-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, L6foo1EIWMSjbYacgcYNl/WpAIkYTlcQG3ma9AfMqRivVczsPku+XBRog7tJgBL8 CFsXtDqK+hH4Xc3v0rXNYg== 0000073088-00-000069.txt : 20000516 0000073088-00-000069.hdr.sgml : 20000516 ACCESSION NUMBER: 0000073088-00-000069 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTHWESTERN CORP CENTRAL INDEX KEY: 0000073088 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 460172280 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10499 FILM NUMBER: 634805 BUSINESS ADDRESS: STREET 1: 125 S DAKOTA AVENUE STREET 2: SUITE 1100 CITY: SIOUX STATE: SD ZIP: 57104 BUSINESS PHONE: 6059782908 MAIL ADDRESS: STREET 1: 125 S DAKOTA AVENUE STREET 2: SUITE 1100 CITY: SIOUX STATE: SD ZIP: 57104 FORMER COMPANY: FORMER CONFORMED NAME: NORTHWESTERN PUBLIC SERVICE CO DATE OF NAME CHANGE: 19920703 10-Q 1 MARCH 31, 2000 10Q 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, 2000 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 (State of Incorporation) IRS Employer Identification No. 46-0172280 125 South Dakota Avenue Suite 1100 Sioux Falls, South Dakota 57104 (Address of principal office) 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 23,108,893 shares outstanding at May 12, 2000 Corporation-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts, Liquidation Amount $25.00 3,500,000 shares outstanding at May 12, 2000 Index PAGE PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - March 31, 2000 and December 31, 1999 3 Consolidated Statements of Income - Three months and nine months ended March 31, 2000 and 1999 4 Consolidated Statements of Cash Flows Three months ended March 31, 2000 and 1999 5 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion of Financial Condition and Results of Operations 10 PART II. OTHER INFORMATION 22 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 23 PART I. FINANCIAL INFORMATION Item 1. Financial Statements NORTHWESTERN CORPORATION CONSOLIDATED BALANCE SHEETS (unaudited) (In Thousands) March 31, December 31, 2000 1999 ASSETS Current Assets: Cash and cash equivalents $ 42,874 $ 29,677 Accounts receivable, net 188,983 205,378 Inventories 107,307 104,099 Other 57,433 44,444 -------- -------- 396,597 383,598 -------- -------- Property, Plant and Equipment, Net 682,843 681,663 -------- -------- Goodwill and Other Intangible Assets, Net 1,028,657 742,010 --------- -------- Other Assets: Investments 99,169 96,056 Other 47,257 53,434 --------- -------- 146,426 149,490 --------- -------- $ 2,254,523 $ 1,956,761 =========== =========== Liabilities and Shareholders' Equity Current Liabilities: Current maturities of long-term debt $ 23,977 $ 24,170 Commercial paper 12,000 11,000 Short-term debt of subsidiaries- nonrecourse 16,500 14,700 Accounts payable 109,111 157,959 Accrued expenses 114,099 61,218 -------- -------- 275,687 269,047 -------- -------- Long-term Debt 390,350 309,350 Long-term Debt of Subsidiaries- nonrecourse 559,643 473,757 Deferred Income Taxes 62,523 64,855 Other Noncurrent Liabilities 62,258 86,797 -------- ------- 1,074,774 934,759 --------- ------- Minority Interests 506,091 361,549 --------- ------- 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 - - Company obligated mandatorily redeemable preferred securities of subsidiary trusts 87,500 87,500 ------- ------- 91,250 91,250 ------- ------- Shareholders' Equity: Common stock 40,438 40,438 Paid-in capital 160,028 160,028 Retained earnings 102,843 94,715 Accumulated other comprehensive income 3,412 4,975 ------- ------- 306,721 300,156 ------- ------- $ 2,254,523 $ 1,956,761 =========== ============ The accompanying notes to consoldiated 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 ----------------- 2000 1999 ----------------- Operating Revenues $ 1,330,944 $ 509,354 Cost of Sales 1,162,751 364,888 ---------- --------- Gross Margin 168,193 144,466 Operating Expenses: Selling, general and administrative expenses 112,037 87,086 Depreciation and other amortization 14,781 11,868 Goodwill amortization 5,386 3,378 ---------- --------- 132,204 102,332 ---------- --------- Operating Income 35,989 42,134 Interest Expense (16,524) (11,931) Interest Income and Other 3,135 3,317 ---------- --------- Income Before Income Taxes and Minority Interests 22,600 33,520 Provision for Income Taxes (4,811) (7,460) ---------- ---------- Income Before Minority Interests 17,789 26,060 Minority Interests (1,550) (11,180) ---------- ---------- Net Income 16,239 14,880 Minority Interest on Preferred Securities of Subsidiary Trusts (1,650) (1,650) Dividends on Cumulative Preferred Stock (48) (48) ---------- ---------- Earnings on Common Stock $ 14,541 $ 13,182 ========== ========== Average Common Shares Outstanding 23,109 23,051 Earnings Per Average Common Share Basic $ 0.63 $ 0.57 Diluted $ 0.62 $ 0.56 Dividends Declared Per Common Share $ 0.2775 $ 0.2575 The accompanying notes to consoldiated financial statements are an integral part of these statements. NORTHWESTERN CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In Thousands) Three Months Ended March 31 ------------------ 2000 1999 ------------------ Operating Activities: Net Income $ 16,239 $ 14,880 Items not affecting cash: Depreciation 13,216 10,053 Amortization 6,941 5,193 Deferred Income taxes (4,319) (103) Minority interests in net income of Consolidated subsidiaries 1,550 11,180 Investment Tax credits (138) (140) Foreign currency adjustments (184) - Changes in current assets and liabilities, net of acquisitions: Accounts receivable 803 (1,479) Inventories (1,448) 13,691 Other current assets (12,160) (8,173) Accounts payable (22,055) 1,244 Accrued expenses 20,572 (13,637) Other, Net 691 (3,458) -------- -------- Cash flows provided by operating activites 19,708 29,251 -------- -------- Investment Activities: