Free Redacted Document - District Court of Delaware - Delaware

Case 1:04-cv-01494-JJF

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Service Date: January 27, 2003 DEPARTMENT OF PUBLJC SERVICE REGULATION
BEFORE THE PUBLJC SERVICE COMMlSSION
OF THE STATE OF MONTANA

11

'* * * *
)
) )
) )
)

IN THE MATTER of the Application of NORTHWESTERN CORPORATION for Authority to Consummate a Credit Agreement and Issue $390 MILLJON in Principal Amount of Secured Long·Term Notes in the Fonn of First Mortgage Bonds

UTILJTY DlVlSION
DOCKET NO. D2002.12.l59
ORDER NO. 6474a


FINAL ORDER
J.

On December 23, 2002, NorthWestern Corporation (''NorthWestern'' or

"Applicant"), a Delaware corporation authorized to transnct business within Montana, filed with the Montana Public Service Commission ("Commission") its application ("Application") pursuant to §§ 69-3-501·507, MCA (2001), seeking an order authorizing Applicant to perform its obligations under a certain Credit Agreement and the related transactions contemplated by the Credit Agreement whereby long-term notes in the form of first mortgage bonds (the "FirSl Mortgage Bonds") are to be issued over a period beginning with the issuance of the applicable Commission Order and, unless extended, through and including December 3 J, 2004 (the "Transaction"), and which provides that the loan proceeds shall be placed in escrow and cannot be accessed by or disbursed by the Applicant without the Corrunission approval of the Transaction. 2. The Application is supported by exhibits and data in accordance with

Commission practice and rules and regulations governing the issuance and sale of securities by public utilities operating within the State of Montana. 3. The Commission is required to consider applications for the issuance of

securities within 30 days of the application being filed as set forth at § 69-3-503, MCA. There is a provision in that section that consideration of an application may be extended. In this Docket the Commission extended the time for consideration of this application by an additional 30 days. Proper ilOtice of this filing was provided on the agenda for the

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NWE Docket No. D2002.12.159, Order No. 6474a Commission's regularly scheduled business meeting held on January 6,2003. No requests for intervention were received by the Commission in this Docket. 4. The Application states that Applicant is a public utility as defined at

Page 2

§ 69-3-101, MeA, in that it furnishes electric and natural gas service in the State of Montana through NorthWestern Energy, a division of :NorthWestern; that its principal executive office for its Montana operations is at 40 East Broadway, Butte. Montana; and that Applicant is duly qualified to do business in the State of Montana. For detailed information with respect to the general character of NorthWestern's business and the territory served by it, reference is made to the Application.

FINDINGS I. Applicant is a corporation organized and existing under and by virtue of

the laws of the State of Delaware and is qualified to transact business in the State of Montana. 2. Applicant is a public utility as defmed at § 69-3-10l, MCA, and is

engaged in furnishing electric and natural gas service. in the State of Montana through its division, NorthWestern Energy. 3. The Conunission has jurisdiction over the subject matter of the

Application pursuant to §§ 69-3-501·507, MCA. The Commission has jurisdiction over the entire $390 million of fmancing contained in the Application. The Commission historically addresses security issues in their entirelY and again in this Docket will consider the entire amount of financing being contemplated by NorthWestern. Further, the Commission must evaluate all fmancing activity given the serious nature of the challenges now faced by NorthWestern. 4. The Application states that Applicant intends to issue and, potentially sell,

First Mortgage Bonds. The First Mortgage Bonds will be issued under an indenture covering its Montana utility asset in the amount of $280 million (the "Montana Bonds") and under an indenture covering its South Dakota and Nebraska utility assets in the amount of$110 milIion (the "South Dakota Bonds"). As detailed in the Application, the Montana Bonds will be either (i) issued to a Collateral Agent to secure term loans under a new credit facility; andlor (ii) syndicated in a private placement to qualified institutional

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NWE Docket No, 02002.12.159, Order No. 6474a

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buyers. The Montana Bonds (i) will be issued under and secured by the Mortgage and Deed of Trust dated October 1, J 945 from the Applicant to the trustees named thf;;rein, as supplemented from time to time, which indenture creates a general and first priority lien on substantially all of the Applicant's utility property in Montana, (ii) will be for terms of not less than nine months nor more than forty years, (iii) will have such redemption and/or repayment provisions as shall be detennined at the time of sale, and (iv) will bear interest payable at such times and rates as shall be detennined at the time of sale, aJl based on then-existing market conditions. 5. The Application states that the Montana Bonds will secure term loans

which will replace an existing $280 million credit facility as soon after the effective date of the Commission's Order as possible. It further states that the tenn loans secured by the Montana Bonds will be used for general corporate purposes allowed under § 69-3 501, MeA. 6. Applicant has agreed to inform the Commission, after the issuance or sale,

ofthe principal amount sold, the maturity, the interest rate, the redemption and/or repayment provisions and any other information with re~pect to the bonds that the Commission may request. 7. Public notice ofthis Application was given by its inclusion on the

Commission's Utility Division Agenda for January 6, 2002. Applicant has furnished complete financial data with its Application in accordance with the developed practice of the Commission. The Application sets forth a certified copy of the resolution of the Board of Directors of Applicant pertaining thereto, which was adopted on December 12, 2002. 8. On December 20, 2002, Moody's Investors Service downgraded the debt

ratings of North Western senior secured to Baa3 from Baal. Moody's indicated that it, "is continuing to review the long-tenn ratings for possible further downgrade, where they were placed August 1,2002., This downgrade included ratings on obligations of the former NorthWestern Energy L.L.C., which became direct obligations ofNorthWestern Corporation effective November 20,2002 when the former subsidiary of NorthWestern was folded into NorthWestern's already existing utility division. The ratings downgrades reflect concerns about considerably Jess debt reduction to date than anticipated, as well

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as weaker than anticipated cash flow relative to the consolidated debt load and fixed obligations." Moody's further stated, "The ratings downgrades also reflect North~ Western's recently announced expectations for lower than expected earnings and cash flow for 2002 due to ongoing challenges and disappointing results at NorthWestern's nonutilityoperations. Those operations are Expanets, the teleconununications solutions business, and Blue DOl, the heating, ventilation and air conditioning service business." Moody's noted that "NorthWestern recently announced that it is anticipating a significant increase in reserves for accounts receivable and billing adjustments at Expanets, as well as substantial non-cash writedowns of goodwill and intangibles related to Expanets and Blue Dot. The full extent of the goodwill. and intangible asset impairment wi'll be determined in conjunction with the year-end audit which will be completed over the next several months." Moody's is continuing to review all ofNorthWestern's long-tenn ratings for possible further downgrade due to uncertainties surrounding the amount of the expected asset impairment and the impact that action will have on NorthWestern's balance sheet. At the time of this writing the Commission is unable to evaluate the magnitude of the asset impairment because the year-erid audit is not complete. Finally, 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 announcement related to expected non-cash charges could jeopardize NorthWestern's ability to remain in compliance with some of the financial covenants in that facility." 9. On December 30, 2002 Standard and Poor's Ratings Services lowered its

corporate credit rating on NorthWestern to BB+ from BBB+, and at the same time assigned its BBB- rating to NorthWestern's $390 million secured four-year bank loan and other seniqr secured debt. The ratings outlook remains negative. S&P stated that NorthWestern has about $1. 7 billion in outstanding debt. S&P explained that ''The downgrade is the result of the several problems facing NorthWestern Corporation, including a deteriorating balance sheet, continued poor perfonnance in its Expanets and Blue Dot subsidiaries, and management's inability to adequately project the perfonnance of the non-regulated businesses." S&P indicated that the financing plan for the Montana Power acquisition in early 2002 included $200 million of equity, to be issued in the fIrst quarter of2002. Northytestem did issue about $83 million of equity in September 2002,

