Back to GetFilings.com

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

Commission File No. 0-692

NORTHWESTERN CORPORATION
(Exact name of registrant as specified in its charter)

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section13 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. Yes ý    No o

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule12b-2 of the Exchange Act). Yes ý    No o

        Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: As of May 14, 2003, 37,680,095 shares of the registrant's common stock, par value $1.75 per shares were outstanding.

NORTHWESTERN CORPORATION
FORM 10-Q

INDEX

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

        On one or more occasions, we may make statements in this Quarterly Report on Form 10-Q regarding our assumptions, projections, expectations, targets, intentions or beliefs about future events. All statements other than statements of historical facts included herein relating to management's current expectations of future financial performance, continued growth, changes in economic conditions or capital markets and changes in customer usage patterns and preferences are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

        Words or phrases such as "anticipates," "believes," "estimates," "expects," "intends," "plans," "predicts," "projects," "targets," "will likely result," "will continue" or similar expressions identify forward-looking statements. Forward-looking statements involve risks and uncertainties, which could cause actual results or outcomes to differ materially from those expressed. We caution that while we make such statements in good faith and we believe such statements are based on reasonable assumptions, including without limitation, management's examination of historical operating trends, data contained in records and other data available from third parties, we cannot assure you that our expectations will be achieved. Factors that may cause such differences include, but are not limited to:

•

our success in implementing our turnaround plan, which is dependent upon receiving significant proceeds from the sale of non-core assets;



•

if we are unable to significantly reduce our debt, restructure our debt or obtain additional capital, then our ability to fund our operations and service our substantial indebtedness will be adversely affected;



•

risks regarding the shareholder class action lawsuit relating to the disposition of the energy assets by The Montana Power Company, including our acquisition of the electric and natural gas transmission and distribution business formerly held by The Montana Power Company, together with ERISA litigation regarding The Montana Power Company ESOP and 401(k) plan;



•

risks of existing shareholder and derivative litigation and additional litigation and regulatory action in connection with the restatement of our 2002 quarterly financial statements and the potential liability from any such litigation or regulatory action;



•

our ability to address and fully correct inadequacies or material weaknesses in our internal controls and thereafter to maintain an effective internal controls structure;



•

the risk of disruption of Expanets' business, including the loss of key employees, customers and suppliers, and reduction in the value of such business and its assets as a result of our efforts to sell or dispose of Expanets, or its assets, and our limited ability to provide further funds to such business;



•

adverse federal, state, or local legislation or regulation or adverse determinations by regulators;



•

unscheduled outages, maintenance or repairs;



•

unanticipated changes in commodity prices or in fuel supply costs or availability due to higher demand, shortages, weather conditions, transportation problems or other developments;



•

the risk of vendors requiring additional credit support, including letters of credit, or other constraints on credit;



•

increases in interest rates;



•

the rate of growth and economic conditions in our service territories;

2

•

changes in general economic and competitive conditions in the markets in which we may compete; and



•

risks regarding business uncertainties related to the occurrence of natural disasters, war, hostilities and the threat of terrorist actions.

        We have attempted to identify, in context, certain of the factors that we believe may cause actual future experiences and results to differ materially from our current expectation regarding the relevant matter of subject area. In addition to the items specifically discussed above, our business and results of operations are subject to the uncertainties described under the caption "Risk Factors" which is a part of the disclosure included in Item 2 of this Quarterly Report entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations."

        From time to time, oral or written forward-looking statements are also included in our reports on Forms 10-K, 10-Q and 8-K, Proxy Statements on Schedule 14A, press releases and other materials released to the public. Although we believe that at the time made, the expectations reflected in all of these forward-looking statements are and will be reasonable, any or all of the forward-looking statements in this report on Form 10-Q, our reports on Forms 10-K and 8-K, Proxy Statements on Schedule 14A and any other public statements that are made by us may prove to be incorrect. This may occur as a result of inaccurate assumptions or as a consequence of known or unknown risks and uncertainties. Many factors discussed in this Form 10-Q, certain of which are beyond our control, will be important in determining our future performance. Consequently, actual results may differ materially from those that might be anticipated from forward-looking statements. In light of these and other uncertainties, you should not regard the inclusion of a forward-looking statement in this Form 10-Q or other public communications that we might make as a representation by us that our plans and objectives will be achieved, and you should not place undue reliance on such forward-looking statements.

        We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. However, your attention is directed to any further disclosures made on related subjects in our subsequent annual and periodic reports filed with the Commission on Forms 10-K, 10-Q and 8-K and Proxy Statements on Schedule 14A.

3

PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NORTHWESTERN CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except per share amounts)

The accompanying notes to consolidated financial statements are an integral part of these statements.

4

NORTHWESTERN CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Unaudited)
(in thousands, except per share amounts)

        The accompanying notes to consolidated financial statements are an integral part of these statements.

5

NORTHWESTERN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)

        The accompanying notes to consolidated financial statements are an integral part of these statements.

6

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Reference is made to Notes to Financial Statements Included in the Company's Annual Report)

(1) Management's Statement

        The consolidated financial statements for the interim periods included herein have been prepared by NorthWestern Corporation (the "Corporation" or "we"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that may affect the reported amounts of assets, liabilities, revenues and expenses during the reporting period. Actual results could differ from those estimates. In our opinion, the unaudited interim consolidated financial statements reflect all adjustments, consisting of normal and recurring adjustments, necessary for a fair presentation of the financial condition, results of operations and cash flows for the periods indicated. Results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year, and these financial statements do not contain the detail or footnote disclosure concerning accounting policies and other matters that would be included in full fiscal year financial statements. Therefore, these financial statements should be read in conjunction with the financial statements and the notes thereto included in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2002.

(2) Nature of Operations and Recent Developments

        We are one of the largest providers of electricity and natural gas in the Upper Midwest and Northwest, serving approximately 598,000 customers in Montana, South Dakota and Nebraska. We have generated and distributed electricity in South Dakota and distributed natural gas in South Dakota and Nebraska since 1923 through our energy division, NorthWestern Energy, formerly NorthWestern Public Service. On February 15, 2002, we completed the acquisition of the electric and natural gas transmission and distribution business of The Montana Power Company, or Montana Power. As a result of the acquisition, from February 15, 2002 through November 15, 2002, we distributed electricity and natural gas in Montana through our wholly owned subsidiary, NorthWestern Energy, L.L.C. Effective November 15, 2002, we transferred the energy and natural gas transmission and distribution operations of NorthWestern Energy, L.L.C. to NorthWestern Corporation, and since that date, we have operated its business as part of our NorthWestern Energy division. We are operating our utility business under the common name "NorthWestern Energy" in all our service territories. The former NorthWestern Energy, L.L.C. has been renamed "Clark Fork and Blackfoot, L.L.C."

        We also have made significant investments in three primary non-energy businesses; Expanets, Inc., or Expanets, a provider of networked communications and data services and solutions to small to mid-sized businesses nationwide, Blue Dot Services Inc., or Blue Dot, a nationwide provider of air conditioning, heating, plumbing and related services; and, through November 1, 2002, we held an economic equity interest in a subsidiary that serves as the managing general partner of CornerStone Propane Partners, L.P., or CornerStone, a publicly traded limited partnership that is a retail propane and wholesale energy related commodities distributor.

