<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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
[LOGO]
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
23,118,893 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
<PAGE>
Index
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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 of Financial
Condition and Results of Operations 11
PART II. OTHER INFORMATION
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
</TABLE>
2
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
NORTHWESTERN CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------------- ------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents $ 77,466 $ 29,677
Accounts Receivable, Net 284,173 205,378
Inventories 125,158 104,099
Other 45,016 44,444
----------------- ------------------
531,813 383,598
----------------- ------------------
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
----------------- ------------------
$ 2,383,567 $ 1,956,761
================= ==================
LIABILITIES AND SHAREHOLDERS' 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 128,741 61,218
----------------- ------------------
439,938 269,047
----------------- ------------------
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 459,901 361,549
----------------- ------------------
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 - -
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
----------------- ------------------
$ 2,383,567 $ 1,956,761
================= ==================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
3
<PAGE>
NORTHWESTERN CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
-------------- -------------- ------------- ----------------
2000 1999 2000 1999
-------------- -------------- ------------- ----------------
<S> <C> <C> <C> <C>
OPERATING REVENUES $ 1 ,596,399 $ 595,850 $2,927,343 $1,105,204
COST OF SALES
1,399,715 482,788 2,562,466 847,676
-------------- ------------ ------------- ---------------
GROSS MARGIN 196,684 113,062 364,877 257,528
OPERATING EXPENSES
Selling, general and
administrative expenses 176,524 85,573 288,561 172,659
Depreciation and other amortization 16,461 10,206 31,242 22,074
Goodwill amortization 11,970 5,684 17,356 9,062
-------------- ------------ ------------- ---------------
204,955 101,463 337,159 203,795
-------------- ------------ ------------- ---------------
OPERATING INCOME (LOSS) (8,271) 11,599 27,718 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 (24,709) 373 (2,109) 33,893
Provision (Benefit) for Income Taxes 1,095 (3,417) (3,716) (10,877)
-------------- ------------ ------------- ---------------
Income (Loss) Before Minority Interests (23,614) (3,044) (5,825) 23,016
Minority Interests 31,316 9,881 29,766 (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
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
4
<PAGE>
NORTHWESTERN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30
--------------------------------------
2000 1999
---------------- ------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 23,941 $ 21,717
Items not affecting cash:
Depreciation and other amortization 31,242 22,074
Goodwill amortization 17,356 9,062
Deferred income taxes (4,929) (3,434)
Minority interests in net income (loss) of consolidated
subsidiaries (29,766) 1,299
Investment tax credits (272) (140)
Foreign currency adjustments (299) (229)
Changes in current assets and liabilities, net of acquisitions:
Accounts Receivable (74,825) 12,785
Inventories (18,054) 10,801
Other current assets 265 (1,734)
Accounts payable 95,451 (16,655)
Accrued expenses 20,724 (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 interests 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) -
Repurchase of minority interest (11,406) (12,119)
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
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
5
<PAGE>
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
6
<PAGE>
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
<TABLE>
<CAPTION>
Total
Electric & Total Communi- All
Natural Gas Propane HVAC cations Other Total
--------------- ---------------- ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues $ 35,404 $ 1,131,669 $ 108,121 $ 317,237 $ 3,968 $ 1,596,399
Cost of Sales 14,651 1,103,848 67,158 211,280 2,778 1,399,715
--------------- ---------------- ------------- -------------- ------------- --------------
Gross Margin 20,753 27,821 40,963 105,957 1,190 196,684
Selling, general &
administrative 9,038 32,567 32,247 98,903 3,769 176,524
Depreciation &
other amortization 3,950 8,388 1,975 1,861 287 16,461
Goodwill amortization - 2,110 1,288 8,565 7 11,970
--------------- ---------------- ------------- -------------- ------------- --------------
Operating income (loss) 7,765 (15,244) 5,453 (3,372) (2,873) (8,271)
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 (4,792) (5,375) (24,709)
Provision for taxes (1,536) 2,134 (2,238) 103 2,632 1,095
--------------- ---------------- ------------- -------------- ------------- --------------
Income (loss) before minority
interests $ 4,293 $ (22,355) $ 1,880 $ (4,689) $ (2,743) $ (23,614)
=============== ================ ============= ============== ============= ==============
Total Assets $ 123,548 $ 851,210 $ 323,575 $ 737,992 $ 347,242 $ 2,383,567
=============== ================ ============= ============== ============= ==============
Maintenance Capital
Expenditures $ 3,138 $ 1,253 $ 3,192 $ 1,398 $ 5 $ 8,986
=============== ================ ============= ============== ============= ==============
</TABLE>
7
<PAGE>
Three Months Ended June 30, 1999
<TABLE>
<CAPTION>
Total
Electric & Total Communi- All
Natural Gas Propane HVAC cations Other Total
---------------- -------------- ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
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 & other
amortization 3,700 4,128 1,200 883 295 10,206
Goodwill amortization - 2,736 901 2,037 10 5,684
---------------- -------------- ------------- -------------- ------------- --------------
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
================ ============== ============= ============== ============= ==============
</TABLE>
Three Months Ended June 30
<TABLE>
<CAPTION>
2000 1999
------------------------------- -------------------------------
Natural Natural
Electric Gas Electric Gas
-------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
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
============== ============== ============== ===============
</TABLE>
8
<PAGE>
Three Months Ended June 30
<TABLE>
<CAPTION>
2000 1999
Retail Wholesale Retail Wholesale
Propane Propane Propane Propane
-------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C>
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
============== ============== ============== ===============
</TABLE>
Six Months Ended June 30, 2000
<TABLE>
<CAPTION>
Total
Electric & Total Communi- All
Natural Gas Propane HVAC cations Other Total
--------------- ---------------- ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues $ 88,443 $ 2,241,254 $ 187,899 $ 402,684 $ 7,063 $ 2,927,343
Cost of Sales 42,880 2,134,462 117,823 262,532 4,769 2,562,466
--------------- ---------------- ------------- -------------- ------------- --------------
Gross Margin 45,563 106,792 70,076 140,152 2,294 364,877
Selling, general
administrative 19,091 71,606 60,323 130,361 7,180 288,561
Depreciation & other
amortization 7,900 16,063 3,528 3,211 540 31,242
Goodwill amortization - 4,202 2,465 10,674 15 17,356
--------------- ---------------- ------------- -------------- ------------- --------------
Operating income (loss) 18,572 14,921 3,760 (4,094) (5,441) 27,718
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 (6,197) (8,234) (2,109)
