NORTHWESTERN CORP - 10-Q Quarterly Report

PART 1. FINANCIAL INFORMATION

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

	Successor Company
	March 31, 2005			December 31, 2004
ASSETS
Current Assets:
Cash and cash equivalents	$	77,314			$	17,058
Restricted cash	19,554				18,115
Accounts receivable, net	123,378				141,350
Inventories	22,672				28,033
Regulatory assets	12,101				13,152
Prepaid energy supply	16,987				30,278
Prepaid and other	9,180				8,601
Assets held for sale	20,000				20,000
Current assets of discontinued operations	70,646				71,091
Total current assets	371,832				347,678
Property, Plant, and Equipment, Net	1,378,468				1,379,060
Goodwill	435,076				435,076
Other:
Investments	8,765				8,876
Regulatory assets	218,964				224,192
Other	20,625				18,597
Noncurrent assets of discontinued operations	36				37
Total assets	$	2,433,766			$	2,413,516
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Current maturities of long-term debt	$	67,665			$	73,380
Accounts payable	62,858				85,120
Accrued expenses	168,237				131,852
Regulatory liabilities	21,770				19,342
Current liabilities of discontinued operations	17,396				18,374
Total current liabilities	337,926				328,068
Long-term Debt	757,354				763,566
Deferred Income Taxes	54,741				41,354
Noncurrent Regulatory Liabilities	164,425				160,750
Other Noncurrent Liabilities	398,312				410,000
Noncurrent Liabilities of Discontinued Operations	443				443
Total liabilities	1,713,201				1,704,181
Shareholders’ Equity:
Common stock, par value $0.01; authorized 200,000,000 shares; issued and outstanding 35,728,351 and 35,611,026, respectively; Preferred stock, par value $0.01; authorized 50,000,000 shares; none issued	355				355
Treasury stock at cost	(81		)		—
Paid-in capital	717,791				717,994
Unearned restricted stock	(1,655		)		(2,093		)
Retained earnings (deficit)	4,140				(6,944		)
Accumulated other comprehensive income	15				23
Total shareholders’ equity	720,565				709,335
Total liabilities and shareholders’ equity	$	2,433,766			$	2,413,516

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

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

	Successor Company				Predecessor Company
	Three Month Period Ended March 31,
	2005				2004
OPERATING ACTIVITIES:
Net Income		$	18,918			$	16,981
Items not affecting cash:
Depreciation and amortization		18,690				18,176
Amortization of debt issue costs		458				3,029
Amortization of restricted stock		375				107
Gain on qualifying facility contract amendment		(4,888		)		—
Income on discontinued operations, net of taxes		(524		)		(4,922		)
Deferred income taxes		13,387				(916		)
Gain on property, plant and equipment and investments		—				(81		)
Changes in current assets and liabilities:
Restricted cash		(1,439		)		(257		)
Accounts receivable		17,972				(6,368		)
Inventories		5,361				(7		)
Prepaid energy supply costs		13,291				17,229
Other current assets		(1,080		)		10,117
Accounts payable		(22,262		)		1,453
Accrued expenses		36,385				32,206
Changes in regulatory assets		6,279				7,399
Changes in regulatory liabilities		3,536				1,361
Other noncurrent assets		(2,230		)		34
Other noncurrent liabilities		(8,265		)		2,442
Cash flows provided by continuing operations		93,964				97,983
Change in net assets of discontinued operations		(8		)		(2		)
Cash provided by operating activities		93,956				97,981
INVESTING ACTIVITIES:
Property, plant, and equipment additions		(13,400		)		(13,633		)
Proceeds from sale of assets		5				695
Proceeds from sale of investments		—				39
Cash used in investing activities		(13,395		)		(12,899		)
FINANCING ACTIVITIES:
Dividends on common stock		(7,834		)		—
Repayment of long-term debt		(12,039		)		(4,215		)
Treasury stock activity		(81		)		—
Financing costs		(211		)		—
Equity registration fees		(140		)		—
Cash used in financing activities		(20,305		)		(4,215		)
Increase in Cash and Cash Equivalents		60,256				80,867
Cash and Cash Equivalents, beginning of period		17,058				15,183
Cash and Cash Equivalents, end of period		$	77,314			$	96,050
Supplemental Cash Flow Information:
Cash paid (received) during the period for:
Income taxes		$	(14	)		$	(4,579	)
Interest		6,887				12,670
Reorganization professional fees and expenses		1,668				5,325
Reorganization interest income		—				(15		)

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Reference is made to Notes to Financial Statements
included in NorthWestern Corporation’s Annual Report)

(1) Nature of Operations and Basis of Consolidation

We are one of the largest providers of electricity and natural gas in the Upper Midwest and Northwest, serving approximately 617,000 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 and have distributed electricity and natural gas in Montana since 2002 under the trade name “NorthWestern Energy.”

The consolidated financial statements for the periods included herein have been prepared by NorthWestern Corporation (NorthWestern, we or us), pursuant to the rules and regulations of the 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. The actual results for the interim periods are not necessarily indicative of the operating results to be expected for a full year or for other interim periods. Although management believes that the disclosures provided are adequate to make the information presented not misleading, management recommends that these unaudited consolidated financial statements be read in conjunction with audited consolidated financial statements and related footnotes included in our Annual Report on Form 10-K for the year ended December 31, 2004 filed with the SEC on March 14, 2005.

On September 14, 2003 (the Petition Date), we filed a voluntary petition for relief under the provisions of Chapter 11 of the Federal Bankruptcy Code (the Bankruptcy Code) in the United States Bankruptcy Court for the District of Delaware (Bankruptcy Court). On October 19, 2004, the Bankruptcy Court entered an order confirming our Plan of Reorganization (Plan), which became effective on November 1, 2004.

Between September 14, 2003 and November 1, 2004, we operated as a debtor-in-possession under the supervision of the Bankruptcy Court. Our financial statements for reporting periods within that timeframe were prepared in accordance with the provisions of Statement of Position 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code. In accordance with SOP 90-7, we applied the principles of fresh-start reporting as of the close of business on October 31, 2004, resulting in the creation of a new reporting entity. “Predecessor Company” refers to us prior to emergence from bankruptcy (operations prior to October 31, 2004). “Successor Company” refers to us after emergence from bankruptcy (operations after November 1, 2004).

The accompanying consolidated financial statements include our accounts together with those of our wholly and majority-owned or controlled subsidiaries. The financial statements of Netexit, Inc. (Netexit) and Blue Dot Services, Inc. (Blue Dot) are included in the accompanying consolidated financial statements by virtue of the voting and control rights, and therefore included in references to “subsidiaries.” Netexit and Blue Dot were not party to our recently concluded Chapter 11 case. However on May 4, 2004, Netexit filed a voluntary petition for relief under the provisions of Chapter 11 of the Federal Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. All significant intercompany balances and transactions have been eliminated from the consolidated financial statements. The operations of Netexit and Blue Dot and our interest in these subsidiaries have been reflected in the consolidated financial statements as Discontinued Operations (see Note 4 for further discussion). We continue to consolidate the operations and financial position of Netexit in our financial statements as we believe that the continued consolidation results in a more meaningful presentation due to our negative investment, our

expectation that the bankruptcy will be brief and our anticipated control of Netexit upon its emergence from bankruptcy.

In December 2003, the FASB issued Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, or FIN 46R. FIN 46R was issued to replace FIN 46 and clarify the accounting for interests in variable interest entities. FIN 46R requires the consolidation of entities which are determined to be variable interest entities (VIEs) when the reporting company determines that it will absorb a majority of the VIE’s expected losses, receive a majority of the VIE’s residual returns, or both. The company that is required to consolidate the VIE is called the primary beneficiary. Conversely, the reporting company would be required to deconsolidate VIEs that are currently consolidated when the company is not considered to be the primary beneficiary. Variable interests are contractual, ownership or other monetary interests in an entity that change as the fair value of the entity’s net assets exclusive of variable interests change. An entity is considered to be a VIE when its capital is insufficient to permit it to finance its activities without additional subordinated financial support or its equity investors, as a group, lack the characteristics of having a controlling financial interest. Certain long-term purchase power and tolling contracts may be considered variable interests under FIN 46R. We have various long-term purchase power contracts with other utilities and certain qualifying facility plants. After evaluation of these contracts, we believe one qualifying facility contract may constitute a variable interest entity under the provisions of FIN 46R. While we have made exhaustive efforts, we have been unable to obtain the information necessary to further analyze this contract under the requirements of FIN 46R. We will continue to make appropriate efforts to obtain the necessary information from this qualifying facility in order to determine if it is a VIE and if so, whether we are the primary beneficiary. We continue to account for this qualifying facility contract as an executory contract. Based on the current contract terms with this qualifying facility, our estimated gross contractual payments aggregate approximately $586.7 million through 2025.

(2) Asset Retirement Obligations

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 remediation 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. These amounts do not represent Statement of Financial Accounting Standards (SFAS) No. 143 legal retirement obligations. As of March 31, 2005 and December 31, 2004, we have recognized accrued removal costs of $135.5 million and $132.9 million, respectively, which are included in noncurrent regulatory liabilities. In addition, related to our nonregulated electric operations, we have recognized accrued removal costs of $2.1 million and $2.0 million as of March 31, 2005 and December 31, 2004, respectively.

For our generation properties, we have accrued decommissioning costs since the generating units were first put into service in the amount of $12.5 million and $12.3 million as of March 31, 2005 and December 31, 2004, respectively, which is classified as a noncurrent regulatory liability. These amounts also do not represent SFAS No. 143 legal retirement obligations.

(3) Goodwill

There were no changes in our goodwill during the three months ended March 31, 2005. Goodwill by segment as of March 31, 2005 and December 31, 2004 is as follows (in thousands):

Regulated electric	$	295,377
Regulated natural gas	139,699
Unregulated electric	—
Unregulated natural gas	—
	435,076

(4) Discontinued Operations

During the second quarter of 2003, we committed to a plan to sell or liquidate our interest in Netexit and Blue Dot. In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we classified the results of operations of Netexit and Blue Dot as discontinued operations.

In order to wind-down its affairs in an orderly manner, Netexit and its subsidiaries filed for bankruptcy protection on May 4, 2004. Netexit currently holds approximately $66 million in cash, which is included in current assets of discontinued operations on our consolidated financial statements. We have agreed to and the Bankruptcy Court has ordered mediation with Netexit’s official committee of unsecured creditors and another Netexit claimant in an attempt to resolve outstanding issues related to Netexit’s liquidating plan of reorganization. Additionally, Netexit’s creditors committee has indicated that NorthWestern’s claims against Netexit may be subject to avoidance and/or subordination under operative provisions of the Bankruptcy Code. We intend to vigorously defend against any efforts to invalidate or subordinate our claims against Netexit, but we cannot currently predict the resolution of any litigation with respect to the validity of NorthWestern’s claims against Netexit. Netexit may incur significant additional expenses related to the bankruptcy filing and may incur additional losses related to the resolution of open claims. Pending the resolution of open claims by Netexit creditors, the proceeds from the sale remain at Netexit and distributions to NorthWestern could be delayed until the effective date of Netexit’s liquidating plan of reorganization.

As of March 31, 2005 and December 31, 2004, Netexit had current assets of $67.2 million and $66.3 million and current liabilities of $15.8 million and $15.6 million, respectively.

Summary financial information for the discontinued Netexit operations is as follows (in thousands):

	Successor Company			Predecessor Company
	Three Months Ended
	March 31, 2005			March 31, 2004
Revenues		$	—		$	—
Income before income taxes		$	715		$	1,666
Income tax provision		—			—
Income from discontinued operations, net of income taxes		$	715		$	1,666

Blue Dot has one remaining business. As of March 31, 2005 and December 31, 2004, Blue Dot had current assets of $3.5 million and $4.8 million and current liabilities of $1.6 million and $2.8 million, respectively. As of March 31, 2005 and December 31, 2004, Blue Dot had noncurrent assets of $0.04 million and noncurrent liabilities of $0.4 million.

Summary financial information for the discontinued Blue Dot operations is as follows (in thousands):

	Successor Company				Predecessor Company
	Three Months Ended
	March 31, 2005				March 31, 2004
Revenues		$	723			$	16,593
Loss before income taxes		$	(191	)		$	(4,293	)
Gain on disposal		—				7,549
Income tax provision		—				—
(Loss) Income from discontinued operations, net of income taxes		$	(191	)		$	3,256

(5) Other Comprehensive Income

The Financial Accounting Standards Board defines comprehensive income 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 excluded. Comprehensive income consists of net income and other comprehensive income. Net income may include such items as income from continuing operations, discontinued operations, extraordinary items, and cumulative effects of changes in accounting principles. Other comprehensive income may include foreign currency translations, adjustments of minimum pension liability, and unrealized gains and losses on certain investments in debt and equity securities.

Comprehensive income is calculated as follows (in thousands):

	Successor Company			Predecessor Company
	Three Months Ended March 31,
	2005			2004
Net income		$	18,918		$	16,981
Other comprehensive income (loss), net of tax:
Foreign currency translation		15			(20		)
Comprehensive income		$	18,933		$	16,961

(6) Income Taxes

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

	Successor Company			Predecessor Company
	Three Months Ended
	March 31, 2005			March 31, 2004
Federal statutory rate		35.0	%		35.0	%
State income, net of federal provisions		3.5			3.7
Dividends received deduction and other investments		—			(0.4	)
Valuation allowance		—			(41.6	)
Other, net		4.1			2.1
		42.6	%		(1.2	)%

(7) Segment Information

We currently operate our business in five reporting segments: (i) electric utility operations, (ii) natural gas utility operations, (iii) unregulated electric, (iv) unregulated natural gas, and (v) all other, which primarily consists of our other miscellaneous service activities that are not included in the other identified segments, together with the unallocated corporate costs and investments. Items below operating income are not allocated between our segments.

