SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
[No fee required]
For the transition period from _______________ to _______________
Commission File No. 0-692
NORTHWESTERN CORPORATION
(Exact name of registrant as specified in its charter)
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)
605-978-2908
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $1.75 par value and
related Common Stock Purchase Rights New York Stock Exchange
Company Obligated Mandatorily Redeemable New York Stock Exchange
Security of Trust Holding Solely Parent
Debentures, $25.00 liquidation amount
Common Stock Purchase Rights New York Stock Exchange
(Title of each class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
Preferred Stock, Par Value $100
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [ X ] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
State the aggregate market value of the voting stock held by nonaffiliates
of the registrant.
$589,474,087 as of March 25, 1999
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
23,060,111 shares outstanding at March 25, 1999
DOCUMENTS INCORPORATED BY REFERENCE:
1998 Annual Report to Stockholders . . . . .Parts I and II
Proxy Statement for 1999 Annual Meeting . . . . .Part III
PART I: BUSINESS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-K, including, without limitation,
statements in Item 1, under the headings `GENERAL OVERVIEW OF BUSINESS',
`OVERVIEW', `INDUSTRY OVERVIEW', `PRODUCTS AND SERVICES', `COMPETITION',
`SEASONALITY', `REGULATION', `SOURCES OF SUPPLY', `OPERATIONS', `BUSINESS
RISK', in ITEM 3 under the heading `LEGAL PROCEEDINGS', and in ITEM 7 under
the heading `MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS', constitute `forward-looking statements' within
the meaning of the Securities Act of 1933, as amended, and the Securities
Exchange Act of 1934, as amended. When used in this Form 10-K, the words
`expects', `anticipates', `estimates', `believes', `no assurance' and
similar expressions are intended to identify such forward-looking
statements that involve risks and uncertainties. Such forward-looking
statements involve known and unknown risks, uncertainties and other
factors, which may cause the Company's actual results, performance or
achievements to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. In addition to the risks and uncertainties discussed in the
foregoing sections, actual results or outcomes could differ materially as a
result of such important factors including, among others, the following:
the impact of competition and changes to the competitive environment for
the Company's products and services; changes in technology; reliance on
strategic partners; weather; regional, commercial, industrial and
residential growth in the geographic areas served by Company and its
partner entities; 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; uncertainty of litigation; changes
in government regulation; changes in the capital and equity markets;
changes in market interest or currency exchange rates; new or increased
environmental liabilities; the effects of the Year 2000 Issue; other
unforeseen events; and other factors detailed, from time to time, in the
Company's filings with the Securities and Exchange Commission. These
forward-looking statements speak only as of the date of this Form 10-K.
NorthWestern Corporation expressly disclaims any obligation or undertakings
to release publicly any updates or revisions to any forward-looking
statements contained herein to reflect any change in the Company's
expectations with regard thereto or any change in events, conditions or
circumstances on which any such statement is based.
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
GENERAL OVERVIEW OF BUSINESS
NorthWestern Corporation (`NorthWestern' or `Company') and its partner
entities are leading providers of value-added services and solutions to
residential and business customers nationwide. Our strategic focus is on
direct customer relationships where we can provide value-added service
integration, which we believe offers us the opportunity to achieve higher
sustainable operating results and build greater shareholder value over
time. Through the commitment and initiative of our team members,
NorthWestern and its partner entities are reinventing customer service,
redefining business solutions, and sharing core values and strategic vision
with the aim to be `America's Best Service and Solutions Experience'-SM-.
NorthWestern and its partner entities discussed herein include:
* Blue Dot Services, Inc. (`Blue Dot'), a Delaware corporation, one of
America's leading providers of air conditioning, heating,
plumbing and related services, with operations in 23 cities and 18
states;
* CornerStone Propane Partners, L.P. (`CornerStone'), a publicly traded
master limited partnership (NYSE: CNO), the nation's
fourth largest and fastest growing publicly held retail propane
distributor, serving more than 440,000 residential, commercial, industrial
and agricultural customers from 310 customer service centers in 34 states;
* Expanets, Inc. (`Expanets'), a Delaware corporation, a leading provider
of integrated communication and data solutions and network services to small
and medium-sized businesses, with operations in 60 cities and 25 states; and
* NorthWestern Public Service (`NorthWestern Public Service'), a division of
the Company, provides competitive, reliable electric and natural gas
service and other value-added services to over 125,000 customers in the
upper Midwest.
NorthWestern Growth Corporation (`NorthWestern Growth'), a wholly-owned
subsidiary of the Company, is the strategic development and investment
capital arm of NorthWestern. Its mission is to implement development,
investment, acquisition and operations initiatives on behalf of
NorthWestern and its partner entities to achieve long-term value creation.
To accomplish these objectives, NorthWestern Growth seeks to: (i) acquire,
develop and expand into new businesses to complement our existing
operations and expand our customer base; (ii) partner with premier, growth-
oriented and entrepreneurial management teams in each sector of our
business operations; (iii) integrate additional products, services and
solutions into our growing customer base; and (iv) maximize growth and
financial performance of investments and acquired businesses.
Since its formation in 1994, NorthWestern Growth has implemented a dynamic
acquisition and investment program (including the formation and initiation
of the Blue Dot, CornerStone, and Expanets investment strategies) to
support NorthWestern's plan of becoming the premier provider of value-added
services and solutions across America. NorthWestern Growth intends to
continue building NorthWestern and its partner entities by expanding into
additional industries and markets offering high growth potential consistent
with NorthWestern's strategic vision.
NorthWestern was incorporated under the laws of the state of Delaware in
1923. Our executive offices are located at 125 S. Dakota Avenue, Suite
1100, Sioux Falls, South Dakota 57104, and our telephone number is 605-978-
2908. Our website is located at www.northwestern.com.
In this report, the terms `Company' and `NorthWestern' as well as the terms
`our,' `we,' and `its,' are sometimes used as abbreviated references to
NorthWestern Corporation, its partner entities or, collectively,
NorthWestern Corporation and its partner entities.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Financial information about industry segments is incorporated by reference
to Note 14 of the `Notes to Consolidated Financial Statements' of the
Company's 1998 Annual Report, filed as Exhibit 13 hereto.
HVAC AND RELATED SERVICES BUSINESS
OVERVIEW - BLUE DOT SERVICES, INC.
Blue Dot Services, Inc. (`Blue Dot') is a leading, national provider of
comprehensive maintenance, repair and replacement services for heating,
ventilation and air conditioning (`HVAC'), plumbing and other related
systems and major appliances in homes and small commercial businesses. Our
differentiating strategy offers a broad range of value-added products and
services for full-service convenience and a national marketing program to
promote brand recognition. As of December 31, 1998, Blue Dot had completed
acquisitions of 28 companies with 1998 pro forma revenues of $210 million
with 1,995 total team members serving 398,000 customers in 18 states. Our
emphasis is on companies with a strong residential and light commercial
maintenance, repair and replacement mix, with firms more heavily involved
in new construction focused primarily in areas with high new residential
and commercial growth. Residential maintenance, repair and replacement and
new construction constitute approximately 60% of the business of companies
acquired by Blue Dot, with the other 40% involved in commercial service.
Blue Dot was formed by NorthWestern Growth in July 1997 as a Delaware
corporation, under the name ServiCenter USA, Inc. In October 1998 the
name was changed to Blue Dot as part of a strategy to create a national
brand identity. Acquisitions by Blue Dot are effected utilizing cash,
stock in Blue Dot or a combination of both. Through the use of different
classes of capital stock, NorthWestern (through NorthWestern Growth)
controls approximately 95% of the voting common and preferred stock (as of
December 31, 1998). Additional information relating to the investment in
Blue Dot is incorporated by reference to Note 2 of `Notes to Consolidated
Financial Statements' on pages 27-28 of the Company's 1998 Annual Report,
filed as Exhibit 13 hereto.
Upon formation, Blue Dot immediately began implementing its strategy of
acquiring local service providers in major metropolitan markets and plans
to continue its dynamic growth through acquisitions and internal growth and
development. In each new market, we seek to acquire a leading local
company with an established reputation and experience, a revenue mix of
predominately residential and light commercial maintenance, repair and
replacement sales, and that has superior management team.
Once we have entered a market, we seek to acquire other well established
HVAC, plumbing and related services businesses operating within that region
and also pursue the acquisition of other potential service partners with
complementary products and services that present opportunities to reduce
overhead or otherwise leverage our infrastructure. When acquired, the
operations of such businesses are integrated into the operations of
existing platform Blue Dot companies in the region, enabling Blue Dot to
reduce overhead costs, sell redundant assets and consolidate operations
within existing areas.
We believe there are significant opportunities to increase our
profitability and that of subsequently acquired businesses. The key
elements of Blue Dot's operating strategy are: (i) providing superior,
high quality service in a professional manner; (ii) increasing revenue at
locations through sales of maintenance agreements; cross-marketing of
products and services; and customer financing packages; (iii) offering
complementary non-traditional complimentary products and services; (iv)
achieving operating efficiencies through increased purchasing power to gain
volume discounts, national advertising and local marketing support; (v)
`best practices' integration; and (vi) attracting and retaining quality
team members.
INDUSTRY OVERVIEW
The HVAC and plumbing industry consists of the installation, replacement,
maintenance, service and repair of systems at existing and new residences
and commercial businesses. According to industry sources, annual revenues
for these market segments in the United States are approximately $65
billion for HVAC services, $19 billion for plumbing services and $16
billion for electrical services. Based on available industry data, there
are currently over 40,000 businesses, consisting predominantly of small,
owner-operated companies focusing on a single local geographic area and
providing a limited range of services. Because of this market
fragmentation and a lower capability of smaller firms to raise the capital
necessary to expand their businesses, a number of firms have begun
consolidating the smaller businesses.
The industry can be broadly divided into the new installation market
(estimated 34% of the annual revenues) and the maintenance, repair and
replacement market (estimated 66% of the annual revenues). The new
installation market includes the installation of systems in new homes and
commercial buildings for contractors, builders, developers and other users.
The maintenance, repair and replacement market includes the maintenance,
repair and replacement and reconfiguration of existing systems in
residential homes and commercial buildings.
PRODUCTS AND SERVICES
Maintenance, Repair and Replacement: These services include preventive
maintenance (periodic checkups, cleaning and filter change-outs), emergency
repairs, and the placement (in conjunction with the retrofitting or
remodeling of a residence or commercial building, or as a result of an
emergency repair request) of air conditioning, heating and plumbing
systems. The maintenance, repair and replacement segment offers more
attractive pricing because of customers' demands for immediate, convenient
and reliable service. Blue Dot focuses on this segment of the industry
rather than the new construction segment because we believe that it offers
higher margins, less cyclicality and seasonality, and exposes Blue Dot to
less credit and interest rate risk, while allowing establishment of the
national service reputation among customers. Growth in this segment is
driven by a number of factors, particularly: the aging of the installed
base; the increasing energy efficiency, sophistication and complexity of
air conditioning and heating systems; the upgrading of existing homes to
central air conditioning; and the increasing restrictions on the use of
refrigerants commonly used in older systems. The energy efficiency and
sophistication of new systems are encouraging owners of buildings to
upgrade and reconfigure their current systems. Blue Dot also pursues
maintenance agreements which lead to better utilization of personnel,
develop customer loyalty, provide the opportunity for cross-marketing of
Blue Dot's other services and products, link the customer with Blue Dot
should a major repair or replacement be needed, and result in recurring
revenues.
