Northwestern Corporation Business Information, Profile, and History

Company Perspectives:

We know our customers' needs are changing; expectations for superior service and innovative solutions delivered by knowledgeable, trusted professionals have never been greater. This is creating a wealth of opportunity for NorthWestern. Throughout our partner entities, we are focusing our energies and resources on reinventing, redefining and delivering a higher standard for services and solutions to our customers. The people who make our vision a reality include more than 10,000 talented team members who are the catalyst of our success. Their commitment, energy, enthusiasm and innovation has made NorthWestern Corporation one of America's fastest growing companies, achieving record earnings for the seventh year in a row.

History of North Western Corporation

One of the United States' fastest-growing companies, NorthWestern Corporation is a diversified holding company with operations and customers in all 50 states. For most of its history, the company (previously known as the Northwestern Public Service Company) was an electric and natural gas distributor operating in South Dakota, North Dakota, and Nebraska. But the deregulation of the electric utilities in the 1970s and 1980s spurred NorthWestern to expand its holdings into new service-related niches. Most of NorthWestern's sales are derived from its 30 percent stake in Cornerstone Propane Partners, L.P. which distributes propane through a network of local stores, repairs and maintains propane heating systems, and sells propane-related supplies and wholesale propane. NorthWestern also owns Exp@nets, a telecommunications and data networking services provider for small and mid-sized businesses; Blue Dot Services, a heating, ventilation, air conditioning, and plumbing services provider; and NorthWestern Energy and Communications Solutions (formerly the Northwestern Public Service utility). In addition, NorthWestern acquired the electric and gas distribution business of The Montana Power Company in 2000.

Roaring Twenties Origins

Northwestern Public Service Company was incorporated on November 27, 1923, when three investors associated with the Albert Emanuel Company of New York purchased several small electric utilities in rural Nebraska and South Dakota from the Omaha, Nebraska-based Union Power & Light Company. Northwestern, like many other electric utilities of this era, was controlled by a giant utility holding company--the Albert Emanuel Company--which owned utilities in Ohio, Michigan, and Pennsylvania.

Backed by Emanuel's considerable resources, Northwestern went on an acquisition spree in 1924, purchasing ten local utilities, including South Dakota's Huron Light & Power Company, which became Northwestern's headquarters. In 1925, Emanuel reorganized its corporate interests and formed the National Electric Power Company, which subsumed Northwestern along with dozens of utilities in Delaware, Florida, Georgia, Kansas, Maryland, Michigan, North Carolina, Ohio, Pennsylvania, South Dakota, Virginia, and West Virginia. After this restructuring, Northwestern continued to acquire local electric companies. By the end of 1927, the company served 68 towns and had gross earnings of more than $2 million.

In 1928 National Electric was swallowed by an even larger holding company, Middle West Utilities Company, which incorporated Northwestern into its Wisconsin-based Northwest Utilities Company. Owned by Samuel Insull, Middle West was a sprawling concern that reached into 19 states. Under Insull's aegis, Northwestern bought two North Dakota utilities and the Knife River Coal Mining Company in 1929. These acquisitions marked Northwestern's first penetration into North Dakota and encompassed consumers in 53 new towns. In addition, the Knife River facility provided Northwestern with a constant, low-cost supply of coal to feed its power plants.

Dark Days: Turmoil in the 1930s

Northwestern's fortunes soon changed dramatically. The stock market crash rocked the entire utility industry, and Insull compounded Northwestern's problems by making a disastrous bet on further expansion in the belief that the downturn would be temporary. The financial market remained in free-fall, and Middle West went with it, going bankrupt in 1932. After three years in bankruptcy court, Insull's far-flung holdings were reorganized and Northwestern, along with Insull's other utilities, were transferred to a newly created corporate entity, the Middle West Corporation.

