SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES ACT OF 1934
For the transition period from ___________ to __________
Commission File No. 0-692
NORTHWESTERN CORPORATION
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)
Indicate by check mark whether the registrant (1)
has filed all reports required to be filed by
Section 13 or 15 (D) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to
file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
[X ] Yes [ ] No
Indicate the number of shares outstanding of each
of the registrant's classes of common stock, as of
the latest practicable date:
Common Stock, Par Value $1.75
23,107,096 shares outstanding at May 10, 1999
Corporation-Obligated Mandatorily Redeemable
Preferred Securities
of Subsidiary Trusts, Liquidation Amount $25.00
3,500,000 shares outstanding at May 10, 1998
Index
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
March 31, 1999 and December 31, 1998...............
Consolidated Statements of Income -
Three months ended
March 31, 1999 and 1998............................
Consolidated Statements of Cash Flows
Three months ended
March 31, 1999 and 1998............................
Notes to Consolidated Financial Statements
Item 2. Management's Discussion of Financial
Condition and Results of Operations............
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of matters to a vote of security holders
Item 5. Other Information
Item 6. Exhibits and reports on Form 8-K
a. Exhibits
b. Reports on 8-K
SIGNATURES .............................................
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NORTHWESTERN CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In Thousands)
March 31, December 31,
1999 1998
ASSETS
Current Assets
Cash and Cash Equivalents $ 26,107 $ 30,865
Accounts Receivable, Net 136,639 131,541
Inventories 70,534 72,805
Other 35,541 31,957
-------- --------
268,821 267,168
-------- --------
Property, Plant and Equipment, Net 637,276 629,278
-------- --------
Goodwill and Other Intangible Assets, Net 645,055 631,029
-------- --------
Other Assets
Investments 159,048 152,470
Other 95,380 56,271
-------- --------
$ 254,428 $ 208,741
-------- --------
$ 1,805,580 $ 1,736,216
=========== ===========
Liabilities and Shareholders' Equity
Current Liabilities
Current Maturities of Long-Term Debt $ 8,419 $ 20,060
Short-Term Debt - Nonrecourse 13,019 11,554
Accounts Payable 116,104 113,036
Accrued Expenses 55,091 64,779
--------- ---------
192,633 209,429
--------- ---------
Long-term Debt 256,350 256,350
Long-term Debt of Subsidiaries - Nonrecourse 374,887 332,525
Deferred Income Taxes and Other 73,969 74,072
Other Noncurrent Liabilities 128,439 101,787
--------- --------
833,645 764,734
--------- --------
Minority Interests 397,271 388,702
--------- --------
Preferred stock, Preference Stock and Preferred
Securities
Preferred Stock - 4 1/2% Series 2,600 2,600
Redeemable Preferred Stock - 6 1/2% Series 1,150 1,150
Preference Stock - -
Corporation Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary Trusts 87,500 87,500
------- -------
91,250 91,250
------- -------
Shareholders' Equity
Common Stock 40,386 40,279
Paid-in Capital 159,539 158,530
Retained earnings 88,344 81,100
Accumulated Other Comprehensive Income 2,512 2,192
------- -------
290,781 282,101
------- -------
$ 1,805,580 $ 1,736,216
=========== ===========
The accompanying notes to consolidated financial
statements are an integral part of these statements.
NORTHWESTERN CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In Thousands, Except for Per Share Amounts)
Three Months Ended
March 31
1999 1998
--------- ---------
Operating Revenues $ 509,354 $ 298,964
Cost of Sales 364,888 218,391
------- --------
Gross Margin 144,466 80,573
------- --------
Operating Expenses:
Selling, General and Administrative Expenses 87,086 41,925
Depreciation and Amortization 15,246 8,812
------- --------
102,332 50,737
------- --------
Operating Income 42,134 29,836
Interest Expense (11,931) (7,709)
Investment Income and Other 3,317 2,745
------- -------
Income Before Income Taxes and Minority Intersts 33,520 24,872
Provision for Income Taxes (7,460) (4,750)
------- --------
Income Before Minority Interests 26,060 20,122
Minority Interests (11,180) (9,118)
-------- -------
Net Income 14,880 11,004
Minority Interest on Preferred Securities of
Subsidiary Trusts (1,650) (660)
Dividends on Cumulative Preferred Stock (48) (48)
------- --------
Earnings on Common Stock $ 13,182 $ 10,296
======== ========
Average Common Shares Outstanding 23,051 17,843
Earnings Per Average Common Share
Basic $ 0.57 $ 0.58
Diluted $ 0.56 $ 0.58
Dividends Declared Per Common Share $ 0.2575 $ 0.2425
The accompanying notes to consolidated financial
statements are an integral part of these statements.