Property, plant and equipment additions (5,873) (6,467) Purchase of noncurrent investments, net (4,954) (6,288) Acquisitions and growth expenditures (89,339) (31,977) --------- --------- Cash flows used in investing activities (100,166) (44,732) Financing Activities: Dividends on common and preferred stock (6,461) (5,986) Minority interest on preferred securities of subsidiary trusts (1,650) (1,650) Proceeds from exercise of warrants - 1,116 Subsidiary payment of common unit distributions (9,083) (9,247) Proceeds from issuance of common units 345 - Issuance of nonrecourse subsidiary debt 36,301 38,338 Repayment of nonrecourse subsidiary debt (3,237) (13,278) Repurchase of minority interest (6,360) - Short term borrowings of subsidiaries 1,800 1,430 Outstanding lines of credit 81,000 - Commercial paper issuances 1,000 - ------- ------- Cash flows provided by financing activities 93,655 10,723 ------- ------- Increase (Decrease) in Cash and Cash Equivalents 13,197 (4,758) Cash and Cash Equivalents, beginning of period 29,677 30,865 ------- ------- Cash and Cash Equivalents, end of period $ 42,874 $ 26,107 ======== ======== Supplemental Cash Flows Information: Cash paid during the period for: Income Taxes $ (493) $ 1,486 Interest 12,090 11,984 The accompanying notes to consoldiated 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. The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that may affect the reported amounts of assets, liabilities, revenues and expenses during the reporting period. Actual results could differ from those estimates. 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 and majority-owned or controlled subsidiaries, including CornerStone Propane Partners, L.P. (NYSE:CNO), the nation's fourth largest retail propane distributor; Blue Dot Services Inc. ('Blue Dot.'), a national provider of air conditioning, heating, plumbing and related services (HVAC); and Expanets, Inc. ('Expanets'), a national provider of networked communications solutions to mid-sized business customers. All significant intercompany balances and transactions have been eliminated from the consolidated financial statements. The public unitholders' interest in CornerStone's net assets subsequent to CornerStone's formation is reflected as minority interests in the consolidated financial statements. 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. Losses allocable to minority interests in the future may increase or decrease depending upon the level of losses in these business segments, the amount of preferred dividends and the remaining minority interest basis available to absorb losses. (3) Comprehensive Income Comprehensive income for the three months ended March 31, 2000 and 1999, was $14.7 million and $15.2 million. (4) Segment Information For the purpose of providing segment information in accordance with SFAS 131, 'Disclosures about Segments of an Enterprise and Related Information,' the Corporation's six principal business segments are its electric, natural gas, retail propane, wholesale propane, HVAC and communications operations. All other includes other service businesses, activities and assets of the parent and any reconciling or eliminating amounts. 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, 2000 ----------------------------------------------------- Total Electric & Total Communi- All Natural Gas Propane HVAC cations Other Total Operating revenues $ 53,039 $ 1,109,585 $ 79,778 $ 79,778 $3,095 $1,330,944 Cost of sales 28,229 1,030,614 50,665 51,252 1,991 1,162,751 -------- ----------- -------- -------- ------ ---------- Gross margins 24,810 78,971 29,113 34,195 1,104 168,193 Selling, general and administrative 10,053 39,039 28,076 31,458 3,411 112,037 Depreciation & amortization 3,950 7,675 1,553 1,350 253 14,781 Goodwill amortization - 2,092 1,177 2,109 8 5,386 -------- ------- ------- ------- ----- ------- Operating income/(loss) 10,807 30,165 (1,693) (722)(2,568) 35,989 Interest expense (2,083) (9,435) (924) (792)(3,290) (16,524) Investment income and other (39) - 66 109 2,999 3,135 -------- ------- ------- ------- ----- ------- Income/(loss) before taxes and minority interests 8,685 20,730 (2,551) (1,405)(2,859) 22,600 Provision for taxes (3,643) (2,492) 505 (285) 1,104 (4,811) -------- ------- -------- ------- ----- ------- Income/(loss) before minority interests $ 5,042 $ 18,238 $ (2,046)$(1,690)$(1,755) $ 17,789 ======== ======== ======== ======= ======== ======== Maintenance capital expenditures $ 1,909 $ 961 $ 1,788 $ 1,125 $ 90 $ 5,873 ======== ======== ======== ======= ======= ======== THREE MONTHS ENDED MARCH 31, 1999 ------------------------------------- Total Electric & Total Communi- All Natural Gas Propane HVAC cations Other Total Operating revenues $ 50,598 $ 340,328 $ 52,619 $ 52,619 $62,768 $ 509,354 Cost of sales 26,405 270,068 32,695 34,505 1,215 364,888 -------- --------- -------- -------- ------- --------- Gross Margins 24,193 70,260 19,924 28,263 1,826 144,466 Selling, general and administrative 10,168 34,318 18,265 20,980 3,355 87,086 Depreciation & amortization 3,737 6,347 858 707 219 11,868 Goodwill amortization - 1,501 748 1,123 6 3,378 -------- --------- -------- ------- ------- -------- Operating income/(loss) 10,288 28,094 53 5,453 (1,754) 42,134 Interest expense (2,179) (6,863) - (283) (2,606) (11,931) Investment income and other 53 - 88 (539) 3,715 3,317 -------- --------- -------- ------- ------- -------- Income/(loss) before taxes and minority interests 8,162 21,231 141 4,631 (645) 33,520 Provision for taxes (2,700) (2,693) (384) (2,542) 859 (7,460) -------- --------- -------- ------- ------- -------- Income/(loss) before minority interests $ 5,462 $ 18,538 $ (243) $ 2,089 $ 214 $ 26,060 ======== ========= ======== ======= ======= ======== Maintenance