New Installation: These services in the residential market often begin
with a homebuilder providing architectural plans or mechanical drawings for
the particular type or types of residences to be developed and requesting a
bid or contract proposal for the work (often broken into phases within a
tract). Blue Dot team members analyze the plans and drawings and estimate
the equipment, materials and parts and the direct and supervisory labor
required for the project, and deliver a written bid or negotiate the
written agreement for the job. Working with the builder's construction
supervisors, Blue Dot team members coordinate and supervise the
installation. Commercial new installation work often begins with a design
request from the owner or general contractor, followed by preliminary and
then more detailed design specifications, engineering drawings and cost
estimates. Actual field work (ordering of equipment and materials,
fabrication or assembly of certain components, delivery of such materials
and components to the job site, scheduling of work crews with the necessary
skills, inspection and quality control) is coordinated by Blue Dot team
members.
COMPETITION
The market for HVAC, plumbing and related services is highly competitive.
The principal competitive factors in the residential and commercial
maintenance, repair and replacement segment of the industry are timeliness,
reliability and quality of services provided; range of services offered;
market share and visibility; and price. In order to be successful as a
national provider of comprehensive services, we must employ, train and
retain highly motivated, professional service technicians. Blue Dot
believes that it does so through training programs, team member
compensation, team member health and savings benefit plans, career
opportunities and team building. Competitive pricing is possible through
purchasing economies and other cost saving opportunities that exist across
each of the service lines offered and from productivity improvements.
Most of Blue Dot's competitors are small, owner-operated companies that
typically operate in a single market. Many of these smaller competitors
may have lower overhead cost structures and may be able to provide their
services at lower rates. Moreover, many homeowners have traditionally
relied on individual persons or small repair service firms with whom they
have long-established relationships for a variety of home repairs. In
addition, there are a limited number of companies focused on providing
comprehensive residential and/or commercial services in some of the same
business lines provided by Blue Dot. There also are a number of national
retail chains that sell a variety of plumbing fixtures and equipment and
air conditioning and heating equipment for residential use and offer,
either directly or through various subcontractors, installation, warranty
and repair services.
Future competition may be encountered from, among others, other newly
formed or existing public or private service companies with aggressive
acquisition programs (currently these companies constitute approximately 3%
of the operations of the industry), HVAC equipment manufacturers, the
unregulated business segments of regulated gas and electric utilities, or
from newly deregulated utilities entering into various residential or
commercial service areas.
The principal methods of meeting competition employed by Blue Dot are
assurance of customer satisfaction, a history of providing quality service,
and name recognition. We intend to expand our marketing program to
capitalize on brand recognition. In addition, we have forged a national
alliance with the Air Conditioning Contractors of America (ACCA), with each
of Blue Dot's local businesses being a Contracting Member of ACCA. ACCA is
a national trade association with 69 state and local chapters representing
more than 9,000 air conditioning and heating contractors nationwide. Blue
Dot will use ACCA's training programs and information channels to assist in
its customer service goals.
SEASONALITY
Blue Dot's installation, maintenance, repair and replacement operations are
subject to seasonal variations in the different lines of service. Except in
certain regions, the demand for new installations can be substantially
lower during the winter months. Demand for HVAC services generally varies
with the weather; demand generally is higher during periods of extremely
cold or hot weather and lower in the spring and fall months. Blue Dot
expects its revenues and operating results generally will be lower in the
first and fourth quarters.
REGULATION
Blue Dot's operations are subject to various federal, state and local laws
and regulations, including, among others: permitting and licensing
requirements applicable to service technicians in their respective trades;
building, air conditioning, heating, plumbing and electrical codes and
zoning ordinances; laws and regulations relating to consumer protection,
including laws and regulations governing service contracts for residential
services; and laws and regulations relating occupational health and safety
and protection of the environment. Blue Dot believes it has all permits
and licenses necessary to conduct its operations and is in substantial
compliance with applicable regulatory requirements relating to its
operations. A large number of state and local regulations governing the
residential services trades require various permits and licenses to be held
by individual technicians. In some cases, a required permit or license held
by a single individual may be sufficient to authorize specified activities
for all the service technicians who work in the geographic area covered by
the permit or licenses.
Blue Dot's operations are subject to the Clean Air Act -- Title VI of which
governs air emissions and imposes specific requirements on the use and
handling of substances known or suspected to cause or contribute
significantly to harmful effects on the stratospherical ozone layer, such
as chlorofluorocarbons and certain other refrigerants (`CFCs'). Clean Air
Act regulations require the certification of service technicians involved
in the service or repair of systems, equipment and appliances containing
these refrigerants and also regulate the containment and recycling of these
refrigerants. These requirements have increased Blue Dot's training
expenses and expenditures for containment and recycling equipment. The
Clean Air Act is intended ultimately to eliminate the use of CFCs in the
United States and require alternative refrigerants to be used in
replacement HVAC systems. The implementation of the Clean Air Act
restrictions has also increased the cost of CFCs in recent years and is
expected to continue to increase such costs in the future. As a result, the
number of conversions of existing HVAC systems that use CFCs to systems
using alternative refrigerants is expected to increase. Capital
expenditures related to environmental matters during fiscal 1998 were not
material. Blue Dot does not currently anticipate any material adverse
effect on its business or consolidated financial position as a result of
future compliance with existing environmental laws and regulations
controlling the discharge of materials into the environment. Future events,
however, such as changes in existing laws and regulations or their
interpretation, more vigorous enforcement policies of regulatory agencies
or stricter or different interpretations of existing laws and regulations
may require additional expenditures by Blue Dot which may be material.
TEAM MEMBERS
As of December 31, 1998, Blue Dot employed 1,995 team members. Blue Dot
considers its relations with team members to be good. No team members are
covered by collective bargaining agreements.
ITEM 2. PROPERTIES - BLUE DOT
The executive offices are located at 500 Fairway Drive, Suite 205,
Deerfield Beach, Florida 33441, where Blue Dot leases approximately 8,400
square feet of office space, and such lease shall terminate in November
2000. However, we are planning to relocate our executive offices to
Sunrise, Florida in 1999 and have entered into a lease for approximately
18,500 square feet of office space for a five year term, commencing at
occupancy. The Deerfield Beach leased property is expected to be sublet
for the duration of the lease term.
Blue Dot generally leases the office and service facilities for its
operations. We serve more than 398,000 customers from 23 cities and 18
states. Other principal properties include our vehicle fleet, which
predominantly consists of owned vehicles, and our inventory and equipment.
We use our relationship with vendors to minimize the amount of capital
invested in inventory.
PROPANE BUSINESS
OVERVIEW - CORNERSTONE PROPANE PARTNERS, L.P.
CornerStone Propane Partners, L.P. ( `CornerStone') is the fourth largest
and fastest-growing publicly traded (NYSE: CNO) retail propane distributor
in the United States. As of December 31, 1998, CornerStone served more than
440,000 residential, commercial, industrial and agricultural customers from
310 customer service centers in 34 states. Our operations are concentrated
in the east coast, south-central and west coast regions of the United
States. For the 12 months ended December 31, 1998 (CornerStone's fiscal
year ends June 30), CornerStone had retail propane sales of approximately
232 million gallons. CornerStone attributes its dynamic growth to a
balanced strategy of internal growth, new customer service start-ups and
acquisitions.
CornerStone, and its subsidiary, CornerStone Propane, L.P. (`the Operating
Partnership'), were organized in October 1996 and November 1996,
respectively, as Delaware limited partnerships. CornerStone Propane GP,
Inc. (the `Managing General Partner') and SYN Inc. (the `Special General
Partner' and, collectively with the Managing General Partner, the `General
Partners') are the general partners of CornerStone and the Operating
Partnership. The General Partners own an aggregate 2% interest as general
partners, and the Unitholders (including the General Partners as holders of
Subordinated Units) own a 98% interest as limited partners, in CornerStone
and the Operating Partnership on a combined basis. Through NorthWestern
Growth, NorthWestern owns approximately 30% of CornerStone and controls the
Managing General Partner. CornerStone, the Operating Partnership and its
corporate subsidiaries are referred to collectively herein as the
`Partnership' or `CornerStone'.
The Partnership was formed in 1996 to acquire, own and operate the propane
businesses and assets of SYN, Inc. and its subsidiaries (`Synergy') and
Empire Energy Corporation and its subsidiaries (`Empire Energy') (formerly
subsidiaries of Northwestern Growth) and CGI Holdings, Inc. and its
subsidiaries (`Coast'). To capitalize on the growth and consolidation
opportunities in the propane distribution market, in August 1995,
Northwestern Growth acquired the predecessor of Synergy, then the sixth
largest retail marketer of propane in the United States and, in October
1996, it acquired Empire Energy, then the eighth largest retail marketer of
propane in the United States. Immediately prior to the Partnership's
initial public offering (`IPO') of Common Units in December 1996,
Northwestern Growth acquired Coast, then the 18th largest retail marketer
of propane in the United States. The Partnership commenced operation on
December 17, 1996, concurrently with the closing of the IPO, when
substantially all of the assets and liabilities of Synergy, Empire Energy
and Coast were contributed to the Operating Partnership.
In 1998, 16 new companies joined CornerStone, including Propane
Continental, Inc. (`PCI'), the nation's 19th largest retail propane
distributor which operates 34 retail propane customer service centers in 11
states. Additional information relating to the investment in CornerStone is
incorporated by reference to Note 2 of `Notes to Consolidated Financial
Statements' on page 27 of the Company's 1998 Annual Report, filed as
Exhibit 13 hereto.
CornerStone is principally engaged in (i) the retail distribution of
propane for residential, commercial, industrial, agricultural and other
retail uses; (ii) the wholesale marketing and distribution of propane,
natural gas liquids and crude oil to the retail propane industry, the
chemical and petrochemical industries and other commercial and agricultural
markets; (iii) the repair and maintenance of propane heating systems and
appliances; and (iv) the sale of propane-related supplies, appliances and
other equipment. The retail propane business is a `margin-based' business
in which gross profits depend on the excess of sales prices over propane
supply costs. Sales of propane to residential and commercial customers,
which account for the vast majority of CornerStone's revenue, have provided
a relatively stable source of revenue for CornerStone. Based on fiscal 1998
retail propane gallons sold, the customer base consisted of 57%
residential, 23% commercial and industrial and 20% agricultural and other
customers. Sales to residential customers have generally provided higher
gross margins than other retail propane sales. While commercial propane
sales are generally less profitable than residential retail sales, we have
traditionally relied on this customer base to provide a steady, noncyclical
source of revenues. No single customer accounted for more than 1% of total
revenues.
