SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
[No fee required]
For the transition period from _______________ to _______________
Commission File No. 0-692
NORTHWESTERN CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 46-0172280
(State of Incorporation) (IRS Employer Identification No.)
125 South Dakota Avenue, Suite 1100
Sioux Falls, South Dakota 57104
(Address of principal office) (Zip Code)
605-978-2908
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $1.75 par value and
related Common Stock Purchase Rights New York Stock Exchange
Company Obligated Mandatorily Redeemable New York Stock Exchange
Security of Trust Holding Solely Parent
Debentures, $25.00 liquidation amount
Common Stock Purchase Rights New York Stock Exchange
(Title of each class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
Preferred Stock, Par Value $100
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
State the aggregate market value of the voting stock held by nonaffiliates
of the registrant.
$589,474,087 as of March 25, 1999
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
23,060,111 shares outstanding at March 25, 1999
DOCUMENTS INCORPORATED BY REFERENCE:
1998 Annual Report to Stockholders . . . . .Parts I and II
Proxy Statement for 1999 Annual Meeting . . . . .Part III
PART I: BUSINESS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-K, including, without limitation,
statements in Item 1, under the headings `GENERAL OVERVIEW OF BUSINESS',
`OVERVIEW', `INDUSTRY OVERVIEW', `PRODUCTS AND SERVICES', `COMPETITION',
`SEASONALITY', `REGULATION', `SOURCES OF SUPPLY', `OPERATIONS', `BUSINESS
RISK', in ITEM 3 under the heading `LEGAL PROCEEDINGS', and in ITEM 7 under
the heading `MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS', 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 this Form 10-K, 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 Company'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 Company's products and services; changes in technology; reliance on
strategic partners; weather; regional, commercial, industrial and
residential growth in the geographic areas served by Company and its
partner entities; customers' usage patterns and preferences; the speed and
degree to which competition enters the Company's industries; the timing and
extent of changes in commodity prices; 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
Company's filings with the Securities and Exchange Commission. These
forward-looking statements speak only as of the date of this Form 10-K.
NorthWestern Corporation expressly disclaims any obligation or undertakings
to release publicly any updates or revisions to any forward-looking
statements contained herein to reflect any change in the Company's
expectations with regard thereto or any change in events, conditions or
circumstances on which any such statement is based.
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
GENERAL OVERVIEW OF BUSINESS
NorthWestern Corporation (`NorthWestern' or `Company') and its partner
entities are leading providers of value-added services and solutions to
residential and business customers nationwide. Our strategic focus is on
direct customer relationships where we can provide value-added service
integration, which we believe offers us the opportunity to achieve higher
sustainable operating results and build greater shareholder value over
time. Through the commitment and initiative of our team members,
NorthWestern and its partner entities are reinventing customer service,
redefining business solutions, and sharing core values and strategic vision
with the aim to be `America's Best Service and Solutions Experience'-SM-.
NorthWestern and its partner entities discussed herein include:
* Blue Dot Services, Inc. (`Blue Dot'), a Delaware corporation, one of
America's leading providers of air conditioning, heating,
plumbing and related services, with operations in 23 cities and 18
states;
* CornerStone Propane Partners, L.P. (`CornerStone'), a publicly traded
master limited partnership (NYSE: CNO), the nation's
fourth largest and fastest growing publicly held retail propane
distributor, serving more than 440,000 residential, commercial, industrial
and agricultural customers from 310 customer service centers in 34 states;
* Expanets, Inc. (`Expanets'), a Delaware corporation, a leading provider
of integrated communication and data solutions and network services to small
and medium-sized businesses, with operations in 60 cities and 25 states; and
* NorthWestern Public Service (`NorthWestern Public Service'), a division of
the Company, provides competitive, reliable electric and natural gas
service and other value-added services to over 125,000 customers in the
upper Midwest.
NorthWestern Growth Corporation (`NorthWestern Growth'), a wholly-owned
subsidiary of the Company, is the strategic development and investment
capital arm of NorthWestern. Its mission is to implement development,
investment, acquisition and operations initiatives on behalf of
NorthWestern and its partner entities to achieve long-term value creation.
To accomplish these objectives, NorthWestern Growth seeks to: (i) acquire,
develop and expand into new businesses to complement our existing
operations and expand our customer base; (ii) partner with premier, growth-
oriented and entrepreneurial management teams in each sector of our
business operations; (iii) integrate additional products, services and
solutions into our growing customer base; and (iv) maximize growth and
financial performance of investments and acquired businesses.
Since its formation in 1994, NorthWestern Growth has implemented a dynamic
acquisition and investment program (including the formation and initiation
of the Blue Dot, CornerStone, and Expanets investment strategies) to
support NorthWestern's plan of becoming the premier provider of value-added
services and solutions across America. NorthWestern Growth intends to
continue building NorthWestern and its partner entities by expanding into
additional industries and markets offering high growth potential consistent
with NorthWestern's strategic vision.
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.
In this report, the terms `Company' and `NorthWestern' as well as the terms
`our,' `we,' and `its,' are sometimes used as abbreviated references to
NorthWestern Corporation, its partner entities or, collectively,
NorthWestern Corporation and its partner entities.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Financial information about industry segments is incorporated by reference
to Note 14 of the `Notes to Consolidated Financial Statements' of the
Company's 1998 Annual Report, filed as Exhibit 13 hereto.
HVAC AND RELATED SERVICES BUSINESS
OVERVIEW - BLUE DOT SERVICES, INC.
Blue Dot Services, Inc. (`Blue Dot') is a leading, national provider of
comprehensive maintenance, repair and replacement services for heating,
ventilation and air conditioning (`HVAC'), plumbing and other related
systems and major appliances in homes and small commercial businesses. Our
differentiating strategy offers a broad range of value-added products and
services for full-service convenience and a national marketing program to
promote brand recognition. As of December 31, 1998, Blue Dot had completed
acquisitions of 28 companies with 1998 pro forma revenues of $210 million
with 1,995 total team members serving 398,000 customers in 18 states. Our
emphasis is on companies with a strong residential and light commercial
maintenance, repair and replacement mix, with firms more heavily involved
in new construction focused primarily in areas with high new residential
and commercial growth. Residential maintenance, repair and replacement and
new construction constitute approximately 60% of the business of companies
acquired by Blue Dot, with the other 40% involved in commercial service.
Blue Dot was formed by NorthWestern Growth in July 1997 as a Delaware
corporation, under the name ServiCenter USA, Inc. In October 1998 the
name was changed to Blue Dot as part of a strategy to create a national
brand identity. Acquisitions by Blue Dot are effected utilizing cash,
stock in Blue Dot or a combination of both. Through the use of different
classes of capital stock, NorthWestern (through NorthWestern Growth)
controls approximately 95% of the voting common and preferred stock (as of
December 31, 1998). Additional information relating to the investment in
Blue Dot is incorporated by reference to Note 2 of `Notes to Consolidated
Financial Statements' on pages 27-28 of the Company's 1998 Annual Report,
filed as Exhibit 13 hereto.
Upon formation, Blue Dot immediately began implementing its strategy of
acquiring local service providers in major metropolitan markets and plans
to continue its dynamic growth through acquisitions and internal growth and
development. In each new market, we seek to acquire a leading local
company with an established reputation and experience, a revenue mix of
predominately residential and light commercial maintenance, repair and
replacement sales, and that has superior management team.
Once we have entered a market, we seek to acquire other well established
HVAC, plumbing and related services businesses operating within that region
and also pursue the acquisition of other potential service partners with
complementary products and services that present opportunities to reduce
overhead or otherwise leverage our infrastructure. When acquired, the
operations of such businesses are integrated into the operations of
existing platform Blue Dot companies in the region, enabling Blue Dot to
reduce overhead costs, sell redundant assets and consolidate operations
within existing areas.
We believe there are significant opportunities to increase our
profitability and that of subsequently acquired businesses. The key
elements of Blue Dot's operating strategy are: (i) providing superior,
high quality service in a professional manner; (ii) increasing revenue at
locations through sales of maintenance agreements; cross-marketing of
products and services; and customer financing packages; (iii) offering
complementary non-traditional complimentary products and services; (iv)
achieving operating efficiencies through increased purchasing power to gain
volume discounts, national advertising and local marketing support; (v)
`best practices' integration; and (vi) attracting and retaining quality
team members.
INDUSTRY OVERVIEW
The HVAC and plumbing industry consists of the installation, replacement,
maintenance, service and repair of systems at existing and new residences
and commercial businesses. According to industry sources, annual revenues
for these market segments in the United States are approximately $65
billion for HVAC services, $19 billion for plumbing services and $16
billion for electrical services. Based on available industry data, there
are currently over 40,000 businesses, consisting predominantly of small,
owner-operated companies focusing on a single local geographic area and
providing a limited range of services. Because of this market
fragmentation and a lower capability of smaller firms to raise the capital
necessary to expand their businesses, a number of firms have begun
consolidating the smaller businesses.
The industry can be broadly divided into the new installation market
(estimated 34% of the annual revenues) and the maintenance, repair and
replacement market (estimated 66% of the annual revenues). The new
installation market includes the installation of systems in new homes and
commercial buildings for contractors, builders, developers and other users.
The maintenance, repair and replacement market includes the maintenance,
repair and replacement and reconfiguration of existing systems in
residential homes and commercial buildings.
PRODUCTS AND SERVICES
Maintenance, Repair and Replacement: These services include preventive
maintenance (periodic checkups, cleaning and filter change-outs), emergency
repairs, and the placement (in conjunction with the retrofitting or
remodeling of a residence or commercial building, or as a result of an
emergency repair request) of air conditioning, heating and plumbing
systems. The maintenance, repair and replacement segment offers more
attractive pricing because of customers' demands for immediate, convenient
and reliable service. Blue Dot focuses on this segment of the industry
rather than the new construction segment because we believe that it offers
higher margins, less cyclicality and seasonality, and exposes Blue Dot to
less credit and interest rate risk, while allowing establishment of the
national service reputation among customers. Growth in this segment is
driven by a number of factors, particularly: the aging of the installed
base; the increasing energy efficiency, sophistication and complexity of
air conditioning and heating systems; the upgrading of existing homes to
central air conditioning; and the increasing restrictions on the use of
refrigerants commonly used in older systems. The energy efficiency and
sophistication of new systems are encouraging owners of buildings to
upgrade and reconfigure their current systems. Blue Dot also pursues
maintenance agreements which lead to better utilization of personnel,
develop customer loyalty, provide the opportunity for cross-marketing of
Blue Dot's other services and products, link the customer with Blue Dot
should a major repair or replacement be needed, and result in recurring
revenues.
New Installation: These services in the residential market often begin
with a homebuilder providing architectural plans or mechanical drawings for
the particular type or types of residences to be developed and requesting a
bid or contract proposal for the work (often broken into phases within a
tract). Blue Dot team members analyze the plans and drawings and estimate
the equipment, materials and parts and the direct and supervisory labor
required for the project, and deliver a written bid or negotiate the
written agreement for the job. Working with the builder's construction
supervisors, Blue Dot team members coordinate and supervise the
installation. Commercial new installation work often begins with a design
request from the owner or general contractor, followed by preliminary and
then more detailed design specifications, engineering drawings and cost
estimates. Actual field work (ordering of equipment and materials,
fabrication or assembly of certain components, delivery of such materials
and components to the job site, scheduling of work crews with the necessary
skills, inspection and quality control) is coordinated by Blue Dot team
members.
COMPETITION
The market for HVAC, plumbing and related services is highly competitive.
The principal competitive factors in the residential and commercial
maintenance, repair and replacement segment of the industry are timeliness,
reliability and quality of services provided; range of services offered;
market share and visibility; and price. In order to be successful as a
national provider of comprehensive services, we must employ, train and
retain highly motivated, professional service technicians. Blue Dot
believes that it does so through training programs, team member
compensation, team member health and savings benefit plans, career
opportunities and team building. Competitive pricing is possible through
purchasing economies and other cost saving opportunities that exist across
each of the service lines offered and from productivity improvements.
Most of Blue Dot's competitors are small, owner-operated companies that
typically operate in a single market. Many of these smaller competitors
may have lower overhead cost structures and may be able to provide their
services at lower rates. Moreover, many homeowners have traditionally
relied on individual persons or small repair service firms with whom they
have long-established relationships for a variety of home repairs. In
addition, there are a limited number of companies focused on providing
comprehensive residential and/or commercial services in some of the same
business lines provided by Blue Dot. There also are a number of national
retail chains that sell a variety of plumbing fixtures and equipment and
air conditioning and heating equipment for residential use and offer,
either directly or through various subcontractors, installation, warranty
and repair services.
Future competition may be encountered from, among others, other newly
formed or existing public or private service companies with aggressive
acquisition programs (currently these companies constitute approximately 3%
of the operations of the industry), HVAC equipment manufacturers, the
unregulated business segments of regulated gas and electric utilities, or
from newly deregulated utilities entering into various residential or
commercial service areas.
The principal methods of meeting competition employed by Blue Dot are
assurance of customer satisfaction, a history of providing quality service,
and name recognition. We intend to expand our marketing program to
capitalize on brand recognition. In addition, we have forged a national
alliance with the Air Conditioning Contractors of America (ACCA), with each
of Blue Dot's local businesses being a Contracting Member of ACCA. ACCA is
a national trade association with 69 state and local chapters representing
more than 9,000 air conditioning and heating contractors nationwide. Blue
Dot will use ACCA's training programs and information channels to assist in
its customer service goals.
SEASONALITY
Blue Dot's installation, maintenance, repair and replacement operations are
subject to seasonal variations in the different lines of service. Except in
certain regions, the demand for new installations can be substantially
lower during the winter months. Demand for HVAC services generally varies
with the weather; demand generally is higher during periods of extremely
cold or hot weather and lower in the spring and fall months. Blue Dot
expects its revenues and operating results generally will be lower in the
first and fourth quarters.
REGULATION
Blue Dot's operations are subject to various federal, state and local laws
and regulations, including, among others: permitting and licensing
requirements applicable to service technicians in their respective trades;
building, air conditioning, heating, plumbing and electrical codes and
zoning ordinances; laws and regulations relating to consumer protection,
including laws and regulations governing service contracts for residential
services; and laws and regulations relating occupational health and safety
and protection of the environment. Blue Dot believes it has all permits
and licenses necessary to conduct its operations and is in substantial
compliance with applicable regulatory requirements relating to its
operations. A large number of state and local regulations governing the
residential services trades require various permits and licenses to be held
by individual technicians. In some cases, a required permit or license held
by a single individual may be sufficient to authorize specified activities
for all the service technicians who work in the geographic area covered by
the permit or licenses.
Blue Dot's operations are subject to the Clean Air Act -- Title VI of which
governs air emissions and imposes specific requirements on the use and
handling of substances known or suspected to cause or contribute
significantly to harmful effects on the stratospherical ozone layer, such
as chlorofluorocarbons and certain other refrigerants (`CFCs'). Clean Air
Act regulations require the certification of service technicians involved
in the service or repair of systems, equipment and appliances containing
these refrigerants and also regulate the containment and recycling of these
refrigerants. These requirements have increased Blue Dot's training
expenses and expenditures for containment and recycling equipment. The
Clean Air Act is intended ultimately to eliminate the use of CFCs in the
United States and require alternative refrigerants to be used in
replacement HVAC systems. The implementation of the Clean Air Act
restrictions has also increased the cost of CFCs in recent years and is
expected to continue to increase such costs in the future. As a result, the
number of conversions of existing HVAC systems that use CFCs to systems
using alternative refrigerants is expected to increase. Capital
expenditures related to environmental matters during fiscal 1998 were not
material. Blue Dot does not currently anticipate any material adverse
effect on its business or consolidated financial position as a result of
future compliance with existing environmental laws and regulations
controlling the discharge of materials into the environment. Future events,
however, such as changes in existing laws and regulations or their
interpretation, more vigorous enforcement policies of regulatory agencies
or stricter or different interpretations of existing laws and regulations
may require additional expenditures by Blue Dot which may be material.
TEAM MEMBERS
As of December 31, 1998, Blue Dot employed 1,995 team members. Blue Dot
considers its relations with team members to be good. No team members are
covered by collective bargaining agreements.
ITEM 2. PROPERTIES - BLUE DOT
The executive offices are located at 500 Fairway Drive, Suite 205,
Deerfield Beach, Florida 33441, where Blue Dot leases approximately 8,400
square feet of office space, and such lease shall terminate in November
2000. However, we are planning to relocate our executive offices to
Sunrise, Florida in 1999 and have entered into a lease for approximately
18,500 square feet of office space for a five year term, commencing at
occupancy. The Deerfield Beach leased property is expected to be sublet
for the duration of the lease term.
Blue Dot generally leases the office and service facilities for its
operations. We serve more than 398,000 customers from 23 cities and 18
states. Other principal properties include our vehicle fleet, which
predominantly consists of owned vehicles, and our inventory and equipment.
We use our relationship with vendors to minimize the amount of capital
invested in inventory.
PROPANE BUSINESS
OVERVIEW - CORNERSTONE PROPANE PARTNERS, L.P.
CornerStone Propane Partners, L.P. ( `CornerStone') is the fourth largest
and fastest-growing publicly traded (NYSE: CNO) retail propane distributor
in the United States. As of December 31, 1998, CornerStone served more than
440,000 residential, commercial, industrial and agricultural customers from
310 customer service centers in 34 states. Our operations are concentrated
in the east coast, south-central and west coast regions of the United
States. For the 12 months ended December 31, 1998 (CornerStone's fiscal
year ends June 30), CornerStone had retail propane sales of approximately
232 million gallons. CornerStone attributes its dynamic growth to a
balanced strategy of internal growth, new customer service start-ups and
acquisitions.
CornerStone, and its subsidiary, CornerStone Propane, L.P. (`the Operating
Partnership'), were organized in October 1996 and November 1996,
respectively, as Delaware limited partnerships. CornerStone Propane GP,
Inc. (the `Managing General Partner') and SYN Inc. (the `Special General
Partner' and, collectively with the Managing General Partner, the `General
Partners') are the general partners of CornerStone and the Operating
Partnership. The General Partners own an aggregate 2% interest as general
partners, and the Unitholders (including the General Partners as holders of
Subordinated Units) own a 98% interest as limited partners, in CornerStone
and the Operating Partnership on a combined basis. Through NorthWestern
Growth, NorthWestern owns approximately 30% of CornerStone and controls the
Managing General Partner. CornerStone, the Operating Partnership and its
corporate subsidiaries are referred to collectively herein as the
`Partnership' or `CornerStone'.
The Partnership was formed in 1996 to acquire, own and operate the propane
businesses and assets of SYN, Inc. and its subsidiaries (`Synergy') and
Empire Energy Corporation and its subsidiaries (`Empire Energy') (formerly
subsidiaries of Northwestern Growth) and CGI Holdings, Inc. and its
subsidiaries (`Coast'). To capitalize on the growth and consolidation
opportunities in the propane distribution market, in August 1995,
Northwestern Growth acquired the predecessor of Synergy, then the sixth
largest retail marketer of propane in the United States and, in October
1996, it acquired Empire Energy, then the eighth largest retail marketer of
propane in the United States. Immediately prior to the Partnership's
initial public offering (`IPO') of Common Units in December 1996,
Northwestern Growth acquired Coast, then the 18th largest retail marketer
of propane in the United States. The Partnership commenced operation on
December 17, 1996, concurrently with the closing of the IPO, when
substantially all of the assets and liabilities of Synergy, Empire Energy
and Coast were contributed to the Operating Partnership.
In 1998, 16 new companies joined CornerStone, including Propane
Continental, Inc. (`PCI'), the nation's 19th largest retail propane
distributor which operates 34 retail propane customer service centers in 11
states. Additional information relating to the investment in CornerStone is
incorporated by reference to Note 2 of `Notes to Consolidated Financial
Statements' on page 27 of the Company's 1998 Annual Report, filed as
Exhibit 13 hereto.