Local conditions hurt Northwestern as well. South Dakota was devastated by both the Great Depression and the Dust Bowl, leading to a massive population exodus. Northwestern stayed afloat by cutting electric rates and trimming salaries, but Franklin Delano Roosevelt soon worsened Northwestern's situation when he made the breakup of utility holding companies the centerpiece of his 1932 presidential campaign (even singling out Insull as a particular example of rapacious corporate greed). The public (which was becoming increasingly accustomed to cheap, plentiful electricity) agreed, and Roosevelt was able to push the Public Utility Holding Companies Act (PUHCA) through Congress in 1935. The act dramatically changed the landscape for electric utilities, as it mandated the breakup of all holding companies within five years unless the Federal Power Commission certified that a holding company was necessary for the operation of an economic unit in contiguous states. (The implementation of this law eventually was delayed until after World War II.)

In this new environment, Northwestern recognized that its survival depended on 'building load,' or encouraging consumers to use more power. To this end, the company aggressively sold appliances, lights, and light bulbs to consumers. By 1939 this strategy proved effective. That year the company served more than 50,000 customers in 190 communities across three states, and its revenues exceeded $3 million, regaining the ground that had been lost since 1929.

Northwestern suffered a setback in 1940 when it was forced out, essentially, of Nebraska's electric market. Nebraska had established a state-owned power system in the late 1930s and ultimately forced Northwestern--along with all other private utilities operating in the state&mdashø sell out. Northwestern challenged the move in court but lost, finally, in the U.S. Supreme Court. The company was able to retain its Nebraska natural gas business, though.

Growth and Change in the 1940s and 1950s

World War II had a minimal effect on Northwestern, but the postwar years brought considerable change. As the United States demobilized in 1945, the Securities and Exchange Commission began to enforce the PUHCA and required Middle West to dispose of its holdings in Northwestern. Middle West turned Northwestern into a publicly traded company and sold its interest in it in 1946. As part of this process, Bear Stearns & Co., a New York investment banking house, took control of the company for one year.

Newly independent, Northwestern found new opportunities. The end of World War II unleashed a flood of demand for electric power as Americans hungered for labor-saving appliances that had been underproduced during the war years (factories had had to devote their resources to military rather than consumer uses). The sale of electrical appliances quadrupled between 1945 and 1946 alone, and factories ran around the clock to meet this demand--consuming even more power in the process. Farms undertook major electrification projects as well. Northwestern's revenues soared to more than $4 million in 1946.

In the midst of these boom years, however, Northwestern was confronted with two distinct challenges. In 1946 the Montana-Dakota Utilities Co. (MDU) filed suit against Northwestern. MDU had purchased a pair of North Dakota utilities and the Knife River coal plant from Northwestern in 1945, and subsequently charged that Northwestern had looted the accounts of the three companies before the sale. Although Northwestern eventually was exonerated (the U.S. Supreme Court dismissed the case in 1951), it was forced to spend thousands of dollars on legal fees. The suit also was a major distraction for Northwestern during what was otherwise a time of phenomenal growth for the utility industry as a whole.

The second major factor affecting Northwestern in the postwar era was the entrance of the federal Bureau of Reclamation into South Dakota's electric market. In the wake of severe flooding on the Missouri River in 1943, Congress enacted the Flood Control Act in 1944, which empowered the Bureau of Reclamation and the Army Corps of Engineers to construct five major hydroelectric dams on the Missouri River in South Dakota. Congress ordered the Bureau to sell the hydroelectric power from these dams to 'preference' customers, typically publicly owned electric utilities. Northwestern feared that it would not survive if it had to compete with public power utilities awash in cheap, federally funded hydroelectric power, and it pleaded for relief throughout the 1940s. It had little success, but the company's bottom line remained strong. Revenues for 1950 exceeded $7 million.

Northwestern's concerns were treated more sympathetically after Republican Dwight D. Eisenhower was elected to the presidency in 1952. Fred Aandahl, Eisenhower's Assistant Secretary of the Interior for Water and Power, believed that the government should not be competing with private utilities, and championed the rights of private power companies in South Dakota. In 1953, Aandahl enabled the Bureau to sell excess power to 'nonpreference' customers&mdash′ivate electric utilities. Northwestern signed a contract with the Bureau in 1953 to purchase heavily discounted power under the condition that it pass along savings to customers. For the next 25 years, the Missouri River dams provided the vast majority of Northwestern's power generation (freeing the company from having to invest in generating plants of its own).

