<PAGE>
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, 1998
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
(formerly known as NORTHWESTERN PUBLIC SERVICE COMPANY)
Delaware 46-0172280
(State of Incorporation) (IRS Employer Identification No.)
125 South Dakota Avenue
Suite 1100
Sioux Falls, South Dakota 57104
(Address of principal office) (Zip Code)
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
22,976,946 shares outstanding at November 9, 1998
Company-Obligated Mandatorily Redeemable
Preferred Securities
of Subsidiary Trust, Liquidation Amount $25.00
1,300,000 shares outstanding at November 9, 1998
</page>
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheets -
September 30, 1998 and December 31, 1997
Consolidated Statements of Income -
Three months and nine months ended
September 30, 1998 and 1997
Consolidated Statements of Cash Flows
Nine months ended
September 30, 1998 and 1997
Notes to Consolidated Financial Statements
Management's Discussion of Financial Condition and Results of
Operations
PART II. OTHER INFORMATION
SIGNATURE
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<PAGE>
NORTHWESTERN CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands)
September 30, December 31,
1998 1997
------ ------
(unaudited)
ASSETS
- -------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 11,207 $ 14,309
Trade accounts receivable, net 43,416 90,749
Inventories 25,957 36,015
Other 18,298 15,335
-------- -------
98,878 156,408
-------- -------
PLANT AND EQUIPMENT:
Electric 360,997 356,836
Natural Gas 90,106 85,874
Propane 296,031 275,911
Manufacturing 2,387 2,270
-------- ------
749,521 720,891
Less Accumulated Depreciation (190,312) (175,269)
--------- ---------
559,209 545,622
--------- ---------
OTHER ASSETS:
Investments 210,938 121,587
Deferred charges and other 67,796 58,435
Goodwill and other intangibles, net 230,427 224,071
-------- --------
509,161 404,093
-------- --------
$ 1,167,248 $ 1,106,123
========== ==========
CAPITALIZATION AND LIABILITIES
- ------------------------------
CURRENT LIABILITIES:
Long-term debt due within one year 8,466 7,814
Accounts payable 43,252 89,064
Accrued expenses 10,288 12,899
Other 21,289 34,787
------- -------
83,295 144,564
------- -------
DEFERRED CREDITS:
Accumulated deferred income taxes 70,288 72,884
Unamortized investment tax credits 8,480 8,901
Other 50,129 51,925
------- -------
128,897 133,710
------- -------
CAPITALIZATION:
Common stock equity 170,095 166,596
Nonredeemable cumulative preferred stock 2,600 2,600
Redeemable cumulative preferred stock 1,150 1,150
Company obligated mandatorily redeemable
security of trust holding soley parent
debentures 32,500 32,500
Other debt 113,500 -
Long term debt 151,350 156,350
-------- --------
471,195 359,196
Minority interest in subsidiaries 221,095 199,722
Long term debt of subsidiaries 262,766 268,931
-------- --------
955,056 827,849
-------- --------
$ 1,167,248 $ 1,106,123
========== ===========
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<PAGE>
<TABLE>
<CAPTION>
NORTHWESTERN CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)
(Unaudited)
Three Months Nine Months
Ended Ended
September 30 September 30
-------------- ---------------
1998 1997 1998 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
OPERATING REVENUES
Propane $ 160,727 $ 152,165 $534,949 $501,490
Electric 22,497 21,223 60,049 58,872
Natural Gas 6,692 7,249 51,560 58,846
Manufacturing 5,645 4,447 17,253 15,733
------ ------ ------- -------
195,561 185,084 663,811 634,941
OPERATING EXPENSES
Propane costs 134,030 127,630 432,014 414,217
Fuel and purchased 4,410 4,287 12,018 11,431
Purchased natural gas 3,763 4,307 36,236 42,031
Manufacturing cost of
goods sold 2,907 2,871 10,150 9,892
Other operating expense 34,994 29,949 102,147 87,511
Maintenance 1,247 1,562 3,922 4,795
Depreciation and
amortization 9,047 8,726 26,015 23,413
Property and other taxes 1,689 1,719 4,948 5,189