The accounting policies of the operating segments are the same as the parent except that the parent allocates some of its operating expenses to the operating segments according to a methodology designed by management for internal reporting purposes and involves estimates and assumptions. Financial data for the business segments, excluding discontinued operations, are as follows (in thousands):

Successor Company Three months ended	Utility				Unregulated
March 31, 2005	Electric		Gas		Electric		Gas		Other			Eliminations				Total
Operating revenues	$	154,362	$	138,604	$	24,430	$	50,343	$	226			$	(32,872	)	$	335,093
Cost of sales	70,066		98,414		6,364		47,767		183				(32,413		)	190,381
Gross margin	84,296		40,190		18,066		2,576		43				(459		)	144,712
Operating, general and administrative	30,072		15,106		9,476		839		1,621				(459		)	56,655
Property and other taxes	12,563		4,798		810		30		4				—			18,205
Depreciation	14,328		3,705		261		101		295				—			18,690
Reorganization items	—						—		3,363				—			3,363
Operating income (loss)	27,333		16,581		7,519		1,606		(5,240		)		—			47,799
Total assets	$	1,506,537	$	709,061	$	37,838	$	64,466	$	45,182			$	—		$	2,363,084
Capital expenditures	$	11,053	$	1,833	$	514	$	—	$	—			$	—		$	13,400

Predecessor Company Three months ended	Utility				Unregulated
March 31, 2004	Electric		Gas		Electric			Gas		Other			Eliminations				Total
Operating revenues(1)	$	142,987	$	121,181	$	17,736		$	40,719	$	658			$	(17,654	)	$	305,627
Cost of sales(1)	66,277		80,978		4,697			37,551		467				(17,052		)	172,918
Gross margin	76,710		40,203		13,039			3,168		191				(602		)	132,709
Operating, general and administrative	27,664		13,839		13,312			984		1,608				(602		)	56,805
Property and other taxes	12,380		4,668		821			17		17				—			17,903
Depreciation	13,849		3,537		304			89		397				—			18,176
Reorganization items	—		—		—			—		6,830				—			6,830
Operating income	22,817		18,159		(1,398		)	2,078		(8,661		)		—			32,995
Total assets	$	1,508,709	$	710,083	$	25,730		$	67,662	$	73,678			$	—		$	2,385,862
Capital expenditures	$	9,752	$	2,295	$	1,418		$	160	$	8			$	—		$	13,633

(1) In accordance with Emerging Issues Task Force 03-11, Reporting Realized Gains and Losses on Derivative Instruments that are Subject to FASB Statement No. 133 and not “Held for Trading Purposes” as defined in Issue No. 02-3, which was effective beginning with the 4^th quarter of 2003, the Predecessor Company has revised revenues downward from amounts previously reported for the first quarter of 2004 to report revenue net versus gross for certain regulated electric and gas contracts that did not physically deliver. These revenues did not impact gross margin, operating income or net income as previously reported. These revenue revisions were determined not to be material to the Predecessor Company financial statements. Revenues and cost of sales for the first quarter of 2004 reflected above were each reduced by $34.0 million.

(8) New Accounting Standards

In March 2005, the Financial Accounting Standards Board issued Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations, or FIN 47. FIN 47 was issued to clarify the accounting for conditional asset retirement obligations in order to have more consistent recognition of liabilities relating to asset retirement obligations and additional information on expected future cash outflows and investments in long-lived assets. While we are currently evaluating the potential impact on our asset retirement obligations, we do not anticipate the effects of FIN 47 will have a material impact on our financial condition or results of operations. FIN 47 is effective for periods ended after December 15, 2005.

(9) Reclassifications

Certain 2004 amounts have been reclassified to conform to the 2005 presentation. Such reclassifications have no impact on net income or shareholders’ equity as previously reported.

(10) Income 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 and warrants. Average shares used in computing the basic and diluted earnings per share for the three months ended March 31, 2005 are as follows:

	Successor Company March 31, 2005
Basic computation		35,611,026
Dilutive effect of
Restricted shares		114,157
Stock warrants		—
Diluted computation		35,725,183

Warrants to purchase 4,620,297 shares of common stock as of March 31, 2005 are antidilutive and have been excluded from the earnings per share calculations. These warrants have an exercise price of $28.48. Under the terms of the warrant agreement, the exercise price of the warrants is subject to adjustment from time to time, based on certain events. These events include additional share issuances and dividend payments. An adjustment is made in the case of a cash dividend if the amount of the cash dividend increases or decreases the exercise price by at least 1%, otherwise such amount is carried forward and taken into account with any subsequent cash dividend. Adjustments in the exercise price may require an adjustment in the number of warrants or the number of shares covered by the warrants. Historical earnings per share information for the Predecessor Company has not been presented as all shares were cancelled upon emergence from bankruptcy.

(11) Employee Benefit Plans

Net periodic benefit cost for our pension and other postretirement plans consists of the following for the three ended March 31, 2005 and 2004 (in thousands):

	Pension Benefits								Other Postretirement Benefits
	Successor Company				Predecessor Company				Successor Company				Predecessor Company
	Three Months Ended March 31
	2005				2004				2005				2004
Components of Net Periodic Benefit Cost
Service cost		$	2,044			$	2,166			$	219			$	220
Interest cost		5,087				7,265				722				805
Expected return on plan assets		(4,916		)		(7,129		)		(161		)		(76		)
Amortization of transitional obligation		—				155				—				—
Amortization of prior service cost		—				373				—				—
Recognized actuarial loss		—				701				—				194
Net Periodic Benefit Cost		$	2,215			$	3,531			$	780			$	1,143

(12) Commitments and Contingencies

Environmental Liabilities

We are subject to numerous state and federal environmental laws and regulations. Because these laws and regulations are continually developing and subject to amendment, reinterpretation and varying degrees of enforcement, we may be subject to, but can not predict with certainty the nature and amount of future environmental liabilities. The Clean Air Act Amendments of 1990 (the Act) and subsequent amendments stipulate limitations on sulfur dioxide and nitrogen oxide emissions from coal-fired power plants. We comply with these existing emission requirements through purchase of sub-bituminous coal and we believe that we are in compliance with all presently applicable environmental protection requirements and regulations with respect to these plants. Recent legislation has been proposed, which may require further limitations on emissions of these pollutants along with limitations on carbon dioxide, particulate mater, and mercury emissions. The recent regulatory and legislative proposals are subject to normal administrative processes, however, and thus we cannot make any prediction as to whether the proposals will pass or on the impact of those actions.

We are subject to other environmental laws and regulations including those that relate to former manufactured gas plant sites and other past and present operations and facilities. In addition, we may be subject to financial liabilities related to the investigation and remediation from activities of previous owners or operators of our industrial and generating facilities. The range of exposure for environmental remediation obligations at present is estimated to range between $45.3 million to $84.1 million. Our environmental reserve accrual is $45.3 million as of March 31, 2005.

Our subsidiary, Clark Fork and Blackfoot, LLC, (CFB) owns the Milltown Dam hydroelectric facility, a three megawatt generation facility located at the confluence of the Clark Fork and Blackfoot Rivers. In April 2003, the Environmental Protection Agency (EPA) announced its proposed remedy to address the mining waste contamination located in the Milltown Reservoir. This remedy proposed partial removal of the contaminated sediments located within the Milltown Reservoir, together with the removal of the Milltown Dam and powerhouse (this remedy was incorporated into the EPA’s formal Record of Decision issued on December 20, 2004). In light of this announcement, we commenced negotiations with the Atlantic Richfield Company or Atlantic Richfield, to prevent a challenge from Atlantic Richfield to our statutorily exempt status under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA) as a potentially responsible party. On September 10, 2003, we executed a confidential settlement agreement with Atlantic Richfield which, among other things, capped our maximum

contribution towards remediation of the Milltown Reservoir superfund site. A motion to approve the settlement agreement with Atlantic Richfield was filed with the Bankruptcy Court on October 17, 2003. On April 7, 2004 we entered into a stipulation (Stipulation) with Atlantic Richfield, the EPA, the Department of the Interior, the State of Montana and the Confederated Salish and Kootenai Tribes (collectively the Government Parties), which is intended to resolve both our liability with Atlantic Richfield in general accordance with the previously negotiated settlement agreement and establish a framework to resolve our liability with the Government Parties for their claims, including natural resource restoration claims, against NorthWestern as they relate to remediation of the Milltown Site. The Stipulation caps NorthWestern’s and CFB’s collective liability to Atlantic Richfield and the Government Parties at $11.4 million. On June 22, 2004 the Bankruptcy Court approved the Stipulation and the funding of the Atlantic Richfield settlement, as modified by the Stipulation. The amount of the stipulated liability has been fully accrued in the accompanying financial statements. Pursuant to the Stipulation, commencing in August 2004 and each month thereafter, we pay $500,000 alternately into two escrow accounts, one for the State of Montana and one for Atlantic Richfield, until the total agreed amount is funded. No interest will accrue on the unpaid balance due, and the escrow accounts will remain funded until a final, nonappealable consent decree is entered by the United States District Court. If, however, a consent decree (i) is not executed by the relevant parties, (ii) is not approved by the United States District Court, or (iii) does not become fully effective, then all funds in the escrow accounts will continue to be held in trust pending further court order. The Stipulation incorporates appropriate releases and indemnifications from Atlantic Richfield under the previously negotiated settlement agreement. There can be no assurance that the settlement set forth in the Stipulation will become effective, as the parties to this matter continue to negotiate the terms and conditions of the consent decree.

In anticipation of completion of the consent decree negotiations, CFB filed an application to amend its FERC operating license to allow for the commencement of Stage 1 of the EPA’s proposed plan for the remediation of the Milltown Reservoir superfund site. Stage 1 activities anticipated the permanent drawdown of the Milltown Reservoir and the construction of: (i) the Clark Fork River bypass channel, (ii) a railroad spur to facilitate loading of contaminated sediments to be removed from the reservoir, and (iii) certain equipment access roads. All such construction activity was to take place within FERC jurisdictional areas. On January 19, 2005, the FERC issued an order dismissing CFB’s application, and issuing a notice of intent to accept surrender of CFB’s operating license. Based on certain incorrect assumptions made by the FERC (particularly with respect to the existence of a completed and executed consent decree for the Milltown Reservoir superfund site as of the date of the order), the FERC transferred its complete jurisdiction over the Milltown facility to the EPA and concluded that, based on certain actions to take place during the Stage 1 activities, that such actions demonstrate CFB’s intent to surrender its operating license. Moreover, based upon the operation of Section 121(e) of CERCLA, the FERC concluded that CFB need not file a formal license surrender application. Due to the FERC’s reliance upon certain incorrect assumptions, all relevant parties to the Milltown superfund consent decree negotiations concluded that the order created certain unacceptable risks due, in large part, to the fact that a consent decree addressing the rights and obligations of the various parties with respect to implementation of the Milltown remedial action and restoration plan has not been fully negotiated and approved by the federal district court in Montana. As a result, EPA, the State of Montana, the Atlantic Richfield Company and CFB all filed comments with the FERC on February 18, 2005, requesting that the FERC modify its order to continue jurisdiction over the Milltown facility until entry of a final consent decree. On March 21, 2005 the FERC granted CFB’s motion for clarification and rehearing. On May 4, 2005, the FERC conducted a hearing on CFB’s motion. On May 6, 2005, the FERC issued a written order on CFB’s motion, modifying its January 19, 2005 order to deem the Milltown Dam operating license surrendered upon the effective date of the anticipated consent decree. As a result of this order, the FERC will continue to have jurisdiction over the Milltown Dam until the effective date of anticipated consent decree.

Legal Proceedings

As a result of the Chapter 11 filing for the period from September 14, 2003 through November 1, 2004, attempts by third parties to collect, secure or enforce remedies with respect to most prepetition claims against us were subject to the automatic stay provisions of Section 362(a) of Chapter 11.

On October 19, 2004 the Bankruptcy Court entered a written order confirming our plan of reorganization. On October 25, 2004 Magten Asset Management Corporation (Magten) filed a notice of appeal of such order seeking, among other things, a reversal of the confirmation order. In connection with this appeal, Magten filed motions with the Bankruptcy Court and the United States District Court for the District of Delaware seeking a stay of the enforcement of the confirmation order to prevent our plan of reorganization from becoming effective. On October 25, 2004 the Bankruptcy Court denied Magten’s motion for a stay, and on October 29, 2004, the Delaware District Court denied Magten’s motion for a stay. With no stay imposed, our plan of reorganization became effective November 1, 2004. While we cannot currently predict the impact or resolution of Magten’s appeal of the confirmation order, we intend to vigorously defend against the appeal.

On April 15, 2005 Magten and Law Debenture filed an adversary complaint in the Bankruptcy Court against NorthWestern Corporation, Gary Drook, Michael Hanson, Brian Bird, Thomas Knapp and Roger Schrum alleging that NorthWestern and the former and current officers committed fraud by failing to include a sufficient amount of shares in the Class 9 reserve set aside for payment of unsecured claims and thus the confirmation order should be revoked and set aside. While we cannot predict the impact or resolution of Magten’s complaint, we intend to vigorously defend against it.

We, and certain of our present and former officers and directors, were named as defendants in numerous complaints purporting to be class actions which were filed in the United States District Court for the District of South Dakota, Southern Division, alleging violations of Sections 11, 12 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. In June 2003, the complaints were consolidated in the United States District Court for the District of South Dakota and given the caption In Re NorthWestern Corporation Securities Litigation, Case No. 03-4049. In addition, certain of our present and former officers, former 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. In July 2003, these derivative complaints were consolidated in the United States District Court for the District of South Dakota and given the caption In re NorthWestern Corporation Derivative Litigation, Case No. 03-4091.

On February 7, 2004, the parties to the above consolidated securities class actions and consolidated derivative litigation, together with certain other affected persons and parties, reached a tentative settlement of the litigation. On April 19, 2004, the parties and other affected persons signed a memorandum of understanding (MOU) which memorialized the tentative settlement. On June 16, 2004, the parties and other affected persons signed a settlement agreement memorializing the tentative settlement and addressing various issues necessary for federal court approval. We obtained approval of the MOU in the NorthWestern and Netexit bankruptcy cases on October 7, 2004 and September 15, 2004, respectively. Final approval of the consolidated securities class action settlement was granted by the federal District Court at a hearing on December 13, 2004, with a written order issued on January 14, 2005. No timely appeal has been filed from such order. On April 26, 2005, the district court in the consolidated derivative litigation issued an order granting the motion for approval of the settlement, and also issued a final judgment and order of dismissal with prejudice (except that the court will retain jurisdiction to address the attorneys’ fees sought by plaintiffs’ counsel, which will not affect the finality of the judgment). On October 26, 2004 Magten filed a notice of appeal of the Bankruptcy Court’s approval of the MOU. Magten’s appeal of the confirmation order and the order approving the MOU have been consolidated. In

March 2005 we moved to dismiss both appeals on equitable mootness grounds. While we cannot currently predict the impact or resolution of the appeals and our motion to dismiss, we intend to vigorously prosecute our dismissal motion and defend against the appeals as noted. The parties are scheduled to conduct a mediation of all of the outstanding disputes between Magten and NorthWestern on May 12, 2005.

In December 2003, the SEC notified NorthWestern that it had issued a formal order of private investigation and subsequently subpoenaed documents from NorthWestern, NorthWestern Communications Solutions, Expanets and Blue Dot. This development followed the SEC’s requests for information made in connection with the previously disclosed SEC informal inquiry into questions regarding the restatements and other accounting and financial reporting matters. Since December 2003, we have periodically received and continue to receive subpoenas from the SEC requesting documents and testimony from employees regarding these matters. The SEC investigation will continue and any claims alleging violations of federal securities laws made by the SEC will not be extinguished pursuant to our plan of reorganization. In addition, certain of our directors and several employees of NorthWestern and our subsidiary affiliates have been interviewed by representatives of the Federal Bureau of Investigation (FBI) concerning certain of the allegations made in the class action securities and derivative litigation matters. We have not been advised that NorthWestern is the subject of any FBI investigation. We understand that the FBI and the Internal Revenue Service (IRS) have contacted former employees of ours or our subsidiaries. As of the date hereof, we are not aware of any other governmental inquiry or investigation related to these matters. We are cooperating with the SEC’s investigation and intend to cooperate with the FBI and IRS if we are contacted in connection with any investigation. We cannot predict whether or not any other governmental inquiry or investigation will be commenced. We cannot predict when the SEC investigation will be completed or its outcome. If the SEC determines that we have violated federal securities laws and institutes civil enforcement proceedings against us, for which we can provide no assurance, we may face sanctions, including, but not limited to, monetary penalties and injunctive relief and any monetary liability incurred by us may be material to our financial position or results of operations.