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but given the company's current stock price ($5.51 on January 22, 2003) of half its book value, and general equity market conditions S&P does not believe that the company will issue additional equity in the foreseeable future. Instead, NorthWestern may potentially incur additional debt to snbstitute for equity issues. A new $390 million credit facility will be used to replace existing NorthWestern bank loans and fund capital expenditures at the utilities, will give the company additional liquidity, but will further weaken coverages for debtholders. S&P is also concerned about the performance of NorthWestem's non utility businesses, specifically Expanets and Blue Dot. 10. On January J6, 2002 Fitch rating service downgraded NorthWestern's

senior unsecured notes and pollution control revenue bonds from BBB to BB+, the highest junk status Fitch has. Preferred stock and trust preferred securities for North Western were also downgraded from BBB- to BB+. Secured debt with senior status was lowered from BBB+ to BBB- which is the lowest Fitch rating that still is investment grade. According to Fitch, NorthWestern's debt and preferred shares total $1.9 billion. The utility division's fixed assets carry a book value of $1.6 billion. That means NorthWestern's book value is less than the corporation:s debt. Factors in the downgrades were NorthWestern's high debt, expected writeoffs against earnings this year and marginal performance at Expanets and Blue Dot. Fitch did indicate that "The utilil-y is strong and has good cash flow, but despite that, there is a lot of debt at the parent company." II. On January 9,2003, NorthWestern filed a letter which set forth the nature

of the draws against the current credit facility. Non-utility activities accounted for $114 million of the $276 million expended through December 31,2002. Montana First Megawatts (MFM), the proposed combined cycle gas plant in Great Falls drew' $6 I million, Expanets drew $37 million, Blue Dot contributed $10 millio? on ~ net basis, and CornerStone 'Propane drew $26. The new credit facility permits additional funds of $25 million to Blue Dot and $75 million to Expanets. 12. The Commission views the financial condition of NorthWestern with great

concern. The Commission approved NorthWestern as the purchaser ofMPC's trans mission and distribution systems. Since that approval the financial condition of North Western has spiraled down due to non-utility activities at CornerStone Propane, Expanets

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and Blue Dot. The Commission is dismayed at the erosion of NorthWestem's credit ratings to either the lowest investment grade or to junk status. The performance of the non-utility entities and the resulting threats to the provision of utilily service is unaccept able to this Commission. The cost of borrowing money has been increased due to losses al the non-utility companies. In its January 9, 2003 letter, noted above, NorthWestern stated "It is the company's intent to move in the direction ofa pure energy-distribution . . business." The Commission finds that the company's intention to become a pure utility company is the proper course of action. The Commission directs NoI1hWestern to devote its management to making sure that the company focuses all of its resources on changing its strategic direction in a timely manner. As was noted in the comments of the rating agencies. it is imperative that NorthWestern take timely action to reduce the amount of debt in the company's capital structure. 13. During its review of this filing the Commission became aware of an

incentive program adopted by the company in September 1999. The program was one in which certain key executives of NorthWestern and key team members NorthWestern Growth Corporation, which initiates strategic investments for NorthWestern, were provided the opportunity to make personal investments. The investment entity was structured as a limited liability company. is controlled and substantially owned by NorthWestern. and enables the
in~estors

to participate in long-term capital appreciation

resulting from increases in the value ofN0l1hWestem's interests in Blue Dot, Expanets and CornerStone above benchmark rates ofretum to NorthWestern approved by the independent Compensation Committee of NorthWestern's Board of Directors. The limited liability company has no indebtedness and is consolidated in NorthWestern's financial statements. No l?sses of these subsidiaries have been allocated to the minority interest owned by the limited liability company. In the year ended December 31,2001. the following executive officers of NorthWestem received
distri~utions

Merle Lewis $1.1

million; Richard Hyland $.8 million; Daniel Newell $.8 million; Eric Jacobsen
$.4 million and Kipp Onne $.1 million. This recruitment and retention program is no

longer being utilized to provide long-term equity incentives and is no longer open to new participants, although the pre-existing interests of the participants remain outstanding. The Commission finds that this Long-Term Equity Incentive Plan is completely

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inappropriate and directs NorthWestern to refrain from making any further payments under the plan until NorthWestern's financial condition has dramatically improved. Any future incentive plans for key executives must be approved by the Commission before they are adopted.

14.

Questions about accounting practices at NorthWestern have appeared in a

number of comments by analysts and others. NorthWestern has decided to discontinue recording income from minority interest. The Commission findsthat NorthWestern should follow Generally Accepted Accounting Principles and take all necessary steps to ensure that its accounting records properly reflect the true results from each segment of the company in a manner that is transparent and easily understood.

CONCLUSIONS OF LA W

I.

NorthWestern Energy is a public utility in Montana subject to the

supervision and regulation of the Montana Public Service Commis$ion. §§ 69-3-10 1 102, MCA.
2. . NorthWestern Energy is a division of NorthWestern Corporation.

NorthWestern Corporation is subject to §§ 69-3-50]-507, MCA, for purposes of the action it proposes in this Docket. . . 3. The Transaction proposed by the Application, as hereinafter authorized, will be for a lawful purpose and is consistent with the public interest; is necessary or appropriate for and consistent with the proper performance by Applicant of service as a public utility; and the aggregate amount of the securities outstanding, and proposed to be outstanding, will not exceed the fair value of NorthWestern's utility properties and business of Applicant.

ORDER
I.
The Application of NorthWestern for authority to consummate the Transaction and to issue secured long-term notes in the form of the First Mortgage Bonds is approved with the conditions noted below. This authorization is for a period beginning with the issuance of this Order and, unless extended, through and including December 31, 2004.

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NWE Docket No. D2002.12.1 59, Order No. 6474a 2.

