<Page>
Exhibit 99.2
NORTHWESTERN CORPORATION
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To: The Shareholders and Board of Directors of NorthWestern Corporation
We have audited the accompanying consolidated balance sheets of NORTHWESTERN
CORPORATION (a Delaware corporation) AND SUBSIDIARIES as of December 31, 2001
and 2000, and the related consolidated statements of income, cash flows and
shareholders' equity for each of the three years in the period ended
December 31, 2001. These financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of NorthWestern Corporation and
Subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.
As discussed in Note 1 to the consolidated financial statements,
NorthWestern Corporation adopted the provisions of Statement of Financial
Accounting Standards No. 133 (Accounting for Derivative Instruments and Hedging
Activates) effective July 1, 2000.
/s/ Arthur Andersen LLP
Minneapolis, Minnesota
February 1, 2002, except for Note 18 as to which the date is February 15, 2002
1
<Page>
NORTHWESTERN CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<Table>
<Caption>
DECEMBER 31, DECEMBER 31,
2001 2000
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 53,528 $ 91,601
Accounts receivable, net.................................. 382,329 710,440
Inventories............................................... 106,228 143,870
Other..................................................... 86,461 55,080
---------- ----------
628,546 1,000,991
Property, Plant, and Equipment, Net......................... 818,367 695,965
Goodwill and Other Intangible Assets, Net................... 979,648 1,033,035
Other:
Investments............................................... 94,650 93,463
Other assets.............................................. 96,150 74,616
---------- ----------
$2,617,361 $2,898,070
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt...................... $ 155,000 $ 5,000
Current maturities of long-term debt of 29,469 121,963
subsidiaries--nonrecourse...............................
Short-term debt of subsidiaries--nonrecourse.............. 219,828 --
Accounts payable.......................................... 264,844 638,818
Accrued expenses.......................................... 259,959 194,896
---------- ----------
929,100 960,677
Long-term Debt.............................................. 373,350 507,650
Long-term Debt of Subsidiaries--Nonrecourse................. 462,523 506,215
Deferred Income Taxes....................................... 5,934 55,549
Other Noncurrent Liabilities................................ 75,476 59,524
---------- ----------
Total Liabilities........................................... 1,846,383 2,089,615
---------- ----------
Commitments and Contingencies (Notes 2, 7, 8, 15)
Minority Interests.......................................... 183,312 398,004
---------- ----------
Preferred Stock, Preference Stock, and Preferred Securities:
Preferred stock--4 1/2% series............................ 2,600 2,600
Redeemable preferred stock--6 1/2% series................. 1,150 1,150
Preference stock.......................................... -- --
Corporation obligated mandatorily redeemable preferred 187,500 87,500
securities of subsidiary trusts.........................
---------- ----------
191,250 91,250
---------- ----------
Shareholders' Equity:
Common stock, par value $1.75; authorized 50,000,000 47,942 40,968
shares; issued and outstanding 27,396,762 and
23,411,333..............................................
Paid-in capital........................................... 240,797 165,932
Treasury stock, 155,943 shares at cost.................... (3,681) --
Retained earnings......................................... 112,307 111,355
Accumulated other comprehensive income (loss)............. (949) 946
---------- ----------
396,416 319,201
---------- ----------
$2,617,361 $2,898,070
========== ==========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements
2
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NORTHWESTERN CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<Table>
<Caption>
ACCUMULATED
NUMBER OF NUMBER OF OTHER TOTAL
COMMON TREASURY COMMON PAID-IN TREASURY RETAINED COMPREHENSIVE SHAREHOLDERS'
SHARES SHARES STOCK CAPITAL STOCK EARNINGS INCOME (LOSS) EQUITY
---------- ---------- -------- -------- -------- -------- -------------- -------------
Balance at December 31,
1998..................... 23,017 -- $40,279 $158,530 $ -- $81,100 $ 2,192 $282,101
Comprehensive Income:
Net income............... -- -- -- -- -- 44,663 -- 44,663
Other comprehensive
Income (loss), net of
tax:
Foreign currency
translations......... -- -- -- -- -- -- (78) (78)
Unrealized gain on
marketable securities
net of
reclassification
adjustment........... -- -- -- -- -- -- 2,861 2,861
Exercise of warrants..... 92 -- 159 1,498 -- -- -- 1,657
Distributions on minority
interests in preferred
securities of
subsidiary trusts...... -- -- -- -- -- (6,601) -- (6,601)
Dividends on preferred
stock.................. -- -- -- -- -- (191) -- (191)
Dividends on common
stock.................. -- -- -- -- (24,256) -- (24,256)
------ --- ------- -------- ------- -------- ------- --------
Balance at December 31,
1999..................... 23,109 -- 40,438 160,028 -- 94,715 4,975 300,156
Comprehensive Income:
Net income............... -- -- -- -- -- 49,553 -- 49,553
Other comprehensive
Income (loss), net of
tax:
Foreign currency
translation.......... -- -- -- -- -- -- (212) (212)
Unrealized loss on
marketable securities
net of
reclassification
adjustment........... -- -- -- -- -- -- (3,817) (3,817)
Issuances of common
stock.................. 292 -- 512 5,740 -- -- -- 6,252
Proceeds from exercise of
warrants............... 10 -- 18 164 -- -- -- 182
Distributions on minority
interests in preferred
securities of
subsidiary trusts...... -- -- -- -- -- (6,601) -- (6,601)
Dividends on preferred
stock.................. -- -- -- -- -- (191) -- (191)
Dividends on common
stock.................. -- -- -- -- -- (26,121) -- (26,121)
------ --- ------- -------- ------- -------- ------- --------
Balance at December 31,
2000..................... 23,411 -- 40,968 165,932 -- 111,355 946 319,201
Comprehensive Income:
Net income............... -- -- -- -- -- 44,532 -- 44,532
Other comprehensive
Income (loss), net of
tax:
Foreign currency
translation.......... -- -- -- -- -- -- 122 122
Unrealized loss on
marketable securities
net of
reclassification
adjustment........... -- -- -- -- -- -- (2,017) (2,017)
Issuances of common
stock.................. 3,714 -- 6,498 68,370 -- -- -- 74,868
Cashless exercise of
warrants............... 272 -- 476 6,321 -- (6,797) -- --
Amortization of unearned
restricted stock
compensation........... -- -- -- 174 -- -- -- 174
Purchases of treasury
stock.................. -- 156 -- -- (3,681) -- -- (3,681)
Distributions on minority
interests in preferred
securities of
subsidiary trusts...... -- -- -- -- -- (6,827) -- (6,827)
Dividends on preferred
stock.................. -- -- -- -- -- (191) -- (191)
Dividends on common
stock.................. -- -- -- -- -- (29,765) -- (29,765)
------ --- ------- -------- ------- -------- ------- --------
Balance at December 31,
2001..................... 27,397 156 $47,942 $240,797 $(3,681) $112,307 $ (949) $396,416
====== === ======= ======== ======= ======== ======= ========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements
3
<Page>
NORTHWESTERN CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 31
------------------------------------
2001 2000 1999
---------- ---------- ----------
OPERATING REVENUES....................................... $4,237,755 $7,132,090 $3,004,340
COST OF SALES............................................ 3,380,188 6,295,675 2,467,765
---------- ---------- ----------
GROSS MARGIN............................................. 857,567 836,415 536,575
---------- ---------- ----------
OPERATING EXPENSES
Selling, general and administrative.................... 790,936 686,814 388,717
Depreciation........................................... 66,138 58,034 43,602
Amortization of goodwill and other intangibles......... 59,627 50,295 24,700
Restructuring charge................................... 24,916 -- --
---------- ---------- ----------
941,617 795,143 457,019
---------- ---------- ----------
OPERATING INCOME (LOSS).................................. (84,050) 41,272 79,556
Interest Expense......................................... (90,365) (77,207) (53,154)
Investment Income and Other.............................. 8,023 8,981 9,800
---------- ---------- ----------
Income (Loss) Before Income Taxes and Minority
Interests.............................................. (166,392) (26,954) 36,202
Benefit (Provision) for Income Taxes..................... 47,380 4,117 (14,466)
---------- ---------- ----------
Income (Loss) Before Minority Interests.................. (119,012) (22,837) 21,736
Minority Interests....................................... 163,544 73,436 22,927
---------- ---------- ----------
Income Before Cumulative Effect of Change in Accounting
Principle.............................................. 44,532 50,599 44,663
Cumulative Effect of Change in Accounting Principle, Net
of Tax and Minority Interests.......................... -- (1,046) --
---------- ---------- ----------
Net Income............................................... 44,532 49,553 44,663
Minority Interests on Preferred Securities of Subsidiary
Trusts................................................. (6,827) (6,601) (6,601)
Dividends on Preferred Stock............................. (191) (191) (191)
---------- ---------- ----------
Earnings on Common Stock................................. $ 37,514 $ 42,761 $ 37,871
========== ========== ==========
Average Common Shares Outstanding........................ 24,390 23,141 23,094
Basic Earnings per Average Common Share:
Before cumulative effect............................... $ 1.54 $ 1.89 $ 1.64
Cumulative effect of change in accounting principle.... -- (.04) --
---------- ---------- ----------
Basic.................................................. $ 1.54 $ 1.85 $ 1.64
========== ========== ==========
Diluted Earnings per Average Common Share:
Before cumulative effect............................... $ 1.53 $ 1.87 $ 1.62
Cumulative effect of change in accounting principle.... -- (.04) --
---------- ---------- ----------
Diluted................................................ $ 1.53 $ 1.83 $ 1.62
========== ========== ==========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements
4
<Page>
NORTHWESTERN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 31
---------------------------------
2001 2000 1999
--------- --------- ---------
OPERATING ACTIVITIES:
Net Income................................................ $ 44,532 $ 49,553 $ 44,663
Items not affecting cash:
Depreciation.......................................... 66,138 58,034 43,602
Amortization.......................................... 59,627 50,295 24,700
Deferred income taxes................................. (48,529) (9,493) (9,518)
Minority interests in net losses of consolidated
subsidiaries........................................ (163,544) (73,436) (22,927)
Foreign currency adjustments.......................... 429 (732) (261)
Cumulative effect of change in accounting principle... -- 1,046 --
Changes in current assets and liabilities, net of
acquisitions:
Accounts receivable................................. 332,545 (181,622) (27,193)
Inventories......................................... 37,907 (41,451) (34,704)
Other current assets................................ (31,704) (9,285) 6,071
Accounts payable.................................... (252,124) 184,653 33,113
Accrued expenses.................................... 80,988 66,665 15,848
Other, net.......................................... 736 (17,502) (1,671)
--------- --------- ---------
Cash flows provided by operating activities........... 127,001 76,725 71,723
--------- --------- ---------
Investment Activities:
Property, plant, and equipment additions................ (40,868) (32,097) (32,599)
Sale of noncurrent investments and assets, net.......... 7,053 5,753 34,198
Acquisitions and growth expenditures.................... (157,042) (152,765) (207,663)
--------- --------- ---------
Cash flows used in investing activities............... (190,857) (179,109) (206,064)
--------- --------- ---------
Financing Activities:
Dividends on common and preferred stock................. (29,956) (26,312) (24,447)
Minority interest on preferred securities of subsidiary
trusts................................................ (6,827) (6,601) (6,601)
Subsidiary payment of common unit distributions......... (27,364) (37,124) (37,003)
Proceeds from issuance of common stock and common
units................................................. 74,878 21 (971)
Proceeds from exercise of warrants...................... -- 182 1,657
Issuance of long term debt.............................. -- 149,625 --
Repayment of long-term debt............................. (5,000) (5,000) (5,000)
Line of credit borrowings, net.......................... 16,931 53,300 58,000
Issuance of preferred securities of subsidiary trusts... 96,833 -- --
Subsidiary repurchase of minority interests............. (57,768) (20,773) (7,669)
Line of credit (repayments) borrowings of subsidiaries,
net................................................... (66,516) 21,670 3,146
Issuance of nonrecourse subsidiary debt................. 2,884 76,877 133,608
Repayment of nonrecourse subsidiary debt................ (25,915) (15,857) (7,267)
Short-term borrowings of subsidiaries, net.............. 53,603 (14,700) 14,700
Commercial paper (repayments) borrowings, net........... -- (11,000) 11,000
--------- --------- ---------
Cash flows provided by financing activities........... 25,783 164,308 133,153
--------- --------- ---------
Increase (Decrease)in Cash and Cash Equivalents........... (38,073) 61,924 (1,188)
Cash and Cash Equivalents, beginning of period............ 91,601 29,677 30,865
--------- --------- ---------
Cash and Cash Equivalents, end of period.................. $ 53,528 $ 91,601 $ 29,677
========= ========= =========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements
5
<Page>
NORTHWESTERN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
NorthWestern Corporation ("Corporation") is a service and solutions company
providing integrated energy, communications, air conditioning, heating,
ventilating, plumbing and related services and solutions to residential and
business customers throughout North America. A division of the Corporation is
engaged in the regulated energy business of production, purchase, transmission,
distribution and sale of electricity and the delivery of natural gas to
customers located in the Midwest region of the United States. The Corporation
has investments in Expanets, Inc. ("Expanets"), a national provider of
integrated communications, data solutions and network services to business
customers; Blue Dot Services Inc. ("Blue Dot"), a national provider of heating,
ventilating, air conditioning, plumbing and related services ("HVAC") and
CornerStone Propane Partners, L.P. ("CornerStone"), a publicly traded Delaware
master limited partnership, formed to engage in the retail propane and wholesale
energy-related commodities distribution business throughout North America.
