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TAB A

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Expert Report of Paul A. Marcus
September 19, 2007

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Introduction ..................................................................................................................................................................3 Qualifications ...............................................................................................................................................................4 Compensation ..............................................................................................................................................................5 Summary of Opinions..................................................................................................................................................5 Background ..................................................................................................................................................................7 Overview .................................................................................................................................................................7 NorthWestern financing, public announcements and other events .........................................................................8 NorthWestern management knowledge ................................................................................................................11 General market conditions ....................................................................................................................................14 Equity analyst view of NorthWestern prior to restatement ....................................................................................16 Rating agency view of NorthWestern prior to restatement ....................................................................................21 Financial restatement on April 15, 2003................................................................................................................24 Financial restatement per Accounting Expert........................................................................................................28 Statement of Opinions...............................................................................................................................................30 I. The misstatements and omissions in NorthWestern's financial statements, Registration Statement in connection with the $720 million in bonds, and other public disclosures during 2002 enabled the Company to complete the October 2002 $87 million equity offering and the transfer of the NorthWestern Energy L.L.C. assets to NorthWestern in November 2002. Had the true information been disclosed to the public prior to October 8 and November 15, 2002, respectively, the equity offering would not have occurred and the asset transfer would have been impeded by the attempts of security holders and regulators to protect their respective investments and constituents because:...............................................................................................................................................30 · The market's knowledge that NorthWestern would never realize a return on or cash flow from its significant investment (including preferred stock and intercompany advances) in its unregulated subsidiaries, Blue Dot and Expanets, would have been accelerated. .................................................................................................................30 · The precipitous drop in NorthWestern's stock price would have been accelerated...........................................30 · The downgrading of NorthWestern's credit to below investment grade would have been accelerated. ............30 · NorthWestern would have defaulted on financial covenants related to its $280 million facility for which Credit Suisse First Boston ("CSFB") was the administrative agent. ....................................................................................30 · CSFB would likely not have funded the $280 million facility..............................................................................30 · The suspension of NorthWestern's dividend would have been accelerated......................................................30 · The $390 million debt financing with CSFB would have been unlikely. .............................................................30 Ratings downgrade ...............................................................................................................................................32 NorthWestern stock price drop..............................................................................................................................33 Covenant default...................................................................................................................................................34 Funding of CSFB $280 million credit facility..........................................................................................................36 $87 million equity offering .....................................................................................................................................37 Suspension of cash dividend payment..................................................................................................................40 $390 million CSFB financing .................................................................................................................................43 Transfer of NorthWestern Energy, L.L.C. assets ..................................................................................................46 II. Had the assets of NorthWestern Energy, L.L.C. not been transferred to NorthWestern, the QUIPS investors would have been covered by the former's assets and not junior to the debt and other liabilities of NorthWestern Corp. .......................................................................................................................................................................50 III. Assuming Clark Fork remained liable for the QUIPS obligations; Clark Fork would not have had the financial ability to meet those obligations. ..............................................................................................................................51

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Introduction
1. I have been retained by Fried, Frank, Harris, Shriver & Jacobson LLP, counsel for Magten Asset Management Corporation ("Magten") on behalf of both Magten and Law Debenture Trust Company of New York to analyze and assess the impact of misstatements and omissions in NorthWestern Corporation's ("NorthWestern" or "Company") financial statements and public disclosures during 2002 on NorthWestern's invested capital and the availability of additional capital. 2. I have prepared this report to set forth the opinions I may express at the trial of this matter and reserve the right to supplement this report based upon information that may become available subsequent to the date of this report. When I testify at trial, I may illustrate my testimony with demonstrative aids such as graphs, charts and/or slides. 3. My opinions are based upon an independent examination of the evidence provided by the parties in this case and my knowledge and professional experience. I express all opinions to a reasonable degree of professional certainty. 4. The general categories of information that I have reviewed during the course of my analysis to assist in formulating my opinion include: · Case related documents in the Magten Asset Management Corporation & Law Debenture Trust Company of New York v. NorthWestern Corporation litigation including but not limited to: · · Case complaint Depositions and related exhibits Board meeting minutes Presentations to rating agencies Bear Stearns presentations to NorthWestern Management Financial and Information Reports E-mails Company memos Company financial projections

NorthWestern's Securities and Exchange Commission ("SEC") filings and press releases SEC complaints and proceedings involving NorthWestern and its former management
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· · · · 5.

Equity research for NorthWestern and the utility industry Rating agency press releases and reports Credit facility agreements Other research related to NorthWestern and the utility industry I have also relied on the analyses and findings of Robert Berliner in his Expert Report dated September 19, 2002 related to NorthWestern's violations of U.S. generally accepted accounting principles ("GAAP") and SEC disclosure regulations and the impact of those violations on NorthWestern's financial statements and financial covenants.

6.

A complete list of documents I considered to formulate my opinions in this matter is provided in Exhibit 1.

Qualifications
7. I am a professional with over twenty years of experience in corporate finance, mergers and acquisitions, valuation, financial analysis, and advising on complex financial transactions. I hold an M.B.A. from the University of Chicago and a B.S. from Tufts University. I also hold the Chartered Financial Analyst designation granted by the CFA Institute and successfully completed a formal credit training program at Bank of America. 8. As a practitioner, I have substantial experience in performing financial analysis related to providing capital to companies as well as advising them on financing strategy. In my roles at Bank of America, Shawmut Bank and Marlborough Capital Advisors, I was responsible for recommending investment of senior debt, subordinated debt, and equity in excess of a billion dollars. As an investment banker, I assisted companies in determining the appropriate capital structure and financing plans to achieve their goals and advised them in transactions which raised funds from equity and debt sources including but not limited to: the public equity markets, private equity and mezzanine funds, insurance companies, finance companies, commercial banks (cash flow and asset-based loans), factors, and others. These investments covered a wide variety of

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industries including electric utilities, gas utilities, gas pipelines, independent power producers, and others. 9. As a consultant, I have provided consulting and expert services to numerous attorneys and companies on matters of valuation, damages, lost profits, corporate finance, solvency, business modeling, bankruptcy, and mergers and acquisitions. I have also served as a financial analyst and consultant to numerous companies on mergers and acquisitions, valuation of debt and equity securities, business valuation, leveraged buyouts, private placement of debt and equity, and debt restructuring. 10. In addition, I have testified in federal court and have made presentations on financing strategies, exit strategies for business owners, and understanding financial statements to business groups and law firms. I have designed and taught classes on the determination and calculation of damages as part of Huron's formal training activities. 11. A detailed description of my qualifications and expert testimony during the last four years is provided in Exhibit 2.

Compensation
12. Huron charges an hourly rate of $505 for my time in conducting the research and analysis supporting my opinion and for any testimony I may give. I have supervised others at Huron who also have worked on this project; their hourly rate varies based on their experience level. Neither Huron's fees nor my compensation are contingent on my findings or on the outcome of this litigation.

