SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES ACT OF 1934
For the transition period from ___________ to __________
Commission File No. 0-692
NORTHWESTERN CORPORATION
Delaware
(State of Incorporation)
IRS Employer Identification No. 46-0172280
125 South Dakota Avenue
Suite 1100
Sioux Falls, South Dakota 57104
(Address of principal office)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (D) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. [ X ] Yes [ ] No
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date:
Common Stock, Par Value $1.75
23,108,893 shares outstanding at August 9, 1999
Corporation-Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trusts, Liquidation Amount $25.00
3,500,000 shares outstanding at August 9, 1999
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
June 30, 1999 and December 31, 1998 3
Consolidated Statements of Income -
Three months and six months ended
June 30, 1999 and 1998 4
Consolidated Statements of Cash Flows
Six months ended June 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion of Financial
Condition and Results of Operations 10
PART II. OTHER INFORMATION 17
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of matters to a vote of
security holders
Item 5. Other Information
Item 6. Exhibits and reports on Form 8-K
a. Exhibits
b. Reports on 8-K
SIGNATURES 17
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NORTHWESTERN CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In Thousands)
June 30, December 31,
1999 1998
---------- ------------
ASSETS
Current Assets
Cash and Cash Equivalents $ 38,938 $ 30,865
Accounts Receivable, Net 129,718 131,541
Inventories 75,065 72,805
Other 30,629 31,957
---------- ---------
274,350 267,168
---------- ---------
Property, Plant and Equipment, Net 649,679 629,278
---------- ---------
Goodwill and Other Intangible
Assets, Net 647,173 631,029
---------- ---------
Other Assets
Investments 104,615 152,470
Other 104,758 56,271
---------- ----------
209,373 208,741
---------- ----------
$ 1,780,575 $ 1,736,216
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current Maturities of
Long-Term Debt $ 16,771 $ 20,060
Short-Term Debt - Nonrecourse 15,000 11,554
Accounts Payable 102,054 113,036
Accrued Expenses 53,369 64,779
--------- ---------
187,194 209,429
--------- ---------
Long-term Debt 256,350 256,350
Long-term Debt of Subsidiaries -
Nonrecourse 412,374 332,525
Deferred Income Taxes and Other 70,535 74,072
Other Noncurrent Liabilities 84,797 101,787
--------- ---------
824,056 764,734
--------- ---------
Minority Interests 386,374 388,702
--------- ---------
Preferred Stock, Preference Stock
and Preferred Securities
Preferred Stock - 4 1/2% Series 2,600 2,600
Redeemable Preferred Stock
- 6 1/2% Series 1,150 1,150
Preference Stock - -
Corporation Obligated Mandatorily
Redeemable Preferred Securities of
Subsidiary Trusts 87,500 87,500
--------- --------
91,250 91,250
--------- --------
Shareholders' Equity
Common Stock 40,438 40,279
Paid-in Capital 160,028 158,530
Retained Earnings 87,533 81,100
Accumulated Other Comprehensive
Income 3,702 2,192
--------- --------
291,668 282,101
--------- --------
$ 1,780,575 $ 1,736,216
========= =========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
NORTHWESTERN CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1999 1998 1999 1998
------------------ ----------------
OPERATING REVENUES $ 595,850 $ 233,145 $ 1,105,20 $ 532,109
COST OF SALES 482,788 166,126 847,676 384,517
-------- -------- --------- --------
GROSS MARGIN 113,062 67,019 257,528 147,592
OPERATING EXPENSES
Selling, general and
administrative expenses 85,573 50,665 172,659 92,590
Depreciation & amortization 15,890 9,416 31,136 18,228
-------- ------- -------- --------
101,463 60,081 203,795 110,818
-------- ------- -------- --------
OPERATING INCOME 11,599 6,938 53,733 36,774
Interest Expense, net (13,676) (7,763) (25,607) (15,472)
Investment Income and Other 2,450 578 5,767 3,323
-------- ------- -------- ------
Income (Loss) Before Income
Taxes and Minority Interests 373 (247) 33,893 24,625
Income Taxes (3,417) (1,999) (10,877) (6,749)
--------- -------- -------- -------
Income (Loss) Before Minority
Interests (3,044) (2,246) 23,016 17,876
Minority Interests 9,881 5,601 (1,299) (3,517)
--------- -------- -------- --------
Net Income 6,837 3,355 21,717 14,359
Minority Interests on Preferred
Securities of Subsidiary Trusts (1,650) (660) (3,300) (1,320)
Dividends on Preferred Stock (48) (48) (96) (96)
Earnings on Common Stock $ 5,139 $ 2,647 $ 18,321 $ 12,943
======== ======= ======== ========
Average Shares Outstanding 23,108 17,843 23,078 17,843
========= ======= ======= =======
Earnings per Average Common
Share
Basic $ 0.22 $ 0.15 $ 0.79 $ 0.73
======== ======= ======== ========
Diluted $ 0.22 $ 0.15 $ 0.78 $ 0.73
======== ======= ======== ========
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
Six Months Ended
June 30
------------------
1999 1998
---- ----
Operating Activities:
Net Income $ 21,717 $ 14,359
Items not Affecting Cash
Depreciation and Amortization 31,136 18,228
