NORTHWESTERN CORP, 10-Q/A, 2000-11-13

NORTHWESTERN CORP
10-Q/A, 2000-11-13
ELECTRIC & OTHER SERVICES COMBINED

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q/A

(Mark One)

/x/	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended June 30, 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

Delaware
(State of Incorporation)

IRS Employer Identification No. 46-0172280

125 South Dakota Avenue
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. Yes /x/ 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
23,118,893 shares outstanding at August 8, 2000

Corporation-Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trusts, Liquidation Amount $25.00
3,500,000 shares outstanding at August 8, 2000

EXPLANATORY STATEMENT

We are filing this amendment to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2000 in order to revise Item 1 Financial Statements, Item 2 Management's Discussion and Analysis of Results of Operations, and Part 2, Exhibit 27, Financial Data Schedule for the effects of understatements of gross margins for the quarter and six months ended June 30, 2000, with no change in consolidated net income (see Note 5).

INDEX

			PAGE
PART 1. FINANCIAL INFORMATION
	Item 1.	Financial Statements	3
		Consolidated Balance Sheets—June 30, 2000 and December 31, 1999	3
		Consolidated Statements of Income—Three months and six months ended June 30, 2000 and 1999	4
		Consolidated Statements of Cash Flows—Six months ended June 30, 2000 and 1999	5
		Notes to Consolidated Financial Statements	6
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	11
PART 2. OTHER INFORMATION			23
	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 1. FINANCIAL INFORMATION
Item 1. Financial Statements

NORTHWESTERN CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In Thousands)

		June 30, 2000		December 31, 1999
ASSETS
Current Assets:
	Cash and Equivalents	$	77,466	$	29,677
	Accounts Receivable, Net		291,616		205,378
	Inventories		125,158		104,099
	Other		45,016		44,444

			539,256		383,598

Property, Plant, and Equipment, Net			687,809		681,663

Goodwill and Other Intangible Assets, Net			1,017,874		742,010

Other Assets
	Investments		96,831		96,056
	Other		49,240		53,434

			146,071		149,490

		$	2,391,010	$	1,956,761

LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
	Current Maturities of Long-Term Debt	$	5,000	$	5,000
	Current Maturities of Long-Term Debt—Nonrecourse		50,515		19,170
	Commercial Paper		8,000		11,000
	Short-term Debt—Nonrecourse		20,000		14,700
	Accounts Payable		227,682		157,959
	Accrued Expenses		131,292		61,218

			442,489		269,047

Long-term Debt			410,350		309,350
Long-term Debt of Subsidiaries—Nonrecourse			548,451		473,757
Deferred Income Taxes and Other			64,101		64,855
Other Noncurrent Liabilities			63,560		86,797

			1,086,462		934,759

Minority Interests			464,793		361,549

	Preferred Stock, Preference Stock, and Preferred Securities
	Preferred Stock—4¹/2% Series		2,600		2,600
	Redeemable Preferred Stock—6¹/2% Series		1,150		1,150
	Preference Stock		—		—
	Corporation Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts		87,500		87,500

			91,250		91,250

Shareholders' Equity
	Common Stock		40,456		40,438
	Paid-in Capital		160,192		160,028
	Retained Earnings		102,432		94,715
	Accumulated Other Comprehensive Income		2,936		4,975

			306,016		300,156

		$	2,391,010	$	1,956,761

The accompanying notes to consolidated financial statements are an integral part of these statements.

NORTHWESTERN CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)
(Unaudited)

		Three Months Ended June 30						Six Months Ended June 30
		2000			1999			2000			1999
OPERATING REVENUES		$	1,637,715		$	595,850		$	2,968,659		$	1,105,204
COST OF SALES			1,433,588			482,788			2,596,339			847,676

GROSS MARGIN			204,127			113,062			372,320			257,528
OPERATING EXPENSES
	Selling, general and administrative expenses		176,524			85,573			288,561			172,659
	Depreciation		14,859			9,654			28,099			19,643
	Goodwill and other intangibles amortization		13,572			6,236			20,499			11,493

			204,955			101,463			337,159			203,795

OPERATING INCOME (LOSS)			(828	)		11,599			35,161			53,733
Interest Expense, Net			(19,431	)		(13,676	)		(35,955	)		(25,607	)
Investment Income and Other			2,993			2,450			6,128			5,767

Income (Loss) Before Income Taxes and Minority Interests			(17,266	)		373			5,334			33,893
Provision for Income Taxes			(1,456	)		(3,417	)		(6,267	)		(10,877	)

Income (Loss) Before Minority Interests			(18,722	)		(3,044	)		(933	)		23,016
Minority Interests			26,424			9,881			24,874			(1,299	)

Net Income			7,702			6,837			23,941			21,717
Minority Interests on Preferred Securities of Subsidiary Trusts			(1,650	)		(1,650	)		(3,300	)		(3,300	)
Dividends on Preferred Stock			(48	)		(48	)		(96	)		(96	)

Earnings on Common Stock		$	6,004		$	5,139		$	20,545		$	18,321

Average Common Shares Outstanding			23,117			23,108			23,113			23,078
Earnings per Average Common Share
	Basic	$	0.26		$	0.22		$	0.89		$	0.79
	Diluted	$	0.26		$	0.22		$	0.88		$	0.78

The accompanying notes to consolidated financial statements are an integral part of these statements

NORTHWESTERN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)