CornerStone's wholesale operations engage in the marketing of propane to
independent dealers, major interstate marketers and the chemical and
petrochemical industries. We participate to a lesser extent in the
marketing of other natural gas liquids, the processing and marketing of
natural gas and the gathering of crude oil. We either own or have
contractual rights to use transshipment terminals, rail cars, long-haul
tanker trucks, pipelines and storage capacity. CornerStone believes that
its wholesale marketing and processing activities position it to achieve
product cost advantages and to avoid shortages during periods of tight
supply to an extent not generally available to other retail propane
distributors.
The principal elements of CornerStone's business strategy are to (i) extend
and refine our existing service orientation; (ii) continue to pursue
balanced growth through small and large acquisitions, internal growth at
our existing customer service centers and start-ups of new customer service
centers; (iii) enhance the profitability of our existing operations by
integrating the operations of our predecessors, implementing
entrepreneurially oriented local manager incentive programs and continuing
to centralize administrative systems; and (iv) capitalize on our national
wholesale supply and logistics business.
PRODUCT
Propane, a by-product of natural gas processing and petroleum refining, is
a clean-burning energy source recognized for its transportability and ease
of use relative to alternative stand-alone energy sources. Our retail
propane business consists principally of transporting propane to our retail
distribution outlets and then to tanks located on our customers' premises.
Retail propane use falls into four broad categories: (i) residential, (ii)
industrial and commercial, (iii) agricultural and (iv) other applications,
including motor fuel sales. Residential customers use propane primarily for
space and water heating. Industrial customers use propane primarily as fuel
for forklifts and stationary engines, to fire furnaces, as a cutting gas,
in mining operations and in other process applications. Commercial
customers, such as restaurants, motels, laundries and commercial buildings,
use propane in a variety of applications, including cooking, heating and
drying. In the agricultural market, propane is primarily used for tobacco
curing, crop drying, poultry brooding and weed control. Other retail uses
include motor fuel for cars and trucks, outdoor cooking and other
recreational purposes, propane resales and sales to state and local
governments. In our wholesale operations, we sell propane principally to
large industrial customers and other propane distributors.
Propane is extracted from natural gas or oil wellhead gas at processing
plants or separated from crude oil during the refining process. Propane is
many times more compact as a liquid than a gas, and therefore is normally
transported and stored in a liquid state under moderate pressure or
refrigeration for ease of handling in shipping and distribution. When the
pressure is released or the temperature is increased, it is usable as a
flammable gas. Propane is colorless and odorless; an odorant is added to
allow its detection. Like natural gas, propane is a clean burning fuel and
is considered an environmentally preferred energy source.
SOURCES OF SUPPLY
CornerStone's propane supply is purchased from oil companies and natural
gas processors at numerous supply points located in the United States and
Canada. During 1998, virtually all of our propane purchases for supply were
made pursuant to agreements with terms of less than one year, but the
percentage of contract purchases may vary from year to year as determined
by CornerStone. Supply contracts generally provide for pricing in
accordance with posted prices at the time of delivery or the current prices
established at major delivery points. Most of these agreements provide
maximum and minimum seasonal purchase guidelines. In addition, we make
purchases on the spot market from time to time to take advantage of
favorable pricing. We receive our supply of propane predominantly through
railroad tank cars and common carrier transport.
Supplies of propane from our sources historically have been readily
available. In 1998, Dynegy was our largest supplier providing approximately
9% of Cornerstone's total propane supply for our retail and wholesale
operations (excluding propane obtained from our natural gas processing
operations). CornerStone believes that if supplies from Dynegy were
interrupted, we would be able to secure adequate propane supplies from
other sources without a material disruption of our operations. No single
supplier provided more than 10% of our domestic propane supply in the year.
Although no assurance can be given that supplies of propane will be readily
available in the future, CornerStone expects a sufficient supply to
continue to be available. We have not experienced a shortage that has
prevented us from satisfying our customers' needs and do not foresee any
significant shortage in the supply of propane.
We engage in hedging of product cost and supply through common hedging
practices. These practices are monitored and maintained by CornerStone
management on a daily basis. Hedging of product cost and supply does not
always result in increased margins. The market price of propane is subject
to volatile changes as a result of supply or other market conditions over
which we have no control. Since it may not be possible to pass rapid
increases in the wholesale cost of propane on to customers immediately,
such increases could reduce our gross profits. Consequently, CornerStone's
profitability will be sensitive to changes in wholesale propane prices. We
also engage in the trading of propane, natural gas, crude oil and other
commodities in amounts that have not had and are not expected to have a
material effect on our financial condition or results of operations.
We have from time to time leased space in storage facilities to take
advantage of supply purchasing opportunities, and CornerStone believes that
it will have adequate third party storage to take advantage of such
opportunities in the future. Access to storage facilities will allow us, to
the extent it may deem it desirable, to buy and store large quantities of
propane during periods of low demand, which generally occur during the
summer months, thereby helping to ensure a more secure supply of propane
during periods of intense demand or price instability.
OPERATIONS
CornerStone has organized its operations in a manner that we believe
enables us to provide excellent service to our customers and to achieve
maximum operating efficiencies. Our retail propane distribution business is
organized into regions. Each region is supervised by a regional manager.
Team members located at the retail service centers in the various regions
are primarily responsible for customer service and sales.
A number of functions are centralized at our corporate headquarters in
order to achieve certain operating efficiencies as well as to enable the
team members located in the retail service centers to focus on customer
service and sales. Each of our primary retail service centers is equipped
with a computer connected to the central management information system in
our corporate headquarters. This computer network system provides us with
accurate and timely information on supply cost, inventory and customer
accounts. We make centralized purchases of propane through our wholesale
division for resale to the retail service centers which allows us to
achieve certain advantages, including price advantages, because of our
status as a large volume buyer. The functions of cash management,
accounting, taxes, payroll, permits, licensing, asset control, team member
benefits, human resources, and strategic planning are also performed on a
centralized basis.
COMPETITION
Based upon information provided by the Energy Information Administration,
propane accounts for approximately 3-4% of household energy consumption in
the United States. Propane competes primarily with natural gas, electricity
and fuel oil as an energy source, principally on the basis of price,
availability and portability. Propane is more expensive than natural gas on
an equivalent BTU basis in locations served by natural gas, but serves as a
substitute for natural gas in rural and suburban areas where natural gas is
unavailable or portability of product is required. Historically, the
expansion of natural gas into traditional propane markets has been
inhibited by the capital costs required to expand pipeline and retail
distribution systems. Although the extension of natural gas pipelines tends
to displace propane distribution in areas affected, we believe that new
opportunities for propane sales arise as more geographically remote
neighborhoods are developed. Propane is generally less expensive to use
than electricity for space heating, water heating, clothes drying and
cooking. Although propane is similar to fuel oil in certain applications
and market demand, propane and fuel oil compete to a lesser extent
primarily because of the cost of converting from one to the other.
In addition to competing with alternative energy sources, the Partnership
competes with other companies engaged in the retail propane distribution
business. Competition in the propane industry is highly fragmented and
generally occurs on a local basis with other large full-service multi-state
propane marketers, thousands of smaller local independent marketers and
farm cooperatives. Based on industry publications, the domestic retail
market for propane is approximately 9.2 billion gallons annually, with more
than 8,000 retail propane operations in the United States, of which the 10
largest retailers, including CornerStone, account for approximately 33% of
the total retail sales of propane in the United States, with no single
marketer having a greater than 10% share of the total retail market. Most
of our customer service centers compete with five or more marketers or
distributors. Each customer service center operates in its own competitive
environment, because retail marketers tend to locate in close proximity to
customers. Our customer service centers generally have an effective
marketing radius of approximately 25 to 50 miles, although in certain rural
areas the marketing radius may be extended by a satellite storage location.
The ability to compete effectively further depends on the reliability of
service, responsiveness to customers and the ability to maintain
competitive prices. CornerStone believes that its service capabilities and
customer responsiveness differentiate it from many of these smaller
competitors. Our team members are on call 24 hours a day and seven days a
week for emergency repairs and deliveries. The wholesale liquefied
petroleum gas (LPG) business, which includes propane, is highly
competitive. CornerStone believes that the wholesale business provides us
with a national presence and a reasonably secure, efficient supply base,
and positions us well for expansion through acquisitions or start-up
operations in new markets.
SEASONALITY
Because a substantial amount of propane is sold for heating purposes, the
severity of winter and resulting residential and commercial heating usage
have an important impact on CornerStone's earnings. Approximately two-
thirds of our retail propane sales usually occur during the six-month
heating season from October through March. As a result of this seasonality,
our sales and operating profits are concentrated in the second and third
fiscal quarters (October through March). Cash flows from operations,
however, are greatest from November through April when customers pay for
propane purchased during the six-month peak season. To the extent the
Managing General Partner deems appropriate, CornerStone may reserve cash
from these periods for distribution to Unitholders during periods with
lower cash flows from operations. Sales and profits are subject to
variation from month to month and from year to year, depending on
temperature fluctuations.
Weather in 1998 averaged 9% warmer than normal in our market areas. While
weather factors generally measure the directional impact of temperatures on
the business, other factors such as product prices, geographic mix,
magnitude and duration of temperature and weather conditions can also
impact sales.
REGULATION
CornerStone's operations are subject to various federal, state and local
laws governing the transportation, storage and distribution of propane,
occupational health and safety, and other matters. All states in which we
operate have adopted fire safety codes that regulate the storage and
distribution of propane. In some states these laws are administered by
state agencies, and in others they are administered on a municipal level.
Certain municipalities prohibit the below ground installation of propane
furnaces and appliances, and certain states are considering the adoption of
similar regulations. CornerStone cannot predict the extent to which any
such regulations might affect CornerStone, but does not believe that any
such effect would be material. It is not anticipated that we will be
required to expend material amounts by reason of environmental and safety
laws and regulations, but inasmuch as such laws and regulations are
constantly being changed, we are unable to predict the ultimate cost to
CornerStone of complying with environmental and safety laws and
regulations. However, we are always aware of all existing state and federal
environmental regulations and take all reasonable precautions to prevent
any incidents that would violate any of these rules.
We currently meet and exceed federal regulations requiring that all team
members employed in the handling of propane gas be trained in proper
handling and operating procedures. All team members have participated or
will participate within 90 days of their employment date, in hazardous
materials training. We have established ongoing training programs in all
phases of product knowledge and safety including participation in the
National Propane Gas Association's (`NPGA') Certified Employee Training
Program.
TEAM MEMBERS
As of December 31, 1998, CornerStone had 2,503 full-time team members.
Fewer than 100 of our team members were represented by labor unions.
CornerStone believes that its relations with its employees are good. We
generally hire seasonal workers to meet peak winter demand.
ITEM 2. PROPERTIES -- PROPANE
The principal executive offices are located at 432 Westridge Drive,
Watsonville, California 95076. These offices are leased through 2002. The
accounting and the day-to-day operations are centralized in Lebanon,
Missouri. These offices are leased through 2006. CornerStone leases retail
service centers and administrative office space under noncancelable
operating leases expiring at various times through 2008. As of December 31,
1998, customers are served from 310 customer service centers with
operations in 34 states.