Deferred Income Taxes (3,434) (1,359)
Minority Interests in Net Income of
Consolidated Subsidiaries 1,299 3,517
Investment Tax Credits (140) (281)
Foreign currency translations (229) -
Changes in Current Assets and
Liabilities,
Net of Acquisitions:
Accounts Receivable 12,785 37,149
Inventories 10,801 (4,331)
Other Current Assets (1,734) (3)
Accounts Payable (16,655) (29,270)
Accrued Expenses (1,530) (5,468)
Other, Net (4,192) 10,291
---------- ---------
Cash Flows Provided by Operating
Activities 49,824 42,832
--------- ---------
Investment Activities:
Property, Plant and Equipment Additions (12,200) (13,591)
Sale (Purchase) of Noncurrent
Investments, Net 40,478 28,305
Acquisitions and Growth Expenditures (106,803) (99,477)
---------- ----------
Cash flows Used in Investing
Activities (78,545) (84,763)
---------- ----------
Financing Activities:
Dividends on Common and Preferred Stock (11,984) (8,750)
Minority Interest on Preferred Securities
of Subsidiary Trusts (3,300) (1,320)
Proceeds From Exercise of Warrants 1,656 -
Subsidiary Payment of Common Unit
Distributions (18,499) (14,213)
Proceeds From Issuance of Common Units - 40,700
Issuance of Nonrecourse Subsidiary Debt 81,040 (28,230)
Repayment of Nonrecourse Subsidiary Debt (12,119) -
Short-Term Borrowings - 34,021
Commercial Paper Issuances - 23,000
--------- ---------
Cash Flows Provided by
Financing Activities 36,794 45,200
--------- ---------
Increase in Cash and Cash
Equivalents 8,073 3,277
Cash and Cash Equivalents, Beginning of
Period 30,865 14,309
--------- --------
Cash and Cash Equivalents, End of Period $ 38,938 $ 17,586
========= =========
Supplemental Cash Flow Information
Cash Paid During the Period For
Income Taxes $ 9,826 $ 5,256
Interest $ 14,898 $ 7,792
The accompanying notes to consolidated financial statements are an
integral part of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Reference is made to Notes to Financial Statements
included in the Company's Annual Report)
(1) Management's Statement -
The financial statements included herein have been prepared by
NorthWestern Corporation (the Corporation), without audit, pursuant
to the rules and regulations of the Securities and Exchange
Commission. In the opinion of the Corporation, all adjustments
necessary for a fair presentation of the results of operations for
the interim periods have been included. It is suggested that these
financial statements be read in conjunction with the financial
statements and the notes thereto included in the Corporation's
latest annual report to shareholders.
(2) Subsidiaries and Principles of Consolidation -
The accompanying consolidated financial statements include the
accounts of the Corporation and all wholly, majority-owned, and
controlled subsidiaries, including CornerStone Propane Partners,
L.P. (NYSE:CNO), the nation's fourth largest retail propane
distributor; Blue Dot Services, Inc., a national provider of air
conditioning, heating, plumbing and related services (HVAC), and
Expanets, Inc., a national provider of integrated communication and
data solutions and network services. All significant intercompany
balances and transactions have been eliminated from the
consolidated financial statements. The Corporation's regulated
businesses are subject to various state and federal agency
regulation. The public unitholders' interest in CornerStone's net
assets subsequent to the Partnership Formation is reflected as
minority interests in the consolidated financial statements.
Equity interests of the former owners of companies acquired by Blue
Dot. and Expanets who continue to hold an interest in Blue Dot. and
Expanets are also reflected as minority interests in the
consolidated financial statements.
(3) Comprehensive Income -
In 1998, the Corporation adopted Statement of Financial Accounting
Standards No. 130 (SFAS No. 130) `Reporting Comprehensive Income.'
This statement requires the reporting of comprehensive income in addition to
net income from operations. Comprehensive income is a more inclusive financial
reporting methodology that includes disclosure of certain financial
information that historically has not been recognized in the
calculation of net income. Comprehensive income for the three
months ended June 30, 1999 and 1998, was $8.0 million and $3.8
million. Comprehensive income for the six months ended June 30,
1999 and 1998, was $23.2 million and $13.2 million.
(4) Segment Information -
In 1998, the Corporation adopted SFAS No. 131, `Disclosures About Segments
of an Enterprise and Related Information,' which requires the reporting
of certain financial information by business segment. For the
purpose of providing segment information, the Corporation's
principal business segments are its electric, natural gas, retail
propane, wholesale propane, HVAC and communications operations.
All other includes other service businesses, the results of
manufacturing operations (only in 1998), activities and assets of
the parent, any reconciling or eliminating amounts and amortization
of purchase accounting adjustments related to the acquisitions of
HVAC and communication companies.