				Six Months Ended June 30
				2000			1999
Operating Activities:
	Net Income			$	23,941		$	21,717
	Items not affecting cash:
		Depreciation			28,099			19,643
		Amortization			20,499			11,493
		Deferred income taxes			(4,929	)		(3,434	)
		Minority interests in net income (loss) of consolidated subsidiaries			(24,874	)		1,299
		Investment tax credits			(272	)		(140	)
		Foreign currency adjustments			(299	)		(229	)
		Changes in current assets and liabilities, net of acquisitions:
			Accounts receivable		(82,268	)		12,785
			Inventories		(18,054	)		10,801
			Other current assets		265			(1,734	)
			Accounts payable		95,451			(16,655	)
			Accrued expenses		23,275			(1,530	)
		Other, net			(5,856	)		(4,192	)

		Cash flows provided by operating activities			54,978			49,824

Investment Activities:
	Property, plant and equipment additions				(15,159	)		(12,200	)
	Purchase of noncurrent investments, net				(3,470	)		40,478
	Acquisitions and growth expenditures				(100,309	)		(106,823	)

		Cash flows used in investing activities			(118,938	)		(78,545	)

Financing Activities:
	Dividends on common and preferred stock				(12,924	)		(11,984	)
	Minority interest on preferred securities of subsidiary trusts				(3,300	)		(3,300	)
	Proceeds from exercise of warrants				182			1,656
	Subsidiary payment of common unit distributions				(18,539	)		(18,499	)
	Issuance of nonrecourse subsidiary debt				59,700			81,040
	Repayment of nonrecourse subsidiary debt				(5,264	)		(12,119	)
	Repurchase of minority interest				(11,406	)		—
	Short-term borrowings of subsidiaries, net				5,300			—
	Outstanding lines of credit				101,000			—
	Commercial paper repayments, net				(3,000	)		—

		Cash flows provided by financing activities			111,749			36,794

Increase (Decrease) in Cash and Cash Equivalents					47,789			8,073
Cash and Cash Equivalents, beginning of period					29,677			30,865

Cash and Cash Equivalents, end of period				$	77,466		$	38,938

Supplemental Cash Flow Information:
	Cash paid during the period for:
		Income Taxes		$	7,724		$	9,826
		Interest		$	31,010		$	14,898
	Non-cash transactions:
		Long-term debt assumed from acquisitions		$	479		$	4,051
		Minority equity interest issued for acquisitions		$	159,638		$	20,096

The accompanying notes to consolidated financial statements are an integral part of these statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Reference is made to Notes to Financial Statements
included in the Company's Annual Report)

(1) Management's Statement—

The consolidated financial statements for the interim periods included herein have been prepared by NorthWestern Corporation (the Corporation), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). 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. Results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year, and these financial statements do not contain the detail or footnote disclosure concerning accounting policies and other matters that would be included in full fiscal year financial statements. Therefore, these financial statements should 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 and data solutions primarily to small and 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—

The Financial Accounting Standards Board defines comprehensive income as all changes to the equity of a business enterprise during a period, except for those resulting from transactions with owners. For example, dividend distributions are excepted. Comprehensive income consists of net income and other comprehensive income. Net income may include such items as income from continuing operations, discontinued operations, extraordinary items, and cumulative effects of changes in accounting principles. Other comprehensive income may include foreign currency translations, adjustments of minimum pension liability, and unrealized gains and losses on certain investments in debt and equity securities.

Comprehensive income for the three months ended June 30, 2000 and 1999, was $7.2 million and $8.0 million. Comprehensive income for the six months ended June 30, 2000 and 1999 was $21.9 million and $23.2 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 June 30, 2000
	Total Electric and Natural Gas			Total Propane			HVAC			Communi- cations			All Other			Total
Operating Revenues	$	35,404		$	1,131,669		$	108,121		$	358,553		$	3,968		$	1,637,715
Cost of Sales		14,651			1,103,848			67,158			245,153			2,778			1,433,588

Gross Margin		20,753			27,821			40,963			113,400			1,190			204,127
Selling, general, & administrative		9,038			32,567			32,247			98,903			3,769			176,524
Depreciation		3,950			6,877			1,928			1,817			287			14,859
Goodwill and other intangibles amortization		—			3,621			1,335			8,609			7			13,572

Operating income (loss)		7,765			(15,244	)		5,453			4,071			(2,873	)		(828	)
Interest expense		(1,978	)		(9,245	)		(1,507	)		(1,592	)		(5,109	)		(19,431	)
Investment income and other		42			—			172			172			2,607			2,993

Income (loss) before taxes and minority interests		5,829			(24,489	)		4,118			2,651			(5,375	)		(17,266	)
Provision for taxes		(1,536	)		2,134			(2,238	)		(2,448	)		2,632			(1,456	)

Income (loss) before minority interests	$	4,293		$	(22,355	)	$	1,880		$	203		$	(2,743	)	$	(18,722	)

Total Assets	$	123,548		$	851,210		$	323,575		$	745,435		$	347,242		$	2,391,010

Maintenance Capital Expenditures	$	3,138		$	1,253		$	3,192		$	1,398		$	5		$	8,986

	Three Months Ended June 30, 1999
	Total Electric and Natural Gas			Total Propane			HVAC			Communi- cations			All Other			Total
Operating Revenues	$	33,581		$	417,792		$	73,082		$	67,813		$	3,582		$	595,850
Cost of Sales		13,429			385,217			44,801			36,363			2,978			482,788

Gross Margin		20,152			32,575			28,281			31,450			604			113,062
Selling, general, & administrative		8,652			28,324			22,108			25,083			1,406			85,573
Depreciation		3,700			3,811			1,067			781			295			9,654
Goodwill and other intangibles amortization		—			3,053			1,034			2,139			10			6,236

Operating income (loss)		7,800			(2,613	)		4,072			3,447			(1,107	)		11,599
Interest expense		(2,178	)		(8,658	)		—			(260	)		(2,580	)		(13,676	)
Investment income and other		172			—			19			569			1,690			2,450

