August 6, 2003 Update

G AN
M OR
J OSEPH

Northwestern Corporation
Instrument
Debt:
$914 million mtg bonds and debt secured by mtg bonds
( CCC /B3)
$250 million 7 7/8% sr notes due 3/15/07 (CC/Ca)

$470 million 8 % sr notes due 3/15/12 (CC/Ca)

$105 million 6.95% sr debentures due 11/15/28
(CC/Ca)
$46.8 mill other unsecured
Trust Preferreds (all $25 face)*:
1.3 mill shs NWPS Capital Financing I 8 1/8 % due25
2.2 mill shs Northwestern Capital Financing I 7.20%
4.27 mill shs Northwestern Cap Financing III 8.25% due
31
4.44 mill shs Northwest Cap Trust III 8.1% due 32
2.6 mill shs Montana Power Capital I 8.45% due 36

HIGH YIELD RESEARCH

37.7 mill shs common

Price

YTM

Opinion

72 5/8 - 73

18.6% 18.5%
14.6% 14.3%
10.5% 10.4%

Attractive

72-73
68.5-69.5

$4.10
$3.95
$4.98

na
na
na

$4.00
$7.05

na
na

Attractive
Attractive

$0.74

*Dividend has been suspended

Opinion
Our accompanying valuation analysis suggests that the unsecured bonds are
most likely covered or close to covered by the underlying enterprise value and
that a meaningful proportion of that value is likely to be ultimately realized in
equity. We think the reasonable range of coverage for unsecured obligations is
approximately 85% - 115%. We would recommend purchase of unsecured debt
in the low 70s or below on that basis and the expectation that the value will be
realized through some form of debt restructuring by late 2004 or early 2005. At
these prices, one creates the utility business at about 6x EBITDA using our midrange assumptions versus the 7x-8x that we believe is appropriate for a fully
regulated transmission and distribution utility. While we believe Chapter 11 is
likely this year or next, for the moment we are limiting the analysis to assessing
values and claims and not performing a full-fledged bankruptcy recovery analysis
(not accounting, for example, for exit capital structure and trading levels of new
securities, cash build in bankruptcy or value that may be given to the trust
preferreds).

Dan Travers
212-218-3701
DTRAVERS@MORGANJOSEPH.COM

The Disclosure section may be found on the last page of this report.

Background
Northwestern Corporation owns and operates electric and natural gas utility businesses in
Montana, South Dakota and Nebraska.
The company is attempting to divest its
telecommunications and its heating, ventilation and air-conditioning businesses, both of which it
built up over recent years in a costly and disastrous diversification effort. Northwestern has
generated and distributed electricity in South Dakota and has distributed natural gas in South
Dakota and Nebraska since 1923. In February 2002, the company acquired the electric and
natural gas transmission and distribution business of The Montana Power Company for $478
million cash and the assumption of $511 million of debt and trust preferreds. This acquisition
effectively tripled the size of the company's utility business. From February 15, 2002 to
November 15, 2002, the Montana utility businesses were conducted through a subsidiary. On
November 15, 2002, the utility assets were transferred to Northwestern Corporation, which
assumed the associated debt and trust preferreds. The company has approximately 598,000
utility customers.
Financial Restructuring / Liquidity
Companys Intention to Reduce Debt
The company has stated that it needs to substantially reduce debt and further stated that
proceeds from contemplated asset sales will be insufficient to accomplish the necessary debt
reduction. Unless the company can sell new equity (which is extremely unlikely, in our view), the
company will attempt to exchange its trust preferreds and a portion of its unsecured bonds into
common and/or preferred equity. Management has said it would like to take $1 billion of
debt/trust preferreds off its books, which would amount to all of the trust preferreds and about
70% of the unsecured bonds. The company has stated that it cannot attempt such exchanges
until next year, after it files its 2003 10K, because it cannot file an S-4 until it has three years of
clean financials (which it does not for reasons related to the fact that its former auditor was Arthur
Anderson). An ongoing SEC investigation may also hamper its efforts. We note that other
companies audited by Arthur Anderson have done exchanges so we are not certain that the
company could not attempt one sooner.
In order to attempt an exchange of bonds and trust prefereds into equity, NOR must amend its
Certificate of Incorporation to increase the number of authorized shares. Presently 50 million
shares are authorized and 37.7 million are outstanding leaving an insufficient 12.3 million
shares with which to offer in an exchange. The company is seeking to quintuple the number of
authorized shares to 250 million. Additionally, the company seeks authorization to issue up to 50
million new preferred shares. These matters will be voted upon at the companys annual meeting
on August 26. Fifty percent of outstanding shares are required to amend the Certificate of
Incorporation.
Liquidity
NORs liquidity is precarious and may well get worse through the balance of the year. While the
company has no significant unsecured debt maturity until December 2006 (we assume the
modest first mortgage debt maturing in 2005 will be refinanced so long as the company is not in
Chapter 11), the company has effectively no trade credit, no bank availability, EBITDA which
barely covers interest and maintenance capital expenditures, increasing seasonal working capital
needs and depleting cash balances. Restricted cash, which we believe is largely used to support
energy purchases, was $45.3 million at March 31. Unrestricted cash, which was $95 million as of
April 7, 2003, has declined significantly since then.