Colstrip Electric Limited Partnership (CELP) initiated adversary proceedings against NorthWestern in our Chapter 11 proceedings. CELP sought additional payment for capacity contracted to be provided to NorthWestern under its existing power purchase agreement. On April 24, 2005 the Bankruptcy Court approved a stipulation providing for payment of the remaining cure amount of $350,000 and dismissal of the adversary proceeding. In addition, we intervened in a FERC proceeding, which placed at issue the Qualifying Facility (QF) status of CELP. A FERC judge initially ruled that CELP is a QF and we filed an appeal with the FERC on October 12, 2004. On April 8, 2005 the FERC confirmed the initial ruling that CELP is a QF.

On April 16, 2004 Magten and Law Debenture initiated an adversary proceeding, the QUIPs Litigation, against NorthWestern seeking among other things, to void the transfer of certain assets of CFB to us. In essence, Magten and Law Debenture are asserting that the transfer of the transmission and distribution assets acquired from the Montana Power Company was a fraudulent conveyance because such transfer left CFB insolvent and unable to pay certain claims. The plaintiffs also assert that they are creditors of CFB as a result of Magten owning a portion of the Series A 8.5% Quarterly Income Preferred Securities for which Law Debenture serves as the Indenture Trustee. By its adversary proceeding, the plaintiffs seek, among other things, the avoidance of the transfer of assets, declaration that the assets were fraudulently transferred and are not property of our bankruptcy estate, the imposition of constructive trusts over the transferred assets and the return of such assets to CFB. In August 2004, the Bankruptcy Court granted in part, but denied in part our motion to dismiss the QUIPs Litigation. As a result of filing the appeal of the confirmation order, the Bankruptcy Court has stayed the prosecution of this case until the appeal is finally decided. (In addition to the adversary proceeding filed by Magten and Law Debenture, the plaintiffs in the class action lawsuit entitled McGreevey, et al v. Montana Power Company, et al received approval in our bankruptcy case to initiate similar adversary proceedings. Under the terms of the

settlement with the plaintiffs in the McGreevey case discussed below, they would not file such proceeding.) On April 19, 2004, Magten also filed a complaint against certain former and current officers of CFB in U.S. District Court in Montana, seeking compensatory and punitive damages for breaches of fiduciary duties by such officers. Those officers have requested CFB to indemnify them for their legal fees and costs in defending against the lawsuit and any settlement and/or judgment in such lawsuit. On February 9, 2005 we agreed to settlement terms with Magten and Law Debenture to release all claims, including Magten and Law Debenture’s fraudulent conveyance action pending against each other for Magten and Law Debenture receiving the distribution of new common stock and warrants from Class 8(b) in the same amounts as if they had voted to accept the Plan and a distribution from Class 9 of new common stock in the amount of approximately $17.4 million. Prior to seeking approval from the Bankruptcy Court, certain major shareholders and the Plan Committee objected to the settlement on both its economic terms and asserting that the structure of the settlement violated the Plan. After reviewing the objections and undertaking our own analysis of the potential Plan violation, we informed Magten and Law Debenture as well as the Plan Committee and the objecting major shareholders that we would not proceed with the settlement. Magten and Law Debenture filed a motion with our Bankruptcy Court seeking approval of the settlement. On March 10, 2005 the Bankruptcy Court entered an order denying the motion filed by Magten and Law Debenture. Magten and Law Debenture have appealed that order. At this time, we cannot predict the impact or resolution of any of these lawsuits, the appeal or reasonably estimate a range of possible loss, which could be material. An adverse resolution of these lawsuits and/or appeal could harm our business and have a material adverse impact on our financial condition. We intend to vigorously defend against the adversary proceeding, appeal and any subsequently filed similar litigation. The plaintiffs’ claims with respect to the QUIPs Litigation will be treated as general unsecured, or Class 9, claims and will be satisfied out of the share reserve that we established with respect to the Class 9 disputed claims reserve under the plan of reorganization.

We are one of several defendants in a class action lawsuit entitled McGreevey, et al. v. The Montana Power Company, et al, now pending in U.S. District Court in Montana. The lawsuit, which was filed by former shareholders of The Montana Power Company (most of whom became shareholders of Touch America Holdings, Inc. as a result of a corporate reorganization of the Montana Power Company), claims that the disposition of various generating and energy-related assets by The Montana Power Company were void because of the failure to obtain shareholder approval for the transactions. Plaintiffs thus seek to reverse those transactions, or receive fair value for their stock as of late 2001, when plaintiffs claim shareholder approval should have been sought. NorthWestern is named as a defendant due to the fact that we purchased Montana Power LLC, which plaintiffs claim is a successor to the Montana Power Company.

On November 6, 2003, the Bankruptcy Court approved a stipulation between NorthWestern and the plaintiffs in McGreevey, et al. v. The Montana Power Company, et al. The stipulation provides that litigation, as against NorthWestern, CFB, The Montana Power Company, Montana Power LLC and Jack Haffey, shall be temporarily stayed for 180 days from the date of the stipulation. The stay has been extended. Pursuant to the stipulation and after providing notice to NorthWestern, the plaintiffs may move the Bankruptcy Court for termination of the temporary stay. On July 10, 2004, we and the other insureds under the applicable directors and officers liability insurance policies along with the plaintiffs in the McGreevey case, plaintiffs in the In Re Touch America Holdings, Inc. Securities Litigation and the Touch America Creditors Committee reached a tentative settlement through mediation. Among the terms of the tentative settlement, we, CFB and other parties will be released from all claims in this case, the plaintiffs in McGreevey will dismiss their claims against the third party purchasers of the generation assets and non-regulated energy assets of Montana Power Company including PPL Montana, and a settlement fund in the amount of $67 million (all of which will be contributed by the former Montana Power Company directors and officers liability insurance carriers) will be established. The settlement is subject to the occurrence of several conditions, including approval of the proposed settlement by the Bankruptcy Court in our bankruptcy proceeding, and approval of the proposed settlement by the Federal District Court for the

District of Montana, where the class actions are pending. On April 29, 2005, the Federal District Court in Montana denied the plaintiffs motion for preliminary approval of the proposed settlement without prejudice and ordered the parties to work out their differences and present a global settlement agreement in 60 days; otherwise, the court will order the parties to resume trial preparations. In the event the parties do not reach a global settlement agreement, a settlement is not approved or it does not take effect for any other reason, we intend to vigorously defend against this lawsuit. If we are unsuccessful in defending against this class action lawsuit, the plaintiffs’ litigation claims would be subordinated to our other debt under our Plan, and such claims would be treated as securities, or Class 14, claims under our plan of reorganization, and would be entitled to no recovery against NorthWestern under our Plan. Claims by our current and former officers and directors (and the former officers and directors of The Montana Power Company) for indemnification for these proceedings would be channeled into the Directors and Officers Trust established by the Plan. The plaintiffs could elect to proceed directly against CFB and the assets owned by such entity, which as of December 31, 2004 were not material to our operations or financial position. 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 this lawsuit may harm our business and have a material adverse impact on our financial condition.

In NorthWestern Corporation vs. PPL Montana, LLC vs. NorthWestern Corporation and Clark Fork and Blackfoot, LLC, No. CV-02-94-BU-SHE, (D. MT), we are pursuing claims against PPL Montana, LLC (PPL) due to its refusal to purchase the Colstrip transmission assets under the Asset Purchase Agreement (APA) executed by and between The Montana Power Company (MPC) and PP&L Global, Inc. (PPL Global). NorthWestern claims PPL (PPL Global’s successor-in-interest under the APA) is required to purchase the Colstrip transmission assets for $97.1 million. PPL has also asserted a number of counterclaims against NorthWestern and CFB based in large part upon PPL’s claim that MPC and/or NorthWestern Energy breached two Wholesale Transition Service Agreements and certain indemnification obligations under the APA in the approximate amount of $120 million. PPL also filed a proof of claim and an amended proof of claim against NorthWestern’s bankruptcy estate which asserts substantially the same claims as the PPL counterclaim. Our Bankruptcy Court transferred all the claims for resolution to the federal court in Montana. On May 5, 2005 the parties announced a settlement in principle of all claims which settlement is subject to Plan Committee review, federal court dismissal of the lawsuit and may require our Bankruptcy Court approval. In the event the settlement is not approved or fails for any other reason, we intend to vigorously defend against the PPL claims in federal court as well as vigorously prosecute our claims against PPL. We cannot currently predict the impact or resolution of the claims or this litigation or reasonably estimate a range of possible loss on the counterclaims, which could be material to the disputed claims reserve. PPL’s counterclaims with respect to this litigation will be treated as general unsecured, or Class 9, claims and will be satisfied out of the share reserve that we established with respect to the Class 9 disputed claims reserve under the plan of reorganization.

We are also one of several defendants in a class action lawsuit entitled In Re Touch America ERISA Litigation, which is currently pending in U.S. District Court in Montana. The lawsuit was filed by participants in the former Montana Power Company retirement savings plan and alleges that there was a breach of fiduciary duty in connection with the employee stock ownership aspects of the plan. The court has recently entered orders indefinitely staying the ERISA litigation because of Touch America Holdings Inc.’s bankruptcy filing. 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 this lawsuit may harm our business and have a material adverse impact on our financial condition. We believe that in the event of a judgment against us in this litigation, we will be able to make claims against The Montana Power Company’s fiduciary insurance policy. Any judgment against us in excess of policy limits would be treated as unsecured general, or Class 9, claims and would be satisfied out of the share reserve that we have established.

We, and certain of our former officers and directors, were named as defendants in certain complaints filed against CornerStone Propane Partners, LP and other defendants purporting to be class actions filed in the United States District Court for the Northern District of California by purchasers of units of CornerStone Propane Partners alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Through November 1, 2002, we held an economic equity interest in a subsidiary that serves as the managing general partner of CornerStone Propane Partners, LP. Certain former officers and directors of NorthWestern who are named as defendants in certain of these actions have also been sued in their capacities as directors of the managing general partner. These complaints allege that defendants sold units of CornerStone Propane Partners based upon false and misleading statements and failed to disclose material information about CornerStone Propane Partners’ financial condition and future prospects, including overpayment for acquisitions, overstating earnings and net income, and that it lacked adequate internal controls. All of the lawsuits have now been consolidated and Gilbert H. Lamphere has been named as lead plaintiff. The actions have been stayed as to NorthWestern due to its bankruptcy filing. On October 27, 2003, the plaintiffs filed an amended consolidated class action complaint. The new complaint does not name NorthWestern as a defendant, although it alleges facts relating to NorthWestern’s conduct. Certain of our former officers and directors are named as defendants in the amended consolidated complaint. The plaintiffs seek compensatory damages, prejudgment and postjudgment interest and costs, injunctive relief, and other relief. On November 6, 2003, the Bankruptcy Court entered an order approving a stipulation between NorthWestern and plaintiffs in this litigation. The stipulation provides that litigation as against NorthWestern shall be temporarily stayed for 180 days from the date of the stipulation. The stay has been extended. Pursuant to the stipulation and after providing notice to NorthWestern, the plaintiffs may move the Bankruptcy Court for termination of the temporary stay. On March 2, 2004, the plaintiffs filed a corrected consolidated amended complaint against CornerStone and the individual defendants, which also did not name NorthWestern. In June 2004, CornerStone Propane Partners, LP along with its subsidiaries and affiliates filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. As a result of that filing this case is now stayed against CornerStone Propane Partners and other named subsidiaries and affiliates. On June 24, 2004 the District Court issued an order removing the consolidated class action from the court’s active calendar in light of the bankruptcy filing by CornerStone. On September 14, 2004 the plaintiffs filed a motion seeking an order restoring the case to the court’s active calendar as to the individual defendants. On November 19, 2004 the District Court granted that motion. If we are named in the lawsuit, we intend to vigorously defend any claims asserted against us by these lawsuits. To the extent such claims are prepetition claims, such claims would be extinguished under the confirmation order. If the claims are not extinguished, the plaintiffs’ claims with respect to this litigation would be treated as securities, or Class 14, claims and would be entitled to no recovery under the plan of reorganization. Any claims in this litigation for indemnification from our officers and directors, would be channeled into the Directors and Officers Trust to the extent that they are indemnification claims.

We were named in a complaint filed against us, CornerStone Propane GP, Inc., CornerStone Propane Partners LP and other defendants in a lawsuit entitled Leonard S. Mewhinney, Jr. v. NorthWestern Corporation, et al. in the circuit court of the city of St. Louis, state of Missouri. The complaint alleges that the plaintiff purchased units of Cornerstone Propane Partners, LP between March 13, 1998 and November 29, 2001 and that NorthWestern owned and controlled all or the majority of stock or other indicia of ownership of Cornerstone Propane, GP, Inc. and all other entities that were the general partners of Cornerstone Propane Partners, LP. According to the plaintiff, NorthWestern, Cornerstone Propane GP, Inc., Coast Gas, Inc. and Cornerstone Propane Partners, LP breached fiduciary duties to the plaintiff by engaging in certain misconduct, including mismanaging Cornerstone Propane Partners, LP and transferring its assets for less than market value and other activities. The complaint further alleges that the defendants fraudulently failed to disclose material information regarding the value of units of Cornerstone Propane Partners, LP and violated the Florida Securities Act in connection with the sale of such units. The

plaintiff seeks compensatory damages, punitive damages and costs. The complaint was amended to add a state class action claim. All defendants filed a petition to remove the case to the federal court in St. Louis, Missouri, but the federal court granted plaintiff’s motion to remand. The case has now been stayed against NorthWestern and CornerStone due to their bankruptcy filings. Any claim arising from this lawsuit has been channeled to the Directors and Officers Trust under the confirmation order.

Certain of our former officers and directors, and CornerStone Propane Partners, LP, as a nominal defendant, are among other defendants named in two derivative actions commenced in the Superior Court for the State of California, County of Santa Cruz, entitled Adelaide Andrews v. Keith G. Baxter, et al., Case No. CV146662 and Ralph Tyndall v. Keith G. Baxter, et al., Case No. CV146661. These derivative lawsuits allege that the defendants breached various fiduciary duties based upon the same general set of alleged facts and circumstances as the federal unitholder suits. The plaintiffs seek unspecified compensatory damages, treble damages pursuant to the California Corporations Code, injunctive relief, restitution, disgorgement, costs, and other relief. The case has now been stayed against CornerStone due to its bankruptcy filing. The former officers and directors have requested the Company indemnify them for their legal fees and costs in defending against the lawsuits and any settlement and/or judgment in such lawsuits. Claims by our former officers and directors for indemnification with respect to these proceedings would be channeled into the Directors and Officers Trust under the terms of the Plan.