Provision for taxes (5,179) (358) (1,733) (182) 3,736 (3,716)
--------------- ---------------- ------------- -------------- ------------- --------------
Income (loss) before minority
interests $ 9,335 $ (4,117) $ (166) $ (6,379) $ (4,498) $ (5,825)
=============== ================ ============= ============== ============= ==============
Total Assets $ 123,548 $ 851,210 $ 323,575 $ 737,992 $ 347,242 $ 2,383,567
=============== ================ ============= ============== ============= ==============
Maintenance Capital
Expenditures $ 5,047 $ 2,214 $ 4,980 $ 2,822 $ 96 $ 15,159
=============== ================ ============= ============== ============= ==============
</TABLE>
9
<PAGE>
Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Total
Electric & Total Communi- All
Natural Gas Propane HVAC cations Other Total
---------------- -------------- ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
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 & other
amortization 7,437 10,475 2,058 1,590 514 22,074
Goodwill amortization - 4,237 1,649 3,160 16 9,062
---------------- -------------- ------------- -------------- ------------- --------------
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
================ ============== ============= ============== ============= ==============
</TABLE>
Six Months Ended June 30
<TABLE>
<CAPTION>
2000 1999
------------------------------- -------------------------------
Natural Natural
Electric Gas Electric Gas
-------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
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 and
administrative 12,046 7,045 12,598 6,222
Depreciation and
amortization 6,284 1,616 6,005 1,432
-------------- -------------- -------------- ---------------
Operating Income $ 13,714 $ 4,858 $ 12,987 $ 5,101
============== ============== ============== ===============
</TABLE>
Six Months Ended June 30
<TABLE>
<CAPTION>
2000 1999
------------------------------- -------------------------------
Retail Wholesale Retail Wholesale
Propane Propane Propane Propane
-------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
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
============== ============== ============== ===============
</TABLE>
10
<PAGE>
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 SEC 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 December 31, 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.
(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):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
-------------------------------- ------------------------------
2000 1999 2000 1999
---------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
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
================ ============ ============== ============
</TABLE>
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.
11
<PAGE>
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 167.9% over
second quarter 1999 operating revenues to reach $1,596 million. Approximately
70% 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 25%
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
$2,927 million, an increase of 164.9% over the six months ended June 30,
1999. $1,452 million, 79.6%, of the increase is due to the wholesale propane
segment's increased commodity prices, internal growth and acquisitions. An
additional $227.0 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 $1,400 million for the quarter ended
June 30, 2000, an increase of $916.9 million over the prior quarter ended June
30, 1999. Increased wholesale propane costs accounted for 77.5 % of the
increase. Communications costs added an additional $174.9 million to the
increase, primarily a result of the Lucent GEM transaction. Cost of sales for
the six months ended were $1,715 million higher than for the six month period
ended June 30, 1999. Wholesale propane costs rose $1,443 million alone,
accounting for 85% 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 $196.7 million,
an increase of $83.6 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 37.6% 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 $364.9 million (12.5% of
operating revenues or 39.6% 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 $107.3 million increase, $80.4 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
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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 $8.3 million for the quarter was a $20.0 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 $27.7 million was a decrease of $26.0
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
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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 primarily
as a result of management's decision to pass on higher product prices to
customers through price increases as well as some acquisitions, 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, offset partially 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
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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 $249.4 million, 367.8%, 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
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acquisitions completed during 1999 and internal growth at previous
acquisitions comprised the remainder of the growth. For the six months ended,
revenues increased $272.1 million to $402.7 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 $211.3 million for the quarter increased $174.9
million, 481.0%, 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 $191.7 million. This increase was due to the aforementioned factors
affecting the second quarter costs.
Gross margins grew $74.5 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 33.4% 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 $80.4
million, 134.7%, 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 34.8% 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.
An operating loss for the quarter of $3.4 million was a $6.8 million
decrease from 1999 operating income. This decline was primarily attributable to
the Lucent GEM acquisition which represents a larger percentage of equipment
versus service revenues, and therefore lower gross margins, and more costly
support systems than the existing Expanents business. 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 an operating loss of $4.1 million, a
decrease of $13.0 million from 1999 operating income, due to the same factors
noted previously for the quarter.
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.
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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 $4.5 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 $3.7 million, was a decrease of $7.2 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 $31.3
million, a $21.4 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 interest
allocation of losses increased $31.1 million, from a minority loss of $1.3
million in 1999 to minority income of $29.8 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
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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
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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,
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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,
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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
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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.
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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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