Income (loss) before taxes and minority interests		5,794			(11,271	)		4,091			3,756			(1,997	)		373
Provision for taxes		(1,738	)		1,184			(1,982	)		(1,835	)		954			(3,417	)

Income (loss) before minority interests	$	4,056		$	(10,087	)	$	2,109		$	1,921		$	(1,043	)	$	(3,044	)

Total Assets	$	311,131		$	779,230		$	88,638		$	97,187		$	504,389		$	1,780,575

Maintenance Capital Expenditures	$	3,523		$	565		$	604		$	825		$	236		$	5,753

	Three Months Ended June 30
	2000				1999
	Electric		Natural Gas		Electric		Natural Gas
Operating Revenues	$	18,985	$	16,419	$	20,061	$	13,520
Cost of Sales		3,291		11,360		4,515		8,914

Gross Margin		15,694		5,059		15,546		4,606
Selling, general & administrative		5,814		3,224		5,981		2,671
Depreciation & amortization		3,147		803		3,003		697

Operating Income	$	6,733	$	1,032	$	6,562	$	1,238

	Three Months Ended June 30
	2000				1999
	Retail Propane		Wholesale Propane		Retail Propane		Wholesale Propane
Operating Revenues	$	53,951	$	1,077,718	$	47,641	$	370,151
Cost of Sales		27,521		1,076,327		19,263		365,954

Gross Margin	$	26,430	$	1,391	$	28,378	$	4,197

	Six Months Ended June 30, 2000
	Total Electric and Natural Gas			Total Propane			HVAC			Communi- cations			All Other			Total
Operating Revenues	$	88,443		$	2,241,254		$	187,899		$	444,000		$	7,063		$	2,968,659
Cost of Sales		42,880			2,134,462			117,823			296,405			4,769			2,596,339

Gross Margin		45,563			106,792			70,076			147,595			2,294			372,320
Selling, general, & administrative		19,091			71,606			60,323			130,361			7,180			288,561
Depreciation		7,900			13,045			3,453			3,161			540			28,099
Goodwill and other intangibles amortization		—			7,220			2,540			10,724			15			20,499

Operating income (loss)		18,572			14,921			3,760			3,349			(5,441	)		35,161
Interest expense		(4,061	)		(18,680	)		(2,431	)		(2,384	)		(8,399	)		(35,955	)
Investment income and other		3			—			238			281			5,606			6,128

Income (loss) before taxes and minority interests		14,514			(3,759	)		1,567			1,246			(8,234	)		5,334
Provision for taxes		(5,179	)		(358	)		(1,733	)		(2,733	)		3,736			(6,267	)

Income (loss) before minority interests	$	9,335		$	(4,117	)	$	(166	)	$	(1,487	)	$	(4,498	)	$	(933	)

Total Assets	$	123,548		$	851,210		$	323,575		$	745,435		$	347,242		$	2,391,010

Maintenance Capital Expenditures	$	5,047		$	2,214		$	4,980		$	2,822		$	96		$	15,159

	Six Months Ended June 30, 1999
	Total Electric and Natural Gas			Total Propane			HVAC			Communi- cations			All Other			Total
Operating Revenues	$	84,179		$	758,120		$	125,701		$	130,581		$	6,623		$	1,105,204
Cost of Sales		39,834			655,285			77,496			70,868			4,193			847,676

Gross Margin		44,345			102,835			48,205			59,713			2,430			257,528
Selling, general, & administrative		18,820			62,642			40,373			46,063			4,761			172,659
Depreciation		7,437			8,343			1,861			1,488			514			19,643
Goodwill and other intangibles amortization		—			6,369			1,846			3,262			16			11,493

Operating income (loss)		18,088			25,481			4,125			8,900			(2,861	)		53,733
Interest expense		(4,357	)		(15,521	)		—			(543	)		(5,186	)		(25,607	)
Investment income and other		225			—			107			30			5,405			5,767

Income (loss) before taxes and Minority Interests		13,956			9,960			4,232			8,387			(2,642	)		33,893
Provision for taxes		(4,438	)		(1,509	)		(2,366	)		(4,377	)		1,813			(10,877	)

Income (loss) before minority interests	$	9,518		$	8,451		$	1,866		$	4,010		$	(829	)	$	23,016

Total Assets	$	311,131		$	779,230		$	88,638		$	97,187		$	504,389		$	1,780,575

Maintenance Capital Expenditures	$	6,754		$	2,567		$	1,152		$	1,473		$	274		$	12,220

	Six Months Ended June 30
	2000				1999
	Electric		Natural Gas		Electric		Natural Gas
Operating Revenues	$	39,574	$	48,869	$	40,536	$	43,643
Cost of Sales		7,530		35,350		8,946		30,888

Gross Margin		32,044		13,519		31,590		12,755
Selling, general & administrative		12,046		7,045		12,598		6,222
Depreciation & amortization		6,284		1,616		6,005		1,432

Operating Income	$	13,714	$	4,858	$	12,987	$	5,101

	Six Months Ended June 30
	2000				1999
	Retail Propane		Wholesale Propane		Retail Propane		Wholesale Propane
Operating Revenues	$	187,081	$	2,054,173	$	155,847	$	602,273
Cost of Sales		99,544		2,034,918		63,701		591,584

Gross Margin	$	87,537	$	19,255	$	92,146	$	10,689

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 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 required 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 on 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, the adoption of which will not have a material impact upon our financial position or results of operations.

(5) 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.

After filing of the Form 10-Q on August 14, 2000, the Corporation was informed by Lucent Technologies that certain product sales and associated costs attributable to the Lucent GEM operations purchased by Expanets had been incorrectly allocated by the Lucent Technologies general ledger system. The consolidated financial statements have been restated to properly reflect the inclusion of the revenue, cost of sales, income taxes, and minority interests associated with the adjustments. These restatements did not have any impact on the consolidated net income for the quarter or six month period ended June 30, 2000.