capital expenditures $ 3,231 $ 2,002 $ 548 $ 648 $ 38 $ 6,467 ======== ========= ======== ======= ======= ======== 2000 1999 Natural Natural Electric Gas Electric Gas -------- -------- -------- ------- Operating Revenues $ 20,589 $ 32,450 $ 20,475 $ 30,123 Cost of Sales 4,239 23,990 4,431 21,974 ------- ------- ------- ------- Gross Margin $ 16,350 $ 8,460 $ 16,044 $ 8,149 ======== ======== ======== ======= Retail Wholesale Retail Wholesale Propane Propane Propane Propane Operating Revenues $ 133,130 $ 976,455 $ 108,206 $ 232,122 Cost of Sales 72,023 958,591 44,438 225,630 -------- -------- --------- -------- Gross Margin $ 61,107 $ 17,864 $ 63,768 $ 6,492 ========= ========= ========== ========= (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.' SFAS 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments imbedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS 133 requires changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. SFAS 133, as amended, is effective for fiscal years beginning after June 15, 2000. The Corporation is evaluating the impacts of adopting SFAS 133 on its financial statements. The impact of SFAS 133 will likely depend upon the extent of use of derivative instruments and their designation and effectiveness as hedges of market risk. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ('SAB 101'), 'Revenue Recognition in Financial Statements.' SAB 101 summarizes certain of the staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. The Corporation is required to apply SAB 101 effective for the quarter ending June 30, 2000, but does not expect the adoption of SAB 101 to have any effect on our financial position or results of operations. (6) Reclassifications and Restatements Certain 1999 amounts have been reclassified to conform to the 2000 presentation. Such reclassifications and restatements had no impact on net income or shareholders' equity as previously reported. (7) 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 2000 and 1999 (in thousands): Three Months Ended March 31 ------------------- 2000 1999 ------------------- Average Common Shares outstanding for Basic computation 23,109 23,051 Diluted effect of: Stock Options - 18 Stock Warrants 183 303 ------- ------ Average common Shares outstanding for Diluted computation 23,292 23,372 ====== ====== ITEM 2. MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The Corporation and its partner entities are providers of value-added services and solutions to customers across North America and Canada. The Corporation provides electric and natural gas service to Midwestern customers through its energy division, NorthWestern Public Service. In addition, the Corporation holds interests in Blue Dot., CornerStone, and Expanets. The Corporation is also engaged in other service and nonenergy related businesses. The Corporation was incorporated under the laws of the state of Delaware in 1923. The executive offices are located at 125 S. Dakota Avenue, Sioux Falls, South Dakota 57104, and our telephone number is 605-978-2908. Our website is located at www.northwestern.com RESULTS OF OPERATIONS CONSOLIDATED OPERATING RESULTS Diluted earnings per share of $.62 for the quarter ended March 31, 2000 was an increase of $.06 over diluted earnings per share of $.56 for first quarter 1999, as a result of expanded operations. Operating revenues for the first quarter of 2000 increased $822 million, 161.3%, over first quarter 1999 to $1,331 million. Over 90% of the growth is attributable to increases in the wholesale propane segment, resulting from internal growth along with increased commodity prices. Acquisitions in the HVAC and communications segments contributed to the remaining increase as a full quarter's impact from 1999 acquisitions were realized in 2000. Cost of sales for the quarter of $1,163 million increased $798 million over first quarter 1999. The propane segment's wholesale operations accounted for over 90% of the increase. Acquisitions completed in 1999 in the HVAC and communications segments were responsible for the balance of the growth. Gross margins were $168.2 million or 12.6% of operating revenues (42.4% excluding wholesale propane) for the quarter, an increase of $23.7 million over first quarter 1999 gross margins of $144.5 million or 28.4% of operating revenues (49.8% excluding wholesale propane). The increase was due to acquisitions in the HVAC and communications segments as well as the internal growth in the wholesale propane segment. The significant wholesale propane increases also drove down overall gross margin percentages due to the low margin nature of those sales. The overall gross margin percentage exclusive of the propane segment decreased in the first quarter 2000 due principally to the increased proportion which the HVAC and communications segments (which have lower gross margins than the electric segment) represent to total gross margin. Operating expenses grew 29.2% over first quarter 1999 to $132.2 million for first quarter 2000. This growth was principally derived from acquisitions and infrastructure building within the HVAC and communications segments, as well as internal and acquisitions growth within the propane segment. Selling, general and administrative expenses increased $24.9 million, from $87.1 million for first quarter 1999 to $112.0 million for 2000. The HVAC and communications segments comprised the majority of the increase, a result of a full quarter inclusion of 1999 acquisitions in 2000, continued infrastructure building and internal growth. The propane segment also contributed to the increase due to the continued growth of the wholesale operations. Depreciation and amortization was $20.2 million for the quarter, a 32.3% increase over first quarter 1999. The HVAC and