Northwestern Corporation

August 6, 2003

Increasing working capital needs probably account for a substantial amount of the decrease in
cash since quarter end. Some of the decrease is due to increased purchased power
requirements to meet summer needs and will reverse when the weather cools. On balance,
however, we guess working capital needs will increase for most of the year and probably peak in
November. Gas in storage was at a seasonal low of around zero at March 31 and since then the
company purchased 2.5 bcf for storage. Between now through the end of October the company
needs to purchase an additional 3.5 bcf for storage. We believe the company is paying
substantially below spot, though we do not know the price. Assuming for illustrative purposes the
company pays $4.50/mcf on average for gas, gas purchases would amount to a $27 million cash
use. Additionally, we understand the company generally has to pay for power 30 60 days in
advance which means its purchase requirements for winter peak usage (Montana electricity
usage peaks in the winter) will probably peak in November, approximately the same time that that
maximum capital is tied up in stored gas. NOR is in discussions with Montana officials regarding
the possibility of the State purchasing energy or providing credit support for the companys
purchases. The fact that these discussions are taking place suggests to us that the companys
ability to operate outside of Chapter 11 near-term is an open question. We also note that the
MPSC and the Montana legislature have been taking measures to educate themselves as to the
consequences of a NOR bankruptcy.
Additional strains on liquidity include the following: first, the company did not pay $24 million of its
annual $48 million of Montana property taxes due earlier this year. It intends to pay the balance
over the remainder of the year. Second, an adverse decision at the MPSC recently denied the
company a recovery of purchased gas costs incurred in the amount of about $6 million. Finally, it
is not clear to us that EBITDA is covering interest and capital expenditures at present because of
excessive costs being incurred at the corporate level. For example, the run-rate for NORs
professional fees, we believe, is close to $30 million annually.
Options
NORs options to improve liquidity are limited. One option is to obtain an accounts receivable
facility. The company is seeking one for around $50 million from GECC and expects to have an
answer within a few weeks. A second option is asset sale proceeds (see discussion below).
Third, as mentioned, the state of Montana might support the company in some form. Finally, the
company has capacity under its utility mortgage indentures to issue several hundred million
dollars of mortgage bonds (though bank group consent and regulatory approval would be
required).
Chapter 11 Considerations
1. The company has a $30 million interest payment on September 15 and we think that this
could be a bankruptcy trigger absent obtaining an accounts receivables facility or sale of
Expanets before then (see next page). By September 15, the company should have a good
idea if it has the resources to make its winter gas and power purchases. Management in fact
has said the company ought not pay the coupon if, at that time, Chapter 11 looks like the
course the company will eventually take.
2. Obtaining an accounts receivable facility or consummating the sale of Expanets would give
the company breathing room and would increase the likelihood that the company would carry
through with its intention to attempt exchange offers in the Spring of next year.
3. If the company is unsuccessful in its exchange efforts, it is highly probable it will file Chapter
11, in our opinion (presuming it does not file prior to attempting exchanges).
4. The company has a variety of things to gain by filing Chapter 11 and, as we see it, not much
to lose. As a monopoly regulated utility, Chapter 11 would not harm NORs business. As
discussed below, management believes it can create value for the company by modifying or
rejecting its Qualified Facility (QF) contracts and has stated that if it filed Chapter 11 they

