-----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, MyKNxtwGRRjIP+CKnXtmiJD89moK6xhbA8xPUfb/QSPcjrcImB9dBeW6Jy85dxKk CzNpBKSxmSe7yAzwF0KYuQ== 0000073088-99-000013.txt : 19991117 0000073088-99-000013.hdr.sgml : 19991117 ACCESSION NUMBER: 0000073088-99-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: 99756351 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 09/30/99 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 September 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 November 9, 1999 Corporation-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts, Liquidation Amount $25.00 3,500,000 shares outstanding at November 9, 1999 Index PAGE PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - September 30, 1999 and December 31, 1998 3 Consolidated Statements of Income - Three months and nine months ended September 30, 1999 and 1998 4 Consolidated Statements of Cash Flows Nine months ended September 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) September 30, December 31, 1999 1998 ASSETS Current Assets Cash and Cash Equivalents $ 38,543 $ 30,865 Accounts Receivable, Net 180,485 131,541 Inventories 100,331 72,805 Other 36,373 31,957 ------- ------- 355,732 267,168 ------- ------- Property, Plant and Equipment, Net 662,978 629,278 ------- ------- Goodwill and Other Intangible Assets, Net 679,698 631,029 ------- ------- Other Assets Investments 99,542 152,470 Other 105,715 56,271 ------- ------- 205,257 208,741 ------- ------- $ 1,903,665 $ 1,736,216 =========== =========== Liabilities and Shareholders' Equity Current Liabilities Current Maturities of Long-Term Debt $ 16,416 $ 20,060 Commercial Paper Borrowings 13,000 - Short-Term Debt - Nonrecourse 16,296 11,554 Accounts Payable 153,384 113,036 Accrued Expenses 71,132 64,779 ------- ------- 270,228 209,429 ------- ------- Long-term Debt 286,350 256,350 Long-term Debt of Subsidiaries - Nonrecourse 444,864 332,525 Deferred Income Taxes and Other 75,718 74,072 Other Noncurrent Liabilities 71,667 101,787 ------- ------- 878,599 764,734 ------- ------- Minority Interests 371,378 388,702 ------- ------- Preferred 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 Corporation Obligated Mandatorily Redeemable 87,500 87,500 ------ ------ Preferred Securities of Subsidiary Trusts 91,250 91,250 ------ ------ Shareholders' Equity Common Stock 40,438 40,279 Paid-in Capital 160,028 158,530 Retained Earnings 88,722 81,100 Accumulated Other Comprehensive Income 3,022 2,192 ------- ------- 292,210 282,101 ------- ------- $ 1,903,665 $ 1,736,216 ========== ========== The accompanying notes to consolidated financial statements are an integral part of these statements. NORTHWESTERN CORPORATION CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In Thousands, Except for Per Share Amounts) Three Months Ended Nine Months Ended September 30 September 30 ------------------ ------------------ 1999 1998 1999 1998 ------------------ ------------------ OPERATING REVENUES $ 753,443 $ 276,896 $1,858,647 $ 809,005 COST OF SALES 630,008 194,436 1,477,684 578,953 ------- ------- --------- ------- GROSS MARGIN 123,435 82,460 380,963 230,052 OPERATING EXPENSES Selling, general and administrative expenses 96,975 62,505 269,634 155,095 Depreciation & amortization 16,795 12,001 47,931 30,229 ------- ------ ------- ------- 113,770 74,506 317,565 185,324 ------- ------ ------- ------- OPERATING INCOME 9,665 7,954 63,398 44,728 Interest Expense, net (13,461) (9,528) (39,068) (25,000) Investment Income and Other 1,065 1,293 6,832 4,616 ------- ------- -------- -------- Income(Loss) Before Income Taxes and Minority Interests (2,731) (281) 31,162 24,344 Provision for Income Taxes (3,221) (3,992) (14,098) (10,741) ------- ------- -------- -------- Income (Loss) Before Minority Interests (5,952) (4,273) 17,064 13,603 Minority Interests 14,790 8,855 13,491 5,338 ------- ------- ------ ------ Net Income 8,838 4,582 30,555 18,941 Minority Interest on Preferred Securities of Subsidiary Trusts (1,650) (660) (4,950) (1,980) Dividends on Cumulative Preferred Stock (48) (48) (144) (144) ------- ------- ------ ------- Earnings on Common Stock $ 7,140 $ 3,874 $ 25,461 $ 16,817 ======== ======== ======== ========= Average Common Shares Outstanding 23,109 17,860 23,089 17,848 Earnings per Average Common Share Basic $ 0.31 $ 0.21 $ 1.10 $ 0.94 Diluted $ 0.31 $ 0.20 $ 1.09 $ 0.93 The accompanying notes to consolidated financial statements are an integral part of these statements. NORTHWESTERN CORPORATON CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In Thousands) Nine Months Ended September 30 ---------------- 1999 1998 ---- ---- Operating Activities: Net Income $ 30,555 $ 18,941 Items not Affecting Cash Depreciation