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Exhibit 99.8
SUMMARY
UNLESS THE CONTEXT REQUIRES OTHERWISE, REFERENCES TO "WE," "US," "OUR"
AND "NORTHWESTERN" REFER SPECIFICALLY TO NORTHWESTERN CORPORATION AND ITS
SUBSIDIARIES.
NORTHWESTERN CORPORATION
We operate one of the premier regional electric and natural gas utilities in
the upper Midwest of the United States through our energy division, NorthWestern
Services Group, or NSG, and our wholly-owned subsidiary, The Montana Power,
L.L.C. On February 15, 2002, we completed the acquisition of the electric and
natural gas transmission and distribution businesses of The Montana Power
Company for approximately $1.1 billion, including the assumption of
approximately $488.0 million in existing Montana Power LLC debt and preferred
stock, net of cash received. We intend to transfer the energy and natural gas
transmission and distribution operations of Montana Power LLC to NorthWestern
Corporation during 2002 and to operate its business as part of our NSG division.
We believe the acquisition creates greater regional scale allowing us to realize
the full value of our existing energy assets and provides a strong platform for
future growth. Our regulated business contributed a majority of our consolidated
earnings before interest, taxes, depreciation and amortization, or EBITDA, for
the year ended December 31, 2001 on a pro forma basis after giving effect to the
acquisition. See "Recent Developments--2001 Results--Unaudited Pro Forma
Results."
We also have investments in unregulated businesses. Our principal
unregulated subsidiary, Expanets, Inc., is a leading provider of networked
communications and data services and solutions to medium-sized businesses. In
addition, we own investments in our subsidiaries, Blue Dot Services Inc., a
nationwide provider of air conditioning, heating, plumbing and related services,
and CornerStone Propane Partners, L.P., a publicly traded master limited
partnership (NYSE: CNO), in which we hold a 30% interest and operate through one
of our subsidiaries that serves as managing general partner. On January 18,
2002, the board of directors of the general partner of CornerStone announced
that it had retained Credit Suisse First Boston Corporation to review strategic
options, including the possible sale or merger of CornerStone. See "Recent
Developments--CornerStone Propane Partners, L.P."
REGULATED BUSINESSES
ELECTRIC OPERATIONS
MONTANA
Montana Power LLC operates an extensive electric transmission and
distribution network in Montana. Montana Power LLC's operations included an
approximately 7,000-mile electric transmission system as of December 31, 2001,
which extended through the western two-thirds of Montana from Colstrip in the
east to Thompson Falls in the west. Montana Power LLC's electric transmission
system transmits bulk energy from in-state and out-of-state generation sources
to distribution points and other non-affiliated transmission systems. As of
December 31, 2001, Montana Power LLC's electric distribution operations
delivered electricity to approximately 295,000 customers in 191 communities and
their surrounding rural areas in Montana, including Yellowstone National Park.
Montana Power LLC's electric distribution system consisted of approximately
16,800 miles of overhead and underground distribution lines and 351 transmission
and distribution substations as of December 31, 2001.
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The following diagram provides the percentage of Montana Power LLC's
electric revenue by sales type for the year ended December 31, 2001:
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<Table>
<Caption>
RESIDENTIAL TRANSMISSION AND
Distribution 28%
Commercial Transmission and
Distribution 34%
Industrial Transmission and
Distribution 38%
</Table>
SOUTH DAKOTA
Our energy division, NSG, operates as a vertically integrated utility
generating and distributing electricity to over 57,000 retail customers in 108
communities throughout South Dakota as of December 31, 2001. Our regulated
assets in South Dakota included approximately 3,100 miles of overhead and
underground electric transmission and distribution lines, 120 substations and
interests in generation facilities comprising approximately 312 megawatts of
capacity as of December 31, 2001. Our South Dakota business enjoys competitive
low cost fuel with no nuclear exposure. Coal was used to generate approximately
95% of NSG's electricity during the year ended December 31, 2001.
The following diagram provides the percentage of NSG's electric revenue by
sales type for the year ended December 31, 2001:
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<Table>
<Caption>
RESIDENTIAL TRANSMISSION AND
Distribution 33%
Commercial and industrial Transmission and
Distribution 43%
Wholesale 21%
Other Transmission and
Distribution 3%
</Table>
GAS OPERATIONS
Our regulated natural gas utility operations purchase, transport,
distribute, sell and store natural gas for over 236,800 commercial and
residential customers in 109 Montana communities, 59 South Dakota communities
and four Nebraska communities as of December 31, 2001 after giving effect to the
acquisition of Montana Power LLC. Our natural gas transmission system comprised
over 2,000 miles of pipeline serving more than 130 city gate stations and
strategic connections with four major, non-affiliated transmission systems and
our natural gas distribution system consisted of approximately
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5,300 miles of underground distribution pipelines as of December 31, 2001 after
giving effect to the acquisition.