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Corporation and all wholly and majority-owned or controlled subsidiaries.
The Corporation holds marketable preferred stock investments, Expanets preferred
and common stock, Blue Dot preferred and common stock, CornerStone subordinated
common units and CornerStone general partner and common units. The financial
statements of these entities are included in the accompanying consolidated
financial statements, and therefore included in referencing to "subsidiaries,"
by virtue of the voting and control rights associated with the common and
preferred stock investments (see Note 2, Business Combinations and Acquisitions,
for further discussion as to the nature and extent of the Corporation's
investments in Expanets, Blue Dot and CornerStone). All significant intercompany
balances and transactions have been eliminated from the consolidated financial
statements.
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES
Equity interests of the former owners of companies acquired by Expanets and
Blue Dot who continue to hold an interest in Expanets and Blue Dot are reflected
as Minority Interests in the consolidated financial statements. The public
common unitholders' interest in CornerStone's net assets are also included in
Minority Interests in the Corporation's consolidated financial statements.
The income or loss allocable to minority interests will vary in the future
depending on the underlying profitability of the various entities, after giving
effect to all expenses of the entities (including where applicable, cost
allocations from the Corporation) and to dividends on the outstanding preferred
stock of these entities owned by the Corporation, and the equity structure of
these entities. Further, in the event losses at these entities continue,
allocation of those losses to minority interests will be limited to the amount
by which the minority interest balance of the respective entity exceeds the
amount of such interest subject to exchange agreements (see Note 2). As of
December 31, 2001, exchange agreements totaling $6.0 million for Expanets and
$12.4 million for Blue Dot remained outstanding and are included in Minority
Interests.
6
<Page>
NORTHWESTERN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The equity held by third parties of these entities as of December 31 is as
follows:
<Table>
<Caption>
THIRD PARTY EQUITY
REFLECTED AS MINORITY
INTERESTS
----------------------
2001 2000
-------- --------
IN THOUSANDS
Expanets............................................... $ 17,124 $140,390
Blue Dot............................................... 12,439 51,691
CornerStone............................................ 153,245 205,172
Other.................................................. 504 751
-------- --------
Total................................................ $183,312 $398,004
======== ========
</Table>
Loss (income) by entity allocated to Minority Interests were as follows for
the years ended December 31:
<Table>
<Caption>
MINORITY INTERESTS
------------------------------
2001 2000 1999
-------- -------- --------
IN THOUSANDS
Expanets........................................ $127,893 $49,908 $14,393
Blue Dot........................................ 13,555 17,913 10,395
CornerStone..................................... 22,096 5,615 (1,861)
-------- ------- -------
Total......................................... $163,544 $73,436 $22,927
======== ======= =======
</Table>
Based upon the entities' capital structure at December 31, 2001, to the
extent losses at Expanets and Blue Dot subsequently exceed $11.1 million, all
such losses will be allocated to the Corporation.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS
For purposes of the statement of cash flows, the Corporation generally
considers all highly liquid investments purchased with maturity of three months
or less to be cash equivalents.
ACCOUNTS RECEIVABLE, NET
Accounts receivable are net of $13.0 million and $11.2 million of allowances
for uncollectible accounts at December 31, 2001 and 2000.
7
<Page>
NORTHWESTERN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Natural gas inventories for the regulated energy business are stated at
lower of cost or market, using the first-in, first-out ("FIFO") method.
Materials and supplies for the regulated energy business are stated at the lower
of cost or market, with cost determined using the average cost method.
Inventories for Expanets consist of voice and data equipment, parts and supplies
held for use in the ordinary course of business and are stated at the lower of
cost (weighted average) or market. Inventories for Blue Dot consist of air
conditioning units and parts and supplies held for use in the ordinary course of
business and are stated at the lower of cost or market using the FIFO method.
CornerStone inventories are stated at the lower of cost or market, with cost
being determined using the FIFO method for natural gas liquids, crude oil,
natural gas, and parts, and the specific identification method for appliances.
INVESTMENTS
The Corporation classifies its investments as available-for-sale in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." SFAS 115
states that certain investments in debt and equity securities be reported at
fair value. Investments consist primarily of short-maturity, fixed-income
securities and corporate preferred and common stocks. In addition, the
Corporation has investments in privately held entities and ventures and various
money market and tax-exempt investment programs.
The Corporation's available-for-sale securities are classified under the
provisions of SFAS 115 as follows:
<Table>
<Caption>
UNREALIZED
FAIR VALUE COST GAIN (LOSS)
---------- -------- -----------
IN THOUSANDS
December 31, 2001
Preferred stocks............................ $31,460 $32,660 $(1,200)
Marketable securities....................... 63,190 63,190 --
December 31, 2000
Preferred stocks............................ $36,507 $41,110 $(4,603)
Marketable securities....................... 56,956 51,747 5,209
</Table>
The combined unrealized gain (loss), net of tax, at December 31, 2001 and
2000, was ($.8) million and $.4 million.
The Corporation uses the specific identification method for determining the
cost basis of its investments in available-for-sale securities. Realized gains
and losses on its available-for-sale securities were $2.1 million,
$2.9 million, and $.5 million in 2001, 2000 and 1999.
DERIVATIVE FINANCIAL INSTRUMENTS
The Corporation manages risk using derivative financial instruments for
changes in natural gas supply prices, liquefied petroleum prices and interest
rate fluctuations.
The Corporation and CornerStone use commodity futures contracts to reduce
the risk of future price fluctuations for natural gas and liquefied petroleum
gas inventories and contracts. Increases or
8
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NORTHWESTERN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
decreases in contract values are reported as gains and losses in the
Corporation's Consolidated Statements of Income.
The fair value of fixed-price commodity contracts were estimated based on
market prices of natural gas, natural gas liquids, and crude oil for the periods
covered by the contracts. The net differential between the prices in each
contract and market prices for future periods has been applied to the volumes
stipulated in each contract to arrive at an estimated future value. Total
contracts of $7.2 million and $4.8 million at December 31, 2001 and 2000 existed
with estimated future liabilities of $7.0 million and $4.5 million.
The Corporation has entered into an interest rate swap agreement to fix the
interest rate on $55.0 million of its term loan obligations of Montana Megawatts
I (a wholly-owned subsidiary of the Corporation) at an average rate of 2.83% per
annum. The agreement expires December 31, 2002. The differential paid or
received on interest rate swap agreements is recognized as an adjustment to
interest expense. Cash flows from the interest rate swap agreement are
classified in cash flows from operations.
The Corporation is exposed to credit loss in the event of nonperformance by
counter parties. The Corporation minimizes its credit risk on these transactions
by only dealing with leading, credit-worthy financial institutions having
long-term credit ratings of "A" or better and, therefore, does not anticipate
nonperformance. In addition, the contracts are distributed among several
financial institutions, thus minimizing credit risk concentration.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less depreciation.
Depreciation is computed using the straight-line method based on the estimated
useful lives of the various classes of property, which range from three to
40 years. The Corporation includes in property, plant and equipment external and
incremental internal costs associated with computer software developed for use
in the businesses. Capitalization begins when the preliminary design stage of
the project is completed. These costs are amortized on a straight-line basis
over the project's estimated useful life once the installed software is ready
for its intended use. During 2001, 2000 and 1999, the Corporation capitalized
costs for internally developed software of $62.5 million, $4.3 million and
$10.7 million. Internal costs capitalized for other property, plant and
equipment were $18.0 million, $10.6 million and $10.0 million.
Depreciation rates include a provision for the Corporation's share of the
estimated costs to decommission three coal-fired generating plants at the end of
the useful life of each plant. The annual provision for such costs is included
in depreciation expense, while the accumulated provisions are included in other
noncurrent liabilities.
When property for the communications, HVAC or propane interests are retired
or otherwise disposed, the cost and related accumulated depreciation is removed
from the accounts, and the resulting gain or loss is reflected in operations. No
profit or loss is recognized in connection with ordinary retirements of
depreciable electric and natural gas utility property. Maintenance and repairs
are expensed as incurred, while replacements and betterments that extend
estimated useful lives are capitalized.
9
<Page>
NORTHWESTERN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Construction work in process is composed principally of costs incurred to
date on the construction of a 240-megawatt natural gas-fired generation project
currently under construction in Great Falls, MT. The remaining costs are for
various projects underway in the regulated energy segment.
