SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES ACT OF 1934 For the transition period from ________ to _________ Commission File No. 0-692 NORTHWESTERN CORPORATION (formerly known as NORTHWESTERN PUBLIC SERVICE COMPANY) Delaware 46-0172280 (State of Incorporation) (IRS Employer Identification No.) 125 South Dakota Avenue Suite 1100 Sioux Falls, South Dakota 57104 (Address of principal office) (Zip Code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (D) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [ X ] Yes [ ] No Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: Common Stock, Par Value $1.75 22,976,946 shares outstanding at November 9, 1998 Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust, Liquidation Amount $25.00 1,300,000 shares outstanding at November 9, 1998 </page> INDEX PART I. FINANCIAL INFORMATION Consolidated Balance Sheets - September 30, 1998 and December 31, 1997 Consolidated Statements of Income - Three months and nine months ended September 30, 1998 and 1997 Consolidated Statements of Cash Flows Nine months ended September 30, 1998 and 1997 Notes to Consolidated Financial Statements Management's Discussion of Financial Condition and Results of Operations PART II. OTHER INFORMATION SIGNATURE </page> NORTHWESTERN CORPORATION CONSOLIDATED BALANCE SHEETS (In Thousands) September 30, December 31, 1998 1997 ------ ------ (unaudited) ASSETS - ------------------------- CURRENT ASSETS: Cash and cash equivalents $ 11,207 $ 14,309 Trade accounts receivable, net 43,416 90,749 Inventories 25,957 36,015 Other 18,298 15,335 -------- ------- 98,878 156,408 -------- ------- PLANT AND EQUIPMENT: Electric 360,997 356,836 Natural Gas 90,106 85,874 Propane 296,031 275,911 Manufacturing 2,387 2,270 -------- ------ 749,521 720,891 Less Accumulated Depreciation (190,312) (175,269) --------- --------- 559,209 545,622 --------- --------- OTHER ASSETS: Investments 210,938 121,587 Deferred charges and other 67,796 58,435 Goodwill and other intangibles, net 230,427 224,071 -------- -------- 509,161 404,093 -------- -------- $ 1,167,248 $ 1,106,123 ========== ========== CAPITALIZATION AND LIABILITIES - ------------------------------ CURRENT LIABILITIES: Long-term debt due within one year 8,466 7,814 Accounts payable 43,252 89,064 Accrued expenses 10,288 12,899 Other 21,289 34,787 ------- ------- 83,295 144,564 ------- ------- DEFERRED CREDITS: Accumulated deferred income taxes 70,288 72,884 Unamortized investment tax credits 8,480 8,901 Other 50,129 51,925 ------- ------- 128,897 133,710 ------- ------- CAPITALIZATION: Common stock equity 170,095 166,596 Nonredeemable cumulative preferred stock 2,600 2,600 Redeemable cumulative preferred stock 1,150 1,150 Company obligated mandatorily redeemable security of trust holding soley parent debentures 32,500 32,500 Other debt 113,500 - Long term debt 151,350 156,350 -------- -------- 471,195 359,196 Minority interest in subsidiaries 221,095 199,722 Long term debt of subsidiaries 262,766 268,931 -------- -------- 955,056 827,849 -------- -------- $ 1,167,248 $ 1,106,123 ========== =========== </page> NORTHWESTERN CORPORATION CONSOLIDATED STATEMENTS OF INCOME (In Thousands, Except Per Share Amounts) (Unaudited) Three Months Nine Months Ended Ended September 30 September 30 -------------- --------------- 1998 1997 1998 1997 ----- ----- ----- ----- OPERATING REVENUES Propane $ 160,727 $ 152,165 $534,949 $501,490 Electric 22,497 21,223 60,049 58,872 Natural Gas 6,692 7,249 51,560 58,846 Manufacturing 5,645 4,447 17,253 15,733 ------ ------ ------- ------- 195,561 185,084 663,811 634,941 OPERATING EXPENSES Propane costs 134,030 127,630 432,014 414,217 Fuel and purchased 4,410 4,287 12,018 11,431 Purchased natural gas 3,763 4,307 36,236 42,031 Manufacturing cost of goods sold 2,907 2,871 10,150 9,892 Other operating expense 34,994 29,949 102,147 87,511 Maintenance 1,247 1,562 3,922 4,795 Depreciation and amortization 9,047 8,726 26,015 23,413 Property and other taxes 1,689 1,719 4,948 5,189 ------- ------- ------- ------- 192,087 181,051 627,450 598,479 OPERATING INCOME Propane (4,134) (3,051) 12,838 9,436 Electric 8,849 8,030 20,035 20,865 Natural gas (1,104) (903) 2,959 5,416 Manufacturing (137) (43) 529 745 ------- ------ ------ ------ 3,474 4,033 36,361 36,462 Interest Expense, net (9,312) (7,755) (24,610) (23,625) Investment Income and Other 4,553 3,823 10,616 7,977 ------ ------ ------ ------ Income Before Income Taxes and Minority Interest (1,285) 101 22,367 20,814 Provision for Income Taxes (603) (1,464) (5,569) (7,335) ------ ------- ------- ------- Income Before Minority Interest (1,888) (1,363) 16,798 13,479 Minority Interest 6,470 5,085 2,143 3,924 ------ ------- ------ ------- Net Income 4,582 3,722 18,941 17,403 Minority Interest on Preferred Securities of Subsidiary Trust (660) (660) (1,980) (1,980) Dividends on Preferred Stock (48) (48) (144) (165) ------ ------ ------ ------ Earnings on Common $ 3,874 $ 3,014 $ 16,817 $ 15,258 ======= ====== ======= ======= Average Shares Outstanding 17,860 17,843 17,848 17,843 Basic Earnings Per Common Share $ 0.21 $ 0.17 $ 0.94 $ 0.86 ====== ======= ======= ====== Diluted