communications segments had increased amortization due to acquisition activity and growth in depreciation expense from additional infrastructure and acquisitions. The propane segment also increased due to capital expenditures and acquisitions since the first quarter of 1999. Operating income of $36.0 million for the quarter decreased $6.1 million, 14.6%, compared to first quarter 1999. The decline was attributable to the operating losses in the HVAC, communications and all other segments resulting from operating expense increases (due in part to infrastructure investments) in excess of gross margin growth, partially offset by increased operating income in the propane and electric segments. ELECTRIC Revenues of $20.6 million for the segment grew 1% over the quarter ended March 31, 1999. Warm weather patterns compared to the prior year in the residential and commercial service areas adversely affected retail revenues. Strong wholesale sales due to market demands and excess capacity helped to offset the reduced retail activity. Costs of sales decreased from $4.4 million in 1999 to $4.2 million for the current quarter end primarily as a result of slightly lower power costs compared to prior years. Wholesale activity accounted for 70% of the increase in gross margins to $16.4 million for the quarter. Retail margins increased minimally due to higher property tax assessments reflected in collected rates. Operating expenses decreased slightly compared to the prior year, to $9.4 million from $9.6 million. The allocation of resources between electric and natural gas operations and increased capital projects accounted for the decrease, which was partially offset by higher property taxes. Operating income grew $556,000 over first quarter 1999 to $7.0 million for first quarter 2000. As noted above, higher margins for wholesale activity and the decrease in operating expenses attributed to the increase. NATURAL GAS Revenues grew 7.7% for first quarter 2000 over 1999 to $32.4 million. The increase was primarily due to higher product prices, a small rate increase and a slight increase in the total number of customers in 2000, offset by the negative effects of the abnormally warm weather as compared to the prior year. Cost of sales grew $2.0 million over 1999 to $24.0 million for first quarter 2000. Higher product prices as compared to first quarter 1999 and an increase in customers served resulted in the increase. Gross margins grew from $8.1 million or 27.1% of operating revenues for first quarter 1999 to $8.5 million or 26.1% of operating revenues for first quarter 2000. The growth in gross margin is the result of the aforementioned revenue increases, offset partially by increased costs, while the decreased gross margin percentage is the result of product price increases in 2000. Operating expenses of $4.6 million for the quarter were 7.6% higher than first quarter 1999. Allocation of resources between electric and natural gas for 2000 resulted in the increase. Operating income fell slightly from $3.9 million for first quarter 1999 to $3.8 million for first quarter 2000 as a result of operating expenses growth in excess of gross margin growth. PROPANE Overall revenues for the segment increased $769 million, 226.0%, over first quarter 1999 to $1,110 million for the current quarter end. Wholesale revenues increased $744.3 million from $232.1 million first quarter 1999 to $976.5 million for 2000. The wholesale operations contributed 88% of total revenues for the current quarter compared to a contribution of 69% in first quarter 1999. Retail revenues increased 23% from $108.2 million to $133.1 million, primarily due to significant increases in product prices combined with retail acquisitions. The revenue growth was offset in part by a decline in retail volumes of 3.7 million gallons or 3.4% to 104.1 million for first quarter 2000 due to weather that was considerably warmer than normal and prior year, offset partially by acquisitions. Cost of sales of $1,031 million for the quarter increased $761 million over first quarter 1999. The wholesale activity accounted for $958.6 million of total costs and $733.0 million of the increase (wholesale sales have inherently low gross margins). Retail costs grew $27.6 million over first quarter 1999 to $72.0 million for the current quarter end. The increase was due to the increased product prices experienced throughout the first quarter of 2000. Gross margins were $79.0 million or 7.1% of operating revenues as compared to $70.3 million or 20.8% of operating revenues in 1999. The increase was a result of the increased wholesale activity offset by decreased retail margins, which was the result of higher product prices and abnormally warm weather conditions as compared to prior year. The increased wholesale activity reduced the gross margin percentage due to the low margin nature of wholesale sales and their significant impact on the segment. Selling, general and administrative expenses grew 13.8% or $4.7 million over first quarter 2000. The growth was a result of the increased wholesale activity. Depreciation and amortization increased $1.9 million or 24.5% as a result of acquisitions and capital expenditures. Operating income of $30.2 million was a 7.4% increase over first quarter 1999 income of $28.1 million. This increase resulted from the strong wholesale activity, offset by the adverse weather-affected retail segment. HVAC First quarter 2000 revenues of $79.8 million reflect an increase of 51.6% over 1999 first quarter revenues. This is largely attributable to the inclusion of a full quarter of revenues from the 1999 acquisitions for first quarter 2000. Most of the 1999 acquisitions were completed after March 31, 1999. Cost of sales grew 55.0%, increasing from $32.7 million to $50.7 million