Summary of Opinions
13. My opinions in this matter are: I. The misstatements and omissions in NorthWestern's financial statements, Registration Statement in connection with the $720 million in bonds, and other public disclosures during 2002 enabled the Company to complete the October 2002 $87 million equity offering and the transfer of the NorthWestern Energy L.L.C. assets to NorthWestern in November 2002. Had the true information been disclosed to the public prior to October

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8 and November 15, 2002, respectively, the equity offering would not have occurred and the asset transfer would have been impeded by the attempts of security holders and regulators to protect their respective investments and constituents because: · The market's knowledge that NorthWestern would never realize a return on or cash flow from its significant investment (including preferred stock and intercompany advances) in its unregulated subsidiaries, Blue Dot and Expanets, would have been accelerated. · · The precipitous drop in NorthWestern's stock price would have been accelerated. The downgrading of NorthWestern's credit to below investment grade would have been accelerated. · NorthWestern would have defaulted on financial covenants related to its $280 million facility for which Credit Suisse First Boston ("CSFB") was the administrative agent.1 · · · CSFB would likely not have funded the $280 million facility. The suspension of NorthWestern's dividend would have been accelerated. The $390 million debt financing with CSFB would have been unlikely.

In each case above, material information, much of which was the focal point of analyses performed by security analysts, rating agencies and investors, was known and withheld from the market place by the management of NorthWestern. The effect of withholding such information was that the Company continued to have access to the financial markets based on public filings, disclosures, and statements that were false and/or which had omitted material information. In reality, this scheme to withhold information allowed the Company to execute the above mentioned transactions. With knowledge of the undisclosed information, particularly with respect to Expanets and Blue Dot, the market would have readily recognized that NorthWestern was in serious financial trouble. As it was, the Company had progressed through 2002 with a financing plan that was limited and below expectations. As NorthWestern's management was aware, had the true information been known, the Company's ability
1

Depending on context, CSFB refers to itself and other members of the bank group.
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to continue to finance its operations by raising money in the capital markets would have been severely limited or eliminated altogether. In addition, both security holders and regulators would have acted to protect their interest in NorthWestern Energy, L.L.C. from being transferred to NorthWestern. II. Had the assets of NorthWestern Energy, L.L.C. not been transferred to NorthWestern, the QUIPS investors would have been covered by the former's assets and not junior to the debt and other liabilities of NorthWestern Corp. III. Assuming Clark Fork remained liable for the QUIPS obligations; Clark Fork would not have had the financial ability to meet those obligations.

Background
Overview 14. In November 1996,2 Montana Power Company ("Montana Power") issued, via a trust, 8.45% Cumulative Quarterly Income Preferred Securities, Series A (the "QUIPS") due in 2036.3 The offering included 2.6 million units with a liquidation preference value of $25 each, for a total of $65 million.4 15. On February 15, 2002, NorthWestern acquired Montana Power, which provides electric and natural gas transmission and distribution in Montana, for $478 million in cash and the assumption of $511 million in debt and preferred securities,5 augmenting similar services NorthWestern provides in South Dakota and Nebraska. Montana Power changed its name to NorthWestern Energy, L.L.C. at the time of the acquisition; however, it remained a wholly owned subsidiary of NorthWestern.6

Complaint to Avoid the Transfer of Assets of Clark Fork and Blackfoot LLC (f/k/a NorthWestern Energy LLC) to NorthWestern Corporation, April 2004, p, 4. 3 NorthWestern Form 10-K for the period December 31, 2002 filed April 15, 2003, F-52. 4 NorthWestern Form 10-K for the period December 31, 2002 filed April 15, 2003, F-52. 5 NorthWestern Form 10-K for the period December 31, 2002 filed April 15, 2003, p. 5. 6 NorthWestern Form 10-K for the period December 31, 2002 filed April 15, 2003, p. 5.
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16. At the time of the acquisition, the market generally reacted favorably to the transaction, although equity analysts did express concern about the high leverage that would result based on NorthWestern's financing plan.7 17. Consistent with repeated statements by management to rating agencies and others,8 substantially all of the assets and the majority of the liabilities of the former Montana Power (aka NorthWestern Energy L.L.C.) were transferred to NorthWestern on November 15, 2002.9 In December 2002, NorthWestern announced significant reductions in earnings due to lower than expected performance at Blue Dot and Expanets, as well as the need to increase reserves for accounts receivable and billing adjustments at Expanets, and the likelihood of a significant impairment charge.10 In April 2003, through its restated quarterly financial statements for 2002 NorthWestern reported worse financial information.11 NorthWestern filed for bankruptcy in September 2003.12

NorthWestern financing, public announcements and other events 18. NorthWestern undertook several financing activities in 2002. Many of these activities as well as other announcements and events pertinent to NorthWestern's invested capital are listed below: Date January 14, 2002 Event CSFB provided financing for the acquisition in the form of $720 million in term loans.13 In the same credit agreement, CSFB also provided NorthWestern $280 million in revolving credit loans.14 Under the credit agreement, the expiration date of the revolving credit facility was

7 A.G. Edwards, NorthWestern Corporation, Will Investor Attention on Accounting Issues Result in Lower Share Price? We Think Yes, March 19, 2002 (NOR101965-66). Merrill Lynch, NorthWestern Corporation, Transformation Underway, But Execution Risk Remains High, May 1, 2002 (NOR101990-92). A.G. Edwards, Equity Research ­ Electric Utilities, Montana Commission Approves Acquisition of MPT T&D Business, January 29, 2002 (NOR10196062). 8 NorthWestern Corporation, Transcript from First Quarter 2002 Earnings conference call, April 30, 2002, p. 54 (NOR379816). NorthWestern Corporation, Rating Agency Presentation, October 16, 2001 (CSFB015656). 9 NorthWestern Form 10-K for the period December 31, 2002 filed April 15, 2003, p. 5. 10 Press Release: NorthWestern Lowers Guidance For Estimated 2002 Results, December 13, 2002. 11 NorthWestern Form 10-Q/A for the period March 31, 2002 filed April 15, 2003. NorthWestern Form 10-Q/A for the period June 30, 2002 filed April 15, 2003. NorthWestern Form 10-Q/A for the period September 30, 2002 filed April 15, 2003. 12 Press Release: NorthWestern Corporation Files for Reorganization, September 15, 2003. 13 NorthWestern Form 10-K405 for the period December 31, 2001 filed April 1, 2002, Exhibit 10(b)(1), p. 1. 14 NorthWestern Form 10-K405 for the period December 31, 2001 filed April 1, 2002, Exhibit 10(b)(1), p. 1.