Property, plant and equipment at December 31 consisted of the following:
<Table>
<Caption>
2001 2000
---------- ---------
IN THOUSANDS
Land and improvements................................. $ 17,550 $ 17,507
Building and improvements............................. 73,099 74,864
Storage, distribution, transmission and generation.... 677,400 664,042
Construction work in process.......................... 70,025 13,342
Other equipment....................................... 330,835 210,323
---------- ---------
1,168,909 980,078
Less accumulated depreciation......................... (350,542) (284,113)
---------- ---------
$ 818,367 $ 695,965
========== =========
</Table>
GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles consist of the following at December 31 (in
thousands):
<Table>
<Caption>
2001 2000
---------- ----------
Goodwill............................................. $ 778,964 $ 759,215
Noncompete agreements................................ 26,669 27,761
Financing costs...................................... 33,437 24,882
Other intangibles.................................... 306,038 316,987
---------- ----------
1,145,108 1,128,845
Less accumulated amortization........................ (165,460) (95,810)
---------- ----------
$ 979,648 $1,033,035
========== ==========
</Table>
The excess of the cost of businesses acquired over the fair value of all
tangible and intangible assets acquired, net of liabilities assumed, has been
recorded as goodwill. Other intangibles primarily consist of dealer agreements,
maintenance contracts and assembled work force costs. Intangibles and goodwill
are being amortized over the estimated periods benefited, which range from three
to 40 years. Financing costs are amortized over the term of the applicable debt.
The Corporation's policy is to review property, goodwill and other
intangible assets for possible impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be
recoverable as measured by the comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If such assets are
considered impaired, the impairment recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying amount or
fair value less costs to sell. If such review indicates that the carrying amount
is not recoverable, the Corporation's policy is to reduce the carrying amount of
these assets to fair value.
10
<Page>
NORTHWESTERN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INSURANCE SUBSIDIARY
Risk Partners, Inc. is a wholly owned off-shore insurance subsidiary created
during 2001 to insure worker's compensation, general liability and automobile
liability risks. At December 31, 2001, Expanets and CornerStone were insured
through Risk Partners, Inc. Reserve requirements are established based on
actuarial projections of ultimate losses. Any losses estimated to be paid within
one year from the balance sheet date are classified as accrued expenses, while
losses expected to be payable in later periods are included in other long-term
liabilities. Risk Partners, Inc. has purchased reinsurance policies through a
third-party reinsurance company to transfer a portion of the insurance risk.
REVENUE RECOGNITION
Electric and natural gas utility revenues are based on billings rendered to
customers rather than on meters read or energy delivered. Customers are billed
monthly on a cycle basis. Communications and HVAC revenues are recognized as
goods are delivered to customers or services are performed, except for work
performed under material installation or service contracts. Revenues under
material installation or service contracts are recognized on the
percentage-of-completion method based on the percentage of costs incurred to
date in relation to total estimated costs for each contract. Provisions for
total estimated losses on uncompleted contracts are recognized in the period
such losses are determined. Revenues from propane sales are recognized
principally when fuel products are shipped or delivered to customers.
INCOME TAXES
Deferred income taxes relate primarily to the difference between book and
tax methods of depreciating property, the difference in the recognition of
revenues for book and tax purposes, certain natural gas costs, which are
deferred for book purposes but expensed currently for tax purposes and net
operating loss carryforwards.
For book purposes, deferred investment tax credits are being amortized as a
reduction of income tax expense over the useful lives of the property which
generated the credits.
REGULATORY ASSETS AND LIABILITIES
The regulated operations of the Corporation are subject to the provisions of
SFAS No. 71, "Accounting for the Effects of Certain Types of Regulations."
Regulatory assets represent probable future revenue associated with certain
costs, which will be recovered from customers through the ratemaking process.
Regulatory liabilities represent probable future reductions in revenues
associated with amounts that are to be credited to customers through the
ratemaking process.
If all or a separable portion of the Corporation's operations becomes no
longer subject to the provisions of SFAS No. 71, an evaluation of future
recovery of the related regulatory assets and liabilities would be necessary. In
addition, the Corporation would determine any impairment to the carrying costs
of deregulated plant and inventory assets.
11
<Page>
NORTHWESTERN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING STANDARDS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments imbedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 requires changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. The Corporation adopted the provisions of
SFAS No. 133, as amended, effective July 1, 2000, consistent with the timing of
CornerStone's adoption of SFAS No. 133. The initial adoption of SFAS No. 133 at
CornerStone resulted in a charge of $5.3 million and is reflected in the
consolidated statements of income as a cumulative effect of change in accounting
principle and is shown net of taxes of $.5 million and net of minority interest
of $3.8 million. Propane related and natural gas commodity pricing gains
relating to the change in derivatives' fair value since the date of adoption are
reported as part of cost of sales and total $.2 million and $.3 million for the
years ended December 31, 2001 and 2000.
In evaluating the requirements of Staff Accounting Bulletin No. 101 ("SAB
101"), an adjustment for certain activities of CornerStone was required. Certain
natural gas and crude oil activities were recorded on a one-month-lag basis as
sufficient information was not available to recognize current month activity. In
connection with the implementation of improved information systems and because
of the increase in these activities, CornerStone began to recognize such
activities in the month in which they occurred, beginning with the quarter ended
December 31, 2000. Accordingly, additional revenue and accounts receivable of
$321.1 million, cost of sales and accounts payable of $319.3 million and gross
margin of $1.8 million were recorded in the fourth quarter of 2000.
SFAS No. 141, "Business Combinations," issued in June 2001, requires all
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method. In addition, it requires that all identifiable intangible
assets be separately recognized and the purchase price allocated accordingly,
which will result in the recognition, in some instances, of substantially more
categories of intangibles.
SFAS No. 142, "Goodwill and Other Intangible Assets," was also issued in
June 2001 and eliminates amortization of goodwill and allows amortization of
other intangibles only if the assets have a finite, determinable life. At
adoption, and at least annually thereafter, companies must also perform an
impairment analysis of intangible assets at the reporting unit level, to
determine whether the carrying value exceeds the fair value of the assets. In
instances where the carrying value is less than the fair value of the asset, an
impairment loss must be recognized. Subsequent reversal of a previously
recognized impairment loss is prohibited. SFAS No. 142 is effective for all
fiscal years beginning after December 15, 2001, with early application permitted
in some instances for entities with fiscal years beginning after March 15, 2001.
CornerStone adopted the provisions of SFAS No. 142 effective July 1, 2001 and
the initial impairment assessment is that there is no impairment associated with
adoption. CornerStone's amortization expense for the six-month period ended
December 31, 2001 was reduced by approximately $4.0 million, but the effect of
this reduction and all other impacts of CornerStone's adoption of SFAS No. 142
have been fully reversed in the Corporation's financial statements since the
Corporation will adopt SFAS No. 142 effective January 1, 2002. The Corporation
is currently in the process of evaluating the impact of SFAS No. 142 on all
reporting units. While it is not currently known what the impact to net income
will be from the discontinuance of amortization or possible loss impairments, it
is anticipated to have a material effect on the results of operations.
12
<Page>
NORTHWESTERN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SFAS No. 143, "Accounting for Asset Retirement Obligations," was issued in
August 2001 and addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. SFAS No. 143 is effective for fiscal years beginning
after June 15, 2002 and the impact on the Corporation's results of operations
and financial position is currently under review by management.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," was issued in October 2001 and establishes a single accounting model
for long-lived assets to be disposed of by sale. SFAS No. 144 is effective for
fiscal years beginning after December 15, 2001 and management is currently
evaluating the impact of the Statement on the Corporation's results of
operations and financial position is currently under review by management.
RELATED PARTY TRANSACTIONS
The Corporation provides certain services to its subsidiaries, including
insurance, administrative support for employee benefits, transaction
structuring, financial analysis and information technology. These services are
provided under arrangements that include reimbursements for certain costs
(primarily salaries) under terms that approximately reflect the Corporation's
actual costs. These fees were $15.2 million and $11.5 million in 2001 and 2000
with no fees charged in 1999.
The Corporation extended a $51.4 million operational loan to Expanets during
2001. The loan was used for general operating purposes by the business and bears
interest at 17% per annum. As an intercompany transaction, it is has been
eliminated from the consolidated financial statements.
RECLASSIFICATIONS
Certain 1999 and 2000 amounts have been reclassified to conform to the 2001
presentation. Such reclassifications had no impact on net income or
shareholders' equity as previously reported.
SUPPLEMENTAL CASH FLOW INFORMATION
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
IN THOUSANDS
Cash paid for
Income taxes................................. $ 7,297 $ 7,306 $24,020
Interest..................................... 100,234 76,228 49,591
Noncash transactions for
Exchange of warrants for common stock........ 6,795 -- --
Issuance of restricted stock................. 760 -- --
Issuance of common stock for acquisitions and
repurchases of subsidiary stock............ -- 6,252 --
Assets acquired in exchange for current
liabilities and debt....................... 21,712 66,241 5,771
Subsidiary stock issued to third parties for
acquisitions, debt, earn-outs and notes
receivable................................. 28,739 176,832 41,852
Inventory purchased using short-term debt.... 125,000 -- --
</Table>
13
<Page>
NORTHWESTERN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. BUSINESS COMBINATIONS AND ACQUISITIONS
EXPANETS
On March 31, 2000, Expanets acquired a portion of Lucent Technologies'
Growing and Emerging Markets business. As part of the purchase, Lucent received
$145 million in junior convertible preferred stock in Expanets, which is
subordinated to the Corporation's preferred stock investment and is PARI PASSU
with Expanets common stock. The purchase price also included $64 million in
cash, a $15 million convertible note and a $35 million nonrecourse subordinated
note. As of December 31, 2001, the $15 million convertible note had been
converted to Expanets junior convertible Series D preferred stock.
At December 31, 2001, Expanets had 152 operational centers located across
the United States. The Corporation's investment in Expanets at December 31,
2001, consisted of $313.6 million in the form of 12% coupon non-convertible
preferred stock and $.5 million in the form of Series B Common Stock that is
convertible at the option of the Corporation into 40% of the originally issued
common stock at Expanets. The Corporation holds supervoting rights through its
preferred stock investment as well.
BLUE DOT
At December 31, 2001, Blue Dot had acquired 91 companies in 29 states. The
Corporation's investment in Blue Dot at December 31, 2001, consisted of
$329.4 million in the form of 11% coupon non-convertible redeemable preferred
stock and $.5 million in the form of Series B Common Stock that is convertible
at the option of the Corporation into 40% of the originally issued common stock
of Blue Dot. The Corporation holds supervoting rights through its preferred
stock investment as well.
CORNERSTONE
At December 31, 2001, CornerStone's capital consisted of 17,293,340 Common
Units, 6,597,619 Subordinated Units representing limited partner interests, a 2%
aggregate general partner interest and approximately 676,000 warrants to
purchase Common Units. At December 31, 2001, the Corporation's wholly and
majority-owned subsidiaries owned all 6,597,619 Subordinated Units, 379,438
Common Units, all outstanding warrants and an aggregate 2% general partner
interest in CornerStone, for a combined approximate 30% effective interest.
THE MONTANA POWER COMPANY
On October 2, 2000, the Corporation announced it had entered into a
definitive agreement to acquire The Montana Power Company's (NYSE:TAA) energy
distribution and transmission business.
