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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
[No fee required]
For the transition period from _______________ to _______________
Commission File No. 0-692
NORTHWESTERN CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 46-0172280
(State of Incorporation) (IRS Employer Identification No.)
125 South Dakota Avenue
Sioux Falls, South Dakota 57104
(Address of principal office) (Zip Code)
605-978-2908
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $1.75 par value and
related Common Stock Purchase Rights All listed on
Company Obligated Mandatorily Redeemable New York Stock Exchange
Security of Trust Holding Solely Parent
Debentures, $25.00 liquidation amount
Common Stock Purchase Rights
(Title of each class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
Preferred Stock, Par Value $100
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [ X ] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
State the aggregate market value of the voting stock held by nonaffiliates
of the registrant.
$462,382,000 as of March 24, 2000
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of the latest practicable date:
Common Stock, Par Value $1.75
23,108,893 shares outstanding at March 24, 2000
DOCUMENTS INCORPORATED BY REFERENCE:
1999 Annual Report to Shareholders . . . . .Parts I and II
Proxy Statement for 2000 Annual Meeting . . . . .Part III
REPORT CONTENTS
Page
Part I: Business
Special Note Regarding Forward-Looking Statements 3
Items 1 Business
General Overview of Business 3
Financial Information about Industry Segments 4
Communication Network Services and Data Solutions 4
Electricity and Natural Gas Distribution 7
Propane 12
HVAC, Plumbing and Related Services 18
Additional Business Information 21
Item 2 Properties 25
Item 3. Legal Proceedings 26
Item 4. Submission of Matters to Vote of Security Holders 26
Identification of Executive Officers 26
Part II.
Item 5. Market for Registrant's Equity 29
Item 6. Selected Financial Data 29
Item 7. Management's Discussion and Analysis 29
Item 7A. Quantitative and Qualitative Disclosures about
Market Risk 30
Item 8. Financial Statements 30
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 30
Part III
Item 10. Directors 30
Item 11. Executive Compensation 30
Item 12. Security Ownership of Certain Beneficial Owners and
Management 30
Item 13. Certain Relationships and Related Transactions 30
Part IV
Item 14. Exhibits 31
Signatures 32
Exhibit Index 33
Exhibits 36
PART I: BUSINESS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-K, including, without limitation,
statements in ITEM 1, under the headings 'GENERAL OVERVIEW OF BUSINESS';
'INDUSTRY OVERVIEW'; 'PRODUCTS AND SERVICES'; 'COMPETITION'; 'SEASONALITY';
'SOURCES OF SUPPLY'; 'ADDITIONAL BUSINESS INFORMATION' including 'BUSINESS
RISK', 'ENVIRONMENTAL' and 'REGULATION'; in ITEM 3 under the heading 'LEGAL
PROCEEDINGS'; and in ITEM 7 under the heading 'MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS'; including
statements relating to expectations of future financial performance,
continued growth and dividend policy, constitute `forward-looking
statements' within the meaning of the Private Securities Litigation Reform
Act of 1995. When used in this Form 10-K, the words 'expects',
'anticipates', 'estimates', 'believes', 'no assurance' and similar
expressions and statements made in the future tense are intended to
identify such forward-looking statements that involve 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 Company 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; 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.
ITEM 1. BUSINESS
General Overview of Business. NorthWestern Corporation and its partner
entities are leading providers of value-added services and solutions to
residential and business customers nationwide. Our strategic focus is on
direct customer relationships where we can provide value-added service
integration, which we believe offers us the opportunity to achieve higher
sustainable operating results and build greater shareholder value over
time. Through the commitment and initiative of our team members, we are
reinventing customer service, redefining business solutions, and sharing
core values and strategic vision with the aim to be 'America's Best Service
and Solutions Experience'-SM-. NorthWestern and its partner entities
discussed herein include:
* Expanets, Inc. ('Expanets'), a Delaware corporation, a leading provider
of integrated communication and data solutions and network services to small
and medium-sized businesses, with operations in 73 locations in 32 states;
* NorthWestern Public Service ('NPS'), a division of the Company, provides
competitive, reliable electric and natural gas service and other value-added
services to over 125,000 customers in the upper Midwest.
* CornerStone Propane Partners, L.P. ('CornerStone'), a publicly traded
master limited partnership (NYSE: CNO), the nation's fourth largest and
fastest growing publicly held retail propane distributor, serving more than
460,000 residential, commercial, industrial and agricultural customers
from 298 customer service centers in 34 states; and
* Blue Dot Services, Inc. ('Blue Dot'), a Delaware corporation, one of
America's leading providers of air conditioning, heating, plumbing and
related services, with operations at 62 locations in 23 states;
NorthWestern Growth Corporation ('NorthWestern Growth'), a wholly-owned
subsidiary of the Company, is the strategic development and investment
capital arm of NorthWestern. Its mission is to implement development,
investment, acquisition and operations initiatives on behalf of
NorthWestern and its partner entities to achieve long-term value creation.
To accomplish these objectives, NorthWestern Growth seeks to: (i) acquire,
develop and expand into new businesses to complement our existing
operations and expand our customer base; (ii) partner with premier, growth-
oriented and entrepreneurial management teams in each sector of our
business operations; (iii) integrate additional products, services and
solutions into our growing customer base; and (iv) maximize growth and
financial performance of investments and acquired businesses.
Since its formation in 1994, NorthWestern Growth has implemented a dynamic
acquisition and investment program (including the formation and initiation
of the Blue Dot, CornerStone, and Expanets investment strategies) to
support NorthWestern's plan of becoming the premier provider of value-added
services and solutions across America. NorthWestern Growth intends to
continue building NorthWestern and its partner entities by expanding into
additional industries and markets offering high growth potential consistent
with NorthWestern's strategic vision.
NorthWestern was incorporated under the laws of the state of Delaware in
1923. Our executive offices are located at 125 S. Dakota Avenue, Sioux
Falls, South Dakota 57104, our telephone number is 605-978-2908, and our
Web site is located at www.northwestern.com, and the Web sites for the
partner entities are located at www.expanets.com, www.cornerstonepropane.com,
and www.bluedotservices.com.
In this report, the terms 'Company' and 'NorthWestern' as well as the terms
'our,' 'we,' and 'its,' are sometimes used as abbreviated references to
NorthWestern Corporation, individual partner entities or, collectively,
NorthWestern Corporation and its partner entities.
Financial Information about Industry Segments. Financial information about
industry segments is incorporated by reference to Note 14 of the 'Notes to
Consolidated Financial Statements' of the Company's 1999 Annual Report,
filed as Exhibit 13 hereto.
COMMUNICATIONS, NETWORK SERVICES AND DATA SOLUTIONS
EXPANETS, INC.
Expanets is a leading provider of integrated communications, network
services and data solutions to small and medium-sized business
customers nationwide. We design, procure, implement, maintain and monitor
voice, video and data systems which provide connectivity for our customers.
Expanets' areas of expertise include voice networking, data networking,
internet connectivity, messaging systems, advanced call processing
applications, computer telephony, network management, carrier services and
e-Business enablement. During 1999, Expanets completed the acquisition of
eight companies representing approximately $37.8 million in revenues ($76
million on a pro forma annualized basis), and currently operates in 73
locations in 32 states.
Expanets was formed by NorthWestern Growth in late 1997 under the name of
Communication Systems USA, Inc., and in February 1999 changed its name to
Expanets. Acquisitions by Expanets are effected utilizing a combination of
cash and Expanets stock. Through the use of different classes of capital
stock, NorthWestern Growth controls approximately 95.8% of the voting
common and preferred stock (as of December 31, 1999). Additional
information relating to the investment in Expanets is incorporated by
reference to Note 2 of 'Notes to Consolidated Financial Statements' of
NorthWestern's 1999 Annual Report, filed as Exhibit 13 hereto.
INDUSTRY OVERVIEW
In the current environment of rapid development of the Internet and
accelerating technological change, businesses increasingly depend upon
technology-based solutions to enhance their competitive position and
improve the products and services they provide to their customers. The
network services market is growing rapidly because of the increase in the
number, size and complexity of networks, resulting from the use of the
Internet and e-business, the convergence of voice and data, and the need to
integrate new and evolving technologies. This situation has made it
challenging for businesses to integrate and deploy the most reliable and
responsive communications and data networks, customized to their needs in a
cost-effective manner.
The growth in data networking and anticipated continued convergence of data
networking and established voice networking into a single network using
internet protocol ('IP') technology are expected to equal and then surpass
the voice networking market segment. Factors driving this growth are:
rapid development globally of the use of the Internet; use of corporate
Intranets; remote access by mobile workers; networks linking companies with
their strategic partners, vendors, other enterprises, and customers; use of
video conferencing; and reliance on client/server based applications and
local area computing structures. The large numbers of users and the
increased amount of data generated by these applications has increased
traffic and placed higher demand on networks. Thus, the technology
underlying networks has become very complex. The implementation of these
technologies requires significant expertise. Faced with a shortage of
qualified technical resources and great demands to implement the latest
technology while ensuring the reliability, performance and security of
these systems, customers are increasingly relying on outside vendors to
provide the necessary resources. Because of the rapid technological
changes in communications networking, and as companies focus on their core
competencies, businesses are increasingly looking to third parties for
access to specialized technical skills and rapid implementation of
communications and data networking solutions.
According to the Gartner Group, business-to-business ('B2B') e-commerce
will grow at aggressive rates through 2004. It is forecast to grow from
$145 billion in 1999 to $7.29 trillion in 2004. Projections show that the
worldwide B2B market will reach $403 billion in 2000 followed by $953
billion in 2001. Key drivers of growth are rapid technological change,
converging networks and a trend toward outsourcing due to the complex
nature of communications networks.
PRODUCTS AND SERVICES
Expanets is poised to be one of the nation's premier sources of networked
communications solutions to small and mid-sized business customers. From
call centers and messaging, voice, data and video integration, and Web-
enablement to voice and data network design and engineering, system
installation and support, Expanets is a single, total-solution resource for
its customers. The following products and services are included in the
suite of customer solutions Expanets offers:
* Voice, data and video integration
* Network integration and support
* Premise switching equipment
* Interactive voice response (IVR) equipment
* Voice message systems (VMS) design and engineering
* Data networking systems design and engineering
* Call center design and system installation and support
* Local and long distance voice telephony services
* Data services
* Internet services
* Web-enablement
We believe that Expanets' relationships with a wide range of leading
technology companies position it to deliver the most appropriate solutions
to each customer. Because Expanets is a distributor and not a
manufacturer, we are able to design the best solution and select the best
products to meet a customer's unique requirements. Expanets goes beyond
the usual service expectations by uniquely providing a Maintenance
Guarantee that guarantees on-site response time, a Price Protection
Guarantee on the price of component parts, an Obsolescence Guarantee, and a
Guarantee of Maintenance Agreement Continuity.
Expanets' strategic initiatives in fiscal 2000 include delivering a broad
portfolio of voice and data network design and consulting services;
implementing internal best practices, synergies and economies of scale;
building strategic alliances to expand growth opportunities; developing
Internet and e-business applications to take advantage of converging voice
and data technologies, network design, integration and management services;
and attracting, developing and training a highly professional team.
