SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES ACT OF 1934
For the transition period from ___________ to __________
Commission File No. 0-692
NORTHWESTERN CORPORATION
Delaware
(State of Incorporation)
IRS Employer Identification No. 46-0172280
125 South Dakota Avenue
Suite 1100
Sioux Falls, South Dakota 57104
(Address of principal office)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15 (D) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [ X ] Yes
[ ] No
Indicate the number of shares outstanding of each of the
registrant's classes of common stock, as of the latest
practicable date:
Common Stock, Par Value $1.75
23,108,893 shares outstanding at May 12, 2000
Corporation-Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trusts, Liquidation Amount $25.00
3,500,000 shares outstanding at May 12, 2000
Index
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
March 31, 2000 and December 31, 1999 3
Consolidated Statements of Income -
Three months and nine months ended
March 31, 2000 and 1999 4
Consolidated Statements of Cash Flows
Three months ended March 31, 2000 and 1999 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion of Financial
Condition and Results of Operations 10
PART II. OTHER INFORMATION 22
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of matters to a vote of security holders
Item 5. Other Information
Item 6. Exhibits and reports on Form 8-K
a. Exhibits
b. Reports on 8-K
SIGNATURES 23
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NORTHWESTERN CORPORATION
CONSOLIDATED BALANCE SHEETS
(unaudited)
(In Thousands)
March 31, December 31,
2000 1999
ASSETS
Current Assets:
Cash and cash equivalents $ 42,874 $ 29,677
Accounts receivable, net 188,983 205,378
Inventories 107,307 104,099
Other 57,433 44,444
-------- --------
396,597 383,598
-------- --------
Property, Plant and Equipment, Net 682,843 681,663
-------- --------
Goodwill and Other Intangible Assets,
Net 1,028,657 742,010
--------- --------
Other Assets:
Investments 99,169 96,056
Other 47,257 53,434
--------- --------
146,426 149,490
--------- --------
$ 2,254,523 $ 1,956,761
=========== ===========
Liabilities and Shareholders' Equity
Current Liabilities:
Current maturities of long-term debt $ 23,977 $ 24,170
Commercial paper 12,000 11,000
Short-term debt of subsidiaries-
nonrecourse 16,500 14,700
Accounts payable 109,111 157,959
Accrued expenses 114,099 61,218
-------- --------
275,687 269,047
-------- --------
Long-term Debt 390,350 309,350
Long-term Debt of Subsidiaries-
nonrecourse 559,643 473,757
Deferred Income Taxes 62,523 64,855
Other Noncurrent Liabilities 62,258 86,797
-------- -------
1,074,774 934,759
--------- -------
Minority Interests 506,091 361,549
--------- -------
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 - -
Company obligated mandatorily redeemable
preferred securities of subsidiary
trusts 87,500 87,500
------- -------
91,250 91,250
------- -------
Shareholders' Equity:
Common stock 40,438 40,438
Paid-in capital 160,028 160,028
Retained earnings 102,843 94,715
Accumulated other comprehensive income 3,412 4,975
------- -------
306,721 300,156
------- -------
$ 2,254,523 $ 1,956,761
=========== ============
The accompanying notes to consoldiated financial statements
are an integral part of these statements.
NORTHWESTERN CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In Thousands, Except for Per Share Amounts)
Three
Months Ended
March 31
-----------------
2000 1999
-----------------
Operating Revenues $ 1,330,944 $ 509,354
Cost of Sales 1,162,751 364,888
---------- ---------
Gross Margin 168,193 144,466
Operating Expenses:
Selling, general and administrative
expenses 112,037 87,086
Depreciation and other amortization 14,781 11,868
Goodwill amortization 5,386 3,378
---------- ---------
132,204 102,332
---------- ---------
Operating Income 35,989 42,134
Interest Expense (16,524) (11,931)
Interest Income and Other 3,135 3,317
---------- ---------
Income Before Income Taxes and Minority
Interests 22,600 33,520
Provision for Income Taxes (4,811) (7,460)
---------- ----------
Income Before Minority Interests 17,789 26,060
Minority Interests (1,550) (11,180)
---------- ----------
Net Income 16,239 14,880
Minority Interest on Preferred Securities
of Subsidiary Trusts (1,650) (1,650)
Dividends on Cumulative Preferred Stock (48) (48)
---------- ----------
Earnings on Common Stock $ 14,541 $ 13,182
========== ==========
Average Common Shares Outstanding 23,109 23,051
Earnings Per Average Common Share
Basic $ 0.63 $ 0.57
Diluted $ 0.62 $ 0.56
Dividends Declared Per Common Share $ 0.2775 $ 0.2575
The accompanying notes to consoldiated financial statements are an
integral part of these statements.