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Date

Event February 14, 2003. NorthWestern would be able to convert up to $225 million of aggregate outstanding into a one year term loan.15

March 13, 2002

NorthWestern issued $720 million senior unsecured notes to retire the CSFB $720 million term loan used to acquire Montana Power.16 These bonds were initially rated BBB+ by Fitch Ratings ("Fitch") and Baa2 by Moody's Investor Service ("Moody's").17 The notes were not registered at the time of sale. NorthWestern reaffirmed its $2.30 to $2.55 earnings per share ("EPS") target.18 NorthWestern amended the first and second quarter 2002 10-Q filings addressing concerns raised by the SEC regarding necessary disclosures which were not included in the original filings.19 Among these disclosures were intercompany advances from NorthWestern to Expanets of $113.4 million and to Blue Dot of $22.8 million as of June 30, 200220 and additional discussion of NorthWestern's practice of allocating losses to the minority interests resulting from the acquisitions made by Expanets and Blue Dot as well as quantification of those losses.21 NorthWestern raised $87 million ($81 million net proceeds) in a common stock offering of 10,000,000 shares22 at an issue price of $8.75.23 NorthWestern completed the exchange of its previously issued $720 million unregistered notes for notes which were registered under the Securities Act of 1933.24 NorthWestern announced that, due to lower projections and the October equity offering, it was reducing forecasted earnings per share from $2.30 to $1.50-$1.60.25 Substantially all of the assets and a majority of the liabilities in the wholly owned subsidiary NorthWestern Energy L.L.C., except for the Milltown

August 8, 2002 September 20, 2002

October 8, 2002 October 22, 2002

November 7, 2002

November 15, 2002

NorthWestern Corp. Form 424B2 filed October 3, 2002, S-6. NorthWestern Form 10-K405 for the period December 31, 2001 filed April 1, 2002, Exhibit 13 (MD&A), p. 17. 17 Fitch press release: NorthWestern Corp's $720MM Sr Notes Rated 'BBB+' By Fitch Ratings, March 8, 2002. Moody's press release: Moody's Assigns Baa2 Rating to NorthWestern Corporation's Planned $700 Million Note Offering, March 5, 2002. 18 Press Release: NorthWestern Corporation Reports Second Quarter 2002 EPS Of 49 Cents From Continuing Operations; Operating Income Reaches $83.5 Million, August 8, 2002. 19 Letter from Paul Hastings to the Securities and Exchange Commission, July 12, 2002 (NOR080418-59). Letter from Paul Hastings to the Securities and Exchange Commission, August 16, 2002 (NOR080471-97). Letter from Paul Hastings to the Securities and Exchange Commission, September 6, 2002 (NOR080498-505). 20 NorthWestern Form 10-Q/A for the period March 31, 2002 filed September 20, 2002, p. 34. 21 NorthWestern Form 10-Q/A for the period March 31, 2002 filed September 20, 2002, pp. 6-7. 22 NorthWestern Form 10-K for the period December 31, 2002 filed April 15, 2003, F-51. 23 NorthWestern Form 8-K for the period October 2, 2002 filed October 8, 2002, Exhibit 1.1, Sch. B-1. 24 Press Release: NorthWestern Corporation Successfully Completes Exchange Offer For 7-7/8% Notes Due 2007 and 8-3/4% Notes Due 2012, October 22, 2002. 25 Press Release: NorthWestern Reports Third Quarter 2002 Earnings Of 25 Cents Per Share From Continuing Operations, November 7, 2002.
16

15

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Date

Event Dam, were transferred to NorthWestern26 in a transaction referred to as "going flat." The entity that retained the Milltown Dam was subsequently renamed Clark Fork and Blackfoot L.L.C. ("Clark Fork").27

December 13, 2002

NorthWestern announced that it would miss its 2002 earnings estimates announced on November 7, 2002 due to increased reserves at Expanets and performance issues at Expanets and Blue Dot.28 It also disclosed that it "may recognize a substantial impairment of goodwill and other intangible assets" at Expanets and Blue Dot.29 CSFB and NorthWestern entered into a $390 million senior secured term loan credit facility with a term of at least four years.30 The loan was secured by First Mortgage Bonds ($280 million of which were secured by substantially all of NorthWestern's Montana utility assets and $110 million were secured by the remaining availability of NorthWestern's South Dakota and Nebraska utility assets).31 Moody's downgraded NorthWestern's senior unsecured debt and issuer ratings from Baa2 to Ba1,32 a rating that is below investment grade or junk. Standard & Poor's ("S&P") downgraded NorthWestern's corporate credit from BBB+ to BB+,33 a rating that is below investment grade. Fitch downgraded NorthWestern senior unsecured debt from BBB to BB+,34 a rating that is below investment grade. The Montana Public Service Commission ("MPSC") approved issuance of First Mortgage Bonds to secure the $390 million loan.35 The $390 million loan closed.36 NorthWestern repaid the $280 million revolver.37 NorthWestern announced that the common stock dividend would be suspended to pay down debt and that it expected to report

December 18, 2002

December 20, 2002

December 30, 2002 January 16, 2003 January 27, 2003 February 10, 2003 February 19, 2003

NorthWestern Form 10-K for the period December 31, 2002 filed April 15, 2003, pp. 5, 106, F-8. NorthWestern Form 10-K for the period December 31, 2002 filed April 15, 2003, p. 17. 28 Press Release: NorthWestern Lowers Guidance For Estimated 2002 Results, December 13, 2002. 29 Press Release: NorthWestern Lowers Guidance For Estimated 2002 Results, December 13, 2002. 30 Press Release: NorthWestern Enters Into $390 Million Secured Credit Facility, December 18, 2002. 31 NorthWestern Form 10-K for the period December 31, 2002 filed April 15, 2003, p. F-29. 32 Moody's Investor Services, Global Credit Research Rating Action, Moody's Downgrades Ratings of NorthWestern Corporation (Sr. Sec. To Baa3); Continues to Review Ratings for Possible Further Downgrade, December 20, 2002. 33 Standard & Poor's Research Update NorthWestern Corp., December 30, 2002. 34 Fitch press release: NorthWestern Downgraded By Fitch Ratings; Rating Outlook Negative, January 16, 2003 (NOR035384). Fitch Ratings, Corporate Finance, NorthWestern Corporation, February 6, 2003 (NOR058336). 35 Department of Public Service Regulation before the Public Service Commission of the State of Montana, In the Matter of the Application of NorthWestern Corporation for Authority to Consummate a Credit Agreement and Issue $390 Million in Principal Amount of Secured Long-Term Notes in the Form of First Mortgage Bonds, Final Order, January 27, 2003 (NOR001606-17). 36 NorthWestern Form 10-K for the period December 31, 2002 filed April 15, 2003, p. 6. 37 NorthWestern Form 10-K for the period December 31, 2002 filed April 15, 2003, p. 6.
27