for 2000. As with revenues, the inclusion of all the 1999 acquisitions in first quarter 2000 results accounted for most of the increase. There was also an increase in new construction activity, which have lower gross margins, combined with price increases in materials and fuel. Gross margins of $29.1 million, 36.5% of operating revenues, for the quarter increased $9.2 million over 1999 margins of $19.9 million, 37.9% of operating revenues. As noted previously, the increase was due to acquisitions, offset by price increases and lower gross margin projects. Selling, general and administrative expenses increased $9.8 million over first quarter 1999, to $28.1 million. The increase is principally due to 1999 acquisitions, as well as increased fuel and insurance costs and the annualization of infrastructure investments made during 1999. Depreciation and amortization increased $1.1 million to $2.7 million for the quarter end due to acquisitions and capital expenditures. The segment had an operating loss of $1.7 million for the quarter end, as compared to operating income of $53,000 for 1999 first quarter end, due to growth in operating expenses that surpassed gross margin growth. The HVAC industry is seasonally influenced and is also impacted in part by weather conditions. The first quarter typically generates below average revenues. Further, the weather conditions experienced in the first quarter 2000 were warmer than prior year and normal, which also had a negative impact on revenues. Accordingly, the fixed operating expense element of the HVAC segment is deleveraged during such operating conditions. COMMUNICATIONS Revenues grew 36.1% over first quarter 1999 to $85.4 million for first quarter 2000. The increase resulted from the inclusion of a full quarter of revenues from the 1999 acquisitions, most of which closed near or after first quarter end 1999. Cost of sales grew at a slightly faster rate than revenues, increasing 48.5% from $34.5 million in 1999 to $51.3 million for 2000. This increase was a result of the 1999 acquisitions which had sales mixes that contained a larger percentage of equipment sales, which are traditionally a lower margin. Gross margins for 2000 of $34.2 million, or 40% of operating revenues, were an increase of 21.0% over 1999 margins of $28.3 million (45% of operating revenues). The increase in dollars was due to the 1999 acquisitions, which also drove down the gross margin percentages due to their higher equipment sales mix which is lower margin business. Selling, general and administrative expenses grew 50.0% over first quarter 1999 to $31.5 million. Expenses increased due to additional personnel added throughout 1999, expenses from acquisitions and the increase in infrastructure, particularly in sales and technicians, for anticipated revenue growth. Depreciation and amortization increased $1.6 million to $3.5 million as a result of acquisitions and capital expenditures. Operating income fell from first quarter 1999 income of $5.5 million to an operating loss of $722,000 for first quarter 2000. The growth of operating expenses outpaced gross margin growth, driving down operating income. OTHER This segment consists of the financial results of other service and nonenergy-related business activities along with unallocated corporate costs. Revenues grew 1.8% to $3.1 million. The growth was attributable to internal growth within the businesses. Cost of sales rose $776,000 over first quarter 1999 to $2.0 million due to cost reclassifications between the quarters and internal growth in lower margin lines of business. Gross margins decreased to $1.1 million for first quarter 2000, down from $1.8 million in 1999. The decline was due to an increase in cost of sales that was not directly related to revenue growth. Operating expenses of $3.7 million for the first quarter increased 2.6% over 1999 operating expenses due to increased infrastructure expenditures. Operating loss for the segment decreased from $1.8 million to $2.6 million for first quarter 2000. This resulted from the decreased gross margins, as operating expenses remained relatively flat. OTHER INCOME STATEMENT ITEMS Interest expense grew $4.6 million, 38.5%, over first quarter 1999 to $16.5 million for 2000. Increased interest charges from additional nonrecourse borrowings in the propane segment during 1999 accounted for over 50% of the increase along with additional nonrecourse borrowings in the HVAC segment compared to 1999. Corporate borrowings for acquisitions also increased for the first quarter 2000 as compared to 1999, resulting in higher interest expense. Investment income of $3.1 million for the quarter was a decline of $182,000 over first quarter 1999 income. The decrease in excess cash for first quarter 2000 compared to 1999 is the result of increased preferred stock investments in Blue Dot. and Expanets. Income taxes decreased 35.5% over first quarter 1999 to $4.8 million. This is directly related to the decrease in income before taxes, most notably in the HVAC, communications and all other segments, between the quarters. Minority interests are the portion of the net income or loss after preferred dividends related to the Corporation's preferred stock investments in Blue Dot. and Expanets and earnings attributable to the CornerStone public common unitholders, which are allocable to other equity holders of the minority interests. Minority interests income for the quarter was $1.6 million, a decrease of $9.6 million from first quarter 1999. The change is attributable to the performance of the HVAC and communications segments where allocable losses increased $5.0 million and $4.3 million, respectively, combined with a slight decrease in the propane segment's minority interest. LIQUIDITY & CAPITAL RESOURCES OPERATING