CornerStone owns and operates a fleet of over-the-road tractors, transport
trailers, bobtail trucks and delivery and service vehicles to deliver
propane and customer tanks to its customers. We also rely on common
carriers to deliver propane to our retail service centers. Cornerstone
owns approximately 450,000 propane storage tanks that are leased, rented or
loaned to customers. Additionally in 1998, CornerStone operated bulk
storage facilities with total propane storage capacity of approximately 15
million gallons, of which 3 million gallons are owned and 12 million
gallons are leased. CornerStone does not own, operate or lease any
underground propane storage facilities (excluding customer and local
distribution tanks) or pipeline transportation assets (excluding local
delivery systems).
INTEGRATED COMMUNICATION AND DATA SOLUTIONS
AND NETWORK SERVICES BUSINESS
OVERVIEW - EXPANETS, INC.
Expanets, Inc. (`Expanets') is a leading provider of integrated
communication solutions to businesses by offering voice and data networking
solutions along with network services to our customers. We focus on small-
to medium-sized business customers and offer solutions from multiple
vendors providing over 55,000 active customers with solutions customized to
their needs. We plan to expand in major metropolitan markets with
attractive demographic and economic characteristics. As of December 31,
1998, Expanets had completed the acquisition of 18 leading private
communication, data and network entities representing 1998 pro forma
revenues of approximately $249 million. Our areas of expertise include
voice networking, data networking, network management, messaging and web-
enabling capabilities. We currently operate in 60 U.S. cities and in 25
states.
Expanets was formed by NorthWestern Growth in late 1997 as a Delaware
corporation, under the name of Communication Systems USA, Inc., and in
February 1999, the name was changed to Expanets, as part of national
branding strategy. Acquisitions by Expanets are effected utilizing cash,
stock in Expanets or a combination of both. Through the use of different
classes of capital stock, NorthWestern (through NorthWestern Growth)
controls approximately 94% of the voting common and preferred stock (as of
December 31, 1998). Additional information relating to the investment in
Expanets is incorporated by reference to Note 2 of `Notes to Consolidated
Financial Statements' on pages 27-28 of the Company's 1998 Annual Report,
filed as Exhibit 13 hereto.
INDUSTRY OVERVIEW
Efficiently exchanging information both internally and externally is a
competitive advantage for businesses. Businesses are looking to a variety
of new technologies to enhance the performance of their voice and data
networking systems. For example, to exchange information, businesses are
increasingly using client/server based applications, e-mail, remote access
by mobile workers, the Internet, corporate Intranets, video, graphics and
audio. An organization's ability to integrate and deploy the most
responsive and reliable communications and information systems, customized
to their needs in a cost-effective manner, will create have a competitive
advantage.
While organizations recognize the importance of communication and data
networking systems, the selection, implementation, customization and
maintenance of these systems is becoming more complex. The complexity of
networks is magnified by the need to integrate new and evolving
technologies. Faced with a shortage of qualified technical resources and
great demands to implement the latest technology while ensuring the
reliability, performance and security of these systems, customers are
increasingly relying on outside vendors to provide the necessary resources.
By outsourcing services, companies are able to focus on their core
businesses; access specialized technical skills; implement communications
and data networking solutions more rapidly; benefit from flexible staffing;
and reduce the cost of recruiting, training and retraining specialized
talent. The rapid technological changes in networking and the move to out-
sourcing of customized networking solutions have created increased demand
for companies such as Expanets.
The communication systems and data services market is experiencing robust
growth. Industry sources estimate that the current United States market for
switching, networking and application equipment is over $17 billion and the
market for telecommunications maintenance and professional services is
approximately $4 billion. According to industry sources, between 1996 and
2000, the United States market for voice mail, interactive voice response
units, networking equipment, and other telecommunications peripherals and
applications is estimated to grow at a compound annual growth rate of
approximately 12%.
PRODUCTS AND SERVICES
Expanets is poised to be a leader in the industry by capitalizing on
developments in technology, increased demand for complex data networking,
call centers, messaging systems, and voice, data and video integration. We
provide a full range of these services from network design and engineering
to installation and support.
We provide customers with a single source for a broad range of
communications and data networking products and services to design, develop
and implement technology solutions in a variety of customer environments.
The following products are included in the suite of customer solutions we
offer:
* Network integration and support
* Premise switching equipment
* Interactive voice response (IVR) equipment
* Voice message systems (VMS)
* Data networking equipment
* Call center equipment
* Local and long distance voice telephony services
* Data services
* Internet access
* Technologies that enable web hosting
Expanets, as a single source of enterprise communications solutions,
enables customers to place their network strategy in the hands of a single
company which can competently provide the correct technology and implement
it appropriately. We work with our customers as a trusted ally to help
them make the correct technology choices. This allows customers to know
that they are purchasing the best technology for their current needs and
have a clear network evolution path as new technologies and business
requirements are developed.
Expanets believes that its relationships with a wide range of leading
technology companies position Expanets to deliver the most appropriate
solutions to each customer. Expanets provides products from many vendors,
including: Siemens, Northern Telecom, Tadiran, NEC, Lucent, Meridian,
Micom, Octel, PictureTel, Newbridge, Cisco, Edify, Verilink, Latitude,
Siemon Cabling, Executone, Mitel, Adtran, AVT, Gandalf, Inter-Tel, VTEL,
Fujitsu, Toshiba, Nortel, Panasonic, Active Voice, Compaq, Comdial, 3-Com,
Scout, Taske, Safari, Hitachi, Centigram, ABS Talkx, Telrad, Airtouch,
Nextel, IBM, Lotus Notes, CallWare, ISDN Products, Ascend Data Products,
and Bay Networks, as well as others.
COMPETITION
The market for data services and solutions includes a large number of
competitors, is subject to rapid change and is highly competitive. Many
of Expanets competitors in the communications business are small, owner-
operated companies typically located and operated in a single geographic
area. There also are a number of large, integrated national and multi-
national companies (such as Lucent Technologies, AT&T) as well as the
former regional Bell operating companies (`RBOCs'), with financial and
other resources much greater than Expanets', engaged in providing
commercial services in the service lines in which Expanets intends to focus
and 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
programs. In addition, Expanets competes with its customers' internal
resources, particularly when these resources represent a fixed cost to the
customer.
Subject to this competitive environment, Expanets competes on the basis of
the depth and breadth of services and products offered; the ability to
provide innovative solutions to customers' needs; the ability to integrate
communications and data networking systems as the related technologies
continue to converge; and its reputation for providing the highest level of
customer service.
Expanets has approximately 360 sales and marketing team members within the
United States. These Expanets team members have significant experience
selling complex communications and data networking solutions and managing
customer relationships. Expanets uses several techniques to pursue new
customer opportunities, including direct marketing, referrals,
telemarketing, seminars, participation in trade shows and advertising.
Also we use a comprehensive approach to evaluate each customer's technology
needs which will further efforts to cross-sell the depth and breadth of its
product and service offerings to existing and potential customers.
REGULATION
Expanets operations are subject to various federal, state and local laws
and regulations affecting businesses generally such as laws and regulations
concerning employment, occupational health and safety, protection of the
environment and other matters. Expanets believes it is in substantial
compliance with all applicable regulatory requirements relating to its
operations. One Expanets entity is required to file tariffs for long
distance telecommunications services with the State of Oklahoma
Corporations Commission. Expanets has not initiated any material capital
expenditures regarding environmental protection in the past year. However,
we are always aware of all existing state and federal environmental
regulations and take all reasonable precautions to prevent any incidents
that would violate any of these rules. Future events, however, such as
changes in existing laws and regulations or their interpretation, more
vigorous enforcement policies of regulatory agencies or stricter or
different interpretations of existing laws and regulations may require
additional expenditures by Expanets which may be material.
TEAM MEMBERS
As of December 31, 1998, Expanets employed 1577 team members. Expanets
considers its relations with team members to be good. Approximately 106
team members are covered by collective bargaining agreements.
ITEM 2. PROPERTIES - EXPANETS
The executive offices are located at 2 Oak Way, Berkeley Heights, New
Jersey 07936, where Expanets leases office space. Substantially all of
Expanets' facilities are leased. We serve over 55,000 customers in 60
cities and 25 states. Our principal otherproperties include inventory,
equipment and vehicle fleet.
ELECTRIC AND NATURAL GAS DISTRIBUTION BUSINESS
OVERVIEW- NORTHWESTERN PUBLIC SERVICE
NorthWestern Public Service, a division of NorthWestern, provides
competitive, reliable electric and natural gas service and value-added
services to customers in the upper Midwest. As of December 31, 1998, we
provided electricity to 155,886 customers in South Dakota and natural gas
to 78,912 customers in South Dakota and Nebraska. Electric and natural gas
revenues accounted for 12% of all revenues for NorthWestern in 1998.
NorthWestern Public Service is qualified to conduct its electric and
natural gas business in the states of South Dakota, Nebraska, Iowa and
North Dakota. We do not currently serve any electric customers in
Nebraska, North Dakota or Iowa.
NORTHWESTERN PUBLIC SERVICE -- ELECTRIC OPERATIONS OVERVIEW
Pursuant to the South Dakota Public Utilities Act, the South Dakota Public
Utilities Commission (`PUC') assigned as our electric service territory the
communities and adjacent rural areas in which we provide electric service
in South Dakota. This gives us the right to provide fully bundled services
to each present and future electric customer within our assigned territory
for so long as the service provided is adequate.
Customer Base, Service Territory and Revenue
As of the December 31, 1998, NorthWestern Public Service provided retail
electricity to 108 communities in South Dakota with a combined population
of approximately 98,403 people. The NorthWestern Public Service territory
spans over 26 counties in South Dakota. Electric energy sales constituted
7% of all revenue of NorthWestern for 1998. The following table shows
electric revenues for the last three years, together with the percent of
the total for each segment.
1996 1997 1998
Electric Revenue
Residential $31,274,274 42.6% $31,822,303 41.5% $31,832,054 40.6%
Commercial
& Industrial 38,682,023 52.7% 39,665,962 51.7% 40,017,227 51.0%
Public and
other retail 1,384,269 1.9% 1,445,711 1.9% 1,459,933 1.9%
Sales for resale 1,311,133 1.8% 3,244,751 4.2% 4,498,815 5.7%
Other 765,296 1.0% 548,094 0.7% 592,977 0.8%
------------ ----- ---------- ----- ---------- -----
Total $73,416,995 100.0% $76,726,821 100.0% $78,401,006 100.0%
Sales for resale primarily include power pool sales to other utilities.
Power pool sales fluctuate from year to year depending on a number of
factors including our availability of excess short-term generation and the
ability to sell the excess power to the other utilities in the power pool.
We also sell power and energy at wholesale to certain municipalities for
resale and to various governmental agencies.
Electric Generation, Transmission and Distribution
NorthWestern Public Service shares in the ownership of the Big Stone
Generating Plant (`Big Stone'), located near Big Stone City in northeastern
South Dakota. In North Dakota, we maintain transmission facilities to
interconnect with electric transmission lines of other utilities and share
in the ownership of Coyote I Electric Generating Plant (`Coyote'), located
near Beulah, North Dakota. In Iowa, we share in the ownership of Neal
Electric Generating Unit No. 4 (`Neal'), located near Sioux City, Iowa.
These facilities are fueled by coal, which is provided through various
length contracts with several coal companies.