The accounting policies of the operating segments are the same as
the parent except that the parent allocates some of its operating
expenses and interest expense to the operating segments according
to a methodology designed by management for internal reporting
purposes and involves estimates and assumptions. Financial data
for the business segments are as follows (in thousands):
Three Months ended June 30, 1999
------------------------------------
Total
Electric & Total Communi- All
Natural Gas Propane HVAC cations Other Total
----------- ------- ----- ------- ----- -------
Operating
Revenues $ 33,581 $ 417,792 $ 73,082 $ 67,813 $ 3,582 $ 595,850
Cost of Sales 13,429 385,217 44,526 36,363 3,253 482,788
------- -------- ------- ------- ------ --------
Gross Margin $ 20,152 32,575 28,556 31,450 329 113,062
Selling,
general &
Administrative 8,652 28,324 21,499 25,083 2,015 85,573
Depreciation
& amortization 3,700 6,864 1,217 781 3,328 15,890
------- ------- ------- ------- ------ -------
Operating
Income 7,800 (2,613) 5,840 5,586 (5,014) 11,599
Interest
Expense (2,178) (8,658) - (260) (2,580) (13,676)
Investment
income and
other 172 - 19 569 1,690 2,450
------- ------- ------- ------ ------- -------
Income
before taxes
and minority
interests 5,794 (11,271) 5,859 5,895 (5,904) 373
Provision
for income
taxes (1,738) 1,184 (2,250) (1,835) 1,222 (3,417)
-------- ------- ------- ------- ------- --------
Income
before
minority
interests $ 4,056 $ (10,087) $ 3,609 $ 4,060 $ (4,682) $ (3,044)
========= ========== ======= ======= ========= =========
Total Assets $ 311,131 $ 779,23 $ 88,638 $ 97,187 $ 504,389 $1,780,575
========= ========= ======= ======== ========= ==========
Maintenance
Capital
Expenditures $ 3,523 $ 565 $ 604 $ 825 $ 236 $ 5,753
========= ========= ======= ======== ========= ==========
Three Months ended June 30, 1998
------------------------------------
Total
Electric &
Natural Total Commun All
Gas Propane HVAC ications Other Total
---------- ------- ---- -------- ----- ------
Operating
Revenues $ 33,436 $ 144,891 $ 24,778 $ 24,315 $ 5,725 $ 233,145
Cost of
Sales 13,968 118,623 15,052 14,917 3,566 166,126
------- ------- ------ ------ ----- --------
Gross
Margin 19,468 26,268 9,726 9,398 2,159 67,019
Selling,
general &
Admini-
strative 9,712 24,431 6,988 7,789 1,745 50,665
Depreciation
&
amortization 3,694 4,630 389 352 351 9,416
------- ------ ------ ------ ----- --------
Operating
Income 6,062 (2,793) 2,349 1,257 63 6,938
Interest
Expense (2,770) (4,571) (12) (129) (281) (7,763)
Investment
income and other 268 - 15 58 237 578
------- ------- -------- ------ ----- -------
Income
before taxes
and minority
interests 3,560 (7,364) 2,352 1,186 19 (247)
Provision
for income
taxes (1,191) 460 (1,034) (475) 241 (1,999)
-------- ------- -------- ------- ------ --------
Income
before
minority
interests $ 2,369 $ (6,904) $ 1,318 $ 711 $ 260 $ (2,246)
======== ========= ======= ======== ======= =========
Total Assets $304,533 $ 603,810 $ 28,656 $ 57,172 $ 220,53 $ 1,214,703
======== ======== ======== ========= ======== ===========
Maintenance
Capital
Expenditures $ 4,107 $ 1,650 $ 1,777 $ 611 $ 26 $ 8,171
======= ======== ======= ========= ======== ===========
Three Months Ended June 30
------------------------------
1999 1998
------ ------
Electric Natural Gas Electric Natural Gas
-------- ----------- -------- -----------
Operating Revenues $ 20,061 $ 13,520 $ 18,589 $ 18,847
Cost of Sales 4,515 8,914 3,792 10,176
------- ------- -------- --------
Gross Margin 15,546 4,606 14,797 4,671
Selling, general
& administrative 5,981 2,671 6,324 3,388
Depreciation and
amortization 3,003 697 2,976 718
-------- ------- -------- --------
$ 6,562 $ 1,238 $ 5,497 $ 565
========= ========= ======== ========
Three Months Ended June 30
----------------------------
1999 1998
------ ------
Retail Wholesale Retail Wholesale
Propane Propane Propane Propane
--------- ----------- --------- ----------
Operating Revenues $ 47,641 $ 370,151 $ 39,312 $ 105,579
Cost of Sales 19,263 365,954 16,813 101,810
-------- --------- -------- ---------
Gross Margin $ 28,378 $ 4,197 $ 22,499 $ 3,769
======== ========= ======== =========
Six Months Ended June 30, 1999
--------------------------------
Total
Electric
& Natural Total Commun All
Gas Propane HVAC ications Other Total
--------- -------- ---- --------- ------ -----
Operating
Revenues $ 84,179 $ 758,120 $ 125,701 $ 130,581 $ 6,623 $ 1,105,204
Cost of
Sales 39,834 655,285 77,146 70,868 4,543 847,676
-------- --------- --------- --------- ------- ----------
Gross Margin $ 44,345 $ 102,835 $ 48,555 $ 59,713 $ 2,080 $ 257,528
Selling,
general &
Admini-
strative 18,820 62,642 39,181 46,063 5,953 172,659
Depreciation
& amortization 7,437 14,712 2,160 1,488 5,339 31,136
------ ------- ------- ------- ------ -------
Operating
Income 18,088 25,481 7,214 12,162 (9,212) 53,733
Interest
Expense (4,357) (15,521) - (543) (5,186) (25,607)
Investment
income and
other 225 - 107 30 5,405 5,767
------ -------- ------- -------- ------- ------
Income
before taxes
and minority
interests 13,956 9,960 7,321 11,649 (8,993) 33,893 0
Provision
for income
taxes (4,438) (1,509) (2,830) (4,377) 2,277 (10,877)
-------- -------- -------- -------- ------- --------
Income
before
minority
interests $ 9,518 $ 8,451 $ 4,491 $ 7,272 $ (6,716) $ 23,016
======= ======== ======== ======= ======== =======
Total Assets $311,131 $779,230 $ 88,638 $ 97,187 $ 504,389 $1,780,575
======== ======== ========= ======== ========= ==========
Maintenance
Capital
Expenditures $ 6,754 $ 2,567 $ 1,152 $ 1,473 $ 274 $ 12,220
======== ======== ========= ======== ========= ==========
Six Months Ended June 30, 1998
--------------------------------
Total
Electric
& Natural Total Commun All
Gas Propane HVAC ications Other Total
---------- ------- ---- -------- ------ ------
Operating
Revenues $ 82,420 $ 374,222 $ 35,360 $ 28,499 $ 11,608 $ 532,109
Cost of
Sales 40,081 297,985 21,667 17,543 7,241 384,517
------- -------- ------- ------- ------- --------
Gross
Margin 42,339 76,237 13,693 10,956 4,367 147,592