        In February 2003, we outlined the elements of a turnaround plan intended to strengthen our balance sheet and improve our financial performance. Absent proceeds from the sale of non-core assets, significant improvements in the operating results of our non-energy businesses, restructuring of our debt or raising additional capital, we will not have the ability to materially reduce our debt, and our ability to fund our operations and service our substantial indebtedness will be adversely affected and we would become insolvent. For our utility only operations, which therefore excludes Blue Dot,

7

Expanets, and all other unregulated entities, and absent proceeds from the sale of non-core assets, we estimate the following for the years 2003 and 2004 ($ are approximate and in millions):

(1)

The 2003 amount includes a use of cash for working capital changes of approximately $85 million and cash interest payments of approximately $140 million. The 2004 amount includes use of cash for working capital changes of approximately $5 million and cash interest payments of approximately $140 million. Our estimates continue to assume normal weather patterns. Due in part to recent credit rating downgrades, we have experienced reduced vendor credit terms, including in some cases, prepayment or deposit requirements. Our cash flows from operating activities estimates have been reduced to assume the ongoing reduction of vendor credit terms consistent with the recent trend. We may experience additional reductions in credit terms beyond what we are estimating to include increased prepayment or deposit requirements, and in the event this occurs, our cash flows from operating activities could be further reduced from the amounts reflected above.

(2)

These amounts are comprised of capital expenditures.

(3)

These amounts are comprised of the following:

        We have the right to defer payment of our distributions on our mandatorily redeemable preferred securities of trusts for up to 20 consecutive quarters. The payment of the upcoming distributions is under review and while our Board of Directors has not yet made a formal decision, it is likely that such payments will be deferred.

        Based on our current plans and business conditions, we expect that our available cash, cash equivalents and investments, together with amounts generated from operations, should be sufficient to meet our cash requirements for 2003. However, due to a decrease in cash and cash equivalents during 2003 and 2004, we believe that we may need additional funding sources or proceeds from the sale of non-core assets (as discussed below), during 2004 or early in 2005. Commencing in 2005, we face substantial debt reduction payments. Absent the receipt of significant proceeds from the sale of non-core assets, the raising of additional capital or a restructuring of our debt, we will not have the

8

ability to reduce our debt or meet our maturing debt obligations. Even if we are successful in selling some or all of our non-core assets, we will have to restructure our debt or seek new capital prior to 2005.

        We are taking steps to improve the financial position of the Company, including focusing on our core electric and natural gas utility business and committing to the reduction of our debt. We have suspended the declaration and payment of common stock dividends, which represented approximately $38 million in distributions in 2002. We do not anticipate paying any cash dividends for the foreseeable future. In addition, we are currently prohibited from paying dividends on our common stock under Delaware law. Our senior secured term loan also prohibits the payment of dividends during any period of default under the agreement. We are not currently in default under our senior secured term loan. To the extent that payment of a cash dividend on our common stock becomes permissible under Delaware law, we would only be able to pay a cash dividend on our common stock to the extent that all required distributions on our mandatorily redeemable preferred securities of trusts has been made.

        We are seeking to enforce a contract for the sale of our Colstrip transmission line, and propose to sell certain of our non-core assets, including our Montana First Megawatts project. We are also reviewing strategic options for Expanets and Blue Dot, including the sale or disposition of each of these businesses or their assets. We will not make any additional significant investments in, or commitments to, Expanets and Blue Dot while we examine strategic alternatives for the two businesses. In addition, in January 2003 the Montana Public Service Commission (MPSC) restricted our ability to make additional investments or commitments to our non-regulated businesses to $10 million in the aggregate unless we obtain prior approval. We intend to use any future proceeds from sales of non-core assets and surplus cash, if any, from operations to pay down debt. We have engaged a financial advisor to assist us in negotiating the sale of Expanets and Blue Dot.

        In February 2003, we closed and received funds from a $390.0 million senior secured term loan. The net proceeds of $366.0 million, after payment of financing costs and fees, were used to repay $259.6 million outstanding under the existing $280.0 million bank credit facility and existing outstanding letters-of-credit. The remaining proceeds of the term loan will be utilized to provide working capital and for other general corporate purposes. In addition, our new $390.0 million senior secured term loan does not include any adverse rating triggers, and its covenants are linked to the performance of our core utility operations and generally excludes all of our non-energy businesses. As an additional financing source, we are also seeking to obtain financing secured by the accounts receivable of our utility operations.

        On March 13, 2003, Expanets and Avaya restructured their relationship and, in exchange for mutual releases, resolved all outstanding issues between the parties. The principal terms of the new arrangement are: (i) Avaya has cancelled the Expanets subordinated note in the face amount of $35 million due 2005 (this note was non-interest bearing and had a carrying value of $27.3 million); (ii) Avaya relinquished all of its equity interests in Expanets represented by two series of preferred stock; (iii) the outstanding balance on the credit facility of approximately $27 million was further extended and is now due in three equal installments of approximately $9 million on each of January 1, April 1, and July 1, 2004; and (iv) Expanets and Avaya revised their agreement to reduce the costs payable by Expanets for Avaya's support services for the Expanets Technical Assistance Center.

9

(3) Basis of Consolidation and Minority Interests

        The accompanying consolidated financial statements include our accounts together with those of our wholly and majority-owned or controlled subsidiaries. The financial statements of Expanets, Blue Dot and CornerStone (CornerStone is only through November 1, 2002) are included in the accompanying consolidated financial statements by virtue of the voting and control rights, and therefore included in references to "subsidiaries". All significant intercompany balances and transactions have been eliminated from the consolidated financial statements. The operations of CornerStone and our interest in CornerStone have been reflected in the consolidated financial statements as Discontinued Operations (see Note 6 for further discussion).

        Substantially all acquisitions by Expanets and Blue Dot have involved the issuance of common and preferred stock in those subsidiaries to the sellers of the acquired businesses. Our investments in Expanets and Blue Dot are principally in the form of senior preferred stock with voting control and a liquidation preference over the common stock. We are required to consolidate the financial results of Expanets and Blue Dot because of our voting control. The common and preferred stock issued to third parties in connection with acquisitions creates minority interests which are junior to our preferred stock interests and against which operating losses have been allocated.

        The income or loss allocable to minority interests will vary depending on the underlying profitability of the consolidated subsidiaries. Losses allocable to minority interests, which include the effect of dividends on the outstanding preferred stock that we owned and applicable allocations from us, are charged to minority interests. Corporate allocations relate to certain services we provide to our subsidiaries for management services, including insurance, administrative support for employee benefits, transaction structuring, financial analysis, tax services and information technology. There were no corporate allocations to Blue Dot for the three months ended March 31, 2003. Corporate allocations to Blue Dot were $1.2 million for the three months ended March 31, 2002. Corporate allocations to Expanets were $0.8 million and $1.1 million for the three months ended March 31, 2003 and 2002, respectively. The decreases reflect decreased services provided by NorthWestern, which have been eliminated or are now performed and directly expensed by each entity. Losses are allocated to minority interests to the extent they do not exceed the minority interest in the equity capital of the subsidiary, after giving effect for any exchange agreements. Losses in excess of the minority interests are allocated to us.

        No losses were allocated to Minority Interests for the three months ended March 31, 2003. Losses allocated to Minority Interests were $14.9 million for the three months ended March 31, 2002. Minority Interests balances were $9.0 million at March 31, 2003, and $10.3 million at December 31, 2002. We will recognize future losses of the subsidiaries to the extent these losses exceed the Minority Interest balance after the effect of exchange agreements. Based on the capital structures of Expanets and Blue Dot at March 31, 2003, all future losses at Expanets and Blue Dot will be allocated to us.