The 1950s brought rapid economic growth to South Dakota, and Northwestern invested in new plant facilities, as well as substations that connected it with the Bureau's dams, to keep up with burgeoning demand. The company also achieved a longstanding goal in 1956 when it introduce natural gas into South Dakota. Northwestern had been a major natural gas distributor in Nebraska since the early 1940s, but had been stymied by its efforts to expand northward. In 1952, however, Northern Natural Gas of Omaha had begun to study the feasibility of running a pipeline to the Dakotas and eventually opted to do so. Northwest jumped at the opportunity to distribute Natural's gas to individual customers. By 1959, Northwestern had more than 71,000 customers and revenues of nearly $12 million, with almost as much of that amount generated by natural gas as by electricity.

Reorganization and Turbulence in the 1960s and 1970s

In 1961 the company made the biggest acquisition in its history to date when it purchased ten electric franchise towns in South Dakota, thereby gaining a firmer foothold in the more prosperous eastern half of South Dakota. As this part of the state was more industrialized, Northwestern was now less dependent on the vagaries of agriculture for its revenues.

But in the mid-1960s Northwestern faced a unique set of problems posed by its customers' ever-increasing demand for electric and gas power. While the company's swelling sales were obviously welcomed (revenues had reached $16.5 million by 1964), Northwestern struggled to get enough power across its lines. The company was not alone in this predicament. Demand for power had become so great nationwide that system overloads began to cause widespread power outages. To alleviate this problem, utilities begin to interconnect their electric transmission networks. In 1963, Northwestern joined with 21 power suppliers from nine states to form the Mid-Continent Area Power Planners (MAPP--later renamed Mid-Continent Area Power Pool), whose goal was to develop integrated regional planning.

As demand for power continued to rise, Northwestern encountered a more serious hurdle. The number of public preference customers for the federal hydropower allocations on the Missouri River had grown in the 1960s, and by 1970 Northwestern recognized that it would soon be unable to purchase discounted power. Therefore, it needed to return to the generation business. To this end, Northwestern, along with Otter Tail Power Company and Montana-Dakota Utilities, agreed in 1969 to build a new coal-fired plant. But by the time this Big Stone Steam Electric Generating Plant was completed in 1975, it proved so expensive (costs ran to more than $160 million, with Northwestern alone contributing $52 million) that Northwestern had to raise its rates. Customers were undaunted by the new prices, though, and when Big Stone failed to slake the region's thirst for power, Northwestern entered into more joint ventures to construct new generating plants. In 1975 Northwestern, Minnesota Power & Light, Minnkota Power Cooperative, Otter Tail, and Montana-Dakota built the Coyote I Generating Station near Beulah, North Dakota. This $385 million project went on line in 1981.

Unfortunately for Northwestern--and much of the electric utility industry--demand eventually slackened. The Organization of Petroleum Exporting Companies' (OPEC) 1973 oil embargo put a premium on energy conservation. At the same time, energy companies such as Northwestern faced natural gas shortages. Responding to pressure from both industry and consumer groups, Congress took the first steps toward deregulating the gas and electric industry in 1978. But deregulation brought its own set of challenges. For instance, although natural gas distributors such as Northwestern were free to buy their gas from any supplier (not just from pipelines that had served them in the past), customers could also choose to bypass their local distributors (such as Northwestern) and purchase natural gas directly from pipelines and natural gas brokers.

The Deregulation Era: 1980s and Beyond

The early 1980s were not kind to Northwestern. With a downturn in demand and an enormous debt load from construction projects that suddenly seemed superfluous, the company suffered from a cash-flow crunch. To cope, Northwestern--like many of its competitors--sought to diversify its assets and investments to protect itself from the vicissitudes of the gas and electric industry. In the mid-1980s, for example, Northwestern began to sell its computerized Customer Service System to other utilities, and in 1986, the company invested in the Satellite Movie Company, which provided in-room movies to hotel chains.