and Amortization 47,931 30,229 Deferred Income Taxes (6,273) (1,949) Minority Interests in Net Income of Consolidated Subsidiaries (13,491) (5,338) Investment Tax Credits (421) (421) Foreign Currency Translations (240) - Changes in Current Assets and Liabilities, Net of Acquisitions: Accounts Receivable (5,941) 45,110 Inventories (6,808) 373 Other Current Assets (6,836) (3,828) Accounts Payable 15,563 (45,565) Accrued Expenses (1,973) (2,611) Other, Net (3,535) 215 -------- ------- Cash Flows Provided by Operating Activities 48,531 35,156 -------- ------- Investment Activities: Property, Plant and Equipment Additions (19,521) (19,742) Sale (Purchase) of Noncurrent Investments, Net 28,617 28,872 Acquisitions and Growth Expenditures (150,775) (142,495) --------- --------- Cash flows Used in Investing Activites (141,679) (133,365) --------- --------- Financing Activities: Dividends on Common and Preferred Stock (17,983) (13,129) Minority Interest on Preferred Securities of Subsidiary Trusts (4,950) (1,980) Proceeds From Exercise of Warrants 1,656 869 Subsidiary Payment of Common Unit Distributions (27,751) (21,369) Proceeds From Issuance of Common Units - 40,700 Issuance of Long Term Debt 35,000 - Repayment of Long Term Debt (5,000) (5,000) Issuance of Nonrecourse Subsidiary Debt 120,520 - Repayment of Nonrecourse Subsidiary Debt (13,666) (7,188) Short-Term Borrowings - 88,500 Commercial Paper Issuances 13,000 25,000 --------- --------- Cash Flows Provided by Financing Activities 100,826 106,403 --------- --------- Increase in Cash and Cash Equivalents 7,678 8,194 Cash and Cash Equivalents, Beginning of Period 30,865 14,309 -------- --------- Cash and Cash Equivalents, End of Period $ 38,543 $ 22,503 ======== ======== Supplemental Cash Flow Information Cash Paid During the Period For Income Taxes $ 15,968 $ 10,577 Interest $ 28,831 $ 21,952 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. The preparation of financial statements in conformity with generally accepted accounting principles 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, 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. The Common Stock equity interests of the former owners of companies acquired by Blue Dot. and Expanets who continue to hold an interest in Blue Dot. and Expanets are also reflected as minority interests in the consolidated financial statements. (3) Comprehensive Income - In 1998, the Corporation adopted SFAS No. 130 "Reporting Comprehensive Income." This statement requires the reporting of comprehensive income in addition to net income from operations. Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of net income. Comprehensive income for the three months ended September 30, 1999 and 1998, was $8.2 million and $4.6 million. Comprehensive income for the nine months ended September 30, 1999 and 1998, was $31.4 million and $17.7 million. (4) Segment Information - In 1998, the Corporation adopted Statement of Financial Accounting Standards No. 131 (SFAS 131), "Disclosures About Segments of an Enterprise and Related Information," which requires the reporting of certain financial information by business segment. For the purpose of providing segment information, the Corporation's principal business segments are its electric and natural gas, retail propane and 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 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 September 30, 1999 ------------------------------------- Total Electric & Natural Total Communi- All Gas Propane HVAC cations Other Total --------- --------- ------ ---------- ------- ------- Operating Revenues $ 30,845 $ 556,527 $ 82,628 $ 77,940 $ 5,503 $ 753,443 Cost of Sales 9,241 521,436 50,217 45,381 3,733 630,008 ------ ------- ------ ------ ----- ------- Gross Margin 21,604 35,091 32,411 32,559 1,770 123,435 Selling, general & administrative 9,257 33,382 26,370 25,346 2,620 96,975 Depreciation & amortization 3,752 8,169 2,117 2,647 110 16,795 ----- ------ ------ ------ ----- ------ Operating Income (Loss) 8,595 (6,460) 3,924 4,566 (960) 9,665 Interest Expense (2,187) (8,362) (459) (290) (2,163) (13,461) Investment Income & Other 30 1 377 (594) 1,251 1,065 ----- ------ ----- ----- ------ ------ Income before taxes and minority interests 6,438 (14,821) 3,842 3,682 (1,872) (2,731) Provision for income taxes (2,608) 1,454 (1,948) (1,868) 1,749 (3,221) ------- ------ ------- ------- ------ ------- Income before minority interests $ 3,830 $ (13,367) $ 1,894 $ 1,814 $ (123) $ (5,952) ======= ========== ======= ======= ======= ======= Total Assets $336,266 $831,437 $279,025 $242,397 $214,540 $1,903,665 ======== ======== ======== ======== ======== ========== Maintenance Capital Expenditures $ 3,807 $ 