(4) Acquisitions

        On February 15, 2002, we completed the acquisition of Montana Power's energy transmission and distribution business for $478.0 million in cash and the assumption of $511.1 million in existing debt and mandatorily redeemable preferred securities of subsidiary trusts (net of cash received). Acquisition costs were approximately $24.8 million. We completed this acquisition to expand our presence in the energy market. As a result of the acquisition, we are now a provider of natural gas and electricity to

10

approximately 598,000 customers in Montana, South Dakota, and Nebraska. Results of our Montana operations have been included in the accompanying consolidated financial statements since the effective date of the acquisition.

        During the second and third quarters of 2002, Blue Dot completed five acquisitions. Consideration paid to the sellers in these acquisitions included cash consideration of $15.6 million and the issuance of Blue Dot common stock. No value has been assigned to the common stock issued for these acquisitions. Maximum contingent payments totaling $11.4 million associated with our 2002 acquisitions may be required based on earnings contingencies over an extended period. To the extent these payments occur, they will be considered an additional cost of the acquired entity.

        The following unaudited pro forma results of consolidated operations for the quarter ended March 31, 2002, give effect as if the acquisitions had occurred as of January 1, 2002 (in thousands, except per share amounts):

        The pro forma results are not necessarily indicative of what actually would have occurred if the acquisitions had been completed as of the beginning of the period, nor are they necessarily indicative of future consolidated results.

(5) Goodwill and Other Intangibles

        A summary of changes in our goodwill for the three months ended March 31, 2003 by business segment, is as follows (in thousands):

        All other goodwill relates to One Call Locators, which is part of our Montana non-utility operations.

11

        As of March 31, 2003 and December 31, 2002, our intangible assets, other than goodwill, and related accumulated amortization consisted of the following (in thousands):

        Other amortizable intangibles primarily consist of customer lists and contracts, and assembled workforce resulting from an asset acquisition by Expanets, which are amortized over their estimated periods of benefit.

        Intangible asset amortization expense for the three months ended March 31, 2003 and 2002 was $6.0 million and $7.1 million, respectively. Based on the current amount of intangible assets subject to amortization, estimated amortization expense for each of the succeeding five years is as follows: 2003—$25.2 million; 2004—$22.3 million; 2005—$13.6 million; 2006—$13.6 million; 2007—$13.6 million.

(6) Discontinued Operations

        During the first quarter of 2003, Blue Dot committed to sell 16 non-core locations, of which nine were sold as of March 31, 2003, and the remaining seven were sold in April 2003. Blue Dot received cash proceeds of $1.8 million from the sale of the 16 locations, of which $1.4 million related to the nine non-core locations sold during the quarter ended March 31, 2003. In addition to the cash proceeds, Minority Interest shareholders surrendered 8.1 million shares of Blue Dot Class C Common Stock. The results of all 16 locations have been presented as discontinued operations in the Consolidated Statements of Income (Loss). The Consolidated Balance Sheet as of March 31, 2003, as it relates to discontinued operations, includes only the remaining seven locations sold in April.

12

        Summary financial information for the Blue Dot non-core locations is as follows (in thousands):

        Effective November 1, 2002, we relinquished our direct and indirect equity interests in CornerStone Propane Partners, L.P. and CornerStone Propane, L.P. We do however own a non-economic voting interest in a limited liability company which owns 100 percent of the stock of the managing general partner of CornerStone. As a result, the assets and liabilities of CornerStone are no longer included in our Consolidated Balance Sheets subsequent to November 1, 2002. Effective November 1, 2002, we no longer reflect the results of CornerStone's operations in the Consolidated Income Statements. The results for CornerStone's operations and impairments related to our investments in and advances to CornerStone for the three months ended March 31, 2002, have been presented as discontinued operations in the Consolidated Statements of Income (Loss).

        On August 20, 2002, NorthWestern purchased the lenders' interest in approximately $19.9 million of CornerStone short-term debt, outstanding under CornerStone's credit facility together with approximately $6.1 million in letters of credit, which NorthWestern had previously guaranteed. No further drawings may be made under this facility. In addition, NorthWestern is owed $13.5 million from CornerStone and NorthWestern also has $9.2 million in letters of credit outstanding on behalf of CornerStone. As of March 31, 2003, the net recorded value of our receivables from and letters of credit exposure related to CornerStone was an aggregate $21.1 million.

13

        The following is summarized financial information for the discontinued CornerStone operations for the three months ended March 31, 2002 (in thousands):

(7) Other Comprehensive Income (Loss)

        The Financial Accounting Standards Board defines other comprehensive income (loss) as all changes to the equity of a business enterprise during a period, except for those resulting from transactions with owners. For example, dividend distributions are excepted. Other comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss). Net income (loss) may include such items as income (loss) from continuing operations, discontinued operations, extraordinary items, and cumulative effects of changes in accounting principles. Other comprehensive income (loss) may include foreign currency translations, adjustments of minimum pension liability, and unrealized gains and losses on certain investments in debt and equity securities. Other comprehensive income (loss) is calculated as follows (in thousands):

(8) Restructuring Reserve

        The restructuring charge of $24.9 million recognized in the fourth quarter of 2001 related to certain cost savings initiatives. The Board of Directors approved these initiatives in November 2001. The employee-related termination benefits include severance costs for 474 former employees. Facility closure costs include lease payments for remaining lease terms of unused facilities after closure as well as any early exit costs that we are contractually liable for. We summarize the components of the

14

accrued expenses related to the restructuring charge in our Consolidated Balance Sheets in the following table:

(9) Income Taxes

        The following table reconciles our effective income tax rate to the federal statutory rate:

        For the three months ended March 31, 2003, we have not recognized any federal income tax expense due to net operating loss carryforwards. Our income tax expense for the three months ended March 31, 2003 consists entirely of state income taxes payable.

(10) Segment Information

        We operate our business in five reporting segments: (i) electric utility operations; (ii) natural gas utility operations; (iii) communications; (iv) heating, ventilation and air conditioning, or HVAC, and plumbing related services; and (v) all other, which primarily consists of our other miscellaneous service and non-energy related operations and activities that are not included in the other identified segments, together with the unallocated corporate costs and investments, and any eliminating amounts. We combine our electric and natural gas segments in the following schedule principally because items below operating income are not allocated between these segments. The results of these two segments through operating income are presented in the subsequent schedule. The results of operations of our electric and natural gas utility segments and all other operations for the three months ended March 31, 2002, include the results of our Montana operations since February 1, 2002, the effective date of our acquisition.

        The accounting policies of the operating segments are the same as the parent except that the parent allocates some of its operating expenses and interest expense to the operating segments according to a methodology designed by management for internal reporting purposes and involves

15

estimates and assumptions. Financial data for the business segments, excluding discontinued operations, are as follows (in thousands):

Three Months Ended March 31, 2003

16

Three Months Ended March 31, 2002

17

Three Months Ended March 31

(11) New Accounting Standards

        In June 2001, the Financial Accounting Standards Board issued SFAS No. 143, Accounting for Asset Retirement Obligations, which was effective January 1, 2003. The statement provides accounting and disclosure requirements for retirement obligations associated with long-lived assets. The statement requires the present value of future retirement costs for which the Company has a legal obligation be recorded as liabilities with an equivalent amount added to the asset cost and depreciated over the asset life.