CornerStone is principally engaged in (i) the retail distribution of
propane for residential, commercial, industrial, agricultural and other
retail uses; (ii) the wholesale marketing and distribution of propane,
natural gas liquids and crude oil to the retail propane industry, the
chemical and petrochemical industries and other commercial and agricultural
markets; (iii) the repair and maintenance of propane heating systems and
appliances; and (iv) the sale of propane-related supplies, appliances and
other equipment. The retail propane business is a `margin-based' business
in which gross profits depend on the excess of sales prices over propane
supply costs. Sales of propane to residential and commercial customers,
which account for the vast majority of CornerStone's revenue, have provided
a relatively stable source of revenue for CornerStone. Based on fiscal 1998
retail propane gallons sold, the customer base consisted of 57%
residential, 23% commercial and industrial and 20% agricultural and other
customers. Sales to residential customers have generally provided higher
gross margins than other retail propane sales. While commercial propane
sales are generally less profitable than residential retail sales, we have
traditionally relied on this customer base to provide a steady, noncyclical
source of revenues. No single customer accounted for more than 1% of total
revenues.
CornerStone's wholesale operations engage in the marketing of propane to
independent dealers, major interstate marketers and the chemical and
petrochemical industries. We participate to a lesser extent in the
marketing of other natural gas liquids, the processing and marketing of
natural gas and the gathering of crude oil. We either own or have
contractual rights to use transshipment terminals, rail cars, long-haul
tanker trucks, pipelines and storage capacity. CornerStone believes that
its wholesale marketing and processing activities position it to achieve
product cost advantages and to avoid shortages during periods of tight
supply to an extent not generally available to other retail propane
distributors.
The principal elements of CornerStone's business strategy are to (i) extend
and refine our existing service orientation; (ii) continue to pursue
balanced growth through small and large acquisitions, internal growth at
our existing customer service centers and start-ups of new customer service
centers; (iii) enhance the profitability of our existing operations by
integrating the operations of our predecessors, implementing
entrepreneurially oriented local manager incentive programs and continuing
to centralize administrative systems; and (iv) capitalize on our national
wholesale supply and logistics business.
PRODUCT
Propane, a by-product of natural gas processing and petroleum refining, is
a clean-burning energy source recognized for its transportability and ease
of use relative to alternative stand-alone energy sources. Our retail
propane business consists principally of transporting propane to our retail
distribution outlets and then to tanks located on our customers' premises.
Retail propane use falls into four broad categories: (i) residential, (ii)
industrial and commercial, (iii) agricultural and (iv) other applications,
including motor fuel sales. Residential customers use propane primarily for
space and water heating. Industrial customers use propane primarily as fuel
for forklifts and stationary engines, to fire furnaces, as a cutting gas,
in mining operations and in other process applications. Commercial
customers, such as restaurants, motels, laundries and commercial buildings,
use propane in a variety of applications, including cooking, heating and
drying. In the agricultural market, propane is primarily used for tobacco
curing, crop drying, poultry brooding and weed control. Other retail uses
include motor fuel for cars and trucks, outdoor cooking and other
recreational purposes, propane resales and sales to state and local
governments. In our wholesale operations, we sell propane principally to
large industrial customers and other propane distributors.
Propane is extracted from natural gas or oil wellhead gas at processing
plants or separated from crude oil during the refining process. Propane is
many times more compact as a liquid than a gas, and therefore is normally
transported and stored in a liquid state under moderate pressure or
refrigeration for ease of handling in shipping and distribution. When the
pressure is released or the temperature is increased, it is usable as a
flammable gas. Propane is colorless and odorless; an odorant is added to
allow its detection. Like natural gas, propane is a clean burning fuel and
is considered an environmentally preferred energy source.
SOURCES OF SUPPLY
CornerStone's propane supply is purchased from oil companies and natural
gas processors at numerous supply points located in the United States and
Canada. During 1998, virtually all of our propane purchases for supply were
made pursuant to agreements with terms of less than one year, but the
percentage of contract purchases may vary from year to year as determined
by CornerStone. Supply contracts generally provide for pricing in
accordance with posted prices at the time of delivery or the current prices
established at major delivery points. Most of these agreements provide
maximum and minimum seasonal purchase guidelines. In addition, we make
purchases on the spot market from time to time to take advantage of
favorable pricing. We receive our supply of propane predominantly through
railroad tank cars and common carrier transport.
Supplies of propane from our sources historically have been readily
available. In 1998, Dynegy was our largest supplier providing approximately
9% of Cornerstone's total propane supply for our retail and wholesale
operations (excluding propane obtained from our natural gas processing
operations). CornerStone believes that if supplies from Dynegy were
interrupted, we would be able to secure adequate propane supplies from
other sources without a material disruption of our operations. No single
supplier provided more than 10% of our domestic propane supply in the year.
Although no assurance can be given that supplies of propane will be readily
available in the future, CornerStone expects a sufficient supply to
continue to be available. We have not experienced a shortage that has
prevented us from satisfying our customers' needs and do not foresee any
significant shortage in the supply of propane.
We engage in hedging of product cost and supply through common hedging
practices. These practices are monitored and maintained by CornerStone
management on a daily basis. Hedging of product cost and supply does not
always result in increased margins. The market price of propane is subject
to volatile changes as a result of supply or other market conditions over
which we have no control. Since it may not be possible to pass rapid
increases in the wholesale cost of propane on to customers immediately,
such increases could reduce our gross profits. Consequently, CornerStone's
profitability will be sensitive to changes in wholesale propane prices. We
also engage in the trading of propane, natural gas, crude oil and other
commodities in amounts that have not had and are not expected to have a
material effect on our financial condition or results of operations.
We have from time to time leased space in storage facilities to take
advantage of supply purchasing opportunities, and CornerStone believes that
it will have adequate third party storage to take advantage of such
opportunities in the future. Access to storage facilities will allow us, to
the extent it may deem it desirable, to buy and store large quantities of
propane during periods of low demand, which generally occur during the
summer months, thereby helping to ensure a more secure supply of propane
during periods of intense demand or price instability.
OPERATIONS
CornerStone has organized its operations in a manner that we believe
enables us to provide excellent service to our customers and to achieve
maximum operating efficiencies. Our retail propane distribution business is
organized into regions. Each region is supervised by a regional manager.
Team members located at the retail service centers in the various regions
are primarily responsible for customer service and sales.
A number of functions are centralized at our corporate headquarters in
order to achieve certain operating efficiencies as well as to enable the
team members located in the retail service centers to focus on customer
service and sales. Each of our primary retail service centers is equipped
with a computer connected to the central management information system in
our corporate headquarters. This computer network system provides us with
accurate and timely information on supply cost, inventory and customer
accounts. We make centralized purchases of propane through our wholesale
division for resale to the retail service centers which allows us to
achieve certain advantages, including price advantages, because of our
status as a large volume buyer. The functions of cash management,
accounting, taxes, payroll, permits, licensing, asset control, team member
benefits, human resources, and strategic planning are also performed on a
centralized basis.
COMPETITION
Based upon information provided by the Energy Information Administration,
propane accounts for approximately 3-4% of household energy consumption in
the United States. Propane competes primarily with natural gas, electricity
and fuel oil as an energy source, principally on the basis of price,
availability and portability. Propane is more expensive than natural gas on
an equivalent BTU basis in locations served by natural gas, but serves as a
substitute for natural gas in rural and suburban areas where natural gas is
unavailable or portability of product is required. Historically, the
expansion of natural gas into traditional propane markets has been
inhibited by the capital costs required to expand pipeline and retail
distribution systems. Although the extension of natural gas pipelines tends
to displace propane distribution in areas affected, we believe that new
opportunities for propane sales arise as more geographically remote
neighborhoods are developed. Propane is generally less expensive to use
than electricity for space heating, water heating, clothes drying and
cooking. Although propane is similar to fuel oil in certain applications
and market demand, propane and fuel oil compete to a lesser extent
primarily because of the cost of converting from one to the other.
In addition to competing with alternative energy sources, the Partnership
competes with other companies engaged in the retail propane distribution
business. Competition in the propane industry is highly fragmented and
generally occurs on a local basis with other large full-service multi-state
propane marketers, thousands of smaller local independent marketers and
farm cooperatives. Based on industry publications, the domestic retail
market for propane is approximately 9.2 billion gallons annually, with more
than 8,000 retail propane operations in the United States, of which the 10
largest retailers, including CornerStone, account for approximately 33% of
the total retail sales of propane in the United States, with no single
marketer having a greater than 10% share of the total retail market. Most
of our customer service centers compete with five or more marketers or
distributors. Each customer service center operates in its own competitive
environment, because retail marketers tend to locate in close proximity to
customers. Our customer service centers generally have an effective
marketing radius of approximately 25 to 50 miles, although in certain rural
areas the marketing radius may be extended by a satellite storage location.
The ability to compete effectively further depends on the reliability of
service, responsiveness to customers and the ability to maintain
competitive prices. CornerStone believes that its service capabilities and
customer responsiveness differentiate it from many of these smaller
competitors. Our team members are on call 24 hours a day and seven days a
week for emergency repairs and deliveries. The wholesale liquefied
petroleum gas (LPG) business, which includes propane, is highly
competitive. CornerStone believes that the wholesale business provides us
with a national presence and a reasonably secure, efficient supply base,
and positions us well for expansion through acquisitions or start-up
operations in new markets.
SEASONALITY
Because a substantial amount of propane is sold for heating purposes, the
severity of winter and resulting residential and commercial heating usage
have an important impact on CornerStone's earnings. Approximately two-
thirds of our retail propane sales usually occur during the six-month
heating season from October through March. As a result of this seasonality,
our sales and operating profits are concentrated in the second and third
fiscal quarters (October through March). Cash flows from operations,
however, are greatest from November through April when customers pay for
propane purchased during the six-month peak season. To the extent the
Managing General Partner deems appropriate, CornerStone may reserve cash
from these periods for distribution to Unitholders during periods with
lower cash flows from operations. Sales and profits are subject to
variation from month to month and from year to year, depending on
temperature fluctuations.
Weather in 1998 averaged 9% warmer than normal in our market areas. While
weather factors generally measure the directional impact of temperatures on
the business, other factors such as product prices, geographic mix,
magnitude and duration of temperature and weather conditions can also
impact sales.
REGULATION
CornerStone's operations are subject to various federal, state and local
laws governing the transportation, storage and distribution of propane,
occupational health and safety, and other matters. All states in which we
operate have adopted fire safety codes that regulate the storage and
distribution of propane. In some states these laws are administered by
state agencies, and in others they are administered on a municipal level.
Certain municipalities prohibit the below ground installation of propane
furnaces and appliances, and certain states are considering the adoption of
similar regulations. CornerStone cannot predict the extent to which any
such regulations might affect CornerStone, but does not believe that any
such effect would be material. It is not anticipated that we will be
required to expend material amounts by reason of environmental and safety
laws and regulations, but inasmuch as such laws and regulations are
constantly being changed, we are unable to predict the ultimate cost to
CornerStone of complying with environmental and safety laws and
regulations. However, we are always aware of all existing state and federal
environmental regulations and take all reasonable precautions to prevent
any incidents that would violate any of these rules.
We currently meet and exceed federal regulations requiring that all team
members employed in the handling of propane gas be trained in proper
handling and operating procedures. All team members have participated or
will participate within 90 days of their employment date, in hazardous
materials training. We have established ongoing training programs in all
phases of product knowledge and safety including participation in the
National Propane Gas Association's (`NPGA') Certified Employee Training
Program.
TEAM MEMBERS
As of December 31, 1998, CornerStone had 2,503 full-time team members.
Fewer than 100 of our team members were represented by labor unions.
CornerStone believes that its relations with its employees are good. We
generally hire seasonal workers to meet peak winter demand.
ITEM 2. PROPERTIES -- PROPANE
The principal executive offices are located at 432 Westridge Drive,
Watsonville, California 95076. These offices are leased through 2002. The
accounting and the day-to-day operations are centralized in Lebanon,
Missouri. These offices are leased through 2006. CornerStone leases retail
service centers and administrative office space under noncancelable
operating leases expiring at various times through 2008. As of December 31,
1998, customers are served from 310 customer service centers with
operations in 34 states.
CornerStone owns and operates a fleet of over-the-road tractors, transport
trailers, bobtail trucks and delivery and service vehicles to deliver
propane and customer tanks to its customers. We also rely on common
carriers to deliver propane to our retail service centers. Cornerstone
owns approximately 450,000 propane storage tanks that are leased, rented or
loaned to customers. Additionally in 1998, CornerStone operated bulk
storage facilities with total propane storage capacity of approximately 15
million gallons, of which 3 million gallons are owned and 12 million
gallons are leased. CornerStone does not own, operate or lease any
underground propane storage facilities (excluding customer and local
distribution tanks) or pipeline transportation assets (excluding local
delivery systems).
INTEGRATED COMMUNICATION AND DATA SOLUTIONS
AND NETWORK SERVICES BUSINESS
OVERVIEW - EXPANETS, INC.
Expanets, Inc. (`Expanets') is a leading provider of integrated
communication solutions to businesses by offering voice and data networking
solutions along with network services to our customers. We focus on small-
to medium-sized business customers and offer solutions from multiple
vendors providing over 55,000 active customers with solutions customized to
their needs. We plan to expand in major metropolitan markets with
attractive demographic and economic characteristics. As of December 31,
1998, Expanets had completed the acquisition of 18 leading private
communication, data and network entities representing 1998 pro forma
revenues of approximately $249 million. Our areas of expertise include
voice networking, data networking, network management, messaging and web-
enabling capabilities. We currently operate in 60 U.S. cities and in 25
states.
Expanets was formed by NorthWestern Growth in late 1997 as a Delaware
corporation, under the name of Communication Systems USA, Inc., and in
February 1999, the name was changed to Expanets, as part of national
branding strategy. Acquisitions by Expanets are effected utilizing cash,
stock in Expanets or a combination of both. Through the use of different
classes of capital stock, NorthWestern (through NorthWestern Growth)
controls approximately 94% of the voting common and preferred stock (as of
December 31, 1998). Additional information relating to the investment in
Expanets is incorporated by reference to Note 2 of `Notes to Consolidated
Financial Statements' on pages 27-28 of the Company's 1998 Annual Report,
filed as Exhibit 13 hereto.
INDUSTRY OVERVIEW
Efficiently exchanging information both internally and externally is a
competitive advantage for businesses. Businesses are looking to a variety
of new technologies to enhance the performance of their voice and data
networking systems. For example, to exchange information, businesses are
increasingly using client/server based applications, e-mail, remote access
by mobile workers, the Internet, corporate Intranets, video, graphics and
audio. An organization's ability to integrate and deploy the most
responsive and reliable communications and information systems, customized
to their needs in a cost-effective manner, will create have a competitive
advantage.
While organizations recognize the importance of communication and data
networking systems, the selection, implementation, customization and
maintenance of these systems is becoming more complex. The complexity of
networks is magnified by the need to integrate new and evolving
technologies. Faced with a shortage of qualified technical resources and
great demands to implement the latest technology while ensuring the
reliability, performance and security of these systems, customers are
increasingly relying on outside vendors to provide the necessary resources.
By outsourcing services, companies are able to focus on their core
businesses; access specialized technical skills; implement communications
and data networking solutions more rapidly; benefit from flexible staffing;
and reduce the cost of recruiting, training and retraining specialized
talent. The rapid technological changes in networking and the move to out-
sourcing of customized networking solutions have created increased demand
for companies such as Expanets.
The communication systems and data services market is experiencing robust
growth. Industry sources estimate that the current United States market for
switching, networking and application equipment is over $17 billion and the
market for telecommunications maintenance and professional services is
approximately $4 billion. According to industry sources, between 1996 and
2000, the United States market for voice mail, interactive voice response
units, networking equipment, and other telecommunications peripherals and
applications is estimated to grow at a compound annual growth rate of
approximately 12%.
PRODUCTS AND SERVICES
Expanets is poised to be a leader in the industry by capitalizing on
developments in technology, increased demand for complex data networking,
call centers, messaging systems, and voice, data and video integration. We
provide a full range of these services from network design and engineering
to installation and support.
We provide customers with a single source for a broad range of
communications and data networking products and services to design, develop
and implement technology solutions in a variety of customer environments.
The following products are included in the suite of customer solutions we
offer:
* Network integration and support
* Premise switching equipment
* Interactive voice response (IVR) equipment
* Voice message systems (VMS)
* Data networking equipment
* Call center equipment
* Local and long distance voice telephony services
* Data services
* Internet access
* Technologies that enable web hosting
Expanets, as a single source of enterprise communications solutions,
enables customers to place their network strategy in the hands of a single
company which can competently provide the correct technology and implement
it appropriately. We work with our customers as a trusted ally to help
them make the correct technology choices. This allows customers to know
that they are purchasing the best technology for their current needs and
have a clear network evolution path as new technologies and business
requirements are developed.
Expanets believes that its relationships with a wide range of leading
technology companies position Expanets to deliver the most appropriate
solutions to each customer. Expanets provides products from many vendors,
including: Siemens, Northern Telecom, Tadiran, NEC, Lucent, Meridian,
Micom, Octel, PictureTel, Newbridge, Cisco, Edify, Verilink, Latitude,
Siemon Cabling, Executone, Mitel, Adtran, AVT, Gandalf, Inter-Tel, VTEL,
Fujitsu, Toshiba, Nortel, Panasonic, Active Voice, Compaq, Comdial, 3-Com,
Scout, Taske, Safari, Hitachi, Centigram, ABS Talkx, Telrad, Airtouch,
Nextel, IBM, Lotus Notes, CallWare, ISDN Products, Ascend Data Products,
and Bay Networks, as well as others.
COMPETITION
The market for data services and solutions includes a large number of
competitors, is subject to rapid change and is highly competitive. Many
of Expanets competitors in the communications business are small, owner-
operated companies typically located and operated in a single geographic
area. There also are a number of large, integrated national and multi-
national companies (such as Lucent Technologies, AT&T) as well as the
former regional Bell operating companies (`RBOCs'), with financial and
other resources much greater than Expanets', engaged in providing
commercial services in the service lines in which Expanets intends to focus
and also manufacture and sell directly the products that Expanets services
and sells. Future competition may be encountered from other newly formed
or existing public or private service companies with aggressive acquisition
programs. In addition, Expanets competes with its customers' internal
resources, particularly when these resources represent a fixed cost to the
customer.
Subject to this competitive environment, Expanets competes on the basis of
the depth and breadth of services and products offered; the ability to
provide innovative solutions to customers' needs; the ability to integrate
communications and data networking systems as the related technologies
continue to converge; and its reputation for providing the highest level of
customer service.
Expanets has approximately 360 sales and marketing team members within the
United States. These Expanets team members have significant experience
selling complex communications and data networking solutions and managing
customer relationships. Expanets uses several techniques to pursue new
customer opportunities, including direct marketing, referrals,
telemarketing, seminars, participation in trade shows and advertising.
Also we use a comprehensive approach to evaluate each customer's technology
needs which will further efforts to cross-sell the depth and breadth of its
product and service offerings to existing and potential customers.
REGULATION
Expanets operations are subject to various federal, state and local laws
and regulations affecting businesses generally such as laws and regulations
concerning employment, occupational health and safety, protection of the
environment and other matters. Expanets believes it is in substantial
compliance with all applicable regulatory requirements relating to its
operations. One Expanets entity is required to file tariffs for long
distance telecommunications services with the State of Oklahoma
Corporations Commission. Expanets has not initiated any material capital
expenditures regarding environmental protection in the past year. However,
we are always aware of all existing state and federal environmental
regulations and take all reasonable precautions to prevent any incidents
that would violate any of these rules. Future events, however, such as
changes in existing laws and regulations or their interpretation, more
vigorous enforcement policies of regulatory agencies or stricter or
different interpretations of existing laws and regulations may require
additional expenditures by Expanets which may be material.
TEAM MEMBERS
As of December 31, 1998, Expanets employed 1577 team members. Expanets
considers its relations with team members to be good. Approximately 106
team members are covered by collective bargaining agreements.
ITEM 2. PROPERTIES - EXPANETS
The executive offices are located at 2 Oak Way, Berkeley Heights, New
Jersey 07936, where Expanets leases office space. Substantially all of
Expanets' facilities are leased. We serve over 55,000 customers in 60
cities and 25 states. Our principal otherproperties include inventory,
equipment and vehicle fleet.