On April 30, 2003, Mr. Richard Hylland, our former President and Chief Operating Officer, filed a demand for arbitration of contract claims under his employment agreement, as well as tort claims for defamation, infliction of emotional distress and tortious interference and a claim for punitive damages. Mr. Hylland is seeking relief in the amount of $25 million, plus interest, attorney’s fees, costs, and punitive damages. Mr. Hylland has also filed claims in our bankruptcy case similar to the claims in his arbitration demand. We dispute Mr. Hylland’s claims and intend to vigorously defend the arbitration and object to Mr. Hylland’s claims in our bankruptcy case. On May 6, 2003, based on the recommendations of the Special Committee of the NorthWestern Board of Directors formed to evaluate Mr. Hylland’s performance and conduct in connection with the management of NorthWestern and its subsidiaries, the Board determined that Mr. Hylland’s performance and conduct as President and Chief Operating Officer warranted termination under his employment contract. As a result of the confirmation of our plan of reorganization, this arbitration has commenced with parties having filed dispositive motions. We expect the arbitrator will rule on those motions in the next few months. We cannot currently predict the impact or resolution of this litigation or reasonably estimate a range of possible loss, which could be material, but we intend to defend the matter vigorously. Mr. Hylland has asked our Bankruptcy Court to decide if some of his benefits he claims he is due under his employment agreement should be paid by NorthWestern and not from the Class 9 reserve. The Bankruptcy Court has ruled that an arbitrator should resolve the issue of whether or not such benefits can be terminated by NorthWestern and what amount, if any, should be allowed Mr. Hylland as a result of such termination. It is our position that Mr. Hylland’s claims with respect to this proceeding would be treated as unsecured general, or Class 9, claims and would be satisfied out of the share reserve that we have established.

Expanets and NorthWestern have been named defendants in two complaints filed with the Supreme Court of the State of New York, County of Bronx, alleging violations of New York’s prevailing wage laws, breach of contract, unjust enrichment, willful failure to pay wages, race, ethnicity, national origin and/or age discrimination and retaliation. In the complaint entitled Felix Adames et al. v. Avaya, Expanets, NorthWestern et al., Supreme Court of the State of New York, Bronx County, Index No. 8664-04, which has not yet been served upon Expanets, 14 former employees of Expanets seek damages in the amount of $27,750,000, plus interest, penalties, punitive damages, costs, and attorney’s fees. In the complaint entitled Wayne Belnavis and David Daniels v. Avaya, Expanets, NorthWestern et al., Supreme Court of the State of New York, Bronx County, Index No. 8729-04, two former employees of Expanets seek damages in the amount of $12,500,000, plus interest, penalties, punitive damages, costs, and attorney’s fees. Avaya Inc. has

sent NorthWestern and subsidiaries a notice seeking indemnification and defense for these lawsuits under the asset purchase agreement. We have responded by accepting in part and rejecting in part the indemnification request. As a result of the Netexit bankruptcy, the cases were removed to federal court in New York and Netexit was dismissed from the lawsuit. NorthWestern and Avaya were dismissed as defendants by the plaintiffs. These claims against Netexit will be subject to the claims process of the Netexit bankruptcy proceeding. We intend to vigorously defend against the allegations made in these claims. We cannot currently predict the impact or resolution of these claims or reasonably estimate a range of possible loss.

Netexit is also subject to an investigation by the New York City Comptroller’s Office over the same prevailing wage allegations set forth in the Adames and Belnavis lawsuits. The Comptroller’s Office scheduled a hearing before the Office of Administrative Trials and Hearings, which hearing is now stayed pending the Bankruptcy Court’s decision on its rule to show cause why the Comptroller’s Office should not be held in contempt of court. The Comptroller’s Office also filed claims in the Netexit bankruptcy and will be subject to the claims process in the bankruptcy case. Avaya Inc. has sent NorthWestern and subsidiaries a notice seeking indemnification and defense for these lawsuits under the asset purchase agreement. We have responded by accepting in part and rejecting in part the indemnification request. We intend to vigorously defend against the allegations made in these claims. We cannot currently predict the impact or resolution of these claims or reasonably estimate a range of possible loss.

On March 17, 2004, certain minority shareholders of Expanets filed a lawsuit against Avaya Inc., Expanets, NorthWestern Growth Corporation, and Merle Lewis, Dick Hylland and Dan Newell entitled Cohen et al. v Avaya Inc., et al. in U.S. District Court in Sioux Falls, South Dakota contending that (i) the defendants fraudulently induced the shareholders to sell their businesses to Expanets during 1998 and 1999 in exchange for Expanets stock which would have value only if Expanets went public, when in fact no IPO was intended, and (ii) the defendants and NorthWestern (a) hid the true financial condition of NorthWestern, NorthWestern Growth and Expanets, (b) permitted internal controls to lapse, (c) failed to document loans by NorthWestern to Expanets, and (d) allowed the individual defendants to realize millions of dollars in bonus payments at the expense of Expanets and its minority shareholders. The lawsuit alleges federal and state securities laws violations and breaches for fiduciary duties. The plaintiffs have recently filed an amended complaint that reflects one less plaintiff and a clarification on the damages that they seek. In addition, Avaya Inc. has sent NorthWestern a notice seeking indemnification and defense for this lawsuit under the terms of the asset purchase agreement. We have responded by accepting in part and rejecting in part the indemnification request. The case has now been stayed against Expanets due to its bankruptcy filing. The defendants, including NorthWestern Growth Corporation, have filed motions to dismiss, which are pending and we have filed a formal objection to the claim the defendants filed in the bankruptcy case. Claims by our former officers and directors for indemnification for these proceedings would be channeled in to the Directors and Officers Trust established pursuant to NorthWestern’s Plan. The plaintiff’s litigation claims against Netexit would be subordinated to NorthWestern’s debt and claims of general unsecured creditors in the Netexit bankruptcy, and therefore such claims would not be entitled to recovery. NorthWestern Growth Corporation intends to vigorously defend against this lawsuit. We cannot currently predict the impact or resolution of this litigation or reasonably estimate a range of possible loss, which could be material.

In April 2005, a group of former employees of the Montana Power Company filed a lawsuit in the state court of Montana against us and certain officers styled Ammondson, et al. v. NorthWestern Corporation, et al., Case No. DV-05-97. The former employees have alleged that by moving to terminate their supplemental retirement contracts in our bankruptcy proceeding without having listed as claimants or given them notice of the disclosure statement and plan or reorganization in our bankruptcy case that we breached those contracts, and breached a covenant of good faith and fair dealing under Montana law and by virtue of filing a complaint in our Bankruptcy Case against those employees from seeking to prosecute

their state court action against NorthWestern, we had engaged in malicious prosecution and subject to punitive damages. Our Bankruptcy Court on May 4, 2005 found that it did not have jurisdiction over these contracts, dismissed our action against these former employees, and transferred our motion to terminate the contracts to Montana state court where the former employees lawsuit is pending. We intend to vigorously defend against this lawsuit. We cannot currently predict the impact of this litigation or reasonably estimate a range of possible loss, which could be material.

Relative to Colstrip Unit 4’s long-term coal supply contract with Western Energy Company, Mineral Management Service of the United States Department of Interior issued orders to Western Energy Company (WECO) in 2002 and 2003 to pay additional royalties concerning coal sold to Colstrip Units 3 and 4. The orders assert that additional royalties are owed as a result of WECO not paying royalties under a coal transportation agreement from 1991 through 2001. WECO has appealed these orders and we are monitoring the process. WECO has asserted that any potential judgment would be considered a pass-through cost under the coal supply agreement. Based on our review, we do not believe any potential judgment would qualify as a pass-through cost under the terms of the coal supply agreement. Neither the outcome of this matter nor the associated costs can be predicted at this time.

Each year we submit a natural gas tracker filing for recovery of natural gas costs. The MPSC reviews such filings and makes a determination as to whether or not our natural gas procurement activities were prudent. If the MPSC finds that we have not exercised prudence, it can disallow such costs. On July 3, 2003 the MPSC issued orders disallowing the recovery of certain gas supply costs for the 2003 and 2004 tracker years. The MPSC also rejected a motion for reconsideration filed by us on July 14, 2003. We filed suit in Montana state court on July 28, 2003, seeking to overturn the MPSC’s decision to disallow recovery of these costs. A tracker year runs from July to June, and because of the MPSC orders, we were disallowed recovery of $6.2 million and $4.6 million for the 2003 and 2004 tracker years, respectively. The MPSC has approved a stipulation between us and the Montana Consumer Counsel regarding the recovery of natural gas costs for the 2003 and 2004 tracking years. With this stipulation as a foundation, we are working with the MPSC to settle the District Court case, including the recovery of $4.6 million of these previously disallowed gas costs. If the MPSC and District Court approve the settlement, which we expect in the second quarter of 2005, then we would record a gain of $4.6 million.

We are also subject to various other legal proceedings and claims that arise in the ordinary course of business. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect our financial position or results of operations.

Disputed Claims Reserve

Upon consummation of our plan of reorganization, we established a reserve of approximately 4.4 million shares of common stock from the shares allocated to holders of our trade vendor claims in excess of $20,000 and holders of Class 9 unsecured claims. The shares held in this reserve may be used to resolve various outstanding unsecured claims and unliquidated litigation claims, to the extent these claims were not resolved or deemed allowed upon consummation of our plan of reorganization. If these claims ultimately exceed the reserve, then such claimants would share pro rata as to the shares, if any, remaining in the reserve. We have surrendered control over the common stock provided with respect to the Class 9 reserve and the shares so reserved are administered by our transfer agent; therefore we recognized the issuance of the common stock upon emergence. If excess shares remain in the reserve after satisfaction of all obligations, such amounts would be reallocated pro rata to the allowed Class 7 and 9 claimants.

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. “Predecessor Company” refers to us prior to emergence from bankruptcy (operations prior to October 31, 2004). “Successor Company” refers to us after emergence from bankruptcy (operations after November 1, 2004).

OVERVIEW

On September 14, 2003 (the Petition Date), the Predecessor Company filed a voluntary petition for relief under the provisions of Chapter 11 of the Federal Bankruptcy Code (the Bankruptcy Code) in the United States Bankruptcy Court for the District of Delaware (Bankruptcy Court). On October 19, 2004, the Bankruptcy Court entered an order confirming our Plan of Reorganization (Plan) and the Plan became effective on November 1, 2004.

Between September 14, 2003 and November 1, 2004, the Predecessor Company operated as a debtor-in-possession under the supervision of the Bankruptcy Court. Our financial statements for reporting periods within that timeframe were prepared in accordance with the provisions of Statement of Position 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code. In accordance with SOP 90-7, we applied the principles of fresh-start reporting as of the close of business on October 31, 2004.

Status of Noncore Asset Sales Efforts

We are also attempting to sell our interest in Montana Megawatts I, LLC, or MMI, our indirect wholly-owned subsidiary that owns the Montana First Megawatts generation project, a partially constructed, 260 megawatt, natural gas-fired, combined-cycle electric generation facility located in Great Falls, Montana. On February 17, 2005, our subsidiary, NorthWestern Generation I, LLC, the sole member of MMI, entered into a non-binding letter of intent to sell all of the member interest of MMI to a non-affiliated third party. Under the terms of the letter of intent, MMI will sell all generation assets. Upon completion of the sale of the generation assets or transfer of ownership of these assets from the MMI entity, the buyer will acquire MMI and all remaining assets held by the entity. Any sale will be subject to board approval.

In anticipation of the letter of intent to sell MMI, we entered into an exclusive arrangement with a major electric generation equipment broker to market MMI’s generation assets. We anticipate that a sale of this equipment will be completed on or before June 30, 2005. Any sale will be subject to board approval.

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, qualifying facilities liabilities, impairment of long-lived assets and revenue recognition, among others. Actual results could differ from those estimates.

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.

Fresh Start Reporting

Upon applying fresh-start reporting, a new reporting entity (the Successor Company) is deemed to be created and the recorded amounts of assets and liabilities are adjusted to reflect their estimated fair values. The enterprise value was determined using various valuation methods including, (i) reviewing historical financial information (ii) comparing us and our projected performance to the market values of comparable companies, (iii) performing industry precedent transaction analysis, and (iv) considering certain economic and industry information relevant to the operating business. The estimated enterprise value is highly dependent upon achieving the future financial results set forth in the projections and is necessarily based on a variety of estimates and assumptions which, though considered reasonable by management, may not be realized and are inherently subject to significant business and economic uncertainties and contingencies, many of which are beyond our control.

Goodwill

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.

Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, 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.

Qualifying Facilities Liability

Certain Qualifying Facilities, or QFs, require us to purchase minimum amounts of energy at prices ranging from $65 to $138 per megawatt hour through 2029. As of March 31, 2005, our gross contractual obligation related to the QFs is approximately $1.7 billion. A portion of the costs incurred to purchase this energy is recoverable though rates authorized by the MPSC, totaling approximately $1.3 billion through 2029. Upon adoption of fresh-start reporting, we recomputed the fair value of the liability to be approximately $143.8 million based on the net present value of the difference between our obligations under the QFs and the related amount recoverable. During the first quarter of 2005 we amended one of these contracts, which reduced our capacity and energy rates over the term of the contract (through 2028). As a result of this amendment, we reduced our QF liability based on the new rates, resulting in a $4.9 million gain. At March 31, 2005, our estimated QF liability was $136.3 million. The determination of the discount rate used to establish this liability was a significant assumption. We determined the appropriate discount rate to be 7.75%, in accordance with Statement of Financial Accounting Concepts No. 7, Using Cash Flow Information and Present Value in Accounting Measures. We believe that 7.75% approximates the

rate we could have negotiated with an independent lender for a similar transaction under comparable terms and conditions as of the fresh-start reporting date. In computing the liability, we have also had to make various estimates in relation to contract costs, capacity utilization, and recoverable amounts. Actual QF utilization and future regulatory changes relating to QFs could significantly impact our results of operations.

Long-lived Assets

We evaluate our property, plant and equipment 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, 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, then 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.

During the fourth quarter of 2004, we recorded an additional impairment charge of $10.0 million due to further decline in the estimated realizable value of our investment in our Montana First Megawatts project. We had recorded impairment charges of $12.4 million and $35.7 million in previous years.

Revenue Recognition

Revenues are recognized differently depending on the various jurisdictions. For our 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. For our Montana operations, as prescribed by the MPSC, operating revenues are recorded monthly on the basis of consumption or services rendered. Customers are billed on a monthly cycle basis. 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.

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, including our estimate of amounts recoverable for natural gas and default electric supply purchases. 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, then we would need to evaluate the probable future recovery of or reduction in revenue with respect to the related regulatory assets and liabilities. 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.

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 pension and other postretirement benefit costs. Pension and 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 pension and other postretirement benefit costs recorded in any period do not reflect (and are generally greater than) the actual benefits provided to 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.