NORTHWESTERN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
Three Months Ended
March 31
------------------
2000 1999
------------------
Operating Activities:
Net Income $ 16,239 $ 14,880
Items not affecting cash:
Depreciation 13,216 10,053
Amortization 6,941 5,193
Deferred Income taxes (4,319) (103)
Minority interests in net income of
Consolidated subsidiaries 1,550 11,180
Investment Tax credits (138) (140)
Foreign currency adjustments (184) -
Changes in current assets and liabilities,
net of acquisitions:
Accounts receivable 803 (1,479)
Inventories (1,448) 13,691
Other current assets (12,160) (8,173)
Accounts payable (22,055) 1,244
Accrued expenses 20,572 (13,637)
Other, Net 691 (3,458)
-------- --------
Cash flows provided by operating activites 19,708 29,251
-------- --------
Investment Activities:
Property, plant and equipment additions (5,873) (6,467)
Purchase of noncurrent investments, net (4,954) (6,288)
Acquisitions and growth expenditures (89,339) (31,977)
--------- ---------
Cash flows used in investing activities (100,166) (44,732)
Financing Activities:
Dividends on common and preferred stock (6,461) (5,986)
Minority interest on preferred securities of
subsidiary trusts (1,650) (1,650)
Proceeds from exercise of warrants - 1,116
Subsidiary payment of common unit
distributions (9,083) (9,247)
Proceeds from issuance of common units 345 -
Issuance of nonrecourse subsidiary debt 36,301 38,338
Repayment of nonrecourse subsidiary debt (3,237) (13,278)
Repurchase of minority interest (6,360) -
Short term borrowings of subsidiaries 1,800 1,430
Outstanding lines of credit 81,000 -
Commercial paper issuances 1,000 -
------- -------
Cash flows provided by financing activities 93,655 10,723
------- -------
Increase (Decrease) in Cash and Cash Equivalents 13,197 (4,758)
Cash and Cash Equivalents, beginning of period 29,677 30,865
------- -------
Cash and Cash Equivalents, end of period $ 42,874 $ 26,107
======== ========
Supplemental Cash Flows Information:
Cash paid during the period for:
Income Taxes $ (493) $ 1,486
Interest 12,090 11,984
The accompanying notes to consoldiated financial statements are
an integral part of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Reference is made to Notes to Financial Statements
included in the Company's Annual Report)
(1) Management's Statement -
The financial statements included herein have been
prepared by NorthWestern Corporation (the Corporation),
without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of the
Corporation, all adjustments necessary for a fair
presentation of the results of operations for the interim
periods have been included. The preparation of financial
statements in conformity with generally accepted accounting
principles in the United States requires management to make
estimates and assumptions that may affect the reported
amounts of assets, liabilities, revenues and expenses during
the reporting period. Actual results could differ from
those estimates. It is suggested that these financial
statements be read in conjunction with the financial
statements and the notes thereto included in the
Corporation's latest annual report to shareholders.
(2) Subsidiaries and Principles of Consolidation
The accompanying consolidated financial statements
include the accounts of the Corporation and all wholly and
majority-owned or controlled subsidiaries, including
CornerStone Propane Partners, L.P. (NYSE:CNO), the nation's
fourth largest retail propane distributor; Blue Dot Services
Inc. ('Blue Dot.'), a national provider of air conditioning,
heating, plumbing and related services (HVAC); and Expanets,
Inc. ('Expanets'), a national provider of networked
communications solutions to mid-sized business customers.
All significant intercompany balances and transactions have
been eliminated from the consolidated financial statements.
The public unitholders' interest in CornerStone's net assets
subsequent to CornerStone's formation is reflected as
minority interests in the consolidated financial statements.
Interests of the former owners of companies acquired by Blue
Dot. and Expanets who continue to hold an interest in Blue
Dot. and Expanets are also reflected as minority interests
in the consolidated financial statements. Losses allocable
to minority interests in the future may increase or decrease
depending upon the level of losses in these business
segments, the amount of preferred dividends and the
remaining minority interest basis available to absorb
losses.
(3) Comprehensive Income
Comprehensive income for the three months ended March
31, 2000 and 1999, was $14.7 million and $15.2 million.
(4) Segment Information
For the purpose of providing segment information in
accordance with SFAS 131, 'Disclosures about Segments of an
Enterprise and Related Information,' the Corporation's six
principal business segments are its electric, natural gas,
retail propane, wholesale propane, HVAC and communications
operations. All other includes other service businesses,
activities and assets of the parent and any reconciling or
eliminating amounts.