Northwestern Corporation

August 6, 2003

would be rejected first thing. The company would obtain trade credit, lower collateral
requirements for purchasing gas and power and cease having to operate hand-to-mouth. It
could clean up its capital structure easily whereas out-of-court exchanges into equity of both
bonds and five issues of trust preferreds strikes us as difficult to accomplish. The company
would rid itself of a number of lawsuits, potential lawsuits and contingent liabilities. The
common appears to us to have no value irrespective of whether the company files. Lazard
has been hired as NORs restructuring advisor and, we note, many think Lazard leans toward
advising its restructuring clients to file Chapter 11.
5. Management does not appear to have a strong incentive to defend the equity. Gary Drook,
the CEO since January 2003, owns a total of 5,610 shares. The Board granted him 233,000
shares of restricted stock (also described as options in company filings), and additional
options to acquire 339,000 shares, all of which are based on a stock price of $4.90 (the stock
is at $0.92 today) and which vest in annual installments over three years beginning one year
after his appointment. His compensation includes a base salary of $565,000, an up front cash
payment of $600,000 which must be repaid in full should he serve less than 12 months and
$250,000 of which must be repaid if he serves less than two years. Mr. Drook also has use of
NORs corporate jet to commute from his Florida home to the companys office in Sioux Falls,
S.D. On balance, this arrangement does not strike us as creating an enormous incentive to
preserve the equity.
Asset Sales
NOR is attempting to sell all of its non-utility businesses plus its Colstrip transmission lines. The
non-utility businesses were purchased and grown in pursuit of an ill-conceived diversification
strategy. These businesses are difficult to value and the numbers we discuss are guesswork
based on scraps of information. We guess that sale proceeds in total will be in the range of $150
million - $300 million.
1. Expanets: Expanets sells networked communications and data services to small and midsized businesses.
It was formed by Northwestern in 1997 and acquired 26
telecommunications services companies by the end of 1999. In 2000, it acquired the Growth
and Emerging Markets division of Lucents Enterprise Network Group, which was the
divisions primary distribution arm for small and mid-sized businesses in the U.S.
Subsequently, Lucent contributed its Enterprise Network business to Avaya. Expanets
became and continues to be Avayas largest dealer, and Avaya is Expanets primary vendor
for products, maintenance and technical support services sold to Expanets customers.
Expanets last year experienced a software and internal controls disaster with its EXPERTS
computer and software system whereby the company lost control of its order entry, billing, and
collection functions. This in turn has led to customer dissatisfaction and greater than
anticipated erosion of the customer base. Northwestern is not providing any further financial
support to Expanets. Expanets had $710 million of revenues in 2002 and $48 million of
EBITDA. In 1Q03, EBITDA was $4.5 million on $169 million of revenue, suggesting a
possible stabilization of the situation. Expanets is presently profitable and cash flow positive,
according to the company. In mid-June 2003 Expanets obtained a two-year $25 million
secured credit facility from Congress Financial that is not supported by Northwestern.
Some insights as to the possible value of Expanets might be gleaned from information
regarding costs presently being incurred that may largely go away in the hands of a new
owner. Expanets is paying Avaya, we are told, $7 million per month to maintain ETAC the
Expanets Technical Assistance Center. The company says that an acquirer with its own
Technical Assistance Center could perform ETACs function with its own Center and save a
substantial portion of a cost that is running at an $84 million annual rate. Similarly, the
company has gotten its EXPERT system functioning, though it requires more than 70 people

Northwestern Corporation

August 6, 2003

to back it up. Presumably, the company eventually will have a fully functioning system that
requires far less personnel to make it work and realize substantial savings thereby.
Our guess is that Expanets will sell for $120 million - $180 million (net of debt) based on
conversations with industry sources, an apparent stabilization of the companys software and
controls problem, its return to profitability and positive cash flow, however modest, and
plausible reasons to think there could be substantial value in the company created through the
reduction of excessive costs. NOR expects a sale by year-end.
2. Blue-Dot: Blue Dot is a heating, ventilation and air-conditioning company founded by NOR in
1997 with a strategy to form a national HVAC company through roll-ups of local firms. The
strategy failed. Northwestern ceased supporting Blue Dot earlier this year. Blue Dot had
revenues in 2002 of $472 million. The company has identified 44 locations as core locations.
In March and April 2002 it sold 16 noncore locations for a total of $1.8 million. Blue Dot is in
default under its credit agreement and under various payment obligations to its minority
stockholders. In addition to $20 million of debt, Blue Dot has share repurchase and earn-out
obligations up to a maximum of $37.4 million. Our guess is that the net value in Blue Dot for
Northwestern will be between $0 - $30 million.
3. Montana First Megawatts: this is a partially built 260 megawatt combined cycle gas-fired plant
(CCGF) in Montana. The company has spent $78.4 million on the project and has
discontinued it for lack of funds. The project has been written down to around $35 million,
which is the companys estimate of scrap value. The total cost of completion, including
amounts spent, is $180 million, according to the company. We note that the total cost
estimate is $692,000 per megawatt, versus the widely quoted generic figures for CCGF plants
of $500,000 -$550,000 per megawatt. MFM has a 10 year contract to sell roughly one-half its
output to NOR, though it is subject to various approvals and has not been submitted to the
Montana PSC. The contract is simply an unapproved contract between a parent and its
subsidiary with no third-party interests, as far as we can tell, and thus we do not ascribe any
value to the contract at this point. We note the cost to complete the project is around
$390,000/megawatt. We believe there are interested buyers for the project. Our guess is that
the project is worth $35 million - $50 million.
4. Colstrip Transmission Assets: Northwestern is the successor to an asset sale agreement
originally entered into by The Montana Power Company with PPL Montana, a subsidiary of
PPL Corporation, under which PPL agreed as part of a larger transaction to purchase
Montana Powers portion of the 500 kilovolt transmission system associated with Colstrip units
1, 2 and 3 for $97.1 million. The sale was never consummated and NOR commenced suit
against PPL in September 2002 to enforce the sale. The suit is in the early stages of
litigation; a hearing on NORs summary judgement motion will be heard in August. We
believe the asset generates EBITDA in the $6 million - $8 million range. The company has
expressed the view that the asset is worth $55 million - $100 million. This asset is included in
the utility results and thus its sale would not be additive to value but would provide liquidity.
5. Cornerstone Propane receivables: Effective November 1, 2002, Northwestern relinquished all
its direct and indirect equity interests in Cornerstone Propane Partners, L.P. and Cornerstone
Propane, L.P. (collectively, Cornerstone) but still holds Cornerstone debt and other
obligations. The obligations include short-term debt, receivables and letters of credit, some of
which are senior and some subordinated, though this is not laid out clearly in company filings.
Management summarizes the exposure as a $27 million receivable worth 70 - 100
cents/dollar. NOR carries its Cornerstone exposure at $21.1 million.