(6) 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 June 30		Six Months Ended June 30
		2000	1999	2000	1999
Average Common Shares Outstanding
	For Basic Computation	23,117	23,108	23,113	23,078
Dilutive Effect of:
	Stock Options	30	23	21	22
	Stock Warrants	203	310	193	307

Average Common Shares Outstanding
	For Diluted Computation	23,350	23,441	23,327	23,407

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS 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 $.26 for the quarter ended June 30, 2000 represented an increase of 18.1% or $.04 per share over second quarter 1999 diluted earnings per share of $.22. For the six months ended June 30, 2000, diluted earnings per share of $.88 was a $.10 per share, 12.8%, increase over the six months ended June 30, 1999 diluted earnings per share of $.78.

Operating revenues for the current quarter increased 174.9% over second quarter 1999 operating revenues to reach $1,638 million. Approximately 68% of the growth is attributable to the propane segment, mainly through increased wholesale activity. The wholesale growth has been achieved as a result of increased commodity prices and internal growth. An additional 27.9% of the revenue growth is due to the communications segment as a result of the Lucent GEM transaction that was consummated March 31, 2000 (see, "Liquidity and Capital Resources"). Revenues for the six months ended June 30, 2000 were $2,969 million, an increase of 168.6% over the six months ended June 30, 1999. $1,452 million, 77.9%, of the increase is due to the wholesale propane segment's increased commodity prices, internal growth and acquisitions. An additional $268.3 million is due to the revenues from the Lucent GEM transaction included in the communications segment as well as continued acquisitions within the HVAC segment.

Cost of sales were approximately $1,434 million for the quarter ended June 30, 2000, an increase of $950.8 million over the prior quarter ended June 30, 1999. Increased wholesale propane costs accounted for 74.7% of the increase. Communications costs added an additional $208.8 million to the increase, primarily a result of the Lucent GEM transaction. Cost of sales for the six months ended were $1,749 million higher than for the six month period ended June 30, 1999. Wholesale propane costs rose $1,443 million alone, accounting for 82.5% of the increase. The remaining increase is due largely to acquisition growth in the communications segment.

Gross margins for the quarter ended June 30, 2000 were $204.1 million, an increase of $91.1 million over the quarter ended June 30, 1999. The communications segment, mainly through the Lucent GEM acquisition, accounted for the majority of the increase. The overall gross margin percentage of 12.3% decreased from the quarter ended June 30, 1999 percentage of 19.0%, primarily as a result of the increased wholesale activity in the propane segment (wholesale propane sales have substantially lower margins than retail propane sales). Exclusive of the wholesale activity, gross margin percentages decreased from 48.3% for the quarter ended June 30, 1999, to 36.2% for the quarter ended June 30, 2000. This is due to a shift in the communications segment towards more voice data (equipment) sales activity, most notably in the Lucent GEM acquisition operations, and HVAC's shift in business and product mixes. For the six months ended June 30, 2000, gross margins were $372.3 million (12.5% of operating revenues or 38.6% excluding wholesale propane) as compared to 1999 gross margins of $257.5 million (23.3% of operating revenues or 49.1% excluding wholesale

propane). Of the $114.8 million increase, $87.9 million is attributable to the communications segment as a result of internal growth and through the Lucent GEM acquisition. The HVAC segment increased $21.9 million due to acquisitions. As noted for the quarter, gross margin percentages decreased due to the increased, but lower margin, wholesale propane activity. As with the quarter-end comparisons, the shift in the communications segment towards more equipment sales and HVAC's changing sales mix accounted for the remaining percentage decrease.

Operating expenses of $205.0 million increased 102.0% over second quarter 1999 expenses. The increase is due to acquisitions in the HVAC, communications (particularly the Lucent GEM acquisition) and propane segments, and continued investment in operating infrastructure. Selling, general and administrative expenses increased $91.0 million over second quarter 1999 to $176.5 million for the current quarter-end. The communications segment accounted for $73.8 million of the increase, due in large part to the Lucent GEM acquisition, internal growth and infrastructure growth to support business expansions. HVAC and propane segments contributed the majority of the remaining increase due to internal growth and acquisitions. Depreciation and amortization expenses increased $12.5 million over second quarter 1999 due to increased goodwill amortization within the communications segment resulting primarily from the Lucent GEM acquisition, and increases in depreciation and amortization within the HVAC and propane segments as a result of acquisitions and capital expenditures. Overall operating expenses for the six months ended June 30, 2000 of $337.2 million is an increase of 65.4% over the six-month period ended June 30, 1999. Increased expenses within the communications segment due to the Lucent GEM acquisition, accounted for the majority of the increase. HVAC growth due to inclusion of acquisitions completed throughout 1999 along with current year acquisitions, and similar activities within the propane segment comprised the balance of the increase. Selling, general and administrative expenses grew $115.9 million, mainly as a result of the Lucent GEM acquisition and growth within the HVAC segment. Depreciation and amortization increased as a result of acquisitions within the HVAC, communications and propane segments.

Operating loss of $828,000 for the quarter was a $12.4 million decline from the operating income of $11.6 million for the second quarter of 1999. The propane segment accounted for more than half of the decrease, a result of gross margin decreases resulting from unprecedented warm weather patterns and discontinued unprofitable natural gas trading operations, compounded by operating expense growth. The communications segment and all other segment accounted for the remaining decreases, due to the increased infrastructure development expenses and acquisitions. Operating income for the six months ended June 30, 2000 of $35.2 million was a decrease of $18.6 million from the same period in 1999. Propane and communications segments comprised approximately 90% of the decrease, a result of the same factors noted above for the quarter end comparisons.