------- ------- ------- -------
192,087 181,051 627,450 598,479
OPERATING INCOME
Propane (4,134) (3,051) 12,838 9,436
Electric 8,849 8,030 20,035 20,865
Natural gas (1,104) (903) 2,959 5,416
Manufacturing (137) (43) 529 745
------- ------ ------ ------
3,474 4,033 36,361 36,462
Interest Expense, net (9,312) (7,755) (24,610) (23,625)
Investment Income and
Other 4,553 3,823 10,616 7,977
------ ------ ------ ------
Income Before Income
Taxes and Minority
Interest (1,285) 101 22,367 20,814
Provision for Income Taxes (603) (1,464) (5,569) (7,335)
------ ------- ------- -------
Income Before Minority
Interest (1,888) (1,363) 16,798 13,479
Minority Interest 6,470 5,085 2,143 3,924
------ ------- ------ -------
Net Income 4,582 3,722 18,941 17,403
Minority Interest on
Preferred Securities
of Subsidiary Trust (660) (660) (1,980) (1,980)
Dividends on Preferred
Stock (48) (48) (144) (165)
------ ------ ------ ------
Earnings on Common $ 3,874 $ 3,014 $ 16,817 $ 15,258
======= ====== ======= =======
Average Shares
Outstanding 17,860 17,843 17,848 17,843
Basic Earnings Per
Common Share $ 0.21 $ 0.17 $ 0.94 $ 0.86
====== ======= ======= ======
Diluted Earnings Per
Common Share $ 0.20 $ 0.17 $ 0.93 $ 0.86
====== ======= ======= ======
Dividends Declared Per $ 0.25 $ 0.23 $ 0.73 $ 0.69
Common Share ====== ======= ======= ======
</TABLE>
</page>
NORTHWESTERN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Nine Months Ended
September 30
-------------------
1998 1997
---- ----
OPERATING ACTIVITIES:
Net income $ 18,941 $ 17,403
Items not affecting cash:
Depreciation and
amortization 26,015 23,413
Deferred income taxes (1,949) (261)
Minority interest in net income
of consolidated subsidiaries (2,143) (3,924)
Investment tax credits (421) (421)
Changes in current assets
and liabilities, net:
Trade accounts receivable 49,914 (8,825)
Inventories 10,052 19,782
Other current assets (2,963) 6,164
Accounts payable (46,159) (13,452)
Accrued expenses (2,611) (660)
Other current liabilities (13,536) (11,741)
Other, net 28 4,343
-------- -------
Cash flows provided by
operating activities 35,168 31,821
-------- -------
INVESTING ACTIVITIES:
Property Additions (11,083) (18,194)
Sale (Purchase) of
noncurrent investments, net (106,942) 21,003
Acquisitions and growth
expenditures (26,648) (21,157)
------- --------
Cash flows used in
investing activities (144,673) (18,348)
--------- --------
FINANCING ACTIVITIES:
Dividends on common and
preferred stock (13,129) (12,476)
Subsidiary payment of common
unit distributions (21,369) (12,031)
Minority interest on
preferred securities of
Subsidiary trust (1,980) (1,980)
Redemption of preferred
stock of subsidiary - (2,687)
Issuance of nonrecourse
subsidiary debt - 19,131
Repayment of nonrecourse
subsidiary debt (7,188) (7,544)
Repayment of long term debt (5,000) (22,500)
Proceeds from subsidiary
secondary offering 40,700 -
Common stock issued on
exercise of warrants 869 -
Short term borrowings 88,500 -
Commercial paper issuances 25,000 -
------- -------
Cash flows provided by (used
in) financing activities 106,403 (40,087)
------- -------
DECREASE IN CASH AND CASH
EQUIVALENTS (3,102) (26,614)
Cash and Cash Equivalents,
beginning of period 14,309 36,790
------- -------
Cash and Cash Equivalents, end
of period $ 11,207 $ 10,176
--------- --------
SUPPLEMENTAL CASH FLOW
INFORMATION
Cash paid during the
period for:
Income taxes $ 7,005 $ 8,815
Interest $ 21,815 $ 22,267
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<PAGE>
NORTHWESTERN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1998 and 1997
(Reference is made to Notes to Financial Statements included in the Company's
Annual Report)
(1) Management's Statement -
NorthWestern Corporation (the Company) has prepared the financial
statements included herein, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of the
Company, 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 Company's latest annual report to
stockholders.