The accounting policies of the operating segments are
the same as the parent except that the parent allocates some
of its operating expenses and interest expense to the
operating segments according to a methodology designed by
management for internal reporting purposes and involves
estimates and assumptions. Financial data for the business
segments are as follows (in thousands):
THREE MONTHS ENDED MARCH 31, 2000
-----------------------------------------------------
Total
Electric & Total Communi- All
Natural Gas Propane HVAC cations Other Total
Operating revenues $ 53,039 $ 1,109,585 $ 79,778 $ 79,778 $3,095 $1,330,944
Cost of sales 28,229 1,030,614 50,665 51,252 1,991 1,162,751
-------- ----------- -------- -------- ------ ----------
Gross margins 24,810 78,971 29,113 34,195 1,104 168,193
Selling, general and
administrative 10,053 39,039 28,076 31,458 3,411 112,037
Depreciation &
amortization 3,950 7,675 1,553 1,350 253 14,781
Goodwill amortization - 2,092 1,177 2,109 8 5,386
-------- ------- ------- ------- ----- -------
Operating income/(loss) 10,807 30,165 (1,693) (722)(2,568) 35,989
Interest expense (2,083) (9,435) (924) (792)(3,290) (16,524)
Investment income and
other (39) - 66 109 2,999 3,135
-------- ------- ------- ------- ----- -------
Income/(loss) before taxes
and minority interests 8,685 20,730 (2,551) (1,405)(2,859) 22,600
Provision for taxes (3,643) (2,492) 505 (285) 1,104 (4,811)
-------- ------- -------- ------- ----- -------
Income/(loss) before
minority interests $ 5,042 $ 18,238 $ (2,046)$(1,690)$(1,755) $ 17,789
======== ======== ======== ======= ======== ========
Maintenance capital
expenditures $ 1,909 $ 961 $ 1,788 $ 1,125 $ 90 $ 5,873
======== ======== ======== ======= ======= ========
THREE MONTHS ENDED MARCH 31, 1999
-------------------------------------
Total
Electric & Total Communi- All
Natural Gas Propane HVAC cations Other Total
Operating revenues $ 50,598 $ 340,328 $ 52,619 $ 52,619 $62,768 $ 509,354
Cost of sales 26,405 270,068 32,695 34,505 1,215 364,888
-------- --------- -------- -------- ------- ---------
Gross Margins 24,193 70,260 19,924 28,263 1,826 144,466
Selling, general and
administrative 10,168 34,318 18,265 20,980 3,355 87,086
Depreciation &
amortization 3,737 6,347 858 707 219 11,868
Goodwill amortization - 1,501 748 1,123 6 3,378
-------- --------- -------- ------- ------- --------
Operating income/(loss) 10,288 28,094 53 5,453 (1,754) 42,134
Interest expense (2,179) (6,863) - (283) (2,606) (11,931)
Investment income and other 53 - 88 (539) 3,715 3,317
-------- --------- -------- ------- ------- --------
Income/(loss) before taxes
and minority interests 8,162 21,231 141 4,631 (645) 33,520
Provision for taxes (2,700) (2,693) (384) (2,542) 859 (7,460)
-------- --------- -------- ------- ------- --------
Income/(loss) before
minority interests $ 5,462 $ 18,538 $ (243) $ 2,089 $ 214 $ 26,060
======== ========= ======== ======= ======= ========
Maintenance capital
expenditures $ 3,231 $ 2,002 $ 548 $ 648 $ 38 $ 6,467
======== ========= ======== ======= ======= ========
2000 1999
Natural Natural
Electric Gas Electric Gas
-------- -------- -------- -------
Operating
Revenues $ 20,589 $ 32,450 $ 20,475 $ 30,123
Cost of Sales 4,239 23,990 4,431 21,974
------- ------- ------- -------
Gross Margin $ 16,350 $ 8,460 $ 16,044 $ 8,149
======== ======== ======== =======
Retail Wholesale Retail Wholesale
Propane Propane Propane Propane
Operating
Revenues $ 133,130 $ 976,455 $ 108,206 $ 232,122
Cost of Sales 72,023 958,591 44,438 225,630
-------- -------- --------- --------
Gross Margin $ 61,107 $ 17,864 $ 63,768 $ 6,492
========= ========= ========== =========
(5) New Accounting Standards
In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 133
(SFAS 133), 'Accounting for Derivative Instruments and
Hedging Activities.' SFAS 133 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. SFAS 133 requires changes in the derivative's fair
value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS 133, as amended, is
effective for fiscal years beginning after June 15, 2000.
The Corporation is evaluating the impacts of adopting SFAS
133 on its financial statements. The impact of SFAS 133
will likely depend upon the extent of use of derivative
instruments and their designation and effectiveness as
hedges of market risk.