ELECTRIC

Operating revenues declined 5.4% for the current quarter ended June 30, 2000, as compared to the second quarter of 1999. Revenues decreased from $20.1 million to $19.0 million, a result of mild weather, decreased wholesale activity (due to reduced excess capacity in second quarter 2000), and pass-through lower fuel costs to consumers. Revenues for the six-month period ended were down $1.0 million from the six months ended June 30, 1999. Reduced retail revenues were the main cause of the decline, a product of mild weather throughout 2000 and the aforementioned pass-through fuel costs decrease.

Cost of sales declined $1.2 million for the quarter ended June 30, 2000 as compared to second quarter 1999. The decrease was mainly attributable to lower overall power costs primarily due to reduced coal costs in the retail segment and deferred power cost adjustments. For the six months ended June 30, 2000, costs decreased $1.4 million from 1999 due to the same factors noted for the quarter decline.

Gross margins for the quarter end were up $148,000 due to decreased fuel costs as noted above. Gross margins of $32.0 million for the six months ended increased 1.4% over 1999 again due to cost of sales decreases principally within the retail operations.

Operating expenses declined $23,000 for the current quarter end as compared to second quarter 1999. A higher proportion of capital projects accounted for the majority of the change, offset by increased health insurance costs. Expenses for the six months ended June 30, 2000 decreased $273,000 from expenses of $18.6 million for the six months ended June 30, 1999, due to the same factors noted previously for the quarter.

Operating income increased 2.6% over the second quarter 1999 income, to $6.7 million for the current quarter end. This increase was a result of decreased operating expenses and slight gross margin growth. Operating income for the six-month period increased $727,000 over 1999 due to decreases in operating expenses and gross margin growth in the retail segment.

NATURAL GAS

Operating revenues reached $16.4 million for the second quarter of 2000, a 21.4% increase over the second quarter 1999. Increased product prices (which are passed through to consumers through rate adjustments) as well as an increase in rates effective in 1999 accounted for the increase. For the six months ended June 30, 2000, revenues increased $5.2 million, 12%, over 1999. Rising product prices and the rate increase were offset by mild weather throughout 2000.

Second quarter 2000 cost of sales increased $2.4 million, 27.4%, over second quarter 1999 costs of $8.9 million. Higher product prices in second quarter 2000 as compared to 1999 caused the increase. Cost of sales of $35.4 million for the six months ended June 30, 2000 increased 14.5% over 1999, a result of increased product prices throughout 2000.

Gross margins grew 9.8% for second quarter 2000 versus 1999. This increase was largely a result of the 1999 rate increase as volumes remained relatively unchanged. Gross margin percentages decreased from 34.1% for second quarter 1999 to 30.8% for the current quarter as a result of the higher product prices. For the six months ended, margins increased $764,000, 6.0%, over 1999. This change was a result of the 1999 rate increase, offset by a 1.3% decrease in volumes.

Operating expenses grew 19.6% over second quarter 1999, to $4.0 million for the current quarter. This increase is a result of increased employee benefit costs and customer service expenses. Expenses for the six months ended were $8.7 million, an increase of 13.2%. This growth was due to the aforementioned factors affecting the quarterly results.

Operating income for the quarter decreased $206,000 from second quarter 1999 income. This decrease was caused by the operating expense growth which outpaced the gross margin growth. Operating income for the six months ended June 30, 2000 of $4.9 million was a decrease of $243,000 from the June 30, 1999 operating income. As in the quarterly results, operating expenses grew more rapidly than gross margins.

PROPANE

Operating revenue for the propane segment of $1.1 billion was an increase of 170.9% over second quarter 1999 revenues. This increase was almost entirely attributable to the growth of the wholesale operations. Wholesale revenues increased $707.6 million, 191.2%, over second quarter 1999 due to product prices and internal growth, and accounted for 95.2% of total revenues for the quarter. Retail propane revenues grew $6.3 million as a result of management's decision to pass on higher product prices to customers through price increases, offset by mild weather. Retail volumes decreased 1.4 million gallons compared to second quarter 1999 volumes as a result of mild weather and delayed purchasing by customers due to high prices. Revenues for the six months ended June 30, 2000

increased $1,483 million, of which 97.9% was attributable to the wholesale operations product price increases and internal growth. Retail revenues increased to $187.1 million, a growth of 20.0% over second quarter 1999 results. This revenue growth was achieved through increased prices and acquisitions, offset by the effects of warmer than normal weather. Volumes decreased as a result of the warm weather from 148.6 million gallons in 1999 to 143.5 million gallons for 2000.

Cost of sales increased $718.6 million for the current quarter as compared to second quarter 1999. Of the increase $710.4 million was attributable to wholesale operations, while retail costs increased $8.3 million. The wholesale operations costs rose due to higher product prices as well as unprofitable natural gas trading operations which has since been discontinued. Retail costs increased despite volume decreases due primarily to overall higher market product prices. Costs for the six months ended increased to $2,134 million as compared to $655.3 million for the six months ended June 30, 1999. Of the increase, 97.6% was due to wholesale operations, through higher product prices, internal growth and the aforementioned unprofitable natural gas trading operations. Retail cost of sales was higher due to increased product prices.