ELECTRIC AND NATURAL GAS DISTRIBUTION BUSINESS
OVERVIEW- NORTHWESTERN PUBLIC SERVICE
NorthWestern Public Service, a division of NorthWestern, provides
competitive, reliable electric and natural gas service and value-added
services to customers in the upper Midwest. As of December 31, 1998, we
provided electricity to 155,886 customers in South Dakota and natural gas
to 78,912 customers in South Dakota and Nebraska. Electric and natural gas
revenues accounted for 12% of all revenues for NorthWestern in 1998.
NorthWestern Public Service is qualified to conduct its electric and
natural gas business in the states of South Dakota, Nebraska, Iowa and
North Dakota. We do not currently serve any electric customers in
Nebraska, North Dakota or Iowa.
NORTHWESTERN PUBLIC SERVICE -- ELECTRIC OPERATIONS OVERVIEW
Pursuant to the South Dakota Public Utilities Act, the South Dakota Public
Utilities Commission (`PUC') assigned as our electric service territory the
communities and adjacent rural areas in which we provide electric service
in South Dakota. This gives us the right to provide fully bundled services
to each present and future electric customer within our assigned territory
for so long as the service provided is adequate.
Customer Base, Service Territory and Revenue
As of the December 31, 1998, NorthWestern Public Service provided retail
electricity to 108 communities in South Dakota with a combined population
of approximately 98,403 people. The NorthWestern Public Service territory
spans over 26 counties in South Dakota. Electric energy sales constituted
7% of all revenue of NorthWestern for 1998. The following table shows
electric revenues for the last three years, together with the percent of
the total for each segment.
1996 1997 1998
Electric Revenue
Residential $31,274,274 42.6% $31,822,303 41.5% $31,832,054 40.6%
Commercial
& Industrial 38,682,023 52.7% 39,665,962 51.7% 40,017,227 51.0%
Public and
other retail 1,384,269 1.9% 1,445,711 1.9% 1,459,933 1.9%
Sales for resale 1,311,133 1.8% 3,244,751 4.2% 4,498,815 5.7%
Other 765,296 1.0% 548,094 0.7% 592,977 0.8%
------------ ----- ---------- ----- ---------- -----
Total $73,416,995 100.0% $76,726,821 100.0% $78,401,006 100.0%
Sales for resale primarily include power pool sales to other utilities.
Power pool sales fluctuate from year to year depending on a number of
factors including our availability of excess short-term generation and the
ability to sell the excess power to the other utilities in the power pool.
We also sell power and energy at wholesale to certain municipalities for
resale and to various governmental agencies.
Electric Generation, Transmission and Distribution
NorthWestern Public Service shares in the ownership of the Big Stone
Generating Plant (`Big Stone'), located near Big Stone City in northeastern
South Dakota. In North Dakota, we maintain transmission facilities to
interconnect with electric transmission lines of other utilities and share
in the ownership of Coyote I Electric Generating Plant (`Coyote'), located
near Beulah, North Dakota. In Iowa, we share in the ownership of Neal
Electric Generating Unit No. 4 (`Neal'), located near Sioux City, Iowa.
These facilities are fueled by coal, which is provided through various
length contracts with several coal companies.
We are evaluating additional generation which will provide adequate
generating capacity reserves through the year 2000. Currently, we have
capacity options for the years 2001-2007. Because the cost of capacity has
risen significantly and also because of the reduced availability of
capacity in the future, NorthWestern Public Service is developing a
comprehensive plan to assure that it has sufficient capacity to meet
customer needs and the reserve requirements of the Mid-Continent Area Power
Pool (`MAPP').
Capability and Demand
As of December 31, 1998, the aggregate net summer peaking capacity of all
NorthWestern Public Service-owned electric generating units was 308,289 kw,
consisting of 104,420 kw from Big Stone (our 23.4% share), 42,700 kw from
Coyote (our 10.0% share), 54,169 kw from Neal (our 8.7% share), and 107,000
kw from internal combustion turbine units and small diesel units, used
primarily for providing electric power during peak demand periods. In
addition to those plant facilities, we have entered into agreements to
purchase up to 14,950 kw of firm capacity from Basin Electric Cooperative
and various amounts from Nebraska Public Power District to assist in
meeting peak demands.
We are a summer peaking utility. The 1998 peak demand of 276,976 kw
occurred on July 14, 1998. Total system capability at the time of peak was
333,589 kw. The reserve margin for 1998 was 20%. The minimum reserve
margin requirement as determined by the members of the MAPP, of which we are
a member, is 15%.
MAPP is an area power pool arrangement consisting of utilities and power
suppliers having transmission interconnections located in a 9-state area in
the north central region of the United States and in two Canadian
provinces. The objective of MAPP is to accomplish coordination of planning
and operation of generation and interconnecting transmission facilities to
provide reliable and economical electric service to members' customers,
consistent with reasonable utilization of natural resources and protection
of the environment. While benefiting from the advantages of the planning,
coordination, and operations of MAPP, each member has the right and
obligation to own or otherwise provide the facilities to meet its own
requirements. The terms and conditions of the MAPP agreement and
transactions between MAPP members are subject to the jurisdiction of the
Federal Energy Regulatory Commission (`FERC'). NorthWestern Public Service
also has interconnections with the transmission facilities of Otter Tail
Power Company, Montana-Dakota Utilities Co., Northern States Power Company,
and Western Area Power Administration and has emergency interconnections
with transmission facilities of East River Electric Cooperative, Inc. and
West Central Electric Cooperative. These interconnections and pooling
arrangements enable us to arrange purchases or sales of substantial
quantities of electric power and energy with other pool members and to
participate in the benefits of pool arrangements.
We are in the process of updating the load forecast portion of our
integrated resource plan to identify how it will meet the future electric
energy needs of our customers. The plan includes estimates of customer
usage and programs to provide for economic, reliable, and timely supplies
of energy.
Fuel Supply
Lignite and sub-bituminous coal were utilized as fuel for virtually all of
the electric energy generated during 1998. North Dakota lignite is the
primary fuel at Coyote. Montana sub-bituminous coal was burned at Big Stone
during 1998. During 1998, the average heating value of lignite burned was
6,926 BTU per pound at Coyote. The sulfur content of this lignite is
typically between 0.8% and 1.2%. The Montana sub-bituminous coal burned at
Big Stone contained an average heating value of 8,731 BTU per pound and a
sulfur content between 0.58% and 0.70%. Neal burned Wyoming sub-bituminous
coal which had an average heating value of 8,401 BTU per pound during 1998.
Typically, the sulfur content of this coal is between 0.30% and 0.40%.
Our fuel costs have remained relatively stable. The average cost by type
of fuel burned is shown below for the periods indicated:
% of 1998
Cost Per Million BTU Megawatt
Year Ended December 31 Hours
----------------------- Generated
Fuel Type 1996 1997 1998 --------------
----- ---- ----
Sub-bituminous - Big StonE $.95 $.93 $.96 50.2%
Lignite - Coyote** .86 .91 .89 21.5%
Sub-bituminous - Neal .75 .71 .73 27.3%
Natural Gas 2.24 2.33 2.57 *
Oil 4.65 4.64 4.17 *
*Combined for approximately one percent.
**Includes pollution control reagent.
During 1998, the average delivered cost per ton of lignite was $11.71 to
Coyote. The average cost per ton of sub-bituminous coal received at Big
Stone for 1998 was $16.77. The average cost for coal delivered to Neal was
$12.39 per ton for 1998. Such amounts include severance taxes imposed by
the states of North Dakota and Montana and a production tax imposed by the
state of Wyoming. While the effect on our fuel costs of future changes in
severance or production taxes cannot be predicted, any changes in our fuel
costs may be passed on to our customers through the operation of the fuel
adjustment clause. This feature of our electric rates is more fully
discussed in the section entitled `Regulation'.
The continued delivery of lignite and sub-bituminous coal to the three
large steam generating units in which we are part owner is reasonably
assured by contracts covering various periods of the operating lives of
these units. The contract for delivery of Montana sub-bituminous coal to
Big Stone expires in 1999. Evaluations of supply options are currently
being conducted to select a coal supply for periods beyond 1999. The
contract for delivery of lignite to Coyote, which expires in 2016, provides
for an adequate fuel supply for the estimated economic life of that plant.
Neal receives Wyoming sub-bituminous coal under multiple firm and spot
contracts with terms up to several years in duration.
Following test burns in 1990 and 1991, the owners of the Big Stone Plant
received approval from the South Dakota Department of Environment and
Natural Resources to burn tire derived fuel (`TDF') and refuse derived fuel
(`RDF'). The quantity of TDF and RDF that was burned in 1998 was less than
5% of the total fuel consumption at the plant.
The fossil fuel supplies for Big Stone and Neal are delivered via unit
trains belonging to the respective plants' owners and locomotives of the
Burlington Northern/Santa Fe Railroad and the Union Pacific Railroad,
respectively. The lignite supply for Coyote is delivered via conveyor at
this `mine-mouth' plant. In early 1996, the partners at Big Stone executed
a fifteen year operating lease agreement for aluminum unit train cars.
This agreement was effective late in 1996. The prior unit train cars were
sold to another third party independent of the leasing transaction.
While we have no firm contract for diesel fuel for our other electric
generating plants, we have been able to purchase our diesel fuel
requirements in recent years from local suppliers and currently have in
storage an amount adequate to satisfy our normal requirements for such
fuel.
Additional information relating to jointly owned plants is incorporated by
reference to Note 7 of the `Notes to Consolidated Statements' of the
Company's 1998 Annual Report to Stockholders filed as an Exhibit 13 hereto.
COMPETITION
Direct competition does not presently exist within NorthWestern Public
Service's assigned electric territory for the supply and delivery of
electricity. Providers of electricity compete with each other to some
extent to attract and retain customers to their assigned service areas. In
addition, some degree of competition exists with the ability of some
customers to self-generate or by-pass parts of our electric system.
However, to date these threats of competition have not been prevalent in
our electric territory.
Competition for various aspects of electric services is being introduced
throughout the country that will open utility markets to new providers of
some or all the traditional utility services. It is unclear if and when
such competition will begin to affect NorthWestern Public Service's
territory. Should this occur, we expect competition will emerge first for
the commodity of electricity. Potential competitors include various
surrounding providers as well as national providers of electricity.
Competition may also arise for distribution, meter reading, billing and any
other aspect of utility services.
Competition in the utility industry is likely to result in the unbundling
of utility services. Separate markets may emerge for generation,
transmission, distribution, meter reading, billing and other services
currently provided by utilities as a bundled service. At present it is
unclear when or to what extent unbundling of utility services will occur.
We are ever mindful of the trends in the industry and are formulating a
strategy to meet and anticipate the changes in the industry in the years
ahead.
SEASONALITY
Seasonal temperatures can have a large impact on sales and corresponding
revenues in the electric utility industry. The past two winters have been
relatively mild in South Dakota which has had an adverse effect on electric
revenues. However, favorable sales of electricity during the summer and
fall seasons have offset this effect. NorthWestern Public Service has
sought to counteract seasonal revenue variations by becoming more efficient
and reducing expenditures whenever possible.
NORTHWESTERN PUBLIC SERVICE -- NATURAL GAS
OPERATIONS OVERVIEW
NorthWestern Public Service has nonexclusive municipal franchises to
provide natural gas service in Nebraska and South Dakota communities in
which it provides such service. The maximum term permitted under Nebraska
law for such franchises is 25 years while the maximum term permitted under
South Dakota law is 20 years. Our policy is to seek renewal of a franchise
in the last year of its term. We have never been denied the renewal of any
of these franchises and do not anticipate that any future renewals would be
denied. Natural gas service generally consists of fully bundled services,
although certain large commercial and industrial customers as well as
wholesale customers, may buy the natural gas commodity from another
provider. In this instance, we provide transportation service to the
customer's facility.
Customer Base, Service Territory and Revenue
NorthWestern Public Service serves 61 retail communities. Four of those
communities served are in Nebraska -- North Platte, Grand Island, Kearney
and Alda. The total population in those communities served by us according
to the 1990 census was 193,229. Our gas operations are in a total of 22
counties in South Dakota and Nebraska. Purchase adjustment clauses
contained in South Dakota and Nebraska tariffs allow NorthWestern Public
Service to reflect increases or decreases in fuel and purchase power costs
on a timely basis.
The following table shows natural gas revenues for the last three years,
together with the percent of the total for each segment.
1996 1997 1998
Gas Revenue
Residential $42,116,789 58.3% $43,247,896 55.8% $37,216,059 55.3%
Commercial
& Industrial 29,487,955 40.8% 33,620,524 43.3% 29,674,557 44.1%
Other 664,302 0.9% 692,744 0.9% 353,878 0.5%
----------- ---- ---------- ----- ---------- -----
Total $72,269,046 100.0% $77,561,164 100.0% 67,244,494 100.0%
Natural Gas Sales and Distribution
NorthWestern Public Service owns and operates natural gas distribution
systems serving 39,076 customers in eastern South Dakota. In 1996, we
completed construction of a new natural gas pipeline in northern South
Dakota which increased capacity to 15,000 MMBTU per day. In 1995, we
executed a service agreement with Cibola Energy Services Corporation
(`Cibola') whereby Cibola coordinates supply and transportation services.
The pipeline and storage capacity is provided under service agreements with
Northern Natural Gas Company. These agreements provide for firm
deliverable pipeline capacity of approximately 57,215 MMBTU per day in
South Dakota.
In Nebraska, we own and operate natural gas distribution systems serving
39,836 retail customers in the village of Alda and the cities of Grand
Island, Kearney, and North Platte. We purchase all of our natural gas for
these systems through KN Gas Marketing, Inc. (`KN') under a service
agreement entered in 1995 with all supply and transportation services
coordinated through NorthWestern Energy. These agreements provide for firm
deliverable pipeline capacity of approximately 57,429 MMBTU per day in
Nebraska.
In 1992, FERC issued Order 636. Order 636 requires, among other
provisions, that all companies with natural gas pipelines separate natural
gas supply or production services from transportation service and storage
business. This allows natural gas distribution companies, such as
NorthWestern Public Service, and individual customers to purchase natural
gas directly from producers, third parties, and various gas marketing
entities and transport it through the suppliers' pipelines. We have
operated under the restructured environment during the past several years.
To supplement firm gas supplies, our service agreements with Cibola and KN
also provide for underground natural gas storage services to meet the
heating season and peak day requirements of our gas customers. In
addition, we also own and operate five propane-air plants with a total
rated capacity of 14,000 MMBTU per day, or approximately 10% of peak day
requirements. The propane-air plants provide an economic alternative to
pipeline transportation charges to meet the peaks caused by customer demand
on extremely cold days.
A few of our industrial customers purchase their natural gas requirements
directly from gas marketing firms for transportation and delivery through
our distribution system. Transportation rates have been designed to make
NorthWestern Public Service economically indifferent as to whether we sell
and transport natural gas or transport natural gas only.
COMPETITION
There are no assigned service territories for the natural gas portion of
NorthWestern Public Service, and therefore competition in this industry may
come from a number of sources. Competition currently exists for commodity
sales to large volume customers. NorthWestern Energy is the primary entity
that engages in the natural gas commodity market. NorthWestern Public
Service functions as a distribution entity for natural gas. Competition
for delivery exists in the form of system by-pass, alternative fuel
sources, (propane or fuel oil) and, in some cases, duplicate providers such
as KN Energy in Nebraska. The key to NorthWestern Public Service's
continued success is to maximize efficiency, reliability, service quality
and customer satisfaction.
Competition in the natural gas industry is likely to result in the further
unbundling of natural gas services. Separate markets may emerge for the
natural gas commodity, transmission, distribution, meter reading, billing
and other services currently provided by utilities. At present it is
unclear when or to what extent further unbundling of utility services will
occur. It is clear, however, that to remain the consumer's provider of
choice, NorthWestern Public Service must provide top quality services at
reasonable prices. To prepare for the future, NorthWestern Public Service
must ensure that all aspects of this business are efficient, reliable,
economical and customer focused.
SEASONALITY
One of the predominant factors affecting NorthWestern Public Service's
natural gas operations is weather patterns during the winter heating
season. Because natural gas is heavily used for residential and commercial
heating, the demand for this product depends upon weather conditions. In
1998, the 13.3% decrease in natural gas revenues from 1997, primarily
reflects the negative impact from significantly warmer weather than the
prior year during the heating season. During the first quarter of 1998,
weather was approximately 18% warmer than 1997, while weather during the
last quarter of 1998 was also warmer than the prior year by approximately
14%.
NORTHWESTERN PUBLIC SERVICE -- UTILITY OPERATIONS - ELECTRIC AND NATURAL
GAS
REGULATION
NorthWestern Public Service is a `public utility' within the meaning of the
Federal Power Act and the South Dakota Public Utilities Act and, as such,
is subject to the jurisdiction of, and regulation by, FERC with respect to
issuance of securities, the PUC with respect to electric service
territories, and both FERC and the PUC with respect to rates, service,
accounting records, and in other respects. The State of Nebraska has no
centralized regulatory agency which has jurisdiction over our operations in
that state; however, our natural gas rates are subject to regulation by the
municipalities in which we operate.
Under the South Dakota Public Utilities Act, effective July 1, 1976, a
requested rate increase may be implemented 30 days after the date of its
filing unless its effectiveness is suspended by the PUC and, in such event,
can be implemented subject to refund with interest six months after the
date of filing, unless sooner authorized by the PUC. Our electric rate
schedules provide that we may pass along to all classes of customers
qualified increases or decreases in the cost of fuel used in our generating
stations and in the cost of fuel included in purchased power. A purchased
natural gas adjustment provision in our natural gas rate schedules permits
us to pass along to natural gas customers increases or decreases in the
cost of purchased natural gas.
We filed no electric rate cases in South Dakota during the three years
ended December 31, 1998. A natural gas increase was implemented in South
Dakota on November 15, 1994. Effective April 1, 1995, we implemented
increased rates related to our Nebraska natural gas service area as a
result of a negotiated settlement with representatives of the four
communities in which we operate.
On April 24, 1996, FERC issued its final rule (Order No. 888) on wholesale
electric transmission open access and recovery of stranded costs. On July
9, 1996, NorthWestern Public Service, along with other jurisdicational
utilities, filed tariffs with FERC in compliance with Order 888. Included
in this filing, NorthWestern Public Service filed an Open Access
Transmission Tariff (`OATT') which conforms to the `Pro Forma' tariff in
Order 888 in which eligible transmission service customers can choose to
purchase transmission services from a variety of options ranging from full
use of the transmission network on a firm long-term basis to a fully
interruptible service available on an hourly basis. These tariffs also
include a full range of ancillary services necessary to support the
transmission of energy while maintaining reliable operations of our
transmission system.
FERC has approved NorthWestern Public Service's Request for Waiver of the
requirements of FERC Order No. 888 as it relates to the Standards of
Conduct. The Standards of Conduct require companies to physically separate
their transmission operations/reliability functions from their
marketing/merchant functions. The Request for Waiver is based on criteria
established by FERC, exempting small public utilities as defined by the
United States Small Business Administration.
NorthWestern Public Service's operations are also subject to various
federal, state and local laws and regulations affecting businesses
generally such as laws and regulations concerning employment, occupational
health and safety, protection of the environment and other matters.
NorthWestern Public Service believes it is in substantial compliance with
applicable regulatory requirements relating to its operations.
NorthWestern Public Service has not initiated any material capital
expenditures regarding environmental protection in the past year. However,
we are always aware of all existing state and federal environmental
regulations and take all reasonable precautions to prevent any incidents
that would violate any of these rules.
We are subject to regulation with regard to air and water quality, solid
waste disposal, and other environmental considerations by Federal, state,
and local governmental authorities. The application of governmental
requirements to protect the environment involves or may involve review,
certification, issuance of permits, or similar action by government
agencies or authorities, including the United States Environmental
Protection Agency (EPA), the South Dakota Department of Environment and
Natural Resources (DENR), the North Dakota State Department of Health, and
the Iowa Department of Environmental Quality, as well as compliance with
decisions of the courts.
The Clean Air Act Amendments of 1990 (the `Clean Air Act') stipulate
limitations on sulfur dioxide and nitrogen oxide emissions from coal-fired
power plants will require the purchase of additional emission allowances or
a reduction in sulfur dioxide emissions beginning in the year 2000 from the
Big Stone Plant. NorthWestern Public Service believes it can economically
meet the sulfur dioxide emission requirements of the Clean Air Act by the
required compliance dates.