On February 15, 2002, the Corporation completed the acquisition for
$602.0 million in cash and the assumption of $488.0 million in existing Montana
Power Company debt and preferred stock, net of cash received. As a result of the
acquisition, the Corporation will be the provider of natural gas and electricity
to more than 575,000 customers in Montana, South Dakota and Nebraska and the
capacity to provide service to wider regions of the country. See Note 18 for
further discussion of this transaction.
14
<Page>
NORTHWESTERN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. BUSINESS COMBINATIONS AND ACQUISITIONS (CONTINUED)
OTHER
Acquisitions made by Expanets and Blue Dot generally utilize a combination
of cash and stock (of Expanets or Blue Dot). In connection with certain
acquisitions of both Expanets and Blue Dot, the sellers can elect to exchange
the stock of Expanets or Blue Dot for cash at a predetermined exchange rate.
Alternatively, Blue Dot, in certain circumstances, may, at its election,
purchase the stock directly from the seller at the same predetermined exchange
rate using their choice of cash or common stock of the Corporation. During 2001,
Expanets exchanged $20.3 million in cash for Expanets stock issued in prior
acquisitions and Blue Dot exchanged $37.5 million in cash. As of December 31,
2001, exchange agreements totaling $6.0 million for Expanets and $12.4 million
for Blue Dot remained outstanding and are included in Minority Interests.
The acquisitions made by Expanets, Blue Dot and CornerStone have been
accounted for using the purchase method of accounting and, accordingly, the
assets acquired and liabilities assumed have been recorded at their fair values
as of the dates of acquisitions. The excess of the purchase price over the fair
value of the assets acquired and liabilities assumed has been recorded as
goodwill. The assets acquired and liabilities assumed in the current year
acquisitions have been recorded based upon preliminary estimates of fair value
as of the dates of acquisition. The Corporation does not believe the final
allocation of purchase price will be materially different from preliminary
allocations. Any changes to the preliminary estimates will be reflected as an
adjustment to goodwill. Results of operations for these acquisitions have been
included in the accompanying consolidated financial statements since the dates
of acquisition. The accompanying unaudited consolidated pro forma results of
operations for the years ended December 31, 2001 and 2000 give effect to the
acquisitions as if such transactions had occurred at the beginning of the
period:
<Table>
<Caption>
2001 2000
---------- ----------
UNAUDITED
IN THOUSANDS
EXCEPT PER SHARE AMOUNTS
Revenues............................................ $4,269,698 $7,215,467
Net income.......................................... $ 46,810 $ 53,619
Diluted earnings per share.......................... $ 1.63 $ 2.01
</Table>
As the purchase of Lucent Technologies' Growing and Emerging Markets
business was an asset purchase rather than an acquisition, no pro forma results
of operations were required by the Securities and Exchange Commission.
Liabilities for costs associated with the shutdown and consolidation of
certain acquired facilities and severance costs at December 31, 2001 and 2000
are as follows (in thousands):
<Table>
<Caption>
2001 2000
-------- --------
Facility closing and other costs............................ $2,856 $5,830
Severance................................................... 195 1,750
------ ------
$3,051 $7,580
====== ======
</Table>
15
<Page>
NORTHWESTERN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. RESTRUCTURING CHARGE
The restructuring charge of $24.9 million recognized in the fourth quarter
of 2001 relates to the Corporation's Operational Excellence Initiative which is
targeting selling, general and administrative cost reductions of approximately
$150 million. The Board of Directors approved this initiative in November 2001.
The following components of the restructuring charge to expense for the year
ended December 31, 2001 were as follows:
<Table>
<Caption>
IN
THOUSANDS
----------
Employee termination benefits............................... $16,643
Facility closure costs...................................... 4,745
Other....................................................... 3,528
-------
$24,916
=======
</Table>
The employee-related termination benefits include severance costs for 474
employees. Facility closure costs include lease payments for remaining lease
terms of unused facilities after closure as well as any early exit costs that
the Corporation is contractually liable for. Restructuring expenses of
$5.6 million had been paid as of December 31, 2001. The remaining balance of
$19.3 million is part of Accrued Expenses on the Consolidated Balance Sheets.
4. SHORT-TERM DEBT
The Corporation may issue short-term debt in the form of commercial paper as
interim financing for general corporate purposes. The Corporation also maintains
other secured and unsecured lines of credit as described in Note 5, Long-Term
Debt. At December 31, 2001, the Corporation did not have any commercial paper
borrowings outstanding.
In May 2001, Expanets obtained a short-term line of credit to finance
product purchases from Avaya Inc. (successor to Lucent). Borrowings under the
line are limited to the lesser of $125.0 million or the borrowing base (75% of
eligible customer accounts plus 60% of eligible inventory). $125.0 million was
outstanding at December 31, 2001, bearing interest at 12% on any borrowings
outstanding greater than 45 days. The Corporation is obligated by virtue of a
purchase participation obligation to purchase up to $25.0 million of inventory
and accounts upon an event of default by Expanets. The line expires March 31,
2002.
The CornerStone Bank Credit Facility (the "Facility") was entered into as of
November 28, 2001 and matures on November 28, 2002 and provides $50.0 million of
available credit for general corporate purposes. The Facility bears interest at
a variable rate tied to a certain Eurodollar index or prime rate plus a variable
margin, which depends upon CornerStone's ratio of consolidated debt to
consolidated cash flow, and can range from .75% to 2.0%. The Facility is
collateralized by substantially all assets of CornerStone and ranks pari passu
with CornerStone's Senior Secured Notes. The Facility contains restrictive
covenants similar to those under the Senior Secured Notes and also requires that
CornerStone maintain a ratio of total funded indebtedness to consolidated cash
flow, as defined. In extending the Facility, the Corporation provided a guaranty
for the entire $50.0 million. As a result, CornerStone's independent Audit
Committee and Board of Directors approved a $2.3 million cash commitment fee and
the issuance of 487,179 warrants to purchase common units at $.10 per unit. The
16
<Page>
NORTHWESTERN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. SHORT-TERM DEBT (CONTINUED)
commitment fee and value of the warrants are being recognized over the term of
the guaranty. At December 31, 2001, $41.2 million was outstanding on the
Facility with an effective interest rate of 4.65%, but CornerStone was not in
compliance with the financial ratio covenants and therefore no additional
borrowings were available. The Facility was amended on January 18, 2002 to
address certain covenant violations, but also suspended CornerStone's ability to
pay Minimum Quarterly Distributions for the remaining term of the Facility (see
Note 18).
Montana Megawatts I, LLC, a wholly owned subsidiary of the Corporation,
entered into a 365-day term loan in September 2001 to finance the purchase of
certain equipment and related expenses for a 240-megawatt natural gas-fired
generation project currently under construction in Great Falls, Montana. The
loan bears interest at LIBOR plus 1.50%. The Corporation has provided a
guarantee on 50% of the borrowings outstanding (maximum of $27.5 million) on the
loan. As of December 31, 2001, $53.6 million had been drawn on the loan with an
effective interest rate of 4.63% and is reflected on the balance sheet as part
of non-recourse short-term debt.
5. LONG-TERM DEBT
Long-term debt at December 31 consisted of the following (in thousands):
<Table>
<Caption>
DUE 2001 2000
-------- --------- --------
Long-Term Debt
Senior unsecured debt--6.95%..................... 2028 $ 105,000 $105,000
General mortgage bonds--
6.99%.......................................... 2002 5,000 10,000
7.10%.......................................... 2005 60,000 60,000
7%............................................. 2023 55,000 55,000
Pollution control obligations--
5.85%, Mercer Co., ND.......................... 2023 7,550 7,550
5.90%, Salix, IA............................... 2023 4,000 4,000
5.90%, Grant Co., SD........................... 2023 9,800 9,800
Bank credit facility............................. 2003 132,000 111,300
Floating rate notes.............................. 2002 150,000 150,000
Less current maturities.......................... (155,000) (5,000)
--------- --------
$ 373,350 $507,650
========= ========
</Table>
Substantially all of the Corporation's electric and natural gas utility
plant is subject to the lien of the indentures securing its general mortgage
bonds and pollution control obligations. General mortgage bonds of the
Corporation may be issued in amounts limited by property, earnings and other
provisions of the mortgage indenture.
17
<Page>
NORTHWESTERN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. LONG-TERM DEBT (CONTINUED)
The Corporation entered into an unsecured Bank Credit Facility with a group
of commercial banks in June 1999. The Bank Credit Facility was amended in
October 2001 to increase the available credit to $315 million and extend the
Facility maturity date to January 1, 2003. The Bank Credit Facility is used for
general corporate purposes including acquisitions. There were $132.0 million of
borrowings outstanding and $115.0 million available under the Bank Credit
Facility at December 31, 2001 after consideration of nonrecourse debt guaranties
and borrowings outstanding. The Bank Credit Facility bears interest at a
variable rate tied to a certain Eurodollar index or prime rate plus a variable
margin, which depends upon the total borrowings outstanding on the Bank Credit
Facility and can range from zero to 2.0%. The effective interest rate on
borrowings outstanding for the year ended December 31, 2001 was 5.1% with a rate
at December 31, 2001 of 3.19%. The Bank Credit Facility contains restrictive
covenants, which require the Corporation to maintain a minimum net worth and a
maximum debt to equity ratio. The Corporation was in compliance with all terms
and covenants at December 31, 2001. The facility expires January 1, 2003.
On September 21, 2000, the Corporation completed a private placement of
$150 million principal amount of medium term floating rate notes. Net proceeds
of $149.6 million were used to repay a portion of the debt outstanding from the
Corporation's Bank Credit Facility. The notes mature September 21, 2002 and bear
interest at LIBOR plus .75%. The effective interest rate on the notes for 2001
was 5.2% with a rate at December 31, 2001 of 2.65%.
The following table summarizes the long-term nonrecourse obligations of
subsidiaries (in thousands):
<Table>
<Caption>
DUE 2001 2000
-------- -------- --------
Senior Secured Notes--
7.33%........................................ 2010 $220,000 $220,000
7.53%........................................ 2013 85,000 85,000
10.26%....................................... 2009 45,000 45,000
8.08%........................................ 2005 30,000 30,000
8.27%........................................ 2009 30,000 30,000
Bank Credit Facility (CornerStone)............. 2001 -- 69,700
Bank Credit Facility (Blue Dot)................ 2002 12,950 48,478
Subordinated note.............................. 23,743 35,000
Convertible promissory note.................... -- 15,000
Other term debt................................ Various 45,299 50,000
Less current maturities........................ (29,469) (121,963)
-------- --------
$462,523 $506,215
======== ========
</Table>
The 7.33% and 7.53% Senior Secured Notes are collateralized by substantially
all of the assets of CornerStone and rank PARI PASSU with the CornerStone Bank
Credit Facility (described in Note 4). The 7.53% Senior Secured Notes mature in
the year 2010 with eight equal annual installments beginning in the year 2003.
