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Rating Action:

MOODY'S DOWNGRADES RATINGS OF NORTHWESTERN CORPORATION (SR. SEC. TO Baa3); CONTINUES TO REVIEW RATINGS FOR POSSIBLE FURTHER DOWNGRADE

20 Dec 2002
MOODY'S DOWNGRADES RATINGS OF NORTHWESTERN CORPORATION (SR. SEC. TO Baa3); CONTINUES TO REVIEW RATINGS FOR POSSIBLE FURTHER DOWNGRADE

Approximately $1.9 Billion of Securities Affected

New York, December 20, 2002 -- Moody's Investors Service downgraded the debt ratings of NorthWestern Corporation (senior secured to Baa3 from Baa1) and is continuing to review the long-term ratings for possible further downgrade, where they were placed August 1, 2002. This action includes ratings on obligations of the former NorthWestern Energy L.L.C., which became direct obligations of NorthWestern Corporation (NOR) effective November 20, 2002 when the former subsidiary of NOR was folded into NOR's already existing utility division. The rating downgrades reflect concerns about considerably less debt reduction to date than anticipated, as well as weaker than anticipated cash flow relative to the consolidated debt load and fixed obligations. The rating downgrades also reflect NOR's recently announced expectations for lower than expected earnings and cash flow for 2002 due to ongoing challenges and disappointing results at NOR's nonutility operations. The latter are comprised of Expanets, the telecommunications solutions business, and Blue Dot, the heating, ventilation, and air conditioning service business. Furthermore, we note that NOR 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 will be determined in conjunction with the year-end audit to be completed over the next several months.

Moody's is continuing to review all of NOR's long-term ratings for possible further downgrade due to uncertainties surrounding the amount of the expected asset impairment and the impact that action will have on NOR's balance sheet. The continuation of the review also takes into account the need to obtain regulatory approvals from the Montana Public Service Commission (MPSC) in order to post first mortgage bond collateral with the collateral agent related to the $390 million secured term loan credit facility entered into with Credit Suisse First Boston (CSFB) on December 17, 2002. Posting of this collateral is necessary before NOR can access the funds under the new CSFB facility. Access to the funds would be a favorable development for the company since it would provide for refinancing of NOR's existing $280 million credit facility and reasonable liquidity for the company to go forward with a focus on opportunities in the core regulated electric and gas utility business. With respect to liquidity needs, we note that NOR faces a modest near-term debt maturity schedule.

In the continuing review process, Moody's will also monitor what other actions management might take as it seeks to minimize the adverse effects of the non-cash writeoffs and optimize the performance of its more stable and predictable utility operations in Montana, South Dakota, and Nebraska.

NorthWestern Corporation's long-term ratings downgraded and continuing under review for possible further downgrade include: senior secured debt to Baa3 from Baa1; senior unsecured debt and issuer ratings to Ba1 from Baa2; trust preferred securities to Ba2 from Baa3; shelf registration for prospective issuance of senior secured debt, senior unsecured debt, subordinated debt, preferred stock, and preference stock to (P)Baa3/(P)Ba1/(P)Ba2/(P)Ba3/(P)Ba3, respectively, from (P)Baa1/(P)Baa2/(P)Baa3/(P)Ba1/(P)Ba1, respectively; and shelf registration for prospective issuance of trust preferred securities to (P)Ba2 from (P)Baa3. In addition, Moody's downgraded NorthWestern Corporation's short-term debt rating to Not Prime from Prime-2 and will subsequently withdraw the rating at NOR's request. We note that NOR has no commercial paper outstanding at the time of this rating withdrawal.

Also downgraded and continuing under review for possible further downgrade are the long-term ratings of the former NorthWestern Energy L.L.C. (now part of NOR's utility division and direct obligations of NOR), which are comprised of the following: senior secured debt to Baa3 from Baa1; senior unsecured debt to Ba1 from Baa2; and trust preferred securities to Ba2 from Baa3. The issuer rating of the former NorthWestern Energy L.L.C., which was previously Baa2, has been withdrawn.

Despite using the $83 million of proceeds from an October issuance of common stock to repay bank debt, NOR's balance sheet remains very debt heavy at about 80% on an adjusted basis that includes the trust preferred securities as a debt component of the capital structure. Moody's notes that it was management's plan and commitment to issue considerably more common equity to de-leverage as part of its take-out financing strategy following the February acquisition of the utility distribution and transmission assets of the former Montana Power Company. However, a confluence of factors resulted in that strategy being delayed. Meanwhile, the high debt load and correspondingly high fixed charges place strain on disappointing consolidated levels of cash flow, leaving a thin cushion to protect fixed income investors.

As management works through the challenges posed by NOR's nonutility operations, the more stable and predictable cash flows from the expanded regulated utility operations will be especially important to maintain in order to avoid further pressure on the ratings. Important among the challenges that the company faces is the need to secure MPSC approval for posting collateral related to the CSFB facility, as well as the need to reduce its heavy debt load. We also note 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 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).

NorthWestern Corporation, headquartered in Sioux Falls, South Dakota, is a regional energy company focused on building its core regulated electric and natural gas transmission and distribution businesses. NorthWestern also has investments in unregulated businesses, including Expanets, Inc., a leading provider of networked communications and data services and solutions, and Blue Dot Services Inc., a nationwide provider of air conditioning, heating, plumbing and related services. Propane distribution operations were discontinued earlier this year.

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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