10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)

x	ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2007
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 1-10499

NORTHWESTERN CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	46-0172280
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
3010 W. 69th Street, Sioux Falls, South Dakota	57108
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: 605-978-2900

Securities registered pursuant to Section 12(b) of the Act:

(Title of each class)	(Name of each exchange on which registered)
Common Stock, $0.01 par value	NASDAQ Global Select Market System

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes x No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes o No x

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 past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Large Accelerated Filer x           Accelerated Filer o           Non-accelerated Filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x

The aggregate market value of the voting and non-voting common stock held by nonaffiliates of the registrant was $1,219,000,000 computed using the last sales price of $34.35 per share of the registrant’s common stock on June 30, 2007, the last business day of the registrant’s most recently completed second fiscal quarter.

As of February 22, 2008, 38,972,551 shares of the registrant’s common stock, par value $0.01 per share, were outstanding.

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

Yes x No o

Documents Incorporated by Reference

Certain sections of our Proxy Statement for the 2008 Annual Meeting of Shareholders is incorporated by reference into Part III of this Form 10-K

INDEX
		Page
	Part I
Item 1.	Business	8
Item 1A.	Risk Factors	21
Item 1B.	Unresolved Staff Comments	24
Item 2.	Properties	24
Item 3.	Legal Proceedings	24
Item 4.	Submission of Matters to a Vote of Security Holders	24
	Part II
Item 5.	Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities	25
Item 6.	Selected Financial Data	27
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	53
Item 8.	Financial Statements and Supplementary Data	53
Item 9.	Changes In and Disagreements With Accountants on Accounting and Financial Disclosure	54
Item 9A.	Controls and Procedures	54
Item 9B.	Other Information	54
	Part III
Item 10.	Directors, Executive Officers and Corporate Governance	55
Item 11.	Executive Compensation	55
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters	55
Item 13 .	Certain Relationships and Related Transactions, and Director Independence	55
Item 14.	Principal Accounting Fees and Services	55
	Part IV
Item 15.	Exhibits, Financial Statement Schedules	56
Signatures		61
Index to Financial Statements		F -1

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

Words or phrases such as “anticipates," “may," “will," “should," “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 believe such statements are based on reasonable assumptions, including without limitation, management's examination of historical operating trends, data contained in records and other data available from third parties, we cannot assure you that our projections will be achieved. Factors that may cause such differences include, but are not limited to:

• our ability to avoid or mitigate adverse rulings or judgments against us in our pending litigation;

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

• unscheduled generation outages or forced reductions in output, maintenance or repairs, which may reduce revenues and increase cost of sales or may require additional capital expenditures or other increased operating costs;

• adverse changes in general economic and competitive conditions in our service territories; and

• potential additional adverse federal, state, or local legislation or regulation or adverse determinations by regulators could have a material adverse effect on our liquidity, results of operations and financial condition.

We have attempted to identify, in context, certain of the factors that we believe may cause actual future experience and results to differ materially from our current expectation regarding the relevant matter or subject area. In addition to the items specifically discussed above, our business and results of operations are subject to the uncertainties described under the caption “Risk Factors" which is part of the disclosure included in Part I, Item 1A of this Report.

From time to time, oral or written forward-looking statements are also included in our reports on Forms 10-K, 10-Q and 8-K, Proxy Statements on Schedule 14A, press releases, analyst and investor conference calls, and other communications released to the public. Although we believe that at the time made, the expectations reflected in all of these forward-looking statements are and will be reasonable, any or all of the forward-looking statements in this Annual Report on Form 10-K, our reports on Forms 10-Q and 8-K, our Proxy Statements on Schedule 14A and any other public statements that are made by us may prove to be incorrect. This may occur as a result of assumptions, which turn out to be inaccurate or as a consequence of known or unknown risks and uncertainties. Many factors discussed in this Annual Report on Form 10-K, certain of which are beyond our control, will be important in determining our future performance. Consequently, actual results may differ materially from those that might be anticipated from forward-looking statements. In light of these and other uncertainties, you should not regard the inclusion of a forward-looking statement in this Annual Report on Form 10-K or other public communications that we might make as a representation by us that our plans and objectives will be achieved, and you should not place undue reliance on such forward-looking statements.

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

Unless the context requires otherwise, references to “we," “us," “our," “NorthWestern Corporation," “NorthWestern Energy" and “NorthWestern" refer specifically to NorthWestern Corporation and its subsidiaries. “Predecessor Company" refers to us prior to emergence from bankruptcy (operations prior to October 31, 2004). “Successor Company" refers to us after emergence from bankruptcy (operations after November 1, 2004).

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GLOSSARY

Allowance for Funds Used During Construction (AFUDC) - An accounting convention prescribed by the Federal Energy Regulatory Commission that represents the estimated composite interest costs of debt and a return on equity funds used to finance construction. The allowance is capitalized in the property accounts and included in income.

Ancillary Services - These services ensure reliability and support the transmission of electricity from generation sites to customer loads. Such services may include: load regulation, spinning reserve, non-spinning reserve, replacement reserve, and voltage support.

Base-Load - The minimum amount of electric power or natural gas delivered or required over a given period of time at a steady rate. The minimum continuous load or demand in a power system over a given period of time usually is not temperature sensitive.

Base-Load Capacity - The generating equipment normally operated to serve loads on an around-the-clock basis.

Cushion Gas - The natural gas required in a gas storage reservoir to maintain a pressure sufficient to permit recovery of stored gas.

Deregulation - In the energy industry, the process by which regulated markets become competitive markets, giving customers the opportunity to choose their energy supplier.

Environmental Protection Agency (EPA) - A Federal agency charged with protecting the environment.

Federal Energy Regulatory Commission (FERC) - The Federal agency that has jurisdiction over interstate electricity sales, wholesale electric rates, hydroelectric licensing, natural gas transmission and related services pricing, oil pipeline rates and gas pipeline certification.

Franchise - A special privilege conferred by a unit of state or local government on an individual or corporation to occupy and use the public ways and streets for benefit to the public at large. Local distribution companies typically have exclusive franchises for utility service granted by state or local governments.

Hedging - Entering into transactions to manage various types of risk (e.g. commodity risk).

Hinshaw Exemption - A pipeline company (defined by the Natural Gas Act and exempted from FERC jurisdiction under the NGA) defined as a regulated company engaged in transportation in interstate commerce, or the sale in interstate commerce for resale, of natural gas received by that company from another person within or at the boundary of a state, if all the natural gas so received is ultimately consumed within such state. A Hinshaw pipeline may receive a certificate authorizing it to transport natural gas out of the state in which it is located, without giving up its status as a Hinshaw pipeline.

Independent Systems Operator (ISO) - An entity that has been granted the authority by multiple utilities to operate in a non-discriminatory manner all the transmission assets of a fixed geographic area.

Lignite Coal - The lowest rank of coal, often referred to as brown coal, used almost exclusively as fuel for steam-electric power generation. It has a high inherent moisture content, sometimes as high as 45 percent. The heat content of lignite ranges from 9 to 17 million Btu per ton on a moist, mineral-matter-free basis.

Mid-Columbia Electricity Price Index (Mid-C) – An electric pricing index of volume-weighted averages of specifically defined bilateral, wholesale, physical transactions. Calculations for these indexes average power transactions from Columbia, Midway, Rocky Reach, Wells, and Wanapum/Vantage, delivery points along the Columbia River.

Midcontinent Area Power Pool (MAPP) - A voluntary association of electric utilities and other electric industry participants that acts as a regional transmission group, responsible for facilitating open access of the transmission system and a generation reserve sharing pool which provides efficient and available generation to meet regional demand.

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Montana Consumer Counsel (MCC) - A Montana state constitution established advocate for public utility and transportation consumers, which represents them before the Public Service Commission, state and federal courts, and administrative agencies in matters concerning public utility regulation.

Montana Public Service Commission (MPSC) - The state agency that regulates public utilities doing business in Montana.

Nebraska Public Service Commission (NPSC) - The state agency that regulates public utilities doing business in Nebraska.

Open Access - Non-discriminatory, fully equal access to transportation or transmission services offered by a pipeline or electric utility.

Open Season - A period of time in which potential customers can bid for services, and during which such customers are treated equally regarding priority in the queue for service.

Peak Load - A measure of the maximum amount of energy delivered at a point in time.

Qualifying Facility (QF) - As defined under the Public Utility Regulatory Policies Act of 1978, a QF sells power to a regulated utility at a price determined by a public service commission that is intended to be equal to that which the utility would otherwise pay if it were to build its own power plant or buy power form another source.

Regional Transmission Organization (RTO) - An independent entity, which is established to have “functional control" over utilities' transmission systems, in order to expedite transmission of electricity. RTO's typically operate markets within their territories.

Securities and Exchange Commission (SEC) - The U.S. agency charged with protecting investors, maintaining fair, orderly and efficient markets and facilitating capital formation.

South Dakota Public Utilities Commission (SDPUC) - The state agency that regulates public utilities doing business in South Dakota.

Sub-bituminous coal -- A coal whose properties range from those of lignite to those of bituminous coal and used primarily as fuel for steam-electric power generation. Sub-bituminous coal contains 20 to 30 percent inherent moisture by weight. The heat content of sub-bituminous coal ranges from 17 to 24 million Btu per ton on a moist, mineral-matter-free basis.

Tariffs - A collection of the rate schedules and service rules authorized by a federal or state commission. It lists the rates the regulated entity will charge to provide service to its customers as well as the terms and conditions that it will follow in providing service.

Test Period - In a rate case, a test period is used to determine the cost of service upon which the utility's rates will be based. A test period consists of a base period of twelve consecutive months of recent actual operational experience, adjusted for changes in revenues and costs that are known and are measurable with reasonable accuracy at the time of the rate filing and which will typically become effective within nine months after the last month of actual data utilized in the rate filing.

Tolling Arrangement - An arrangement whereby a party moves fuel to a power generator and receives kilowatt hours (kWh) in return for a pre-established fee.

Transition Costs - Out of market energy costs associated with the change of an industry from a regulated, bundled service to a competitive open-access service.

Transmission - Transmission or transportation is the flow of electricity from generating stations over high voltage lines to substations. The electricity then flows from the substations into a distribution network.

Western Area Power Administration (WAPA) - One of five federal power-marketing administrations and electric transmission agencies established by Congress.

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Measurements:

British Thermal Unit (Btu) - a basic unit used to measure natural gas; the amount of natural gas needed to raise the temperature of one pound of water by one degree Fahrenheit.

Degree Day - A measure of the coldness / warmness of the weather experienced, based on the extent to which the daily mean temperature falls below or above a reference temperature.

Dekatherm - A measurement of natural gas; ten therms or one million Btu.

Kilovolt (kV) - A unit of electrical power equal to one thousand volts.

Megawatt (MW) - A unit of electrical power equal to one million watts or one thousand kilowatts.

Megawatt Hour (MWH) - One million watt-hours of electric energy. A unit of electrical energy which equals one megawatt of power used for one hour.

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Part I

 

ITEM 1. BUSINESSES

OVERVIEW

NorthWestern Corporation, doing business as Northwestern Energy, provides electricity and natural gas to approximately 650,000 customers in Montana, South Dakota and Nebraska. We have generated and distributed electricity in South Dakota and distributed natural gas in South Dakota and Nebraska since 1923 and have distributed electricity and natural gas in Montana since 2002.

We were incorporated in Delaware in November 1923. Our principal office is located at 3010 W. 69^th Street, Sioux Falls, South Dakota 57108 and our telephone number is (605) 978-2900. We maintain an Internet site at http://www.northwesternenergy.com. Our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and amendments to such reports filed or furnished pursuant to section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended, along with our annual report to shareholders and other information related to us are available, free of charge, on this site as soon as reasonably practicable after we electronically file those documents with, or otherwise furnish them to, the SEC. Our Internet Website and those of our subsidiaries and the information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K and should not be considered a part of this Annual Report on Form 10-K.

We operate our business in the following reporting segments:

• regulated electric operations;

• regulated natural gas operations;

• unregulated electric operations;

• all other, which primarily consists of our remaining unregulated natural gas operations and our unallocated corporate costs. During 2007 we changed our management of the unregulated natural gas segment, moved certain customers to our regulated natural gas segment and sold several customer contracts; therefore, the unregulated natural gas operations are no longer reported separately.

REGULATED ELECTRIC OPERATIONS

MONTANA

Our regulated electric utility business consists of an extensive electric transmission and distribution network. Our service territory covers approximately 107,600 square miles, representing approximately 73% of Montana's land area, and includes a population of approximately 786,000 according to the 2000 census. We deliver electricity to approximately 328,000 customers in 187 communities and their surrounding rural areas, 15 rural electric cooperatives and in Wyoming to the Yellowstone National Park. In 2007, by category, residential, commercial and industrial, and other sales accounted for approximately 36%, 52%, and 12% of our Montana regulated electric utility revenue, respectively. We also transmit electricity for nonregulated entities owning generation facilities, other utilities and power marketers serving the Montana electricity market. The total control area peak demand was approximately 1,724 MWs, the average daily load was approximately 1,186 MWs, and more than 10.4 million MWHs were supplied during the year ended December 31, 2007.

Our Montana electric transmission system consists of approximately 7,000 miles of transmission lines, ranging from 50 to 500 kV, 272 circuit segments and approximately 125,000 transmission poles with associated transformation and terminal facilities, and extends throughout the western two-thirds of Montana from Colstrip in the east to Thompson Falls in the west. Our 500 kV transmission system, which is jointly owned, 230 kV and 161 kV facilities form the key assets of our Montana transmission system. Lower voltage systems, which range from 50 kV to 115 kV, provide for local area service needs. The system has interconnections with five major nonaffiliated transmission systems located in the Western Electricity Coordinating Council (WECC) area, as well as one interconnection to a nonaffiliated system that connects with the Mid-Continent Area Power Pool region. With these interconnections, we transmit power to and from diverse interstate transmission systems, including those operated by Avista Corporation; Idaho Power Company; PacifiCorp; the Bonneville

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Power Administration; and the Western Area Power Administration.

Our Montana electric distribution system consists of approximately 21,000 miles of overhead and underground distribution lines and approximately 335 transmission and distribution substations.

Electric Supply

Currently, we own no regulated generation assets in Montana. Accordingly, we purchase substantially all of our Montana capacity and energy requirements for electric supply from third parties. Our annual electric supply load requirements are slightly in excess of 700 average MWs. We currently have under contract approximately 94 percent of the energy requirements necessary to meet our projected load requirements through June 30, 2008, with approximately 96 percent at fixed prices. For the period July 1, 2008 through June 30, 2009, we have under contract approximately 73 percent of our projected load requirements, with approximately 96 percent at fixed prices. Remaining customer load requirements are met with market purchases. Specifically, we have a seven year power purchase agreement with PPL Montana for 325 MWs of on-peak supply and 175 MWs of off-peak supply through June 2010 and decreasing volumes thereafter through June 2014. Our jointly owned interest in Colstrip Unit 4 supplies 90 MWs of unit-contingent, base-load energy for a term of 11.5 years, which commenced on July 1, 2007, to meet a portion of our electric supply requirements and, in a separate agreement 21 MWs of unit contingent power for 76 months beginning March 2008. We also purchase power under several QF contracts entered into under the Public Utility Regulatory Policies Act of 1978, which provide a total of 101 MWs of capacity. We have several other long and medium-term power purchase agreements including contracts for 135 MWs of wind generation and 5 MWs of seasonal base-load hydro supply. In December 2007, we filed a biennial Electric Default Supply Resource Procurement Plan with the MPSC which will guide future resource acquisition activities.

Our electric supply purchases are being recovered through an electricity cost tracking process pursuant to which rates are adjusted on a monthly basis for electricity loads and electricity costs for the upcoming 12-month period. On an annual basis, rates are adjusted to include any differences in the previous tracking year's actual to estimated information, for recovery in the subsequent tracking year. The MPSC reviews the prudency of our energy supply procurement activities as part of the annual tracking filing.

FERC Regulation

We are subject to the jurisdiction of, and regulation by, the FERC with respect to rates for electric transmission service in interstate commerce and electricity sold at wholesale rates, the issuance of securities, incurrence of certain long-term debt, and compliance with mandatory reliability regulations.

In Montana, we sell transmission service across our system under terms, conditions and rates defined in our Open Access Transmission Tariff (OATT), on file with FERC. We are required to provide retail transmission service in Montana under tariffs for customers still receiving “bundled" service and under the OATT for “choice" customers and other wholesale transmission customers such as cooperatives. In 2007, FERC issued Order No. 890, Preventing Undue Discrimination and Preference in Transmission Service (Order 890). FERC Order 890 contained many changes to the OATT, and a number of items which all FERC jurisdictional entities, including us, were to comply with under various time frames defined by Order 890. We met or have approved mitigation plans for each of the compliance tasks by the dates specified by FERC. In 2008, FERC expects the North American Electric Reliability Corporation (NERC) and the North American Energy Standards Board to further define and develop business practices and changes to the Open Access Same-time Information System (OASIS), which will allow for further transparency and nondiscriminatory use of the transmission system. We intend to participate in the processes under which these standards and business practices are developed, and will ultimately be subject to them once they are complete.

The Area Control Error Diversity Interchange (ADI) between the Idaho Power Company, PacifiCorp and our control areas was implemented during the first quarter of 2007. The ADI effort is expected to improve our ability to satisfy NERC required reliability criteria. Other entities in the Northwest and Southwest regions of the WECC may be joining this effort in the second quarter of 2008.

Under an agreement beginning in 2005, Idaho Power Company (Idaho Power) sold regulating reserve service to us, which in turn we used to provide service under Schedule 3 (Regulation and Frequency Response) to our customers under our OATT. Idaho Power terminated the agreement as of December 31, 2007. Upon completion of a competitive RFP process, we entered into one-year agreements with Avista Utilities and Powerex to replace the Idaho Agreement, which will allow us to

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balance loads and resources within our balancing authority area on a moment-to-moment basis and to provide Schedule 3 service under our Montana OATT. Both agreements have been approved by the FERC. We are in the process of conducting an RFP for services beyond 2008. Our tariffs allow for pass-through of ancillary costs, including the regulating reserve described above.

In October 2006, we submitted a filing with FERC requesting an increase in transmission rates in Montana under our OATT. While the request is due to an increase in overall transmission costs, the rate adjustment pertains only to wholesale transmission and retail choice customers. Therefore, the portion of the requested cost increase pertaining to the remaining Montana retail customer electric supply loads, which represents approximately 70% of this increase, is subject to MPSC jurisdictional rates.

We also requested certain changes to the tariff, most notably, changing network service to a stated rate instead of a load ratio share-based charge and the inclusion of a new schedule for generation imbalance service. In December 2006, FERC issued an initial order approving our proposal to convert from load ratio share to a stated rate. The FERC accepted our proposed revisions for filing, and suspended them until May 18, 2007, at which time the rates were implemented, subject to refund. The FERC also set the proposed revisions for hearing and settlement judgment procedures. We filed settlement documents on February 15, 2008 and are awaiting FERC approval, which is expected during the first half of 2008.

MPSC Regulation

Our Montana operations are subject to the jurisdiction of the MPSC with respect to rates, terms and conditions of service, accounting records, electric service territorial issues and other aspects of our operations, including when we issue, assume, or guarantee securities in Montana, or when we create liens on our regulated Montana properties.

In July 2007, we filed a request with the MPSC for an electric transmission and distribution revenue increase of $31.4 million. In December 2007, we and the MCC filed a joint Stipulation and Agreement (Stipulation) regarding the rate filing. Specific terms of the Stipulation include:

• An increase in base electric rates of $10 million;

• Interim rates effective January 1, 2008;

• Capital investment in our electric and natural gas system totaling $38.8 million to be completed in 2008 and 2009 on which we will not earn a return on, but will recover depreciation expense;

• A commitment of 21 MWs of unit contingent power from Colstrip Unit 4 at Mid-C minus $19 per MWH to electric supply for a period of 76 months beginning March 1, 2008; and

• We will submit a general electric and natural gas rate filing no later than July 31, 2009 based on a 2008 test year.

The MPSC has approved interim rates, subject to refund, beginning January 1, 2008, and we anticipate finalizing the rate case during the second quarter of 2008.

Montana's Electric Utility Industry Restructuring and Customer Choice Act was passed in 1997, which provided for deregulation and allowed for customer choice and competition among suppliers. During 2007, the Montana legislature passed House Bill 25 (HB 25), labeled The Generation Reintegration Act, which became effective October 1, 2007. This bill largely removes the remaining remnants of deregulation from Montana Law that began in 1997 by eliminating customer choice for all customers except for the largest industrial customers using more than five MWs, and providing utilities with the ability to build and own electric generation assets that would be included in utility cost of service. In addition, the bill provides for a timely upfront approval process for electricity supply resource projects and requires carbon offsets to reduce carbon dioxide emissions.

SOUTH DAKOTA

Our South Dakota electric utility business operates as a vertically integrated generation, transmission and distribution utility. We have the exclusive right to serve an area in South Dakota comprised of 25 counties with a combined population of approximately 99,900 according to the 2000 census. We provide retail electricity to more than 60,100 customers in 110 communities in South Dakota. In 2007, by category, residential, commercial and industrial, wholesale, and other sales accounted for approximately 38%, 53%, 5% and 4% of our South Dakota electric utility revenue, respectively. Currently, we serve these customers principally from generation capacity obtained through our joint ownership interests in three base-load generation plants and other peaking facilities that provide us with 312 MWs of demonstrated capacity. In addition, we have contracted capacity with MidAmerican Energy Company (MidAmerican) for an additional 50 MWs. Peak demand was

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approximately 317 MWs, the average daily load was approximately 154 MWs, and more than 1.35 million MWHs were supplied during the year ended December 31, 2007. We use market purchases and internal peaking generation to provide peak supply in excess of our base-load capacity.

Residential, commercial and industrial services are generally bundled packages of generation, transmission, distribution, meter reading, billing and other services. In addition, we provide wholesale transmission of electricity to a number of South Dakota municipalities, state government agencies and agency buildings. For these wholesale sales, we are responsible for the transmission of contracted electricity to a substation or other distribution point, and the purchaser is responsible for further distribution, billing, collection and other related functions. We also provide sales of electricity to resellers, primarily including power pools or other utilities. Sales to power pools fluctuate from year to year depending on a number of factors, including the availability of excess short-term generation and the ability to sell excess power to other utilities in the power pool.

Our transmission and distribution network in South Dakota consists of approximately 3,200 miles of overhead and underground transmission and distribution lines as well as 120 substations. We have interconnection and pooling arrangements with the transmission facilities of Otter Tail Power Company; Montana-Dakota Utilities Co.; Xcel Energy, Inc.; and the Western Area Power Administration. We have emergency interconnections with the transmission facilities of East River Electric Cooperative, Inc. and West Central Electric Cooperative. These interconnection and pooling arrangements enable us to arrange purchases or sales of substantial quantities of electric power and energy with other pool members and to participate in the efficiency benefits of pool arrangements.

Direct competition does not presently exist within our South Dakota service territory for the supply and delivery of electricity, except with regard to certain new large load customers with demand in excess of two MWs. The SDPUC, pursuant to the South Dakota Public Utilities Act, assigned the South Dakota service territory to us effective March 1976. Pursuant to that law, we have the exclusive right, other than as previously noted, to provide fully bundled services to all present and future electric customers within our assigned territory for so long as the service provided is adequate. There have been no allegations of inadequate service since assignment in 1976. The assignment of a service territory is perpetual under current South Dakota law.

Electric Supply

Most of the electricity that we supply to customers in South Dakota is generated by power plants that we own jointly with unaffiliated parties. In addition, we have several wholly owned peaking/standby generating units at seven locations throughout our service territory. Details of our generating facilities are described further in the chart below. Each of the jointly owned plants is subject to a joint management structure. We are not the operator of any of these plants. Except as otherwise noted, we are entitled to a proportionate share of the electricity generated in our jointly owned plants and are responsible for a proportionate share of the operating expenses, based upon our ownership interest. Most of the power allocated to us from these facilities is distributed to our South Dakota customers. During periods of lower demand, electricity in excess of our load requirements are sold in the competitive wholesale market. In 2007, this was approximately 10% of the power generated.

Name and Location of Plant	Fuel Source	Our Ownership Interest		Our Share of 2007 Peak Summer Demonstrated Capacity (MW)	% of Total 2007 Peak Summer Demonstrated Capacity
Big Stone Plant, located near Big Stone City in northeastern South Dakota	Sub-bituminous coal	23.4	%	108.95	34.8	%
Coyote I Electric Generating Station, located near Beulah, North Dakota	Lignite coal	10.0	%	42.70	13.7	%
Neal Electric Generating Unit No. 4, located near Sioux City, Iowa	Sub-bituminous coal	8.7	%	56.30	18.0	%
Miscellaneous combustion turbine units and small diesel units (used only during peak periods)	Combination of fuel oil and natural gas	100.0	%	104.73	33.5	%
Total Capacity				312.68	100.0	%

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MidAmerican provided 50 MWs of firm capacity during the summer months of 2007 and we have an agreement with them to supply firm capacity of 53 MWs and 56 MWs during the summer months of 2008 and 2009, respectively. MidAmerican has provided us notification that they will not extend the agreement beyond 2009 and we are currently analyzing other firm capacity resources to replace this contract. We are a member of the MAPP, which is an area power pool arrangement consisting of utilities and power suppliers having transmission interconnections located in a nine-state area in the North Central region of the United States and in two Canadian provinces. The terms and conditions of the MAPP agreement and transactions between MAPP members are subject to the jurisdiction of the FERC.

We have a resource plan that includes estimates of customer usage and programs to provide for economic, reliable and timely supply of energy. We continue to update our load forecast to identify the future electric energy needs of our customers, and we evaluate additional generating capacity requirements on an ongoing basis. This forecast shows customer peak demand growing modestly, which will result in the need to add peaking capacity in the future; however, we have adequate base-load generation capacity to meet customer supply needs through at least 2013. We are undergoing an evaluation of our needs for base-load supply beyond that point based on our current load forecast.

Coal was used to generate approximately 99% of the electricity utilized for South Dakota operations for the year ended December 31, 2007. Our natural gas and fuel oil peaking units provided the balance of generating capacity. We have no interests in nuclear generating plants. The fuel for our jointly owned base-load generating plants is provided through supply contracts of various lengths with several coal companies. Coyote is a mine-mouth generating facility. Neal #4 and Big Stone I receive their fuel supply via rail. Continuing upward pressure on coal prices and transportation costs could result in increases in costs to our customers due to mechanisms to recover fuel adjustments in our rates. The average cost, inclusive of transportation costs, by type of fuel burned is shown below for the periods indicated:

	Cost per Million Btu for the Year Ended December 31,						Percent of 2007 MW
Fuel Type	2007		2006		2005		Hours Generated
Sub-bituminous-Big Stone	$	1.55	$	1.49	$	1.43	45.57	%
Lignite-Coyote	1.06		0.96		0.85		21.47
Sub-bituminous-Neal	1.15		1.10		0.90		32.53
Natural Gas	7.41		7.17		8.49		0.22
Oil	13.11		15.38		7.52		0.21

During the year ended December 31, 2007, the average delivered cost per ton of fuel burned for our base-load plants was $25.49 at Big Stone I, $14.70 at Coyote and $16.39 at Neal #4. The average cost by type of fuel burned and delivered cost per ton of fuel varies between generation facilities due to differences in transportation costs and owner purchasing power for coal supply. Changes in our fuel costs are passed on to customers through the operation of the fuel adjustment clause in our South Dakota tariffs.

The Big Stone I facility currently burns sub-bituminous coal from the Powder River Basin delivered under a contract through 2010. Neal #4 also receives sub-bituminous coal from the Powder River Basin delivered under multiple firm and spot contracts with terms of up to several years in duration. The Coyote facility has a contract for the supply of lignite coal that expires in 2016 and provides for an adequate fuel supply for Coyote's estimated economic life.

The South Dakota Department of Environment and Natural Resources has given approval for Big Stone I to burn a variety of alternative fuels, including tire-derived fuel and refuse-derived fuel. In 2007, approximately 1.3% of the fuel consumption at Big Stone I was derived from alternative fuels.

Although we have no firm contract for the supply of diesel fuel or natural gas for our electric peaking units, we have historically been able to purchase diesel fuel requirements from local suppliers and have enough diesel fuel in storage to satisfy our current requirements. We have been able to use excess capacity from our natural gas operations as the fuel source for our gas peaking units.

We must pay fees to third parties to transmit the power generated at our Big Stone I, Coyote, and Neal #4 plants to our South Dakota transmission system. We have a 10-year agreement, expiring in 2011, with the Western Area Power Administration for transmission services, including transmission of electricity from Big Stone I and Neal #4 to our South Dakota service areas through seven points of interconnection on the Western Area Power Administration's system. Transmission services under this agreement, and our costs for such services, are variable and depend upon a number of

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factors, including the respective parties' system peak demand and the number of our transmission assets that are integrated into the Western Area Power Authority's system. In 2007, our costs for services under this contract totaled approximately $5.1 million. Our tariffs in South Dakota generally allow us to pass through these transmission costs to our customers.

FERC Regulation

Our South Dakota transmission operations underlie the MISO system and are part of the WAPA Control Area. The Coyote and Big Stone I power plants, of which we are a joint owner, are connected directly to the MISO system, and we have ownership rights in the transmission lines from these plants to our distribution system. We are not participating in the MISO markets that began operation on April 1, 2005, but continue to utilize WAPA to handle our scheduling and power marketing activities. We have negotiated a settlement as a grandfathered agreement with MISO and the other Big Stone I and Coyote power plant joint owners related to providing MISO with the information it needs to operate its system, while exempting us from assignment of MISO operational costs. We are working with the other non-MISO MAPP members in developing an Independent Transmission Services Coordinator. It is still intended for MISO to provide the reliability coordinator functions for MAPP.

SDPUC Regulation

Our South Dakota operations are subject to SDPUC jurisdiction with respect to rates, terms and conditions of service, accounting records, electric service territorial issues and other aspects of our operations. Our retail electric rates, approved by the SDPUC, provide several options for residential, commercial and industrial customers, including dual-fuel, interruptible, special all-electric heating, and other special rates, as well as various incentive riders to encourage business development. An adjustment clause provides for quarterly adjustment based on differences in the delivered cost of energy, delivered cost of fuel, ad valorem taxes paid and commission-approved fuel incentives. The adjustment goes into effect upon filing, and is deemed approved within 10 days after the information filing unless the SDPUC staff requests changes during that period.

REGULATED NATURAL GAS OPERATIONS

MONTANA

We distribute natural gas to approximately 177,000 customers located in 105 Montana communities. We also serve several smaller distribution companies that provide service to approximately 30,000 customers. Our natural gas distribution system consists of approximately 3,900 miles of underground distribution pipelines. We transmit natural gas in Montana from production receipt points and storage facilities to distribution points and other nonaffiliated transmission systems. We transported natural gas volumes of approximately 38 billion dekatherms, and our peak capacity was approximately 335 million dekatherms per day during the year ended December 31, 2007.

Our natural gas transmission system consists of more than 2,000 miles of pipeline, which vary in diameter from two inches to 20 inches, and serve more than 130 city gate stations. We have connections in Montana with five major, nonaffiliated transmission systems: Williston Basin Interstate Pipeline, NOVA Gas Transmission Ltd., Colorado Interstate Gas, Encana and Havre Pipeline. Seven compressor sites provide more than 42,000 horsepower, capable of moving more than 314 million dekatherms per day. In addition, we own and operate a pipeline border crossing through our wholly owned subsidiary, Canadian-Montana Pipe Line Corporation.

We own and operate three working natural gas storage fields in Montana with aggregate working gas capacity of approximately 16.2 billion dekatherms and maximum aggregate daily deliverability of approximately 195 million dekatherms. We own a fourth storage field that is no longer economically feasible as a working storage field and is being depleted at approximately 0.02 million dekatherms per day, with approximately 47 million dekatherms of remaining reserves as of December 31, 2007.

