-----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, UiKn3obvt7d8fbo7+HfY002Ho2GMGJimxxU00KUPby4Ej8l7ByP8+cVif/GD2u2W 6J0CDXPAmevk6n8/iRSFzw== 0000073088-99-000011.txt : 19990817 0000073088-99-000011.hdr.sgml : 19990817 ACCESSION NUMBER: 0000073088-99-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 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: 99693198 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 10-Q FOR 06/30/99 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 June 30, 1999 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES ACT OF 1934 For the transition period from ___________ to __________ Commission File No. 0-692 NORTHWESTERN CORPORATION Delaware (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 August 9, 1999 Corporation-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts, Liquidation Amount $25.00 3,500,000 shares outstanding at August 9, 1999 INDEX PAGE PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - June 30, 1999 and December 31, 1998 3 Consolidated Statements of Income - Three months and six months ended June 30, 1999 and 1998 4 Consolidated Statements of Cash Flows Six months ended June 30, 1999 and 1998 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion of Financial Condition and Results of Operations 10 PART II. OTHER INFORMATION 17 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 17 PART I. FINANCIAL INFORMATION Item 1. Financial Statements NORTHWESTERN CORPORATION CONSOLIDATED BALANCE SHEETS (Unaudited) (In Thousands) June 30, December 31, 1999 1998 ---------- ------------ ASSETS Current Assets Cash and Cash Equivalents $ 38,938 $ 30,865 Accounts Receivable, Net 129,718 131,541 Inventories 75,065 72,805 Other 30,629 31,957 ---------- --------- 274,350 267,168 ---------- --------- Property, Plant and Equipment, Net 649,679 629,278 ---------- --------- Goodwill and Other Intangible Assets, Net 647,173 631,029 ---------- --------- Other Assets Investments 104,615 152,470 Other 104,758 56,271 ---------- ---------- 209,373 208,741 ---------- ---------- $ 1,780,575 $ 1,736,216 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Current Maturities of Long-Term Debt $ 16,771 $ 20,060 Short-Term Debt - Nonrecourse 15,000 11,554 Accounts Payable 102,054 113,036 Accrued Expenses 53,369 64,779 --------- --------- 187,194 209,429 --------- --------- Long-term Debt 256,350 256,350 Long-term Debt of Subsidiaries - Nonrecourse 412,374 332,525 Deferred Income Taxes and Other 70,535 74,072 Other Noncurrent Liabilities 84,797 101,787 --------- --------- 824,056 764,734 --------- --------- Minority Interests 386,374 388,702 --------- --------- Preferred Stock, Preference Stock and Preferred Securities Preferred Stock - 4 1/2% Series 2,600 2,600 Redeemable Preferred Stock - 6 1/2% Series 1,150 1,150 Preference Stock - - Corporation Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts 87,500 87,500 --------- -------- 91,250 91,250 --------- -------- Shareholders' Equity Common Stock 40,438 40,279 Paid-in Capital 160,028 158,530 Retained Earnings 87,533 81,100 Accumulated Other Comprehensive Income 3,702 2,192 --------- -------- 291,668 282,101 --------- -------- $ 1,780,575 $ 1,736,216 ========= ========= The accompanying notes to consolidated financial statements are an integral part of these statements. NORTHWESTERN CORPORATION CONSOLIDATED STATEMENTS OF INCOME (In Thousands, Except Per Share Amounts) (Unaudited) Three Months Ended Six Months Ended June 30 June 30 ------------------ ---------------- 1999 1998 1999 1998 ------------------ ---------------- OPERATING REVENUES $ 595,850 $ 233,145 $ 1,105,20 $ 532,109 COST OF SALES 482,788 166,126 847,676 384,517 -------- -------- --------- -------- GROSS MARGIN 113,062 67,019 257,528 147,592 OPERATING EXPENSES Selling, general and administrative expenses 85,573 50,665 172,659 92,590 Depreciation & amortization 15,890 9,416 31,136 18,228 -------- ------- -------- -------- 101,463 60,081 203,795 110,818 -------- ------- -------- -------- OPERATING INCOME 11,599 6,938 53,733 36,774 Interest Expense, net (13,676) (7,763) (25,607) (15,472) Investment Income and Other 2,450 578 5,767 3,323 -------- ------- -------- ------ Income (Loss) Before Income Taxes and Minority Interests 373 (247) 33,893 24,625 Income Taxes (3,417) (1,999) (10,877) (6,749) --------- -------- -------- ------- Income (Loss) Before Minority Interests (3,044) (2,246) 23,016 17,876 Minority Interests 9,881 5,601 (1,299) (3,517) --------- -------- -------- -------- Net Income 6,837 3,355 21,717 14,359 Minority Interests on Preferred Securities of Subsidiary Trusts (1,650) (660) (3,300) (1,320) Dividends on Preferred Stock (48) (48) (96) (96) Earnings on Common Stock $ 5,139 $ 2,647 $ 18,321 $ 12,943 ======== ======= ======== ======== Average Shares Outstanding 23,108 17,843 23,078 17,843 ========= ======= ======= ======= Earnings per Average Common Share Basic $ 0.22 $ 0.15 $ 0.79 $ 0.73 ======== ======= ======== ======== Diluted $ 0.22 $ 0.15 $ 0.78 $ 0.73 ======== ======= ======== ======== CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In Thousands) Six Months Ended June 30 ------------------ 1999 1998 ---- ---- Operating Activities: Net Income $ 21,717 $ 14,359 Items not Affecting Cash Depreciation and Amortization 31,136 18,228 Deferred Income Taxes (3,434) (1,359) Minority Interests in Net Income of Consolidated Subsidiaries 1,299 3,517 Investment Tax Credits (140) (281) Foreign currency translations (229) - Changes in Current Assets and Liabilities, Net of Acquisitions: Accounts Receivable 12,785 37,149 Inventories 10,801 (4,331) Other Current Assets (1,734) (3) Accounts Payable (16,655) (29,270) Accrued Expenses (1,530) (5,468) Other, Net (4,192) 10,291 ---------- --------- Cash Flows Provided by Operating Activities 49,824 42,832 --------- --------- Investment Activities: Property, Plant and Equipment Additions (12,200) (13,591) Sale (Purchase) of Noncurrent Investments, Net 40,478 28,305 Acquisitions and Growth Expenditures (106,803) (99,477) ---------- ---------- Cash flows Used in Investing Activities (78,545) (84,763) ---------- ---------- Financing Activities: Dividends on Common and Preferred Stock (11,984) (8,750) Minority Interest on Preferred Securities of Subsidiary Trusts (3,300) (1,320) Proceeds From Exercise of Warrants 1,656 - Subsidiary Payment of Common Unit Distributions (18,499) (14,213) Proceeds From Issuance of Common Units - 40,700 Issuance of Nonrecourse Subsidiary Debt 81,040 (28,230) Repayment of Nonrecourse Subsidiary Debt (12,119) - Short-Term Borrowings - 34,021 Commercial Paper Issuances - 23,000 --------- --------- Cash Flows Provided by Financing Activities 36,794 45,200 --------- --------- Increase in Cash and Cash Equivalents 8,073 3,277 Cash and Cash Equivalents, Beginning of Period 30,865 14,309 --------- -------- Cash and Cash Equivalents, End of Period $ 38,938 $ 17,586 ========= ========= Supplemental Cash Flow Information Cash Paid During the Period For Income Taxes $ 9,826 $ 5,256 Interest $ 14,898 $ 7,792 The accompanying notes to consolidated financial statements are an integral part of these statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Reference is made to Notes to Financial Statements included in the Company's Annual Report) (1) Management's Statement - The financial statements included herein have been prepared by NorthWestern Corporation (the Corporation), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of the Corporation, all adjustments necessary for a fair presentation of the results of operations for the interim periods have been included. It is suggested that these financial statements be read in conjunction with the financial statements and the notes thereto included in the Corporation's latest annual report to shareholders. (2) Subsidiaries and Principles of Consolidation - The accompanying consolidated financial statements include the accounts of the Corporation and all wholly, majority-owned, and controlled subsidiaries, including CornerStone Propane Partners, L.P. (NYSE:CNO), the nation's fourth largest retail propane distributor; Blue Dot Services, Inc., a national provider of air conditioning, heating, plumbing and related services (HVAC), and Expanets, Inc., a national provider of integrated communication and data solutions and network services. All significant intercompany balances and transactions have been eliminated from the consolidated financial statements. The Corporation's regulated businesses are subject to various state and federal agency regulation. The public unitholders' interest in CornerStone's net assets subsequent to the Partnership Formation is reflected as minority interests in the consolidated financial statements. Equity interests of the former owners of companies acquired by Blue Dot. and Expanets who continue to hold an interest in Blue Dot. and Expanets are also reflected as minority interests in the consolidated financial statements. (3) Comprehensive Income - In 1998, the Corporation adopted Statement of Financial Accounting Standards No. 130 (SFAS No. 130) `Reporting Comprehensive Income.' This statement requires the reporting of comprehensive income in addition to net income from operations. Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of net income. Comprehensive income for the three months ended June 30, 1999 and 1998, was $8.0 million and $3.8 million. Comprehensive income for the six months ended June 30, 1999 and 1998, was $23.2 million and $13.2 million. (4) Segment Information - In 1998, the Corporation adopted SFAS No. 131, `Disclosures About Segments of an Enterprise and Related Information,' which requires the reporting of certain financial information by business segment. For the purpose of providing segment information, the Corporation's principal business segments are its electric, natural gas, retail propane, wholesale propane, HVAC and communications operations. All other includes other service businesses, the results of manufacturing operations (only in 1998), activities and assets of the parent, any reconciling or eliminating amounts and amortization of purchase accounting adjustments related to the acquisitions of HVAC and communication companies. The accounting policies of the operating segments are the same as the parent except that the parent allocates some of its operating expenses and interest expense to the operating segments according to a methodology designed by management for internal reporting purposes and involves estimates and assumptions. Financial data for the business segments are as follows (in thousands): Three Months ended June 30, 1999 ------------------------------------ Total Electric & Total Communi- All Natural Gas Propane HVAC cations Other Total ----------- ------- ----- ------- ----- ------- Operating Revenues $ 33,581 $ 417,792 $ 73,082 $ 67,813 $ 3,582 $ 595,850 Cost of Sales 13,429 385,217 44,526 36,363 3,253 482,788 ------- -------- ------- ------- ------ -------- Gross Margin $ 20,152 32,575 28,556 31,450 329 113,062 Selling, general & Administrative 8,652 28,324 21,499 25,083 2,015 85,573 Depreciation & amortization 3,700 6,864 1,217 781 3,328 15,890 ------- ------- ------- ------- ------ ------- Operating Income 7,800 (2,613) 5,840 5,586 (5,014) 11,599 Interest Expense (2,178) (8,658) - (260) (2,580) (13,676) Investment income and other 172 - 19 569 1,690 2,450 ------- ------- ------- ------ ------- ------- Income before taxes and minority interests 5,794 (11,271) 5,859 5,895 (5,904) 373 Provision for income taxes (1,738) 1,184 (2,250) (1,835) 1,222 (3,417) -------- ------- ------- ------- ------- -------- Income before minority interests $ 4,056 $ (10,087) $ 3,609 $ 4,060 $ (4,682) $ (3,044) ========= ========== ======= ======= ========= ========= Total Assets $ 311,131 $ 779,23 $ 88,638 $ 97,187 $ 504,389 $1,780,575 ========= ========= ======= ======== ========= ========== Maintenance Capital Expenditures $ 3,523 $ 565 $ 604 $ 825 $ 236 $ 5,753 ========= ========= ======= ======== ========= ========== Three Months ended June 30, 1998 ------------------------------------ Total Electric & Natural Total Commun All Gas Propane HVAC ications Other Total ---------- ------- ---- -------- ----- ------ Operating Revenues $ 33,436 $ 144,891 $ 24,778 $ 24,315 $ 5,725 $ 233,145 Cost of Sales 13,968 118,623 15,052 14,917 3,566 166,126 ------- ------- ------ ------ ----- -------- Gross Margin 19,468 26,268 9,726 9,398 2,159 67,019 Selling, general & Admini- strative 9,712 24,431 6,988 7,789 1,745 50,665 Depreciation & amortization 3,694 4,630 389 352 351 9,416 ------- ------ ------ ------ ----- -------- Operating Income 6,062 (2,793) 2,349 1,257 63 6,938 Interest Expense (2,770) (4,571) (12) (129) (281) (7,763) Investment income and other 268 - 15 58 237 578 ------- ------- -------- ------ ----- ------- Income before taxes and minority interests 3,560 (7,364) 2,352 1,186 19 (247) Provision for income taxes (1,191) 460 (1,034) (475) 241 (1,999) -------- ------- -------- ------- ------ -------- Income before minority interests $ 2,369 $ (6,904) $ 1,318 $ 711 $ 260 $ (2,246) ======== ========= ======= ======== ======= ========= Total Assets $304,533 $ 603,810 $ 28,656 $ 57,172 $ 220,53 $ 1,214,703 ======== ======== ======== ========= ======== =========== Maintenance Capital Expenditures $ 4,107 $ 1,650 $ 1,777 $ 611 $ 26 $ 8,171 ======= ======== ======= ========= ======== =========== Three Months Ended June 30 ------------------------------ 1999 1998 ------ ------ Electric Natural Gas Electric Natural Gas -------- ----------- -------- ----------- Operating Revenues $ 20,061 $ 13,520 $ 18,589 $ 18,847 Cost of Sales 4,515 8,914 3,792 10,176 ------- ------- -------- -------- Gross Margin 15,546 4,606 14,797 4,671 Selling, general & administrative 5,981 2,671 6,324 3,388 Depreciation and amortization 3,003 697 2,976 718 -------- ------- -------- -------- $ 6,562 $ 1,238 $ 5,497 $ 565 ========= ========= ======== ======== Three Months Ended June 30 ---------------------------- 1999 1998 ------ ------ Retail Wholesale Retail Wholesale Propane Propane Propane Propane --------- ----------- --------- ---------- Operating Revenues $ 47,641 $ 370,151 $ 39,312 $ 105,579 Cost of Sales 19,263 365,954 16,813 101,810 -------- --------- -------- --------- Gross Margin $ 28,378 $ 4,197 $ 22,499 $ 3,769 ======== ========= ======== ========= Six Months Ended June 30, 1999 -------------------------------- Total Electric & Natural Total Commun All Gas Propane HVAC ications Other Total --------- -------- ---- --------- ------ ----- Operating Revenues $ 84,179 $ 758,120 $ 125,701 $ 130,581 $ 6,623 $ 1,105,204 Cost of Sales 39,834 655,285 77,146 70,868 4,543 847,676 -------- --------- --------- --------- ------- ---------- Gross Margin $ 44,345 $ 102,835 $ 48,555 $ 59,713 $ 2,080 $ 257,528 Selling, general & Admini- strative 18,820 62,642 39,181 46,063 5,953 172,659 Depreciation & amortization 7,437 14,712 2,160 1,488 5,339 31,136 ------ ------- ------- ------- ------ ------- Operating Income 18,088 25,481 7,214 12,162 (9,212) 53,733 Interest Expense (4,357) (15,521) - (543) (5,186) (25,607) Investment income and other 225 - 107 30 5,405 5,767 ------ -------- ------- -------- ------- ------ Income before taxes and minority interests 13,956 9,960 7,321 11,649 (8,993) 33,893 0 Provision for income taxes (4,438) (1,509) (2,830) (4,377) 2,277 (10,877) -------- -------- -------- -------- ------- -------- Income before minority interests $ 9,518 $ 8,451 $ 4,491 $ 7,272 $ (6,716) $ 23,016 ======= ======== ======== ======= ======== ======= Total Assets $311,131 $779,230 $ 88,638 $ 97,187 $ 504,389 $1,780,575 ======== ======== ========= ======== ========= ========== Maintenance Capital Expenditures $ 6,754 $ 2,567 $ 1,152 $ 1,473 $ 274 $ 12,220 ======== ======== ========= ======== ========= ========== Six Months Ended June 30, 1998 -------------------------------- Total Electric & Natural Total Commun All Gas Propane HVAC ications Other Total ---------- ------- ---- -------- ------ ------ Operating Revenues $ 82,420 $ 374,222 $ 35,360 $ 28,499 $ 11,608 $ 532,109 Cost of Sales 40,081 297,985 21,667 17,543 7,241 384,517 ------- -------- ------- ------- ------- -------- Gross Margin 42,339 76,237 13,693 10,956 4,367 147,592 Selling, general & Admini- strative 19,761 49,903 10,453 9,049 3,424 92,590 Depreciation & amortization 7,329 9,345 610 429 515 18,228 ------ ------- ------- ------- ------ ------- Operating Income 15,249 16,989 2,630 1,478 428 36,774 Interest Expense (5,585) (9,395) (20) (154) (318) (15,472) Investment income and other 607 - 18 63 2,635 3,323 ------- ------- ------- ------- ------- -------- Income before taxes and minority interests 10,271 7,594 2,628 1,387 2,745 24,625 Provision for income taxes (3,948) (1,325) (1,215) (569) 308 (6,749) Income before minority Interests $ 6,232 $ 6,269 $ 1,413 $ 818 $ 3,053 $ 17,876 ======= ======== ======= ====== ======= ========== Total Assets $304,533 $603,810 $28,656 $57,172 $220,532 $1,214,703 ======== ======== ======= ====== ======== ========== Maintenance Capital Expenditures $ 6,484 $ 4,647 $ 1,777 $ 611 $ 72 $ 13,591 ======== ======== ======= ======= ======== ========== Six Months Ended June 30 -------------------------- 1999 1998 ------ ------ Electric Natural Gas Electric Natural Gas -------- ----------- -------- ----------- Operating Revenues $ 40,536 $ 43,643 $ 37,552 $ 44,868 Cost of Sales 8,946 30,888 7,608 32,473 ------- -------- ------- -------- Gross Margin 31,590 12,755 29,944 12,395 Selling, general & administrative 12,598 6,222 12,860 6,901 Depreciation and amortization 6,005 1,432 5,898 1,431 -------- -------- ------- -------- $ 12,987 $ 5,101 $ 11 186 $ 4,063 ======== ======= ======== ======= Six Months Ended June 30 -------------------------- 1999 1998 ------ ------ Retail Wholesale Retail Wholesale Propane Propane Propane Propane ------- --------- ------- --------- Operating Revenues $ 155,847 $ 602,273 123,791 250,431 Cost of Sales 63,701 591,584 56,783 241,202 -------- -------- -------- -------- Gross Margin $ 92,146 $ 10,689 $ 67,008 $ 9,229 ========= ========= ======== ========= (5) New Accounting Standards - In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 (SFAS 133), `Accounting for Derivative Instruments and Hedging Activities.' The Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments imbedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement requires changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. SFAS 133 is effective for fiscal years beginning after June 15, 