NORTHWESTERN CORPORATON
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
Three Months Ended
March 31
--------
1999 1998
------ ------
Operating Activities:
Net Income $ 14,880 $ 11,004
Items not Affecting Cash
Depreciation and Amortization 15,246 8,812
Deferred Income Taxes (103) (550)
Minority Interests in Net Income of
Consolidated Subsidiaries 11,180 9,118
Investment Tax Credits (140) (140)
Changes in Current Assets and
Liabilities,
Net of Acquisitions:
Accounts Receivable (1,479) 17,717
Inventories 13,691 7,979
Other Current Assets (8,173) 1,439
Accounts Payable 1,244 (34,715)
Accrued Expenses (13,637) 4,083
Other, Net (3,458) (3,646)
-------- --------
Cash Flows Provided by Operating
Activities 29,251 21,101
-------- --------
Investment Activities:
Property, Plant and Equipment Additions (6,467) (5,420)
Sale (Purchase) of Noncurrent
Investments, Net (6,288) 44,687
Acquisitions and Growth Expenditures (31,977) (64,556)
-------- --------
Cash flows Used in Investing Activities (44,732) (25,289)
-------- --------
Financing Activities:
Dividends on Common and Preferred Stock (5,986) (4,375)
Minority Interest on Preferred Securities of
Subsidiary Trusts (1,650) (660)
Proceeds From Exercise of Warrants 1,116 -
Subsidiary Payment of Common Unit
Distributions (9,247) (7,067)
Proceeds From Issuance of Common Units - 40,700
Issuance of Nonrecourse Subsidiary Debt 38,338 -
Repayment of Nonrecourse Subsidiary Debt (13,278) (32,499)
Short-Term Borrowings 1,430 -
Commercial Paper Issuances - 14,000
------- -------
Cash Flows Provided by Financing
Activities 10,723 10,099
------- --------
Increase (Decrease) in Cash and Cash
Equivalents (4,758) 5,911
Cash and Cash Equivalents, Beginning of Period 30,865 14,309
Cash and Cash Equivalents, End of Period $ 26,107 $ 20,220
========= =========
Supplemental Cash Flow Information
Cash Paid During the Period For
Income Taxes $ 1,486 $ 27
Interest $ 11,984 $ 6,465
The accompanying notes to consolidated financial
statements are an integral part of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Reference is made to Notes to Financial Statements
included in the Company's Annual Report)
(1) Management's Statement -
The financial statements included herein have been prepared by NorthWestern
Corporation (the Corporation), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion
of the Corporation, all adjustments necessary for a fair presentation of the
results of operations for the interim periods have been included. It is
suggested that these financial statements be read in conjunction with the
financial statements and the notes thereto included in the Corporation's latest
annual report to shareholders.
(2) Subsidiaries and Principles of Consolidation -
The accompanying consolidated financial statements include the accounts of the
Corporation and all wholly, majority-owned, and controlled subsidiaries,
including CornerStone Propane Partners, L.P. (NYSE:CNO), the nation's fourth
largest retail propane distributor; Blue Dot Services, Inc., a national
provider of air conditioning, heating, plumbing and related services (HVAC),
and Expanets, Inc., a national provider of integrated communication and data
solutions and network services. All significant intercompany balances and
transactions have been eliminated from the consolidated financial statements.
The Corporation's regulated businesses are subject to various state and federal
agency regulation. The public unitholders' interest in CornerStone's net
assets subsequent to the Partnership Formation is reflected as minority
interests in the consolidated financial statements. Equity interests of the
former owners of companies acquired by Blue Dot. and Expanets who continue to
hold an interest in Blue Dot. and Expanets are also reflected as minority
interests in the consolidated financial statements.
(3) Comprehensive Income -
In 1998, the Corporation adopted SFAS No. 130 'Reporting Comprehensive Income.'
This statement requires the reporting of comprehensive income in addition to
net income from operations. Comprehensive income is a more inclusive financial
reporting methodology that includes disclosure of certain financial information
that historically has not been recognized in the calculation of net income.
Comprehensive income for the three months ended March 31, 1999 and 1998, was
$15.2 million and $9.4 million.