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In accordance with § 69-3-507, MCA, neither the issuance and sale of

securities by NorthWestern pursuant to the provisions of this Order, nor any other act or deed done or performed in connection therewith, shall be construed to obligate the State of Montana to payor guarantee, in any manner whatsoever, any security authorized, issued, assumed or guaranteed under the provisions of §§ 69-3"501-507, MCA. 3. Issuance of this Order does Dot mean acceptance of NorthWestern's

exhibits or other material accompanying the Appli<:ation for any purpose other than the issuance of this Order. Approval of this application is for financing purposes only. This approval is without prejudice to the regulatory authority of this Commission with respect to ratemaking, rates, scrvicc, accounts, valuations, estimates or determinations of cost, or any other matter subject to its jurisdiction as provided by law. 4. Because the Commission has continuing concerns about the performance

and prospects of Applicant's non-utility businesses, and the implications of their [mancial performance for utility customers, the following conditions are expressly added to this Order. 5. NorthWestern Corporation has indicated it is exploring its options with
sp~cifically

regard to any of its non-utility entities,

including Blue Dot and Expanets.

When a sale in whole or in part of any non-utility entities is completed the proceeds shall be as expeditiously as possible applied to debt reduction. 6. NorthWestern Corporation's loan agreement allows the company to make

additional equity investments in its subsidiaries of no more than $10 million over the five-year term of the agreement. Additionally, under the new loan agreement, secured loans of up to $25 million to Blue Dot and up to $75 million to Expanets are allowed by the lender. 7. The Commission understands that NorthWestern may need to make

limited capital available to thOe subsidiaries to ensure their viability while it completes its examination of alternatives for these entities. However, the Commission does net fa VOr additional financing of the subsidiaries since further investments in the subsidiaries may not be in the best interests of utility customers. 8. The Commission recognizes that NorthWestern Corporation's board of

directors and management are responsible to prepare and implement a strategic workout

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plan to resolve the financial crisis precipitated by a series of corporate decisions, non utility ventures, poor performance, and acquisitions. The crisis did not develop overnight, and it will not be resolved overnight. Nevertheless, the Corrunission's outlook is negative, mirroring that of rating agencies. Neither NorthWestern's actions nor information presented to date allay the concerns. 9. The Commission is primarily responsible to ensure that regulated energy

services provided to Montana consumers are safe, adequate and reliable at rates that are just and reasonable. NorthWestern's ability to fulfil1 these requirements is placed at risk by its current financial condition. Serious questions exist about the ability and commitment of NorthWestern to pursue adequate and necessary maintenance, repair and replacement
0

f critical utility infrastructure when potential bankruptcy and survival

occupy the attention of the board of directors and management. Approval of this security application requires ongoing commitment to fu]ly fund comprehensive operation, maintenance, repair and replacement of its public utility infrastmcture in Montana. NorthWestem must file a maintenance plan and budget within 45 days of the issuance of this Order.

] O.

By approving this security application; subject to the conditions contained

in this Order, the Commission is not satisfied that NorthWestern has pU'rsued all available options for digging out of the financial crisis which threatens utility service quality and rates. The Conunission expects the board of directors and
~anagement,

to fully examine

all options, including but not limited to: dividend policy and payouts; board of directors and senior management compensation levels and concessions; disposition ofnon-utility assets/operations; and sale of the Montana First Megawatts project, or a portion thereof. 1 J. Without prior approval from the Conunission, NorthWestern may, if it

deems it necessary, provide up to'an addition;tl $10 million in capital to any non-utility entities. However, the Conunission expects NorthWestern's management to exercise this authority with the utmost caution and to fIrst ensure that all steps are being taken within these subsidiaries themselves to minimize the ne((d for external resources. NorthWeslern must report all advances to non-utility companies within 5 business days of the advances to this Commission.

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NWE Docket No. D2002.12.159, Order No. 6474a 12.

Page 10

If existing credit agreements for Blue Dot or Expanets are tenninated

NorthWestern may file an application with the Commission seeking approval to provide secured loan agreements not to exceed $20 million for Blue Dot and $30 million for Expanets. DONE IN OPEN SESSION at Helena, Montana, this 24th day of January, 2003, by a vote of:4 to 1.

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NWE Docket No. D2002.l2.l59, Order No. 6474a

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BY ORDER OF THE MONTANA PUBUC SERVICE COMMISSiON

BOB ROWE, Chairman

TOM SCHNEIDER, Vice Chairman

GREG JERGESON, Commissioner

MATT BRAINARD, Commissioner
Voting to Dissent, Opinion Attached


JA Y STOVALL, Commissioner

ATTEST: Rhonda J. Simmons Commission Secretary . (SEAL) Note: Any interested party may request that the Commission reconsider this decision. A motion to reconsider must be filed within ten (10) days. See 38.2.4806, ARM.

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Dissenting Opinion of Commiss,ioner ~rainard
Docket No, D2002.12.159

As restrictive as the order may appear to some, it does little to retain the needed firewall between the utility and non-utility operations of the applicant. Certainly there is no reciprocity available to the utility and its customers to advantage themselves of the assets of the non-utility businesses, even if those businesses were financially robust and able. It is most certain that the Commission would not, could not, and should not ever order the use ofnon-utility assets to benefit the ratepayers. The Commission has a duty to see that the utility owner lives up to legitimate obligations to manage the utility assets in a way that is not detrimental to the customers and the public interest. While it may be lawful for the company to have multiple business inte~ests including utilities and non-utilities, a wall of separation should exist and business affairs should be conducted in a manner that insures that separation. The applicant has presented the Commission with a "fait accompli" by using part of the credit facility used in the purchase of MPC to finance non-utility ventures. Now that it is time to restructure the credit facHity the COllunission is asked to sanction the use
o~utility assets to secure the debt ofthe non-utilities as well. T~is has been presented to

the Commission as 'a unique event, the applicant is in desperate financial conditions and the utility itself is threatened by the conditions that face the applicant. The Commission should not succumb to the exigency of imminent crisis arid establisb precedent that will undoubtedly be visited in the future. The non-utility businesses are beyond the regulatory scope of the Commission. Pro,fits, losses or catastrophic failures of non-utility operations are beyond regulatory Teach, hence regulated assets should not be tendered as security for those business ventures. RESPECTFULLY SUBMITTED this 24th day of January, 2003.