All natural gas is delivered through service agreements. Montana Power LLC's
natural gas supply requirements in Montana for the year ended December 31, 2001
were approximately 19.5 million MMBTU. NSG's natural gas supply requirements in
South Dakota and Nebraska for the year ended December 31, 2001 were
approximately 5.5 million MMBTU and approximately 5.6 million MMBTU,
respectively.
UNREGULATED BUSINESSES
Our principal unregulated subsidiary, Expanets, is a leading provider of
networked communications and data services and solutions to medium-sized
businesses. Expanets is a leading independent distributor for Avaya, Inc.'s wide
range of products and software and is a significant independent distributor for
a number of other major enterprise software providers. Expanets' services
include the design, procurement, implementation, maintenance and monitoring of
voice networking, data networking, internet connectivity, messaging systems,
advanced call processing applications, computer telephony, network management,
carrier services and e-business services. Expanets' business is not capital
intensive and competition in Expanets' industries is fragmented. In addition,
Expanets' maintenance services, which include the maintenance and upgrades of
systems, provide recurring revenues.
Expanets served approximately 559,000 business customers through more than
150 operational centers in all 50 states during the year ended December 31,
2001. Expanets generated approximately $1.0 billion in revenues and
approximately $47.5 million in losses before interest, taxes, depreciation and
amortization and restructuring charges during the year ended December 31, 2001.
Expanets' 2001 results were adversely impacted by non-recurring transition and
integration costs. As a result of actions taken in 2001 and early 2002 aimed at
reducing operating expenses, we believe Expanets is positioned to deliver
improved performance in 2002. See "Recent Developments--2001
Results--NorthWestern Results."
Blue Dot is a nationwide network of air conditioning, heating, duct cleaning
and plumbing professionals who install and maintain indoor comfort systems. Blue
Dot primarily operates in the residential and light commercial markets and
serviced approximately 850,000 customers in 29 states during the year ended
December 31, 2001. Blue Dot generated approximately $423.8 million in revenues
and approximately $9.9 million in EBITDA, before restructuring charges during
the year ended December 31, 2001. In addition, we hold approximately 30% of
CornerStone, which is the sixth largest retail marketer of propane in the United
States based on total retail gallons sold.
BUSINESS STRATEGY
We are a premier regional energy company focused on building our core
competencies in our regulated businesses. Our goal is to provide "America's Best
Services and Solutions Experience" by delivering superior service and innovative
solutions. We intend to focus on the following strategic initiatives:
EXPAND OUR REGULATED ELECTRIC AND GAS UTILITY PLATFORM. We intend to
pursue balanced growth in our core utility operations through both organic
and external growth. We have a demonstrated ability to create value for our
customers by supplying reliable, low-cost energy and related services with
superior customer service. In February 2001, we received the RELIABILITY ONE
AWARD for superior electric system reliability in the Midwest from PA
Consulting Group, a leading energy management firm. The award was issued to
the top four regional companies in the U.S. following a comprehensive study
and audit of more than 100 electric utility companies nationwide. We believe
our recent acquisition of Montana Power LLC creates greater regional scale
allowing us to realize the full value of our existing energy assets and
provides a strong platform for future growth. We will seek to strengthen our
leadership position in the upper Midwest where we can emphasize economies of
scale and apply our best practices of operational excellence.
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CONTINUE BUILDING ON ESTABLISHED SERVICE EXCELLENCE. Our guiding philosophy
mandates unwavering commitment not only to sector-leading, top line growth, but
also to service excellence. Our goal is to achieve a high level of customer
satisfaction and to leverage customer relationships to expand our service
territories and lines of value-added products and services. Our team members
strive for excellence by following our SPIRIT values--Service excellence,
Performance, Integrity, Respect, Innovation and Teamwork. These principles form
our foundation and guide our team members as they strive to build our customer
base.
REALIZE THE ECONOMIC BENEFITS OF OUR COMMUNICATIONS BUSINESSES. Our
investment in Expanets has created one of the nation's leading providers of
networked communications and data services and solutions to medium-sized
businesses. Expanets' focus on being a single-source provider of essential
communications and data solutions at its customers' premises has enabled it to
maintain a core level of recurring customer revenues. Expanets plans to generate
increasing cash flows from this business through organic growth by broadening
the services and products it offers, focusing on higher growth and higher margin
services, building recurring maintenance and service revenues and fostering
existing and developing supply relationships with the leading technology
companies.
OPTIMIZE THE PERFORMANCE OF OUR DIVERSIFIED ENERGY AND COMMUNICATIONS
OPERATIONS. We strive to identify ways to improve efficiency and productivity
across our divisions and subsidiaries through ongoing management initiatives.
Our goal is to maximize our operational strengths, centralize back office
supporting systems and eliminate redundancy. Our immediate goal is to execute
operating efficiencies designed to reduce annualized selling, general and
administrative expenses by approximately $150.0 million through our Operational
Excellence initiative. We believe this effort is critical to optimizing our
energy and communications business platforms and realizing the full value of our
regulated and unregulated assets.