1,389 $ 591 $ 1,176 $ 338 $ 7,301 ======= ======== ======== ======== ======== ========== 1999 1998 Electric Natural Electric Natural Gas Gas ---------- --------- --------- -------- Operating Revenues $ 24,155 $ 6,690 $ 22,497 $ 6,692 Cost of Sales 5,501 3,740 4,410 3,763 ------- ------- -------- -------- Gross Margin 18,654 2,950 18,087 2,929 Selling, general & administrative 5,994 3,263 6,253 3,242 Depreciation and amortization 2,994 758 2,985 791 ------ ----- ------ ----- $ 9,666 $ (1,071) $ 8,849 $ (1,104) ======= ========= ======= ========= 1999 1998 Retail Wholesale Retail Wholesale Propane Propane Propane Propane --------- ----------- --------- ---------- Operating Revenues $ 53,019 $ 503,508 $ 39,188 $ 121,539 Cost of Sales 25,036 496,400 15,548 118,482 -------- -------- ------- -------- Gross Margin $ 27,983 $ 7,108 $ 23,640 $ 3,057 ========= ========= ======== ========= Three Months Ended September 30, 1998 --------------------------------------- Total Electric & Natural Total Communi- All Gas Propane HVAC cations Other Total --------- ------- ------ -------- ------- ------- Operating Revenues $ 29,189 $ 160,727 $ 36,550 $ 44,786 $ 5,644 $ 276,896 Cost of Sales 8,173 134,030 22,133 27,192 2,908 194,436 ------- -------- ------- ------- ------ ------- Gross Margin 21,016 26,697 14,417 17,594 2,736 82,460 Selling, general & administrative 9,495 25,694 10,746 13,828 2,742 62,505 Depreciation & amoritization 3,776 5,122 1,000 1,543 560 12,001 ------ ------ ------ ------ ----- ------- Operating Income (Loss) 7,745 (4,119) 2,671 2,223 (566) 7,954 Interest Expense (2,754) (5,124) - (216) (1,434) (9,528) Investment Income & Other 271 - 87 49 886 1,293 ------ ------- ----- ----- ------- ------- Income before taxes and minority interests 5,262 (9,243) 2,758 2,056 (1,114) (281) Provision for income taxes (1,892) 810 (1,394) (1,267) 479 (3,992) -------- ----- ------- ------- ------ ------- Income before minority interests $ 3,370 $ (8,433) $ 1,364 $ 789 $ (1,363) $ (4,273) ======== ========= ======= ===== ======== ======= Total Assets $ 332,367 $ 735,290 $ 47,195 $ 73,171 $ 548,193 $ 1,736,216 ======== ======== ======= ======= ======== ========== Maintenance Capital Expenditures $ 2,519 $ 1,270 $ 1,066 $ 1,205 $ 91 $ 6,151 ====== ====== ======= ====== ===== ========= Nine Months Ended September 30, 1999 -------------------------------------- Total Electric & Natural Total Communi- All Gas Propane HVAC cations Other Total ----------- --------- ------ --------- ------- -------- Operating Revenues $115,013 $1,314,647 $208,329 $208,521 $12,137 $1,858,647 Cost of Sales 49,075 1,176,721 127,363 116,249 8,276 1,477,684 -------- ---------- ------- ------- ------ --------- Gross Margin 65,938 137,926 80,966 92,272 3,861 380,963 Selling, general & administrative 28,077 96,024 65,551 71,409 8,573 269,634 Depreciation & amoritization 11,189 22,881 6,067 7,427 367 47,931 ------- ------- ------ ------ ----- ------- Operating Income (Loss) 26,672 19,021 9,348 13,436 (5,079) 63,398 Interest Expense (6,544) (23,883) (459) (833) (7,349) (39,068) Investment Income & Other 255 1 484 (564) 6,656 6,832 ------ ------- ----- ------ ------ ------ Income before taxes and minority interests 20,383 (4,861) 9,373 12,039 (5,772) 31,162 Provision for income taxes (7,046) (55) (4,778) (6,245) 4,026 (14,098) ------- ------- ------- ------- ------ -------- Income before minority interests $ 13,337 $ (4,916) $ 4,595 $ 5,794 $(1,746) $ 17,064 ======== ======== ======= ======= ======== ======== Total Assets $336,266 $831,437 $279,025 $242,397 $214,540 $1,903,665 ======== ======== ======== ======== ======== ========== Maintenance Capital Expenditure $10,561 $3,956 $1,743 $2,649 $612 $19,521 ======== ======== ======== ======== ======== ========= 1999 1998 Electric Natural Electric Natural Gas Gas --------- -------- --------- --------- Operating Revenues $ 64,680 $ 50,333 $ 60,049 $ 51,560 Cost of Sales 14,447 34,628 12,018 36,236 ------- ------- ------- ------- Gross Margin 50,233 15,705 48,031 15,324 Selling, general & administrative 18,592 9,485 19,113 10,143 Depreciation and amortization 8,999 2,190 8,883 2,222 ------ ------ ------ ------ $ 22,642 $ 4,030 $ 20,035 $ 2,959 ======== ======= ======== ======= 1999 1998 Retail Wholesale Retail Wholesale Propane Propane Propane Propane --------- ---------- --------- ---------- Operating Revenues $ 208,866 $1,105,781 $ 162,979 $371,970 Cost of Sales 88,737 1,087,984 72,331 359,684 ------- --------- ------- ------- Gross Margin $ 120,129 $ 17,797 $ 90,648 $ 12 286 ========= ========== ========= ======== Nine Months Ended September 30, 1998 --------------------------------------- Total Electric & Natural Total Communi- All Gas Propane HVAC cations Other