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 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. ý Yes o No

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

This Amendment No. 1 (this "Amendment") to the Quarterly Report on Form 10-Q of NorthWestern Corporation ("NorthWestern") for the quarter ended March 31, 2002, is filed solely for the purpose of amending Item 1 and Item 2 of Part 1 to provide additional disclosure in response to comments received from the Securities and Exchange Commission in connection with a review of NorthWestern's Registration Statement on Form S-4 (File No. 333-86888), which was declared effective on September 11, 2002.

The information contained in this Amendment has been updated in certain respects to reflect developments since March 31, 2002, the date of the financial statements contained herein. This Amendment should be read together with NorthWestern's Annual Report on Form 10-K, as amended, for the year ended December 31, 2001 and NorthWestern's Quarterly Report on Form 10-Q, as amended, for the three months ended June 30, 2002.

PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
NORTHWESTERN CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands)

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

NORTHWESTERN CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In Thousands, Except Per Share Amounts)

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

NORTHWESTERN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Reference is made to Notes to Financial Statements
Included in the Company's Annual Report)

The consolidated financial statements for the interim periods included herein have been prepared by NorthWestern Corporation (the "Corporation"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). In the opinion of the Corporation, all adjustments necessary for a fair presentation of the results of operations for the interim periods have been included. 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 latest annual report to shareholders.

The Corporation is a service and solutions company providing integrated energy, communications, air conditioning, heating, ventilation, plumbing and related services and solutions to residential and business customers throughout North America. A division of the Corporation (NorthWestern Energy) is engaged in the regulated energy business of production, purchase, transmission, distribution and sale of electricity and the delivery of natural gas to customers located in the upper Midwest region of the United States. The Corporation has investments in Expanets, Inc. ("Expanets"), a leading provider of networked communications and data services and solutions to medium-sized businesses nationwide; Blue Dot Services, Inc. ("Blue Dot"), a national provider of air conditioning, heating, plumbing and related services ("HVAC"); and CornerStone Propane Partners, L.P. ("CornerStone"), a publicly traded Delaware master limited partnership, formed to engage in the retail propane and wholesale energy-related commodities distribution business throughout North America.

The accompanying consolidated financial statements include the accounts of the Corporation and all wholly and majority-owned or controlled subsidiaries. The financial statements of Expanets, Blue Dot and CornerStone are included in the accompanying consolidated financial statements, and therefore included in referencing to "subsidiaries," by virtue of the voting and control rights. All significant intercompany balances and transactions have been eliminated from the consolidated financial statements. The operations of CornerStone and the Corporation's interest in CornerStone have been reflected in the consolidated financial statements as Discontinued Operations (see Note 4, Discontinued Operations, for further discussion).

Many of the Corporation's acquisitions at Expanets and Blue Dot have involved the issuance of common and junior preferred stock in those subsidiaries to the sellers of the acquired businesses. The Corporation's investments in Expanets and Blue Dot are principally in the form of senior preferred stock with voting control and a liquidation preference over the common and junior preferred stock. We are required to consolidate the financial results of Expanets and Blue Dot because of our voting control. The common and preferred stock issued to third parties in connection with acquisitions creates minority interests which are junior to the Corporation's preferred stock interests and against which operating losses have been allocated.

The income or loss allocable to minority interests will vary depending on the underlying profitability of the consolidated subsidiaries. Losses allocable to minority interests, which include the effect of dividends on the outstanding preferred stock owned by the Corporation and applicable allocations from the Corporation, are charged to minority interests. Losses are allocated to minority interests to the extent they do not exceed the minority interest in the equity capital of the subsidiary, after giving effect for any exchange agreements. Losses in excess of the minority interests are allocated to the Corporation.

Losses allocated to Minority Interests were $14.9 million and $45.8 million for the three months ended March 31, 2002 and 2001, respectively. Minority Interests balances were $14.9 million at March 31, 2002 and $30.1 million at Dec. 31, 2001. The Corporation will recognize future losses of the subsidiaries to the extent these losses exceed the Minority Interest balance after any effects of exchange agreements, totaling $14.9 million as of March 31, 2002. Accordingly, based on the capital structures of Expanets and Blue Dot at March 31, 2002, all losses at Expanets and Blue Dot will be allocated to the Corporation, unless additional minority interest is issued as a result of new acquisitions.

On February 15, 2002, the Corporation completed the asset acquisition of The Montana Power Company's energy distribution and transmission business for $602.0 million in cash and the assumption of $488.0 million in existing Montana Power Company debt and mandatorily redeemable preferred securities of subsidiary trusts (net of cash received). As a result of the acquisition, the Corporation is now a provider of natural gas and electricity to more than 590,000 customers in Montana, South Dakota and Nebraska and has the capacity to provide service to wider regions of the country. For accounting convenience, due to the burden of a mid-month closing, both parties agreed to an effective date for the sale of January 31, 2002.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of February 1, 2002. The Corporation is in the process of obtaining third-party valuations of certain tangible assets, intangible assets and liabilities; thus, the allocation of the purchase price is subject to refinement, generally within one year of the date of acquisition and in the interim, has been allocated to goodwill. Final allocations will separate between any goodwill, intangible assets subject to amortization and those that are not, useful lives and tax deductibility.

		February 1, 2002
		(in thousands)
Cash		$	105,140
Other current assets			76,178
Property, plant and equipment			1,093,988
Goodwill & other intangibles			196,403
Other			154,803

	Total assets acquired	$	1,626,512

Current liabilities		$	219,950
Long-term debt			442,711
Mandatorily redeemable preferred securities of subsidiary trusts			65,000
Other			320,211

	Total liabilities assumed		1,047,872

Net assets acquired		$	578,640

The following unaudited pro forma results of consolidated operations for the quarter ended March 31, 2002, give effect as if the acquisition had occurred as of January 1, 2002 (in thousands except per share amounts):

	Three Months Ended March 31, 2002
Revenues	$	544,076
Net Income (Loss)		(23,069	)
Diluted earnings per share		(1.07	)

The Corporation owns an effective 30% interest in CornerStone through subordinated units, a 2% aggregate general partner interest, 379,438 common units and all outstanding warrants. On January 18, 2002, the board of directors of the general partner of CornerStone announced that it had retained Credit Suisse First Boston Corporation to review strategic options, including the possible sale or merger of CornerStone. Accordingly, the Corporation has adopted discontinued operations accounting for its CornerStone interests. Accordingly, the assets, liabilities and results of operations of CornerStone and those representing the Corporation's interests in Cornerstone are presented as discontinued operations in the consolidated financial statements. Subsequently, on August 5, 2002, CornerStone announced that it had elected not to make an interest payment aggregating 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 11 case under the United States Bankruptcy Code. After this announcement, the New York Stock Exchange announced that it had suspended trading in CornerStone's publicly traded partnership units and would seek to delist the partnership units due to their low price and CornerStone's decision not to make the 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 first quarter 2002, the Corporation recognized a loss from discontinued operations of $40.0 million. This was comprised of a write-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):

	March 31, 2002		December 31, 2001
Accounts receivable, net	$	61,001	$	121,843
Other current assets		40,139		59,854

Current assets of discontinued operations	$	101,140	$	181,697

Property, plant and equipment, net	$	312,769	$	322,126
Goodwill and other intangibles, net		336,176		339,058
Other noncurrent assets		33,267		34,013

Noncurrent assets of discontinued operations	$	682,212	$	695,197

Accounts payable	$	70,921	$	142,578
Other current liabilities		54,420		87,492

Current liabilities of discontinued operations	$	125,341	$	230,070

Long-term debt	$	423,137	$	424,524
Minority interests		160,826		153,245
Other noncurrent liabilities		68,359		27,556

Noncurrent liabilities and minority interests of discontinued operations	$	652,322	$	605,325

Partners' capital of discontinued operations	$	5,689	$	41,449

	Three months ended
	March 31, 2002		March 31, 2001
Revenues	$	277,240	$	1,019,097
Income before income taxes and minority interests		10,470		22,220
Income from discontinued operations, net of income taxes and minority interests		1,652		5,196

The Corporation has provided a guaranty of CornerStone's $50 million credit facility. At March 31, 2002, $10.7 million was outstanding under CornerStone's credit facility, along with $5.6 million in letters of credit.

A provision for loss on discontinued operations as of March 31, 2002 has been included based on management's best estimates as of March 31, 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.

In March 2002, the Corporation retired the $720.0 million term loan, due February 2003, that was used for interim financing for the acquisition of The Montana Power Company's energy distribution and transmission business. The recognition of deferred costs related to the interim financing resulted in

an extraordinary loss of $13.4 million, net of related income taxes of $7.2 million, or $(0.49) basic and diluted earnings per share.

The Financial Accounting Standards Board defines comprehensive income as all changes to the equity of a business enterprise during a period, except for those resulting from transactions with owners. For example, dividend distributions are excepted. Comprehensive income consists of net income and other comprehensive income. Net income may include such items as income from continuing operations, discontinued operations, extraordinary items, and cumulative effects of changes in accounting principles. Other comprehensive income may include foreign currency translations, adjustments of minimum pension liability, and unrealized gains and losses on certain investments in debt and equity securities. Comprehensive income (loss) is calculated as follows (in thousands):

		Three Months Ended March 31
		2002			2001
Net Income		$	(29,488	)	$	18,389
Other comprehensive income, net of tax:
	Unrealized gain (loss) on investments		23			(1,136	)
	Gain on termination of hedge		5,073			—

Comprehensive Income (Loss)		$	(24,392	)	$	17,253

The Corporation recognized a restructuring charge of $24.9 million in the fourth quarter of 2001 relating to the Corporation's Operational Excellence Initiative which is targeting selling, general and administrative cost reductions of approximately $150 million. The Board of Directors approved this initiative in November 2001. At December 31, 2001, $19.3 million remained as part of Accrued Expenses on the Consolidated Balance Sheet. The activity in the restructuring reserve was as follows for the quarter ended March 31, 2002:

	December 31, 2001		Deductions			March 31, 2002
Employee termination benefits	$	11,932	$	(3,094	)	$	8,838
Facilities		4,745		(439	)		4,306
Other		2,662		(2,426	)		236

	$	19,339	$	(5,959	)	$	13,380

For the purpose of providing segment information in accordance with Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," the Corporation's principal business segments are its electric, natural gas, communications and HVAC operations. The "All Other" category primarily consists of our other miscellaneous service activities which are not included in the other identified segments together with unallocated corporate costs and any reconciling or eliminating amounts.

The accounting policies of the operating segments are the same as the parent except that the parent allocates some of its operating expenses and interest expense to the operating segments according to a methodology designed by management for internal reporting purposes and involves estimates and assumptions. Financial data for the business segments, excluding the discontinued operations of CornerStone, are as follows (in thousands):

SFAS No. 141, "Business Combinations," issued in June 2001, requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. In addition, it requires

that all identifiable intangible assets be separately recognized and the purchase price allocated accordingly, which will result in the recognition, in some instances, of substantially more categories of intangibles.

SFAS No. 142, "Goodwill and Other Intangible Assets," was also issued in June 2001 and eliminates amortization of goodwill and allows amortization of other intangibles only if the assets have a finite, determinable life. At adoption, and at least annually thereafter, companies must also perform an impairment analysis of intangible assets at the reporting unit level, to determine whether the carrying value exceeds the fair value of the assets. In instances where the carrying value is more than the fair value of the asset, an impairment loss must be recognized. Subsequent reversal of a previously recognized impairment loss is prohibited. SFAS No. 142 is effective for all fiscal years beginning after December 15, 2001, with early application permitted in some instances for entities with fiscal years beginning after March 15, 2001. The Corporation adopted the provision effective January 1, 2002 and, as reported subsequently in the June 30, 2002 Quarterly Report on Form 10-Q/A, the Corporation retained a third party to assist in the analysis of fair value for compliance with SFAS No. 142 and determined that no impairment charge was necessary.

The following tables present a reconciliation of net income and earnings per share as reported net of taxes and minority interests, to adjusted amounts which included the impact of the adoption of SFAS 142 for all periods presented:

SFAS No. 143, "Accounting for Asset Retirement Obligations," was issued in August 2001 and addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The Corporation is currently assessing the impact of the adoption on the financial statements.

SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," was issued in October 2001 and establishes a single accounting model for long-lived assets to be disposed of by sale. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Corporation adopted SFAS No. 144 on January 1, 2002, which affected the discontinued operations accounting treatment for CornerStone (see Note 4, Discontinued Operations).

Certain 2001 amounts have been reclassified to conform to the 2002 presentation. Such reclassifications have no impact on net income or shareholders' equity as previously reported.

Basic earnings per share is computed on the basis of the weighted average number of common shares outstanding. Diluted earnings per share is computed on the basis of the weighted average number of common shares outstanding plus the effect of the outstanding stock options and warrants. The following table presents the shares used in computing the basic and diluted earnings per share for 2002 and 2001:

Certain outstanding antidilutive options and warrants have been excluded from the earnings per share calculation. These options and warrants total 2,530,381 and 458,331 for the quarters ended March 31, 2002 and 2001, respectively.

In connection with the acquisition of NorthWestern Energy, L.L.C. ("NorthWestern Energy LLC"), which held the energy distribution and transmission business of The Montana Power Company, the Corporation assumed the following environmental obligations:

The U.S. Environmental Protection Agency (the "EPA"), identified the Milltown Reservoir, which sits behind a hydroelectric dam the Corporation acquired in connection with the acquisition of NorthWestern Energy LLC, on its Superfund National Priority List in 1983 as a result of the collection of toxic heavy metals in the silts. The Atlantic Richfield Company ("ARCO") has been named as the party with responsibility for completing the remedial investigation and feasibility studies and conducting site cleanup, under the EPA's direction. The former owner of NorthWestern Energy LLC did not undertake any direct responsibility in that regard, in light of a special statutory exemption from liability under CERCLA in relation to the Milltown Dam. By virtue of its acquisition of The Montana Power Corporation's utility business and the dam, NorthWestern Energy LLC succeeded to similar protection under this statutory exception. ARCO has argued that the former owner of NorthWestern Energy LLC should be considered a Potentially Responsible Party ("PRP") and has threatened to challenge its exempt status. ARCO and the former owner of NorthWestern Energy LLC entered into a settlement agreement to limit the former owner's and now NorthWestern Energy LLC's potential liability, costs and ongoing operating expenditures, provided that the EPA selects a remedy that leaves the dam and sediments in place in its final Record of Decision. The final Record of Decision is not expected to be issued until late 2002 or early 2003. Depending on the outcome of that decision, the Corporation may be required to defend its exempt position. There can be no assurance that the Corporation will not incur costs or liabilities associated with the Milltown Dam site in the future, some of which could be significant. The Corporation has established a reserve of approximately $20.9 million at March 31, 2002, primarily for liabilities related to the Milltown Dam and other environmental liabilities. To the

extent NorthWestern Energy LLC's liabilities are greater than this reserve, its financial condition and results of operations could be adversely affected.

