now pending or known by the Corporation to be
contemplated under present environmental protection requirements.
13. Capital Stock
In December 1996, the Corporation's Board of Directors declared, pursuant
to a shareholders' rights plan, a dividend distribution of one Right on
each outstanding share of the Corporation's common stock. Each Right
becomes exercisable, upon the occurrence of certain events, at an exercise
price of $50 per share, subject to adjustment. The Rights are currently not
exercisable and will be exercisable only if a person or group of affiliated
or associated persons ('Acquiring Person') either acquires ownership of 15%
or more of the Corporation's common stock or commences a tender or exchange
offer that would result in ownership of 15% or more. In the event the
Corporation is acquired in a merger or other business combination
transaction or 50% or more of its consolidated assets or earnings power are
sold, each Right entitles the holder to receive such number of shares of
common stock of the Acquiring Person having a market value of two times the
then current exercise price of the Right. The Rights, which expire in
December 2006, are redeemable in whole, but not in part, at a price of
$.005 per Right, at the Corporation's option at any time until any
Acquiring Person has acquired 15% or more of the Corporation's common
stock.
The Corporation is authorized to issue 1,000,000 shares of $100 par
cumulative preferred stock. As of December 31, 1999 and 1998, there were
37,500 shares outstanding of which 26,000 were 4 1/2% Series and 11,500
were 6 1/2% Series. The provisions of the 6 1/2% Series stock contain a
five-year put option exercisable by the holders of the securities and a 10-
year redemption option exercisable by the Corporation. In any event,
redemption will occur at par value. The 4 1/2% Series may be redeemed in
whole or in part at the option of the Board of Directors at any time upon
at least 30 days notice at $110.00 per share plus accrued dividends.
In the event of involuntary dissolution, all Corporation preferred stock
outstanding would have a preferential interest of $100 per share, plus
accumulated dividends, before any distribution to common shareholders.
The Corporation is authorized to issue a maximum of 1,000,000 shares of
preference stock at a par value of $50 per share. No preference shares have
ever been issued.
As of December 31, 1999 and 1998, the Corporation had 3,500,000 shares of
preferred securities outstanding.
1,300,000 shares outstanding were issued in 1995 at 8 1/8%
with a $25 par value. An additional 2,200,000 shares were issued as part of
a financing transaction in November 1998
when the Corporation sold $55,000,000 of its 7.2% preferred capital
securities at $25 par value. The proceeds were used for general corporate
purposes.
14. Segment and Related Information
In 1998, the Corporation adopted Statement of Financial Accounting
Standards No. 131 ('SFAS 131'), 'Disclosures About Segments of an
Enterprise and Related Information,' which requires the reporting of
certain financial information by business segment. For the purpose of
providing segment information, the Corporation's six principal business
segments are its electric, natural gas, retail propane, wholesale propane,
HVAC and communications operations. The 'All Other' segment includes the
results of service and other nonenergy-related operations, manufacturing
operations (1998 only), activities and assets of the corporate office, as
well as any reconciling or eliminating amounts.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies except that the
parent allocates some of its operating expenses and interest expense to the
operating segments according to a methodology designed by management for
internal reporting purposes and involves estimates and assumptions.
Financial data for the business segments are as follows:
Total
Electric and Total Communi- All
(In thousands) Natural Gas Propane HVAC cations Other Total
1999
Operating revenues $152,166 $2,246,400 $293,736 $294,878 $17,160 $3,004,340
Cost of sales 65,511 2,038,714 181,275 168,888 13,377 2,467,765
Gross margins 86,655 207,686 112,461 125,990 3,783 536,575
Selling, general and
administrative 37,016 137,859 96,580 102,507 14,755 388,717
Depreciation and amortization14,920 25,583 4,934 3,257 510 49,204
Goodwill amortization - 8,219 3,637 7,211 31 19,098