(4) Segment Information -
In 1998, the Corporation adopted Statement of Financial Accounting Standards
No. 131 (SFAS 131), 'Disclosures About Segments of an Enterprise and Related
Information,' which requires the reporting of certain financial information by
business segment. For the purpose of providing segment information, the
Corporation's principal business segments are its electric, natural gas,
retail propane, wholesale propane, HVAC and communications operations. All
other includes other service businesses, the results of manufacturing
operations (only in 1998), activities and assets of the parent, any reconciling
or eliminating amounts and amortization of purchase accounting adjustments
related to the acquisitions of HVAC and communication companies.
The accounting policies of the operating segments are the same as the parent
except that the parent allocates some of its operating expenses and interest
expense to the operating segments according to a methodology designed by
management for internal reporting purposes and involves estimates and
assumptions. Financial data for the business segments are as follows
(in thousands): Three Months Ended March 31, 1999
Total
Electric Total Communi- All
& Natural Propane HVAC cations Other Total
Gas
---------- ------- ----- -------- ------ ------
Operating
Revenues $ 50,598 $340,328 $ 52,619 $ 62,768 $ 3,041 $ 509,354
Cost of Sales 26,405 270,068 32,620 34,505 1,290 364,888
------ ------- ------ ------ ----- -------
Gross Margin 24,193 70,260 19,999 28,263 1,751 144,466
Selling,
general & 10,168 34,318 17,682 20,980 3,938 87,086
Administrative
Depreciation
& amortization 3,737 7,848 943 707 2,011 15,246
------ ----- ----- ------ ----- ------
Operating
Income 10,288 28,094 1,374 6,576 (4,198) 42,134
Interest
Expense (2,179) (6,863) - (283) (2,606) (11,931)
Investment
Income & Other 53 - 88 (539) 3,715 3,317
------ ------ ------ ------ ------ ------
Income
before taxes
and minority
interests 8,162 21,231 1,462 5,754 (3,089) 33,520
Provision
for income
taxes (2,700) (2,693) (580) (2,542) 1,055 (7,460)
Income
before
minority
interests $ 5,462 $ 18,538 $ 882 $ 3,212 $ (2,034) $ 26,060
======= ======== ===== ======= ========= ========
Total
Assets $ 310,871 $ 784,630 $ 50,904 $ 75,357 $ 583,818 $ 1,805,580
========= ========= ======== ======== ========= ===========
Maintenance
Capital
Expenditures $ 3,231 $ 2,002 $ 548 $ 648 $ 38 $ 6,467
======= ========= ======== ======== ========= ===========
Three Months Ended March 31, 1998
Total
Electric
& Natural Total Communi- All
Gas Propane HVAC cations Other Total
---------- -------- ------ --------- ------- -----
Operating
Revenues $ 48,984 $ 229,331 $ 10,582 $ 4,184 $5,883 $ 298,964
Cost of Sales 26,113 179,362 6,615 2,626 3,675 218,391
------- ------- ------ ------ ------ -------
Gross Margin 22,871 49,969 3,967 1,558 2,208 80,573
Selling,
general &
Administrative 10,049 25,472 3,465 1,260 1,679 41,925
Depreciation
& amoritization 3,635 4,715 221 77 164 8,812
------ ------ ----- ------ ------ -------
Operating
Income 9,187 19,782 281 221 365 29,836
Interest
Expense (2,815) (4,824) (8) (25) (37) (7,709)
Investment
Income & Other 339 - 3 5 2,398 2,745
------ ------- ---- ----- ----- -------
Income
before taxes
and minority
interests 6,711 14,958 276 201 2,726 24,872
Provision
for income
taxes (2,757) (1,785) (181) (94) 67 (4,750)
------- ------- ----- ------- ------ -------
Income
before
minority
Interest $ 3,954 $ 13,173 $ 95 $ 107 $ 2,793 $ 20,122
======== ======== ===== ===== ======= ========
Total Assets $ 303,517 $ 600,423 $ 21,845 $ 17,263 $ 215,213 $ 1,158,261
========= ========= ======== ======== ========= ===========
Maintenance
Capital
Expenditures $ 2,377 $ 2,997 $ - $ - $ 46 $ 5,420
========= ========= ======== ========= ======== ==========
1999 1998
Electric Natural Gas Electric Natural Gas
-------------------------- ---------------------------
Operating
Revenues $ 20,475 $ 30,123 $ 18,963 $30,021
Cost of Sales 4,431 21,974 3,816 22,297
-------- ------- ------- --------
Gross Margin 16,044 8,149 15,147 7,724
Selling, general
& administrative 6,617 3,551 6,536 3,513
Depreciation and
amortization 3,002 735 2,922 713
------ ----- ------- ------
$ 6,425 $ 3,863 $ 5,689 $ 3,498
======= ======= ======= ========
1999 1998
Retail Wholesale Retail Wholesale
Propane Propane Propane Propane
----------------------- ----------------------
Operating
Revenues $ 108,206 $ 232,122 $ 84,479 $ 144,852
Cost of Sales 44,438 225,630 39,970 139,392
--------- --------- -------- ---------
Gross Margin $ 63,768 $ 6,492 $ 44,509 $ 5,460
========= ========= ======== ==========
(5) New Accounting Standards -
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for
Derivative Instruments and Hedging Activities." The Statement establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments imbedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. The Statement requires changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria
are met. SFAS 133 is effective for fiscal years beginning after June 15, 1999.