With regard to the Clean Air Act's nitrogen oxide emission requirements,
the Neal wall-fired boiler is expected to meet the emission limitations for
such boilers. The Clean Air Act does not yet specify nitrogen oxide
limitations for boilers with cyclone burners such as those used at Big
Stone and Coyote because practical low-nitrogen oxide cyclone burner
technology does not exist. It requires the EPA to establish nitrogen oxide
emission limitations for cyclone boilers including taking into account that
the cost to accomplish such limits be comparable to retrofitting low-
nitrogen oxide burner technology to other types of boilers. In addition,
the Clean Air Act also requires future studies to determine what controls,
if any, should be imposed on coal-fired boilers to control emissions of
certain air toxics other than sulfur and nitrogen oxides. Because of the
uncertain nature of cyclone boiler nitrogen oxide and air toxic emission
limits, NorthWestern Public Service cannot now determine the additional
costs, if any, it may incur due to these provisions of the Clean Air Act.
NorthWestern Public Service has met or exceeded the removal and disposal
requirements of equipment containing polychlorinated biphenyls (PCBs) as
required by state and Federal regulations. We will use some PCB-
contaminated equipment for its remaining useful life, and dispose of the
equipment according to pertinent regulations that govern that use and
disposal of this equipment. PCB-contaminated oil is burned for energy
recovery at a permitted facility.
The South Dakota DENR and the EPA adopted regulations imposing requirements
upon the owners and operators of above ground and underground storage
tanks. Our fuel oil storage facilities at our generating plants in South
Dakota are affected by the above ground tank regulations, and we have
instituted procedures for compliance.
In addition to the Clean Air Act, we are also subject to other
environmental regulations. NorthWestern Public Service believes that it is
in compliance with all presently applicable environmental protection
requirements and regulations. However, we are unable to forecast the
effect which future environmental regulations may ultimately have upon the
cost of our utility-related facilities and operations. No administrative
or judicial proceedings involving NorthWestern Public Service are now
pending or known by us to be contemplated under presently effective
environmental protection requirements.
The states of South Dakota, North Dakota, and Iowa have enacted laws with
respect to the siting of large electric generating plants and transmission
lines. The South Dakota PUC, the North Dakota Public Service Commission,
and the Iowa Utilities Board have been granted authority in their
respective states to issue site permits for nonexempt facilities.
TEAM MEMBERS
As of December 31, 1998, NorthWestern Public Service had 369 full time and
24 part time team members. System Council U-26 of the International
Brotherhood of Electrical Workers (`IBEW') is the bargaining entity for 178
team members. NorthWestern Public Service considers its relations with
team members to be good.
ITEM 2. PROPERTIES - NORTHWESTERN PUBLIC SERVICE
NorthWestern Public Service's head offices are owned and located at
600 Market Street West, Huron, SD 57350. Substantially all of
NorthWestern Public Service's facilities are owned.
NorthWestern Public Service co-owns 3 steam plants and owns 9 other generating
stations. We also have 120 electric substations and over 3,000 pole miles
of electric lines. We have 5 gas plants with a daily capacity of 17,853
mcf with 1,906 miles of gas mains for distribution.
OTHER NON-REGULATED BUSINESS
NorthWestern also provides other value-added energy and service solutions
through the following non-regulated partners, each of which is a South
Dakota corporation and wholly-owned subsidiary of NorthWestern:
* NorthWestern Energy Corporation provides customized energy-related
solutions and energy management and consultation services
primarily to large business customers and other energy providers;
* NorthWestern Services Corporation provides energy-related turn-key
capital improvement project solutions to business customers
in the United States and electrical and HVAC services and solutions to
residential customers within South Dakota and Nebraska;
* NorCom Advanced Technologies, Inc. provides a comprehensive variety of
voice, video and data products and services to customers primarily in North
Dakota, South Dakota and Nebraska.
INTELLECTUAL PROPERTY - NORTHWESTERN CORPORATION
NorthWestern and each of its partner entities utilize a variety of
registered and unregistered trademarks and servicemarks for its products
and services. Unregistered marks are governed by common law and state
unfair competition laws. We regard our trademarks and servicemarks and
other proprietary rights as valuable assets and believe that they are
associated with a high level of quality and have significant value in the
marketing of our products. Our policy is to vigorously protect our
intellectual property and oppose any infringement of our trademarks and
servicemarks.
NorthWestern's success is also dependent in part on its trade secrets and
information technology, some of which is proprietary to NorthWestern, and
other intellectual property rights. We rely on a combination of
nondisclosure and other contractual arrangements, technical measures, and
trade secret and trademark laws to protect our proprietary rights. Where
appropriate, we enter into confidentiality agreements with our team members
and attempt to limit access to and distribution of proprietary information.
BUSINESS RISK - NORTHWESTERN CORPORATION
Competition and Business Risk Information is incorporated by reference to
Management's Discussion and Analysis of the Company's 1998 Annual Report,
on pages 17 through 19, and filed as Exhibit 13 hereto.
ENVIRONMENTAL - NORTHWESTERN CORPORATION
By virtue of the nature of our operations in electricity, natural gas,
propane and other areas, NorthWestern and its partner entities are subject
to numerous environmental laws and regulations in the ordinary course of
day-to-day operations, and such laws and regulations may require us to
incur certain costs, which could be substantial, to operate existing
facilities, construct and operate new facilities and mitigate or remove the
effect of past operations on the environment. We proactively try to
prevent adverse environmental impacts by regularly monitoring operations to
ensure the environment is not compromised. When we become aware of an
environmental issue, we investigate the situation to gain facts as to the
nature and magnitude of environmental impact, and the extent, if any, that
we may be held responsible for contributing to any costs incurred for
taking action at such sites. We also attempt to gain information to
reasonably estimate potential costs attributable to any environmental
issue. NorthWestern does not believe any pending environmental liabilities
will have a significant impact on the results of operations or financial
position of the Company. It is not possible for us to predict the scope,
enforceability or financial impact of other environmental laws or
regulations which may be established in the future.
Additional information relating to `Environmental Matters' is incorporated
by reference to Note 12 of `Notes to Consolidated Financial Statements' on
pages 32-33, of the Company's 1998 Annual Report, filed as Exhibit 13
hereto.
ITEM 3. LEGAL PROCEEDINGS - NORTHWESTERN CORPORATION
NorthWestern and its partner entities are parties to various pending
proceedings and lawsuits, but in the judgment of management after
consultation with counsel for NorthWestern, the nature of such proceedings
and suits, and the amounts involved do not depart from the routine
litigation and proceedings incident to the kind of business conducted by
NorthWestern.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No issues were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Company's common stock, which is traded under the ticker symbol
NOR, is listed on the New York Stock Exchange. The following are the high
and low sale prices for common stock for each full quarterly periods with
the most recent years and the dividends paid per share during each period:
QUARTERLY COMMON STOCK DATA
Prices Cash
-------- Dividends
High Low Declared
---------- --------- ------------
1998
First Quarter $ 24 $ 21 5/16 $ .24 1/4
Second Quarter 25 5/16 20 1/4 .24 1/4
Third Quarter 27 7/16 23 15/16 .24 1/4
Fourth Quarter 26 1/2 22 3/4 .25 3/4
1997
First Quarter $ 19 3/4 $ 16 15/16 $ .23
Second Quarter 22 1/4 18 5/16 .23
Third Quarter 21 1/4 17 3/4 .23
Fourth Quarter 23 1/2 18 7/16 .24 1/4
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item 6 is incorporated by reference
to "11 Year Financial Summary" of the financial section of the Company's 1998
Annual Report to Stockholders, filed as an Exhibit hereto.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
The information required by this Item 7 is incorporated by reference
to "Management's Discussion and Analysis" of the Company's 1998 Annual
Report to Stockholders, filed as an Exhibit hereto.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The information required by this Item 7A is incorporated by reference
to the Company's 1998 Annual Report to Stockholders, filed as an Exhibit 13
hereto.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item 8 is incorporated by reference
to the Company's financial statements and related footnotes of the
Company's 1998 Annual Report to Stockholders, filed as an Exhibit hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in accountants or disagreements on
accounting principles or practices or financial statement disclosures.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE
OFFICERS OF THE REGISTRANT
(a) IDENTIFICATION OF DIRECTORS
The information regarding directors required by this Item 10 is
incorporated by reference to the information under "Election of Directors"
and Reports to the Securities and Exchange Commission" in the Company's
definitive Proxy Statement dated March 9, 1999, and filed with the
Commission pursuant to Regulation 14A under the Securities Exchange Act of
1934. The executive officers of the Company are as follows:
M. D. Lewis, Chairman and Chief Executive Officer, age 51
Chairman since May 1, 1997; Chief Executive Officer since February
1994; President since February 1994; formerly Executive Vice President
from May 1993, to February 1994; Executive Vice President-Corporate
Services 1992-1993; Vice President-Corporate Services 1987-1992;
Assistant Corporate Secretary 1982-1993. Mr. Lewis also serves as
Chairman of Northwestern Growth Corporation, Cornerstone Propane GP,
Inc., Blue Dot Services, Inc., and Expanets, Inc.
R. R. Hylland, President and Chief Operating Officer, age 38
Executive Vice President since May, 1996. Formerly Executive Vice
President - Strategic Development November 1995-May 1996; Vice
President-Strategic Development from August 1995 to November 1995;
Vice President Corporate Development from 1993-1995; Vice President-
Finance from 1991-1995; Treasurer from 1990-1994; Mr. Hylland also
serves as Vice Chairman and Chief Executive Officer of Northwestern
Growth Corporation since January, 1998. Formerly President and Chief
Operating Officer September 1994-January 1998. Mr. Hylland is also a
member of the board of directors of Northwestern Public Service,
Northwestern Growth Corporation, Cornerstone Propane GP, Inc., Blue
Dot Services, Inc., Expanets, Inc., and LodgeNet Entertainment
Corporation.
A. D. Dietrich, Vice President - Legal Administration, age 48
Vice President-Administration since November 1994; Corporate Secretary
since October 1989; formerly Vice President-Legal May 1990-November
1994.
D. K. Newell, Vice President - Finance and Chief Financial Officer, age 42
Chief Financial Officer and Vice President - Finance since July 1996.
Formerly Vice President - Finance, July 1995-June 1996. Prior to
joining the Company in 1995, Mr. Newell served as CFO, Vice President
- Finance and Treasurer with Energy Fuels Corporation. Mr. Newell also
serves as President and COO of Northwestern Growth Corporation since
January 1998. Formerly Executive Vice President of Northwestern
Growth Corporation July 1995 - January 1998. Mr. Newell also is a
member of the board of directors of Northwestern Growth Corporation,
Cornerstone Propane Partners, Blue Dot Services, Inc, Expanets, Inc.,
and Franklin Industries.
R. A. Thaden, Vice President - Communications, age 47
Vice President-Communications since February 1997; formerly Treasurer
November 1994 - May 1997; Manager-Corporate Accounting 1987-November
1994. Ms. Thaden also serves as Vice President of Northwestern Growth
Corporation since September 1995. Formerly Treasurer of Northwestern
Growth Corporation September 1995-May 1997.
D. A. Monaghan, Controller and Treasurer, age 31
Controller and Treasurer since June 1997. Mr. Monaghan also serves as
Treasurer of Northwestern Growth Corporation, Northwestern Services
Corporation, and Northwestern Energy Corporation. Formerly Controller
November 1996-May 1997. Prior to joining the Company in November
1996, Mr. Monaghan was an audit and consulting manager with regional
public accounting firm Baird, Kurtz & Dobson.
W .A. Trey Bradley, III Vice President & Chief Information Officer, age 40
Vice President & Chief Information Officer since April 1998. Prior to
joining the Company in April 1998, Mr. Bradley was Senior Vice
President - Chief Information Officer of Mary Kay, Inc. in Dallas
Texas from 1994 to 1998. Previously Mr. Bradley was with Price
Waterhouse LLP from 1990 to 1994 as senior manager and Andersen
Consulting from 1989 to 1990.
J. M. Fabiano, Vice President - Human Resources, age 43
Vice President - Human Resources since January 1999. Prior to joining
the Company, Mr. Fabiano was Vice President - Human Resources for
Tricon Global Restaurants, the restaurant business of PepsiCo, Inc.
E. R. Jacobsen, Vice President - General Counsel & Chief Legal Officer, age 42
Vice President - General Counsel & Chief Legal Officer since November
1998. Prior to joining the Company, Mr. Jacobson was Vice President -
General Counsel and Secretary of LodgeNet Entertainment Corporation, a
specialized communications company. Previously Mr. Jacobson was a
partner with the law firm Manatt, Phelps & Phillips in Los Angeles,
California.
All of the above executive officers of the registrant serve at the
discretion of the Board, and are elected annually by the Board of Directors
following the Annual Meeting of Stockholders. No family relationships
exist between any officers of the Company.
Reports to the Securities and Exchange Commission
The information required by Item 405 of Regulation S-K is incorporated
by reference to the information under "Reports to the Securities and
Exchange Commission" in the Company's definitive Proxy Statement dated
March 9, 1999 and filed with the Commission pursuant to Regulation 14A
under the Securities Exchange Act of 1934.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated by reference
to the information under "Compensation of Directors and Executive Officers"
in the Company's definitive Proxy Statement dated March 9, 1999, and filed
with the Commission pursuant to Regulation 14A under the Securities
Exchange Act of 1934.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is incorporated by reference
to the information under "Securities Ownership by Directors and Officers"
in the Company's definitive Proxy Statement dated March 9, 1999, and filed
with the Commission pursuant to Regulation 14A under the Securities
Exchange Act of 1934.
ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS
The Company has no relationships or transactions covered by this item.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF THIS REPORT
1. Financial Statements
The following items are included in this annual report by reference to
the registrant's Annual Report to Stockholders for the year ended December
31, 1998:
Page in financial
section of Annual
Report to Stockholders
------------------------
FINANCIAL STATEMENTS:
Report of Independent Public Accountants 20
Consolidated Statements of Income for the
Three Years Ended December 31, 1998 21
Consolidated Statements of Cash Flows for the
Three Years Ended December 31, 1998 22
Consolidated Balance Sheets,
December 31, 1998 and 1997 23
Consolidated Statement of Sharholders' Equity
For the Three Years Ended December 31, 1998 24
Notes to Consolidated Financial Statements 25-35
Quarterly Unaudited Financial Data for the
Two Years Ended December 31, 1998 35
2. Financial Statement Schedules
The following supplemental financial data included herein should be
read in conjunction with the financial statements referenced above:
Report of Independent Public Accountants
Schedule II - Valuation and Qualifying Accounts
Schedules other than those listed above are omitted because of the
absence of the conditions under which they are required or because the
information required is included in the financial statements or the notes
thereto.
3. Exhibits
The exhibits listed on the Exhibit Index beginning of this Annual
Report on Form 10-K are filed herewith or are incorporated herein by reference
to other filings.
(b) REPORTS ON FORM 8-K
The Company filed a Form 8-K on November 17, 1998, and is
incorporated herein by reference. Commission File No. 0-692.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
March 30, 1999 /s/ M. D. Lewis
--------------------------------------------------
M. D. Lewis, Chairman of the Board of Directors
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
March 30, 1999 /s/ M. D. Lewis
---------------------------------------------------
M. D. Lewis, Chairman of the Board of Directors
and Chief Executive Officer
March 30, 1999 /s/ R. R. Hylland
--------------------------------------------------
R. R. Hylland, Director,
President and Chief Operating Officer
March 30, 1999 /s/ D. K Newell
-------------------------------------------------
D. K. Newell, Vice President - Finance
and Chief Financial Officer
(Principal Financial Officer)
March 30, 1999 /s/ David A. Monaghan
------------------------------------------------
David A. Monaghan, Controller and Treasurer
(Principal Accounting Officer)
March 30, 1999 /s/ Randy G. Darcy
------------------------------------------------
Randy G. Darcy, Director
March 30, 1999 /s/ Gary G. Drook
-----------------------------------------------
Gary G. Drook, Director
March 30, 1999 /s/ Aelred J. Kurtenbach
-----------------------------------------------
Aelred J. Kurtenbach, Director
March 30, 1999 /s/ Jerry W. Johnson
-----------------------------------------------
Jerry W. Johnson, Director
March 30, 1999 /s/ Larry F. Ness
-----------------------------------------------
Larry F. Ness, Director
March 30, 1999 /s/ Gary Olson
------------------------------------------------
Gary Olson, Director
March 30, 1999 /s/ Raymond M. Schutz
-----------------------------------------------
Raymond M. Schutz, Director
March 30, 1999 /s/ Bruce I. Smith
----------------------------------------------
Bruce I. Smith, Director
<PAGE>
Report of Independent Public Accountants
To the Shareholders and Board of Directors
of NorthWestern Corporation:
We have audited the accompanying consolidated balance sheets of
NORTHWESTERN CORPORATION (a Delaware corporation) AND SUBSIDIARIES as of
December 31, 1998 and 1997, and the related consolidated statements of
income, cash flows and shareholders' equity for each of the three years in
the period ended December 31, 1998. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of NorthWestern
Corporation and Subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Minneapolis, Minnesota
January 29, 1999
</PAGE>
SCHEDULE II
NORTHWESTERN PUBLIC SERVICE COMPANY AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
Additions
Balance
Beginning Charged Charged Balance
of Period to Costs to Other Deductions End
Description (F1) Expenses Expenses (F2) of Period
FOR THE YEAR ENDED DECEMBER 31, 1998
(In Thousands)
RESERVES DEDUCTED
FROM APPLICABLE ASSETS:
Uncollectible accounts $3.583 $3,509 $ - $(1,030) $6,062
====== ====== ====== ======== ======
OTHER DEFERRED
CREDITS:
Reserve for
decommissioning costs $8,813 $513 $ - $ - $9,326
====== ====== ====== ======== =======
FOR THE YEAR ENDED DECEMBER 31, 1997
RESERVES DEDUCTED
FROM APPLICABLE ASSETS:
Uncollectible accounts $5,369 $1,522 $ - $(3,308) $3,583
====== ====== ====== ======== ======
OTHER DEFERRED
CREDITS:
Reserve for
decommissioning costs $8,300 $513 $ - $ - $8,813
====== ==== ====== ======= ======
FOR THE YEAR ENDED DECEMBER 31, 1996
RESERVES DEDUCTED
FROM APPLICABLE ASSETS:
Uncollectible accounts $8,705 $3,109 $ - $(6,445) $5,369
====== ====== ====== ======== ======
OTHER DEFERRED
CREDITS:
Reserve for
decommissioning costs $7,789 $511 $ - $ - $8,300
====== ====== ====== ======= ======
(FN)
(F1) The beginning balance for 1996 was restated to reflect the propane
acquisitions that occurred during those periods.
(F2) All deductions from reserves were for purposes for which such reserves
were created.
EXHIBIT 21-SUBSIDIARIES OF THE REGISTRANT
State of Jurisdiction
of Incorporation
Name or Limited Partnership
- ------------------------------------ ---------------------------------------
Northwestern Corporation Delaware
Grant, Inc. South Dakota
Northwestern Growth Corporation South Dakota
Northwestern Networks, Inc. South Dakota
Northwestern Systems, Inc. South Dakota
Lucht Inc. Delaware
Cornerstone Propane GP, Inc. California
SYN Inc. Delaware
Cornerstone Propane Partners, L.P. Delaware Limited Partnership
Blue Dot Services, Inc. Delaware
Expanets, Inc. Delaware
Northwestern Energy Corporation South Dakota
Nekota Resources Inc. South Dakota
NorCom Advanced Technologies, Inc. South Dakota
Northwestern Services Corporation South Dakota
EXHIBIT INDEX
- -----------------
(3) ARTICLES OF INCORPORATION AND BY-LAWS
(3)(a)(1)
Registrant's Restated Certificate of Incorporation, dated February 7, 1990,
is incorporated by reference to Exhibit 3(a)(1) to Form 10-K for the year
ended December 31, 1989, Commission File No. 0-692.
3(a)(2)
Certificate of Retirement of Preferred Stocks, dated January 13, 1992, is
incorporated by reference to Exhibit 3(a)(2) to Form 10-K for the year
ended December 31, 1991, Commission File No. 0-692.