Earnings Per Common Share $ 0.20 $ 0.17 $ 0.93 $ 0.86 ====== ======= ======= ====== Dividends Declared Per $ 0.25 $ 0.23 $ 0.73 $ 0.69 Common Share ====== ======= ======= ====== </page> NORTHWESTERN CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) (Unaudited) Nine Months Ended September 30 ------------------- 1998 1997 ---- ---- OPERATING ACTIVITIES: Net income $ 18,941 $ 17,403 Items not affecting cash: Depreciation and amortization 26,015 23,413 Deferred income taxes (1,949) (261) Minority interest in net income of consolidated subsidiaries (2,143) (3,924) Investment tax credits (421) (421) Changes in current assets and liabilities, net: Trade accounts receivable 49,914 (8,825) Inventories 10,052 19,782 Other current assets (2,963) 6,164 Accounts payable (46,159) (13,452) Accrued expenses (2,611) (660) Other current liabilities (13,536) (11,741) Other, net 28 4,343 -------- ------- Cash flows provided by operating activities 35,168 31,821 -------- ------- INVESTING ACTIVITIES: Property Additions (11,083) (18,194) Sale (Purchase) of noncurrent investments, net (106,942) 21,003 Acquisitions and growth expenditures (26,648) (21,157) ------- -------- Cash flows used in investing activities (144,673) (18,348) --------- -------- FINANCING ACTIVITIES: Dividends on common and preferred stock (13,129) (12,476) Subsidiary payment of common unit distributions (21,369) (12,031) Minority interest on preferred securities of Subsidiary trust (1,980) (1,980) Redemption of preferred stock of subsidiary - (2,687) Issuance of nonrecourse subsidiary debt - 19,131 Repayment of nonrecourse subsidiary debt (7,188) (7,544) Repayment of long term debt (5,000) (22,500) Proceeds from subsidiary secondary offering 40,700 - Common stock issued on exercise of warrants 869 - Short term borrowings 88,500 - Commercial paper issuances 25,000 - ------- ------- Cash flows provided by (used in) financing activities 106,403 (40,087) ------- ------- DECREASE IN CASH AND CASH EQUIVALENTS (3,102) (26,614) Cash and Cash Equivalents, beginning of period 14,309 36,790 ------- ------- Cash and Cash Equivalents, end of period $ 11,207 $ 10,176 --------- -------- SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the period for: Income taxes $ 7,005 $ 8,815 Interest $ 21,815 $ 22,267 </page> NORTHWESTERN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) September 30, 1998 and 1997 (Reference is made to Notes to Financial Statements included in the Company's Annual Report) (1) Management's Statement - NorthWestern Corporation (the Company) has prepared the financial statements included herein, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of the Company, all adjustments necessary for a fair presentation of the results of operations for the interim periods have been included. It is suggested that these financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's latest annual report to stockholders. (2) Subsidiaries and Principles of Consolidation - The accompanying consolidated financial statements include the accounts of the Company and all wholly and majority owned or controlled subsidiaries. All significant inter-company balances and transactions have been eliminated from the consolidated financial statements. (3) Accounting Pronouncements During June 1997, the Financial Accounting Standards Board released SFAS No. 130, `Reporting Comprehensive Income,' effective January 1, 1998. SFAS No. 130 established standards for reporting and display of comprehensive earnings and its components in financial statements; however, the adoption of this Statement had no impact on the Company's net earnings or shareholders' equity. There were no material differences between net earnings and comprehensive earnings for any periods presented in the accompanying financial statements. FASB Statement No. 131 `Disclosures about Segments of an Enterprise and Related Information' requires that a publicly held company report financial and descriptive information about its operating segments in financial statements issued to shareholders for interim and annual periods. The Statement also requires additional disclosures with respect to products and services, geographic areas of operation, and major customers. The Company has historically presented segment information in the consolidated financial statements and related notes and as such does not expect adoption of the disclosure requirement of this pronouncement to have a material impact on its financial statements. The Company will adopt this statement in the fourth quarter of 1998. FASB Statement No. 132 `Employers' Disclosures about Pensions and Other Postretirement Benefits - an amendment of FASB Statements No. 87, 88, and 106' requires revised disclosures about pension and other postretirement benefit plans. The Company does not expect that adoption of the disclosure requirements of this pronouncement will have a material impact on its financial statements. The Company will adopt this Statement in the fourth quarter of 1998. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, `Accounting for Derivative Instruments and Hedging Activities.' The Standard 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. The Statement requires changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement. Statement 133 is effective for fiscal years beginning after June 15, 1999. The Statement must be applied to derivative instruments and certain derivative instruments embedded in hybrid contracts that were issued, acquired, or substantively modified after December 31, 1997. The Company has not yet quantified the impacts of adopting Statement 133 on its financial statements and has not determined the timing of adoption of Statement 133. (4) Financial Instruments Cornerstone Propane Partners, L.P., a subsidiary of the Company, routinely uses commodity futures contracts to reduce the risk of future price fluctuations for liquefied petroleum gas and natural gas 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. (5) Reclassifications Certain 1997 amounts have been reclassified to conform to the 1998 presentation. Such reclassifications had no impact on net income and common stock equity as previously reported. (6) Subsequent Events. In November 1998, the Company proposed a common stock, preferred securities, and senior debt offerings to public markets. The common stock offering transaction closed on November 9, 1998, resulting in the issuance of 5 million new common shares with net proceeds of $115.8 million. These funds were used to repay short-term borrowings which are classified as other long term debt at September 30, 1998, due to such subsequent financing. MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NorthWestern Corporation is a service and solutions company providing energy, telecommunications and related services. A division of the Company is engaged in the regulated energy business of production, purchase, transmission, distribution and sale of electricity and the delivery of natural gas. The Company generates and distributes electric energy to 56,000 customers in eastern South Dakota. It also purchases and distributes natural gas to 77,000 customers in eastern South Dakota and central Nebraska. To provide base load electric power, the Company jointly owns three coal-fired generating plants with other utilities. Through Cornerstone Propane Partners, L.P. (Cornerstone), the Company is engaged in retail and wholesale propane distribution business located throughout the United States. Cornerstone is a publicly traded Delaware limited partnership, formed to acquire and operate propane businesses and assets. A wholly owned subsidiary of the Company serves as the general partner of Cornerstone and manages and operates Cornerstone's business. In January 1998 Cornerstone sold an aggregate of 1,960,000 Common Units at $22.125 per unit pursuant to an unwritten public offering. Net proceeds were approximately $40.7 million. Cornerstone used approximately $10.0 million of the net proceeds for general business purposes and the balance to repay amounts outstanding under a credit facility. The Company owns as of September 30, 1998, a combined 35% interest in Cornerstone after considering the secondary offering of additional common units sold in January 1998. The Company's manufacturing operations are comprised of Lucht Inc., a wholly owned subsidiary that develops, manufactures and markets multi-image photographic printers and other related equipment. In 1997, the Company formed Blue Dot Services, Inc. (Blue Dot, formerly ServiCenter, USA) to acquire heating, ventilating, air conditioning, and plumbing and related services companies in the U.S. The Company also formed Communication Systems USA Inc. (Communication Systems) to acquire and consolidate companies providing telecommunications and data services to business customers. Weather Weather patterns have a material impact on the Company's operating performance for all three segments of its energy business. This impact is particularly relevant for natural gas and propane. Because propane and natural gas are heavily used for residential and commercial heating, the demand for these products depends heavily upon weather patterns throughout the Company's market areas. With a larger proportion of its operations related to seasonal propane and natural gas sales, a significantly greater portion of the Company's consolidated operating income is recognized in the first and fourth quarters related to higher revenues from the heating season. RESULTS OF OPERATIONS: Consolidated Earnings Comparisons - Diluted earnings per share for the quarters ended September 30, 1998 and 1997, were $.20 and $.17. The increase in earnings was primarily due to increased investment income. Diluted earnings per share for the year to date through September 30, 1998, was $.93 compared to $.86 for the nine months ended September 30, 1997. The increase in earnings was due to operating income from the propane operations resulting from acquired retail propane distribution centers and increased investment income partially offset by weather which negatively impacted the Company's propane and natural gas operations. Propane - Operating revenues from propane for the three months ended September 30 increased 