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. (6) Reclassification and Restatements - Certain 1998 amounts have been reclassified to conform to the 1999 presentation. Operating results for 1998 have been restated to reflect the consolidation of Blue Dot. and Expanets effective January 1, 1998. Such reclassifications and restatements had no impact on net income and common stock equity as previously reported. (7) Earnings Per Share - In 1998, the Corporation adopted SFAS No. 128, `Earnings Per Share,' which establishes two methods for calculating earnings per share, basic and diluted, and simplifies the previous standards for computing earnings per share. Basic earnings per share is computed on the basis of the weighted average number of common shares outstanding. Diluted earnings per share is computed on the basis of the weighted average number of common shares outstanding plus the effect of the outstanding stock options and warrants. The following table presents the shares used in computing the basic and diluted earnings per share for 1999 and 1998 (in thousands): Three Months Ended Six Months Ended June 30 June 30 ------------------ ------------------ 1999 1998 1999 1998 ------------------ ------------------ Average common Shares outstanding for 23,108 17,843 23,078 17,843 Basic computation Dilutive effect of: Stock Options 23 22 Stock Warrants 310 307 ------ ------ ------- ------ Average Common Shares outstanding for Diluted computation 23,441 17,843 23,407 17,843 ======= ======= ======= ======= Item 2.MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NorthWestern Corporation ('NorthWestern' or 'Corporation') and its partner entities are providers of value-added services and solutions to residential and business customers nationwide. The Corporation provides electric and natural gas service to Midwestern customers through our energy division, NorthWestern Public Service. In addition, the Corporation holds interests in Cornerstone Propane Partners, L.P. (NYSE:CNO), the nation's fourth largest retail propane distributor; Expanets, Inc., a national provider of integrated communication and data solutions and network services; and Blue Dot Services, Inc., a national provider of air conditioning, heating, plumbing and related services (HVAC). The Corporation is also engaged in other service and nonenergy related businesses. NorthWestern was incorporated under the laws of the state of Delaware in 1923. Our executive offices are located at 125 S. Dakota Avenue, Suite 1100, Sioux Falls, South Dakota 57104, and our telephone number is 605-978-2908. Our website is located at www.northwestern.com - -------------------- Weather Weather patterns have a material impact on the Corporation's operating performance for all three segments of its energy business. This impact is particularly relevant for natural gas and propane. Because propane and natural gas are heavily used for residential and commercial heating, the demand for these products depends heavily upon weather patterns throughout the Corporation's market areas. With a larger proportion of its operations related to seasonal propane and natural gas sales, a significantly greater portion of the Corporation's operating income is recognized in the first and fourth quarters related to higher revenues from the heating season. RESULTS OF OPERATIONS: Consolidated Earnings Comparisons - Diluted earnings per share for the quarters ended June 30, 1999 and 1998, were $.22 and $.15. Diluted earnings per share for the year to date through June 30, 1999 was $.78 as compared to $.73 for the six months ended June 30, 1998. Excluding a nonrecurring investment gain of $.07 related to a sale of stock in a non-strategic investment, June 30, 1998, year to date diluted earnings were $.66 per share. The increase in ongoing earnings was due to increased operating income from electric and natural gas operations as well as increased operating income from HVAC and communications operations resulting from internal growth and acquired companies, offset by decreases in propane operating income due to a warmer than normal heating season in the Corporation's propane markets which resulted in lower spring fills. Propane Retail propane sales for the three months ended June 30 increased 21% from $39.3 million in 1998 to $47.6 million in 1999. Gross margins also increased 26% from $22.5 million in 1998 to $28.3 million in 1999. The increases are due to internal growth combined with the acquisition of retail propane centers including a large retail propane distribution company in December 1998. Wholesale propane sales increased 251% from $105.6 million in 1998 to $370.2 million in 1999. Wholesale propane margins also increased 11% from $3.8 million in 1998 to $4.2 million in 1999. The increases in wholesale sales and margins are due principally to internal growth and acquisitions in December 1998. The majority of propane revenues and operating income occur in the first and fourth quarters when propane is heavily sold for residential and commercial heating as compared to the second and third quarter which traditionally are operating loss periods in the industry. Propane operating losses for the three months ended June 30 decreased 6% from $2.8 million in 1998 to $2.6 million in 1999. Retail propane sales for the six months ended June 30 increased 26% from $123.8 million in 1998 to $ 155.8 million in 1999. Gross margins also increased 38% from $67.0 million in 1998 to $92.1 million in 1999. The increases are due to acquisitions and internal growth partially offset by weather that has been significantly warmer than normal. Wholesale propane revenues increased 140% from $250.4 million in 1998 to $602.3 million in 1999. Gross margins also increased 16% from $9.2 million in 1998 to $10.7 million in 1999. These increases were due to internal growth and large acquisitions completed in December 1998. Electric Electric revenues for the three months ended June 30 increased 8% from $18.6 million in 1998 to $20.1 million in 1999. The increase in revenues is principally due to internal growth and increased wholesale sales. Operating income from electric operations increased 19% from $5.5 million in 