The 7.33% Senior Secured Notes mature in the year 2013 with nine equal annual
installments beginning in the year 2005. CornerStone may, at its option and
under certain circumstances following the disposition of assets, be required to
offer to prepay the Notes in whole or in part. The Notes agreement contains
restrictive covenants applicable to CornerStone including
18
<Page>
NORTHWESTERN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. LONG-TERM DEBT (CONTINUED)
a) restrictions on the incurrence of additional indebtedness, b) restrictions on
the ratio of consolidated cash flow to consolidated interest expense of
CornerStone, as defined, and c) restrictions on certain liens, loans and
investments, payments, mergers, consolidations, sales of assets and other
transactions.
The 8.08% Senior Secured Notes mature in 2005 with equal annual installments
beginning in the year 2003. The 8.27% Senior Secured Notes mature in 2009 with
equal annual installments beginning in 2003. These notes rank on an equal and
ratable basis with the CornerStone Bank Credit Facility and other Senior Secured
Notes. The 10.26% Senior Notes mature in 2009 with equal annual installments
beginning in the year 2005 and are subordinated to the 7.53% and 7.33% Senior
Secured Notes and the CornerStone Bank Credit Facility.
The Corporation had provided a guaranty and stand-by commitment to purchase
up to approximately $70 million of secured loans under ConerStone's Bank Credit
Facility. The guaranty and stand-by commitment ended with the expiration of the
Bank Credit Facility on November 28, 2001. In connection with this commitment,
CornerStone's independent Audit Committee and Board of Directors approved the
payment to the Corporation of a cash commitment fee and warrants to purchase
common units at $.10 per unit. The commitment fee of $4.6 million remains unpaid
and approximately 189,000 warrants remain unexercised as of December 31, 2001.
The commitment fee and the value of the warrants were recognized over the term
of the guaranty.
As of December 31, 2001, Blue Dot has a Bank Credit Facility with a group of
commercial banks that originally provided for advances up to $135.0 million. The
Bank Credit Facility is used for working capital and to finance business
acquisitions. There were $13.0 million and $48.5 million of borrowings
outstanding under the Bank Credit Facility at December 31, 2001 and 2000. Under
terms of the Bank Credit Facility, no additional borrowings are available at
December 31, 2001. The Bank Credit Facility bears interest at a variable rate
tied to certain LIBOR rate or prime rate plus a variable margin, which depends
upon Blue Dot's interest coverage rates. The effective interest rate for 2001
was 8.52% with a rate at December 31, 2001 of 7.50%. The Bank Credit Facility
matured in February 2002 and all borrowings under the Bank Credit Facility were
repaid January 31, 2002.
The balance of other nonrecourse debt of $45.3 million and $100.0 million at
December 31, 2001 and 2000 is generally comprised of debt assumed and issued in
conjunction with acquisitions.
Annual scheduled consolidated retirements of long-term debt, including
nonrecourse debt, during the next five years are $184.5 million in 2002,
$184.3 million in 2003, $48.9 million in 2004, $151.0 million in 2005 and
$52.8 million in 2006.
The Corporation and its subsidiaries expect to repay or refinance all short
and long-term debt coming due in 2002 using proceeds from long-term financing
expected to be completed in 2002.
6. INCOME TAXES
Prior to 2000, the Corporation filed separate federal income tax returns for
Expanets, Blue Dot and the regulated, unregulated and corporate activities of
the Corporation. In 2000, the Corporation determined that control levels for
Blue Dot, as defined by the applicable tax regulations, had been met and allowed
for the entity to be included in the regulated, unregulated and corporate tax
return filed for the year ended December 31, 2000. For 2001, the Corporation has
determined that the control levels for Expanets have been met as well and the
entity will also be included in the consolidated tax
19
<Page>
NORTHWESTERN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. INCOME TAXES (CONTINUED)
return to be filed for the year ended December 31, 2001. The net operating
losses identified in the tables below have a twenty-year carryforward period.
Income tax expense (benefit) for the years ended December 31 is comprised of
the following (in thousands):
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
Federal income
Current....................................... $ 3,269 $ 5,610 $22,079
Deferred...................................... (46,546) (9,071) (9,179)
Investment tax benefit........................ (535) (539) (562)
State income tax................................ (3,568) (117) 2,128
-------- ------- -------
$(47,380) $(4,117) $14,466
======== ======= =======
</Table>
The following table reconciles the Corporation's effective income tax rate
to the federal statutory rate:
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
Federal statutory rate................................ (35.0)% (35.0)% 35.0%
State income, net of federal benefit................ (2.1)% -- 4.0%
Amortization of investment tax credit............... (0.3)% (2.0)% (1.0)%
Taxable dividends from subsidiaries................. -- 12.0% 5.0%
Nondeductible goodwill amortization................. 3.8% 23.0% 11.0%
Dividends received deduction and other
investments....................................... (.4)% (14.0)% (10.0)%
Valuation allowance................................. 5.9% -- --
Other, net.......................................... (.7)% 1.0% (4.0)%
----- ----- -----
(28.8)% (15.0)% 40.0%
===== ===== =====
</Table>
The components of the net deferred income tax liability recognized in the
Corporation's Consolidated Balance Sheets are related to the following temporary
differences at December 31 (in thousands):
<Table>
<Caption>
2001 2000
-------- --------
Excess tax depreciation................................. $(84,898) $(95,866)
Safe harbor leases...................................... -- 1,238
Regulatory assets....................................... 4,189 4,189
Regulatory liabilities.................................. (3,138) (2,838)
Unbilled revenue........................................ 2,304 7,135
Unamortized investment tax credit....................... 2,205 2,740
Unrealized gain (loss) on investments................... 144 (3,464)
Compensation accruals................................... 8,010 2,054
Reserves and accruals................................... 29,192 22,702
Recognition of net operating loss carryforward.......... 48,712 --
AMT credit carryforward................................. 1,577 --
Valuation allowance on net operating loss............... (11,035) --
Other, net.............................................. (3,196) 6,561
-------- --------
$ (5,934) $(55,549)
======== ========
</Table>
20
<Page>
NORTHWESTERN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. JOINTLY OWNED PLANTS
The Corporation has an ownership interest in three electric generating
plants, all of which are coal fired and operated by other utility companies. The
Corporation has an undivided interest in these facilities and is responsible for
its proportionate share of the capital and operating costs while being entitled
to its proportionate share of the power generated. The Corporation's interest in
each plant is reflected in the consolidated balance sheets on a pro rata basis
and its share of operating expenses is reflected in the consolidated statements
of income. The participants each finance their own investment.
Information relating to the Corporation's ownership interest in these
facilities at December 31, 2001, is as follows:
<Table>
<Caption>
BIG STONE NEAL #4 COYOTE I
(S.D.) (IOWA) (N.D.)
--------- -------- --------
IN THOUSANDS
Ownership percentages............................ 23.4% 8.7% 10.0%
Plant in service................................. $48,267 $34,441 $47,120
Accumulated depreciation......................... $29,978 $21,518 $25,414
</Table>
8. OPERATING LEASES
The Corporation, CornerStone, Expanets and Blue Dot lease office, office
equipment and warehouse facilities under various long-term operating leases. At
December 31, 2001, future minimum lease payments under noncancelable lease
agreements are as follows in thousands:
<Table>
2002......... $27,359
2003......... 18,632
2004......... 13,244
2005......... 9,968
2006......... 6,062
Thereafter... 4,452
</Table>
Lease and rental expense incurred were $29.3 million, $23.0 million and
$13.8 million in 2001, 2000 and 1999, respectively.
9. TEAM MEMBER BENEFIT PLANS
The Corporation maintains a noncontributory defined benefit pension plan for
team members of corporate and the regulated utility division. The benefits to
which a team member is entitled under the plan are derived using a formula based
on the number of years of service and compensation levels, as defined. The
Corporation determines the annual funding for its plan using the frozen initial
liability cost method. The Corporation's annual contribution is funded in
accordance with the requirements of the Employee Retirement Income Security Act.
Assets of the plan consist primarily of debt and equity securities.
21
<Page>
NORTHWESTERN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. TEAM MEMBER BENEFIT PLANS (CONTINUED)
Following is a reconciliation of the changes in the plan's benefit
obligations and fair value of assets over the two-year period ended
December 31, 2001, and a statement of the funded status as of December 31 of
both years:
<Table>
<Caption>
2001 2000
-------- --------
IN THOUSANDS
Reconciliation of Benefit Obligation
Obligation at January 1.................................. $46,304 $ 57,549
Service cost........................................... 780 922
Interest cost.......................................... 3,280 3,805
Actuarial (gain) loss.................................. 2,450 (120)
Benefits paid.......................................... (4,642) (8,316)
Plan amendments........................................ -- (264)
Settlement cost........................................ -- (11,885)
Special termination benefits........................... -- 4,613
Benefit obligation at end of year........................ 48,172 46,304
Reconciliation of Fair Value of Plan Assets
Fair value of plan assets at January 1................... 58,438 84,135
Actual return on plan assets........................... (4,925) (5,496)
Benefits paid.......................................... (4,642) (8,316)
Settlements............................................ -- (11,885)
Fair value of plan assets at end of year................. 48,871 58,438
Funded Status
Funded status at December 31............................. 698 12,133
Unrecognized transition amount......................... 619 773
Unrecognized net actuarial loss (gain)................. 3,109 (9,220)
Unrecognized prior service cost........................ 1,642 2,099
------- --------
Prepaid (accrued) benefit cost........................... $ 6,068 $ 5,785
======= ========
</Table>
The following table provides the components of net periodic benefit cost for
the plans for 2001, 2000 and 1999:
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
IN THOUSANDS
Service cost...................................... $ 780 $ 922 $ 1,149
Interest cost..................................... 3,280 3,805 3,682
Expected return on plan assets.................... (4,738) (6,318) (6,059)
Amortization of transition obligation............. 155 155 155
Amortization of prior service cost................ 457 457 501
Amortization of net gain.......................... (215) (729) (672)
Special termination benefits...................... -- 4,613 --
Settlement cost................................... -- (3,067) --
------- ------- -------
Net periodic benefit cost (income)................ $ (281) $ (162) $(1,244)
======= ======= =======
</Table>
22
<Page>
NORTHWESTERN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. TEAM MEMBER BENEFIT PLANS (CONTINUED)
The prior service costs are amortized on a straight-line basis over the
average remaining service period of active participants. Gains and losses in
excess of 10% of the greater of the benefit obligation or the market-related
value of assets are amortized over the average remaining service period of
active participants.
The assumptions used in calculating the projected benefit obligation for
2001, 2000, and 1999 were as follows:
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
Discount rate........................................ 7.00% 7.50% 6.75%
Expected rate of return on assets.................... 8.50% 8.50% 8.50%
Long-term rate of increase in compensation levels.... 3.50% 3.00% 3.00%
</Table>
During 1999, the Corporation made available to eligible team members the
option to convert their pension plan benefit to a cash balance plan. Effective
January 1, 2000, eligible new team members hired after December 31, 1999, are
automatically enrolled in the cash balance plan as there are no new participants
in the pension plan after December 31, 1999. The result of team members choosing
the cash balance plan did not materially impact the Corporation's 2000 financial
statements. The pension plan will continue for those eligible team members who
did not elect the cash balance plan.