Selling,
general &
Admini-
strative 19,761 49,903 10,453 9,049 3,424 92,590
Depreciation
& amortization 7,329 9,345 610 429 515 18,228
------ ------- ------- ------- ------ -------
Operating
Income 15,249 16,989 2,630 1,478 428 36,774
Interest
Expense (5,585) (9,395) (20) (154) (318) (15,472)
Investment
income and
other 607 - 18 63 2,635 3,323
------- ------- ------- ------- ------- --------
Income
before taxes
and minority
interests 10,271 7,594 2,628 1,387 2,745 24,625
Provision
for income
taxes (3,948) (1,325) (1,215) (569) 308 (6,749)
Income
before
minority
Interests $ 6,232 $ 6,269 $ 1,413 $ 818 $ 3,053 $ 17,876
======= ======== ======= ====== ======= ==========
Total Assets $304,533 $603,810 $28,656 $57,172 $220,532 $1,214,703
======== ======== ======= ====== ======== ==========
Maintenance
Capital
Expenditures $ 6,484 $ 4,647 $ 1,777 $ 611 $ 72 $ 13,591
======== ======== ======= ======= ======== ==========
Six Months Ended June 30
--------------------------
1999 1998
------ ------
Electric Natural Gas Electric Natural Gas
-------- ----------- -------- -----------
Operating
Revenues $ 40,536 $ 43,643 $ 37,552 $ 44,868
Cost of Sales 8,946 30,888 7,608 32,473
------- -------- ------- --------
Gross Margin 31,590 12,755 29,944 12,395
Selling, general
& administrative 12,598 6,222 12,860 6,901
Depreciation and
amortization 6,005 1,432 5,898 1,431
-------- -------- ------- --------
$ 12,987 $ 5,101 $ 11 186 $ 4,063
======== ======= ======== =======
Six Months Ended June 30
--------------------------
1999 1998
------ ------
Retail Wholesale Retail Wholesale
Propane Propane Propane Propane
------- --------- ------- ---------
Operating
Revenues $ 155,847 $ 602,273 123,791 250,431
Cost of Sales 63,701 591,584 56,783 241,202
-------- -------- -------- --------
Gross Margin $ 92,146 $ 10,689 $ 67,008 $ 9,229
========= ========= ======== =========
(5) New Accounting Standards -
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 (SFAS 133),
`Accounting for Derivative Instruments and Hedging Activities.'
The Statement establishes accounting and reporting standards
requiring that every derivative instrument (including certain
derivative instruments imbedded in other contracts) be recorded in
the balance sheet as either an asset or liability measured at its
fair value. The Statement requires changes in the derivative's
fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS 133 is effective for
fiscal years beginning after June 15, 2000. The Corporation is
evaluating the impacts of adopting SFAS 133 on its financial
statements. The impact of SFAS 133 will likely depend upon the
extent of use of derivative instruments and their designation and
effectiveness as hedges of market risk.
(6) Reclassification and Restatements -
Certain 1998 amounts have been reclassified to conform to the 1999
presentation. Operating results for 1998 have been restated to
reflect the consolidation of Blue Dot. and Expanets effective
January 1, 1998. Such reclassifications and restatements had no
impact on net income and common stock equity as previously
reported.
(7) Earnings Per Share -
In 1998, the Corporation adopted SFAS No. 128, `Earnings Per
Share,' which establishes two methods for calculating earnings per
share, basic and diluted, and simplifies the previous standards for
computing earnings per share. Basic earnings per share is computed
on the basis of the weighted average number of common shares
outstanding. Diluted earnings per share is computed on the basis
of the weighted average number of common shares outstanding plus
the effect of the outstanding stock options and warrants. The
following table presents the shares used in computing the basic and
diluted earnings per share for 1999 and 1998 (in thousands):
Three Months Ended Six Months Ended
June 30 June 30
------------------ ------------------
1999 1998 1999 1998
------------------ ------------------
Average common
Shares outstanding for 23,108 17,843 23,078 17,843
Basic computation
Dilutive effect of:
Stock Options 23 22
Stock Warrants 310 307
------ ------ ------- ------
Average Common
Shares outstanding
for Diluted computation 23,441 17,843 23,407 17,843
======= ======= ======= =======
Item 2.MANAGEMENT'S DISCUSSION OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
NorthWestern Corporation ('NorthWestern' or 'Corporation') and its
partner entities are providers of value-added services and
solutions to residential and business customers nationwide. The
Corporation provides electric and natural gas service to Midwestern
customers through our energy division, NorthWestern Public Service.
In addition, the Corporation holds interests in Cornerstone Propane
Partners, L.P. (NYSE:CNO), the nation's fourth largest retail
propane distributor; Expanets, Inc., a national provider of
integrated communication and data solutions and network services;
and Blue Dot Services, Inc., a national provider of air
conditioning, heating, plumbing and related services (HVAC). The
Corporation is also engaged in other service and nonenergy related
businesses.
NorthWestern was incorporated under the laws of the state of
Delaware in 1923. Our executive offices are located at 125 S.
Dakota Avenue, Suite 1100, Sioux Falls, South Dakota 57104, and our
telephone number is 605-978-2908. Our website is located at
www.northwestern.com
- --------------------
Weather
Weather patterns have a material impact on the Corporation's
operating performance for all three segments of its energy
business. This impact is particularly relevant for natural gas and
propane. Because propane and natural gas are heavily used for
residential and commercial heating, the demand for these products
depends heavily upon weather patterns throughout the Corporation's
market areas. With a larger proportion of its operations related
to seasonal propane and natural gas sales, a significantly greater
portion of the Corporation's operating income is recognized in the
first and fourth quarters related to higher revenues from the
heating season.