Income Taxes

We realized approximately $558 million of cancellation of indebtedness (COD) income in 2004. For tax purposes, we were not required to include any COD income in our taxable income when we emerged, however we will be required to reduce certain tax attributes up to the amount of COD income. As a general rule, tax attributes are reduced in the following order: (a) net operating losses (NOLs), (b) most tax credits, (c) capital loss carryovers, (d) tax basis in assets, and (e) foreign tax credits. Under a certain tax code election, we are considering reducing a combination of attributes, consisting of tax basis in depreciable assets and NOLs. While we made assumptions related to the reduction of these attributes, the ultimate amounts of each reduction will not be determined until we finalize our tax return for 2004, which will be filed by September 15, 2005. Changes in our assumptions related to these attribute reductions could materially impact the tax basis of our depreciable assets and the amount of NOLs available to utilize against future income. Additionally, under our plan of reorganization, there was a “ownership change” as defined under Internal Revenue Code Section 382 in connection with our emergence from bankruptcy, which provides an annual limit on the ability to utilize our NOLs. Based on this limitation and our current assumptions, we estimate the majority of our NOLs will be utilized. Upon the adoption of fresh-start reporting, we removed substantially all of the valuation allowance against our deferred tax assets because, based on our current projections, we believe it is more likely than not that these assets will be realized. While we believe our assumptions are reasonable, changes to these assumptions could materially impact our results.

Exposures exist related to various tax filing positions, which may require an extended period of time to resolve and may result in income tax adjustments by taxing authorities. Management has established a liability based on our best estimate of future probable adjustments related to these exposures. On a quarterly basis, management evaluates the liability in light of any additional information and adjusts the balance as necessary to reflect the best estimate of the future outcomes. We believe our established liability is appropriate for estimated exposures, however, actual results may differ from these estimates. The resolution of tax matters in a particular future period could have a material impact on our consolidated statement of operations and provision for income taxes.

RESULTS OF OPERATIONS

The following is a summary of our results of operations for the three month periods ended March 31, 2005 and 2004. 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.

OVERALL CONSOLIDATED RESULTS

Consolidated revenues in the first quarter 2005 were $335.1 million, an increase of $29.5 million, or 9.6%, over the same period 2004. Revenue from our regulated businesses increased primarily due to higher supply costs of $27.8 million, including $18.2 million from our regulated gas segment and $9.6 million from our regulated electric segment. In addition, regulated electric transmission and distribution revenue increased $3.3 million from a 3.2% increase in volumes. Our unregulated gas segment revenues increased $9.6 million from an increase in both volumes and supply cost, and our unregulated electric revenues increased $6.7 million due primarily to higher market prices. The increase in revenues was primarily offset by $15.2 million in higher intersegment eliminations due to increased sales by our unregulated segments to our regulated segments.

Consolidated cost of sales in the first quarter 2005 was $190.4 million, an increase of $17.4 million, or 10.1%, over the same period 2004. Consistent with revenue, the increase in our regulated business was primarily due to higher supply costs, including an increase of $17.1 million in our regulated gas segment and a $3.1 million increase in our regulated electric segment. In addition, our unregulated gas costs increased $10.2 million, primarily due to higher average gas prices, and our unregulated electric supply costs increased $1.7 million. Partially offsetting this increase was a $15.4 million increase in intersegment eliminations.

Consolidated gross margin in the first quarter 2005 was $144.7 million, an increase of $12.0 million, or 9.0%, over gross margin of $132.7 million in 2004. Margin as a percentage of revenues decreased to 43.2% for 2005, from 43.4% for 2004. Gross margin as a percentage of revenue is primarily impacted by the fluctuations that occur in regulated electric and natural gas supply costs, which are typically collected in rates from customers. While these fluctuations impact gross margin as a percentage of revenue, they only impact gross margin amounts if they cannot be passed through to customers. Margins in our regulated electric segment increased $7.6 million primarily due to a $4.9 million gain related to a QF contract amendment. This amendment reduces our capacity and energy rates over the term of the contract (through 2028) and we have reduced our QF liability based on the new rates. In addition, our unregulated electric segment margins increased $5.0 million primarily due to higher market prices.

Consolidated operating, general and administrative expenses were flat in 2005 as compared to the first quarter of 2004. Within operating, general and administrative expenses, our pension expense increased approximately $2.3 million in 2005, however this was offset by a lease expense decrease of approximately $2.5 million of in the first quarter of 2005 due to the extension of our operating lease for the Colstrip Unit 4 generation facility. Property and other taxes were $18.2 million in 2005 as compared to $17.9 million in 2004. Depreciation expense was $18.7 million in 2005 as compared to $18.2 million in 2004.

Reorganization items consists of bankruptcy related professional fees and expenses. These expenses totaled $3.4 million in 2005 as compared to $6.8 million in 2004. While we have emerged from bankruptcy, we are still incurring reorganization related professional fees, primarily associated with the resolution of the QUIPs litigation and the resolution of other disputed Class 9 claims. We continue to pay professional fees incurred by the Plan Committee in addition to our own professional fees.

Consolidated operating income in 2005 was $47.8 million, as compared to $33.0 million in 2004. This $14.8 million increase was primarily due to the higher margins and decreased expense related to reorganization items noted above.

Consolidated interest expense in 2005 was $16.3 million, a decrease of $5.4 million, or 25.0%, from 2004. This decrease was primarily attributable to our November 1, 2004 financing transaction, which replaced our $390 million senior secured term loan with lower interest rate debt. On November 1, 2004, we entered into a $125 million, five-year revolving loan tranche and a $100 million, seven-year term loan tranche, both of which bears interest at a variable rate tied to the London Interbank Offered Rate

(approximately 4.5% as of March 31, 2005). In addition, we issued $225 million of our 5.875% senior secured notes due November 1, 2014. Our former $390 million senior secured term loan incurred interest at a variable rate tied to the Eurodollar rate, plus a spread of 5.50% (approximately 6.7% as March 31, 2004).

Consolidated provision for income taxes in 2005 was $13.7 million as compared to a benefit of $0.1 million in 2004. While we were in bankruptcy, we maintained a valuation allowance against our deferred tax assets. Due to our significant net operating losses, the valuation allowance had the effect of minimizing our income tax expense as most changes were offset by an increase or decrease in the valuation allowance. Upon emergence from bankruptcy, we reduced our valuation allowance; therefore we expect our effective tax rate to range between 38% and 43% in 2005. For the first quarter of 2005, our effective tax rate was 42.6%. Many of the professional fees associated with our reorganization are not deductible for tax purposes which increases our effective tax rate. While we reflect an income tax provision in our financial statements, we expect our cash payments for income taxes will be minimal for the next 4-5 years, based on our anticipated use of net operating losses.

Income from discontinued operations in 2005 was $0.5 million as compared to $4.9 million in 2004. The 2004 results were due primarily to gains realized on the disposal of Blue Dot locations.

Consolidated net income in the first quarter of 2005 was $18.9 million, an increase of $1.9 million, or 11.4%, over $17.0 million in the first quarter 2004. This improvement was primarily related to the higher margins and decreased operating and interest expenses discussed above. The increase in income taxes and decrease in discontinued operating results noted above partly offset this improvement.

Factors Affecting Results of Continuing Operations

Our revenues may fluctuate substantially with changes in supply costs, which are typically collected in rates from customers and therefore do not impact gross margin. Revenues are also impacted to a lesser extent by customer usage, which is primarily affected by weather and growth. In addition, various regulatory agencies approve the prices for electric and natural gas utility service within their respective jurisdictions and regulate our ability to recover costs from customers.

REGULATED OPERATIONS

Regulated Electric Utility Segment

	Results (in millions)
	2005			2004			Change				Change %
Electric supply revenue	$	69.8		$	60.2			$	9.6			15.9	%
Transmission & distribution revenue	70.9			67.6				3.3				4.9
Rate schedule revenue	140.7			127.8				12.9				10.1
Transmission	9.2			10.4				(1.2		)		(11.5	)
Wholesale	2.6			3.0				(0.4		)		(13.3	)
Miscellaneous	1.9			1.8				0.1				5.6
Total Revenues	$	154.4		$	143.0			$	11.4			8.0
Supply costs	65.5			62.4				3.1				5.0
Other cost of sales	4.6			3.9				0.7				17.9
Total Cost of Sales	$	70.1		$	66.3			$	3.8			5.7
Gross Margin	$	84.3		$	76.7			$	7.6			9.9	%
% GM/Rev	54.6		%	53.6		%

	Volumes MWH (in thousands)
	2005	2004	Change			Change %
Retail Electric—Montana
Residential	599	582		17			2.9	%
Commercial	754	738		16			2.2
Industrial	755	723		32			4.4
Other	19	15		4			26.7
Total Montana	2,127	2,058		69			2.4	%
Retail Electric—South Dakota
Residential	129	130		(1	)		0.8	%
Commercial	188	181		7			3.9
Other	5	5		—			—
Total South Dakota	322	316		6			1.9	%
Total Retail Electric	2,449	2,374		75			3.2	%
Wholesale Electric—SD	71	101		(30	)		(29.7	)%

Rate Schedule Revenue

Rate schedule revenue consists of revenue earned from customers for electric supply and transmission and distribution of electricity. Rate schedule revenue includes fully bundled rates for supplying, transmitting, and distributing electricity to customers who utilize us as their commodity supplier. Customers that have chosen other commodity suppliers are billed for moving their electricity across our lines and their distribution revenues are reflected as rate schedule revenue, while their transmission revenues are reflected as transmission revenue.

Electric rate schedule revenue in the first quarter of 2005 increased $12.9 million, or 10.1% over results in the first quarter of 2004. This increase consisted of $9.6 million related to increased supply costs and $3.3 million related to increased transmission and distribution revenues. Supply costs increased $7.5 million from higher average rates and $2.1 million from a 3.2% increase in volumes. This increase in volumes was also the primary cause of the transmission and distribution revenue increase, with a 2.9% increase in volumes used by our residential customers and a 2.2% increase in volumes used by our commercial customers.

Transmission Revenue

Transmission revenue consists of revenue earned for transmitting energy across our lines for customers who select other suppliers and for off-system, or open access, customers. Transmission revenues in Montana can fluctuate substantially from year to year based on market conditions in surrounding states. For example, if energy costs are substantially higher in California than in states to our east, suppliers may realize more profit by transmitting electricity across our lines into the California market than by buying electricity within California. We refer to these differences as price differentials. The absence of price differentials in the market and a renegotiated transmission contract caused the $1.2 million, or 11.5%, decrease in transmission revenue.

Wholesale Revenues

Wholesale revenues are derived from our joint ownership in generation facilities. Excess power not used by our South Dakota customers is sold in the wholesale market. These revenues decreased $0.4 million, or 13.3%, primarily due to a $1.1 million, or 29.7%, decrease in volumes sold in the secondary markets offset by $0.7 million, or 23.7% higher average prices.

Gross Margin

Gross margin in the first quarter of 2005 increased $7.6 million, or 9.9% over the first quarter 2004, primarily due to decreases in out of market costs of approximately $6.0 million associated with our QF contracts. These costs can differ substantially from year to year depending on the actual output of the QF’s as compared to the estimates we used in recording our QF liability. In the first quarter of 2005 we recognized a gain of approximately $4.9 million due to the contract amendment discussed above. In the first quarter of 2004 we recognized $1.1 million of expense associated with QF out of market costs, as actual output exceeded our estimate.

Margin as a percentage of revenues increased to 54.6% for 2005, from 53.6% for 2004. Gross margin as a percentage of revenue is largely impacted by the fluctuations that occur in power supply costs, which are typically collected in rates from customers. While these fluctuations impact gross margin as a percentage of revenue, they only impact gross margin amounts if they cannot be passed through to customers.

Volumes

Regulated retail electric volumes in the first quarter of 2005 totaled 2,448,675 MWHs, compared with 2,373,630 MWHs in the same period in 2004. Regulated wholesale electric volumes in the first quarter of 2005 were 70,553 MWHs, compared with 101,393 MWHs in the same period in 2004. Regulated wholesale electric volumes decreased during the first quarter of 2005 due to decreased volumes sold in the secondary market resulting from lower generation plant availability.

Regulated Natural Gas Utility Segment

	Results (in millions)
	2005			2004			Change				Change %
Gas supply revenue	$	87.2		$	72.7			$	14.5			19.9	%
Transportation, distribution & storage revenue	35.8			36.3				(0.5		)		(1.4	)
Rate schedule revenue	123.0			109.0				14.0				12.8
Sales for resale	10.1			6.4				3.7				57.8
Transportation	4.3			4.3				—				—
Miscellaneous	1.2			1.5				(0.3		)		(20.0	)
Total Revenues	$	138.6		$	121.2			$	17.4			14.4
Supply costs	87.2			73.8				13.4				18.2
Sales for resale costs	10.1			6.4				3.7				57.8
Other cost of sales	1.1			0.8				0.3				37.5
Total Cost of Sales	$	98.4		$	81.0			$	17.4			21.5
Gross Margin	$	40.2		$	40.2			$	—			—	%
% GM/Rev	29.0		%	33.2		%

	Volumes MMbtu (in thousands)
	2005	2004	Change			Change %
Retail Gas—Montana
Residential	5,296	5,294		2			—	%
Commercial	2,588	2,578		10			—
Industrial	84	100		(16	)		(16.0	)
Other	47	47		—			—
Total Montana	8,015	8,019		(4	)		—	%
Retail Gas—South Dakota
Residential	1,500	1,576		(76	)		(4.8	)
Commercial	970	965		5			0.5
Other	5	5		—			—
Total South Dakota	2,475	2,546		(71	)		(2.8	)
Retail Gas—Nebraska
Residential	1,292	1,446		(154	)		(10.7	)%
Commercial	1,155	1,201		(46	)		(3.8	)
Other	2	2		—			—
Total Nebraska	2,449	2,649		(200	)		(7.6	)%
Total Retail Gas	12,939	13,214		(275	)		(2.1	)%

Rate Schedule Revenue

Rate schedule revenue consists of revenue earned from customers receiving supply, transportation, and distribution of natural gas. Rate schedule revenue includes fully bundled rates for supplying, transporting, and distributing natural gas to customers who utilize us as their commodity supplier. Customers that have chosen other commodity suppliers are billed for moving their natural gas through our pipelines and their distribution revenues are reflected as rate schedule revenue, while their transportation revenues are reflected as transportation revenue.

Gas supply revenues in the first quarter of 2005 increased $14.5 million, or 19.9% over results in the first quarter of 2004. This increase consisted of $16.4 million due to increased supply costs partially offset by a $1.9 million, or 2.1%, decrease in volumes. While we are currently recovering in revenue an amount equal to our supply costs, in the first quarter 2004, our supply costs exceeded our supply revenues due to a $0.9 million disallowance by the MPSC. Transmission, distribution and storage revenue decreased slightly in 2005 due to the decrease in volumes.

Sales for Resale

Revenue from sales for resale increased $3.7 million, or 57.8%, due to sales of excess purchased gas in the secondary markets. As the sales of excess purchased gas are also reflected in cost of sales, there is no gross margin impact.

Transportation Revenue

Transportation revenue consists of revenue earned for transporting natural gas through our pipelines for customers who select other suppliers and for off-system, or open access, customers. Transportation revenue remained flat for the first quarter 2005 as compared to the same period 2004.

