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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (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), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

Indicate by check mark whether the registrant is an accelerated filer. Yes ý    No o

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date:

Common Stock, Par Value $1.75
37,680,095 outstanding at August 14, 2003

NORTHWESTERN CORPORATION
FORM 10-Q

INDEX

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

        On one or more occasions, we may make statements in this Quarterly Report on Form 10-Q regarding our assumptions, projections, expectations, targets, intentions or beliefs about future events. All statements other than statements of historical facts, included or incorporated by reference herein relating to management's current expectations of future financial performance, continued growth, changes in economic conditions or capital markets and changes in customer usage patterns and preferences are forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

        Words or phrases such as "anticipates," "believes," "estimates," "expects," "intends," "plans," "predicts," "projects," "targets," "will likely result," "will continue" or similar expressions identify forward-looking statements. Forward-looking statements involve risks and uncertainties, which could cause actual results or outcomes to differ materially from those expressed. We caution that while we make such statements in good faith and we believe such statements are based on reasonable assumptions, including without limitation, management's examination of historical operating trends, data contained in records and other data available from third parties, we cannot assure you that our projections will be achieved. Factors that may cause such differences include but are not limited to:

(i)

if we are unable to address our significant and immediate liquidity challenges and effectively implement our turnaround plan, which will require significantly reducing our debt, restructuring our debt and generating cash from additional funding sources or proceeds from the sale of non core assets, then we will not have sufficient working capital to continue to fund our operations or service our substantial indebtedness and we may be required to seek protection under the U.S. Bankruptcy Code;



(ii)

if we file for Bankruptcy protection, our creditors will be paid prior to our stockholders and our stockholders could lose their entire investment;



(iii)

if we are unable to obtain the consent of our stockholders at our annual meeting to be held on August 26, 2003 to amend our certificate of incorporation to significantly increase the number of shares of common stock and preferred stock we may issue and to amend the terms of our preferred stock, then we will not be able to effectuate our turnaround plan and our ability to reduce our debt will be materially adversely affected;



(iv)

if we default on certain covenants under the instruments governing our indebtedness, including our credit agreement, all or a significant portion of our outstanding indebtedness may be accelerated and we will not have sufficient working capital to satisfy those obligations;



(v)

if our vendors continue to require additional credit support, including letters of credit and prepayments, or impose other constraints on normal trade credit, our liquidity will be materially adversely affected;



(vi)

if plaintiffs receive a material monetary judgment against us greater than applicable insurance coverage or we become subject to other adverse judgments in the shareholder class action lawsuit relating to the disposition of the generating and energy-related assets by The Montana Power Company, excluding our acquisition of the electric and natural gas transmission and distribution business formerly held by The Montana Power Company, together with ERISA litigation regarding The Montana Power Company ESOP and 401(k) plan, then our liquidity and financial condition will be materially adversely affected;



(vii)

if plaintiffs receive a material monetary judgment against us greater than applicable insurance coverage or we become subject to other adverse judgments in existing shareholder and derivative litigation or in any additional litigation and regulatory action in connection with the

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restatement of our 2002 quarterly financial statements, our liquidity and financial condition will be materially adversely affected;

(viii)

if we are unable to fully address and correct inadequacies or material weaknesses in our internal controls and to thereafter maintain an effective internal controls structure, our financial condition will be materially adversely affected;



(ix)

if Expanets' or Blue Dot's business continues to be disrupted, including by the loss of key employees, customers and suppliers or reductions in liquidity, and the value of such businesses and their respective assets decline further as a result of our efforts to sell or dispose of such businesses or assets, and our limited ability to provide further funds to such businesses, then our ability to reduce debt with the proceeds of a sale of such businesses or assets will be adversely affected and we will not be able to implement our turnaround plan;



(x)

we may become subject to additional adverse federal, state, or local legislation or regulation or adverse determinations by regulators, including the recent final order of the Montana Public Service Commission (MPSC) disallowing the recovery of $6.2 million of natural gas costs we incurred during the past year, and an interim order fixing the recovery price during the next year, which has had and could continue to have a material adverse affect on our liquidity, results of operations and financial condition;



(xi)

we may suffer unscheduled generation outages, maintenance or repairs which may reduce revenues or may require additional capital expenditures or other increased operating costs;



(xii)

unanticipated changes in commodity prices or in fuel supply costs or availability due to higher demand, shortages, weather conditions, transportation problems or other developments, in combination with reduced availability of trade credit, may reduce revenues or may increase operating costs, each of which would adversely affect our liquidity;



(xiii)

increases in interest rates will increase our cost of borrowing;



(xiv)

if the rate of growth and economic conditions in our service territories decline, our operations and financial condition would be adversely affected;



(xv)

adverse changes in general economic and competitive conditions in the markets in which we may compete may adversely affect our operations and financial condition; and



(xvi)

certain other business uncertainties related to the occurrence of natural disasters, war, hostilities and the threat of terrorist actions may adversely affect our operations and financial condition.