3(a)(3)
Certificate of Amendment of Restated Certificate of Incorporation, dated
May 16, 1996, is incorporated by reference to Exhibit 3(a)(3) to Form 10-K
for the year ended December 31, 1996, Commission File No. 0-692.
3(a)(4)
Certificate of Retirement of Preferred Stocks, dated June 20, 1996, is
incorporated by reference to Exhibit 3(a)(4) to Form 10-K for the year
ended December 31, 1996, Commission File No. 0-692.
3(a)(5)
Certificate of Amendment of Restated Certificate of Incorporation, dated
May 7, 1997, is incorporated by reference to Exhibit 3 to Form 10-Q for the
quarter ended March 31, 1997, Commission File No. 0-692.
3(a)(6)
Certificate of Amendment of Restated Certificate of Incorporation, dated
May 6, 1998, is incorporated by reference to Exhibit 3 to Form 10-Q for the
quarter ended March 31, 1998, Commission File No. 0-692.
3(b)
Registrant's By-Laws, as amended, dated May 7, 1997, are incorporated by
reference to Exhibit 3(ii) to Form 10-Q for the quarter ended March 31,
1997, Commission File No. 0-692.
(4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING
INDENTURES
4(a)(1)
General Mortgage Indenture and Deed of Trust, dated as of August 1, 1993,
from the Company to The Chase Manhattan Bank (National Association), as
Trustee, is incorporated by reference to Exhibit 4(a) of Form 8-K, dated
August 16, 1993, Commission File No. 0-692.
4(a)(2)
Supplemental Indenture, dated August 15, 1993, from the Company to The
Chase Manhattan Bank (National Association), as Trustee, is incorporated by
reference to Exhibit 4(b) of Form 8-K, dated August 16, 1993, Commission
File No. 0-692.
4(a)(4)
Supplemental Indenture, dated August 1, 1995, from the Company to The Chase
Manhattan Bank (National Association), as Trustee, is incorporated by
reference to Exhibit 4(b) of Form 8-K, dated August 30, 1995, Commission
File No. 0-692.
4(a)(5)
Supplemental Indenture, dated September 1, 1995, from the Company to The
Chase Manhattan Bank (National Association), as Trustee, concerning the New
Mortgage Bonds, 6.99% Series due 2002, is incorporated by reference to
Exhibit (4)(a)(5) to Form 10-K for the year ended December 31, 1995,
Commission File No. 0-692.
4(b)(1)
Preferred Securities Guarantee Agreement, dated August 3, 1995, between the
Company and Wilmington Trust Company is incorporated by reference to
Exhibit 1(d) of Form 8-K, dated August 30, 1995, Commission File No. 0-692.
4(b)(2)
Declaration of Trust of NWPS Capital Financing I is incorporated by
reference to Exhibit 4(d) of Form 8-K, dated August 30, 1995, Commission
File No. 0-692.
4(b)(3)
Amended and Restated Declaration of Trust of NWPS Capital Financing I is
incorporated by reference to Exhibit 4(e) of Form 8-K, dated August 30,
1995, Commission File No. 0-692.
4(b)(4)
Subordinated Debt Securities Indenture, dated August 1, 1995, between the
Company and The Chase Manhattan Bank (National Association), as Trustee, is
incorporated by reference to Exhibit 4(f) of Form 8-K, dated August 30,
1995, Commission File No. 0-692.
4(b)(5)
First Supplemental Indenture, dated August 1, 1995, to the Subordinated
Debt Securities Indenture is incorporated by reference to Exhibit 4(g) of
Form 8-K, dated August 30, 1995, Commission File No. 0-692.
4(c)(1)
Copy of Sale Agreement between Company and Mercer County, North Dakota,
dated June 1, 1993, related to issuance of Pollution Control Refunding
Revenue Bonds (Northwestern Public Service Company Project) Series 1993, is
incorporated by reference to Exhibit 4(b)(1) of Registrant's report on Form
10-Q for the quarter ending June 30, 1993, Commission File No. 0-692.
4(c)(2)
Copy of Loan Agreement between Company and Grant County, South Dakota,
dated June 1, 1993, related to issuance of Pollution Control Refunding
Revenue Bonds (Northwestern Public Service Company Project) Series 1993A,
is incorporated by reference to Exhibit 4(b)(2) of Registrant's report on
Form 10-Q for the quarter ending June 30, 1993, Commission File No. 0-692.
4(c)(3)
Copy of Loan Agreement between Company and Grant County, South Dakota,
dated June 1, 1993, related to issuance of Pollution Control Refunding
Revenue Bonds (Northwestern Public Service Company Project) Series 1993B,
is incorporated by reference to Exhibit 4(b)(3) of Registrant's report on
Form 10-Q for the quarter ending June 30, 1993, Commission File No. 0-692.
4(c)(4)
Copy of Loan Agreement between Company and City of Salix, Iowa, dated June
1, 1993, related to issuance of Pollution Control Refunding Revenue Bonds
(Northwestern Public Service Company Project) Series 1993, is incorporated
by reference to Exhibit 4(b)(4) of Registrant's report on Form 10-Q for the
quarter ending June 30, 1993, Commission File No. 0-692.
4(c)(5)
Copy of Rights Agreement, dated as of December 11, 1996, between Loan
Agreement between Company and Norwest Bank Minnesota, N.A. as Rights Agent,
is incorporated by reference to Exhibit I, to Form 8-A, dated December 13,
1996, Commission File No. 0-692.
(10) MATERIAL CONTRACTS
10(a)(1) *
Supplemental Income Security (Retirement) Plan for Directors, Officers and
Managers, as amended January 1, 1997, is incorporated by reference to
Exhibit 10(a)(1) to Form 10-K for the year ended December 31, 1996,
Commission File No. 0-692.
10(a)(2) *
Deferred Compensation Plan for Non-employee Directors adopted November 6,
1985, is incorporated by reference to Exhibit 10(g)(2) to Form 10-K for the
year ended December 31, 1988, Commission File No. 0-692.
10(a)(3) *
Pension Equalization Plan, dated August 5, 1987, is incorporated by
reference to Exhibit 10(g)(4) to Form 10-K for the year ended December 31,
1988, Commission File No. 0-692.
10(a)(4) *
NorthStar Annual Incentive Plan, for all eligible employees, as amended
February 4, 1998, is incorporated by reference to Exhibit 10(a)(7) to Form
10-K for the year ended December 31, 1997, Commission File No. 0-692.
10(a)(5) *
Form of Employment Agreement for Executive Officers, including Change of
Control and Noncompetition Agreement, is incorporated by reference to
Exhibit 10(ii) to Form 10-Q for the quarter ended March 31, 1997,
Commission File No. 0-692.
10(a)(6) *
Stock Option and Incentive Plan, dated May 6, 1998, is incorporated by
reference to Exhibit 10 to Form 10-Q for the quarter ended March 31, 1998,
Commission File No. 0-692.
(13) REPORT FURNISHED TO SECURITY HOLDERS
Annual Report for Fiscal Year ended December 31, 1998, furnished to
stockholders of record on March 10, 1999.
27
Financial Data Schedule
- ----------------------------------------------------------
* Management contract or compensatory plan or arrangement.
NORTHWESTERN CORPORATION
1998 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
NORTHWESTERN CORPORATION
NorthWestern Corporation (the Corporation) is a provider of services and
solutions to customers across North America. 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.
RESULTS OF OPERATIONS
EARNINGS AND DIVIDENDS
Consolidated earnings for 1998 were $27.1 million or diluted $1.44 per
share, compared to $23.4 million or diluted $1.31 per share for 1997, and $22.9
million or diluted $1.19 per share for 1996, which excludes $.09 related to a
one-time gain from proceeds of refinancing transactions at CornerStone Propane
Partners, L.P. (CornerStone). Earnings per share in 1998 reflect a 5% increase
in average shares outstanding related to the public offering of five million
additional common shares completed in November 1998. The earnings increase in
1998 was primarily driven by growth in our HVAC and communications segments
through internal growth and companies acquired during the year partially offset
by abnormally warmer weather affecting our propane and natural gas operations.
The earnings increase in 1997 was primarily due to propane acquisitions,
improved electric and natural gas returns and increased investment income.
In November 1998, the Corporation's Board of Directors elected to
increase annual dividends six cents per share from $.97 to $1.03. Previously,
in November 1997, the board approved a five cent per share increase in annual
dividends from $.92 to $.97. The Corporation's financial strength, operating
performance, the success of its growth strategies and competitive changes in
the industry will be factors considered by the Corporation's Board of Directors
when evaluating future dividend payments.
CONSOLIDATED OPERATING RESULTS
Consolidated operating revenues increased by $269.1 million from $918.1
million in 1997 to $1.2 billion in 1998. This growth is mainly attributable to
acquisitions within the propane, communications and HVAC business segments
combined with internal growth within all business segments. The growth was
partially offset by abnormally warm weather that adversely affected propane and
natural gas sales during the winter heating season. Pro forma consolidated
operating revenues for 1998 are $2.0 billion, which is a 118.9% increase over
actual 1997 operating revenues. Actual 1998 results only include the operating
results of acquired companies from the date acquired. (Pro forma results
included here and elsewhere reflect operating results from acquired companies
as if they had been acquired on January 1 of the reporting period.) Selling,
general and administrative expenses increased $98.0 million from $132.8 million
in 1997 to $230.8 million in 1998. The largest part of these increases is
directly attributable to the growth by acquisitions in our propane,
communications and HVAC business segments. Depreciation and amortization also
increased $11.4 million from $31.2 million in 1997 to $42.6 million in 1998.
This increase is primarily due to companies acquired within the business
segments combined with a slight increase due to growth capital expenditures.The
other operating expense increases were incremental with the revenue increases
primarily due to the acquired companies and modest inflationary increases in
operating costs. Operating income increased by $14.9 million from $59.0 million
in 1997 to $73.9 million in 1998. This growth was primarily due to the
acquisitions in our propane, communications and HVAC businesses combined with
internal growth, which was partially offset by the adverse effect the warm
weather had on our propane and natural gas sales during the winter heating
season.
Consolidated operating revenues increased by $574.1 million from $344.0
million in 1996 to $918.1 million in 1997. The majority of this increase is
attributable to a full year of consolidated operations as well as significant
acquisitions in our propane segment. The increase was partially offset by
warmer than normal temperatures in 1997. The positive revenues were also driven
by customer increases and higher natural gas prices. Selling, general and
administrative expenses increased $39.0 million from $93.8 million in 1996 to
$132.8 million in 1997, while depreciation and amortization increased $11.8
million from $19.4 million in 1996 to $31.2 million in 1997. The majority of
these increases were related to the growth in the propane segment. The other
operating expense increases were incremental with the revenue growth in the
electric and natural gas revenues. Operating income increased by $8.6 million
from $50.4 million in 1996 to $59.0 million in 1997 primarily due to
acquisitions and growth in propane, but negatively impacted by the warmer than
normal temperatures in 1997.
PROPANE
Our results of operations in the propane segment for 1998 and 1997 include
a full year of operations from CornerStone as compared to 1996, which includes
revenues from CornerStone since December 18, 1996, Empire Energy Corporation
since October 7, 1996, and Synergy Group Incorporated for all of 1996. As of
December 31, 1998, the Corporation owned an effective combined 30% interest in
CornerStone (comprised of subordinated units and our general partner interests).
Because of the heavy use of propane for heating, propane sales are
extremely weather sensitive. The majority of propane revenues occur in the
first and fourth quarters when propane is heavily sold for residential and
commercial heating. 1998 weather averaged 9% warmer than normal in
CornerStone's market areas. While weather factors generally measure the
directional impact of temperatures on the business, other factors such as
product prices, geographic mix, magnitude and duration of temperature and
weather conditions can also impact sales.
Retail propane sales increased in 1998 to $297.8 million from $243.6
million in 1997 with gross margin also increasing from $116.1 million to $132.3
million. The increase in retail sales and margins are primarily due to
acquisitions during late 1998, partially offset by significantly warmer than
normal weather during the heating season. Retail propane gallons sold in 1998
increased to 231.8 million from 220.8 million in 1997 and 141.4 million in
1996.
Wholesale sales decreased in 1998 to $470.0 million from $499.4 million in
1997 due to lower product prices being caused by depressed oil and related
product prices resulting from an oversupply of oil. However, gross margin
increased to $16.7 million in 1998 from $14.7 million in 1997 due to higher
sales volumes. Propane operating income decreased slightly in 1998 to $23.3
million from $23.6 million in 1997. The decrease in operating income is
primarily attributable to warmer than normal weather in propane market areas
partially offset by acquisitions of retail service centers.
Operating revenue from propane sales increased in 1997 to $743.0 million
from $175.1 million in 1996. The large increase in sales is primarily due to a
full year of the wholesale operations combined with a full year of retail sales
and acquisitions during 1997. Operating income increased in 1997 to $23.6
million from $18.9 million in 1996. The increase in operating income is
primarily attributable to a full year of operations of CornerStone partially
offset by warmer than normal temperatures in 1997 combined with higher product
costs.
ELECTRIC
NorthWestern Public Service, a division of the Corporation, generates,
transmits and distributes electricity to customers in the Midwest. While
electricity is used year round, retail demand is higher in the summer months
for air conditioning causing sales of electricity to be weather sensitive.
In 1998, retail electric mwh sales increased by 1% and wholesale mwh sales
grew by 24%. The increase is due to warmer than prior year summer weather,
which resulted in higher use of air conditioning by retail customers combined
with increased usage by commercial and industrial customers. Electric revenues
increased by $1.7 million from $76.7 million in 1997 to $78.4 million in 1998
due to the increased retail and wholesale mwh sales. Operating income decreased
slightly by $1.6 million due to higher property taxes and salary costs nearly
offset by increases in retail and wholesale sales volumes.
In 1997, retail electric mwh sales grew by 3% reflecting weather, which was
slightly warmer than the previous year. Electric revenues increased due to the
increased retail mwh sales and an increase in wholesale sales. Operating income
increased primarily due to the increase in sales volumes combined with decreases
in maintenance and operating expenses.
HVAC
In 1997, Blue Dot Services Inc. (Blue Dot., formerly ServiCenter USA) was
formed by NorthWestern Growth Corporation (NGC), a wholly owned subsidiary of
the Corporation, to provide heating, ventilating, air conditioning, plumbing
and related services for residential and business customers in the U.S. Through
1998, the Corporation had invested $87 million in Blue Dot. to acquire 28
companies with operations in 18 states. 1998 revenues were $126.5 million and
operating income was $11.1 million. Pro forma 1998 revenues increased $23.4
million from $186.2 million in 1997 to $209.6 million in 1998 due principally
to the internal growth within the acquired companies. Pro forma operating
income increased $1.3 million from $15.9 million in 1997 to $17.2 million in
1998. Pro forma operating income increased due to increases in operating
revenues partially offset by increases in operating expenses directly related
to the revenue increase.
COMMUNICATIONS
Expanets, Inc. (Expanets, formerly Communication Systems USA) was formed
by NGC to provide communication, data and related services to business
customers. During 1998, the Corporation invested $108 million in Expanets to
acquire 18 companies with operations in 25 states. 1998 revenues were $127.9
million and operating income was $12.0 million. Pro forma 1998 revenues
increased $15.4 million from $233.4 million in 1997 to $248.8 million in 1998
due principally to the internal growth within the acquired companies. Pro forma
operating income increased $2.2 million from $22.3 million in 1997 to $24.5
million in 1998. Pro forma operating income increased due to increases in
operating revenues partially offset by increases in operating expenses directly
related to the revenue increase.
NATURAL GAS
One of the predominant factors affecting the Corporation's natural gas
operations is weather patterns during the winter heating season. Because
natural gas is heavily used for residential and commercial heating, the demand
for this product depends upon weather conditions. In 1998, the 13.3% decrease
in natural gas revenues from 1997 primarily reflects the negative impact from
significantly warmer weather than the prior year during the heating season.
This negative weather impact reduced operating gross margin for natural gas
from $22.5 million in 1997 to $20.0 million in 1998. During the first quarter
of 1998, weather was approximately 18% warmer than in 1997, while weather
during the last quarter of 1998 was also warmer than the prior year by
approximately 14%. The decrease in operating income is primarily due to the
decreased revenues and gross margins resulting from the warmer weather.
In 1997, the 7.3% increase in natural gas revenues over 1996 primarily
reflects higher market prices for natural gas supply, which were passed on to
customers through the purchased gas adjustment, a 1.5% increase in gas
customers and differing weather patterns during the year. During the first
quarter of 1997, weather was approximately 7% colder than 1996, while weather
during the last quarter of 1997 was approximately 15% warmer than the prior
year. The increase in operating income reflects the increased revenues
resulting from the expanding customer base and colder first quarter weather
combined with decreased operating and maintenance expenses.
OTHER INCOME STATEMENT ITEMS
Other operating revenues consists primarily of manufacturing revenues and
operating income related to the Corporation's former ownership interest in
Lucht Inc., a company that manufactured photographic processing and imaging
equipment used by high-volume photo processing laboratories. In November
1998, the Corporation sold its ownership interest in Lucht.
Other income decreased from $11.6 million in 1997 to $6.1 million in 1998
principally due to funds utilized in growing the Corporation's operations
through strategic acquisitions principally in the communications and HVAC
businesses. Interest expense increased $4.2 million from $31.5 million in 1997
to $35.7 million in 1998, principally due to increases in propane working
capital and acquisition borrowings. The Corporation also completed a new debt
offering in November 1998, which slightly increased interest expense in 1998.
Interest expense and minority interest on preferred securities in 1999 will
increase over 1998 due to a full year of outstanding borrowings from the new
debt and preferred securities offerings completed in November 1998. Income
taxes increased due to increased taxable income from the expanded operations of
the Corporation in 1998 as compared to 1997.
LIQUIDITY AND CAPITAL RESOURCES
During 1998, cash flow from operations, net of dividends paid, together
with proceeds from common stock, preferred securities and long-term debt
offerings and other external financing activities, provided the funds for
acquisition activities, growth and maintenance expenditures and other
requirements.
OPERATING ACTIVITIES
Cash flow from operating activities in 1998 increased $7.2 million or
11.5% from 1997 primarily due to growth in the Corporation's earnings as a
result of expanded operations. Liquidity is also provided from the availability
of substantial cash and investment balances. Cash and cash equivalents and
marketable securities totaled $157.3 million, $108.6 million and $179.9 million
at December 31, 1998, 1997 and 1996.
INVESTING AND FINANCING ACTIVITIES
The Corporation's principal investment activities in 1998 were related to
increased strategic development investments including the investments in Blue
Dot. and Expanets. The Corporation's principal financing activities related to
public offerings of common stock, preferred securities and senior debt
offerings completed in November 1998, and the sinking fund retirement of $5.0
million of 6.99% series general mortgage bonds. The offering transactions
resulted in gross proceeds to the Corporation of approximately $280 million.
These funds were used to repay short-term borrowings used to fund corporate
development activities of the Corporation in 1998 and general corporate
purposes. In January 1998, CornerStone completed a secondary offering of common
units with net proceeds of approximately $41 million. The proceeds were used to
repay amounts outstanding under the CornerStone credit facility and general
business purposes. In December 1998, CornerStone completed another secondary
offering of common units and issued additional senior notes with combined gross
proceeds of approximately $139 million. The proceeds were used to fund the
acquisition of Propane Continental Inc., the 19th largest retailer of propane,
repay amounts outstanding under the CornerStone credit facility and general
business purposes.
Unused lines of credit also provide working capital and other financial
resources. These lines may also be used to support commercial paper borrowings,
a primary source of short-term financing. At December 31, 1998 and 1997, the
Corporation had no outstanding borrowings under its lines of credit or
commercial paper borrowings. Unused short-term lines of credit totaled $75
million at December 31, 1998. CornerStone maintains a Bank Credit Facility,
which provides for combined working capital and acquisition borrowings of up to
$110 million subject to certain loan covenants and other limitations. At
December 31, 1998 and 1997, CornerStone had combined outstanding working
capital and acquisition borrowings of $1.7 million and $36.0 million. In
addition, the Corporation's other nonregulated businesses maintain credit
agreements with banks for revolving loans.
CAPITAL REQUIREMENTS
The Corporation's primary capital requirements include the funding of its
business segments, maintenance and expansion programs, the funding of debt and
preferred stock retirements, sinking fund requirements, the funding of its
corporate development and investment activities, payment of common dividends,
and the distributions to propane common unitholders.