We have nonexclusive municipal franchises to transport and distribute natural gas in the Montana communities we serve. The terms of the franchises vary by community, but most are for 30 to 50 years. During the next five years, 17 of our municipal franchises, which account for approximately 77,000 customers, are scheduled to expire. Our policy is to seek renewal of a franchise in the last year of its term.

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Natural Gas Supply

Under an agreement with the MPSC, we supply natural gas to customers that have not chosen other suppliers. Our natural gas supply requirements are fulfilled through third-party fixed-term purchase contracts and short-term market purchases. Our portfolio approach to natural gas supply enables us to maintain a diversified supply of natural gas sufficient to meet our supply requirements. We benefit from direct access to suppliers in the major natural gas producing regions in the United States, primarily the Rockies (Colorado), Mid-Continent, Panhandle (Texas/Oklahoma), Montana, and Alberta, Canada. These suppliers also provide us with market insight, which assists us in making procurement decisions. Our Montana natural gas supply requirements for the year ended December 31, 2007, were approximately 19.2 million dekatherms. We have contracted with several major producers and marketers with varying contract durations to provide the necessary supply to meet ongoing requirements.

Similar to our electric supply in Montana, our gas supply purchases are recovered through a gas cost tracking process, which provides for the adjustment of rates on a monthly basis to reflect changes in gas prices. On an annual basis rates are adjusted to include any differences in the previous tracking year's actual to estimated information, for recovery in the subsequent tracking year. The MPSC reviews the prudency of our procurement activities as part of this annual tracking filing.

We filed a Biennial Natural Gas Procurement Plan (Gas Plan) in December 2006. This Gas Plan provides the MPSC the blueprint we will follow in procuring natural gas supply to meet our electric supply needs and reliability requirements and the implementation of hedging strategies to reduce price volatility. The next Gas Plan will be filed in December 2008.

FERC Regulation

FERC Order No. 636 requires that all companies with interstate natural gas pipelines separate natural gas supply and production services from interstate transportation service and underground storage services. The effect of the order was that natural gas distribution companies, such as us, and individual customers purchase natural gas directly from producers, third parties and various gas-marketing entities and transport it through interstate pipelines. We have established transportation rates on our transmission and distribution systems to allow customers to have supply choices. Our transportation tariffs have been designed to make us economically indifferent as to whether we sell and transport natural gas or merely deliver it for the customer.

Our natural gas transportation pipelines are generally not subject to the jurisdiction of the FERC, although we are subject to state regulation. We conduct limited interstate transportation in Montana that is subject to FERC jurisdiction, but through a Hinshaw Exemption the FERC has allowed the MPSC to set the rates for this interstate service.

MPSC Regulation

Our Montana operations are subject to the jurisdiction of the MPSC with respect to natural gas rates, terms and conditions of service, accounting records, and other aspects of its operations.

In July 2007, we filed a request with the MPSC for a natural gas transmission, storage and distribution revenue increase of $10.5 million. In December 2007, we and the MCC filed a joint Stipulation regarding the rate filing. The specific terms of the Stipulation include an increase in base natural gas rates of $5 million. The remaining terms of the Stipulation are discussed above in the MPSC regulation section related to our Montana electric operations.

SOUTH DAKOTA AND NEBRASKA

We provide natural gas to approximately 84,500 customers in 60 South Dakota communities and four Nebraska communities. We have approximately 2,200 miles of distribution gas mains in South Dakota and Nebraska. In South Dakota, we also transport natural gas for five gas-marketing firms and two large end-user accounts, currently serving 85 customers through our distribution systems. In Nebraska, we transport natural gas for three gas-marketing firms and one end-user account, servicing eight customers through our distribution system. We delivered approximately 15.2 million dekatherms of third-party transportation volume on our South Dakota distribution system and approximately 2.1 million dekatherms of third-party transportation volume on our Nebraska distribution system during 2007.

We have nonexclusive municipal franchises to purchase, transport and distribute natural gas in the South Dakota and Nebraska communities we serve. The maximum term permitted under Nebraska law for these franchises is 25 years while the

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maximum term permitted under South Dakota law is 20 years. Our policy is to seek renewal of a franchise in the last year of its term. During the next five years, 30 of our South Dakota and Nebraska municipal franchises, which account for approximately 53,300 customers, are scheduled to expire.

In South Dakota and Nebraska, we are subject to competition for natural gas supply. In addition, competition currently exists for commodity sales to large volume customers and for delivery in the form of system by-pass, alternative fuel sources such as propane and fuel oil and, in some cases, duplicate providers. We do not face material competition from alternative natural gas supply companies in the communities we serve in South Dakota and Nebraska.

Competition in the natural gas industry may result in the further unbundling of natural gas services. Separate markets may emerge for the natural gas commodity, transmission, distribution, meter reading, billing and other services currently provided by utilities. At present, it is unclear when or to what extent further unbundling of utility services will occur.

Natural gas is used primarily for residential and commercial heating. As a result, the demand for natural gas depends upon weather conditions. Natural gas is a commodity that is subject to market price fluctuations. Purchase adjustment clauses contained in South Dakota and Nebraska tariffs allow us to pass through increases or decreases in gas supply and interstate transportation costs on a timely basis, so we are generally allowed to pass these changes in natural gas prices through to our customers.

Natural Gas Supply

Our South Dakota natural gas supply requirements for the year ended December 31, 2007, were approximately 5.2 million dekatherms. We have contracted with Tenaska Marketing Ventures, Inc. in South Dakota to manage transportation, storage and procurement of supply in order to minimize cost and price volatility to our customers.

Our Nebraska natural gas supply requirements for the year ended December 31, 2007, were approximately 5.2 million dekatherms. Our Nebraska natural gas supply, storage and pipeline requirements are fulfilled primarily through a third-party contract with ONEOK Energy Services Co.

To supplement firm gas supplies in South Dakota and Nebraska, we also contract for firm natural gas storage services to meet the heating season and peak day requirements of our natural gas customers. We also maintain and operate two propane-air gas peaking units with a peak daily capacity of approximately 6,400 dekatherms. These plants provide an economic alternative to pipeline transportation charges to meet the peaks caused by customer demand on extremely cold days.

FERC Regulation

Our natural gas transportation pipelines are generally not subject to the jurisdiction of the FERC, although we are subject to state regulation. We have capacity agreements with interstate pipelines that are subject to FERC jurisdiction.

SDPUC Regulation

Our South Dakota operations are subject to the jurisdiction of the SDPUC with respect to rates, terms and conditions of service, accounting records and other aspects of our natural gas distribution operations in South Dakota. A purchased gas adjustment provision in our natural gas rate schedules permits the monthly adjustment of charges to customers to reflect increases or decreases in purchased gas, gas transportation and ad valorem taxes.

Our retail natural gas tariffs, approved by the SDPUC, include gas transportation rates for transportation through our distribution systems by customers and natural gas marketers from the interstate pipelines at which our systems take delivery to the end-user's premises. Such transporting customers nominate the amount of natural gas to be delivered daily and telemetric equipment installed for each customer monitors daily usage.

In June 2007, we filed a request with the SDPUC for a natural gas distribution revenue increase of $3.7 million. In December 2007, the SDPUC approved our settlement with SDPUC Staff related to our natural gas rate case, granting an annual revenue increase of approximately $3.1 million.

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NPSC Regulation

Our natural gas rates and terms and conditions of service for residential and smaller commercial customers are regulated in Nebraska by the NPSC. High volume customers are not subject to such regulation but can file complaints if they allege discriminatory treatment. Under the State Natural Gas Regulation Act, for a regulated natural gas utility to propose a change in rates to its regulated customers, it is required to file an application for a rate increase with the NPSC and with the communities in which it serves customers. The utility may negotiate with those communities for a settlement with regard to the rate change, or it may proceed to have the NPSC review the filing and make a determination.

Since enactment of the State Natural Gas Regulation Act, our initial tariffs, representing rates in effect at the time the law was approved, have been accepted by the NPSC, and the NPSC has adopted certain rules governing the terms and conditions of service of regulated natural gas utilities. Our retail natural gas tariffs provide residential, general service and commercial and industrial options, as well as firm and interruptible transportation service. A purchased gas adjustment clause provides for adjustments based on changes in gas supply and interstate pipeline transportation costs.

In June 2007, we filed a request with the NPSC for a natural gas distribution revenue increase of $2.8 million. We and the cities chose the process described above whereby we can negotiate the settlement directly with the cities regarding the outcome of the rate case. In November, a settlement was reached between us and the cities resulting in an annual revenue increase of approximately $1.5 million. The NPSC issued an order in December approving the settlement.

UNREGULATED ELECTRIC OPERATIONS

We have a 30% interest in Colstrip Unit 4, a 740 MW demonstrated-capacity coal-fired power plant located in southeastern Montana. Our interest represents approximately 222 MWs at full load, and was historically a leased interest; however, during 2007 we purchased our leased interest for approximately $145.2 million, plus the assumption of $53.7 million of debt.

We sell the majority of our generation from Colstrip Unit 4 to Puget Sound Energy (Puget) and DB Energy Trading, LLC, (DB) under agreements expiring on December 29, 2010. When operating at full contract capacity, we deliver 97 MWs to Puget and 111 MWs to DB plus losses. We have a separate agreement with DB to repurchase 111 MWs through December 2010, which has been committed to supply a portion of the Montana electric supply load.

We currently have approximately 111 MWs of uncommitted base-load capacity after December 31, 2010. Due to the base-load nature of this capacity and the fact that the northwestern region of the United States is projected to be “short" of base-load capacity in 2010, we do not believe that we have a material financial risk arising from this merchant capacity. In January 2008, we retained a financial advisor to assist us in evaluating our strategic options with respect to our interest in Colstrip Unit 4.

A long-term coal supply contract with Western Energy Company provides the coal necessary to run the Colstrip facility.

SEASONALITY AND CYCLICALITY

Our electric and gas utility businesses are seasonal businesses, and weather patterns can have a material impact on their operating performance. Because natural gas is used primarily 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 for cooling and heating, respectively. 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, these weather patterns could adversely affect our results of operations and financial condition.

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ENVIRONMENTAL

Environmental laws and regulations are continually evolving, and, therefore, the character, scope, cost and availability of the measures we may be required to take to ensure compliance with evolving laws or regulations cannot be accurately predicted. The range of exposure for environmental remediation obligations at present is estimated to range between $19.8 million to $57.0 million. As of December 31, 2007, we have a reserve of approximately $32.7 million. We anticipate that as environmental costs become fixed and reliably determinable, we will seek insurance reimbursement and/or authorization to recover these in rates; therefore, we do not expect these costs to have a material adverse effect on our consolidated financial position, ongoing operations, or cash flows.

The Clean Air Act Amendments of 1990 and subsequent amendments stipulate limitations on sulfur dioxide and nitrogen oxide emissions from coal-fired power plants. We comply with these existing emission requirements through purchase of sub-bituminous coal, and we believe that we are in compliance with all presently applicable environmental protection requirements and regulations with respect to these plants.

Coal-Fired Plants

We have a jointly owned interest in Colstrip Unit 4, a coal-fired power plant located in southeastern Montana. In addition, we are joint owners in three coal-fired plants used to serve our South Dakota customer supply demands. Citing its authority under the Clean Air Act, the EPA had finalized Clean Air Mercury Regulations (CAMR) that affect coal-fired plants. These regulations established a cap-and-trade program to take effect in two phases, with a first phase to begin in January 2010, and a second phase with more stringent caps to begin in January 2018. Under CAMR, each state is allocated a mercury emissions cap and is required to develop regulations to implement the requirements, which can follow the federal requirements or be more restrictive. In February 2008 the EPA’s mercury regulations were turned down by the U.S. Court of Appeals for the District of Columbia Circuit; however, Montana has finalized its own rules more stringent than CAMR’s 2018 cap that would require every coal-fired generating plant in the state to achieve reduction levels by 2010. If the Montana rules are maintained in their current form and enhanced chemical injection technologies are not sufficiently developed to meet these Montana levels of reduction by 2010, then adsorption/absorption technology with fabric filters at the Colstrip Unit 4 generation facility would be required, which could represent a material cost. Recent tests have shown that it may be possible to meet the Montana rules with more refined chemical injection technology combined with adjustments to boiler/fireball dynamics at a minimal cost. We are continuing to work with the other Colstrip owners to determine the ultimate financial impact of these rules.

In addition to the requirements related to emissions noted above, there is a growing concern nationally and internationally about global climate change and the contribution of emissions of greenhouse gases including, most significantly, carbon dioxide. This concern has led to increased interest in legislation at the federal level, actions at the state level, as well as litigation relating to greenhouse emissions, including a recent US Supreme Court decision holding that the EPA has the authority to regulate carbon dioxide emissions from motor vehicles under the Clean Air Act. Increased pressure for carbon dioxide emissions reduction also is coming from investor organizations. If legislation or regulations are passed at the federal or state levels imposing mandatory reductions of carbon dioxide and other greenhouse gases on generation facilities, the cost to us of such reductions could be significant.

Manufactured Gas Plants

Approximately $26.1 million of our environmental reserve accrual is related to manufactured gas plants. A formerly operated manufactured gas plant located in Aberdeen, South Dakota, has been identified on the Federal Comprehensive Environmental Response, Compensation, and Liability Information System (CERCLIS) list as contaminated with coal tar residue. We are currently investigating, characterizing, and initiating remedial actions at the Aberdeen site pursuant to work plans approved by the South Dakota Department of Environment and Natural Resources. In 2007, we completed remediation of sediment in a short segment of Moccasin Creek that had been impacted by the former manufactured gas plant operations. Our current reserve for remediation costs at this site is approximately $12.4 million, and we estimate that approximately $10 million of this amount will be incurred during the next five years.

We also own sites in North Platte, Kearney and Grand Island, Nebraska on which former manufactured gas facilities were located. During 2005, the Nebraska Department of Environmental Quality (NDEQ) conducted Phase II investigations of soil and groundwater at our Kearney and Grand Island sites. On March 30, 2006 and May 17, 2006, the NDEQ released to us the Phase II Limited Subsurface Assessment performed by the NDEQ's environmental consulting firm for Kearney and

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Grand Island, respectively. We have initiated additional site investigation and assessment work at these locations. At present, we cannot determine with a reasonable degree of certainty the nature and timing of any risk-based remedial action at our Nebraska locations.

In addition, we own or have responsibility for sites in Butte, Missoula and Helena, Montana on which former manufactured gas plants were located. An investigation conducted at the Missoula site did not require entry into the Montana Department of Environmental Quality (MDEQ) voluntary remediation program, but required preparation of a groundwater monitoring plan. The Butte and Helena sites were placed into the MDEQ's voluntary remediation program for cleanup due to exceedences of regulated pollutants in the groundwater. We have conducted additional groundwater monitoring at the Butte and Missoula sites and, at this time, we believe natural attenuation should address the problems at these sites; however, additional groundwater monitoring will be necessary. In Helena, we continue limited operation of an oxygen delivery system implemented to enhance natural biodegradation of pollutants in the groundwater and we are currently evaluating limited source area treatment/removal options. Monitoring of groundwater at this site will be necessary for an extended time. At this time, we cannot estimate with a reasonable degree of certainty the nature and timing of risk-based remedial action at the Helena site.

Based upon our investigations to date, our current environmental liability reserves, applicable insurance coverage, and the potential to recover some portion of prudently incurred remediation costs in rates, we do not expect remediation costs at these locations to be materially different from the established reserve.

Milltown Mining Waste

Our subsidiary, Clark Fork and Blackfoot, LLC (CFB), owns the Milltown Dam hydroelectric facility, a three MW generation facility located at the confluence of the Clark Fork and Blackfoot Rivers. In April 2003, the Environmental Protection Agency (EPA) announced its proposed remedy to address the mining waste contamination located in the Milltown Reservoir. This remedy proposed partial removal of the contaminated sediments located within the Milltown Reservoir, together with the removal of the Milltown Dam and powerhouse (this remedy was incorporated into the EPA's formal Record of Decision issued on December 20, 2004). In light of this pre-Record of Decision announcement, we entered into a stipulation (Stipulation) with Atlantic Richfield, the EPA, the Department of the Interior, the State of Montana and the Confederated Salish and Kootenai Tribes (collectively, the Government Parties), which capped NorthWestern's and CFB's collective liability to Atlantic Richfield and the Government Parties at $11.4 million. In April 2006, we released escrowed amounts of $2.5 million and $7.5 million to the State of Montana and Atlantic Richfield, respectively, in accordance with the terms of the consent decree described below.

On July 18, 2005, we and CFB executed the Milltown Reservoir superfund site consent decree, which incorporated the terms set forth in the Stipulation. The consent decree was approved by the Federal District Court for the District of Montana on February 8, 2006 and became effective on April 10, 2006. In light of the material environmental risks associated with the catastrophic failure of the Milltown Dam, we secured a 10-year, $100 million environmental insurance policy, effective May 31, 2002, to mitigate the risk of future environmental liabilities arising from the structural failure of the Milltown Dam caused by an act of God. We are obligated under the settlement to continue to maintain the environmental insurance policy until the Milltown Dam is removed during implementation of the remedy. Dam removal activities will be initiated in January of 2008.

Pursuant to the terms of the consent decree, the parties expect that the remaining financial obligation of $1.4 million to the State of Montana will be covered through a combination of any refund of premium upon cancellation of the catastrophic release policy, and the sale or transfer of land and water rights associated with the Milltown Dam operations.

Other

We continue to manage equipment containing polychlorinated biphenyl (PCB) oil in accordance with the EPA's Toxic Substance Control Act regulations. We will continue to use certain PCB-contaminated equipment for its remaining useful life and will, thereafter, dispose of the equipment according to pertinent regulations that govern the use and disposal of such equipment.

We routinely engage the services of a third-party environmental consulting firm to assist in performing a comprehensive evaluation of our environmental reserve. Based upon information available at this time, we believe that the current environmental reserve properly reflects our remediation exposure for the sites currently and previously owned by us. The

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portion of our environmental reserve applicable to site remediation may be subject to change as a result of the following uncertainties:

• We may not know all sites for which we are alleged or will be found to be responsible for remediation; and

• Absent performance of certain testing at sites where we have been identified as responsible for remediation, we cannot estimate with a reasonable degree of certainty the total costs of remediation.

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EMPLOYEES

As of December 31, 2007, we had 1,351 employees. Of these, 1,037 employees were in Montana and 314 were in South Dakota or Nebraska. Of our Montana employees, 413 were covered by six collective bargaining agreements involving five unions. Five of these agreements expire in 2008. In addition, our South Dakota and Nebraska operations had 192 employees covered by the System Council U-26 of the International Brotherhood of Electrical Workers. This collective bargaining agreement expires in 2009. We consider our relations with employees to be in good standing.

Executive Officers

Executive Officer	Current Title and Prior Employment	Age on Feb. 26, 2008
Michael J. Hanson	President and Chief Executive Officer since May 20, 2005; formerly President since March 2005; Chief Operating Officer since August 2003; formerly President and Chief Executive Officer of NorthWestern's utility operations (1998-2003). Prior to joining NorthWestern, Mr. Hanson was General Manager and Chief Executive of Northern States Power Company of South Dakota and North Dakota in Sioux Falls, S.D. (1994-1998). Mr. Hanson serves on the board of directors of a NorthWestern subsidiary.	49
Brian B. Bird	Vice President and Chief Financial Officer since December 2003. Prior to joining NorthWestern, Mr. Bird was Chief Financial Officer and Principal of Insight Energy, Inc., a Chicago-based independent power generation development company (2002-2003). Previously, he was Vice President and Treasurer of NRG Energy, Inc., in Minneapolis, MN (1997-2002). Mr. Bird serves on the board of directors of a NorthWestern subsidiary.	45
Patrick R. Corcoran	Vice President-Government and Regulatory Affairs since December 2004; formerly Vice President-Regulatory Affairs for the Company and the former Montana Power Company since September 2000.	56
David G. Gates	Vice President-Wholesale Operations since September 2005; formerly Vice President-Transmission Operations since May 2003; formerly Executive Director-Distribution Operations since January 2003; formerly Executive Director-Distribution Operations for the former Montana Power Company (1996-2002). Mr. Gates serves on the board of directors of a NorthWestern subsidiary.	51
Kendall G. Kliewer	Vice President and Controller since August 2006; Controller since June 2004; formerly Chief Accountant since November 2002. Prior to joining NorthWestern, Mr. Kliewer was a Senior Manager at KPMG LLP (1999-2002).	38

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Thomas J. Knapp	Vice President, General Counsel and Corporate Secretary since November 2004; formerly Vice President and Deputy General Counsel since March 2003; formerly consultant to NorthWestern since May 2002. Prior to joining NorthWestern, Mr. Knapp was Of Counsel at Paul, Hastings, Janofsky &Walker (2000-2002). Mr. Knapp serves on the boards of directors of two NorthWestern subsidiaries.	55
Curtis T. Pohl	Vice President-Retail Operations since September 2005; formerly Vice President-Distribution Operations since August 2003; formerly Vice President-South Dakota/Nebraska Operations since June 2002; formerly Vice President-Engineering and Construction since June 1999. Mr. Pohl serves on the board of directors of a NorthWestern subsidiary.	43
Bobbi L. Schroeppel	Vice President-Customer Care and Communications since September 2005; formerly Vice President-Customer Care since June 2002; formerly Director-Staff Activities and Corporate Strategy since August 2001; formerly Director-Corporate Strategy since June 2000.	39
Gregory G. A. Trandem	Vice President-Administrative Services since September 2005; formerly Vice President-Support Services since March 2004; formerly Vice President-Asset Management since June 2002; formerly Vice President-Energy Operations since August 1999.	56

Officers are elected annually by, and hold office at the pleasure of the Board and do not serve a “term of office” as such.

 

ITEM 1A. RISK FACTORS

You should carefully consider the risk factors described below, as well as all other information available to you, before making an investment in our shares or other securities.

We have incurred, and may continue to incur, significant costs associated with outstanding litigation, which may adversely affect our results of operations and cash flows.

These costs, which are being expensed as incurred, have had, and may continue to have, an adverse affect on our results of operations and cash flows. Pending litigation matters are discussed in detail under the Legal Proceedings section in Note 21 to the Consolidated Financial Statements. An adverse result in any of these matters could have an adverse effect on our business.

Seasonal and quarterly fluctuations of our business could adversely affect our results of operations and liquidity.

Our electric and natural gas utility business is seasonal, and weather patterns can have a material impact on our financial performance. Demand for electricity and natural gas is often greater in the summer and winter months associated with cooling and heating. 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. 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 cool summers in the future, our results of operations and financial condition could be adversely affected. In addition, exceptionally hot summer weather or unusually cold winter weather could add significantly to working capital needs to fund higher than normal supply purchases to meet customer demand for electricity and natural gas.

We are subject to extensive governmental laws and regulations that affect our industry and our operations, which could have a material adverse effect on our results of operations and financial condition.

We are subject to regulation by federal and state governmental entities, including the FERC, MPSC, SDPUC and NPSC. Regulations can affect allowed rates of return, recovery of costs and operating requirements. In addition, existing regulations may be revised or reinterpreted, new laws, regulations, and interpretations thereof may be adopted or become applicable to us

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and future changes in laws and regulations may have a detrimental effect on our business.

Our rates are approved by our respective commissions and are effective until new rates are approved. In addition, supply costs are recovered through adjustment charges that are periodically reset to reflect current and projected costs. Inability to recover costs in rates or adjustment clauses could have a material adverse effect on our results of operations, cash flows and financial position.

We are subject to extensive environmental laws and regulations and potential environmental liabilities, which could result in significant costs and liabilities.

We are subject to extensive laws and regulations imposed by federal, state and local government authorities in the ordinary course of operations with regard to the environment, including environmental laws and regulations relating to air and water quality, solid waste disposal and other environmental considerations. We believe that we are in substantial compliance with environmental regulatory requirements and that maintaining compliance with current requirements will not materially affect our financial position or results of operations; however, possible future developments, including the promulgation of more stringent environmental laws and regulations, such as the new mercury emissions rules in Montana, and the timing of future enforcement proceedings that may be taken by environmental authorities could affect the costs and the manner in which we conduct our business and could require us to make substantial additional capital expenditures.

In addition to the requirements related to the mercury emissions rules noted above, there is a growing concern nationally and internationally about global climate change and the contribution of emissions of greenhouse gases including, most significantly, carbon dioxide. This concern has led to increased interest in legislation at the federal level, actions at the state level, as well as litigation relating to greenhouse emissions, including a recent US Supreme Court decision holding that the EPA has the authority to regulate carbon dioxide emissions from motor vehicles under the Clean Air Act. Increased pressure for carbon dioxide emissions reduction also is coming from investor organizations. If legislation or regulations are passed at the federal or state levels imposing mandatory reductions of carbon dioxide and other greenhouse gases on generation facilities, the cost to us of such reductions could be significant.

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 cannot predict with certainty the occurrence of private tort allegations or government claims for damages associated with specific environmental conditions. We may be required to make significant expenditures in connection with the investigation and remediation of alleged or actual spills, personal injury or property damage claims, and the repair, upgrade or expansion of our facilities in order to meet future requirements and obligations under environmental laws.

Our range of exposure for current environmental remediation obligations is estimated to be $19.8 million to $57.0 million. We had an environmental reserve of $32.7 million at December 31, 2007. This reserve was established in anticipation of future remediation activities at our various environmental sites and does not factor in any exposure to us arising from new regulations, private tort actions or claims for damages allegedly associated with specific environmental conditions. To the extent that our environmental liabilities are greater than our reserves or we are unsuccessful in recovering anticipated insurance proceeds under the relevant policies or recovering a material portion of remediation costs in our rates, our results of operations and financial condition could be adversely affected.

To the extent our incurred supply costs are deemed imprudent by the applicable state regulatory commissions, we would under recover our costs, which could adversely impact our results of operations and liquidity.

Our wholesale costs for electricity and natural gas are recovered through various pass-through cost tracking mechanisms in each of the states we serve. The rates are established based upon projected market prices or contract obligations. As these variables change, we adjust our rates through our monthly trackers. To the extent our energy supply costs are deemed imprudent by the applicable state regulatory commissions, we would under recover our costs, which could adversely impact our results of operations.

We do not own any natural gas reserves or regulated electric generation assets to service our Montana operations. As a result, we are required to procure our entire natural gas supply and substantially all of our Montana electricity supply pursuant to contracts with third-party suppliers. In light of this reliance on third-party suppliers, we are exposed to certain risks in the event a third-party supplier is unable to satisfy its contractual obligation. If this occurred, then we might be required to purchase gas and/or electricity supply requirements in the energy markets, which may not be on commercially

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reasonable terms, if at all. If prices were higher in the energy markets, it could result in a temporary material under recovery that would reduce our liquidity.

Our obligation to supply a minimum annual quantity of power to the Montana electric supply could expose us to material commodity price risk if certain QFs under contract with us do not perform during a time of high commodity prices, as we are required to supply any quantity deficiency.

We perform management of the QF portfolio of resources under the terms and conditions of the QF Tier II Stipulation. This Stipulation may subject us to commodity price risk if the QF portfolio does not perform in a manner to meet the annual minimum energy requirement.

As part of the Stipulation and Settlement with the MPSC and other parties in the Tier II Docket, we agreed to supply the electric supply with a certain minimum amount of power at an agreed upon price per MW. The annual minimum energy requirement is achievable under normal QF operations, including normal periods of planned and forced outages. Furthermore, we will not realize commodity price risk unless any required replacement energy cost is in excess of the total amount recovered under the QF contracts.

However, to the extent the supplied QF power for any year does not reach the minimum quantity set forth in the settlement, we are obligated to secure the quantity deficiency from other sources. Since we own no material generation in Montana, the anticipated source for any quantity deficiency is the wholesale market which, in turn, would subject us to commodity price volatility.

Our jointly owned regulated electric generating facilities and our joint ownership in Colstrip Unit 4 are subject to operational risks that could result in unscheduled plant outages, unanticipated operation and maintenance expenses and increased power purchase costs.

Operation of electric generating facilities involves risks which can adversely affect energy output and efficiency levels. Most of our generating capacity is coal-fired. We rely on a limited number of suppliers of coal for our regulated generation, making us vulnerable to increased prices for fuel as existing contracts expire or in the event of unanticipated interruptions in fuel supply. We are a captive rail shipper of the Burlington Northern Santa Fe Railway for shipments of coal to the Big Stone I Plant (our largest source of generation in South Dakota), making us vulnerable to railroad capacity issues and/or increased prices for coal transportation from a sole supplier. Operational risks also include facility shutdowns due to breakdown or failure of equipment or processes, labor disputes, operator error and catastrophic events such as fires, explosions, floods, intentional acts of destruction or other similar occurrences affecting the electric generating facilities. The loss of a major regulated generating facility would require us to find other sources of supply, if available, and expose us to higher purchased power costs.

We must meet certain credit quality standards. If we are unable to maintain an investment grade credit rating, we would be required under certain commodity purchase agreements to provide collateral in the form of letters of credit or cash, which may materially adversely affect our liquidity and /or access to capital.

A downgrade of our credit ratings could adversely affect our liquidity, as counter parties could require us to post collateral. In addition, our ability to raise capital on favorable terms could be hindered, and our borrowing costs could increase.

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ITEM 1B. UNRESOLVED STAFF COMMENTS

None

 

ITEM 2. PROPERTIES

NorthWestern's executive offices are located at 3010 West 69^th Street, Sioux Falls, South Dakota 57108, where we lease approximately 20,000 square feet of office space, pursuant to a lease that expires on December 1, 2012.

Our principal office for our South Dakota and Nebraska operations is owned and located at 600 Market Street W., Huron, South Dakota 57350. Substantially all of our South Dakota and Nebraska facilities are owned. Our principal office for our Montana operations is owned and located at 40 East Broadway Street, Butte, Montana 59701. We own or lease other facilities throughout the state of Montana.

For further information regarding our operating properties, including generation and transmission, see the descriptions included in Item 1.

 

ITEM 3. LEGAL PROCEEDINGS

We discuss details of our legal proceedings in Note 21, Commitments and Contingencies, to the Consolidated Financial Statements. Some of this information is about costs or potential costs that may be material to our financial results.

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of our security holders during the quarter ended December 31, 2007.

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Part II

 

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock, which is traded under the ticker symbol NWEC, is listed on the NASDAQ Global Select Market System. As of February 22, 2008, there were approximately 922 common stockholders of record.

Dividends

We pay dividends on our common stock after our Board of Directors (Board) declares them. The Board reviews the dividend quarterly and establishes the dividend rate based upon such factors as our earnings, financial condition, capital requirements, debt covenant requirements and/or other relevant conditions.  Although we expect to continue to declare and pay cash dividends on our common stock in the future, we cannot assure that dividends will be paid in the future or that, if paid, the dividends will be paid in the same amount as during 2007. Quarterly dividends were declared and paid on our common stock during 2007 as set forth in the table below.

QUARTERLY COMMON STOCK PRICE RANGES AND DIVIDENDS

	Prices				Cash Dividends
	High		Low		Paid
2007—
Fourth Quarter	$	30.05	$	26.97	$	0.33
Third Quarter	32.10		25.30		0.33
Second Quarter	35.47		30.60		0.31
First Quarter	36.51		35.32		0.31
2006—
Fourth Quarter	$	35.80	$	35.01	$	0.31
Third Quarter		35.15		33.77		0.31
Second Quarter		35.18		30.30		0.31
First Quarter		32.75		30.92		0.31

On February 22, 2008, the last reported sale price on the NASDAQ for our common stock was $27.69.

Securities Authorized for Issuance under Equity Compensation Plans

The following table presents summary information about our equity compensation plans, including our employee incentive plan. The table presents the following data on our plans as of the close of business on December 31, 2007:

(i) the aggregate number of shares of our common stock subject to outstanding stock options, warrants and rights;

(ii) the weighted average exercise price of those outstanding stock options, warrants and rights; and

(iii) the number of shares that remain available for future option grants, excluding the number of shares to be issued upon the exercise of outstanding options, warrants and rights described in (i) above.

