Pipeline &
Gas Journal
April issue 2000:
Services & Solutions
Revitalization Leads
To Record-Setting Growth
In an industry undergoing fundamental restructuring, there have been many stories of change in electric and natural gas companies. Perhaps none as dramatic, though, as the small midwestern utility which turned its company into a dynamic national services and solutions market player.
How Did NorthWestern Do It?
When Merle Lewis took over as chief executive officer of NorthWestern Corporation in 1994, the small midwestern electric and natural gas utility had serious growth problems. Headquartered in Sioux Falls, SD, and serving a largely rural, sparsely populated area of eastern South Dakota and central Nebraska, NorthWestern faced annual growth rates in the 2-3 percent range. And there was more: the traditionally predictable utility industry was undergoing dramatic change and a fundamental restructuring. With overwhelming odds against him, could Lewis lead NorthWestern to survive—let alone thrive—in the soon-to-be-transformed utility industry?
The numbers tell it all. From the time Lewis took over, NorthWestern’s revenues have increased from $157 million to $3 billion; customers have grown from 120,000 to more than a million; and the company just finished its seventh consecutive year of record-breaking earnings, including double-digit growth for the last five years.
Lewis is quick to attribute the company’s success to the teamwork that surrounds him. “From the very beginning, we recognized that people were going to be the differentiator to our success,” he says. “From that standpoint, we have been passionate about putting talented, committed and caring people in place throughout NorthWestern.”
That message of teamwork and people is pervasive throughout NorthWestern and its partner companies. It’s in the company’s vision statement, “To be America’s best service and solutions experience.” It’s in the SPIRIT values that define the company’s culture. It’s in the corporate philosophy of incentive compensation and equity ownership. And it’s in the frequent speeches to team members, sprinkled with the SPIRIT attributes of service excellence, performance, integrity, respect, innovation and teamwork. “We just can’t overemphasize that people are the heart and soul of NorthWestern,” Lewis said.
The Strategic Journey
A native of South Dakota, he graduated with a law degree from the University of South Dakota, Lewis noted that NorthWestern faced its most defining moment in 1994. Asked by the board of directors whether the company should restructure or revitalize was a wake-up call. “At that point, I knew the board was serious about exploring opportunities to grow,” he recalled.
The strategic revitalization began with a thorough introspection of core competencies, according to Lewis. One of the first decisions NorthWestern made was to adopt a customer-focused driving force and to target growth in areas related to its distribution strengths. Later the company would expand its focus again to capture the synergies in the newly converging energy, communications and related services industries.
“We also knew we needed to be much more customer-oriented,” said Lewis. That acknowledgment led the company to adopt its vision statement, “To be America’s best service and solutions experience.”
Soon after, NorthWestern created its own in-house, private investment firm, NorthWestern Growth Corporation. NorthWestern Growth, acting much like a venture capitalist with team members sharing equity ownership in the firm, was given an initial capital infusion of $50 million and told to look for growth opportunities. According to Lewis, the only stipulations were that the deals had to fit the company’s strategic filter, which meant they had to be accretive, had to be in complementary service and solutions businesses concentrating on the small- to mid-market customer, and had to include a successful management team.
Growth Comes Fast
During the period of August 1995 to December 1996, NorthWestern acquired the sixth-, eighth- and 18th-largest retail propane distribution companies in the U.S. “Over the course of 17 short months, we acquired over 300 propane customer service locations and became the fifth-largest propane distributor in the U.S.,” said Richard Hylland, NorthWestern’s president and chief operating officer.
Expanding into propane distribution made sense to NorthWestern because of the numerous similarities between natural gas and propane. Along with the last sizeable propane acquisition in 1996, NorthWestern acquired one of the industry’s best management teams, according to Lewis and Hylland. While at Coast Gas, the propane management team compiled a ten-year record of 20 percent compounded average growth in EBITDA, customers and gallons. “With their track record, as well as their high regard in the industry, we knew this was the team we wanted,” said Hylland.
In December 1996, NorthWestern combined its propane operations into a master limited partnership and took the new company, CornerStone Propane Partners, L.P., public. When all was said and done, NorthWestern had recovered its investment, had net proceeds to invest in the next chapter of growth, and had retained a sizable equity interest in the new public company.