Maintenance expenditure plans are subject to continual review and may be
revised as a result of changing economic conditions, variations in sales,
environmental requirements, investment opportunities and other ongoing
considerations. Expenditures for maintenance activities for 1998, 1997 and 1996
were $22.6 million, $22.4 million and $35.2 million. Consolidated 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
totaled $7.8 million, $1.2 million, and $400,000 for the years ended 1998,
1997 and 1996. It is expected that such mandatory retirements will be $20.1
million in 1999, $10.2 million in 2000, $8.9 million in 2001, $8.0 million in
2002, and $40.2 million in 2003. The Corporation anticipates that existing
investments and marketable securities, internally generated cash flows and
available external financing will meet future capital requirements.
The Corporation will continue to review the economics of retiring or
refunding remaining long-term debt and preferred stock to minimize long-term
financing costs. The Corporation will continue to make investments in its
strategic partner entities, Blue Dot. and Expanets. Also, the Corporation may
make other significant acquisition investments in related industries that might
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 coverage ratios 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
expansions 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 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 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 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 services exists, allowing customers to buy
their own electricity and natural gas on the open market and having it
delivered by the local utility.
The growing pace of competition in the energy industry has been a primary
focus of management over the last few years. The 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 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 a highly competitive market. 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
Expanets competitors in the communications business are generally small, owner-
operated companies typically located and operated in a single geographic 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 save processing time and storage space within
computers and was continued in use until the mid 1990s. 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 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 is on target to remediate all
critical applications early in 1999 and then will devote the remainder of 1999
to work on final interface issues, remediation, testing and fine-tuning
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 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 Corporation anticipates that 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 expected to be completed by June
30, 1999.
This Annual Report contains forward-looking statements within the meaning
of the securities laws. The Corporation cautions that, while it believes such
statements to be based on reasonable assumptions and makes such statements in
good faith, there can be no assurance that the actual results will not differ
materially from such assumptions or that the expectations set forth in the
forward-looking statements derived from such assumptions will be realized.
Investors should be aware of important factors that could have a material
impact on future results. These factors include, but are not limited to,
weather, the federal and state regulatory environment, the economic climate,
regional, commercial, industrial and residential growth in the service
territories served by the Corporation and its subsidiaries, 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,
changing conditions in the capital and equity markets, and other uncertainties,
all of which are difficult to predict and many of which are beyond the control
of the Corporation.
REPORT OF MANAGEMENT
The management of NorthWestern is responsible for the integrity and
objectivity of the financial information contained in this Annual Report. The
consolidated financial statements, which necessarily include some amounts which
are based on informed judgments and estimates of management, have been prepared
in conformity with generally accepted accounting principles.
In meeting this responsibility, management maintains a system of internal
accounting controls, which is designed to provide reasonable assurance that the
assets of the Corporation are safeguarded and that transactions are executed in
accordance with management's authorization and are recorded properly for the
preparation of financial statements. This system is supported by written
policies, selection and training of qualified personnel, an appropriate
segregation of responsibilities within the organization and a program of
internal auditing. The Board of Directors, through its Audit Committee, which
is comprised entirely of outside directors, oversees management's
responsibilities for financial reporting. The Audit Committee meets regularly
with management and the independent public accountants to make inquiries as to
the manner in which each is performing its responsibilities. The independent
public accountants and the internal audit staff have unrestricted access to the
Audit Committee, without management's presence, to discuss auditing, internal
accounting control and financial reporting matters.
Arthur Andersen LLP, an independent public accounting firm, has been
engaged annually to perform an audit of the Corporation's financial statements.
Their audit is conducted in accordance with generally accepted auditing
standards and includes examining, on a test basis, supporting evidence,
assessing the Corporation's accounting principles and significant estimates
made by management, and evaluating the overall financial statement presentation
to the extent necessary to allow them to report on the fairness, in all
material respects, of the operating results and financial condition of the
Corporation.
Merle D. Lewis Richard R. Hylland
Chairman and President and
Chief Executive Officer Chief Operating Officer
Consolidated Statements of Income
Years Ended December 31,
(In Thousands Except Per Share Amounts)
1998 1997 1996
Operating Revenues $ 1,187,187 $ 918,070 $ 344,009
Cost of Sales 839,787 695,045 180,426
---------- -------- --------
Gross Margins 347,400 223,025 163,583
---------- -------- --------
Operating Expenses:
Selling, general and
administrative expenses 230,833 132,793 93,751
Depreciation and amortization 42,626 31,235 19,414
--------- -------- --------
273,459 164,028 113,165
--------- -------- --------
Operating Income 73,941 58,997 50,418
Interest Expense (35,732) (31,476) (18,668)
Investment Income and Other 6,145 11,564 9,719
--------- -------- --------
Income Before Income Taxes and
Minority Interests 44,354 39,085 41,469
Provision for Income Taxes (13,196) (11,111) (15,415)
---------- -------- ---------
Income Before Minority Interests 31,158 27,974 26,054
Minority Interests (767) (1,710) -
---------- -------- ---------
Net Income 30,391 26,264 26,054
Minority Interests on Preferred
Securities of Subsidiary Trusts (3,114) (2,641) (2,641)
Dividends on Cumulative
Preferred Stock (191) (212) (550)
---------- -------- ---------
Earnings on Common Stock $ 27,086 $ 23,411 $ 22,863
======= ======= =======
Average Common Shares Outstanding 18,660 17,843 17,840
Earnings Per Average Common Share
Basic $ 1.45 $ 1.31 $ 1.28
Diluted $ 1.44 $ 1.31 $ 1.28
Dividends Declared Per Average
Common Share $ .985 $ .933 $ .890
See Notes to Consolidated Financial Statements
Consolidated Statements of Cash Flows
Years Ended December 31,
(In Thousands) 1998 1997 1996
Operating Activities:
Net income $ 30,391 $ 26,264 $ 26,054
Items not affecting cash:
Depreciation and amortization 42,626 31,235 19,414
Deferred income taxes 1,548 4,439 5,830
Minority interests in net income
of consolidated subsidiaries 767 1,710 -
Investment tax credits (562) (559) (561)
Changes in current assets and
liabilities, net of acquisitions:
Accounts receivable 26,388 (363) (333)
Inventories 24,715 8,325 (4,374)
Other current assets (8,682) - (4,308)
Accounts payable (19,484) (11,364) 15,712
Accrued expenses (30,427) 6,945 4,501
Other, net 2,610 (3,965) (1,032)
--------- -------- --------
Cash flows provided by operating
activities 69,890 62,667 60,903
--------- -------- --------
Investment Activities:
Property, plant and equipment
additions (22,625) (22,400) (35,170)
Sale (purchase) of noncurrent
investments, net (68,974) 36,621 (107,426)
Acquisitions and growth
expenditures (318,113) (58,936) (26,521)
--------- -------- ---------
Cash flows used in investing
activities (409,712) (44,715) (169,117)
--------- -------- ----------
Financing Activities:
Dividends on common and preferred
Stock (19,092) (16,852) (16,428)
Minority interests on preferred
securities of subsidiary trusts (3,114) (2,641) (2,641)
Subsidiary payment of common unit
distributions (29,145) (17,708) -
Proceeds from issuance of common
units 95,592 - -
Issuance of nonrecourse subsidiary
debt 84,723 29,499 21,654
Repayment of nonrecourse subsidiary
debt (37,107) (7,544) (340)
Issuance of long-term debt 97,161 - -
Repayment of long-term debt (5,000) (22,500) -
Issuance of preferred securities of
subsidiary trusts 49,816 - -
Issuance of common stock 107,813 - -
Proceeds from exercise of warrants 3,177 - -
Retirement of preferred stock - - (10)
Retirement of subsidiary preferred
stock - (2,687) -
Short-term borrowings 11,554 - 35,500
--------- -------- --------
Cash flows provided by
(used in) financing activities 356,378 (40,433) 37,735
--------- --------- --------
CornerStone Propane Partners
Formation Transactions:
Acquisition of CGI Holdings,
net of cash acquired - - (68,962)
Issuance of CornerStone Propane
Partners common units - - 191,804
Issuance of CornerStone Propane
Partners long-term debt - - 220,000
Repayment of long-term debt and
short-term financings - - (229,571)
Other fees and expenses - - (10,554)
--------- -------- ---------
Cash flows provided by CornerStone
Propane Partners formation
transactions - - 102,717
--------- -------- ----------
Increase (Decrease) in Cash and
Cash Equivalents 16,556 (22,481) 32,238
Cash and Cash Equivalents, beginning
of year 14,309 36,790 4,552
-------- -------- -------
Cash and Cash Equivalents,
end of year $ 30,865 $ 14,309 $ 36,790
======== ======== =======
See Notes to Consolidated Financial Statements
Consolidated Balance Sheets
December 31,
(In Thousands) 1998 1997
ASSETS
Current Assets:
Cash and cash equivalents $ 30,865 $ 14,309
Accounts receivable, net 131,541 90,749
Inventories 72,805 36,015
Other 31,957 15,335
---------- ----------
267,168 156,408
---------- ----------
Property, Plant and Equipment, Net 629,278 545,622
---------- ----------
Goodwill and Other Intangible
Assets, Net 631,029 237,044
---------- ----------
Other Assets:
Investments 152,470 121,587
Other 56,271 45,462
---------- ----------
208,741 167,049
---------- ----------
$ 1,736,216 $ 1,106,123
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of
long-term debt $ 20,060 $ 7,814
Short-term debt - nonrecourse 11,554 -
Accounts payable 113,036 89,064
Accrued expenses 64,779 47,686
---------- ---------
209,429 144,564
---------- ---------
Long-term Debt 256,350 156,350
Long-term Debt of Subsidiaries
- nonrecourse 332,525 268,931
Deferred Income Taxes 74,072 72,884
Other Noncurrent Liabilities 101,787 60,826
---------- ---------
764,734 558,991
---------- ---------
Commitments and Contingencies
(Notes 2, 6, 7, 12)
Minority Interests 388,702 199,722
--------- ---------
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 32,500
-------- --------
91,250 36,250
-------- --------
Shareholders' Equity:
Common stock 40,279 31,224
Paid-in capital 158,530 56,595
Retained earnings 81,100 72,915
Accumulated other comprehensive
income 2,192 5,862
------- --------
282,101 166,596
------- --------
$ 1,736,216 $ 1,106,123
========= =========
See Notes to Consolidated Financial Statements
Consolidated Statements of Shareholders' Equity
Accumulated
Number of Other Total
Common Common Paid-in Retained Comprehensive Shareholders'
(In Thousands) Shares Stock Capital Earnings Income Equity
Balance at December
31, 1995 17,840 $31,220 $56,595 $59,159 $5,704 $152,678
Comprehensive income:
Net income - - - 26,054 - 26,054
Other comprehensive
income, net of tax:
Unrealized gain on
marketable securities
net of reclassification
adjustment - - - - 4,142 4,142
Distributions declared on
minority interests in
preferred securities of
subsidiary trusts - - - (2,641) - (2,641)
Dividends declared on
preferred stock - - - (550) - (550)
Dividends declared on
common stock - - - (15,878) - (15,878)
--------- ------- ----- -------- ------- --------
Balance at December 31,
1996 17,840 31,220 56,595 66,144 9,846 163,805
Comprehensive income:
Net income - - - 26,264 - 26,264
Other comprehensive
income, net of tax:
Unrealized loss on
marketable securities
net of reclassification
adjustment - - - - (3,984) (3,984)
Common stock issued 3 4 - - - 4
Distributions declared on
minority interestsin
preferred securities of
subsidiary trusts - - - (2,641) - (2,641)
Dividends declared on
preferred stock - - - (212) - (212)
Dividends declared on
common stock - - - (16,640) - (16,640)
------- -------- ---- -------- ------ --------
Balance at December
31, 1997 17,843 31,224 56,595 72,915 5,862 166,596
Comprehensive income:
Net income - - - 30,391 - 30,391
Other comprehensive
income, net of tax:
Unrealized loss on
marketable securities
net of reclassification
adjustment - - - - (3,670) (3,670)
Common stock issued 5,000 8,750 99,063 - - 107,813
Proceeds from exercise of
warrants 174 305 2,872 - - 3,177
Distributions declared
on minority interests
in preferred securities
of subsidiary trusts - - - (3,114) - (3,114)
Dividends declared on
preferred stock - - - (191) - (191)
Dividends declared on
common stock - - - (18,901) - (18,901)
-------- -------- ------- -------- ------- -------
Balance at December
31, 1998 23,017 $ 40,279 $ 158,530 $81,100 $2,192 $282,101
====== ======= ======= ======= ====== ========
See Notes to Consolidated Financial Statements
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS:
NorthWestern Corporation (the Corporation) is a service and solutions
company providing energy, communications and related services to customers
throughout North America. A division of the Corporation is engaged in the
regulated energy business of production, purchase, transmission, distribution
and sale of electricity and the delivery of natural gas to Midwestern
customers. Through CornerStone Propane Partners, L.P. (CornerStone), the
Corporation is engaged in retail and wholesale propane distribution business
located throughout North America. CornerStone is a publicly traded Delaware
limited partnership, formed to acquire and operate propane businesses and
assets. A wholly owned subsidiary of the Corporation serves as the general
partner of CornerStone and manages and operates CornerStone's business. (For a
detailed description of the Partnership Formation and related transactions, see
Note 2.) At December 31, 1998, the Corporation owns a combined 30% effective
interest in the Partnership. Through Blue Dot Services Inc. (Blue Dot.,
formerly ServiCenter USA), the Corporation has become a national provider of
heating, ventilating, air conditioning, plumbing and related services (HVAC) by
acquiring existing companies throughout the U.S. Through Expanets, Inc.
(Expanets, formerly Communication Systems USA), the Corporation has become a
national provider of integrated communications, data solutions and network
services to business customers by acquiring companies throughout the U.S.
BASIS OF CONSOLIDATION:
The accompanying consolidated financial statements include the accounts of
the Corporation and all wholly and majority-owned or controlled subsidiaries,
including CornerStone, Blue Dot. and Expanets. 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 a minority interest in the consolidated financial statements. Equity
interest of the former owners of companies acquired by Blue Dot. and Expanets
who continue to hold an interest in Blue Dot. and Expanets are reflected as
minority interests in the consolidated financial statements.
USES OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS:
The Corporation generally considers all highly liquid investments
purchased with a maturity of three months or less to be cash equivalents.
ACCOUNTS RECEIVABLE, NET:
Accounts receivable is stated net of allowance for doubtful accounts of
$6.1 million and $3.6 million at December 31, 1998 and 1997.
INVESTMENTS AND FAIR VALUE OF
FINANCIAL INSTRUMENTS:
The Corporation's investments consist primarily of short-maturity, fixed-
income securities and corporate preferred and common stocks. In addition, the
Corporation has investments in privately held entities and ventures, safe
harbor leases and various money market and tax exempt investment programs.
These investments are accounted for in accordance with Statement of Financial
Accounting Standards No. 115 (SFAS 115), `Accounting for Certain Investments in
Debt and Equity Securities.' SFAS 115 requires that certain investments in debt
and equity securities be reported at fair value.
The Corporation's securities are classified under the provisions of SFAS
115 as follows (in thousands):
Unrealized
Fair Value Cost Gain
December 31, 1998:
Preferred Stocks $41,547 $39,560 $1,987
Marketable Securities 30,045 27,376 2,669
December 31, 1997:
Preferred Stocks $64,849 $62,197 $2,652
Marketable Securities 29,470 23,094 6,376
The combined unrealized gain, net of tax, at December 31, 1998 and 1997,
was $3.0 million and $5.9 million. Held to maturity securities are reported at
cost, which approximated fair value and at December 31, 1998 and 1997, was
$80.9 million and $27.3 million.
The Corporation uses the specific identification method for determining
the cost basis of its investments in available for sale securities. Gross
proceeds and realized gains and losses on sales of its available for sale
securities were not material in 1998, 1997 and 1996.
Based on current market rates for debt of similar credit quality and
remaining maturities or quoted market prices for certain issues, the face value
of the Corporation's long-term debt approximates its market value.
CornerStone routinely uses commodity futures contracts to reduce the risk
of future price fluctuations for natural gas and liquefied petroleum gas (LPG)
inventories and contracts. Gains and losses on futures contracts purchased as
hedges are deferred and recognized in cost of sales as a component of the
product cost for the related hedged transaction. Net realized gains and losses
on these contracts are generally not material.
REVENUE RECOGNITION:
Electric and natural gas revenues are based on billings rendered to
customers rather than on meters read or energy delivered. Customers are billed
monthly on a cycle basis. Revenues from propane sales are recognized
principally when fuel products are shipped or delivered to customers. HVAC and
communication revenues are recognized as goods are delivered to customers or
services are performed.
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are stated at cost of acquisition less a
depreciation reserve. Depreciation is computed using the straight-line method
based on the estimated useful lives of the various classes of property.
Depreciable property has estimated useful lives which range from 3 to 40 years.
Depreciation rates include a provision for the Corporation's share of the
estimated costs to decommission three coal-fired generating plants at the end
of the useful life of each plant. The annual provision for such costs is
included in depreciation expense, while the accumulated provisions are
included in other noncurrent assets.
When property for the propane, HVAC or communications interests are
retired or otherwise disposed, the cost and related accumulated depreciation is
removed from the accounts, and the resulting gain or loss is credited or
charged to operations. No profit or loss is recognized in connection with
ordinary retirements of depreciable electric and natural gas property.
Maintenance and repairs are expensed as incurred, while replacements and
betterments that extend estimated useful lives are capitalized. Property, plant
and equipment at December 31 consisted of the following (in thousands):
1998 1997
Land and improvements $ 19,871 $ 15,808
Building and improvements 66,941 63,658
Storage, distribution,
transmission and generation 611,052 567,514
Other equipment 128,002 73,912
----------- ----------
825,866 720,892
Less accumulated depreciation (196,588) (175,270)
----------- ----------
$ 629,278 $ 545,622
======= ========
COMPUTER SOFTWARE COSTS:
The Corporation includes in property, plant and equipment external and
incremental internal costs associated with computer software we develop for use
in our businesses. Capitalization begins when the costs of the preliminary
stage of the project is completed. These costs are amortized on a straight-line
basis over an estimated useful life once the installed software is ready for
its intended use.
GOODWILL AND OTHER INTANGIBLES:
The excess of the cost of businesses acquired over the fair market value
of all tangible and intangible assets acquired, net of liabilities assumed, has
been recorded as goodwill. Other intangibles, consists principally of costs of
covenants not to compete. Intangibles and goodwill are being amortized over the
estimated periods benefited, which range from 3 to 40 years. Financing costs are
amortized over the term of the applicable debt.
The Corporation's policy is to review property, goodwill and other
intangible assets for possible impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be
recoverable. If such review indicates that the carrying amount is not
recoverable, the Corporation's policy is to reduce the carrying amount of these
assets to fair value.
(in thousands) 1998 1997
Goodwill $611,847 $231,459
Noncompete agreements 17,585 4,266
Financing costs 21,936 7,949
-------- --------
651,368 243,674
Less accumulated amortization (20,339) (6,630)
-------- --------
$631,029 $237,044
======== ========
INCOME TAXES:
Deferred income taxes relate primarily to the difference between book and
tax methods of depreciating property, the difference in the recognition of
revenues for book and tax purposes, and natural gas costs, which are deferred
for book purposes but expensed currently for tax purposes.
For book purposes, investment tax credits were deferred and are being
amortized as a reduction of income tax expense over the useful lives of the
property which generated the credits.
REGULATORY ASSETS AND LIABILITIES:
The regulated operations of the Corporation are subject to the provisions
of Statement of Financial Accounting Standards No. 71 (SFAS 71), `Accounting
for the Effects of Certain Types of Regulations.' Regulatory assets represent
probable future revenue to the Corporation associated with certain costs, which
will be recovered from customers through the ratemaking process. Regulatory
liabilities represent probable future reductions in revenues associated with
amounts that are to be credited to customers through the ratemaking process.
If all or a separable portion of the Corporation's operations becomes no
longer subject to the provisions of SFAS 71, an evaluation of future recovery
from related regulatory assets and liabilities would be necessary. In addition,
the Corporation would determine any impairment to the carrying costs of
deregulated plant and inventory assets.