RESULTS OF OPERATIONS:
Consolidated Earnings Comparisons -
Diluted earnings per share for the quarters ended June 30, 1999 and
1998, were $.22 and $.15. Diluted earnings per share for the year
to date through June 30, 1999 was $.78 as compared to $.73 for the
six months ended June 30, 1998. Excluding a nonrecurring investment
gain of $.07 related to a sale of stock in a non-strategic
investment, June 30, 1998, year to date diluted earnings were $.66
per share. The increase in ongoing earnings was due to increased
operating income from electric and natural gas operations as well
as increased operating income from HVAC and communications
operations resulting from internal growth and acquired companies,
offset by decreases in propane operating income due to a warmer
than normal heating season in the Corporation's propane markets
which resulted in lower spring fills.
Propane
Retail propane sales for the three months ended June 30 increased
21% from $39.3 million in 1998 to $47.6 million in 1999. Gross
margins also increased 26% from $22.5 million in 1998 to $28.3
million in 1999. The increases are due to internal growth combined
with the acquisition of retail propane centers including a large
retail propane distribution company in December 1998. Wholesale
propane sales increased 251% from $105.6 million in 1998 to $370.2
million in 1999. Wholesale propane margins also increased 11% from
$3.8 million in 1998 to $4.2 million in 1999. The increases in
wholesale sales and margins are due principally to internal growth and
acquisitions in December 1998. The majority of propane revenues and operating
income occur in the first and fourth quarters when propane is
heavily sold for residential and commercial heating as compared to
the second and third quarter which traditionally are operating
loss periods in the industry. Propane operating losses for the
three months ended June 30 decreased 6% from $2.8 million in 1998
to $2.6 million in 1999.
Retail propane sales for the six months ended June 30 increased 26%
from $123.8 million in 1998 to $ 155.8 million in 1999. Gross
margins also increased 38% from $67.0 million in 1998 to $92.1
million in 1999. The increases are due to acquisitions and
internal growth partially offset by weather that has been
significantly warmer than normal. Wholesale propane revenues
increased 140% from $250.4 million in 1998 to $602.3 million in
1999. Gross margins also increased 16% from $9.2 million in 1998
to $10.7 million in 1999. These increases were due to internal
growth and large acquisitions completed in December 1998.
Electric
Electric revenues for the three months ended June 30 increased 8%
from $18.6 million in 1998 to $20.1 million in 1999. The increase
in revenues is principally due to internal growth and increased wholesale
sales. Operating income from electric operations increased 19%
from $5.5 million in 1998 to $6.6 million in 1999. The increase in
operating income is due to higher revenues in 1999.
Electric revenues for the six months ended June 30 increased 8%
from $37.6 million in 1998 to $40.5 million in 1999. The increase
is principally due to internal growth and increased wholesale sales,
partially offset by unfavorable heating degree weather in the first
three months. Operating income increased 16% from $11.2 million in
1998 to $13.0 million in 1999.
HVAC
HVAC revenues for the three months ended June 30 increased from
$24.8 million in 1998 to $73.1 million in 1999. Gross margins increased
from $9.7 million in 1998 to $28.6 million in 1999. Operating
income increased from $2.3 million in 1998 to $5.8 million in 1999.
The increases are principally due to acquisitions as well as internal growth.
HVAC revenues for the six months ended June 30 increased from $35.4
million in 1998 to $125.7 in 1999. Gross margins were up $34.9 million
from $13.7 million reported in 1998 to $48.6 million in 1999, while operating
income reflected an increase of $4.6 million from the 1998 total of $2.6
million. These increases are due to internal growth combined with
acquisitions of companies throughout 1998 and continuing into 1999.
Communications
Communications revenues for the three months ended June 30
increased from $24.3 million in 1998 to $67.8 million in 1999.
Gross margins increased from $9.4 million in 1998 to $31.5 million in
1999. Operating income increased from $1.3 million in 1998 to $5.6
million in 1999. The increases are principally due to acquisitions as
well as internal growth.
Communications revenues for the six months ended June 30 increased
from $28.5 million in 1998 to $130.6 million in 1999. Gross margins
were up $48.8 million from $11.0 million reported in 1998 to $59.7
million in 1999, while operating income reflected an increase of $10.7
million from the 1998 total of $1.5 million. These increases are due to
internal growth combined with acquisitions of companies throughout 1998
and continuing into 1999.
Natural Gas
Natural gas revenues for the three months ended June 30 decreased
from $14.8 million in 1998 to $13.5 million in 1999. The decrease
in revenues is due to significantly warmer than normal weather.
Operating income from natural gas operations increased from $.6
million in 1998 to $1.2 million in 1999. The increase in operating
income is due to higher volumes in 1999 as well as improvements in
general and administrative costs which were partially offset by the
warmer than normal weather.
Natural gas revenues for the six months ended June 30 decreased
from $44.9 million in 1998 to $43.6 million in 1999. The decrease
was due to the significantly warmer than normal weather patterns in
the Corporation's natural gas areas for the first four months of
the year. Operating income from natural gas operations increased
from $4.1 million in 1998 to $5.1 million in 1999. The increase in
operating income is due to higher margins and lower administrative
expenses offset by the warmer than normal weather.
Other Income Statement Items
Other operating revenues for 1998 consists principally of
manufacturing revenues (related to the Corporation's former
ownership interest in Lucht Inc. which was sold in 1998) and in
1999 consists of other service businesses.