(2) Subsidiaries and Principles of Consolidation -
The accompanying consolidated financial statements include the accounts of
the Company and all wholly and majority owned or controlled subsidiaries. All
significant inter-company balances and transactions have been eliminated from
the consolidated financial statements.
(3) Accounting Pronouncements
During June 1997, the Financial Accounting Standards Board released SFAS
No. 130, `Reporting Comprehensive Income,' effective January 1, 1998. SFAS No.
130 established standards for reporting and display of comprehensive earnings
and its components in financial statements; however, the adoption of this
Statement had no impact on the Company's net earnings or shareholders' equity.
There were no material differences between net earnings and comprehensive
earnings for any periods presented in the accompanying financial statements.
FASB Statement No. 131 `Disclosures about Segments of an Enterprise and
Related Information' requires that a publicly held company report financial and
descriptive information about its operating segments in financial statements
issued to shareholders for interim and annual periods. The Statement also
requires additional disclosures with respect to products and services,
geographic areas of operation, and major customers. The Company has
historically presented segment information in the consolidated financial
statements and related notes and as such does not expect adoption of the
disclosure requirement of this pronouncement to have a material impact on
its financial statements. The Company will adopt this statement in the fourth
quarter of 1998.
FASB Statement No. 132 `Employers' Disclosures about Pensions and Other
Postretirement Benefits - an amendment of FASB Statements No. 87, 88, and 106'
requires revised disclosures about pension and other postretirement benefit
plans. The Company does not expect that adoption of the disclosure
requirements of this pronouncement will have a material impact on its
financial statements. The Company will adopt this Statement in the fourth
quarter of 1998.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, `Accounting for Derivative Instruments
and Hedging Activities.' The Standard 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.
Special accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income statement.
Statement 133 is effective for fiscal years beginning after June 15, 1999.
The Statement must be applied to derivative instruments and certain derivative
instruments embedded in hybrid contracts that were issued, acquired, or
substantively modified after December 31, 1997. The Company has not yet
quantified the impacts of adopting Statement 133 on its financial statements
and has not determined the timing of adoption of Statement 133.
(4) Financial Instruments
Cornerstone Propane Partners, L.P., a subsidiary of the Company, routinely
uses commodity futures contracts to reduce the risk of future price
fluctuations for liquefied petroleum gas and natural gas inventories and
contracts. Gains and losses on futures contracts purchased as hedges are
deferred and recognized in cost of sales as a component of the product cost
for the related hedged transaction.
(5) Reclassifications
Certain 1997 amounts have been reclassified to conform to the 1998
presentation. Such reclassifications had no impact on net income and common
stock equity as previously reported.
(6) Subsequent Events.
In November 1998, the Company proposed a common stock, preferred
securities, and senior debt offerings to public markets. The common stock
offering transaction closed on November 9, 1998, resulting in the issuance of
5 million new common shares with net proceeds of $115.8 million. These funds
were used to repay short-term borrowings which are classified as other long
term debt at September 30, 1998, due to such subsequent financing.
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
NorthWestern Corporation is a service and solutions company providing
energy, telecommunications and related services. A division of the Company
is engaged in the regulated energy business of production, purchase,
transmission, distribution and sale of electricity and the delivery of natural
gas. The Company generates and distributes electric energy to 56,000 customers
in eastern South Dakota. It also purchases and distributes natural gas to
77,000 customers in eastern South Dakota and central Nebraska. To provide base
load electric power, the Company jointly owns three coal-fired generating
plants with other utilities. Through Cornerstone Propane Partners, L.P.
(Cornerstone), the Company is engaged in retail and wholesale propane
distribution business located throughout the United States. Cornerstone is a
publicly traded Delaware limited partnership, formed to acquire and operate
propane businesses and assets. A wholly owned subsidiary of the Company serves
as the general partner of Cornerstone and manages and operates Cornerstone's
business. In January 1998 Cornerstone sold an aggregate of 1,960,000 Common
Units at $22.125 per unit pursuant to an unwritten public offering. Net
proceeds were approximately $40.7 million. Cornerstone used approximately
$10.0 million of the net proceeds for general business purposes and the
balance to repay amounts outstanding under a credit facility. The Company
owns as of September 30, 1998, a combined 35% interest in Cornerstone after
considering the secondary offering of additional common units sold in January
1998. The Company's manufacturing operations are comprised of Lucht Inc., a
wholly owned subsidiary that develops, manufactures and markets multi-image
photographic printers and other related equipment. In 1997, the Company formed
Blue Dot Services, Inc. (Blue Dot, formerly ServiCenter, USA) to acquire
heating, ventilating, air conditioning, and plumbing and related services
companies in the U.S. The Company also formed Communication Systems USA Inc.