COMPETITIVE AND REGULATORY ENVIRONMENT
ELECTRIC OPERATIONS
MONTANA
Although Montana customers have a choice with regard to electricity
suppliers, Montana Power LLC does not currently face material competition in the
transmission and distribution of electricity within its Montana service
territories. Montana's Electric Utility Industry Restructuring and Customer
Choice Act of 1997 enabled larger customers in Montana to choose their supplier
of electricity beginning on July 1, 1998 and provided that all other Montana
customers will be able to choose their electric supplier during a transition
period beginning on July 1, 2002 through June 30, 2007. Montana Power LLC is
required to act as the "default supplier" for those customers who have not
chosen an alternate supplier. The Montana Electric Utility Restructuring Act
provided for the full recovery of costs incurred in procuring default supply
contracts during this transition period. In its 2001 session, the Montana
Legislature passed House Bill 474, which, among other things, reaffirmed full
cost recovery for the default supplier of prudently incurred electric energy
supply costs.
On October 29, 2001, the former owner of Montana Power LLC filed with the
Montana Public Service Commission, or the MPSC, its default supply portfolio,
containing a mix of long and short-term contracts that it negotiated in order to
provide electricity to default supply customers. This filing seeks approval of
the default supply portfolio contracts and the establishment of default supply
rates for customers who have not chosen alternate suppliers during the
transition period ending on June 30, 2007. The MPSC has set a procedural
schedule on the default supply portfolio and an order is expected in
April 2002.
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SOUTH DAKOTA
Our regulated electric utility business in South Dakota, NSG, operates as a
vertically integrated generation, transmission and distribution utility. Direct
competition does not presently exist within our South Dakota service territories
for the supply and delivery of electricity.
GAS OPERATIONS
MONTANA
Montana's Natural Gas Utility Restructuring and Customer Choice Act, which
was passed in 1997, provides that a natural gas utility may voluntarily offer
its customers their choice of natural gas suppliers and provide open access in
Montana. Although Montana Power LLC has opened access to its gas transmission
and distribution systems and gas supply choice is available to all of its
natural gas customers in Montana, Montana Power LLC does not currently face
material competition in the transmission and distribution of natural gas in its
Montana service territories.
SOUTH DAKOTA AND NEBRASKA
We have non-exclusive municipal franchises to purchase, transport,
distribute and store natural gas in the South Dakota and Nebraska communities we
serve. However, competition currently exists only for commodity sales to large
volume customers. We are currently the largest provider of natural gas in our
South Dakota and Nebraska natural gas service territories based on MMBTU sold.
We have never been denied the renewal of any of our franchises in South Dakota
and Nebraska.
For additional information regarding our regulatory environment generally
and our filings with the MPSC, see "Risk Factors--We face uncertainty with
respect to our ability to fully recover transition costs, the resolution of our
default supply filings that are pending before the MPSC and the outcome of other
rate orders of the MPSC."
--------------
We were incorporated in Delaware in 1923. Our principal office is located at
125 S. Dakota Avenue, Sioux Falls, South Dakota 57104 and our telephone number
is (605) 978-2908. We maintain an internet site at http://www.northwestern.com
which contains information concerning us and our subsidiaries. The information
contained on our internet site and those of our subsidiaries is not incorporated
by reference in this offering circular and should not be considered a part of
this offering circular.
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RISK FACTORS
THE FOLLOWING RISKS SHOULD BE CONSIDERED BY INVESTORS IN OUR SECURITIES.
THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES FACING OUR
COMPANY. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN OR THAT WE
CURRENTLY BELIEVE TO BE LESS SIGNIFICANT MAY ALSO ADVERSELY AFFECT US.
OUR GROWTH STRATEGY IS SUBJECT TO RISKS AND UNCERTAINTIES, INCLUDING THOSE
RELATED TO THE INTEGRATION OF ACQUIRED BUSINESSES.
A substantial part of our growth has been from acquisitions and a
substantial part of future growth in our utility business may come from
acquisitions. Our growth strategy is subject to certain risks and uncertainties,
including:
- the future availability of market capital to fund development and
acquisitions,
- our ability to develop and implement new growth initiatives,
- our ability to identify acquisition targets,
- our response to increased competition,
- our ability to attract, retain and train skilled team members,
- governmental regulations and
- general economic conditions relating to the economy and capital markets.
Many of our acquisitions at Expanets and Blue Dot have involved the issuance
of common stock in those subsidiaries. This common stock creates minority
interests against which operating losses, if any, are allocated to the extent of
basis. If such subsidiaries incur operating losses in excess of available
minority interest basis, our share of any such losses will be recognized in our
operating results. See note 1 to our consolidated financial statements filed
as Exhibit 99.2 to this Current Report on Form 8-K.