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Date April 15, 2003

Event approximately $700 million in charges in its 2002 results.38 NorthWestern filed its 2002 10-K and restated the first three quarters of 2002. It reported it would no longer be paying cash dividends for the foreseeable future.39 NorthWestern announced it filed for Chapter 11 bankruptcy and would be delisted from the New York Stock Exchange.40

September 15, 2003

NorthWestern management knowledge 19. Based on my review of Mr. Berliner's report as well as many of the documents which underlie his statements, there is considerable evidence during 2002 that Company management was aware of several material items that a reasonable investor would need to know to make an informed investment decision. Many of these were concealed by the incorrect financial statements that the Company filed in the first three quarters of 2002 including but not limited to the reserves and other issues at Expanets, the likelihood of an impairment of Expanets and Blue Dot, and the difficulties related to monetizing certain assets, including the transmission assets at Colstrip. I highlight these issues below. 20. The SEC also addressed these items: NorthWestern also misrepresented or did not disclose, among other things, the effects of significant problems with Expanets' new information technology system, the material impact of Expanets' reserve reductions and its receipt of non-compete payments on Expanets' income, large intercompany advances NorthWestern made to support Expanets and Blue Dot, and the timing of anticipated payments from the sale of certain utility assets. Through its financial misstatements, misrepresentations and omissions, NorthWestern obscured the continuing poor performance of its subsidiaries at a time when it was publicly relying on these subsidiaries' operations to strengthen its financial condition.41

38 Press Release: NorthWestern Corporation Outlines Turnaround Plan Company Will Focus on Core Utility Business, Improving Liquidity and Paying Down Debt Common Stock Dividend Suspended Company Projects Charges of Approximately $700 Million in 2002, February 19, 2003. 39 NorthWestern Form 10-K for the period December 31, 2002 filed April 15, 2003, p. 81. 40 Press Release: NorthWestern Corporation Files for Reorganization, September 15, 2003. 41 Securities and Exchange Commission, Order Instituting Cease-and-Desist Proceedings, Making Findings and Imposing a Cease-and-Desist Order Pursuant to Section 21C of the Securities Exchange Act of 1934, March 7, 2007, p. 2.

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21. Management of NorthWestern was aware throughout 2002 that Expanets' earnings were not being reported accurately.42 NorthWestern management was, as an example, directing Expanets to meet its EBITDA targets by reducing its reserves for bad debt expense and billing adjustments.43 These were among the very items which were later restated. 22. On September 18, 2002, a presentation was made to NorthWestern revealing that of Expanets' accounts receivables, $52 million was over 180 days old and $21 million was over 300 days old.44 NorthWestern management instructed, however, that the proper reserves for these outstanding amounts not be made.45 The SEC noted that though the uncollectible accounts receivable issue was not disclosed in NorthWestern's 10-Q filings for the first or second quarters of 2002, it was disclosed in the third quarter, but the SEC stated, "this disclosure was inadequate since NorthWestern knew at that time that Expanets' bad debt reserve was materially insufficient."46 23. In his timeline, Richard Fresia, CFO of Expanets,47 stated, "[i]n the July [2002] Operations review meeting, I advised the NOR senior team that billing adjustments for the year `may be as high as $30M'".48 However, as also noted by the SEC, though it was aware of the need to increase the billing adjustment reserve at Expanets, NorthWestern management actually reduced the reserve in the second and third quarters of 2002 to increase income in those quarters.49 24. Additionally, though NorthWestern management was clearly aware of the amount of its intercompany advances to Expanets and Blue Dot, they were not disclosed in NorthWestern's original 10-Q filings for the first or second quarters of 2002. This was
42 43

Declaration to Paul Hastings Janofsky & Walker LLP by Kipp Orme, April 2003 (NOR519889-90). Declaration to Paul Hastings Janofsky & Walker LLP by John Charters, April 11, 2003 (NOR519910-12). 44 Expanets Collections Strategy Discussion Presentation, September 18, 2002 (NOR306807). 45 Declaration to Paul Hastings Janofsky & Walker LLP by Richard Fresia, April 18, 2003 (NOR519917-18). 46 Securities and Exchange Commission, Order Instituting Cease-and-Desist Proceedings, Making Findings and Imposing a Cease-and-Desist Order Pursuant to Section 21C of the Securities Exchange Act of 1934, March 7, 2007, p. 5. 47 Deposition of Richard Fresia, April 30, 2007, pp. 7-8. 48 Fresia Exhibit 13, Timeline of key events (ultimately) leading to 12/31/02 reserve (NOR306791-92). E-mail from Rick Fresia to Marty Snella RE: Gap in reported revenue for July dated August 6, 2002 (NOR306793). 49 Securities and Exchange Commission, Order Instituting Cease-and-Desist Proceedings, Making Findings and Imposing a Cease-and-Desist Order Pursuant to Section 21C of the Securities Exchange Act of 1934, March 7, 2007, p. 6.
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significant as by June 30, 2002, NorthWestern had approximately $113.4 million in intercompany advances, increasing nearly 100% during the quarter from the March 31, 2002 balance of $63.3 million, 50 in addition to the disclosed $51.4 million of additional indebtedness to Expanets and $22.8 million in intercompany advances to Blue Dot.51 The intercompany advances were included in the first 10-Q/A filed on September 20, 2002.52 By September 30, 2002, the intercompany advances to Expanets totaled $191.2 million.53 25. Internal documents also reflect that NorthWestern management understood a substantial impairment of Expanets and Blue Dot was likely during 2002, however, NorthWestern did not disclose the amount of the impairment until April 15, 2003 in connection with the filing of its annual 10-K. One of the reasons this information was withheld was to enable NorthWestern to finalize its new financing and to avoid a covenant violation on its $280 million CSFB facility as the following implies. ...the Board should determine its financing plan as soon as practicable, preferably by the week of December 9. The combination of underperformance, increasing of reserves, and potential SFAS 142 impairments at the unregulated businesses not only potentially jeopardize NorthWestern's ability to term-out its existing credit facility in February should there be any problem in executing the FMB [first mortgage bond] financing, but also could potentially result in an earlier covenant breach following completion of the company's SFAS 142 impairment analysis and final sign off by Deloitte (likely to occur in mid to late January or early February).54 26. Regarding the monetization of assets, NorthWestern, knowing the market was concerned about its liquidity, stated that it expected to collect $97 million in Colstrip proceeds in June or July 2002.55 As late as August 8, 2002, NorthWestern told

NorthWestern Form 10-Q/A for the period March 31, 2002 filed September 20, 2002, p. 34. NorthWestern Form 10-Q/A for the period June 30, 2002 filed September 20, 2002, p. 45. 52 NorthWestern Form 10-Q/A for the period June 30, 2002 filed September 20, 2002, p. 45. 53 NorthWestern Form 10-Q for the period September 30, 2002 filed November 14, 2002, p. 44. 54 Memo from M. Lewis and D. Hylland to the Board of Directors Re: NOR Financing Status and Recommendations, December 7, 2002 (NOR063739). 55 United States District Court, District of South Dakota, Southern Division, Securities and Exchange Commission, Plaintiff, v. Richard R. Hylland, Defendant, Complaint, April 25, 2007, p. 26.
51

50

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analysts, "[w]e do intend to close on that transaction within the next couple months and that would bring in $97 million in proceeds."56 27. However, NorthWestern did not disclose that its receipt of those proceeds was uncertain and that it initiated a lawsuit against the potential purchaser of the Colstrip assets. 57 On August 5, 2002, NorthWestern filed a complaint against the other party and served the complaint on September 4, 2002, disclosing the lawsuit at that time. 58 With the lawsuit, the ultimate completion of the transaction would be perceived by the market as more difficult.