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For additional information regarding our stock option plans and the accounting effects of our stock-based compensation, please see Notes 3 and 17 to our Financial Statements included in Item 8 herein.

Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)	Weighted average exercise price of outstanding options, warrants and rights (b)	Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)(1) (c)
Equity compensation plans approved by security holders
None	N/A	N/A	N/A
Equity compensation plans not approved by security holders
New Incentive Plan (1)	—	—	1,375,844
Total	—		1,375,844

(1) Upon emergence from bankruptcy, a New Incentive Plan (described more fully in our Proxy Statement for our 2008 Annual Meeting, which is incorporated by reference herein), was established pursuant to our Plan of Reorganization, which set aside 2,265,957 shares for the new Board to establish equity-based compensation plans for employees and directors. As the New Incentive Plan was established by provisions of the Plan of Reorganization, shareholder approval was not required. Upon emergence, 228,315 shares of restricted stock were granted (Special Recognition Grants) under the New Incentive Plan to certain officers and key employees. There are no remaining unvested shares under this grant. In addition, during 2005 the NorthWestern Corporation 2005 Long-Term Incentive Plan was established under the New Incentive Plan, under which restricted stock grants of 576,166 shares, net of forfeitures, have been distributed to directors, officers and employees and 70,132 deferred stock units and 15,500 shares of restricted stock have been granted to our Board.

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ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data has been derived from our consolidated financial statements and should be read in conjunction with the consolidated financial statements and notes thereto and with “Management's Discussion and Analysis of Financial Condition and Results of Operations" and other financial data included elsewhere in this report. The historical results are not necessarily indicative of results to be expected for any future period. Between September 14, 2003 and October 31, 2004, we operated as a debtor-in-possession under the supervision of the Bankruptcy Court. Our financial statements for reporting periods within that timeframe were prepared in accordance with the provisions of Statement of Position 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code. In accordance with SOP 90-7, we applied the principles of fresh-start reporting as of the close of business on October 31, 2004.

FIVE-YEAR FINANCIAL SUMMARY

	Successor Company									Predecessor Company
	Year Ended December 31,						November 1 December 31,				January 1 October 31,		(1)	Year Ended December 31
	2007		2006		2005		2004				2004			2003
Financial Results (in thousands, except per share data)
Operating revenues	$	1,200,060	$	1,132,653	$	1,165,750	$	205,952			$	833,037		$	1,012,515
Income (loss) from continuing operations	53,191		37,482		61,547		(6,520		)		548,889			(71,582		)
Basic earnings (loss) per share from continuing operations(2)	1.45		1.06		1.73		(0.18		)
Diluted earnings (loss) per share from continuing operations(2)	1.44		1.00		1.71		(0.18		)
Dividends declared & paid per common share	1.28		1.24		1.00		—
Financial Position
Total assets	$	2,547,380	$	2,395,937	$	2,400,403	$	2,448,869			$	2,554,740			2,456,849
Long-term debt and capital leases, including current portion	846,368		747,117		742,970		836,946				910,154			1,784,237
Preferred stock subject to mandatory redemption	—		—		—		—				—			365,550
Ratio of earnings to fixed charges(3)	2.4		2.0		2.4		—				7.5			—

(1) Income (loss) from continuing operations includes reorganization items. The financial position information is that of the Successor Company as of October 31, 2004.

(2) Per share results have not been presented for the Predecessor Company as all shares were cancelled upon emergence.

(3) The fixed charges exceeded earnings, as defined by this ratio, by $11.5 million for the two-months ended December 31, 2004, and $86.6 million year ended December 31, 2003.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with “Item 6 Selected Financial Data" and our consolidated financial statements and related notes contained elsewhere in this Annual Report on Form 10-K. For additional information related to our industry segments, see Note 23 of “Notes to Consolidated Financial Statements" of our consolidated financial statements, which are included in Item 8 herein. For information regarding our revenues, net income and assets, see our consolidated financial statements included in Item 8.

OVERVIEW

NorthWestern Corporation, doing business as Northwestern Energy, provides electricity and natural gas to approximately 650,000 customers in Montana, South Dakota and Nebraska. As you read this discussion and analysis, refer to our Consolidated Statements of Income, which present the results of our operations for 2007, 2006 and 2005. Following is a brief overview of highlights for 2007, and a discussion of our strategy. Additional details on our results of operations follow the Critical Accounting Policies and Estimates section.

Highlights

Highlights for the year ended December 31, 2007 include:

• Improvement in net income of $15.3 million as compared with 2006;

• Natural gas rate increases in our South Dakota and Nebraska jurisdictions;

• A proposed Stipulation with the MCC resulting in a rate increase in our Montana electric and natural gas rates;

• Completing the purchase of our interest in Colstrip Unit 4, resulting in an annualized reduction in operating lease expense of $22.1 million, partially offset by increased depreciation expense of $6.2 million and interest expense of $11.1 million; and

• Improvement in our long-term corporate credit rating outlook to positive from stable by Standard and Poor’s Rating Group.

Termination of Merger Agreement with Babcock & Brown Infrastructure Limited

On April 25, 2006, we entered into an Agreement and Plan of Merger (Merger Agreement) with Babcock and Brown Infrastructure Limited (BBI), an infrastructure investment company listed on the Australian Stock Exchange, under which BBI would acquire NorthWestern Corporation in an all-cash transaction at $37 per share. We had received all approvals necessary for the transaction, except from the MPSC. On May 22, 2007, the MPSC unanimously directed its staff to draft an order denying the transaction. On June 25, 2007, we and BBI filed a formal joint request asking the MPSC to consider a revised proposal. In connection with our joint request to the MPSC, we and BBI agreed that if the MPSC denied the revised application, then either party in their sole discretion could terminate the Merger Agreement. On July 24, 2007, the MPSC denied the joint request and BBI terminated the Merger Agreement. The MPSC issued a final written order on July 31, 2007.

We incurred transaction related costs of approximately $1.5 million during the year ended December 31, 2007. Our total transaction related costs since inception were $15.5 million, which have been expensed as incurred.

Strategy

We are focused on growing through investing in our core utility business and earning a reasonable return on invested capital, while providing safe, reliable service. The need for additional infrastructure investment, growing customer demand for electricity and environmental initiatives create opportunities to grow our core business. In addition, we continue to focus on enhancing our system reliability, including significant planned investments in electric transmission.

Our cash flows from operations and existing borrowing capacity should be sufficient to fund our operations, service existing debt, pay dividends, and fund capital expenditures (excluding strategic growth opportunities). In order to fund our

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strategic growth opportunities we will utilize available cash flow, debt capacity that would allow us to maintain investment grade ratings (50 -55% debt to capital ratio), and if necessary additional equity financing. We will continue to target a long-term dividend payout ratio of 60 – 70 % of net income.

Rate Case Filings

As a part of our focus on earning a fair return on our utility investments, during 2007 we filed general rate cases in each of our jurisdictions. Our regulatory approach is based on filing rate requests designed to provide for recovery of legitimate expenses and a reasonable return on investment. Following is the current status of each of these filings:

• A proposed settlement in our Montana electric and natural gas rate case with a base rate increase of $15 million annually;

• A settlement in our South Dakota natural gas rate case with a base rate increase of $3.1 million annually beginning December 1, 2007;

• A settlement in our Nebraska natural gas rate case with a base rate increase of $1.5 million annually beginning December 1, 2007; and

• We are currently awaiting FERC approval of a proposed settlement in our transmission rate case, and anticipate finalizing the rate case during the first half of 2008. Interim rates were implemented in May 2007. This proposed settlement would result in an annualized margin increase of approximately $3.0 million.

These rate cases are a key component of our earnings growth and achieving our financial objectives.

Investment Opportunities

We continue to make significant maintenance capital investments in our system in excess of our depreciation, which is the amount of these costs we recover through rates. This is consistent with the regulatory approach described above. See the “Capital Requirements" discussion for further detail on planned maintenance capital expenditures. In addition to this base level of capital investment, we have several other significant investment opportunities. The first step in any of these opportunities is to obtain legislative and regulatory support prior to making the investment. To avoid excessive risk for us, it is critical to reduce regulatory uncertainty before making large capital investments.

During 2007, the Montana legislature passed House Bill 25, which allows for utilities to be fully vertically integrated by owning rate base generation. As a result, we recently proposed a new natural gas-fired generation plant with an estimated cost in excess of $100 million. The plant would provide regulating reserve capacity for electric supply and assist with providing adequate regulation capacity to maintain federal reliability standards within our balancing area. We anticipate requesting the MPSC's approval for this plant in the second quarter of 2008.

Our Montana transmission assets are strategically located to take advantage of the potential transmission grid expansion in the Northwest part of the United States. There are a number of potential paths and more than a dozen points of interconnection with major players in the Northwest. Regional load growth forecasts remain strong allowing us to leverage our strategic geographic advantage related to transmission. In Montana, we have begun siting and permitting work on two significant electric transmission growth opportunities - a $250 million expansion of the existing Colstrip 500 kV system that would increase capacity by 500-700 MWs and a new $800 million 500 kV transmission line from Southwestern Montana to Southeastern Idaho with a potential capacity of 1,500 MWs.

Uncertainty surrounding global climate change and environmental concerns related to new coal-fired generation development is changing the mix of the potential sources of new generation in the region. State renewable portfolio standards are increasing the region's reliance on wind generation and Montana has one of the best wind regimes in the country. Certain aspects of our proposed transmission development projects are scaleable and thus can be built out to more closely match the timing of new generation and loads.

The proposed new 500 kV transmission line between southwestern Montana and southeastern Idaho is known as the Mountain States Transmission Intertie (MSTI). The transmission line's main purpose will be to meet requests for transmission service from customers and relieve constraints on the high-voltage transmission system in the region. We conducted an Open Season Process in 2004 to identify potential interest for new transmission capacity on this path and currently we have 890 MWs of transmission service requests from open season participants for capacity on the proposed new transmission line. These requests can be revoked at any time by the customer up to the point of an executed service agreement. The proposed MSTI 500 kV line will extend from a new substation to be built near either Townsend or Garrison,

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Montana to the existing Borah or Midpoint substation, located in southern Idaho. The new substation south of Townsend, Montana will be adjacent to, and interconnect with, the two existing 500 kV lines between Colstrip and Garrison, Montana. An initial siting study identified several reasonable alternatives for the route and we are in the process of selecting a preferred, as well as two alternative routes. Based on our current timeline, we anticipate the line will be in service by 2013. Construction cannot commence until all local, state and federal permits/regulatory requirements are met. We have capitalized approximately $1.8 million of preliminary survey and investigative costs associated with this project as of December 31, 2007.

We have experienced continued strong organic load growth in South Dakota, including several large load additions during 2007. Due to this load growth and the tightening of capacity markets in the MAPP region, we are evaluating the need for capacity and base-load additions in our South Dakota service territory. Currently, we estimate the capacity need is in the 50-75 MW range. In addition, in South Dakota and Nebraska we expect to deploy up to $20 million in capital over the next three years to continue pipeline extension projects to serve new and expanded ethanol and biodiesel facilities in the region. Our investment in these pipeline extension projects are protected by letters of credit. During 2007, approximately $8.0 million of our capital expenditures were related to growth in service to these types of facilities.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management's discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and other assumptions that are believed to be proper and reasonable under the circumstances. We continually evaluate the appropriateness of our estimates and assumptions, including those related to goodwill, qualifying facilities liabilities, impairment of long-lived assets and revenue recognition, among others. Actual results could differ from those estimates.

We have identified the policies and related procedures below as critical to understanding our historical and future performance, as these polices affect the reported amounts of revenue and the more significant areas involving management's judgments and estimates.

Goodwill and Long-lived Assets

We believe that the accounting estimate related to determining the fair value of goodwill and long-lived assets, and thus any impairment, is a “critical accounting estimate" because: (i) it is highly susceptible to change from period to period since it requires company management to make cash flow assumptions about future revenues, operating costs and discount rates over an indefinite life; and (ii) recognizing an impairment could have a significant impact on the assets reported on our balance sheet and our operating results. Management's assumptions about future sales margins and volumes require significant judgment because actual margins and volumes have fluctuated in the past and are expected to continue to do so. In estimating future margins, we use our internal budgets.

Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, was issued during 2001 and is effective for all fiscal years beginning after December 15, 2001. According to the guidance set forth in SFAS No. 142, we are required to evaluate our goodwill for impairment at least annually (October 1) and more frequently when indications of impairment exist. Accounting standards require that if the fair value of a reporting unit is less than its carrying value including goodwill, an impairment charge for goodwill must be recognized in the financial statements. To measure the amount of an impairment loss, the implied fair value of the reporting unit's goodwill is compared with its carrying value.

We evaluate our property, plant and equipment for impairment whenever indicators of impairment exist. SFAS No. 144, Accounting for the Impairment or the Disposal of Long-Lived Assets, requires that if the sum of the undiscounted cash flows from a company's asset, without interest charges, is less than the carrying value of the asset, impairment must be recognized in the financial statements. If an asset is deemed to be impaired, then the amount of the impairment loss recognized represents the excess of the asset's carrying value as compared to its estimated fair value, based on management's assumptions and projections.

Qualifying Facilities Liability

Certain QF contracts under the Public Utility Regulatory Policy Act (PURPA) require us to purchase minimum amounts of energy at prices ranging from $65 to $138 per MWH through 2029. As of December 31, 2007, our gross contractual obligation related to the QFs is approximately $1.5 billion. A portion of the costs incurred to purchase this energy is recoverable though rates authorized by the MPSC, totaling approximately $1.2 billion through 2029. We maintain a liability based on the net present value (discounted at 7.75%) of the difference between our estimated obligations under the QFs and the related amounts recoverable in rates.

There are ten contracts encompassed in the QF liability of which, three contracts account for more than 98% of the output. The liability was established based on certain assumptions and projections over the contract terms related to pricing, estimated output and recoverable amounts. The estimated capacity factor for each QF and the estimated escalation rate for one of the contracts are key assumptions. The estimated capacity factors are primarily based on historical actual capacity factors. The estimated escalation rate for the one contract was based on a combination of historical actual results and market data available for future projections. Since the liability is based on projections over a 25-year period; actual QF output, changes in pricing, contract amendments and regulatory decisions relating to QFs could significantly impact the liability and our results of operations in any given year.

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In assessing the liability each reporting period, we compare our assumptions to actual results and make adjustments as necessary for that period.

In December 2006, the MPSC issued an order finalizing certain QF rates for the periods July 1, 2003 through June 30, 2006. The result of this order could provide for a significant reduction to our QF liability, as it reduces the escalating energy and capacity rates for one contract that we utilize in determining the present value of our obligation. If the order is upheld in its current form, we could reduce our QF liability by a range of $25 million to $50 million based on our current estimated changes to the assumptions. We are currently in litigation with a QF over this matter and we cannot predict the outcome of this litigation, therefore we have not changed our historical assumptions or reduced the liability. We will continue to assess the status of the litigation and will not change our assumptions until we can determine a probable outcome.

Revenue Recognition

Revenues are recognized differently depending on the various jurisdictions. For our South Dakota and Nebraska operations, consistent with historic treatment in the respective jurisdictions, electric and natural gas utility revenues are based on billings rendered to customers. For our Montana operations, operating revenues are recorded monthly on the basis of consumption or services rendered. Customers are billed on a monthly cycle basis. To match revenues with associated expenses, we accrue unbilled revenues for electric and natural gas services delivered to the customers but not yet billed at month-end.

Regulatory Assets and Liabilities

Our regulated operations are subject to the provisions of SFAS No. 71, Accounting for the Effects of Certain Types of Regulation. Our regulatory assets are the probable future revenues associated with certain costs to be recovered from customers through the ratemaking process, including our estimate of amounts recoverable for natural gas and electric supply purchases. 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, then we would need to evaluate the probable future recovery of or reduction in revenue with respect to the related regulatory assets and liabilities. In addition, we would need to determine if there was any impairment to the carrying costs of the associated plant and inventory assets.

While we believe that our assumptions regarding future regulatory actions are reasonable, different assumptions could materially affect our results. For example, we had recorded liabilities in previous years for remediation obligations related to several formerly operated manufactured gas plants (MGP) in South Dakota. In December 2007, the SDPUC approved our settlement with SDPUC Staff related to our natural gas rate case, which included a provision allowing us to include approximately $1.4 million annually in rates to recover MGP environmental clean-up costs. This was partially offset by a requirement to return approximately $2.3 million ($0.8 million annually) of previous insurance recoveries to customers. The SDPUC's approval of our settlement provides reasonable assurance that we will recover future South Dakota related MGP costs, therefore we recorded net regulatory assets (with a corresponding reduction to operating, general and administrative expenses) of $12.6 million in December 2007 to offset the previously recorded South Dakota MGP related liabilities.

Pension and Postretirement Benefit Plans

We sponsor defined benefit pension plans, which cover substantially all employees, and provide postretirement health care and life insurance benefits for certain of our employees. Our reported costs of providing pension and other postretirement benefits, as described in Note 16 to the consolidated financial statements, are dependent upon numerous factors including the provisions of the plans, changing employee demographics and economic conditions, and various actuarial calculations, assumptions, and accounting mechanisms. As a result of these factors, significant portions of pension and other postretirement benefit costs recorded in any period do not reflect (and are generally greater than) the actual benefits provided to plan participants. Due to the complexity of these calculations, long-term nature of the obligations, and the importance of the assumptions utilized, the determination of these costs is considered a critical accounting estimate.

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Assumptions

Key actuarial assumptions utilized in determining these costs include:

• Discount rates used in determining the future benefit obligations;

• Projected health care cost trend rates;

• Expected long-term rate of return on plan assets; and

• Rate of increase in future compensation levels.

We review these assumptions on an annual basis and adjust them as necessary. The assumptions are based upon information available as of the beginning of the year, specifically, market interest rates, past experience and management's best estimate of future economic conditions.

We set the discount rate using a yield curve analysis, which projects benefit cash flows into the future and then discounts those cash flows to the measurement date using a yield curve. This is done by constructing a hypothetical bond portfolio whose cash flow from coupons and maturities matches the year-by-year, projected benefit cash flow from our plans. Based on this analysis, in 2007 we increased our discount rate 0.50% to 6.25% for our pension plans.

The health care cost trend rates are established through a review of actual recent cost trends and projected future trends. Our retiree medical trend assumptions are the best estimate of expected inflationary increases to our healthcare costs. Due to the relative size of our retiree population (under 700 members), the assumptions used are based upon both nationally expected trends and our specific expected trends. Our average increase remains consistent with the nationally expected trends. The long-term trend assumption is based upon our actuary's macroeconomic forecast, which includes assumed long-term nominal gross domestic product (GDP) growth plus the expected excess growth in national health expenditures versus GDP, the assumed impact of population growth and aging, and variations by healthcare sector. Based on this review, the health care cost trend rate used in calculating the December 31, 2007 accumulated postretirement benefit obligation was a 10% increase in health care costs in 2007 gradually decreasing each successive year until it reaches a 5.0% annual increase in health care costs in 2013.

The expected long-term rate of return assumption on plan assets was determined based on the historical returns and the future expectations for returns for each asset class, as well as the target asset allocation of the pension and postretirement portfolios. We target an asset allocation of roughly 70% equity securities, and 30% fixed-income securities. Considering this information and future expectations for asset returns, we decreased our expected long-term rate of return on assets assumption from 8.5% during 2005 to 8.00% for 2006 and 2007. The assumed rate of increase in future compensation levels used to calculate benefit obligations was 3.50% for union and 3.58% - 3.61% for nonunion employees in 2007.

Cost Sensitivity

The following table reflects the sensitivity of pension costs to changes in certain actuarial assumptions (in thousands):

Actuarial Assumption	Change in Assumption		Impact on Pension Cost			Impact on Projected Benefit Obligation
Discount rate	0.25	%	$	(154	)	$	(12,245	)
	(0.25	)%	139			11,237
Rate of return on plan assets	0.25	%	(764		)	N/A
	(0.25	)%	764			N/A

Accounting Treatment

In accordance with SFAS No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, and SFAS No. 87, Employers' Accounting for Pensions, we utilize a number of accounting mechanisms that reduce the volatility of reported pension costs. Differences between actuarial assumptions and actual plan results are deferred and are recognized into earnings only when the accumulated differences exceed 10% of the greater of the projected benefit obligation or the market-related value of plan assets. If necessary, the excess is amortized over the average remaining service period of active employees. SFAS No. 158 also requires that a plan's funded status be recognized as an asset or liability. Through fresh-start reporting in 2004 we had previously recorded the funded status of our plans on the balance sheet, and adjusted our

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qualified pension and other postretirement benefit plans to their projected benefit obligation by recognition of all previously unamortized actuarial gains and losses. Therefore, we recognized all prior service costs, and net actuarial gains and losses from 2005 and 2006 as of December 31, 2006.

As our regulated operations are subject to the provisions of SFAS No. 71, our financial statements reflect the effects of the different rate making principles followed by the jurisdiction regulating us. Pension costs in Montana and other postretirement benefit costs in South Dakota are included in rates on a pay as you go basis for regulatory purposes. Pension costs in South Dakota and other postretirement benefit costs in Montana are included in rates on an accrual basis for regulatory purposes. Regulatory assets have been recognized for the obligations that will be included in future cost of service. In 2005, the MPSC authorized the recognition of pension costs based on an average of the funding to be made over a 5-year period for the calendar years 2005 through 2009.

Income Taxes

Exposures exist related to various tax filing positions, which may require an extended period of time to resolve and may result in income tax adjustments by taxing authorities. We have reduced deferred tax assets or established liabilities based on our best estimate of future probable adjustments related to these exposures. On a quarterly basis, we evaluate exposures in light of any additional information and make adjustments as necessary to reflect the best estimate of the future outcomes. We currently estimate that as of December 31, 2007, we have approximately $346 million of consolidated net operating loss carryforwards (CNOLs) to offset federal taxable income in future years. We believe our deferred tax assets and established liabilities are appropriate for estimated exposures; however, actual results may differ from these estimates.

In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 is an interpretation of FASB Statement No. 109, Accounting for Income Taxes, and it seeks to reduce the diversity in practice associated with certain aspects of measurement and recognition in accounting for income taxes by prescribing a recognition threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken in a tax return. Additionally, FIN 48 provides guidance on derecognition, classification, accounting in interim periods and expanded disclosure with respect to the uncertainty in income taxes. FIN 48 was effective for us as of January 1, 2007. FIN 48 provides that a tax position that meets the more-likely-than-not threshold shall initially and subsequently be measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. As a result of the implementation of FIN 48, we increased our deferred tax assets by $77.5 million and decreased other noncurrent liabilities by $2.4 million, with a corresponding decrease to goodwill. The decrease to goodwill is consistent with the guidance in FASB Statement No. 109, Accounting for Income Taxes, and the requirements of fresh-start reporting, as our uncertain tax positions relate to periods prior to our emergence from bankruptcy. We have unrecognized tax benefits of approximately $111.1 million as of December 31, 2007. The resolution of tax matters in a particular future period could have a material impact on our cash flows, results of operations and provision for income taxes.

34

RESULTS OF OPERATIONS

The following is a summary of our results of operations in 2007, 2006, and 2005. 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.

Factors Affecting Results of Continuing Operations

Our revenues may fluctuate substantially with changes in supply costs, which are generally collected in rates from customers. Revenues are also impacted to a lesser extent by customer growth and usage, the latter of which is primarily affected by weather. In addition, various regulatory agencies approve the prices for electric and natural gas utility service within their respective jurisdictions and regulate our ability to recover costs from customers.

Weather affects the demand for electricity and natural gas, especially among residential and commercial customers. Very cold winters increase demand for natural gas and to a lesser extent, electricity, while warmer than normal summers increase demand for electricity. The weather's effect is measured using degree-days, which is the difference between the average daily actual temperature and a baseline temperature of 65 degrees. Heating degree-days result when the average daily actual temperature is less than the baseline. Cooling degree-days result when the average daily actual temperature is greater than the baseline. The statistical weather information provided in our regulated segments represents a comparison of these degree-days.

OVERALL CONSOLIDATED RESULTS

Year Ended December 31, 2007 Compared with Year Ended December 31, 2006

	Year Ended December 31,
			2007				2006				Change			% Change
	(in millions)
Operating Revenues
Regulated Electric		$		736.7		$		661.7		$		75.0			11.3		%
Regulated Natural Gas				363.6				359.7				3.9			1.1
Unregulated Electric				74.2				83.0				(8.8	)		(10.6	)
Other				56.7				77.0				(20.3	)		(26.4	)
Eliminations				(31.1	)			(48.7	)			17.6			36.1
		$		1,200.1		$		1,132.7		$		67.4			6.0		%

	Year Ended December 31,
			2007				2006				Change			% Change
	(in millions)
Cost of Sales
Regulated Electric		$		389.7		$		332.8		$		56.9			17.1		%
Regulated Natural Gas				236.0				240.8				(4.8	)		(2.0	)
Unregulated Electric				18.0				16.6				1.4			8.4
Other				54.2				70.5				(16.3	)		(23.1	)
Eliminations				(29.5	)			(47.1	)			17.6			37.4
		$		668.4		$		613.6		$		54.8			8.9		%

35

	Year Ended December 31,
			2007				2006				Change			% Change
	(in millions)
Gross Margin
Regulated Electric		$		347.0		$		328.9		$		18.1			5.5		%
Regulated Natural Gas				127.6				118.9				8.7			7.3
Unregulated Electric				56.2				66.4				(10.2	)		(15.4	)
Other				2.5				6.5				(4.0	)		(61.5	)
Eliminations				(1.6	)			(1.6	)			—			—
		$		531.7		$		519.1		$		12.6			2.4		%

Consolidated gross margin in 2007 was $531.7 million, an increase of $12.6 million, or 2.4%, from gross margin in 2006.

	Gross Margin
	2007 vs. 2006
	(Millions of Dollars)
Property tax tracker	$	11.5
Regulated electric and gas customer growth and favorable weather	9.3
Transmission volumes and rate increase (subject to refund)	3.2
Unregulated electric volumes	7.5
Unregulated electric pricing and fuel supply costs	(17.7		)
Other	(1.2		)
Improvement in Gross Margin	$	12.6

A substantial portion of the increase in 2007 regulated margins relates to a change in presentation of property taxes collected through our Montana property tax tracker. In 2007, margins in our regulated electric and natural gas segments increased by $11.5 million related to collections through our Montana property tax tracker. In 2006, we netted comparative property tax tracker collections of $7.8 million against property and other taxes. Additional increases in our regulated margin primarily related to customer growth and favorable weather. In addition, we had higher transmission revenues due to our interim rate increase (subject to refund) and increased transmission of energy acquired by others across our system. Offsetting these increases were decreases in unregulated electric margin due to lower average contracted prices and higher fuel supply costs, partially offset by an increase in volumes resulting from higher demand and plant availability.

	Year Ended December 31,
			2007			2006			Change			% Change
	(in millions)
Operating Expenses
Operating, general and administrative		$		221.6	$		240.2	$		(18.6	)		(7.7	)	%
Property and other taxes				87.6			74.2			13.4			18.1
Depreciation				82.4			75.3			7.1			9.4
Ammondson verdict				—			19.0			(19.0	)		(100.0	)
		$		391.6	$		408.7	$		(17.1	)		(4.2	)	%

36

Consolidated operating, general and administrative expenses were $221.6 million in 2007 as compared to $240.2 million in 2006.

	Operating, General & Administrative Expenses
	2007 vs. 2006
	(Millions of Dollars)
Environmental clean-up cost recovery	$	(12.6	)
BBI transaction costs	(12.3		)
Operating lease expense	(11.1		)
Legal and professional fees	(4.8		)
Postretirement medical benefits	(1.5		)
Bad debt expense	(1.2		)
2006 Insurance settlement	9.3
Stock-based compensation and short-term incentive	5.7
Insurance reserves	5.5
Labor	5.3
Other	(0.9		)
Reduction in Operating, General & Administrative Expenses	$	(18.6	)

The reduction in operating, general and administrative expenses of $18.6 million was primarily due to the following:

• Various MGP environmental issues settled in our South Dakota natural gas rate case resulting in recovery of clean-up costs (see “Critical Accounting Policies and Estimates - Regulatory Assets and Liabilities”);

• Lower transaction related costs due to the termination of the proposed merger agreement with BBI during 2007;

• Decreased operating lease expense due to the purchase of our previously leased interest in Colstrip Unit 4 during 2007;

• Decreased legal and professional fees primarily related to outstanding litigation;

• Lower claims for postretirement medical benefits; and

• Improvement in collections of customer balances.

Offsets to these reductions include the following:

• The inclusion in 2006 results of a reduction in expenses due to an insurance settlement received;

• Increases in stock-based compensation due to equity awards granted during 2006, and higher short-term incentive primarily due to better company financial performance in 2007;

• Increases in insurance reserves related to workers compensation claims; and

• Increased labor costs due to a combination of compensation increases and less time spent by employees on capital projects. During 2007, employees spent a greater portion of their time on maintenance projects (which are expensed) and we utilized more contract labor for capital projects.

In addition to the $11.1 million decrease in 2007, we expect operating lease expense to decrease another $14.4 million in 2008.

Property and other taxes were $87.6 million in 2007 as compared to $74.2 million in 2006. Property and other taxes in 2006 are net of $7.8 million that we collected through our Montana property tax tracker, as discussed in the gross margin analysis above. In addition, property and other taxes increased by approximately $5.6 million during 2007.

We have seen significant increases in our Montana property taxes since 2003 due primarily to increasing valuation assessments of our property by the Montana Department of Revenue. We have protested approximately $16.6 million, $16.3 million and $11.6 million of our 2007, 2006 and 2005 property taxes, respectively, and are currently appealing our 2005 valuation in Montana state court. We have recognized our property tax expense based on the total amount billed (including amounts protested), so if we are successful with our appeal, we will recognize a reduction of property tax expense in the period the appeal is resolved. Under Montana law, we are allowed to track the changes in the actual level of state and local taxes and fees and recover these amounts in rates; however the MPSC has only authorized recovery of approximately 60% of this increase for the last three years. We disputed the MPSC's decision in Montana District Court, and during the first quarter of 2007, the District Court ruled in the MPSC's favor. We did not appeal the decision. We have recognized property tax expense based on the 60% recovery previously approved by the MPSC; therefore, this ruling did not impact our expense recognition.

37

Depreciation expense was $82.4 million in 2007 as compared with $75.3 million in 2006. This $7.1 million increase was primarily due to increased property in service and a $2.0 million increase due to our purchase of our previously leased interest in Colstrip Unit 4. We expect annual depreciation expense to increase by $4.4 million in 2008 in addition to the $2.0 million in 2007 due to this purchase.

In February 2007, a jury verdict was rendered against us in Montana state court, which ordered us to pay $17.4 million in compensatory and $4.0 million in punitive damages in a case called Ammondson, et al. v. NorthWestern Corporation, et al. Due to the verdict, we recognized a loss of $19.0 million in our 2006 results of operations to increase our recorded liability related to this claim.

Consolidated operating income in 2007 was $140.1 million, as compared with $110.4 million in 2006. This $29.7 million increase was primarily due to the $12.6 million increase in gross margin and lower operating expenses as discussed above.

Consolidated interest expense in 2007 was $56.9 million, an increase of $0.9 million, or 1.6%, from 2006. We expect interest expense to increase by approximately $8.2 million in 2008 as a result of the additional debt related to the purchase of our previously leased interest in Colstrip Unit 4. See “Liquidity and Capital Resources" for additional information regarding our refinancing activities.

Consolidated other income in 2007 was $2.4 million, a decrease of $6.7 million from 2006. This decrease was primarily due to the inclusion in 2006 results of gains of $3.9 million related to an interest rate swap and $2.3 million on the sale of a partnership interest in oil and gas properties.

Consolidated income tax expense in 2007 was $32.4 million as compared with $25.9 million in 2006. Our effective tax rate for 2007 was 37.8% as compared to 40.9% for 2006. Portions of our BBI transaction related costs were considered non-deductible for taxes in 2006; however, with the termination of the agreement these costs became deductible, resulting in a reduction to our tax expense of approximately $1.2 million in 2007. While we reflect an income tax provision in our financial statements, we expect our cash payments for income taxes will be minimal through at least 2010, based on our anticipated use of net operating losses.