(Communication Systems) to acquire and consolidate companies providing
telecommunications and data services to business customers.
Weather
Weather patterns have a material impact on the Company'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 Company's
market areas. With a larger proportion of its operations related to seasonal
propane and natural gas sales, a significantly greater portion of the Company's
consolidated 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, 1998 and
1997, were $.20 and $.17. The increase in earnings was primarily due to
increased investment income.
Diluted earnings per share for the year to date through September 30,
1998, was $.93 compared to $.86 for the nine months ended September 30, 1997.
The increase in earnings was due to operating income from the propane
operations resulting from acquired retail propane distribution centers and
increased investment income partially offset by weather which negatively
impacted the Company's propane and natural gas operations.
Propane -
Operating revenues from propane for the three months ended September 30
increased 6% from $152.2 million in 1997 to $160.7 million in 1998. Gross
margins increased from $24.5 million in 1997 to $26.7 million in 1998. Retail
gallons decreased from 40.1 million in 1997 to 39.4 million in 1998 which is
primarily the result of warmer than normal weather. The increase in margin is
primarily the result of lower gas costs. The majority of propane revenues and
operating income occur in the first and fourth quarters when there is
substantial usage of propane for residential and commercial
heating as compared to the second and third quarters which traditionally are
operating loss periods in the industry.
Operating revenues from propane for the nine months ended September 30
increased from $501.5 million in 1997 to $ 534.9 million in 1998. Gallons also
increased from 437.7 million in 1997 to 476.1 million in 1998, due to
acquisitions and internal growth. The propane operations in 1998 have been
negatively impacted by weather that has been substantially warmer than normal.
Electric -
Electric revenues increased 6% from $21.2 million to $22.5 million while
retail volumes increased by 9% for the three months ended September 30 as
compared to the same period of the prior year. Electric gross margins
increased 7% from $16.9 million to $18.1 million as compared to the prior
year. The increase is a result of an increase in cooling degree weather as
compared to the same period of the prior year.
Electric revenues increased by 2% and retail volumes increased 2% for the
nine months ended September 30 as compared to the same period of the prior
year. The increase is the result of higher cooling degree days from slightly
warmer weather as compared to the same period of the prior year partially
offset by heating degree day weather which was significantly warmer than normal
and warmer as compared to the same period of the prior year.
Natural Gas -
Natural gas revenues decreased by 8% from $7.2 million to $6.7 million
while volumes decreased by 15% for the three months ended September 30 as
compared to the prior year. Gross margins remained unchanged at $2.9 million.
Natural gas revenues decreased by 12% from $58.8 million to $51.6 million
and volumes decreased by 12% for the nine months ended September 30. Gross
margins decreased 9%. Natural gas operations were negatively impacted by
weather which was significantly warmer than normal and warmer as compared to
the same period of the prior year.
Manufacturing -
Stronger quarterly sales activity produced higher revenues for the third
quarter and the year to date as compared to 1997. Revenues for the three
months ended September 30 increased 27% from $4.4 million to $5.6 million and
gross margins increased 74% from $1.6 million to $2.7 million compared to the
same period of the prior year. Revenues for the nine months ended September
30 increased 10% from $15.7 million to $17.3 million and gross margins
increased 22% from $5.8 million to $7.1 million compared to the same period of
the prior year due to increased sales of higher margin items.
Operating Expenses and Other Income Statement Items -
Other operating expenses for both the three months and nine months ended
September 30 increased 17% in 1998 as compared to 1997 primarily due to the
acquisitions of retail propane distribution centers in 1997. Investment and
other income increased during the three months and nine months ended September
30 due to higher investment income in 1998 as compared to 1997 principally due
to the Company's increased preferred stock investments in Blue Dot and
Communication Systems and the sale of investments. The increase in
depreciation reflects the increase in depreciable propane assets when compared
to the same periods of the prior year. The increase in interest expense for
the three months ended September 30 is the result of increased debt to fund the
investments in Blue Dot and Communication Systems. The decrease in interest
expense for the nine months ended September 30 is primarily related to the
redemption of $7.5 million 8.9% series general mortgage bonds in March
1997 and the redemption of $15 million 8.824% series general mortgage bonds in
July 1997. Income taxes decreased because of tax preference items and
increased minority interest.