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.
RECLASSIFICATIONS:
Certain 1997 and 1996 amounts have been reclassified to conform to the
1998 presentation. Such reclassifications had no impact on net income or
shareholders' equity as previously reported. Shares outstanding and earnings
per share amounts have been adjusted to reflect the May 1997 stock split.
SUPPLEMENTAL CASH FLOW INFORMATION:
(in thousands) 1998 1997 1996
Cash paid during the year for:
Income taxes $17,629 $8,940 $6,271
Interest 35,162 30,090 18,645
Noncash transactions
during the year for:
Assumption of debt as
part of acquisitions 28,572 1,551 149,516
2. BUSINESS COMBINATIONS AND ACQUISTIONS
MASTER LIMITED PARTNERSHIP
OFFERING AND ACQUISITIONS:
On December 17, 1996, a wholly owned subsidiary of NorthWestern Growth
Corporation acquired CGI Holdings, Inc. (Coast). Immediately after the
acquisition, the Corporation combined the propane distribution businesses of
Coast, Empire Energy Corporation (Energy), Myers Propane Gas Corporation
(Myers), and Synergy Group Incorporated (Synergy) into CornerStone. As part of
an IPO on the same date, CornerStone sold a total of 9,821,000 Common Units at
a price to the public of $21 a Unit. In January 1998, CornerStone sold an
additional 1,960,000 Common Units at a price to the public of $22.125 per Unit.
The net proceeds of $191.8 million from the sale of 9,821,000 Common Units
of CornerStone and the net proceeds from the issuance of $220 million face
value of CornerStone Senior Notes were used to repay term and revolving debt of
Coast, Energy and Synergy, including accrued interest and any prepayment
premiums which were assumed by the Partnership. In addition, the preferred
stock of Synergy was redeemed at a premium. As a result of these repayments,
the Corporation recorded a one-time, after-tax gain of $.09 per share from the
prepayment of the term debt and redemption of preferred stock investment in
Synergy.
On December 11, 1998, the Partnership acquired the operations of Propane
Continental, Inc. (PCI), a retail and wholesale propane distributor for
approximately $121 million, including debt to be refunded. The acquisition was
financed with Common Unit equity and long-term debt. The acquisition was
accounted for under the purchase method of accounting. PCI operates 34 retail
propane customer service centers in 11 states. Through Tri Power Fuels, PCI's
wholesale business, PCI distributes propane and other natural gas liquids to
independent dealers, resellers and end users predominately in the West, Midwest
and Northeast sections of the country.
On December 31, 1998, the Partnership acquired the operations of ERI
Services Canada, Ltd. and ERI Services, Inc. for approximately $4.5 million.
Both of these entities are engaged in wholesale natural gas purchases and
sales. The majority of their business is in Canada with a limited amount of
business in the northeastern U.S.
At December 31, 1998, CornerStone's capital consisted of 16,444,096 Common
Units, 6,597,619 Subordinated Units representing limited partner interests and
a 2% aggregate general partner interest. At December 31, 1998, the
Corporation's wholly and majority-owned subsidiaries owned all 6,597,619
Subordinated Units and an aggregate 2% general partner interest in the
Partnership, or a combined 30% effective interest in the Partnership.
BLUE DOT SERVICES INC.:
In 1997, NorthWestern formed Blue Dot. to acquire and operate HVAC
companies in the U.S. At December 31, 1998, Blue Dot. had acquired 28 companies
in 18 states with a total NorthWestern investment of $87.0 million. At
December 31, 1998, NorthWestern owned a 94.8% voting interest in Blue Dot.
through common and preferred stock ownership.
EXPANETS, INC.:
In 1997, NorthWestern formed Expanets to acquire and operate communication
companies in the U.S. At December 31, 1998, Expanets had acquired 18 companies
in 25 states with a total NorthWestern investment of $108.3 million. At December
31, 1998, NorthWestern owned a 93.8% voting interest in Expanets through common
and preferred stock ownership.
The acquisitions made by Blue Dot. and Expanets were effected utilizing
cash or stock (of Blue Dot. or Expanets) and generally with a combination of
both. In connection with certain acquisitions where the merger consideration
included stock, both Blue Dot. and Expanets entered into exchange agreements
with the sellers that typically do not exceed two years. Under such agreements,
the seller can elect to exchange the stock of Blue Dot. or Expanets that they
received in connection with the acquisition back to the Corporation for, at the
Corporation's option, either stock of the Corporation or cash at a
predetermined exchange rate.
All acquisitions of CornerStone, Blue Dot. and Expanets were accounted for
under the purchase method of accounting with the excess of the purchase price
over the fair value of assets acquired recorded as goodwill based upon the
preliminary estimates of fair value and are subject to further changes. Had the
acquisitions of CornerStone, Blue Dot. and Expanets occurred on January 1,
1997, combined unaudited pro forma results for the year ended December 31,
1997, as prescribed under Accounting Principles Board Opinion No. 16 (APB 16)
`Business Combinations,' would have been: revenues $1.8 billion, net income
$37.7 million and diluted earnings per share $1.34. The combined unaudited pro
forma results for the year ended December 31, 1998, would have been: revenues
$2.0 billion, net income $41.1 million and diluted earnings per share $1.48.
The pro forma disclosures required under APB 16 are not indicative of past or
future operating results.
3. SHORT-TERM BORROWINGS
The Corporation may issue short-term debt in the form of bank loans and
commercial paper as interim financing for general corporate purposes. The bank
loans may be obtained under short-term lines of credit. At December 31, 1998,
the Corporation's aggregate lines of credit available were $75 million. The
Corporation pays an annual fee generally equivalent to .1% to .25% of the
unused lines. There were no line of credit borrowings or commercial paper
outstanding at December 31, 1998 and 1997.
Expanets entered into a Bank Credit Facility in December 1998 with a
commercial bank. The Bank Credit Facility consists of a $15 million Working
Capital Facility. There were $11.6 million of borrowings outstanding under the
Working Capital Facility at December 31, 1998. The Bank Credit Facility bears
interest at a variable rate tied to the Eurodollar or prime rate plus a stated
margin for each rate. The Bank Credit Facility matures in June 1999. The
Facility is not secured, however, Expanets is subject to restrictive covenants
which include a) restrictions on other indebtedness, b) limits on mergers,
acquisitions and dispositions, and c) minimum investment in Expanets by the
Corporation.
4. LONG-TERM DEBT
Substantially all of the Corporation's electric and natural gas utility
plant is subject to the lien of the indentures securing its general mortgage
bonds and pollution control obligations. General mortgage bonds of the
Corporation may be issued in amounts limited by property, earnings and other
provisions of the mortgage indenture. In March 1997, the Corporation retired
early the $7.5 million outstanding of the 8.9% series general mortgage bonds.
In July 1997, the Corporation retired early the $15 million outstanding of the
8.824% series general mortgage bonds. As part of a financing transaction in
November 1998, the Corporation issued $105 million of 6.95%, 30-year senior
unsecured debt. The proceeds were used to repay short-term indebtedness and for
general corporate purposes. The following tables summarize the Corporation's
long-term obligations at December 31 (in thousands):
Due 1998 1997
Long-Term Debt:
Senior Unsecured Debt - 6.95% 2028 $105,000 $ -
General mortgage bonds -
6.99% 2002 20,000 25,000
7.10% 2005 60,000 60,000
7% 2023 55,000 55,000
Pollution control obligations -
5.85%, Mercer Co., ND 2023 7,550 7,550
5.90%, Salix, IA 2023 4,000 4,000
5.90%, Grant Co., SD 2023 9,800 9,800
Less current maturities (5,000) (5,000)
------- -------
$256,350 $156,350
========= ========
Long-Term Debt of Subsidiaries - nonrecourse:
Senior Secured Debt -
7.53% 2010 $220,000 $220,000
7.33% 2010 85,000 -
Bank Credit Facility 1999 1,700 36,000
Other term debt 40,885 15,745
Less current maturities (15,060) (2,814)
--------- --------
$332,525 $268,931
========= =========
In conjunction with the Partnership Formation in December 1996, the
Partnership issued $220 million in First Mortgage Notes (Mortgage Notes). These
Mortgage Notes are collateralized by substantially all of the assets of the
Partnership and rank pari passu with the Bank Credit Facility. The Mortgage
Notes bear interest at a fixed rate of 7.53% payable semi-annually and mature
in the year 2010 with eight equal annual installments beginning in the year
2003. The Partnership may, at its option and under certain circumstances
following the disposition of assets, be required to offer to prepay the
Mortgage Notes in whole or in part. The Mortgage Notes agreement contains
restrictive covenants applicable to the Partnership including a) restrictions
on the incurrence of additional indebtedness, b) restrictions on the ratio of
consolidated cash flow to consolidated interest expense of the Partnership,
as defined, and c) restrictions on certain liens, loans and investments,
payments, mergers, consolidations, sales of assets and other transactions.
Generally, as long as no default exists or would result, the Partnership is
permitted to make cash distributions not more frequently than quarterly in an
amount not to exceed available cash, as defined, for the immediately preceding
calendar quarter.
As part of a financing transaction in December 1998, the Partnership
issued$85 million of Senior Secured Notes (Senior Notes). These Senior Notes
are collateralized by substantially all of the assets of the Partnership and
ranks pari passu with existing notes and borrowings under the Bank Credit
Facility. The Senior Notes bear interest at a fixed rate of 7.33% payable semi-
annually and mature in the year 2010 with eight annual installments beginning
in the year 2003. The Senior Notes agreement contains the same restrictive
covenants as those associated with the 1996 Mortgage Notes.
The Partnership also has a Bank Credit Facility with a group of commercial
banks. The Bank Credit Facility consists of a combined $110 million Working
Capital and Acquisition Facilities to finance propane business acquisitions.
There were $1.7 million of combined borrowings outstanding under the Working
Capital and Acquisition Facilities. There were $36.0 million of combined
borrowings outstanding under the Working Capital and the Acquisition Facilities
at December 31, 1997. The Bank Credit Facility bears interest at a variable
rate tied to a certain Eurodollar index or prime rate plus a variable margin
for either rate which depends upon the Partnership's ratio of consolidated debt
to consolidated cash flow. The Bank Credit Facility matures in December 1999.
The Bank Credit Facility is collateralized by substantially all the assets of
the Partnership and ranks pari passu with the Mortgage Notes. The Bank Credit
Facility contains restrictive covenants applicable to the Partnership including
a) restrictions on the incurrence of additional indebtedness, b) restrictions
on the ratio of consolidated cash flow to consolidated interest expense of the
Partnership, as defined, and c) restrictions on certain liens, loans and
investments, payments, mergers, consolidations, sales of assets and other
transactions. They also require that the Partnership maintain a ratio of total
funded indebtedness to consolidated cash flow, as defined. Generally, as long
as no default exists or would result, the Partnership is permitted to make cash
quarterly distributions in an amount not to exceed Available Cash, as defined.
The balance of other nonrecourse debt is generally comprised of the debt
assumed and issued in conjunction with acquisitions of $40.9 million and $15.8
million at December 31, 1998 and 1997.
Annual scheduled consolidated retirements of long-term debt during the
next five years are $20.1 million in 1999, $10.2 million in 2000, $8.9 million
in 2001, $8.0 million in 2002 and $40.2 million in 2003.
5. INCOME TAXES
Income tax expense is comprised of the following (in thousands):
1998 1997 1996
Federal income:
Current tax expense $12,945 $4,620 $9,174
Deferred tax expense (1,069) 6,512 5,830
Investment tax credit (562) (559) (561)
State income 1,882 538 972
------- ------- --------
$13,196 $11,111 $15,415
======= ======= =======
The following table reconciles the Corporation's effective income tax rate
to the federal statutory rate:
1998 1997 1996
Federal statutory rate 35 % 35 % 35 %
State income, net of federal
benefit 2 1 2
Amortization of investment tax credit(1) (2) (1)
Dividends received deduction (7) (2) (1)
Other, net 1 1 2
---------- --------- --------
30 % 33 % 37 %
========== ========= =========
The components of the net deferred income tax liability recognized in the
Corporation's Consolidated Balance Sheets are related to the following temporary
differences at December 31 (in thousands):
1998 1997
Excess tax depreciation $ (80,556) $ (79,366)
Safe harbor leases (4,192) (4,514)
Property basis and life differences (11,027) (12,902)
Asset sales (3,967) (4,273)
Regulatory assets (2,732) (3,057)
Regulatory liabilities 4,125 4,512
Unbilled revenue 2,360 5,746
Unamortized investment tax credit 3,385 3,491
Unrealized gain on investments (3,308) (3,399)
Other, net 21,840 20,878
------------- ------------
$ (74,072) $ (72,884)
============= =============
6. TEAM MEMBER BENEFIT PLANS
The Corporation maintains a noncontributory defined benefit pension plan.
The benefits to which a team member is entitled under the plan are derived
using a formula based on the number of years of service and compensation
levels, as defined. The Corporation determines the annual funding for its
plan using the frozen initial liability cost method. The Corporation's annual
contribution is funded in accordance with the requirements of ERISA. Assets of
the plan consist primarily of debt and equity securities.
Following is a reconciliation of the changes in the plan's benefit
obligations and fair value of assets over the two-year period ending December
31, 1998, and a statement of the funded status as of December 31, of both years
(in thousands):
1998 1997
Reconciliation of benefit obligation:
Obligation at January 1 $54,656 $50,058
Service cost 1,012 981
Interest cost 3,689 3,499
Participant contributions - -
Amendments - 1,779
Actuarial (gain) loss 1,009 1,712
Acquisition - -
Benefits paid (3,649) (3,373)
---------- --------
Benefit obligation at end of year 56,717 54,656
---------- --------
Reconciliation of fair value of plan assets:
Fair value of plan assets at January 1 64,389 56,507
Actual return on plan assets 12,707 10,024
Acquisition - -
Employer contributions - 1,231
Participant contributions - -
Benefits paid (3,649) (3,373)
--------- ---------
Fair value of plan assets at end of year 73,447 64,389
--------- ---------
Funded status:
Funded status at December 31 16,730 9,734
Unrecognized transition amount 1,083 1,237
Unrecognized net actuarial loss (16,755) (10,665)
Unrecognized prior service cost 3,320 3,820
------- --------
Prepaid (accrued) benefit cost $4,378 $4,126
======= =======
The following table provides the components of net periodic benefit cost
for the plans for 1998, 1997 and 1996 (in thousands):
1998 1997 1996
Service cost $1,012 $981 $958
Interest cost 3,689 3,499 3,506
Expected return on plan assets (5,307) (4,681) (4,377)
Amortization of transition
(asset) obligation 155 155 155
Amortization of prior service cost 500 278 278
Amortization of net (gain) loss (302) (106) (193)
-------- -------- -------
Net periodic benefit cost $(253) $126 $327
======== ======== =======
The prior service costs are amortized on a straight-line basis over the
average remaining service period of active participants. Gains and losses in
excess of 10% of the greater of the benefit obligation and the market-related
value of assets are amortized over the average remaining service period of
active participants.
The assumptions used in calculating the projected benefit obligation for 1998,
1997 and 1996 were as follows:
1998 1997 1996
Discount rate 6.75% 7.00% 7.25%
Expected rate of return on assets 8.50% 8.50% 8.50%
Long-term rate of increase in
compensation levels 3.00% 3.00% 3.00%
The Corporation provides a team member savings plan, which permits a team
member to defer receipt of compensation as provided in Section 401(k) of the
Internal Revenue Code. Under the plan, a team member may elect to direct up to
12 percent of their gross compensation be contributed to the plan (subject to a
maximum dollar amount as specified by applicable regulations). The Corporation
contributes 50 cents for every one dollar contributed by the employee, up to a
maximum Corporation contribution of 3% of the team member's gross compensation.
The Corporation also provides an Employee Stock Ownership Plan (ESOP) for full-
time team members. The ESOP is funded primarily with federal income tax
savings, which arise from tax laws applicable to such team member benefit
plans. Certain Corporation contributions and shares of stock acquired by the
ESOP are allocated to participants' accounts in proportion to the compensation
of team members during the particular year for which allocation is made. Costs
incurred under the plan were $1.6 million, $1.5 million and $1.4 million in
1998, 1997 and 1996.
The Corporation also has various supplemental retirement plans for outside
directors and selected management team members. The plans are nonqualified
defined benefit plans that provide for certain amounts of salary continuation
in the event of death before or after retirement or certain supplemental
retirement benefits in lieu of any death benefits. In addition, the Corporation
provides life insurance benefits to beneficiaries of eligible team members who
represent a reasonable insurable risk. To minimize the overall cost of plans
providing life insurance benefits, the Corporation has obtained life insurance
coverage that is sufficient to fund benefit obligations. Costs incurred under
the plans were $1.5 million, $1.2 million and $1.3 million in 1998, 1997 and
1996.
CornerStone has a Restricted Unit Plan (the `Restricted Unit Plan') which
authorizes the issuance of Common Units with an aggregate value of $17.5
million to directors, executives, managers and selected supervisors of the
Partnership. The value of the Restricted Common Unit is established by the
market price of the Common Unit at the date of grant. As of December 31, 1998,
Restricted Common Units with a value of $13.8 million have been awarded.
CornerStone, Blue Dot. and Expanets provide various team member savings
plans, which permit team members to defer receipt of compensation as provided
in Section 401(k) of the Internal Revenue Code. Under the plans, the team
member may elect to direct a percentage of their gross compensation be
contributed to the plans. CornerStone, Blue Dot. and Expanets, at their
discretion, may match a portion of the team member contribution.
7. JOINTLY OWNED PLANTS
The Corporation has an ownership interest in three major electric
generating plants, all of which are operated by other utility companies. The
Corporation has an undivided interest in these facilities and is responsible
for its proportionate share of the capital and operating costs while being
entitled to its proportionate share of the power generated. The Corporation's
interest in each plant is reflected in the Consolidated Balance Sheets on a
prorate basis, and its share of operating expenses is reflected in the
Consolidated Statements of Income. The participants each finance their own
investment. Information relating to the Corporation's ownership interest in
these facilities at December 31, 1998, is as follows (in thousands):
Big Stone Neal #4 Coyote I
Plant in service $46,813 $33,711 $46,646
Accumulated depreciation $26,444 $18,059 $21,467
8. OPERATING LEASES
The Corporation leases office, office equipment and warehouse facilities
under various long-term operating leases. At December 31, 1998, future minimum
lease payments under noncancelable lease agreements are as follows:
1999 $8,456
2000 7,204
2001 5,723
2002 4,087
2003 2,887
Thereafter 3,734
9. STOCK OPTIONS AND WARRANTS
In May 1998, the Corporation adopted the NorthWestern Stock Option and
Incentive Plan (the `Plan'). Under the Plan, the Corporation has reserved
1,338,189 shares for issuance to officers, key team members and directors as
either incentive-based options or nonqualified options. The Nominating and
Compensation Committee of the Corporation's Board of Directors administers the
Plan. Unless established differently by the Committee, the per share option
exercise price shall be the fair market value of the Corporation's common stock
at the grant date. The options are outstanding for 10 years following the date
of grant. In addition, the Corporation issued 1,279,476 warrants to purchase
shares of NorthWestern common stock in connection with a previous acquisition.
A summary of the activity of stock options and warrants are as follows:
Stock Options
Exercise
Shares Price
Outstanding at December 31, 1997 - -
Issued 188,500 $23.00
Exercised - -
-------- -------
Outstanding at December 31, 1998 188,500 $23.00
======== =======
Stock Warrants
Exercise
Shares Price
Outstanding at December 31, 1997 - -
Issued 1,279,476 $ 18.225
Exercised 174,318 $ 18.225
--------- --------
Outstanding at December 31, 1998 1,105,158 $ 18.225
========= ========
The Corporation follows Accounting Principles Board Opinion 25, `Accounting
for Stock Issued to Employees,' to account for stock option plans. No
compensation cost is recognized because the option exercise price is equal to
the market price of the underlying stock on the date of grant.