Under the terms of the acquisition of NorthWestern Energy LLC, the Corporation assumed the first $50 million of NorthWestern Energy LLC's pre-closing environmental liabilities, including these retained environmental liabilities. Touch America Holdings, Inc. assumed the next $25 million in costs. The Corporation and Touch America Holdings, Inc. agreed to equally split costs that fall between $75 and $150 million. An evaluation of the potential liability under the contract was performed and the Corporation recognized a liability in the amount of $5.1 million.

Environmental laws and regulations require the Corporation to incur certain costs, which could be substantial, to operate existing facilities, construct and operate new facilities and mitigate or remove the effect of past operations on the environment. Governmental regulations establishing environmental protection standards are continually evolving, and, therefore, the character, scope, cost and availability of the measures the Corporation may be required to take to ensure compliance with evolving laws or regulations cannot be accurately predicted. However, the Corporation believes that an appropriate amount of costs have been accrued and potential costs related to such environmental regulation and cleanup requirements are timely estimated and recorded. The Corporation does not expect these costs to have a material adverse effect on its consolidated financial position, ongoing operations, or cash flows.

The Corporation has provided guarantees for various credit facilities of majority owned subsidiaries, totaling $127.5 million. At March 31, 2002, $88.2 million outstanding under these facilities was subject to guaranty by the Corporation.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Unless the context requires otherwise, references to "we," "us," "our" and "NorthWestern" refer specifically to NorthWestern Corporation and its subsidiaries and references to "NorthWestern Energy LLC" refer to NorthWestern Energy, L.L.C., our wholly-owned subsidiary, which was formerly known as The Montana Power, L.L.C.

We are a service and solutions company providing integrated energy, communications, heating, ventilation, air conditioning, plumbing and related services and solutions to residential and business customers throughout North America. We own and operate one of the largest regional electric and natural gas utilities in the upper Midwest of the United States. We distribute electricity in South Dakota and natural gas in South Dakota and Nebraska through our energy division, NorthWestern Energy, formerly NorthWestern Public Service, and electricity and natural gas in Montana through our wholly owned subsidiary, NorthWestern Energy LLC. We are operating under the common brand "NorthWestern Energy" in all our service territories. On February 15, 2002, we completed the acquisition of the electric and natural gas transmission and distribution businesses of The Montana Power Company for approximately $1.1 billion, including the assumption of approximately $488.0 million in existing debt and preferred stock, net of cash received. We intend to transfer the energy and natural gas transmission and distribution operations of NorthWestern Energy LLC to NorthWestern Corporation during 2002 and to operate its business as part of our NorthWestern Energy division. We believe the acquisition creates greater regional scale allowing us to more fully realize the value of our existing energy assets and provides a strong platform for future growth.

Our principal unregulated investment is in Expanets, Inc., or Expanets, a leading provider of networked communications and data services and solutions to medium-sized businesses nationwide. In addition, we own investments in Blue Dot Services Inc., or Blue Dot, a nationwide provider of air conditioning, heating, plumbing and related services, and CornerStone Propane Partners L.P., or CornerStone, a publicly traded limited partnership (OTCBB: CNPP), in which we hold a 30% interest and operate through one of our subsidiaries that serves as managing general partner. CornerStone is a retail propane and wholesale energy-related commodities distributor. On January 18, 2002, the board of directors of the general partner of CornerStone announced it has retained Credit Suisse First Boston Corporation to pursue the possible sale or merger of CornerStone. We fully support the board's action as it is consistent with our strategy to focus our resources on our energy and communications platforms. A special committee of the board of directors of the managing general partner, composed of directors that are not officers of NorthWestern, has been formed to pursue strategic options. As a result, we have recharacterized our investment in CornerStone to reflect the results of operations of CornerStone as discontinued operations. Accordingly, the results of CornerStone's operations, for all periods reported, are presented separately below income from continuing operations. In conjunction with the adoption of discontinued operations accounting for CornerStone, substantially all of our approximately $40.0 million net carrying value in the partnership was recorded as a noncash charge during the first quarter of 2002 and an additional charge of $5.1 million was recorded during the second quarter of 2002.

On August 5, 2002, CornerStone announced that it had elected not to make an interest payment aggregating 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 11 case under the United States Bankruptcy Code. After this announcement, the New York Stock Exchange announced that it had suspended trading in CornerStone's publicly traded partnership units and would seek to delist the partnership units due to their low price and CornerStone's decision not to make the scheduled interest payments. We will continue to evaluate CornerStone's financial restructuring and the impact upon creditors of CornerStone, including us, and we expect to reflect any resulting financial implication in our third

quarter 2002 results. See Note 4, Discontinued Operations, to the consolidated financial statements and Exhibits 99.3, 99.4, 99.5 and 99.6 to this Quarterly Report on Form 10-Q for the three months ended March 31, 2002 for further discussion regarding CornerStone.

We were incorporated in Delaware in 1923. Our principal office is located at 125 S. Dakota Avenue, Sioux Falls, South Dakota 57104 and our telephone number is 605-978-2908. We maintain an internet site at http://www.northwestern.com which contains information concerning us and our subsidiaries. The information contained on our internet site and those of our subsidiaries is not incorporated by reference herein and should not be considered a part of this Quarterly Report on Form 10-Q for the three months ended March 31, 2002.

The following is a summary of our results of operations for each of the three-month periods ended March 31, 2002 and 2001.

The following is a summary of our consolidated results of operations for the three-month periods ended March 31, 2002 and 2001. Our consolidated results include the results of our divisions and subsidiaries constituting each of our business segments. This discussion is followed by a more detailed discussion of operating results by segment. Our "All Other" category primarily consists of our other miscellaneous service activities, which are not included in the other identified segments together with unallocated corporate costs. See "—Segment Information—All Other Operations" for a discussion of the items contained in our "All Other" category. Product and service category fluctuations highlighted at the consolidated level are more fully explained in the segment discussions.

Consolidated losses were $35.8 million in the first quarter of 2002, a decline of $52.5 million, or 314.3%, from consolidated earnings of $16.7 million in the first quarter of 2001. The decline was a result of a $40.0 million charge for discontinued operations relating to our planned divestiture of our interest in CornerStone (see Note 4, Discontinued Operations, to the consolidated financial statements, for further discussion regarding CornerStone) in addition to an extraordinary loss of $13.4 million related to debt costs associated with the early extinguishment of debt. Exclusive of these charges, earnings on common stock were $17.7 million, an increase of $1.0 million, or 6.0%, over the first quarter of 2001. The increase is due to the addition of the electric and natural gas transmission and distribution business of NorthWestern Energy LLC, or the Montana operations, that we acquired on February 15, 2002, effective February 1, 2002, and improved performance within our communications segment.

Consolidated operating revenues were $480.1 million in the first quarter of 2002, an increase of $2.5 million, or 1.0%, from $477.6 million in the first quarter of 2001. The increase in consolidated revenues was primarily due to increased revenues from the electric and natural gas operations of $67.9 million as a result of the inclusion of NorthWestern Energy LLC's Montana operations and a $6.6 million increase in revenues from our All Other operations as a result of the addition of certain non-utility operations acquired with NorthWestern Energy LLC's 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. These increases were partially offset by decreases in revenues from our communications segment of $66.9 million as a result of continuing market softness and a change in the mix of revenues

toward certain higher-margin activities and decreases in revenues from our HVAC segment of $5.1 million due to mild weather conditions, slowness in the market and the discontinuation of certain business lines.

Consolidated cost of sales was $269.7 million in the first quarter of 2002, a reduction of $52.8 million, or 16.4%, from results in the first quarter of 2001. Consolidated cost of sales declined primarily due to a $61.3 million decrease in costs within the communications segment and an additional $18.4 million due to reduced natural gas costs. Cost of sales in the communications and natural gas segments were partially offset by $26.3 million of increased costs associated with NorthWestern Energy LLC's Montana operations. Costs of sales in our HVAC segment also declined $2.8 million while costs of sales in All Other increased $3.3 million from NorthWestern Energy LLC's Montana operations and increased activities within the South Dakota operations.

Consolidated gross margin was $210.4 million in the first quarter of 2002, an increase of $55.3 million, or 35.6%, from results in the first quarter of 2001. Electric and natural gas operations gross margins increased by an aggregate of $60.0 million as a result of the addition of NorthWestern Energy LLC's Montana operations. Communications gross margin declined $5.6 million quarter over quarter as the benefit of cost reductions partially lagged behind revenue decreases. HVAC gross margin decreased $2.4 million in the first quarter of 2002 compared to the first quarter of 2001. All Other gross margin improved due to the additional activity from the Montana operations. Consolidated gross margin as a percentage of revenues was 43.8% in the first quarter of 2002, compared to 32.5% in the first quarter of 2001. The improvement in consolidated gross margin was primarily a result of lower natural gas commodity prices and margin improvement within the communications segment due to a better sales mix and additional higher-margin maintenance revenues.

Consolidated operating expenses were $175.8 million in the first quarter of 2002, a decline of $16.5 million, or 8.6%, from results in the first quarter of 2001. Operating expenses for the communications segment in the first quarter of 2002 were $51.6 million less than in the first quarter of 2001 due to reductions in costs related to selling and operational functions as well as a reduction in costs related to corporate and transition/integration efforts to better align the business with the reduced revenue streams. Electric and natural gas operating expenses in the first quarter of 2002 were $34.4 million more than similar expenses in the first quarter of 2001. Electric and natural gas operating expenses increased primarily due to the inclusion of NorthWestern Energy LLC's Montana operations, but were partially offset by a reduction in costs within the South Dakota and Nebraska operations. HVAC operating expenses in the first quarter of 2002 increased only $345,000 over results in the first quarter of 2001. All Other expenses in the first quarter of 2002 increased $1.1 million over results in the first quarter of 2001 due to the addition of NorthWestern Energy LLC's Montana operations, as corporate and other expenses within the previously owned operations declined.

Consolidated operating income in the first quarter of 2002 was $34.6 million, an improvement of $71.7 million, or 193.4%, compared to losses of $37.1 million in the first quarter of 2001. Operating income in our communications segment increased $46.0 million in the first quarter of 2002 compared to the first quarter of 2001, primarily as a result of the reduction in operating expenses. Operating income in our electric and natural gas segments increased $25.6 million due to the addition of NorthWestern Energy LLC's Montana operations. HVAC operating losses in the first quarter of 2002 increased $2.0 million from results in the first quarter of 2001 as a result of reduced margins while All Other operating losses declined $2.2 million as a result of lower expenses.

Consolidated interest expense in the first quarter of 2002 was $21.7 million, an increase of $9.3 million, or 75.0%, over interest expense of $12.4 million in the first quarter of 2001. The increase was attributable principally to approximately $5.0 million of additional interest expense from the debt assumed with NorthWestern Energy LLC's Montana operations in addition to the increased expense

from the $720.0 million of financing obtained for NorthWestern Energy LLC's Montana operations acquisition.

Consolidated investment income and other was $694,000 in the first quarter of 2002, a decline of $484,000 from results in the first quarter of 2001. The decline was primarily attributable to losses incurred for certain preferred stock investment impairments.

Consolidated income tax expense was $4.6 million in the first quarter of 2002, a $20.3 million decline from a $15.7 million income tax benefit position in the first quarter of 2001. The decline in consolidated income tax positions was principally due to a $15.3 million decrease in the tax benefit within the communications segment as a result of substantially lower losses. In addition, increased income within the electric and natural gas segments in the first quarter of 2002 resulting from the addition of the Montana operations increased income tax expense by $6.3 million over results in the first quarter of 2001. These changes were partially offset by an increase in income tax benefits generated by the HVAC segment and All Other from increased operating losses.

Minority interests in net loss of consolidated subsidiaries was $14.9 million in the first quarter of 2002, a decline of $30.9 million from minority interests in net loss of consolidated subsidiaries of $45.8 million in the first quarter of 2001. The decline was partially due to a $31.8 million decline in allocations in the communications segment, which was partially offset by a $0.9 million increase in allocations within the HVAC segment. The decreased communications allocation was the result of improved profitability and a lack of additional minority basis upon which to allocate the losses compared to the first quarter of 2001. To the extent that future operating losses are incurred within the HVAC or communications segments, unless additional minority interest were to be issued as a result of new acquisitions, such losses will be allocated to us to the extent of our basis and, thereafter, pro rata in accordance with ownership interests. See "—Significant Accounting Policies—Minority Interest in Consolidated Subsidiaries" for a discussion of the allocation of income (loss) to minority interests and the changes in such allocations during the periods discussed.

Revenues from our electric utility operations in the first quarter of 2002 were $95.3 million, an increase of $66.0 million, or 224.7%, from results in the first quarter of 2001. The growth resulted primarily from the addition of NorthWestern Energy LLC's Montana operations effective February 1, 2002. The additional electric operations contributed $73.8 million of the increase. Offsetting these additional revenues was a decline in the wholesale electric revenues in our South Dakota operations during the first quarter of 2002 as a result of a reduction of sales by over 80%, or $6.5 million, due to a drop in market prices as compared to the unusually high prices experienced in the first quarter of 2001. Retail electric revenues also declined slightly during the first quarter of 2002 due to warmer weather in the South Dakota service territory.

Cost of sales for our electric utility operations in the first quarter of 2002 were $31.6 million, an increase of $26.3 million, or 493.8%, from results in the first quarter of 2001. The increase was almost exclusively attributable to the addition of NorthWestern Energy LLC's Montana operations which increased costs by $26.2 million. Costs within our South Dakota operations increased during the first quarter of 2002 by $134,000 over costs in the first quarter of 2001 due to higher fuel costs compared to the prior year.

Gross margin for our electric utility operations in the first quarter of 2002 was $63.7 million, an increase of $39.7 million over gross margin in the first quarter of 2001. The increase in gross margin in the first quarter of 2002 was primarily due to the contribution of $47.2 million to gross margin by NorthWestern Energy LLC's Montana operations. Gross margin in our South Dakota operations

decreased $7.5 million in the first quarter of 2002 from results in the first quarter of 2001, primarily as a result of the substantial decrease in market prices for wholesale electricity. In addition, retail electric margins decreased slightly in the first quarter of 2002 from results in the first quarter of 2001 due to the impact of warmer weather and slightly higher cost of sales. As a percentage of revenue, gross margin in the first quarter of 2002 was 66.8%, compared to 81.9% in the first quarter of 2001. The decline was the result of the substantial decline in wholesale electric margins from market price fluctuations and the influence of the margin impact from retail electric operations in Montana.