Matt Brainard. Commissioner District #4

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORMIO-Q
(Mark One)

lEI

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934

For thc quartcrly period ended June 30, 2002

or

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES ACT OF

1934
to Commission File No. 0-692

'

, For the transition period from

N~~rthWesteni

CORPORArJOP~

i'

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


. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 'i3 or IS (D) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such ,reports), I8J Yes 0 No , and (2) has been subject to such filing requirements for the past 90 days. " Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable dale: Common Stock, Par Value $1.75 27,396,762 outstanding at August 12,2002

Source: NORTHWESTERN CORP, 10-0, AuguSl14, 2002

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approximately $5.6 million on three classes of its senior secured notes, which was due on July 31, 2002, and was continuing to review financial restructuring and strategic options, including the potential commencement of a Chapter II case under the United States Bankruptcy Code. After this announcement, the New Yorlc Stock Exchange announced that it had suspended trading in CornerStone's pUblicly traded partnership units and would seek to deJist the partnership units due to their low price and CornerStone's decision not to make Ihe scheduled interest payments. The Corporation will continue to evaluate CornerStone's financial restructuring and the impact upon creditors of CornerStone, including the Corporation, and expects to reflect any resulting financial implication in its third quarter 2002 results. During ftrst quarter 2002, the Corporation recognized a loss from discontinued operations of $40.0 mill ion. This was comprised of a writo-down of its investment in CornerStone of $41.7 million, which was partially offset by income (net of taxes and minority interests) of $1. 7 million for first quarter 2002. SUbsequent losses of $5.1 million (net of taxes and minority interests) for the' quarter ended June 30, 2002 have increased the amount of the recognized loss to $45.1 million. Summary financial information is as follows (in thousands):
June 30, 2002
December 31,