Gross margins for the quarter ended June 30, 2000 decreased $4.8 million, 14.6%, from 1999 gross margins of $32.6 million and gross margins as a percentage of operating revenues fell from 7.8% to 2.5%. The wholesale operations accounted for $2.8 million of the decrease as a result of approximately $4.6 million of unprofitable natural gas trading operations losses. The unprofitable natural gas trading operations have since been discontinued. Continued internal growth in the wholesale operations helped to offset the trading losses. Retail margins decreased from $28.4 million (59.6% of retail operating revenues) to $26.4 million (49.0% of retail operating revenues) due to higher product prices, partially offset by less weather sensitive, non-propane activity. Gross margins of $106.8 million for the six months ended June 30, 2000 increased by $4.0 million over the six months ended June 30, 1999. Wholesale margins contributed $8.6 million to the growth, while retail margins decreased $4.6 million. Wholesale margin increases were due to internal growth, offset by the discontinued unprofitable natural gas trading operations. Retail margins decreased due to the aforementioned factors affecting the quarter, most notably the weather impact. Overall gross margin percentages decreased from a 1999 percentage of 13.6% to 4.8% in 2000. Retail gross margin declines, due to high product costs and increased non-propane, low margin sales, were responsible for the decrease. Wholesale margins declined slightly as well, principally a result of the unprofitable natural gas trading operations and higher product prices.

Selling, general and administrative expenses grew 15.0%, $4.2 million, for the quarter ended June 30, 2000 as compared to the second quarter 1999. This increase was due to acquisitions, higher vehicle operating fuel costs and increased wholesale activity. Expenses for the six months ended June 30, 2000 of $71.6 million increase by 14.3% over 1999 expenses, again a result of increased fuel costs, wholesale activity and acquisitions. Depreciation and amortization expense increased $3.6 million, 52.9%, due to capitalized leases, as well as acquisitions. Depreciation and amortization for the six months ended of $20.3 million increased $5.6 million from 1999 due to acquisitions and capitalized leases.

The propane segment's operating loss of $15.2 million for the quarter ended June 30, 2000 was a decrease of $12.6 million from second quarter 1999. A $4.8 million decrease in gross margins and $7.8 million increase in operating expenses combined to account for the increased loss. Operating income for the six months ended June 2000 of $14.9 million was a $10.6 million decrease as compared to 1999 operating income. Gross margin growth of 3.9% was offset by an 18.8% increase in operating expenses, resulting in the decreased operating income.

HVAC

Operating revenues for the second quarter of 2000 increased $35.0 million or 47.9% over second quarter 1999. Acquisitions accounted for $36.3 million of the growth, offset by declines at three previously acquired locations. Revenues for the six months ended June 2000 of $187.9 million increased 49.4% over 1999, entirely attributable to 2000 acquisitions. Existing locations decreased slightly due to the same factors noted above.

Cost of sales for the segment rose $22.4 million over second quarter 1999 costs to $67.2 million primarily due to the 2000 acquisitions, while previous acquisitions increased slightly due to increased new construction business and lower margin projects. For the six months ended June 2000, costs of sales rose 52.0% to $117.8 million. As with the quarter end, 2000 acquisitions accounted for the majority of the increase.

Gross margin increases of $12.7 million to $41.0 million for the current quarter end were due entirely to 2000 acquisitions ($14.2 million contribution) offset by margin erosion of $1.5 million at existing locations. The margin decline noted was due to project pricing pressures, new construction and overall lower margin business. Gross margin percentage decreased from 38.7% of operating revenues for 1999 to 37.9% due to the same factors. Gross margins for the six months ended rose $21.9 million over 1999 gross margins of $48.2 million. Acquisitions completed in 2000 accounted for $24.2 million of the growth, while previously acquired locations decreased $2.3 million. The same factors noted for the quarterly decline impacted results for the six months ended. A similar decline in gross margin percentage occurred for the six months ended as did for the quarter end, for the same reasons noted previously.

Selling, general and administrative expense of $32.2 million for the current quarter increased $10.1 million over 1999 expenses. Acquisitions completed in 2000 increased approximately $11.2 million, while expenses at existing locations decreased approximately 3.4%, offset by slight increases at the corporate level. Depreciation and amortization expense increased $1.2 million due to acquisitions and capital expenditures. Selling, general and administrative expenses for the six month period grew $20.0 million over the six month period ended June 1999. This growth was attributable to 2000 acquisitions, offset by continued cost control and reduction measures at previously acquired locations. Depreciation and amortization increased as a result of continued acquisitions and capital expenditures.

Operating income grew 33.9% to $5.5 million for the quarter. Acquisitions completed in 2000 accounted for all of the increase, offset by a slight decline in operating income at previously acquired locations and corporate, due mainly to gross margin declines. For the six months ended June 2000, operating income was $3.8 million, an 8.9% decrease. As noted for the quarter, operating income contributions from 2000 acquisitions were offset partially by higher corporate expenses and gross margin declines at previously acquired locations.

COMMUNICATIONS

Operating revenues grew $290.7 million, 428.7%, in the second quarter of 2000 as compared to second quarter 1999. Over 90% of the growth was attributable to revenues from the Lucent GEM acquisition completed March 31, 2000. The inclusion of a full quarter revenue for acquisitions completed during 1999 and internal growth at previous acquisitions comprised the remainder of the growth. For the six months ended, revenues increased $313.4 million to $444.0 million. The Lucent GEM acquisition accounted for approximately $227.0 million of the increase, while the inclusion of a full six months of revenues for 1999 acquisitions and internal growth accounted for the remainder of the increase.

Cost of sales of $245.2 million for the quarter increased $208.8 million, 574.2%, over second quarter 1999 cost of sales. The Lucent GEM acquisition operations, which are primarily cost-intensive

voice equipment sales, accounted for the majority of the increase. Internal growth and an inclusion of a full quarter's costs for previously acquired companies also contributed to the increase. For the six months ended June 30, 2000, costs increased $225.5 million. This increase was due to the aforementioned factors affecting the second quarter costs.

