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
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