An alternative method of accounting for stock options is SFAS 123,
`Accounting for Stock-Based Compensation.' Under SFAS 123, team member stock
options are valued at grant date using the Black-Scholes valuation model and
compensation cost is recognized ratably over the vesting period. Had
compensation cost for the Corporation's stock option plan been determined based
on the Black-Scholes value at the grant dates for awards as prescribed by SFAS
123, the pro forma information for 1998 would have been as follows (in thousands
except per share amounts):
Earnings on common stock:
As reported $27,086
Pro forma $26,607
Diluted earnings per share:
As reported $1.44
Pro forma $1.41
The weighted average Black-Scholes value of options granted under the
stock option plan during 1998 was $3.91. The 1998 value was estimated using an
expected life of eight years, 3.8% dividend yield, volatility of 16.9% and
risk-free interest rate of 5.08%.
10. 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 1998,
1997 and 1996 (in thousands):
1998 1997 1996
Average common
shares outstanding for
basic computation 18,660 17,843 17,840
Dilutive effect of:
Stock options 5 - -
Stock warrants 151 - -
------- ------- ------
Average common
shares outstanding for
diluted computation 18,816 17,843 17,840
====== ====== ======
11. PARTNERSHIP DISTRIBUTIONS
The Partnership makes distributions to its partners with respect to each
fiscal quarter of the Partnership in an aggregate amount equal to its Available
Cash for such quarter. Available Cash generally means, with respect to any
fiscal quarter of the Partnership, all cash on hand at the end of such quarter
plus all additional cash on hand as of the date of determination resulting from
borrowings subsequent to the end of such quarter less the amount of cash
reserves established by the General Partner in its reasonable discretion for
future cash requirements. These reserves are retained for the proper conduct of
the Partnership's business, for the payment of debt principal and interest, and
for distributions during the next four quarters.
Distributions by the Partnership, in an amount equal to 100% of its
Available Cash, will generally be made 98% to the Common and Subordinated
Unitholders and 2% to the General Partners. Distributions are subject to the
payment of incentive distributions in the event Available Cash exceeds the
Quarterly Distribution of $.594 on all Units. To the extent there is sufficient
Available Cash, the holders of Common Units have the right to receive the
Minimum Quarterly Distribution, plus any arrearages, prior to the distribution
of Available Cash to holders of Subordinated Units. Common Units will not
accrue arrearages for any quarter after the Subordination Period (as defined
below), and Subordinated Units will not accrue any arrearages with respect to
distributions for any quarter.
The Subordination Period will generally extend until the first day of any
quarter beginning on or after December 31, 2001, in respect of which a)
distributions of Available Cash from operating surplus equal or exceed the
Minimum Quarterly Distribution on each of the outstanding Common and
Subordinated Units for each of the three consecutive four-quarter periods
immediately preceding such date, b) the adjusted operating surplus generated
during each of the three consecutive four-quarter periods immediately preceding
such date equals or exceeds the Minimum Quarterly Distribution on each of the
Common and Subordinated Units and the related distribution on the General
Partner interests in the Partnership during such periods, and c) there are no
outstanding Common Unit arrearages.
In addition, 1,649,405 Subordinated Units will convert into Common Units
for any quarter ending on or after December 31, 1999, and an additional
1,649,405 Subordinated Units will convert into Common Units for any quarter
ending on or after December 31, 2000, if a) distributions of Available Cash
from operating surplus on each of the outstanding Common and Subordinated Units
equal or exceed the Minimum Quarterly Distribution for each of the three
consecutive four-quarter periods immediately preceding such date, b) the
adjusted operating surplus generated during the immediately preceding two
consecutive four-quarter periods equals or exceeds the Minimum Quarterly
Distribution on all of the Common and Subordinated Units outstanding during
that period and c) there are no arrearages on the Common Units.
The Partnership will make distributions of its Available Cash
approximately 45 days after the end of each quarter ending March, June,
September and December to holders of record on the applicable record dates. For
the quarter ended December 31, 1997, and year ended December 31, 1998, the
Partnership and the Corporation elected to forgo the Subordinated Unit
distributions continuing the support for the Common Unitholders.
12. ENVIRONMENTAL MATTERS
The Corporation is subject to environmental regulations from numerous
entities. The Clean Air Act Amendments of 1990 (the Act) stipulate limitations
on sulfur dioxide and nitrogen oxide emissions from coal-fired power plants.
The Corporation believes it can economically meet such sulfur dioxide emission
requirements at its generating plants by the required compliance dates and that
it is in compliance with all presently applicable environmental protection
requirements and regulations. The Corporation is also subject to other
environmental regulations including matters related to former manufactured gas
plant sites. In 1995, the Corporation remediated a site located at Huron, South
Dakota, through thermal desorption of residues in the soil. Adjustments of the
Corporation's natural gas rates to reflect the costs associated with the
remediation were approved through the regulatory process. The Corporation is
pursuing recovery from insurance carriers. No administrative or judicial
proceedings involving the Corporation are now pending or known by the
Corporation to be contemplated under present environmental protection
requirements.
13. CAPITAL STOCK
In December 1996, the Corporation's Board of Directors declared, pursuant
to a shareholders' rights plan, a dividend distribution of one Right on each
outstanding share of the Corporation's common stock. Each Right becomes
exercisable, upon the occurrence of certain events, at an exercise price of $50
per share, subject to adjustment. The Rights are currently not exercisable and
will be exercisable only if a person or group of affiliated or associated
persons (Acquiring Person) either acquires ownership of 15% or more of the
Corporation's common stock or commences a tender or exchange offer that would
result in ownership of 15% or more. In the event the Corporation is acquired in
a merger or other business combination transaction or 50% or more of its
consolidated assets or earnings power are sold, each Right entitles the holder
to receive such number of shares of common stock of the Acquiring Person having
a market value of two times the then current exercise price of the Right. The
Rights, which expire in December 2006, are redeemable in whole, but not in
part, at a price of $.005 per Right, at the Corporation's option at any time
until any Acquiring Person has acquired 15% or more of the Corporation's common
stock.
The Corporation is authorized to issue 1,000,000 shares of $100 par
cumulative preferred stock. As of December 31, 1998 and 1997, there were 37,500
shares outstanding of which 26,000 were 6 1/2% Series and 11,500 were 4 1/2%
Series. The provisions of the 6 1/2% Series stock contain a five-year put
option exercisable by the holders of the securities and a 10-year redemption
option exercisable by the Corporation. In any event, redemption will occur
at par value. The 4 1/2% Series may be redeemed in whole or in part at the
option of the Board of Directors at any time upon at least 30 days notice at
$110.00 per share plus accrued dividends.
In the event of involuntary dissolution, all Corporation preferred stock
outstanding would have a preferential interest of $100 per share, plus
accumulated dividends, before any distribution to common shareholders.
There were 2,500 shares of subsidiary preferred stock outstanding at
December 31, 1996. The subsidiary preferred stock was redeemed in January 1997.
The Corporation is also authorized to issue a maximum of 1,000,000 shares
of preference stock at a par value of $50 per share. No preference shares have
ever been issued.
As of December 31, 1998 and 1997, the Corporation had 3,500,000 and
1,300,000 shares of preferred securities outstanding. The 1,300,000 outstanding
at December 31, 1997, were issued in 1995 at 8 1/8% with a $25 par value. The
additional 2,200,000 shares were issued as part of a financing transaction in
November 1998 when the Corporation sold $55,000,000 of its 7.2% preferred
capital securities at $25 par value. The proceeds were used for general
corporate purposes.
14. SEGMENT AND RELATED 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 six principal business segments are its
electric, natural gas, retail propane, wholesale propane, HVAC and
communications operations. All other includes the results of the manufacturing
operations, activities and assets of the parent, any reconciling or eliminating
amounts and amortization of purchase accounting adjustments of $3.8 million in
1998 related to the acquisitions of HVAC and communication companies.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies 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):
Total
Electric and Total Communi- All
Natural Gas Propane HVAC cations Other Total
1998
Operating revenues $145,645 $767,735 $126,510 $127,898 $19,399 $1,187,187
Cost of sales 62,595 618,754 77,045 71,214 10,179 839,787
--------- -------- -------- -------- ------- ----------
Gross margins 83,050 148,981 49,465 56,684 9,220 347,400
Selling, general and
administrative 37,445 105,520 36,690 42,964 8,214 230,833
Depreciation and
amortization 14,759 20,154 1,659 1,701 4,353 42,626
--------- -------- ------- ------- ------- ------
Operating income 30,846 23,307 11,116 12,019 (3,347) 73,941
Interest expense (12,059) (20,321) (25) (561) (2,766) (35,732)
Investment income
and other 1,261 - 208 (17) 4,693 6,145
--------- -------- ------- ------- ------- -------
Income before taxes and
minority interests 20,048 2,986 11,299 11,441 (1,420) 44,354
Provision for taxes (7,379) (999) (4,301) (3,523) 3,006 (13,196)
--------- -------- ------- -------- ------ --------
Income before minority
interests $ 12,669 $ 1,987 $ 6,998 $ 7,918 $ 1,586 $31,158
========= ======== ======== ======= ======= =======
Total assets $ 321,847 $759,232 $ 57,035 $77,418 $520,684 $1,736,216
Maintenance capital
expenditures $ 14,366 $ 2,898 $ 2,641 $ 2,161 $ 559 $ 22,625
1997
Operating revenues $ 154,288 $743,038 - - $ 20,744 $ 918,070
Cost of sales 69,595 612,305 - - 13,145 695,045
--------- -------- ------- ----- ------- ----------
Gross margins 84,693 130,733 - - 7,599 223,025
Selling, general and
administrative 36,384 90,344 - - 6,065 132,793
Depreciation and
amortization 13,901 16,784 - - 550 31,235
--------- -------- ------- ------ ------- ---------
Operating income 34,408 23,605 - - 984 58,997
Interest expense (12,186) (18,980) - - (310) (31,476)
Investment income and other 689 - - - 10,875 11,564
----- -------- ------- ------ ------- --------
Income before taxes and
minority interests 22,911 4,625 - - 11,549 39,085
Provision for taxes (8,334) (1,283) - - (1,494) (11,111)
--------- -------- -------- ------ ------- --------
Income before minority
interests $ 14,577 $ 3,342 - - $10,055 $ 27,974
======== ======= ======= ====== ====== ======
Total assets $ 306,930 $622,077 - - $177,116$1,106,123
Maintenance capital
expenditures $ 18,210 $ 4,056 - - $ 134 $ 22,400
1996
Operating revenues $ 145,686 $175,102 - - $ 23,221 $ 344,009
Cost of sales 64,518 101,360 - - 14,548 180,426
---------- -------- ------ ------ -------- ---------
Gross margins 81,168 73,742 - - 8,673 163,583
Selling, general and
administrative 37,897 49,065 - - 6,789 93,751
Depreciation and
amortization 13,112 5,730 - - 572 19,414
----------- -------- ------- ------- -------- -------
Operating income 30,159 18,947 - - 1,312 50,418
Interest expense (13,611) (13,085) - - 8,028 (18,668)
Investment income and other 850 - - - 8,869 9,719
----------- -------- ------- ------- -------- --------
Income before taxes
and minority
interests 17,398 5,862 - - 18,209 41,469
Provision for taxes (5,741) (2,879) - - (6,795) (15,415)
----------- -------- ------- ------- ------- --------
Income before minority
interests $ 11,657 $ 2,983 - - $ 11,414 $ 26,054
======= ====== ======= ======= ======= ========
Total assets $ 289,475 $ 611,707 - - $212,534 $1,113,716
Maintenance capital
expenditures $ 227,770 $ 7,349 - - $ 51 $ 35,170
1998 1997 1996
----------------- -------------- -----------------
Electric Natural Gas Electric Natural Gas Electric Natural Gas
Operating revenues $78,401 $ 67,244 $ 76,727 $ 77,56 $ 73,417 $ 72,269
Cost of sales 15,390 47,205 14,560 55,035 13,347 51,171
------- ------- ------ ------- ------ ---------
Gross margins 63,011 20,039 62,16 22,52 60,070 21,098
Selling, general and
administrative 25,534 11,911 23,685 12,699 24,801 13,096
Depreciation and
amortization 11,870 2,889 11,305 2,596 10,794 2,318
-------- ------- ------- ------ ------- ------
Operating income $ 25,607 $ 5,239 27,177 $ 7,231 $ 24,475 $ 5,684
======= ======= ======= ====== ======= ========
1998 1997 1996
-------------------- ------------------ ----------------------
Retail Wholesale Retail Wholesale Retail Wholesale
Propane Propane Propane Propane Propane Propane
Operating revenues $297,779 $469,956 $243,589 $499,449 $153,571 $21,531
Cost of sales 165,526 453,228 127,529 484,776 80,264 21,096
--------- -------- --------- -------- -------- -------
Gross margins $132,253 $ 16,728 $116,060 $ 14,673 $ 73,307 $ 435
========= ======== ========= ======== ======== ========
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
(In Thousands Except Per Share Amounts)
First Second Third Fourth
1998
Operating revenues* $ 298,964 $ 233,145 $ 276,896 $ 378,182
Operating income* $ 29,836 $ 6,938 $ 11,545 $ 25,622
Net income $ 11,004 $ 3,355 $ 4,582 $ 11,450
Average common shares
outstanding 17,843 17,843 17,860 21,068
Basic earnings per average
common share** $ .58 $ .15 $ .21 $ .49
Diluted earnings per
average common share** $ .58 $ .15 $ .20 $ .48
1997
Operating revenues $ 284,406 $ 165,451 $ 185,084 $ 283,129
Operating income $ 27,932 $ 4,497 $ 4,033 $ 22,535
Net income $ 10,523 $ 3,158 $ 3,722 $ 8,861
Average common shares
outstanding 17,842 17,843 17,843 17,843
Basic earnings per average
common share $ .55 $ .14 $ .17 $ .45
Diluted earnings per average
common share $ .55 $ .14 $ .17 $ .45
*Operating revenues and operating income for the first, second and third
quarters have been restated to reflect the consolidation of Blue Dot. and
Expanets effective January 1, 1998. There was no impact upon net income and
earnings per share from those restated periods.
**The 1998 quarterly earnings per average common share do not total to the
1998 annual earnings per average common share due to the effect of common stock
issuances during the year.
<TABLE>
<CAPTION>
ELEVEN-YEAR FINANCIAL SUMMARY
In Thousands,
Except Per Share Data
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
Financial Results
Operating revenues $1,187,187 $918,070 $344,009 $204,970 $157,266 $153,257 $119,197 $122,900 $115,980 $117,671 $117,375
---------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Gross margins 347,400 223,025 163,583 108,545 82,366 80,259 67,275 69,509 64,940 66,166 65,180
Operating expenses 273,459 164,028 113,165 70,448 51,830 52,986 42,466 42,061 40,744 41,171 40,337
---------- -------- -------- -------- -------- -------- -------- -------- --------- ------- ------
Operating income 73,941 58,997 50,418 38,097 30,536 27,273 24,809 27,448 24,196 24,995 24,843
Interest expense (35,732) (31,476) (18,668) (11,694) (9,670) (8,945) (8,105) (7,244) (6,804) (6,886) (6,981)
Investment income
and other 6,145 11,564 9,719 3,029 2,444 4,431 2,690 1,834 6,890 4,314 (64)
----------- -------- ------- ------- ------- --------- -------- ------- ------ ------- -------
Income before income
taxes and minority
interests 44,354 39,085 41,469 29,432 23,310 22,759 19,394 22,038 24,282 22,423 17,798
Provision for income
taxes (13,196) (11,111)(15,415) (10,126) (7,869) (7,568) (5,673) (7,223) (6,776) (6,300) (3,922)
----------- -------- -------- -------- ------- ------- ------- ------- ------- ------- ------
Income before minority
Interests 31,158 27,974 26,054 19,306 15,441 15,191 13,721 14,815 17,506 16,123 13,876
Minority interests (767) (1,710) - - - - - - - - -
----------- -------- -------- -------- ------- ------- ------- ------ ------- --------- ------
Net income $30,391 $26,264 $26,054 $19,306 $15,441 $15,191 $13,721 $14,815 $17,506 $16,123 $13,876
Common Stock Data
Basic earnings
per share* $1.45 $1.31 $1.28 $1.11 $1.00 $0.98 $0.88 $0.94 $1.12 $1.02 $0.86
Diluted earnings
per share* $1.44 $1.31 $1.28 $1.11 $1.00 $0.98 $0.88 $0.94 $1.12 $1.02 $0.86
Basic and diluted earnings
pershare (excluding one
time gains)* - - $1.19 - - - - - $.89 $.88 -
Average shares outstanding*:
Basic 18,660 17,843 17,840 16,261 15,354 15,354 15,354 15,354 15,354 15,354 15,354
Diluted 18,816 17,843 17,840 16,261 15,354 15,354 15,354 15,354 15,354 15,354 15,354
Dividends paid per
common share* $.985 $.933 $.890 $.873 $.835 $.815 $.795 $.768 $.738 $.708 $.675
Annual dividend rate
at year end* $1.03 $.97 $.92 $.88 $.85 $.83 $.81 $.79 $.76 $.73 $.70
Book value per share
at year end* $12.26 $9.34 $9.18 $8.56 $7.47 $7.14 $6.98 $6.89 $6.72 $6.34 $6.03
Common stock price range*:
High $27.375 $23.500 $18.250 $14.188 $14.813 $16.750 $14.375 $13.438 $10.250 $10.125 $9.625
Low $20.250 $16.938 $13.375 $12.125 $12.250 $13.125 $11.750 $10.125 $8.375 $8.250 $7.813
Close $26.438 $23.000 $17.130 $14.000 $13.380 $14.380 $14.000 $12.940 $10.250 $10.000 $8.750
Price earnings ratio 18.4x 17.6x 13.4x 12.7 13.4x 14.7x 15.8x 13.8x 9.2x 9.8x 10.2x
Dividend payout ratio
(from ongoing operations)68.4% 71.2% 74.8% 79.0% 83.5% 83.2% 89.8% 81.6% 66.1% 69.4% 78.5%
Return on average common
Equity 14.6% 14.1% 14.4% 13.7% 13.1% 13.7% 12.8% 13.7% 17.0% 16.2% 14.3%
Common shareholders at
year end 10,116 8,845 8,750 8,738 8,132 8,231 8,279 8,262 8,014 8,246 8,473
Financial Position
(As of December 31)
Total assets $1,736,216 $1,106,123 $1,113,716 $558,721 $359,066 $343,574 $308,194 $297,761 $283,073 $272,260 $264,810
Working capital 57,739 11,844 44,922 31,859 (3,033) 6,121 5,774 (4,010) (4,599) 678 (1,403)
Long-term debt,
excluding current
portion 256,350 156,350 183,850 183,850 127,053 126,600 106,422 92,003 78,236 79,469 80,702
Total debt (including
subsidiaries) 608,935 433,095 425,657 213,410 127,623 127,200 106,572 93,236 79,469 80,702 81,935
Shareholders' equity 282,101 166,596 163,805 152,678 114,705 109,667 107,111 105,780 103,120 97,322 92,546
Other equity 479,952 235,972 225,464 38,760 2,640 2,670 2,700 5,590 5,785 5,980 6,175
Total equity $762,053 $402,568 $389,269 $191,438$117,345 $112,337 $109,811 $111,370 $108,905 $103,302 $98,721
</TABLE>
*Adjusted for the two-for-one stock split in May 1997 and the two-for-one stock
split in June 1988.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 30,865,212
<SECURITIES> 0
<RECEIVABLES> 1,315,451,199
<ALLOWANCES> 0
<INVENTORY> 72,805,229
<CURRENT-ASSETS> 267,168,310
<PP&E> 835,827,480
<DEPRECIATION> (206,549,700)
<TOTAL-ASSETS> 1,736,215,986
<CURRENT-LIABILITIES> 209,429,097
<BONDS> 588,875,109
0
91,250,000
<COMMON> 40,279,474
<OTHER-SE> 241,822,089
<TOTAL-LIABILITY-AND-EQUITY> 1,736,215,986
<SALES> 1,187,187,270
<TOTAL-REVENUES> 1,187,187,270
<CGS> 839,787,963
<TOTAL-COSTS> 839,787,963
<OTHER-EXPENSES> 273,458,984
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35,732,272
<INCOME-PRETAX> 44,353,509
<INCOME-TAX> 13,195,183
<INCOME-CONTINUING> 30,391,866
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,391,866
<EPS-PRIMARY> 1.45
<EPS-DILUTED> 1.44
</TABLE>