Today, CornerStone is still an integral part of NorthWestern’s long-term growth plans. Since the IPO in 1996, CornerStone has added approximately 107 million retail gallons and over 135,000 customers. The company now ranks as the fourth-largest propane distributor in the U.S., serving 460,000 customers in 34 states.
National HVAC Was Next
Encouraged by the growth, Lewis raised expectations again. What other growth opportunity could expand NorthWestern’s footprint on a national scale, yet stay within the strict strategic filter criteria established by the board?
The next step was to enter the U.S. heating, air conditioning, plumbing and related services market—an extension of the energy and customer service businesses that NorthWestern was already in. In late 1997, Blue Dot Services was founded, and a highly qualified chief executive was recruited from Service America (the leading U.S. provider of HVAC service contracts).
The strategy is working. Today, after slightly more than two years, Blue Dot serves 600,000 customers in 23 states, and annual revenues exceed $300 million. And there are no signs of slowing. The company has an aggressive goal to be in the nation’s top 100 major metropolitan areas and to capitalize on branding its unusual—but memorable—name.
Communications Was A Natural
While there have been many electric utilities in the U.S. that have made the decision to get into telecommunications, most have generally followed an established theme of leveraging fiber-optic assets and rights-of-way, or by getting into telecom services such as cable TV and high-speed Internet access. Not so with NorthWestern.
NorthWestern’s communications strategy, started in early 1998 with the formation of Expanets, focuses on bringing together independent communications and data service providers. With an intent to provide networked solutions to small- and mid-sized business customers, Expanets offers a wide range of integrated systems such as voice, data and video integration, voice and data network design, Web-enablement, call centers, messaging, service and maintenance.
“We make networked communications systems work for customers,” explained Hylland. He defined Expanets’ focus as being on the value-added side of communications, rather than on asset-intensive investments.
Running Expanets is a chief executive officer who spent more than a decade in senior management roles with AT&T and later with Lucent Technologies. Today, the company has in place 73 locations in 32 states, serving 40,000 business customers. Annual revenues are topping $350 million and the company says it is just getting started.
“Because of rapid technological change and a trend to outsource complex requirements, communications is our fastest-growing sector,” said Hylland. “It’s a good place to be right now.”
Lessons Learned
While NorthWestern’s growth has been impressive, Lewis and Hylland admit there have been lessons learned along the way.
“We learned very early that expanding into services and solutions meant that we were in the people business,” said Lewis. “And if we don’t have the right people, our success is going to be limited.” Like other major U.S. companies, Lewis says NorthWestern is feeling the effects of the competitive war for talent. “That’s why it is so important to have incentive compensation programs, equity ownership, advanced education and certification, advancement opportunities, and a winning culture that provides the guidance in reaching the company’s vision.”
NorthWestern also says its success can be attributed to a strong discipline to live by their growth strategies. “We are intensely focused on balanced growth - setting the right targets for aggressive internal growth combined with acquisitions,” said Hylland. He pointed out that the company has rejected more than $4 billion of potential acquisition revenue in the last few years due to economics, cultural misfits, management issues and poor long-term growth prospects, among other factors.
Customers have also taught NorthWestern some lessons. Lewis said customers today have much higher expectations, expecting more in value, reliability and quality. “In every sense of the word, customers are wanting more than a commodity,” he added. Lewis said NorthWestern has been broadening service offerings, service and performance guarantees, service standards and customer satisfaction measures to build deeper customer relationships.
What’s Ahead?
What should impress investors about NorthWestern’s strategies is its repeated capability to deliver. Having just completed its fifth record-breaking year for double-digit growth, the company is an anomaly in the energy industry. That performance hasn’t gone unnoticed by industry peers either.
NorthWestern was recently recognized by Fortune magazine as one of America’s most admired companies, ranking number one in the energy category. That recognition followed Forbes’ inclusion of NorthWestern in its Platinum List, a listing of America’s exceptional big corporations.
How big can this business grow? Lewis said he sees the opportunities ahead as unlimited. “NorthWestern is well-positioned in services and solutions markets, and all of those markets have tremendous opportunities to grow.” He believes that long-term success will be determined by customers. For that, Lewis’ specific goals for the next few years include being the fastest-growing provider in each of the business sectors the company operates in.
“We want to take that goal to a number one market position on a longer-term basis.” He said another important goal is to continue the trend of annual double-digit earnings per share growth that NorthWestern’s shareholders appreciate.
Can radical transformations really happen in the utility industry? While not common, they do obviously occur. P&GJ