Operating income 34,719 36,025 7,310 13,015 (11,513) 79,556
Interest expense (8,790) (32,176 (1,043) (1,384) (9,761) (53,154)
Investment income and other 366 - 796 (1,016) 9,654 9,800
Income before taxes and minority
interests 26,295 3,849 7,063 10,615 (11,620) 36,202
Provision for taxes (8,816) (693) (3,990) (7,129) 6,162 (14,466)
Income before minority
interests $17,479 $3,156 $3,073 $3,486 $(5,458) $21,736
Total assets $364,673 $861,813 $279,140 $324,489 $126,646$ 1,956,761
Maintenance capital
expenditures $12,813 $7,735 $7,763 $3,589 $699 $32,599
1998
Operating revenues $145,645 $767,735 $124,880 $126,457 $22,470$1,187,187
Cost of sales 62,595 618,754 75,843 69,982 12,613 839,787
Gross margins 83,050 148,981 49,037 56,475 9,857 347,400
Selling, general and
administrative 37,445 105,520 39,334 45,709 8,214 236,222
Depreciation and amortization14,759 12,574 1,764 1,680 301 31,078
Goodwill amortization - 7,580 1,765 3,208 5 12,558
Operating income 30,846 23,307 6,174 5,878 1,337 67,542
Interest expense (12,059) (20,321) (52) (669) (2,766) (35,867)
Investment income and other 1,261 - 296 87 4,056 5,700
Income before taxes and minority
interests 20,048 2,986 6,418 5,296 2,627 37,375
Provision for taxes (7,379) (999) (3,043) (2,807) 3,006 (11,222)
Income before minority
interests $12,669 $1,987 $3,375 $2,489 $5,633 $26,153
Total assets $321,847 $759,232 $57,035 $77,418 $512,942$1,728,474
Maintenance capital
expenditures $14,366 $2,898 $2,641 $2,161 $559 $22,625
1997
Operating revenues $154,288 $743,038 - - $20,744 $918,070
Cost of sales 69,595 612,305 - - 13,145 695,045
Gross margins 84,693 130,733 - - 7,599 223,025
Selling, general and
administrative 36,384 90,344 - - 6,065 132,793
Depreciation and amortization 13,901 11,297 - - 550 25,748
Goodwill amortization - 5,487 - - - 5,487
Operating income 34,408 23,605 - - 984 58,997
Interest expense (12,186) (18,980) - - (310) (31,476)
Investment income and other 689 - - - 10,875 11,564
Income before taxes and minority
interests 22,911 4,625 - - 11,549 39,085
Provision for taxes (8,334) (1,283) - - (1,494) (11,111)
Income before minority
interests $14,577 $3,342 - - $10,055 $27,974
Total assets $306,930 $622,077 - - $177,116$1,106,123
Maintenance capital
expenditures $18,210 $4,056 - - $134 $22,400
1999 1998 1997
(In thousands) Electric Natural Gas Electric Natural Gas Electric Natural Gas
Operating
revenues $83,943 $68,223 $78,401 $67,244 $76,727 $77,561
Cost of sales 18,456 47,055 15,390 47,205 14,560 55,035
Gross margins 65,487 21,168 63,011 20,039 62,167 22,526
Selling, general and
Administrative 24,722 12,294 25,534 11,911 23,685 12,699
Depreciation 11,355 2,763 11,239 2,742 11,066 2,541
Amortization 651 151 631 147 239 55
Operating income$28,759 $5,960 $25,607 $5,239 $27,177 $7,231
1999 1998 1997
Retail Wholesale Retail Wholesale Retail Wholesale
(In thousands) Propane Propane Propane Propane Propane Propane
Operating revenues $303,947 $1,942,453 $234,612 $533,123 $243,589 $499,449
Cost of sales 133,084 1,905,630 103,645 515,109 127,529 484,776
Gross margins $170,863 $36,823 $130,967 $18,014 $116,060 $14,673
15. Quarterly Financial Data (Unaudited)
(In thousands except per share amounts) First Second Third Fourth
1999
Operating revenues $509,354 $595,850 $753,443 $1,145,693
Operating income $42,134 $11,599 $9,665 $16,158
Net income $14,880 $6,837 $8,838 $14,108
Average common shares outstanding 23,051 23,108 23,109 23,109
Basic earnings per average common share $.57 $.22 $.31 $ .54
Diluted earnings per average common share $.56 $.22 $.31 $ .53
Dividends per share $.2575 $.2575 $.2575 $.2775
Stock price:
High $27.13 $27.06 $26.00 $24.19
Low $23.75 $24.19 $22.44 $20.63
Quarter-end close $25.94 $24.19 $22.75 $22.00
1998
Operating revenues $298,964 $233,145 $276,896 $378,182
Operating income $29,836 $6,938 $7,954 $22,814
Net income $11,004 $3,355 $4,582 $11,450
Average common shares outstanding 17,843 17,843 17,860 21,068
Basic earnings per average common share* $.58 $.15 $.21 $ .49
Diluted earnings per average common share* $.58 $.15 $.20 $ .48
Dividends per share $.2425 $.2425 $.2425 $.2575
Stock price:
High $24.00 $25.31 $27.38 $26.50
Low $21.31 $20.25 $23.94 $22.75
Quarter-end close $22.94 $25.00 $26.00 $26.44
* The 1998 quarterly earnings per average common share do not total to
the 1998 annual earnings per average common share due to the effect of
common stock issuances during the year.