Operating expenses for our electric utility operations in the first quarter of 2002 were $37.9 million, an increase of $27.2 million over results in the first quarter of 2001. Selling, general and administrative expenses in the first quarter of 2002 were $27.7 million, an increase of $20.2 million over results in the first quarter of 2001. While selling, general and administrative expenses within our South Dakota operations decreased from reduced staffing, customer service expenses and incentive accruals, similar expenses for NorthWestern Energy LLC's Montana operations in the first quarter of 2002 added approximately $22.2 million in operating expenses. Depreciation in the first quarter of 2002 was $10.2 million, an increase of $7.0 million over depreciation in the first quarter of 2001 of $3.2 million. The increase in depreciation was due to the addition of NorthWestern Energy LLC's Montana operations.

Operating income for our electric utility operations in the first quarter of 2002 was $25.8 million, an increase of $12.5 million, or 93.7%, from $13.3 million in the first quarter of 2001. The increase was primarily attributable to the addition of approximately $18.0 million in operating income from NorthWestern Energy LLC's Montana operations. Income from our South Dakota operations declined $5.5 million in the first quarter of 2002 from results in the first quarter of 2001 as a result of the decline in wholesale electric margins but was partially offset by operating expense savings.

Revenues for our natural gas utility operations in the first quarter of 2002 were $78.2 million, an increase of $1.9 million, or 2.5%, from results in the first quarter of 2001. Revenues for the period reflect the inclusion of NorthWestern Energy LLC's Montana operations which contributed $32.1 million in revenues. The increase was offset by a drop in commodity prices reflected within the previously owned operations during the first quarter of 2002 compared to the first quarter of 2001, and a decrease in volumes as a result of warmer weather in the Nebraska and South Dakota service territories, as heating degree days for the first quarter of 2002 were 17% lower than during the first quarter of 2001.

Cost of sales for our natural gas utility operations in the first quarter of 2002 was $48.0 million, a decline of $18.4 million, or 27.7%, from results in the first quarter of 2001. The reduced cost of sales was the result of the decline in commodity prices, which have declined by over 40% since 2001, and a decrease in volumes resulting from warmer weather. Partially offsetting the decrease in previously owned operations was $11.5 million of additional costs added from the inclusion of NorthWestern Energy LLC's Montana operations.

Gross margin for our natural gas utility operations in the first quarter of 2002 was $30.3 million, an increase of $20.3 million, or 202.7%, over gross margin in the first quarter of 2001. The growth was primarily attributable to the addition of NorthWestern Energy LLC's Montana operations. Gross margin for previously owned operations declined $374,000 in the first quarter of 2002 compared to the first quarter of 2001 due to warmer weather. As a percentage of revenues, gross margin improved from 13.1% in the first quarter of 2001 to 38.7% in the first quarter of 2002, primarily as a result of the significant decrease in commodity prices and the margin impact from NorthWestern Energy LLC's operations in Montana.

Operating expenses for our natural gas utility operations in the first quarter of 2002 were $12.3 million, an increase of $7.2 million, or 141.3%, from results in the first quarter of 2001. Selling, general and administrative expenses grew $5.5 million in the first quarter of 2002 compared to the first quarter of 2001, primarily due to $6.8 million in additional expenses attributable to NorthWestern Energy LLC's Montana operations, while selling, general and administrative expenses at previously owned operations in South Dakota and Nebraska declined due to reduced customer service expenses, employee benefits and system maintenance expenses. Depreciation was $2.5 million in the first quarter of 2002, an increase of $1.7 million over depreciation during the first quarter of 2001. This increase was due primarily to the addition of NorthWestern Energy LLC's Montana operations.

Operating income for our natural gas utility operations in the first quarter of 2002 was $18.0 million, compared to $4.9 million in the first quarter 2001. NorthWestern Energy LLC's Montana operations contributed $12.2 million to operating income in the first quarter of 2002 while the operating expense reductions in the previously owned operations in South Dakota and Nebraska more than offset the margin shortfalls in these operations to add $0.9 million of income.

Revenues for the communications segment in the first quarter of 2002 were $201.9 million, a decline of $66.9 million, or 24.9%, from revenues of $268.8 million in the first quarter of 2001. The decline was due to certain revisions made in May 2001 to the original agreements executed in association with the acquisition of the Lucent Technologies' Growing and Emerging Markets, or "Lucent GEM", business in March 2000, which eliminated minimum sales referral obligations of Avaya, Inc., formerly Lucent Technologies, and increased the volume of higher-margin recurring revenue service maintenance contracts. Overall market softness throughout the economy, particularly in the telecommunications and technology sectors, also negatively impacted revenues.

Cost of sales in the first quarter of 2002 was $124.8 million, a decline of $61.3 million from cost of sales in the first quarter of 2001 of $186.0 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 higher-margin maintenance and service sales.

Gross margin in the first quarter of 2002 was $77.2 million, a decline of $5.6 million compared to gross margin in the first 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 30.8% in the first quarter of 2001 to 38.2% in the first 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. The sales mix changes are a result of the renegotiated Avaya agreement and a continued focus by management on growing higher margin recurring revenues.

Operating expenses in the first quarter of 2002 were $79.9 million, a decline of $51.6 million from results in the first quarter of 2001. Selling, general and administrative expenses declined $52.0 million to $68.5 million in the first quarter of 2002 from $120.5 million for the first quarter of 2001. Our communications segment workforce has been reduced by nearly 20% since the first quarter of 2001 resulting in savings within salary, benefits, travel and other personnel costs. In addition, approximately $7 million of transition/integration expenses incurred in the first quarter of 2001 were nonrecurring in the first quarter of 2002. In November 2001, Expanets installed an enterprise software system, 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 incurred under the former transition service agreements executed with Avaya as part of the original Lucent GEM acquisition. The system is now fully operational and savings are expected to continue throughout 2002. Management is focused on reducing overhead costs and discretionary spending wherever possible to further help bring expenses in line with the reduced sales volumes. Depreciation expense increased $2.2 million to

$4.5 million in the first quarter of 2002 compared to the first quarter of 2001 as a result of continued capital expenditures. Amortization expense decreased $1.8 million in the first quarter of 2002 compared to the first quarter of 2001 due to implementation of SFAS No. 142 which has resulted in the discontinuance of a portion of the intangibles amortization.

Operating losses in the first quarter of 2002 were $2.7 million, compared to operating losses of $48.7 million in the first quarter of 2001. The reduction in losses resulted from the substantial decline in operating expenses, and was offset slightly by a reduction in gross margins. Management expects to see continued operational improvements throughout 2002 as a result of continued focus on expense reductions and margin improvement.

Revenues in our HVAC division in the first quarter of 2002 were $94.5 million, a decline of $5.1 million, or 5.2%, from results in the first quarter of 2001. Revenues from locations acquired subsequent to March 2001 contributed approximately $8.3 million to first quarter 2002 results, while revenues from existing locations declined $13.4 million from results in the first quarter of 2001. The decrease in existing location revenues is a result of the exit of some business lines, mild weather, business seasonality and continued slow market conditions.

Cost of sales in the first quarter of 2002 was $59.7 million, a decline of $2.8 million, or 4.4%, from results in the first quarter of 2001. Costs of sales for newly acquired locations added approximately $3.6 million of costs in the first quarter of 2002 compared to the first quarter of 2001 while cost of sales within existing locations decreased $6.4 million in the first quarter of 2002 compared to the first quarter of 2001. The reduction in costs was a result of decreased sales activity which negatively impacted revenues as well.

Gross margin in the first quarter of 2002 was $34.7 million, a decline of $2.4 million from results in the first quarter of 2001. Gross margin from acquired locations contributed $3.6 million in the first quarter of 2002, but were more than offset by a $6.0 million decline in gross margin for existing locations in the first quarter of 2002 compared to the first quarter of 2001. This decrease is a result of the revenue shortfalls noted above as costs were not reduced sufficiently to offset the revenue losses. As a percentage of revenues, gross margins declined slightly from 37.3% in the first quarter of 2001 to 36.8% in the first quarter of 2002.

Operating expenses in the first quarter of 2002 were $38.4 million, a decline of $345,000, or 1.0%, in the first quarter of 2001. Selling, general and administrative expenses increased $719,000 in the first quarter of 2002 from results in the first quarter of 2001. Acquired locations added approximately $3.0 million of costs in the first quarter of 2002 while expenses within existing locations decreased in the first quarter of 2002 as management focused on cost control in light of revenue reductions. Corporate expenses increased slightly in the first quarter of 2002 as a result of increased business and travel and salary and benefit expenses. Depreciation expense increased $489,000 in the first quarter of 2002 as compared to the first quarter of 2001 due to continued acquisition activity. Amortization expense decreased $1.6 million during the first quarter of 2002 from results in the first quarter of 2001 as a result of discontinuance of a portion of the intangibles amortization.

Operating losses in the first quarter of 2002 were $3.7 million, a decline of $2.0 million from losses of $1.7 million in the first quarter of 2001. Gross margin shortfalls noted earlier within the existing locations were partially offset by a slight decrease in operating expenses. The first quarter is typically the slowest quarter in the HVAC industry, and management expects improved performance for the balance of 2002 from both margin improvements and further cost containment efforts.

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 businesses engaged in voice and data networks and systems, and a portfolio of services to residential and business customers, including product sales and maintenance contracts in areas such as home monitoring devices and appliances.

Revenues for the quarter increased $6.7 million to $10.1 million compared to the first quarter of 2001. This growth is attributable to the addition of non-utility operations acquired with NorthWestern Energy LLC's Montana operations and improved market conditions in the previously owned operations.

Cost of sales in the first quarter of 2002 was $5.6 million, an increase of $3.3 million over results in the first quarter of 2001. This increase was, as with revenues, due to the addition of NorthWestern Energy LLC's Montana operations and improvement within the previously operated activities.

Gross margin in the first quarter of 2002 was $4.5 million, an increase of $3.3 million over gross margins in the first quarter of 2001. All of the growth was due to the addition of NorthWestern Energy LLC's Montana operations as the previously owned operations were basically flat between the quarters.

Operating expenses in the first quarter of 2002 were $7.2 million, an increase of $1.1 million over results in the first quarter of 2001. This increase resulted from the additional expenses attributable to the acquisition of NorthWestern Energy LLC's Montana operations, which were partially offset by a decrease in operating expenses within the corporate and previously owned operations as a result of lower salary and benefits and travel costs.

Operating losses in the first quarter of 2002 were $2.7 million, a decline of $2.3 million from losses of $5.0 million in the first quarter of 2001. The decline resulted primarily from reduced operating expenses within the corporate and previously owned operations as there was negligible operating income generated from NorthWestern Energy LLC's acquired Montana operations.

On January 18, 2002, the board of directors of the general partner of CornerStone announced that it had retained Credit Suisse First Boston Corporation to review strategic options, including the possible sale or merger of CornerStone. We are the largest unitholder of CornerStone owning a 30% interest in CornerStone and we own all of the stock of CornerStone's managing general partner. As a result, we have recharacterized our investment in CornerStone to reflect the results of operations of CornerStone as discontinued operations. Accordingly, the results of CornerStone's operations, for all periods reported, are presented separately below income from continuing operations. In conjunction with the adoption of discontinued operations accounting for CornerStone, substantially all of our approximately $40.0 million net carrying value in the partnership was recorded as a noncash charge during the first quarter of 2002 and an additional charge of $5.1 million was recorded during the second quarter of 2002.

CornerStone, including us, and we expect to reflect any resulting financial implication in our third quarter 2002 results. For additional information relating to CornerStone, see Note 4, Discontinued Operations, to the consolidated financial statements included elsewhere herein and Exhibits 99.3, 99.4, 99.5 and 99.6 to this Quarterly Report on Form 10-Q for the three months ended March 31, 2002.

Revenues from our discontinued propane operations in the first quarter of 2002 were $277.3 million, a decline of $588.2 million or 68.0%, from the first quarter of 2001. The decrease was due to the reduction in CEG activities during the quarter.

Cost of sales for our discontinued propane operations in the first quarter of 2002 were $206.3 million, a decrease of $575.6 million or 73.6% from $781.9 million in the first quarter of 2001. The decline in the cost of sales is mostly due to the reduction in CEG activities during the quarter and is also due to the lower commodity prices and lower volume.

Gross margin for the segment decreased $12.6 million from the first quarter of 2001 to $70.9 million for the first quarter of 2002. The decline in gross margin dollars was a result of the reduction in CEG activities as noted above. As a percentage of revenues, gross margin improved from 9.7% in the first quarter of 2001 to 25.6% in the first quarter of 2002. The improvement was due to the reduction in CEG activities and lower commodity prices and lower volume.

Operating expenses for the first quarter of 2002 were $38.3 million, a decrease of $2.6 million or 6.4%, from $40.9 million for the first quarter of 2001. The decline was due to a reduction in and better management of rent, personnel and vehicle costs.

Operating income decreased $9.8 million and 32.4% during the first quarter of 2002 to $20.5 million from the first quarter of 2001.

We generate cash to fund our operations through a combination of cash flows from current operations, the sale of our securities and our borrowing facilities. We realized cash outflows from operations of $23.8 million in the first quarter of 2002 compared to inflows of $15.6 million in the first quarter of 2001. The reduction in cash flows is principally a result of the increase in accounts receivable within our communications segment resulting from a delay in billings experienced in connection with the EXPERT system implementation and additional receivables added from NorthWestern Energy LLC's Montana operations where accounts receivable balances are higher due to heavier energy use for heating needs. Our cash, cash equivalents and marketable securities totaled $217.8 million as of March 31, 2002 compared to $104.4 million as of March 31, 2001. The increased balance is a result of excess cash invested from NorthWestern Energy LLC's Montana operations.

We expect to generate net positive cash flows from operations for the balance of 2002 and to fund our day to day operations through our operating cash flows and our current cash and cash equivalents. Operating cash flows are expected to increase in 2002 as a result of our Operational Excellence initiatives, reduced integration and transition expenses and incremental operating cash flows from NorthWestern Energy LLC's Montana operations.

Cash flows used in investing activities were $501.4 million in the first quarter of 2002 compared to $26.8 million in the first quarter of 2001. The increase was principally due to the acquisition of NorthWestern Energy LLC's Montana operations during the quarter. Cash flows provided by financing activities were $608.6 million in the first quarter of 2002 compared to $6.5 million in the first quarter of

2001. The increase was primarily due to proceeds received from our $720.0 million notes offering discussed below, which was used to pay our acquisition term loan used to finance the acquisition of NorthWestern Energy LLC's Montana operations, and the trust preferred securities offerings discussed below.