In December 1999, the Securities and Exchange
Commission issued Staff Accounting Bulletin No. 101 ('SAB
101'), 'Revenue Recognition in Financial Statements.' SAB
101 summarizes certain of the staff's views in applying
generally accepted accounting principles to revenue
recognition in financial statements. The Corporation is
required to apply SAB 101 effective for the quarter ending
June 30, 2000, but does not expect the adoption of SAB 101
to have any effect on our financial position or results of
operations.
(6) Reclassifications and Restatements
Certain 1999 amounts have been reclassified to conform
to the 2000 presentation. Such reclassifications and
restatements had no impact on net income or shareholders'
equity as previously reported.
(7) Earnings per Share
Basic earnings per share is computed on the basis of
the weighted average number of common shares outstanding.
Diluted earnings per share is computed on the basis of the
weighted average number of common shares outstanding plus
the effect of the outstanding stock options and warrants.
The following table presents the shares used in computing
the basic and diluted earnings per share for 2000 and 1999
(in thousands):
Three Months Ended
March 31
-------------------
2000 1999
-------------------
Average Common
Shares outstanding for
Basic computation 23,109 23,051
Diluted effect of:
Stock Options - 18
Stock Warrants 183 303
------- ------
Average common
Shares outstanding for
Diluted computation 23,292 23,372
====== ======
ITEM 2. MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The Corporation and its partner entities are providers
of value-added services and solutions to customers across
North America and Canada. The Corporation provides electric
and natural gas service to Midwestern customers through its
energy division, NorthWestern Public Service. In addition,
the Corporation holds interests in Blue Dot., CornerStone,
and Expanets. The Corporation is also engaged in other
service and nonenergy related businesses.
The Corporation was incorporated under the laws of the
state of Delaware in 1923. The executive offices are
located at 125 S. Dakota Avenue, Sioux Falls, South Dakota
57104, and our telephone number is 605-978-2908. Our
website is located at www.northwestern.com
RESULTS OF OPERATIONS
CONSOLIDATED OPERATING RESULTS
Diluted earnings per share of $.62 for the quarter
ended March 31, 2000 was an increase of $.06 over diluted
earnings per share of $.56 for first quarter 1999, as a
result of expanded operations.
Operating revenues for the first quarter of 2000
increased $822 million, 161.3%, over first quarter 1999 to
$1,331 million. Over 90% of the growth is attributable to
increases in the wholesale propane segment, resulting from
internal growth along with increased commodity prices.
Acquisitions in the HVAC and communications segments
contributed to the remaining increase as a full quarter's
impact from 1999 acquisitions were realized in 2000.
Cost of sales for the quarter of $1,163 million
increased $798 million over first quarter 1999. The propane
segment's wholesale operations accounted for over 90% of the
increase. Acquisitions completed in 1999 in the HVAC and
communications segments were responsible for the balance of
the growth.
Gross margins were $168.2 million or 12.6% of operating
revenues (42.4% excluding wholesale propane) for the
quarter, an increase of $23.7 million over first quarter
1999 gross margins of $144.5 million or 28.4% of operating
revenues (49.8% excluding wholesale propane). The increase
was due to acquisitions in the HVAC and communications
segments as well as the internal growth in the wholesale
propane segment. The significant wholesale propane
increases also drove down overall gross margin percentages
due to the low margin nature of those sales. The overall
gross margin percentage exclusive of the propane segment
decreased in the first quarter 2000 due principally to the
increased proportion which the HVAC and communications
segments (which have lower gross margins than the electric
segment) represent to total gross margin.
Operating expenses grew 29.2% over first quarter 1999
to $132.2 million for first quarter 2000. This growth was
principally derived from acquisitions and infrastructure
building within the HVAC and communications segments, as
well as internal and acquisitions growth within the propane
segment. Selling, general and administrative expenses
increased $24.9 million, from $87.1 million for first
quarter 1999 to $112.0 million for 2000. The HVAC and
communications segments comprised the majority of the
increase, a result of a full quarter inclusion of 1999
acquisitions in 2000, continued infrastructure building and
internal growth. The propane segment also contributed to
the increase due to the continued growth of the wholesale
operations. Depreciation and amortization was $20.2 million
for the quarter, a 32.3% increase over first quarter 1999.
The HVAC and communications segments had increased
amortization due to acquisition activity and growth in
depreciation expense from additional infrastructure and
acquisitions. The propane segment also increased due to
capital expenditures and acquisitions since the first
quarter of 1999.
