In its latest 10-K report to the Securities and Exchange Commission (SEC), Sioux Falls, SD-based NorthWestern Corp. confirmed that it is cooperating with separate investigations by the Internal Revenue Service (IRS) and the Federal Bureau of Investigation (FBI). The investigations resulted from an ongoing class action lawsuit that dates back to the sale of Montana Power Co. to NorthWestern in early 2002.
Last December, bankrupt NorthWestern was notified by the SEC that it was the subject of an investigation. Subsequently, the federal agency subpoenaed documents from the utility holding company and several former non-utility affiliates, the company said in a SEC filing last week. In addition, it noted that one of its directors was interviewed by the FBI related to some of the allegations in the lawsuit. NorthWestern company officials have not been contacted by the FBI, the SEC filing stated.
“We understand that the FBI or the IRS may have contacted former employees of ours or our subsidiaries,” NorthWestern said in its 10-K filing. As of March 15, “we are not aware of any other governmental inquiry or investigation related to these matters.”
NorthWestern is named as one of several defendants in a class action lawsuit against the sale of the energy assets of Montana Power Co. If it does not successfully resolve the lawsuit and insurance doesn’t cover any judgments, NorthWestern’s business could be “harmed and there could be material adverse impact,” the company said in its SEC filing.
Early last week, NorthWestern reported losses again in 2003, although much smaller ones than the previous year. Consolidated results for all of last year showed losses totaling $128.7 million, compared with consolidated losses of $892.9 million in 2002. Revenues from continuing operations in 2003 were $1.03 billion, compared with $783.7 million the previous year, the latter including only 11 months of Montana utility revenues.
NorthWestern natural gas and electric utilities were profitable with a slight increase in net income overall year-to-year: $144.4 million in operating income in 2003, compared with $143.6 million in operating income in 2002. Electric operations showed a 10.6% increase last year ($121.4 million, compared with $109.7 million in 2002), but the increase was primarily due to inclusion of 12 months of Montana utility results in 2003, compared with only 11 months the previous year, NorthWestern said in its announcement of financial results, coinciding with a filing to the SEC.
A few days prior to the earnings announcement, NorthWestern filed its Chapter 11 reorganization plan with a federal court in Delaware, aiming to recover from more than $2 billion in debts and money-losing non-utility businesses that helped contribute to a plunge in its stock price. A hearing on the company disclosure statement (like a prospectus on its plan) is set for May 17.
NorthWestern CEO Gary Drook called the reorganization plan “a significant milestone,” noting that the company doesn’t anticipate having to raise utility retail rates in Montana and the two other states in which it operates over the next five years if the company successfully emerges from bankruptcy. That means the plan must be approved by creditors and the court, and the company must regain an investment-grade credit rating.
Separately, news reports out of Montana indicated that a paid expert witness for the state consumer counsel’s office told an investigative hearing of the Montana Public Service Commission that retail utility customers are paying rates that are well beyond the costs of the Northwestern utility and that utility consumers should be protected more from any future fallout from the company’s failed non-utility businesses.
In its financial report for 2003, NorthWestern indicated it has sold most of its non-utility businesses, including Expanets to Avaya Inc. (Expanets was renamed “Netexit”). However, a dispute over Avaya reducing by $44 million its net cash payment at the closing of the deal has cast doubt on the sale, so if the company cannot wind down its affairs satisfactorily, it, too, may have to file for Chapter 11 bankruptcy. The other business, Blue Dot, a network of local heating-plumbing retail contracting businesses across the nation, has been substantially sold, with only 14 individual businesses remaining, and six of those were sold by March 1, 2004.
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