1998 to $6.6 million in 1999. The increase in operating income is due to higher revenues in 1999. Electric revenues for the six months ended June 30 increased 8% from $37.6 million in 1998 to $40.5 million in 1999. The increase is principally due to internal growth and increased wholesale sales, partially offset by unfavorable heating degree weather in the first three months. Operating income increased 16% from $11.2 million in 1998 to $13.0 million in 1999. HVAC HVAC revenues for the three months ended June 30 increased from $24.8 million in 1998 to $73.1 million in 1999. Gross margins increased from $9.7 million in 1998 to $28.6 million in 1999. Operating income increased from $2.3 million in 1998 to $5.8 million in 1999. The increases are principally due to acquisitions as well as internal growth. HVAC revenues for the six months ended June 30 increased from $35.4 million in 1998 to $125.7 in 1999. Gross margins were up $34.9 million from $13.7 million reported in 1998 to $48.6 million in 1999, while operating income reflected an increase of $4.6 million from the 1998 total of $2.6 million. These increases are due to internal growth combined with acquisitions of companies throughout 1998 and continuing into 1999. Communications Communications revenues for the three months ended June 30 increased from $24.3 million in 1998 to $67.8 million in 1999. Gross margins increased from $9.4 million in 1998 to $31.5 million in 1999. Operating income increased from $1.3 million in 1998 to $5.6 million in 1999. The increases are principally due to acquisitions as well as internal growth. Communications revenues for the six months ended June 30 increased from $28.5 million in 1998 to $130.6 million in 1999. Gross margins were up $48.8 million from $11.0 million reported in 1998 to $59.7 million in 1999, while operating income reflected an increase of $10.7 million from the 1998 total of $1.5 million. These increases are due to internal growth combined with acquisitions of companies throughout 1998 and continuing into 1999. Natural Gas Natural gas revenues for the three months ended June 30 decreased from $14.8 million in 1998 to $13.5 million in 1999. The decrease in revenues is due to significantly warmer than normal weather. Operating income from natural gas operations increased from $.6 million in 1998 to $1.2 million in 1999. The increase in operating income is due to higher volumes in 1999 as well as improvements in general and administrative costs which were partially offset by the warmer than normal weather. Natural gas revenues for the six months ended June 30 decreased from $44.9 million in 1998 to $43.6 million in 1999. The decrease was due to the significantly warmer than normal weather patterns in the Corporation's natural gas areas for the first four months of the year. Operating income from natural gas operations increased from $4.1 million in 1998 to $5.1 million in 1999. The increase in operating income is due to higher margins and lower administrative expenses offset by the warmer than normal weather. Other Income Statement Items Other operating revenues for 1998 consists principally of manufacturing revenues (related to the Corporation's former ownership interest in Lucht Inc. which was sold in 1998) and in 1999 consists of other service businesses. Consolidated other income increased from $.6 million in 1998 to $2.5 million in 1999 for the three month period ended June 30 and also increased from $3.3 million in 1998 to $5.8 million in 1999 for the six month period ended June 30. These increases are principally due to the investment of additional funds which are a result of the excess proceeds from the debt and equity offerings completed by the Corporation in November 1998. Interest expense increased from $7.8 million in 1998 to $13.7 million in 1999 for the three months ended June 30 and from $15.5 million in 1998 to $25.6 million in 1999 for the same six months. This increase resulted from debt issued by the Corporation in November 1998 and Cornerstone in December 1998 and June 1999. Minority interests for the three months ended June 30 changed from $5.6 million in 1998 to $9.9 million in 1999. For the six months ended June 30, minority interests changed from $(3.5) million in 1998 to $(1.3) million in 1999. Both changed as a result of additional allocation of propane losses to the propane minority interest as well as allocations to HVAC and communications minority interests. Income taxes increased from $2.0 million and $6.7 million in 1998 to $3.4 million and $10.9 million in 1999 for the three and six months ended June 30, respectively. Theses increases were due to the higher consolidated taxable income in such periods. LIQUIDITY AND CAPITAL RESOURCES: The Corporation believes it has adequate long-term liquidity through the generation of operating cash flows, the availability of substantial marketable securities, and a sound capital structure. In addition, the Corporation has adequate capacity for additional financing and continues to maintain this strong position through favorable bond ratings. The Corporation has generated significant operating cash flows while continuing to maintain substantial cash and investment balances in the form of marketable securities. Cash flows from operating activities during the six months ended June 30, 1999 and 1998 were $49.8 million and $42.8 million. The increase is primarily due to increased cash flow from propane, HVAC and communication operations. Cash equivalents and investment securities totaled $136.4 million and $72.7 million at June 30, 1999 and 1998, recpectively. Working capital and other financial resources are also provided by lines of credit, which are generally used to support commercial paper borrowings, a primary source of short-term financing. At June 30, 1999, available lines of credit totaled $195 million. There were no borrowings or commercial paper issuances outstanding on these credit facilities at June 30, 1999. In addition, the Corporation's nonregulated subsidiaries maintain credit agreements on a nonrecourse basis to the Corporation with various banks for revolving and term loans. Capital Requirements - The Corporation's