ACTIVITIES The Corporation believes it has adequate long-term liquidity through the generation of operating cash flows, the availability of substantial marketable securities, existing credit facilities 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. Cash flows from operations for the quarter ended March 31, 2000 were $19.7 million, a decrease of $9.6 million versus operating cash flows of $29.3 million for first quarter 1999. The decrease is primarily due to changes in HVAC and communications operations. Cash and cash equivalents and investment securities totaled $124.0 million and $165.6 million at March 31, 2000 and 1999. These cash investment balances combined with available lines of credit provide the resources necessary to support continued business operations. INVESTING AND FINANCING ACTIVITIES The Corporation's primary investing focus was on the continued strategic development and growth of Blue Dot. and Expanets. In order to fund these activities as well as general business operations, the Corporation maintains a line of credit and commercial paper which provide an aggregate $194.5 million for business use. At March 31, 2000, $12.0 million of commercial paper and $139.0 million of the line of credit were drawn and outstanding and $43.5 million was available for use. In addition to the lines of credit available at the Corporate level, the nonregulated subsidiaries maintain nonrecourse credit agreements with various banks. CornerStone has a $110.0 million Bank Credit Facility for acquisitions and general business purposes. CornerStone had $10.0 million outstanding from their acquisitions line of credit at March 31, 2000 to fund acquisitions and $80.9 million available for use on their Facility. Blue Dot.'s Credit Facility provides for up to $135.0 million to fund acquisitions and for general business purposes. Blue Dot. had $61.2 million outstanding on their Facility and $73.8 million available at March 31, 2000. Expanets maintains a $25.0 million line of credit, of which $16.5 million was outstanding and $8.5 million available at March 31, 2000. On March 31, 2000, Expanets completed a transaction to purchase the small and mid-sized business sales organization from Lucent Technologies. In order to partially finance this transaction, the Corporation purchased an additional $64.0 million cash investment in Expanets' preferred stock. Any additional future working capital and capital expenditure requirements are anticipated to be funded by nonrecourse facilities obtained at the Expanets level. CAPITAL REQUIRMENTS The Corporation's principal capital requirements include continued funding for growth of business segments; funding corporate investment and development ventures; funding maintenance and expansion programs; funding debt and preferred stock retirements; sinking fund requirements; and distributions to propane common unitholders. Maintenance capital expenditures for the three months ended March 31, 2000 and 1999 were $5.9 million and $6.5 million. Expenditures are continually reviewed and are subject to change as a result of changing economic conditions, variations in sales, investment opportunities and other ongoing considerations. Estimated annual maintenance expenditures for 2000 and 2001 are $41.2 million and $43.7 million, respectively. Capital requirements for the mandatory retirements of long-term debt, including nonrecourse debt of subsidiaries is expected to be $24.0 million in 2000. The Corporation anticipates that existing investments and marketable securities, internally generated cash flows and available external financing will be sufficient to meet future capital requirements. The Corporation will continue to review the economics of retiring or refunding remaining long-term debt and preferred stock to minimize long-term financing costs. The Corporation may continue to make investments in Blue Dot. and Expanets, in which the Corporation had invested $401.1 million through March 31, 2000. Also, the Corporation may make other significant acquisition investments in related or other industries that might require the Corporation to raise additional equity and/or incur debt financings, which are therefore subject to certain risks and uncertainties. Weather Weather patterns can have a material impact on the Corporation's operating performance for all three segments (propane, natural gas and electric) of its energy business, and to a lesser extent the HVAC business segment. 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. COMPETITION AND BUSINESS RISK NorthWestern and its partner entities are leading providers of value-added, integrated services and solutions to over two million residential and business customers nationwide. Our strategy will continue to focus on the expansion of our existing growth initiatives, both through internal growth and acquisitions and through the integration of other value-added services. We also intend to seek investment opportunities in other existing or emerging growth industries within the service and solutions sector. While these strategic development and acquisitions activities can involve increased risk, we believe they offer the potential for enhanced investment returns. The Corporation's growth strategy will be subject to certain risks and uncertainties, including the future availability of market capital to fund development and acquisitions, our ability to develop or acquire suitable businesses, our responses to increased competition, our ability to attract, retain and train skilled team members, governmental regulations and general economic conditions, some of which factors are discussed in further detail below. Our acquisition activities involve the risk of successfully integrating acquired companies, including the adequacy and