During 2000, the Corporation made available to select employees an early
retirement window. The impact of that reduction in participants resulted in the
Settlement Costs and Special Termination Benefits presented in the above table.
The Corporation, Expanets, Blue Dot and CornerStone provide various team
member savings plans, which permit team members to defer receipt of compensation
as provided in Section 401(k) of the Internal Revenue Code. Under the Plans, the
team member may elect to direct a percentage of their gross compensation to be
contributed to the Plans. The Corporation contributes up to a maximum of 3.5% of
the team member's gross compensation contributed to the Plan. Expanets
contributes up to 66.67% of the first 6% of team member contributions. Blue Dot
contributes 25% of the first 6% of team member contributions. CornerStone
contributes from 20% to 40% of the employee's contributions to the Plan up to a
maximum amount of 5% of the employee's salary. Costs incurred under all of these
plans were $8.8 million, $5.8 million and $3.0 million in 2001, 2000 and 1999.
The Corporation also has various supplemental retirement plans for outside
directors and selected management team members. The plans are nonqualified
defined benefit plans that provide for certain amounts of salary continuation in
the event of death before or after retirement or certain supplemental retirement
benefits in lieu of any death benefits. In addition, the Corporation provides
predetermined death benefits based upon compensation to beneficiaries of
eligible team members who represent a reasonable insurable risk. To minimize the
overall cost of plans providing life insurance benefits, the Corporation has
obtained life insurance coverage to fund the benefit obligations. Costs incurred
under the plans were $3.6 million, $2.1 million and $2.6 million in 2001, 2000
and 1999.
The Corporation has a deferred compensation trust available to all team
members of corporate and the regulated utility division who are participants in
the team member savings plan and whose maximum elective contribution permissible
under that plan could be limited by any provision of the Internal Revenue Code.
Trust participants may invest contributions in common stock of the Corporation
or other diversified investments available in the plan. Any investment elections
in common
23
<Page>
NORTHWESTERN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. TEAM MEMBER BENEFIT PLANS (CONTINUED)
stock are presented as Treasury Stock; other investments as part of Investments;
and an offsetting liability for both as part of Other Noncurrent Liabilities in
the Consolidated Balance Sheets. Contributions by the Corporation to the plan
were $64, $56 and $36 in 2001, 2000 and 1999.
CornerStone has a Restricted Unit Plan, which authorizes the issuance of
Common Units with an aggregate value of $17.5 million to directors, executives,
managers and selected supervisors of CornerStone. The value of the Restricted
Common Unit is established by the market price of the Common Unit at the date of
grant. As of December 31, 2001, Restricted Common Units with a face value of
$13.2 million have been awarded.
10. EMPLOYEE STOCK OWNERSHIP PLAN
The Corporation provides an Employee Stock Ownership Plan ("ESOP") for
full-time team members of corporate and the regulated utility division. The ESOP
acquired the majority of its shares through leveraged loans from a financial
institution. The ESOP is funded primarily with federal income tax savings which
arise from the deductibility of dividends, as allowed by the tax laws applicable
to such team member benefit plans. Active employees enrolled in the plan prior
to 1989 receive annual cash dividend payments, and may voluntarily contribute
back to the plan a percentage of these dividends subject to discrimination rules
of the IRS and ERISA. The Corporation then contributes a matching contribution
equal to two times the voluntary contribution. Any excess after payment of the
match is allocated pro rata to all participants. All dividends received on
unallocated shares of participants enrolling subsequent to 1989 are used to
repay the loans of the leveraged loan segment of the Plan. Shares on this
leveraged portion of the plan are released as principal and interest on the
loans are made. Certain Corporation contributions and shares of stock acquired
by the ESOP are allocated to participants' accounts in proportion to the
compensation of team members during the particular year for which the allocation
is made subject to certain IRS limits. At December 31, 2001 and 2000, the ESOP
had an outstanding loan balance of $7.0 million and $8.0 million, respectively,
which is secured by the unallocated assets of the ESOP and guarantees of future
minimum debt funding payments by the Corporation to the ESOP. Costs incurred
under the plan were $.8 million in 2001 and $1.0 million each year in 2000 and
1999, respectively.
The shares held by the plan are included in the number of average shares
outstanding when computing the Corporation's basic and diluted earnings per
share and any dividends paid to the plan are included in the common dividend
totals. The number, classification and fair value of shares held by the plan at
December 31 are as follows:
<Table>
<Caption>
2001 2000
------------------------- -------------------------
ALLOCATED UNALLOCATED ALLOCATED UNALLOCATED
----------- ----------- ----------- -----------
Number of shares........... 677,769 387,447 653,209 451,757
Fair value................. $14,267,037 $8,155,759 $15,108,724 $10,449,139
</Table>
11. REGULATORY ASSETS AND LIABILITIES
Our regulated business prepares their financial statements in accordance
with the provisions of SFAS 71, as discussed in Note 1 to the Financial
Statements. Under SFAS 71, regulatory assets and liabilities can be created for
amounts that regulators may allow the Corporation to collect, or may require
amounts paid back to customers in future electric and natural gas rates. The
components of
24
<Page>
NORTHWESTERN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. REGULATORY ASSETS AND LIABILITIES (CONTINUED)
unamortized regulatory assets and liabilities shown on the balance sheet at
December 31 were as follows (in thousands):
<Table>
<Caption>
REMAINING
AMORTIZATION
PERIOD 2001 2000
------------ -------- --------
Environmental costs............................ 1 year $ 1,100 $ 2,215
Unrecovered gas costs.......................... 1 year 7,347 6,911
Investment tax credit deferrals................ 12 years (6,704) (7,239)
Other.......................................... 1 year (246) (21)
------- -------
$ 1,497 $ 1,866
======= =======
</Table>
12. STOCK OPTIONS AND WARRANTS
Under the NorthWestern Stock Option and Incentive Plan ("Plan"), the
Corporation has reserved 2,750,000 shares for issuance to officers, key team
members and directors as either incentive-based options or nonqualified options.
The Nominating and Compensation Committee ("Committee") of the Corporation's
Board of Directors administers the Plan. Unless established differently by the
Committee, the per share option exercise price shall be the fair market value of
the Corporation's common stock at the grant date. The options expire 10 years
following the date of grant and vest over a three-year period beginning in the
third year. In addition, the Corporation issued 1,279,476 warrants to
non-employees to purchase shares of NorthWestern common stock at $18.225 per
share in connection with a previous acquisition. During 2001, all of those
remaining warrants were extinguished through a cashless exchange whereby holders
received shares of the Corporation's common stock equivalent to the difference
between the warrant price and the market price of the Corporation's
25
<Page>
NORTHWESTERN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. STOCK OPTIONS AND WARRANTS (CONTINUED)
common stock on the date of the exchange. 271,949 shares of common stock were
issued in association with these transactions. A summary of the activity of
stock options and warrants is as follows:
<Table>
<Caption>
STOCK OPTIONS
------------------------------------
SHARES RANGE WEIGHTED
--------- ------------- --------
Balance December 31, 1998.................. 225,463 23.00 - 24.88 23.11
Issued..................................... 449,604 21.19 - 26.13 25.67
Canceled................................... (11,000) 26.13 26.13
---------
Balance December 31, 1999.................. 664,067 23.00 - 26.13 24.39
Issued..................................... 741,454 21.50 - 23.31 21.95
Canceled................................... (14,000) 20.63 - 23.00 21.98
---------
Balance December 31, 2000.................. 1,391,521 21.19 - 26.13 23.31
Issued..................................... 536,100 22.70 - 25.00 23.03
Canceled................................... (43,129) 21.19 - 23.31 22.31
---------
Balance December 31, 2001.................. 1,884,492 21.19 - 26.13 23.26
=========
</Table>
<Table>
<Caption>
STOCK WARRANTS
SHARES
--------------
Balance December 31, 1998................................... 1,105,158
Exercised................................................... (90,896)
----------
Balance December 31, 1999................................... 1,014,262
Exercised................................................... (10,000)
----------
Balance at December 31, 2000................................ 1,004,262
Extinguished................................................ (1,004,262)
----------
Balance December 31, 2001................................... --
==========
</Table>
The Corporation follows Accounting Principles Board Opinion 25, "Accounting
for Stock Issued to Employees," to account for stock option plans. No
compensation cost is recognized because the option exercise price is equal to
the market price of the underlying stock on the date of grant.
An alternative method of accounting for stock options is SFAS 123,
"Accounting for Stock-Based Compensation." Under SFAS 123, stock options are
valued at grant date using the Black-Scholes valuation model and compensation
cost is recognized ratably over the vesting period. Had compensation cost for
the Corporation's stock option plan been determined as prescribed by SFAS 123,
26
<Page>
NORTHWESTERN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. STOCK OPTIONS AND WARRANTS (CONTINUED)
the pro forma information for 2001, 2000 and 1999 would have been as follows (in
thousands except per share amounts):
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
Earnings on common stock
As reported.................................... $37,514 $42,761 $37,871
Pro forma...................................... $36,881 $42,365 $37,763
Diluted earnings per share
As reported.................................... $ 1.53 $ 1.83 $ 1.62
Pro forma...................................... 1.51 $ 1.82 $ 1.62
</Table>
The weighted average Black-Scholes value of options granted under the stock
option plan during 2001, 2000 and 1999 was $3.17, $2.95 and $2.11. The 2001
value was estimated using an expected life of eight years, 5.2% dividend yield,
volatility of 18.8% and risk-free interest rate of 5.1%.
13. EARNINGS PER 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 2001, 2000 and 1999 were
as follows:
<Table>
<Caption>
2001 2000 1999
---------- ---------- ----------
Basic computation...................... 24,390,184 23,140,615 23,093,702
Dilutive effect of
Stock options.......................... 19,364 13,770 14,000
Stock warrants......................... 45,760 183,396 263,704
Diluted computation.................... 24,455,308 23,337,781 23,371,403
</Table>
Certain outstanding antidilutive options and warrants have been excluded
from the earnings per share calculations. These options and warrants total
1,221,876 shares, 697,976 shares and 386,852 shares in 2001, 2000 and 1999.
14. CORNERSTONE DISTRIBUTIONS
CornerStone makes distributions to its partners each fiscal quarter in an
aggregate amount equal to its available cash, as defined in its partnership
agreement. Distributions will generally be made 98% to the Common and
Subordinated Unitholders and 2% to the general partner. To the extent there is
sufficient available cash, the holders of Common Units have the right to receive
the Minimum Quarterly Distribution, plus any arrearages, prior to the
distribution of available cash to holders of Subordinated Units. Common Units
will not accrue arrearages for any quarter after the Subordination Period (as
defined below), and Subordinated Units will not accrue any arrearages with
respect to distributions for any quarter.
The Subordination Period will generally extend until the first day of any
future quarter in which a) distributions of available cash equal or exceed the
Minimum Quarterly Distribution on each of the
27
<Page>
NORTHWESTERN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. CORNERSTONE DISTRIBUTIONS (CONTINUED)
outstanding Common and Subordinated Units for each of the three consecutive
four-quarter periods immediately preceding such date, b) the adjusted operating
surplus generated during each of the three consecutive four-quarter periods
immediately preceding such date equals or exceeds the Minimum Quarterly
Distribution on each of the Common and Subordinated Units and the related
distribution on the general partner interests in the Partnership during such
periods, and c) there are no outstanding Common Unit arrearages.
