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Rating Action:

MOODY'S DOWNGRADES RATINGS OF NORTHWESTERN CORPORATION (SR. SEC. TO B2); RATING OUTLOOK IS NEGATIVE

25 Apr 2003
MOODY'S DOWNGRADES RATINGS OF NORTHWESTERN CORPORATION (SR. SEC. TO B2); RATING OUTLOOK IS NEGATIVE

Approximately $2 Billion of Debt Securities Affected

New York, April 25, 2003 -- Moody's Investors Service downgraded the debt ratings of NorthWestern Corporation (NOR; senior secured to B2 from Baa3). This action concludes the review for downgrade of NorthWestern Corporation's ratings. Concurrently, Moody's assigned a Senior Implied rating of B3. The outlook for the ratings is negative.

The ratings downgrade reflects: 1) concerns about NOR's high total adjusted debt load and poor coverage ratios; 2) expectations that operating cash flow will continue to be very low relative to the company's high debt level; 3) Moody's view that it will be difficult for NOR to materially reduce its debt burden over time; 4) negative net worth following approximately $878 million of charges taken in conjunction with reporting 2002 year-end results, a process which was delayed and was associated with the restatement of results for prior periods; 5) admissions by NOR's management that there are weaknesses in financial reporting and controls; and 6) uncertainties surrounding potential regulatory investigations, as well as current and potential shareholder lawsuits.

The negative rating outlook reflects Moody's concerns about the significant execution risks associated with management's strategy to return NOR's focus to its core regulated electric and gas utility businesses. The outlook also reflects Moody's view that after elimination of non-core businesses the remaining debt level will be a very heavy burden relative to the cash flow generating capacity of the utility operations. In addition to our expectation that funds from operations will continue to be meager in relation to total debt, Moody's does not see a likelihood of substantial reduction of the company's heavy debt burden in the near term, either by the sale of nonutility assets or through the issuance of equity. This view considers that nonutility assets have exhibited very poor returns, and that NorthWestern's market capitalization is under $100 million while its adjusted debt exceeds $2 billion. Demonstrated progress toward shoring up financial reporting and controls, selling assets to exit the remaining nonutility businesses, maximizing cash flow from utility operations, paying down debt, and returning NOR's strategic focus to utility operations will be necessary to stabilize the credit profile.

Moody's notes that NOR closed and funded in February 2003 a $390 million secured term loan credit facility, which is backed by NOR's first mortgage bonds. Proceeds from this secured term loan, which expires in December 2006, provided cash for repayment of the company's prior $280 million unsecured bank credit facility that was due to expire on February 14, 2003, as well as additional cash to support ongoing working capital needs. The secured term loan credit facility does not contain any rating triggers and related financial covenants are not affected by the performance of, or charges relating to NOR's nonutility businesses. With regard to liquidity needs, Moody's notes that NOR does not face any significant debt maturities until 2005 and has no plans for further investments in nonutility operations. Maintenance utility capital expenditures are currently estimated at $60 million annually for 2003 and 2004. Absent unexpected circumstances that place increased demands on NOR's cash, the company's liquidity appears tight but sufficient to meet its near-term obligations.

NOR recently suspended its common stock dividend to conserve cash and has embarked on a strategy to reduce debt through non-core asset sales. Management has set an initial target of $200 million of debt reduction over the next twelve months. Included among the actions we anticipate from management are the possible sale or disposition of Blue Dot, which is NOR's heating, ventilation, and air-conditioning services business, as well as Expanets, which is its telecommunications solutions business. Given circumstances surrounding those businesses, it may be difficult to maximize value during the sale process, thereby making material debt reduction a more significant challenge. Other non-core assets identified for sale include NOR's Montana First Megawatts generating facility, which is partially constructed, as well as certain transmission assets tied to the Colstrip generation facility, which is now owned by PPL Montana.

Despite using the $83 million of proceeds from an October 2002 issuance of common stock to repay bank debt, Moody's estimates that NOR's total adjusted debt burden, including basket adjusted trust preferred securities, guaranteed debt, and underfunded pension fund obligations, now stands at about $2.3 billion. The company's leveraged balance sheet and weak cash flow coverage of fixed charges, which we expect to be below 2x for 2003, leaves investors without any visible cushion for further unexpected adverse events.

NorthWestern Corporation's ratings downgraded include: senior secured debt to B2 from Baa3; senior unsecured debt and Issuer Rating to Caa1 from Ba1; trust preferred securities to Caa3 from Ba2; shelf registration for prospective issuance of senior secured debt, senior unsecured debt, subordinated debt, preferred stock, and preference stock to (P)B2/(P)Caa1/(P)Caa3/(P)Ca/(P)Ca, respectively, from (P)Baa3/(P)Ba1/(P)Ba2/(P)Ba3/(P)Ba3, respectively; and shelf registration for prospective issuance of trust preferred securities to (P)Caa3 from (P)Ba2.

NorthWestern Corporation, headquartered in Sioux Falls, South Dakota, is a diversified service and solutions company with investments in electric and gas utility assets, energy services, and HVAC, plumbing, and telecommunications and data services.

New York
John Diaz
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Kevin G. Rose
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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