General market conditions 28. As a result of the rampant economic disturbances in 2001, including the Enron scandal and the September 11 terrorist attacks, 2002 began with weak and uncertain financial markets. The manifestation of which was generally referred to as a "flight to quality"59 due to market participants heightened risk aversion. Investors and creditors were particularly weary of companies with "questionable accounting practices" and highly leveraged balance sheets.60 Companies with these characteristics generally experienced declining stock prices and higher interest costs,61 as well as increasing pressure to reduce their debt.62 29. Utility companies were not isolated from the inhospitable financial markets. The industry faced poor fundamentals due to an increasing power supply and subsequently lower prices leading to continued reductions in earnings.63 In the first quarter of 2002,

NorthWestern Corporation's Second Quarter Earnings Release conference call transcript, August 8, 2002, p. 26 (NOR099958). 57 United States District Court, District of South Dakota, Southern Division, Securities and Exchange Commission, Plaintiff, v. Richard R. Hylland, Defendant, Complaint, April 25, 2007, p. 26. Press Release: NorthWestern and PPL Montana Reach Agreement in Principle to Settle Litigation Claims, May 4, 2005. 58 United States District Court, District of South Dakota, Southern Division, Securities and Exchange Commission, Plaintiff, v. Richard R. Hylland, Defendant, Complaint, April 25, 2007, pp. 26-27. 59 International Monetary Fund, Global Financial Stability Report Market Developments and Issues, June 2002, p. 9. 60 International Monetary Fund, Global Financial Stability Report Market Developments and Issues, June 2002, p. 2. 61 International Monetary Fund, Global Financial Stability Report Market Developments and Issues, June 2002, p. 2. 62 International Monetary Fund, Global Financial Stability Report Market Developments and Issues, June 2002, p. 12. 63 I note that for the most part, the regulated businesses of NorthWestern, including the Montana utility operations, were not subject to these pricing impacts. Deutsche Bank Electric Power Monthly, April 2, 2002. Bear Stearns Utility Review, August 9, 2002. Salomon Smith Barney Industry Note Utilities, October 8, 2002.
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U.S. electric power distribution companies' earnings were 21% lower on average than the first quarter of 2001.64 30. The pervasiveness of weak balance sheets and corresponding liquidity issues as well caused ratings agencies to view utilities with additional scrutiny and more proactively adjust the ratings of weaker companies.65 The ratings agencies' influence on the financial markets was expanding during this period and their criticisms led to a "negative bias" for the entire utility industry.66 According to Salomon Smith Barney, debt for the industry was trading at significant discounts "reflecting strong investor concerns".67 The equity market, adopting this concern, was highly focused on the outstanding debt levels of utility companies. Many analysts were recommending underweighting electric utilities in investment portfolios during 2002.68 31. The financing situation for utilities firms was so dire by mid-October 2002 that one analyst deemed the capital markets "essentially closed to these companies, with equity financing unavailable and future debt refinancings likely occurring only on a secured basis and at unattractive terms. In fact, debt ratings and credit spreads already reflect the erosion of investor confidence in these companies' financial condition".69
32.

Another analyst summarized the situation as follows: Little did we know that the big splash created by Enron's demise last year would escalate into a tidal wave by mid-2002. That wave has eroded investors' confidence in energy markets, drying up much needed capital prompting the cancellation or postponement of most power plant development projects and essentially halting power energy trading activities. Increased cost of capital combined with declining near-term profit margins resulted in significant EPS erosion in 2002. The wave was swift, unforeseen and the loss of capital significant.70

Deutsche Bank Securities Inc., U.S. Electric Power Review Industry Quarter Earnings Review, May 13, 2002. Baird, Utility Monthly, September 2002, p. 2. 66 Bear Stearns, Utility Review, June 4, 2002. 67 Salomon Smith Barney, Multi-Company Note, Electric Utilities, October 18, 2002. 68 Bear Stearns, Monthly Utility Review, October 18, 2002. Salomon Smith Barney, Multi-Company Note, Electric Utilities, October 18, 2002. Salomon Smith Barney, Electric Utilities Weekly Energy Wire, November 26, 2002. Deutsche Bank, U.S. Electric Power Industry, August 12, 2002. Deutsche Bank, U.S. Electric Power Industry, October 4, 2002. Deutsche Bank, U.S. Electric Power Monthly, October 7, 2002. Deutsche Bank, U.S. Electric Power Monthly, December 6, 2002. 69 Salomon Smith Barney, Multi-Company Note, Electric Utilities, October 18, 2002, p. 2. 70 Baird, Utility Monthly, September 2002, p. 2.
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33. As shown in Exhibit 3, both the S&P and Dow Jones utility indices underperformed the broader market in 2002. This chart also shows that NorthWestern's stock price lagged behind the industry for the majority of the year and substantially so in the latter half. From the time of the acquisition of Montana Power on February 15, 2002 to December 12, 2002, just before its announcement that it would miss its November 2002 revised earnings target, NorthWestern's stock price dropped approximately 65% (from $21.60 to $7.61) to a 15-year low, while the utilities indices dropped less than 30% during the same period.71 Over the next two months, NorthWestern's stock fell another 66% to $2.60 on February 19, 2003 when NorthWestern announced it would be suspending its dividend payment.72

Equity analyst view of NorthWestern prior to restatement 34. Based on information released by NorthWestern, filings with the SEC and calls with equity analysts prior to November 2002, analysts at a number of investment banking firms generally believed that the Company was on target to meet its 2002 earnings estimate of $2.30 per share, even recommending that investors purchase NorthWestern's stock in the first half of 2002.73 The equity analysts' optimism stemmed from the stability of NorthWestern's regulated utility business and the consistency of NorthWestern's dividend,74 as well as their beliefs that NorthWestern would achieve "EBITDA of $330-$355 million and a year-end free cash flow run rate of $100 million"75 for 2002 and strengthen its liquidity position through the issuance of equity and the sale of its Colstrip-related transmission assets.76