efficiency of information systems, business processes and related support functions. The Corporation has taken and continues to take steps to address and mitigate such risks. There are no assurances that such efforts will be sufficient to meet the future needs of the Corporation. Future changes in accounting rules and regulations, such as those related to the proposed reduction in the maximum goodwill life from 40 to 20 years, could also have a material impact upon the Corporation's future financial statement presentation, results from operations and financial position. PROPANE The retail propane business is a margin-based business in which gross profits depend on the excess of sales prices over propane supply costs. Consequently, CornerStone's profitability will be sensitive to changes in wholesale propane prices. Propane is a commodity, the market price of which can be subject to volatile changes in response to changes in supply or other market conditions. As it may not be possible to immediately pass on to customers rapid increases in the wholesale cost of propane, such increases could reduce CornerStone's gross profits. Weather conditions have a significant impact on propane demand for both heating and agricultural purposes. The majority of CornerStone's customers rely heavily on propane as a heating fuel. Actual weather conditions can vary substantially from year to year, significantly affecting CornerStone's financial performance. Furthermore, variations in weather in one or more regions in which CornerStone operates can significantly affect the total volumes sold by CornerStone and the margins realized on such sales and, consequently, CornerStone's results of operations. These conditions may also impact CornerStone's ability to meet various debt covenant requirements, which could adversely affect CornerStone's ability to pay common and subordinated unit distributions and fund future growth and acquisitions. Propane competes with other sources of energy, some of which are less costly for equivalent energy value. Propane distributors compete for customers against suppliers of electricity, fuel oil and natural gas, principally on the basis of price, service, availability and portability. Electricity is a competitor of propane, but propane generally enjoys a competitive price advantage over electricity for space heating, water heating and cooking. Propane serves as an alternative to natural gas in rural and suburban areas where natural gas is unavailable or portability of product is required. Natural gas is generally a less expensive source of energy than propane, although in areas where natural gas is available, propane is used for certain industrial and commercial applications. The gradual expansion of the nation's natural gas distribution systems has resulted in the availability of natural gas in some areas that previously depended upon propane. However, natural gas pipelines are not present in many regions of the country where propane is sold for heating and cooking purposes. CornerStone's profitability is affected by the competition for customers among all participants in the retail propane business. Some of CornerStone's competitors are larger or have greater financial resources than CornerStone. Should a competitor attempt to increase market share by reducing prices, CornerStone's financial condition and results of operations could be materially adversely affected. In addition, propane competes with other sources of energy, some of which may be less costly per equivalent energy value. ELECTRIC AND NATURAL GAS The electric and natural gas industries continue to undergo numerous transformations, and the Corporation is operating in an increasingly competitive marketplace. The Federal Energy Regulatory Commission (FERC), which regulates interstate and wholesale electric transmissions, has issued final rules designed to open up transmission grids and mandate owners of transmission assets to allow others equal access to utility transmission systems and prompts the formation of regional transmission organizations (RTO's) to control and operate interstate transmission facilities. Various state regulatory bodies are supporting initiatives to redefine the electric energy market and are experimenting with retail wheeling, which gives some retail customers the ability to choose their supplier of electricity. These and other developments are expected to increase competition in the wholesale and retail electricity markets. The potential for continued unbundling of customer services exists, allowing customers to buy their own electricity and natural gas on the open market and having it delivered by the local utility. The Corporation's future financial performance will be dependent on the effective execution of operating strategies to address a more competitive and changing energy marketplace. The Corporation is exploring new energy products and services, utilizing new technologies, centralizing activities to improve efficiency and customer responsiveness and business processes are being reengineered to apply best-practices methodologies. Weather conditions have a significant impact on electric and natural gas demand for heating and cooling purposes. Actual weather conditions can vary substantially from year to year, significantly affecting the Corporation's financial performance. The Corporation complies with the provisions of Statement of Financial Accounting Standards No. 71 (SFAS 71), 'Accounting for the Effects of Certain Types of Regulation.' SFAS 71 provides for the financial reporting requirements of the Corporation's regulated electric and natural gas operations, which requires specific accounting treatment of certain costs and expenses that are related to the Corporation's regulated operations. Criteria