Gross Margin

Gross margin was $40.2 million in the first quarter 2005, which remained flat with the first quarter 2004. While we expensed $0.9 million in gas costs disallowed by the MPSC in the first quarter of 2004, this

was offset by a slight decrease in transmission, distribution, and storage and miscellaneous revenues in the first quarter of 2005.

On July 3, 2003 the MPSC issued orders disallowing the recovery of certain gas supply costs for the 2003 and 2004 tracker years. The MPSC also rejected a motion for reconsideration filed by us on July 14, 2003. We filed suit in Montana state court on July 28, 2003, seeking to overturn the MPSC’s decision to disallow recovery of these costs. A tracker year runs from July to June, and because of the MPSC orders, we were disallowed recovery of $6.2 million and $4.6 million for the 2003 and 2004 tracker years, respectively. The MPSC has approved a stipulation between us and the Montana Consumer Counsel regarding the recovery of natural gas costs for the 2003 and 2004 tracking years. With this stipulation as a foundation, we are working with the MPSC to settle the District Court case, including the recovery of $4.6 million of these previously disallowed gas costs. If the MPSC and District Court approve the settlement, which we expect in the second quarter of 2005, then we would record a gain of $4.6 million.

Margin as a percentage of revenue decreased to 29.0% for 2005, from 33.2% for 2004. Gross margin as a percentage of revenue is largely impacted by the fluctuations that occur in gas supply costs, which are typically collected in rates from customers. While these fluctuations impact gross margin as a percentage of revenue, they only impact gross margin amounts if they cannot be passed through to customers.

Regulated retail natural gas volumes were 12,939,339 MMbtu (million British Thermal Units) during the first quarter of 2005, compared with 13,214,227 MMbtu or a 2.1% decline from the same period in 2004. The decline in volumes in the first quarter of 2005 was due primarily to warmer than normal historic weather in all regulated markets.

UNREGULATED OPERATIONS

Unregulated Electric Segment

Our unregulated electric segment reflects the operations of our Colstrip Unit 4 division and CFB’s results arising from the ownership and operation of the three megawatt Milltown Dam hydroelectric facility.

	Results (in millions)
	2005			2004			Change				Change %
Total Revenues	$	24.4		$	17.7			$	6.7			37.9	%
Supply costs	5.7			3.3				2.4				72.7
Wheeling costs	0.7			1.4				(0.7		)		(50.0	)
Total Cost of Sales	$	6.4		$	4.7			$	1.7			36.2
Gross Margin	$	18.0		$	13.0			$	5.0			38.5	%
% GM/Rev	73.8		%	73.4		%

Volumes MWH (in thousands)

2005

2004

Change

Change %

Wholesale Electric Montana

511

454

12.6

Revenue

Unregulated electric revenue increased $6.7 million, or 37.9%, due primarily to higher market prices.

Gross Margin

Gross margin increased $5.0 million, or 38.5%, primarily due to higher market prices partially offset by a $2.4 million increase in supply costs.

Unregulated electric volumes were 510,745 MWHs in the first quarter of 2005, compared with 454,264 MWHs in the same period in 2004. The 2005 increase in volumes was due primarily to improved generation plant availability.

Unregulated Natural Gas Segment

Our unregulated natural gas segment reflects the operations of our subsidiary, NorthWestern Services Corporation, which markets gas supply services to large volume customers and, through its subsidiary, operates a pipeline that provides gas supply and distribution services. In addition, this segment also reflects the results of our unregulated Montana retail propane operations.

Results (in millions)

2005

2004

Change

Change %

Total Revenue

50.3

40.7

9.6

23.6

Supply costs

47.8

37.6

10.2

27.1

Gross Margin

2.5

3.1

(0.6

)

(19.4

% GM/Rev

5.0

7.6

	Volumes MMbtu (in thousands)
	2005	2004	Change		Change %
Wholesale Gas—South Dakota	4,158	3,860		298		7.7	%
Wholesale Gas—Nebraska	2,854	2,493		361		1.4
Total Wholesale Gas	7,012	6,353		659		10.4	%

Revenue

Unregulated natural gas revenue increased $9.6 million, or 23.6%, due primarily to a $4.6 million, or 10.4%, increase in volumes and a $5.2 million, or 13.5%, increase in average price.

Gross Margin

Gross margin decreased $0.6 million, or 19.4%, primarily due to losses recorded on out of market fixed price sales contracts.

Unregulated wholesale natural gas volumes totaled 7,012,125 MMbtu in the first quarter of 2005, compared with 6,353,169 MMbtu during the same period in 2004. The 10.4% increase in volumes in the first quarter of 2005 was due primarily to volumes sold to ethanol facilities in South Dakota.

DISCONTINUED OPERATIONS

Discontinued Communications Segment Operations

against Netexit may be subject to avoidance and/or subordination under operative provisions of the Bankruptcy Code. We intend to vigorously defend against any efforts to invalidate or subordinate our claims against Netexit, but we cannot currently predict the resolution of any litigation with respect to the validity of NorthWestern’s claims against Netexit. Netexit may incur significant additional expenses related to the bankruptcy filing and may incur additional losses related to the resolution of open claims. Pending the resolution of open claims by Netexit creditors, the proceeds from the sale remain at Netexit and distributions to NorthWestern could be delayed until the effective date of Netexit’s liquidating plan of reorganization.

Summary financial information for the discontinued Netexit operations is as follows (in thousands):

	Successor Company			Predecessor Company
	Three Months Ended
	March 31, 2005			March 31, 2004
Revenues		$	—		$	—
Income before income taxes		$	715		$	1,666
Income tax provision		—			—
Income from discontinued operations, net of income taxes		$	715		$	1,666

Blue Dot has one remaining business. Summary financial information for the discontinued Blue Dot operations is as follows (in thousands):

	Successor Company				Predecessor Company
	Three Months Ended
	March 31, 2005				March 31, 2004
Revenues		$	723			$	16,593
Loss before income taxes		$	(191	)		$	(4,293	)
Gain on disposal		—				7,549
Income tax provision		—				—
(Loss) Income from discontinued operations, net of income taxes		$	(191	)		$	3,256

LIQUIDITY AND CAPITAL RESOURCES

During the first quarter of 2005, we used existing cash to repay $12.0 million of debt. We also paid dividends on common stock of $7.8 million on March 31, 2005. On April 22, 2005, we used cash on hand to make an early principal payment of $25 million on our senior secured term loan B. We are focused on maintaining a strong liquidity position and strengthening our balance sheet, thereby improving our credit profile. We believe that our cash on hand, operating cash flows, and borrowing capacity (currently approximately $100 million remaining revolver availability), taken as a whole, provide sufficient resources to fund our ongoing operating requirements, 2005 debt maturities, anticipated dividends and estimated future capital expenditures.

In addition, we anticipate receiving approximately $20 million to $25 million from the sale of MMI’s generation equipment.

Credit Ratings

Standard & Poor’s Ratings Group (S&P), Moody’s Investors Service (Moody’s) and Fitch Investors Service (Fitch) are independent credit-rating agencies that rate our debt securities. These ratings indicate

the agencies’ assessment of our ability to pay interest and principal when due on our debt. As of May 1, 2005, our ratings with these agencies are as follows:

	Senior Secured Rating		Issuer Rating		Outlook
S&P		BB		BB-	Positive
Moody’s		Ba1		Ba2	Stable
Fitch		BB+		—	Positive

In general, less favorable credit ratings make debt financing more costly and more difficult to obtain on terms that are economically favorable to us, and impacts our trade credit availability.

Cash Flows

Our operations are subject to seasonal fluctuations in cash flow. During the heating season, which is primarily from November through March, cash receipts from natural gas sales and transportation services generally exceed cash requirements. During the summer months, cash on hand, together with the seasonal increase in cash flows from the electric business during the summer cooling season and external financing, is used to purchase natural gas to place in storage for heating season deliveries, perform necessary maintenance, and make capital improvements in plant.

As of March 31, 2005, cash and cash equivalents were $77.3 million, compared with $17.1 million at December 31, 2004, and $96.1 million as of March 31, 2004. Cash provided by continuing operations totaled $94.0 million during the three months ended March 31, 2005, compared to $98.0 million during the three months ended March 31, 2004. We anticipate our cash flows from operations to decrease during the second quarter. As our electric and natural gas utility business is seasonal and the weather is typically milder during the second quarter, we typically see reduced revenues during this time period. In addition, during the second quarter of 2005 we expect to make property tax payments of approximately $30 million and an operating lease payment of approximately $16 million.

Cash used in investing activities totaled $13.4 million in the first quarter of 2005 compared to $12.9 million in 2004. Cash used during 2005 and 2004 was principally due to property, plant and equipment additions.

Cash used in financing activities totaled $20.3 million in the first quarter of 2005 compared to $4.2 million in 2004. In 2005 we paid dividends on common stock of $7.8 million and made scheduled principal payments on debt of $12.0 million. Cash used during 2004 was for scheduled principal payments on debt.

Contractual Obligations and Other Commitments

We have a variety of contractual obligations and other commitments that require payment of cash at certain specified periods. The following table summarizes our contractual cash obligations and commitments as of March 31, 2005 for each of the periods presented. See our Annual Report on Form 10-K for the year ended December 31, 2004 for additional discussion.

	Total			2005		2006		2007		2008		2009		Thereafter
	(in thousands)
Debt:
Senior Secured Term Loan B(1)	$	99,750		$	750	$	1,000	$	1,000	$	1,000	$	1,000	$	95,000
South Dakota Mortgage Bonds, 5.875% 7.00% and 7.10%	179,000			60,000		—		—		—		—		119,000
South Dakota Pollution Control Obligations, 5.85% and 5.90%	21,350			—		—		—		—		—		21,350
Montana First Mortgage Bonds, 5.875% 7.00%, 7.30%, 8.25% and 8.95%	311,365			—		150,000		365		—		—		161,000
Discount on Montana First Mortgage Bonds	(2,355		)	—		—		—		—		—		(2,355		)
Montana Pollution Control Obligations, 6.125% and 5.90%	170,205			—		—		—		—		—		170,205
Montana Natural Gas Transition Bonds, 6.20%	39,720			2,014		4,712		5,248		5,391		5,862		16,493
Capital leases(2)	5,984			1,493		1,759		1,152		667		189		724
	825,019			64,257		157,471		7,765		7,058		7,051		581,417
Future minimum operating lease payments(3)	312,095			33,204		33,473		32,909		32,294		32,245		147,970
Estimated Pension and Other Postretirement Obligations(4)	114,000			25,000		25,000		25,000		25,000		14,000		N/A
Qualifying Facilities(5)	1,672,329			54,644		56,398		58,420		60,574		62,598		1,379,695
Supply and Capacity Contracts(6)	1,483,532			298,413		268,443		181,765		115,403		108,831		510,677
Interest payments on debt	484,811			44,238		46,458		35,925		35,000		34,672		288,518
Total Commitments	$	4,891,786		$	519,756	$	587,243	$	341,784	$	275,329	$	259,397	$	2,908,277

(1) The Senior Secured Term Loan B is secured by $72 million and $28 million of our Montana and South Dakota First Mortgage Bonds issued under our existing mortgage indentures, respectively.

(2) The capital lease obligations are used to finance various equipment purchases. These leases are secured by the equipment under lease, which includes $3.2 million of our Montana assets and $2.8 million of our South Dakota assets.

(3) Our operating leases include a lease agreement for our share of the Colstrip Unit 4 generation facility, which requires payments of $32.2 million annually through 2010. In January 2005, we exercised an option to extend the term of this lease for an additional eight years with annual payments of $14.5 million.

(4) We have only estimated cash obligations related to our pension and other postretirement benefit programs for five years, as it is not practicable to estimate thereafter.

(5) The QFs require us to purchase minimum amounts of energy at prices ranging from $65 to $138 per megawatt hour through 2032. Our estimated gross contractual obligation related to the QFs is approximately $1.7 billion. A portion of the costs incurred to purchase this energy is recoverable through rates authorized by the MPSC, totaling approximately $1.3 billion. The obligation and payments reflected on this schedule represent the estimated gross contractual obligation as of March 31, 2005.

(6) We have entered into various purchase commitments, largely purchased power, coal and natural gas supply and natural gas transportation contracts. These commitments range from one to 30 years.

Successor Company Financing Transaction

On November 1, 2004 in connection with our emergence from bankruptcy, we entered into a new $225 million credit facility secured bonds which are in turn secured by our utility assets. The credit facility consists of a $125 million, five-year revolving tranche and a $100 million, seven-year term tranche (Senior Secured Term Loan B), which bears interest at a variable rate (currently approximately 4.5%) tied to the London Interbank Offered Rate. The revolving tranche replaced our DIP Facility and is available to us for general corporate purposes and for the issuance of letters of credit. Concurrently with the establishment of the new credit facility, we issued $225 million of our 5.875% senior secured notes due November 1, 2014. The notes are also secured by bonds which are in turn secured by our utility assets. Borrowings under the term portion of the new credit facility, together with the net proceeds of the notes offering and available cash, were used to repay our $390 million senior secured term loan facility. As of March 31, 2005 we had $22.0 million in letters of credit outstanding and no borrowings under the revolving tranche of the new credit facility.

Our new credit facility includes covenants which require us to meet certain financial tests, including a minimum interest coverage ratio and a maximum debt to capitalization ratio. The facility also contains covenants which, among other things, limit our ability to incur additional indebtedness, create liens, engage in any consolidation or merger or otherwise liquidate or dissolve, dispose of property, make restricted payments, make loans or advances, enter into transactions with affiliates, engage in business activities other than specified activities, and engage in other matters customarily restricted in such agreements. As of March 31, 2005 we are in compliance with all of the covenants under the new credit facility.

NEW ACCOUNTING STANDARDS

See Note 8 for a discussion of new accounting standards.

RISK FACTORS

You should carefully consider the risk factors described below, as well as all other information available to you, before making an investment in our shares or other securities.

Bankruptcy-Related Risks

Parties objecting to confirmation of our plan of reorganization may appeal the order confirming our plan of reorganization and may challenge the confirmation through litigation.

On October 22, 2004, Magten filed a motion with the Bankruptcy Court seeking a stay of the confirmation order pending resolution of their appeal of such order, which notice of appeal was filed on October 25, 2004. On October 25, 2004, the Bankruptcy Court denied Magten’s motion for a stay. Thereafter, Magten requested that the United States District Court for the District of Delaware impose a stay of the effectiveness of the confirmation order pending resolution of Magten’s appeal. On October 29, 2004, the Delaware District Court denied Magten’s motion for a stay. The appeal has now been docketed with the District Court but a briefing schedule has not been issued. In March 2005 we moved to dismiss Magten’s appeal of the confirmation order on equitable mootness grounds. Although we will vigorously prosecute the motion to dismiss the appeal and defend against the appeal, we cannot currently predict the impact or resolution of Magten’s appeal of the confirmation order.

On April 15, 2005 Magten and Law Debenture filed an adversary complaint in the Bankruptcy Court against NorthWestern, Gary Drook, Michael Hanson, Brian Bird, Thomas Knapp and Roger Schrum alleging that the Company and former and current officers committed fraud by failing to include sufficient stock in the Class 9 reserve for payment of unsecured claims, and requesting, among other relief, that the confirmation order be revoked and set aside. While we cannot predict the impact or resolution of Magten’s complaint we intend to vigorously defend against it.