Total --------- -------- ------ --------- ----- ------- Operating Revenues $ 111,609 $ 534,949 $ 71,910 $ 73,285 $ 17,252 $ 809,005 Cost of Sales 48,254 432,015 43,800 44,735 10,149 578,953 -------- -------- ------- ------- ------- -------- Gross Margin 63,355 102,934 28,110 28,550 7,103 230,052 Selling, general & administrative 29,256 75,597 21,199 22,877 6,166 155,095 Depreciation & amoritization 11,105 14,467 1,610 1,972 1,075 30,229 ------- ------- ------ ------ ------ ------- Operating Income (Loss) 22,994 12,870 5,301 3,701 (138) 44,728 Interest Expense (8,339) (14,519) (20) (370) (1,752) (25,000) Investment Income & Other 878 - 105 112 3,521 4,616 ------- -------- ------ ------ ------ ------ Income before taxes and minority interests 15,533 (1,649) 5,386 3,443 1,631 24,344 Provision for income taxes (5,840) (515) (2,058) (1,836) (492) (10,741) -------- ------ ------- ------- ------ -------- Income before minority interests $ 9,693 $ (2,164) $ 3,328 $ 1,607 $ 1,139 $ 13,603 ======== ========= ======= ======= ======= ======== Total Assets $332,367 $735,290 $47,195 $73,171 $548,193 $1,736,216 ======== ======== ======= ======= ======== ========== Maintenance Capital Expenditures $ 9,003 $ 5,917 $ 2,843 $ 1,816 $ 163 $ 19,742 ========== ======== ======= ======= ====== ========== (5) New Accounting Standards - In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 (SFAS 133), 'Accounting for Derivative Instruments and Hedging Activities.' The Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments imbedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement requires changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. SFAS 133 is effective for fiscal years beginning after June 15, 1999. The Corporation is evaluating the impacts of adopting SFAS 133 on its financial statements. The impact of SFAS 133 will likely depend upon the extent of use of derivative instruments and their designation and effectiveness as hedges of market risk. (6) Reclassification and Restatements - Certain 1998 amounts have been reclassified to conform to the 1999 presentation. Operating results for 1998 have been restated to reflect the consolidation of Blue Dot. and Expanets effective January 1, 1998. Such reclassifications and restatements had no impact on net income and common stock equity as previously reported. (7) Earnings Per Share - 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 Nine Months Ended Ended September 30 September 30 --------------- -------------- 1999 1998 1999 1998 Average common Shares outstanding for Basic computation 23,109 17,860 23,089 17,848 Dilutive effect of: Stock Options 14 7 19 20 Stock Warrants 264 289 287 350 ------ ------ ------ ------ Average common Shares outstanding for Diluted computation 23,387 18,144 23,395 18,230 ======= ======= ======= ======= 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 (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. RESULTS OF OPERATIONS: Consolidated Earnings Comparisons - Diluted earnings per share for the quarters ended September 30, 1999 and 1998, were $.31 and $.20. Diluted earnings per share for the year to date through September 30, 1999 was $1.09 compared to $.93 for the nine months ended September 30, 1998. Excluding a nonrecurring investment gain of $.07 related to a sale of stock in a non-strategic investment, September 30, 1998, year to date diluted earnings were $.86 per share. The increase in ongoing earnings was due to increased income from electric and natural gas operations as well as increased income from HVAC and communications operations resulting from internal growth and acquired companies, offset by decreases in propane due primarily to the impact of additional acquisitions in a traditional seasonal loss period. Propane Retail propane sales for the three months ended September 30 increased 35% from $39.2 million in 1998 to $53.0 million in 1999. Sales revenues have increased primarily due to acquisitions and to a lesser extent increases in the average price of propane and internal growth. Gross margins also increased 18% from $23.6 million in 1998 to $28.0 million in 1999. The increases are due to the acquisition of retail propane centers including a large retail propane distribution company in late 1998 as well as internal growth. Wholesale propane sales increased 314% from $121.5 million in 1998 to $503.5 million in 1999. Wholesale propane margins also increased 133% from $3.1 million in 1998 to $7.1 million in 1999. The increases in wholesale sales and margins are primarily due to acquisitions in late 1998 and early 1999. The majority of retail 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's which traditionally are operating loss periods in the