In addition, our acquisition activities involve the risk of successfully
transitioning, integrating and managing acquired companies, including assessing
the adequacy and efficiency of information, technical and accounting systems,
business processes and related support functions and realizing cost savings and
efficiencies from integration in excess of any related restructuring charges. In
particular, the integration of Montana Power LLC with our NSG utility business
may involve, among other things, integration of sales, marketing, billing,
accounting, quality control, management, personnel, payroll, regulatory
compliance and other systems and operating hardware and software, some of which
may be incompatible with our existing systems and therefore may need to be
replaced. In addition, Expanets is subject to risks associated with its
continuing integration of the significant acquisition of the Growing and
Emerging Markets, or GEM, division of Lucent Technologies, Inc. and other
acquired businesses, including reliance upon transition services agreements
entered into with the sellers of such businesses, substantial investments in
corporate infrastructure systems to enable Expanets to terminate such transition
services agreements and the integration of these systems into our existing
operations, the successful integration of the much larger GEM business with the
existing Expanets business and the successful transition of the historical GEM
sales from voice equipment to relatively higher margin integrated voice and data
services solutions despite weakness in the communications and data sectors
generally. The expansion of our operations may place significant strain on
our management, financial and other resources. We could expend a substantial
amount of time and capital integrating businesses that have been acquired or
pursuing acquisitions we do not consummate, which could adversely affect our
business, financial condition and results of operations.
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WE FACE UNCERTAINTY WITH RESPECT TO OUR ABILITY TO FULLY RECOVER TRANSITION
COSTS, THE RESOLUTION OF OUR DEFAULT SUPPLY FILINGS THAT ARE PENDING BEFORE THE
MPSC AND THE OUTCOME OF OTHER RATE ORDERS OF THE MPSC.
Montana law requires that the MPSC determine the value of net unmitigable
transition costs associated with the transformation of the Montana Power utility
business from a vertically integrated electric service company to a utility
providing only default supply and transmission and distribution services. The
MPSC is also obligated to set a competitive transition charge to be included in
distribution rates to collect those net transition costs. The majority of these
transition costs relate to out-of-market power purchase contracts, which run
through 2032, that the former owner of Montana Power LLC was required to enter
into with certain "qualifying facilities" as established under the Public
Utility Regulatory Policies Act of 1978. The former owner of Montana Power LLC
estimated the pre-tax net present value of its transition costs to be
approximately $304.7 million in a filing with the MPSC on October 29, 2001.
On January 31, 2002, the MPSC approved a stipulation among the former owner
of Montana Power LLC, us and a number of other parties, which, among other
things, conclusively established the pre-tax net present value of the transition
costs relating to out-of-market power purchase contracts recoverable in rates to
be approximately $244.7 million, or approximately $60.0 million less than the
former owner of Montana Power LLC estimated in its initial filing with the MPSC.
In addition, the stipulation set a fixed annual recovery for the transition
costs beginning at $14.9 million in the first year after implementation and
increasing up to $25.6 million in the fourth year and thereafter. Because the
recovery stream as finalized by the stipulation is less than the total payments
due under the out-of-market power purchase contracts, the difference must be
mitigated or covered from other revenue sources. We estimate that the annual
after tax differences will be approximately $1.9 million in 2002, increasing to
a high of approximately $13.2 million in 2017. The aggregate after tax amount of
the differences over the 28-year life of these contracts would be approximately
$193.5 million. Although we believe we have opportunities to mitigate the impact
of these differences, we cannot assure you that we will be successful. To the
extent we are unable to mitigate these differences, our net income and financial
condition could be adversely affected.
On October 29, 2001, the former owner of Montana Power LLC filed with the
MPSC its default supply portfolio, containing a mix of long and short-term
contracts from new and existing generators. We expect that the costs of the
default supply portfolio and a competitive transition charge for out-of-market
costs will increase residential electric rates in Montana Power LLC's service
territories by approximately 20%. This filing seeks MPSC review of the supply
portfolio to establish that the contracts meet applicable prudency standards and
to establish default supply rates for customers who have not chosen alternate
suppliers during the transition period ending on June 30, 2007. The MPSC has set
a procedural schedule on the default supply portfolio and an order is expected
in April 2002. If the MPSC does not approve the default supply portfolio, we may
be required to seek alternate sources of supply. The MPSC could also disallow
the recovery of the costs incurred in entering into the default supply portfolio
if a determination is made that the contracts were not prudently entered into. A
failure to recover such costs could adversely affect our net income and
financial condition.
On June 27, 2001, the MPSC issued an order, which, among other things,
required that if the former owner of Montana Power LLC desired a power supply
rate change at the end of its current rate moratorium in Montana on July 1,
2002, it was required to make a filing containing information that supports what
rates would be if the regulatory system in place prior to deregulation remained
intact. The former owner of Montana Power LLC did not make a filing by the
required date, but instead filed a motion for reconsideration with the MPSC,
which was subsequently denied. On September 6, 2001, the former owner of Montana
Power LLC filed a complaint against the MPSC in Montana state court in Helena,
Montana disputing this order as having no basis under applicable law. We believe
that approval by the MPSC of cost recovery for the default supply portfolio will
resolve this matter. We cannot predict the ultimate outcome of this matter or
its potential effect on our financial position or results of operations.