Consolidated other income increased from $.6 million in 1998 to
$2.5 million in 1999 for the three month period ended June 30 and
also increased from $3.3 million in 1998 to $5.8 million in 1999
for the six month period ended June 30. These increases are
principally due to the investment of additional funds which are a
result of the excess proceeds from the debt and equity offerings
completed by the Corporation in November 1998. Interest expense
increased from $7.8 million in 1998 to $13.7 million in 1999 for
the three months ended June 30 and from $15.5 million in 1998 to
$25.6 million in 1999 for the same six months. This increase
resulted from debt issued by the Corporation in November 1998 and
Cornerstone in December 1998 and June 1999. Minority interests for
the three months ended June 30 changed from $5.6 million in 1998 to
$9.9 million in 1999. For the six months ended June 30, minority
interests changed from $(3.5) million in 1998 to $(1.3) million in
1999. Both changed as a result of additional allocation of propane
losses to the propane minority interest as well as allocations to
HVAC and communications minority interests. Income taxes increased
from $2.0 million and $6.7 million in 1998 to $3.4 million and
$10.9 million in 1999 for the three and six months ended June 30,
respectively. Theses increases were due to the higher consolidated
taxable income in such periods.
LIQUIDITY AND CAPITAL RESOURCES:
The Corporation believes it has adequate long-term liquidity
through the generation of operating cash flows, the availability of
substantial marketable securities, and a sound capital structure.
In addition, the Corporation has adequate capacity for additional
financing and continues to maintain this strong position through
favorable bond ratings.
The Corporation has generated significant operating cash flows
while continuing to maintain substantial cash and investment
balances in the form of marketable securities. Cash flows from
operating activities during the six months ended June 30, 1999 and
1998 were $49.8 million and $42.8 million. The increase is
primarily due to increased cash flow from propane, HVAC and
communication operations. Cash equivalents and investment
securities totaled $136.4 million and $72.7 million at June 30,
1999 and 1998, recpectively.
Working capital and other financial resources are also provided by
lines of credit, which are generally used to support commercial
paper borrowings, a primary source of short-term financing. At
June 30, 1999, available lines of credit totaled $195 million.
There were no borrowings or commercial paper issuances outstanding
on these credit facilities at June 30, 1999. In addition, the
Corporation's nonregulated subsidiaries maintain credit agreements
on a nonrecourse basis to the Corporation with various banks for
revolving and term loans.
Capital Requirements -
The Corporation's primary capital requirements include the funding
of its energy business construction, maintenance and expansion
programs, the funding of debt and preferred stock retirements,
sinking fund requirements and the funding of its corporate
development and investment activities.
Maintenance capital expenditure plans are subject to continual
review and may be revised as a result of changing economic
conditions, variations in sales, environmental requirements,
investment opportunities and other ongoing considerations. Capital
expenditures for maintenance activities during the six months ended
June 30, 1999 and 1998 were $12.2 million and $13.6 million.
Estimated annual maintenance capital expenditures for 1999 and
2000 are estimated to be $27.3 million and $26.2 million.
Capital requirements for the mandatory retirement of long-term debt
including nonrecourse debt of subsidiaries should be $8.4 million
in 1999. The Corporation anticipates that future capital
requirements will be met by existing investments and marketable
securities, internally generated cash flows and available external
financing.
The Corporation will continue to review economics of retiring or
refunding remaining long-term debt and the preferred stock to minimize
long-term financing costs. At June 30, 1999, the Corporation had
invested an aggregate of $243.0 million in Blue Dot. and Expanets. The
Corporation may continue to make other significant acquisition investments
in related industries that would require the Corporation to raise
additional equity and/or incur debt financing, which are therefore
subject to certain risks and uncertainties. The Corporation's
financial coverages are at levels in excess of those required for
the issuance of additional debt and preferred stock.
COMPETITION AND BUSINESS RISK
NorthWestern's strategy centers upon the development, acquisition
and expansion of operations offering integrated services and
solutions within the NorthWestern partner entities. In addition to
maintaining a strong competitive position in its electric, natural
gas and propane distribution businesses, the Corporation intends to
pursue strategic development and acquisitions that have long-term
growth potential. While these strategic development and
acquisition activities can involve increased risk in comparison to
the Corporation's energy distribution businesses, they offer the
potential for enhanced investment returns. The Corporation's
strategy to continue strategic development through acquisitions
will be subject to future availability of market capital to fund
such acquisitions. The NorthWestern strategy of integrating
products and services and acquired companies have other factors
which may also increase the risks of the Corporation. These
factors include the ability of management teams to successfully implement
operating strategies and the adequacy and efficiency information
systems, business processes, related support functions and the
ability to attract and retain quality team members. The
Corporation has taken and continues to take steps to refine,
improve and scale up its back-office support systems and processes.
There are no assurances that such efforts will be sufficient to
meet the future needs of the Corporation's operations. Future
changes in accounting rules and regulations could have a material
impact upon the Corporation's future financial statement
presentation, results from operations and financial position.
PROPANE
The retail propane business is a margin-based business in which
gross profits depend on the excess of sales prices over propane
supply costs. Consequently, CornerStone's profitability will be
sensitive to changes in wholesale propane prices. Propane is a
commodity, the market price of which can be subject to volatile
changes in response to changes in supply or other market
conditions. As it may not be possible to immediately pass on to
customers rapid increases in the wholesale cost of propane, such
increases could reduce CornerStone's gross margins.
Weather conditions have a significant impact on propane demand for
both heating and agricultural purposes. The majority of
CornerStone's customers rely heavily on propane as a heating fuel.
Actual weather conditions can vary substantially from year to year,
significantly affecting CornerStone's financial performance.
Furthermore, variations in weather in one or more regions in which
CornerStone operates can significantly affect the total volumes
sold by CornerStone and the margins realized on such sales and,
consequently, CornerStone's results of operations. These
conditions may also impact CornerStone's ability to meet various
debt covenant requirements and affect CornerStone's ability to pay
common and subordinated unit distributions.
Propane competes with other sources of energy, some of which are
less costly for equivalent energy value. Propane distributors
compete for customers against suppliers of electricity, fuel oil
and natural gas, principally on the basis of price, service,
availability and portability. Electricity is a competitor of
propane, but propane generally enjoys a competitive price advantage
over electricity for space heating, water heating and cooking.