We are evaluating additional generation which will provide adequate
generating capacity reserves through the year 2000. Currently, we have
capacity options for the years 2001-2007. Because the cost of capacity has
risen significantly and also because of the reduced availability of
capacity in the future, NorthWestern Public Service is developing a
comprehensive plan to assure that it has sufficient capacity to meet
customer needs and the reserve requirements of the Mid-Continent Area Power
Pool (`MAPP').
Capability and Demand
As of December 31, 1998, the aggregate net summer peaking capacity of all
NorthWestern Public Service-owned electric generating units was 308,289 kw,
consisting of 104,420 kw from Big Stone (our 23.4% share), 42,700 kw from
Coyote (our 10.0% share), 54,169 kw from Neal (our 8.7% share), and 107,000
kw from internal combustion turbine units and small diesel units, used
primarily for providing electric power during peak demand periods. In
addition to those plant facilities, we have entered into agreements to
purchase up to 14,950 kw of firm capacity from Basin Electric Cooperative
and various amounts from Nebraska Public Power District to assist in
meeting peak demands.
We are a summer peaking utility. The 1998 peak demand of 276,976 kw
occurred on July 14, 1998. Total system capability at the time of peak was
333,589 kw. The reserve margin for 1998 was 20%. The minimum reserve
margin requirement as determined by the members of the MAPP, of which we are
a member, is 15%.
MAPP is an area power pool arrangement consisting of utilities and power
suppliers having transmission interconnections located in a 9-state area in
the north central region of the United States and in two Canadian
provinces. The objective of MAPP is to accomplish coordination of planning
and operation of generation and interconnecting transmission facilities to
provide reliable and economical electric service to members' customers,
consistent with reasonable utilization of natural resources and protection
of the environment. While benefiting from the advantages of the planning,
coordination, and operations of MAPP, each member has the right and
obligation to own or otherwise provide the facilities to meet its own
requirements. The terms and conditions of the MAPP agreement and
transactions between MAPP members are subject to the jurisdiction of the
Federal Energy Regulatory Commission (`FERC'). NorthWestern Public Service
also has interconnections with the transmission facilities of Otter Tail
Power Company, Montana-Dakota Utilities Co., Northern States Power Company,
and Western Area Power Administration and has emergency interconnections
with transmission facilities of East River Electric Cooperative, Inc. and
West Central Electric Cooperative. These interconnections and pooling
arrangements enable us to arrange purchases or sales of substantial
quantities of electric power and energy with other pool members and to
participate in the benefits of pool arrangements.
We are in the process of updating the load forecast portion of our
integrated resource plan to identify how it will meet the future electric
energy needs of our customers. The plan includes estimates of customer
usage and programs to provide for economic, reliable, and timely supplies
of energy.
Fuel Supply
Lignite and sub-bituminous coal were utilized as fuel for virtually all of
the electric energy generated during 1998. North Dakota lignite is the
primary fuel at Coyote. Montana sub-bituminous coal was burned at Big Stone
during 1998. During 1998, the average heating value of lignite burned was
6,926 BTU per pound at Coyote. The sulfur content of this lignite is
typically between 0.8% and 1.2%. The Montana sub-bituminous coal burned at
Big Stone contained an average heating value of 8,731 BTU per pound and a
sulfur content between 0.58% and 0.70%. Neal burned Wyoming sub-bituminous
coal which had an average heating value of 8,401 BTU per pound during 1998.
Typically, the sulfur content of this coal is between 0.30% and 0.40%.
Our fuel costs have remained relatively stable. The average cost by type
of fuel burned is shown below for the periods indicated:
% of 1998
Cost Per Million BTU Megawatt
Year Ended December 31 Hours
----------------------- Generated
Fuel Type 1996 1997 1998 --------------
----- ---- ----
Sub-bituminous - Big StonE $.95 $.93 $.96 50.2%
Lignite - Coyote** .86 .91 .89 21.5%
Sub-bituminous - Neal .75 .71 .73 27.3%
Natural Gas 2.24 2.33 2.57 *
Oil 4.65 4.64 4.17 *
*Combined for approximately one percent.
**Includes pollution control reagent.
During 1998, the average delivered cost per ton of lignite was $11.71 to
Coyote. The average cost per ton of sub-bituminous coal received at Big
Stone for 1998 was $16.77. The average cost for coal delivered to Neal was
$12.39 per ton for 1998. Such amounts include severance taxes imposed by
the states of North Dakota and Montana and a production tax imposed by the
state of Wyoming. While the effect on our fuel costs of future changes in
severance or production taxes cannot be predicted, any changes in our fuel
costs may be passed on to our customers through the operation of the fuel
adjustment clause. This feature of our electric rates is more fully
discussed in the section entitled `Regulation'.
The continued delivery of lignite and sub-bituminous coal to the three
large steam generating units in which we are part owner is reasonably
assured by contracts covering various periods of the operating lives of
these units. The contract for delivery of Montana sub-bituminous coal to
Big Stone expires in 1999. Evaluations of supply options are currently
being conducted to select a coal supply for periods beyond 1999. The
contract for delivery of lignite to Coyote, which expires in 2016, provides
for an adequate fuel supply for the estimated economic life of that plant.
Neal receives Wyoming sub-bituminous coal under multiple firm and spot
contracts with terms up to several years in duration.
Following test burns in 1990 and 1991, the owners of the Big Stone Plant
received approval from the South Dakota Department of Environment and
Natural Resources to burn tire derived fuel (`TDF') and refuse derived fuel
(`RDF'). The quantity of TDF and RDF that was burned in 1998 was less than
5% of the total fuel consumption at the plant.
The fossil fuel supplies for Big Stone and Neal are delivered via unit
trains belonging to the respective plants' owners and locomotives of the
Burlington Northern/Santa Fe Railroad and the Union Pacific Railroad,
respectively. The lignite supply for Coyote is delivered via conveyor at
this `mine-mouth' plant. In early 1996, the partners at Big Stone executed
a fifteen year operating lease agreement for aluminum unit train cars.
This agreement was effective late in 1996. The prior unit train cars were
sold to another third party independent of the leasing transaction.
While we have no firm contract for diesel fuel for our other electric
generating plants, we have been able to purchase our diesel fuel
requirements in recent years from local suppliers and currently have in
storage an amount adequate to satisfy our normal requirements for such
fuel.
Additional information relating to jointly owned plants is incorporated by
reference to Note 7 of the `Notes to Consolidated Statements' of the
Company's 1998 Annual Report to Stockholders filed as an Exhibit 13 hereto.
COMPETITION
Direct competition does not presently exist within NorthWestern Public
Service's assigned electric territory for the supply and delivery of
electricity. Providers of electricity compete with each other to some
extent to attract and retain customers to their assigned service areas. In
addition, some degree of competition exists with the ability of some
customers to self-generate or by-pass parts of our electric system.
However, to date these threats of competition have not been prevalent in
our electric territory.
Competition for various aspects of electric services is being introduced
throughout the country that will open utility markets to new providers of
some or all the traditional utility services. It is unclear if and when
such competition will begin to affect NorthWestern Public Service's
territory. Should this occur, we expect competition will emerge first for
the commodity of electricity. Potential competitors include various
surrounding providers as well as national providers of electricity.
Competition may also arise for distribution, meter reading, billing and any
other aspect of utility services.
Competition in the utility industry is likely to result in the unbundling
of utility services. Separate markets may emerge for generation,
transmission, distribution, meter reading, billing and other services
currently provided by utilities as a bundled service. At present it is
unclear when or to what extent unbundling of utility services will occur.
We are ever mindful of the trends in the industry and are formulating a
strategy to meet and anticipate the changes in the industry in the years
ahead.
SEASONALITY
Seasonal temperatures can have a large impact on sales and corresponding
revenues in the electric utility industry. The past two winters have been
relatively mild in South Dakota which has had an adverse effect on electric
revenues. However, favorable sales of electricity during the summer and
fall seasons have offset this effect. NorthWestern Public Service has
sought to counteract seasonal revenue variations by becoming more efficient
and reducing expenditures whenever possible.
NORTHWESTERN PUBLIC SERVICE -- NATURAL GAS
OPERATIONS OVERVIEW
NorthWestern Public Service has nonexclusive municipal franchises to
provide natural gas service in Nebraska and South Dakota communities in
which it provides such service. The maximum term permitted under Nebraska
law for such franchises is 25 years while the maximum term permitted under
South Dakota law is 20 years. Our policy is to seek renewal of a franchise
in the last year of its term. We have never been denied the renewal of any
of these franchises and do not anticipate that any future renewals would be
denied. Natural gas service generally consists of fully bundled services,
although certain large commercial and industrial customers as well as
wholesale customers, may buy the natural gas commodity from another
provider. In this instance, we provide transportation service to the
customer's facility.
Customer Base, Service Territory and Revenue
NorthWestern Public Service serves 61 retail communities. Four of those
communities served are in Nebraska -- North Platte, Grand Island, Kearney
and Alda. The total population in those communities served by us according
to the 1990 census was 193,229. Our gas operations are in a total of 22
counties in South Dakota and Nebraska. Purchase adjustment clauses
contained in South Dakota and Nebraska tariffs allow NorthWestern Public
Service to reflect increases or decreases in fuel and purchase power costs
on a timely basis.
The following table shows natural gas revenues for the last three years,
together with the percent of the total for each segment.
1996 1997 1998
Gas Revenue
Residential $42,116,789 58.3% $43,247,896 55.8% $37,216,059 55.3%
Commercial
& Industrial 29,487,955 40.8% 33,620,524 43.3% 29,674,557 44.1%
Other 664,302 0.9% 692,744 0.9% 353,878 0.5%
----------- ---- ---------- ----- ---------- -----
Total $72,269,046 100.0% $77,561,164 100.0% 67,244,494 100.0%
Natural Gas Sales and Distribution
NorthWestern Public Service owns and operates natural gas distribution
systems serving 39,076 customers in eastern South Dakota. In 1996, we
completed construction of a new natural gas pipeline in northern South
Dakota which increased capacity to 15,000 MMBTU per day. In 1995, we
executed a service agreement with Cibola Energy Services Corporation
(`Cibola') whereby Cibola coordinates supply and transportation services.
The pipeline and storage capacity is provided under service agreements with
Northern Natural Gas Company. These agreements provide for firm
deliverable pipeline capacity of approximately 57,215 MMBTU per day in
South Dakota.
In Nebraska, we own and operate natural gas distribution systems serving
39,836 retail customers in the village of Alda and the cities of Grand
Island, Kearney, and North Platte. We purchase all of our natural gas for
these systems through KN Gas Marketing, Inc. (`KN') under a service
agreement entered in 1995 with all supply and transportation services
coordinated through NorthWestern Energy. These agreements provide for firm
deliverable pipeline capacity of approximately 57,429 MMBTU per day in
Nebraska.
In 1992, FERC issued Order 636. Order 636 requires, among other
provisions, that all companies with natural gas pipelines separate natural
gas supply or production services from transportation service and storage
business. This allows natural gas distribution companies, such as
NorthWestern Public Service, and individual customers to purchase natural
gas directly from producers, third parties, and various gas marketing
entities and transport it through the suppliers' pipelines. We have
operated under the restructured environment during the past several years.
