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Black Hills Proposes 'Strategic' Merger with NorthWestern Energy

Two South Dakota-based energy holding companies that have struggled at times in recent years are in play for a "strategic combination" proposed by Black Hills Corp. in a stock-for-stock merger with NorthWestern Corp.

NorthWestern emerged from Chapter 11 bankruptcy a year ago and has been the target of a hostile bid from a public sector coalition of cities in Montana, where it provides natural gas and electric retail utility services to most of the state. The proposal was outlined in a letter dated Nov. 21 from Black Hills' CEO to the CEO at NorthWestern and made public late last Wednesday before the Thanksgiving holiday.

Working out a definitive agreement on conditions, due diligence by both sides, and ultimately state and federal regulatory approvals, all will be needed before the companies could be merged, assuming NorthWestern's board gives its approval to pursue the offer. It's a deal potentially worth up to $1.25 billion.

The proposed merged company would have nearly 700,000 electric and natural gas utility customers in four states (South Dakota, Montana, Wyoming and Nebraska) and merchant energy and electricity investments in various other states. Black Hills senior executives said they intend to talk with regulators and community leaders in the four states in which utility operations are involved.

NorthWestern announced that its board would review the proposal before deciding whether to start negotiations with Black Hills. The offer stated a range of $33 to $35/share to NorthWestern shareholders with the precise amount to be determined "after mutual due diligence in conjunction with the requested negotiations," Sioux Falls, SD-based NorthWestern said in its prepared statement.

"The company's board, consistent with its fiduciary duties and in consultation with its financial advisor and legal counsel will meet to review and evaluate the Black Hills proposal and other potential strategic alternatives," NorthWestern's spokesperson said.

Black Hills said that NorthWestern shareholders would receive Black Hills stock based upon the implied exchange value of between $33 and $35/share, or what it called a 13% to 20% premium based on NorthWestern's closing stock price of $29.15 last Wednesday. (Black Hills closed Wednesday at $37.36/share, down 53 cents.)

Black Hills said that it would consider paying a part of the consideration in cash; based on 35.7 million NorthWestern shares outstanding, the total equity value of the transaction to NorthWestern stockholders would range between $1.178 billion and $1.25 billion. Black Hills CEO David Emery outlined the proposal in a letter to Michael Hanson, NorthWestern CEO, and Linn Draper, board chairman.

"We felt compelled to make out interest in NorthWestern known after witnessing public overtures from another potential buyer and the strong support for a sale of the company from NorthWestern stockholders, " Emery said. "We believe our proposal represents a full and fair price for NorthWestern stockholders and represents a high certainty of successful execution."

For several months, NorthWestern's board has been urged by the Montana public sector coalition to consider its offer, but the board finally formally spurned the deal last month.

Emery told NorthWestern's CEO and board chairman that the "increased scale" of the combined companies will provide what he called "meaningful operating, financial and strategic benefits" to both of the companies' shareholders, particularly the consolidation of the two companies' utility operations. NorthWestern serve 617,000 customers in Montana, South Dakota and Nebraska. Black Hills is a vertically integrated energy and utility holding company based in Rapid City, SD, has 62,000 retail utility customers in South Dakota, Wyoming and Montana, and substantial merchant wholesale energy operations.

Earlier this month, Black Hills reported a third quarter loss of $23.9 million, or 73 cents/share, compared to net income of $17.1 million, or 52 cents/share, for the same period last year. For the nine months of 2005 ended Sept. 30, the company showed a profit of $6.6 million, or 20 cents/share, compared with $38.2 million, or $1.17/share, for the first nine months of 2004.

In contrast, NorthWestern reversed red ink from last year and reported operating profits of $9.3 million, or 26 cents/share, for the third quarter of this year, compared to a $25.2 million loss for the same period in 2004. On a consolidated basis for the first nine months this year, the company earned $34.1 million, or 96 cents/share, compared with a loss of $27.4 million for the same period last year.

"We are eager to move forward with our proposed combination with NorthWestern, and we invite NorthWestern's stockholders, who are interested in such a combination to share their views with their company's management and directors," Emery said. Ultimately the combination's success, he said, will depend upon the combined company's ability to work "as partners" with various state regulators and community leaders.

Black Hills is being advised by Lehman Brothers, and Morgan, Lewis & Bockius LLP is the company's legal advisor on the proposal.

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