Northwestern's diversification efforts gained greater momentum in the mid-1990s. In 1994 the company formed Northwestern Growth Corporation, a strategic development and private investment arm. Northwestern Growth advised the company to complement its current holdings in the energy business, which Northwestern did by venturing into the propane distribution business. In 1995 the company acquired Synergy Group Inc., a propane distributor with 152 retail branches in 23 states. Northwestern increased its presence in this new niche the following year with the purchase of another propane distributor, Empire Energy Corp. Also that year, Northwestern took a stake in Cornerstone Propane Partners, L.P., one of the leading propane retailers in the country. Cornerstone was also a wholesale propane marketer through its own subsidiary, The Coast Energy Group. Through Cornerstone, Northwestern was able to expand beyond the geographic confines of its electric and gas holdings. By 2000, Cornerstone was the fifth largest propane distributor in the United States with 460,000 customers in 43 states.

Northwestern Growth also prompted its parent company to explore business areas wholly unrelated to energy. In 1997, Northwestern founded ServiCenter USA, a provider of value-added heating, air-conditioning, plumbing, and related services. ServiCenter quickly conducted a spate of acquisitions, making it a leader in this sector. In 1998, Northwestern changed ServiCenter's name to Blue Dot. By 2000, Blue Dot boasted 600,000 customers in 25 states.

Also in 1997 Northwestern created Communication Systems USA (renamed Exp@nets in 1998), which became a force in the telecommunications and data communications industries. Exp@nets designed networked communications solutions--call centers and messaging, web enablement, data network design and engineering, and systems installment and support--for mid-sized business customers. In 2000, Exp@nets acquired the Enterprise Network Group from Lucent Technology. With 750,000 customers in 29 states, Exp@nets was the country's largest integrated communications solutions provider for small and mid-sized businesses.

Northwestern was well positioned for future growth and development. The company transformed itself from a regional utility company into a leading provider of energy, telecommunications, and related services nationwide. Reflecting its new and diversified identity, the company renamed itself the NorthWestern Corporation in 1998. But the company had not abandoned the electric and natural gas utility sector. Northwestern Public Service--re-christened NorthWestern Energy and Communications Solutions in 2000--remained a key part of the company. In 2000, NorthWestern expanded its utility operations by acquiring The Montana Power Company's electricity and natural gas distribution business. For $1.1 billion, NorthWestern gained an additional 493,000 electric and natural gas customers in Montana as well as the capacity to build further into the west. With more than two million customers, NorthWestern was named to Forbes' 'Platinum List' and to Fortune's list of 'America's most admired companies' in 2000.

Principal Subsidiaries: Blue Dot Services; Exp@nets; NorthWestern Growth Corporation; NorthWestern Energy and Communications Solutions; Cornerstone Propane Partners, L.P. (30%).

Principal Competitors: AmeriGas Partners, L.P.; At & T Corp.; Ferrellgas Partners, L.P.; Suburban Propane Partners, L.P.

Chronology

• Key Dates:

• 1923: Northwestern Public Service Company is incorporated.
• 1925: Northwestern becomes an operating utility of National Electric Power Company.
• 1928: Middle West Utilities acquires National Electric Power Company.
• 1932: Middle West Utilities enters bankruptcy proceedings.
• 1935: Congress passes the Public Utilities Holding Companies Act.
• 1944: Congress passes the Flood Control Act.
• 1945: The Securities and Exchange Commission orders Middle West to dispose of its holdings in Northwestern.
• 1953: Northwestern begins to purchase power from Missouri River dams.
• 1956: Company brings natural gas to South Dakota.
• 1957: Northwestern joins the Upper Missouri Power Pool.
• 1969: Northwestern joins with other utilities to build Big Stone Steam Electric Generating Plant.
• 1994: Northwestern forms the Northwestern Growth Corporation.
• 1998: Northwestern Public Service changes its name to NorthWestern Corporation.
• 2000: Company purchases The Montana Power Company's energy distribution and transmission business.