        We have attempted to identify, in context, certain of the factors that we believe may cause actual future experience and results to differ materially from our current expectation regarding the relevant matter or subject area. In addition to the items specifically discussed above, our business and results of operations are subject to the uncertainties described under the caption "Risk Factors" which is a part of the disclosure included in Item 2 of this Report entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations."

        From time to time, oral or written forward-looking statements are also included in our reports on Forms 10-K, 10-Q and 8-K, Proxy Statements on Schedule 14A, press releases and other materials released to the public. Although we believe that at the time made, the expectations reflected in all of these forward-looking statements are and will be reasonable, any or all of the forward-looking statements in this report on Form 10-Q, our reports on Forms 10-K and 8-K, our Proxy Statements on Schedule 14A and any other public statements that are made by us may prove to be incorrect. This may occur as a result of inaccurate assumptions or as a consequence of known or unknown risks and uncertainties. Many factors discussed in this Quarterly Report on Form 10-Q, certain of which are

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beyond our control, will be important in determining our future performance. Consequently, actual results may differ materially from those that might be anticipated from forward-looking statements. In light of these and other uncertainties, you should not regard the inclusion of a forward-looking statement in this Quarterly Report on Form 10-Q or other public communications that we might make as a representation by us that our plans and objectives will be achieved, and you should not place undue reliance on such forward-looking statements.

        We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. However, your attention is directed to any further disclosures made on related subjects in our subsequent annual and periodic reports filed with the Commission on Forms 10-K, 10-Q and 8-K and Proxy Statements on Schedule 14A.

        Unless the context requires otherwise, references to "we," "us," "our," "NorthWestern Corporation" and "NorthWestern" refer specifically to NorthWestern Corporation and its subsidiaries.

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PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NORTHWESTERN CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except per share amounts)

The accompanying notes to consolidated financial statements are an integral part of these statements.

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NORTHWESTERN CORPORATION
CONSOLIDATED STATEMENTS OF LOSS
(Unaudited)
(in thousands, except per share amounts)

The accompanying notes to consolidated financial statements are an integral part of these statements.

7

NORTHWESTERN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)

The accompanying notes to consolidated financial statements are an integral part of these statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Reference is made to Notes to Financial Statements
included in NorthWestern Corporation's Annual Report)

(1)   Management's Statement

        The consolidated financial statements for the interim periods included herein have been prepared by NorthWestern Corporation (the "Corporation" or "we"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that may affect the reported amounts of assets, liabilities, revenues and expenses during the reporting period. Actual results could differ from those estimates. Results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year, and these financial statements do not contain the detail or footnote disclosure concerning accounting policies and other matters that would be included in full fiscal year financial statements. Therefore, these financial statements should be read in conjunction with the financial statements and the notes thereto included in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2002.

(2)   Nature of Operations and Recent Developments

        We are one of the largest providers of electricity and natural gas in the Upper Midwest and Northwest, serving approximately 598,000 customers in Montana, South Dakota and Nebraska. We have generated and distributed electricity in South Dakota and distributed natural gas in South Dakota and Nebraska since 1923 through our energy division, NorthWestern Energy, formerly NorthWestern Public Service. On February 15, 2002, we completed the acquisition of the electric and natural gas transmission and distribution business of The Montana Power Company, or Montana Power. As a result of the acquisition, from February 15, 2002 through November 15, 2002, we distributed electricity and natural gas in Montana through our wholly owned subsidiary, NorthWestern Energy, L.L.C. Effective November 15, 2002, we transferred the electric and natural gas transmission and distribution operations of NorthWestern Energy, L.L.C. to NorthWestern Corporation, and since that date, we have operated its business as part of our NorthWestern Energy division. We are operating our utility business under the common name "NorthWestern Energy" in all our service territories. The former NorthWestern Energy, L.L.C. has been renamed "Clark Fork and Blackfoot, L.L.C."