During early 2002, we raised cash proceeds from the following offerings of our securities and new debt facilities.

On January 15, 2002, NorthWestern Capital Financing II sold 270,000 shares of its 8¹/4% trust preferred securities pursuant to an overallotment option. We received approximately $6.5 million in net proceeds from the offering, which we used for general corporate purposes and to repay a portion of the amounts outstanding under our old credit facility. The 8¹/4% trust preferred securities will be redeemed either at maturity on December 15, 2031, or upon early redemption.

On January 31, 2002, NorthWestern Capital Financing III sold 4.0 million shares of its 8.10% trust preferred securities, and on February 5, 2002, sold an additional 440,000 shares of its 8.10% trust preferred securities pursuant to an overallotment option. We received approximately $107.4 million in net proceeds from the offering, which we used for general corporate purposes and to repay a portion of the amounts outstanding under our old credit facility. The 8.10% trust preferred securities will be redeemed either at maturity on January 15, 2032, or upon early redemption.

On February 15, 2002, in connection with our recently completed acquisition of The Montana Power Company's energy distribution and transmission business, we assumed $488.0 million of debt and preferred stock net of cash received from The Montana Power Company and we drew down a $720.0 million term loan and $19.0 million swing line commitment under our $280.0 million revolving credit facility to fund our acquisition costs and repay borrowings of $132.0 million outstanding under our existing recourse bank credit facility. The $488.0 million of assumed debt and preferred stock includes various series of mortgage bonds, pollution control bonds and notes that bear interest rates of between 5.90% to 8.95%. These include both secured and unsecured obligations with maturities that range from 2003 to 2026.

On March 13, 2002, we issued $250.0 million of our 7⁷/8% senior notes due March 15, 2007, and $470.0 million of our 8³/4% senior notes due March 15, 2012, which resulted in net proceeds to us of $714.1 million. We have applied these net proceeds together with available cash to fully repay and terminate the $720.0 million term loan portion of our credit facility. On March 28, 2002, we entered into two fair-value hedge agreements, each of $125.0 million, to effectively swap the fixed interest rate on our $250.0 million five-year notes to floating interest rates at the three-month London Interbank Offered Rate plus spreads of 2.32% and 2.52%, effective as of April 3, 2002.

On July 31, 2002, we redeemed the $2.6 million of our 26,000 outstanding shares of 4¹/2% series preferred stock at $110.75 per share resulting in a cash outlay of $2.9 million. On August 15, 2002, we redeemed the $1.2 million of our 11,500 outstanding shares of 6¹/2% series redeemable preferred stock at $101.35 per share resulting in a cash outlay of $1.2 million.

See "—Capital Requirements" below for more information regarding our future funding requirements.

We and our subsidiaries had the following long-term and short-term debt, mandatorily redeemable preferred securities and other commitments outstanding as of March 31, 2002:

Since we have accounted for CornerStone as a discontinued operation, the above table does not include $410.0 million of 7.33%, 7.53%, 8.08%, 8.27% and 10.26% senior secured notes of CornerStone and $18.4 million of notes payable and capital lease obligations of CornerStone, which are non-recourse to us, all of which was outstanding at March 31, 2002. $41.8 million of CornerStone's senior secured notes mature in 2003 and $152.2 million of CornerStone's senior secured notes mature in 2004 through 2006. On August 5, 2002, CornerStone announced that it had elected not to make an interest payment aggregating 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 11 case under the United States Bankruptcy Code. For additional information relating to CornerStone, see Note 4, Discontinued Operations, to the consolidated financial statements included elsewhere herein and Exhibits 99.3, 99.4, 99.5 and 99.6 to this Quarterly Report on Form 10-Q for the three months ended March 31, 2002.

The following is certain additional information relating to our debt facilities listed in the above table.

The Mortgage Bonds are three series of general obligation bonds we issued, that are secured by substantially all of our electric and natural gas assets. As reflected in the table above, these bonds mature in 2002, 2005 and 2023.

The Senior Unsecured Debt is a general obligation that matures in 2028. We issued this debt in November 1998, and the proceeds were used to repay short-term indebtedness and for general corporate purposes.

The Pollution Control Obligations are three obligations we issued in 1993 that are secured by substantially all of our electric and gas assets.

The Floating Rate Notes are notes we issued in a private placement in September 2000, which mature on September 21, 2002. The effective interest rate on the notes for the three months ended March 31, 2002 was 2.94% with a rate at March 31, 2002 of 2.78%. The effective interest rate on the notes for 2001 was 5.2% with a rate at December 31, 2001 of 2.65%.

Our $280.0 million revolving credit facility bears interest at a variable rate tied to the London Interbank Offered Rate plus a spread of 1.5% based on our current credit ratings and accrued interest at 3.38% per annum as of March 31, 2002. At September 9, 2002, we had $68.0 million of indebtedness

outstanding and letters of credit totaling $19.6 million outstanding under our $280.0 million credit facility and $192.4 million of availability under the facility. Our revolving credit facility expires on February 14, 2003, although we may convert up to $225.0 million of the aggregate amount outstanding as of February 11, 2003 into a term loan on a non-revolving basis that matures on February 14, 2004. The credit agreement with respect to our revolving credit facility contains a number of representations and warranties and imposes a number of restrictive covenants that, among other things, limit our ability to incur indebtedness and make guarantees, create liens, make capital expenditures, pay dividends and make investments in other entities. In addition, we are required to maintain certain financial ratios, including:

We were in compliance with all ratios for the quarters ended March 31, 2002. As of March 31, 2002 and June 30, 2002, our net worth was $731.4 million, our funded debt-to-capital ratio was 69.3% and our ratio of utility business EBITDA to consolidated recourse interest expense was 3.27 to 1.00.

For a description of our 7⁷/8% and 8³/4% senior notes and the trust preferred securities, see "—Cash Flows and Cash Position—Investing and Financing Activities."

The Expanets facility represents a short-term line of credit provided to Expanets by Avaya for the purpose of financing purchases of Avaya products. This facility was recently amended to extend the repayment term through December 31, 2002 and was reduced from $125.0 million to $100.0 million on March 5, 2002, $80.0 million on April 30, 2002 and $55.0 million on August 30, 2002, and which had an outstanding balance of $39.6 million as of August 30, 2002. If Expanets defaults on this facility, we may be obligated to purchase up to $50.0 million of inventory and accounts from Avaya. As of March 31, 2002, the effective interest rate of this loan was 12%.

Montana Megawatts I, LLC, one of our wholly owned subsidiaries, is a party to a 365-day term loan facility providing for loans in an aggregate principal amount of $55.0 million with ABN AMRO Bank N.V. and Bank of Scotland to finance the purchase of certain equipment and related expenses for a 240-megawatt natural gas-fired generation project currently under construction in Great Falls,

Montana. The loans bear interest at LIBOR plus 1.00% on the first $27.5 million outstanding and LIBOR plus 1.50% on amounts outstanding in excess of $27.5 million. $27.5 million of the facility is currently scheduled to mature on September 28, 2002 and $27.5 million of the facility is currently scheduled to mature on September 28, 2003. We have provided a guarantee on 50% of the borrowings outstanding on the facility, up to a maximum guarantee of $27.5 million. As of March 31, 2002, $54.1 million had been drawn on the facility with an effective interest rate of 3.37% and is reflected on the balance sheet as part of non-recourse short-term debt. We intend to seek to extend the facility for up to one year while Montana Megawatts seeks to enter into power purchase agreements to sell output from the project, which may include agreements with NorthWestern Energy LLC as the default supplier, after which we, or one or more of our affiliates, will seek to enter into traditional construction finance arrangements in connection with the project. For further information about the financing and operation of our Great Falls electric generation project, see note 4 of the notes to our consolidated financial statements included elsewhere herein.

The CornerStone guarantee relates to CornerStone's $50.0 million credit facility. At March 31, 2002, $10.7 million was outstanding under CornerStone's credit facility. The credit facility bears interest at a variable rate tied to a certain Eurodollar index or prime rate plus a variable margin, which depends upon CornerStone's ratio of consolidated debt to consolidated cash flow. The effective rate on the CornerStone credit facility at March 31, 2002 was 5.75%. As part of this facility, we agreed to provide a guaranty for the entire $50.0 million. In consideration for providing this guarantee, CornerStone's independent Audit Committee and Board of Directors approved a cash payment to us of $2.3 million and granted us 487,179 warrants to purchase common units at $.10 per unit. All of the commitment fee has been accrued, but remains unpaid at March 31, 2002. CornerStone was projected to not be in compliance with certain covenants under this facility and on January 18, 2002 received an amendment to the credit agreement relaxing certain financial maintenance covenants and requiring CornerStone to eliminate any quarterly distributions to common unitholders for the remaining term of the facility. On August 20, 2002, NorthWestern purchased the lenders' interest in approximately $19.9 million of short-term debt, together with approximately $6.1 million in letters of credit, of CornerStone outstanding under CornerStone's credit facility, which NorthWestern had previously guaranteed. No further drawings may be made under this facility.

On August 5, 2002, CornerStone announced that it had elected not to make an interest payment aggregating 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 11 case under the United States Bankruptcy Code. We will continue to evaluate CornerStone's financial restructuring and the impact upon creditors of CornerStone, including us, and we expect to reflect any resulting financial implication in our third quarter 2002 results. For additional information relating to CornerStone, see Note 4, Discontinued Operations, to the consolidated financial statements included elsewhere herein and Exhibits 99.3, 99.4, 99.5 and 99.6 to this Quarterly Report on Form 10-Q for the three months ended March 31, 2002.

The Other Debt includes a $35.0 million subordinated note payable to Avaya. In April 2000, Expanets completed a transaction to purchase the Lucent GEM business and, as part of the transaction, Expanets issued Avaya a $35.0 million subordinated note and a $15.0 million convertible note. The $15.0 million note converted into Series D Preferred Stock of Expanets prior to the end of 2001. The $35.0 million subordinated note, which matures on March 31, 2005, is discounted at March 31, 2002, to $23.7 million, as it is noninterest bearing.

The capital lease obligations are principally used to finance equipment purchases and capital leases and notes payable assumed by our subsidiaries in connection with their respective acquisitions of other businesses. These leases have various implicit interest rates, which range from 0.9% to 22.2%.

We expect to fund our day-to-day operations through our operating cash flows and our current cash and cash equivalents. Our principal capital requirements include continued funding for growth of existing business segments; funding new corporate investment and development ventures; funding maintenance and expansion programs; funding debt and preferred stock retirements, sinking fund requirements, and the payment of dividends to our common shareholders, all of which may require us to incur additional debt or sell or issue additional equity securities.

Maintenance capital expenditures for property, plant and equipment for the first quarter of 2002 and 2001 were $10.4 million and $10.6 million, respectively. Maintenance capital expenditures are capital expenditures incurred in order to maintain our business as it exists at that time. We estimate that our maintenance capital expenditures for 2002 and 2003 will be $57.4 million and $75.5 million, respectively. Our maintenance capital expenditures are continually examined and evaluated and may be revised in light of changing business operating conditions, variation in sales, investment opportunities and other business factors.

As of March 31, 2002, debt facilities totaling $339.5 million maintained by us or our subsidiaries will mature in 2002 and 2003 and will need to be repaid or extended, including:

In addition, on August 20, 2002 NorthWestern purchased the lenders' interest in approximately $19.9 million of short-term debt, together with approximately $6.1 million in letters of credit, of CornerStone outstanding under CornerStone's credit facility, a portion of which was outstanding on March 31, 2002 and which NorthWestern had previously guaranteed. No further drawings may be made under this facility.

We intend to finance these obligations in a number of ways, including the issuance of additional securities and by obtaining new credit arrangements. We intend to raise approximately $150.0 to $200.0 million in additional equity in 2002 and 2003, through one or more public offerings and/or private placements, and use the proceeds to retire debt and for other corporate purposes, including funding new corporate investments and acquisition and growth ventures. We may also consider applying a portion of our free cash flow and/or the net proceeds from sales of non-core assets to further reduce our debt. We may also issue additional other debt or equity during the year for these purposes. However, there can be no assurance that we will be successful in our refinancing endeavors. See "Risk Factors—Our growth strategy is subject to risks and uncertainties, including those related to the integration of acquired businesses" and "Risk Factors—We will need significant additional capital to refinance our indebtedness that is scheduled to mature and for other working capital purposes, which we may not be able to obtain" included elsewhere herein.

Several of the maturing obligations are obligations of our subsidiaries. If the subsidiaries are unable to secure alternate financing, we may need to provide them with additional financing to repay these maturing obligations and to fund their operations.

Blue Dot has expanded its operations by acquiring existing complementary businesses. These acquisitions have been funded, in part, through Blue Dot's prior credit facility. Blue Dot is currently negotiating for a working capital facility. It will be likely that we will need to provide Blue Dot with additional funding for acquisitions and general operating purposes.

Expanets is in the process of seeking an asset-based commercial credit facility to replace the Avaya line of credit and to provide operating capital to fund its day-to-day operations. If Expanets is unable to secure an acceptable facility, it will be likely that we will need to provide Expanets with additional funding for general operating purposes. Additionally, Expanets is in the process of enhancing the operational capabilities of its new enterprise software system, which it calls the EXPERT system. We expect that Expanets will need to invest additional funds in the EXPERT system to fully implement it. We have in the past, and may need to in the future, provide Expanets with funding for other working capital purposes until Expanets refinances the Avaya line of credit.

In July 2001, CornerStone formed a Special Committee of its Board of Directors to review the partnership operating plan and capital structure. CornerStone also announced it has engaged Credit Suisse First Boston Corporation to pursue the possible sale or merger of CornerStone. Based upon CornerStone's current situation, it is impossible to predict CornerStone's future capital expenditures or how CornerStone will obtain the necessary capital. While the operations of CornerStone have been reflected in the March 2002 financial statements as discontinued operations, and the associated liabilities reflected as such, we have provided a guaranty for the entire $50.0 million bank credit facility that CornerStone maintains. As of March 31, 2002, $10.7 million was outstanding under that facility along with $5.6 million in letters of credit. The facility expires November 2003. CornerStone has breached its covenants under this facility and through an amendment executed January 18, 2002, the facility was continued but Cornerstone's ability to pay minimum quarterly distributions to its common unit holders was suspended for the remaining term of the facility. On August 20, 2002, NorthWestern purchased the lenders' interest in approximately $19.9 million of short-term debt, together with approximately $6.1 million in letters of credit, of CornerStone outstanding under CornerStone's credit facility, which NorthWestern had previously guaranteed. No further drawings may be made under this facility. On August 5, 2002, CornerStone announced that it had elected not to make an interest payment aggregating approximately $5.6 million on three classes of its senior secured note, which was due on July 31, 2002, and was continuing to review financial restructuring and strategic options, including the potential commencement of a Chapter 11 case under the United States Bankruptcy Code. SYN, Inc., a majority owned subsidiary of NorthWestern Corporation, extended a $9.0 million loan to CornerStone for immediate financing needs.