In addition, 3,298,810 Subordinated Units may convert into Common Units if
a) distributions of available cash from operating surplus on each of the
outstanding Common and Subordinated Units equal or exceed the Minimum Quarterly
Distribution for each of the three consecutive four-quarter periods immediately
preceding the conversion date, b) the adjusted operating surplus generated
during the immediately preceding two consecutive four-quarter periods equals or
exceeds the Minimum Quarterly Distribution on all of the Common and Subordinated
Units outstanding during that period and c) there are no arrearages on the
Common Units. No subordinated units have converted to Common Units as of
December 31, 2001. CornerStone will make distributions of its available cash
approximately 45 days after the end of each quarter ending March, June,
September and December to holders of record on the applicable record dates to
the extent allowed under Credit and Partnership Agreements. For all quarters
ended after December 31, 1997, CornerStone and the Corporation have elected to
forgo the Subordinated Unit distributions.
In July 2001, the Board of Directors announced that the distribution to
Common Unit holders for the quarter ended June 30, 2001 would be reduced by 50%.
The Minimum Quarterly Distribution was not changed however, and the difference
between that and the reduced distribution will therefore accrete as a priority
over any distribution on Subordinated Units. On January 18, 2002, in association
with the amendment of the Bank Credit Facility (discussed in Note 5),
CornerStone's ability to pay Minimum Quarterly Distributions has been suspended.
As with the July reduction, the distributions will be subject to arrearage
privileges, which total $1.08 per common unit at December 31, 2001.
15. COMMITMENTS AND CONTINGENCIES
The Corporation and its subsidiaries are parties to various pending
proceedings and lawsuits, but in the judgment of management, after consultation
with counsel for the Corporation, the nature of such proceedings and suits and
the amounts involved do not depart from the routine litigation and proceedings
incident to the kinds of businesses conducted by the Corporation, and management
believes that such proceedings will not result in any material adverse impact on
the Corporation's financial position or results of operations.
The Corporation is subject to numerous state and federal environmental
regulations. The Clean Air Act Amendments of 1990 (the Act) stipulate
limitations on sulfur dioxide and nitrogen oxide emissions from coal-fired power
plants. The Corporation believes it can comply with such sulfur dioxide emission
requirements at its generating plants and that it is in compliance with all
presently applicable environmental protection requirements and regulations. The
Corporation is also subject to other environmental statutes and regulations
including matters related to former manufactured gas plant sites. No
administrative or judicial proceedings involving the Corporation are now pending
or known by the Corporation to be contemplated under present environmental
protection requirements.
28
<Page>
NORTHWESTERN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Corporation's 1997 and 1998 federal income tax returns and Expanets'
1998 federal income tax return are under audit by the IRS. Certain state income
and franchise tax returns are also under audit by various state agencies.
Management believes that the final results of these audits will not have a
material adverse effect on the Corporation's financial position or results of
operations.
16. CAPITAL STOCK
In December 1996, the Corporation's Board of Directors declared, pursuant to
a shareholders' rights plan, a dividend distribution of one Right on each
outstanding share of the Corporation's common stock. Each Right becomes
exercisable, upon the occurrence of certain events, at an exercise price of $50
per share, subject to adjustment. The Rights are currently not exercisable and
will be exercisable only if a person or group of affiliated or associated
persons ("Acquiring Person") either acquires ownership of 15% or more of the
Corporation's common stock or commences a tender or exchange offer that would
result in ownership of 15% or more. In the event the Corporation is acquired in
a merger or other business combination transaction or 50% or more of its
consolidated assets or earnings power are sold, each Right entitles the holder
to receive such number of shares of common stock of the Acquiring Person having
a market value of two times the then current exercise price of the Right. The
Rights, which expire in December 2006, are redeemable in whole, but not in part,
at a price of $.005 per Right, at the Corporation's option at any time until any
Acquiring Person has acquired 15% or more of the Corporation's common stock.
In October 2001 the Corporation completed a common stock offering of
3,680,000 shares. The offering resulted in net proceeds of $74.9 million and the
funds were used to redeem certain subsidiary equity arrangements and for general
corporate purposes, including reducing debt. The Corporation also issued 33,480
shares of common stock in 2001 under a restricted stock plan with a fair value
at date of issuance of $.7 million. The stock vests over a four-year period and
compensation expense is recognized ratably over the vesting period. Compensation
expense for 2001 of $.2 million has been recognized.
The Corporation is authorized to issue 1,000,000 shares of $100 par
cumulative preferred stock. As of December 31, 2001 and 2000, there were 37,500
shares outstanding of which 26,000 were 4 1/2% Series and 11,500 were 6 1/2%
Series. The provisions of the 6 1/2% Series stock contain a five-year put option
exercisable by the holders of the securities and a 10-year redemption option
exercisable by the Corporation. In any event, redemption will occur at par
value. The 4 1/2% Series may be redeemed in whole or in part at the option of
the Board of Directors at any time upon at least 30 days notice at $110.00 per
share plus accrued dividends. In the event of involuntary dissolution, all
Corporation preferred stock outstanding would have a preferential interest of
$100 per share, plus accumulated dividends, before any distribution to common
shareholders.
The Corporation is authorized to issue a maximum of 1,000,000 shares of
preference stock at a par value of $50 per share. No preference shares have been
issued.
Treasury stock held by the Corporation represents shares held by the
Corporation's deferred compensation plan (see Note 9). 155,943 shares reflected
at cost were held at December 31, 2001.
29
<Page>
NORTHWESTERN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. CORPORATION OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUSTS
<Table>
<Caption>
SERIES PAR VALUE SHARES 2001 2000
- ------ --------- --------- -------- --------
IN THOUSANDS
8.125% $25 1,300,000 $ 32,500 $32,500
7.2% $25 2,200,000 55,000 55,000
8.25% $25 4,000,000 100,000 --
--------- -------- -------
7,500,000 $187,500 $87,500
========= ======== =======
</Table>
The Corporation has established three wholly owned, special-purpose business
trusts, NWPS Capital Financing I, NorthWestern Capital Financing I, and
NorthWestern Capital Financing II, to issue common and preferred securities and
hold Subordinated Debentures that the Corporation issues. The sole assets of
these trusts are the investments in Subordinated Debentures. The trusts use the
interest payments received on the Subordinated Debentures to make quarterly cash
distributions on the preferred securities. These Subordinated Debentures are
unsecured and subordinated to all of the Corporation's other liabilities and
rank equally with the guarantees related to the other trusts. The Corporation
guarantees payment of the dividends on the preferred securities only if the
Corporation has made the required interest payments on the Subordinated
Debentures held by the trusts. In addition, the Corporation owns all of the
common securities of each trust, equivalent to approximately 3% of the capital
of each trust. Five years from the date of each issuance, the Corporation has
the option of redeeming some or all of the Subordinated Debentures at 100% of
their principal amount plus any accrued interest to the date of redemption. All
of the Subordinated Debentures have a 30-year maturity period.
18. SUBSEQUENT EVENTS
On January 18, 2002, CornerStone announced that, as a result of its
financial performance in the December 2001 quarter, it would not be in
compliance with certain covenants of its $50 million Bank Credit Facility.
Discussions with the lenders of this Facility led to an amendment that allows
continued access to funding under the Facility. However, the amendment
eliminates the ability of CornerStone to make further Minimum Quarterly
Distributions during the term of the Facility. Pursuant to the Partnership
Agreement, the suspension of distributions under the defined Minimum Quarterly
Distribution will be subject to arrearage privileges, so that no distribution
will be made to the Subordinated Unitholders until the arrearages have been paid
to the Common Unitholders. In addition, CornerStone announced that it had
retained Credit Suisse First Boston Corporation to pursue the possible sale or
merger of the Partnership.
Under the provisions of the December 2001 trust preferred securities
offering, additional shares were issued on January 15, 2002. The Corporation
also issued $111.0 million in 8.1% trust preferred securities through
NorthWestern Capital Financing III, a special-purpose wholly owned business
trust (4.4 million shares with $25 par value.) The securities were issued under
terms identical to those identified in Note 17, "Corporation Obligated
Mandatorily Redeemable Preferred Securities of Subsidiary Trusts." The proceeds
were used for debt repayment and general corporate purposes.
Under a credit agreement executed January 14, 2002, the Corporation entered
into a credit facility for the acquisition The Montana Power Company's
(NYSE:TAA) energy distribution and transmission business. The facility is
comprised of $720.0 million term loan, a $280.0 million revolving credit
facility
30
<Page>
NORTHWESTERN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. SUBSEQUENT EVENTS (CONTINUED)
and a $25.0 million swingline facility. The facility terminates 364 days
subsequent to the acquisition closing date and bears interest at a variable rate
tied to a certain Eurodollar index or prime rate plus a variable margin, which
can range from zero to 2.75%. Proceeds from the $720.0 million term loan
commitment and $19.0 million of the swingline commitment were used for the
acquisition purchase price, related acquisition fees and repayment of
$102.3 million of outstanding principal, interest and fees under the current
credit facility (see Note 5) which was subsequently terminated.
On February 15, 2002, the Corporation completed the acquisition of The
Montana Power Company's energy distribution and transmission business for
$602.0 million in cash and the assumption of $488.0 million in existing Montana
Power Company debt and mandatorily redeemable, preferred securities of
subsidiary trusts. As a result of the acquisition, the Corporation will be the
provider of natural gas and electricity to more than 575,000 customers in
Montana, South Dakota and Nebraska and the capacity to provide service to wider
regions of the country. For accounting convenience, due to the burden of a
mid-month closing, both parties have agreed to an effective date for the sale of
January 31, 2002.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed as of December 31, 2001. The Corporation is in
the process of obtaining third-party valuations of certain intangible assets;
thus, the allocation of the purchase price is subject to refinement, generally
within one year of the date of acquisition and in the interim, has been
allocated to goodwill. Final allocations will separate between goodwill,
intangible assets subject to amortization and those that are not, useful lives
and tax deductibility.