COMPETITION
The market served by Expanets in the communications, data services and
network solutions industry is a highly competitive market and subject to
rapid change. The principal competitive factors include (i) market
acceptance of the products, services and technology solutions Expanets
provides, (ii) pending and future legislation affecting the communications
and data industry, (iii) name recognition and market share, and (iv) our
ability to provide integrated communications and data solutions for
customers in a dynamic industry. Many of Expanets' competitors in the
communications business are generally small, owner-operated companies
typically located and operating in a single geographic area. Certain of
these smaller competitors may have lower overhead cost structures and,
consequently, may be able to charge lower rates for their services. There
are a number of large, integrated national and multi-national companies
engaged in providing commercial services in the service lines in which we
focus, some of which also manufacture and sell directly the products that
Expanets services and sells. Future competition may be encountered from
other newly formed or existing public or private service companies with
aggressive acquisition and marketing programs. Certain of Expanets'
competitors may have greater financial resources to finance acquisition and
internal growth opportunities and may be willing to pay higher prices than
Expanets for acquisition opportunities. Certain products and services
offered by Expanets are manufactured or supplied by others and involve the
risk of partial reliance upon third party systems and services, as well as
risks associated with the need to integrate services and solutions across
networks, platforms and equipment manufactured or supplied by various
companies.
Expanets competes on the basis of the depth and breadth of services and
products offered; our ability to provide innovative solutions to customers'
needs; our ability to integrate communications and data networking systems
as the related technologies continue to converge; and our reputation for
providing a high level of customer service.
TEAM MEMBERS
As of December 31, 1999, Expanets employed approximately 2000 team members,
whom it calls 'associates.' We consider Expanets' relations with team
members to be good. Approximately 106 team members are covered by
collective bargaining agreements.
ELECTRICITY AND NATURAL GAS DISTRIBUTION BUSINESS
NORTHWESTERN PUBLIC SERVICE
NPS, a division of NorthWestern, provides competitive, reliable electric
and natural gas service and value-added services to customers in the upper
Midwest. As of December 31, 1999, we provided electricity to 57,035
customers in South Dakota and natural gas to 80,882 customers in South
Dakota and Nebraska. Electric and natural gas revenues accounted for 5.1%
of all revenues for NorthWestern in 1999.
NPS is qualified to conduct its electric and natural gas business in the
states of South Dakota, Nebraska, Iowa and North Dakota. We currently
serve no electric customers in Nebraska, North Dakota or Iowa.
ELECTRIC OPERATIONS. Pursuant to the South Dakota Public Utilities Act,
the South Dakota Public Utilities Commission ('PUC') assigned as NPS'
electric service territory certain communities and adjacent rural areas in
which we provide electric service in South Dakota. This gives NPS the
right to provide fully bundled services to each present and future electric
customer within that assigned territory for so long as the service provided
is adequate. As of December 31, 1999, NPS provided retail electricity to
108 communities in South Dakota with a combined population of approximately
98,403 people. That service territory spans more than 26 counties in South
Dakota, where economic growth is believed to be modest. Electric energy
sales constituted 2.8% of all revenue of NorthWestern for 1999, as compared
to 6.6% in 1998 and 8.4% in 1997. NPS' electric revenues during the past
three years have grown from $76,700,000 to $83,900,000. Residential
customer sales and commercial and industrial customer sales have
constituted approximately 40% and 50% of such sales, respectively, during
this period. Sales for resale primarily include power pool sales to other
utilities. Power pool sales fluctuate from year to year depending on a
number of factors, including the availability of excess short-term
generation and the ability to sell the excess power to the other utilities
in the power pool. NPS also sells and energy at wholesale to the cities of
Miller, Langford and Bryant, South Dakota, for resale, and power to various
governmental agencies such as the State Correctional Facility at
Springfield, the Human Services Center at Yankton and the State
Developmental Facility in Redfield, all in South Dakota.
NPS shares with Otter Tail Power Company ('Otter Tail') and Montana-Dakota
Utilities Co. ('MDU') in the ownership of the Big Stone Generating Plant
('Big Stone'), located near Big Stone City in northeastern South Dakota.
In North Dakota, NPS maintains transmission facilities to interconnect with
electric transmission lines of other utilities and shares in the ownership
of the Coyote I Electric Generating Plant ('Coyote'), located near Beulah,
North Dakota with MDU, Otter Tail and the Northern Municipal Power Agency.
In Iowa, NPS shares in the ownership of Neal Electric Generating Unit No. 4
('Neal') located near Sioux City, Iowa, with MidAmerican Energy Company,
Aliant Power, Cornbelt Power Cooperative, Northeastern Iowa Power
Cooperative, and nine other companies. Big Stone and Neal are fueled by
sub-bituminous coal, while Coyote is fueled by lignite coal. The fuel is
provided through various length contracts with several coal companies.
Additionally, NorthWestern owns peaking/standby generating units, fueled by
natural gas and/or fuel oil, installed at eight locations through the
service territory.
NPS contracts with the Western Area Power Administration (WAPA) for
transmission of electricity from Big Stone and Neal to its service area
through 7 points of interconnection on WAPA's system. The 20-year term of
that contract ends on December 31, 2000 and WAPA has chosen not to extend
or renew the contract. Therefore, NPS will likely be required to take
service under WAPA's Open Access Transmission Tariff (OATT) after December
31, 2000. The rate terms of WAPA's OATT indicate that NPS' customers will
incur a cost increase compared to the former contract; however, the extent
of that increase is not known at this time. NPS is pursuing the details of
the rate application with WAPA, including credits for NPS' network
resources that are integrated with and provide enhancements to WAPA's
system. Further discussion of FERC-mandated OATT's can be found in the
'Regulation' section below.
In order to provide for forecasted load growth during the next few years,
the evaluation of additional generating capacity requirements is ongoing.
The 1999 evaluation resulted in a contract for purchased capacity to
provide for adequate generating reserves through the year 2003. Because
the availability of existing capacity that can be purchased in the region
is falling and costs are rising, we will continue to evaluate all
available options, including installing new units, to meet future
requirements.
As of December 31, 1999, the aggregate net summer peaking capacity of all
NPS-owned electric generating units was 311,220 kw, consisting of 106,830
kw from Big Stone (23.4% share), 42,700 kw from Coyote (10.0% share),
54,690 kw from Neal (8.7% share), and 107,000 kw from combustion turbine
units and small diesel units, used primarily for providing electric power
during peak demand periods. In addition to those plant facilities, NPS has
entered into agreements to purchase up to 28,750 kw of firm summer
capacity from other Midcontinent Area Power Pool (MAPP) utilities to assist
in meeting peak demands during the summers of 2000-2003.
NPS is a summer peaking utility. The 1999 peak demand of 292,938 kw
occurred on July 29, 1999. Total system capability at the time of peak was
335,370 kw resulting in a reserve margin for 1999 of 14.5%. The minimum
reserve margin requirement as determined by the members of the MAPP, of
which NPS is a member, is 15%. This shortfall in capacity will likely
result in a MAPP Schedule 'B' After-the-Fact allocation of approximately
1,500 kw of capacity from other MAPP resources. While this allocation is
subject to MAPP audit, the estimated cost of this allocation is $140,000
likely to occur during 2000.
MAPP is an area power pool arrangement consisting of utilities and power
suppliers having transmission interconnections located in a 9-state area in
the north central region of the United States and in two Canadian
provinces. The objective of MAPP is to accomplish coordination of planning
and operation of generation and interconnecting transmission facilities to
provide reliable and economical electric service to members' customers,
consistent with reasonable utilization of natural resources and protection
of the environment. While benefiting from the advantages of the planning,
coordination, and operations of MAPP, each member has the right and
obligation to own or otherwise provide the facilities to meet its own
requirements. The terms and conditions of the MAPP agreement and
transactions between MAPP members are subject to the jurisdiction of the
Federal Energy Regulatory Commission ('FERC'). NPS also has
interconnections with the transmission facilities of Otter Tail, MDU,
Northern States Power Company, and WAPA and has emergency interconnections
with transmission facilities of East River Electric Cooperative, Inc. and
West Central Electric Cooperative. These interconnections and pooling
arrangements enable us to arrange purchases or sales of substantial
quantities of electric power and energy with other pool members and to
participate in the benefits of pool arrangements.
NPS is in the process of updating the load forecast portion of its
integrated resource plan to identify how to meet the future electric energy
needs of its customers. The plan includes estimates of customer usage and
programs to provide for economic, reliable, and timely supplies of energy.
Lignite and sub-bituminous coal were utilized as fuel for virtually all of
the electric energy generated during 1999. NPS' fuel costs have remained
relatively stable. The average cost by type of fuel burned is shown below
for the periods indicated:
% of 1999
Cost Per Million BTU Megawatt
Year Ended December 31 Hours
------------------------- Generated
Fuel Type 1997 1998 1999 ------------
------- ------- -------
Sub-bituminous - Big Stone $.93 $.96 $.95 53.1%
Lignite - Coyote** .91 .89 .82 19.3%
Sub-bituminous - Neal .71 .73 .74 27.0%
Natural Gas 2.33 2.57 2.78 *
Oil 4.64 4.17 4.23 *
*Combined for approximately 0.5 percent.
**Includes pollution control reagent.
During 1999, the average delivered costs per ton of fuel for NPS' base load
plants were $10.75 at Coyote, $16.43 at Big Stone and $12.54 at Neal. Such
amounts include severance taxes imposed by the states of North Dakota and
Montana and a production tax imposed by the state of Wyoming. While the
effect on NPS fuel costs of future changes in severance or production taxes
cannot be predicted, any changes in fuel costs are passed on to customers
through the operation of NPS' adjustment clause.
The continued delivery of lignite and sub-bituminous coal to the three base
load plants is reasonably assured by contracts covering various periods of
the operating lives of these units. The contract for delivery of Montana
sub-bituminous coal to Big Stone expired at the end of 1999 and has been
replaced with a 3-year contract for Wyoming sub-bituminous coal. The
contract for delivery of lignite to Coyote, which expires in 2016,
provides for an adequate fuel supply for the estimated economic life of
that plant. Neal receives Wyoming sub-bituminous coal under multiple firm
and spot contracts with terms up to several years in duration.
Following test burns at various times during the 1990's, the Big Stone
owners received approval from the South Dakota Department of Environment
and Natural Resources to burn a variety of alternative fuels including tire
derived fuel and refuse derived fuel. The quantity of alternative fuels
that was burned in 1999 was approximately 5.8% of the total fuel
consumption at the plant.
The fossil fuel supplies for Big Stone and Neal are delivered via unit
trains belonging to the respective plants' owners and locomotives of the
Burlington Northern/Santa Fe Railroad and the Union Pacific Railroad,
respectively. The lignite supply for Coyote is delivered via conveyor at
this 'mine-mouth' plant. While NPS has no firm contract for diesel fuel
for its other electric generating plants, it has been able to purchase
diesel fuel requirements in recent years from local suppliers and currently
have in storage an amount adequate to satisfy its normal requirements for
such fuel.
Additional information relating to jointly owned plants is incorporated by
reference to Note 7 of the 'Notes to Consolidated Statements' of the
Company's 1999 Annual Report to Shareholders filed as an Exhibit 13 hereto.
NATURAL GAS OPERATIONS. NPS has nonexclusive municipal franchises to
provide natural gas service in four Nebraska and 57 South Dakota
communities. The maximum term permitted under Nebraska law for such
franchises is 25 years while the maximum term permitted under South Dakota
law is 20 years. Our policy is to seek renewal of a franchise in the last
year of its term. We have never been denied the renewal of any of these
franchises, and do not anticipate that any future renewals will be denied.