Gross margins grew $82.0 million in second quarter 2000 as compared to second quarter 1999. The Lucent GEM acquisition was the principal driver of the increase. Gross margins as a percentage of operating revenues declined from 46.4% in 1999 to 31.6% for second quarter 2000. The Lucent GEM acquisition was the primary cause of the decrease, due to the large percentage of voice equipment sales as compared with previously acquired businesses which generally reflect a higher percentage of service revenues which represent a higher gross margin percentage. The decreased gross margin percentage is also due to a shift in business mix towards more data equipment sales in previously acquired companies. Over time, management intends to expand the level of service related revenues pertaining to the Lucent GEM acquisition and the data equipment sales. Gross margins increased $87.9 million, 147.2%, for the six months ended June 2000 as compared to the six months ended June 1999. Internal growth and the Lucent GEM acquisition accounted for the increase. Gross margin percentages declined from 45.7% in 1999 to 33.2% in 2000, a result of the shift in business mix to more voice equipment sales as noted previously for the quarter.

Selling, general and administrative expenses grew $73.8 million or 294.3% over second quarter 1999 expenses. This increase was primarily due to the Lucent GEM acquisition, combined with investment in operations infrastructure at the corporate level to support the Lucent GEM acquisition and continued internal growth. Depreciation and amortization grew to $10.4 million for the current quarter, an increase of $7.5 million over second quarter 1999. Goodwill amortization expense of the GEM acquisition comprised the majority of the increase, while capital expenditures, software implementations and acquisitions accounted for the remaining increase. Selling, general and administrative expenses for the six months ended of $130.4 million were an $84.3 million increase from the six months ended June 1999. The increase was due to the aforementioned factors affecting the quarterly expenses. Depreciation and amortization for the six months ended increased $9.1 million due to the Lucent GEM acquisition, capital expenditures and other acquisitions as noted previously.

Operating income for the quarter of $4.1 million was a $624,000 increase from 1999 operating income. This increase was primarily attributable to the Lucent GEM acquisition. Over time, management's intention is to increase the percentage and mix of service and solution sales within the 800,000+ customers obtained from the Lucent GEM business, as well as to transition this business to less costly support systems. There are no assurances that management will ultimately be successful in this exercise and in the interim, there will be incremental transition expenses incurred which will likely total $50 to $60 million during the next eighteen to twenty-four months. For the six months ended, the segment had operating income of $3.3 million, a decrease of $5.6 million from 1999 operating income. This decline is due to a shift in business mix at several previously acquired locations towards more equipment sales, resulting in lower margins. This, combined with the increased corporate expenditures for infrastructure, caused a decrease in operating income.

OTHER

This segment consists of the financial results of other service and nonenergy-related business activities along with unallocated corporate costs.

Operating revenues for second quarter 2000 of $4.0 million increased 10.8% over 1999 revenues due to internal growth within the various businesses. Growth for the six months ended of $440,000 was also due to internal growth.

Cost of sales decreased $200,000 for the quarter due to changes in sales mix and cost allocations between quarters, offset by lower margin activities. Cost of sales for the six months ended of

$4.8 million were an increase of $576,000 over 1999. This increase was attributable to changes in sales mixes and an increase in lower margin projects.

Gross margins for the quarter of $1.2 million increased due to revenue growth and cost reallocations. For the six months ended, gross margins decreased slightly due to increased lower margin sales.

Operating expenses for the quarter of $4.1 million were an increase of $2.4 million over 1999. Expenditures at the corporate level to support the increased size of operations and differences in cost allocations between the quarters, accounted for the increase. Operating expenses of $7.7 million for the six months ended were $2.4 million higher than the six months ended June 1999. As noted for the quarter, corporate infrastructure building accounted for the increase.

Operating losses of $2.9 million were $1.8 million worse than second quarter 1999 losses. This was due to increased corporate expenses. For the six months ended, the operating loss of $5.4 million was due to increased corporate expenses.

OTHER INCOME STATEMENT ITEMS

Interest expense increased $5.8 million over second quarter 1999 expense of $13.7 million. Increased corporate borrowings to fund operations and continued investments in subsidiaries accounted for 43.9% of the increase. Increased nonrecourse borrowings in the HVAC and communications segments for acquisitions and operations accounted for the majority of the remaining increase. Interest expense for the six months ended grew $10.3 million over 1999 expense. The growth was evenly spread among the corporate, propane, HVAC and communications segments as each business increased borrowings for acquisitions, operations and investment purposes.

Investment income of $3.0 million for the current quarter was an increase of 22.2% over 1999 income. The growth is attributable to a gain on the sale of Lodgenet stock during second quarter 2000, offset by decreased investment income from reduced excess cash as a result of continued investments in Blue Dot and Expanets. For the six months ended June 2000, investment income was $361,000 higher than the six months ended June 1999. This increase was due to the gain on stock sale, offset by decreased investment income earnings.

Income taxes for the quarter decreased $2.0 million from income tax expense of $3.4 million for the second quarter 1999. This was due to decreased income before taxes between the quarters, particularly in the HVAC, communications and propane segments. Income tax expense for the six months ended of $6.3 million, was a decrease of $4.6 million from 1999 expense. This is directly attributable to on overall decrease in taxable income most notably in the HVAC, communications, propane and other segments.

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 allocation of losses for the quarter was $26.4 million, a $16.5 million increase over 1999. The increase was due mainly to allocable losses in the communications and propane segments, as well as a slight loss increase in the HVAC segment. For the six months ended, minority interests allocation changed by $26.2 million, from a reduction to consolidated income of $1.3 million in 1999 to an addition to income of $24.9 million for the six months ended June 2000. Increased allocable losses within all three segments, particularly the communications and propane segments, caused the increase.