Northwestern Corporation

August 6, 2003

6. One Call Locators, Ltd: This is a pipe locating company acquired by NOR with the Montana
Power assets and sold on July 1, 2003 to ELM Enterprises, LLC, of Peoria, Illinois for $7
million cash and a $4.2 million 3-year amortizing subordinated note.
Qualified Facility (QF) Contracts
Northwestern has around a dozen QF purchase power contracts (contracts with Qualified
Facilities as per the Public Utility Regulatory Policy Act) that it inherited with the Montana Power
assets. NOR has indicated that the single biggest action it can take to create value for the
company is to renegotiate these contracts, and stated that they would be rejected if the company
filed Chapter 11. The aggregate amount NOR must pay on these contracts through 2029 is $1.9
billion, while the amount it will be able to collect to cover this cost is $1.5 billion. The PV of the
$400 million built-in loss at the date of NORs acquisition discounted at 8.75% was $134.3 million.
Currently the negative cash flow resulting from these contracts is around $6 million annually,
according to the company, though the amount will increase over time because the cost of power
under the contracts rises while NORs rate recovery for these contracts remains flat. Two projects
account for the bulk of the economics. The price of power under the contracts ranges from $65 to
$138 per megawatt hour through 2029.
It is not obvious to us that the company can create value through rejecting the contracts in
bankruptcy. The QFs would have a claim for the PV of their lost profits. If unsecured claims are
covered by underlying value, as the company believes, then the QFs claims would be made
whole. The claim amount, it seems to us, would be roughly equal to the savings the company
would get through rejecting the contracts. For example, if we use the $1.1 billion suggested by
the company as to where the company could buy (or the QFs sell) the same power today, the
company would have undiscounted savings through 2029 of $800 million and the QFs would have
undiscounted lost profits of $800 million.
It is possible that the company threatening to reject the contracts amounts to posturing to gain
leverage for contract renegotiation with its QF counterparties. We also recognize that this
analysis is simplistic and we do not reject the possibility that there is more to this than we are able
to glean presently.
Possible actions by regulatory bodies complicate the analysis. It is not clear how the MPSC
would react to contract rejection given that it authorized $1.5 billion of rate for the QF contracts.
We would guess it would not be bound to leave revenue in place that was specifically given for
these contracts if they are rejected. Second, FERC has asserted authority on the issue of
rejection of purchase power contracts in bankruptcy and conceivably could do so here.
We incorporate the QF situation into our analysis two ways. First, we look at it assuming the
contracts are not rejected. We start with the $134.3 million PV of the built-in loss under the
contracts. Because a portion of this quasi-liability is captured in a valuation based on current
EBITDA, we subtract that amount for the purposes of calculating incremental liability. The annual
loss under the contracts presently is around $6 million, according to the company, which we
capitalize at 7.5x or $45 million. Thus the incremental liability not captured in our EBITDA
valuation is about $90 million. This amount represents a hidden liability that we subtract from
enterprise value. Alternatively, we can look at it assuming that the contracts are rejected. Here
we get into the situation described above where the savings to the company, in theory, ought to
equal the lost profit claim of the QFs.