Consolidated net income in 2007 was $53.2 million compared with $37.9 million for the same period in 2006. This increase was primarily due to higher operating income as discussed above, partially offset by lower other income and increased income tax expense.

38

Year Ended December 31, 2006 Compared with Year Ended December 31, 2005

		Year Ended December 31,
				2006				2005				Change			% Change
		(in millions)
Operating Revenues
	Regulated Electric		$		661.7		$		631.7		$		30.0			4.7		%
	Regulated Natural Gas				359.7				369.5				(9.8	)		(2.7	)
	Unregulated Electric				83.0				87.0				(4.0	)		(4.6	)
	Other				77.0				155.0				(78.0	)		(50.3	)
	Eliminations				(48.7	)			(77.4	)			28.7			37.1
			$		1,132.7		$		1,165.8		$		(33.1	)		(2.8	)	%

	Year Ended December 31,
			2006				2005				Change			% Change
			(in millions)
Cost of Sales
Regulated Electric		$		332.8		$		306.5		$		26.3			8.6		%
Regulated Natural Gas				240.8				246.8				(6.0	)		(2.4	)
Unregulated Electric				16.6				17.4				(0.8	)		(4.6	)
Other				70.5				147.0				(76.5	)		(52.0	)
Eliminations				(47.1	)			(75.9	)			28.8			37.9
		$		613.6		$		641.8		$		(28.2	)		(4.4	)	%

		Year Ended December 31,
					2006					2005						Change					% Change
		(in millions)
Gross Margin
Regulated Electric			$			328.9			$			325.2			$			3.7					1.1				%
Regulated Natural Gas						118.9						122.7						(3.8		)			(3.1		)
Unregulated Electric						66.4						69.6						(3.2		)			(4.6		)
Other						6.5						8.0						(1.5		)			(18.8		)
	Eliminations						(1.6	)					(1.5	)					(0.1			)		(6.7		)
				$			519.1				$		524.0				$		(4.9			)		(0.9		)		%

Consolidated gross margin in 2006 was $519.1 million, a decrease of $4.9 million, or 0.9%, from gross margin in 2005. The regulated electric gross margin increase in 2006 was primarily due to increased transmission revenues and retail volumes offset by the following items. During March 2006, we signed a stipulation with the MCC to settle various issues raised relative to our 2005 and 2006 electric tracker filings. As a result of this stipulation we recognized increased cost of sales of $4.3 million during the first quarter of 2006 related to the removal of replacement costs and certain forward sales contracts from our electric tracker. Regulated electric results for 2005 also included a $4.9 million gain related to a QF contract amendment.The $3.8 million decrease in regulated natural gas margin was primarily due to a $4.6 million recovery of supply costs during the second quarter of 2005 that were previously disallowed by the MPSC, partly offset by higher transmission and storage revenue. Unregulated electric margin decreased $3.2 million primarily due to lower volumes partially offset by higher average prices. Other gross margin decreased $1.5 million primarily due to a renegotiated gas supply and management services contract and lower volumes.

	Year Ended December 31,
			2006			2005			Change		% Change
	(in millions)
Operating Expenses
Operating, general and administrative		$		240.2	$		225.5	$		14.7		6.5		%
Property and other taxes				74.2			72.1			2.1		2.9
Depreciation				75.3			74.4			0.9		1.2
Ammondson verdict				19.0			—			19.0		100.0
Reorganization items				—			7.5			(7.5	)	(100.0	)
		$		408.7	$		379.5	$		29.2		7.7		%

39

Consolidated operating, general and administrative expenses were $240.2 million in 2006 as compared to $225.5 million in 2005. The $14.7 million increase was primarily due to $13.8 million in transaction related costs pursuant to the proposed BBI transaction and $2.2 million in higher legal and professional fees associated with assessing our strategic alternatives and addressing outstanding litigation. While an acquiring entity typically capitalizes its acquisition related costs, the transaction costs incurred by an acquiree are expensed as incurred.These costs included payment of $8.6 million transaction fees to our strategic advisor during 2006. Other items impacting operating, general and administrative expense were increased pension expense of $3.0 million, increased bad debt expense of $1.9 million due to increases in past due customer balances, and higher operating costs of approximately $1.8million primarily due to increased line clearance, maintenance and fuel costs. In addition, our self-insurance reserves decreased $2.8 million in 2006 with past claims settling at or below their estimated amounts, as compared to a $5.0 million decrease in the 2005 primarilybased on claims settled for less than anticipated and positive loss experience. The receipt of $9.3 million from an insurance settlement and a $3.1 million reduction in stock-based compensation and short-term incentive expense partially offset these increases.

Property and other taxes were $74.2 million in 2006 as compared to $72.1 million in 2005. Property and other taxes are net of $7.8 million and $5.7 million in 2006 and 2005, respectively, that we collected through our Montana property tax tracker.

Depreciation expense was $75.3 million in 2006 as compared with $74.4 million in 2005.

In February 2007, a jury verdict was rendered against us in Montana state court, which ordered us to pay $17.4 million in compensatory and $4.0 million in punitive damages in a case called Ammondson, et al. v. NorthWestern Corporation, et al. Due to the verdict, we recognized a loss of $19.0 million in our 2006 results of operations to increase our recorded liability related to this claim. The case relates to 15 former Montana Power Company (MPC) executives who had supplemental retirement contracts that provided additional payments above and beyond their qualified pension and 401K Plan. These executives, and seven other former executives who were not included in the suit, were the only individuals that were offered these supplemental contracts. The supplemental payments were suspended during our bankruptcy proceedings and later reinstated. These former MPC executives received all funds that had previously been suspended and as of November 2005 were again receiving the monthly amount determined in their contracts.

Reorganization items in 2005 of $7.5 million consisted of bankruptcy related professional fees and expenses. During 2005 reorganization related professional fees were primarily associated with the attempted resolution of the QUIPs litigation and the resolution of other disputed Class 9 claims.

Consolidated operating income in 2006 was $110.4 million, as compared with $144.5 million in 2005. This $34.1 million decrease was primarily due to the adverse jury verdict, BBI transaction related costs and lower margins discussed above.

Consolidated interest expense in 2006 was $56.0 million, a decrease of $5.3 million, or 8.6%, from 2005. This decrease was primarily attributable to a $94 million decrease in debt in 2005 as well as our 2006 refinancing transactions, which replaced our $90.2 million and $80.0 million Montana pollution control obligations and our $150 million Montana first mortgage bonds with lower interest rate debt. Our credit facility borrowings have also decreased in 2006 by $31 million. See “Liquidity and Capital Resources" for additional information regarding our refinancing activities.

Consolidated loss on extinguishment of debt of $0.5 million in 2005 resulted from an early principal payment of $25.0 million on our senior secured term loan B on April 22, 2005.

Consolidated other income in 2006 was $9.1 million, a decrease of $8.4 million from 2005. In 2006, we recorded a $3.9 million gain related to an interest rate swap and a $2.3 million gain on the sale of a partnership interest in oil and gas properties. In 2005, we recorded a $9.0 million gain from a dispute settlement and a $4.7 million gain from the sale of excess sulfur dioxide (SO2) emission allowances. The market value of SO2 emission allowances increased significantly during the third quarter of 2005 and we sold our excess SO2 emission allowances covering years 2011 through 2016. Proceeds from the sale of these emission allowances are not subject to regulatory jurisdiction. We have excess SO2 emission allowances remaining for years 2017 through 2031, however the market for these years is presently illiquid, and these emission allowances have no carrying value in our financial statements.

40

Consolidated income tax expense in 2006 was $25.9 million as compared with $38.5 million in 2005. Our effective tax rate for 2006 was 40.9% as compared to 38.5% for 2005. Portions of our BBI transaction related costs were considered non-deductible for taxes, which increased our effective tax rate in 2006.

Income from discontinued operations in 2006 was $0.4 million compared to a loss of $2.1 million in 2005. The income in 2006 related to the final liquidation of Netexit, while the 2005 loss was primarily related to professional fees and settlement of claims in Netexit's bankruptcy proceedings.

Consolidated net income in 2006 was $37.9 million compared with $59.5 million for the same period in 2005. This decline was primarily due to a $29.2 million increase in operating expenses due largely to the adverse jury verdict and transaction related costs pursuant to the proposed BBI transaction, a $4.9 million decrease in gross margin, and an $8.4 million decline in other income. Partially offsetting this decline was a decrease in tax expense of $12.6 million, decreased interest expense of $5.3 million and a $2.5 million increase in income from discontinued operations.

REGULATED ELECTRIC MARGIN

Year Ended December 31, 2007 Compared with Year Ended December 31, 2006

The following summarizes the regulated electric revenue, cost of sales, and gross margin for the years ended December 31, 2007 and 2006:

			Results
			2007				2006				Change		% Change
			(in millions)
	Total Revenues			736.7				661.7				75.0		11.3	%
	Total Cost of Sales			389.7				332.8				56.9		17.1	%
	Gross Margin	$		347.0		$		328.9		$		18.1		5.5	%
% GM/Rev			47.1		%		49.7		%

The following summarizes the components of the changes in regulated electric margin for the years ended December 31, 2007 and 2006:

	Gross Margin
	2007 vs. 2006
	(Millions of Dollars)
Property tax tracker	$	8.4
Customer growth and warmer weather	6.6
2006 MCC stipulation	4.1
Transmission volumes	1.6
Transmission interim rate increase	1.6
Lower QF gain	(2.3		)
Wholesale and other	(1.9		)
Improvement in Gross Margin	$	18.1

Regulated electric margin increased $18.1 million, or 5.5%, due primarily to amounts collected through our Montana property tax tracker and increased volumes from 1.7% customer growth and warmer summer weather in Montana. In addition, we had higher transmission margin in 2007 primarily from transmitting additional energy acquired by others across our transmission system and an interim increase in our transmission rates (subject to refund). These increases were partially offset by lower QF related gains and a 37.5% decrease in wholesale volumes sold in the secondary markets. We recorded gains (reduced cost of sales) related to our QF liability of $0.9 million in 2007 and $3.2 million in 2006 as actual QF output and variable pricing terms were lower than our estimate. Wholesale margin was lower in 2007 primarily due to decreased plant availability resulting from planned and unplanned maintenance. Our 2006 margin was also $4.1 million lower due to a loss recorded as a result of a stipulation with the MCC.

41

The following summarizes regulated electric volumes, customer counts and cooling degree-days for the years ended December 31, 2007 and 2006:

	Volumes MWH
			2007		2006		Change		% Change
	(in thousands)
Retail Electric
Montana		2,235		2,184		51				2.3		%
South Dakota		505		474		31				6.5
Residential		2,740		2,658		82				3.1
Montana		3,213		3,125		88				2.8
South Dakota		827		776		51				6.6
Commercial		4,040		3,901		139				3.6
Industrial		2,992		2,998		(6		)		(0.2	)
Other		181		185		(4		)		(2.2	)
Total Retail Electric		9,953		9,742		211				2.2		%
Wholesale Electric		155		248		(93		)		(37.5	)	%

Average Customer Counts			2007	2006		Change	% Change
	Montana	326,248		320,401	5,847			1.8	%
	South Dakota	59,474		58,968	506			0.9	%
	Total	385,722		379,369	6,353			1.7	%

	2007 as compared with:
Cooling Degree-Days	2006	Historic Average
Montana	25% warmer	82% warmer
South Dakota	Remained Flat	23% warmer

Regulated electric volumes increased 211 MWHs, or 2.2%, due primarily to customer growth and warmer summer weather in Montana. Regulated wholesale electric volumes decreased 93 MWHs, or 37.5%, primarily due to decreased plant availability resulting from planned and unplanned maintenance.

We expect electric transmission and distribution revenues to increase approximately $10 million annually as a result of our joint stipulation with the MCC to settle our Montana general rate filing.

Year Ended December 31, 2006 Compared with Year Ended December 31, 2005

The following summarizes the regulated electric revenue, cost of sales, and gross margin for the years ended December 31, 2006 and 2005:

			Results
			2006				2005				Change		% Change
			(in millions)
	Total Revenues			661.7				631.7				30.0		4.7	%
	Total Cost of Sales			332.8				306.5				26.3		8.6	%
	Gross Margin	$		328.9		$		325.2		$		3.7		1.1	%
% GM/Rev			49.7		%		51.5		%

42

The following summarizes the components of the changes in regulated electric margin for the years ended December 31, 2006 and 2005:

	Gross Margin
	2006 vs. 2005
	(Millions of Dollars)
Transmission volumes	$	5.3
Customer growth and warmer weather	4.5
Wholesale and other	2.2
Higher QF gain	0.7
MCC stipulation	(4.1		)
2005 QF contract amendment	(4.9		)
Improvement in Gross Margin	$	3.7

Regulated electric margin increased $3.7 million, or 1.1%. Transmission margin increased $5.3 million primarily due to strong hydro generation in 2006. During the second quarter of 2006, the Pacific Northwest experienced strong hydro generation, which resulted in increased electric supply at significantly lower prices than states to our south. Since Pacific Northwest energy prices were substantially lower than in these states, suppliers realized more profit by transmitting electricity across our lines. Customer growth of 1.8% and warmer summer weather in Montana contributed approximately $4.5 million to the increase in margin, while wholesale and other added $2.2 million. In addition, we recorded a $3.2 million gain in 2006 as compared to $2.5 million in 2005, as actual QF output and variable pricing terms were lower than our estimate. These increases were partly offset by the following items. During March 2006, we signed a stipulation with the MCC to settle various issues they raised relative to our 2005 and 2006 electric tracker filings. As a result of this stipulation, we recognized increased cost of sales of $4.1 million during the first quarter of 2006 related to the removal of replacement costs and certain forward sales contracts from our electric tracker. Results for 2005 also included a $4.9 million gain related to a QF contract amendment.

The following summarizes regulated electric volumes, customer counts and cooling degree-days for the years ended December 31, 2006 and 2005:

	Volumes MWH
			2006		2005		Change		% Change
	(in thousands)
Retail Electric
Montana		2,184		2,104		80				3.8		%
South Dakota		474		476		(2		)		(0.4	)
Residential		2,658		2,580		78				3.0
Montana		3,125		3,040		85				2.8
South Dakota		776		774		2				0.3
Commercial		3,901		3,814		87				2.3
Industrial		2,998		3,034		(36		)		(1.2	)
Other		185		170		15				8.8
Total Retail Electric		9,742		9,598		144				1.5		%
Wholesale Electric		248		219		29				13.2		%

Average Customer Counts			2006	2005		Change	% Change
	Montana	320,401		314,131	6,270			2.0	%
	South Dakota	58,968		58,536	432			0.7	%
	Total	379,369		372,667	6,702			1.8	%

	2006 as compared with:
Cooling Degree-Days	2005	Historic Average
Montana	55% warmer	48% warmer
South Dakota	7% cooler	22% warmer

43

Regulated retail electric volumes increased 144 MWHs, or 1.5%, due primarily to a 1.8% increase in customer growth and warmer summer weather in Montana. Regulated wholesale electric volumes increased 29 MWHs, or 13.2%, due primarily to increased availability at our jointly owned plants with less down time for maintenance.

REGULATED NATURAL GAS MARGIN

Year Ended December 31, 2007 Compared with Year Ended December 31, 2006

The following summarizes the regulated natural gas revenue, cost of sales, and gross margin for the years ended December 31, 2007 and 2006:

			Results
			2007				2006				Change			% Change
			(in millions)
Total Revenues		363.6				359.7				3.9			1.1			%
Total Cost of Sales		236.0				240.8				(4.8		)	(2.0		)	%
Gross Margin	$	127.6			$	118.9			$	8.7			7.3			%
% GM/Rev		35.1		%		33.1		%

The following summarizes the components of the changes in regulated natural gas margin for the years ended December 31, 2007 and 2006:

	Gross Margin
	2007 vs. 2006
	(Millions of Dollars)
Property tax tracker	$	3.1
Customer growth and colder weather	2.7
Transfer of previously unregulated customers	1.7
Storage	0.9
Other	0.3
Improvement in Gross Margin	$	8.7

Regulated natural gas margin increased $8.7 million, or 7.3%, primarily due to amounts collected through our Montana property tax tracker and increased volumes due to 1.8% customer growth and colder winter weather in South Dakota and Nebraska. In addition, regulated natural gas margin increased $1.7 million due to the transfer of certain previously unregulated customers and pipelines into the regulated business, and $0.9 million from higher storage utilization.

The following summarizes regulated natural gas volumes, customer counts and heating degree-days for the years ended December 31, 2007 and 2006:

	Volumes Dekatherms
			2007		2006		Change			% Change
	(in thousands)
Retail Gas
Montana		12,101		12,036		65			0.5			%
South Dakota		2,771		2,596		175			6.7
Nebraska		2,519		2,371		148			6.2
Residential		17,391		17,003		388			2.3
Montana		6,091		6,025		66			1.1
South Dakota		2,444		2,189		255			11.6
Nebraska		2,655		2,546		109			4.3
Commercial		11,190		10,760		430			4.0
Industrial		169		177		(8		)	(4.5		)
Other		144		153		(9		)	(5.9		)
Total Retail Gas		28,894		28,093		801			2.9			%

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Average Customer Counts		2007		2006		Change		% Change
	Montana		174,651		170,873		3,778		2.2	%
	South Dakota		42,427		41,842		585		1.4
	Nebraska		40,866		40,781		85		0.2
	Total		257,944		253,496		4,448		1.8	%

	2007 as compared with:
Heating Degree-Days	2006	Historic Average
Montana	1% warmer	8% warmer
South Dakota	8% colder	6% warmer
Nebraska	7% colder	8% warmer

Regulated natural gas volumes increased 801 dekatherms, or 2.9%, primarily due to customer growth and colder winter weather in South Dakota and Nebraska.

We expect natural gas transportation and distribution revenues to increase approximately $5 million annually as a result of our joint stipulation with the MCC to settle our Montana general rate filing and approximately $4.6 million annually as a result of rate case settlements in South Dakota and Nebraska.

Year Ended December 31, 2006 Compared with Year Ended December 31, 2005

The following summarizes the regulated natural gas revenue, cost of sales, and gross margin for the years ended December 31, 2006 and 2005:

			Results
			2006				2005				Change			% Change
			(in millions)
Total Revenues		359.7				369.5				(9.8		)	(2.7		)	%
Total Cost of Sales		240.8				246.8				(6.0		)	(2.4		)	%
Gross Margin	$	118.9			$	122.7			$	(3.8		)	(3.1		)	%
% GM/Rev		33.1		%		33.2		%

The following summarizes the components of the changes in regulated natural gas margin for the years ended December 31, 2006 and 2005:

	Gross Margin
	2006 vs. 2005
	(Millions of Dollars)
2005 Supply cost recovery	$	(4.6	)
Transportation volumes	0.8
Decline in Gross Margin	$	(3.8	)

Gross margin decreased $3.8 million, or 3.1%, primarily due the recovery of $4.6 million of supply costs reflected in the 2005 margin, which were previously disallowed by the MPSC, partly offset by higher transportation volumes.

45

The following summarizes regulated natural gas volumes, customer counts and heating degree-days for the years ended December 31, 2006 and 2005:

	Volumes Dekatherms
	2006		2005		Change			% Change
	(in thousands)
Retail Gas
Montana		12,036		12,584		(548	)		(4.4	)
South Dakota		2,596		2,846		(250	)		(8.8	)
Nebraska		2,371		2,596		(225	)		(8.7	)
Residential		17,003		18,026		(1,023	)		(5.7	)	%
Montana		6,025		6,210		(185	)		(3.0	)
South Dakota		2,189		1,913		276			14.4
Nebraska		2,546		2,646		(100	)		(3.8	)
Commercial		10,760		10,769		(9	)		(0.1	)
Industrial		177		181		(4	)		(2.2	)
Other		153		131		22			16.8
Total Retail Gas		28,093		29,107		(1,014	)		(3.5	)	%

Average Customer Counts		2006		2005		Change		% Change
	Montana		170,873		167,043		3,830		2.3	%
	South Dakota		41,842		41,511		331		0.8
	Nebraska		40,781		40,653		128		0.3
	Total		253,496		249,207		4,289		1.7	%

	2006 as compared with:
Heating Degree-Days	2005	Historic Average
Montana	8% warmer	7% warmer
South Dakota	5% warmer	11% warmer
Nebraska	6% colder	13% warmer

Regulated retail natural gas volumes decreased 1,014 dekatherms, or 3.5%, due primarily to warmer weather in Montana and South Dakota.

UNREGULATED ELECTRIC MARGIN

Year Ended December 31, 2007 Compared with Year Ended December 31, 2006

Our unregulated electric segment primarily consists of our joint ownership in the Colstrip Unit 4 generation facility, which represents approximately 30%. We sell our Colstrip Unit 4 output, approximately 222 MWs at full load, principally to two unrelated third parties under agreements through December 2010. Under a separate agreement we repurchase 111 MWs through December 2010. These 111 MWs were available for market sales to other third parties through June 2007. Beginning July 1, 2007, 90 MWs of base-load energy from Colstrip Unit 4 are being supplied to the Montana electric supply load (included in our regulated electric segment) for a term of 11.5 years at an average nominal price of $35.80 per MWH. In addition, 21 MWs of base-load energy from Colstrip Unit 4 are committed to the Montana electric supply load for a term of 76 months beginning in March 2008 at $19 per MWH below the Mid-C index price with a floor of zero, pending applicable regulatory approvals.

46

The following summarizes the components of the changes in unregulated electric revenue, cost of sales, and gross margin for the years ended December 31, 2007 and 2006:

			Results
					2007				2006				Change			% Change
			(in millions)
Total Revenues		$		74.2			$	83.0			$	(8.8		)	(10.6		)	%
Total Cost of Sales		$		18.0			$	16.6			$	1.4			8.4			%
Gross Margin		$		56.2			$	66.4			$	(10.2		)	(15.4		)	%
	% GM/Rev				75.7	%			80.0	%

The following summarizes the components of the changes in unregulated electric margin for the years ended December 31, 2007 and 2006:

	Gross Margin
	2007 vs. 2006
	(Millions of Dollars)
Volumes	$	7.5
Average prices	(15.1		)
Fuel supply costs	(2.6		)
Decline in Gross Margin	$	(10.2	)

Unregulated electric margin decreased $10.2 million, or 15.4%, due primarily to lower average contracted prices associated with the 90 MW contract discussed above and higher fuel supply costs, partially offset by an increase in volumes resulting from higher demand and plant availability.

The following summarizes unregulated electric volumes for the years ended December 31, 2007 and 2006:

	Volumes MWH
	2007	2006	Change	% Change
	(in thousands)
Wholesale Electric	1,638	1,504	134	8.9	%

Unregulated electric volumes increased 134 MWHs, or 8.9%. During the second quarter of 2006 strong hydro generation in the Pacific Northwest provided increased supply in the wholesale electricity market, resulting in reduced demand for our Colstrip power. In addition, we had less energy available to sell in 2006 due to decreased plant availability resulting from planned and unplanned outages for plant maintenance.

We expect our margin to decrease in 2008 under the terms of our Colstrip Unit 4 90 MW commitment to electric supply, which will be in place for a full year, combined with the additional 21 MW commitment to electric supply discussed above. Including these commitments and our other forward sales contracts, we estimate our margin will decrease approximately $5.1 million in 2008 based on anticipated volumes of 1.7 million MWH at an overall average sales price of $46.54 per MWH. If Colstrip Unit 4 experiences unplanned outages, we may not achieve our planned margin. In addition, in January 2008, we retained a financial advisor to assist us in evaluation our strategic options with respect to our joint ownership of Colstrip Unit 4.

Year Ended December 31, 2006 Compared with Year Ended December 31, 2005

The following summarizes the components of the changes in unregulated electric revenue, cost of sales, and gross margin for the years ended December 31, 2006 and 2005:

			Results
					2006				2005				Change			% Change
			(in millions)
Total Revenues		$		83.0			$	87.0			$	(4.0		)	(4.6		)	%
Total Cost of Sales		$		16.6			$	17.4			$	(0.8		)	(4.6		)	%
Gross Margin		$		66.4			$	69.6			$	(3.2		)	(4.6		)	%
	% GM/Rev				80.0	%			80.0	%

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The following summarizes the components of the changes in unregulated electric margin for the years ended December 31, 2006 and 2005:

	Gross Margin
	2006 vs. 2005
	(Millions of Dollars)
Volumes	$	(12.5	)
Average prices	9.3
Decline in Gross Margin	$	(3.2	)

Unregulated electric margin decreased $3.2 million, or 4.6%, primarily due to lower volumes partially offset by higher average prices.

The following summarizes unregulated electric volumes for the years ended December 31, 2006 and 2005:

	Volumes MWH
	2006	2005	Change		% Change
	(in thousands)
Wholesale Electric	1,504	1,785	(281	)	(15.7	)	%

Unregulated electric volumes decreased 281 MWHs, or 15.7%, due to reduced demand as discussed above and less plant availability related to planned and unplanned outages.

ALL OTHER

This primarily consists of our remaining unregulated natural gas operations and unallocated corporate costs. We previously disclosed our intent to sell our unregulated natural gas business or transfer the remaining customers and contracts to our regulated natural gas business. We have moved certain customers to our regulated natural gas business unit and sold several customer contracts during 2007; therefore, the unregulated natural gas business unit will no longer be considered a reportable segment under FASB Statement No. 131, Disclosures About Segments of an Enterprise and Related Information. We have two remaining unregulated natural gas contracts (a supply contract and an interstate capacity agreement) that will be presented in all other.

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LIQUIDITY AND CAPITAL RESOURCES

We utilize our revolver availability to manage our cash flows due to the seasonality of our business, and utilize any cash on hand in excess of current operating requirements to reduce borrowings. As of December 31, 2007, we had cash and cash equivalents of $12.8 million, and revolver availability of $158.7 million. During the year ended December 31, 2007, we repaid $53.5million of debt, including $38.0 million on our revolver, paid dividends on common stock of $47.3 million, made property tax payments of approximately $77.9 million, contributed $22.6 million to our pension plans, and completed the purchase of our previously leased interest in the Colstrip Unit 4 generating facility for approximately $141.3 million (see “Financing Activities” for further discussion).

Sources and Uses of Funds

We believe that our cash on hand, operating cash flows, and borrowing capacity, taken as a whole, provide sufficient resources to fund our ongoing operating requirements, debt maturities, anticipated dividends, and estimated future capital expenditures during the next 12 months. As of February 22, 2007, our availability under our revolving line of credit was approximately $169.2 million.

The amount of debt reduction and dividends is subject to certain factors including the use of existing cash, cash equivalents and the receipt of cash from operations. A material adverse change in operations or available financing could impact our ability to fund our current liquidity and capital resource requirements.

Capital Requirements

Our capital expenditures program is subject to continuing review and modification. Actual utility construction expenditures may vary from estimates due to changes in electric and natural gas projected load growth, changing business operating conditions and other business factors. We anticipate funding capital expenditures through cash flows from operations, available credit sources and future rate increases. Our estimated cost of capital expenditures (excluding strategic growth opportunities discussed in our strategy section above) for the next five years is as follows (in thousands):

Year	Amount
2008	$	107,000
2009	107,000
2010	107,500
2011	108,000
2012	110,000

Our strategic growth capital falls within one of three categories: transmission, generation, and natural gas pipelines. We have two significant transmission projects currently being contemplated, as discussed in the strategy section. The Colstrip 500 kV upgrade has a projected total capital cost of $250 million of which we have assumed to have a 50% ownership and an estimated completion date in 2011. The MSTI project has an estimated cost of $800 million with an anticipated completion date in 2013. Decisions whether to partner and/or resize the line due to demand would impact the ultimate capital expected from us.

We have proposed development of a 100-150 MW gas fired generation plant in Montana. This has an estimated cost of greater than $100 million and if approved, is expected to be in service by 2010. We are also evaluating peaking and base-load generation in South Dakota but are early in the evaluation process and have no estimates of future costs. We have also taken advantage of growth in the ethanol business in our South Dakota and Nebraska territories by providing these customers with natural gas delivery. We estimate up to $20 million of capital investment will be required to support this growth over the next three years.

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Contractual Obligations and Other Commitments

We have a variety of contractual obligations and other commitments that require payment of cash at certain specified periods. The following table summarizes our contractual cash obligations and commitments as of December 31, 2007. See additional discussion in Note 11 to the Consolidated Financial Statements.

	Total			2008		2009		2010		2011		2012		Thereafter
	(in thousands)
Long-term Debt(1)	$		805,977	$	18,617	$	132,045	$	23,605	$	6,578	$	3,792	$	621,340
Capital Leases	40,391			2,389		1,282		1,174		1,265		1,363		32,918
Future minimum operating lease payments(1)	4,602			1,828		1,081		684		501		429		79
Estimated Pension and Other Postretirement Obligations(2)	111,300			26,100		22,200		22,600		21,500		18,900		N/A
Qualifying Facilities(3)	1,518,679			60,574		62,598		64,580		66,067		68,156		1,196,704
Supply and Capacity Contracts(4)	1,915,658			544,137		329,779		306,622		151,411		129,413		454,296
Contractual interest payments on debt (5)	409,673			48,639		46,409		37,981		35,830		35,417		205,397
Total Commitments(6)	$	4,806,280		$	702,284	$	595,394	$	457,246	$	283,152	$	257,470	$	2,510,734

(1)    During 2007, we completed the purchase of an interest in a portion of the Colstrip Unit 4 generating facility, which increased our long-term debt obligations, and reduced our operating lease payments. See Note 4, Colstrip Unit 4 acquisition.

(2)    We have only estimated cash obligations related to our pension and other postretirement benefit programs for five years, as it is not practicable to estimate thereafter.

(3)    The QFs require us to purchase minimum amounts of energy at prices ranging from $65 to $138 per MWH through 2029. Our estimated gross contractual obligation related to the QFs is approximately $1.5 billion. A portion of the costs incurred to purchase this energy is recoverable through rates authorized by the MPSC, totaling approximately $1.2 billion.

(4)    We have entered into various purchase commitments, largely purchased power, coal and natural gas supply and natural gas transportation contracts. These commitments range from one to 24 years.

(5)    Contractual interest payments include an assumed average interest rate of 6.5% on an estimated revolving line of credit balance of $12.0 million through maturity in November 2009, and an assumed average interest rate of 5.5% on the $100 million floating rate nonrecourse loan through maturity in December 2009.

(6)    Potential tax payments related to uncertain tax positions are not practicable to estimate and have been excluded from this table.

Cash Flows

Factors Impacting our Liquidity

Our operations are subject to seasonal fluctuations in cash flow. During the heating season, which is primarily from November through March, cash receipts from natural gas sales and transportation services typically exceed cash requirements. During the summer months, cash on hand, together with the seasonal increase in cash flows and utilization of our existing revolving line of credit, are used to purchase natural gas to place in storage, perform maintenance and make capital improvements.

The effect of this seasonality on our liquidity is also impacted by changes in the market prices of our electric and natural gas supply, which is recovered through various monthly cost tracking mechanisms. These energy supply tracking mechanisms are designed to provide stable and timely recovery of supply costs on a monthly basis during the July to June annual tracking period, with an adjustment in the following annual tracking period to correct for any under or over collection in our monthly trackers. Due to the lag between our purchases of electric and natural gas commodities and revenue receipt from customers, cyclical over and under collection situations arise consistent with the seasonal fluctuations discussed above; therefore we usually under collect in the fall and winter and over collect in the spring. However, as of December 31,

50

2007, we are over collected on our current Montana natural gas and electric trackers by approximately $4.0 million, as compared with an undercollection of $16.9 million as of December 31, 2006. This overcollection is primarily due to increases phased into our electric supply rates during 2007 in anticipation of contract changes leading to higher supply prices. This phase in of increases will distribute the impact of supply cost increases over the next annual tracking period.