The Corporation is evaluating the impacts of adopting SFAS 133 on its
financial statements. The impact of SFAS 133 will likely depend upon the
extent of use of derivative instruments and their designation and effectiveness
as hedges of market risk.
(6) Reclassification and Restatements
Certain 1998 amounts have been reclassified to conform to the 1999
presentation. Operating results for 1998 have been restated to reflect the
consolidation of Blue Dot. and Expanets effective January 1, 1998. Such
reclassifications and restatements had no impact on net income and common
stock equity as previously reported.
(7) Earnings Per Share
In 1998, the Corporation adopted SFAS No. 128, "Earnings Per Share," which
establishes two methods for calculating earnings per share, basic and
diluted, and simplifies the previous standards for computing earnings per
share. Basic earnings per share is computed on the basis of the weighted
average number of common shares outstanding. Diluted earnings per share is
computed on the basis of the weighted average number of common shares
outstanding plus the effect of the outstanding stock options and warrants.
The following table presents the shares used in computing the basic and
diluted earnings per share for 1999 and 1998 (in thousands):
Three Months Ended
March 31
1999 1998
------- -------
Average common
Shares outstanding for 23,051 17,843
Basis computation
Dilutive effect of:
Stock Options 18
Stock Warrants 303
-------- --------
Average common
Shares outstanding for
Diluted computation 23,372 17,843
-------- --------
Item 2. MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
NorthWestern Corporation ('NorthWestern' or 'Corporation') and its partner
entities are providers of value-added services and solutions to residential
and business customers nationwide. The Corporation provides electric and
natural gas service to Midwestern customers through our energy division,
NorthWestern Public Service. In addition, the Corporation holds interests in
Cornerstone Propane Partners, L.P. (NYSE:CNO), the nation's fourth largest
retail propane distributor; Expanets, Inc., a national provider of integrated
communication and data solutions and network services; and Blue Dot Services,
Inc., a national provider of air conditioning, heating, plumbing and related
services (HVAC). The Corporation is also engaged in other service and
nonenergy related businesses. 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.
Weather
Weather patterns have a material impact on the Corporation's operating
performance for all three segments of its energy business. This impact is
particularly relevant for natural gas and propane. Because propane and natural
gas are heavily used for residential and commercial heating, the demand for
these products depends heavily upon weather patterns throughout the
Corporation's market areas. With a larger proportion of its operations
related to seasonal propane and natural gas sales, a significantly greater
portion of the Corporation's operating income is recognized in the first and
fourth quarters related to higher revenues from the heating season.
RESULTS OF OPERATIONS:
Consolidated Earnings Comparisons -
Diluted earnings per share for the quarters ended March 31, 1999 and 1998,
were $.56 and $.58. Excluding a nonrecurring investment gain of $.07 related
to a sale of stock in a nonstrategic investment, March 31, 1998, ongoing
diluted earnings were $.51 per share. The increase in ongoing earnings was due
to increased operating income from the propane operations resulting from
acquired retail propane distribution centers and increased operating income
from HVAC and communications operations resulting from internal growth and
acquired companies, offset by decreases due to significantly warmer than normal
weather in the Corporation's propane, natural gas and electric operating areas.
Propane
Retail propane sales for the three months ended March 31 increased 28% from
$84.5 million in 1998 to $108.2 million in 1999. Gross margins also
increased 43% from $44.5 million in 1998 to $63.8 million in 1999. The
increases are due to internal growth combined with the acquisition of retail
propane centers including a large retail propane distribution company in late
1998. These increases were negatively impacted by weather that has been
substantially warmer than normal. Wholesale propane sales increased 62% from
$144.9 million in 1998 to $232.1 million in 1999. Wholesale propane margins
also increased 19% from $5.5 million in 1998 to $6.5 million in 1999. The
increases in wholesale sales and margins are due to acquisitions in late 1998
offset by warmer than normal weather. Propane operating income for the
three months ended March 31 increased 42% from $19.8 million in 1998 to $28.1
million in 1999. The increase in operating income is due to the acquisitions
of retail and wholesale service centers partially offset by the negative impact
from warmer than normal weather.