We have incurred, and expect to continue to incur, significant costs associated with the Chapter 11 proceedings, which may adversely affect our results of operations and cash flows.

We have incurred and will continue to incur significant costs associated with the Chapter 11 proceedings. These costs, which are being expensed as incurred, are expected to have an adverse effect on our results of operations and cash flows. Although our plan of reorganization has been successfully consummated and we have emerged from bankruptcy, we expect to continue to incur significant costs in connection with the steps necessary to close the bankruptcy case which include, among other things, resolution of remaining unsecured claims, administration of the claim reserve, coordination with the Plan Committee and the resolution of appeals and certain pending litigation..

Claims that were not discharged in the bankruptcy proceeding, and to the extent certain claimants did not receive proper notice of the claim bar date, such claims could have a material adverse effect on our results of operations and profitability.

Although most claims made against us prior to the date of the bankruptcy filing were satisfied and discharged in accordance with the terms of our plan of reorganization or in connection with settlement agreements that were approved by the Bankruptcy Court prior to consummation of our plan of reorganization, certain claims, such as environmental claims, that were not discharged or settled may have a material adverse effect on our results of operations and profitability.

Claims made against us prior to the date of the bankruptcy filing might not be discharged if the claimant had no notice of the bankruptcy filing. In addition, in other bankruptcy cases, states have challenged whether their claims could be discharged in a federal bankruptcy proceeding if they never made an appearance in the case. This issue has not been finally settled by the U.S. Supreme Court.

We filed several motions to terminate various nonqualified benefit plans and individual supplemental retirement contracts with estimated allowed claims of approximately $17 million. All liabilities associated with these plans have been removed from our balance sheet based on our expectation that these claims will be settled through the shares from the reserve established for Class 9 claimants. Some of the participants in those plans and individual supplemental retirement contracts have objected to the Bankruptcy Court’s jurisdiction to terminate such plans and/or contracts. On May 4, 2005, our Bankruptcy Court determined that it did not have jurisdiction to consider our motion to terminate these contracts. We may have to reestablish the liabilities on our balance sheet and recognize a loss in the Successor Company operations if we decide to not appeal the Bankruptcy Court decision or are not successful with such appeal.

Certain of our prepetition creditors received NorthWestern common stock pursuant to our plan of reorganization and have the ability to influence certain aspects of our business operations.

Under our plan of reorganization, holders of certain claims received distributions of shares of our common stock. Harbert Distressed Investment Master Fund Ltd. (Harbert), is affiliated with or manage funds which, based on the most recent information made available to us, collectively received more than 20% of our new common stock. Harbert could acquire additional claims or shares, or divest claims or shares in the future. Our prepetition senior unsecured noteholders, trade vendors with claims in excess of $20,000 and holders of our trust preferred securities and our quarterly income preferred securities received, collectively, approximately 9% of our new common stock. Other than Harbert, however, we are not aware of any other entity that owns or controls 10% or more of our common stock distributed upon emergence pursuant to our plan of reorganization.

If any holders of a significant number of the shares of our common stock were to act as a group, then such holders could be in a position to control the outcome of actions requiring stockholder approval, such as an amendment to our certificate of incorporation, the authorization of additional shares of capital stock, and any merger, consolidation, or sale of all or substantially all of our assets, and could prevent or cause a change of control of NorthWestern.

Risks Relating to Our Business

We are one of several defendants in the McGreevey litigation, a class action lawsuit brought in connection with the sale of generating and energy-related assets by The Montana Power Company. If we do not successfully resolve this lawsuit, the insurance coverage does not pay for any damages we are found liable for, or our indemnification claims against Touch America Holdings, Inc. cannot be enforced and reimbursed, then our business will be harmed and there will be a material adverse impact on our financial condition.

We are one of several defendants in a class action lawsuit entitled McGreevey, et al. v. The Montana Power Company, et al., now pending in federal court in Montana. The lawsuit, which was filed by the former shareholders of The Montana Power Company (many of whom became shareholders of Touch America Holdings, Inc. as a result of a corporate reorganization of The Montana Power Company), claims that the disposition of various generating and energy-related assets by The Montana Power Company was void because of the failure to obtain shareholder approval for the transactions. Plaintiffs thus seek to reverse those transactions, or receive fair value for their stock as of late 2001, when plaintiffs claim

shareholder approval should have been sought. NorthWestern is named as a defendant due to the fact that we purchased the unit membership interest of The Montana Power, LLC, which the plaintiffs claim is a successor to The Montana Power Company. On July 10, 2004, we and the other insureds under the applicable directors and officers liability insurance policies along with the plaintiffs in the McGreevey case, plaintiffs in the In Re Touch America Holdings, Inc. Securities Litigation and the Touch America Creditors Committee reached a tentative settlement as a result of mediation. Among the terms of the tentative settlement, we, our wholly owned subsidiary CFB, and other parties will be released from all claims in this case, the plaintiffs in McGreevey will dismiss their claims against the third party purchasers of the generation assets and non-regulated energy assets of Montana Power Company, including PPL Montana, and a settlement fund in the amount of $67 million (all of which will be contributed by the former Montana Power Company directors and officers liability insurance carriers) will be established. The settlement is subject to the occurrence of several conditions, including approval of the proposed settlement by the Bankruptcy Court in our bankruptcy proceeding, approval of the Touch America bankruptcy court, and approval of the proposed settlement by the federal District Court for the District of Montana, where the class action is pending. Plaintiffs in the McGreevey class action have filed a motion for approval of the settlement. On April 29, 2005 the Federal District Court in Montana denied the plaintiffs motion for preliminary approval of the proposed settlement without prejudice and ordered the parties to work out their differences and present a global settlement agreement in 60 days; otherwise, the court will order the parties to resume trial preparations. In the event the parties do not reach a global settlement agreement, a settlement is not approved or it does not take effect for any other reason, we cannot predict the ultimate outcome of this litigation, but we intend to vigorously defend against this lawsuit. The Bankruptcy Court entered an order permitting the plaintiffs in McGreevey to file a fraudulent conveyance action against us if we were not able to consummate the settlement; however, it is not certain that the plaintiff could pursue such action post emergence. 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.

We are a defendant in litigation related to our quarterly income preferred securities, which litigation is related to the transfer of certain assets to NorthWestern from our subsidiary, CFB. Certain current and former officers of CFB are defendants in a lawsuit related to the same transfer of assets. Our business could be harmed and there could be a material adverse impact on our financial condition if we do not successfully resolve the lawsuit.

Certain creditors and parties-in-interest have initiated legal action against us related to the transfer of the assets and liabilities comprising our Montana utility operations from CFB to NorthWestern, and seek the removal of such assets from our estate or the imposition of a constructive trust for the benefit of such creditors. This litigation currently is stayed pending termination of the appeal of the order confirming our plan of reorganization filed by Magten. This litigation could adversely affect our business, results of operations, our financial condition and our ability to continue normal operations.

We are the subject of a formal investigation by the SEC relating to the restatement of our 2002 quarterly financial statements and other accounting and financial reporting matters. If the investigation was to result in a regulatory proceeding or action against us, then our business and financial condition could be harmed.

In December 2003, the SEC notified NorthWestern that it had issued a formal order of private investigation and subsequently subpoenaed documents from NorthWestern and affiliated companies NorthWestern Communications Solutions, Expanets and Blue Dot. This development followed the SEC’s requests for information made in connection with the previously disclosed SEC informal inquiry into questions regarding the restatements and other accounting and financial reporting matters. Since December 2003, we have periodically received and continue to receive subpoenas from the SEC requesting

documents and testimony from employees regarding these matters. The SEC investigation will continue, and while no claims have been filed, any claims alleging violations of federal securities laws made by the SEC may not be discharged pursuant to our plan of reorganization.

In addition, certain of our former directors and several employees of NorthWestern and our subsidiary affiliates have been interviewed by representatives of the Federal Bureau of Investigation (FBI) concerning certain of the allegations made in the class action securities and derivative litigation matters. We have not been advised that NorthWestern is the subject of any FBI investigation. We understand that the FBI and the Internal Revenue Service (IRS) have contacted former employees of ours or our subsidiaries. As of the date hereof, we are not aware of any other governmental inquiry or investigation related to these matters.

We are cooperating with the SEC’s investigation and intend to cooperate with the FBI and IRS if we are contacted in connection with any investigation. We cannot predict whether or not any other governmental inquiry or investigation will be commenced. We cannot predict when the SEC investigation will be completed or its outcome. If the SEC determines that we have violated federal securities laws and institutes civil enforcement proceedings against us, then we may face sanctions, including, but not limited to, monetary penalties and injunctive relief and any monetary liability incurred by us may be material to our financial position or results of operations.

We are subject to extensive governmental regulations that affect our industry and our operations. Existing and changed regulations and possible deregulation have the potential to impose significant costs, increase competition and change rates which could have a material adverse effect on our results of operations and financial condition.

Our operations and the operations of our subsidiary entities are subject to extensive federal, state and local laws and regulations concerning taxes, service areas, tariffs, rates, issuances of securities, employment, occupational health and safety, protection of the environment and other matters. In addition, we are required to obtain and comply with a wide variety of licenses, permits and other approvals in order to operate our facilities. In the course of complying with these requirements, we may incur significant costs. If we fail to comply with these requirements, we could be subject to civil or criminal liability and the imposition of liens or fines. In addition, existing regulations may be revised or reinterpreted, new laws, regulations, and interpretations thereof may be adopted or become applicable to us or our facilities and future changes in laws and regulations may have a detrimental effect on our business.

Our utility businesses are regulated by certain state commissions. As a result, these commissions have the ability to review the regulated utility’s books and records. This ability to review our books and records could result in prospective negative adjustments to our rates.

The United States electric utility and natural gas industries are currently experiencing increasing competitive pressures as a result of consumer demands, technological advances, deregulation, greater availability of natural gas-fired generation and other factors. Competition for various aspects of electric and natural gas services is being introduced throughout the country that will open these markets to new providers of some or all of traditional electric utility and natural gas services. Competition is likely to result in the further unbundling of electric utility and natural gas services as has occurred in Montana for electricity and Montana, South Dakota and Nebraska for natural gas. Separate markets may emerge for generation, transmission, distribution, meter reading, billing and other services currently provided by electric utility and natural gas providers as a bundled service. As a result, significant additional competitors could become active in the generation, transmission and distribution segments of our industry.

We are currently subject to limited regulation under the Public Utility Holding Company Act of 1935, as amended (PUHCA); however, we may become subject to additional PUHCA requirements if certain of our 10% shareholders or other shareholders are not deemed to be “exempt” holding companies under the Act. Complying with additional PUHCA requirements could make it more difficult for us to enter into financing arrangements, conduct nonutility lines of business or acquire other businesses or assets.

We are subject to limited regulation under PUHCA, because more than 20% of our voting stock (following the distribution under the approved bankruptcy plan) is currently held by Harbert or affiliates of Harbert. Harbert has applied for status as an “exempt” holding company, under Section 3(a)(4) of PUHCA, on the basis that it is only temporarily a holding company. Harbert has represented that it will reduce its holdings below 10% within 3 years from its initial filing in November 2004 and it will not take an active role in our management. Pending action by the SEC on its application (and assuming that the application was filed in good faith and the relevant facts have not changed), Harbert is entitled to exempt status upon its filing pending SEC action on the application. As a result of Harbert’s holdings, we are a “subsidiary” of an “exempt holding company”, and are subject to Section 9 of PUHCA, but are not otherwise subject to the Act. The Company is itself not a utility holding company, because all of its utility operations are conducted at the parent level.

Under PUHCA the SEC does not regulate rates and charges for the sale or distribution of gas or electricity, but it does regulate the structure, financing, lines of business and internal transactions of public utility holding companies and their system companies. If Harbert were denied an exemption, or if other entities became holders of more than 10% of our voting stock either individually or as a group acting together, and were not otherwise exempt from the Act, then we would be subject to additional requirements under PUHCA, including requirements for SEC approval before issuing securities, entering into financing arrangements, entering or continuing lines of business not necessary or appropriate to our utility businesses, or acquiring other utility assets or businesses.

There are proposals to repeal PUHCA pending before Congress. Such proposals have been made in the last several years, and while each house has passed a bill to repeal PUHCA (usually as part of broader energy legislation), final agreement on a single bill has not occurred. We believe that each house will consider action on such bills in the current session, but we cannot predict when or whether any such legislation might pass.

Our obligation to supply a minimum annual quantity of qualifying facility (QF) power to the Montana default supply could expose us to material commodity price risk if we are required to supply any quantity deficiency during a time of commodity price volatility.

As part of the Stipulation and Settlement with the MPSC and other parties in the Tier II Docket, we agreed to supply the default supply with a certain minimum amount of QF power at an agreed upon price per megawatt. To the extent the supplied QF power for any year did not reach the minimum quantity set forth in the settlement, we are obligated to secure the quantity deficiency from other sources. Since we own no material generation in Montana, the anticipated source for any quantity deficiency is the wholesale market which, in turn, would subject us to commodity price volatility. Our understanding of the Stipulation and Settlement was that the quantity deficiency could be filled by us at any time during the measurement year. To the extent this interpretation is not supported by a regulatory ruling or we experience commodity price volatility during the period we replenish the quantity deficiency, our results of operations could be adversely affected.

Our electric and natural gas distribution systems are subject to municipal condemnation.

The government of each of the municipalities in which we provide electric or natural gas service has the right to condemn our facilities in that community and to establish a municipal utility distribution system to serve customers by use of such facilities, subject to the approval of the voters of the community and the payment to NorthWestern of fair market value for our facilities, including compensation for the

cancellation of our service rights. If we lose a material portion of our distribution systems to municipal condemnation, then our results of operations and financial condition could be harmed because we may not be able to replace or repurchase income generating assets in a timely manner, if at all.

Seasonal and quarterly fluctuations of our business could adversely affect our results of operations and financial condition.

Our electric and natural gas utility business is seasonal and weather patterns can have a material impact on their financial performance. Demand for electricity is often greater in the summer and winter months associated with cooling and heating. Because natural gas is heavily used for residential and commercial heating, the demand for this product depends heavily upon weather patterns throughout our market areas, and a significant amount of natural gas revenues are recognized in the first and fourth quarters related to the heating season. Accordingly, our operations have historically generated less revenues and income when weather conditions are milder in the winter and cooler in the summer. In the event that we experience unusually mild winters or cool summers in the future, our results of operations and financial condition could be adversely affected. In addition, exceptionally hot summer weather or unusually cold winter weather could add significantly to working capital needs to fund higher than normal supply purchases to meet customer demand for electricity and natural gas.

To the extent our incurred supply costs are deemed imprudent by the applicable state regulatory commissions, we could under-recover our costs, which would adversely impact our results of operations.