Bloomberg stock quote data Press Release: NorthWestern Corporation Outlines Turnaround Plan Company Will Focus on Core Utility Business, Improving Liquidity and Paying Down Debt Common Stock Dividend Suspended Company Projects Charges of Approximately $700 Million in 2002, February 19, 2003. 73 UBS Warburg, Global Equity Research, NorthWestern Corp., April 30, 2002. Merrill Lynch, NorthWestern Corporation, May 1, 2002 (NOR101990). Merrill Lynch, NorthWestern Corporation, May 17, 2002 (NOR101994). Merrill Lynch, NorthWestern Corporation, June 25, 2002 (NOR053471). Merrill Lynch, NorthWestern Corporation, August 9, 2002 (NOR234617). Merrill Lynch, NorthWestern Corporation, August 19, 2002 (NOR026460). Morgan Stanley, NorthWestern Corp., May 17, 2002 (NOR053430). 74 Morgan Stanley, NorthWestern Corp., April 25, 2002 (NOR053319-28). Merrill Lynch, NorthWestern Corporation, August 9, 2002 (NOR234617-20). 75 UBS Warburg, Global Equity Research, NorthWestern Corp, July 18, 2002. 76 UBS Warburg, Global Equity Research, NorthWestern Corp, July 18, 2002. Merrill Lynch, NorthWestern Corporation, August 9, 2002 (NOR234617-20).
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35. These expectations proved to be wrong when NorthWestern announced on November 7, 2002, that it was lowering its 2002 earnings forecast to $1.50-$1.60 per share as a result of lowered EBITDA projections for Expanets and Blue Dot and adjustments related to the additional common shares from the October 2002 offering. 77 36. Prior to this announcement, analysts had expressed concerns about the unregulated subsidiaries. However, these concerns were abated by the Company's release of information on the "dramatic transformation"78 at Expanets and its "EBITDA level of $80 to $87 million"79 for 2002 as well as the "improvement for the second half of [2002]"80 at Blue Dot, with EBITDA targets of $15 to $20 million.81 The Company also told analysts in August 2002 that "[d]uring the balance of the year when you look at the projections, they will certainly be paying their dividends in cash and, in fact, we would look for payments in excess of the actual dividends so we can start working back down to preferred stock investment. Blue Dot, during the balance of the year we would see them having an ability to pay roughly half of their dividends in cash."82 37. HSBC reported its understanding of the situation as follows: Cash flows to the parent from its non-regulated subsidiaries are expected to improve during [the second half of 2002]: $20mn dividends from Expanets are expected to be in cash, and half of Blue Dot's $20mn dividend in [the second half] will be in cash. Also, Expanets may begin to return capital to parent NOR though redemption of preferred stock.83 38. Additionally, the analysts generally believed based on management representations that the accounts receivable (collectability) issues Expanets had experienced due to the implementation of a new enterprise software system, Expert,84 would "be reduced

Press Release: NorthWestern Reports Third Quarter 2002 Earnings Of 25 Cents Per Share From Continuing Operations, November 7, 2002. 78 NorthWestern Corporation's Second Quarter Earnings Release conference call transcript, August 8, 2002, p. 4 (NOR099936). 79 NorthWestern Corporation's Second Quarter Earnings Release conference call transcript, August 8, 2002, p. 17 (NOR099949). 80 NorthWestern Corporation's Second Quarter Earnings Release conference call transcript, August 8, 2002, p. 5 (NOR099937). 81 NorthWestern Corporation's Second Quarter Earnings Release conference call transcript, August 8, 2002, p. 21 (NOR099953). 82 NorthWestern Corporation's Second Quarter Earnings Release conference call transcript, August 8, 2002, p. 35 (NOR099967). 83 HSBC, NorthWestern Corporation, 2Q Results Imply Solid Year-End Outlook, August 13, 2002. 84 NorthWestern Form 10-Q/A for the period March 31, 2002 filed September 20, 2002, p. 21.
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to normal levels".85 Merrill Lynch reported in May 2002 that "[t]he significant cost expense associated with putting in a new back office is now finally paying off..."86 As late as September 20 in its amended 10-Q for the first quarter, NorthWestern reported that "[t]he [Expert] system is now fully operational and savings are expected to continue throughout 2002."87 39. The analysts also believed that "...the problem units/regions [of Blue Dot] have been identified and the company is implementing a management restructuring."88 40. As discussed above, equity analysts during 2002 were acutely aware of highly leveraged capital structures, and NorthWestern's liquidity constraints, which were exacerbated by the debt incurred for the Montana Power acquisition, were therefore troubling to the market. Bear Stearns, NorthWestern's own financial advisor, addressed this situation in a September presentation to NorthWestern's Board of Directors: "NorthWestern's stock price performance has suffered as the equity markets have grown concerned about the Company's debt ratios and the lack of flexibility within NorthWestern's capital structure."89 A handwritten note on a page of the presentation describes the consequences to NorthWestern resulting from this lack of flexibility - "slippage in EBITDA would be catastrophic".90 41. Notwithstanding NorthWestern's precarious financial position (which later would be proven to be much worse), NorthWestern issued 10,000,000 shares of common stock at $8.75 per share, with net proceeds of $81 million on October 8, 2002, a mere 40% of the initially planned $200 million offering. This financing did little to allay concerns about the Company's ability to reduce debt or improve its financial flexibility and in hindsight only served to postpone the inevitable bankruptcy filing that occurred later in 2003. Despite a very difficult financing environment, the Company was able to successfully complete its 10 million share offering, raising net proceeds of $82.5 MM... The issue price of $8.75 was somewhat disappointing to the
UBS Warburg, Global Equity Research, NorthWestern Corp., May 20, 2002. Merrill Lynch, NorthWestern Corporation, May 1, 2002, p. 2 (NOR101991). 87 NorthWestern Form 10-Q/A for the period March 31, 2002 filed September 20, 2002, p. 21. 88 Morgan Stanley, NorthWestern Corp., New, More Regulated Look, Attractive Valuation, April 25, 2002 (NOR053320). 89 Bear Stearns Presentation to NorthWestern Corporation, September 12, 2002, p. 3 (NOR349346). 90 Bear Stearns Presentation to NorthWestern Corporation, September 12, 2002, p. 8 (NOR349354).
86 85