6% from $152.2 million in 1997 to $160.7 million in 1998. Gross margins increased from $24.5 million in 1997 to $26.7 million in 1998. Retail gallons decreased from 40.1 million in 1997 to 39.4 million in 1998 which is primarily the result of warmer than normal weather. The increase in margin is primarily the result of lower gas costs. The majority of propane revenues and operating income occur in the first and fourth quarters when there is substantial usage of propane for residential and commercial heating as compared to the second and third quarters which traditionally are operating loss periods in the industry. Operating revenues from propane for the nine months ended September 30 increased from $501.5 million in 1997 to $ 534.9 million in 1998. Gallons also increased from 437.7 million in 1997 to 476.1 million in 1998, due to acquisitions and internal growth. The propane operations in 1998 have been negatively impacted by weather that has been substantially warmer than normal. Electric - Electric revenues increased 6% from $21.2 million to $22.5 million while retail volumes increased by 9% for the three months ended September 30 as compared to the same period of the prior year. Electric gross margins increased 7% from $16.9 million to $18.1 million as compared to the prior year. The increase is a result of an increase in cooling degree weather as compared to the same period of the prior year. Electric revenues increased by 2% and retail volumes increased 2% for the nine months ended September 30 as compared to the same period of the prior year. The increase is the result of higher cooling degree days from slightly warmer weather as compared to the same period of the prior year partially offset by heating degree day weather which was significantly warmer than normal and warmer as compared to the same period of the prior year. Natural Gas - Natural gas revenues decreased by 8% from $7.2 million to $6.7 million while volumes decreased by 15% for the three months ended September 30 as compared to the prior year. Gross margins remained unchanged at $2.9 million. Natural gas revenues decreased by 12% from $58.8 million to $51.6 million and volumes decreased by 12% for the nine months ended September 30. Gross margins decreased 9%. Natural gas operations were negatively impacted by weather which was significantly warmer than normal and warmer as compared to the same period of the prior year. Manufacturing - Stronger quarterly sales activity produced higher revenues for the third quarter and the year to date as compared to 1997. Revenues for the three months ended September 30 increased 27% from $4.4 million to $5.6 million and gross margins increased 74% from $1.6 million to $2.7 million compared to the same period of the prior year. Revenues for the nine months ended September 30 increased 10% from $15.7 million to $17.3 million and gross margins increased 22% from $5.8 million to $7.1 million compared to the same period of the prior year due to increased sales of higher margin items. Operating Expenses and Other Income Statement Items - Other operating expenses for both the three months and nine months ended September 30 increased 17% in 1998 as compared to 1997 primarily due to the acquisitions of retail propane distribution centers in 1997. Investment and other income increased during the three months and nine months ended September 30 due to higher investment income in 1998 as compared to 1997 principally due to the Company's increased preferred stock investments in Blue Dot and Communication Systems and the sale of investments. The increase in depreciation reflects the increase in depreciable propane assets when compared to the same periods of the prior year. The increase in interest expense for the three months ended September 30 is the result of increased debt to fund the investments in Blue Dot and Communication Systems. The decrease in interest expense for the nine months ended September 30 is primarily related to the redemption of $7.5 million 8.9% series general mortgage bonds in March 1997 and the redemption of $15 million 8.824% series general mortgage bonds in July 1997. Income taxes decreased because of tax preference items and increased minority interest. Liquidity and Capital Resources - The Company has a high degree of long-term liquidity through the generation of operating cash flows, the availability of substantial marketable securities, and a sound capital structure. In addition, the Company has adequate capacity for additional financing and has maintained its liquidity position through favorable bond ratings. The Company has generated significant operating cash flows while continuing to maintain substantial cash and investment balances in the form of marketable securities. Cash flows from operating activities during the nine months ended September 30, 1998 and 1997 were $35.2 million and $31.8 million. The increase is primarily due to the increased cash flow from propane operations. Cash equivalents and investment securities totaled $50.1 million and $120.1 million at September 30, 1998 and 1997. In March 1997 the Company retired early the $7.5 million outstanding of the 8.9% series general mortgage bonds. In July 1997 the company retired early the $15 million outstanding of the 8.824% series general mortgage bonds. Lines of credit also provide working and growth capital and other financial resources. In addition, lines of credit are used to support commercial paper borrowings, a primary source of short-term working capital financing. At September 30, 1998, available short-term lines of credit totaled $175 million after considering the common equity, preferred securities and senior debt financing transactions which occurred in November 1998. In addition, the Company's nonregulated subsidiaries maintain nonrecourse credit agreements with various banks for revolving and term loans. Capital Requirements - The Company's primary capital requirements include the funding of its energy business construction, maintenance and expansion programs, the funding of debt and preferred stock retirements, sinking fund requirements and the funding of its corporate development and investment activities. The emphasis of the Company's construction activities is to undertake those projects that most efficiently serve the expanding needs of its customer base, enhance energy delivery and reliability capabilities through system replacement and provide for the reliability of energy supply. Capital expenditure plans are subject to continual review and may be revised as a result of changing economic conditions, variations in sales, environmental requirements, investment opportunities and other ongoing considerations. Expenditures for maintenance construction activities during the nine months ended September 30, 1998 and 1997 were $11.1 and $14.6 million. Included in such construction activities were nonregulated maintenance capital expenditures of $2.0 million and $3.0 million during the nine months ended September 30, 1998 and 1997. Capital expenditures for 1998, excluding propane, are estimated to be $13.8 million with a large portion of expenditures to be spent on enhancements of the electric and natural gas distribution systems. Electric and natural gas related capital expenditures for the years 1998 through 2002 are estimated to be $61.5 million. Nonregulated maintenance capital expenditures for 1998 are estimated to be $3.8 million. Estimated nonregulated maintenance capital expenditures for the years 1998 through 2002 are estimated to be $19.0 million. Capital requirements for the mandatory retirement of long-term debt including nonrecourse debt of subsidiaries will be $7.8 million in 1999, $8.9 million in 2000, $8.5 million in 2001, and $8.3 million in 2002. The Company anticipates that existing investments and marketable securities, internally generated cash flows and available external financing will meet future capital requirements. At September 30, 1998, the Company had invested $138.8 million in Blue Dot and Communication Systems. The Company will continue to make investments in these unconsolidated affiliates. Also, the Company may make other significant acquisition investments in related industries that would require the Company to raise additional equity and incur debt financing, which are therefore subject to certain risks and uncertainties. The Company's financial coverage ratios are at levels in excess of those required for the issuance of additional debt and preferred stock. The Company will continue to review economics of retiring or refunding remaining long-term debt and preferred stock to minimize long-term financing costs. Competition and Business Risk - NorthWestern's strategy centers upon the development, acquisition and expansions of operations offering integrated energy, telecommunications, and related products and services within the Northwestern companies. In addition to maintaining a strong competitive position in electric, natural gas and propane distribution businesses, the Company intends to pursue development and acquisitions that have long-term growth potential. While such investments and acquisitions can involve risk in comparison to the Company's energy distribution businesses, they offer the potential to enhance investment returns. PROPANE Weather conditions have a significant impact on propane demand for both heating and agricultural purposes. The majority of Cornerstone's customers rely heavily on propane as a heating fuel. Actual weather conditions can vary substantially from year to year, significantly affecting Cornerstone's financial performance. Furthermore, variations in weather in one or more regions in which Cornerstone operates can significantly affect the total volumes sold by Cornerstone and the margins realized on such sales and, consequently, Cornerstone's results of operations. These conditions may also impact Cornerstone's ability to meet various debt covenant requirements and affect Cornerstone's ability to pay common and subordinated unit distributions. The retail propane business is a margin-based business in which gross profits depend on the excess of sales prices over propane supply costs. Consequently, Cornerstone's profitability will be sensitive to changes in wholesale