        We also have made investments in three primary non-energy businesses: Expanets, Inc., or Expanets, a provider of networked communications and data services and solutions to small to mid-sized businesses nationwide; Blue Dot Services Inc., or Blue Dot, a nationwide provider of air conditioning, heating, plumbing and related services; and, through November 1, 2002, we held an economic equity interest in a subsidiary that serves as the managing general partner of CornerStone Propane Partners, L.P., or CornerStone, a publicly traded limited partnership that is a retail propane and wholesale energy related commodities distributor. The operations of Expanets, Blue Dot and CornerStone and our interest in these subsidiaries have been reflected in the consolidated financial statements as Discontinued Operations (see Note 6 for further discussion).

        Our financial condition has been significantly and negatively affected by the poor performance of our non-energy businesses and our significant indebtedness. If we are unable to address our significant and immediate liquidity challenges and effectively implement our turnaround plan, which will require significantly reducing our debt and generating cash from additional funding sources or proceeds from the sale of non-core assets, then we will not have sufficient working capital to continue to fund our

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operations or service our substantial indebtedness and we may be required to seek protection under the U.S. Bankruptcy Code:

•

At June 30, 2003, we had a common stockholders' deficit of $503.9 million and currently have approximately $2.2 billion in debt and trust preferred instruments outstanding.



•

Interest obligations of approximately $39 million are due in September with respect to our outstanding indebtedness. We have the ability to defer $31 million due on September 15, with respect to our outstanding senior unsecured notes payable, for up to thirty days. We also owe approximately $38 million in property taxes in Montana, which are due by the end of November. If we are unable to generate cash from additional funding sources or proceeds from the sale of non-core assets, we will not be able to meet these obligations as they come due and we will be in default on various debt instruments.



•

In light of our current liquidity situation, we have reviewed the provisions of our debt instruments for default and cross-default provisions that would occur if we are unable to meet our interest and tax obligations. We have reclassified approximately $1.2 billion of long-term debt to current maturities of long-term debt on our consolidated balance sheet as of June 30, 2003, based on the amount of debt that would become due under the various default and cross-default provisions of our debt instruments.



•

If we are unable to generate cash from additional funding sources or proceeds from the sale of non-core assets, then the amount of cash being generated from our continuing operations may not be sufficient to sustain current and anticipated interest payments, capital expenditures and working capital requirements, which have risen significantly due to reductions in trade credit demanded by our vendors, additional professional and other fees related to our turnaround plan and certain stockholder and derivative litigation.



•

At present we have no ability to access equity markets and no new bank lines to supplement our working capital and must rely on our cash balances to cover shortfalls. We are currently seeking a working capital facility, however there are no assurances that we will be able to consummate this or any similar financing.



•

Commencing in 2005, we face substantial debt reduction payments. Absent the receipt of significant proceeds from the sale of non-core assets, the raising of additional capital or a restructuring of our debt, we will not have the ability to reduce our debt or meet our maturing debt obligations. Even if we are successful in selling some or all of our non-core assets, we will have to restructure our debt or seek new capital prior to these debt maturities.



•

Unless the market price of our common stock and our total market capitalization increases significantly, we could become subject to a delisting proceeding by the NYSE, which could have a material adverse effect on our business, financial condition and operating results.

        In order to address the Corporation's financial problems, we have developed a turnaround plan, the key elements of which are to: (i) focus on our core electric and natural gas utility businesses; (ii) substantially reduce debt by applying net proceeds from the sale of non-core assets and other means; (iii) reduce operating costs; and (iv) improve internal financial controls and procedures.

        We have eliminated the dividend on our common stock, which represented approximately $38 million in distributions in 2002, and elected to defer distributions on the publicly traded trust preferred securities of our subsidiary trusts. We do not anticipate paying any cash dividends on our common stock for the foreseeable future. In addition, we are currently prohibited from paying dividends on our common stock under Delaware law. Our senior secured term loan also prohibits the payment of dividends during any period of default under the agreement. We currently are not in default under our senior secured term loan. To the extent that payment of a cash dividend on our

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common stock becomes permissible under Delaware law, we would only be able to pay a cash dividend on our common stock to the extent that all required distributions (including any deferred amounts) on the publicly traded trust preferred securities of our subsidiary trusts have been made.

        We have engaged a financial adviser to assist us in effecting the sale of Blue Dot and Expanets. With our financial advisor we are conducting a private auction with respect to Blue Dot and are seeking to exit this business. Although we hope to conclude our disposition of Blue Dot in 2003, we do not anticipate receiving a material amount of net cash proceeds in excess of liabilities from that transaction. We are also seeking to sell Expanets. We are attempting to conclude this transaction during 2003. If we are successful in consummating the sale of Expanets, we hope to receive net cash proceeds significantly in excess of liabilities to third parties. Any final arrangement relating to the sale of Blue Dot or Expanets is subject to numerous legal, accounting, financial and business issues being resolved. We will not make any additional investments in, or commitments to, Expanets and Blue Dot. In addition, in January 2003, the MPSC restricted our ability to make additional investments or commitments to our non-regulated businesses to $10 million in the aggregate unless we obtain its prior approval.