Electric
Electric revenues for the three months ended March 31 increased 8% from $19.0
million in 1998 to $20.5 million in 1999. The increase in revenues is due to
internal growth and increased wholesale sales offset by warmer than normal
weather. Weather in 1999, while similar to the prior year, was still warmer
than normal negatively impacting electric operations. Operating income from
electric operations increased 13% from $5.7 million in 1998 to $6.4 million in
1999. The increase in operating income is due to higher revenues and margins
in 1999 partially offset by normal inflationary increases in operating
expenses and warmer than normal weather.
HVAC
HVAC revenues for the three months ended March 31 increased from $10.6 million
in 1998 to $52.6 million in 1999. Margins increased from $4.0 million in 1998
to $20.0 million in 1999. Operating income increased from $.3 million in 1998
to $1.4 million in 1999. The increases are due to internal growth combined
with acquisitions of companies throughout 1998 and continuing into 1999.
Communications
Communications revenues for the three months ended March 31 increased from
$4.2 million in 1998 to $62.8 million in 1999. Margins increased from $1.6
million in 1998 to $28.3 million in 1999. Operating income increased from
$.2 million in 1998 to $6.6 million in 1999. The increases are due to
internal growth combined with acquisitions of companies throughout
1998 and continuing into 1999.
Natural Gas
Natural gas revenues for the three months ended March 31 increased from $30.0
million in 1998 to $30.1 million in 1999. The increase in revenues is due to
internal growth offset by warmer than normal weather. Weather in 1999, while
similar to the prior year, was still warmer than normal which negatively
impacted natural gas operations. Operating income from natural gas operations
increased 10% from $3.5 million in 1998 to $3.9 million in 1999. The increase
in operating income is due to higher revenues and margins in 1999 offset by
normal inflationary increases in operating expenses and warmer than normal
weather.
Other Income Statement Items
Other operating revenues for 1998 consists principally of manufacturing
revenues (related to the Corporation's former ownership interest in Lucht Inc.
which was sold in 1998) and in 1999 consists of other service businesses.
Other income increased during the three months ended March 31, from $2.7
million in 1998 to $3.3 million in 1999 principally due to the investment of
additional funds which are a result of the excess proceeds from the debt and
equity offerings completed by the Corporation in November 1998. Interest
expense increased from $7.7 million to $11.9 million resulting from debt
issued by the Corporation in November 1998 and Cornerstone in December 1998.
Minority interests increased from $9.1 million in 1998 to $11.2 million in 1999
due to growth within the propane, HVAC and communications businesses. Income
taxes increased from $4.8 million in 1998 to $7.5 million in 1999 due to
increased consolidated taxable income.
Liquidity and Capital Resources -
The Corporation believes it has adequate long-term liquidity through the
generation of operating cash flows, the availability of substantial marketable
securities, and a sound capital structure. In addition, the Corporation has
adequate capacity for additional financing and continues to maintain this
strong position through favorable bond ratings.
The Corporation has generated significant operating cash flows while
continuing to maintain substantial cash and investment balances in the form of
marketable securities. Cash flows from operating activities during the three
months ended March 31, 1999 and 1998 were $29.3 million and $21.1 million.
The increase is primarily due to increased cash flow from propane, HVAC and
communication operations. Cash equivalents and investment securities totaled
$170.1 million and $87.5 million at March 31, 1999 and 1998.
Working capital and other financial resources are also provided by lines of
credit, which are generally used to support commercial paper borrowings, a
primary source of short-term financing. At March 31, 1999, available short
term lines of credit totaled $75 million. In addition, the Corporation's
nonregulated subsidiaries maintain nonrecourse credit agreements with various
banks for revolving and term loans.
Capital Requirements -
The Corporation's primary capital requirements include the funding of its
energy business construction, maintenance and expansion programs, the
funding of debt and preferred stock retirements, sinking fund requirements and
the funding of its corporate development and investment activities.
Maintenance capital expenditure plans are subject to continual review and may
be revised as a result of changing economic conditions, variations in sales,
environmental requirements, investment opportunities and other ongoing
considerations. Capital expenditures for maintenance activities during the
three months ended March 31, 1999 and 1998 were $6.5 million and $5.4 million.