industry. Propane operating losses for the three months ended September 30 increased 57% from $(4.1) million in 1998 to $(6.5)million in 1999 due primarily to the impact of additional acquisitions in a traditional seasonal loss period. Retail propane sale for the nine months ended September 30 increased 28% from $163.0 million in 1998 to $ 208.9 million in 1999. Gross margins also increased 33% from $90.6 million in 1998 to $120.1 million in 1999. The increases are due primarily to acquisitions and to a lesser extent internal growth. Wholesale propane revenues increased 197% from $372.0 million in 1998 to $1.1 billion in 1999. Gross margins also increased 45% from $12.3 million in 1998 to $17.8 million in 1999. These increases were mainly due to acquisitions completed late in 1998 and early 1999. Electric Electric revenues for the three months ended September 30 increased 7% from $22.5 million in 1998 to $24.2 million in 1999. The increase in revenues is due to internal growth and increased wholesale sales as well a slight increase in the number of cooling degree days in the period. Operating income from electric operations increased 9% from $8.8 million in 1998 to $9.7 million in 1999. The increase in operating income is due to higher revenues and margins in 1999. Electric revenues for the nine months ended September 30 increased 8% from $60.0 million in 1998 to $64.7 million in 1999. The increase is due to internal growth, increased wholesale sales, and a slight increase in the number of cooling degree days in the period partially offset by a slight decrease in the number of heating degree days in the first three months. Operating income increased 13% from $20.0 million in 1998 to $ $22.6 million in 1999. HVAC HVAC revenues for the three months ended September 30 increased from $36.6 million in 1998 to $82.6 million in 1999. Margins increased from $14.4 million in 1998 to $32.4 million in 1999. Operating income increased from $2.7 million in 1998 to $3.9 million in 1999. The increases are due primarily to acquisitions along with internal growth. HVAC revenues for the nine months ended September 30 increased from $71.9 million in 1998 to $208.3 in 1999. Gross margins were up $52.9 million from the $28.1 million reported in 1998 while operating income reflected an increase of $4.0 million from $5.3 million reported in 1998. These increases are due primarily to acquisitions of companies throughout 1998 and continuing into 1999 along with internal growth. Communications Communications revenues for the three months ended September 30 increased from $44.8 million in 1998 to $77.9 million in 1999. Margins increased from $17.6 million in 1998 to $32.6 million in 1999. Operating income increased from $2.2 million in 1998 to $4.6 million in 1999. The increases are due primarily to acquisitions along with internal growth. Communications revenues for the nine months ended September 30 increased from $73.3 million in 1998 to $208.5 million in 1999. Margins were up $63.7 million from the $28.6 million reported in 1998 while operating income reflected an increase of $9.7 million from $3.7 million reported in 1998. These increases are due primarily to acquisitions of companies throughout 1998 and continuing into 1999 along with internal growth. Natural Gas Natural gas revenues for the three months ended September 30 remained unchanged from the 1998 total of $6.7 million. Operating losses from natural gas operations also remained unchanged from the 1998 total of $(1.1) million. Natural gas revenues for the nine months ended September 30 decreased from $51.6 million in 1998 to $50.3 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 $3.0 million in 1998 to $4.0 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. Investment income and other decreased slightly from $1.3 million for the three months ended September 30, 1998, to $1.1 million for the same period in 1999. This decrease was due to cash utilized for acquisitions in 1999 as compared to overnight investments in 1998. Investment income and other increased from $4.6 million during the nine months ended September 30, 1998, to $6.8 million for the same period in 1999. This increase is 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 $9.5 million in 1998 to $13.5 million in 1999 for the three months ending September 30 and from $25.0 million in 1998 to $39.1 million in 1999 for the same nine months. This increase resulted from debt issued by the Corporation in November 1998 and Cornerstone in December 1998. The losses apportioned to minority interests increased from $(8.9) million and $(5.3) million in 1998 to $(14.8) million and $(13.5) million in 1999 for the three and nine month periods ended September 30. 