        We are also attempting to sell other non-core assets, including the Montana First Megawatts generation project, and we are seeking to enforce an existing contract to sell certain Colstrip transmission assets to a third party. During the second quarter of 2003, we consummated the sale of one non-core business for cash consideration of $6.6 million and a note receivable of $4.7 million (see Note 6 for further discussion).

        We face considerable challenges in selling our non-energy businesses, which have historically not been cash flow contributors to the organization. Expanets faces challenges with respect to, among other things, economic conditions in the telecommunications market and problems with its Expert system, an enterprise information technology and management system. Expanets may not have sufficient working capital to satisfy its debt obligations as they mature or in the event of an acceleration of all or a significant portion of its outstanding indebtedness. Blue Dot faces serious liquidity concerns in the near term as it seeks to extend its forbearance agreement with its credit facility provider, obtain favorable payment terms related to its upcoming insurance renewals and meet other cash payment obligations as they become due. If we are unable to dispose of Blue Dot within the next three months, we may incur additional claims related to amounts we have guaranteed on behalf of Blue Dot. Each company also faces challenges related to retention of its employees, key managers, customers and suppliers. The challenges faced by Expanets and Blue Dot have caused serious disruption to these businesses and have materially and adversely affected their value. We cannot predict whether or when such assets may be sold, or whether we can obtain a favorable price or other terms in any such sale.

        In addition to the sale of non-core assets and other steps we have taken and intend to take to improve operating performance and preserve cash, we believe that reduction of debt will require the issuance of additional equity securities, either to raise cash or to exchange for the retirement of outstanding debt. We are asking that our stockholders approve, at our annual meeting scheduled for August 26, 2003, a significant increase in the authorized number of shares of common stock, a significant increase in the number of shares of preferred stock and a significant amendment of preferred stock terms, together with other changes to the Restated Certificate of Incorporation, in order to provide us with greater flexibility in pursuing our turnaround plan. We believe that unless a new Amended and Restated Certificate of Incorporation is adopted we will not be able to effectuate our turnaround plan. In addition, if our common shares are delisted from the NYSE, raising capital in the future or using our shares to extinguish all or part of our debt would be significantly more difficult.

        We have retained a financial restructuring advisory firm to assist us in implementing our turnaround plan. If we are unable to effectuate our turnaround plan, which will require significantly reducing our debt, restructuring our debt and obtaining additional capital, we will not be able to fund

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our operations and service our substantial indebtedness and we may default on certain covenants under instruments governing our indebtedness, including our credit agreement. If those events were to occur we may be required to pursue alternate means of resolving our financial problems, which could include seeking protection under the U.S. Bankruptcy Code, thus creating substantial doubt about our ability to continue as a going concern.

        The Montana Consumer Counsel (MCC) has filed with the MPSC a Petition for Investigation, Adoption of Additional Regulatory Controls and Related Relief. The relief sought includes adoption of new regulatory controls that would specifically apply to NorthWestern, including additional reporting, cost allocation and financing rules and requirements, and examination of affiliate transactions. We cannot determine the impact or resolution of this petition, however, any action taken by the MPSC to increase the regulatory controls under which we operate may have a material affect on our liquidity, operations and financial condition. Any new MPSC orders related to our financing activities may make it more difficult to restructure our debt in connection with our turnaround plan. Also, if we are unable to comply with any MPSC orders in a timely manner, we may become subject to material monetary penalties and fines.

(3)   Basis of Consolidation

        The accompanying consolidated financial statements include our accounts together with those of our wholly and majority-owned or controlled subsidiaries. The financial statements of Expanets, Blue Dot and CornerStone (CornerStone is only through November 1, 2002) are included in the accompanying consolidated financial statements by virtue of the voting and control rights, and therefore included in references to "subsidiaries". All significant intercompany balances and transactions have been eliminated from the consolidated financial statements. The operations of Expanets, Blue Dot and CornerStone and our interest in these subsidiaries have been reflected in the consolidated financial statements as Discontinued Operations (see Note 6 for further discussion).

(4)   Acquisition

        On February 15, 2002, we completed the asset acquisition of Montana Power's energy transmission and distribution business for $478.0 million in cash and the assumption of $511.1 million in existing debt and mandatorily redeemable preferred securities of subsidiary trusts (net of cash received). Acquisiti