Operating income of $36.0 million for the quarter
decreased $6.1 million, 14.6%, compared to first quarter
1999. The decline was attributable to the operating losses
in the HVAC, communications and all other segments resulting
from operating expense increases (due in part to
infrastructure investments) in excess of gross margin
growth, partially offset by increased operating income in
the propane and electric segments.
ELECTRIC
Revenues of $20.6 million for the segment grew 1% over
the quarter ended March 31, 1999. Warm weather patterns
compared to the prior year in the residential and commercial
service areas adversely affected retail revenues. Strong
wholesale sales due to market demands and excess capacity
helped to offset the reduced retail activity.
Costs of sales decreased from $4.4 million in 1999 to
$4.2 million for the current quarter end primarily as a
result of slightly lower power costs compared to prior
years.
Wholesale activity accounted for 70% of the increase in
gross margins to $16.4 million for the quarter. Retail
margins increased minimally due to higher property tax
assessments reflected in collected rates.
Operating expenses decreased slightly compared to the
prior year, to $9.4 million from $9.6 million. The
allocation of resources between electric and natural gas
operations and increased capital projects accounted for the
decrease, which was partially offset by higher property
taxes.
Operating income grew $556,000 over first quarter 1999
to $7.0 million for first quarter 2000. As noted above,
higher margins for wholesale activity and the decrease in
operating expenses attributed to the increase.
NATURAL GAS
Revenues grew 7.7% for first quarter 2000 over 1999 to
$32.4 million. The increase was primarily due to higher
product prices, a small rate increase and a slight increase
in the total number of customers in 2000, offset by the
negative effects of the abnormally warm weather as compared
to the prior year.
Cost of sales grew $2.0 million over 1999 to $24.0
million for first quarter 2000. Higher product prices as
compared to first quarter 1999 and an increase in customers
served resulted in the increase.
Gross margins grew from $8.1 million or 27.1% of
operating revenues for first quarter 1999 to $8.5 million or
26.1% of operating revenues for first quarter 2000. The
growth in gross margin is the result of the aforementioned
revenue increases, offset partially by increased costs,
while the decreased gross margin percentage is the result of
product price increases in 2000.
Operating expenses of $4.6 million for the quarter were
7.6% higher than first quarter 1999. Allocation of
resources between electric and natural gas for 2000 resulted
in the increase.
Operating income fell slightly from $3.9 million for
first quarter 1999 to $3.8 million for first quarter 2000 as
a result of operating expenses growth in excess of gross
margin growth.
PROPANE
Overall revenues for the segment increased $769
million, 226.0%, over first quarter 1999 to $1,110 million
for the current quarter end. Wholesale revenues increased
$744.3 million from $232.1 million first quarter 1999 to
$976.5 million for 2000. The wholesale operations
contributed 88% of total revenues for the current quarter
compared to a contribution of 69% in first quarter 1999.
Retail revenues increased 23% from $108.2 million to $133.1
million, primarily due to significant increases in product
prices combined with retail acquisitions. The revenue
growth was offset in part by a decline in retail volumes of
3.7 million gallons or 3.4% to 104.1 million for first
quarter 2000 due to weather that was considerably warmer
than normal and prior year, offset partially by
acquisitions.
Cost of sales of $1,031 million for the quarter
increased $761 million over first quarter 1999. The
wholesale activity accounted for $958.6 million of total
costs and $733.0 million of the increase (wholesale sales
have inherently low gross margins). Retail costs grew $27.6
million over first quarter 1999 to $72.0 million for the
current quarter end. The increase was due to the increased
product prices experienced throughout the first quarter of
2000.
Gross margins were $79.0 million or 7.1% of operating
revenues as compared to $70.3 million or 20.8% of operating
revenues in 1999. The increase was a result of the
increased wholesale activity offset by decreased retail
margins, which was the result of higher product prices and
abnormally warm weather conditions as compared to prior
year. The increased wholesale activity reduced the gross
margin percentage due to the low margin nature of wholesale
sales and their significant impact on the segment.
Selling, general and administrative expenses grew 13.8%
or $4.7 million over first quarter 2000. The growth was a
result of the increased wholesale activity. Depreciation
and amortization increased $1.9 million or 24.5% as a result
of acquisitions and capital expenditures.
Operating income of $30.2 million was a 7.4% increase
over first quarter 1999 income of $28.1 million. This
increase resulted from the strong wholesale activity, offset
by the adverse weather-affected retail segment.
HVAC
First quarter 2000 revenues of $79.8 million reflect an
increase of 51.6% over 1999 first quarter revenues. This is
largely attributable to the inclusion of a full quarter of
revenues from the 1999 acquisitions for first quarter 2000.
Most of the 1999 acquisitions were completed after March 31,
1999.