        We have completed an assessment of the specific applicability and implications of SFAS No. 143. We have identified, but have not recognized, asset retirement obligation, or ARO, liabilities related to our electric and natural gas transmission and distribution assets. Many of these assets are installed on easements over property not owned by us. The easements are generally perpetual and only require retirement action upon abandonment or cessation of use of the property for the specified purpose. The ARO liability is not estimable for such easements as we intend to utilize these properties indefinitely. In the event we decide to abandon or cease the use of a particular easement, an ARO liability would be recorded at that time.

        Our regulated utility operations have, however, previously recognized removal costs of transmission and distribution assets as a component of depreciation in accordance with regulatory treatment. To the extent these amounts do not represent SFAS No. 143 legal retirement obligations, they are to be disclosed upon adoption of the statement. As of March 31, 2003, we have estimated accrued removal costs related to our Montana transmission and distribution operations in the amount of $114.3 million and $4.6 million for our South Dakota and Nebraska operations, all of which are included in accumulated depreciation.

        For our generation properties, we have accrued decommissioning costs since the generating units were first put into service in the amount of $11.5 million, which is classified as a noncurrent regulatory liability.

        SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections, was issued in April 2002. SFAS No. 145 eliminates the requirement

18

that gains and losses from the extinguishments of debt be aggregated and classified as extraordinary items, net of the related income tax. It also requires sale-leaseback treatment for certain modifications of a capital lease that result in the lease being classified as an operating lease. We adopted SFAS No. 145 on January 1, 2003. As a result of the adoption, effective January 1, 2003, we reclassified the recognition of deferred costs related to interim financing of $20.7 million, incurred for the three months ended March 31, 2002, from an extraordinary loss to gain (loss) on debt extinguishment on the Consolidated Statement of Income (Loss). The related tax benefit of $7.2 million has been reclassified from an extraordinary loss to benefit (provision) for income taxes on the Consolidated Statement of Income (Loss).

        SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, was issued in June 2002. SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan, including lease termination costs and certain employee termination benefits that are associated with a restructuring, discontinued operation, plant closing or other exit or disposal activity. SFAS No. 146 will be applied prospectively and is effective for exit or disposal activities that are initiated after December 31, 2002. We adopted SFAS No. 146 on January 1, 2003. The adoption of SFAS No. 146 did not have a material impact on our consolidated results of operations, financial position, or cash flows.

        FASB Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45), was issued in November 2002. FIN 45 elaborates on the existing disclosure requirements for most guarantees. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair market value of the obligations it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The initial recognition and measurement provisions of the FIN 45 apply on a prospective basis to guarantees issued or modified after December 31, 2002. We adopted FIN 45 effective December 2002 and the applicable disclosures are reflected in Note 15, "Commitments and Contingencies."

        SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure—an Amendment of FASB Statement No. 123, was issued in December 2002. It provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 is effective for fiscal years beginning after December 15, 2003. We do not expect to voluntarily adopt the fair value based method of SFAS No. 123 and, therefore, do not expect the measurement provisions of SFAS No. 148 to affect our financial position or results of operations. We have included disclosures required by SFAS No. 148 in these financial statements. We apply the intrinsic value based method of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for our stock option plan. No compensation cost is recognized, as the option exercise price is equal to the market price of the underlying stock on the date of grant. For the three months ended March 31, our pro forma net income and earnings per share would have been as indicated below had the fair value of option grants

19

been charged to compensation expense in accordance with SFAS No. 123 (in thousands, except per share amounts):

        FASB Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46), was issued in January 2003. This interpretation changes the method of determining whether certain entities, including securitization entities, should be included in a company's Consolidated Financial Statements. An entity is subject to FIN 46 and is called a variable interest entity, or VIE, if it has equity that is insufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, or equity investors that cannot make significant decisions about the entity's operations, or that do not absorb the expected losses or receive the expected returns of the entity. All other entities are evaluated for consolidation in accordance with SFAS No. 94, Consolidation of All Majority-Owned Subsidiaries. A VIE is consolidated by its primary beneficiary, which is the party involved with the VIE that has a majority of the expected losses or a majority of the expected residual returns or both. The provisions of the interpretation are to be applied immediately to VIEs created after January 31, 2003, and to VIEs in which an enterprise obtains an interest after that date. For VIEs in which an enterprise holds a variable interest that it acquired before February 1, 2003, FIN 46 applies in the first fiscal period beginning after June 15, 2003. For any VIEs that must be consolidated under FIN 46 that were created before February 1, 2003, the assets, liabilities and non-controlling interest of the VIE would be initially measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN 46 first applies may be used to measure the assets, liabilities and non-controlling interest of the VIE. FIN 46 also mandates new disclosures about VIEs, some of which are required to be presented in financial statements issued after January 31, 2003. We have determined that we do not have a significant interest in VIEs requiring disclosure under FIN 46.

(12) Reclassifications

        Certain 2002 amounts have been reclassified to conform to the 2003 presentation. Such reclassifications have no impact on net income (loss) or shareholders' deficit as previously reported.

20

(13) Earnings (Loss) per Average Common Share

        Basic earnings per share is computed on the basis of the weighted average number of common shares outstanding. Diluted earnings per share is computed on the basis of the weighted average number of common shares outstanding plus the effect of the outstanding stock options. The following table presents the shares used in computing the basic and diluted earnings per share for 2003 and 2002:

        Certain outstanding antidilutive options have been excluded from the earnings (loss) per average share calculation. These options total 1,843,808 and 2,530,381 for the quarters ended March 31, 2003 and 2002, respectively.

(14) Gain (Loss) on Debt Extinguishment

        On March 13, 2003, Avaya cancelled Expanets' subordinated note in the face amount of $35 million due 2005. This note was non-interest bearing and had a carrying value of $27.3 million. The carrying value of this note was extinguished and recognized as a gain in the quarter ended March 31, 2003.

        In March 2002, we retired a $720 million term loan, due February 2003, that was used for interim financing for the acquisition of the electric and natural gas transmission and distribution business of The Montana Power Company. The recognition of deferred costs related to the interim financing resulted in a loss of $20.7 million.

(15) Commitments and Contingencies

Environmental Liabilities

        We are subject to numerous state and federal environmental regulations. The Clean Air Act Amendments of 1990 (the Act) stipulate limitations on sulfur dioxide and nitrogen oxide emissions from coal-fired power plants. We believe we can comply with such sulfur dioxide emission requirements at our generating plants and that we are in compliance with all presently applicable environmental protection requirements and regulations. We are also subject to other environmental statutes and regulations including matters related to former manufactured gas plant sites. The range of exposure for environmental remediation obligations is estimated to be $35.4 million to $93.0 million. We have an environmental reserve of $35.4 million at March 31, 2003, primarily related to liabilities from our Montana operations. When losses from costs of environmental remediation obligations from our utility operations are probable and reasonably estimable, we charge these costs against the established reserve.