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market, both in terms of dilution and the signals being sent about share price levels... The Company's trading levels (2003 P/E around 3.8x and 15+% dividend yields) suggest that the market continues to have questions about both liquidity and NorthWestern's long-term strategy.91 42. The concerns expressed above as well as similar comments made by other analysts obviously could not reflect the Company's true situation due to the more optimistic false information consistently provided by management to the market at this time. 43. Indeed, in July 2002 prior to the October stock offering, the equity markets were questioning the prudence of the transaction before any knowledge of the financial restatements that would later take place as described in the following: "The company has previously indicated that it plans to issue approximately $200 million in new equity to strengthen its balance sheet. We believe that, in the current market environment, the risks and potential dilution for this type of transaction have increased."92 NorthWestern's own financial advisor, Bear Stearns, warned that because of the stock price discount to the market,93 the equity offering could be "highly dilutive,"94 and as a result, Bear Stearns stated that all of its financing alternatives which did not include issuance of common equity would ultimately "provide significantly more value to shareholders".95 44. Following NorthWestern's November 2002 announcement of the decreased earning estimate described above and a subsequent December 2002 announcement stating that it would miss the $1.50-$1.60 per share estimate from November and would be recording substantial charges at year end, certain equity analysts commented that a change to NorthWestern's dividend policy including a suspension of the dividend, which had been consistent for many years, was likely.96 They also expressed concern that the unregulated subsidiaries, which they had believed to be improving, would

91 92

Bear Stearns Presentation to NorthWestern Corporation, November 6, 2002, p. 1 (NOR054686). UBS Warburg, Global Equity Research, NorthWestern Corp., July 18, 2002, p. 2. 93 Bear Stearns Presentation to NorthWestern Corporation, September 12, 2002, p. 24 (NOR349374). 94 Bear Stearns Presentation to NorthWestern Corporation, September 27, 2002, p. 6 (NOR255876). 95 Bear Stearns Presentation to NorthWestern Corporation, September 23, 2002, p. 3 (NOR057819). 96 Morgan Stanley, NorthWestern Corp., Unreg Expected to Fall Short; Lowering Estimates, November 11, 2002 (NOR026678). RBC Capital Markets, NorthWestern Corp., Aggressive Growth Strategy Creates Problems, February 18, 2003.
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require additional capital, diverting funds from the debt repayment they had been expecting.97 45. In response to the announcement, a Morgan Stanley analyst noted its loss of trust in NorthWestern's management causing it to preemptively assume a full write-down prior to the actual disclosure in April 2003: "We are lowering our ongoing EPS estimate to $1.00 on management's guidance that the non-utility subsidiaries, principally telecom, has deteriorated even more than previously admitted. For practical purposes, we would consider these subsidiaries likely to be completely written off and unlikely to contribute to parent cash flow or EPS."98 Still, the analyst could not predict the ultimate loss of $30.04 per diluted share for 2002.99 46. By February 2003, many analysts had stopped coverage of NorthWestern. One that continued coverage wrote the following: · "In addition to the above problems, we believe that certain management actions have had a negative impact on investor confidence in NorthWestern and its management team. These actions include: Providing positive earnings guidance throughout most of 2002 and issuing an earnings warning shortly after the completion of the company's equity issuance in October 2002..."100 "... the company has encumbered all of its utility assets in order to secure the new $390 million senior secured term loan credit facility and the new facility has restrictions on additional indebtedness. Given NorthWestern's current stock price, its debt leverage and encumbrances, it may be difficult to raise capital at a reasonable cost. ...NorthWestern's ability to access capital could also be negatively impacted by recent downgrades in its debt ratings by Standard and Poor's, Moody's and Fitch to below investment grade."101 "The Company's current ratings are as follows: Standard and Poor's, BB+; Moody's, Ba1; and Fitch, BB+. If NorthWestern continues to maintain its annual dividend at $1.27, the forecast dividend payout ratios for 2003 and 2004 are in excess of 100%. We believe this situation is not sustainable over the long run and believe there is a high probability that the dividend will be cut or eliminated in light of the February 6,

·

·

Morgan Stanley, NorthWestern Corp., Unreg Expected to Fall Short; Lowering Estimates, November 11, 2002 (NOR026678). 98 Morgan Stanley, NorthWestern Corp, Lowering Ests. On Guidance ­ A Real Workout Story Now, December 16, 2002 (NOR035357). 99 Press Release: NorthWestern Corporation Reports 2002 Financial Results, Company Reports Loss of $892.9 Million for Full-Year 2002, April 16, 2003. 100 RBC Capital Markets, NorthWestern Corporation, Pessimism Overhangs Stock, February 18, 2003, p. 4. 101 RBC Capital Markets, NorthWestern Corporation, Pessimism Overhangs Stock, February 18, 2003, p. 23.
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2003 announcement that NorthWestern's board of directors deferred a decision on the Company's common stock dividend."102 · "We believe that a number of factors have had and could continue to have a negative impact on investor confidence in NorthWestern and its management team. These factors include the sharp decline in Company's share price in recent months; the pending bankruptcy of CornerStone; continued operational difficulties at Expanets and Blue Dot; substantial indebtedness associated with the NorthWestern's business acquisitions; and concerns over executive compensation, accounting practices and consulting fees."103

Rating agency view of NorthWestern prior to restatement 47. Until December 2002, all of the Company's debt maintained investment grade ratings. Exhibit 4 includes a summary of the changes in the ratings on NorthWestern's senior secured, senior unsecured, senior notes, first mortgage bonds, and issuer ratings from 2000 through NorthWestern's bankruptcy in 2003. 48. As discussed below, the agencies viewed the planned equity offering and transfer of assets from Montana Power to NorthWestern as necessary to maintain the Company's investment grade ratings. However, the ratings agencies were focused on several items including NorthWestern's tight liquidity, its increased debt level leading to a highly leveraged capital structure, and volatility at the unregulated subsidiaries. Additionally, if the equity offering or the asset transfer were not completed, the agencies indicated that NorthWestern's ratings would be impacted. 49. By the end of 2001, NorthWestern's liquidity issues were of significant concern to the rating agencies. In November 2001, Moody's stated that it was "concerned about NorthWestern's significant increase in recourse debt and debt-like obligations that will be taken on as a result of the acquisition of MPC's utility assets."104 Following through on the concerns both Moody's and S&P downgraded NorthWestern's credit in late 2001. Moody's reasoning for this downgrade included NorthWestern's increasing debt leverage and a weak cash flow coverage.105