We will continue to review the economics of extending the maturity dates or refinancing short-term debt and retiring or refunding remaining long-term debt and preferred stock to provide financial flexibility and minimize long-term financing costs. We may continue to make investments in Blue Dot and Expanets. We have made $363.6 million in aggregate preferred stock investments in Expanets and $342.6 million in aggregate preferred stock investments in Blue Dot through March 31, 2002. Additionally, we advanced $51.4 million in credit to Expanets during 2001 which, along with other intercompany balances, was outstanding as of March 31, 2002. The loan bears interest at 17% per annum and repayment is anticipated in 2002. Pursuant to our growth strategy, we have evaluated, and expect to continue to evaluate, possible acquisitions in related and other industries on an ongoing basis and at any given time may be engaged in discussion or negotiations with respect to possible acquisitions. Some of these acquisitions may be significant and might require us to raise additional equity and/or incur debt financings, which are subject to certain risks and uncertainties. See "Risk

Factors—Our growth strategy is subject to risks and uncertainties, including those related to the integration of acquired businesses."

The preparation of our financial statements includes the application of several significant accounting policies. Understanding these policies is critical to comprehending our financial statements. The following is a discussion of the most significant policies we apply. Additional policies are described in Note 2 of our unaudited quarterly consolidated financial statements included elsewhere herein.

Revenues are recognized differently depending on the type of revenue. Electric and natural gas utility revenues are recognized when customers are billed on a monthly basis, rather than on the basis of meters read or energy delivered. Communications and HVAC revenues are recognized when goods are delivered to customers or services are performed, except for revenues for services performed under material installation or service contracts, which are recognized in any given period based on the percentage of costs incurred to date in relation to total estimated costs to complete the contracts. Certain judgments affect the application of our revenue recognition policy, primarily percentage of project completion. Revenue estimates in these areas are difficult to predict, and any shortfall in revenue or delay in recognizing revenue could cause our operating results to vary significantly from quarter to quarter and could materially impact future operating results.

Our regulated operations are subject to the provisions of SFAS No. 71, Accounting for the Effects of Certain Types of Regulations. Our regulatory assets are the probable future revenues associated with certain costs to be recovered from customers through the ratemaking process. Regulatory liabilities are the probable future reductions in revenues associated with amounts to be credited to customers through the ratemaking process. If any part of our operations become no longer subject to the provisions of SFAS No. 71, the probable future recovery of or reduction in revenue with respect to the related regulatory assets and liabilities would need to be evaluated. In addition, we would need to determine if there was any impairment to the carrying costs of deregulated plant and inventory assets. While we believe that our assumption regarding future regulatory actions is reasonable, different assumptions could materially affect our results.

Many of our acquisitions at Expanets and Blue Dot have involved the issuance of common stock in those subsidiaries to the sellers of the acquired businesses. In connection with certain acquisitions of Expanets and Blue Dot, the sellers can elect to exchange the stock of Expanets and Blue Dot for cash at a predetermined exchange rate. Our investments in Expanets and Blue Dot are principally in the form of senior preferred stock with voting control and a liquidation preference over the common stock. We are required to consolidate the financial results of Expanets and Blue Dot because of our voting control. The common stock issued to third parties in connection with acquisitions creates minority interests which are junior to our preferred stock interests. Operating losses at Expanets and Blue Dot have been allocated first to the common shareholders of each subsidiary in proportion to common equity ownership to the extent the allocation does not exceed the minority interest of such common shareholders in the equity capital of the subsidiary after giving effect to any put options or exchange agreements, and thereafter is allocated to the preferred shareholders of each subsidiary in the order of priority equal to the liquidation preference of each series of preferred stock. Exchange agreements totaling $6.0 million and $6.0 million for Expanets and $8.4 million and $12.4 million for Blue Dot

remained outstanding and were included in minority interests as of March 31, 2002 and December 31, 2001, respectively. The equity held by third parties of these entities is as follows:

		Third Party Equity Reflected as Minority Interests
				At December 31,
		At March 31, 2002		At December 31,
		At March 31, 2002		2001		2000
		(in thousands)
Expanets		$	5,972	$	17,124	$	140,390
Blue Dot			8,380		12,439		51,691
Other			504		504		751

	Total	$	14,856	$	30,067	$	192,832

The Minority Interests in Net Loss of Consolidated Subsidiaries contained in our consolidated statements of income is the income (loss) of our subsidiaries which is allocable to minority interests. In order to determine the allocation of income (loss) to minority interests, preferred dividends and corporate services allocations are deducted from the income (loss) before minority interests reported in our segment disclosures in order to arrive at the Minority Interests in Net Loss of Consolidated Subsidiaries contained in our consolidated statements of income. The corporate services allocations relate to certain services NorthWestern provides to, and is reimbursed from, its subsidiaries for management services, including insurance, administrative support for employee benefits, transaction structuring, financial analysis and information technology. These services are discussed in Note 1 "Significant Accounting Policies—Related Party Transactions" to NorthWestern's annual consolidated financial statements. The preferred dividends relate to dividends on our 12% coupon Preferred Stock of Expanets and our 11% coupon Preferred Stock of Blue Dot. The preferred dividends and corporate services allocations are eliminated in consolidation. The net income (loss) before minority interests and net income (loss) available to common equity holders reported in our segment disclosures includes the portion of interest expense on our $51.4 million loan to Expanets which is allocable to third party minority interests.

The following tables demonstrate the reconciliation of income (loss) before minority interests reported in NorthWestern's segment disclosures for its communications and HVAC segments, the only two segments which have Minority Interest, to Minority Interests in Net Loss of Consolidated Subsidiaries contained in its consolidated statements of income for the periods indicated. All amounts in boxes are reflected directly within NorthWestern's consolidated financial statements. All other amounts support the derivation of those numbers.

Preferred dividends for the three months ended March 31, 2002 of $10.6 and $9.1 million for Expanets and Blue Dot, respectively, represent increases of $2.9 million and $3.1 million, respectively, which reflect increased investments by NorthWestern in the preferred stock of each entity. Corporate allocations for the three months ended March 31, 2002 of $1.1 and $1.2 million for Expanets and Blue Dot, respectively, represent a decrease of $0.5 million for Expanets and an increase of $0.5 million for Blue Dot. The decrease at Expanets is due to reduced services provided by NorthWestern related to the non-recurring transition and integration expenses related to the acquisition of the Lucent GEM assets. The increase at Blue Dot is due to continued increased involvement and corporate services provided by NorthWestern.

As of March 31, 2002, no remaining minority interest basis existed against which to allocate losses. Accordingly, if such subsidiaries incur operating losses in the future, unless additional minority interest is issued as a result of new acquisitions, our share of any such losses will be recognized in our operating results. Different capital structures in the future or unanticipated future operating results, either positive or negative, could result in materially different results.

As of March 31, 2002, our common stock basis in Expanets and Blue Dot was zero as a result of losses applicable to common stock of those entities that was allocated to us based on our common stock ownership. As of March 31, 2002, our preferred stock basis in Expanets and Blue Dot was $356.9 million and $296.5 million, respectively. In addition, we also loaned $51.4 million to Expanets for general operating purposes during 2001, which was outstanding at December 31, 2001 and at June 30, 2002, which we anticipate is likely to be repaid during 2002. We had an intercompany advance to Expanets totaling $63.3 million and $113.4 million as of March 31, 2002 and June 30, 2002, respectively, which we anticipate is likely to be repaid during 2003. We also had an intercompany advance to Blue Dot totaling $37.1 million and $22.8 million as of March 31, 2002 and June 30, 2002, respectively, which we anticipate is likely to be repaid during 2003.

We have entered into commodity futures contracts for natural gas to attempt to reduce the risk of future price fluctuations. Any increase or decrease in the values of these contracts are reported as gains and losses in our consolidated statements of income. The fair value of fixed-price commodity contracts are estimated based on market prices of natural gas, natural gas liquids and crude oil for the periods covered by these contracts.

SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, requires every derivative instrument, including certain derivative instruments imbedded in other contracts, to be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires any changes in the derivative's fair value to be currently recognized in earnings, unless specific hedge accounting criteria are met. We adopted the provisions of SFAS No. 133, as amended, effective July 1, 2000, consistent with the timing of CornerStone's adoption of SFAS No. 133. The initial adoption of SFAS No. 133 at CornerStone resulted in a charge of $5.3 million. Such charge is reflected in the consolidated statements of income as a cumulative effect of change in accounting principles and is shown net of taxes of $0.5 million and net of minority interest of $3.8 million. Pricing increases resulting in a change of the fair value of propane related and natural gas commodity futures were reported as part of cost of sales in the amount of $0.2 million and $0.3 million for the years ended December 31, 2001 and 2000. Changes in the commodity markets may materially impact our future estimates of fair value and operating results. See "Risk Factors—Changes in commodity prices may increase our cost of producing and distributing electricity and distributing natural gas or decrease the amount we receive from selling electricity and natural gas, adversely affecting our financial performance and condition" included in Item 1 hereof.

SFAS No. 142, which was issued during 2001 and is effective for all fiscal years beginning after December 15, 2001, eliminates amortization of goodwill and allows amortization of other intangibles only if the assets have a finite, determinable life. Based on SFAS No. 142, we are required to perform an impairment analysis of intangible assets at the reporting unit level, at least annually to determine whether the carrying value exceeds the fair value. In instances where the carrying value is less than the fair value of the asset, an impairment loss must be recognized.

CornerStone adopted SFAS No. 142 effective July 1, 2001, and we adopted SFAS No. 142 effective January 1, 2002. CornerStone's initial assessment indicated no impairment associated with the adoption. CornerStone's amortization expense for the six-month period ended December 31, 2001, was reduced by approximately $4.0 million as a result of the adoption. However, the effect of this reduction and all other impacts of CornerStone's adoption of SFAS No. 142 have been fully reversed in our financial statements as a result of our adoption of SFAS No. 142 on January 1, 2002. We are currently in the process of evaluating the impact of SFAS No. 142 on all reporting units. Amortization of goodwill totaled $11.3 million, $19.8 million and $7.0 million for the years ended December 31, 2001, 2000 and 1999, respectively, excluding CornerStone. Had we adopted the provisions of SFAS No. 142 in those years, it would have resulted in an increase to earnings on common stock, net of taxes and minority interests, of $8.6 million, $6.3 million and $20,000 for the years ended December 31, 2001, 2000 and 1999, respectively. Basic earnings per share would have increased $0.35 and $0.27 for 2001 and 2000, respectively, with no impact for 1999. Diluted earnings per share would have increased by $0.36 and $0.27 for 2001 and 2000, respectively, with no impact for 1999.

Property, plant and equipment, and intangibles that may be amortized pursuant to SFAS No. 142 are depreciated and amortized over their useful lives. The useful life of an asset is based on our estimate of the period that the asset will provide benefit. We review all long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable as measured by the future net cash flows expected to be generated by the asset. If such an asset is considered impaired, the impairment recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset.

SFAS No. 141, Business Combinations, issued in June 2001, requires all business combinations initiated after June 30, 2001, to be accounted for using the purchase method. In addition, it requires

that all identifiable intangible assets be separately recognized and the purchase price allocated accordingly. In some cases, this will result in the recognition of substantially more categories of intangibles.

SFAS No. 143, Accounting for Asset Retirement Obligations, was issued in August 2001. It addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The impact on our results of operations and financial position is currently under review by management.

SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, was issued in October 2001. It establishes a single accounting model for long-lived assets to be disposed of by sale. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The impact of the Statement on our results of operations and financial position is currently under review by management.

In order to provide a recruitment and retention incentive, NorthWestern adopted a long-term equity incentive program in September 1999 in which certain key executives of NorthWestern and key team members of 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 investors to participate in long-term capital appreciation resulting from increases in the value of NorthWestern's interests in Blue Dot, Expanets and CornerStone above benchmark rates of return to NorthWestern approved by the independent Compensation Committee of NorthWestern's Board of Directors. Participants benefit in any such capital appreciation on a pro rata basis with the other holders of equity interests in such entities after achievement of the benchmark rate of return to NorthWestern. The interest of NorthWestern executives in the limited liability company upon formation collectively represented a less than 0.5% interest in each of Blue Dot, Expanets and CornerStone. The limited liability company has no indebtedness and is consolidated in NorthWestern's financial statements. No losses of these subsidiaries have been allocated to the minority interest owned by the limited liability company. NorthWestern has the right to acquire the limited liability company interests of the investors under specified circumstances, including termination of employment. In the year ended December 31, 2001, the following executive officers of NorthWestern received distributions in respect of the transfer to NorthWestern of a portion of their vested interests: M. Lewis, chief executive officer, $1.1 million; R. Hylland, president, $0.8 million; D. Newell, senior vice president, $0.8 million; E. Jacobsen, senior vice president, $0.4 million; and K. Orme, chief financial officer, $0.1 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.

Operation of our businesses involves a number of risks. You should carefully consider the risk factors described below, as well as the other information included or incorporated by reference in this Quarterly Report on Form 10-Q, when considering investment in our securities. The risks and uncertainties described below are not the only ones facing our company. Additional risks and uncertainties not presently known or that we currently believe to be less significant may also adversely affect us. If any of the risks discussed below actually occur, our business, financial condition, operating results or cash flows could be materially adversely affected.

Our growth strategy is subject to risks and uncertainties, including those related to the integration of acquired businesses. A substantial part of our growth has been from acquisitions, and a substantial part

of future growth in our utility business may come from acquisitions. Pursuant to our growth strategy, we have evaluated and expect to continue to evaluate possible acquisitions on an ongoing basis and at any given time may be engaged in discussions or negotiations with respect to possible acquisitions or strategic investments in the energy or communications industries. Some of these acquisitions may be significant and might require us to raise additional equity and/or incur debt financings. Our growth strategy is subject to certain risks and uncertainties, including:

Many of our acquisitions at Expanets and Blue Dot have involved the issuance of common stock in those subsidiaries to the sellers of the acquired businesses. Our investments in Expanets and Blue Dot are principally in the form of senior preferred stock with voting control and a liquidation preference over the common stock held by third parties. We are required to consolidate the financial results of Expanets and Blue Dot because of our voting control. The common stock issued to third parties in connection with acquisitions creates minority interests which are junior to our preferred stock interests and against which operating losses have been allocated. As of March 31, 2002, however, no remaining minority interest basis existed against which to allocate losses. Accordingly, if such subsidiaries incur operating losses in the future, unless additional minority interests are issued as a result of new acquisitions, our share of any such losses will be recognized in our operating results.