21

Legal Proceedings

        We, and certain of our present and former officers and directors, are defendants in four purported class action lawsuits pending in the United States District Court for the District of South Dakota, Southern Division, entitled Dana Ross, et al. v. Merle D. Lewis, et al.; Case No. CIV034049; Carpenters Pension Trust for Southern California, et al. v. NorthWestern Corp., et al., Case No. CIV034086, John Gremillion, Jr., et al. v. NorthWestern Corp., et al., Case No. CIV034089, Samuel E. Christen, et al. v. NorthWestern Corp., et al., Case No. CIV034093. The plaintiffs are seeking unspecified compensatory damages, rescission, and attorneys' fees and costs as well as accountants' and experts' fees based on allegations that the defendants misrepresented and omitted material facts concerning NorthWestern's business operations and financial performance, overstated NorthWestern's revenue and earnings by, among other things, maintaining insufficient reserves for accounts receivable at Expanets, failing to disclose billing problems and lapses and data conversion problems, failing to make full disclosures of problems (including the billing and data conversion issues) arising from the implementation of Expanets' EXPERT system, and profited from improper related-party transactions all in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. We, and certain of our present and former officers and directors, have also been named in a purported class action commenced in the United States District Court for the Southern District of New York, entitled Sanford & Beatrice Golman Family Trust, et al. v. NorthWestern Corp., et al., Case No. 03CV3223, which was brought on behalf of the purchasers of our 8.10% trust preferred securities due January 15, 2032 which were offered and sold pursuant to our registration statement on Form S-3 filed on July 12, 1999. The plaintiffs' claims are based on similar allegations of material misrepresentations and omissions of fact relating to the registration statement in violation of Sections 11 and 12 of the Securities Act of 1933 and they seek unspecified compensatory damages, rescission and attorneys', accountants' and experts' fees. Certain of our present and former officers and directors and NorthWestern, as a nominal defendant, have been named in two shareholder derivative actions commenced in the United States District Court for the District of South Dakota, Southern Division, entitled Deryl Lusty, et al. v. Richard R. Hylland, et al., Case No. CIV034091 and Jerald and Betty Stewart, et al. v. Richard R. Hylland, et al., Case No. CIV034114. These shareholder derivative lawsuits allege that the defendants breached various fiduciary duties based upon the same general set of alleged facts and circumstances as the federal shareholder suits. The plaintiffs seek unspecified compensatory damages, restitution of improper salaries, insider trading profits and payments from NorthWestern, and disgorgement under the Sarbanes Oxley Act of 2002. These lawsuits were recently filed and have not been answered. We intend to vigorously defend against these lawsuits. We cannot currently predict the impact or resolution of this litigation or reasonably estimate a range of possible loss, which could be material, and the resolution of these lawsuits may harm our business and have a material adverse impact on our financial condition.

        In April 2003, the SEC notified NorthWestern that it is conducting an informal inquiry relating to questions regarding the restatements and other accounting and financial reporting matters. We are cooperating fully with the SEC's informal inquiry and intend to provide requested information as expeditiously as possible. Other than the informal SEC inquiry, as of the date hereof, we are not aware of any additional litigation or inquiry or investigation having been commenced against us related to these matters, but we cannot predict whether or not any such litigation or regulatory inquiry or investigation will be commenced or, if it is, the outcome of any such litigation or regulatory inquiry or investigation.

22

        On April 18, 2003, NorthWestern and other defendants were sued in the state court in Missouri for common law fraud, breach of fiduciary duty and Florida state securities fraud. The suit is entitled Leonard S. Mewhinney Jr. v Cornerstone Propane GP Inc.; Coast Gas, Inc.; Cornerstone Propane Partners LP, NorthWestern Corporation; and A.G. Edwards Juvestment Management Consulting Services, Inc. (No. 032-01181 Circuit Court of the City of St. Louis, Missouri). Plaintiff alleges that NorthWestern Cornerstone Propane GP, Inc.; Coast Gas, Inc. and Cornerstone Propane Partners LP, breached fiduciary duties between 1998 and 2001 by mismanaging Cornerstone Propane Partners, LP, transferring its assets for less than market value, taking excessive fees, and misrepresenting the true value of the partnership units, and that they fraudulently failed to disclose material information regarding the value of units of Cornerstone Propane Partners, LP and violated the Florida Securities Act by failing to properly register the partnership units in Florida and by making false statements and material omissions in connection with the sale of such units. The plaintiff seeks rescission, compensatory damages totaling $346,692, punitive damages of $1.0 million against NorthWestern only and court costs. We cannot currently predict the impact or resolution of this litigation or reasonably estimate a range of possible loss.

        On April 29, 2003, a suit was brought against Blue Dot and NorthWestern Growth Corporation in Massachusetts state court by a holder of Blue Dot Series A Preferred Stock that was to be exchanged on March 31, 2003 for $1.4 million. The suit, entitled Kinz Limited Partnership v. Blue Dot Services, Inc. and NorthWestern Growth Corporation (Case No. 03-1843, Superior Court of the Commonwealth of Massachusetts) includes claims for damages for breach of contract, specific performance and injunctive relief. The plaintiff alleges that Blue Dot agreed to exchange the Series A preferred shares for cash or shares of the common stock of NorthWestern, and that such agreement was guaranteed by NorthWestern and that both Blue Dot and NorthWestern failed to perform their obligations.

        On April 30, 2003, Mr. Hylland filed a demand for arbitration of contract claims under his employment agreement, as well as tort claims for defamation, infliction of emotional distress and tortuous interference and a claim for punitive damages. Mr. Hylland is seeking relief in an amount of $25 million, plus interest, attorney's fees, costs, and punitive damages. The Company disputes Mr. Hylland's claims and intends to vigorously defend the arbitration.

        On May 8, 2003, we reported that the Special Committee of the Board formed to evaluate Mr. Richard Hylland's performance and conduct in connection with the management of NorthWestern and its subsidiaries has completed its evaluation. Mr. Hylland is the former President and Chief Operating Officer of NorthWestern. Based on the recommendations of the Special Committee, on May 6, 2003, the Board determined that Mr. Hylland's performance and conduct as President and Chief Operating Officer warranted termination under his employment contract.

Residual value guarantees

        We have residual value guarantees related to certain vehicles under operating leases by Expanets and Blue Dot, in the event of default and subsequent failure to cure such default. At March 31, 2003, the maximum exposure under these residual value guarantees is approximately $1.0 million and $19.7 million related to Expanets and Blue Dot, respectively.

23

Performance Bonds

        Expanets has various performance bonds and guarantees in place to cover the installation of equipment and inventory purchases. The maximum potential payout under these performance bonds is $37.4 million and $49.9 million as of March 31, 2003 and December 31, 2002, respectively. Included in this total is a performance bond that expires on July 18, 2003 and covers up to $25 million for the benefit of a certain vendor. In May this vendor presented a claim against the bond and is attempting to accelerate their current and past due account balance of $9 million. Expanets has located and is using alternative supply sources.

        Blue Dot has various performance bonds in place to cover the installation of equipment. The maximum potential payout under these performance bonds is $6.9 million and $14.3 million as of March 31, 2003 and December 31, 2002, respectively.

        We have issued indemnity agreements that support the outstanding performance bonds of Expanets and Blue Dot.

Letters of Credit

        We have various letter of credit requirements and other collateral obligations of approximately $34.6 million and $48.1 million as of March 31, 2003 and December 31, 2002, respectively. Approximately $19.0 million and $18.6 million of these obligations as of March 31, 2003 and December 31, 2002, respectively, serve to support performance bonds primarily related to Expanets and Blue Dot. In addition, included in restricted cash at March 31, 2003 is $7.1 million that supports performance bonds related to Expanets and Blue Dot. No such amounts existed at December 31, 2002.

Other Contractual Obligations

        Blue Dot is currently in default under its existing credit facility and certain other material payment obligations to minority shareholders. In connection with its issuance of shares of Series A Preferred Stock to third parties, Blue Dot entered into certain exchange agreements giving the holders the right to exchange these shares for a predetermined amount, payable in cash or shares of common stock of NorthWestern that have been registered for resale, if an initial public offering of Blue Dot does not occur within a specified time after the issuance of such shares. The aggregate amount of exchange obligations as of March 31, 2003, was $3.9 million (included in Minority Interests in the Consolidated Balance Sheet), of which approximately $2.1 million was required to be paid at the holders' election on March 31, 2003, and of which approximately $0.5 million could be required to be paid at the holders' election on September 30, 2003. Blue Dot did not make the payments due on March 31, 2003, and is attempting to negotiate a forbearance agreement with its lender and extensions, repayment terms or other arrangements to satisfy other obligations with the appropriate parties.