2001

Three months ended
June 30,
June 30, 2002 2001


Loss before income taxes and minorit interests

~~~1!~.__ ~mf~~~~!'iWii~t\.~¥~~U,~~$2~'M$~~*~",,§lif..iJ.'j~
25 191 17 140

Six months ended
June 3D,
June 30, 2002 2001


The Corporation has provided a guaranty of CornerStone's $50 million credit facility. At June 30, 2002, $17.7 million was. outstanding under CornerStone's credit facility, along with $8.3 million in letters ofcredil. 8

Source: NORTHWESTERN CORP, 10-0, August 14, 2002

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A provision for loss on discontinued operations as of June 30, 2002 has been included based on manasement's best estimates as of June 30, 2002 of the amounts expected to be realized on the disposition of its investment. The amount the Corporation will ultimately realize could differ from the assumptions currently used in arriving at the anticipated loss.
(5)

Supplemental Guarantor Financial Information

The $65 million of 8.45% Cumulative Quarterly Income Preferred Securities. Series A (QUlPS) of Montana Power Capital I; which were assumed as pan of the Montana Power acquisition, have been guaranteed by the Corporation. Ai; guarantor, we provide an unconditional guarantee, on an unsecured junior subordinated basis, of payment on these securities. The following presents condensed consolidating financial statements as oflune 30, 2002 and for the quarters then ended. Income Statement Consolidating Schedule Three Months Ended June 30, 2002 (in thousands)

9

. \i
..../

Source; NORTHWESTERN·CORP, 10-0, August 14, 2002

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Income Statement Consolidating Schedule Six Months Ended June 30, 2002 (in thQusands)
Parenland Consolldaled Subsidiaries

.Op¢ratilig'~¥Wp'u.~i?:~!~i;i~~':~:'?~itt:}{J?:;W~t~:t;~~io;i(~X,;·:t:'J,::::·::~::~·t~~~:r~~r;'$';{~!?,:r~;(J~~t;;;:i.$1.~.?}!1:!;~;i~t:;~:~~:$'Y:~'::·;%9'~i16.'S5 Cost of Sales .. . 448.291 83,140 531,431

NW Energy LLC

Eliminations

Total

~[[:t:~~~~?:~'~,:.':;~;;((C~':~;:~:~;iY;tt·*2::F~;~;f?W!~1~:~t:.i~;~f.~~~Fft;t{i;~;>:~;·: . ::;:~D~\*~;11'3.it~~~~t\;~:X{\~ .;1Y;;:,',~~f.i;~;:?·i1~;~;U~~?~i~zJ.~Jj2f: ~~t~;~r~;'f\!;:~t~~~~f~~~*lN~~14'1bt:;:~0.{~~~)t~t\t:~)7ii! t4.t';i;:;.j}S;~~~!i.k~~~~'~f01~§.!~~t~jJJtf~t~t1~l1;;;(tg %;'.Ht~~1~1M~~!~:;~
~gt;~:~~~~;i;:\-~:~~:·,~:··::ilt~1.ti{iJ~~::t!~{~JY~rJf:t~;~t~~~i~~~~~11.~~)5;~Br~t~¥ff~t:r~,~~);·~:~i;~;·~gJ~~~~~?iit~:~~~~~~~t*.~t:~~l~~~ii.~~~[';~~f~f.~~1~~~~~
Amortization of intangibles. 13 930

;y..:~ ~~:. :~~·.?I~/;'·::··:~/~ ~~~~~~;[~·~j~r~&.~?~:Nfry&tf.~j;~~~~j}~~'$~~r:~~!..i~Y(~Y~ -~7:1i:~(:;\~·:~~-~:;.~·~~:::~ ~,~~{~~r;{~r:~:~:g;~~}~~!~l~t~1tl0:~~rt?Mf~~t~tt~~::~:15j~~'t~:~~.~f?-1~r~1~~JJt.~~~

-

-

13,930

~J~~*~J.tJjlfr~*W~i~~~~~~~flt~~~%~ff[4~~Ji:~1&~~~~~{tf{.;~ti.~:f;f~1?~~~tk~~Jij.~~?t.~>t.:'iif;i!i;t~11ift.~;:tJ ..~~~jt~
*~~u.~'t~.H~!1l\:t~'\~,~~.1J.4~@8} ..~¥i~tt'-';{;.Ji':;~~~;M':f..;:i~~'t~;;~.r.7t ..:t:;f.~~.~~";{"A;f(: ;4:"'·,'~J:::~~.f·. ~:~~.ti~1 ~lJ'...~~~;4~~~;jo'1-?J.fb;L·~{'~A:D'.!J1~iY~"'~I;W~~~~ ...W~~(l~Y..~~~tE!a \!J~~l

~n.. J,~be:.1 ~~e~~e.'in';. :ftil'.,%·~,·:~g'~'i~l\"i'':;'';?''"'''F.4ri.:~';:;:A:;;'!J,a:~,;;,~~ AA'f~\;1~~'P:,;Y·: ;{,;;\~~I~~~ ";:"'l(Tl.,~,J,1~~;~1"'<~Y~ii'l.o,::~~~1I.~!~~(~~!2t;Ii'ii1;:n;~(~t,4~,

10

Source: NORTHWESTERN 'CORP, 10-0. August 14, 2002

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Gross margin for our natural gas utility operations in the second quarter of 2002 was $26.7 million, an increase of $21.2. . million, or 392.3%, over gross margin in the second quarter of 200 I. The growth was primarily attributable to the addition of NorthWestern Energy LLC's Montana operations which added $20.7 million in margin. Gross margin for previously owned operations increased $0.5 million in the second quarter of 2002 compared to the second quarter of 2001. As a percentage of revenues, gross margin improved from 18.3% in the second quarter of2001 to 49.7% in the second quarter of 2002, primarily as a result of the significant decrease in commodity prices within Nebraska/South Dakota operations and the higher margin impact from operations in Montana. Margins for the six months ended June 30, 2002 were $56.9 million, or $41.5 million higher than the first six months of 2001. NorthWestern Energy llC's Montana operations accounted for almost the en.tire increase, adding $41.4 million in margins. As with the quarter, margin percentages increased, rising from 14.6% for the frrs!.six months of2DOI to 43.2% for the first six months of- . 2002. This reflects the impact of lower commodity prices within the Nebraska/South Dakota operations and the higher margin NorthWestern Energy LLC's Montana operations. Operating expenses for our natural gas utility operations in the second quarter of 2002 were $16.9 million, an increase of $12.4 million, or 273.6%, from results in the second quarter of 2001. Selling, general and administrative expenses grew $10.2 million in the second quarter of 2002 to $13.8 million compared to the second quarter of2001, when such expenses were $3.7 million, primarily due to $11.0 million in additional expenses attributable to NorthWestern Energy llC's Montana operations, while selling, general and administrativ&expenses at previously owned operations declined due to reduced customer service expenses, employee benefits and distribution expenses. Depreciation was $3.1 million.in the second quarter of 2002, an increase of $22 million over depreciation during the second quarter of 2001. This increase was primarily due to the addition of NorthWestern Energy LLC's Montana operations. Operating expenses for the six months ended June 30, 2002, were $29.3 million, an increase of $19.6 million, or 203.5%, from results in the first six months of 2001. Selling, general and administrative expenses grew $15.7 million in the six month . period ended June 30, 2002 to S23.6 million compared to the six months ended June 30, 2001 when such expenses were $7.9 million. primarily due to $17.8 million in additional expenses attributable to NorthWestern Energy llC's Montana operations, while selling, general and administrative expenses at previously owned operations declined similar to the quarter changes. Depreciation was $5.6 million for the six months ended June 30, 2002, an increase of S3.9 million over depreciation during the. first six months of 2001. This increase was primarily due to the addition of NorthWestern Energy LLC's Montana operations. . Operating income for our natural gas utility operations in the second quarter 9f2002 was $9.7 million, compared to SO.9
million in the second quarter 2001. NorthWestern Energy LLC's Montana operations contributed $7.4 million to operating income in
the second quarter of 2002 while the operating expense reductions in the previously owned operations more than offset the revenue
shortfalIs in these operations to add S2.2 million of income. For the six months ended June 30, 2002, operating income of $27.7
million, which was $21.9 million higher than operating income for the six months ended June 30, 2001, with NorthWestern Energy
LLC's Montana operations contributing $19.6 million ·in iilcome. . ·

COMMUNICATIONS SEGMENT OPERATIONS

RevenuesJor the colIl.ffiunic.ations segment in the second quarter of2002 were $21 OJ million, a decline of $91.0 million, or 30.2%,
from revenues of $301.3 million in the second quarter of 2001. The decline was due to revisions made in May 2001 to the original
agreements executed in association with the acquisition of the Lucent Technologies' Growing and Energy Markets ("Lucent Gem")
business in Mar~h 2002,which eliminated minimum sales referral obligations of Av.aya,lnc. (formerly Lucent Technologies) and
increased the volume of higher-margin recurring revenue service maintenance contracts.' Overall market soflness in the technology
and comt)lunication segments of industry further depressed revenues. For the six months ended June 30, 2002, revenues were
$412.2 million, or $157.9 million lower than revenues for the six months ended June 3D, 2001. As with the second quarter of 2002,
the six month decline in revenues was primarily due to revisions in, the Lucent GEM agreements, as well as continued soft market
, conditions. . Cost ()f sales in the second quarter of 2002 were $116.7 million, a decline of $70.lmillion from cost of sales in the second
quarter of2oo1.0f$186.9 million. The decrease in cost of sales principally resulted from the lower sales volumes and efforts to
continue to improve the revenue mix by reducing cost intensive equipment sales and increasing lower cost service sales. III addition, a
.
technical assistance call center agreement signed with Avaya in March 2002 resulted in $10.1 million of reduced costs during the quarter ended June 30, 2002. Costs for the first six months of 2002 decreased 35.3% to $241.4 million when compared to cost of sales
for the first six months of 2001. As with the
24