Natural gas service generally consists of fully bundled services, although
certain large commercial and industrial customers, as well as wholesale
customers, may buy the natural gas commodity from another provider and
utilize the distribution utility's transportation service to their
facility. NPS transports natural gas for its unregulated affiliate,
NorthWestern Energy Corporation ('NEC'), and for other gas suppliers and
marketers.
The total population in the communities served, according to the 1990
census, was 193,229. Purchase adjustment clauses contained in South Dakota
and Nebraska tariffs allow us to reflect increases or decreases in gas
supply and interstate transportation costs on a timely basis. During the
past two years, natural gas revenues have been approximately $68,000,000,
with 55% coming from sales to residential customers and 44% coming from
sales to commercial and industrial customers. The mild winter weather in
NPS' service areas during the past two years has resulted in decreased
sales, as compared to the $77,000,000 in revenues in 1997, which reflected
a more normal winter period.
NPS owns and operates natural gas distribution systems serving 40,425
customers in eastern South Dakota. In 1996, it completed construction of a
new natural gas pipeline in northern South Dakota which increased capacity
to 15,000 MMBTU per day. In 1999, NPS executed a service agreement with
Coast Energy Group ('CEG', the wholesale division of Cornerstone),
whereby CEG coordinates supply and transportation services for NPS'
South Dakota gas systems and provides product hedging services for NPS and
NEC. Pipeline and storage capacity services are provided under service
agreements with Northern Natural Gas Company. These
agreements provide for firm deliverable pipeline capacity of approximately
61,805 MMBTU per day in South Dakota, effective November 1, 1999. In
Nebraska, NPS owns and operates natural gas distribution systems serving
40,457 retail customers. It purchases all of its natural gas for these
systems through KN Gas Marketing, Inc. ('KN') under a service agreement
entered in 1995 with all supply and transportation services coordinated
through NEC. These agreements provide for firm deliverable pipeline
capacity of approximately 57,429 MMBTU per day in Nebraska.
A 1992 order of the FERC, Order 636, requires that all companies with
interstate natural gas pipelines separate natural gas supply and production
services from interstate transportation service and underground storage
services. This allows natural gas distribution companies, such as NPS, and
individual customers, to purchase natural gas directly from producers,
third parties, and various gas marketing entities and transport it through
the interstate pipelines. Transportation rates on NPS' distribution
systems have been designed to make NPS economically indifferent as to
whether it sells and transports natural gas or merely transports natural
gas.
To supplement firm gas supplies, NPS' service agreements with CEG and KN
also provide for underground natural gas storage services to meet the
heating season and peak day requirements of its gas customers. In
addition, NPS also owns and operates five propane-air plants with a total
rated capacity of 14,000 MMBTU per day, or approximately 10% of peak day
requirements. The propane-air plants provide an economic alternative to
pipeline transportation charges to meet the peaks caused by customer demand
on extremely cold days.
Effective June 1, 1999, NPS filed an application with the cities of Grand
Island, Kearney and North Platte and the Village of Alda to raise natural
gas rates to its customers in Nebraska. On November 2, 1999, we entered
into an agreement with these four communities for an overall increase in
natural gas rates of $1,146,414.00. The new rates were effective October
2, 1999. Also on June 1, 1999, NPS filed an application with the South
Dakota PUC for an increase in revenues to its South Dakota natural gas
customers. On October 20, 1999, the PUC approved a settlement agreement
between the Staff of the Public Utilities Commission (Staff) and NPS for an
overall increase in its natural gas revenues of $1,279,025.00. The
increase was effective for all customer billings rendered on or after
December 1, 1999. The settlement resolved all issues except the regulatory
treatment of NPS' purchase of transportation capacity from NorthWestern
subsidiary Nekota Resources, Inc., upon which issue a hearing was held in
October 1999, and for which a decision is anticipated in the near future.
COMPETITION
Direct competition does not presently exist within NPS' assigned electric
territory for the supply and delivery of electricity. Providers of
electricity compete with each other to some extent to attract and retain
customers to their assigned service areas. In addition, some degree of
competition exists with the ability of some customers to self-generate or
by-pass parts of the electric system.
Competition for various aspects of electric services is being introduced
throughout the country that will open utility markets to new providers of
some or all the traditional utility services. It is unclear if and when
such competition will begin to affect NPS' territory. Should this occur,
we expect competition will emerge first for the commodity of electricity.
Potential competitors include various surrounding providers as well as
national providers of electricity. Competition in the utility industry is
likely to result in the unbundling of utility services. Separate markets
may emerge for generation, transmission, distribution, meter reading,
billing and other services currently provided by utilities as a bundled
service. At present it is unclear when or to what extent unbundling of
utility services will occur. We are monitoring the trends in the industry
and formulating a strategy to meet the changes in the industry in the years
ahead.
There are no assigned service territories for NPS' natural gas business,
and therefore competition in this industry may come from a number of
sources. Competition currently exists for commodity sales to large volume
customers. In South Dakota, NEC is the principal other entity transporting
natural gas on NPS' distribution system. Competition for delivery exists
in the form of system by-pass, alternative fuel sources, (propane or fuel
oil) and, in some cases, duplicate providers. The key to our continued
success is to maximize efficiency, reliability, service quality and
customer satisfaction.
Competition in the natural gas industry is likely to result in the further
unbundling of natural gas services. Separate markets may emerge for the
natural gas commodity, transmission, distribution, meter reading, billing
and other services currently provided by utilities. At present it is
unclear when or to what extent further unbundling of utility services will
occur. It is clear, however, that to remain the consumer's provider of
choice, we must provide top quality services at reasonable prices. To
prepare for the future, we must ensure that all aspects of this business
are efficient, reliable, economical and customer focused.
SEASONALITY
Seasonal temperatures can have a large impact on sales and corresponding
revenues in the electric utility industry. The past two winters have been
relatively mild in South Dakota, which has had an adverse effect on NPS
electric revenues. However, favorable sales of electricity during the
summer and fall seasons have offset this effect. We have sought to
counteract seasonal revenue variations by becoming more efficient and
reducing expenditures whenever possible.
One of the predominant factors affecting NPS' natural gas operations is
weather patterns during the winter heating season. Because natural gas is
heavily used for residential and commercial heating, the demand for this
product depends upon weather conditions. In 1999, the .5% increase in
natural gas revenues from 1998 primarily reflects the negative impact from
continued significantly warmer than normal weather in NPS' natural gas
service areas. During the first quarter of 1999, weather was approximately
2.5% warmer than 1998, while weather during the last quarter of 1999 was
also colder than the prior year by approximately 5%.
TEAM MEMBERS
As of December 31, 1999, NPS had 349 full time and 23 part time team
members. System Council U-26 of the International Brotherhood of
Electrical Workers ('IBEW') is the bargaining entity for 199 team members,
and we consider NPS' relations with team members to be good.
PROPANE BUSINESS
CORNERSTONE PROPANE PARTNERS, L.P.
CornerStone is the fourth largest and fastest-growing publicly traded
(NYSE: CNO) retail propane distributor in the United States. As of December
31, 1999, CornerStone served more than 460,000 residential, commercial,
industrial and agricultural customers from 298 customer service centers in
34 states. Our operations are concentrated in the east coast, south-
central and west coast regions of the United States. For the 12 months
ended December 31, 1999 (CornerStone's fiscal year ends June 30),
CornerStone had retail propane sales of approximately 335 million gallons.
The retail propane sales produce substantially higher gross margins than
wholesale operations. CornerStone attributes its dynamic growth to a
balanced strategy of internal growth, new customer service start-ups and
acquisitions.
CornerStone, and its subsidiary, CornerStone Propane, L.P. ('the Operating
Partnership'), were organized in October 1996 and November 1996,
respectively. CornerStone Propane GP, Inc. and SYN Inc. are the general
partners of CornerStone and the Operating Partnership. The general partners
own an aggregate 2% interest as general partners, and the Unitholders
(including the General Partners as holders of Subordinated Units) own a 98%
interest as limited partners, in CornerStone and the Operating Partnership
on a combined basis. Through NorthWestern Growth, NorthWestern owns
approximately 30% of CornerStone and is the Managing General Partner.
CornerStone, the Operating Partnership and its corporate subsidiaries are
referred to collectively herein as the 'Partnership' or 'CornerStone'.
The Partnership was formed to acquire, own and operate the propane
businesses and assets of SYN, Inc. and its subsidiaries ('Synergy'), Empire
Energy Corporation and its subsidiaries ('Empire Energy') and CGI Holdings,
Inc. and its subsidiaries ('Coast'). To capitalize on the growth and
consolidation opportunities in the propane distribution market, in August
1995, Northwestern Growth acquired the predecessor of Synergy, then the
sixth largest retail marketer of propane in the United States and, in
October 1996, it acquired Empire Energy, then the eighth largest retail
marketer of propane in the United States. Immediately prior to the
Partnership's initial public offering ('IPO') of Common Units in December
1996, Northwestern Growth acquired Coast, then the 18th largest retail
marketer of propane in the United States. The Partnership commenced
operation on December 17, 1996, concurrently with the closing of the IPO,
when substantially all of the assets and liabilities of Synergy, Empire
Energy and Coast were contributed to the Operating Partnership. In 1999, 15
new companies joined CornerStone. Additional information relating to the
investment in CornerStone is incorporated by reference to Note 2 of 'Notes
to Consolidated Financial Statements' on page 27 of the Company's 1999
Annual Report, filed as Exhibit 13 hereto.
CornerStone is principally engaged in (i) the retail distribution of
propane for residential, commercial, industrial, agricultural and other
retail uses; (ii) the wholesale marketing and distribution of propane,
natural gas liquids and crude oil to the retail propane industry, the
chemical and petrochemical industries and other commercial and agricultural
markets; (iii) the repair and maintenance of propane heating systems and
appliances; and (iv) the sale of propane-related supplies, appliances and
other equipment.
The retail propane business is a 'margin-based' business in which gross
profits depend on the excess of sales prices over propane supply costs.
Sales of propane to residential and commercial customers, which account for
the vast majority of CornerStone's revenue, have provided a relatively
stable source of revenue for CornerStone. Based on fiscal 1999 retail
propane gallons sold, the customer base consisted of 60% residential, 23%
commercial and industrial and 17% agricultural and other customers. Sales
to residential customers have generally provided higher gross margins than
other retail propane sales. While commercial propane sales are generally
less profitable than residential retail sales, we have traditionally relied
on this customer base to provide a steady, noncyclical source of revenues.
No single customer accounted for more than 1% of total revenues.
Through CEG, CornerStone engages in the marketing and distribution of
propane to independent dealers, major interstate marketers and the chemical
and petrochemical industries in addition to procurement and distribution of
propane for the retail segment. CEG also participates in the marketing of
other natural gas liquids, the processing and marketing of natural gas and the
marketing of crude oil. CornerStone either owns or has contractual rights to
use transshipment terminals, rail cars, long-haul tanker trucks, pipelines and
storage capacity. We believe that the CEG marketing and processing
activities position CornerStone to achieve product cost advantages and to
avoid shortages during periods of tight supply to an extent not generally
available to other retail propane distributors.