that could give rise to the discontinuance of SFAS 71 include 1) increasing competition that restricts the Corporation's ability to establish prices to recover specific costs and 2) a significant change in the manner in which rates are set by regulators from cost-based regulation to another form of regulation. The Corporation periodically reviews these criteria to ensure the continuing application of SFAS 71 is appropriate. Based on a current evaluation of the various factors and conditions that are expected to impact future cost recovery, the Corporation believes that its regulatory assets, including those related to generation, are probable of future recovery. This evaluation of recovery must be updated for any change, which might occur in the Corporation's current regulatory environment. HVAC The markets served by Blue Dot. for residential and commercial heating, 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, data services and network solutions industry is also a highly competitive market. The Corporation believes that 1) market acceptance of the products, services and technology solutions 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 Expanets competitors in the communications business are generally small, owner- operated companies typically located and operated in a single geographic 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 and marketing programs. YEAR 2000 READINESS The year 2000 issue is a result of computer programs, which were written using two digits (rather than the actual four) to identify the year in the date field. This old approach was intended to save processing time and storage space within computers and was continued in use until the mid 1990s. If not corrected, affected systems and devices containing computer chips or clocks 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. The Corporation assembled a diverse oversight and advisory team from all businesses with experienced information systems, legal, communications and operating leadership to work on our enterprise-wide year 2000 program. The initiative covered not only the Corporation's information technology systems and computer applications, but also considered hardware, embedded systems and components internal and external to our organizations. The Corporation's program considered not only our businesses and technology areas but also those of our customers and suppliers. The Corporation spent approximately $2 million in 1999 related to the year 2000 issue which was expensed as incurred or capitalized in accordance with our accounting policy for software development costs. As a result of year 2000 readiness efforts, the Corporation's mission critical information technology systems did not experience any material adverse application failures on January 1, 2000, and we are not aware of any material adverse impacts to our suppliers or customers. We do not believe that year 2000 issues have had any material impact on customer spending patterns for our services and solutions. The Corporation will continue to monitor its mission critical computer applications throughout the year 2000 to ensure that any potential year 2000 issues that may arise are addressed promptly. The Corporation cannot provide assurance that our suppliers or customers have not been affected by a year 2000 issue in a manner that is not yet apparent. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Statements made in this Form 10-Q, such as those relating to expectation of future financial performance, continued growth, dividend policy, liquidity, absence of year 2000 problems and the impact of changes in interest rates and commodity prices, are forward-looking statements that involve inherent risks and uncertainties. A number of important factors which are difficult to predict and many of which are beyond the control of the Corporation, could cause actual results to differ materially from those implied by the forward-looking statements. These factors include, but are not limited to, the adverse impact of unseasonal weather, developments in the federal and state regulatory environment, the rate of growth in the service territories of the Corporation and its subsidiaries, the speed and degree to which competition enters the Corporation's businesses, the timing and extent of changes in interest rates and commodity prices, risks associated with acquisitions and integration of acquired companies, changes in customer usage patterns and preferences, as well as changing conditions in the economy, capital markets and other factors identified from time to time in the Corporation's filings with the Securities and Exchange Commission. This Form 10-Q should be read in conjunction with the most recent annual consolidated financial statements and notes thereto. NORTHWESTERN CORPORATION PART II ITEM 1. LEGAL PROCEEDINGS The Corporation is from time to time a part to litigation arising in the ordinary course of its business and strategic development activities. Management believes that none of such actions will have a material adverse effect on our financial condition, results of such operations or cash flows. ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 27 - Financial Data Schedule 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 12, 2000 /s/ David A. Monaghan ------------------------------ Controller and Treasurer EX-27 2 FINANCIAL DATA SCHEDULE
5 3-MOS DEC-31-2000 MAR-31-2000 42,874,288 0 188,983,406 0 107,307,188 396,597,290 921,893,539 (239,050,760) 2,254,523,226 275,686,797 949,993,413 0 91,250,000 40,438,158 266,282,618 2,254,523,226 1,330,943,584 1,330,943,584 1,162,751,023 1,162,751,023 132,204,420 0 16,523,827 21,048,244 4,811,209 16,239,035 0 0 0 16,239,035 0.63 0.62
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