propane prices. Propane is a commodity, the market price of which can be subject to volatile changes in response to changes in supply or other market conditions. As it may not be possible to immediately pass on to customers' rapid increases in wholesale cost of propane, such increases could reduce Cornerstone's gross profits. Cornerstone's profitability is affected by the competition for customers among all participants in the retail propane business. Some of Cornerstone's competitors are larger or have greater financial resources than Cornerstone. Should a competitor attempt to increase market share by reducing prices, Cornerstone's financial condition and results of operations could be materially adversely affected. In addition, propane competes with other sources of energy, some of which may be less costly per equivalent energy value. ELECTRIC AND NATURAL GAS 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 Company's financial performance. The electric and natural gas industries continue to undergo numerous transformations and the Company is operating in an increasingly competitive marketplace. The Federal Energy Regulatory Commission (FERC), which regulates interstate and wholesale electric transmissions, opened up transmission grids and mandated that utilities must allow others equal access to utility transmission systems. Various state regulatory bodies are supporting initiatives to redefine the electric energy market and are experimenting with retail wheeling, which gives some retail customers the ability to choose their supplier of electricity. Traditionally, utilities have been vertically integrated, providing bundled energy services to customers. The potential for continued unbundling of customer services exists, allowing customers to buy their own electricity and natural gas on the open market and having it delivered by the local utility. The growing pace of competition in the energy industry has been a primary focus of management over the last few years. The Company's future financial performance will be dependent on the effective execution of operating strategies to address a more competitive and changing energy marketplace. Business strategies focus on enhancing the Company's competitive position, on expanding energy sales and markets with new products and services for customers and increasing shareholder value. The Company has realigned various areas of its business to support customer services and marketing functions. A new marketing plan, an expanded line of integrated customer products and services, additional staff and new technologies are part of the Company's strategy for providing responsive and superior customer service. To strengthen the Company's competitive position, new technologies have and will be added that enable employees to better serve customers. The Company is centralizing activities to improve efficiency and customer responsiveness and business processes are being reengineered to apply best-practices methodologies. Long-term supply contracts have been renegotiated to lower customers' energy costs and new alliances help reduce expenses and add innovative work approaches. As described in Note 1 to the consolidated financial statements, the Company complies with the provision of Statement of Financial Accounting Standards No. 71 (SFAS 71), `Accounting for the Effects of Certain Types of Regulation.' SFAS 71 provides for the financial reporting requirements of the Company's regulated electric and natural gas operations which requires specific accounting treatment of certain costs and expenses that are related to the Company's regulated operations. Criteria that could give rise to the discontinuance of SFAS 71 include 1) increasing competition that restricts the Company's ability to establish prices to recover specific costs and 2) a significant change in the manner in which rates are set by regulators from cost-based regulation to another form of regulation. The Company periodically reviews these criteria to ensure the continuing application of SFAS 71 is appropriate. Based on a current evaluation of the various factors and conditions that are expected to impact future cost recovery, the Company believes that its regulatory assets, including those related to generation, are probable of future recovery. This evaluation of recovery must be updated for any change, which might occur in the Company's current regulatory environment. HVAC, TELECOMMUNICATIONS AND RELATED SERVICES The markets served by Blue Dot for residential and commercial heating, ventilating, air conditioning, plumbing and other related services are highly competitive. The principal competitive factors in these segments of the industry are 1) timeliness, reliability and quality of services provided, 2) range of products and services provided, 3) name recognition and market share and 4) pricing. Many of Blue Dot's competitors in the HVAC business are small, owner-operated companies typically located and operated in a single geographic area. There are only a small number of national companies engaged in providing residential and commercial services in the service lines