The principal elements of CornerStone's business strategy are to (i) extend
and refine our existing service orientation; (ii) continue to pursue
balanced growth through small and large acquisitions, internal growth at
our existing customer service centers and start-ups of new customer service
centers; (iii) enhance the profitability of our existing operations by
improving delivery efficiencies, using entrepreneurially oriented local
manager incentive programs, pricing decisions by the local manager and
increased emphasis in non-propane activities to reduce weather dependency;
(iv) further enhance the profitability of operations by expanding into
related home-service initiatives that are less dependent on winter weather
patterns; and (v) capitalize on the CEG marketing, supply and logistics
business.
CornerStone has organized its operations in a manner that it believes
enables it to provide excellent service to customers and to achieve maximum
operating efficiencies. CornerStone's retail propane distribution business
is organized into divisions, which are each comprised of regions. Each
regions is comprised of a number of customer service centers. Each
division and region is supervised by a manager. Team members located at
the customer service centers in the various regions are primarily
responsible for customer service, sales and delivery of product to the
customer.
A number of functions are centralized at CornerStone's support locations in
order to achieve certain operating efficiencies as well as to enable the
team members located in the customer service centers to focus on customer
service and sales. A computer system links each of the customer service
centers to the central management information system at the corporate
headquarters. This computer network system provides team members with
accurate and timely information on supply cost, inventory and customer
accounts. CornerStone makes centralized purchases of propane through CEG
for resale to the customer service centers which allows it to achieve
certain advantages, including price advantages, because of its status as a
large volume buyer. The functions of cash management, accounting, taxes,
payroll, permits, licensing, team member benefits, human resources, and
strategic planning are also performed on a centralized basis.
INDUSTRY OVERVIEW
Based upon information provided by the Energy Information Administration,
propane accounts for approximately 3-4% of household energy consumption in
the United States. Propane competes primarily with natural gas, electricity
and fuel oil as an energy source, principally on the basis of price,
availability and portability. Propane is more expensive than natural gas on
an equivalent BTU basis in locations served by natural gas, but serves as a
substitute for natural gas in rural and suburban areas where natural gas is
unavailable, or where portability of product is required. Historically, the
expansion of natural gas into traditional propane markets has been
inhibited by the capital costs required to expand pipeline and retail
distribution systems. Although the extension of natural gas pipelines tends
to displace propane distribution in areas affected, CornerStone believes
that new opportunities for propane sales arise as more geographically
remote neighborhoods are developed. Propane is generally less expensive to
use than electricity for space heating, water heating, clothes drying and
cooking. Although propane is similar to fuel oil in certain applications
and market demand, propane and fuel oil compete to a lesser extent
primarily because of the cost of converting from one to the other.
PRODUCTS AND SERVICES
Propane, a by-product of natural gas processing and petroleum refining, is
a clean-burning energy source recognized for its transportability and ease
of use relative to alternative stand-alone energy sources. Our retail
propane business consists principally of transporting propane to our retail
distribution outlets and then to tanks located on our customers' premises.
Retail propane use falls into four broad categories: (i) residential, (ii)
industrial and commercial, (iii) agricultural and (iv) other applications,
including motor fuel sales. Residential customers use propane primarily for
space and water heating. Industrial customers use propane primarily as fuel
for forklifts and stationary engines, to fire furnaces, as a cutting gas,
in mining operations and in other process applications. Commercial
customers, such as restaurants, motels, laundries and commercial buildings,
use propane in a variety of applications, including cooking, heating and
drying. In the agricultural market, propane is primarily used for tobacco
curing, crop drying, poultry brooding and weed control. Other retail uses
include motor fuel for cars and trucks, outdoor cooking and other
recreational purposes, propane resales and sales to state and local
governments. CEG sells propane principally to large industrial customers
and other propane distributors.
Propane is extracted from natural gas or oil wellhead gas at processing
plants or separated from crude oil during the refining process. Propane is
normally transported and stored in a liquid state under moderate pressure
or refrigeration for ease of handling in shipping and distribution. When
the pressure is released or the temperature is increased, it is usable as a
flammable gas.
SOURCES OF SUPPLY
CornerStone's propane supply is purchased from oil companies and natural
gas processors at numerous supply points located in the United States and
Canada. During 1999, virtually all of our propane supply was purchased
pursuant to agreements with terms of less than one year, but the percentage
of contract purchases may vary from year to year. Supply contracts
generally provide for pricing in accordance with posted prices at the time
of delivery or the current prices established at major delivery points.
Most of these agreements provide maximum and minimum seasonal purchase
guidelines. In addition, purchases on the spot market are made from time to
time to take advantage of favorable pricing. CornerStone receives its
supply of propane predominantly through railroad tank cars and common
carrier transport.
Supplies of propane from our sources historically have been readily
available. In 1999, Dynegy was CornerStone's largest supplier providing
approximately 8% of its total propane supply for retail and CEG operations
(excluding propane obtained from CEG's natural gas processing operations).
CornerStone believes that if supplies from Dynegy were interrupted, it
would be able to secure adequate propane supplies from other sources
without a material disruption of operations. No single supplier provided
more than 10% of CornerStone's domestic propane supply in the year.
Although no assurance can be given that supplies of propane will be readily
available in the future, we expect a sufficient supply to continue to be
available. CornerStone has not experienced a shortage that has prevented
it from satisfying its customers' needs, and we do not foresee any
significant shortage in the supply of propane.
CEG engages in hedging of product cost and supply through common hedging
practices. These practices are monitored and maintained by CornerStone
management on a daily basis. Hedging of product cost and supply does not
always result in increased margins.
The market price of propane is subject to volatile changes as a result of
supply or other market conditions over which CornerStone has no control.
Since it may not be possible to pass rapid increases in the wholesale cost
of propane on to customers immediately, such increases could reduce
CornerStone's gross profits. Consequently, CornerStone's profitability will
be sensitive to changes in wholesale propane prices. CEG engages in the
trading of propane, natural gas, crude oil and other commodities in amounts
that have not had and are not expected to have a material effect on
CornerStone's financial condition or results of operations.
CornerStone has from time to time leased space in storage facilities to
take advantage of supply purchasing opportunities as they occur, and we
believe that CornerStone will have adequate third party storage to take
advantage of such opportunities in the future. Access to storage facilities
will allow CornerStone, to the extent it may deem it desirable, to buy and
store large quantities of propane during periods of low demand, which
generally occur during the summer months, thereby helping to ensure a more
secure supply of propane during periods of intense demand or price
instability.
COMPETITION
In addition to competing with alternative energy sources, CornerStone
competes with other companies engaged in the retail propane distribution
business. Competition in the propane industry is highly fragmented and
generally occurs on a local basis with other large full-service multi-state
propane marketers, thousands of smaller local independent marketers and a
number of farm cooperatives. Based on industry publications, the domestic
retail market for propane is approximately 8.6 billion gallons annually,
with the 10 largest retailers, including CornerStone, accounting for
approximately 37% of the total retail sales of propane in the United
States, and with no single marketer having a greater than 10% share of the
total retail market. Most of CornerStone's customer service centers compete
with five or more marketers or distributors. Each customer service center
operates in its own competitive environment, because retail marketers tend
to locate in close proximity to customers. CornerStone's customer service
centers generally have an effective marketing radius of approximately 25 to
50 miles, although in certain rural areas the marketing radius may be
extended by a satellite storage location.
The ability to compete effectively further depends on the reliability of
service, responsiveness to customers and the ability to maintain
competitive prices. CornerStone believes that its service capabilities and
customer responsiveness differentiate it from many of these smaller
competitors. Its team members are on call 24 hours a day and seven days a
week for emergency repairs and deliveries.
CEG's operations compete in the wholesale liquefied petroleum gas (LPG)
business, which includes propane, is highly competitive. CEG also provides
marketing and risk management services in the natural gas and crude oil
markets, which are highly competitive. CEG's operations constitute 77% of
CornerStone's total revenue but less than 16% of the gross profit. The CEG
operations provide CornerStone with a national presence and a reasonably
secure, efficient supply base, and position CornerStone well for expansion
through acquisitions or start-up operations in new markets.
SEASONALITY
Because a substantial amount of propane is sold for heating purposes, the
severity of winter and resulting residential and commercial heating usage
have an important impact on CornerStone's earnings. Approximately two-
thirds of CornerStone's retail propane sales usually occur during the six-
month heating season from October through March. As a result of this
seasonality, its sales and operating profits are concentrated in its second
and third fiscal quarters. Cash flows from operations, however, are
greatest from November through April when customers pay for propane
purchased during the six-month peak season. To the extent NorthWestern
Growth, as Managing General Partner deems appropriate, CornerStone may
reserve cash from these periods for distribution to Unitholders during
periods with lower cash flows from operations. Sales and profits are
subject to variation from month to month and from year to year, depending
on temperature fluctuations.
Weather in 1999 averaged 12% warmer than normal in CornerStone's market
areas. While weather factors generally measure the directional impact of
temperatures on the business, other factors such as product prices,
geographic mix, magnitude and duration of temperature and weather
conditions can also impact sales.
TEAM MEMBERS
As of December 31, 1999, CornerStone had 2,665 full-time team members, and
none of its team members were represented by labor unions. We believe that
CornerStone's relations with its employees are satisfactory. CornerStone
generally hires seasonal workers to meet peak winter demand.
HVAC, PLUMBING AND RELATED SERVICES
BLUE DOT SERVICES, INC.
Blue Dot is a leading, national provider of comprehensive repair,
replacement and maintenance services and products for heating, ventilation
and air conditioning ('HVAC'), plumbing and related systems in homes and
light commercial businesses. Our differentiating strategy offers a broad
range of value-added products and services for full-service convenience and
a marketing program to promote brand recognition. As of December 31, 1999,
Blue Dot had completed acquisitions of 62 companies with 3,300 total team
members serving over 600,000 customers in 23 states. Our emphasis is on
companies with an established reputation and experience, a strong residential
and light commercial repair, replacement and maintenance mix, with firms more
heavily involved in new construction focused primarily in areas with high new
residential and commercial growth. We also look for companies with
superior management teams. Residential repair, replacement and maintenance
and new construction constitute approximately 60% of the business of
companies acquired by Blue Dot, with the other 40% involved in commercial
service.
Blue Dot was formed by NorthWestern Growth in July 1997 under the name
ServiCenter USA, Inc. and changed its name to Blue Dot in 1998.
Acquisitions by Blue Dot are effected utilizing cash, notes and stock in
Blue Dot or a combination. Through the use of different classes of capital
stock, NorthWestern controls approximately 96.9% of the voting common and
preferred stock (as of December 31, 1999). Additional information relating
to the investment in Blue Dot is incorporated by reference to Note 2 of
'Notes to Consolidated Financial Statements' on page 28 of the Company's
1999 Annual Report, filed as Exhibit 13 hereto.
Once we have entered a market, we seek to expand our market share through
internal growth and by acquisition of other well-established HVAC, plumbing
and related services businesses operating within that region and also other
potential service partners with complementary products and services that
present opportunities to reduce overhead or otherwise leverage our
infrastructure. Over time, the operations of such businesses are
integrated into the operations of existing platform Blue Dot companies in
the region, enabling Blue Dot to become the dominant market player.