The following table summarizes our consolidated cash flows for 2007, 2006 and 2005.

	Year Ended December 31,
	2007			2006			2005
Continuing Operating Activities
Net income	$	53.2		$	37.9		$	59.5
Non-cash adjustments to net income	113.1			99.8			117.1
Proceeds from hedging activities	—			14.5			—
Changes in working capital	26.9			13.2			(9.4		)
Other	8.8			(0.3		)	(20.5		)
	202.0			165.1			146.7
Continuing Investing Activities
Property, plant and equipment additions	(117.1		)	(101.0		)	(80.9		)
Colstrip Unit 4 acquisition	(141.3		)	—			—
Sale of assets	1.9			24.2			7.5
Proceeds from hedging activities	—			5.3			—
Net proceeds from purchases / sales of investments	—			—			4.7
	(256.5		)	(71.5		)	(68.7		)
Financing Activities
Net borrowing (repayment) of debt	46.5			(37.5		)	(94.3		)
Dividends on common stock	(47.3		)	(44.1		)	(35.6		)
Deferred gas storage	—			(11.7		)	2.4
Proceeds from exercise of warrants	68.8			2.9			—
Other	(2.6		)	(11.6		)	(7.8		)
	65.4			(102.0		)	(135.3		)
Discontinued Operations	—			7.6			42.9
Net Increase (Decrease) in Cash and Cash Equivalents	$	10.9		$	(0.8	)	$	(14.4	)
Cash and Cash Equivalents, beginning of period	$	1.9		$	2.7		$	17.1
Cash and Cash Equivalents, end of period	$	12.8		$	1.9		$	2.7

Cash Flows Provided By Continuing Operating Activities

As of December 31, 2007, cash and cash equivalents were $12.8 million, compared with $1.9 million at December 31, 2006, and $2.7 million at December 31, 2005. Cash provided by continuing operating activities totaled $202.0 million during 2007, compared with $165.1 million during 2006. The increase in operating cash flows was primarily due to an overcollection in our electric tracker, which is discussed above in the “Factors Impacting our Liquidity" section, decreased purchases of storage gas, and higher net income. These increases were partially offset by the timing of the semi-annual Colstrip Unit 4 lease payment as discussed below, and proceeds received from hedging activities during 2006.

Cash provided by continuing operating activities totaled $165.1 million during 2006, compared with $146.7 million during 2005. This improvement in operating cash flows was primarily due to the timing of our semi-annual Colstrip Unit 4 lease payment of $16.1 million, which is typically paid by December 31^st each year, but was not paid until January 2, 2007. Other positive operating cash flow impacts were the reduced under collection of supply costs discussed above, proceeds received from hedging activities in 2006, and decreases in pension funding in 2006 versus 2005, offset by decreased net income and increases in natural gas held in storage.

Cash Flows Used In Investing Activities

Cash used in investing activities of continuing operations totaled $256.5 million in 2007, compared with $71.5 million during 2006, and $68.7 million during 2005. During 2007 we used $141.3 million to complete the purchase of an interest in a portion of the Colstrip Unit 4 generating facility, and $117.1 million for property, plant and equipment additions.

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During 2006, we received approximately $24.2 million from the sale of assets and $5.3 million from the settlement of hedging activities, offset by cash used of approximately $101.0 million for property, plant and equipment additions. In 2005, we received approximately $4.7 million of net proceeds from the sale of short-term investments, approximately $7.5 million of proceeds from the sale of assets and we used approximately $80.9 million for property, plant and equipment additions.

Cash Flow Provided By (Used In) Financing Activities

Cash provided by financing activities of continuing operations totaled $65.4 million during 2007, as compared with cash used of $102.0 million in 2006, and $135.3 million during 2005. During December 2007, our newly formed subsidiary, Colstrip Lease Holdings LLC, closed on a $100 million loan to finance the purchase of an interest in Colstrip Unit 4. In addition, we received proceeds during 2007 of $68.8 million from the exercise of warrants. We also made debt repayments of $53.5 million and paid dividends on common stock of $47.3 million.

In 2006, we made debt repayments of $37.5 million, paid dividends on common stock of $44.1 million, and paid $11.7 million for deferred storage transactions. Cash used to repurchase shares during 2006 was approximately $4.3 million. In addition, in association with our debt refinancings during 2006, we incurred financing costs of $7.2 million.

In 2005 we made debt repayments of $94.3 million, and paid dividends on common stock of $35.6 million. Cash used to repurchase shares during 2005 was approximately $5.6 million.

Discontinued Operations Cash Flows

The decrease in restricted cash held by discontinued operations during 2006 and 2005 was primarily due to Netexit's $7.7 million and $42.2 million distribution to us, respectively, along with payment of other allowed claims pursuant to its liquidating plan of reorganization in 2005.

Financing Transactions

In the fourth quarter of 2007 we formed a new subsidiary, Colstrip Lease Holdings LLC (CLH) to hold a portion of our acquired interest in Colstrip Unit 4. CLH closed on a $100 million loan on December 28, 2007, which is secured by its interest in Colstrip Unit 4 and is nonrecourse to NorthWestern Corporation. The loan bears interest at a floating rate of 5.96% as of December 31, 2007, which is 1.25% over LIBOR. In association with the Colstrip Unit 4 transaction we also consolidated $44.9 million in existing debt. This debt amortizes through December 31, 2010 and is at a fixed interest rate of 13.25%.

Credit Ratings

Fitch Investors Service (Fitch), Moody's Investors Service (Moody's) and Standard and Poor's Rating Group (S&P) are independent credit-rating agencies that rate our debt securities. These ratings indicate the agencies' assessment of our ability to pay interest and principal when due on our debt. As of February 22, 2008, our ratings with these agencies are as follows:

	Senior Secured Rating	Senior Unsecured Rating	Corporate Rating	Outlook
Fitch	BBB	BBB-	BBB-	Stable
Moody's	Baa3	Ba2	N/A	Stable
S&P	BBB	BB-	BB+	Positive

In general, less favorable credit ratings make debt financing more costly and more difficult to obtain on terms that are economically favorable to us and impacts our trade credit availability. Our credit ratings have remained consistent during the fourth quarter.

NEW ACCOUNTING STANDARDS

See Note 3 of “Notes to Consolidated Financial Statements," included in Item 8 herein for a discussion of new accounting standards.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

We are exposed to market risks, including, but not limited to, interest rates, energy commodity price volatility, and credit exposure. Management has established comprehensive risk management policies and procedures to manage these market risks.

Interest Rate Risk

We utilize various risk management instruments to reduce our exposure to market interest rate changes. These risks include exposure to adverse interest rate movements for outstanding variable rate debt and for future anticipated financings. All of our debt has fixed interest rates, with the exception of our revolver and the CLH $100 million loan. The revolving credit facility bears interest at a variable rate (approximately 4.73% as of December 31, 2007) tied to the London Interbank Offered Rate (LIBOR) plus a credit spread. The CLH loan currently bears interest at approximately 5.96%, which is 1.25% over LIBOR. Based upon amounts outstanding as of December 31, 2007, a 1% increase in the LIBOR would increase our annual interest expense by approximately $1.1 million.

Commodity Price Risk

Commodity price risk is one of our most significant risks due to our lack of ownership of natural gas reserves or regulated electric generation assets within the Montana market. Several factors influence price levels and volatilities. These factors include, but are not limited to, seasonal changes in demand, weather conditions, available generating assets within regions, transportation availability and reliability within and between regions, fuel availability, market liquidity, and the nature and extent of current and potential federal and state regulations.

As part of our overall strategy for fulfilling our electric supply requirements, we employ the use of market purchases, including forward purchase and sales contracts. These types of contracts are included in our electric supply portfolio and are used to manage price volatility risk by taking advantage of seasonal fluctuations in market prices. While we may incur gains or losses on individual contracts, the overall portfolio approach is intended to provide price stability for consumers; therefore, these commodity costs are included in our cost tracking mechanisms.

In our all other segment, we currently have a capacity contract through 2013 with a pipeline that gives us basis risk depending on gas prices at two different delivery points. We have sales contracts with certain customers that provide for a selling price based on the index price of gas coming from a delivery point in Ventura, Iowa. The pipeline capacity contract allows us to take delivery of gas from Canada, which has historically been cheaper than gas coming from Ventura, even when including transportation costs. If the Canadian gas plus transportation cost exceeds the index price at Ventura, then we will lose money on these gas sales. The annual capacity payments are approximately $1.8 million, which represents our maximum annual exposure related to this basis risk.

Counterparty Credit Risk

We have considered a number of risks and costs associated with the future contractual commitments included in our energy portfolio. These risks include credit risks associated with the financial condition of counterparties, product location (basis) differentials and other risks. Declines in the creditworthiness of our counterparties could have a material adverse impact on our overall exposure to credit risk. We maintain credit policies with regard to our counterparties that, in management's view, reduce our overall credit risk. There can be no assurance, however, that the management tools we employ will eliminate the risk of loss.

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial information, including the reports of independent accountants, the quarterly financial information, and the financial statement schedules, required by this Item 8 is set forth on pages F-1 to F-39 of this Annual Report on Form 10-K and is hereby incorporated into this Item 8 by reference.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None

 

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We have established disclosure controls and procedures to ensure that material information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms and accumulated and reported to the officers who certify the financial statements and to other members of senior management and the Audit Committee of the Board, as appropriate to allow timely decisions regarding required disclosure.

We conducted an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on this evaluation our principal executive officer and principal financial officer have concluded that, as of December 31, 2007, our disclosure controls and procedures are effective in providing reasonable assurance that information requiring disclosure is recorded, processed, summarized, and reported within the timeframe specified by the SEC's rules and forms.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal controls over financial reporting for the three-months ended December 31, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Management's Report on Internal Controls over Financial Reporting

The management of NorthWestern is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system was designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of published financial statements.

All internal controls over financial reporting, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention or overriding of controls. Therefore, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of internal controls over financial reporting may vary over time.

Our management, including our chief executive officer and chief financial officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2007. In making its assessment of internal control over financial reporting, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. Based on our evaluation, management concluded that, as of December 31, 2007, our internal control over financial reporting was effective based on those criteria.

 

ITEM 9B. OTHER INFORMATION

Not applicable.

54

Part III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this item with respect to directors and corporate governance will be set forth in NorthWestern Corporation's Proxy Statement for its 2008 Annual Meeting of Shareholders, which is incorporated by reference. Information with respect to our Executive Officers is included in Item 1 to this report.

 

ITEM 11. EXECUTIVE COMPENSATION

Information required by this Item will be set forth in NorthWestern Corporation's Proxy Statement for its 2008 Annual Meeting of Shareholders, which is incorporated by reference.

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS

Information required by this item will be set forth in NorthWestern Corporation's Proxy Statement for its 2008 Annual Meeting of Shareholders, which is incorporated by reference. Information with respect to issuance under equity compensation plans is included in Part II, Item 5 to this report.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Information concerning relationships and related transactions of the directors and officers of NorthWestern Corporation and director independence will be set forth in NorthWestern Corporation's Proxy Statement for its 2008 Annual Meeting of Shareholders, which is incorporated by reference.

 

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

Information concerning fees paid to the principal accountant for each of the last two years is contained in NorthWestern Corporation's Proxy Statement for its 2008 Annual Meeting of Shareholders, which is incorporated by reference.

55

Part IV

 

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

a) The following documents are filed as part of this report:

(1) Financial Statements.

The following items are included in Part II, Item 8 of this annual report on Form 10-K:

FINANCIAL STATEMENTS:

	Page
Reports of Independent Registered Public Accounting Firm	F - 2
Consolidated Statements of Income for the Years Ended December 31, 2007, 2006 and 2005	F - 4
Consolidated Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and 2005	F - 5
Consolidated Balance Sheets as of December 31, 2007 and 2006	F - 6
Consolidated Statements of Shareholders' Equity and Comprehensive Income for the Years Ended December 31, 2007, 2006 and 2005	F - 7
Notes to Consolidated Financial Statements	F - 8
Quarterly Unaudited Financial Data for the Two Years Ended December 31, 2007	F - 38

(2) Financial Statement Schedules

Schedule II. Valuation and Qualifying Accounts

Schedule II, Valuation and Qualifying Accounts, is included in Part II, Item 8 of this annual report on Form 10-K. All other schedules are omitted because they are not applicable or the required information is shown in the Financial Statements or the Notes thereto.

56

(3) Exhibits.

The exhibits listed below are hereby filed with the SEC, as part of this annual report on Form 10-K. Certain of the following exhibits have been previously filed with the SEC pursuant to the requirements of the Securities Act of 1933 or the Securities Exchange Act of 1934. Such exhibits are identified by the parenthetical references following the listing of each such exhibit and are incorporated by reference. We will furnish a copy of any exhibit upon request, but a reasonable fee will be charged to cover our expenses in furnishing such exhibit.

Exhibit Number	Description of Document
2.1(a)	Second Amended and Restated Plan of Reorganization of NorthWestern Corporation (incorporated by reference to Exhibit 2.1 of NorthWestern Corporation's Current Report on Form 8-K, dated October 20, 2004, Commission File No. 1-10499).
2.1(b)	Order Confirming the Second Amended and Restated Plan of Reorganization of NorthWestern Corporation (incorporated by reference to Exhibit 2.2 of NorthWestern Corporation's Current Report on Form 8-K, dated October 20, 2004, Commission File No. 1-10499).
3.1	Amended and Restated Certificate of Incorporation of NorthWestern Corporation, dated November 1, 2004 (incorporated by reference to Exhibit 3.1 of NorthWestern Corporation's Current Report on Form 8-K, dated October 20, 2004, Commission File No. 1-10499).
3.2(a)	Amended and Restated By-Laws of NorthWestern Corporation, dated November 1, 2004 (incorporated by reference to Exhibit 3.2 of NorthWestern Corporation's Current Report on Form 8-K, dated October 20, 2004, Commission File No. 1-10499).
3.2(b)	Amended and Restated By-Laws of NorthWestern Corporation, dated May 3, 2006 (incorporated by reference to Exhibit 3.1 of NorthWestern Corporation's Current Report on Form 8-K, dated March 17, 2006, Commission File No. 1-10499).
3.2(c)	Amended and Restated By-Laws of NorthWestern Corporation, dated May 3, 2006 (incorporated by reference to Exhibit 3.1 of NorthWestern Corporation's Current Report on Form 8-K, dated May 3, 2006, Commission File No. 1-10499).
3.2(d)	Amended and Restated By-Laws of NorthWestern Corporation, dated May 3, 2006 (incorporated by reference to Exhibit 3.1 of NorthWestern Corporation's Current Report on Form 8-K, dated June 27, 2006, Commission File No. 1-10499).
4.1(a)	General Mortgage Indenture and Deed of Trust, dated as of August 1, 1993, from NorthWestern Corporation to The Chase Manhattan Bank (National Association), as Trustee (incorporated by reference to Exhibit 4(a) of NorthWestern Corporation's Current Report on Form 8-K, dated August 16, 1993, Commission File No. 1-10499).
4.1(b)	Supplemental Indenture, dated as of August 15, 1993, from NorthWestern Corporation to The Chase Manhattan Bank (National Association), as Trustee (incorporated by reference to Exhibit 4(b) of NorthWestern Corporation's Current Report on Form 8-K, dated August 16, 1993, Commission File No. 1-10499).
4.1(c)	Supplemental Indenture, dated as of August 1, 1995, from NorthWestern Corporation to The Chase Manhattan Bank (National Association), as Trustee (incorporated by reference to Exhibit 4(b) of NorthWestern Corporation's Current Report on Form 8-K, dated August 30, 1995, Commission File No. 1-10499).
4.1(e)	Supplemental Indenture, dated as of November 1, 2004, by and between NorthWestern Corporation (formerly known as Northwestern Public Service Company) and JPMorgan Chase Bank (successor by merger to The Chase Manhattan Bank (National Association)), as Trustee under the General Mortgage Indenture and Deed of Trust dated as of August 1, 1993 (incorporated by reference to Exhibit 4.5 of NorthWestern Corporation's Current Report on Form 8-K, dated November 1, 2004, Commission File No. 1-10499).
4.2(a)	Indenture, dated as of November 1, 2004, between NorthWestern Corporation and U.S. Bank National Association, as trustee agent (incorporated by reference to Exhibit 4.1 of NorthWestern Corporation's Current Report on Form 8-K, dated November 1, 2004, Commission File No. 1-10499).
4.2(b)	Supplemental Indenture No. 1, dated as of November 1, 2004, by and between NorthWestern Corporation and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.2 of NorthWestern Corporation's Current Report on Form 8-K, dated November 1, 2004, Commission File No. 1-10499).
4.2(c)	Registration Rights Agreement, dated as of November 1, 2004, between NorthWestern Corporation, as issuer, and Credit Suisse First Boston LLC and Lehman Brothers Inc., as representatives of the several initial purchasers (incorporated by reference to Exhibit 4.3 of NorthWestern Corporation's Current Report on Form 8-K, dated November 1, 2004, Commission File No. 1-10499).

57

4.3(a)	Sale Agreement, dated as of June 1, 1993, between NorthWestern Corporation and Mercer County, North Dakota, related to the issuance of Pollution Control Refunding Revenue Bonds (Northwestern Public Service Company Project) Series 1993 (incorporated by reference to Exhibit 4(b)(1) of NorthWestern Corporation's Quarterly Report on Form 10-Q for the quarter ending June 30, 1993, Commission File No. 1-10499).
4.3(b)	Loan Agreement, dated as of June 1, 1993, between NorthWestern Corporation and Grant County, South Dakota, related to the issuance of Pollution Control Refunding Revenue Bonds (Northwestern Public Service Company Project) Series 1993A (incorporated by reference to Exhibit 4(b)(2) of NorthWestern Corporation's Quarterly Report on Form 10-Q for the quarter ending June 30, 1993, Commission File No. 1-10499).
4.3(c)	Loan Agreement, dated as of June 1, 1993, between NorthWestern Corporation and Grant County, South Dakota, related to the issuance of Pollution Control Refunding Revenue Bonds (Northwestern Public Service Company Project) Series 1993B (incorporated by reference to Exhibit 4(b)(3) of NorthWestern Corporation's Quarterly Report on Form 10-Q for the quarter ending June 30, 1993, Commission File No. 1-10499).
4.3(d)	Loan Agreement, dated as of June 1, 1993, between NorthWestern Corporation and the City of Salix, Iowa, related to the issuance of Pollution Control Refunding Revenue Bonds (Northwestern Public Service Company Project) Series 1993 (incorporated by reference to Exhibit 4(b)(4) of NorthWestern Corporation's Quarterly Report on Form 10-Q for the quarter ending June 30, 1993, Commission File No. 1-10499).
4.3(e)	Loan Agreement, dated as of April 1, 2006, between NorthWestern Corporation and the City of Forsyth, Montana, related to the issuance of City of Forsyth Pollution Control Revenue Bonds Series 2006 (incorporated by reference to Exhibit 4.3(e) of the Company's Report on Form 10-K for the year ended December 31, 2006, Commission File No. 1-10499).
4.4(a)	First Mortgage and Deed of Trust, dated as of October 1, 1945, by The Montana Power Company in favor of Guaranty Trust Company of New York and Arthur E. Burke, as trustees (incorporated by reference to Exhibit 7(e) of The Montana Power Company's Registration Statement, Commission File No. 002-05927).
4.4(b)	Thirteenth Supplemental Indenture to the Mortgage and Deed of Trust, dated as of December 1, 1991 (incorporated by reference to Exhibit 4(a)—14 of The Montana Power Company's Registration Statement on Form S-3, dated December 16, 1992, Commission File No. 033-55816).
4.4(c)	Fourteenth Supplemental Indenture to the Mortgage and Deed of Trust, dated as of January 1, 1993 (incorporated by reference to Exhibit 4(c) of The Montana Power Company's Registration Statement on Form S-8, dated June 17, 1993, Commission File No. 033-64576).
4.4(d)	Fifteenth Supplemental Indenture to the Mortgage and Deed of Trust, dated as of March 1, 1993 (incorporated by reference to Exhibit 4(d) of The Montana Power Company's Registration Statement on Form S-8, dated June 17, 1993, Commission File No. 033-64576).
4.4(e)	Sixteenth Supplemental Indenture to the Mortgage and Deed of Trust, dated as of May 1, 1993 (incorporated by reference to Exhibit 99(a) of The Montana Power Company's Registration Statement on Form S-3, dated September 13, 1993, Commission File No. 033-50235).
4.4(f)	Seventeenth Supplemental Indenture to the Mortgage and Deed of Trust, dated as of December 1, 1993 (incorporated by reference to Exhibit 99(a) of The Montana Power Company's Registration Statement on Form S-3, dated December 5, 1994, Commission File No. 033-56739).
4.4(g)	Eighteenth Supplemental Indenture to the Mortgage and Deed of Trust, dated as of August 5, 1994 (incorporated by reference to Exhibit 99(b) of The Montana Power Company's Registration Statement on Form S-3, dated December 5, 1994, Commission File No. 033-56739).
4.4(h)	Nineteenth Supplemental Indenture to the Mortgage and Deed of Trust, dated as of December 16, 1999 (incorporated by reference to Exhibit 99 of The Montana Power Company's Annual Report on Form 10-K for the year ended December 31, 2000, Commission File No. 001-04566).
4.4(i)	Twentieth Supplemental Indenture to the Mortgage and Deed of Trust, dated as of November 1, 2001 (incorporated by reference to Exhibit 4(u) of NorthWestern Energy, LLC's Annual Report on Form 10-K for the year ended December 31, 2001, Commission File No. 001-31276).
4.4(j)	Twenty-first Supplemental Indenture to the Mortgage and Deed of Trust, dated as of February 13, 2002 (incorporated by reference to Exhibit 4(v) of NorthWestern Energy, LLC's Annual Report on Form 10-K for the year ended December 31, 2001, Commission File No. 001-31276).
4.4(k)	Twenty-second Supplemental Indenture to the Mortgage and Deed of Trust, dated as of November 15, 2002 (incorporated by reference to Exhibit 4.1 of NorthWestern Corporation's Current Report on Form 8-K, dated February 10, 2003, Commission File No. 1-10499).
4.4(l)	Twenty-third Supplemental Indenture to the Mortgage and Deed of Trust, dated as of February 1, 2002 (incorporated by reference to Exhibit 4.2 of NorthWestern Corporation's Current Report on Form 8-K, dated February 10, 2003, Commission File No. 1-10499).

58

4.4(m)	Twenty-Fourth Supplemental Indenture, dated as of November 1, 2004, between NorthWestern Corporation and The Bank of New York and MaryBeth Lewicki, (incorporated by reference to Exhibit 4.4 of NorthWestern Corporation's Current Report on Form 8-K, dated November 1, 2004, Commission File No. 1-10499).
4.4(n)	Twenty-Fifth Supplemental Indenture, dated as of April 1, 2006, between NorthWestern Corporation and The Bank of New York and Ming Ryan, as trustees (incorporated by reference to Exhibit 4.4(n) of the Company's Report on Form 10-K for the year ended December 31, 2006, Commission File No. 1-10499).
4.4(o)	Twenty-Sixth Supplemental Indenture, dated as of September 1, 2006, between NorthWestern Corporation and The Bank of New York and Ming Ryan, as trustees (incorporated by reference to Exhibit 4.4 of NorthWestern Corporation's Current Report on Form 8-K, dated September 13, 2006, Commission File No. 1-10499).
4.6(a)	Natural Gas Funding Trust Indenture, dated as of December 22, 1998, between MPC Natural Gas Funding Trust, as Issuer, and U.S. Bank National Association, as Trustee (incorporated by reference to Exhibit 4.7(a) of the Company's Report on Form 10-K for the year ended December 31, 2002, Commission File No. 1-10499).
4.6(b)	Natural Gas Funding Trust Agreement, dated as of December 11, 1998, among The Montana Power Company, Wilmington Trust Company, as trustee, and the Beneficiary Trustees party thereto (incorporated by reference to Exhibit 4.7(b) of the Company's Report on Form 10-K for the year ended December 31, 2002, Commission File No. 1-10499).
4.6(c)	Transition Property Purchase and Sale Agreement, dated as of December 22, 1998, between MPC Natural Gas Funding Trust and The Montana Power Company (incorporated by reference to Exhibit 4.7(c) of the Company's Report on Form 10-K for the year ended December 31, 2002, Commission File No. 1-10499).
4.6(d)	Transition Property Servicing Agreement, dated as of December 22, 1998, between MPC Natural Gas Funding Trust and The Montana Power Company (incorporated by reference to Exhibit 4.7(d) of the Company's Report on Form 10-K for the year ended December 31, 2002, Commission File No. 1-10499).
4.6(e)	Assumption Agreement regarding the Transition Property Purchase Agreement and the Transition Property Servicing Agreement, dated as of February 13, 2002, by The Montana Power, LLC to MPC Natural Gas Funding Trust (incorporated by reference to Exhibit 4.7(e) of the Company's Report on Form 10-K for the year ended December 31, 2002, Commission File No. 1-10499).
4.6(f)	Assignment and Assumption Agreement (Natural Gas Transition Documents), dated as of November 15, 2002, by and between NorthWestern Energy, LLC, as assignor, and NorthWestern Corporation, as assignee (incorporated by reference to Exhibit 4.7(f) of the Company's Report on Form 10-K for the year ended December 31, 2002, Commission File No. 1-10499).
10.1(b) †	NorthWestern Corporation 2004 Special Recognition Grant Restricted Stock Plan (incorporated by reference to Exhibit 3.1 of NorthWestern Corporation's registration statement on Form S-8, dated January 31, 2005, Commission File No. 333-122428).
10.1(c) †	NorthWestern Corporation 2005 Deferred Compensation Plan for Non-Employee Directors (incorporated by reference to Exhibit 10.1(c) to NorthWestern Corporation's Annual Report on Form 10-K for the year ended December 31, 2004, Commission File No. 1-10499).
10.1(d) †	NorthWestern Corporation Incentive Compensation and Severance Plan, effective through November 1, 2004 (incorporated by reference to Exhibit 10.1(d) to NorthWestern Corporation's Annual Report on Form 10-K for the year ended December 31, 2004, Commission File No. 1-10499).
10.1(e) †	NorthWestern Corporation 2005 Long-Term Incentive Plan (incorporated by reference to Exhibit 2.1 of NorthWestern Corporation's registration statement on Form S-8, dated May 4, 2005, Commission File No. 333-124624).
10.1(f)  †	NorthWestern Corporation 2006 Officer Severance Plan (incorporated by reference to Exhibit 99.1 of NorthWestern Corporation's Current Report on Form 8-K, dated March 31, 2006, Commission File No. 1-10499).
10.1(g)  †	NorthWestern Corporation 2006 Employee Severance Plan (incorporated by reference to Exhibit 99.2 of NorthWestern Corporation's Current Report on Form 8-K, dated March 31, 2006, Commission File No. 1-10499).
10.2(a)	Credit Agreement among NorthWestern Corporation, as borrower, the several lenders from time to time parties thereto, Lehman Brothers Inc. and Deutsche Bank Securities Inc., as joint lead arrangers, Deutsche Bank Securities Inc., as syndication agent, Union Bank of California, N.A. and KeyBank National Association, s co-documentation agents, and Lehman Commercial Paper Inc., as administrative agent and collateral agent (incorporated by reference to Exhibit 99.1 of NorthWestern Corporation's Current Report on Form 8-K, dated November 1, 2004, Commission File No. 1-10499).

59

10.2(b)	Credit Agreement, dated as of June 30, 2005, among NorthWestern Corporation, as borrower, the several lenders from time to time parties thereto, Deutsche Bank Securities Inc. and Lehman Brothers Inc., as joint lead arrangers, Lehman Commercial Paper Inc., as syndication agent, Union Bank of California, N.A. and KeyBank National Association, as co-documentation agents, and Deutsche Bank AG New York Branch, as administrative agent and collateral agent (incorporated by reference to Exhibit 99.1 of NorthWestern Corporation's Current Report on Form 8-K, dated June 28, 2005, Commission file No. 1-10499).
10.2(c)	Purchase Agreement, dated September 6, 2006, among NorthWestern Corporation and Credit Suisse Securities (USA) LLC and Deutsche Bank Securities Inc., as representatives of several initial purchasers (incorporated by reference to Exhibit 10.1 of NorthWestern Corporation's Current Report on Form 8-K, dated September 13, 2006, Commission File No. 1-10499).
10.2(d)	Registration Rights Agreement, dated September 13, 2006 among NorthWestern Corporation and Credit Suisse Securities (USA) LLC and Deutsche Bank Securities Inc., as representatives of several initial purchasers (incorporated by reference to Exhibit 10.1 of NorthWestern Corporation's Current Report on Form 8-K, dated September 13, 2006, Commission File No. 1-10499).
10.2 (e)	Purchase Agreement, dated January 18, 2007, between NorthWestern Corporation and Mellon Leasing Corporation (incorporated by reference to Exhibit 10.1 of NorthWestern Corporation's Current Report on Form 8-K, dated March 13, 2007, Commission File No.1-10499).
10.2 (f)	Purchase Agreement, dated October 30, 2007, between NorthWestern Corporation and SGE (New York) Associates (incorporated by reference to Exhibit 10.1 of NorthWestern Corporation's Current Report on Form 8-K, dated October 30, 2007, Commission File No.1-10499).
10.2 (g)*	Credit Agreement, dated December 28, 2007, among Colstrip Lease Holdings, LLC, as borrower, and West LB AG, New York Branch, as lender.
12.1*	Statement Regarding Computation of Earnings to Fixed Charges.
21*	Subsidiaries of NorthWestern Corporation.
23.1*	Consent of Independent Registered Public Accounting Firm
24*	Power of Attorney (included on the signature page of this Annual Report on Form 10-K)
31.1*	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002
31.2*	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002
32.1*	Certification of Michael J. Hanson pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*	Certification of Brian B. Bird pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

† Management contract or compensatory plan or arrangement.

* Filed herewith.

All schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions or are not applicable, and, therefore, have been omitted.

60

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.

	NORTHWESTERN CORPORATION
Dated:February 26, 2008	By:	/s/ MICHAEL J. HANSON
		Michael J. Hanson
		President and Chief Executive Officer

61

POWER OF ATTORNEY

We, the undersigned directors and/or officers of NorthWestern Corporation, hereby severally constitute and appoint Michael J. Hanson, Thomas J. Knapp, and Kendall G. Kliewer, and each of them with full power to act alone, our true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution and revocation, for each of us and in our name, place, and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file or cause to be filed the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, and hereby grant unto such attorneys-in-fact and agents, and each of them, the full power and authority to do each and every act and thing requisite and necessary to be done in and about the foregoing, as fully to all intents and purposes as each of us might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their respective substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signature	Title	Date
	Chairman of the Board
E. Linn Draper, Jr.
/s/ MICHAEL J. HANSON	President, Chief Executive Officer and Director	February 26, 2008
Michael J. Hanson	(Principal Executive Officer)
/s/ BRIAN B. BIRD	Vice President and Chief Financial Officer	February 26, 2008
Brian B. Bird	(Principal Financial Officer)
/s/ KENDALL G. KLIEWER	Vice President and Controller	February 26, 2008
Kendall G. Kliewer	(Principal Accounting Officer)
/s/ STEPHEN P. ADIK	Director	February 26, 2008
Stephen P. Adik
/s/ JULIA L. JOHNSON	Director	February 26, 2008
Julia L. Johnson
	Director
Jon S. Fossel
/s/ PHILIP L. MASLOWE	Director	February 26, 2008
Philip L. Maslowe
/s/ D. LOUIS PEOPLES	Director	February 26, 2008
D. Louis Peoples

62

INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

	Page
Financial Statements
Reports of Independent Registered Public Accounting Firm	F-2
Consolidated statements of income for the years ended December 31, 2007, 2006 and 2005	F-4
Consolidated statements of cash flows for the years ended December 31, 2007, 2006 and 2005	F-5
Consolidated balance sheets as of December 31, 2007 and December 31, 2006	F-6
Consolidated statements of common shareholders' equity and comprehensive income for the years ended December 31, 2007, 2006 and 2005	F-7
Notes to consolidated financial statements	F-8
Financial Statement Schedules
Schedule II. Valuation and Qualifying Accounts

F - 1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors of NorthWestern Corporation:

We have audited the accompanying consolidated balance sheets of NorthWestern Corporation (a Delaware Corporation) and subsidiaries (the "Company") as of December 31, 2007 and 2006, and the related consolidated statements of income, common shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2007.  Our audits also included the financial statement schedule listed in the Index at Item 15. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management.  Our responsibility is to express an opinion on the consolidated financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2007 and 2006, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

As discussed in Note 3 to the consolidated financial statements, the Company adopted a new accounting standard.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 26, 2008, expressed an unqualified opinion on the Company's internal control over financial reporting.