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OUR UTILITY BUSINESS IS SUBJECT TO EXTENSIVE ENVIRONMENTAL REGULATIONS AND
POTENTIAL ENVIRONMENTAL LIABILITIES, WHICH COULD RESULT IN SIGNIFICANT COSTS AND
LIABILITIES.
Our utility business is subject to extensive regulations imposed by federal,
state and local government authorities in the ordinary course of day-to-day
operations with regard to the environment, including environmental regulations
relating to air and water quality, solid waste disposal and other environmental
considerations. Many of these environmental laws and regulations create permit
and license requirements and provide for substantial civil and criminal fines
which, if imposed, could result in material costs or liabilities. We regularly
monitor our operations to prevent adverse environmental impacts. We may be
required to make significant expenditures in connection with the investigation
and remediation of alleged or actual spills and the repair and upgrade of our
facilities in order to meet future requirements under environmental laws. Most
of our generating capacity is coal burning.
The Clean Air Act Amendments of 1990, which prescribe limitations on sulfur
dioxide and nitrogen oxide emissions from coal-fired power plants, required
reductions in sulfur dioxide emissions at our Big Stone plant beginning in
the year 2000. The Clean Air Act also contains a requirement for future
studies to determine what, if any, limitations and controls should be imposed
on coal-fired boilers to control emissions of certain air toxics, including
mercury. Because of the uncertain nature the air toxic emission limits and
the potential for development of more stringent emission standards in
general, we cannot reasonably determine the additional costs we may incur
under the Clean Air Act.
In addition, the U.S. Environmental Protection Agency, or the EPA, listed
the Milltown Reservoir, which sits behind a hydroelectric dam owned by Montana
Power LLC, on its Superfund National Priority List in 1983 as a result of the
collection of toxic heavy metals in the silts. The Atlantic Richfield Company,
or ARCO, as successor to the Anaconda Company and a number of small mining
companies, has been named as the Potentially Responsible Party, or PRP, with
responsibility for completing the remedial investigation and feasibility studies
and conducting site cleanup, under the EPA's direction. The former owner of
Montana Power LLC was not identified as a PRP because it is exempt from
liability for cleanup by virtue of a special statutory exemption. By virtue of
its acquisition of the Montana Power utility business and the dam, Montana
Power LLC succeeded to similar protection under this statutory exception. ARCO
has argued that the former owner of Montana Power LLC should be considered a PRP
and threatened to challenge its exempt status. The EPA has taken no position,
and ARCO and the former owner of Montana Power LLC entered into a settlement
agreement to limit the former owner's and now Montana Power LLC's potential
liability, costs and ongoing operating expenditures, provided that the EPA
selects a remedy that leaves the dam and sediments in place in its final Record
of Decision. The final Record of Decision is not expected to be issued until
late 2002 or early 2003. Depending on the outcome of that decision, we may be
required to defend our exempt position. We cannot assure you that we will not
incur costs or liabilities associated with the Milltown Dam site in the future,
some of which could be significant. We have established a $30.0 million reserve
primarily for liabilities related to the Milltown Dam and other environmental
liabilities. To the extent we incur liabilities greater than our reserve, our
financial condition and results of operations could be adversely affected.
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WE ARE SUBJECT TO RISKS ASSOCIATED WITH A CHANGING ECONOMIC ENVIRONMENT.
In response to the occurrence of several recent events, including the
September 11, 2001 terrorist attack on the United States, the ongoing war
against terrorism by the United States and the bankruptcy of Enron Corp., the
financial markets have been disrupted in general and the availability and cost
of capital for our business and that of our competitors has been adversely
affected. In addition, although we have no known exposure relating directly to
Enron Corp. following its bankruptcy, the credit rating agencies initiated a
thorough review of the capital structure and earnings power of certain energy
companies. These events could constrain the capital available to our industry
and could adversely affect our access to funding for our operations, including
the funding necessary to refinance our indebtedness that is scheduled to come
due in 2002 and 2003. See "--We will need significant additional capital to
refinance our indebtedness that is scheduled to mature and for other working
capital purposes, which we may not be able to obtain." The achievement of our
growth targets is dependent, at least in part, upon our ability to access
capital at rates and on terms we determine to be acceptable. If our ability to
access capital becomes significantly constrained, our financial condition and
future results of operations could be significantly adversely affected.
The insurance industry has also been disrupted by these events. As a result,
the availability of insurance covering risks we and our competitors typically
insure against may decrease. In addition, the insurance we are able to obtain
may have higher deductibles, higher premiums and more restrictive policy terms.