Northwestern Corporation

August 6, 2003

Pro Forma 2002

As if Montana Power utility assets
aquired 1/1/02
Operating Revenues

Actual Pro Forma

Montana Montana
Electric
Electric
442.5
485.6

South
Dakota
Electric
92.5

Actual
Pro Forma Actual
Montana Montana Other
Gas
Gas
Gas
120.1
136.2
120.2

Parent Company
Total
Electric

Natural
Gas

578.1

256.4

Total Elec
& Nat Gas

Total
Parent

All Other

834.5

33.9

868.3

Depreciation
35.4
39.1
13.4
8.3
8.9
4.3
52.5
13.1
65.6
3.0
68.6
Amort of goodwill + other intang.
35.7
35.7
Operating Income (loss)
83.2
95.9
27.9
30.0
36.2
3.9
123.8
40.1
163.9
(71.4)
92.5
Pro Forma EBITDA
118.6
135.0
41.3
38.3
45.1
8.1
176.3
53.2
229.5
(32.7)
196.8
Note: Montana assets reflected in actual financials from Feb 1, 2002. January is a peak electricity usage month in Montana. Pro forma numbers derived from Feb-March '02 actuals

2002
Operating Revenues
Cost of Sales
Gross Margin
SGA
Goodwill and other impairment chgs
Depreciation
Amort of goodwill + other intang.
Operating Income (loss)
Interest expense
Investment income and other
Income bf taxes and min. interest
Benefit (provision) for taxes
Inocme bf minority interests
EBITDA

1Q03
Operating Revenues
Cost of Sales
Gross Margin
SGA
Goodwill and other impairment chgs
Depreciation
Amort of goodwill + other intang.
Operating Income (loss)
Interest expense

Montana
Electric
442.5
182.0
260.5
141.9

South
Dakota
Electric
92.5
23.7
68.8
27.5

Montana
Gas
120.1
38.9
81.2
42.9

Other
Gas
120.2
94.2
26.0
17.9

35.4

13.4

8.3

4.3

83.2

27.9

30.0

118.6

41.3

38.3

Montana
Electric

South
Dakota
Electric

Parent Company
Total
Electric

Natural
Gas

535.0
205.6
329.4
169.4

240.3
133.1
107.2
60.8

775.4
338.7
436.6
230.2

3.9

48.9
111.1

12.6
33.9

8.1

160.0

46.4

Other
Gas

Total
Electric

1Q02
Operating Revenues
Cost of Sales
Gross Margin
SGA
Goodwill and other impairment chgs
Depreciation
Amort of goodwill + other intang.
Operating Income (loss)
Interest expense
Investment income and other
Income bf taxes and min. interest
Benefit (provision) for taxes
Inocme bf minority interests
EBITDA

Actual Pro Forma

Montana Montana
Electric
Electric
73.4
116.5
41.6
26.2
47.2
74.9
33.6
22.4

All Other

Total
Parent

Communications

HVAC

61.4
145.0
(81.1)
2.7
66.6
(10.2)
56.4

33.9
5.5
28.4
61.1
35.7
3.0
(71.4)
(17.0)
(8.2)
(96.6)
42.8
(53.8)

809.2
344.2
465.0
291.3
35.7
64.4
73.6
(98.1)
(5.5)
(30.1)
32.6
2.6

710.5
444.5
265.9
314.0
288.7
26.2
28.8
(391.9)
(30.9)
(422.8)
(22.8)
(445.6)

471.8
306.7
165.2
166.3
301.7
8.0
0.6
(311.4)
(0.5)
0.1
(311.7)
(9.1)
(320.8)

206.4

(32.7)

173.7

(48.1)

(1.1)

Consolidated
Total

1,991.5
1,095.4
896.1
771.6
626.1
98.6
29.4
(629.7)
(129.5)
(5.4)
(764.6)
0.8
(763.8)
124.5

Parent Company
Montana
Gas

Natural
Gas

South
Dakota
Electric
22.0

6.5

Total Elec
& Nat Gas

All Other

Total
Parent

168.2
77.2
91.1
45.8

117.9
77.3
40.7
15.9

286.2
154.4
131.7
61.7

10.5
0.7
9.8
18.2

13.6

3.4

17.0

31.7

21.4

53.0
(26.2)

0.7
0.0
(9.2)
(10.4)

296.6
155.2
141.5
79.9
17.7
43.8
(36.5)

0.1
26.9
(7.0)
19.9

(0.3)
(19.9)
2.2
(17.7)

24.8

70.0

(8.5)

Other
Gas
46.2
36.5
9.7
3.5

Total
Electric

Investment income and other

Income bf taxes and min. interest
Benefit (provision) for taxes
Inocme bf minority interests
EBITDA

Total Elec
& Nat Gas

45.3

Actual
Pro Forma
Montana Montana
Gas
Gas
32.1
48.2
11.5
17.3
20.6
30.9
6.9
10

97.7
65.0
32.7
34.1
0.0
(1.4)
(0.3)