Cost of sales grew 55.0%, increasing from $32.7 million
to $50.7 million for 2000. As with revenues, the inclusion
of all the 1999 acquisitions in first quarter 2000 results
accounted for most of the increase. There was also an
increase in new construction activity, which have lower
gross margins, combined with price increases in materials
and fuel.
Gross margins of $29.1 million, 36.5% of operating
revenues, for the quarter increased $9.2 million
over 1999 margins of $19.9 million, 37.9% of operating
revenues. As noted previously, the increase was due to
acquisitions, offset by price increases and lower gross
margin projects.
Selling, general and administrative expenses increased
$9.8 million over first quarter 1999, to $28.1 million. The
increase is principally due to 1999 acquisitions, as well as
increased fuel and insurance costs and the annualization of
infrastructure investments made during 1999. Depreciation
and amortization increased $1.1 million to $2.7 million for
the quarter end due to acquisitions and capital
expenditures.
The segment had an operating loss of $1.7 million for
the quarter end, as compared to operating income of $53,000
for 1999 first quarter end, due to growth in operating
expenses that surpassed gross margin growth. The HVAC
industry is seasonally influenced and is also impacted in
part by weather conditions. The first quarter typically
generates below average revenues. Further, the weather
conditions experienced in the first quarter 2000 were warmer
than prior year and normal, which also had a negative impact
on revenues. Accordingly, the fixed operating expense
element of the HVAC segment is deleveraged during such
operating conditions.
COMMUNICATIONS
Revenues grew 36.1% over first quarter 1999 to $85.4
million for first quarter 2000. The increase resulted from
the inclusion of a full quarter of revenues from the 1999
acquisitions, most of which closed near or after first
quarter end 1999.
Cost of sales grew at a slightly faster rate than
revenues, increasing 48.5% from $34.5 million in 1999 to
$51.3 million for 2000. This increase was a result of the
1999 acquisitions which had sales mixes that contained a
larger percentage of equipment sales, which are
traditionally a lower margin.
Gross margins for 2000 of $34.2 million, or 40% of
operating revenues, were an increase of 21.0% over 1999
margins of $28.3 million (45% of operating revenues). The
increase in dollars was due to the 1999 acquisitions, which
also drove down the gross margin percentages due to their
higher equipment sales mix which is lower margin business.
Selling, general and administrative expenses grew 50.0%
over first quarter 1999 to $31.5 million. Expenses
increased due to additional personnel added throughout 1999,
expenses from acquisitions and the increase in
infrastructure, particularly in sales and technicians, for
anticipated revenue growth. Depreciation and amortization
increased $1.6 million to $3.5 million as a result of
acquisitions and capital expenditures.
Operating income fell from first quarter 1999 income of
$5.5 million to an operating loss of $722,000 for first
quarter 2000. The growth of operating expenses outpaced
gross margin growth, driving down operating income.
OTHER
This segment consists of the financial results of other
service and nonenergy-related business activities along with
unallocated corporate costs. Revenues grew 1.8% to $3.1
million. The growth was attributable to internal growth
within the businesses.
Cost of sales rose $776,000 over first quarter 1999 to
$2.0 million due to cost reclassifications between the
quarters and internal growth in lower margin lines of
business.
Gross margins decreased to $1.1 million for first
quarter 2000, down from $1.8 million in 1999. The decline
was due to an increase in cost of sales that was not
directly related to revenue growth.
Operating expenses of $3.7 million for the first
quarter increased 2.6% over 1999 operating expenses due to
increased infrastructure expenditures.
Operating loss for the segment decreased from $1.8
million to $2.6 million for first quarter 2000. This
resulted from the decreased gross margins, as operating
expenses remained relatively flat.
OTHER INCOME STATEMENT ITEMS
Interest expense grew $4.6 million, 38.5%, over first
quarter 1999 to $16.5 million for 2000. Increased interest
charges from additional nonrecourse borrowings in the
propane segment during 1999 accounted for over 50% of the
increase along with additional nonrecourse borrowings in the
HVAC segment compared to 1999. Corporate borrowings for
acquisitions also increased for the first quarter 2000 as
compared to 1999, resulting in higher interest expense.
Investment income of $3.1 million for the quarter was a
decline of $182,000 over first quarter 1999 income. The
decrease in excess cash for first quarter 2000 compared to
1999 is the result of increased preferred stock investments
in Blue Dot. and Expanets.
Income taxes decreased 35.5% over first quarter 1999 to
$4.8 million. This is directly related to the decrease in
income before taxes, most notably in the HVAC,
communications and all other segments, between the quarters.