Liquidity and Capital Resources -
The Company has a high degree of long-term liquidity through the
generation of operating cash flows, the availability of substantial marketable
securities, and a sound capital structure. In addition, the Company has
adequate capacity for additional financing and has maintained its liquidity
position through favorable bond ratings. The Company 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, 1998 and 1997
were $35.2 million and $31.8 million. The increase is primarily due to the
increased cash flow from propane operations. Cash equivalents and investment
securities totaled $50.1 million and $120.1 million at September 30, 1998 and
1997. In March 1997 the Company retired early the $7.5 million outstanding of
the 8.9% series general mortgage bonds. In July 1997 the company retired early
the $15 million outstanding of the 8.824% series general mortgage bonds. Lines
of credit also provide working and growth capital and other financial
resources. In addition, lines of credit are used to support commercial paper
borrowings, a primary source of short-term working capital financing. At
September 30, 1998, available short-term lines of credit totaled $175 million
after considering the common equity, preferred securities and senior debt
financing transactions which occurred in November 1998. In addition, the
Company's nonregulated subsidiaries maintain nonrecourse credit agreements with
various banks for revolving and term loans.
Capital Requirements -
The Company'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. The emphasis of
the Company's construction activities is to undertake those projects that most
efficiently serve the expanding needs of its customer base, enhance energy
delivery and reliability capabilities through system replacement and provide
for the reliability of energy supply. 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. Expenditures for maintenance
construction activities during the nine months ended September 30, 1998 and
1997 were $11.1 and $14.6 million. Included in such construction activities
were nonregulated maintenance capital expenditures of $2.0 million and $3.0
million during the nine months ended September 30, 1998 and 1997. Capital
expenditures for 1998, excluding propane, are estimated to be $13.8 million
with a large portion of expenditures to be spent on enhancements of the
electric and natural gas distribution systems. Electric and natural gas
related capital expenditures for the years 1998 through 2002 are estimated to
be $61.5 million. Nonregulated maintenance capital expenditures for 1998 are
estimated to be $3.8 million. Estimated nonregulated maintenance capital
expenditures for the years 1998 through 2002 are estimated to be $19.0
million. Capital requirements for the mandatory retirement of long-term debt
including nonrecourse debt of subsidiaries will be $7.8 million in 1999, $8.9
million in 2000, $8.5 million in 2001, and $8.3 million in 2002. The Company
anticipates that existing investments and marketable securities, internally
generated cash flows and available external financing will meet future capital
requirements.
At September 30, 1998, the Company had invested $138.8 million in Blue Dot
and Communication Systems. The Company will continue to make investments
in these unconsolidated affiliates. Also, the Company may make other
significant acquisition investments in related industries that would require
the Company to raise additional equity and incur debt financing, which are
therefore subject to certain risks and uncertainties. The Company's financial
coverage ratios are at levels in excess of those required for the issuance of
additional debt and preferred stock. The Company will continue to review
economics of retiring or refunding remaining long-term debt and preferred
stock to minimize long-term financing costs.
Competition and Business Risk -
NorthWestern's strategy centers upon the development, acquisition and
expansions of operations offering integrated energy, telecommunications, and
related products and services within the Northwestern companies. In addition
to maintaining a strong competitive position in electric, natural gas and
propane distribution businesses, the Company intends to pursue development and
acquisitions that have long-term growth potential. While such investments and
acquisitions can involve risk in comparison to the Company's energy
distribution businesses, they offer the potential to enhance investment
returns.
PROPANE
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.
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 wholesale cost of propane, such increases could
reduce Cornerstone's gross profits.
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
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 Company's
financial performance.
The electric and natural gas industries continue to undergo numerous
transformations and the Company 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 services exists, allowing customers to buy
their own electricity and natural gas on the open market and having it
delivered by the local utility.
The growing pace of competition in the energy industry has been a primary
focus of management over the last few years. The Company'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 Company's competitive position, on
expanding energy sales and markets with new products and services for
customers and increasing shareholder value. The Company 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 Company's
strategy for providing responsive and superior customer service. To
strengthen the Company's competitive position, new technologies have and will
be added that enable employees to better serve customers. The Company 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.