Estimated annual maintenance capital expenditures for 1999 and 2000 are
estimated to be $27.3 million and $26.2 million.
Capital requirements for the mandatory retirement of long-term debt including
nonrecourse debt of subsidiaries will be $8.4 million in 1999. The Corporation
anticipates that future capital requirements will be met by existing
investments and marketable securities, internally generated cash flows and
available external financing.
The Corporation will continue to review economics of retiring or refunding
remaining long-term debt and preferred stock to minimize long-term financing
costs. At March 31. 1999, the Corporation had invested $215.5 million in Blue
Dot. and Expanets. The Corporation will continue to make other significant
acquisition investments in related industries that would require the
Corporation to raise additional equity and/or incur debt financing,
which are therefore subject to certain risks and uncertainties. The
Corporation's financial coverages are at levels in excess of those required for
the issuance of additional debt and preferred stock.
COMPETITION AND BUSINESS RISK
NorthWestern's strategy centers upon the development, acquisition and
expansions of operations offering integrated services and solutions within the
NorthWestern partner entities. In addition to maintaining a strong competitive
position in its electric, natural gas and propane distribution businesses, the
Corporation intends to pursue strategic development and acquisitions that have
long-term growth potential. While these strategic development and acquisition
activities can involve increased risk in comparison to the Corporation's
energy distribution businesses, they offer the potential for enhanced
investment returns. The Corporation's strategy to continue strategic
development through acquisitions will be subject to future availability of
market capital to fund such acquisitions. The NorthWestern strategy of
integrating products and services and acquired companies have other factors
which may also increase the risks of the Corporation. These factors include
the adequacy and efficiency of its information systems, business processes,
related support functions and the ability to attract and retain quality team
members. The Corporation has taken and continues to take steps to refine,
improve and scale up its back-office support systems and processes. There are
no assurances that such efforts will be sufficient to meet the future needs of
the Corporation's operations. Future changes in accounting rules and
regulations could have a material impact upon the Corporation's future
financial statement presentation, results from operations and financial
position.
PROPANE
The retail propane business is a margin-based business in which gross profits
depend on the excess of sales prices over propane supply costs. Consequently,
CornerStone's profitability will be sensitive to changes in wholesale propane
prices. Propane is a commodity, the market price of which can be subject to
volatile changes in response to changes in supply or other market conditions.
As it may not be possible to immediately pass on to customers rapid increases
in the wholesale cost of propane, such increases could reduce CornerStone's
gross profits.
Weather conditions have a significant impact on propane demand for both heating
and agricultural purposes. The majority of CornerStone's customers rely
heavily on propane as a heating fuel. Actual weather conditions can vary
substantially from year to year, significantly affecting CornerStone's
financial performance. Furthermore, variations in weather in one or more
regions in which CornerStone operates can significantly affect the total
volumes sold by CornerStone and the margins realized on such sales and,
consequently, CornerStone's results of operations. These conditions may also
impact CornerStone's ability to meet various debt covenant requirements and
affect CornerStone's ability to pay common and subordinated unit
distributions.
Propane competes with other sources of energy, some of which are less costly
for equivalent energy value. Propane distributors compete for customers against
suppliers of electricity, fuel oil and natural gas, principally on the basis of
price, service, availability and portability. Electricity is a competitor of
propane, but propane generally enjoys a competitive price advantage over
electricity for space heating, water heating and cooking. Propane serves as
an alternative to natural gas in rural and suburban areas where natural gas is
unavailable or portability of product is required. Natural gas is generally a
less expensive source of energy than propane although in areas where natural
gas is available, propane is used for certain industrial and commercial
applications. The gradual expansion of the nation's natural gas distribution
systems has resulted in the availability of natural gas in some areas that
previously depended upon propane. However, natural gas pipelines are not
present in many regions of the country where propane is sold for heating and
cooling purposes.
CornerStone's profitability is affected by the competition for customers among
all participants in the retail propane business. Some of CornerStone's
competitors are larger or have greater financial resources than CornerStone.
Should a competitor attempt to increase market share by reducing prices,
CornerStone's financial condition and results of operations could be materially
adversely affected. In addition, propane competes with other sources of energy,
some of which may be less costly per equivalent energy value.
ELECTRIC AND NATURAL GAS
The electric and natural gas industries continue to undergo numerous
transformations, and the Corporation is operating in an increasingly
competitive marketplace. The Federal Energy Regulatory Commission (FERC),
which regulates interstate and wholesale electric transmissions, opened up
transmission grids and mandated that utilities must allow others equal access
to utility transmission systems. Various state regulatory bodies are
supporting initiatives to redefine the electric energy market and are
experimenting with retail wheeling, which gives some retail customers the
ability to choose their supplier of electricity. Traditionally, utilities have
been vertically integrated, providing bundled energy services to customers. The
potential for continued unbundling of customer service exists, allowing
customers to buy their own electricity and natural gas on the open market and
having it delivered by the local utility.