in which the Company intends to focus. Future competition in both the residential and commercial service lines may be encountered from other newly formed or existing public or private service companies with aggressive acquisition programs, the unregulated business segments of regulated gas and electric utilities or from newly deregulated utilities in those industries entering into various service areas. The market served by Communications Systems in the telecommunications and data services industry is also a highly competitive market. The Company believes that 1) market acceptance of the Company's products and services, 2) pending and future legislation affecting the telecommunications and data industry, 3) name recognition and market share, 4) larger competitors and 5) the Company's ability to provide integrated communication and data solutions for customers in a dynamic industry are all factors that could affect the Company's future operating results. OTHER The Company utilizes software and various technologies throughout its business that will be affected by the date change in the year 2000. The Company has assessed and is continuing to assess the impact of the year 2000 issue on its reporting systems and operations. The Company is making and will continue to make modifications to its systems that it deems necessary in order to address the year 2000 issue. The majority of the Company's financial reporting and operational systems are year 2000 compliant. The expenses related to year 2000 compliance incurred in 1998 and the cost of the modifications of the remaining systems are not expected to be material. The Company's systems and operations with respect to the year 2000 issue may also be affected by other entities with which the Company transacts business. The Company is currently unable to determine the potential adverse consequences, if any, that could result from such entities' failure to effectively address the year 2000 issue. This report contains forward-looking statements within the meaning of the securities laws. The Company cautions that, while it believes such statements to be based on reasonable assumptions and makes such statements in good faith, there can be no assurance that the actual results will not differ materially from such assumptions or that the expectations set forth in the forward looking statements derived from such assumptions will be realized. Investors should be aware of important factors that could have a material impact on future results. These factors include, but are not limited to, weather, the federal and state regulatory environment, the economic climate, regional, commercial, industrial and residential growth in the service territories served by the Company and its subsidiaries, customers' usage patterns and preferences, the speed and degree to which competition enters the Company's industries, the timing and extent of changes in commodity prices, changing conditions in the capital and equity markets and other uncertainties, all of which are difficult to predict and many of which are beyond the control of the Company. NORTHWESTERN CORPORATION PART II ITEM 1. LEGAL PROCEEDINGS The Company is a party to various pending proceedings and suits, but in the judgment of management after consultation with counsel for the Company, the nature of such proceedings and suits, and the amounts involved do not depart from the routine litigation and proceedings incident to the kind of business conducted by the Company. ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 27 - Financial Data Schedule (SEC only) (b) Reports on Form 8-K On October 26, 1998, NorthWestern Corporation filed a report on Form 8-K, dated October 26, 1998. The report included an announcement of its earnings for the quarter and the nine months ended September 30, 1998. A copy of the related press release was attached as an exhibit to the report. The report also included an announcement of Northwestern's filing of a preliminary prospectus supplement under its existing shelf registration statement relating to the offering of 3,000,000 shares of its Common Stock. The preliminary prospectus supplement disclosed Northwestern's intent to offer approximately $50 million of Trust Preferred Securities through a subsidiary trust, and approximately $100 million of Senior Debt Securities, immediately after completion of the Common Stock offering. A copy of the related press release was attached as an exhibit to the report. On November 9, 1998, NorthWestern Corporation filed a report on Form 8-K. The report included an announcement of NorthWestern's sale of 5,000,000 shares of common stock, par value $1.75 per share (the "Common Shares"), pursuant to an Underwiting Agreement dated November 4, 1998. The Common Shares are registered under the Securities Act of 1933. The underwriting agreement was filed as an exhibit and incorporated by reference therein. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NORTHWESTERN CORPORATION - --------------------------------- (Registrant) Date: November 12, 1998 /s/ David A. Monaghan ----------------------------------- Controller and Treasurer