As described in Note 1 to the consolidated financial statements, the
Company complies with the provision 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
Company's regulated electric and natural gas operations which requires specific
accounting treatment of certain costs and expenses that are related to the
Company's regulated operations. Criteria that could give rise to the
discontinuance of SFAS 71 include 1) increasing competition that restricts the
Company'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 Company 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 Company
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 Company's current regulatory environment.
HVAC, TELECOMMUNICATIONS AND RELATED SERVICES
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 only a small number of national companies engaged in providing
residential and commercial services in the service lines in which the Company
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, the unregulated
business segments of regulated gas and electric utilities or from newly
deregulated utilities in those industries entering into various service areas.
The market served by Communications Systems in the telecommunications
and data services industry is also a highly competitive market. The Company
believes that 1) market acceptance of the Company's products and services, 2)
pending and future legislation affecting the telecommunications and data
industry, 3) name recognition and market share, 4) larger competitors and 5)
the Company's ability to provide integrated communication and data solutions
for customers in a dynamic industry are all factors that could affect the
Company's future operating results.
OTHER
The Company utilizes software and various technologies throughout its
business that will be affected by the date change in the year 2000. The
Company has assessed and is continuing to assess the impact of the year 2000
issue on its reporting systems and operations. The Company is making and will
continue to make modifications to its systems that it deems necessary in order
to address the year 2000 issue. The majority of the Company's financial
reporting and operational systems are year 2000 compliant. The expenses
related to year 2000 compliance incurred in 1998 and the cost of the
modifications of the remaining systems are not expected to be material.
The Company's systems and operations with respect to the year 2000 issue
may also be affected by other entities with which the Company transacts
business. The Company is currently unable to determine the potential adverse
consequences, if any, that could result from such entities' failure to
effectively address the year 2000 issue.
This report contains forward-looking statements within the meaning of the
securities laws. The Company cautions that, while it believes such statements
to be based on reasonable assumptions and makes such statements in good faith,
there can be no assurance that the actual results will not differ materially
from such assumptions or that the expectations set forth in the forward looking
statements derived from such assumptions will be realized. Investors should be
aware of important factors that could have a material impact on future results.
These factors include, but are not limited to, weather, the federal and state
regulatory environment, the economic climate, regional, commercial, industrial
and residential growth in the service territories served by the Company and its
subsidiaries, customers' usage patterns and preferences, the speed and degree
to which competition enters the Company's industries, the timing and extent of
changes in commodity prices, changing conditions in the capital and equity
markets and other uncertainties, all of which are difficult to predict and many
of which are beyond the control of the Company.
NORTHWESTERN CORPORATION
PART II
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to various pending proceedings and suits, but
in the judgment of management after consultation with counsel for the
Company, the nature of such proceedings and suits, and the amounts
involved do not depart from the routine litigation and proceedings
incident to the kind of business conducted by the Company.
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 (SEC only)
(b) Reports on Form 8-K
On October 26, 1998, NorthWestern Corporation filed a report on
Form 8-K, dated October 26, 1998. The report included an
announcement of its earnings for the quarter and the nine months
ended September 30, 1998. A copy of the related press release
was attached as an exhibit to the report. The report also
included an announcement of Northwestern's filing of a
preliminary prospectus supplement under its existing shelf
registration statement relating to the offering of 3,000,000
shares of its Common Stock. The preliminary prospectus
supplement disclosed Northwestern's intent to offer
approximately $50 million of Trust Preferred Securities through
a subsidiary trust, and approximately $100 million of Senior
Debt Securities, immediately after completion of the Common
Stock offering. A copy of the related press release was
attached as an exhibit to the report.
On November 9, 1998, NorthWestern Corporation filed a report
on Form 8-K. The report included an announcement of
NorthWestern's sale of 5,000,000 shares of common stock, par
value $1.75 per share (the "Common Shares"), pursuant to an
Underwiting Agreement dated November 4, 1998. The Common Shares
are registered under the Securities Act of 1933. The
underwriting agreement was filed as an exhibit and incorporated
by reference therein.
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 12, 1998 /s/ David A. Monaghan
-----------------------------------
Controller and Treasurer
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