ELEVEN-YEAR FINANCIAL SUMMARY
(In thousands except per share data)1999 1998 1997 1996 1995 1994 1993
1992 1991 1990 1989
Financial Results
Operating revenues $3,004,340 $1,187,187 $918,070 $344,009
$204,970 $157,266 $153,257 $119,197 $122,900 $115,980 $117,671
Gross margins 536,575 347,400 223,025 163,583 108,545 82,366
80,259 67,275 69,509 64,940 66,166
Operating expenses 457,019 279,858 164,028 113,165 70,448
51,830 52,986 42,466 42,061 40,744 41,171
Operating income 79,556 67,542 58,997 50,418 38,097
30,536 27,273 24,809 27,448 24,196 24,995
Interest expense (53,154) (35,867) (31,476) (18,668) (11,694)
(9,670) (8,945) (8,105) (7,244) (6,804) (6,886)
Investment income and other 9,800 5,700 11,564 9,719
3,029 2,444 4,431 2,690 1,834 6,890 4,314
Income before income taxes and
minority interests 36,202 37,375 39,085 41,469 29,432
23,310 22,759 19,394 22,038 24,282 22,423
Provision for income taxes (14,466) (11,222) (11,111) (15,415)
(10,126) (7,869) (7,568) (5,673) (7,223) (6,776) (6,300)
Income before minority interests 21,736 26,153 27,974 26,054
19,306 15,441 15,191 13,721 14,815 17,506 16,123
Minority interests 22,927 4,238 (1,710) - - - - -
- - - -
Net income $ 44,663 $ 30,391 $ 26,264 $ 26,054 $
19,306 $ 15,441 $ 15,191 $ 13,721 $ 14,815 $ 17,506
$ 16,123
Common Stock Data
Basic earnings per share* $1.64 $1.45 $1.31 $1.28
$1.11 $1.00 $.98 $.88 $.94 $1.12 $1.02
Diluted earnings per share* $1.62 $1.44 $1.31 $1.28
$1.11 $1.00 $.98 $.88 $.94 $1.12 $1.02
Basic and diluted earnings per share
(excluding one time gains)* - - - $1.19 - - -
- - - $.89 $.88
Average shares outstanding*:
Basic 23,094 18,660 17,843 17,840 16,261 15,354
15,354 15,354 15,354 15,354 15,354
Diluted 23,372 18,816 17,843 17,840 16,261 15,354
15,354 15,354 15,354 15,354 15,354
Dividends paid per common share* $1.050 $.985 $.933 $.890
$.873 $.835 $.815 $.795 $.768 $.738 $.708
Annual dividend rate at year end* $1.11 $1.03 $.97 $.92
$.88 $.85 $.83 $.81 $.79 $.76 $.73
Book value per share at year end* $12.99 $12.26 $9.34 $9.18
$8.56 $7.47 $7.14 $6.98 $6.89 $6.72 $6.34
Common stock price range*:
High $27.125 $27.375 $23.500 $18.250 $14.188 $14.813
$16.750 $14.375 $13.438 $10.250 $10.125
Low $20.625 $20.250 $16.938 $13.375 $12.125 $12.250
$13.125 $11.750 $10.125 $8.375 $8.250
Close $22.000 $26.438 $23.000 $17.130 $14.000 $13.380
$14.380 $14.000 $12.940 $10.250 $10.000
Price earnings ratio 13.6x 18.4x 17.6x 13.4x 12.7x
13.4x 14.7x 15.8x 13.8x 9.2x 9.8x
Dividend payout ratio
(from ongoing operations) 64.8% 68.4% 71.2% 74.8% 79.0%
83.5% 83.2% 89.8% 81.6% 66.1% 69.4%
Return on average common equity 12.9% 14.6% 14.1% 14.4%
13.7% 13.1% 13.7% 12.8% 13.7% 17.0% 16.2%
Common shareholders at year end 10,475 10,116 8,845 8,750
8,738 8,132 8,231 8,279 8,262 8,014 8,246
Financial Position (as of December 31)
Total assets $1,956,761 $1,728,474 $1,106,123 $1,113,716
$558,721 $359,066 $343,574 $308,194 $297,761 $283,073 $272,260
Working capital 114,551 57,739 11,844 44,922 31,859
(3,033) 6,121 5,774 (4,010) (4,599) 678
Long-term debt, excluding current portion 309,350 256,350 156,350
183,850 183,850 127,053 126,600 106,422 92,003 78,236
79,469
Total debt (including subsidiaries) 807,277 608,935 433,095
425,657 213,410 127,623 127,200 106,572 93,236 79,469
80,702
Shareholders' equity 300,156 282,101 166,596 163,805 152,678
114,705 109,667 107,111 105,780 103,120 97,322
Other equity 452,799 479,202 235,972 225,464 38,760 2,640
2,670 2,700 5,590 5,785 5,980
Total equity $ 752,955 $ 761,303 $ 402,568 $ 389,269
$191,438 $117,345 $112,337 $109,811 $111,370 $108,905 $103,302
Capitalization Ratios (as of December 31)**
Long-term recourse debt 44.1% 40.7% 43.5% 47.9% 49.3%
51.3% 52.4% 49.0% 45.2% 41.8% 43.5%
Preferred stock and securities 13.0% 14.5% 10.1% 9.4% 9.7%
1.1% 1.1% 1.3% 2.7% 3.1% 3.3%
Shareholders' equity 42.9% 44.8% 46.4% 42.7% 41.0%`
47.6% 46.5% 49.7% 52.1% 55.1% 53.2%
* Adjusted for the two-for-one split in May 1997.
** Ratios are exclusive of nonrecourse debt, current debt and minority
interests.