To supplement firm gas supplies, our service agreements with Cibola and KN
also provide for underground natural gas storage services to meet the
heating season and peak day requirements of our gas customers. In
addition, we also own and operate five propane-air plants with a total
rated capacity of 14,000 MMBTU per day, or approximately 10% of peak day
requirements. The propane-air plants provide an economic alternative to
pipeline transportation charges to meet the peaks caused by customer demand
on extremely cold days.
A few of our industrial customers purchase their natural gas requirements
directly from gas marketing firms for transportation and delivery through
our distribution system. Transportation rates have been designed to make
NorthWestern Public Service economically indifferent as to whether we sell
and transport natural gas or transport natural gas only.
COMPETITION
There are no assigned service territories for the natural gas portion of
NorthWestern Public Service, and therefore competition in this industry may
come from a number of sources. Competition currently exists for commodity
sales to large volume customers. NorthWestern Energy is the primary entity
that engages in the natural gas commodity market. NorthWestern Public
Service functions as a distribution entity for natural gas. Competition
for delivery exists in the form of system by-pass, alternative fuel
sources, (propane or fuel oil) and, in some cases, duplicate providers such
as KN Energy in Nebraska. The key to NorthWestern Public Service's
continued success is to maximize efficiency, reliability, service quality
and customer satisfaction.
Competition in the natural gas industry is likely to result in the further
unbundling of natural gas services. Separate markets may emerge for the
natural gas commodity, transmission, distribution, meter reading, billing
and other services currently provided by utilities. At present it is
unclear when or to what extent further unbundling of utility services will
occur. It is clear, however, that to remain the consumer's provider of
choice, NorthWestern Public Service must provide top quality services at
reasonable prices. To prepare for the future, NorthWestern Public Service
must ensure that all aspects of this business are efficient, reliable,
economical and customer focused.
SEASONALITY
One of the predominant factors affecting NorthWestern Public Service's
natural gas operations is weather patterns during the winter heating
season. Because natural gas is heavily used for residential and commercial
heating, the demand for this product depends upon weather conditions. In
1998, the 13.3% decrease in natural gas revenues from 1997, primarily
reflects the negative impact from significantly warmer weather than the
prior year during the heating season. During the first quarter of 1998,
weather was approximately 18% warmer than 1997, while weather during the
last quarter of 1998 was also warmer than the prior year by approximately
14%.
NORTHWESTERN PUBLIC SERVICE -- UTILITY OPERATIONS - ELECTRIC AND NATURAL
GAS
REGULATION
NorthWestern Public Service is a `public utility' within the meaning of the
Federal Power Act and the South Dakota Public Utilities Act and, as such,
is subject to the jurisdiction of, and regulation by, FERC with respect to
issuance of securities, the PUC with respect to electric service
territories, and both FERC and the PUC with respect to rates, service,
accounting records, and in other respects. The State of Nebraska has no
centralized regulatory agency which has jurisdiction over our operations in
that state; however, our natural gas rates are subject to regulation by the
municipalities in which we operate.
Under the South Dakota Public Utilities Act, effective July 1, 1976, a
requested rate increase may be implemented 30 days after the date of its
filing unless its effectiveness is suspended by the PUC and, in such event,
can be implemented subject to refund with interest six months after the
date of filing, unless sooner authorized by the PUC. Our electric rate
schedules provide that we may pass along to all classes of customers
qualified increases or decreases in the cost of fuel used in our generating
stations and in the cost of fuel included in purchased power. A purchased
natural gas adjustment provision in our natural gas rate schedules permits
us to pass along to natural gas customers increases or decreases in the
cost of purchased natural gas.
We filed no electric rate cases in South Dakota during the three years
ended December 31, 1998. A natural gas increase was implemented in South
Dakota on November 15, 1994. Effective April 1, 1995, we implemented
increased rates related to our Nebraska natural gas service area as a
result of a negotiated settlement with representatives of the four
communities in which we operate.
On April 24, 1996, FERC issued its final rule (Order No. 888) on wholesale
electric transmission open access and recovery of stranded costs. On July
9, 1996, NorthWestern Public Service, along with other jurisdicational
utilities, filed tariffs with FERC in compliance with Order 888. Included
in this filing, NorthWestern Public Service filed an Open Access
Transmission Tariff (`OATT') which conforms to the `Pro Forma' tariff in
Order 888 in which eligible transmission service customers can choose to
purchase transmission services from a variety of options ranging from full
use of the transmission network on a firm long-term basis to a fully
interruptible service available on an hourly basis. These tariffs also
include a full range of ancillary services necessary to support the
transmission of energy while maintaining reliable operations of our
transmission system.
FERC has approved NorthWestern Public Service's Request for Waiver of the
requirements of FERC Order No. 888 as it relates to the Standards of
Conduct. The Standards of Conduct require companies to physically separate
their transmission operations/reliability functions from their
marketing/merchant functions. The Request for Waiver is based on criteria
established by FERC, exempting small public utilities as defined by the
United States Small Business Administration.
NorthWestern Public Service's operations are also subject to various
federal, state and local laws and regulations affecting businesses
generally such as laws and regulations concerning employment, occupational
health and safety, protection of the environment and other matters.
NorthWestern Public Service believes it is in substantial compliance with
applicable regulatory requirements relating to its operations.
NorthWestern Public Service has not initiated any material capital
expenditures regarding environmental protection in the past year. However,
we are always aware of all existing state and federal environmental
regulations and take all reasonable precautions to prevent any incidents
that would violate any of these rules.
We are subject to regulation with regard to air and water quality, solid
waste disposal, and other environmental considerations by Federal, state,
and local governmental authorities. The application of governmental
requirements to protect the environment involves or may involve review,
certification, issuance of permits, or similar action by government
agencies or authorities, including the United States Environmental
Protection Agency (EPA), the South Dakota Department of Environment and
Natural Resources (DENR), the North Dakota State Department of Health, and
the Iowa Department of Environmental Quality, as well as compliance with
decisions of the courts.
The Clean Air Act Amendments of 1990 (the `Clean Air Act') stipulate
limitations on sulfur dioxide and nitrogen oxide emissions from coal-fired
power plants will require the purchase of additional emission allowances or
a reduction in sulfur dioxide emissions beginning in the year 2000 from the
Big Stone Plant. NorthWestern Public Service believes it can economically
meet the sulfur dioxide emission requirements of the Clean Air Act by the
required compliance dates.
With regard to the Clean Air Act's nitrogen oxide emission requirements,
the Neal wall-fired boiler is expected to meet the emission limitations for
such boilers. The Clean Air Act does not yet specify nitrogen oxide
limitations for boilers with cyclone burners such as those used at Big
Stone and Coyote because practical low-nitrogen oxide cyclone burner
technology does not exist. It requires the EPA to establish nitrogen oxide
emission limitations for cyclone boilers including taking into account that
the cost to accomplish such limits be comparable to retrofitting low-
nitrogen oxide burner technology to other types of boilers. In addition,
the Clean Air Act also requires future studies to determine what controls,
if any, should be imposed on coal-fired boilers to control emissions of
certain air toxics other than sulfur and nitrogen oxides. Because of the
uncertain nature of cyclone boiler nitrogen oxide and air toxic emission
limits, NorthWestern Public Service cannot now determine the additional
costs, if any, it may incur due to these provisions of the Clean Air Act.
NorthWestern Public Service has met or exceeded the removal and disposal
requirements of equipment containing polychlorinated biphenyls (PCBs) as
required by state and Federal regulations. We will use some PCB-
contaminated equipment for its remaining useful life, and dispose of the
equipment according to pertinent regulations that govern that use and
disposal of this equipment. PCB-contaminated oil is burned for energy
recovery at a permitted facility.
The South Dakota DENR and the EPA adopted regulations imposing requirements
upon the owners and operators of above ground and underground storage
tanks. Our fuel oil storage facilities at our generating plants in South
Dakota are affected by the above ground tank regulations, and we have
instituted procedures for compliance.
In addition to the Clean Air Act, we are also subject to other
environmental regulations. NorthWestern Public Service believes that it is
in compliance with all presently applicable environmental protection
requirements and regulations. However, we are unable to forecast the
effect which future environmental regulations may ultimately have upon the
cost of our utility-related facilities and operations. No administrative
or judicial proceedings involving NorthWestern Public Service are now
pending or known by us to be contemplated under presently effective
environmental protection requirements.
The states of South Dakota, North Dakota, and Iowa have enacted laws with
respect to the siting of large electric generating plants and transmission
lines. The South Dakota PUC, the North Dakota Public Service Commission,
and the Iowa Utilities Board have been granted authority in their
respective states to issue site permits for nonexempt facilities.
TEAM MEMBERS
As of December 31, 1998, NorthWestern Public Service had 369 full time and
24 part time team members. System Council U-26 of the International
Brotherhood of Electrical Workers (`IBEW') is the bargaining entity for 178
team members. NorthWestern Public Service considers its relations with
team members to be good.
ITEM 2. PROPERTIES - NORTHWESTERN PUBLIC SERVICE
NorthWestern Public Service's head offices are owned and located at
600 Market Street West, Huron, SD 57350. Substantially all of
NorthWestern Public Service's facilities are owned.
NorthWestern Public Service co-owns 3 steam plants and owns 9 other generating
stations. We also have 120 electric substations and over 3,000 pole miles
of electric lines. We have 5 gas plants with a daily capacity of 17,853
mcf with 1,906 miles of gas mains for distribution.
OTHER NON-REGULATED BUSINESS
NorthWestern also provides other value-added energy and service solutions
through the following non-regulated partners, each of which is a South
Dakota corporation and wholly-owned subsidiary of NorthWestern:
* NorthWestern Energy Corporation provides customized energy-related
solutions and energy management and consultation services
primarily to large business customers and other energy providers;
* NorthWestern Services Corporation provides energy-related turn-key
capital improvement project solutions to business customers
in the United States and electrical and HVAC services and solutions to
residential customers within South Dakota and Nebraska;
* NorCom Advanced Technologies, Inc. provides a comprehensive variety of
voice, video and data products and services to customers primarily in North
Dakota, South Dakota and Nebraska.
INTELLECTUAL PROPERTY - NORTHWESTERN CORPORATION
NorthWestern and each of its partner entities utilize a variety of
registered and unregistered trademarks and servicemarks for its products
and services. Unregistered marks are governed by common law and state
unfair competition laws. We regard our trademarks and servicemarks and
other proprietary rights as valuable assets and believe that they are
associated with a high level of quality and have significant value in the
marketing of our products. Our policy is to vigorously protect our
intellectual property and oppose any infringement of our trademarks and
servicemarks.
NorthWestern's success is also dependent in part on its trade secrets and
information technology, some of which is proprietary to NorthWestern, and
other intellectual property rights. We rely on a combination of
nondisclosure and other contractual arrangements, technical measures, and
trade secret and trademark laws to protect our proprietary rights. Where
appropriate, we enter into confidentiality agreements with our team members
and attempt to limit access to and distribution of proprietary information.
BUSINESS RISK - NORTHWESTERN CORPORATION
Competition and Business Risk Information is incorporated by reference to
Management's Discussion and Analysis of the Company's 1998 Annual Report,
on pages 17 through 19, and filed as Exhibit 13 hereto.