<Table>
<Caption>
IN
THOUSANDS
----------
Current assets.............................................. $ 219,830
Property, plant and equipment............................... 1,111,034
Goodwill & other intangibles................................ 7,418
Other....................................................... 155,688
----------
Total assets acquired..................................... $1,493,970
==========
Current liabilities......................................... $ 168,465
Long-term debt.............................................. 442,680
QUIPS....................................................... 41,879
Other....................................................... 300,995
----------
Total liabilities assumed................................. 954,019
----------
Net assets acquired......................................... $ 531,951
==========
</Table>
The following unaudited pro forma results of operations for the year ended
December 31, 2001, give effect as if the acquisition had occurred as of
January 1, 2001 (in thousands except per share amounts):
<Table>
<Caption>
2001
-----------
(UNAUDITED)
Revenues.................................................... $4,895,885
Net income.................................................. $ 74,437
Diluted earnings per share.................................. $ 1.68
</Table>
31
<Page>
NORTHWESTERN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. SEGMENT AND RELATED INFORMATION
The Corporation's six principal business segments are its electric, natural
gas, communications, HVAC, retail propane and wholesale propane operations. The
"All Other" segment includes the results of service and other nonenergy-related
operations, activities and assets of the corporate office, as well as any
reconciling or eliminating amounts.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies except that the
parent allocates some of its operating expenses and interest expense to the
operating segments according to a methodology designed by management for
internal reporting purposes and involves estimates and assumptions. Financial
data for the business segments are as follows:
2001
<Table>
<Caption>
TOTAL
ELECTRIC AND TOTAL
NATURAL GAS COMMUNICATIONS HVAC PROPANE ALL OTHER TOTAL
------------ -------------- -------- ---------- --------- ----------
Operating revenues......... $251,208 $1,032,033 $423,803 $2,513,777 $ 16,934 $4,237,755
Cost of sales.............. 142,112 648,036 267,978 2,311,384 10,678 3,380,188
-------- ---------- -------- ---------- -------- ----------
Gross margin............... 109,096 383,997 155,825 202,393 6,256 857,567
Selling, general, &
administrative........... 42,284 431,477 145,954 147,957 23,264 790,936
Depreciation............... 16,428 13,518 9,148 25,102 1,942 66,138
Amortization of goodwill &
other intangibles........ -- 35,647 7,245 16,466 269 59,627
Restructuring charge....... 4,499 5,906 7,239 -- 7,272 24,916
-------- ---------- -------- ---------- -------- ----------
Operating income (loss).... 45,885 (102,551) (13,761) 12,868 (26,491) (84,050)
Interest expense........... (8,692) (17,330) (3,835) (48,164) (12,344) (90,365)
Investment income &
other.................... 306 683 204 -- 6,830 8,023
-------- ---------- -------- ---------- -------- ----------
Income (loss) before taxes
and minority interests... 37,499 (119,198) (17,392) (35,296) (32,005) (166,392)
Benefit (provision) for
taxes.................... (11,857) 32,190 3,830 7,329 15,888 47,380
-------- ---------- -------- ---------- -------- ----------
Income (loss) before
minority interests....... $ 25,642 $ (87,008) $(13,562) $ (27,967) $(16,117) $ (119,012)
======== ========== ======== ========== ======== ==========
Total Assets............... $369,915 $ 775,186 $386,249 $ 850,985 $235,026 $2,617,361
======== ========== ======== ========== ======== ==========
Maintenance Capital
Expenditures............. $ 12,818 $ 18,957 $ 8,521 $ 5,909 $ 1,204 $ 47,409
======== ========== ======== ========== ======== ==========
</Table>
32
<Page>
NORTHWESTERN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. SEGMENT AND RELATED INFORMATION (CONTINUED)
2000
<Table>
<Caption>
TOTAL
ELECTRIC AND TOTAL
NATURAL GAS COMMUNICATIONS HVAC PROPANE ALL OTHER TOTAL
------------ -------------- -------- ---------- --------- ----------
Operating revenues......... $181,309 $1,104,034 $408,829 $5,422,616 $ 15,302 $7,132,090
Cost of sales.............. 88,156 740,553 260,975 5,196,300 9,691 6,295,675
-------- ---------- -------- ---------- -------- ----------
Gross margin............... 93,153 363,481 147,854 226,316 5,611 836,415
Selling, general, &
administrative........... 39,211 350,926 129,447 149,777 17,453 686,814
Depreciation............... 15,919 7,614 7,901 25,271 1,329 58,034
Amortization of goodwill &
other intangibles........ -- 29,552 5,891 14,814 38 50,295
-------- ---------- -------- ---------- -------- ----------
Operating income (loss).... 38,023 (24,611) 4,615 36,454 (13,209) 41,272
Interest expense........... (7,760) (4,019) (4,877) (42,738) (17,813) (77,207)
Investment income &
other.................... (194) 508 401 -- 8,266 8,981
-------- ---------- -------- ---------- -------- ----------
Income (loss) before taxes
and minority interests... 30,069 (28,122) 139 (6,284) (22,756) (26,954)
Benefit (provision) for
taxes.................... (9,819) 8,323 (2,404) (972) 8,989 4,117
-------- ---------- -------- ---------- -------- ----------
Income (loss) before
minority interests....... $ 20,250 $ (19,799) $ (2,265) $ (7,256) $(13,767) $ (22,837)
======== ========== ======== ========== ======== ==========
Total Assets............... $368,308 $ 729,063 $378,711 $1,238,837 $183,151 $2,898,070
======== ========== ======== ========== ======== ==========
Maintenance Capital
Expenditures............. $ 10,810 $ 10,434 $ 7,366 $ 3,109 $ 378 $ 32,097
======== ========== ======== ========== ======== ==========
</Table>
33
<Page>
NORTHWESTERN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. SEGMENT AND RELATED INFORMATION (CONTINUED)
1999
<Table>
<Caption>
TOTAL
ELECTRIC AND TOTAL ALL
NATURAL GAS COMMUNICATIONS HVAC PROPANE OTHER TOTAL
------------ -------------- -------- ---------- -------- ----------
Operating revenues......... $152,166 $294,878 $293,736 $2,246,400 $ 17,160 $3,004,340
Cost of sales.............. 65,511 168,888 182,190 2,038,714 12,462 2,467,765
-------- -------- -------- ---------- -------- ----------
Gross margin............... 86,655 125,990 111,546 207,686 4,698 536,575
Selling, general, &
administrative........... 37,016 102,507 96,723 137,859 14,612 388,717
Depreciation............... 14,920 3,257 4,425 20,587 413 43,602
Amortization of goodwill &
other intangibles........ -- 7,211 4,243 13,215 31 24,700
-------- -------- -------- ---------- -------- ----------
Operating income (loss).... 34,719 13,015 6,155 36,025 (10,358) 79,556
Interest expense........... (8,790) (1,384) (1,210) (32,176) (9,594) (53,154)
Investment income &
other.................... 366 (1,016) 691 -- 9,759 9,800
-------- -------- -------- ---------- -------- ----------
Income (loss) before taxes
and minority interests... 26,295 10,615 5,636 3,849 (10,193) 36,202
Benefit (provision) for
taxes.................... (8,816) (7,129) (3,532) (693) 5,704 (14,466)
-------- -------- -------- ---------- -------- ----------
Income (loss) before
minority interests....... $ 17,479 $ 3,486 $ 2,104 $ 3,156 $ (4,489) $ 21,736
======== ======== ======== ========== ======== ==========
Total Assets............... $364,673 $324,489 $279,140 $ 861,813 $126,646 $1,956,761
======== ======== ======== ========== ======== ==========
Maintenance Capital
Expenditures............. $ 12,813 $ 3,589 $ 7,763 $ 7,735 $ 699 $ 32,599
======== ======== ======== ========== ======== ==========
</Table>
<Table>
<Caption>
2001 2000 1999
------------------- ------------------- -------------------
NATURAL NATURAL NATURAL
ELECTRIC GAS ELECTRIC GAS ELECTRIC GAS
-------- -------- -------- -------- -------- --------
Operating revenues.............. $106,995 $144,213 $ 86,575 $ 94,734 $ 83,943 $ 68,223
Cost of sales................... 23,052 119,060 16,782 71,374 18,456 47,055
-------- -------- -------- -------- -------- --------
Gross margin.................... 83,943 25,153 69,793 23,360 65,487 21,168
Selling, general &
administrative................ 27,734 14,550 25,397 13,814 24,722 12,294
Depreciation.................... 13,193 3,235 12,663 3,256 12,006 2,914
Restructuring charge............ 3,329 1,170 -- -- -- --
-------- -------- -------- -------- -------- --------
Operating Income................ $ 39,687 $ 6,198 $ 31,733 $ 6,290 $ 28,759 $ 5,960
======== ======== ======== ======== ======== ========
</Table>
34
<Page>
NORTHWESTERN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. SEGMENT AND RELATED INFORMATION (CONTINUED)
<Table>
<Caption>
2001 2000 1999
--------------------- --------------------- ---------------------
RETAIL WHOLESALE RETAIL WHOLESALE RETAIL WHOLESALE
PROPANE PROPANE PROPANE PROPANE PROPANE PROPANE
-------- ---------- -------- ---------- -------- ----------
Operating revenues.......... $373,853 $2,139,924 $389,447 5,033,169 $303,947 $1,942,453
Cost of sales............... 195,541 2,115,843 211,139 4,985,161 133,084 1,905,630
-------- ---------- -------- ---------- -------- ----------
Gross margin................ $178,312 $ 24,081 $178,308 $ 48,008 $170,863 $ 36,823
======== ========== ======== ========== ======== ==========
</Table>
20. QUARTERLY FINANCIAL DATA (UNAUDITED)
<Table>
<Caption>
FIRST SECOND THIRD FOURTH
---------- ---------- ---------- ----------
IN THOUSANDS EXCEPT PER SHARE AMOUNTS
2001
Operating revenues............................ $1,496,689 $1,031,586 $ 912,061 $ 797,419
Gross margin.................................. $ 238,358 $ 228,063 $ 189,836 $ 201,310
Operating income (loss)*...................... $ (4,752) $ (10,829) $ (27,058) $ (41,411)
Net income*................................... $ 18,389 $ 10,780 $ 10,272 $ 5,091
Average common shares outstanding............. 23,433 23,669 23,706 26,724
Basic earnings per average common share**..... $ .71 $ .38 $ .36 $ .12
Diluted earnings per average common share**... $ .70 $ .38 $ .36 $ .12
Dividends per share........................... $ .2975 $ .2975 $ .2975 $ .3175
Stock price:
High........................................ $ 25.65 $ 26.75 $ 23.10 $ 22.35
Low......................................... $ 21.63 $ 21.75 $ 20.90 $ 18.25
Quarter-end close........................... $ 24.50 $ 22.40 $ 22.00 $ 21.05
2000
Operating revenues............................ $1,330,944 $1,637,715 $1,613,573 $2,549,858
Gross margin.................................. $ 168,193 $ 204,127 $ 222,620 $ 241,475
Operating income (loss)....................... $ 35,989 $ (828) $ 2,751 $ 3,360
Net income.................................... $ 16,239 $ 7,702 $ 9,947 $ 15,665
Average common shares outstanding............. 23,109 23,117 23,119 23,216
Basic earnings per average common share....... $ .63 $ .26 $ .36 $ .60
Diluted earnings per average common share..... $ .62 $ .26 $ .35 $ .60
Dividends per share........................... $ .2775 $ .2775 $ .2775 $ .2975
Stock price:
High........................................ $ 23.25 $ 23.94 $ 23.94 $ 23.75
Low......................................... $ 20.63 $ 21.00 $ 19.13 $ 19.31
Quarter-end close........................... $ 20.63 $ 23.13 $ 19.50 $ 23.13
</Table>
- ------------------------
* Includes effect of a pretax restructuring charge of $24.9 million.
** The 2001 quarterly basic and diluted earnings per average common shares do
not total to the 2001 annual basic and diluted earnings per average common
shares due to the effect of common stock issuances during the year.
35