We believe there are significant opportunities to increase our
profitability and that of subsequently acquired businesses. The key
elements of Blue Dot's operating strategy are: (i) providing superior,
high quality service in a professional manner; (ii) increasing revenue at
locations through sales of maintenance agreements, cross-marketing of
products and services and customer financing packages; (iii) offering
complementary non-traditional products and services; (iv) achieving
operating efficiencies through increased purchasing power to gain volume
discounts, national advertising and local marketing support; (v) `best
practices' integration; and (vi) attracting and retaining quality team
members. Blue Dot plans to transform the individual acquired businesses
into an integrated organization through common business formats, common
employee benefits, common information systems, national brand identity and
financial system integration. We believe it will take several years to
achieve this goal.
INDUSTRY OVERVIEW
The HVAC and plumbing industry consists of the installation, replacement,
maintenance, service and repair of systems at existing and new residences
and commercial businesses. According to industry sources, annual revenues
for these market segments in the United States are approximately $60
billion for HVAC services, $20 billion for plumbing services and $16
billion for electrical services. The industry can be broadly divided into
the new construction market (estimated 30% of annual revenues) and the
repair, replacement and maintenance market (estimated 70% of annual
revenues). Based on available industry data, there are currently over
50,000 businesses, consisting predominantly of small, owner-operated
companies focusing on a single local geographic area and providing a
limited range of services. Because of this market fragmentation and a
lower capability of smaller firms to raise the capital necessary to expand
their businesses, a number of firms have been consolidating the smaller
businesses.
PRODUCTS AND SERVICES
Repair, Replacement and Maintenance: These services include preventive
maintenance (periodic checkups, cleaning and filter change-outs), emergency
repairs, and the replacement (in conjunction with the retrofitting or
remodeling of a residence or commercial building, or as a result of an
emergency repair request) of air conditioning, heating and plumbing
systems. The repair, replacement and maintenance segment offers more
attractive pricing because of customers' demands for immediate, convenient
and reliable service. Blue Dot focuses on this segment of the industry
rather than the new construction segment because we believe that it offers
higher margins, less cyclicality and seasonality, and exposes Blue Dot to
less credit and interest rate risk, while allowing the establishment of a
national service reputation among customers. Growth in this segment is
driven by a number of factors, particularly: the aging of the installed
base; the increasing energy efficiency, sophistication and complexity of
air conditioning and heating systems; the upgrading of existing homes to
central air conditioning; and the increasing restrictions on the use of
refrigerants commonly used in older systems. The energy efficiency and
sophistication of new systems are encouraging owners of buildings to
upgrade and reconfigure their current systems. We also pursue maintenance
agreements which lead to better utilization of personnel, develop customer
loyalty, provide the opportunity for cross-marketing of Blue Dot's other
services and products, link the customer with Blue Dot should a major
repair or replacement be needed, and result in recurring revenues.
New Construction: These services in the residential market often begin
with a homebuilder providing architectural plans or mechanical drawings for
the particular type or types of residences to be developed and requesting a
bid or contract proposal. Blue Dot team members analyze the plans and
drawings and estimate the equipment, materials and parts and the direct and
supervisory labor required for the project and deliver a written bid or
negotiate the written agreement for the job. Working with the builder's
construction supervisors, Blue Dot team members coordinate and supervise
the installation. Commercial new installation work often begins with a
design request from the owner or general contractor, followed by
preliminary and then more detailed design specifications, engineering
drawings and cost estimates. Actual field work (ordering of equipment and
materials, fabrication or assembly of certain components, delivery of such
materials and components to the job site, scheduling of work crews with the
necessary skills, inspection and quality control) is coordinated by Blue
Dot team members.
COMPETITION
The market for HVAC, plumbing and related services is highly competitive.
The principal competitive factors in the residential and commercial repair,
replacement and maintenance segment of the industry are timeliness,
reliability and quality of services provided. In order to be successful as
a national provider of comprehensive services, we must employ, train and
retain highly motivated, professional service technicians. Blue Dot
believes that it does so through training programs, team member
compensation, team member health and savings benefit plans, career
opportunities and team building. Competitive pricing is possible through
purchasing economies and other cost saving opportunities that exist across
each of the service lines offered and from productivity improvements.
The largest number of Blue Dot's competitors are small, owner-operated
companies that typically operate in a single market. Many of these smaller
competitors may have lower overhead cost structures and may be able to
provide their services at lower rates. Moreover, many homeowners have
traditionally relied on individual persons or small repair service firms
with whom they have long-established relationships for a variety of home
repairs. In addition, there are a limited number of companies focused on
providing comprehensive residential and/or commercial services, on a multi-
state or national basis, in some of the same business lines provided by
Blue Dot. There also are a number of national retail chains that sell a
variety of plumbing fixtures and equipment and air conditioning and heating
equipment for residential use and offer, either directly or through various
subcontractors, installation, warranty and repair services.
Future competition may be encountered from, among others, newly formed or
existing public or private service companies with aggressive acquisition
programs, HVAC equipment manufacturers, the unregulated business segments
of regulated gas and electric utilities, or from newly deregulated
utilities entering into various residential or commercial service areas.
The principal methods of meeting competition employed by Blue Dot are
assurance of customer satisfaction, a history of providing quality service
and name recognition. We intend to expand our marketing program to
capitalize on brand recognition. In addition, we have forged national
alliances with the Air Conditioning Contractors of America (a national
trade association presenting more than 9,000 air conditioning and heating
contractors nationwide) and Honeywell (a manufacturer of home comfort
accessories). Blue Dot uses these alliances for training, information, and
co-marketing purposes. Blue Dot plans to continue efforts to build
strategic alliances.
SEASONALITY
Blue Dot's installation, repair, replacement and maintenance operations are
subject to seasonal variations in the different lines of service. Except in
certain regions, the demand for new installations can be substantially
lower during the winter months. Demand for HVAC services generally varies
with the weather; demand generally is higher during periods of extremely
cold or hot weather and lower in the spring and fall months. Blue Dot
expects its revenues and operating results generally will be lower in the
first and fourth quarters. Weather cycles, such as unseasonably mild
winters or summers can also affect revenues and operating results.
TEAM MEMBERS
As of December 31, 1999, Blue Dot employed 3,300 team members. Blue Dot
considers its relations with team members to be good. No team members are
covered by collective bargaining agreements.
ADDITIONAL NORTHWESTERN BUSINESS INFORMATION
BUSINESS RISK. Competition and Business Risk Information is incorporated
by reference to Management's Discussion and Analysis of the Company's 1999
Annual Report, on pages 18 through 20, and filed as Exhibit 13 hereto.
ENVIRONMENTAL. By virtue of the nature of our operations in electricity,
natural gas, propane and other areas, NorthWestern and its partner entities
are subject to numerous environmental laws and regulations in the ordinary
course of day-to-day operations, and such laws and regulations may require
us to incur certain costs, which could be substantial, to operate existing
facilities, construct and operate new facilities and mitigate or remove the
effect of past operations on the environment. We regularly monitor
operations to prevent adverse environmental impacts. When we become aware
of an environmental issue, we investigate the situation to gain facts as to
the nature and magnitude of environmental impact, and the extent, if any,
that we may be held responsible for contributing to any costs incurred for
taking action at such sites. We also attempt to gain information to
reasonably estimate potential costs attributable to any environmental
issue. NorthWestern does not believe any pending environmental liabilities
known to us will have a significant impact on the results of operations or
financial position of the Company. It is not possible for us to predict
the scope, enforceability or financial impact of other environmental laws
or regulations which may be established in the future.
NPS is subject to regulation with regard to air and water quality, solid
waste disposal, and other environmental considerations by Federal, state,
and local governmental authorities. The application of governmental
requirements to protect the environment involves or may involve review,
certification, issuance of permits, or similar action by government
agencies or authorities, including the United States Environmental
Protection Agency (EPA), the South Dakota Department of Environment and
Natural Resources (DENR), the North Dakota State Department of Health, and
the Iowa Department of Environmental Quality, as well as compliance with
decisions of the courts.
The Clean Air Act Amendments of 1990 (the 'Clean Air Act') stipulate
limitations on sulfur dioxide and nitrogen oxide emissions from coal-fired
power plants will require the purchase of additional emission allowances or
a reduction in sulfur dioxide emissions beginning in the year 2000 from the
Big Stone Plant. NPS believes it can economically meet the sulfur dioxide
emission requirements of the Clean Air Act by the required compliance
dates. With regard to the Clean Air Act's nitrogen oxide emission
requirements, the Neal wall-fired boiler is expected to meet the emission
limitations for such boilers. The Clean Air Act does not yet specify
nitrogen oxide limitations for boilers with cyclone burners such as those
used at Big Stone and Coyote because practical low-nitrogen oxide cyclone
burner technology does not exist. The Clean Air Act requires the EPA to
establish nitrogen oxide emission limitations for cyclone boilers including
taking into account that the cost to accomplish such limits be comparable
to retrofitting low-nitrogen oxide burner technology to other types of
boilers. In addition, the Clean Air Act also requires future studies to
determine what controls, if any, should be imposed on coal-fired boilers to
control emissions of certain air toxics other than sulfur and nitrogen
oxides. Because of the uncertain nature of cyclone boiler nitrogen oxide
and air toxic emission limits, NPS cannot now determine the additional
costs, if any, it may incur due to these provisions of the Clean Air Act.
In addition to the Clean Air Act, NPS is also subject to other
environmental regulations.
The states of South Dakota, North Dakota, and Iowa have enacted laws with
respect to the siting of large electric generating plants and transmission
lines. The South Dakota PUC, the North Dakota Public Service Commission,
and the Iowa Utilities Board have been granted authority in their
respective states to issue site permits for nonexempt facilities.
NPS did not incur any significant environmental expenditures in 1999 and
does not expect to incur any significant capital expenditures through 2001.
However, it keeps current on existing state and federal environmental
regulations and takes reasonable precautions to prevent any incidents that
would violate any of these rules. NPS believes that it is in compliance
with all presently applicable environmental protection requirements and
regulations, however it is unable to forecast the effect which future
environmental regulations may ultimately have upon the cost of its utility-
related facilities and operations. No administrative or judicial
proceedings involving NPS are now pending or known to be contemplated under
presently effective environmental protection requirements. NPS has met or
exceeded the removal and disposal requirements of equipment containing
polychlorinated biphenyls (PCBs) as required by state and Federal
regulations. It will use some PCB-contaminated equipment for its remaining
useful life and dispose of the equipment according to pertinent regulations
that govern that use and disposal of this equipment. PCB-contaminated oil
is burned for energy recovery at a permitted facility. The South Dakota
DENR and the EPA adopted regulations imposing requirements upon the owners
and operators of above ground and underground storage tanks. NPS' fuel oil
storage facilities at its generating plants in South Dakota are affected by
the above ground tank regulations, and NPS has instituted procedures for
compliance.
Blue Dot's operations are also subject to the Clean Air Act -- Title VI of
which governs air emissions and imposes specific requirements on the use
and handling of substances known or suspected to cause or contribute
significantly to harmful effects on the stratospherical ozone layer, such
as chlorofluorocarbons and certain other refrigerants ('CFCs'). Clean Air
Act regulations require the certification of service technicians involved
in the service or repair of systems, equipment and appliances containing
these refrigerants and also regulate the containment and recycling of these
refrigerants. These requirements have increased Blue Dot's training
expenses and expenditures for containment and recycling equipment. The
Clean Air Act is intended ultimately to eliminate the use of CFCs in the
United States and require alternative refrigerants to be used in
replacement HVAC systems. The implementation of the Clean Air Act
restrictions has also increased the cost of CFCs in recent years and is
expected to continue to increase such costs in the future. As a result, the
number of conversions of existing HVAC systems that use CFCs to systems
using alternative refrigerants is expected to increase. Capital
expenditures related to environmental matters during fiscal 1999 were not
material. Blue Dot does not currently anticipate any material adverse
effect on its business or consolidated financial position as a result of
future compliance with existing environmental laws and regulations
controlling the discharge of materials into the environment. Future events,
however, such as changes in existing laws and regulations or their
interpretation, more vigorous enforcement policies of regulatory agencies
or stricter or different interpretations of existing laws and regulations
may require additional expenditures by Blue Dot which may be material.