In addition, our acquisition activities involve the risk of successfully transitioning, integrating and managing acquired companies, including assessing the adequacy and efficiency of information, technical and accounting systems, business processes and related support functions and realizing cost savings and efficiencies from integration in excess of any related restructuring charges. We could expend a substantial amount of time and capital integrating businesses that have been acquired or pursuing acquisitions we do not consummate, which could adversely affect our business, financial condition and results of operations.

The integration and management of NorthWestern Energy LLC into our existing NorthWestern Energy division could result in the expenditure of significant additional resources and may adversely affect our results of operations and financial condition.

Our acquisition of NorthWestern Energy LLC increased our revenues on a consolidated basis by approximately 38% on a pro forma basis for the year ended December 31, 2001 and the integration and management of NorthWestern Energy LLC into our existing NorthWestern Energy division may place significant strain on our management, financial and other resources. The integration of NorthWestern Energy LLC with our NorthWestern Energy division may involve, among other things, integration of operations, maintenance, billing, accounting, quality control, management, personnel, payroll, regulatory compliance and other systems and operating hardware and software, some of which may be incompatible with our existing systems and therefore may need to be replaced. To the extent we are required to incur significant additional costs integrating these operations, our results of operations and financial condition could be adversely affected.

The continuing integration of the Growing and Emerging Markets, or GEM, division of Lucent Technologies, Inc. into Expanets' business could adversely affect Expanets' operations and financial condition.

Expanets is subject to risks associated with its continuing integration of the significant acquisition of the GEM division of Lucent Technologies, Inc. and other acquired businesses into its operations. These risks include reliance upon transition services agreements entered into with the sellers of such businesses, substantial investments in corporate infrastructure systems to enable Expanets to terminate such transition services agreements and the integration of these systems into our existing operations, the successful integration of the much larger GEM business with the existing Expanets business and the successful transition of the historical GEM sales from voice equipment to relatively higher margin integrated voice and data services solutions despite weakness in the communications and data sectors generally. In particular, Expanets has undertaken a restructuring of its sales force for future growth initiatives, migration of the business to a common information technology platform and the elimination of costly transition expenses. Expanets has spent significant amounts integrating the GEM business to date. Although Expanets believes that the integration is substantially complete, we cannot assure that Expanets will not be required to incur additional costs in completing this integration. To the extent Expanets incurs significant additional costs associated with the integration of the GEM business into its business, Expanets' operations and financial condition could be adversely affected.

We may not be able to fully recover transition costs, which could adversely affect our net income and financial condition.

Montana law requires that the MPSC determine the value of net unmitigable transition costs associated with the transformation of the former Montana Power utility business from a vertically integrated electric service company to a utility providing only default supply and transmission and distribution services. The MPSC is also obligated to set a competitive transition charge to be included in distribution rates to collect those net transition costs. The majority of these transition costs relate to out-of-market power purchase contracts, which run through 2032, that the former owner of NorthWestern Energy LLC was required to enter into with certain "qualifying facilities" as established under the Public Utility Regulatory Policies Act of 1978. The former owner of NorthWestern Energy LLC estimated the pre-tax net present value of its transition costs over the approximately 30-year period to be approximately $304.7 million in a filing with the MPSC on October 29, 2001.

On January 31, 2002, the MPSC approved a stipulation among the former owner of NorthWestern Energy LLC, us and a number of other parties, which, among other things, conclusively established the pre-tax net present value of the retail transition costs relating to out-of-market power purchase contracts recoverable in retail rates over the next 28 years to be approximately $244.7 million. In addition, the stipulation set a fixed annual recovery for the retail transition costs beginning at $14.9 million in the first year after implementation and increasing up to $25.6 million in the fourth year and thereafter. Because the recovery stream as finalized by the stipulation is less than the total payments due under the out-of-market power purchase contracts, the difference must be mitigated or covered from other revenue sources. The pre-tax net present value of the retail transition costs approved in the MPSC stipulation is approximately $60.0 million less than the former owner of NorthWestern Energy LLC estimated in its initial filing with the MPSC. We estimate that the annual after tax differences will be approximately $1.9 million in 2002, increasing to a high of approximately $13.2 million in 2017. The estimated aggregate after tax amount of the differences over the remaining 28-year life of these contracts would be approximately $193.5 million. Although we believe we have opportunities to mitigate the impact of these differences, we cannot assure you that we will be successful. To the extent we are unable to mitigate these differences, our net income and financial condition could be adversely affected.

If the MPSC disallows the recovery of the costs incurred in entering into default supply portfolio contracts while we are required to act as the "default supplier," we may be required to seek alternative sources of supply and may not be able to fully recover the costs incurred in procuring default supply contracts, which could adversely affect our net income and financial condition.

The 1997 Montana Restructuring Act provided that customers be able to choose their electricity supplier during a transition period ending on June 30, 2007. NorthWestern Energy LLC is required to act as the "default supplier" for customers who have not chosen an alternate supplier. The Restructuring Act provided for full recovery of costs incurred in procuring a default supply portfolio of electric power and required the default supplier to propose a "cost recovery mechanism" for electrical supply procurement costs before March 30, 2002. On October 29, 2001, the former owner of NorthWestern Energy LLC filed with the MPSC its initial default supply portfolio, containing a mix of long and short-term contracts from new and existing generators. On April 25, 2002, the MPSC approved NorthWestern Energy LLC's proposed "cost recovery mechanism" in the form filed.

On June 21, 2002, the MPSC issued a final order approving contracts meeting approximately 60% of the default supply winter peak load and approximately 93% of the annual energy requirements, and choosing not to preapprove five proposed contracts relating to new generation construction projects, including a contract for 150 megawatts in winter and 75 megawatts in summer with Montana First Megawatts, a 240 megawatt gas-fired generation project being constructed by a NorthWestern subsidiary in Great Falls, Montana. In refusing preapproval of the new generation contracts, the MPSC stated that "prudently incurred costs related to electricity procured from new generation projects are fully recoverable in rates," but that the former owner of NorthWestern Energy LLC did not adequately document and explain its analysis and judgments which led to the specific mix of resource types, products, contract lengths, price stability, dispatchability, risk and other characteristics of the chosen portfolio. As a result of the order, NorthWestern Energy LLC will seek to obtain the remainder of the default supply portfolio through a combination of new power purchase contracts conforming to the MPSC's guidance and open market purchases. In addition, the MPSC approved our "cost recovery mechanism" in the form filed. Currently, NorthWestern Energy LLC is making short-term purchases to fill intermediate and peak electricity needs. These short-term purchases, along with the MPSC-approved base load supply, are being fully recovered through our annual electricity cost tracking process pursuant to which rates are based on estimated electricity loads and electricity costs for the upcoming tracking period and are annually reviewed and adjusted by the MPSC for any differences in the previous tracking year's estimates to actual information. This process is similar to the cost recovery process that has been successfully utilized for more than 20 years in Montana, South Dakota and other states for natural gas purchases for residential and commercial customers. The MPSC further stated that NorthWestern Energy LLC has an ongoing responsibility to prudently administer its supply contracts and the energy procured pursuant to those contracts for the benefit of ratepayers. We expect that the costs of the default supply portfolio and a competitive transition charge for out-of-market costs will increase residential electric rates in NorthWestern Energy LLC's service territories by less than 10% during the first year. The MPSC may disallow the recovery of the costs incurred under default supply portfolio contracts in the future, if it makes a determination that the contracts other than the contracts which were preapproved were not prudently entered into or that the contracts were not prudently administered. A failure to recover such costs could adversely affect our net income and financial condition.

We are subject to extensive governmental regulations which could impose significant costs on our operations and changes in existing regulations and future deregulation may have a detrimental effect on our business and could increase competition.

Our operations and the operations of our subsidiary entities are subject to extensive federal, state and local laws and regulations concerning taxes, service areas, tariffs, issuances of securities,

employment, occupational health and safety, protection of the environment and other matters. In addition, we are required to obtain and comply with a wide variety of licenses, permits and other approvals in order to operate our facilities. In the course of complying with these requirements, we may incur significant costs. If we fail to comply with these requirements, we could be subject to civil or criminal liability and the imposition of liens or fines. In addition, existing regulations may be revised or reinterpreted, new laws and regulations may be adopted or become applicable to us or our facilities and future changes in laws and regulations may have a detrimental effect on our business.

The United States electric utility and natural gas industries are currently experiencing increasing competitive pressures as a result of consumer demands, technological advances, deregulation, greater availability of natural gas-fired generation and other factors. Competition for various aspects of electric and natural gas services is being introduced throughout the country that will open these markets to new providers of some or all of traditional electric utility and natural gas services. Competition is likely to result in the further unbundling of electric utility and natural gas services as has occurred in Montana for electricity and Montana, South Dakota and Nebraska for natural gas. Separate markets may emerge for generation, transmission, distribution, meter reading, billing and other services currently provided by electric utility and natural gas providers as a bundled service. As a result, significant additional competitors could become active in the generation, transmission and distribution segments of our industry.

Proposals have been introduced in Congress to repeal the Public Utility Holding Company Act of 1935. To the extent competitive pressures increase and the pricing and sale of electricity assumes more characteristics of a commodity business, the economics of domestic independent power generation projects may come under increasing pressure.

Our utility business is subject to extensive environmental regulations and potential environmental liabilities, which could result in significant costs and liabilities.

Our utility business is subject to extensive regulations imposed by federal, state and local government authorities in the ordinary course of day-to-day operations with regard to the environment, including environmental regulations relating to air and water quality, solid waste disposal and other environmental considerations. Many of these environmental laws and regulations create permit and license requirements and provide for substantial civil and criminal fines which, if imposed, could result in material costs or liabilities. We regularly monitor our operations to prevent adverse environmental impacts. We may be required to make significant expenditures in connection with the investigation and remediation of alleged or actual spills and the repair and upgrade of our facilities in order to meet future requirements under environmental laws. Most of our generating capacity is derived from our non-operating minority interests in three coal burning generating facilities.

The Clean Air Act Amendments of 1990, which prescribe limitations on sulfur dioxide and nitrogen oxide emissions from coal-fired power plants, required reductions in sulfur dioxide emissions at our Big Stone plant, in which we own an approximate 23.4% interest, beginning in the year 2000. The Clean Air Act also contains a requirement for future studies to determine what, if any, limitations and controls should be imposed on coal-fired boilers to control emissions of certain air toxics, including mercury. Because of the uncertain nature the air toxic emission limits and the potential for development of more stringent emission standards in general, we cannot reasonably determine the additional costs we may incur under the Clean Air Act.

In addition, the U.S. Environmental Protection Agency, or the EPA, listed the Milltown Reservoir, which sits behind a hydroelectric dam owned by NorthWestern Energy LLC, on its Superfund National Priority List in 1983 as a result of the collection of toxic heavy metals in the silts. The Atlantic Richfield Company, or ARCO, as successor to the Anaconda Company, has been named as the party with responsibility for completing the remedial investigation and feasibility studies and conducting site

cleanup, under the EPA's direction. The former owner of NorthWestern Energy LLC did not undertake any direct responsibility in that regard, in light of a special statutory exemption from liability under CERCLA in relation to the Milltown Dam. By virtue of its acquisition of The Montana Power Company's utility business and the dam, NorthWestern Energy LLC succeeded to similar protection under this statutory exception. ARCO has argued that the former owner of NorthWestern Energy LLC should be considered a Potentially Responsible Party, or PRP, and has threatened to challenge its exempt status. ARCO and the former owner of NorthWestern Energy LLC entered into a settlement agreement to limit the former owner's and now NorthWestern Energy LLC's potential liability, costs and ongoing operating expenditures, provided that the EPA selects a remedy that leaves the dam and sediments in place in its final Record of Decision. The final Record of Decision is not expected to be issued until late 2002 or early 2003. Depending on the outcome of that decision, we may be required to defend our exempt position. We cannot assure you that we will not incur costs or liabilities associated with the Milltown Dam site in the future, some of which could be significant. We have established a reserve of approximately $20.9 million at March 31, 2002, primarily for liabilities related to the Milltown Dam and other environmental liabilities. To the extent we incur liabilities greater than our reserve, our financial condition and results of operations could be adversely affected. See "Business—Environmental" contained in Item 1 herein.

You are unlikely to be able to exercise effective remedies or collect judgments against Arthur Andersen and we may incur material expenses or delays in financings or SEC filings because we changed auditors.

Arthur Andersen LLP has served as our independent accountants since 1932. On March 14, 2002, Arthur Andersen was indicted by a federal grand jury on obstruction of justice charges arising from the government's investigation of Enron Corp. In light of recent events concerning Arthur Andersen, we dismissed Arthur Andersen as our independent public accounting firm and retained Deloitte & Touche LLP in their stead on May 16, 2002, although Arthur Andersen has audited our consolidated financial statements contained in our Annual Report on Form 10-K, as amended. On June 15, 2002, Arthur Andersen LLP was found guilty by a jury in Houston, Texas of obstructing justice. In light of the jury verdict and the underlying events, Arthur Andersen has ceased practicing before the SEC. Because it is unlikely that Arthur Andersen will survive, you are unlikely to be able to exercise effective remedies or collect judgments against them.

As a public company, we are required to file with the SEC periodic financial statements audited or reviewed by an independent, certified public accountant. Our access to the capital markets and our ability to make timely filings with the SEC could be impaired if the SEC ceases accepting financial statements audited by Arthur Andersen. In addition, because both the partner and the audit manager who were assigned to our account have left the firm, Arthur Andersen will be unable to provide other information or documents that would customarily be received by us or underwriters in connection with financings or other transactions, including consents and "comfort" letters. As a result, we may encounter delays, additional expense and other difficulties in future financings. Any resulting delay in accessing or inability to access the public capital markets could be disruptive to our operations and could affect the price and liquidity of our securities.

In response to the occurrence of several recent events, including the September 11, 2001 terrorist attack on the United States, the ongoing war against terrorism by the United States and the bankruptcy of several large energy and telecommunications companies, the financial markets have been disrupted in general and the availability and cost of capital for our business and that of our competitors has been adversely affected. In addition, the credit rating agencies have initiated a thorough review of the capital structure and earnings power of certain energy companies. These events could constrain the capital

available to our industry and could adversely affect our access to funding for our operations, including the funding necessary to refinance our indebtedness that is scheduled to come due in 2002 and 2003. See "—We will need significant additional capital to refinance our indebtedness that is scheduled to mature and for other working capital purposes, which we may not be able to obtain." The achievement of our growth targets is dependent, at least in part, upon our ability to access capital at rates and on terms we determine to be acceptable. If our ability to access capital becomes significantly constrained, our financial condition and future results of operations could be significantly adversely affected.