The growing pace of competition in the energy industry has been a primary
focus of management over the last few years. The Corporation's future
financial performance will be dependent on the effective execution of
operating strategies to address a more competitive and changing energy
marketplace. Business strategies focus on enhancing the Corporation's
competitive position, on expanding energy sales and markets with new products
and services for customers, and increasing shareholder value. The Corporation
has realigned various areas of its business to support customer services and
marketing functions. A new marketing plan, an expanded line of integrated
customer products and services, additional staff and new technologies are
part of the Corporation's strategy for providing responsive and superior
customer service. To strengthen the Corporation's competitive position, new
technologies have and will be added that enable team members to better serve
customers. The Corporation is centralizing activities to improve efficiency,
and customer responsiveness and business processes are being reengineered to
apply best-practices methodologies. Long-term supply contracts have been
renegotiated to lower customers' energy costs and new alliances help reduce
expenses and add innovative work approaches.
Weather conditions have a significant impact on electric and natural gas demand
for heating and cooling purposes. Actual weather conditions can vary
substantially from year to year, significantly affecting the Corporation's
financial performance.
As described in Note 1 to the 1998 audited annual consolidated financial
statements, the Corporation complies with the provisions of Statement of
Financial Accounting Standards No. 71 (SFAS 71), 'Accounting for the Effects
of Certain Types of Regulation'. SFAS 71 provides for the financial
reporting requirements of the Corporation's regulated electric and natural gas
operations, which requires specific accounting treatment of certain costs and
expenses that are related to the Corporation's regulated operations.
Criteria that could give rise to the discontinuance of SFAS 71 include 1)
increasing competition that restricts the Corporation's ability to establish
prices to recover specific costs and 2) a significant change in the manner in
which rates are set by regulators from cost-based regulation to another form
of regulation. The Corporation periodically reviews these criteria to
ensure the continuing application of SFAS 71 is appropriate. Based on a
current evaluation of the various factors and conditions that are expected to
impact future cost recovery, the Corporation believes that its regulatory
assets, including those related to generation, are probable of future recovery.
This evaluation of recovery must be updated for any change, which might occur
in the Corporation's c urrent regulatory environment.
HVAC
The markets served by Blue Dot. for residential and commercial heating,
ventilating, air conditioning, plumbing and other related services are highly
competitive. The principal competitive factors in these segments of the
industry are 1) timeliness, reliability and quality of services provided, 2)
range of products and services provided, 3) name recognition and market share
and 4) pricing. Many of Blue Dot's competitors in the HVAC business are small
owner-operated companies typically located and operated in a single geographic
area. There are a small number of larger national companies engaged in
providing residential and commercial services in the service lines in which
the Corporation intends to focus. Future competition in both the residential
and commercial service lines may be encountered from other newly formed or
existing public or private service companies with aggressive acquisition
programs, from the unregulated business segments of regulated gas and electric
utilities, or from newly deregulated utilities in those industries entering
into various service areas.
COMMUNICATIONS
The market served by Expanets in the communications and data services industry
is also highly competitive. The Corporation believes that 1) market acceptance
of the products, services and technology advances the Corporation provides, 2)
pending and future legislation affecting the communications and data industry,
3) name recognition and market share, 4) larger competitors and 5) the
Corporation's ability to provide integrated communication and data solutions
for customers in a dynamic industry are all factors that could affect the
Corporation's future operating results. Many of Expanet's competitors in the
communications business are generally small, owner-operated companies typically
located and operated in a single geographical area. There are a number of
large, integrated national companies engaged in providing commercial services
in the service lines in which the Corporation intends to focus and also
manufacture and sell directly the products that the Corporation services and
sells. Future competition may be encountered from other newly formed or
existing public or private service companies with aggressive acquisition
programs.
YEAR 2000 READINESS
The Corporation utilizes software and various technologies throughout its
businesses that might be impacted by the date change in the year 2000. The
year 2000 issue is a result of computer programs which were written using two
digits (rather than the actual four) to identify the year in the date field.
This old approach was intended to saving processing time and storage space
within computers and was continued in use until the mid 1990's. If not
corrected, affected systems and devices containing computer chips or clocks
could roll back to 1900 instead of moving forward to 2000. Some systems and
devices may continue to function even if this occurs. Others may experience
interruptions in service, processes or obtain erroneous results.