LIQUIDITY & CAPITAL RESOURCES

OPERATING ACTIVITIES

Cash flows from operations for the six months ended June 30, 2000 were $55.0 million, an increase of $5.2 million versus operating cash flows of $49.8 million for six months ended June 30, 1999. The increase is primarily due to changes in the communications operations. Cash and cash equivalents and investment securities totaled $156.3 million and $136.4 million at June 30, 2000 and 1999. The Corporation believes it has adequate liquidity through the generation of operating cash flows, holdings of marketable securities and existing credit facilities, as well as the ability to access debt and equity capital markets to support continued business operations.

INVESTING AND FINANCING ACTIVITIES

The Corporation's primary investing focus during the period 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 $274.5 million for business use. At June 30, 2000, $8.0 million of commercial paper and $159.0 million of the line of credit were drawn and outstanding and $78 million was available for use.

In order to provide continued funding of CornerStone's growth strategy and customer service orientation, CornerStone took steps to secure funding for its anticipated needs through Fiscal 2002. Effective June 30,2000, CornerStone obtained certain amendments and the continued commitment of its revolving credit lenders to make available up to $110 million in advances, including up to $75 million in working capital advances and up to $35 million in acquisition advances. CornerStone had $46.9 million outstanding under its working capital and acquisition lines at June 30, 2000. As part of these arrangements, CornerStone's general partner, a subsidiary of the Corporation, has agreed to provide a guaranty and stand-by commitment to purchase up to approximately $47 million of secured loans from the bank group under certain circumstances. In connection with this commitment, CornerStone's independent Audit Committee approved the payment to the general partner with a combination of consideration, including a cash commitment fee and warrants to purchase common units at a nominal exercise price, that will meet the Corporation's targeted returns for invested capital. These arrangements, together with existing equity and debt funding resources, are expected to provide adequate sources of capital to meet CornerStone's operating needs through Fiscal 2002.

Blue Dot's Credit Facility (nonrecourse to the Corporation) provides for up to $135 million to fund acquisitions and for general business purposes. Blue Dot had $50.2 million outstanding on their Facility, and based on current covenant requirements, approximately $5.6 million available at June 30, 2000. Expanets maintains a $25 million line of credit, of which $20 million was outstanding and $5 million available at June 30, 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 of Expanets' preferred stock with cash. In addition, Expanets issued a $35 million subordinated note and a $15 million convertible note. The $35 million note is nonrecourse to the Corporation and due March 31, 2001. The $15 million convertible promissory note (nonrecourse to the Corporation) is due March 31, 2003 and may be paid in cash, converted to Expanets Series D Preferred Stock, NorthWestern Common Stock or a combination of cash and NorthWestern Common Stock. Any additional future working capital and capital expenditure requirements are anticipated to be funded by nonrecourse facilities obtained at the Expanets level.

CAPITAL REQUIREMENTS

The Corporation's principal capital requirements include continued funding for growth of existing business segments; funding new corporate investment and development ventures; funding maintenance and expansion programs; funding debt and preferred stock retirements; sinking fund requirements; distributions to propane common unitholders; and distributions to NorthWestern's common stockholders.

Maintenance capital expenditures for the six months ended June 30, 2000 and 1999 were $15.2 million and $12.2 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. This represents an increase over prior years due to anticipated future expenditures related to the Lucent GEM acquisition, growth through acquisitions and ongoing maintenance needs.

Capital requirements for the current maturities of long-term debt, including nonrecourse debt of subsidiaries is expected to be $55.5 million. 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 CornerStone, Blue Dot and Expanets. The Corporation had invested $414.3 million through June 30, 2000 in Blue Dot and Expanets. 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 energy and telecommunications sectors. 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.

Commodity price risk arises from the risk of price changes in the commodities that CornerStone buys and sells and as a consequence of providing price risk management services to customers. Futures and forward contracts are utilized to alter CornerStone's exposure to price fluctuations related to the purchase of propane, natural gas, and crude oil. In the past, price changes have generally been passed along to CornerStone's customers to maintain gross margins, mitigating the commodity price risk. CornerStone enters into hedging instruments to lock into purchases when prices are deemed favorable by management.

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

As a result of year 2000 readiness efforts, the Corporation's mission critical information technology systems have not experienced any material adverse application failures in 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 the 10-Q may include forward-looking statements under the Private Securities Litigation Reform Act of 1995. Statements, including those relating to expectations of future financial performance, continued growth, dividend policy, liquidity and absence of year 2000 problems, 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 company 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 served by the Corporation and its subsidiaries and affiliates, the speed and degree to which competition enters the company's industries, the timing and extent of changes in commodity prices, the availability of capital risks associated with acquisitions and integration of acquired companies, including acquired companies not performing to expectations, greater than anticipated difficulties in achieving cost savings and synergies, difficulties in integrating operations of acquired companies and the loss of key management personnel, 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 10-K report, which can be located at www.sec.gov and requested from the Corporation.

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

The election of three directors to Class III of the Board of Directors was submitted to stockholders in the Corporation's proxy statement. At the annual meeting of common stockholders held on May 3, 2000, the three nominees were elected, receiving the following votes: John C. Charters 20,361,455; Merle D. Lewis 20,395,700; Marilyn R. Seymann 20,376,071.

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a): Exhibits

Exhibit 27—Financial Data Schedule UT (SEC only)

(10) MATERIAL CONTRACTS

(b): Reports on Form 8-K

None

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		NORTHWESTERN CORPORATION (Registrant)
Date: August 14, 2000		/s/ David A. Monaghan Controller and Treasurer

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INDEX
PART 1. FINANCIAL INFORMATION Item 1. Financial Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
NORTHWESTERN CORPORATION PART II