A DOWNGRADE IN OUR CREDIT RATING COULD NEGATIVELY AFFECT OUR ABILITY TO ACCESS
CAPITAL.
Moody's and Standard & Poor's rate our senior, unsecured debt at Baa2 with a
negative outlook and BBB, respectively. Although none of our debt instruments
contain acceleration and repayment provisions in the event of a downgrade in our
debt ratings by Moody's or Standard & Poor's, if such a downgrade were to occur,
particularly below investment grade, our borrowing costs would increase which
would adversely impact our financial results and condition. In addition, we
would likely be required to pay a higher interest rate in future financings and
our potential pool of investors and funding sources could decrease.
WE WILL NEED SIGNIFICANT ADDITIONAL CAPITAL TO REFINANCE OUR INDEBTEDNESS THAT
IS SCHEDULED TO MATURE AND FOR OTHER WORKING CAPITAL PURPOSES, WHICH WE MAY NOT
BE ABLE TO OBTAIN.
We have completed a number of financings during 2001 and the beginning of
2002 as discussed in "Recent Developments." In addition, we will be required to
obtain significant additional capital in 2002 and 2003 to execute our business
plan, including for working capital purposes and to repay existing indebtedness
scheduled to mature during the year. In particular, we will be required to
repay, refinance or extend the following indebtedness:
- Expanets' current $125.0 million equipment purchase financing facility
with Avaya, which is scheduled to mature on March 31, 2002;
- our $150.0 million aggregate principal amount of floating rate notes,
which are scheduled to mature on September 23, 2002; and
- our new $720.0 million acquisition credit facility and $280.0 million
working capital facility, which are each scheduled to mature on
February 12, 2003.
We intend to use the net proceeds from our recently announced financing
to refinance our acquisition facility. In addition, we intend to issue
approximately $150.0 million to $200.0 million in additional equity in 2002
and use the proceeds to retire debt and for other corporate purposes. We may
also issue additional other debt or equity during the year for these
purposes. Our ability to obtain additional financing will be dependent on a
number of factors, including those discussed in these "Risk Factors." We
cannot assure you that we will be able to obtain such financing on acceptable
terms and in adequate amounts to accomplish our objectives.
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OUR OPERATING RESULTS MAY FLUCTUATE ON A SEASONAL AND QUARTERLY BASIS.
Our electric and gas utility business and, to a lesser extent, Blue Dot's
HVAC business are seasonal businesses and weather patterns can have a material
impact on their operating performance. Because natural gas is heavily used for
residential and commercial heating, the demand for this product depends heavily
upon weather patterns throughout our market areas and a significant amount of
natural gas revenues are recognized in the first and fourth quarters related to
the heating season. Demand for electricity is often greater in the summer and
winter months associated with cooling and heating. Similarly, Blue Dot's
business is subject to seasonal variations in certain areas of its service
lines, with demand for residential HVAC services generally higher in the second
and third quarters. Accordingly, our operations have historically generated less
revenues and income when weather conditions are milder in the winter and cooler
in the summer. We expect that unusually mild winters and summers in the future
will have an adverse effect on our results of operations and financial
condition.
CHANGES IN COMMODITY PRICES MAY INCREASE OUR COST OF PRODUCING AND DISTRIBUTING
ELECTRICITY AND DISTRIBUTING NATURAL GAS OR DECREASE THE AMOUNT WE RECEIVE FROM
SELLING ELECTRICITY AND NATURAL GAS, ADVERSELY AFFECTING OUR FINANCIAL
PERFORMANCE AND CONDITION.
To the extent not covered by long-term fixed price purchase contracts, we
are exposed to changes in the price and availability of coal because most of our
generating capacity is coal-fired. Changes in the cost of coal and changes in
the relationship between those costs and the market prices of power may affect
our financial results. In addition, natural gas is a commodity, the market price
of which can be subject to volatile changes in response to changes in the world
crude oil market, refinery operations, supply or other market conditions.
Because the rates at which we sell electricity and natural gas are set by state
regulatory authorities, we may not be able to immediately pass on to our retail
customers rapid increases in the wholesale cost of coal and natural gas, which
could reduce our profitability.
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RECENT DEVELOPMENTS
2001 RESULTS
NORTHWESTERN RESULTS
We generated revenues of approximately $4.2 billion during the year ended
December 31, 2001 compared to approximately $7.1 billion during the year ended
December 31, 2000. Revenues in 2001 were lower due primarily to the sale and
exit of certain natural gas and crude oil businesses of CornerStone along with
lower commodity prices.
We reported an operating loss of approximately $84.1 million during the year
ended December 31, 2001 compared to operating income of approximately
$41.3 million during the year ended December 31, 2000. Operating results during
2001 were lower due primarily to non-recurring transition and integration costs
incurred at Expanets, which are intended to advance the migration of its
business toward a common information technology platform and restructure its
operations to match current conditions in the communications industry. In
addition, we recorded a pre-tax restructuring charge of approximately
$24.9 million during the fourth quarter associated with our Operational
Excellence initiative, which is focused on reducing annualized selling, general
and administrative expenses by approximately $150.0 million.