Minority interests are the portion of the net income or
loss after preferred dividends related to the Corporation's
preferred stock investments in Blue Dot. and Expanets and
earnings attributable to the CornerStone public common
unitholders, which are allocable to other equity holders of
the minority interests. Minority interests income for the
quarter was $1.6 million, a decrease of $9.6 million from
first quarter 1999. The change is attributable to the
performance of the HVAC and communications segments where
allocable losses increased $5.0 million and $4.3 million,
respectively, combined with a slight decrease in the propane
segment's minority interest.
LIQUIDITY & CAPITAL RESOURCES
OPERATING ACTIVITIES
The Corporation believes it has adequate long-term
liquidity through the generation of operating cash flows,
the availability of substantial marketable securities,
existing credit facilities and a sound capital structure.
In addition, the Corporation has adequate capacity for
additional financing and continues to maintain this strong
position through favorable bond ratings.
Cash flows from operations for the quarter ended March
31, 2000 were $19.7 million, a decrease of $9.6 million
versus operating cash flows of $29.3 million for first
quarter 1999. The decrease is primarily due to changes in
HVAC and communications operations. Cash and cash
equivalents and investment securities totaled $124.0 million
and $165.6 million at March 31, 2000 and 1999. These cash
investment balances combined with available lines of credit
provide the resources necessary to support continued
business operations.
INVESTING AND FINANCING ACTIVITIES
The Corporation's primary investing focus was on the
continued strategic development and growth of Blue Dot. and
Expanets. In order to fund these activities as well as
general business operations, the Corporation maintains a
line of credit and commercial paper which provide an
aggregate $194.5 million for business use. At March 31,
2000, $12.0 million of commercial paper and $139.0 million
of the line of credit were drawn and outstanding and $43.5
million was available for use.
In addition to the lines of credit available at the
Corporate level, the nonregulated subsidiaries maintain
nonrecourse credit agreements with various banks.
CornerStone has a $110.0 million Bank Credit Facility for
acquisitions and general business purposes. CornerStone had
$10.0 million outstanding from their acquisitions line of
credit at March 31, 2000 to fund acquisitions and $80.9
million available for use on their Facility. Blue Dot.'s
Credit Facility provides for up to $135.0 million to fund
acquisitions and for general business purposes. Blue Dot.
had $61.2 million outstanding on their Facility and $73.8
million available at March 31, 2000. Expanets maintains a
$25.0 million line of credit, of which $16.5 million was
outstanding and $8.5 million available at March 31, 2000.
On March 31, 2000, Expanets completed a transaction to
purchase the small and mid-sized business sales organization
from Lucent Technologies. In order to partially finance
this transaction, the Corporation purchased an additional
$64.0 million cash investment in Expanets' preferred stock.
Any additional future working capital and capital
expenditure requirements are anticipated to be funded by
nonrecourse facilities obtained at the Expanets level.
CAPITAL REQUIRMENTS
The Corporation's principal capital requirements
include continued funding for growth of business segments;
funding corporate investment and development ventures;
funding maintenance and expansion programs; funding debt and
preferred stock retirements; sinking fund requirements; and
distributions to propane common unitholders.
Maintenance capital expenditures for the three months
ended March 31, 2000 and 1999 were $5.9 million and $6.5
million. Expenditures are continually reviewed and are
subject to change as a result of changing economic
conditions, variations in sales, investment opportunities
and other ongoing considerations. Estimated annual
maintenance expenditures for 2000 and 2001 are $41.2 million
and $43.7 million, respectively.
Capital requirements for the mandatory retirements of
long-term debt, including nonrecourse debt of subsidiaries
is expected to be $24.0 million in 2000. The Corporation
anticipates that existing investments and marketable
securities, internally generated cash flows and available
external financing will be sufficient to 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 may continue to make investments in Blue Dot.
and Expanets, in which the Corporation had invested $401.1
million through March 31, 2000. Also, the Corporation may
make other significant acquisition investments in related or
other industries that might require the Corporation to raise
additional equity and/or incur debt financings, which are
therefore subject to certain risks and uncertainties.
Weather
Weather patterns can have a material impact on the
Corporation's operating performance for all three segments
(propane, natural gas and electric) of its energy business,
and to a lesser extent the HVAC business segment. This
impact is particularly relevant for natural gas and propane.
Because propane and natural gas are heavily used for
residential and commercial heating, the demand for these
products depends heavily upon weather patterns throughout
the Corporation's market areas. With a larger proportion of
its operations related to seasonal propane and natural gas
sales, a significantly greater portion of the Corporation's
operating income is recognized in the first and fourth
quarters related to higher revenues from the heating season.