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 decreased from $4.0 million to $3.2 million for the three months ended September 30, 1998 and 1999. Income taxes increased from $10.7 million to $14.1 million for the nine months ended September 30, 1998 and 1999. The decrease for the three month period was due to the increased propane losses while the expense is higher for the nine month period due to the higher consolidated taxable income. LIQUIDITY AND CAPITAL RESOURCES: The Corporation believes it has adequate long-term liquidity through the generation of operating cash flows, the availability of substantial marketable securities, 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. 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 nine months ended September 30, 1999 and 1998 were $48.5 million and $35.2 million. The increase is primarily due to increased cash flow from propane, HVAC and communication operations. Cash equivalents and investment securities totaled $68.2 million and $130.1 million at September 30, 1999 and 1998. Working capital and other financial resources are also provided by lines of credit, which are generally used to support commercial paper borrowings, a primary source of short-term financing, as well as for general corporate purposes. At September 30, 1999, available lines of credit totaled $147 million. There was $35 million of borrowings outstanding on a line of credit and $13 million of commercial paper issuances outstanding at September 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 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 nine months ended September 30, 1999 and 1998 were $19.5 million and $19.7 million, respectively. Estimated annual maintenance capital expenditures for 1999 and 2000 are estimated to be $27.3 million and $26.2 million, respectively. Capital requirements for the mandatory retirement of long-term debt including nonrecourse debt of subsidiaries are scheduled to be $8.4 million in 1999. The Corporation anticipates that future capital requirements will be met by existing investments and marketable securities, internally generated cash flows and available external financing. The Corporation will continue to review economics of retiring or refunding remaining long- term debt and preferred stock to minimize long-term financing costs. At September 30. 1999, the Corporation had invested an aggregate of $275.6 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 growth of operations offering expanded customer 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, they offer the potential for enhanced investment returns. The Corporation's strategy to continue strategic development through acquisitions will be subject to future availability of market capital to fund such acquisitions. The NorthWestern strategy of integrating products and services and acquired companies have other factors which may also increase the risks of the Corporation. These factors include the adequacy and efficiency of its information systems, business processes, related support functions and the ability to attract and retain quality team members. The Corporation has taken and continues to take steps to refine, improve and scale up its back-office support systems and processes. There are no assurances that such efforts will be sufficient to meet the future needs of the Corporation's operations. Future changes in accounting rules and regulation, particularly business combinations, could have a material impact upon the Corporation's future financial statement presentation, results from operations and financial position. PROPANE The retail propane business is a margin-based business in which gross profits depend on the excess of sales prices over propane supply costs. Consequently, CornerStone's profitability will be sensitive to changes in wholesale propane prices. Propane is a commodity, the market price of which can be subject to volatile changes in response to changes in supply or other market conditions. As it may not be possible to immediately pass on to customers rapid increases in the wholesale cost of propane, such increases could reduce CornerStone's gross profits. Weather conditions have a significant impact on propane demand for both heating and agricultural purposes. The majority of CornerStone's customers rely heavily on propane as a heating fuel. Actual weather conditions can vary substantially from year to year, significantly affecting CornerStone's financial performance. Furthermore, variations in weather in one or more regions in which CornerStone operates can significantly affect the total volumes sold by CornerStone and the margins realized on such sales and, consequently, CornerStone's results of