(0.3)
7.0
(4.8)
2.2

0.1
(1.7)
(0.3)
(2.0)

0.1
20.3
(0.3)
20.0

61.5

4.5

(1.4)

64.6

Parent Company
Natural
Gas

95.4

Total Elec
& Nat Gas

Total
Parent

All Other

28.9

78.3
48.0
30.3
10.4

173.7
79.6
94.1
39.3

8.7
4.8
3.9
7.2
0.7
0.0
(4.1)
(4.5)
0.4
(8.2)

3.2

1.1

1.7

0.8

10.6

1.9

12.5

17.5

30.2

6.8

12.7

18.9

5.3

24.3

18.0

42.3

24.9

41.3

10.0

13.8

20.6

6.1

34.9

19.9

54.8

1Q02 numbers reflect acquisition of Montana Power assets as of February 1, 2002

Consolidated
Total

3.6
6.0
(5.2)
(7.4)
27.3
0.3
15.0
4.7
19.7

11.1

168.8
95.2
73.6
69.1

HVAC

563.2
315.4
247.8
183.2
21.3
6.0
37.3
(44.3)

7.4

Source: Company reports and Morgan Joseph estimates

Communications

182.4
84.4
98.0
46.5
13.2
38.2
(4.5)
0.4
34.1
34.1
51.4

Northwestern Corporation

August 6, 2003

Debt Table
Note: utility assets formerly owned by The Montana Power Company were purchased by an NOR subsidiary and were subsequently
transferred to NOR. Montana Power's bond obligations moved with utility assets and are now the obligations of NOR. There is no
separate utility subsidiary. References to Montana Power and South Dakota are to the name of the original issuer, not the current obligor.

Northwestern Corp
Northwestern Corp
Northwestern Corp

at 3/31/03
Outstdg Coupon
250.0
7.875%
105.0
6.950%
470.0
8.750%

Maturity
3/15/07
11/15/18
3/15/12

Mortgage bonds
South Dakota
South Dakota
Montana Power Co.
Montana Power Co.
Montana Power Co.
Montana Power Co.

60.0
55.0
150.0
0.4
1.4
5.4

7.100%
7.000%
7.300%
8.250%
8.950%
7.000%

8/1/05
8/15/23
12/1/06
2007
2022
3/1/05

Bank credit facility (1)

2003

2004

Maturity Schedule
2005
2006

2007
Thereafter
250.0
105.0
470.0

60.0
55.0
150.0
0.4
1.4
5.4
2.9

3.9

3.9

378.3

Annual
Interest
19.7
7.3
41.1
4.3
3.9
11.0
0.0
0.1
0.4

389.0

8.750%

12/1/06

Pollution Control Obligations

Montana
Montana
South Dakota
South Dakota

34.0

90.2
80.0
7.6
13.8

6.125%
5.900%
5.850%
5.900%

2023
2024
2025
2026

90.2
80.0
7.6
13.8

Montana Secured MTNs (2)

13.0

7.250%

2008

13.0

5.5
4.7
0.4
0.8
0.9

15.0
20.0
5.0

7.070%
7.875%
7.960%

2006
2026
12/21/26

20.0
5.0

1.1
1.6
0.4

Mont. Nat. Gas Transition Bonds

48.3
Blue dot credit facility (4)
19.9
Expanets credit facility (5)
25.0
Other term debt
6.8
Capital leases
20.7
Total Debt, adjusted
1,851.5

6.200%

Montana Unsecured MTNs (3)

Obligations of Northwestern

15.0

1.8
19.9

4.1

4.7

4.7

5.2

27.7

3.0

1.0
6.6

1.9
6.0

25.0
1.1
3.6

1.0
1.8

1.0
0.9

0.9
1.8

0.5
1.7

12.3

15.9

103.7

550.8

257.5

891.4

2005
8.0% (guess)
8.0% (guess)

1,806.6

Total:

Maturities (7)

(1 )Libor +5.75%, min Libor of 3%, (2) (3) Issued by Montana Power, now NOR obligation, (4) non-recourse to NOR,
(5) refinanced June '03; non-recourse to NOR (6) $35 mill forgiven by Avaya in '03, (7) Exclues non-recourse debt

Capital Structure

Sources/Uses (Parent)