COMPETITION AND BUSINESS RISK
NorthWestern and its partner entities are leading
providers of value-added, integrated services and solutions
to over two million residential and business customers
nationwide. Our strategy will continue to focus on the
expansion of our existing growth initiatives, both through
internal growth and acquisitions and through the integration
of other value-added services. We also intend to seek
investment opportunities in other existing or emerging
growth industries within the service and solutions sector.
While these strategic development and acquisitions
activities can involve increased risk, we believe they offer
the potential for enhanced investment returns. The
Corporation's growth strategy will be subject to certain
risks and uncertainties, including the future availability
of market capital to fund development and acquisitions, our
ability to develop or acquire suitable businesses, our
responses to increased competition, our ability to attract,
retain and train skilled team members, governmental
regulations and general economic conditions, some of which
factors are discussed in further detail below. Our
acquisition activities involve the risk of successfully
integrating acquired companies, including the adequacy and
efficiency of information systems, business processes and
related support functions. The Corporation has taken and
continues to take steps to address and mitigate such risks.
There are no assurances that such efforts will be sufficient
to meet the future needs of the Corporation. Future changes
in accounting rules and regulations, such as those
related to the proposed reduction in the maximum goodwill
life from 40 to 20 years, could also 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, which could adversely
affect CornerStone's ability to pay common and subordinated
unit distributions and fund future growth and acquisitions.
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, has issued
final rules designed to open up transmission grids and
mandate owners of transmission assets to allow others equal
access to utility transmission systems and prompts the
formation of regional transmission organizations (RTO's) to
control and operate interstate transmission facilities.
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. These and
other developments are expected to increase competition in
the wholesale and retail electricity markets. 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 Corporation's future financial performance will be
dependent on the effective execution of operating strategies
to address a more competitive and changing energy
marketplace. The Corporation is exploring new energy
products and services, utilizing new technologies,
centralizing activities to improve efficiency and customer
responsiveness and business processes are being reengineered
to apply best-practices methodologies.
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.
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,
data services and network solutions industry is also a
highly competitive market. The Corporation believes that 1)
market acceptance of the products, services and technology
solutions 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 and marketing programs.
YEAR 2000 READINESS
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.
The Corporation 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.
The initiative covered not only the Corporation's
information technology systems and computer applications,
but also considered hardware, embedded systems and
components internal and external to our organizations. The
Corporation's program considered not only our businesses and
technology areas but also those of our customers and
suppliers. The Corporation spent approximately $2 million in
1999 related to the year 2000 issue which was expensed as
incurred or capitalized in accordance with our accounting
policy for software development costs.
As a result of year 2000 readiness efforts, the
Corporation's mission critical information technology
systems did not experience any material adverse application
failures on January 1, 2000, and we are not aware of any
material adverse impacts to our suppliers or customers. We
do not believe that year 2000 issues have had any material
impact on customer spending patterns for our services and
solutions. The Corporation will continue to monitor its
mission critical computer applications throughout the year
2000 to ensure that any potential year 2000 issues that may
arise are addressed promptly. The Corporation cannot
provide assurance that our suppliers or customers have not
been affected by a year 2000 issue in a manner that is not
yet apparent.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Statements made in this Form 10-Q, such as those
relating to expectation of future financial performance,
continued growth, dividend policy, liquidity, absence of
year 2000 problems and the impact of changes in interest
rates and commodity prices, are forward-looking statements
that involve inherent risks and uncertainties. A number of
important factors which are difficult to predict and many of
which are beyond the control of the Corporation, could cause
actual results to differ materially from those implied by
the forward-looking statements. These factors include, but
are not limited to, the adverse impact of unseasonal
weather, developments in the federal and state regulatory
environment, the rate of growth in the service territories
of the Corporation and its subsidiaries, the speed and
degree to which competition enters the Corporation's
businesses, the timing and extent of changes in interest
rates and commodity prices, risks associated with
acquisitions and integration of acquired companies, changes
in customer usage patterns and preferences, as well as
changing conditions in the economy, capital markets and
other factors identified from time to time in the
Corporation's filings with the Securities and Exchange
Commission. This Form 10-Q should be read in conjunction
with the most recent annual consolidated financial
statements and notes thereto.
NORTHWESTERN CORPORATION
PART II
ITEM 1. LEGAL PROCEEDINGS
The Corporation is from time to time a part to
litigation arising in the ordinary course of its
business and strategic development activities.
Management believes that none of such actions will
have a material adverse effect on our financial
condition, results of such operations or cash
flows.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule UT (SEC
only)
(10) MATERIAL CONTRACTS
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
NORTHWESTERN CORPORATION
----------------------------
(Registrant)
Date: May 12, 2000 /s/ David A. Monaghan
------------------------------
Controller and Treasurer
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