Propane serves as an alternative to natural gas in rural and
suburban areas where natural gas is unavailable or portability of
product is required. Natural gas is generally a less expensive
source of energy than propane although in areas where natural gas
is available, propane is used for certain industrial and commercial
applications. The gradual expansion of the nation's natural gas
distribution systems has resulted in the availability of natural
gas in some areas that previously depended upon propane. However,
natural gas pipelines are not present in many regions of the
country where propane is sold for heating and cooking purposes.
CornerStone's profitability is affected by the competition for
customers among all participants in the retail propane business.
Some of CornerStone's competitors are larger or have greater
financial resources than CornerStone. Should a competitor attempt
to increase market share by reducing prices, CornerStone's
financial condition and results of operations could be materially
adversely affected. In addition, propane competes with other
sources of energy, some of which may be less costly per equivalent
energy value.
ELECTRIC AND NATURAL GAS
The electric and natural gas industries continue to undergo
numerous transformations, and the Corporation is operating in an
increasingly competitive marketplace. The Federal Energy
Regulatory Commission (FERC), which regulates interstate and
wholesale electric transmissions, opened up transmission grids and
mandated that utilities must allow others equal access to utility
transmission systems. Various state regulatory bodies are
supporting initiatives to redefine the electric energy market and
are experimenting with retail wheeling, which gives some retail
customers the ability to choose their supplier of electricity.
Traditionally, utilities have been vertically integrated, providing
bundled energy services to customers. The potential for continued
unbundling of customer service exists, allowing customers to buy
their own electricity and natural gas on the open market and having
it delivered by the local utility.
The growing pace of competition in the energy industry has been a
primary focus of management over the last few years. The
Corporation's future financial performance will be dependent on the
effective execution of operating strategies to address a more
competitive and changing energy marketplace. Business strategies
focus on enhancing the Corporation's competitive position, on
expanding energy sales and markets with new products and services
for customers, and increasing shareholder value. The Corporation
has realigned various areas of its business to support customer
services and marketing functions. A new marketing plan, an
expanded line of integrated customer products and services,
additional staff and new technologies are part of the Corporation's
strategy for providing responsive and superior customer service. To
strengthen the Corporation's competitive position, new technologies
have and will be added that enable team members to better serve
customers. The Corporation is centralizing activities to improve
efficiency, and customer responsiveness and business processes are
being reengineered to apply best-practices methodologies. Long-
term supply contracts have been renegotiated to lower customers'
energy costs and new alliances help reduce expenses and add
innovative work approaches.
Weather conditions have a significant impact on electric and
natural gas demand for heating and cooling purposes. Actual
weather conditions can vary substantially from year to year,
significantly affecting the Corporation's financial performance.
As described in Note 1 to the 1998 audited annual consolidated
financial statements, the Corporation complies with the provisions
of Statement of Financial Accounting Standards No. 71 (SFAS 71),
'Accounting for the Effects of Certain Types of Regulation'. SFAS
71 provides for the financial reporting requirements of the
Corporation's regulated electric and natural gas operations, which
requires specific accounting treatment of certain costs and
expenses that are related to the Corporation's regulated
operations. Criteria that could give rise to the discontinuance of
SFAS 71 include 1) increasing competition that restricts the
Corporation's ability to establish prices to recover specific costs
and 2) a significant change in the manner in which rates are set by
regulators from cost-based regulation to another form of
regulation. The Corporation periodically reviews these criteria to
ensure the continuing application of SFAS 71 is appropriate. Based
on a current evaluation of the various factors and conditions that
are expected to impact future cost recovery, the Corporation
believes that its regulatory assets, including those related to
generation, are probable of future recovery. This evaluation of
recovery must be updated for any change, which might occur in the
Corporation's current regulatory environment.
HVAC
The markets served by Blue Dot. for residential and commercial
heating, ventilating, air conditioning, plumbing and other related
services are highly competitive. The principal competitive factors
in these segments of the industry are 1) timeliness, reliability
and quality of services provided, 2) range of products and services
provided, 3) name recognition and market share and 4) pricing.
Many of Blue Dot's competitors in the HVAC business are small owner-
operated companies typically located and operated in a single
geographic area. There are a small number of larger national
companies engaged in providing residential and commercial services
in the service lines in which the Corporation intends to focus.
Future competition in both the residential and commercial service
lines may be encountered from other newly formed or existing public
or private service companies with aggressive acquisition programs,
from the unregulated business segments of regulated gas and
electric utilities, from manufacturers of HVAC equipment, or from
newly deregulated utilities in those industries entering into
various service areas. The growth of Blue Dot. is dependent upon
our ability to successfully implement our operating strategy and internal
growth initiatives and identify, acquire, integrate, and finance HVAC
businesses and acquisitions.
COMMUNICATIONS
The market served by Expanets in the communications and data
services industry is also highly competitive. The Corporation
believes that 1) market acceptance of the products, services and
technology advances the Corporation provides, 2) pending and future
legislation affecting the communications and data industry, 3) name
recognition and market share, 4) larger competitors and 5) the
Corporation's ability to provide integrated communication and data
solutions for customers in a dynamic industry are all factors that
could affect the Corporation's future operating results. Many of
Expanet's competitors in the communications business are generally
small, owner-operated companies typically located and operated in a
single geographical area. There are a number of large, integrated
national companies engaged in providing commercial services in the
service lines in which the Corporation intends to focus and also
manufacture and sell directly the products that the Corporation
services and sells. Future competition may be encountered from
other newly formed or existing public or private service companies
with aggressive acquisition programs. The growth of Expanets is
dependent upon our ability to successfully implement our operating
strategy and internal growth initatives and identify, acquire, integrate,
and finance communication and data services businesses and acquistions.