We had net earnings on common stock of approximately $37.5 million during
the year ended December 31, 2001 compared to approximately $42.8 million during
the year ended December 31, 2000. The decrease was primarily due to a pre-tax
restructuring charge of approximately $24.9 million in the fourth quarter
associated with our Operational Excellence initiative discussed above, which was
partially offset by an increase of approximately $7.4 million in pre-tax income
from our regulated businesses. For additional information related to our
financial information for the year ended December 31, 2001, please see our
consolidated financial statements and the notes thereto filed as Exhibit 99.2
to this Current Report on Form 8-K and our Current Report on Form 8-K, filed
with the SEC on February 7, 2002, which is incorporated by reference herein.
THE MONTANA POWER UTILITY RESULTS
THE UTILITY BUSINESS RESULTS
The Montana Power utility business as it existed on December 31, 2001 is
herein referred to as The Utility. The Utility differs from Montana Power LLC,
which we purchased on February 15, 2002. The differences are disclosed below
under "--Montana Power LLC Pro Forma Results." For additional information
related to The Utility's financial information, see the audited combined
financial statements and the notes thereto of The Utility of The Montana Power
Company filed as Exhibit 99.3 to this Current Report on Form 8-K.
The Utility generated revenues of approximately $703.8 million during the
year ended December 31, 2001 compared to approximately $676.1 million during the
year ended December 31, 2000. Revenues in 2001 were higher due primarily to the
impact of the final rate increase approved by the MPSC in May 2001. An interim
rate order providing an annual increase of $19.7 million went into effect
beginning in November 2000 until the final order providing an annual increase of
$20.3 million was approved. The remaining positive impact to 2001 revenues as
compared to 2000 was due to slightly more favorable weather conditions in 2001.
The Utility reported an operating loss of approximately $3.3 million during
the year ended December 31, 2001 compared to operating income of approximately
$14.1 million during the year ended December 31, 2000. Operating results in 2001
were lower due primarily to a $74.7 million increase in losses under an
industrial power supply contract we did not acquire as part of our acquisition
of Montana Power LLC, which were partially offset by the impact of the rate
increase, more favorable weather conditions in 2001, a $10.3 million expense
reduction in 2001 resulting from an early retirement program, an $8.7 million
reduction in liabilities associated with the sale of The Utility's oil and
natural gas businesses and the capitalization of a regulatory asset upon the
settlement of the final rate increase approved in May 2001.
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The Utility had net losses on LLC units of approximately $46.8 million
during the year ended December 31, 2001 compared to net income on LLC units of
approximately $3.1 million during the year ended December 31, 2000. The decrease
was primarily due to the decrease in operating income combined with higher
interest expense resulting from higher short term borrowings, lower interest
income on the proceeds from the sale of The Utility's generation assets, which
were used to repay outstanding debt in 2000 and an increased allocation of
income taxes to The Utility in 2001 resulting from the divestiture of its
business.
MONTANA POWER LLC PRO FORMA RESULTS
Montana Power LLC is the entity we purchased on February 15, 2002. Montana
Power LLC differs from The Utility due to adjustments to give effect to the
exclusion of revenues and costs under an industrial power supply contract that
was not assumed as part of the acquisition, the elimination of certain
regulatory liabilities relating to the sale of The Utility's oil and gas
businesses, the elimination of interest expense on related party and other debt
and interest income that were not assumed as part of the acquisition and the
elimination of dividends paid on preferred stock, which was retained by the
former owner of Montana Power LLC. The following pro forma financial information
of Montana Power LLC gives pro forma effect to the transactions more fully
described in "Montana Power LLC Unaudited Pro Forma Combined Condensed Financial
Data."
Montana Power LLC generated pro forma revenues of approximately
$658.1 million during the year ended December 31, 2001, which was less than The
Utility's revenues for the same period due to the exclusion of approximately
$45.7 million of revenues from an industrial power supply contract that was not
assumed as part of the acquisition.
The pro forma operating income of Montana Power LLC for the year ended
December 31, 2001 was approximately $106.6 million, excluding the impact of an
approximately $86.1 million loss on the excluded industrial power supply
contract and excluding a $23.8 million charge relating to a regulatory liability
for assets sold by the former owner of Montana Power LLC with respect to which
we are specifically indemnified under the Unit Purchase Agreement.
The pro forma net income on LLC units of Montana Power LLC for the year
ended December 31, 2001 was approximately $40.1 million, excluding the
industrial power supply contract and regulatory liability charge described above
and the elimination of interest on related party debt and payments in respect of
preferred securities that we did not assume as part of our acquisition of
Montana Power LLC. For additional information related to the financial
information of Montana Power LLC, please see "Montana Power LLC Unaudited Pro
Forma Combined Condensed Financial Data" filed as Exhibit 99.5 to this
Current Report on Form 8-K.