        In connection with its issuance of shares of Class C Common Stock, Blue Dot entered into certain call option agreements and call and put option agreements giving Blue Dot the right to repurchase these shares. Both types of agreements permit Blue Dot to acquire such Class C Common Stock at a price that will vary, and may be greater or less than the original issuance price, based upon the performance of a designated Blue Dot operating unit over a specific period of time. The call and put option agreements also give the holders of the Class C Common Stock the right to put these shares to

24

Blue Dot at their adjusted book value if there has not been an initial public offering of Blue Dot by a specified date. In addition, certain of the call and put option agreements give the holders that receive shares of Class A Common Stock upon the conversion of their Class C Common Stock in an initial public offering the right to put their Class A Common Stock to Blue Dot at the lesser of the initial public offering price and the market price at the time of the put shortly after the initial public offering occurs. These arrangements provide for payments in cash and in certain instances cash and/or shares of NorthWestern stock that have been registered for resale. The maximum aggregate amount of the call price for all of these arrangements was approximately $45.0 million as of March 31, 2003. As of March 31, 2003, Blue Dot had exercised or was deemed to have exercised its right to purchase 8,512,500 shares of Class C Common Stock with an aggregate call price of approximately $2.0 million on March 31, 2003, and 8,750,000 shares of Class C Common Stock with an aggregate call price of approximately $4.4 million on June 30, 2003. Blue Dot did not make the payment on March 31, 2003, and is attempting to negotiate extensions, repayment terms or other arrangements to satisfy these obligations with the appropriate parties.

        If Blue Dot does not exercise its call right and the holders do not exercise their put right with respect to the Class C Common Stock, the holders of the Class C Common Stock will retain these shares and these shares will be converted into shares of Class A Common Stock of Blue Dot with a value that is equal to the call price in the event of an initial public offering. In addition, these holders may also be entitled to receive certain payments under earnout arrangements that were put in place at the time the Class C Common Stock was issued. These earnout payments will vary depending upon the performance of the designated operating unit associated with the shares. In each case, the maximum earnout payment that may be required to be paid by Blue Dot equals or exceeds the original issuance price of the Class C Common Stock. The maximum aggregate amount of earnout payments that may be required under these arrangements is approximately $37.4 million as of March 31, 2003. These earnout arrangements provide for payments in cash, cash and preferred stock of Blue Dot, and /or shares of NorthWestern stock that have been registered for resale. Any preferred stock of Blue Dot that is issued in connection with these arrangements may be exchanged by the holder for cash (or shares of NorthWestern stock that has been registered for resale) at a predetermined exchange rate at the holder's election under certain additional exchange agreements.

        NorthWestern Growth Corporation may be required to purchase or cause the purchase of shares of Blue Dot Class A Common Stock and/or Blue Dot Series B Preferred Stock and/or other classes or series of Blue Dot stock in an amount sufficient to permit Blue Dot to effect its exchange obligations under all of its exchange agreements and honor its payment obligations under certain call and put option agreements (including the payments that might be required of Blue Dot under the various call options, if the call options are exercised, the payments under the put options, if the put options are exercised, and under certain earn-out arrangements) under certain circumstances. Blue Dot has requested that NorthWestern Growth Corporation provide Blue Dot with the funds necessary to perform these obligations. However, NorthWestern has indicated that no additional funds will be provided to Blue Dot while NorthWestern pursues strategic alternatives for Blue Dot, including the sale or disposition of the business or its assets.

        The Blue Dot credit facility prohibits Blue Dot from performing its obligations under its exchange agreements, call and put arrangements and related earnouts unless the funds or stock used to satisfy

25

such obligations are provided by NorthWestern. In addition, Blue Dot may be prohibited from electing to redeem stock under certain circumstances under Delaware law.

        The maximum aggregate amount of payments that may be required of Blue Dot under the call option agreements, call and put option agreements, or earn-out payments is approximately $45.0 million as of March 31, 2003. Blue Dot currently has a $6.0 million liability accrued related to call notices issued on certain call option agreements.

        In 2002, two former owners of businesses acquired by Expanets elected to exercise put rights they held in connection with the Class A Common Stock of Expanets they had received at the time of the sale. The aggregate value of the put rights was $6.0 million at December 31, 2002. During the first quarter of 2003, Expanets paid $800,000 to one of the holders and has since paid an additional $665,000. Expanets is attempting to negotiate extensions, repayment terms or other arrangements to satisfy the remaining obligations with these parties. Both parties have asserted claims against NorthWestern Growth Corporation for payment of the remaining balance on the put rights, pursuant to an instrument that existed between NorthWestern Growth and Expanets, relating to certain Class A stock of Expanets. We believe the instrument has expired and NorthWestern Growth is under no obligation to the holders, and will contest any effort to collect from any party other than Expanets.

        During the first quarter of 2003, Expanets reached a settlement with a former chief executive officer on disputes relating to an employment contract that resulted in a cash payment of $1.5 million and a non-interest bearing note for up to $6.5 million. The net present value of the note was recorded using a 12% discount rate during the fourth quarter of 2002. The carrying value of this note is $4.3 million at March 31, 2003 and is included in debt on our Consolidated Balance Sheet.

(16) Subsequent Events

        In May 2003, our Board of Directors adopted a resolution to terminate or amend various employee benefit plans. Plans to be terminated include an employee stock purchase plan, an employee stock ownership plan, a non-qualified supplemental 401(k) plan and a postretirement death benefit plan. Two nonqualified postretirement defined benefit plans were amended to permit vested participants the option of continuing the current benefits level or taking a present value lump sum distribution. We will engage an actuary to determine the present value of these benefits as of the effective date of termination.

        In May 2003, Expanets signed a commitment letter with a commercial lending institution for a two-year $25 million asset-backed credit facility. Closing of this facility is anticipated in May 2003, however, it is subject to documentation and final due-diligence and no assurance can be provided that the proposed financing will be consummated. The proceeds from this facility will be used by Expanets to provide working capital and for other general corporate purposes.

26

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        Unless the context requires otherwise, references to "we," "us," "our" and "NorthWestern" refer specifically to NorthWestern Corporation and its subsidiaries.

OVERVIEW

        We operate our business in five reporting segments:

•

electric utility operations;



•

natural gas utility operations;



•

communications;



•

HVAC, plumbing and related services; and



•

all other, which primarily consists of our other miscellaneous service and non-energy related operations and activities that are not included in the other identified segments, together with the unallocated corporate costs and investments, and any eliminating amounts.

        Our financial condition has been significantly and negatively affected by the poor performance of our non-energy businesses and our significant indebtedness.