Governmental regulations establishing environmental protection standards
are continually evolving, and, therefore, the character, scope, cost and
availability of the measures we may be required to take to ensure
compliance with evolving laws or regulations, cannot not be accurately
predicted. Additional information relating to 'Environmental Matters' is
incorporated by reference to Note 12 of 'Notes to Consolidated Financial
Statements' on page 33, of the Company's 1999 Annual Report, filed as
Exhibit 13 hereto.
OTHER REGULATION. The operations of NorthWestern and the individual
partner entities are subject to various federal, state and local laws and
regulations affecting businesses generally such as laws and regulations
concerning employment, occupational health and safety and other matters.
We believe we are in substantial compliance with applicable regulatory
requirements relating to those operations.
Expanets' operations are subject to various federal, state and local laws
and regulations affecting businesses generally, such as laws and
regulations concerning employment, occupational health and safety,
protection of the environment and other matters. Expanets believes it is
in substantial compliance with all applicable regulatory requirements
relating to its operations. One Expanets entity is required to file
tariffs for long distance telecommunications services with the State of
Oklahoma Corporations Commission. Expanets has not initiated any material
capital expenditures regarding environmental protection in the past year.
However, it is aware of existing state and federal environmental
regulations and takes reasonable precautions to prevent any incidents that
would violate any of these rules. Future events, however, such as changes
in existing laws and regulations or their interpretation, more vigorous
enforcement policies of regulatory agencies or stricter or different
interpretations of existing laws and regulations may require additional
expenditures by Expanets which may be material.
NPS is a 'public utility' within the meaning of the Federal Power Act and
the South Dakota Public Utilities Act. As such, we are subject to the
jurisdiction of, and regulation by, FERC with respect to issuance of
securities and wholesale electric rates. We are also subject to the PUC
with respect to electric service territorial issues, rates, terms and
conditions of service, accounting records, and in other aspects of our
operations. Neither NorthWestern nor NPS is a 'holding company' under the
Public Utility Holding Company Act. The state of Nebraska has no
centralized regulatory agency which has jurisdiction over natural gas
operations in that state, however, natural gas rates are subject to
regulation by the municipalities in which gas utilities operate.
Under the South Dakota Public Utilities Act, a requested rate increase may
be implemented 30 days after the date of its filing unless its
effectiveness is suspended by the PUC and, in such event, can be
implemented subject to refund with interest six months after the date of
filing, unless sooner authorized by the PUC. NPS' electric rate schedules
provide that it may pass along to all classes of customers qualified
increases or decreases in costs related to fuel used in electric
generation, purchased power, energy delivery costs, and ad valorem taxes.
A purchased natural gas adjustment provision in NPS' natural gas rate
schedules permits the adjustment of charges to customers to reflect
increases or decreases in purchased gas, gas transportation, and ad valorem
taxes.
In 1996, the FERC issued its final rule (Order No. 888) on wholesale
electric transmission open access and recovery of stranded costs. NPS and
other jurisdictional utilities, filed tariffs with FERC in compliance with
Order 888. NPS included an Open Access Transmission Tariff ('OATT') in its
filing which conforms to the 'Pro Forma' tariff in Order 888 in which
eligible transmission service customers can choose to purchase transmission
services from a variety of options ranging from full use of the
transmission network on a firm long-term basis to a fully interruptible
service available on an hourly basis. These tariffs also include a full
range of ancillary services necessary to support the transmission of energy
while maintaining reliable operations of our transmission system. FERC has
approved NPS' Request for Waiver of the requirements of FERC Order No. 888
as it relates to the Standards of Conduct, exempting NPS as a small public
utility. Without the Waiver, the Standards of Conduct would have required
NPS to physically separate their transmission operations/reliability
functions from its marketing/merchant functions.
CornerStone's operations are subject to various federal, state and local
laws governing the transportation, storage and distribution of propane,
occupational health and safety, and other matters. All states in which
CornerStone operates have adopted fire safety codes that regulate the
storage and distribution of propane. In some states these laws are
administered by state agencies, and in others they are administered on a
municipal level. Certain municipalities prohibit the below ground
installation of propane furnaces and appliances, and certain states are
considering the adoption of similar regulations. CornerStone cannot predict
the extent to which any such regulations might affect it, but it does not
believe that any such effect would be material. It is not anticipated that
CornerStone will be required to expend material amounts by reason of
environmental and safety laws and regulations, but inasmuch as such laws
and regulations are periodically being changed, it are unable to predict
the ultimate cost of complying with environmental and safety laws and
regulations.
CornerStone believes that it currently meets and exceeds federal regulations
requiring that all team members employed in the handling of propane gas be
trained in proper handling and operating procedures. All team members have
participated or will participate within 90 days of their employment date,
in hazardous materials training. CornerStone has established ongoing
training programs in all phases of product knowledge and safety including
participation in the National Propane Gas Association's ('NPGA') Certified
Employee Training Program.
Blue Dot's operations are subject to various federal, state and local laws
and regulations, including, among others: permitting and licensing
requirements applicable to service technicians in their respective trades;
building, air conditioning, heating, plumbing and electrical codes and
zoning ordinances; laws and regulations relating to consumer protection,
including laws and regulations governing service contracts for residential
services; and laws and regulations relating to occupational health and
safety and protection of the environment. Blue Dot believes it has all
permits and licenses necessary to conduct its operations and is in
substantial compliance with applicable regulatory requirements relating to
its operations. A large number of state and local regulations governing
the residential services trades require various permits and licenses to be
held by individual technicians. In some cases, a required permit or license
held by a single individual may be sufficient to authorize specified
activities for all the service technicians who work in the geographic area
covered by the permit or license.
OTHER BUSINESSES. NorthWestern also provides other value-added energy and
service solutions through the following non-regulated partners, each of
which is a South Dakota corporation and wholly-owned subsidiary of
NorthWestern:
* NorthWestern Growth Corporation is the strategic development and private
investment arm of NorthWestern, charged with investing NorthWestern's
capital in businesses that will complement its operations and provide new
opportunities to offer additional products, services and solutions.
* NorthWestern Energy Corporation provides customized energy-related
solutions and energy management and consultation services primarily to
large business customers and other energy providers in South Dakota and
Nebraska.
* NorthWestern Services Corporation provides energy-related turn-key
capital improvement project solutions to business customers in the United
States and electrical and HVAC services and solutions to residential
customers within South Dakota, Nebraska, North Dakota, Iowa, and
Indiana.
* NorCom Advanced Technologies, Inc. provides a comprehensive variety of
voice, video and data products and services to customers primarily in
North Dakota, South Dakota and Nebraska.
ITEM 2. PROPERTIES
NorthWestern's executive offices are located at 125 S. Dakota Avenue, Sioux
Falls, South Dakota, where we lease approximately 24,000 square feet of
office space, pursuant to a long-term lease.
Expanets' executive offices are located at 2 Oak Way, Berkeley Heights,
New Jersey 07936, where Expanets leases office space. Substantially all
of Expanets' facilities are leased. It serves customers in 73 locations
and 32 states. Other principal properties include our vehicle fleet, which
predominantly consists of owned vehicles, and our inventory and equipment.
NPS' principal corporate office is owned and located at 600 Market Street
West, Huron, SD 57350. Substantially all of NPS' facilities are owned.
NPS co-owns three coal-fired generating plants and nine diesel and
combustion turbine plants, fueled by natural gas and/or fuel oil. Its base-
load plant interests are 23.4% of Big Stone, a 440 mw sub-bituminous fueled
plant in northeastern South Dakota, a 8.7% share of Neal, a 630 mw sub-
bituminous fueled plant near Sioux City, Iowa, and 10% of Coyote, a 425 mw
plant in central North Dakota. It also has 120 electric substations and
over 3,000 pole miles of electric lines. It has five propane-air gas
peaking units with a daily capacity of 17,853 mcf and has with 1,906 miles
of distribution gas mains.
CornerStone's principal executive offices are located at 432 Westridge
Drive, Watsonville, California 95076. These offices are leased through
2002. The accounting and the day-to-day operations are centralized in
Lebanon, Missouri. These offices are leased through 2006. CornerStone
leases retail service centers and administrative office space under
noncancelable operating leases expiring at various times through 2008. As
of December 31, 1999, customers are served from 298 customer service
centers with operations in 34 states.
CornerStone owns and operates a fleet of over-the-road tractors, transport
trailers, bobtail trucks and delivery and service vehicles to deliver
propane and customer tanks to its customers. It relies on common carriers
to deliver propane to its retail service centers. CornerStone owns
approximately 450,000 propane storage tanks that are leased, rented or
loaned to customers. Additionally in 1999, CornerStone operated bulk
storage facilities with total propane storage capacity of approximately 15
million gallons, of which 3 million gallons are owned and 12 million
gallons are leased. CornerStone does not own, operate or lease any
underground propane storage facilities (excluding customer and local
distribution tanks) or pipeline transportation assets (excluding local
delivery systems).
The executive offices of Blue Dot are located at 13680 NW 5th Street, Suite
200, Sunrise, Florida 33325 where Blue Dot leases approximately 18,500
square feet of office space, pursuant to a long-term lease. Blue Dot
generally leases the office and service facilities for its operations. We
serve customers from 62 locations in 23 states. Other principal properties
include our vehicle fleet, which predominantly consists of owned vehicles,
and our inventory and equipment.
INTELLECTUAL PROPERTY. NorthWestern and each of its partner entities
utilize a variety of registered and unregistered trademarks and
servicemarks for its products and services. Unregistered marks are
governed by common law and state unfair competition laws. We regard our
trademarks and servicemarks and other proprietary rights as valuable assets
and believe that they are associated with a high level of quality and have
significant value in the marketing of our products. Our policy is to
vigorously protect our intellectual property and oppose any infringement of
our trademarks and servicemarks. NorthWestern's success is also dependent
in part on its trade secrets and information technology, some of which is
proprietary to NorthWestern, and other intellectual property rights. We
rely on a combination of nondisclosure and other contractual arrangements,
technical measures, and trade secret and trademark laws to protect our
proprietary rights. Where appropriate, we enter into confidentiality
agreements with our team members and attempt to limit access to and
distribution of proprietary information.
ITEM 3. LEGAL PROCEEDINGS
NorthWestern and its partner entities are parties to various pending
proceedings and lawsuits, but in the judgment of management, after
consultation with counsel for NorthWestern, the nature of such proceedings
and suits and the amounts involved do not depart from the routine
litigation and proceedings incident to the kinds of businesses conducted by
NorthWestern, and management believes that such proceedings will not result
in any material adverse impact on NorthWestern.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No issues were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
IDENTIFICATION OF EXECUTIVE OFFICERS
The executive officers of the Company are as follows (ages as of March 20,
2000):
Merle D. Lewis, Chairman and Chief Executive Officer, age 52
Chairman since May 1, 1997; Chief Executive Officer since February
1994; formerly President (1994-1998), Executive Vice President (1992-
93), and Vice President-Corporate Services (1987-1992). Mr. Lewis
also serves as Chairman of Northwestern Growth Corporation,
CornerStone Propane GP, Inc., Blue Dot Services, Inc. and Expanets,
Inc.