Mortgage debt*
Capital leases

914.1
20.7

Cash at 12/31/02

Total secured debt

Northwestern unsecured bonds
Other unsecured
Other
Unsecured debt

934.8
825.0
40.0
6.8
871.8

Utility EBITDA
"Other" at Parent
Interest
Utility Capx
Unregulated biz capx

Total recourse debt

Trust preferred**
Recourse debt + trust pref

1,806.6
387.8
2,194.3

Unrestricted cash as of 4/7/03***

95.0
1,711.6
Net debt
Shares o/s
37.7
Price/share
0.74
Equity mkt capitalization
27.9
*includes bank facility, PCBs and other debt
backed by 1st mortgage bonds
**Includes $370.3 mill face plus accrued
***NOR had restricted cash of $45.4 mill at 3/31/02

Source: Company reports and Morgan Joseph estimates

Working capital
Subtotal
Net cash from bank refinancing
Debt maturities
TRUP dividends
Total before asset sales
Asset sales:
Blue Dot
Expanets
Montana First Megawatts
Cornerstone receivable
Locators, other
Colstrip Transmission assets
Total, asset sales
Liquidity, end of period

2003 E

2004E

Notes:

46

200

236
(35)
(142)
(60)
-

242
(25)
(140)
(60)
-

(90)
(46)
86
(27)
13

(5)
212
(16)
196

10
150

35

20
7
187
200

3
60
98
294

$95 mill at April 7 '03

assuming asset
sale proceeds

Range guess
$0 - $30 million
$100 mill -$180 mill
$35 mill - $55 mill
$15 mill - $25 mill
$7 mill - $11.2 mill
$55 mill - $97 mill

142.4

Northwestern Corporation

August 6, 2003

EBITDA Model
2002
Utility EBITDA bf ann. cost improvement (1)
Increase in loss on QF contracts
Assumed utility biz cost improvement

Pro forma
2002

206

230

2003

2004

2005

232

239
(1)
4

244
(1)

Utility EBITDA
230
236
242
243
EBITDA, other (parent only) (2)
(33)
(33)
(35)
(25)
(10)
Parent company EBITDA
173
197
201
217
233
(1) assumes 1% organic EBITDA growth
(2) includes various small business, Montana First Megawatts project, and unallocated corporate,advisors
Company cash flow forecast from 1Q03 10Q:
For utility operations only
Cash flows from operating activities
Cash flows from investing activities
Cash flows provided (used) in financing activities
Increase (decrease) in cash and equiv.

2003
(20.0)
(60.0)
32.0
(48.0)

2004
80.0
(60.0)
(39.0)
(19.0)

Backing out utility EBITDA from company forecast of cash flow

from utility operations:
2003
2004
U tility EBITDA
205.0
225.0
Interest
(140.0)
(140.0)
W orking capital
(85.0)
(5.0)
O ther
Cash flow from operating activities (utility only)
(20.0)
80.0
Valuation
Parent EV:
Parent
EBITDA

EV parent (utility business plus "other")

QF liability not captured in EBITDA
Adj. EV parent (utility business plus "other")
Assets for sale: (4)
Equity in Expanets
Equity in Blue Dot
Equity in Montana First Megawatts
Cornerstone Propane receivable
Locators
Total value, assets for sale
Cash (1)
Excess working capital (2)
Total Value
Secured debt
M inority interest
Value for unsecured
Realized contingent liabilities
Unsecured debt - parent
Unsecured claims - parent
Value for unsecured/unsecured claim s
Value for Trups
Trup face amount
Value for Trups % Face
Value for Trups / share

210
220
230
240

6.5x
1,365
1,430
1,495
1,560

7.0x
1,470
1,540
1,610
1,680

7.5x
1,575
1,650
1,725
1,800

8.0x
1,680
1,760
1,840
1,920

8.5x
1,785
1,870
1,955
2,040

1,575
(90)
1,485

1,650
(90)
1,560

1,700
(90)
1,610

1,750
(90)
1,660

1,850
(90)
1,760

1,900
(90)
1,810

100
30
15
9
154

125
35
20
9
189

135
35
20
9
199

150
5
40
20
9
224

175
10
45
20
9
259

185
20
55
25
9
294

50

50

50

50

50

50

1,689
935
9
745

1,799
935
9
855

1,859
935
9
915

1,934
935
9
990

2,069
935
9
1,125

2,154
935
9
1,210

872
872
85.5%

872
872
98.1%

872
872
105.0%
43
370
12%
2.9

872
872
113.6%
118
370
32%
8.0

872
872
129.1%
253
370
68%
17.1

872
872
138.8%
338
370
91%
22.8

Source: Company reports and Morgan Joseph Estimates

(1) No incremental value given to the $95 mill cash as of April since this represents a seasonal peak for cash and is a
necessary, if not low, amount necessary to run the business; (2) W ith the loss of trade credit, payables are unnaturally low;
when trade credit returns to normal (via Chapter 11 or otherwise), this amount of cash would flow back into the company;
(3) This item can be thought of in two ways: one, as the PV of the built-in loss in the QF contracts that is not captured in
current EBITDA-based valuation because the built-in loss is growing over time, or two, a lease rejection claim in Ch. 11.
The amount is a placeholder figure in any case; (4) Colstrip transmission asset is part of the utility business so not
counted as incremental value.