        In February 2003, we outlined the elements of a turnaround plan intended to strengthen our balance sheet and improve our

        financial performance. We are seeking to enforce a contract for the sale of our Colstrip transmission line, and propose to sell certain of our non-core assets, including our Montana First Megawatts project. We are also reviewing strategic options for Expanets and Blue Dot, including the sale or disposition of each of these businesses or their assets. We will not make any additional significant investments in, or commitments to, Expanets and Blue Dot while we examine strategic alternatives for the two businesses. In addition, in January 2003 the Montana Public Service Commission (MPSC) restricted our ability to make additional investments or commitments to our non-regulated businesses to $10 million in the aggregate unless we obtain prior approval. We intend to use any future proceeds from sales of non-core assets and surplus cash, if any, from operations to pay down debt. Absent proceeds from the sale of non-core assets, significant improvements in the operating results of our non-energy businesses, restructuring of our debt or raising additional capital, we will not have the ability to materially reduce our debt, and our ability to fund our operations and service our substantial indebtedness will be adversely affected.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

        Management's discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and other assumptions that are believed to be proper and reasonable under the circumstances. We continually evaluate the appropriateness of our estimates and assumptions, including those related to goodwill and intangible assets, impairment of long-lived assets, revenue recognition, allowance for doubtful accounts, and minority interest in consolidated subsidiaries, among others. Actual results could differ from those estimates.

27

        We have identified the policies and related procedures below as critical to understanding our historical and future performance, as these polices affect the reported amounts of revenue and the more significant areas involving management's judgments and estimates.

Goodwill and Indefinite-Lived Intangible Assets

        We believe that the accounting estimate related to determining the fair value of goodwill, and thus any impairment, is a "critical accounting estimate" because: (i) it is highly susceptible to change from period to period since it requires company management to make cash flow assumptions about future revenues, operating costs and discount rates over an indefinite life; and (ii) recognizing an impairment has had a significant impact on the assets reported on our balance sheet and our operating results. Management's assumptions about future sales margins and volumes require significant judgment because actual margins and volumes have fluctuated in the past and are expected to continue to do so. In estimating future margins, we use our internal budgets.

        SFAS No. 142 was issued during 2001 and is effective for all fiscal years beginning after December 15, 2001. According to the guidance set forth in SFAS No. 142, we are required to evaluate our goodwill and indefinite-lived intangible assets for impairment at least annually (October 1) and more frequently when indications of impairment exist. Accounting standards require that if the fair value of a reporting unit is less than its carrying value including goodwill, an impairment charge for goodwill must be recognized in the financial statements. To measure the amount of the impairment loss to recognize, we compare the implied fair value of the reporting unit's goodwill with its carrying value.

Long-lived Assets

        We evaluate our property, plant and equipment and definite-lived intangible assets for impairment whenever indicators of impairment exist. SFAS No. 144 requires that if the sum of the undiscounted cash flows from a company's asset, without interest charges that will be recognized as expenses when incurred, is less than the carrying value of the asset, impairment must be recognized in the financial statements. If an asset is deemed to be impaired, the amount of the impairment loss recognized represents the excess of the asset's carrying value as compared to its estimated fair value, based on management's assumptions and projections.

Revenue Recognition

        Revenues are recognized differently depending on the type of revenue. For NorthWestern Energy's South Dakota and Nebraska operations, as prescribed by the respective regulatory authorities, electric and natural gas utility revenues are based on billings rendered to customers. Customers are billed on a monthly cycle basis. For NorthWestern Energy's Montana operations, as prescribed by the Montana Public Service Commission, operating revenues are recorded monthly on the basis of consumption or services rendered. To match revenues with associated expenses, we accrue unbilled revenues for electric and natural gas services delivered to the customers but not yet billed at month-end.

        Communications and HVAC revenues are recognized when goods are delivered to customers or services are performed, except for revenues for services performed under certain material installation or service contracts, which are recognized in any given period based on the percentage of costs incurred to date in relation to total estimated costs to complete the contracts. Revenues at Expanets for certain other material and installation contracts are recognized on the completed contract method of accounting due to the inability to adequately estimate gross margins for these contracts. Certain judgments affect the application of our revenue recognition policy, primarily percentage of project completion. Revenue estimates in these areas are difficult to predict, and any shortfall in revenue or delay in recognizing revenue could cause our operating results to vary significantly from quarter to quarter and could materially impact future operating results. We continue to experience serious

28

difficulties with the EXPERT system billing function. We provide a monthly reserve for billing adjustments at a rate in excess of industry standards, which we believe to be appropriate in our circumstances.

Allowance for Doubtful Accounts

        We maintain a general allowance for doubtful accounts based on our historical experience, along with additional customer-specific allowances. We regularly monitor credit risk exposures in our accounts receivable. In estimating the necessary level of our allowance for doubtful accounts, management considers the aging of its accounts receivable, the creditworthiness of our customers, economic conditions within the customer's industry, and general economic conditions, among other factors. When these factors change, the estimates made by management also change, which in turn impacts the level of our allowance for doubtful accounts. The lack of reliable detailed accounts receivable information from the EXPERT system has negatively impacted our ability to estimate the approximate level of our allowance for doubtful accounts.

Regulatory Assets and Liabilities

        Our regulated operations are subject to the provisions of SFAS No. 71, Accounting for the Effects of Certain Types of Regulations. Our regulatory assets are the probable future revenues associated with certain costs to be recovered from customers through the ratemaking process. Regulatory liabilities are the probable future reductions in revenues associated with amounts to be credited to customers through the ratemaking process. If any part of our operations become no longer subject to the provisions of SFAS No. 71, the probable future recovery of or reduction in revenue with respect to the related regulatory assets and liabilities would need to be evaluated. In addition, we would need to determine if there was any impairment to the carrying costs of deregulated plant and inventory assets.

        While we believe that our assumption regarding future regulatory actions is reasonable, different assumptions could materially affect our results.

29

Pension and Postretirement Benefit Plans

        Our reported costs of providing pension and other postretirement benefits are dependent upon numerous factors resulting from actual plan experience and assumptions of future experience.

        Pension and other postretirement benefit costs, for example, are impacted by actual employee demographics (including age and compensation levels), the level of contributions we make to the plans, earnings on plan assets, and health care cost trends. Changes made to the provisions of the plans may also impact current and future other postretirement benefit costs. Other postretirement benefit costs may also be significantly affected by changes in key actuarial assumptions, including anticipated rates of return on plan assets and the discount rates used in determining the postretirement benefit obligation and postretirement costs.

        As a result of the factors listed above, significant portions of other postretirement benefit costs recorded in any period do not reflect (and are generally greater than) the actual benefits provided to pension plan participants.

        Our pension and other postretirement benefit plan assets are primarily made up of equity and fixed income investments. Fluctuations in actual equity market returns as well as changes in general interest rates may result in increased or decreased pension and other postretirement benefit costs in future periods. Likewise, changes in assumptions regarding current discount rates and expected rates of return on plan assets could also increase or decrease recorded pension and other postretirement benefit costs.

Minority Interest in Consolidated Subsidiaries

        Substantially all of our acquisitions at Expanets and Blue Dot have involved the issuance of common and preferred stock in those subsidiaries to the sellers of the acquired businesses. In connection with certain acquisitions of Expanets and Blue Dot, the sellers can elect to exchange the stock of Expanets and Blue Dot for cash or in certain circumstances, at the election of NorthWestern, shares of common stock of NorthWestern that have been registered for resale, at a predetermined exchange rate. Our investments in Expanets and Blue Dot are principally in the form of senior preferred stock with voting control and a liquidation preference over such common and preferred stock. We are required to consolidate the financial results of Expanets and Blue Dot because of our voting control. The common stock issued to third parties in connection with acquisitions creates minority interests which are junior to our preferred stock interests. Operating losses at Expanets and Blue Dot have been allocated first to the common shareholders of each subsidiary in proportion to common equity ownership to the extent the allocation does not exceed the minority interest of such common shareholders in the equity capital of the subsidiary after giving effect to any put options or exchange agreements, and thereafter is allocated to the preferred shareholders of each subsidiary in the order of priority equal to the liquidation preference of each series of preferred stock. Exchange agreements totaling $5.2 million for Expanets and $3.9 million for Blue Dot remained outstanding and

30

were included in minority interests as of March 31, 2003. The equity held by third parties of these entities is as follows:

        See also "Liquidity and Capital Resources—Other Contractual Obligations" for discussion of additional equity instruments held by third parties that are not reflected in Minority Interests.