ENVIRONMENTAL - NORTHWESTERN CORPORATION
By virtue of the nature of our operations in electricity, natural gas,
propane and other areas, NorthWestern and its partner entities are subject
to numerous environmental laws and regulations in the ordinary course of
day-to-day operations, and such laws and regulations may require us to
incur certain costs, which could be substantial, to operate existing
facilities, construct and operate new facilities and mitigate or remove the
effect of past operations on the environment. We proactively try to
prevent adverse environmental impacts by regularly monitoring operations to
ensure the environment is not compromised. When we become aware of an
environmental issue, we investigate the situation to gain facts as to the
nature and magnitude of environmental impact, and the extent, if any, that
we may be held responsible for contributing to any costs incurred for
taking action at such sites. We also attempt to gain information to
reasonably estimate potential costs attributable to any environmental
issue. NorthWestern does not believe any pending environmental liabilities
will have a significant impact on the results of operations or financial
position of the Company. It is not possible for us to predict the scope,
enforceability or financial impact of other environmental laws or
regulations which may be established in the future.
Additional information relating to `Environmental Matters' is incorporated
by reference to Note 12 of `Notes to Consolidated Financial Statements' on
pages 32-33, of the Company's 1998 Annual Report, filed as Exhibit 13
hereto.
ITEM 3. LEGAL PROCEEDINGS - NORTHWESTERN CORPORATION
NorthWestern and its partner entities are parties to various pending
proceedings and lawsuits, but in the judgment of management after
consultation with counsel for NorthWestern, 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
NorthWestern.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No issues were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Company's common stock, which is traded under the ticker symbol
NOR, is listed on the New York Stock Exchange. The following are the high
and low sale prices for common stock for each full quarterly periods with
the most recent years and the dividends paid per share during each period:
QUARTERLY COMMON STOCK DATA
Prices Cash
-------- Dividends
High Low Declared
---------- --------- ------------
1998
First Quarter $ 24 $ 21 5/16 $ .24 1/4
Second Quarter 25 5/16 20 1/4 .24 1/4
Third Quarter 27 7/16 23 15/16 .24 1/4
Fourth Quarter 26 1/2 22 3/4 .25 3/4
1997
First Quarter $ 19 3/4 $ 16 15/16 $ .23
Second Quarter 22 1/4 18 5/16 .23
Third Quarter 21 1/4 17 3/4 .23
Fourth Quarter 23 1/2 18 7/16 .24 1/4
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item 6 is incorporated by reference
to "11 Year Financial Summary" of the financial section of the Company's 1998
Annual Report to Stockholders, filed as an Exhibit hereto.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
The information required by this Item 7 is incorporated by reference
to "Management's Discussion and Analysis" of the Company's 1998 Annual
Report to Stockholders, filed as an Exhibit hereto.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The information required by this Item 7A is incorporated by reference
to the Company's 1998 Annual Report to Stockholders, filed as an Exhibit 13
hereto.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item 8 is incorporated by reference
to the Company's financial statements and related footnotes of the
Company's 1998 Annual Report to Stockholders, filed as an Exhibit hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in accountants or disagreements on
accounting principles or practices or financial statement disclosures.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE
OFFICERS OF THE REGISTRANT
(a) IDENTIFICATION OF DIRECTORS
The information regarding directors required by this Item 10 is
incorporated by reference to the information under "Election of Directors"
and Reports to the Securities and Exchange Commission" in the Company's
definitive Proxy Statement dated March 9, 1999, and filed with the
Commission pursuant to Regulation 14A under the Securities Exchange Act of
1934. The executive officers of the Company are as follows:
M. D. Lewis, Chairman and Chief Executive Officer, age 51
Chairman since May 1, 1997; Chief Executive Officer since February
1994; President since February 1994; formerly Executive Vice President
from May 1993, to February 1994; Executive Vice President-Corporate
Services 1992-1993; Vice President-Corporate Services 1987-1992;
Assistant Corporate Secretary 1982-1993. Mr. Lewis also serves as
Chairman of Northwestern Growth Corporation, Cornerstone Propane GP,
Inc., Blue Dot Services, Inc., and Expanets, Inc.
R. R. Hylland, President and Chief Operating Officer, age 38
Executive Vice President since May, 1996. Formerly Executive Vice
President - Strategic Development November 1995-May 1996; Vice
President-Strategic Development from August 1995 to November 1995;
Vice President Corporate Development from 1993-1995; Vice President-
Finance from 1991-1995; Treasurer from 1990-1994; Mr. Hylland also
serves as Vice Chairman and Chief Executive Officer of Northwestern
Growth Corporation since January, 1998. Formerly President and Chief
Operating Officer September 1994-January 1998. Mr. Hylland is also a
member of the board of directors of Northwestern Public Service,
Northwestern Growth Corporation, Cornerstone Propane GP, Inc., Blue
Dot Services, Inc., Expanets, Inc., and LodgeNet Entertainment
Corporation.
A. D. Dietrich, Vice President - Legal Administration, age 48
Vice President-Administration since November 1994; Corporate Secretary
since October 1989; formerly Vice President-Legal May 1990-November
1994.
D. K. Newell, Vice President - Finance and Chief Financial Officer, age 42
Chief Financial Officer and Vice President - Finance since July 1996.
Formerly Vice President - Finance, July 1995-June 1996. Prior to
joining the Company in 1995, Mr. Newell served as CFO, Vice President
- Finance and Treasurer with Energy Fuels Corporation. Mr. Newell also
serves as President and COO of Northwestern Growth Corporation since
January 1998. Formerly Executive Vice President of Northwestern
Growth Corporation July 1995 - January 1998. Mr. Newell also is a
member of the board of directors of Northwestern Growth Corporation,
Cornerstone Propane Partners, Blue Dot Services, Inc, Expanets, Inc.,
and Franklin Industries.
R. A. Thaden, Vice President - Communications, age 47
Vice President-Communications since February 1997; formerly Treasurer
November 1994 - May 1997; Manager-Corporate Accounting 1987-November
1994. Ms. Thaden also serves as Vice President of Northwestern Growth
Corporation since September 1995. Formerly Treasurer of Northwestern
Growth Corporation September 1995-May 1997.
D. A. Monaghan, Controller and Treasurer, age 31
Controller and Treasurer since June 1997. Mr. Monaghan also serves as
Treasurer of Northwestern Growth Corporation, Northwestern Services
Corporation, and Northwestern Energy Corporation. Formerly Controller
November 1996-May 1997. Prior to joining the Company in November
1996, Mr. Monaghan was an audit and consulting manager with regional
public accounting firm Baird, Kurtz & Dobson.
W .A. Trey Bradley, III Vice President & Chief Information Officer, age 40
Vice President & Chief Information Officer since April 1998. Prior to
joining the Company in April 1998, Mr. Bradley was Senior Vice
President - Chief Information Officer of Mary Kay, Inc. in Dallas
Texas from 1994 to 1998. Previously Mr. Bradley was with Price
Waterhouse LLP from 1990 to 1994 as senior manager and Andersen
Consulting from 1989 to 1990.
J. M. Fabiano, Vice President - Human Resources, age 43
Vice President - Human Resources since January 1999. Prior to joining
the Company, Mr. Fabiano was Vice President - Human Resources for
Tricon Global Restaurants, the restaurant business of PepsiCo, Inc.
E. R. Jacobsen, Vice President - General Counsel & Chief Legal Officer, age 42
Vice President - General Counsel & Chief Legal Officer since November
1998. Prior to joining the Company, Mr. Jacobson was Vice President -
General Counsel and Secretary of LodgeNet Entertainment Corporation, a
specialized communications company. Previously Mr. Jacobson was a
partner with the law firm Manatt, Phelps & Phillips in Los Angeles,
California.
All of the above executive officers of the registrant serve at the
discretion of the Board, and are elected annually by the Board of Directors
following the Annual Meeting of Stockholders. No family relationships
exist between any officers of the Company.
Reports to the Securities and Exchange Commission
The information required by Item 405 of Regulation S-K is incorporated
by reference to the information under "Reports to the Securities and
Exchange Commission" in the Company's definitive Proxy Statement dated
March 9, 1999 and filed with the Commission pursuant to Regulation 14A
under the Securities Exchange Act of 1934.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated by reference
to the information under "Compensation of Directors and Executive Officers"
in the Company's definitive Proxy Statement dated March 9, 1999, and filed
with the Commission pursuant to Regulation 14A under the Securities
Exchange Act of 1934.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is incorporated by reference
to the information under "Securities Ownership by Directors and Officers"
in the Company's definitive Proxy Statement dated March 9, 1999, and filed
with the Commission pursuant to Regulation 14A under the Securities
Exchange Act of 1934.
ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS
The Company has no relationships or transactions covered by this item.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF THIS REPORT
1. Financial Statements
The following items are included in this annual report by reference to
the registrant's Annual Report to Stockholders for the year ended December
31, 1998:
Page in financial
section of Annual
Report to Stockholders
------------------------
FINANCIAL STATEMENTS:
Report of Independent Public Accountants 20
Consolidated Statements of Income for the
Three Years Ended December 31, 1998 21
Consolidated Statements of Cash Flows for the
Three Years Ended December 31, 1998 22
Consolidated Balance Sheets,
December 31, 1998 and 1997 23
Consolidated Statement of Sharholders' Equity
For the Three Years Ended December 31, 1998 24
Notes to Consolidated Financial Statements 25-35
Quarterly Unaudited Financial Data for the
Two Years Ended December 31, 1998 35
2. Financial Statement Schedules
The following supplemental financial data included herein should be
read in conjunction with the financial statements referenced above:
Report of Independent Public Accountants
Schedule II - Valuation and Qualifying Accounts
Schedules other than those listed above are omitted because of the
absence of the conditions under which they are required or because the
information required is included in the financial statements or the notes
thereto.
3. Exhibits
The exhibits listed on the Exhibit Index beginning of this Annual
Report on Form 10-K are filed herewith or are incorporated herein by reference
to other filings.