/s/ DELOITTE & TOUCHE LLP

Minneapolis, Minnesota

February 26, 2008

F – 2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors of NorthWestern Corporation:

We have audited the internal control over financial reporting of NorthWestern Corporation and subsidiaries (the "Company") as of December 31, 2007, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management's Report on Internal Controls over Financial Reporting".  Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.  Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.  We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America (“generally accepted accounting principles”).  A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis.  Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement scheduleas of and for the year ended December 31, 2007, of the Company, and our report dated February 26, 2008, expressed an unqualified opinion on those consolidated financial statements and financial statement schedule and included an explanatory paragraph regarding the Company’s adoption of a new accounting standard.

/s/ DELOITTE & TOUCHE LLP

Minneapolis, Minnesota

February 26, 2008

F - 3

NORTHWESTERN CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)

	Year Ended December 31,
	2007			2006			2005
OPERATING REVENUES	$	1,200,060		$	1,132,653		$	1,165,750
COST OF SALES	668,405			613,582			641,755
GROSS MARGIN	531,655			519,071			523,995
OPERATING EXPENSES
Operating, general and administrative	221,566			240,215			225,514
Property and other taxes	87,581			74,187			72,087
Depreciation	82,415			75,305			74,413
Ammondson verdict	—			19,000			—
Reorganization items	—			—			7,529
TOTAL OPERATING EXPENSES	391,562			408,707			379,543
OPERATING INCOME	140,093			110,364			144,452
Interest Expense	(56,942		)	(56,016		)	(61,295			)
Loss on Debt Extinguishment	—			—			(548			)
Other Income	2,428			9,065			17,448
Income From Continuing Operations Before Income Taxes	85,579			63,413			100,057
Income Tax Expense	(32,388		)	(25,931		)	(38,510			)
Income From Continuing Operations	53,191			37,482			61,547
Discontinued Operations, Net of Taxes	—			418			(2,080			)
Net Income	$	53,191		$	37,900		$	59,467
Average Common Shares Outstanding	36,623			35,554			35,630
Basic Income per Average Common Share
Continuing operations	$	1.45		$	1.06		$		1.73
Discontinued operations	—			0.01			(0.06			)
Basic	$	1.45		$	1.07		$	1.67
Diluted Income per Average Common Share
Continuing operations	$	1.44		$	1.00		$	1.71
Discontinued operations	—			0.01			(0.06			)
Diluted	$	1.44		$	1.01		$	1.65
Dividends Declared per Average Common Share	$	1.28		$	1.24		$	1.00

See Notes to Consolidated Financial Statements

F - 4

NORTHWESTERN CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Year Ended December 31,
	2007			2006			2005
OPERATING ACTIVITIES:
Net Income	$	53,191		$	37,900		$	59,467
Items not affecting cash:
Depreciation	82,415			75,305			74,413
Amortization of debt issue costs, discount and deferred hedge gain	1,617			2,239			2,384
Amortization of restricted stock	7,116			3,473			4,716
Equity portion of allowance for funds used during construction	(508		)	(624		)	—
Loss on debt extinguishment	—			—			548
(Income) Loss on discontinued operations, net of taxes	—			(418		)	2,080
Gain on qualifying facility contract amendment	—			—			(4,888		)
Gain on rate case settlement	(12,636		)	—			—
Loss on reorganization items	—			—			2,039
(Gain) Loss on sale of assets	85			(2,630		)	(4,946		)
Gain on derivative instruments	—			(4,304		)	—
Deferred income taxes	34,994			26,711			40,746
Proceeds from hedging activities	—			14,547			—
Changes in current assets and liabilities:
Restricted cash	1,354			(598		)	(3,855		)
Accounts receivable	6,311			10,196			(18,639		)
Inventories	(3,096		)	(19,618		)	(3,776		)
Prepaid energy supply costs	(772		)	(640		)	28,524
Other current assets	1,693			(2,343		)	4,204
Accounts payable	12,123			(20,485		)	12,364
Accrued expenses	(13,918		)	32,577			6,606
Regulatory assets	1,221			11,847			(25,488		)
Regulatory liabilities	21,929			2,223			(9,339		)
Other noncurrent assets	23,662			16,800			8,852
Other noncurrent liabilities	(14,817		)	(17,080		)	(29,357		)
Cash provided by continuing operating activities	201,964			165,078			146,655
INVESTING ACTIVITIES:
Property, plant, and equipment additions	(117,084		)	(101,046		)	(80,877		)
Colstrip Unit 4 acquisition	(141,257		)	—			—
Proceeds from sale of assets	1,842			24,169			7,505
Proceeds from hedging activities	—			5,355			—
Proceeds from sale of investments	—			—			123,478
Purchases of investments	—			—			(118,800		)
Cash used in continuing investing activities	(256,499		)	(71,522		)	(68,694		)
FINANCING ACTIVITIES:
Deferred gas storage	—			(11,718		)	2,475
Proceeds from exercise of warrants	68,834			2,896			131
Dividends on common stock	(47,286		)	(44,091		)	(35,634		)
Issuance of long term debt	100,000			320,205			—
Repayment of long-term debt	(15,540		)	(326,754		)	(175,284		)
Line of credit (repayments) borrowings, net	(38,000		)	(31,000		)	81,000
Equity registration fees	—			—			(140		)
Treasury stock activity	(896		)	(4,312		)	(5,573		)
Financing costs	(1,734		)	(7,238		)	(2,257		)
Cash provided by (used in) continuing financing activities	65,378			(102,012		)	(135,282		)
DISCONTINUED OPERATIONS:
Operating cash flows of discontinued operations, net	—			(3,432		)	(17,496		)
Investing cash flows of discontinued operations, net	—			2,872			402
Financing cash flows of discontinued operations, net	—			—			—
Decrease in restricted cash held by discontinued operations	—			8,255			60,048
Increase (Decrease) in Cash and Cash Equivalents	10,843			(761		)	(14,367		)
Cash and Cash Equivalents, beginning of period	1,930			2,691			17,058
Cash and Cash Equivalents, end of period	$	12,773		$	1,930		$	2,691

See Notes to Consolidated Financial Statements

F - 5

NORTHWESTERN CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

	Year Ended December 31,
	2007			2006
ASSETS
Current Assets:
Cash and cash equivalents	$	12,773		$	1,930
Restricted cash	14,482			15,836
Accounts receivable, net	143,482			149,793
Inventories	63,586			60,543
Regulatory assets	27,049			31,125
Prepaid energy supply	3,166			2,394
Deferred income taxes	2,987			19
Other	10,829			6,834
Total current assets	278,354			268,474
Property, Plant, and Equipment, Net	1,770,880			1,491,855
Goodwill	355,128			435,076
Regulatory assets	123,041			159,715
Other noncurrent assets	19,977			40,817
Total assets	$	2,547,380		$	2,395,937
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of capital leases	$	2,389		$	2,079
Current maturities of long-term debt	18,617			5,614
Accounts payable	91,588			78,739
Accrued expenses	168,610			180,278
Regulatory liabilities	40,635			12,226
Total current liabilities	321,839			278,936
Long-term capital leases	38,002			40,383
Long-term debt	787,360			699,041
Deferred income taxes	74,046			113,355
Noncurrent regulatory liabilities	194,959			182,103
Other noncurrent liabilities	308,150			339,348
Total liabilities	1,724,356			1,653,166
Commitments and Contingencies (Note 21)
Shareholders' Equity:
Common stock, par value $0.01; authorized 200,000,000 shares; issued and outstanding 39,333,958 and 38,970,551, respectively; Preferred stock, par value $0.01; authorized 50,000,000 shares; none issued	393			360
Treasury stock at cost	(10,781		)	(9,885		)
Paid-in capital	803,061			727,327
Retained earnings	16,603			10,698
Accumulated other comprehensive income	13,748			14,271
Total shareholders' equity	823,024			742,771
Total liabilities and shareholders' equity	$	2,547,380		$	2,395,937

See Notes to Consolidated Financial Statements

F - 6

NORTHWESTERN CORPORATION

CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME

(in thousands)

	Number of Common Shares	Number of Treasury Shares	Common Stock		Paid in Capital			Treasury Stock			Retained Earnings (Deficit)			Accumulated Other Comprehensive Income			Total Shareholders' Equity
Balance at December 31, 2004	35,614	—	$	355	$	715,901		$	—		$	(6,944	)	$	23		$	709,335
Net income	—	—	$	—	$	—		$	—		$	59,467		$	—		$	59,467
Other comprehensive income, net of tax:
Foreign currency translation adjustments	—	—	—		—			—			—			56			56
Unrealized gain on derivative instruments, net of taxes of $3,045	—	—	—		—			—			—			4,885			4,885
Total comprehensive income																	64,408
Treasury stock activity	—	192	—		—			(5,573		)	—			—			(5,573		)
Issuance of restricted stock	98	—	3		3,255			—			—			—			3,258
Amortization of unearned restricted stock compensation	77	—	—		1.710			—			—			—			1,710
Warrants exercise	5	—	—		131			—			—			—			131
Equity registration fees	—	—	—		(140		)	—			—			—			(140		)
Dividends on common stock	—	—	—		—			—			(35,634		)	—			(35,634		)
Balance at December 31, 2005	35,794	192	$	358	$	720,857		$	(5,573	)	$	16,889		$	4,964		$	737,495
Net income	—	—		—		—			—			37,900			—			37,900
Other comprehensive income, net of tax:
Reclassification of net gains on derivative instruments from OCI to net income,	—	—		—		—			—			—			(3,443	)		(3,443	)
Unrealized gain on derivative instruments	—	—		—		—			—			—			12,588			12,588
Total comprehensive income																		47,045
Adjustment to initially apply SFAS No. 158, net of taxes of $101	—	—		—		—			—			—			162			162
Treasury stock activity	—	138		—		—			(4,312	)		—			—			(4,312	)
Issuance of restricted stock	40	—		—		1,350			—			—			—			1,350
Amortization of unearned restricted stock compensation	18	—		—		2,225			—			—			—			2,225
Warrants exercise	116	—		2		2,895			—			—			—			2,897
Dividends on common stock	—	—		—		—			—			(44,091	)		—			(44,091	)
Balance at December 31, 2006	35,968	330	$	360	$	727,327		$	(9,885	)	$	10,698		$	14,271		$	742,771
Net income	—	—		—		—			—			53,191						53,191
Other comprehensive income, net of tax:
Foreign currency translation adjustment,	—	—		—		—			—			—			318			318
Reclassification of net gains on derivative instruments from OCI to net income	—	—		—		—			—			—			(1,188	)		(1,188	)
SFAS No. 158 adjustment, net of taxes of $133	—	—		—		—			—			—			347			347
Total comprehensive income																		52,668
Treasury stock activity	—	33		—		—			(896	)		—			—			(896	)
Amortization of unearned restricted stock compensation	104	—		1		6,932			—			—			—			6,933
Warrants exercise	3,262	—		32		68,802			—			—			—			68,834
Dividends on common stock	—	—		—		—			—			(47,286	)		—			(47,286	)
Balance at December 31, 2007	39,334	363	$	393	$	803,061		$	(10,781	)	$	16,603		$	13,748		$	823,024

See Notes to Consolidated Financial Statements

F - 7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) Nature of Operations and Basis of Consolidation

NorthWestern Corporation, doing business as NorthWestern Energy, provides electricity and natural gas to approximately 650,000 customers in Montana, South Dakota and Nebraska. We have generated and distributed electricity in South Dakota and distributed natural gas in South Dakota and Nebraska since 1923 and have distributed electricity and natural gas in Montana since 2002.

The consolidated financial statements for the periods included herein have been prepared by NorthWestern Corporation (NorthWestern, we or us), pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) 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. The accompanying consolidated financial statements include our accounts together with those of our wholly and majority-owned or controlled subsidiaries. All intercompany balances and transactions have been eliminated from the consolidated financial statements.

(2) Termination of Merger Agreement with Babcock & Brown Infrastructure Limited

On April 25, 2006, we entered into an Agreement and Plan of Merger (Merger Agreement) with BBI, an infrastructure investment company listed on the Australian Stock Exchange, under which BBI would acquire NorthWestern Corporation in an all-cash transaction at $37 per share. We had received all approvals necessary for the transaction, except from the Montana Public Service Commission (MPSC). On May 22, 2007, the MPSC unanimously directed its staff to draft an order denying the transaction. On June 25, 2007, we and BBI filed a formal joint request asking the MPSC to consider a revised proposal. In connection with our joint request to the MPSC, we and BBI agreed that if the MPSC denied the revised application, then either party in their sole discretion could terminate the Merger Agreement. On July 24, 2007, the MPSC denied the joint request and BBI terminated the Merger Agreement. The MPSC issued a final written order on July 31, 2007.

We incurred and expensed transaction related costs of approximately $1.5 million, and $13.9 million during the years ended December 31, 2007, and December 31, 2006, respectively.

(3) Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are used for such items as long-lived asset values and impairment charges, long-lived asset useful lives, tax provisions, asset retirement obligations, uncollectible accounts, our QF obligation, environmental costs, unbilled revenues and actuarially determined benefit costs. We revise the recorded estimates when we get better information or when we can determine actual amounts. Those revisions can affect operating results.

Fresh-Start Reporting

In accordance with Statement of Position 90-7, Financial Reporting by Entities in Reorganization under the Bankruptcy Code, or SOP 90-7, certain companies qualify for fresh start reporting in connection with their emergence from bankruptcy. Fresh-start reporting is required if (1) the reorganization value of the emerging entity's assets immediately before the date of confirmation is less than the total of all postpetition liabilities and allowed claims, and (2) holders of existing voting shares immediately before confirmation receive less than 50% of the voting shares of the emerging entity. Upon applying fresh-start reporting, a new reporting entity is deemed to be created and the recorded amounts of assets and liabilities are adjusted to reflect their estimated fair values, which impacts the comparability of financial statements. We met these requirements and adopted fresh-start reporting upon the our emergence from bankruptcy on November 1, 2004.

F - 8

Revenue Recognition

For our South Dakota and Nebraska operations, as prescribed by the respective regulatory authorities, electric and natural gas utility revenues are based on billings rendered to customers. For our Montana operations, as prescribed by the MPSC, operating revenues are recorded monthly on the basis of consumption or services rendered. Customers are billed monthly on a cycle basis. To match revenues with associated expenses, we accrue unbilled revenues for electrical and natural gas services delivered to Montana customers but not yet billed at month-end.

Cash Equivalents

We consider all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents.

Restricted Cash

Restricted cash consists primarily of funds held in trust accounts to satisfy the requirements of certain stipulation agreements and insurance reserve requirements.

Accounts Receivable, Net

Accounts receivable are net of allowances for uncollectible accounts of $3.2 million and $3.2 million at December 31, 2007 and December 31, 2006, respectively. Receivables include unbilled revenues of $76.0 million and $68.9 million at December 31, 2007 and December 31, 2006, respectively.

Inventories

Inventories are stated at average cost. Inventory consisted of the following (in thousands):

	December 31, 2007		December 31, 2006
Materials and supplies	$	17,670	$	17,599
Storage gas	45,916		42,944
	$	63,586	$	60,543

Regulation of Utility Operations

Our regulated operations are subject to the provisions of Statement of Financial Accounting Standards (SFAS) No. 71, Accounting for the Effects of Certain Types of Regulations (SFAS No. 71). Accounting under SFAS No. 71 is appropriate provided that (i) rates are established by or subject to approval by independent, third-party regulators, (ii) rates are designed to recover the specific enterprise's cost of service, and (iii) in view of demand for service, it is reasonable to assume that rates are set at levels that will recover costs and can be charged to and collected from customers.

Our financial statements reflect the effects of the different rate making principles followed by the jurisdiction regulating us. The economic effects of regulation can result in regulated companies recording costs that have been, or are expected to be, allowed in the ratemaking process in a period different from the period in which the costs would be charged to expense by an unregulated enterprise. When this occurs, costs are deferred as regulatory assets on the balance sheet and recorded as expenses in the periods when those same amounts are reflected in rates. Additionally, regulators can impose liabilities upon a regulated company for amounts previously collected from customers and for amounts that are expected to be refunded to customers (regulatory liabilities).

If all or a separable portion of our operations becomes no longer subject to the provisions of SFAS No. 71, an evaluation of future recovery of the related regulatory assets and liabilities would be necessary. In addition, we would determine any impairment to the carrying costs of deregulated plant and inventory assets.

F - 9

Derivative Financial Instruments

We are exposed to market risk, including changes in interest rates and the impact of market fluctuations in the price of electricity and natural gas commodities as discussed further in Note 9. In order to manage these risks, we use both derivative and non-derivative contracts that may provide for settlement in cash or by delivery of a commodity, including:

• Forward contracts, which commit us to purchase or sell energy commodities in the future,

• Option contracts, which convey the right to buy or sell a commodity at a predetermined price, and

• Swap agreements, which require payments to or from counterparties based upon the differential between two prices for a predetermined contractual (notional) quantity.

SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133), as amended, requires that all derivatives be recognized in the balance sheet, either as assets or liabilities, at fair value, unless they meet the normal purchase and normal sales criteria. The changes in the fair value of recognized derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and the type of hedge transaction.

For contracts in which we are hedging the variability of cash flows related to forecasted transactions that qualify as cash flow hedges, the changes in the fair value of such derivative instruments are reported in other comprehensive income. The relationship between the hedging instrument and the hedged item must be documented to include the risk management objective and strategy and, at inception and on an ongoing basis, the effectiveness of the hedge in offsetting the changes in the cash flows of the item being hedged. Gains or losses accumulated in other comprehensive income are reclassified to earnings in the periods in which earnings are affected by the variability of the cash flows of the related hedged item. Any ineffective portion of all hedges would be recognized in current-period earnings. Cash flows related to these contracts are classified in the same category as the transaction being hedged.

We have applied the normal purchases and normal sales scope exception, as provided by SFAS No. 133 and interpreted by Derivatives Implementation Guidance Issue C15, to certain contracts involving the purchase and sale of gas and electricity at fixed prices in future periods. Revenues and expenses from these contracts are reported on a gross basis in the appropriate revenue and expense categories as the commodities are received or delivered. For certain regulated electric and gas contracts that do not physically deliver, in accordance with EITF 03-11, Reporting Gains and Losses on Derivative Instruments that are Subject to SFAS No. 133 and not “Held for Trading Purposes" as defined in Issue no. 02-3, revenue is reported net versus gross.

Property, Plant and Equipment

Property, plant and equipment are stated at original cost, including contracted services, direct labor and material, allowance for funds used during construction (AFUDC), and indirect charges for engineering, supervision and similar overhead items. All expenditures for maintenance and repairs of utility property, plant and equipment are charged to the appropriate maintenance expense accounts. A betterment or replacement of a unit of property is accounted for as an addition and retirement of utility plant. At the time of such a retirement, the accumulated provision for depreciation is charged with the original cost of the property retired and also for the net cost of removal. Also included in plant and equipment are assets under capital lease, which are stated at the present value of minimum lease payments.

AFUDC represents the cost of financing construction projects with borrowed funds and equity funds. While cash is not realized currently from such allowance, it is realized under the ratemaking process over the service life of the related property through increased revenues resulting from a higher rate base and higher depreciation expense. The component of AFUDC attributable to borrowed funds is included as a reduction to interest expense, while the equity component is included in other income. We determine the rate used to compute AFUDC in accordance with a formula established by the FERC. This rate averaged 8.7%, 8.8%, and 8.7% for Montana for 2007, 2006, and 2005, respectively, and 8.7%, 8.9%, and 8.7% for South Dakota for 2007, 2006, and 2005, respectively. Interest capitalized totaled $0.8 million for the year ended December 31, 2007, $1.0 million for the year ended December 31, 2006, and $1.3 million for the year ended December 31, 2005, for Montana and South Dakota combined.

F - 10

We may require contributions in aid of construction from customers when we extend service. Amounts used from these contributions to fund capital additions were $14.6 million for the year ended December 31, 2007 and $8.7 million for the year ended December 31, 2006.

We record provisions for depreciation at amounts substantially equivalent to calculations made on a straight-line method by applying various rates based on useful lives of the various classes of properties (ranging from three to 40 years) determined from engineering studies. As a percentage of the depreciable utility plant at the beginning of the year, our provision for depreciation of utility plant was approximately 3.5%, 3.4%, and 3.4% for 2007, 2006, and 2005, respectively.

Depreciation rates include a provision for our share of the estimated costs to decommission three coal-fired generating plants at the end of the useful life of each plant. The annual provision for such costs is included in depreciation expense, while the accumulated provisions are included in noncurrent regulatory liabilities.

Other Noncurrent Liabilities

Other noncurrent liabilities consisted of the following (in thousands):

	December 31, 2007		December 31, 2006
Pension and other employee benefits	$	56,521	$	105,477
Future QF obligation, net	158,132		147,893
Environmental	32,728		34,148
Customer advances	45,194		33,502
Other	15,575		18,328
	$	308,150	$	339,348

Stock-based Compensation

Under our equity-based incentive plans, we have granted restricted stock awards to all employees and members of the Board of Directors (Board). We discuss these awards in further detail in Note 17. We account for these awards using SFAS No. 123R,Share-Based Payment (SFAS No. 123R), which requires companies to recognize compensation expense for all equity-based compensation awards issued to employees that are expected to vest. Under SFAS No. 123R, we recognize the fair value of compensation cost ratably or in tranches (depending if the award has cliff or graded vesting) over the period during which an employee is required to provide service in exchange for the award. As forfeitures of restricted stock grants occur, the associated compensation cost recognized to date is reversed.

Insurance Subsidiary

Risk Partners Assurance, Ltd is a wholly owned non-United States insurance subsidiary established in 2001 to insure a portion of our worker's compensation, general liability and automobile liability risks. New policies have not been underwritten through this subsidiary since 2004. Claims that were incurred during that time period continue to be paid and managed by Risk Partners. Reserve requirements are established based on actuarial projections of ultimate losses. Any losses estimated to be paid within one year from the balance sheet date are classified as accrued expenses, while losses expected to be payable in later periods are included in other long-term liabilities. Risk Partners has purchased reinsurance policies through a third-party reinsurance company to transfer a portion of the insurance risk. Restricted cash held by this subsidiary was $5.6 million at December 31, 2007 and $7.2 million at December 31, 2006.

Income Taxes

Exposures exist related to various tax filing positions, which may require an extended period of time to resolve and may result in income tax adjustments by taxing authorities. We have reduced deferred tax assets or established liabilities based on our best estimate of future probable adjustments related to these exposures. On a quarterly basis, we evaluate exposures in light of any additional information and make adjustments as necessary to reflect the best estimate of the future outcomes. We believe our deferred tax assets and established liabilities are appropriate for estimated exposures; however, actual results may differ from these estimates. The resolution of tax matters in a particular future period could have a material impact on our consolidated statement of operations and provision for income taxes.

F - 11

Environmental Costs

We record environmental costs when it is probable we are liable for the costs and we can reasonably estimate the liability. We may defer costs as a regulatory asset if we have prior regulatory authorization for recovery of these costs from customers in future rates. Otherwise, we expense the costs. If an environmental expense is related to facilities we currently use, such as pollution control equipment, then we capitalize and depreciate the costs over the remaining life of the asset, assuming the costs are recoverable in future rates or future cash flows.

We record estimated remediation costs, excluding inflationary increases and probable reductions for insurance coverage and rate recovery. The estimates are based on the use of an environmental consultant, our experience, our assessment of the current situation and the technology currently available for use in the remediation. We regularly adjust the recorded costs as we revise estimates and as remediation proceeds. If we are one of several designated responsible parties, then we estimate and record only our share of the cost. We treat any future costs of restoring sites where operation may extend indefinitely as a capitalized cost of plant retirement. The depreciation expense levels we can recover in rates include a provision for these estimated removal costs.

Emission Allowances

We have sulfur dioxide (SO2) emission allowances and each allowance permits a generating unit to emit one ton of SO2 during or after a specified year. We have approximately 3,200 excess SO2 emission allowances per year for years 2017 through 2031, however these allowances have no carrying value in our financial statements and the market for these years is presently illiquid. These emission allowances are not subject to regulatory jurisdiction. When excess SO2 emission allowances are sold, we reflect the gain in other income and cash received is reflected as an investing activity.

Accounting Standards Issued

In December 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 141 (revised 2007), Business Combinations (SFAS No. 141R), which replaces FASB Statement No. 141. SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non controlling interest in the acquiree and the goodwill acquired. The Statement also establishes disclosure requirements, which will enable users to evaluate the nature and financial effects of the business combination. SFAS No. 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, and interim periods within those fiscal years. SFAS No.  141R will become effective for our fiscal year beginning January 1, 2009; accordingly, any business combinations we engage in after this date will be recorded and disclosed in accordance with this statement. Based on our preliminary evaluation of SFAS No. 141R, if any of our unrecognized tax benefits reverse after adoption, they will affect the income tax provision in the period of reversal rather than goodwill. See Note 13, Income Taxes, for further information.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statement—amendments of ARB No. 51 (SFAS No. 160). SFAS No. 160 states that accounting and reporting for minority interests will be recharacterized as noncontrolling interests and eliminates diversity in practice by requiring these interests to be classified as a component of equity.  The Statement also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 applies to all entities that prepare consolidated financial statements, except not-for-profit organizations, but will affect only those entities that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary.  This statement will become effective for our fiscal year beginning January 1, 2009, and early adoption is prohibited. We do not expect SFAS No. 160 to have any effect on our financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities-including an amendment of FASB Statement No. 115 (SFAS No. 159), which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value, with unrealized gains and losses related to these financial instruments reported in earnings at each subsequent reporting date. This option would be applied on an instrument by instrument basis. If elected, unrealized gains and losses on the affected financial instruments would be recognized in earnings at each subsequent reporting date. This Statement is effective as of the beginning of our 2008 fiscal year. We do not expect to apply this fair value option to our current financial instruments, and as such do not expect SFAS No. 159 to have a material impact on our financial statements.

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In September 2006, the FASB issued SFAS No. 157 Fair Value Measurements (SFAS No. 157), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of SFAS No. 157 are effective as of the beginning of our 2008 fiscal year. We do not expect SFAS No. 157 to have a material impact on our financial statements.

Accounting Standards Adopted

In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 is an interpretation of FASB Statement No. 109, Accounting for Income Taxes (SFAS No. 109), and it seeks to reduce the diversity in practice associated with certain aspects of measurement and recognition in accounting for income taxes by prescribing a recognition threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken in a tax return. Additionally, FIN 48 provides guidance on the derecognition, classification, accounting in interim periods and expanded disclosure with respect to the uncertainty in income taxes. We adopted FIN 48 as of January 1, 2007. See Note 13, Income Taxes for further discussion of the impact to our financial statements.

Supplemental Cash Flow Information

	Year Ended December 31,
	2007		2006		2005
Cash paid (received) for
Income taxes	$	3,921	$	252	$	(308	)
Interest	43,076		39,267		51,131
Reorganization professional fees and expenses	—		—		7,576
Significant non-cash transactions:
Assumption of debt related to Colstrip Unit 4 Acquisitions	53,685		—		—
Additions to property, plant and equipment and capital lease obligations	2,400		40,210		—

(4) Colstrip Unit 4 Acquisition

During 2007, we completed the purchase of the Owner Participant interest of our 222 MW leased interest in the 740 MW coal-fired steam electric generation unit known as Colstrip Unit 4. The purchase price was approximately $141.3 million, which includes applicable closing costs, plus the assumption of $53.7 million in debt. The transaction does not result in any change in control over, or operation of, Colstrip Unit 4.

In December 2007, we formed a new subsidiary, Colstrip Lease Holdings LLC (CLH) to hold a portion of our acquired interest in Colstrip Unit 4. CLH closed on a $100 million loan on December 28, 2007, which is secured by its interest (approximately 143 MW) in Colstrip Unit 4 and is nonrecourse to NorthWestern Corporation.

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(5) Property, Plant and Equipment

The following table presents the major classifications of our property, plant and equipment (in thousands):

	Estimated Useful Life	December 31,			December 31,
		2007			2006
	(years)	(in thousands)
Land and improvements	26 - 63	$	41,286		$	39,805
Building and improvements	24 - 70	94,386			91,665
Storage, distribution, and transmission	13 - 87	1,908,688			1,835,984
Generation	12 - 35	430,216			200,662
Construction work in process	—	19,524			3,496
Other equipment	2 - 93	203,534			195,735
		2,697,634			2,367,347
Less accumulated depreciation		(926,754		)	(875,492		)
		$	1,770,880		$	1,491,855

As discussed in Note 4, we completed the purchase of our interest in Colstrip Unit 4 during 2007, which increased our generation property, plant and equipment by approximately $218.2 million.

Plant and equipment under capital lease were $42.3 million and $44.8 million as of December 31, 2007 and December 31, 2006, respectively, which included $37.2 million and $39.8 million as of December 31, 2007 and 2006, respectively, related to a long-term power supply contract with the owners of a natural gas fired peaking plant, which has been accounted for as a capital lease.

(6) Variable Interest Entities

FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, or FIN 46R, requires the consolidation of entities which are determined to be variable interest entities (VIEs) when we are the primary beneficiary of a VIE, which means we have a controlling financial interest. Certain long-term purchase power and tolling contracts may be considered variable interests under FIN 46R. We have various long-term purchase power contracts with other utilities and certain qualifying facility plants. After evaluation of these contracts, we believe one qualifying facility contract may constitute a variable interest entity under the provisions of FIN 46R. We are currently engaged in adversary proceedings with this qualifying facility and, while we have made exhaustive efforts, we have been unable to obtain the information necessary to further analyze this contract under the requirements of FIN 46R. We continue to account for this qualifying facility contract as an executory contract as we have been unable to obtain the necessary information from this qualifying facility in order to determine if it is a VIE and if so, whether we are the primary beneficiary. Based on the current contract terms with this qualifying facility, our estimated gross contractual payments aggregate approximately $519.4 million through 2025, and are included in Contractual Obligations and Other Commitments of Management's Discussion and Analysis. During the years ended December 31, 2007, 2006 and 2005 purchases from this QF were approximately $21.1 million, $23.5 million, and $25.6 million, respectively.

(7) Asset Retirement Obligations

We have identified asset retirement obligations, or ARO, liabilities related to our electric and natural gas transmission and distribution assets that have been installed on easements over property not owned by us. The easements are generally perpetual and only require remediation action upon abandonment or cessation of use of the property for the specified purpose. The ARO liability is not estimable for such easements as we intend to utilize these properties indefinitely. In the event we decide to abandon or cease the use of a particular easement, an ARO liability would be recorded at that time.

Our regulated utility operations have, however, previously recognized removal costs of transmission and distribution assets as a component of depreciation in accordance with regulatory treatment. Generally, the accrual of future non-ARO removal obligations is not required. However, long-standing ratemaking practices approved by applicable state and federal regulatory commissions have allowed provisions for such costs in historical depreciation rates. These removal costs have accumulated over a number of years based on varying rates as authorized by the appropriate regulatory entities. Accordingly, the recorded amounts of estimated future removal costs are considered regulatory liabilities pursuant to SFAS No. 71. These amounts do not represent SFAS No. 143, Accounting for Asset Retirement Obligations, legal retirement obligations. As of

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December 31, 2007 and December 31, 2006, we have recognized accrued removal costs of $165.4 million and $153.4 million, respectively. In addition, for our generation properties, we have accrued decommissioning costs since the generating units were first put into service in the amount of $13.8 million and $13.3 million as of December 31, 2007 and December 31, 2006, respectively.