Our wholesale costs for electricity and natural gas are recovered through various pass-through mechanisms in each of the states we serve. The rates are established based upon projected market prices or contract obligations. As these variables change, we adjust our rates through our monthly trackers. To the extent our adjusted rate is deemed imprudent by the applicable state regulatory commissions, we could under-recover our costs, which would adversely impact our results of operations. While the tracker mechanisms are designed to allow a timely recovery of prudently incurred costs, a rapid increase in commodity costs may also create a temporary, material under-recovery situation. As a result, we may not be able to immediately pass on to our retail customers rapid increases in our energy supply costs, which could reduce our liquidity.

We do not own any natural gas reserves and do not own a material amount of electric generation assets to service our Montana operations. As a result, we are required to procure our entire natural gas supply and substantially all of our Montana electricity supply pursuant to contracts with third-party suppliers. In light of this reliance on third-party suppliers, we are exposed to certain risks in the event a third-party supplier is unable to satisfy its contractual obligation. If this occurred, we might be required to purchase gas and electricity supply requirements in the energy markets, which may not be on commercially reasonable terms, if at all. If prices were higher in the energy markets, it could result in a temporary material under-recovery that would reduce our liquidity.

Our internal controls and procedures related to regulated and unregulated energy procurement need to be improved.

As reported in our Annual Report on Form 10-K as of December 31, 2004, we identified various deficiencies related to the accounting for regulated and unregulated energy commodity procurement, which were assessed to be a material weakness in our internal control over financial reporting. These control deficiencies included: (1) weak segregation of duties among front-, mid-, and back office functions; (2) responsibilities between regulated and unregulated front office employees were not appropriately defined and assigned; and (3) certain transactions were not properly evaluated in a timely manner as to the appropriate accounting treatment.

If we are unable to address these deficiencies and correct our material weakness in a timely manner, we have risk that regulated and unregulated energy supply transactions are not properly authorized,

evaluated, recorded or disclosed. This could result in unexpected losses associated with unauthorized regulated and unregulated energy procurement transactions, which could adversely impact our liquidity and results of operations. Accordingly, there is more than a remote likelihood that a material misstatement of our annual or interim financial statements would not be prevented or detected.

Our utility business is subject to extensive environmental laws and regulations and potential environmental liabilities, which could result in significant costs and liabilities.

Our utility business is subject to extensive laws and regulations imposed by federal, state and local government authorities in the ordinary course of operations with regard to the environment, including environmental laws and regulations relating to air and water quality, solid waste disposal and other environmental considerations. We believe that we are in substantial compliance with environmental regulatory requirements and that maintaining compliance with current requirements will not materially affect our financial position or results of operations. However, possible future developments, such as the promulgation of more stringent environmental laws and regulations, and the timing of future enforcement proceedings that may be taken by environmental authorities could affect the costs and the manner in which we conduct our business and could cause us to make substantial additional capital expenditures. There is no assurance that we would be able to recover these increased costs from our customers or that our business, financial condition and results of operations would not be materially adversely affected.

Many of these environmental laws and regulations create permit and license requirements and provide for substantial civil and criminal fines which, if imposed, could result in material costs or liabilities. We cannot predict with certainty the occurrence of a private tort allegation or government claim for damages associated with specific environmental conditions. We may be required to make significant expenditures in connection with the investigation and remediation of alleged or actual spills, personal injury or property damage claims, and the repair, upgrade or expansion of our facilities in order to meet future requirements and obligations under environmental laws.

Environmental laws and regulations require us to incur certain costs, which could be substantial, to operate existing facilities, construct and operate new facilities, and mitigate or remove the effect of past operations on the environment. Governmental regulations establishing environmental protection standards are continually evolving, and, therefore, the character, scope, cost and availability of the measures we may be required to take to ensure compliance with evolving laws or regulations cannot be predicted. Our range of exposure for environmental remediation obligations is estimated to be $45.3 million to $84.1 million. We had an environmental reserve of $45.3 million at March 31, 2005. This reserve was established in anticipation of future remediation activities at our various environmental sites and does not factor in any exposure to us arising from new regulations, private tort actions or government claims for damages allegedly associated with specific environmental conditions. These environmental liabilities will continue and any claims with respect to environmental liabilities will not be extinguished pursuant to our plan of reorganization. To the extent that our environmental liabilities are greater than our reserves or we are unsuccessful in recovering anticipated insurance proceeds under the relevant policies or recovering a material portion of remediation costs in our rates, our results of operations and financial condition could be adversely affected.

The loss of our investment grade credit ratings has impacted our borrowing costs and liquidity, and we expect that our non-investment grade status will continue to affect our cash flows.

Upon emergence from bankruptcy, we were assigned a non-investment grade credit rating. Our current non-investment grade ratings have impacted our borrowing costs. In addition, we continue to either prepay or post collateral in the form of cash and letters of credit to support our operations. We also began payment of quarterly dividends on our common stock in the first quarter of 2005, which may delay our ability to achieve an investment grade rating for our debt securities. While we are working to resolve many of the concerns cited by the credit rating agencies, we cannot assure you that our credit ratings will improve in the foreseeable future.

Our ability to access the capital markets is dependent on our ability to obtain certain regulatory approvals and the covenants contained in our debt instruments.

We may need to continue to support working capital and capital expenditures, and to refinance maturing debt, through external financing. Often, we must obtain federal and certain state regulatory approvals in order to borrow money or to issue securities and therefore will be dependent on the federal and state regulatory authorities to issue favorable orders in a timely manner to permit us to finance our operations. We cannot assure you that these regulatory entities will issue such orders or that such orders will be issued on a timely basis. In addition, our new credit facility and the indenture governing the notes limit us from incurring additional indebtedness.

If we are unable to successfully sell our noncore assets or wind-down operations of certain subsidiaries, then the amount of proceeds we receive from such sales could be significantly less than anticipated.

As part of our efforts to restructure our business, we are attempting to divest our Montana First Megawatts (MMI) generation project in Montana and wind-down operations of Netexit and Blue Dot. If the sales prices for such assets are less than anticipated, or we encounter unexpected liabilities, such as costs relating to the wind-down of operations, including termination of benefit plans and payment of other liabilities, then our liquidity could be adversely affected. Further, we cannot assure you that we will be able to consummate such asset sales or that any asset sales will be at or greater than the current net book value of such assets.

Our subsidiary, Netexit, sold substantially all of its assets to Avaya, Inc. In order to wind-down its affairs in an orderly manner, Netexit and its subsidiaries filed for bankruptcy protection on May 4, 2004. Pending the resolution of open claims to Netexit creditors, the proceeds from the sale remain at Netexit and distributions to NorthWestern could be delayed until the ultimate effective date of the liquidating plan of reorganization. There are many factors beyond our control including our ability to obtain the support of the Netexit official committee of unsecured creditors and potential additional losses related to the resolution of filed claims, which could affect the amount of proceeds we receive as distributions from Netexit. Additionally, Netexit’s creditors committee has indicated that NorthWestern’s claims against Netexit may be subject to avoidance and/or subordination under operative provisions of the Bankruptcy Code. We intend to vigorously defend against any efforts to invalidate or subordinate our claims against Netexit, but we cannot currently predict the resolution of any litigation with respect to the validity of NorthWestern’s claims against Netexit.

We may receive, respond to and not pursue, as appropriate, unsolicited indications of interest, proposals or offers to acquire us or some or all of our assets, and if not pursued, our stockholders would not be able to obtain any premium for their shares of common stock offered in the proposed transaction.

We have in the past received and from time to time may receive in the future unsolicited indications of interest, proposals or offers to acquire us or some or all of our assets. We are not soliciting offers from prospective buyers. As we have stated on prior occasions, as a public company we may receive such indications of interest, proposals or offers, and if we do, we will evaluate them and respond as appropriate. There can be no assurance that we will pursue any such indication of interest, proposal or offer, and we reserve the right not to pursue any acquisition of us or any of our assets as determined by our board of directors. As a consequence of any decision not to pursue an acquisition of us, our stockholders would not be able to sell or exchange their shares of common stock at any premium offered by the prospective buyer in the proposed transaction. As a matter of policy, we will not comment on or provide market updates as to the status of any indications of interest, proposals or offers we may receive from time to time, or the course of discussions with any prospective buyers, nor will we comment upon any rumors with regard to any possible sale.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On October 26, 2004 Magten filed a notice of appeal of the Bankruptcy Court’s approval of the MOU. Magten’s appeal of the confirmation order and the order approving the MOU have been consolidated. In March 2005 we moved to dismiss both appeals on equitable mootness grounds. While we cannot currently predict the impact or resolution of the appeals and our motion to dismiss, we intend to vigorously prosecute our dismissal motion and defend against the appeals as noted. The parties are scheduled to conduct a mediation of all of the outstanding disputes between Magten and NorthWestern on May 12, 2005.

the appeal is finally decided. (In addition to the adversary proceeding filed by Magten and Law Debenture, the plaintiffs in the class action lawsuit entitled McGreevey, et al v. Montana Power Company, et al received approval in our bankruptcy case to initiate similar adversary proceedings. Under the terms of the settlement with the plaintiffs in the McGreevey case discussed below, they would not file such proceeding.) On April 19, 2004, Magten also filed a complaint against certain former and current officers of CFB in U.S. District Court in Montana, seeking compensatory and punitive damages for breaches of fiduciary duties by such officers. Those officers have requested CFB to indemnify them for their legal fees and costs in defending against the lawsuit and any settlement and/or judgment in such lawsuit. On February 9, 2005 we agreed to settlement terms with Magten and Law Debenture to release all claims, including Magten and Law Debenture’s fraudulent conveyance action pending against each other for Magten and Law Debenture receiving the distribution of new common stock and warrants from Class 8(b) in the same amounts as if they had voted to accept the Plan and a distribution from Class 9 of new common stock in the amount of approximately $17.4 million. Prior to seeking approval from the Bankruptcy Court, certain major shareholders and the Plan Committee objected to the settlement on both its economic terms and asserting that the structure of the settlement violated the Plan. After reviewing the objections and undertaking our own analysis of the potential Plan violation, we informed Magten and Law Debenture as well as the Plan Committee and the objecting major shareholders that we would not proceed with the settlement. Magten and Law Debenture filed a motion with our Bankruptcy Court seeking approval of the settlement. On March 10, 2005 the Bankruptcy Court entered an order denying the motion filed by Magten and Law Debenture. Magten and Law Debenture have appealed that order. At this time, we cannot predict the impact or resolution of any of these lawsuits, the appeal or reasonably estimate a range of possible loss, which could be material. An adverse resolution of these lawsuits and/or appeal could harm our business and have a material adverse impact on our financial condition. We intend to vigorously defend against the adversary proceeding, appeal and any subsequently filed similar litigation. The plaintiffs’ claims with respect to the QUIPs Litigation will be treated as general unsecured, or Class 9, claims and will be satisfied out of the share reserve that we established with respect to the Class 9 disputed claims reserve under the plan of reorganization.

directors and officers liability insurance carriers) will be established. The settlement is subject to the occurrence of several conditions, including approval of the proposed settlement by the Bankruptcy Court in our bankruptcy proceeding, and approval of the proposed settlement by the Federal District Court for the District of Montana, where the class actions are pending. On April 29, 2005, the Federal District Court in Montana denied the plaintiffs motion for preliminary approval of the proposed settlement without prejudice and ordered the parties to work out their differences and present a global settlement agreement in 60 days; otherwise, the court will order the parties to resume trial preparations. In the event the parties do not reach a global settlement agreement, a settlement is not approved or it does not take effect for any other reason, we intend to vigorously defend against this lawsuit. If we are unsuccessful in defending against this class action lawsuit, the plaintiffs’ litigation claims would be subordinated to our other debt under our Plan, and such claims would be treated as securities, or Class 14, claims under our plan of reorganization, and would be entitled to no recovery against NorthWestern under our Plan. Claims by our current and former officers and directors (and the former officers and directors of The Montana Power Company) for indemnification for these proceedings would be channeled into the Directors and Officers Trust established by the Plan. The plaintiffs could elect to proceed directly against CFB and the assets owned by such entity, which as of December 31, 2004 were not material to our operations or financial position. 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 this lawsuit may harm our business and have a material adverse impact on our financial condition.

policy. Any judgment against us in excess of policy limits would be treated as unsecured general, or Class 9, claims and would be satisfied out of the share reserve that we have established.

Delaware	46-0172280
(State of Incorporation)	IRS Employer Identification No.
125 South Dakota Avenue Sioux Falls, South Dakota 57104
(Address of principal office)

		Page
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS			3
PART I. FINANCIAL INFORMATION			6
Item 1.	Financial Statements (Unaudited)		6
	Consolidated Balance Sheets—March 31, 2005 and December 31, 2004		6
	Consolidated Statements of Income—Three Months Ended March 31, 2005 and 2004		7
	Consolidated Statements of Cash Flows—Three Months Ended March 31, 2005 and 2004		8
	Notes to Consolidated Financial Statements		9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		25
Item 3.	Quantitative and Qualitative Disclosure About Market Risk		48
Item 4.	Controls and Procedures		49
PART II. OTHER INFORMATION			50
Item 1.	Legal Proceedings		50
Item 6.	Exhibits		58
SIGNATURES			59

	Successor Company				Predecessor Company
	March 31,				March 31,
	2005				2004
OPERATING REVENUES		$	335,093			$	305,627
COST OF SALES		190,381				172,918
GROSS MARGIN		144,712				132,709
OPERATING EXPENSES
Operating, general and administrative		56,655				56,805
Property and other taxes		18,205				17,903
Depreciation		18,690				18,176
Reorganization items		3,363				6,830
TOTAL OPERATING EXPENSES		96,913				99,714
OPERATING INCOME		47,799				32,995
Interest Expense (contractual interest of $46,696 for the three months ended 3/31/04)		(16,342		)		(21,775		)
Investment Income and Other		607				701
Income From Continuing Operations Before Income Taxes		32,064				11,921
(Provision) Benefit for Income Taxes		(13,670		)		138
Income From Continuing Operations		18,394				12,059
Discontinued Operations, Net of Taxes		524				4,922
Net Income		$	18,918			$	16,981
Average Common Shares Outstanding		35,611
Basic Earnings per Average Common Share
Continuing operations		$	0.52
Discontinued operations		0.01
Basic		$	0.53
Diluted Earnings per Average Common Share
Continuing operations		$	0.52
Discontinued operations		0.01
Diluted		$	0.53
Dividends Declared per Average Common Share		$	0.22

	NORTHWESTERN CORPORATION
Date: May 10, 2005	By:	/s/ BRIAN B. BIRD
		Brian B. Bird
		Chief Financial Officer
		Duly Authorized Officer and Principal Financial Officer

Exhibit Number		Description
*10.1		Debtor’s Motion for Order Approving Stipulation Among Debtor, Clark Fork and Blackfoot, LLC, Atlantic Richfield Company, United States, State of Montana, and the Confederated Salish and Kootenai Tribes.
*10.2		Confidential Settlement Agreement and Mutual Release between Atlantic Richfield Company, NorthWestern Corporation and Clark Fork and Blackfoot, LLC.
*31.1		Certification of principal executive officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
*31.2		Certification of chief financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*32.1		Certification of principal executive officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*32.2		Certification of chief financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.