Northwestern Corporation

August 6, 2003

Creation Multiples 1: Low-end for asset sale proceeds

Secured debt
Minority interest
QF liability not captured in EBITDA valuation
Unsecured debt, face
Price - unsecured claim
At above price for unsecured, create company at:

935
9

935
9

935
9

935
9

935
9

935
9

90
872
60%
1,521

90
872
65%
1,569

90
872
70%
1,617

90
872
75%
1,665

90
872
80%
1,713

90
872
100%
1,906

(100)
(15)
(35)
(150)
(50)

(100)
(15)
(35)
(150)
(50)

(100)
(15)
(35)
(150)
(50)

(100)
(15)
(35)
(150)
(50)

(100)
(15)
(35)
(150)
(50)

(100)
(15)
(35)
(150)
(50)

1,321
6.3x
6.0x
5.7x
5.5x

1,369
6.5x
6.2x
6.0x
5.7x

1,417
6.7x
6.4x
6.2x
5.9x

1,465
7.0x
6.7x
6.4x
6.1x

1,513
7.2x
6.9x
6.6x
6.3x

1,706
8.1x
7.8x
7.4x
7.1x

935
9

935
9

935
9

935
9

935
9

935
9

90
872
60%
1,521

90
872
65%
1,569

90
872
70%
1,617

90
872
75%
1,665

90
872
80%
1,713

90
872
100%
1,906

(140)
(15)
(20)
(45)
(220)
(50)

(140)
(15)
(20)
(45)
(220)
(50)

(140)
(15)
(20)
(45)
(220)
(50)

(140)
(15)
(20)
(45)
(220)
(50)

(140)
(15)
(20)
(45)
(220)
(50)

(140)
(15)
(20)
(45)
(220)
(50)

1,251
6.0x
5.7x
5.4x
5.2x

1,299
6.2x
5.9x
5.6x
5.4x

1,347
6.4x
6.1x
5.9x
5.6x

1,395
6.6x
6.3x
6.1x
5.8x

1,443
6.9x
6.6x
6.3x
6.0x

1,636
7.8x
7.4x
7.1x
6.8x

935
9

935
9

935
9

935
9

935
9

935
9

90
872
60%
1,521

90
872
65%
1,569

90
872
70%
1,617

90
872
75%
1,665

90
872
80%
1,713

90
872
100%
1,906

(180)
(30)
(25)
(45)
(280)
(50)

(180)
(30)
(25)
(45)
(280)
(50)

(180)
(30)
(25)
(45)
(280)
(50)

(180)
(30)
(25)
(45)
(280)
(50)

(180)
(30)
(25)
(45)
(280)
(50)

(180)
(30)
(25)
(45)
(280)
(50)

1,191
5.7x
5.4x
5.2x
5.0x

1,239
5.9x
5.6x
5.4x
5.2x

1,287
6.1x
5.9x
5.6x
5.4x

1,335
6.4x
6.1x
5.8x
5.6x

1,383
6.6x
6.3x
6.0x
5.8x

1,576
7.5x
7.2x
6.9x
6.6x

To calculate creation multiple of utility EBITDA:

less equity in Expanets
less equity in Blue Dot
less value Cornerstone receivable
less equity in Montana 1st Megawatts + other
less equity in non-util subs and assets for sale
less excess working capital
plus other
At above price for bonds, create utiltiy business at:
Parent
EBITDA

210
220
230
240

Creation Multiples 2: mid-range for asset sale proceeds

Secured debt
Minority interest
QF liability not captured in EBITDA valuation
Unsecured debt, face
Price - unsecured claim
At above price for unsecured, create company at:
less equity in Expanets
less equity in Blue Dot
less value of Cornerstone receivable
less equity in Montana 1st Megawatts+other
less equity in non-util subs
less excess working capital
At above price for bonds, create utiltiy business at:
Parent
EBITDA

210
220
230
240

Creation Multiples 3: high-end for asset sale proceeds

Secured debt
Minority interest
QF liability not captured in EBITDA valuation
Unsecured debt, face
Price - unsecured claim
At above price for unsecured, create company at:
less equity in Expanets
less equity in Blue Dot
less value of Cornerstone receivable
less equity in Montana 1st Megawatts+other
less equity in non-util subs
less excess working capital
At above price for bonds, create utiltiy business at:
210
220
Parent
230
EBITDA
240
Source: Company reports and Morgan Joseph estimates:

10

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