In connection with the adoption of FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations (FIN 47), we have recorded a conditional asset retirement obligation of $3.9 million and $3.5 million, as of December 31, 2007 and December 31, 2006, respectively, which increases our property, plant and equipment and other noncurrent liabilities. This is primarily related to Department of Transportation requirements to cut, purge and cap retired natural gas pipeline segments. The initial recording of the obligation had no income statement impact due to the deferral of the adjustments through the establishment of a regulatory asset pursuant to SFAS No. 71. We measure the liability at fair value when incurred and capitalize a corresponding amount as part of the book value of the related assets. The increase in the capitalized cost is included in determining depreciation expense over the estimated useful life of these assets. Since the fair value of the ARO is determined using a present value approach, accretion of the liability due to the passage of time is recognized each period and recorded as a regulatory asset until the settlement of the liability. The change in our conditional ARO during the year ended December 31, 2007, is as follows (in thousands):

Liability at January 1, 2007	$	3,801
Accretion expense		294
Liabilities incurred		61
Liabilities settled		(43	)
Revisions to cash flows		340
Liability at December 31, 2007	$	4,453

(8) Goodwill

Our goodwill balance is related to our adoption of fresh-start reporting upon emergence from Chapter 11 bankruptcy on October 31, 2004. Since we are a regulated utility, our regulated property, plant and equipment is kept at values included in allowable costs recoverable through utility rates, and the excess of reorganization value over the fair value of assets and liabilities on the date of our emergence of $435.1 million was recorded as goodwill.

As a result of the implementation of FIN 48, we increased our deferred tax assets by $77.5 million and decreased other noncurrent liabilities by $2.4 million, with a corresponding decrease to goodwill. The decrease to goodwill is consistent with the guidance in SFAS No. 109 and the requirements of fresh-start reporting, as our uncertain tax positions relate to periods prior to our emergence from bankruptcy.

Goodwill by segment is as follows for December 31, 2007 and 2006 (in thousands):

		December 31, 2007		December 31, 2006
Regulated electric	$	241,100	$	295,377
Regulated natural gas		114,028		139,699
Unregulated electric		—		—
	$	355,128	$	435,076

Goodwill is not amortized; rather, it is evaluated for impairment at least annually. We evaluated our goodwill during the fourth quarters of 2007 and 2006 and determined that it was not impaired.

(9) Risk Management and Hedging Activities

We are exposed to market risk, including changes in interest rates and the impact of market fluctuations in the price of electricity and natural gas commodities. We employ established policies and procedures to manage our risk associated with these market fluctuations using various commodity and financial derivative and non-derivative instruments, including forward contracts, swaps and options.

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Interest Rates

During 2005, we implemented a risk management strategy of utilizing interest rate swaps to manage our interest rate exposures associated with anticipated refinancing transactions of approximately $380 million. These swaps were designated as cash-flow hedges under SFAS No. 133 with the effective portion of gains and losses, net of associated deferred income tax effects, recorded in accumulated other comprehensive income (AOCI) in our Consolidated Balance Sheets.

During the first quarter of 2006, based on a review of our capital structure and cash flow, and approval by our Board of Directors, we decided not to refinance $60 million included in the interest rate swap that was being carried on our revolver. As the refinancing transaction and associated interest payments will not occur, the market value included in AOCI of $3.8 million was recognized in Other Income. This forward starting interest rate swap was settled during the second quarter of 2006, and we received an aggregate payment of approximately $3.9 million, which is reflected in investing activities on the statement of cash flows.

During the second and third quarters of 2006, we issued $170.2 million of Montana Pollution Control Obligations and $150 million of Montana First Mortgage Bonds. In association with these refinancing transactions, we settled $170.2 million and $150 million of forward starting interest rate swap agreements, and received aggregate settlement payments of approximately $6.3 million and $8.3 million, respectively. AOCI includes unrealized pre-tax gains related to these transactions of $12.8 million and $14.0 million at December 31, 2007 and December 31, 2006, respectively. We reclassify gains and losses on the hedges from AOCI into interest expense in our Consolidated Statements of Income during the periods in which the interest payments being hedged occur. We expect to reclassify approximately $1.2 million of pre-tax gains on these cash-flow hedges from AOCI into interest expense during the next twelve months. The cash proceeds related to these hedges are reflected in operating activities on the statement of cash flows. We have no further interest rate swaps outstanding.

(10) Discontinued Operations

During the second quarter of 2003, we committed to a plan to sell or liquidate our interest in Netexit and Blue Dot. In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we classified the results of operations of Netexit and Blue Dot as discontinued operations.

Netexit and its subsidiaries filed for bankruptcy protection in 2004, and Netexit's amended and restated liquidating plan of reorganization was confirmed by the Bankruptcy Court in 2005. The liquidation of Netexit was completed during the second quarter of 2006, and total distributions to NorthWestern were $7.7 million in 2006, and $42.2 million in 2005.

Summary financial information for the discontinued Netexit operations is as follows (in thousands):

	Year Ended December 31,
	2006		2005
Revenues	$	—	$	—
Income (Loss) before income taxes	$	418	$	(1,179	)
Gain (loss) on disposal	—		—
Income tax provision	—		—
Income (Loss) from discontinued operations, net of income taxes	$	418	$	(1,179	)

During 2005, Blue Dot sold its final operating location. Summary financial information for the discontinued Blue Dot operations is as follows (in thousands):

	Year Ended December 31, 2005
Revenues	$	3,177
Loss before income taxes	$	(901	)
Gain (loss) on disposal	—
Income tax provision	—
Income (Loss) from discontinued operations, net of income taxes	$	(901	)

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(11) Long-Term Debt and Capital Leases

Long-term debt and capital leases consisted of the following (in thousands):

	Due	December 31, 2007			December 31, 2006
Unsecured Debt:
Unsecured Revolving Line of Credit	2009	$	12,000		$	50,000
Secured Debt:
Mortgage bonds—
South Dakota—7.00%	2023	55,000			55,000
Montana—6.04%	2016	150,000			150,000
Montana—8.25%	2007	—			365
South Dakota & Montana—5.875%	2014	225,000			225,000
Pollution control obligations—
South Dakota—5.85%	2023	7,550			7,550
South Dakota—5.90%	2023	13,800			13,800
Montana—4.65%	2023	170,205			170,205
Montana Natural Gas Transition Bonds— 6.20%	2012	27,746			32,994
Other Long Term Debt:
Colstrip Unit 4 debt—13.25%	2010	44,891			—
Colstrip Lease Holdings, LLC—floating rate	2009	100,000			—
Discount on Notes and Bonds	—	(215		)	(259		)
		805,977			704,655
Less current maturities		(18,617		)	(5,614		)
		$	787,360		$	699,041
Capital Leases:
Total Capital Leases	Various	$	40,391		$	42,462
Less current maturities			(2,389	)		(2,079	)
		$	38,002		$	40,383

Unsecured Revolving Line of Credit

The unsecured revolving line of credit will mature on November 1, 2009 and does not amortize. The facility bears interest at a variable rate based upon a grid, which is tied to our credit rating from Fitch, Moody's, and S&P. The ‘spread' or ‘margin' ranges from 0.625% to 1.75% over the London Interbank Offered Rate (LIBOR). The facility currently bears interest at a rate of approximately 6.2%, which is 1.125% over LIBOR. As of December 31, 2007, we had $29.3 million in letters of credit and $12 million of borrowings outstanding under the unsecured revolving line of credit. The weighted average interest rate on the outstanding revolver borrowings was 4.5% as of December 31, 2007.

Commitment fees for the unsecured revolving line of credit were $0.3 million and $0.3 million for the years ended December 31, 2007 and 2006, respectively.

The credit facility includes covenants, which require us to meet certain financial tests, including a minimum interest coverage ratio and a minimum debt to capitalization ratio. The amended and restated line of credit also contains covenants which, among other things, limit our ability to incur additional indebtedness, create liens, engage in any consolidation or merger or otherwise liquidate or dissolve, dispose of property, make restricted payments, make loans or advances, and enter into transactions with affiliates. Many of these restrictive covenants will fall away upon the line of credit being rated

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“investment grade" by two of the three major credit rating agencies consisting of Fitch, Moody's and S&P. A default on the South Dakota or Montana first mortgage bonds would trigger a cross default on the credit facility; however a default on the credit facility would not trigger a default on any other obligations.

Secured Debt

First Mortgage Bonds and Pollution Control Obligations

The South Dakota Mortgage Bonds are two series of general obligation bonds we issued under our South Dakota indenture, and the South Dakota Pollution Control Obligations are three obligations under our South Dakota indenture. All of such bonds are secured by substantially all of our South Dakota and Nebraska electric and natural gas assets.

The Montana First Mortgage Bonds, and Montana Pollution Control Obligations are secured by substantially all of our Montana electric and natural gas assets. The Montana Natural Gas Transition Bonds are secured by a specified component of future revenues meant to recover the regulatory assets known as a competitive transition charge. The principal payments amortize proportionately with the regulatory asset.

Other Long-Term Debt

As discussed in Note 4, in association with the Colstrip Unit 4 transaction our subsidiary, CLH, closed on a $100 million loan on December 28, 2007, which is secured by its interest in Colstrip Unit 4 and is nonrecourse to NorthWestern Corporation. The loan bears interest at a floating rate of 5.96% as of December 31, 2007, which is 1.25% over LIBOR. In addition, we also consolidated $53.7 million in existing debt. This debt amortizes through December 31, 2010 and is at a fixed interest rate of 13.25%. Covenants associated with this loan are consistent with the covenants on our revolving credit facility, with additional requirements related to the funded status of our pension plans and environmental costs. There are no cross default provisions associated with this loan.

As of December 31, 2007, we are in compliance with all of our debt covenants.

Maturities of Long-Term Debt

The aggregate minimum principal maturities of long-term debt and capital leases, during the next five years are $21.0 million in 2008, $133.3 million in 2009, $24.8 million in 2010, $7.8 million in 2011 and $5.2 million in 2012.

(12) Financial Instruments

The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of SFAS No. 107, Disclosures About Fair Value of Financial Instruments. The estimated fair-value amounts have been determined using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required in interpreting market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that we would realize in a current market exchange.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

• The carrying amounts of cash and cash equivalents, restricted cash approximate fair value due to the short maturity of the instruments.

• Fair values for debt were determined based on interest rates that are currently available to us for issuance of debt with similar terms and remaining maturities, except for publicly traded debt, which is based on market prices.

The fair-value estimates presented herein are based on pertinent information available to us as of December 31, 2007 and 2006.

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The estimated fair value of financial instruments is summarized as follows (in thousands):

	December 31, 2007				December 31, 2006
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Assets:
Cash and cash equivalents	$	12,773	$	12,773	$	1,930	$	1,930
Restricted cash	14,482		14,482		15,836		15,836
Liabilities:
Long-term debt and capital leases (including current portion)	846,368		849,770		747,117		750,296

(13) Income Taxes

Income tax expense applicable to continuing operations is comprised of the following (in thousands):

	Year Ended December 31,
	2007			2006			2005
Federal
Current	$	1,449		$	11		$	4
Deferred	28,586			24,062			36,156
Investment tax credits	(531		)	(536		)	(537		)
State	2,884			2,394			2,887
	$	32,388		$	25,931		$	38,510

The following table reconciles our effective income tax rate to the federal statutory rate:

	Year Ended December 31,
	2007		2006		2005
Federal statutory rate	35.0	%	35.0	%	35.0	%
State income, net of federal provisions	3.4		3.8		3.4
Amortization of investment tax credit	(0.7	)	(0.7	)	(0.5	)
Depreciation of flow through items	(0.7	)	—		(0.9	)
Nondeductible professional fees	1.5		1.7		2.0
Prior year permanent return to accrual adjustments	(1.1	)	(0.5	)	(1.8	)
Other, net	0.4		1.6		1.3
	37.8	%	40.9	%	38.5	%

Deferred income taxes relate primarily to the difference between book and tax methods of depreciating property, amortizing tax-deductible goodwill, the difference in the recognition of revenues and expenses for book and tax purposes, certain natural gas costs which are deferred for book purposes but expensed currently for tax purposes, and net operating loss carry forwards.

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The components of the net deferred income tax liability recognized in our Consolidated Balance Sheets are related to the following temporary differences (in thousands):

	December 31, 2007			December 31, 2006
Excess tax depreciation	$	(104,113	)	$	(97,613	)
Regulatory assets	(12,179		)	(20,392		)
Regulatory liabilities	(2,288		)	1,264
Unbilled revenue	3,819			2,960
Unamortized investment tax credit	1,883			2,169
Compensation accruals	5,034			3,275
Reserves and accruals	23,577			24,203
Goodwill amortization	(50,914		)	(42,155		)
Net operating loss carryforward (NOL)	65,394			15,573
AMT credit carryforward	5,483			3,186
Capital loss carryforward	6,376			6,376
Valuation allowance	(12,758		)	(12,758		)
Other, net	(373		)	576
	$	(71,059	)	$	(113,336	)

A valuation allowance is recorded when a company believes that it will not generate sufficient taxable income of the appropriate character to realize the value of their deferred tax assets. We have a valuation allowance of $12.8 million as of December 31, 2007 against capital loss carryforwards and certain state NOL carryforwards as we do not believe these assets will be realized.

At December 31, 2007 we estimate our total federal NOL carryforward to be approximately $346.0 million. If unused, $172.4 million will expire in the year 2023, and $173.6 million will expire in the year 2025. We estimate our state NOL carryforward as of December 31, 2007 is approximately $491.9 million. If unused, $320.0 million will expire in 2010, $33.8 million will expire in 2011, and $138.1 million will expire in 2012. Management believes it is more likely than not that sufficient taxable income will be generated to utilize these NOL carryforwards except as noted above.

We have elected under Internal Revenue Code 46(f)(2) to defer investment tax credit benefits and amortize them against expense and customer billing rates over the book life of the underlying plant.

FIN 48

We adopted the provisions of FIN 48 on January 1, 2007. FIN 48 provides that a tax position that meets the more-likely-than-not threshold shall initially and subsequently be measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. As a result of the implementation of FIN 48, we increased our deferred tax assets by $77.5 million and decreased other noncurrent liabilities by $2.4 million, with a corresponding decrease to goodwill. The decrease to goodwill is consistent with the guidance in SFAS No. 109 and the requirements of fresh-start reporting, as our uncertain tax positions relate to periods prior to our emergence from bankruptcy. The change in unrecognized tax benefits since adoption of FIN 48 is as follows:

Unrecognized Tax Benefits at January 1, 2007	$	100,264
Gross increases - tax positions in prior period		13,228
Gross decreases - tax positions in prior period		(2,368	)
Unrecognized Tax Benefits at December 31, 2007	$	111,124

If any of our unrecognized tax benefits were recognized, they would have no impact on our effective tax rate. We do not anticipate that total unrecognized tax benefits will significantly change due to the settlement of audits or the expiration of statute of limitations within the next twelve months.

Our policy is to recognize interest and penalties related to uncertain tax positions in income tax expense. During the year ended December 31, 2007, we have not recognized expense for interest or penalties, and do not have any amounts accrued at

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December 31, 2007 and 2006, respectively, for the payment of interest and penalties.

Our federal tax returns from 2000 forward remain subject to examination by the Internal Revenue Service.

(14) Jointly Owned Plants

We have an ownership interest in four electric generating plants, all of which are coal fired and operated by other companies. We have an undivided interest in these facilities and are responsible for our proportionate share of the capital and operating costs while being entitled to our proportionate share of the power generated. Our interest in each plant is reflected in the Consolidated Balance Sheets on a pro rata basis and our share of operating expenses is reflected in the Consolidated Statements of Income. The participants each finance their own investment.

Information relating to our ownership interest in these facilities is as follows (in thousands):

			Big Stone (S.D.)				Neal #4 (Iowa)				Coyote (N.D.)				Colstrip Unit 4 (MT)
	December 31, 2007
	Ownership percentages		23.4		%		8.7		%		10.0		%		30.0	%
Plant in service		$		55,691		$		29,686		$		42,655		257,129
	Accumulated depreciation		34,933				19,816				25,567				14,139
	December 31, 2006
	Ownership percentages		23.4		%		8.7		%		10.0		%		—
Plant in service		$		52,948		$		29,930		$		42,797		—
	Accumulated depreciation		34,588				19,309				24,393				—

(15) Operating Leases

We lease vehicles, office equipment and facilities under various long-term operating leases. At December 31, 2007 future minimum lease payments for the next five years under non-cancelable lease agreements are as follows (in thousands):

2008	$	1,828
2009	1,081
2010	684
2011	501
2012	429

Lease and rental expense incurred was $19.0 million, $30.9 million, and $31.0 million for the years ended December 31, 2007, 2006 and 2005, respectively.

(16) Employee Benefit Plans

Pension and Other Postretirement Benefit Plans

We sponsor and/or contribute to pension and postretirement health care and life insurance benefit plans for employees, which includes two cash balance pension plans. The plan for our South Dakota and Nebraska employees is referred to as the NorthWestern Corporation pension plan, and the plan for our Montana employees is referred to as the NorthWestern Energy pension plan.

In accordance with SFAS No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, and SFAS No. 87, Employers' Accounting for Pensions, we utilize a number of accounting mechanisms that reduce the volatility of reported pension costs. Differences between actuarial assumptions and actual plan results are deferred and are recognized into earnings only when the accumulated differences exceed 10% of the greater of the projected benefit obligation or the market-related value of plan assets. If necessary, the excess is amortized over the average remaining service period of active employees. SFAS No. 158 also requires that a plan's funded status be recognized as an asset or liability. Through fresh-start reporting in 2004 we had previously recorded the funded status of our plans on the balance sheet, and adjusted our

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qualified pension and other postretirement benefit plans to their projected benefit obligation by recognition of all previously unamortized actuarial gains and losses. Therefore, we recognized all prior service costs, and net actuarial gains and losses from 2005 and 2006 as of December 31, 2006. See Note 18 for further discussion on how these costs are recovered through rates charged to our customers.

Benefit Obligation and Funded Status

Following is a reconciliation of the changes in plan benefit obligations and fair value and a statement of the funded status (in thousands):

	Pension Benefits						Other Postretirement Benefits
	December 31, 2007			December 31, 2006			December 31, 2007			December 31, 2006
Reconciliation of Benefit Obligation
Obligation at beginning of period	$	387,562		$	386,915		$	53,063		$	55,620
Service cost	8,947			9,049			581			741
Interest cost	21,799			20,791			2,442			2,775
Actuarial gain	(21,106		)	(10,265		)	(6,219		)	(2,705		)
Gross benefits paid	(20,330		)	(18,928		)	(3,373		)	(3,368		)
Benefit obligation at end of period	$	376,872		$	387,562		$	46,494		$	53,063

	Pension Benefits						Other Postretirement Benefits
	December 31, 2007			December 31, 2006			December 31, 2007			December 31, 2006
Reconciliation of Fair Value of Plan Assets
Fair value of plan assets at beginning of period	$	301,100		$	271,103		$	13,358		$	10,363
Return on plan assets	27,038			30,918			892			1,041
Employer contributions	22,638			18,007			5,578			5,322
Gross benefits paid	(20,330		)	(18,928		)	(3,373		)	(3,368		)
Fair value of plan assets at end of period	$	330,446		$	301,100		$	16,455		$	13,358
Funded Status	$	(46,426	)	$	(86,463	)	$	(30,039	)	$	(39,705	)
Unrecognized net actuarial (gain) loss	—			—			—			—
Unrecognized prior service cost	—			—			—			—
Accrued benefit cost	$	(46,426	)	$	(86,463	)	$	(30,039	)	$	(39,705	)

The total projected benefit obligation and fair value of plan assets for the pension plans with projected benefit obligations in excess of plan assets were $376.9 million and $330.4 million, respectively, as of December 31, 2007. The total accumulated benefit obligation and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $374.9 million and $330.4 million, respectively, as of December 31, 2007.

The total projected benefit obligation and fair value of plan assets for the pension plans with projected benefit obligations in excess of plan assets were $387.6 million and $301.1 million, respectively, as of December 31, 2006. The total accumulated benefit obligation and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $385.4 million and $301.1 million, respectively, as of December 31, 2006.

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Balance Sheet Recognition

The accrued pension and other postretirement benefit obligations recognized in the accompanying Consolidated Balance Sheets are computed as follows (in thousands):

	Pension Benefits						Other Postretirement Benefits
	December 31, 2007			December 31, 2006			December 31, 2007			December 31, 2006
Accrued benefit cost	$	(91,629	)	$	(107,700	)	$	(37,885	)	$	(41,768	)
Amounts not yet reflected in net periodic benefit cost:
Prior service cost	(2,177		)	(2,419		)	—			—
Accumulated gain	47,380			23,656			7,846			2,063
Net amount recognized	$	(46,426	)	$	(86,463	)	$	(30,039	)	$	(39,705	)

Plan Assets

Our investment strategy provides for the following asset allocation, within an allowable range of plus or minus 5%:

	Pension Benefits		Other Benefits
Debt securities	30.0	%	30.0	%
Domestic equity securities	60.0		60.0
International equity securities	10.0		10.0

The percentage of fair value of plan assets held in the following investment types by the NorthWestern Energy pension plan, NorthWestern Corporation pension plan and NorthWestern Energy Health and Welfare Plan as of December 31, 2007 and December 31, 2006, are as follows:

	NorthWestern Energy Pension				NorthWestern Corporation Pension				NorthWestern Energy Health and Welfare
	December 31, 2007		December 31, 2006		December 31, 2007		December 31, 2006		December 31, 2007		December 31, 2006
Cash and cash equivalents	0.2	%	1.9	%	0.2	%	0.7	%	0.1	%	—	%
Debt securities	29.8		30.5		2.4		—		30.3		28.3
Domestic equity securities	58.8		56.1		59.2		57.0		58.6		71.3
International equity securities	11.2		11.5		11.4		11.6		11.0		0.4
Participating group annuity contracts	—		—		26.8		30.7		—		—
	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%

Our investment goals with respect to managing the pension and other postretirement assets are to meet current and future benefit payment needs while maximizing total investment returns (income and appreciation) after inflation within the constraints of diversification, prudent risk taking, and the Prudent Man Rule of the Employee Retirement Income Security Act of 1974 (ERISA). Each plan is diversified across asset classes to achieve optimal balance between risk and return and between income and growth through capital appreciation. We review the asset mix on a quarterly basis. Generally, the asset mix will be rebalanced to the target mix as individual portfolios approach their minimum or maximum levels.

We calculate the market related value of plan assets based on the fair market value of plan assets. Debt and equity securities are recorded at their fair market value each year end as determined by quoted closing market prices on national securities exchanges or other markets as applicable. The participating group annuity contracts are valued based on discounted cash flows of current yields of similar contracts with comparable duration.

Our investment policy allows for all or a portion of each benefit plan to be invested in commingled funds, including mutual funds, collective investment funds, bank commingled funds and insurance company separate accounts. These pooled investment funds must have an adequate asset base relative to their asset class and be invested in a diversified manner and have a minimum of three years of verified investment performance experience or verified portfolio manager investment experience in a particular investment strategy and have management and oversight by an Investment Advisor registered with the SEC. The direct holding of company stock is not permitted; however, any holding in a diversified mutual fund or

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collective investment fund is permitted. The policy prohibits any transactions that would threaten the tax exempt status of the fund and actions that would create a conflict of interest or transactions between fiduciaries and parties in interest as defined under ERISA.

Our investment policy for fixed income investments consist of U.S. as well as international instruments. Core domestic portfolios can be invested in government, corporate, asset-backed and mortgage-backed obligation securities. The portfolio may invest in high yield securities, however, the average quality must be rated at least “investment grade" by rating agencies including Moodys and S&P. In addition, the NorthWestern Corporation pension plan assets also include a participating group annuity contract in the John Hancock General Investment Account, which consists primarily of fixed-income securities.

Equity investments consist primarily of U.S. stocks including large, mid and small cap stocks, which are diversified across investment styles such as growth and value. Non-U.S. equities are utilized with exposure to developing and emerging markets. Derivatives, options and futures are permitted for the purpose of reducing risk but may not be used for speculative purposes.

Actuarial Assumptions

The measurement dates used to determine pension and other postretirement benefit measurements for the plans are December 31, 2007 and 2006. The actuarial assumptions used to compute the net periodic pension cost and postretirement benefit cost are based upon information available as of the beginning of the year, specifically, market interest rates, past experience and management's best estimate of future economic conditions. Changes in these assumptions may impact future benefit costs and obligations. In computing future costs and obligations, we must make assumptions about such things as employee mortality and turnover, expected salary and wage increases, discount rate, expected return on plan assets, and expected future cost increases. Two of these items generally have the most impact on the level of cost: (1) discount rate and (2) expected rate of return on plan assets.

For 2007 and 2006, we set the discount rate using a yield curve analysis, which projects benefit cash flows into the future and then discounts those cash flows to the measurement date using a yield curve. This is done by constructing a hypothetical bond portfolio whose cash flow from coupons and maturities matches the year-by-year, projected benefit cash flow from our plans.

The expected long-term rate of return assumption on plan assets for both the pension and postretirement plans was determined based on the historical returns and the future expectations for returns for each asset class, as well as the target asset allocation of the portfolios.

The health care cost trend rates are established through a review of actual recent cost trends and projected future trends. Our retiree medical trend assumptions are the best estimate of expected inflationary increases to our healthcare costs. Due to the relative size of our retiree population (under 700 members), the assumptions used are based upon both nationally expected trends and our specific expected trends. Our average increase remains consistent with the nationally expected trends.

The weighted-average assumptions used in calculating the preceding information are as follows:

	Pension Benefits						Other Postretirement Benefits
	December 31,		December 31,		December 31,		December 31,		December 31,		December 31,
	2007		2006		2005		2007		2006		2005
Discount rate	6.25	%	5.75	%	5.50	%	5.75-6.00	%	5.50 - 5.75	%	5.50	%
Expected rate of return on assets	8.00	%	8.00	%	8.50	%	8.00	%	8.00	%	8.50	%
Long-term rate of increase in compensation levels (nonunion)	3.58	%	3.61	%	3.64	%	3.55	%	3.57	%	3.64	%
Long-term rate of increase in compensation levels (union)	3.50	%	3.50	%	3.50	%	3.50	%	3.50	%	3.50	%

The postretirement benefit obligation is calculated assuming that health care costs increased by 10% in 2007 and the rate of increase in the per capita cost of covered health care benefits thereafter was assumed to decrease gradually to 5% by the year 2013.

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Net Periodic Cost

The components of the net costs for our pension and other postretirement plans are as follows (in thousands):

	Pension Benefits									Other Postretirement Benefits
	December 31,			December 31,			December 31,			December 31,			December 31,			December 31,
	2007			2006			2005			2007			2006			2005
Components of Net Periodic Benefit Cost
Service cost	$	8,947		$	9,049		$	8,531		$	580		$	741		$	688
Interest cost	21,800			20,791			20,174			2,442			2,775			2,853
Expected return on plan assets	(24,422		)	(21,458		)	(20,347		)	(1,068		)	(829		)	(562		)
Amortization of transitional obligation	—			—			—			—			—			—
Amortization of prior service cost	242			242			—			—			—			—
Recognized actuarial (gain) loss	—			—			—			(259		)	117			—
Net Periodic Benefit Cost	$	6,567		$	8,624		$	8,358		$	1,695		$	2,804		$	2,979

We estimate amortizations from regulatory assets into net periodic cost during 2008 will be as follows (in thousands):

		Pension Benefits		Other Postretirement Benefits
Prior service cost	$	242	$	—
Accumulated gain		(854	)	(292	)

Assumed health care cost trend rates have a significant effect on the amounts reported for the costs each year as well as on the accumulated postretirement benefit obligation. The following table sets forth the sensitivity of retiree welfare results (in thousands):

Effect of a one percentage point increase in assumed health care cost trend
on total service and interest cost components	$	150
on postretirement benefit obligation	1,639
Effect of a one percentage point decrease in assumed health care cost trend
on total service and interest cost components	$	(129	)
on postretirement benefit obligation	(1,450		)

Cash Flows

On August 17, 2006 the Pension Protection Act of 2006 (PPA) was signed into law, with changes that impact the funding calculation for benefit plans. Pension funding is based on annual actuarial studies prepared for each plan in accordance with contribution guidelines established by PPA, ERISA and the Internal Revenue Code. We anticipate making contributions of approximately $26.1 million to our pension and other postretirement benefit plans in 2008. For our postretirement welfare benefits, our policy is to contribute an amount equal to the annual actuarially determined cost that is also recoverable in rates. We generally fund our 401(h) and VEBA trusts monthly, subject to our liquidity needs and the maximum deductible amounts allowed for income tax purposes.

We estimate the plans will make future benefit payments to participants as follows (in thousands):

	Pension Benefits		Other Postretirement Benefits
2008	$	20,415	$	3,900
2009	20,776		3,986
2010	21,544		4,129
2011	22,443		4,072
2012	23,312		4,038
2013-2017	137,730		21,542

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Defined Contribution Plans

Our defined contribution plan permits employees to defer receipt of compensation as provided in Section 401(k) of the Internal Revenue Code. Under the plan, employees may elect to direct a percentage of their gross compensation to be contributed to the plan. We contribute various percentage amounts of the employee's gross compensation contributed to the plan. Matching contributions were $4.7 million for 2007, $4.3 million for 2006, and $3.4 million for 2005, respectively.

(17) Stock-Based Compensation

Restricted Stock Awards

Under our long-term incentive plans administered by the Human Resources Committee of our Board, we have granted service-based restricted stock to all eligible employees and members of our Board. Under these plans, a total of 1,300,000 shares have been set aside for restricted stock grants, in addition to 228,315 shares of restricted stock granted upon our emergence from bankruptcy. We may issue new shares or reuse forfeited shares in order to deliver shares to employees for equity grants. As of December 31, 2007 there were 625,107 shares of common stock remaining available for grants. The stock vests to participants at various times ranging from one to five years if the service requirements are met. Nonvested shares do not receive dividend distributions. The long-term incentive plans provide for accelerated vesting in the event of a change in control.

In accordance with SFAS No. 123R, we account for our service-based restricted stock awards using the fixed accounting method, whereby we amortize the value of the market price of the underlying stock on the date of grant (grant-date fair value) to compensation expense over the service period either ratably or in tranches. We reverse any expense associated with restricted stock that is canceled or forfeited during the performance or service period. Compensation expense recognized for restricted stock awards was $7.0 million, $3.6 million and $4.7 million for the years ended December 31, 2007, 2006 and 2005, respectively. The total income tax benefit recognized in the income statement for these restricted stock awards was $4.4 million, $1.5 million and $1.8 million for the years ended December 31, 2007, 2006 and 2005, respectively.

Summarized share information for our restricted stock awards is as follows:

	Year Ended December 31, 2007	Weighted-Average Grant-Date Fair Value	Year Ended December 31, 2006	Weighted-Average Grant-Date Fair Value
Beginning nonvested grants	476,105	$ 29.54	35,164	$ 20.00
Granted	4,208	31.72	503,337	34.42
Vested	107,973	31.94	57,393	29.94
Forfeited	11,027	34.37	5,003	34.39
Remaining nonvested grants	361,313	34.45	476,105	29.54

As of December 31, 2007 we had $6.6 million of unrecognized compensation cost related to nonvested portion of outstanding restricted stock awards, which is reflected as unearned restricted stock as a portion of additional paid in capital in our Statement of Common Shareholders' Equity. The cost is expected to be recognized over a weighted-average period of 1.9 years. The total fair value of shares vested was $3.4 million, $1.7 million and $4.6 million for the years ended December 31, 2007, 2006 and 2005.