In an effort to recognize these critical systems or devices with potential
business consequences, the Corporation is utilizing internal and external
resources to conduct detailed assessments of critical systems and devices.
To ensure a thorough approach to the year 2000, the Corporation has assembled a
diverse oversight and advisory team from all businesses with experienced
information systems, legal, communications and operating leadership to
work on our enterprise-wide year 2000 program. This initiative covers not only
the Corporation's information technology systems and computer applications, but
also considers hardware, embedded systems and components internal and external
to our organizations. The Corporation's program considers not only our
businesses and technology areas but also those of our customers and suppliers.
The Corporation's operations are dependent upon complex computer systems for
many aspects of its businesses. These different computer information
systems include AS/400, client server and distributed systems. The
Corporation's goal is to have mission critical systems or devices that are
required to maintain operations ready for the year 2000. Year 2000 ready
means that the system or device has been deemed suitable to operate after
December 31, 1999. Many of the Corporation's mission-critical systems
have been replaced or will be replaced in advance of the year 2000.
Remediation plans include prioritizing our efforts based on when the systems
might first experience malfunctions as well as possible impact on our
customers. The Corporation is on target to remediate all critical applications
early in 1999 and then will devote the remainder of 1999 to work on final
interface issues, remediation, testing and fine-tuning critical items.
The Corporation's costs to prepare for the year 2000 were approximately $2
million during 1998 and an estimated additional $2 million will be incurred
during 1999. These costs have been expensed as incurred or capitalized in
accordance with our accounting policy for software development costs.
The Corporation's systems and operations with respectto the year 2000 issue
may also be affected by other third parties with which the Corporation
transacts business. We rely upon other companies to supply us with products
and services necessary to operate our businesses. If key third parties cannot
provide us with products and services as a result of their own year 2000
problem, it could have a material adverse effect upon our operations. The
extent of such impact would depend upon the duration of such interruption and
our costs and ability to find alternative sources of products and services. The
Corporation is currently working with third parties to determine the potential
adverse consequences, if any, that could result from such entities' failure
to effectively address the year 2000 issue. The Corporation's primary focus
has been directed at resolving the year 2000 problem. While the Corporation
expects that the majority of its systems and devices to be year 2000 ready, the
Corporation is developing a contingency plan specifying what will be done if
the Corporation or important third parties are not year 2000 ready. The
Corporation anticipates that the majority of the contingency plan will be
based on manual backup systems, procedures and practices, as well as the
identification of alternative suppliers for key products or services.
The contingency plan is expected to be completed by June 30, 1999.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q 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 the this Form 10-Q,
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 forwardlooking statements involve
known and unknown risks, uncertainties and other factors, which may cause the
Corporation'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 Corporation's products and services; changes in technology;
reliance on strategic partners; weather, regional, commercial, industrial and
residential growth in the geographic areas served by Corporation and its
partner entities; customers' usage patterns and preferences; the speed
and degree to which competition enters the Corporation'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
Corporation's filings with the Securities and Exchange Commission. These
forward-looking statements speak only as of the date of this Form 10-Q.
NorthWestern Corporation expressly disclaims any obligation or undertakings
to release publicly any updated or revisions to any forward-looking statements
contained herein to reflect any change in the Corporation's expectations with
regard thereto or any change in events, conditions or circumstances on
which any such statement is based.
NORTHWESTERN CORPORATION
PART II
ITEM 1. LEGAL PROCEEDINGS
The Corporation is not currently involved
in any pending major litigation.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
The election of three directors to Class II
of the Board of Directors was submitted to
stockholders in the Corporation's proxy
statement. At the annual meeting of common
stockholders held on May 5, 1999, the three
nominees were elected, receiving the
following votes: Richard H. Hylland
22,200,458; Jerry W. Johnson 22,226,673;
Larry F. Ness 22,217,269. Also submitted to
the common and preferred stockholders were
two proposals. The results of the voting
were as follows:
1. To approve a Team Member Stock Purchase Plan.
19,182,020 For 2,774,368 Against 562,665 Abstain
2. To amend the NorthWestern Stock Option andIncentive Plan.
13,353,559 For 3,676,682 Against 532,071 Abstain
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
UT (SEC only) (10) MATERIAL CONTRACTS
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTHWESTERN CORPORATION
------------------------
(Registrant)
Date: May 14, 1999 /s/ David A. Monaghan
---------------------------------
Controller and Treasurer