primary capital requirements include the funding of its energy business construction, maintenance and expansion programs, the funding of debt and preferred stock retirements, sinking fund requirements and the funding of its corporate development and investment activities. Maintenance capital expenditure plans are subject to continual review and may be revised as a result of changing economic conditions, variations in sales, environmental requirements, investment opportunities and other ongoing considerations. Capital expenditures for maintenance activities during the six months ended June 30, 1999 and 1998 were $12.2 million and $13.6 million. Estimated annual maintenance capital expenditures for 1999 and 2000 are estimated to be $27.3 million and $26.2 million. Capital requirements for the mandatory retirement of long-term debt including nonrecourse debt of subsidiaries should be $8.4 million in 1999. The Corporation anticipates that future capital requirements will be met by existing investments and marketable securities, internally generated cash flows and available external financing. The Corporation will continue to review economics of retiring or refunding remaining long-term debt and the preferred stock to minimize long-term financing costs. At June 30, 1999, the Corporation had invested an aggregate of $243.0 million in Blue Dot. and Expanets. The Corporation may continue to make other significant acquisition investments in related industries that would require the Corporation to raise additional equity and/or incur debt financing, which are therefore subject to certain risks and uncertainties. The Corporation's financial coverages are at levels in excess of those required for the issuance of additional debt and preferred stock. COMPETITION AND BUSINESS RISK NorthWestern's strategy centers upon the development, acquisition and expansion of operations offering integrated services and solutions within the NorthWestern partner entities. In addition to maintaining a strong competitive position in its electric, natural gas and propane distribution businesses, the Corporation intends to pursue strategic development and acquisitions that have long-term growth potential. While these strategic development and acquisition activities can involve increased risk in comparison to the Corporation's energy distribution businesses, they offer the potential for enhanced investment returns. The Corporation's strategy to continue strategic development through acquisitions will be subject to future availability of market capital to fund such acquisitions. The NorthWestern strategy of integrating products and services and acquired companies have other factors which may also increase the risks of the Corporation. These factors include the ability of management teams to successfully implement operating strategies and the adequacy and efficiency information systems, business processes, related support functions and the ability to attract and retain quality team members. The Corporation has taken and continues to take steps to refine, improve and scale up its back-office support systems and processes. There are no assurances that such efforts will be sufficient to meet the future needs of the Corporation's operations. Future changes in accounting rules and regulations could have a material impact upon the Corporation's future financial statement presentation, results from operations and financial position. PROPANE The retail propane business is a margin-based business in which gross profits depend on the excess of sales prices over propane supply costs. Consequently, CornerStone's profitability will be sensitive to changes in wholesale propane prices. Propane is a commodity, the market price of which can be subject to volatile changes in response to changes in supply or other market conditions. As it may not be possible to immediately pass on to customers rapid increases in the wholesale cost of propane, such increases could reduce CornerStone's gross margins. Weather conditions have a significant impact on propane demand for both heating and agricultural purposes. The majority of CornerStone's customers rely heavily on propane as a heating fuel. Actual weather conditions can vary substantially from year to year, significantly affecting CornerStone's financial performance. Furthermore, variations in weather in one or more regions in which CornerStone operates can significantly affect the total volumes sold by CornerStone and the margins realized on such sales and, consequently, CornerStone's results of operations. These conditions may also impact CornerStone's ability to meet various debt covenant requirements and affect CornerStone's ability to pay common and subordinated unit distributions. Propane competes with other sources of energy, some of which are less costly for equivalent energy value. Propane distributors compete for customers against suppliers of electricity, fuel oil and natural gas, principally on the basis of price, service, availability and portability. Electricity is a competitor of propane, but propane generally enjoys a competitive price advantage over electricity for space heating, water heating and cooking. Propane serves as an alternative to natural gas in rural and suburban areas where natural gas is unavailable or portability of product is required. Natural gas is generally a less expensive source of energy than propane although in areas where natural gas is available, propane is used for certain industrial and commercial applications. The gradual expansion of the nation's natural gas distribution systems has resulted in the availability of natural gas in some areas that previously depended upon propane. However, natural gas pipelines are not present in many regions of the country where propane is sold for heating and 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, opened up transmission grids and mandated that utilities must allow others equal access to utility transmission systems. Various state regulatory bodies are supporting initiatives to redefine the electric energy market and are experimenting with retail wheeling, which gives some retail customers the ability to choose their