Richard R. Hylland, President and Chief Operating Officer, age 39
President and Chief Operating Officer since May 1998; formerly
Executive Vice President (1995-1998), Vice President-Strategic
Development (1995), Vice President Corporate Development (1993-1995),
Vice President-Finance (1991-1995), and Treasurer (1990-1994). Mr.
Hylland also serves as Vice Chairman of Northwestern Growth
Corporation since January, 1998; formerly Chief Executive Officer from
January 1998-May 1998; President and Chief Operating Officer September
1994-January 1998. Mr. Hylland is also a member of the board of
directors of Northwestern Growth Corporation, Blue Dot Services, Inc.,
CornerStone Propane GP, Inc., Expanets, Inc. and LodgeNet
Entertainment Corporation (NASD: LNET), (serving as Vice Chairman for
Blue Dot Services, Inc., CornerStone Propane GP, Inc. and Expanets,
Inc.).
Daniel K. Newell, Senior Vice President - Finance and Chief Financial
Officer, age 43
Senior Vice President - Finance since May 1999; Chief Financial
Officer since July 1996; formerly Vice President - Finance (1995-
1999). Mr. Newell also serves as Managing Director and Chief Executive
Officer of NorthWestern Growth Corporation since May 1998; formerly
President (1998), Executive Vice President (1995-1998). Mr. Newell
also is a member of the board of directors of Northwestern Growth
Corporation, CornerStone Propane Partners, Blue Dot Services, Inc, and
Expanets, Inc. and is a Vice President of Expanets, Inc. Prior to
joining the Company, Mr. Newell served as CFO, Vice President -
Finance and Treasurer with Energy Fuels Corporation.
Walter A. (Trey) Bradley, III Vice President & Chief Information Officer,
age 41
Vice President & Chief Information Officer since April 1998. Mr.
Bradley serves as a member of the Board of Directors of NorthWestern
Growth Corporation. Prior to joining the Company, Mr. Bradley was
Senior Vice President - Chief Information Officer of Mary Kay, Inc. in
Dallas Texas (1994-1998).
Michael L. Childers, Vice President - Customer Strategies, age 41
Vice President - Customer Strategies since June 1999. Prior to
joining the Company, Mr. Childers was Senior Vice President -
Corporate Marketing and Communications (1998-1999) and Vice President
- Corporate Marketing and Communications (1997-1998) of J. A. Jones
Construction Company in Charlotte, North Carolina. Previously Mr.
Childers was President of GE Service Management (1996-1997) and
General Manager - Marketing and Business Development, Power Delivery
Group (1993-1996) with General Electric Company.
Michael J. Hanson, President & Chief Executive Officer, NorthWestern Public
Service division, age 41
President & Chief Executive Officer of NorthWestern Public Service
division since June 1998. Prior to joining the Company, Mr. Hanson
was General Manager & Chief Executive of Northern States Power Company
South Dakota & North Dakota in Sioux Falls, South Dakota (1994-1998).
Eric R. Jacobsen, Vice President - General Counsel & Chief Legal Officer,
age 43
Vice President - General Counsel & Chief Legal Officer since February
1999; Principal and General Counsel of NorthWestern Growth Corporation
since November 1998. Mr. Jacobsen also serves as Principal and
General Counsel and is a member of the Board of Directors of
NorthWestern Growth Corporation. Prior to joining the Company, Mr.
Jacobson was Vice President - General Counsel and Secretary of
LodgeNet Entertainment Corporation in Sioux Falls, South Dakota (1995-
1998). Previously Mr. Jacobson was a partner (1988-1995) with the law
firm Manatt, Phelps & Phillips in Los Angeles, California.
John R. Van Camp, Vice President - Human Resources, age 37
Vice President - Human Resources since October 1999. Prior to joining
the Company, Mr. Van Camp was Human Resources Manager of GE Medical
Systems in Milwaukee, Wisconsin (1997-1999), Human Resources Manager
of GE Industrial Systems (1995-1997), Human Resources Manager of
United Technologies Pratt & Whitney (1993-1995), and Manager -
Industrial Relations of United Technologies Corporation (1992-1993).
Alan D. Dietrich, Vice President - Legal Administration & Corporate
Secretary, age 49
Vice President - Legal Administration since February 1999; Corporate
Secretary since October 1989; formerly Vice President - Law (1998-
1999), Vice President - Administration (1996-1998), Vice President -
Corporate Services (1994-1996). Mr. Dietrich also serves as Secretary
for NorthWestern Growth Corporation and Expanets, Inc. and as
Assistant Secretary for CornerStone Propane Partners and Blue Dot
Services, Inc.
Kipp D. Orme, Vice President - Finance, age 41
Vice President - Finance since February 2000; Vice President and Chief
Financial Officer of NorthWestern Growth Corporation since May 1999.
Prior to joining the Company, Mr. Orme was Vice President - Rental
Business Finance of Thorn Americas, Inc. in Wichita, Kansas (1997-
1998), Chief Financial Officer of Thorn Asia-Pacific in Sydney,
Australia 1994-1997), and Director - Corporate Planning & Analysis of
Thorn Americas, Inc. (1992-1994).
Rogene A. Thaden, Vice President - Communications, age 48
Vice President-Communications since February 1997; formerly Treasurer
(1994-1997) and Manager-Corporate Accounting (1987-1994), and formerly
Vice President (1995-1998) and Treasurer (1995-1997) of Northwestern
Growth Corporation.
David A. Monaghan, Controller and Treasurer, age 32
Controller since November 1996; Treasurer since June 1997. Prior to
joining the Company, Mr. Monaghan was an audit and consulting manager
with regional public accounting firm Baird, Kurtz & Dobson (1990-
1996), Springfield, Missouri. Mr. Monaghan also serves as Treasurer of
Northwestern Growth Corporation and Expanets, Inc. and as Assistant
Treasurer of CornerStone Propane GP, Inc.
All of the above executive officers of the registrant serve at the
discretion of the Board, and are elected annually by the Board of Directors
at the time of the Annual Meeting of Shareholders. No family relationships
exist between any officers of the Company.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Company's common stock, which is traded under the ticker symbol NOR, is
listed on the New York Stock Exchange. The following are the high and low
sale prices for the common stock for each full quarterly period in the two
most recent years and the dividends paid per share during each period:
QUARTERLY COMMON STOCK DATA
Prices Cash
------ Dividends
High Low Declared
---------- --------- ------------
1999
First Quarter $ 27.13 $ 23.73 $ .2575
Second Quarter 27.06 24.19 .2575
Third Quarter 26.00 22.44 .2575
Fourth Quarter 24.19 20.63 .2775
1998
First Quarter $ 24.00 $ 21.31 $ .2425
Second Quarter 25.31 20.25 .2425
Third Quarter 27.38 23.94 .2425
Fourth Quarter 26.50 22.75 .2575
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item 6 is incorporated by reference to '11-
Year Financial Summary' of the financial section of the Company's 1999
Annual Report to Shareholders, at page 37, filed as Exhibit 13 hereto.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
The information required by this Item 7 is incorporated by reference to
'Management's Discussion and Analysis' of the Company's 1999 Annual Report
to Shareholders, at page 14, et seq., filed as Exhibit 13 hereto.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this Item 7A is incorporated by reference to
the Company's 1999 Annual Report to Shareholders, at page 18, et seq.,
filed as an Exhibit 13 hereto.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item 8 is incorporated by reference to the
Company's financial statements and related footnotes in the Company's 1999
Annual Report to Shareholders, at page 22, filed as Exhibit 13 hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in accountants or disagreements on accounting
principles or practices or financial statement disclosures.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Identification of Directors. The information regarding directors required
by this Item 10 is incorporated by reference to the information under
'Election of Directors' and 'Reports to the Securities and Exchange
Commission' in the Company's definitive Proxy Statement, dated March 10,
2000, at page 2, et seq., filed with the Commission pursuant to Regulation
14A under the Securities Exchange Act of 1934.
Reports to the Securities and Exchange Commission. The information
required by Item 405 of Regulation S-K is incorporated by reference to the
information under 'Compensation of Directors and Executive Officers' in the
Company's definitive Proxy Statement, dated March 10, 2000, at page 13,
filed with the Commission pursuant to Regulation 14A under the Securities
Exchange Act of 1934.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated by reference to
the information under 'Section 16(a) Beneficial Ownership Reporting
Compliance' in the Company's definitive Proxy Statement, dated March 10,
2000, at page 6, et seq., filed with the Commission pursuant to Regulation
14A under the Securities Exchange Act of 1934.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is incorporated by reference to
the information under 'Securities Ownership by Directors and Officers' in
the Company's definitive Proxy Statement, dated March 10, 2000, at page 5,
filed with the Commission pursuant to Regulation 14A under the Securities
Exchange Act of 1934.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is incorporated by reference
to the information describing NorthWestern's private equity investment
company in the Company's definitive Proxy Statement, dated March 10, 2000,
at page 8, and in the notes to the summary compensation table on page 9, with
such loans at an annual interest rate of 7%, due December 31, 2003, filed
with the Commission pursuant to Regulation 14A under the Securities Exchange
Act of 1934 .
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF THIS REPORT
1. Financial Statements
The following items are included in this annual report by reference to the
registrant's Annual Report to Shareholders for the year ended December 31,
1999:
Page in financial
section of Annual
Report to Shareholders
----------------------------
FINANCIAL STATEMENTS:
Report of Independent Public Accountants 21
Consolidated Statements of Income for the Three
Years Ended December 31, 1999 22
Consolidated Statements of Cash Flows for the
Three Years Ended December 31, 1999 23
Consolidated Balance Sheets,
December 31, 1999 and 1998 24
Consolidated Statement of Shareholders' Equity
For The Three Years Ended December 31,1999 25
Notes to Consolidated Financial Statements 26-35
Quarterly Unaudited Financial Data for the
Two Years Ended December 31, 1999 35
2. Financial Statement Schedules
Opinion of Independent Public Accountants:
We have audited in accordance with generally accepted auditing standards,
the financial statements included in NorthWestern Corporation's 1999 Annual
Report to Shareholders incorporated by reference in this Form 10-K, and have
issued outr reports thereon dated February 4, 2000. Our audit was made for the
purpose of forming an opinion on those financial statements taken as a whole.