RBC Capital Markets, NorthWestern Corporation, Pessimism Overhangs Stock, February 18, 2003, p. 2. RBC Capital Markets, NorthWestern Corporation, Pessimism Overhangs Stock, February 18, 2003, p. 2. 104 E-mail from C. Thomson to J. Finch and D. Welch Re: Moody's Press Release, November 20, 2001 (CSFB010284-85). 105 E-mail from C. Thomson to J. Finch and D. Welch Re: Moody's Press Release, November 20, 2001 (CSFB010284).
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50. In addition to the liquidity issues caused by NorthWestern's leveraged capital structure, after the Montana Power acquisition, the ratings were also negatively impacted by the performance of Expanets and Blue Dot.106 NorthWestern acknowledged this concern stating "[the rating agencies] will at least be very pleased to see the turnaround at Expanets, which was a major concern of theirs."107 The rating agencies recognized that the relatively stable cash flows from NorthWestern's utility business108 offset some of the risks identified by the ratings agencies with respect to the Company's unregulated subsidiaries. The regulated business, unlike Expanets and Blue Dot, benefited from "low industrial sales, profitable off-system energy sales, low power costs, reasonable regulation, adequate generating capacity, and supply contracts".109 However, the positive benefits of the stable utility cash flow could not overcome the substantial negative financial performance that, though hidden by the misstatements and omissions by management and thus not apparent to the agencies at the time, was occurring at Expanets and Blue Dot. 51. In fact, in a September 12, 2002 presentation to NorthWestern's Board of Directors, Bear Stearns points out in a sensitivity analysis that "[a] 50% reduction in Expanets projected cash flow would critically impair the Company's balance sheet."110 At the time, NorthWestern management had not disclosed that Expanets' cash flows were negative necessitating $113.4 million in intercompany advances through June 30, 2002 from NorthWestern.111 52. Due to the rating agencies' focus on NorthWestern's liquidity and leverage, the continuation of its investment grade ratings were predicated on an anticipated $200 million equity offering as described below: The expectation of another material, near term common equity issuance as part of the take-out financing is an important factor in Moody's rating determinations. Furthermore, the rating determinations assume that
Moody's Investor Services, Global Credit Research Rating Action, Moody's Assigns Baa2 Rating to NorthWestern Corporation's Planned $700 million Note Offering, March 5, 2002. 107 Jacobsen Exhibit 7, Memo from K. Orme to M. Lewis, D. Hylland and E. Jacobsen Re: Financing Plans and Considerations, May 28, 2002 (NOR056240). 108 Moody's Investor Services, Fundamental Credit Research Opinion Update, NorthWestern Corp., December 6, 2001 (CSFB009055). 109 Standard & Poor's Research, NorthWestern Corp., December 26, 2001 (CSFB009049). 110 Bear Stearns Presentation to NorthWestern Corporation, September 12, 2002 (NOR349356). 111 NorthWestern Form 10-Q/A for the period June 30, 2002 filed September 20, 2002, p. 45.
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management will continue to carefully manage NW's capital structure and issue additional common equity, if necessary, to achieve more financial flexibility.112 53. The equity analysts as well acknowledged this fact: "While we believe $200mm in total equity is still in the works to maintain a solid BBB credit rating, equity financing remains a challenge at current levels. But equity is a must, and we effectively see NOR coming to the market in smaller trenches, and to potentially both the public and private equity markets."113 54. Therefore, the shortfall in the October offering led to another round of ratings downgrades.114 As S&P explained, "NorthWestern was expected to issue $200 million of additional equity to support the company's financial measures, but was only able to issue $83 million due to the substantial decline in the company's stock price that continues to persist."115 These market reactions took place based on the information available at the time, which did not yet incorporate the additional negative information that would soon be revealed. 55. Another factor keeping NorthWestern's ratings higher was the expectation that the Montana utility assets would be transferred to NorthWestern,116 because that "structure favors NOR bondholders as they will not be structurally subordinated to outstanding MPC [Montana Power] debt obligations."117 If that did not occur, the agencies had warned the ratings would be impacted: "In the unlikely event that the collapsing of Montana Power L.L.C. into a division of NOR does not occur as planned, then Moody's would reassess the need to account for a structural subordination relating to NOR's obligations. Under this scenario, a one-notch downgrade of NOR's ratings would be a likely outcome, all other factors being equal."118 In fact, appeasing the rating agencies

E-mail from C. Thomson to J. Finch and D. Welch, Re: Moody's Press Release, November 20, 2001 (CSFB010284-86). 113 Merrill Lynch, NorthWestern Corp., Focusing on Cash, August 9, 2002 (NOR250196). 114 Fitch press release: Fitch Dwngr NorthWestern Corp Sr Sec To 'BBB+'; Outlook Negative, October 14, 2002. 115 Standard & Poor's Research Update, Northwestern Corp., December 30, 2002, p. 2. 116 Fitch press release: Fitch Dwngr NorthWestern Corp Sr Sec To 'BBB+'; Outlook Negative, October 14, 2002. 117 Fitch press release: NorthWestern Corp's $720MM Sr Notes Rated 'BBB+' By Fitch Ratings, March 8, 2002. 118 Moody's Investor Services, Global Credit Research Rating Action, Moody's Assigns Baa2 Rating to NorthWestern Corporation's Planned $700 million Note Offering, March 5, 2002.
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was specifically identified as a reason for the Board of Directors to approve the board resolution to transfer the assets and liabilities.119 56. Less than a month after the asset transfer, NorthWestern announced that it would miss its earnings estimate due to lower than expected performance at Blue Dot and Expanets as well as the need to increase reserves, and the likelihood of a significant impairment charge.120 Based on this December 2002 announcement, ratings for all but NorthWestern's senior secured debt and first mortgage bonds were dropped to junk status.121 Even at this point, however, the announcement understated the problems of which NorthWestern management was aware. 57. In commentary surrounding its December 20, 2002 downgrade, Moody's noted "that absent access to the funds under the new CSFB facility -- which would facilitate termination of the existing $280 million facility -- the recent [December 13] announcement related to expected non-cash charges could jeopardize NOR's ability to remain in compliance with some of the financial covenants in that facility (e.g.; the funded debt to capital ratio as defined within the loan document)."122 Had accurate financials been available, NorthWestern would have already been in default. 58. S&P additionally predicted in December 2002 that "given the company's current stock price of half its book value [$5.10 on December 30, 2002], and general equity market conditions, Standard & Poor's does not believe the company will issue addition[al] equity in the foreseeable future... Standard & Poor's also remains concerned about the company's ability to issue equity over the next four to five years."123

Financial restatement on April 15, 2003 59. On April 15, 2003, NorthWestern issued its annual form 10-K filing as well as amended 10-Q filings for the first three quarters of 2002 (this was the second time the quarterly 2002 10-Q filings were amended). There were a number of adjustments in the
NorthWestern Corporation, Board of Directors Minutes of Regular Meeting, August 7, 2002 (NOR009571). Press Release: NorthWestern Lowers Guidance For Estimated 2002 Results, December 13, 2002. 121 See Exhibit 4. 122 Moody's Investor Services, Global Credit Research Rating Action, Moody's Downgrades Ratings of NorthWestern Corporation (Sr. Sec. To Baa3); Continues to Review Ratings for Possible Further Downgrade, December 20, 2002 (NOR099653). 123 Standard & Poor's Research Update, NorthWestern Corp., December 30, 2002.
120 119

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quarterly restated filings in