(b) REPORTS ON FORM 8-K
The Company filed a Form 8-K on November 17, 1998, and is
incorporated herein by reference. Commission File No. 0-692.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
NorthWestern Corporation
March 30, 1999 /s/ M. D. Lewis
--------------------------------------------------
M. D. Lewis, Chairman of the Board of Directors
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
March 30, 1999 /s/ M. D. Lewis
---------------------------------------------------
M. D. Lewis, Chairman of the Board of Directors
and Chief Executive Officer
March 30, 1999 /s/ R. R. Hylland
--------------------------------------------------
R. R. Hylland, Director,
President and Chief Operating Officer
March 30, 1999 /s/ D. K Newell
-------------------------------------------------
D. K. Newell, Vice President - Finance
and Chief Financial Officer
(Principal Financial Officer)
March 30, 1999 /s/ David A. Monaghan
------------------------------------------------
David A. Monaghan, Controller and Treasurer
(Principal Accounting Officer)
March 30, 1999 /s/ Randy G. Darcy
------------------------------------------------
Randy G. Darcy, Director
March 30, 1999 /s/ Gary G. Drook
-----------------------------------------------
Gary G. Drook, Director
March 30, 1999 /s/ Aelred J. Kurtenbach
-----------------------------------------------
Aelred J. Kurtenbach, Director
March 30, 1999 /s/ Jerry W. Johnson
-----------------------------------------------
Jerry W. Johnson, Director
March 30, 1999 /s/ Larry F. Ness
-----------------------------------------------
Larry F. Ness, Director
March 30, 1999 /s/ Gary Olson
------------------------------------------------
Gary Olson, Director
March 30, 1999 /s/ Raymond M. Schutz
-----------------------------------------------
Raymond M. Schutz, Director
March 30, 1999 /s/ Bruce I. Smith
----------------------------------------------
Bruce I. Smith, Director
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, 1998 and 1997, and the related consolidated statements of
income, cash flows and shareholders' equity for each of the three years in
the period ended December 31, 1998. 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, 1998 and 1997, and the
results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Minneapolis, Minnesota
January 29, 1999
SCHEDULE II
NORTHWESTERN PUBLIC SERVICE COMPANY AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
Additions
Balance
Beginning Charged Charged Balance
of Period to Costs to Other Deductions End
Description (F1) Expenses Expenses (F2) of Period
FOR THE YEAR ENDED DECEMBER 31, 1998
(In Thousands)
RESERVES DEDUCTED
FROM APPLICABLE ASSETS:
Uncollectible accounts $3.583 $3,509 $ - $(1,030) $6,062
====== ====== ====== ======== ======
OTHER DEFERRED
CREDITS:
Reserve for
decommissioning costs $8,813 $513 $ - $ - $9,326
====== ====== ====== ======== =======
FOR THE YEAR ENDED DECEMBER 31, 1997
RESERVES DEDUCTED
FROM APPLICABLE ASSETS:
Uncollectible accounts $5,369 $1,522 $ - $(3,308) $3,583
====== ====== ====== ======== ======
OTHER DEFERRED
CREDITS:
Reserve for
decommissioning costs $8,300 $513 $ - $ - $8,813
====== ==== ====== ======= ======
FOR THE YEAR ENDED DECEMBER 31, 1996
RESERVES DEDUCTED
FROM APPLICABLE ASSETS:
Uncollectible accounts $8,705 $3,109 $ - $(6,445) $5,369
====== ====== ====== ======== ======
OTHER DEFERRED
CREDITS:
Reserve for
decommissioning costs $7,789 $511 $ - $ - $8,300
====== ====== ====== ======= ======
(FN)
(F1) The beginning balance for 1996 was restated to reflect the propane
acquisitions that occurred during those periods.
(F2) All deductions from reserves were for purposes for which such reserves
were created.
EXHIBIT 21-SUBSIDIARIES OF THE REGISTRANT
State of Jurisdiction
of Incorporation
Name or Limited Partnership
- ------------------------------------ ---------------------------------------
Northwestern Corporation Delaware
Grant, Inc. South Dakota
Northwestern Growth Corporation South Dakota
Northwestern Networks, Inc. South Dakota
Northwestern Systems, Inc. South Dakota
Lucht Inc. Delaware
Cornerstone Propane GP, Inc. California
SYN Inc. Delaware
Cornerstone Propane Partners, L.P. Delaware Limited Partnership
Blue Dot Services, Inc. Delaware
Expanets, Inc. Delaware
Northwestern Energy Corporation South Dakota
Nekota Resources Inc. South Dakota
NorCom Advanced Technologies, Inc. South Dakota
Northwestern Services Corporation South Dakota
EXHIBIT INDEX
- -----------------
(3) ARTICLES OF INCORPORATION AND BY-LAWS
(3)(a)(1)
Registrant's Restated Certificate of Incorporation, dated February 7, 1990,
is incorporated by reference to Exhibit 3(a)(1) to Form 10-K for the year
ended December 31, 1989, Commission File No. 0-692.
3(a)(2)
Certificate of Retirement of Preferred Stocks, dated January 13, 1992, is
incorporated by reference to Exhibit 3(a)(2) to Form 10-K for the year
ended December 31, 1991, Commission File No. 0-692.
3(a)(3)
Certificate of Amendment of Restated Certificate of Incorporation, dated
May 16, 1996, is incorporated by reference to Exhibit 3(a)(3) to Form 10-K
for the year ended December 31, 1996, Commission File No. 0-692.
3(a)(4)
Certificate of Retirement of Preferred Stocks, dated June 20, 1996, is
incorporated by reference to Exhibit 3(a)(4) to Form 10-K for the year
ended December 31, 1996, Commission File No. 0-692.
3(a)(5)
Certificate of Amendment of Restated Certificate of Incorporation, dated
May 7, 1997, is incorporated by reference to Exhibit 3 to Form 10-Q for the
quarter ended March 31, 1997, Commission File No. 0-692.
3(a)(6)
Certificate of Amendment of Restated Certificate of Incorporation, dated
May 6, 1998, is incorporated by reference to Exhibit 3 to Form 10-Q for the
quarter ended March 31, 1998, Commission File No. 0-692.
3(b)
Registrant's By-Laws, as amended, dated May 7, 1997, are incorporated by
reference to Exhibit 3(ii) to Form 10-Q for the quarter ended March 31,
1997, Commission File No. 0-692.
(4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING
INDENTURES
4(a)(1)
General Mortgage Indenture and Deed of Trust, dated as of August 1, 1993,
from the Company to The Chase Manhattan Bank (National Association), as
Trustee, is incorporated by reference to Exhibit 4(a) of Form 8-K, dated
August 16, 1993, Commission File No. 0-692.
4(a)(2)
Supplemental Indenture, dated August 15, 1993, from the Company to The
Chase Manhattan Bank (National Association), as Trustee, is incorporated by
reference to Exhibit 4(b) of Form 8-K, dated August 16, 1993, Commission
File No. 0-692.
4(a)(4)
Supplemental Indenture, dated August 1, 1995, from the Company to The Chase
Manhattan Bank (National Association), as Trustee, is incorporated by
reference to Exhibit 4(b) of Form 8-K, dated August 30, 1995, Commission
File No. 0-692.
4(a)(5)
Supplemental Indenture, dated September 1, 1995, from the Company to The
Chase Manhattan Bank (National Association), as Trustee, concerning the New
Mortgage Bonds, 6.99% Series due 2002, is incorporated by reference to
Exhibit (4)(a)(5) to Form 10-K for the year ended December 31, 1995,
Commission File No. 0-692.
4(b)(1)
Preferred Securities Guarantee Agreement, dated August 3, 1995, between the
Company and Wilmington Trust Company is incorporated by reference to
Exhibit 1(d) of Form 8-K, dated August 30, 1995, Commission File No. 0-692.
4(b)(2)
Declaration of Trust of NWPS Capital Financing I is incorporated by
reference to Exhibit 4(d) of Form 8-K, dated August 30, 1995, Commission
File No. 0-692.
4(b)(3)
Amended and Restated Declaration of Trust of NWPS Capital Financing I is
incorporated by reference to Exhibit 4(e) of Form 8-K, dated August 30,
1995, Commission File No. 0-692.
4(b)(4)
Subordinated Debt Securities Indenture, dated August 1, 1995, between the
Company and The Chase Manhattan Bank (National Association), as Trustee, is
incorporated by reference to Exhibit 4(f) of Form 8-K, dated August 30,
1995, Commission File No. 0-692.
4(b)(5)
First Supplemental Indenture, dated August 1, 1995, to the Subordinated
Debt Securities Indenture is incorporated by reference to Exhibit 4(g) of
Form 8-K, dated August 30, 1995, Commission File No. 0-692.
4(c)(1)
Copy of Sale Agreement between Company and Mercer County, North Dakota,
dated June 1, 1993, related to issuance of Pollution Control Refunding
Revenue Bonds (Northwestern Public Service Company Project) Series 1993, is
incorporated by reference to Exhibit 4(b)(1) of Registrant's report on Form
10-Q for the quarter ending June 30, 1993, Commission File No. 0-692.
4(c)(2)
Copy of Loan Agreement between Company and Grant County, South Dakota,
dated June 1, 1993, related to issuance of Pollution Control Refunding
Revenue Bonds (Northwestern Public Service Company Project) Series 1993A,
is incorporated by reference to Exhibit 4(b)(2) of Registrant's report on
Form 10-Q for the quarter ending June 30, 1993, Commission File No. 0-692.
4(c)(3)
Copy of Loan Agreement between Company and Grant County, South Dakota,
dated June 1, 1993, related to issuance of Pollution Control Refunding
Revenue Bonds (Northwestern Public Service Company Project) Series 1993B,
is incorporated by reference to Exhibit 4(b)(3) of Registrant's report on
Form 10-Q for the quarter ending June 30, 1993, Commission File No. 0-692.
4(c)(4)
Copy of Loan Agreement between Company and City of Salix, Iowa, dated June
1, 1993, related to issuance of Pollution Control Refunding Revenue Bonds
(Northwestern Public Service Company Project) Series 1993, is incorporated
by reference to Exhibit 4(b)(4) of Registrant's report on Form 10-Q for the
quarter ending June 30, 1993, Commission File No. 0-692.
4(c)(5)
Copy of Rights Agreement, dated as of December 11, 1996, between Loan
Agreement between Company and Norwest Bank Minnesota, N.A. as Rights Agent,
is incorporated by reference to Exhibit I, to Form 8-A, dated December 13,
1996, Commission File No. 0-692.
(10) MATERIAL CONTRACTS
10(a)(1) *
Supplemental Income Security (Retirement) Plan for Directors, Officers and
Managers, as amended January 1, 1997, is incorporated by reference to
Exhibit 10(a)(1) to Form 10-K for the year ended December 31, 1996,
Commission File No. 0-692.
10(a)(2) *
Deferred Compensation Plan for Non-employee Directors adopted November 6,
1985, is incorporated by reference to Exhibit 10(g)(2) to Form 10-K for the
year ended December 31, 1988, Commission File No. 0-692.
10(a)(3) *
Pension Equalization Plan, dated August 5, 1987, is incorporated by
reference to Exhibit 10(g)(4) to Form 10-K for the year ended December 31,
1988, Commission File No. 0-692.
10(a)(4) *
NorthStar Annual Incentive Plan, for all eligible employees, as amended
February 4, 1998, is incorporated by reference to Exhibit 10(a)(7) to Form
10-K for the year ended December 31, 1997, Commission File No. 0-692.
10(a)(5) *
Form of Employment Agreement for Executive Officers, including Change of
Control and Noncompetition Agreement, is incorporated by reference to
Exhibit 10(ii) to Form 10-Q for the quarter ended March 31, 1997,
Commission File No. 0-692.
10(a)(6) *
Stock Option and Incentive Plan, dated May 6, 1998, is incorporated by
reference to Exhibit 10 to Form 10-Q for the quarter ended March 31, 1998,
Commission File No. 0-692.
(13) REPORT FURNISHED TO SECURITY HOLDERS
Annual Report for Fiscal Year ended December 31, 1998, furnished to
stockholders of record on March 10, 1999.
27
Financial Data Schedule
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* Management contract or compensatory plan or arrangement.