Source: NORnlWESTERN CORP, 10-0, AugUSI14, 2002

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quarter, the six month decrease is also due primarily to the lower sales volumes, sales mix changes and renegotiated terms with Avaya. Gross margin in the second quarter of 2002 was $93.6 million, a decline of $20.7 million compared to gross margin in the
second quarter of 2001. The decrease in gross margin dollars resulted from the overall decline in sales volumes noted above. As a
percentage of revenues, gross margin improved from 38.0% in the second quarter of 200] to 44.5% in the second quarter of 2002.
The improvement was principally a result of changes in sales mix by increasing maintenance and service revenues as compared to
lower margin equipment sales. Additionally, a technical assistance call center agreement with Avaya reduced cost of sales and thereby
also improved margin percentages. Por the six months ended June 3D, 2002, gross margins were $170.8 million as compared to
.$197.1 million for the six months ended June 30, 2001. This decrease is attributable to the lower sales volumes mentioned above, as
well as the renegotiated agreement with Avaya. Gross margin percentage increased to 41.4% as compared to 34.6% for 2001 for
similar reasons as noted in the quarter fluctuations.
Operating expenses in the second quarter of 2002 were $82.6 million, a decline of $46.4 million from results in the second
quarter of 2001. Selling, general and administrative expenses declined $47.6 million to $68.7 million in the second quarter of 2002
from $116.4 million for the second quarter of 200 I. Our communications segment workforce has been reduced throughout 2001
resulting in lower selling, compensation and benefits, travel and other personnel costs. In November 2001, Expanets installed an
enterprise software systenr, the EXPERT system, and although additional costs have been incurred during 2002 to enhance the
system's operational capabilities, the system has eliminated redundant costs inCllrred under the fonner transition ~ervice agreements
executed with Avaya as part of the original Lucent GEM acquisition. The system is now operational and savings are expected to
continue throughout 2002 both from efficiencies and the reduction of non-capitalizable integration costs from the project.
'Depreciation expense increased $4.2 million to $7.1 million in the second quarter of 2002 compared to the second quarter of 2001 as a
. result of continued capital expenditures. Amortization expense decreased $2.9 million in the second quarter of 2002 compared to the
second quarter of 2001 due to implementation of SPAS No. 142, which has resulted in the discontinuance of a portion of the
'. 'intangibles amortization. For the six months ended June 30, 2002, expenses de~reased $98.0 million from the first six months of 2001. As with the quarter, the primary driver in the decrease in operating expenses is the decline in headcount ftom 2001 levels and cost reductions from fonner service agreements and EXPERT implementation. For the six months ended June 30. 2002, as compared to 2001; depreciation expense increased $6.4 million to $11.6 million from continued capital expenditures. Amortization expense decreased $4.7 million to $13.7 million, again as a result of the SFAS No. 142 implementation. Operating income in the second quarter of 2002 was $11.0 million. compared to operating losses of $14.6 million in the second quarter of 200 1. The reduction in tosses resulted from the substantial decline in operating expenses. Management expects to
see continued operational improvements throughout 2002 as a result of continued focus on expense reductions and margin improvement. Operating income for the six months ended Jurie 30, 2002, of $.8.3 million represents a $71.6 'million increase when'
compared to operating losses of $63.3 million'for the six month period ended June 30,2001. As with the quarter above, the primary
.. driver in this turnaround is due to the substantial decline in operating expenses. , .
·HVAC SEGMENT OPERATIONS

.. -.-)

)


Revenues in our HVAC division in the second quarter of 2002 were $117.8 million, an increase of$6.1.million, or 55%,
from results in the second qu.arter of 2001. Revenues from locations acquired subsequent to June 200 I contributed approximately
$7.4·million to the increase in second quarter 2002 results, while revenues from existing locations declined $1.3 million from results
in the second quarter of 2001. ·The decrease in existing location revenues' is a result of poor market conditions in certain areas, mild
, weather and the overall cOntinuation of a soft economy. For the six-month period ended June 30, 2002, revenues reached $212.3
million, a ,0.5% growth over the fIrst half of 2001. Revenues from locations acquired subsequent to June 2001 contributed
approximately $15.7 million to the increase in 2002 results, while revenues from, existing locations declined $14.7 million. As with
the second quarter, the decrease in existing location revenues is a result of poor market conditions, miid weather, a soft economy, as
:. well as several locations closing down certain divisions to improve overan profitability. ' 25

\. ,}
Source: NORTHWESTERN·CORP, 10-Q,Augu5t14, 2002

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Cost of sales in the second quarter of 2002 was $74.2 million, an increase of $5.4 million, or 7.8%, from results in the second quarter of 2001. Costs of sales for newly acquired locations added approximately $4.3 million of costs in the second quarter of 2002 compared to the second quarter of 2001 While cost of sales within existing locations increased $1.1 million in the second quarter of 2002 compared to the second quarter of 200 1. The increase in costs was primarily the result of price increases for labor and materials. For the six months ended June 30, 2002, costs of sales reached $134.0 million, a $2.6 million increase over costs for Ihe first six months of 2001. Cost of sales from locations acquired subsequent 10 June 3D, 2001, contributed approximately $10.0 million, while cost of sales within ex:isting locations declined $7.3 million. This decrease is due primarily to the reduc.ed sales activity mentioned above net of price increases for labor and materials. Gross margin in the second quarter of 2002 was $43.6 million, an increase of $0.7 million from results in the second quarter of2oo1. Gross margin from acquired localions contributed $3.1 million in the second quarter of 2002, but were offset by a $2.4 million decline in gross margin for existing locations in the second quarter of 2002 compared to the second quarter of 2001. This decrease is a result of the revenue shortfalls noted above, project pricing pressures and increased costs. As a percentage of revenues gross margins declined from 38.4% in the second quarter of200110 37.0% in the second quarter of 2002. Gross margin for the six months ended June 2002 decreased $1.7 million to $78.3 million over margins for the six months ended June 30.2001. As with the quarterly results, subsequent acquisitions account for $5.7 million of growth, but were offset by a decrease in gross margin for existing locations of $7.4 million. ..As a percentage of revenues gross margins for the six-month periods ending June 3D, 2001 and 2002 declined from 37.9% 10 36.9%, respectively, due mainly to cost pressures. Operating expenses in the second quarter of 2002 were $41.2 million, an increase of $1.0 million, or 2.6%, in the second quarter of 200 1. Selling. general and administrative expenses increased $3.3 million in the second quarter of 2002 from results in the second quarter of 2001. Acquired locations added approximately $2.0 million of costs in the second quarter of 2002 while expenses within the existing locations decreased $1.3 million in the second quarter of 2002. The increase is primarily attributable to fleet rent expenses, corporate office cost increases, as well as transition costs of the corporate office. Depreciation expense of $1.8 million for the quarter decreased $0.5 million as compared to the second quarter of 2001. During the second quarter of 2002, the company entered into a vehicle sale leaseback agreement resUlting in a depreciation expense decrease of $0.6 million in the second quarter of 2002 as compared ,to the second quarter of 2001. Amortization expense decreased $1.7 million during the second quarter of 2002 from results in the second quarter of 2001. due to implementation of SFAS No. 142, which has resulted in the discontinuance of a portion of the intangibles amortization. For the six months ended June 3D, 2002, operating expenses were $79.6 million, an increase of $0.7 million, or 0.9%. Selling, general and administrative expenses increased $4.0 million for the six months ended June 30, 2002 from the first six months of 2001. Acquired locations added approximately $4.0 million of costs fur 'the six months ended June 3D, 2002, while expenses within the previously owned operations were flat. Depreciation expense was basically flat between the periods 'at $4.4 million ,and $4.5 million, respectively. Amortization ex:pensCfor the six: months ended June 30, 2002. was $3.3 million less than the same period in 2001, as a result of the SFAS No. 142 implementation. Operating income in the second quarter of 2002 was $2.4 million, a decline of $0,3 million from results in the second quarter of 2001. Gross margin increases noted earlier were offset by an increase in operating expenses. Operating losses for the six months .ended June 30,2002 were $1.3 million as compared to operating income of$I.1 million for the six months ended June 30, 2001. This decrease in operating income reflects lower gross margins during the periods as operating expenses were basic;ally flat.