The financial data schedule listed in Exhibit 27 is the responsibility of
management of NorthWesterm Corporation and is presented for purposes of
complying with Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
Arthur Andersen, LLP
Minneapolis, Minnesota
February 4, 2000
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
NORTHWESTERN CORPORATION AND SUBSIDIARIES
Column A Column B Column C Column D Column E
Additions
- --------------------------------------------------------------------------
Balance
Beginning Charged to Charged Balance
of Period Costs and to Other Deductions End
Description Expenses Accounts (2) of Period
(1)
- --------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1999
(In Thousands)
RESERVES DEDUCTED
FROM APPLICABLE
ASSETS:
Uncollectible
accounts $ 6,062 $ 3,895 $ 864(3) $(3,526) $7,295
======= ======= ======== ======= ======
OTHER DEFERRED CREDITS:
Reserve for
decommissioning
costs $ 9,326 $ 551 $ - $ - 9,877
======= ======= ======== ======= ======
Reorganization/
restructuring
liabilities of
acquired businesses $27,812 $ - $ 2,873 $(15,961) $ 14,724
======= ======= ======= ======== ========
FOR THE YEAR ENDED DECEMBER 31, 1998
(In Thousands)
RESERVES DEDUCTED
FROM APPLICABLE
ASSETS:
Uncollectible
accounts $ 3,583 $ 3,509 $ - $(1,030) $ 6,062
====== ======= ====== ======== =======
OTHER DEFERRED CREDITS:
Reserve for
decommissioning
costs $ 8,813 $ 513 $ - $ - $ 9,326
======= ======= ====== ======= =======
Reorganization/
restructuring
liabilities of
acquired businesses $ 2,388 $ - $26,313 $ (889) $27,812
======= ======= ======= ======== =======
FOR THE YEAR ENDED DECEMBER 31, 1997
(In Thousands)
RESERVES DEDUCTED
FROM APPLICABLE
ASSETS:
Uncollectible
accounts $ 5,369 $ 1,522 $ - $(3,308) $ 3,583
======= ======= ====== ======== =======
OTHER DEFERRED CREDITS:
Reserve for
decommissioning
costs $ 8,300 $ 513 $ - $ - $ 8,813
======= ====== ====== ======= =======
Reorganization/
restructuring
liabilities of acquired
businesses $ 12,500 $ - $ - $(10,112) $ 2,388
======== ===== ===== ========= =======
(FN)
(F1) Recorded via allocation of purchase price to fair value of assets and
liabilities of acquired businesses.
(F2) Utilization of previously recorded balances.
(F3) Reserve for purchased receivables.
3. Exhibits
The exhibits listed on the Exhibit Index of this Annual Report on Form 10-K
are filed herewith or are incorporated herein by reference to other
filings.
(b) REPORTS ON FORM 8-K
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
NorthWestern Corporation
March 30, 2000 /s/ M. D. Lewis
--------------------------
M. D. Lewis, Chairman of the Board of Directors
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
March 30, 2000 /s/ M. D. Lewis
-------------------------
M. D. Lewis, Chairman of the Board of Directors
and Chief Executive Officer
March 30, 2000 /s/ R. R. Hylland
--------------------------
R. R. Hylland, Director,
President and Chief Operating Officer
March 30, 2000 /s/ D. K Newell
--------------------------
D. K. Newell, Senior Vice President - Finance
and Chief Financial Officer
(Principal Financial Officer)
March 30, 2000 /s/ David A. Monaghan
--------------------------
David A. Monaghan, Controller and Treasurer
(Principal Accounting Officer)
March 30, 2000 /s/ John C. Charters
---------------------------
John C. Charters, Director
March 30, 2000 /s/ Randy G. Darcy
---------------------------
Randy G. Darcy, Director
March 30, 2000 /s/ Gary G. Drook
---------------------------
Gary G. Drook, Director
March 30, 2000 /s/ Aelred J. Kurtenbach
---------------------------
Aelred J. Kurtenbach, Director
March 30, 2000 /s/ Jerry W. Johnson
----------------------------
Jerry W. Johnson, Director
March 30, 2000 /s/ Larry F. Ness
----------------------------
Larry F. Ness, Director
March 30, 2000 /s/ Gary Olson
----------------------------
Gary Olson, Director
March 30, 2000 /s/ Marilyn R. Seymann
-----------------------------
Marilyn R. Seymann, Director
March 30, 2000 /s/ Bruce I. Smith
-----------------------------
Bruce I. Smith, Director
EXHIBIT INDEX
- ----------------------
(3) ARTICLES OF INCORPORATION AND BY-LAWS
(3)(a)(1) Registrant's Restated Certificate of Incorporation, dated
February 7, 1990, is incorporated by reference to Exhibit 3(a)(1)
to Form 10-K for the year ended December 31, 1989, Commission
File No. 0-692.
3(a)(2) Certificate of Retirement of Preferred Stocks, dated January 13,
1992, is incorporated by reference to Exhibit 3(a)(2) to Form 10-
K for the year ended December 31, 1991, Commission File No. 0-
692.
3(a)(3) Certificate of Amendment of Restated Certificate of
Incorporation, dated May 16, 1996, is incorporated by reference
to Exhibit 3(a)(3) to Form 10-K for the year ended December 31,
1996, Commission File No. 0-692.
3(a)(4) Certificate of Retirement of Preferred Stocks, dated June 20,
1996, is incorporated by reference to Exhibit 3(a)(4) to Form 10-
K for the year ended December 31, 1996, Commission File No. 0-
692.
3(a)(5) Certificate of Amendment of Restated Certificate of
Incorporation, dated May 7, 1997, is incorporated by reference to
Exhibit 3 to Form 10-Q for the quarter ended March 31, 1997,
Commission File No. 0-692.
3(a)(6) Certificate of Amendment of Restated Certificate of
Incorporation, dated May 6, 1998, is incorporated by reference to
Exhibit 3 to Form 10-Q for the quarter ended March 31, 1998,
Commission File No. 0-692.
3(b) Registrant's By-Laws, as amended, dated May 6, 1998.
(4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING
INDENTURES
4(a)(1) General Mortgage Indenture and Deed of Trust, dated as of August
1, 1993, from the Company to The Chase Manhattan Bank (National
Association), as Trustee, is incorporated by reference to Exhibit
4(a) of Form 8-K, dated August 16, 1993, Commission File No. 0-
692.
4(a)(2) Supplemental Indenture, dated August 15, 1993, from the Company
to The Chase Manhattan Bank (National Association), as Trustee,
is incorporated by reference to Exhibit 4(b) of Form 8-K, dated
August 16, 1993, Commission File No. 0-692.
4(a)(4) Supplemental Indenture, dated August 1, 1995, from the Company to
The Chase Manhattan Bank (National Association), as Trustee, is
incorporated by reference to Exhibit 4(b) of Form 8-K, dated
August 30, 1995, Commission File No. 0-692.
4(a)(5) Supplemental Indenture, dated September 1, 1995, from the Company
to The Chase Manhattan Bank (National Association), as Trustee,
concerning the New Mortgage Bonds, 6.99% Series due 2002, is
incorporated by reference to Exhibit (4)(a)(5) to Form 10-K for
the year ended December 31, 1995, Commission File No. 0-692.
4(b)(1) Preferred Securities Guarantee Agreement, dated August 3, 1995,
between the Company and Wilmington Trust Company is incorporated
by reference to Exhibit 1(d) of Form 8-K, dated August 30, 1995,
Commission File No. 0-692.
4(b)(2) Declaration of Trust of NWPS Capital Financing I is incorporated
by reference to Exhibit 4(d) of Form 8-K, dated August 30, 1995,
Commission File No. 0-692.
4(b)(3) Amended and Restated Declaration of Trust of NWPS Capital
Financing I is incorporated by reference to Exhibit 4(e) of Form
8-K, dated August 30, 1995, Commission File No. 0-692.
4(b)(4) Subordinated Debt Securities Indenture, dated August 1, 1995,
between the Company and The Chase Manhattan Bank (National
Association), as Trustee, is incorporated by reference to Exhibit
4(f) of Form 8-K, dated August 30, 1995, Commission File No. 0-
692.
4(b)(5) First Supplemental Indenture, dated August 1, 1995, to the
Subordinated Debt Securities Indenture is incorporated by
reference to Exhibit 4(g) of Form 8-K, dated August 30, 1995,
Commission File No. 0-692.
4(c)(1) Copy of Sale Agreement between Company and Mercer County, North
Dakota, dated June 1, 1993, related to issuance of Pollution
Control Refunding Revenue Bonds (Northwestern Public Service
Company Project) Series 1993, is incorporated by reference to
Exhibit 4(b)(1) of Registrant's report on Form 10-Q for the
quarter ending June 30, 1993, Commission File No. 0-692.
4(c)(2) Copy of Loan Agreement between Company and Grant County, South
Dakota, dated June 1, 1993, related to issuance of Pollution
Control Refunding Revenue Bonds (Northwestern Public Service
Company Project) Series 1993A, is incorporated by reference to
Exhibit 4(b)(2) of Registrant's report on Form 10-Q for the
quarter ending June 30, 1993, Commission File No. 0-692.
4(c)(3) Copy of Loan Agreement between Company and Grant County, South
Dakota, dated June 1, 1993, related to issuance of Pollution
Control Refunding Revenue Bonds (Northwestern Public Service
Company Project) Series 1993B, is incorporated by reference to
Exhibit 4(b)(3) of Registrant's report on Form 10-Q for the
quarter ending June 30, 1993, Commission File No. 0-692.
4(c)(4) Copy of Loan Agreement between Company and City of Salix, Iowa,
dated June 1, 1993, related to issuance of Pollution Control
Refunding Revenue Bonds (Northwestern Public Service Company
Project) Series 1993, is incorporated by reference to Exhibit
4(b)(4) of Registrant's report on Form 10-Q for the quarter
ending June 30, 1993, Commission File No. 0-692.
4(c)(5) Copy of Rights Agreement, dated as of December 11, 1996, between
Loan Agreement between Company and Norwest Bank Minnesota, N.A.
as Rights Agent, is incorporated by reference to Exhibit I, to
Form 8-A, dated December 13, 1996, Commission File No. 0-692.
4(d) Copy of Credit Agreement, dated as of June 10, 1999, among
Company, several lenders and Canadian Imperial Bank of Commerce
as Agent.
(10) MATERIAL CONTRACTS
10(a)(1) * NorthWestern Pension Plan, as amended and restated effective
January 1, 2000.
10(a)(2) * NorthWestern Corporation Traditional Pension Equalization
Plan, as amended and restated effective January 1, 2000.
10(a)(3) * NorthWestern Corporation Cash Balance Supplemental Executive
Retirement Plan, effective January 1, 2000.
10(a)(4) * NorthStar Annual Incentive Plan, for all eligible employees,
as amended May 4, 1999.
10(a)(5) * NorthWestern Stock Option and Incentive Plan, as amended May
4, 1999.
10(a)(6) * Form of Employment Agreement for Executive Officers,
including Change of Control and Noncompetition Agreement, is
incorporated by reference to Exhibit 10(ii) to Form 10-Q for the
quarter ended March 31, 1997, Commission File No. 0-692.
10(a)(7) * Supplemental Income Security (Retirement) Plan for
Directors, Officers and Managers, as amended January 1, 1997, is
incorporated by reference to Exhibit 10(a)(1) to Form 10-K for
the year ended December 31, 1996, Commission File No. 0-692.
10(a)(8) * Deferred Compensation Plan for Non-employee Directors
adopted November 6, 1985, is incorporated by reference to
Exhibit 10(g)(2) to Form 10-K for the year ended December 31,
1988, Commission File No. 0-692.
(13) REPORT FURNISHED TO SECURITY HOLDERS - Annual Report for Fiscal Year
ended December 31, 1999, furnished to shareholders of record on March 10,
2000.
(21) SUBSIDIARIES OF THE REGISTRANT - List of NorthWestern subsidiaries as
of December 31, 1999.
(27) FINANCIAL DATA SCHDEDULES - Financial Data Schedules for
NorthWestern as of December 31, 1999.
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* Management contract or compensatory plan or arrangement.
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