supplier of electricity. Traditionally, utilities have been vertically integrated, providing bundled energy services to customers. The potential for continued unbundling of customer service exists, allowing customers to buy their own electricity and natural gas on the open market and having it delivered by the local utility. The growing pace of competition in the energy industry has been a primary focus of management over the last few years. The Corporation's future financial performance will be dependent on the effective execution of operating strategies to address a more competitive and changing energy marketplace. Business strategies focus on enhancing the Corporation's competitive position, on expanding energy sales and markets with new products and services for customers, and increasing shareholder value. The Corporation has realigned various areas of its business to support customer services and marketing functions. A new marketing plan, an expanded line of integrated customer products and services, additional staff and new technologies are part of the Corporation's strategy for providing responsive and superior customer service. To strengthen the Corporation's competitive position, new technologies have and will be added that enable team members to better serve customers. The Corporation is centralizing activities to improve efficiency, and customer responsiveness and business processes are being reengineered to apply best-practices methodologies. Long- term supply contracts have been renegotiated to lower customers' energy costs and new alliances help reduce expenses and add innovative work approaches. Weather conditions have a significant impact on electric and natural gas demand for heating and cooling purposes. Actual weather conditions can vary substantially from year to year, significantly affecting the Corporation's financial performance. As described in Note 1 to the 1998 audited annual consolidated financial statements, the Corporation complies with the provisions of Statement of Financial Accounting Standards No. 71 (SFAS 71), 'Accounting for the Effects of Certain Types of Regulation'. SFAS 71 provides for the financial reporting requirements of the Corporation's regulated electric and natural gas operations, which requires specific accounting treatment of certain costs and expenses that are related to the Corporation's regulated operations. Criteria that could give rise to the discontinuance of SFAS 71 include 1) increasing competition that restricts the Corporation's ability to establish prices to recover specific costs and 2) a significant change in the manner in which rates are set by regulators from cost-based regulation to another form of regulation. The Corporation periodically reviews these criteria to ensure the continuing application of SFAS 71 is appropriate. Based on a current evaluation of the various factors and conditions that are expected to impact future cost recovery, the Corporation believes that its regulatory assets, including those related to generation, are probable of future recovery. This evaluation of recovery must be updated for any change, which might occur in the Corporation's 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, from manufacturers of HVAC equipment, or from newly deregulated utilities in those industries entering into various service areas. The growth of Blue Dot. is dependent upon our ability to successfully implement our operating strategy and internal growth initiatives and identify, acquire, integrate, and finance HVAC businesses and acquisitions. COMMUNICATIONS The market served by Expanets in the communications and data services industry is also highly competitive. The Corporation believes that 1) market acceptance of the products, services and technology advances the Corporation provides, 2) pending and future legislation affecting the communications and data industry, 3) name recognition and market share, 4) larger competitors and 5) the Corporation's ability to provide integrated communication and data solutions for customers in a dynamic industry are all factors that could affect the Corporation's future operating results. Many of Expanet's competitors in the communications business are generally small, owner-operated companies typically located and operated in a single geographical area. There are a number of large, integrated national companies engaged in providing commercial services in the service lines in which the Corporation intends to focus and also manufacture and sell directly the products that the Corporation services and sells. Future competition may be encountered from other newly formed or existing public or private service companies with aggressive acquisition programs. The growth of Expanets is dependent upon our ability to successfully implement our operating strategy and internal growth initatives and identify, acquire, integrate, and finance communication and data services businesses and acquistions. YEAR 2000 READINESS The Corporation utilizes software and various technologies throughout its businesses that might be impacted by the date change in the year 2000. The year 2000 issue is a result of computer programs which were written using two digits (rather than the actual four) to identify the year in the date field. This old approach was intended to save processing time and storage space within computers and was continued in use until the mid 1990's. If not corrected, affected systems and devices containing computer chips or clocks could roll back to 1900 instead of moving forward to 2000. Some systems and devices may continue to function even if this occurs. Others may experience interruptions in service, processes or obtain erroneous results. In an effort to recognize the critical systems or devices with potential business consequences, the Corporation is utilizing internal and external resources to conduct detailed assessments of critical systems and devices. To ensure a thorough approach to the year 2000, the Corporation has assembled a diverse oversight and advisory team from all businesses with experienced information systems, legal, communications and operating leadership to work on our enterprise-wide