operations. These conditions may also impact CornerStone's ability to meet various debt covenant requirements and affect CornerStone's ability to pay common and subordinated unit distributions. Propane competes with other sources of energy, some of which are less costly for equivalent energy value. Propane distributors compete for customers against suppliers of electricity, fuel oil and natural gas, principally on the basis of price, service, availability and portability. Electricity is a competitor of propane, but propane generally enjoys a competitive price advantage over electricity for space heating, water heating and cooking. Propane serves as an alternative to natural gas in rural and suburban areas where natural gas is unavailable or portability of product is required. Natural gas is generally a less expensive source of energy than propane although in areas where natural gas is available, propane is used for certain industrial and commercial applications. The gradual expansion of the nation's natural gas distribution systems has resulted in the availability of natural gas in some areas that previously depended upon propane. However, natural gas pipelines are not present in many regions of the country where propane is sold for heating and 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, or from newly deregulated utilities in those industries entering into various service areas. COMMUNICATIONS The market served by Expanets in the communications and data services industry is also highly competitive. The Corporation believes that 1) market acceptance of the products, services and technology advances the Corporation provides, 2) pending and future legislation affecting the communications and data industry, 3) name recognition and market share, 4) larger competitors and 5) the Corporation's ability to provide integrated communication and data solutions for customers in a dynamic industry are all factors that could affect the Corporation's future operating results. Many of Expanet's competitors in the communications business are generally small, owner-operated companies typically located and operated in a single geographical area. There are a number of large, integrated national companies engaged in providing commercial services in the service lines in which the Corporation intends to focus and also manufacture and sell directly the products that the Corporation services and sells. Future competition may be encountered from other newly formed or existing public or private service companies with aggressive acquisition programs. YEAR 2000 READINESS The Corporation utilizes software and various technologies throughout its businesses that might be impacted by the date change in the year 2000. The year 2000 issue is a result of computer programs which were written using two digits (rather than the actual four) to identify the year in the date field. This old approach was intended to saving processing time and storage space within computers and was continued in use until the mid 1990's. If not corrected, affected systems and devices containing computer chips or clocks could roll back to 1900 instead of moving forward to 2000. Some systems and devices may continue to function even if this occurs. Others may experience interruptions in service, processes or obtain erroneous results. In an effort to recognize these critical systems or devices with potential business consequences, the Corporation is utilizing internal and external resources to conduct detailed assessments of critical systems and devices. To ensure a thorough approach to the year 2000, the Corporation has assembled a diverse oversight and advisory team from all businesses with experienced information systems, legal, communications and operating leadership to work on our enterprise-wide year 2000 program. This initiative covers not only the Corporation's information technology systems and computer applications, but also considers hardware, embedded systems and components internal and external to our organizations. The Corporation's program considers not only our businesses and technology areas but also those of our customers and suppliers. The Corporation's operations are dependent upon complex computer systems for many aspects of its businesses. These different computer information systems include AS/400, client server and distributed systems. The Corporation's goal is to have missioncritical 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 taken necessary steps to remediate all critical applications and will devote the remainder of 1999 to work on final interface issues, remediation, testing and finetuning critical items. The Corporation's costs to prepare for the year 2000 were approximately $2 million during 1998 and an estimated additional $2 million will be incurred during 1999. These costs have been expensed as incurred or capitalized in accordance with our accounting policy for software development costs. The Corporation's systems and operations with 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 issue. While the Corporation expects that the majority of its systems and devices to be year 2000 ready, the Corporation has developed 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 will be based on manual backup systems, procedures and practices, as well as the identification of alternative suppliers for key products or services. The contingency plan is 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. RISK POLICIES CornerStone, and therefore the Corporation, are exposed to market risks associated with commodity prices, interest rates, equity prices and foreign exchange rates. Comprehensive risk management policies have been established by CornerStone's Corporate Risk Management Committee (CRMC) to monitor and control these market risks. The CRMC is comprised primarily of senior executives. The CRMC has responsibility for oversight of all CornerStone's corporate energy risk management and approving energy financial exposure limits, as well as responsibility for oversight of interest rate risk, foreign currency risk and credit risk. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain statements in this Form 10-Q constitute 'forward-looking statements' within the meaning of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. When used in the this Form 10-Q, the words 'expects', 'anticipates', 'estimates', 'believes', 'no assurance' and similar expressions are intended to identify such forward-looking statements that involve risks and uncertainties. Such forwardlooking statements involve known and unknown risks, uncertainties and other factors, which may cause the Corporation's actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. In addition to the risks and uncertainties discussed in the foregoing sections, actual results or outcomes could differ materially as a result of such important factors including, among others, the following: the impact of competition and changes to the competitive environment for the Corporation's products and services; changes in technology; reliance on strategic partners; weather, regional, commercial, industrial and residential growth in the geographic areas served by Corporation and its partner entities; customers' usage patterns and preferences; the speed and degree to which competition enters the Corporation's industries; the timing and extent of changes in commodity prices; uncertainty of litigation; changes in government regulation; changes in the capital and equity markets; changes in market interest or currency exchange rates; new or increased environmental liabilities; the effects of the year 2000 Issue; other unforeseen events; and other factors detailed, from time to time, in the Corporation's filings with the Securities and Exchange Commission. These forward-looking statements speak only as of the date of this Form 10- Q. NorthWestern Corporation expressly disclaims any obligation or undertakings to release publicly any updated or revisions to any forward-looking statements contained herein to reflect any change in the Corporation's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. NORTHWESTERN CORPORATION PART II ITEM 1. LEGAL PROCEEDINGS The Corporation is 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 In addition to the information reported elsewhere in this report, the Corporation also has made certain management additions and changes during the period. At the Corporation, Michael L. Childers has been appointed Vice President, Customer Strategies, and John Van Camp has been appointed Vice President, Human Resources. At Expanets, Inc., Joel Schleicher, former chief executive officer and president, has left the company. The existing senior management team at Expanets will continue to lead the company together with the continued involvement of senior personnel for NorthWestern Growth Corporation prior to the successor being named. 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: November 15, 1999 /s/ David A. Monaghan ----------------------- Controller and Treasurer EX-27 2
5 9-MOS DEC-31-1999 SEP-30-1999 38,543,208 0 180,485,255 0 100,330,696 355,732,583 879,850,244 (216,872,452) 1,903,665,196 270,228,480 731,214,345 0 91,250,000 40,438,158 251,772,010 1,903,665,196 1,858,646,444 1,858,646,444 1,477,984,773 1,477,984,773 317,565,475 0 39,067,429 44,651,563 14,097,651 30,553,912 0 0 0 30,553,912 1.10 1.09
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