        The Minority Interests in Net Loss of Consolidated Subsidiaries contained in our consolidated statements of income (loss) is the income (loss) of our subsidiaries which is allocable to minority interests. In order to determine the allocation of income (loss) to minority interests, preferred dividends and corporate services allocations are deducted from the income (loss) before minority interests reported in our segment disclosures in order to arrive at the Minority Interests in Net Loss of Consolidated Subsidiaries contained in our consolidated statements of income. The corporate allocations relate to certain services NorthWestern provides to its subsidiaries for management services, including insurance, legal, human resources and benefit administrative support for employee benefits, transaction structuring, financial analysis, tax services and information technology. These services are discussed in Note 2 "Significant Accounting Policies—Minority Interest in Consolidated Subsidiaries" to NorthWestern's annual consolidated financial statements. Certain direct costs of Blue Dot, primarily payroll of certain Blue Dot corporate personnel, are processed and paid by NorthWestern. These costs are billed directly to Blue Dot and reflected in their results of operations. The preferred dividends relate to dividends on our 12% coupon Preferred Stock of Expanets and our 11% coupon Preferred Stock of Blue Dot. The preferred dividends and corporate allocations are eliminated in consolidation. The net loss before minority interests and net loss available to common equity holders reported in our segment disclosures includes the portion of interest expense on our $51.4 million intercompany note and interest charged on other cash advances of $112.5 million due from Expanets, which is allocable to third party minority interests. The intercompany note and cash advances bear interest at 17% and 12% per annum, respectively.

        There were no losses allocated to minority interests for the three months ended March 31, 2003. The following table demonstrates the reconciliation of net loss before minority interests reported in NorthWestern's segment disclosures for its communications and HVAC segments, the only two

31

segments that have Minority Interest, to Minority Interests in Net Loss of Consolidated Subsidiaries contained in its consolidated statements of income for the three months ended March 31, 2002.

(1)

These amounts are reflected directly within NorthWestern's consolidated financial statements. All other amounts support the derivation of those numbers.

(2)

Expanets' loss before minority interests includes $1.3 million of after tax interest expense on amounts due to NorthWestern.

RESULTS OF OPERATIONS

        The following is a summary of our consolidated results of operations for the three-month periods ended March 31, 2003 and 2002. Our consolidated results include the results of our divisions and subsidiaries constituting each of our business segments. This discussion is followed by a more detailed discussion of operating results by segment. Our "All Other" category primarily consists of our other miscellaneous service activities, which are not included in the other identified segments together with unallocated corporate costs. See "—Segment Information—All Other Operations" for a discussion of the items contained in our "All Other" category. Product and service category fluctuations highlighted at the consolidated level are more fully explained in the segment discussions. The results of operations of our electric and natural gas utility segments and all other operations for the three months ended March 31, 2002, include the results of our Montana operations since February 1, 2002, the effective date of the acquisition.

Consolidated Earnings (Loss)

        Consolidated earnings were $9.9 million in the first quarter of 2003, an increase of $62.3 million, from consolidated losses of $52.4 million in the first quarter of 2002. The increase was primarily a result of reduced losses on discontinued operations of $38.8 million and a gain on debt extinguishment of $27.3 million relating to Avaya's cancellation of a non-interest bearing note due from Expanets.

Consolidated Operations

        Consolidated operating revenues were $563.2 million in the first quarter of 2003, an increase of $122.5 million, or 27.8%, from $440.7 million in the first quarter of 2002. This increase in consolidated revenues was primarily due to increases in the electric and natural gas operations of $112.5 million, and an increase in HVAC segment revenues of $18.7 million. Our Montana operations contributed $100.7 million of the electric and natural gas segment increase. These increases were partially offset by decreased revenues from our communications segment of $10.4 million.

32

        Consolidated cost of sales was $315.4 million in the first quarter of 2003, an increase of $57.7 million, or 22.4%, from results in the first quarter of 2002. Consolidated cost of sales increased primarily due to a $74.9 million increase in cost of sales within the electric and natural gas segment, of which $63.8 million was related to our Montana operations, and a $14.5 million increase in our HVAC segment. These increases in cost of sales were partially offset by a $27.7 million decrease in our communications segment and a $4.1 million decrease in our All Other segment.

        Consolidated gross margin was $247.8 million in the first quarter of 2003, an increase of $64.9 million, or 35.5%, from results in the first quarter of 2002. Electric and natural gas operations gross margins increased by $37.6 million, of which $36.9 million was due to the addition of our Montana operations. Communications gross margin increased by $17.2 million due to decreased cost of sales more than offsetting a decline in revenues. HVAC gross margin increased $4.1 million, and All Other gross margin increased $5.9 million. As a percentage of revenue, consolidated gross margin in the first quarter of 2003 was 44.0%, compared to 41.5% in the first quarter of 2002.

        Consolidated operating expenses were $210.6 million in the first quarter of 2003, an increase of $40.6 million, or 23.9%, from results in the first quarter of 2002. Electric and natural gas operating expenses increased $26.9 million, of which $23.0 million was related to our Montana operations. All Other operating expenses increased $11.1 million quarter over quarter, and HVAC operating expenses increased $3.7 million. Communications segment operating expenses declined $1.0 million from results in the first quarter of 2002.

        Consolidated operating income in the first quarter of 2003 was $37.3 million, an improvement of $24.3 million, or 187.0%, compared to income of $13.0 million in the first quarter of 2002. Operating loss in our communications segment decreased by $18.2 million. Operating income in our electric and natural gas segments increased $10.8 million, of which $13.9 million was related to our Montana operations, offset by reduced operating income in our South Dakota and Nebraska operations of $3.1 million. HVAC operating losses decreased $0.5 million. Operating losses in our All Other segment increased by $5.1 million.

        Consolidated interest expense in the first quarter of 2003 was $44.3 million, an increase of $19.5 million, or 78.6%, over interest expense of $24.8 million in the first quarter of 2002. Interest expense in our electric and natural gas segment increased $11.9 million. All Other interest expense increased $5.9 million. The increase was primarily due to increased borrowing under our new senior secured term loan as well and partially due to financings during the first quarter of 2002 to facilitate the acquisition of NorthWestern Energy's Montana operations.

        We recognized a $27.3 million gain on debt extinguishment in the first quarter of 2003 relating to Avaya's cancellation of a non-interest bearing note due from Expanets. We recognized a $20.7 million loss on debt extinguishment in the first quarter of 2002 relating to the write-off of deferred costs upon retirement of our $720 million term loan.

        Consolidated income tax provision was $0.3 million in the first quarter of 2003, a $12.5 million change from a $12.2 million income tax benefit in the first quarter of 2002. The decline in consolidated income tax positions was principally due to a $5.4 million and $9.5 million decrease in the tax benefit within the communications and All Other segments, respectively, partially offset by a $3.4 million decline in income tax provision within the electric and natural gas segment.