ALL OTHER OPERATIONS

All Other primarily consists of our other miscellaneous service activities which are not included in the other identified segments, together with the unallocated corporate costs and investments, and anY reconciling or eliminating amounts. The ,miscellaneous service activities principally include non-utility bnsinesses engaged in voice al\d data networkS and systems, and a portfolio of services to residential and business custoiners. including product sales and maintenance contracts in areas such as home monitoring devices and appliances. Revenues for the quarter increased $8.3 million to $12.5 million compared to the second quarter of 2001. This growth is attributable to the addition of Don-utility operations acquired with NorthWestern Energy LLCs Montana operations, which include revenues from statutory conservation and low income assistance charges, gas stranded costs collected in rates under a securitization program, underground services location operations and other unregulated operations, offset by declines in"the. previously owned operations from reduced sales activity. For the six months ended June 30, 2002, revenues were $22.7 million, a $15.0 million increase over revenues in the six: month 'period ended June 30, 2001. As with the quarter, the increase was a result of the addition of NorthWestern Energy LLC's Montana operations which added $14.8 minion in revenues. 26

Source: NORTHWESTERN CORP, 10-0, August 14, 2002

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!, .
1

2

Wayne Harper NORTHWESTERN ENERGY, LLC. 40 E. Broadway St.
Butte, MT 59701-9394 (406)497-2257

3

4

5
6
1
B

Stanley T. Kaleczyc Kimberly A. Beatty BROWNING, KALECZYC, BERRY & HOVEN, P.C. Attorneys at Law 139 North Last Chance Gulch Helena, Montana 59601
(406) 443-6820

9

Attorneys for NorthWestern Energy, LLC.

10
11

MONTANA SECOND JUDICIAL DISTRICT COURT, BUTTE-SILVER BOW COUNTY MARGARET A. MCGRE~Y; THOMAS G. TAYLOR; JOANNE BARKELL; PATRICK BURTON; ROSALI E BURTON; JAMES DUDLEY; JOSEPH MARTELLI; and LAWRENCE A. LOMBARDO,
Plaintiff,
) ) ) ) ) ) )

12

13

15

) )
) AFFIDAVIT OF DENNJ:S LOPACH

1.8

v.

)
) MONTANA POWER COMPANY, a ) Montana Corporation; MONTANA ) POWER, L.L.C.; TOUCH AMERICA ) HOLDINGS, INC.; R.B. GANNON; ) J.P. PEDERSON; M.J. MELDAHL;
) KAY FOSTER; CARL LEHRKIND, III;
DEBORAH D. McWHINNEY; TUCKER HART
) ) ADAMS; ALAN F. CAIN; JOHN G.
) CONNORS; R.D. CORETTE; JOHN R.
) JESTER; MICHAEL E. ZIMMERMAN;
JOHN D. HAFFEY; NOBLE E. VOSBURG;
) PPL MO~~ANA, LLCi GOLDMAN, SACHS &
) ) CO.,a Limited Partnership; THE
) GOLD~~ SACHS GROUP, INC.;
} PANCANADIAN PETROLEUM LIMITED,
) a Canadian Corporation;


.20
21.

22 23
24

25
26

27

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·
:I.

j..
WESTMORELAND COAL COMPANY,
3
4

"",J

a Delaware corporation, and its wholly- owned subsidiary CES ACQUISITION CORP.j MILBANK, TWEED, HADLEY & MCCLOY, LLPi and JOHN DOES 3-5 Defendant. Dennis Lopach, being Eirst duly sworn, deposes and says: I presently hold the position of Senior Vice President Administrative Services for NorthWestern Energy, L.L.C.

5 6

7
8
9
J.O

(momr

and reside in Helena, MT.

In this position r am responsible for

11
12

Legal Affairs, Government and Regulatory Relations and
Communications. I am a native of Great Falls, MT, and am

13
14

licensed to practice law in Montana and Colorado.

r am a

15
16

graduate of the University of Montana School of Law.
2.
I

have a substantia;I. amount of experience in issues

17

relating to public utilities, particularly with regard to state regulation. Shortly after I was admitted to "practice in 1976, I

became Chief Legal Counsel of the Montana Public Service
20

Commission (MPSC).
21
22
23

Most recently I was Vice President-Law and

Public

Poli~y

for MediaOne, U S WEST's cable television Prior to that I was Associate

subsidiary, in Atlanta, GA.
Genera~

24
2S

Counsel for U S WEST in Denver CO. In these various positions I have worked.with a wide

3.

26
27

variety of public utility issues in states across the country

and am generally familiar with a large number of regulatory,

2

lOSSH

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· ..

operational and financial issues involving electric companies, telecommunications companies and cable television providers.
3

4.

I

first became involved with NorthWestern Corporation

(NOR) in late 2000 when I was hired to lobby the 2001 Montana
5
6 7

Legislature on its behalf.

I became an employee in June 2001,

and have. been continuously involved in Montana regulatory
affairs on behalf of NOR and NWE since that time.
5.

S
9
J.O

I was deeply involved in the purchase by NOR of the

Remaining Utility Assets of The Montana Power Company (MPC), and I am familiar with the terms of the Unit Purchase Agreement

:1.1.

12
B

(UPA) entered into by NOR, MPC and Touch America Holdings (TA
Holdings) under the terms of which NOR acquired The Montana Power, L.L.C. 6. (MPLLC).
~nvolved

14
J.S

16
.17
1.8 1..9

I was specifically

on behalf of NOR in securing

the approval of this acquisition of the Remaining Utility Assets
of MPC by the Montana Public Service Commission (MPSC).
7.

Section 5.08 of the UPA provided that NOR, as Purchaser,

20

21

"may determine, in its discretion to obtain the approval of the

22
23

Securities and Exchange Commission (SEC) under the 1935 Act (the Public Utilities Holding Company Act) ...to consummate the
transactions contemplated by this Agreement pursuant to an exempt holding company structure under the 1935 Act. N

24
25

NOR in

26

good faith filed for an exemption, which operated as an
27

::>

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exemption until the SEC acts otherwise.

In its application, NOR .

represented that it would move to reorganize promptly.
3

B.

The Joint Application of MPC and NOR to the MPSC for

4

approval of the purchase and sale of the Remaining Utility
5 6 7
B

Assets was filed on January 11, ·2001. The case was assigned PSC Docket D2001.1.5, and was later consolidated with Docket
D97.7.90

(MPC's deregulation proceeding). The Joint Application
~At

9

noted that

NorthWestern's election, Montana Power's utility

10
11

operations under the LLC structure will become either a wholly owned subsidiary or a division of NorthWestern and will continue

12

to operate as a separate
14
~5

utility operating company..."

9.

The MPSC's proceedings on the combined dockets continued
On December 28, 2001, the

throughout calendar year 2001.

16
:1.7

parties to the two dockets filed a Stipulation proposing a

resolution of the sale and deregulation matters.

The parties to

the Stipulation were NOR, MPC, the Montana Consumer Counsel
19

(MCC) , the Large Customer Group (LOG) and Commercial Energy of
20 21
22 23
24

Montana, who comprised all of the active parties to the MPSC proceedings. and LCG had
The Stipulation stated, at paragraph 9, that MCC
analyz~d

NOR's financial and managerial ability to

operate the utility businesses, and that the parties requested that the MPSC approve the sale and permit ~MPC'8 utility

25
26 .

operations [be operated) as a subsidiary or a division of
27

[NOR] · It

4

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..
.." ) 1 . 2
3

10.

On January 31, 2002, after conducting a series of pUblic

hearings around the state, the MPSC issued its Final Order approving the stipulation in its entirety. This action provided

4

NOR with the regulatory authority to hold the Remaining Utility
5
6

Assets either as a subsidiary, as is now the case under the SEC's exemption from the 1935 Act, or as a division, which is the case today for the NOR's South Dakota and Nebraska utility properties. The Final Order was net appealed, and on February

7

8

10
11

~5,

2002, NOR's purchase of the Remaining Utility Assets closed.
~~.

In order to close this transaction, NOR incurred

12

13
14

approximately $700 million in short-term bank loans and assumed approximately $500 million in existing MPC debt.
The bank loans

15 16