YEAR 2000 READINESS
The Corporation utilizes software and various technologies
throughout its businesses that might be impacted by the date change
in the year 2000. The year 2000 issue is a result of computer
programs which were written using two digits (rather than the
actual four) to identify the year in the date field. This old
approach was intended to save processing time and storage space
within computers and was continued in use until the mid 1990's. If
not corrected, affected systems and devices containing computer
chips or clocks could roll back to 1900 instead of moving forward
to 2000. Some systems and devices may continue to function even if
this occurs. Others may experience interruptions in service,
processes or obtain erroneous results.
In an effort to recognize the critical systems or devices with
potential business consequences, the Corporation is utilizing
internal and external resources to conduct detailed assessments of
critical systems and devices. To ensure a thorough approach to the
year 2000, the Corporation has assembled a diverse oversight and
advisory team from all businesses with experienced information
systems, legal, communications and operating leadership to work on
our enterprise-wide year 2000 program. This initiative covers not
only the Corporation's information technology systems and computer
applications, but also considers hardware, embedded systems and
components internal and external to our organizations. The
Corporation's program considers not only our businesses and
technology areas but also those of our customers and suppliers.
The Corporation's operations are dependent upon complex computer
systems for many aspects of its businesses. These different
computer information systems include AS/400, client server and
distributed systems. The Corporation's goal is to have mission-
critical systems or devices that are required to maintain
operations ready for the year 2000. Year 2000 ready means that the
system or device has been deemed suitable to operate after December
31, 1999. Many of the Corporation's mission-critical systems have
been replaced or will be replaced in advance of the year 2000.
Remediation plans include prioritizing our efforts based on when
the systems might first experience malfunctions as well as possible
impact on our customers. The Corporation believes that it has adequately
remediated or modified most critical applications and will now
devote the remainder of 1999 to work on final interface issues,
remediation, testing of both existing and replacement systems and
fine-tuning critical items. Note that some replacement systems are
being implemented through the third quarter of 1999 and year 2000
readiness of those systems will be confirmed upon implementation.
The Corporation's costs to prepare for the year 2000 were
approximately $2 million during 1998 and an estimated additional $2
million will be incurred during 1999. These costs have been
expensed as incurred or capitalized in accordance with our
accounting policy for software development costs.
The Corporation's systems and operations with respect to the year
2000 issue may also be affected by other third parties with which
the Corporation transacts business. We rely upon other companies
to supply us with products and services necessary to operate our
businesses. If key third parties cannot provide us with products
and services as a result of their own year 2000 problem, it could
have a material adverse effect upon our operations. The extent of
such impact would depend upon the duration of such interruption and
our costs and ability to find alternative sources of products and
services. The Corporation is currently working with third parties
to determine the potential adverse consequences, if any, that could
result from such entities' failure to effectively address the year
2000 issue.
The Corporation's primary focus has been directed at resolving the
year 2000 problem. While the Corporation expects that the majority
of its systems and devices to be year 2000 ready, the Corporation
is developing a contingency plan specifying what will be done if
the Corporation or important third parties are not year 2000 ready.
The majority of the contingency plan is based on manual backup
systems, procedures and practices, as well as the identification of
alternative suppliers for key products or services. The
contingency plan is completed and will be updated as appropriate
throughout the remainder of 1999. In addition, the Corporation has
informed customers of its plans and maintains a year 2000 readiness
statement on its corporate web site.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q constitute 'forward-looking
statements' within the meaning of the Securities Act of 1933, as
amended, and the Securities Exchange Act of 1934, as amended. When
used in the this Form 10-Q, the words 'expects', 'anticipates',
'estimates', 'believes', 'no assurance' and similar expressions are
intended to identify such forward-looking statements that involve
risks and uncertainties. Such forward-looking statements involve
known and unknown risks, uncertainties and other factors, which may
cause the Corporation's actual results, performance or achievements
to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking
statements. In addition to the risks and uncertainties discussed
in the foregoing sections, actual results or outcomes could differ
materially as a result of various factors including, among
others, the following: the impact of competition and changes to the
competitive environment for the Corporation's products and
services; changes in technology; reliance on strategic partners;
weather, regional, commercial, industrial and residential growth in
the geographic areas served by Corporation and its partner
entities; customers' usage patterns and preferences; the speed and
degree to which competition enters the Corporation's industries; the
ability of the Corporation ot it's Partner Entities to integrate the
operations of acquired businesses; the timing and extent of changes in
commodity prices; uncertainty of litigation; changes in government regulation;
changes in the capital and equity markets; changes in market interest or
currency exchange rates; new or increased environmental liabilities; the
effects of the year 2000 Issue; other unforeseen events; and other
factors detailed, from time to time, in the Corporation's filings
with the Securities and Exchange Commission. These forward-looking
statements speak only as of the date of this Form 10-Q.
NorthWestern Corporation expressly disclaims any obligation or
undertakings to release publicly any updated or revisions to any
forward-looking statements contained herein to reflect any change
in the Corporation's expectations with regard thereto or any change
in events, conditions or circumstances on which any such statement
is based.
NORTHWESTERN CORPORATION
PART II
ITEM 1. LEGAL PROCEEDINGS
The Corporation is from time to time a part to litigation
arising in the ordinary course of its business and stategic
development activities. Management believes that none of
such actions will have a material adverse effect on our
financial condition, results of such operations or cash flows.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule UT (SEC only)
(10) MATERIAL CONTRACTS
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
NORTHWESTERN CORPORATION
________________________________
(Registrant)
Date: August 16, 1999 /s/ David A. Monaghan
-------------------------------------
Controller and Treasurer
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