UNAUDITED PRO FORMA RESULTS
On a pro forma basis after giving effect to the acquisition of Montana Power
LLC and the other transactions described in "Unaudited Pro Forma Combined
Financial Information" as if they had occurred on January 1, 2001, we would have
generated approximately $4.9 billion in consolidated operating revenue,
approximately $205.1 million in consolidated EBITDA and approximately
$44.7 million in consolidated earnings on common stock for the year ended
December 31, 2001. Our pro forma modified EBITDA for the year ended
December 31, 2001 was approximately $281.8 million. See note 7 contained in
"Unaudited Pro Forma Financial Information" filed as Exhibit 99.4 to this
Current Report on Form 8-K for a description of Modified EBITDA.
NEW CREDIT FACILITY
We entered into a credit agreement as of January 14, 2002 with Credit Suisse
First Boston, ABN AMRO Bank N.V., CIBC Inc. and Barclays Capital, as
co-arrangers, Credit Suisse First Boston, as administrative agent, lead arranger
and sole book runner, and the banks and other financial institutions
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parties thereto, for the provision of a $1.0 billion credit facility with a term
of 364 days following the closing of the acquisition of Montana Power LLC. The
credit facility consists of a $280.0 million revolving credit facility and a
$720.0 million acquisition term loan.
We used the proceeds from the credit facility to fund the acquisition of
Montana Power LLC, pay related transaction expenses and repay borrowings under
and terminate our old credit facility with CIBC Inc. and for working capital
purposes. We intend to use the net proceeds from our recently announced
offering, together with other debt and equity issuances, to refinance the
acquisition term loan portion of the credit facility. For additional
information related to our new credit facility, see note 5 contained in
"Unaudited Pro Forma Combined Financial Information" filed as Exhibit 99.4 to
this Current Report on Form 8-K.
CORNERSTONE PROPANE PARTNERS, L.P.
On January 18, 2002, the board of directors of the general partner of
CornerStone announced that it had retained Credit Suisse First Boston
Corporation to review strategic options, including the possible sale or merger
of CornerStone. We are the largest unitholder of CornerStone and own all of the
stock of CornerStone's managing general partner. We fully support the board's
action as it is consistent with our strategic intent to continue to narrow the
focus of our energy and communications businesses. A special committee of the
board of directors of the managing general partner, composed of directors that
are not officers of NorthWestern, has been formed to pursue strategic options.
As a result, we are reevaluating the characterization and valuation of our
investment in CornerStone and the resulting potential disposal of our investment
in CornerStone in conjunction with our required adoption of Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
and Statement of Financial Accounting Standards No. 144, "Impairment or Disposal
of Long-Lived Assets" effective January 1, 2002. It is likely that substantially
all of our nearly $40.0 million net carrying value in CornerStone will be taken
as a non-cash charge during the first quarter of 2002. For additional
information relating to CornerStone, see the Current Report on Form 8-K,
filed with the SEC on January 22, 2002, and incorporated by reference herein.
SECURITIES OFFERINGS
We completed a 3.68 million share common stock offering, including an
overallotment option, in October 2001. The offering raised $74.9 million of net
proceeds, after expenses and commissions. Approximately $35.0 million of these
net proceeds were contributed to our Blue Dot subsidiary for the redemption of
certain preferred stock and common stock pursuant to existing agreements and the
remainder was used for general corporate purposes, including reducing short-term
debt and amounts drawn under our old credit facility with CIBC Inc.
On December 21, 2001, NorthWestern Capital Financing II sold 4.0 million
shares of its 8 1/4% trust preferred securities and on January 15, 2002 sold an
additional 270,000 shares of its 8 1/4% trust preferred securities pursuant to
an overallotment option. We received approximately $102.9 million in net
proceeds from the offering, which we used for general corporate purposes and to
repay a portion of the amounts outstanding under our old credit facility with
CIBC Inc. The 8 1/4% trust preferred securities will be redeemed either at
maturity on December 15, 2031, or upon early redemption. See notes 2 and 7 to
"Unaudited Pro Forma Combined Financial Information" filed as Exhibit 99.4
to this Current Report on Form 8-K
On January 31, 2002, NorthWestern Capital Financing III sold 4.0 million
shares of its 8.10% trust preferred securities and on February 5, 2002 sold an
additional 440,000 shares of its 8.10% trust preferred securities pursuant to an
overallotment option. We received approximately $107.4 million in net proceeds
from the offering, which we used for general corporate purposes and to repay a
portion of the amounts outstanding under our old credit facility with CIBC Inc.
The 8.10% trust preferred securities will be redeemed either at maturity on
January 15, 2032, or upon early redemption. See notes 3 and 8 to "Unaudited Pro
Forma Combined Financial Information" filed as Exhibit 99.4 to this Current
Report on Form 8-K.
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