were replaced with senior unsecured notes issued by NOR in March, 2002.
12.

17

Utilities require substantial amounts of capital in

order to transact their businesses,· Substantial amounts are spent on maintenance and significant investments are made in
20 21

plant upgrades that are necessary to ensure dependable .service. Additionally, there are times of the year when cash expenditures far exceed operating cash flows. For example, NWE earns a

22
23

:24
25
26

substantial amount of its revenues in the winter months, while mose maintenance and investment activity occurs in non-winter periods because of weather. It is very important to the smooth

27

operation of utility businesses that they be able to obtain

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,

I

capital when they need it, and on reasonable terms.

The primary

tool used by the investment community to assess the credit
3

worthiness of borrowers is the debt ratings that are established
by three
rat~ng

4

agencies. Standard and Poor's (S&P), Fitch and

5
6

Moody's.

Each of these agencies has its own rating "system".

7
B

but their ratings are generally similar in that they consider the financial health of the issuing entity and the ability of the issuer to make payments on debt instruments as they become

10

due.

Ratings are made at a point on a scale, and are the
~inve8tment

primary way in which a. bond or note is viewed as
13

grade" or nnon-investment N

,

with the financial characteristics Investment grade carries

\

24

of the issuer determining the rating.

1S
16

relatively low financial risk to the issuer, aud so the associated interest rates are generally lower than noninvestment grade bonds, which are considered relatively higher

lB

in risk.
19

Non-investment grade bonds carry higher interest rates

and many types of investors, such as pension funds, are
20
21

p~eclud~d

from owning these lower-rated instruments.

22
23

13.

When Moody's and Fitch rated NOR's senior unsecured

notes that were to be issued in March 2002 to replace the bank loans that financed the purchase of the Remaining Utility Assets, they analyzed the notes as being investment grade. Moody's rating was Baa2, which is two
~notches"

24
2S

26

above junk

27

status; Fitch was BBBT.

(subsequently downgraded to BBB in

6

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October, 2002), and S&P was BBB.

All three ratings agencies

noted that NOR intended to ncollapse" its holding company
3


structure into a divisional structure at some time in 2002, and noted that 'their ratings were conditioned on that restructuring.

4


5


6


14.

The continued ability of NOR to obtain the capital

7

8


it relies upon to operate the utility businesses on reasonable

terms is at risk if the restructuring is delayed.

Moody's

9


specifically noted that a delay in restructuring would likely result in a downgrade of NOR's rated debt, resulting in higher

10


interest costs and, potentially, a reduced ability to obtain
13

14


funds in the future.

This could adversely affyct NOR's aQility

to maintain and upgrade its plant, to buy the power it-needs to
serve the great bulk of its Montana electric and natural gas
customers, and to continue to operate its utility business ip

lS

16

17
18


its three states consistent with past practices.

None of these

consequences are desirable or are warranted when, as here, the
19


original sale of the utility business to NorthWestern was
20


21

22


approved by a super-majority of the sellers' shareholders, has been a part of the proposed sale transaction from the and has the approval of the
beginn~ng,

23

24
25

26


27


7

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.' ,

1


MPSC, the primary regulator of NOR's utility business in Montana.

3

4


15.

Alternatively, if NOR proceeds with its restructuring

s

6


under the terms of the injunction requested by the Plaintiffs in this case, NOR will be subject to a contingent liability based upon the allegations contained in this law suit. This could

7

8

9


adversely affect NOR's credit rating. If NOR's credit rating were to fall below investment grade, then NOR would be unable to: declare or pay dividends or make other distributions with respect to any class of
its capital stock or purchase, redeem,

10

11


12

13


retire, or otherwise acquire any such stock without the consent of the lenders. If this were to occur, NOR's shareholders would

15

16


wrongly suffer significant injury and NOR's ability to provide service to its Montana customers could be adversely affected.
FURTIlER Affiant ~ o ~

17

18


19


Dennis Lopach
20


21
22
23


24

25


26

27


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3

5

6


On this ri.C\-tl'l day of October r 2002, before me, the undersigned, a Notary Public in and for the State of Montana, personally appeared Dennis Lopachr known to me to be the person whose name is subscribed to the foregoing instrument and acknowledged to me that he executed the same. In witness whereof, I have hereunto set. my hand and affixed my notarial seal on the day and year first above written.

7

8
9


10

11


(Notarial Seal)

14


lS

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17


18
19

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Case 1:04-cv-01494-JJF

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Filed 01/04/2008

Page 33 of 48

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TN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MONTANA

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BILLINGS DIVISrON
MAGTEN ASSET MANAGEMENT CORPORATION, Plaintiff,
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Cause No. CV·04-26-BU-RFC

vs.

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ORDER


MIKE J. HANSON AND ERIE J. KeNDT, ) Defendants.

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BACKGROUND

05-

498

On Febmury 15, 2002, pursullnlto the terms of a Unit Purchase Agreement ("UPA")
entered into between NorthWestern, as purchaser, and Montana Power Company ("MPC") and Touch America Holdings, Inc. C"TAH"), as sellers, NorthWestern acquired sole unit interest in Montana Power, LLC ("MPLLC"). Two days previously, as part ofa corporate reorganization of MPC into TAH, the electric and natural gas transmission and distribution assets of MPC, as well

as MPC's interest in the Milltown Dalll, was transferred from MPC to MPLLC. The assets and
liahilities transferred to MPLLC were certain 8.45% Junior Subordinated Debentures due in 2036 which hod been issued by MPC in or about 1996. Tile interest paid on these Junior Debentures

Case 1:04-cv-01494-JJF

Document 262-11

Filed 01/04/2008

Page 34 of 48

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created the cash flow to make dividend payments on certain Series A 8.45% Quarterly Income Preferred Securities (,'QUIPS") which had previously been issued by Montana Power Capital I (The "Trust"). The sole assets oflhe Trust are the Junior Debentures. Plaintiff Magten is a holder of 33% of the Series A 8.45% QUIPS, wilh a principal face value in excess of $20 million.

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In August 2002, NorthWestern authorized and directed the transfer of the electric and
mllural gas transmission llnd distribution assets and liabilities held by its subsidiary to it, the parent corporation. The transfer was effected on November 15,2002. The Montana Utility Assets and Liabilities transferred included the obligations associated with the Junior Debentures and QUIPS. Other assets and liabilities remained with the Iimite Assels and Liabilities") to its corporate parent and sole owner, NorthWestern.
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Case 1:04-cv-01494-JJF

Document 262-11

Filed 01/04/2008

Page 35 of 48

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Defendants have moved Ihe Court for S\lmmary judgment on the grounds that Maglen was not a creditor of Clark Fork. and therefore, Clark Fork does not have standing to assert a creditor's claim and Defendants owe no duty to Magten.
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STANDARD OF REVIEW

Summary judgtnent is appropriate when no genuine issues of material fact exist and the moving pal1y is entitled tojudgmenl as a matter of law. Fed.R.Civ,P. 56(c); Summet's v. Teichert
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II/c., 127 F.3d 1150 (9th Cir. 1997) (citing Anderson

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Uberty Lobby.

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477 U.S. 242,

250 (1986»). Even ifthe evidence is merely colorable or is not significantly probative, n grant of summary judgment is still appropriate. Eisenberg v. 11Isztrlmce Co. oj North America, 81 S F.2d 1285, 1288 (9th Cir. 1987). The party moving for summary judgment bears the initial burden of proof to identify the absence ora g