The insurance industry has also been disrupted by these events. As a result, the availability of insurance covering risks we and our competitors typically insure against may decrease. In addition, the insurance we are able to obtain may have higher deductibles, higher premiums and more restrictive policy terms.

A downgrade in our credit rating could negatively affect our ability to access capital.

S&P, Moody's and Fitch rate our senior, unsecured debt at "BBB" with a negative outlook, "Baa2" with a negative outlook and "BBB+," respectively. On September 3, 2002, S&P placed our ratings on rating watch negative to reflect changes in NorthWestern's plan for issuing equity and continued weakness in our unregulated businesses. On August 1, 2002, Moody's placed our ratings under review for possible downgrade and Fitch placed our ratings on rating watch negative following the announcement that CornerStone had exercised a five business day grace period with respect to interest payments on three classes of its outstanding senior secured notes. Credit ratings are dependent on a number of quantitative and qualitative factors. Moody's has stated that even though the acquisition of NorthWestern Energy LLC will benefit NorthWestern by increasing cash flow from more stable regulated operations, the reason for the negative outlook in its rating was primarily due to the combined effects of a general weakening of our credit profile over the past year and Moody's expectations for a significant increase in our debt leverage and correspondingly weaker cash flow coverage ratios in the near-term as a result of our acquisition of NorthWestern Energy LLC. Although we are not aware of any current plans of S&P, Moody's or Fitch to further lower their respective ratings on our debt, we cannot assure you that our credit ratings will not be downgraded if we do not reduce our leverage. Although none of our debt instruments contain acceleration and repayment provisions in the event of a downgrade in our debt ratings by S&P, Moody's or Fitch, if such a downgrade were to occur, particularly below investment grade, our ability to access the capital markets and utilize trade credit may be adversely affected and our borrowing costs would increase which would adversely impact our results and condition. In addition, we would likely be required to pay a higher interest rate in future financings and our potential pool of investors and funding sources could decrease.

A downgrade in our credit rating could limit our ability to pay dividends or acquire shares of our capital stock.

If our credit rating by Standard & Poor's falls below BBB- or our credit rating by Moody's falls below Baa3, we will not be able to declare or pay dividends or make other distributions with respect to any class of our capital stock or purchase, redeem, retire or otherwise acquire any such stock without the consent of the lenders, under the terms of our credit agreement with respect to our $280.0 million revolving credit facility. In addition, in the event of such a downgrade in our credit rating by either rating agency, we may not permit any of our subsidiaries to pay dividends or make distributions with respect to any class of its capital stock other than dividends to be paid to us or another of our wholly owned subsidiaries or acquire shares of its capital stock other than as required by existing agreements, under the terms of our credit agreement.

We have substantial indebtedness, which could adversely affect our financial condition.

We have a significant amount of indebtedness outstanding as a result of our acquisition of NorthWestern Energy LLC. We had total consolidated indebtedness of approximately $1.8 billion outstanding as of March 31, 2002.

Our substantial indebtedness could have important consequences to you. For example, it could:

Our failure to comply with any of the covenants contained in the instruments governing our indebtedness could result in an event of default which, if not cured or waived, could result in the acceleration of other outstanding indebtedness. We may not have sufficient working capital to satisfy our debt obligations in the event of an acceleration of all or a significant portion of our outstanding indebtedness.

We could enter into acquisitions, changes of control, refinancings or other recapitalizations or highly leveraged transactions that could adversely affect the trading price of our common stock.

The indentures governing our indebtedness do not prevent us from entering into acquisitions, changes of control, refinancings or other recapitalizations or highly leveraged transactions. These transactions could increase the amount of our outstanding indebtedness or otherwise affect our capital structure or credit quality and could result in the acceleration of the indebtedness outstanding under our credit facility. If we enter into acquisitions, changes of control, refinancings or other recapitalizations or highly leveraged transactions, the trading price of our common stock could be adversely affected.

We will need significant additional capital to refinance our indebtedness that is scheduled to mature and for other working capital purposes, which we may not be able to obtain.

We have completed a number of financings during 2001 and the beginning of 2002 as discussed in "—Liquidity and Capital Resources—Cash and Cash Position—Investing and Financing Activities." In addition, we will be required to obtain significant additional capital in 2002, 2003 and 2004 to execute our business plan, including for working capital purposes and to repay existing indebtedness scheduled to mature during the period. In particular, we will be required to repay, refinance or extend the following indebtedness:

We used the net proceeds from the issuance and sale of $250.0 million aggregate principal amount of our 7⁷/8% senior notes due March 15, 2007 and $470.0 million aggregate principal amount of our 8³/4% senior notes due March 15, 2012 to refinance the term loan portion of our acquisition credit facility. We intend to raise approximately $150.0 million to $200.0 million in additional equity in 2002, through one or more public offerings and/or private placements, and use the proceeds to retire debt and for other corporate purposes, including funding new corporate investment and acquisition and growth ventures. We may also consider applying a portion of our free cash flow and/or the net proceeds from sales of non-core assets to further reduce our debt. We may also issue additional other debt or equity during the year for these purposes. Our ability to obtain additional financing will be dependent on a number of factors, including those discussed in "—We have substantial indebtedness, which could adversely affect our financial condition and prevent us from fulfilling our obligations under the notes." See also "—Liquidity and Capital Resources." If we are unable to obtain additional financing, our working capital, results of operations and financial condition could be adversely affected and the trading price of our common stock could decline.

Our electric and gas utility business and, to a lesser extent, Blue Dot's HVAC business are seasonal businesses and weather patterns can have a material impact on their operating performance. Because natural gas is heavily used for residential and commercial heating, the demand for this product depends heavily upon weather patterns throughout our market areas and a significant amount of natural gas revenues are recognized in the first and fourth quarters related to the heating season. Demand for electricity is often greater in the summer and winter months associated with cooling and heating. Similarly, Blue Dot's business is subject to seasonal variations in certain areas of its service lines, with demand for residential HVAC services generally higher in the second and third quarters. Accordingly, our operations have historically generated less revenues and income when weather conditions are milder in the winter and cooler in the summer. In the event that we experience unusually mild winters or summers in the future, our results of operations and financial condition could be adversely affected.

Changes in commodity prices may increase our cost of producing and distributing electricity and distributing natural gas or decrease the amount we receive from selling electricity and natural gas, adversely affecting our financial performance and condition.

To the extent not covered by long-term fixed price purchase contracts, we are exposed to changes in the price and availability of coal because most of our generating capacity is coal-fired. Changes in the cost of coal and changes in the relationship between those costs and the market prices of power may affect our financial results. In addition, natural gas is a commodity, the market price of which can

be subject to volatile changes in response to changes in the world crude oil market, refinery operations, supply or other market conditions. Because the rates at which we sell electricity and natural gas are set by state regulatory authorities, we may not be able to immediately pass on to our retail customers rapid increases in the wholesale cost of coal and natural gas, which could reduce our profitability.

On one or more occasions, we may make statements 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 in this Quarterly Report on Form 10-Q, including, without limitation, the statements in this Form 10-Q under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Risk Factors" and statements located elsewhere in this Quarterly Report on Form 10-Q or incorporated by reference therein or herein relating to expectation 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.

In addition to other factors and matters discussed elsewhere in our quarterly, annual and current reports that we file with the SEC, and which are incorporated by reference into this Form 10-Q, some important factors that could cause actual results or outcomes for NorthWestern or our subsidiaries to differ materially from those discussed in forward-looking statements include, the adverse impact of weather conditions and seasonal fluctuations; unscheduled generation outages, maintenance or repairs; unanticipated changes to fossil fuel or gas supply costs or availability due to higher demand, shortages, transportation problems or other developments; developments in the federal and state regulatory environment and the terms associated with obtaining regulatory approvals and rate orders; costs associated with environmental liabilities and compliance with environmental laws; the rate of growth and economic conditions in our service territories and those of our subsidiaries; the speed and degree to which competition enters the industries and markets in which our businesses operate; the timing and extent of changes in interest rates and fluctuations in energy-related commodity prices; risks associated with acquisitions, transition and integration of acquired companies, including NorthWestern Energy LLC and the GEM division of Lucent Technologies, Inc., and the implementation of information systems and realization of efficiencies in excess of any related restructuring charges; a lack of minority interest basis, which would require us to recognize an increased share of operating losses at certain of our subsidiaries; our ability to recover transition costs; disallowance by the MPSC of the recovery of the costs incurred in entering into our default supply portfolio contracts while we are required to act as the "default supplier;" disruptions and adverse effects in the capital market due to the changing economic environment; our credit ratings with S&P, Moody's and Fitch; potential delays in financings or SEC filings because we changed auditors; our substantial indebtedness, which could limit our operating flexibility or ability to borrow additional funds; our ability to obtain additional capital to refinance our indebtedness that is scheduled to mature and for working capital purposes; changes in customer usage patterns and preferences; possible future actions and developments at CornerStone; and changing conditions in the economy and capital markets and other factors identified from time to time in our filings with the SEC.

Any forward-looking statement speaks only as of the date on which such statement is made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time and it is not possible for management to predict all such factors.

We filed a Current Report on Form 8-K with the SEC on January 22, 2002, to file as exhibits under Item 5 a copy of the Company's press release dated January 18, 2002, announcing that the Company anticipated its earnings per share from continuing operations would be within the range of analysts' estimates for its fourth quarter and year ended December 31, 2001, and a copy of CornerStone's press release dated January 18, 2002 announcing that the board of directors of its managing general partner had determined that it is in the best interests of CornerStone's unitholders to consider strategic opportunities, including a possible sale or merger of CornerStone. NorthWestern owns approximately 30% of CornerStone, which the Company operates through one of its subsidiaries that serves as CornerStone's managing general partner.

We filed a Current Report on Form 8-K with the SEC on January 28, 2002, (a) to cause certain pro forma information contained in the 424(b) prospectus with respect to the sale of an aggregate of 4,000,000 of NorthWestern Capital Financing III's 8.10% Trust Preferred Securities, with an overallotment option of up to an aggregate of 600,000 additional Trust Preferred Securities of NorthWestern Capital Financing III, attached as an exhibit to such Form 8-K, to be incorporated by reference into the prospectuses relating to the securities offered under effective Registration Statements Nos. 333-64113, 333-80817 and 333-80819, and (b) to file as exhibits under Item 5 a copy of such pro forma information and updated Statements of Eligibility under the Trust Indenture Act of 1939 on Forms T-1 for Wilmington Trust Company.

We filed a Current Report on Form 8-K with the SEC on January 29, 2002, to (a) file as exhibits under Item 5 a copy of the Company's press release dated January 29, 2002, announcing that the Montana Public Service Commission unanimously approved the Company's pending acquisition of The Montana Power Company's energy transmission and distribution business of which the Montana Public Service Commission's formal order was expected on January 31, 2002 and (b) disclose that subsequent to the issuance of the Company's press release, the Federal Trade Commission granted the Company's request for early termination under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, effective January 29, 2002.

We filed a Current Report on Form 8-K with the SEC on January 31, 2002, to cause (a) the Underwriting Agreement, dated as of January 24, 2002, with Morgan Stanley & Co. Incorporated, Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Salomon Smith Barney Inc., as Representatives of the Underwriters named in the Underwriting Agreement, for the sale of an aggregate of 4,000,000 shares of NorthWestern Capital Trust III, 8.10% Trust Preferred Securities (Liquidation Amount $25 per Trust Preferred Security), with an overallotment option for up to an aggregate of 600,000 additional Trust Preferred Securities, and (b) the opinions and consents of Paul, Hastings, Janofsky & Walker LLP and Richards, Layton & Finger, P.A., to be incorporated into the effective Registration Statements Nos. 333-58491 and 333-82707 by reference.

We filed a Current Report on Form 8-K with the SEC on February 7, 2002, to file as an exhibit under Item 5 a copy of the Company's press release dated February 7, 2002, discussing results for the fourth quarter of 2001 and for the full year of 2001.

We filed a Current Report on Form 8-K with the SEC on March 1, 2002, to file as an exhibit under Item 5 a copy of the Company's press release, dated March 1, 2002, announcing the Company's intent to offer $700,000,000 estimated aggregate principal amount of its Senior Notes, in a transaction exempt from the registration requirements of the Securities Act of 1933, as amended.

We filed a Current Report on Form 8-K with the SEC on March 4, 2002, to (a) file as an exhibit a copy of NorthWestern's press release dated February 15, 2001, relating to the purchase of The Montana Power, L.L.C. and (b) file as an exhibit under Item 5 incorporating by reference into the prospectuses relating to Securities offered by NorthWestern under its effective Registration Statements Nos. 333-58491, 333-64113, 333-80817, 333-80819 and 333-82707, certain historical audited financial statements for NorthWestern and for the Utility of The Montana Power Company as of December 31, 2001 and 2000 and for each of the three years in the period ended December 31, 2001 and Unaudited Pro Forma Combined Financial Information of NorthWestern and The Montana Power, L.L.C. as of and for the year ended December 31, 2001, with respect to the recent closing of the acquisition of The Montana Power, L.L.C. Also included as exhibits under Item 5 are the consent of Arthur Andersen, LLP with regards to the audited financial statements of NorthWestern Corporation, and the consent of PricewaterhouseCoopers LLP with regards to the audited financial statements of The Montana Power Company, L.L.C.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

EXPLANATORY NOTE REGARDING CERTIFICATIONS: Representations 4, 5 and 6 of the Certifications as set forth in Item 4 of the Form 10-Q General Instructions have been omitted, consistent with the Transition Provisions of SEC Exchange Act Release No. 34-46427, because this Quarterly Report on Form 10-Q covers a period ending before the Effective Date of Rules 13a-14 and 15d-14.