year 2000 program. This initiative covers not only the Corporation's information technology systems and computer applications, but also considers hardware, embedded systems and components internal and external to our organizations. The Corporation's program considers not only our businesses and technology areas but also those of our customers and suppliers. The Corporation's operations are dependent upon complex computer systems for many aspects of its businesses. These different computer information systems include AS/400, client server and distributed systems. The Corporation's goal is to have mission- critical systems or devices that are required to maintain operations ready for the year 2000. Year 2000 ready means that the system or device has been deemed suitable to operate after December 31, 1999. Many of the Corporation's mission-critical systems have been replaced or will be replaced in advance of the year 2000. Remediation plans include prioritizing our efforts based on when the systems might first experience malfunctions as well as possible impact on our customers. The Corporation believes that it has adequately remediated or modified most critical applications and will now devote the remainder of 1999 to work on final interface issues, remediation, testing of both existing and replacement systems and fine-tuning critical items. Note that some replacement systems are being implemented through the third quarter of 1999 and year 2000 readiness of those systems will be confirmed upon implementation. The Corporation's costs to prepare for the year 2000 were approximately $2 million during 1998 and an estimated additional $2 million will be incurred during 1999. These costs have been expensed as incurred or capitalized in accordance with our accounting policy for software development costs. The Corporation's systems and operations with respect to the year 2000 issue may also be affected by other third parties with which the Corporation transacts business. We rely upon other companies to supply us with products and services necessary to operate our businesses. If key third parties cannot provide us with products and services as a result of their own year 2000 problem, it could have a material adverse effect upon our operations. The extent of such impact would depend upon the duration of such interruption and our costs and ability to find alternative sources of products and services. The Corporation is currently working with third parties to determine the potential adverse consequences, if any, that could result from such entities' failure to effectively address the year 2000 issue. The Corporation's primary focus has been directed at resolving the year 2000 problem. While the Corporation expects that the majority of its systems and devices to be year 2000 ready, the Corporation is developing a contingency plan specifying what will be done if the Corporation or important third parties are not year 2000 ready. The majority of the contingency plan is based on manual backup systems, procedures and practices, as well as the identification of alternative suppliers for key products or services. The contingency plan is completed and will be updated as appropriate throughout the remainder of 1999. In addition, the Corporation has informed customers of its plans and maintains a year 2000 readiness statement on its corporate web site. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain statements in this Form 10-Q constitute 'forward-looking statements' within the meaning of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. When used in the this Form 10-Q, the words 'expects', 'anticipates', 'estimates', 'believes', 'no assurance' and similar expressions are intended to identify such forward-looking statements that involve risks and uncertainties. Such forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the Corporation's actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. In addition to the risks and uncertainties discussed in the foregoing sections, actual results or outcomes could differ materially as a result of various factors including, among others, the following: the impact of competition and changes to the competitive environment for the Corporation's products and services; changes in technology; reliance on strategic partners; weather, regional, commercial, industrial and residential growth in the geographic areas served by Corporation and its partner entities; customers' usage patterns and preferences; the speed and degree to which competition enters the Corporation's industries; the ability of the Corporation ot it's Partner Entities to integrate the operations of acquired businesses; the timing and extent of changes in commodity prices; uncertainty of litigation; changes in government regulation; changes in the capital and equity markets; changes in market interest or currency exchange rates; new or increased environmental liabilities; the effects of the year 2000 Issue; other unforeseen events; and other factors detailed, from time to time, in the Corporation's filings with the Securities and Exchange Commission. These forward-looking statements speak only as of the date of this Form 10-Q. NorthWestern Corporation expressly disclaims any obligation or undertakings to release publicly any updated or revisions to any forward-looking statements contained herein to reflect any change in the Corporation's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. NORTHWESTERN CORPORATION PART II ITEM 1. LEGAL PROCEEDINGS The Corporation is from time to time a part to litigation arising in the ordinary course of its business and stategic 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: August 16, 1999 /s/ David A. Monaghan ------------------------------------- Controller and Treasurer EX-27 2
5 6-MOS DEC-31-1999 JUN-30-1999 38,937,884 0 129,717,798 0 75,064,747 274,349,261 858,710,558 (209,031,673) 1,780,574,878 187,195,535 668,724,140 0 91,250,000 40,438,158 251,262,549 1,780,574,878 1,105,203,643 1,105,203,643 847,676,775 847,676,775 203,795,482 0 25,606,334 32,592,746 10,876,391 21,716,355 0 0 0 21,716,355 0.79 0.78
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