(Mark One)
ý		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
or
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES ACT OF 1934
For the transition period from to

PART 1. FINANCIAL INFORMATION
	Item 1.	Financial Statements	3
		Consolidated Balance Sheets (unaudited)—March 31, 2002 and December 31, 2001	3
		Consolidated Statements of Income (unaudited)—Three months ended March 31, 2002 and 2001	4
		Consolidated Statements of Cash Flows (unaudited)—Three months ended March 31, 2002 and 2001	5
		Notes to Consolidated Financial Statements	6
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	16
PART 2. OTHER INFORMATION
	Item 6.	Exhibits and Reports on Form 8-K	46
		a. Exhibits	46
		b. Reports on 8-K	46
SIGNATURES			48

			March 31, 2002			December 31, 2001
ASSETS
Current Assets:
	Cash and cash equivalents		$	120,518		$	37,158
	Accounts receivable, net			394,922			260,485
	Inventories			69,342			79,719
	Other			82,487			69,487
	Current assets of discontinued operations			101,140			181,697

		Total current assets		768,409			628,546

Property, Plant, and Equipment, Net				1,594,930			496,241
Goodwill and Other Intangible Assets, Net				852,811			640,590
Other:
	Investments			97,288			62,959
	Regulatory assets			112,653			20,415
	Deferred tax asset			14,334			17,374
	Other			98,823			73,413
	Noncurrent assets of discontinued operations			682,212			695,197

		Total assets	$	4,221,460		$	2,634,735

LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
	Current maturities of long-term debt		$	158,934		$	155,000
	Current maturities of long-term debt of subsidiaries — nonrecourse			8,424			22,817
	Short-term debt of subsidiaries-nonrecourse			151,921			178,628
	Accounts payable			128,503			122,266
	Accrued expenses			417,997			216,345
	Current liabilities of discontinued operations			125,341			230,070

		Total current liabilities		991,120			925,126

Long-term Debt				1,400,696			373,350
Long-term Debt of Subsidiaries — Nonrecourse				37,334			37,999
Other Noncurrent Liabilities				393,735			75,040
Noncurrent Liabilities and Minority Interests of Discontinued Operations				652,322			605,325

		Total liabilities		3,475,207			2,016,840

Minority Interests				14,856			30,067

Preferred Stock, Preference Stock, and Preferred Securities:
	Preferred stock — 4¹/2% series			2,600			2,600
	Redeemable preferred stock — 6¹/2% series			1,150			1,150
	Preference stock			—			—
	Corporation obligated mandatorily redeemable preferred securities of subsidiary trusts			370,250			187,500

		Total preferred stock, preference stock and preferred securities		374,000			191,250

Shareholders' Equity:
	Common stock, par value $1.75; authorized 50,000,000 shares; issued and outstanding 27,396,762			47,942			47,942
	Paid-in capital			240,841			240,797
	Treasury stock, at cost			(3,542	)		(3,681	)
	Retained earnings			67,848			112,307
	Accumulated other comprehensive income (loss)			4,308			(787	)

		Total shareholders' equity		357,397			396,578

		Total liabilities and shareholders' equity	$	4,221,460		$	2,634,735

		Three Months Ended March 31
		2002			2001
OPERATING REVENUES		$	480,113		$	477,592
COST OF SALES			269,691			322,448

GROSS MARGIN			210,422			155,144
OPERATING EXPENSES
	Selling, general and administrative		148,150			172,815
	Depreciation		20,535			8,988
	Amortization of intangibles		7,089			10,443

			175,774			192,246

OPERATING INCOME (LOSS)			34,648			(37,102	)
Interest Expense			(21,686	)		(12,393	)
Investment Income and Other			694			1,178

Income (Loss) From Continuing Operations Before Income Taxes and Minority Interests			13,656			(48,317	)
Benefit (Provision) for Income Taxes			(4,611	)		15,674

Income (Loss) From Continuing Operations Before Minority Interests			9,045			(32,643	)
Minority Interests in Net Loss of Consolidated Subsidiaries			14,914			45,836

Income from Continuing Operations			23,959			13,193
Discontinued Operations, Net of Taxes and Minority Interests			(40,000	)		5,196

Income (Loss) before Extraordinary Item			(16,041	)		18,389
Extraordinary Item, Net of Tax of $7,241			(13,447	)		—

Net Income (Loss)			(29,488	)		18,389
Minority Interests on Preferred Securities of Subsidiary Trusts			(6,225	)		(1,650	)
Dividends on Preferred Stock			(48	)		(48	)

Earnings (Loss) on Common Stock		$	(35,761	)	$	16,691

Average Common Shares Outstanding			27,397			23,433
Earnings (Loss) per Average Common Share:
	Continuing operations	$	0.65			0.49
	Discontinued operations		(1.46	)		0.22
	Extraordinary item		(0.49	)		—

	Basic	$	(1.30	)	$	0.71

	Continuing operations	$	0.65			0.48
	Discontinued operations		(1.46	)		0.22
	Extraordinary item		(0.49	)		—

	Diluted	$	(1.30	)	$	0.70

			Three Months Ended March 31
			2002			2001
Operating Activities:
	Net Income (Loss)		$	(29,488	)	$	18,389
	Items not affecting cash:
		Depreciation		20,535			8,988
		Amortization		7,089			10,443
		Loss on discontinued operations		40,000			—
		Extraordinary item, net of taxes		13,447			—
		Deferred income taxes		291			(89	)
		Minority interests in net losses of consolidated subsidiaries		(14,914	)		(45,836	)
	Changes in current assets and liabilities, net of acquisitions:
		Accounts receivable		(93,665	)		3,048
		Inventories		27,134			7,655
		Other current assets		6,310			(5,902	)
		Accounts payable		(23,612	)		(24,989	)
		Accrued expenses		35,974			2,830
	Change in net assets of discontinued operations			(4,190	)		37,215
	Change in noncurrent assets			9,262			6,301
	Change in noncurrent liabilities			(15,394	)		(2,364	)
	Other, net			(2,577	)		(134	)

		Cash flows provided by (used in) operating activities		(23,798	)		15,555

Investment Activities:
	Property, plant and equipment additions			(10,432	)		(10,564	)
	Sale (purchase) of noncurrent investments and assets, net			(8,013	)		(3,146	)
	Acquisitions and growth expenditures, net of cash received			(482,982	)		(13,117	)

		Cash flows used in investing activities		(501,427	)		(26,827	)

Financing Activities:
	Dividends on common and preferred stock			(8,746	)		(7,013	)
	Minority interest on preferred securities of subsidiary trusts			(6,225	)		(1,650	)
	Issuance of long-term debt			719,118			—
	Issuance of preferred securities of subsidiary trusts			117,750			—
	Repayment of long-term debt			(2,007	)		—
	Line of credit (repayments) borrowings, net			(132,000	)		25,000
	Financing costs			(36,028	)		—
	Subsidiary repurchase of minority interests			(8,697	)		(2,051	)
	Line of credit repayments of subsidiaries, net			(12,951	)		(6,478	)
	Issuance of nonrecourse subsidiary debt			—			1,374
	Repayment of nonrecourse subsidiary debt			(29,507	)		(2,669	)
	Proceeds from termination of hedge			7,878			—

		Cash flows provided by financing activities		608,585			6,513

Increase (Decrease) in Cash and Cash Equivalents				83,360			(4,759	)
Cash and Cash Equivalents, beginning of period				37,158			43,385

Cash and Cash Equivalents, end of period			$	120,518		$	38,626

Supplemental Cash Flow Information:
	Cash paid (received) during the period for:
		Income Taxes	$	(6,220	)	$	(681	)
		Interest		18,496			13,146
	Non-cash transactions:
		Debt assumed in acquisitions	$	507,711		$	—
		Assets acquired in exchange for debt		237			3,522
		Interest capitalized for internally developed software		1,297			—
		Minority equity interest issued for acquisitions		—			1,435
		Exchange of warrants for common stock		—			1,505

	Total Parent Company
	Total Electric and Natural Gas			All Other			Total Parent Company			Communications			HVAC			Total
Operating Revenues	$	173,580		$	10,145		$	183,725		$	201,905		$	94,483		$	480,113
Cost of Sales		79,579			5,619			85,198			124,750			59,743			269,691

Gross Margin		94,001			4,526			98,527			77,155			34,740			210,422
Selling, general, & administrative		37,496			6,527			44,023			68,499			35,628			148,150
Depreciation		12,715			703			13,418			4,494			2,623			20,535
Amortization of intangibles		—			7			7			6,895			187			7,089

Operating income (loss)		43,790			(2,711	)		41,079			(2,733	)		(3,698	)		34,648
Interest expense		(12,226	)		(3,385	)		(15,611	)		(5,974	)		(101	)		(21,686	)
Investment income and other		283			399			682			(1	)		13			694

Income (loss) before taxes and minority interests		31,847			(5,697	)		26,150			(8,708	)		(3,786	)		13,656
Benefit (provision) for taxes		(11,802	)		3,630			(8,172	)		2,207			1,354			(4,611	)

Income (loss) before minority interests	$	20,045		$	(2,067	)	$	17,978		$	(6,501	)	$	(2,432	)	$	9,045

Total Assets	$	1,996,097		$	252,467		$	2,248,564		$	811,736		$	377,808		$	3,438,108

Maintenance Capital Expenditures	$	8,836		$	90		$	8,926		$	442		$	1,064		$	10,432

	Total Parent Company
	Total Electric and Natural Gas			All Other			Total Parent- Company			Communications			HVAC			Total
Operating Revenues	$	105,680		$	3,484		$	109,164		$	268,797		$	99,631		$	477,592
Cost of Sales		71,639			2,292			73,931			186,008			62,509			322,448

Gross Margin		34,041			1,192			35,233			82,789			37,122			155,144
Selling, general, & administrative		11,762			5,639			17,401			120,505			34,909			172,815
Depreciation		4,047			491			4,538			2,316			2,134			8,988
Amortization of intangibles		—			29			29			8,674			1,740			10,443

Operating income (loss)		18,232			(4,967	)		13,265			(48,706	)		(1,661	)		(37,102	)
Interest expense		(2,203	)		(6,476	)		(8,679	)		(2,358	)		(1,356	)		(12,393	)
Investment income and other		26			1,242			1,268			(152	)		62			1,178

Income (loss) before taxes and minority interests		16,055			(10,201	)		5,854			(51,216	)		(2,955	)		(48,317	)
Benefit (provision) for taxes		(5,524	)		3,288			(2,236	)		17,461			449			15,674

Income (loss) before minority interests	$	10,531		$	(6,913	)	$	3,618		$	(33,755	)	$	(2,506	)	$	(32,643	)

Total Assets	$	370,118		$	122,894		$	493,012		$	731,147		$	373,337		$	1,597,496

Maintenance Capital Expenditures	$	2,729		$	167		$	2,896		$	5,629		$	2,039		$	10,564

	2002				2001
	Electric		Natural Gas		Electric		Natural Gas
Operating Revenues	$	95,336	$	78,244	$	29,361	$	76,319
Cost of Sales		31,616		47,963		5,324		66,315

Gross Margin		63,720		30,281		24,037		10,004
Selling, general & administrative		27,705		9,791		7,487		4,275
Depreciation		10,177		2,538		3,212		835

Operating Income	$	25,838	$	17,952	$	13,338	$	4,894

	Three Months Ended
	March 31, 2002			March 31, 2001
Reported earnings (loss) on common stock	$	(35,761	)	$	16,691
Add: Goodwill amortization, net of taxes and minority interests		—			1,580

Adjusted net income (losses)	$	(35,761	)	$	18,271

Basic earnings (losses) per share	$	(1.30	)	$	0.71
Add: Goodwill amortization, net of taxes and minority interests		—			0.07

Adjusted basic earnings (losses) per share	$	(1.30	)	$	0.78

Diluted earnings (losses) per share	$	(1.30	)	$	0.70
Add: Goodwill amortization, net of taxes and minority interests		—			0.07

Adjusted diluted earnings (losses) per share	$	(1.30	)	$	0.77

		Three Months Ended March 31
		2002	2001
Average Common Shares Outstanding For Basic Computation		27,396,762	23,432,824
Dilutive Effect of:
	Stock Options	43	77,078
	Stock Warrants	—	211,163

	Average Common Shares Outstanding For Diluted Computation	27,396,805	23,721,065

		Total			2002		2003		2004-2006
		(in thousands)
*Recourse Debt:*
Original Notes, 7⁷/8% and 8³/4%		$	720,000		$	—	$	—	$	—
Discount on Notes			(878	)		—		—		—
Mortgage Bonds, 6.99%, 7.00% and 7.10%			120,000			5,000		—		60,000
Senior Unsecured Debt, 6.95%			105,000			—		—		—
Pollution Control Obligations, 5.85% and 5.90%			21,350			—		—		—
Floating Rate Notes, LIBOR + 0.75%⁽¹⁾			150,000			150,000		—		—
NorthWestern Energy LLC Debt—
	First Mortgage Bonds, 7.30%, 8.25%, 8.95% and 7.00%		157,197			—		—		155,386
	Pollution Control Obligations, 6.125% and 5.90%		170,205			—		—		—
	Secured Medium Term Notes, 7.25% and 7.23%		28,000			—		15,000		—
	Unsecured Medium Term Notes, 7.07%, 7.96% and 7.875%		40,000			—		—		15,000
	Natural Gas Transition Bonds, 6.20%		52,244			3,926		4,364		13,508
	8.45% mandatorily redeemable preferred securities of subsidiary trust		65,000			—		—		—
	Discount on Bonds		(3,488	)		—		—		—
*Nonrecourse Debt:*
Montana Megawatts facility, LIBOR + 1.50%⁽¹⁾⁽²⁾			54,061			54,061		—		—
CornerStone facility⁽³⁾			10,700			10,700		—		—
Expanets facility⁽⁴⁾			97,835			97,835		—		—
Other debt, various			27,958			1,913		1,064		25,400
*Capital and Operating Leases:*
Capital leases			17,825			6,536		4,209		7,076
Future minimum operating lease payments			303,014			50,111		46,480		106,580
*Mandatorily Redeemable Preferred Securities of Subsidiary Trusts:*
8.125% mandatorily redeemable preferred securities of subsidiary trust			32,500			—		—		—
7.20% mandatorily redeemable preferred securities of subsidiary trust			55,000			—		—		—
8¹/4% mandatorily redeemable preferred securities of subsidiary trust			106,750			—		—		—
8.10% mandatorily redeemable preferred securities of subsidiary trust			111,000			—		—		—

	Total⁽⁵⁾	$	2,441,273		$	380,082	$	71,117	$	382,950

			Three months ended March 31, 2002
			HVAC (Blue Dot)			(in thousands) Communications (Expanets)			Total
Income (loss) before minority interests			$	(2,432	)	$	(6,501)	⁽¹⁾	$	(8,933	)
	Preferred dividends			(9,082	)		(10,565	)		(19,647	)
	Management fees			(1,232	)		(1,050	)		(2,282	)

		Net income (loss) available to common equity holders	$	(12,746	)	$	(18,116	)	$	(30,862	)

Income (loss) allocation to shareholders:
	NorthWestern		$	(8,984	)	$	(6,964	)	$	(15,948	)
	Minority interests			(3,762	)		(11,152	)		(14,914	)

	Total		$	(12,746	)	$	(18,116	)	$	(30,862	)

	NORTHWESTERN CORPORATION (Registrant)
Date: September 20, 2002	/s/ KIPP D. ORME Kipp D. Orme Vice President — Finance Chief Financial Officer