Director's Deferred Compensation

Nonemployee directors may elect to defer up to 100% of any qualified compensation that would be otherwise payable to him or her, subject to compliance with our 2005 Deferred Compensation Plan for Nonemployee Directors and Section 409A of the Internal Revenue Code. The deferred compensation may be invested in NorthWestern stock or in designated investment funds. Compensation deferred in a particular month is recorded as a deferred stock unit (DSU) on the first of the following month based on the closing price of NorthWestern stock or the designated investment fund. A DSU entitles the grantee to receive one share of common stock for each DSU at the end of the deferral period. The value of these DSUs are marked-to-market on a quarterly basis with an adjustment to directors compensation expense. Based on the election of the nonemployee director, following separation from service on the Board, other than on account of death, he or she shall be paid

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a distribution either in a lump sum or in approximately equal installments over a designated number years (not to exceed 10 years). During the years ended December 31, 2007 and 2006, DSUs issued to members of our Board totaled 30,563 and 22,805, respectively. Total compensation expense attributable to the DSUs during the years ended December 31, 2007, 2006 and 2005 was approximately $0.7 million, $0.9 million and $0.7 million, respectively.

(18) Regulatory Assets and Liabilities

We prepare our financial statements in accordance with the provisions of SFAS No. 71, as discussed in Note 3 to the Financial Statements. Pursuant to this pronouncement, certain expenses and credits, normally reflected in income as incurred, are deferred and recognized when included in rates and recovered from or refunded to the customers. Regulatory assets and liabilities are recorded based on management's assessment that it is probable that a cost will be recovered or that an obligation has been incurred. Accordingly, we have recorded the following major classifications of regulatory assets and liabilities that will be recognized in expenses and revenues in future periods when the matching revenues are collected or refunded. Of these regulatory assets and liabilities, energy supply costs are the only items earning a rate of return. The remaining regulatory items have corresponding assets and liabilities that will be paid for or refunded in future periods. Because these costs are recovered as paid, they do not earn a return. We have specific orders to cover approximately 97% of our regulatory assets and 100% of our regulatory liabilities.

	Note	Remaining Amortization		December 31,
	Reference	Period		2007		2006
Pension	16	Undetermined	$	47,091	$	87,397
Postretirement benefits	16	Undetermined		21,099		28,725
Competitive transition charges		5 Years		23,227		27,954
Environmental clean-up		Various		14,765		—
Supply costs		1 Year		14,195		15,205
Income taxes	13	Plant Lives		11,279		9,453
State & local taxes & fees		1 Year		—		5,105
Deferred financing costs		Various		4,318		4,637
Other		Various		14,116		12,364
Total regulatory assets			$	150,090	$	190,840
Removal cost	7	Various	$	178,968	$	166,705
Gas storage sales		32 Years		13,354		13,774
Supply costs		1 Year		32,443		11,053
Environmental clean-up		3 Years		2,208		—
Other		Various		8,621		2,797
Total regulatory liabilities			$	235,594	$	194,329

Pension and Postretirement Benefits

A regulatory asset has been recognized for costs in excess of amounts recovered in rates. Historically, the MPSC rates have allowed recovery of pension costs on a cash basis. In 2005, the MPSC authorized the recognition of pension costs based on an average of the funding to be made over a 5-year period for the calendar years 2005 through 2009.The SDPUC allows recovery of pension costs on an accrual basis. The MPSC allows recovery of SFAS No. 106 costs on an accrual basis. This amount also includes adjustments recognized due to the adoption of fresh-start reporting in 2004 and SFAS No. 158 in 2006 (see Note 16).

Natural Gas Competitive Transition Charges

Natural gas transition bonds were issued in 1998 to recover stranded costs of production assets and related regulatory assets and provide a lower cost to utility customers, as the cost of debt was less than the cost of capital. The MPSC authorized the securitization of these assets and approved the recovery of the competitive transition charges in rates over a 15-year period. The regulatory asset relating to competitive transition charges amortizes proportionately with the principal payments on the natural gas transition bonds.

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Supply Costs

The MPSC has authorized the use of electric and natural gas supply cost trackers, which enable us to track actual supply costs and either recover the under collection or refund the over collection to our customers. Accordingly, a regulatory asset and liability has been recorded to reflect the future recovery of under collections and refunding of over collections through the ratemaking process. We earn interest on the electric and natural gas supply costs of 8.46% and 8.82%, respectively, in Montana; 10.61% and 7.96%, respectively, in South Dakota; and 8.55% for natural gas in Nebraska. These same rates are paid to our customers in the event of a refund.

Environmental clean-up

Environmental clean-up costs are the estimated costs of investigating and cleaning up contaminated sites we own. We discuss the specific sites and clean-up requirements further in Note 21. In December 2007, the SDPUC approved our settlement with SDPUC Staff related to our natural gas rate case, which included a provision allowing us to include approximately $1.4 million annually in rates to recover MGP environmental clean-up costs. This was partially offset by a requirement to return approximately $2.3 million ($0.8 million annually) of previous insurance recoveries to customers. The SDPUC's approval of our settlement provides reasonable assurance that we will recover future South Dakota related MGP costs, therefore we recorded net regulatory assets (with a corresponding reduction to operating, general and administrative expenses) of $12.6 million in December 2007 to offset the previously recorded South Dakota MGP related liabilities.

Income Taxes

Tax assetsprimarily reflect the effects of plant related temporary differences such as removal costs, capitalized interest and contributions in aid of construction that we will recover or refund in future rates. We amortize these amounts as temporary differences reverse.

Deferred Financing Costs

Consistent with our historical regulatory treatment, a regulatory asset has been established to reflect the remaining deferred financing costs on long-term debt that has been replaced through the issuance of new debt.

State & Local Taxes & Fees

Under Montana law, we are allowed to track the increases in the actual level of state and local taxes and fees and recover these amounts. In 2006, the MPSC authorized recovery of approximately 60% of the estimated increase in our local taxes and fees (primarily property taxes) as compared to the related amount included in rates during our last general rate case in 1999. In 2007, we filed a general rate case in Montana which reestablishes the amount of state and local taxes and fees collected in base rates.

Removal Cost

Historically, the anticipated costs of removing assets upon retirement were provided for over the life of those assets as a component of depreciation expense; however, SFAS No. 143 precludes this treatment. Our depreciation method, including cost of removal, is established by the respective regulatory commissions, therefore in accordance with SFAS No. 71, we continue to accrue removal costs for our regulated assets by increasing our regulatory liability. See Note 7, Asset Retirement Obligations, for further information regarding this item.

Gas Storage Sales

A gas storage sales regulatory liability was established in 2000 and 2001 based on gains on cushion gas sales in Montana. This gain is being flowed to customers over a period that matches the depreciable life of surface facilities that were added to maintain deliverability from the field after the withdrawal of the gas. This regulatory liability is a reduction of rate base.

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(19) Regulatory Matters

South Dakota Natural Gas Rate Case - In June 2007, we filed a request with the South Dakota Public Utilities Commission (SDPUC) for a natural gas distribution revenue increase of $3.7 million. We reached a settlement with the SDPUC, and in December 2007 an order was issued authorizing a base rate increase of $3.1 million annually. This settlement includes a rate moratorium for a period of three years.

Nebraska Natural Gas Rate Case - In June 2007, we filed a request with the Nebraska Public Service Commission (NPSC) for a natural gas distribution revenue increase of $2.8 million. We reached a settlement with the NPSC, and in December 2007 an order was issued authorizing a base rate increase of $1.5 million annually.

FERC Transmission Rate Case - In October 2006, we filed a request with the FERC for an electric transmission revenue increase. Our requested increase pertains only to FERC jurisdictional wholesale transmission and retail choice customers representing approximately $8.6 million in revenue. In May 2007, we implemented interim rates, which are subject to refund plus interest pending final resolution. We filed settlement documents on February 15, 2008 and are awaiting FERC approval, which is expected during the first half of 2008. This proposed settlement would result in an annualized margin increase of approximately $3.0 million.

Montana Electric and Natural Gas Rate Case- In July 2007, we filed a request with the MPSC for a electric transmission and distribution revenue increase of $31.4 million, and a natural gas transmission, storage and distribution revenue increase of $10.5 million. In December 2007, we and the Montana Consumer Counsel filed a joint stipulation with the MPSC to settle our electric and natural gas rate cases. Specific terms of the Stipulation include:

• An increase in base electric rates of $10 million and base natural gas rates of $5 million;

• Interim rates effective January 1, 2008;

• Capital investment in our electric and natural gas system totaling $38.8 million to be completed in 2008 and 2009 on which we will not earn a return on, but will recover depreciation expense;

• A commitment of 21 MWs of unit contingent power from Colstrip Unit 4 at Mid-C minus $19 per MWH to electric supply for a period of 76 months beginning March 1, 2008; and

• We will submit a general electric and natural gas rate filing no later than July 31, 2009 based on a 2008 test year.

The MPSC has approved interim rates, subject to refund, beginning January 1, 2008, and we anticipate finalizing the rate case during the second quarter of 2008.

(20) Earnings Per Share

Basic earnings per share is computed by dividing earnings applicable to common stock by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of common stock equivalent shares that could occur if all unvested restricted shares were to vest. Common stock equivalent shares are calculated using the treasury stock method, as applicable. The dilutive effect is computed by dividing earnings applicable to common stock by the weighted average number of common shares outstanding plus the effect of the outstanding unvested restricted shares and deferred share units. Average shares used in computing the basic and diluted earnings per share are as follows:

	December 31, 2007	December 31, 2006
Basic computation	36,622,547	35,554,498
Dilutive effect of
Restricted shares and deferred share units	435,615	519,844
Stock warrants	—	1,407,993
Diluted computation	37,058,162	37,482,335

Warrants issued in 2004 were exercisable through the close of business November 1, 2007. A total of 4,238,765 warrants were exercised during the year ended December 31, 2007. Warrants outstanding as of December 31, 2006 of 4,506,525 were dilutive and have been included in the 2006 earnings per share calculation.

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(21) Commitments and Contingencies

Qualifying Facilities Liability

In Montana we have certain contracts with Qualifying Facilities, or QFs. The QFs require us to purchase minimum amounts of energy at prices ranging from $65 to $138 per MWH through 2029. Our gross contractual obligation related to the QFs is approximately $1.5 billion through 2029. A portion of the costs incurred to purchase this energy is recoverable through rates, totaling approximately $1.2 billion through 2029. Upon adoption of fresh-start reporting, we computed the fair value of the remaining liability of approximately $367.9 million to be approximately $143.8 million based on the net present value (using a 7.75% discount factor) of the difference between our obligations under the QFs and the related amount recoverable. The following table summarizes the change in the QF liability (in thousands):

	December 31, 2007			December 31, 2006
Beginning QF liability	$	147,893		$	140,467
Unrecovered amount	(1,223		)	(3,460		)
Interest expense	11,462			10,886
Ending QF liability	$	158,132		$	147,893

The following summarizes the estimated gross contractual obligation less amounts recoverable through rates (in thousands):

	Gross Obligation		Recoverable Amounts			Net
2008	$	60,574	$	(53,060	)	$	7,514
2009	62,598		(53,583		)	9,015
2010	64,580		(54,086		)	10,494
2011	66,067		(54,628		)	11,439
2012	68,156		(55,180		)	12,976
Thereafter	1,196,704		(907,370		)	289,334
Total	$	1,518,679	$	(1,177,907	)	$	340,772

Long Term Supply and Capacity Purchase Obligations

We have entered into various commitments, largely purchased power, coal and natural gas supply and natural gas transportation contracts. These commitments range from one to 23 years. Costs incurred under these contracts were approximately $445.0 million, $447.1 million, and $433.9 million for the years ended December 31, 2007, 2006 and 2005, respectively. As of December 31, 2007 our commitments under these contracts are $544 million in 2008, $330 million in 2009, $307 million in 2010, $151 million in 2011, $129 million in 2012, and $454 million thereafter. These commitments are not reflected in our Consolidated Financial Statements.

Environmental Liabilities

Environmental laws and regulations are continually evolving, and, therefore, the character, scope, cost and availability of the measures we may be required to take to ensure compliance with evolving laws or regulations cannot be accurately predicted. The range of exposure for environmental remediation obligations at present is estimated to range between $19.8 million to $57.0 million. As of December 31, 2007, we have a reserve of approximately $32.7 million. We anticipate that as environmental costs become fixed and reliably determinable, we will seek insurance reimbursement and/or authorization to recover these in rates; therefore, we do not expect these costs to have a material adverse effect on our consolidated financial position, ongoing operations, or cash flows.

The Clean Air Act Amendments of 1990 and subsequent amendments stipulate limitations on sulfur dioxide and nitrogen oxide emissions from coal-fired power plants. We comply with these existing emission requirements through purchase of sub-bituminous coal, and we believe that we are in compliance with all presently applicable environmental protection requirements and regulations with respect to these plants.

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Coal-Fired Plants

We have a jointly owned interest in Colstrip Unit 4, a coal-fired power plant located in southeastern Montana. In addition, we are joint owners in three coal-fired plants used to serve our South Dakota customer supply demands. Citing its authority under the Clean Air Act, the EPA had finalized Clean Air Mercury Regulations (CAMR) that affect coal-fired plants. These regulations established a cap-and-trade program to take effect in two phases, with a first phase to begin in January 2010, and a second phase with more stringent caps to begin in January 2018. Under CAMR, each state is allocated a mercury emissions cap and is required to develop regulations to implement the requirements, which can follow the federal requirements or be more restrictive. In February 2008 the EPA’s mercury regulations were turned down by the U.S. Court of Appeals for the District of Columbia Circuit; however, Montana has finalized its own rules more stringent than CAMR's 2018 cap that would require every coal-fired generating plant in the state to achieve reduction levels by 2010. If the Montana rules are maintained in their current form and enhanced chemical injection technologies are not sufficiently developed to meet the Montana levels of reduction by 2010, then adsorption/absorption technology with fabric filters at the Colstrip Unit 4 generation facility would be required, which could represent a material cost. Recent tests have shown that it may be possible to meet the Montana rules with more refined chemical injection technology combined with adjustments to boiler/fireball dynamics at a minimal cost. We are continuing to work with the other Colstrip owners to determine the ultimate financial impact of these rules.

In addition to the requirements related to emissions noted above, there is a growing concern nationally and internationally about global climate change and the contribution of emissions of greenhouse gases including, most significantly, carbon dioxide. This concern has led to increased interest in legislation at the federal level, actions at the state level, as well as litigation relating to greenhouse emissions, including a recent US Supreme Court decision holding that the EPA has the authority to regulate carbon dioxide emissions from motor vehicles under the Clean Air Act. Increased pressure for carbon dioxide emissions reduction also is coming from investor organizations. If legislation or regulations are passed at the federal or state levels imposing mandatory reductions of carbon dioxide and other greenhouse gases on generation facilities, the cost to us of such reductions could be significant.

Manufactured Gas Plants

Approximately $26.1 million of our environmental reserve accrual is related to manufactured gas plants. A formerly operated manufactured gas plant located in Aberdeen, South Dakota, has been identified on the Federal Comprehensive Environmental Response, Compensation, and Liability Information System (CERCLIS) list as contaminated with coal tar residue. We are currently investigating, characterizing, and initiating remedial actions at the Aberdeen site pursuant to work plans approved by the South Dakota Department of Environment and Natural Resources. In 2007, we completed remediation of sediment in a short segment of Moccasin Creek that had been impacted by the former manufactured gas plant operations. Our current reserve for remediation costs at this site is approximately $12.4 million, and we estimate that approximately $10 million of this amount will be incurred during the next five years.

We also own sites in North Platte, Kearney and Grand Island, Nebraska on which former manufactured gas facilities were located. During 2005, the Nebraska Department of Environmental Quality (NDEQ) conducted Phase II investigations of soil and groundwater at our Kearney and Grand Island sites. On March 30, 2006 and May 17, 2006, the NDEQ released to us the Phase II Limited Subsurface Assessment performed by the NDEQ's environmental consulting firm for Kearney and Grand Island, respectively. We have initiated additional site investigation and assessment work at these locations. At present, we cannot determine with a reasonable degree of certainty the nature and timing of any risk-based remedial action at our Nebraska locations.

In addition, we own or have responsibility for sites in Butte, Missoula and Helena, Montana on which former manufactured gas plants were located. An investigation conducted at the Missoula site did not require entry into the Montana Department of Environmental Quality (MDEQ) voluntary remediation program, but required preparation of a groundwater monitoring plan. The Butte and Helena sites were placed into the MDEQ's voluntary remediation program for cleanup due to exceedences of regulated pollutants in the groundwater. We have conducted additional groundwater monitoring at the Butte and Missoula sites and, at this time, we believe natural attenuation should address the problems at these sites; however, additional groundwater monitoring will be necessary. In Helena, we continue limited operation of an oxygen delivery system implemented to enhance natural biodegradation of pollutants in the groundwater and we are currently evaluating limited source area treatment/removal options. Monitoring of groundwater at this site will be necessary for an extended time. At this time, we cannot estimate with a reasonable degree of certainty the nature and timing of risk-based remedial action at the

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Helena site.

Based upon our investigations to date, our current environmental liability reserves, applicable insurance coverage, and the potential to recover some portion of prudently incurred remediation costs in rates, we do not expect remediation costs at these locations to be materially different from the established reserve.

Milltown Mining Waste

Our subsidiary, Clark Fork and Blackfoot, LLC (CFB), owns the Milltown Dam hydroelectric facility, a three MW generation facility located at the confluence of the Clark Fork and Blackfoot Rivers. In April 2003, the Environmental Protection Agency (EPA) announced its proposed remedy to address the mining waste contamination located in the Milltown Reservoir. This remedy proposed partial removal of the contaminated sediments located within the Milltown Reservoir, together with the removal of the Milltown Dam and powerhouse (this remedy was incorporated into the EPA's formal Record of Decision issued on December 20, 2004). In light of this pre-Record of Decision announcement, we entered into a stipulation (Stipulation) with Atlantic Richfield, the EPA, the Department of the Interior, the State of Montana and the Confederated Salish and Kootenai Tribes (collectively, the Government Parties), which capped NorthWestern's and CFB's collective liability to Atlantic Richfield and the Government Parties at $11.4 million. In April 2006, we released escrowed amounts of $2.5 million and $7.5 million to the State of Montana and Atlantic Richfield, respectively, in accordance with the terms of the consent decree described below.

On July 18, 2005, we and CFB executed the Milltown Reservoir superfund site consent decree, which incorporated the terms set forth in the Stipulation. The consent decree was approved by the Federal District Court for the District of Montana on February 8, 2006 and became effective on April 10, 2006. In light of the material environmental risks associated with the catastrophic failure of the Milltown Dam, we secured a 10-year, $100 million environmental insurance policy, effective May 31, 2002, to mitigate the risk of future environmental liabilities arising from the structural failure of the Milltown Dam caused by an act of God. We are obligated under the settlement to continue to maintain the environmental insurance policy until the Milltown Dam is removed during implementation of the remedy. Dam removal activities will be initiated in January of 2008.

Pursuant to the terms of the consent decree, the parties expect that the remaining financial obligation of $1.4 million to the State of Montana will be covered through a combination of any refund of premium upon cancellation of the catastrophic release policy, and the sale or transfer of land and water rights associated with the Milltown Dam operations.

Other

We continue to manage equipment containing polychlorinated biphenyl (PCB) oil in accordance with the EPA's Toxic Substance Control Act regulations. We will continue to use certain PCB-contaminated equipment for its remaining useful life and will, thereafter, dispose of the equipment according to pertinent regulations that govern the use and disposal of such equipment.

We routinely engage the services of a third-party environmental consulting firm to assist in performing a comprehensive evaluation of our environmental reserve. Based upon information available at this time, we believe that the current environmental reserve properly reflects our remediation exposure for the sites currently and previously owned by us. The portion of our environmental reserve applicable to site remediation may be subject to change as a result of the following uncertainties:

• We may not know all sites for which we are alleged or will be found to be responsible for remediation; and

• Absent performance of certain testing at sites where we have been identified as responsible for remediation, we cannot estimate with a reasonable degree of certainty the total costs of remediation.

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Legal Proceedings

Magten/Law Debenture/QUIPS Litigation

Magten and Law Debenture v. NorthWestern Corporation - On April 16, 2004, Magten Asset Management Corporation (Magten) and Law Debenture Trust Company (Law Debenture) initiated an adversary proceeding, which we refer to as the QUIPS Litigation, against NorthWestern seeking among other things, to void the transfer of certain assets and liabilities of CFB to us. In essence, Magten and Law Debenture are asserting that the transfer of the transmission and distribution assets acquired from the Montana Power Company was a fraudulent conveyance because such transfer allegedly left CFB insolvent and unable to pay certain claims. The plaintiffs also assert that they are creditors of CFB as a result of Magten owning a portion of the Series A 8.45% Quarterly Income Preferred Securities (QUIPS) for which Law Debenture serves as the Indenture Trustee. Plaintiffs seek, among other things, the avoidance of the transfer of assets, declaration that the assets were fraudulently transferred and are not property of NorthWestern, the imposition of constructive trusts over the transferred assets and the return of such assets to CFB. On July 18, 2007, the Delaware District Court extended the discovery schedule and scheduled the trial for March 2008. We have and will continue to vigorously defend against the QUIPS litigation.

Magten v. Certain Current and Former Officers of CFB - On April 19, 2004, Magten filed a complaint against certain former and current officers of CFB in U.S. District Court in Montana, seeking compensatory and punitive damages for alleged breaches of fiduciary duties by such officers in connection with the same transaction described above which is at issue in the QUIPS Litigation, namely the transfer of the transmission and distribution assets acquired from the Montana Power Company to NorthWestern. Those officers have requested CFB to indemnify them for their legal fees and costs in defending against the lawsuit and any settlement and/or judgment in such lawsuit. That lawsuit was transferred to the Federal District Court in Delaware in July 2005 and is consolidated with the QUIPS Litigation for purposes of discovery and pre-trial matters. On July 18, 2007, the Delaware District Court extended the discovery schedule and scheduled the trial for March 2008.

Magten v. Bank of New York - In July 2006, Magten served a complaint against The Bank of New York (BNY) in an action filed in New York State court, seeking damages for alleged breach of contract, breach of fiduciary duty and negligence in connection with the same transaction described above which is at issue in the QUIPS Litigation. Specifically, Magten alleges that BNY, as the Indenture Trustee at the time of the 2002 transfer of assets from Montana Power Company to NorthWestern, should have taken steps to protect the QUIPS holders' interests by seeking to set aside the transfer and imposing a constructive trust on the assets. The New York State court dismissed Magten's complaint in May 2007 and Magten has filed a notice of appeal. BNY has asserted a right to indemnification by NorthWestern for legal fees and costs incurred in defending against Magten's claims pursuant to the terms of the Indenture governing the QUIPS under which BNY served as Trustee. It is our position that any such recovery should be payable from the Class 9 Disputed Claim Reserve set aside under NorthWestern's Chapter 11 Plan of Reorganization (the “Plan"), although the Plan Committee, acting on behalf of certain creditors of NorthWestern's bankruptcy estate, has objected to this position.

Magten and Law Debenture v. NorthWestern Corporation and Certain Individuals - On April 15, 2005, Magten and Law Debenture filed an adversary complaint in the Bankruptcy Court against NorthWestern and certain former and current officers and directors seeking to revoke the Confirmation Order of our Plan of Reorganization on the grounds that it was procured by fraud as a result of the alleged failure to adequately fund the Class 9 Disputed Claims Reserve with enough shares of new common stock to satisfy a potential full recovery on all pending claims against NorthWestern's bankruptcy estate which were outstanding at the time the Plan became effective on November 1, 2004. The plaintiffs also alleged breach of fiduciary duty on the part of certain former and current officers in connection with the alleged under-funding of the Disputed Claims Reserve. NorthWestern filed a motion to dismiss or stay the litigation and on July 26, 2005, the Bankruptcy Court ordered a stay of the litigation pending resolution of Magten's appeal of the Order confirming our Plan of Reorganization. NorthWestern intends to seek dismissal of this action and to the extent such action is not dismissed, NorthWestern intends to vigorously defend this action.

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We have reached a tentative agreement with Magten, the Plan Committee and other interested persons to resolve all the currently pending claims and litigation involving Magten arising out of our bankruptcy proceeding. We will be preparing a settlement agreement and expect to seek bankruptcy court approval for the settlement during the first quarter of 2008. The tentative settlement will be funded from the Class 9 Disputed Claims Reserve and insurance proceeds. While we cannot currently predict if the tentative settlement will be approved, the plaintiffs' claims with respect to the QUIPs Litigation should be treated as general unsecured, or Class 9, claims which would be satisfied out of the Class 9 Disputed Claims Reserve established under the Plan.

McGreevey Litigation

We are one of several defendants in a class action lawsuit entitled McGreevey, et al. v. The Montana Power Company, et al, now pending in U.S. District Court in Montana. The lawsuit, which was filed by former shareholders of The Montana Power Company (most of whom became shareholders of Touch America Holdings, Inc. as a result of a corporate reorganization of The Montana Power Company), claims that the disposition of various generating and energy-related assets by The Montana Power Company were void because of the failure to obtain shareholder approval for the transactions. Plaintiffs thus seek to reverse those transactions, or receive fair value for their stock as of late 2001, when plaintiffs claim shareholder approval should have been sought. NorthWestern is named as a defendant due to the fact that we purchased The Montana Power L.L.C., which plaintiffs claim is a successor to the Montana Power Company.

We are one of the defendants in a second class action lawsuit brought by the McGreevey plaintiffs, also entitled McGreevey, et al. v. The Montana Power Company, et al., pending in U.S. District Court in Montana. This lawsuit, like the Magten litigation described above, seeks, among other things, the avoidance of the transfer of assets from CFB to us, declaration that the assets were fraudulently transferred and are not property of our bankruptcy estate, the imposition of constructive trusts over the transferred assets, and the return of such assets to CFB.

In June 2006, we and the McGreevey plaintiffs entered into an agreement to settle all claims brought by the McGreevey plaintiffs in all of the actions described above, wherein the McGreevey plaintiffs executed a covenant not to execute against us, and we quit claimed any interest we had in any claims we may or may not have under any applicable directors and officers liability insurance policy, against any insurers for contractual or extracontractual damages, and against certain defendants in the McGreevey lawsuits. In November 2006, this agreement was approved by the Delaware Bankruptcy Court and the claims were discharged. We filed a joint motion with the plaintiffs' attorneys in U.S. District Court in Montana to dismiss the claims against us in the McGreevey lawsuits. On March 16, 2007, the U.S. District Court in Montana denied the motion to dismiss us from the McGreevey lawsuits, questioning the benefits of the settlement to be received by the class members in the settlement and the authority of the plaintiffs' counsel to have negotiated the settlement without a class having been certified by the court. On January 11, 2008, the U.S. District Court in Montana suggested that the settlement agreement was invalid because the plaintiffs' attorneys had not secured the court's permission to engage in settlement discussions. It is unlikely that we will be able to obtain our dismissal from the McGreevey litigation in Montana before class representatives and class counsel are approved by the U.S. District Court in Montana. However, we believe that given the scope of our bankruptcy confirmation order and the injunctions issued by the Delaware Bankruptcy Court which channeled the claims to the D&O Trust, we have limited exposure for damages arising from the McGreevey claims. We will continue to vigorously defend against these claims and explore ways to remove ourselves from the lawsuits.

City of Livonia

In November 2005, we and our directors were named as defendants in a shareholder class action and derivative action entitled City of Livonia Employee Retirement System v. Draper, et al., pending in the U.S. District Court for the District of South Dakota. The plaintiff claimed, among other things, that the directors breached their fiduciary duties by not sufficiently negotiating with Montana Public Power Inc. and Black Hills Corporation, two entities that had made public, unsolicited offers to purchase NorthWestern. On April 26, 2006, Livonia amended its complaint to add allegations that our directors had erred in choosing the BBI offer because it was not the most attractive offer they had received for the company. In May 2006, the parties entered into a settlement agreement which provided that NorthWestern would redeem the existing shareholder rights plan either following shareholder approval of the Merger Agreement with BBI or upon termination of the Merger Agreement with BBI - whichever occurs first. Under the proposed agreement, the Board could adopt a new shareholder rights plan if the shareholders approve adoption of such a plan in advance or, in the event that circumstances require timely implementation of such a plan, the Board seeks and receives approval from shareholders within 12 months after adoption. In December 2006, the federal court indicated it would not approve the settlement because it did not provide any benefit to the

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class members. Based on the federal court's order, the plaintiffs agreed to dismiss the lawsuit with prejudice on the condition that the federal court would retain jurisdiction over any award of attorneys' fees. The plaintiffs' motion seeking discovery in advance of its motion for an award of attorneys' fees was denied. Plaintiffs then filed a motion for attorneys' fees and costs seeking $9.9 million on the grounds that the Board's acceptance of the BBI offer was attributable to their efforts. We have responded arguing that plaintiffs opposed all of the Board's efforts leading to the BBI transaction and that its lawyers are thus entitled to no fees. The plaintiffs filed a reply in May 2007. On May 24, 2007, we notified the federal court of the MPSC unanimous direction to its staff to draft an order rejecting the proposed BBI transaction, noting that unless the BBI transaction was approved, the plaintiffs' argument for benefit to the estate would be moot and suggested that the federal court delay any ruling until the MPSC reaches a final decision on the BBI transaction. On July 25, 2007, we advised the federal court that the Merger Agreement was terminated based on the action by the MPSC denying consideration of the revised proposal and denying approval of the transaction. At the time, we noted that there could be no benefit to our shareholders justifying an attorneys' fee award in light of the termination of the BBI transaction. On December 13, 2007, the federal court ordered additional simultaneous briefing on the issue of whether, in light of the BBI termination, the Livonia litigation had benefited our shareholders. Briefings concluded in January 2008 and we are currently awaiting a decision by the federal court. We believe that any award of attorneys' fees would be reimbursed by insurance proceeds.

Ammondson

In April 2005, a group of former employees of the Montana Power Company filed a lawsuit in the state court of Montana against us and certain officers styled Ammondson, et al. v. NorthWestern Corporation, et al., Case No. DV-05-97. The former employees have alleged that by moving to terminate their supplemental retirement contracts in our bankruptcy proceeding without having listed them as claimants or giving them notice of the disclosure statement and Plan, that we breached those contracts, and breached a covenant of good faith and fair dealing under Montana law and by virtue of filing a complaint in our Bankruptcy Case against those employees from seeking to prosecute their state court action against NorthWestern, we had engaged in malicious prosecution and should be subject to punitive damages. In February 2007, a jury verdict was rendered against us in Montana state court, which ordered us to pay $17.4 million in compensatory and $4.0 million in punitive damages in a case called Ammondson, et al. v. NorthWestern Corporation, et al. Due to the verdict, we recognized a loss of $19.0 million in our 2006 results of operations to increase our recorded liability related to this claim. The Montana state court reviewed the amount of the punitive damages under state law and did not alter the amount. We have appealed the judgment and posted a $25.8 million bond. We intend to vigorously pursue the appeal; however, there can be no assurance that we will prevail in our efforts. We expect to incur additional legal and court costs related to these proceedings.

Other Litigation and Contingencies

During the second quarter of 2007, we voluntarily informed the FERC of several potential regulatory compliance issues related to our natural gas business. The FERC has initiated a nonpublic, informal investigation. We cannot currently predict the outcome of the FERC's investigation.

In December 2006, the MPSC issued an order finalizing certain qualifying facility rates for the periods July 1, 2003 through June 30, 2006. Colstrip Energy Limited Partnership (CELP) is a qualifying facility with which we have a power purchase agreement through 2025. CELP filed a complaint against NorthWestern and the MPSC in Montana district court on July 6, 2007. Under the terms of the power purchase agreement with CELP, energy and capacity rates were fixed (with a small portion being set by the MPSC's determination of rates in the annual avoided cost filing) through June 30, 2004 and beginning July 1, 2004 through the end of the contract energy and capacity rates are to be determined each year pursuant to a formula. If the MPSC's order is upheld in its current form, we anticipate reducing our QF liability by approximately $25 million as our estimate of energy and capacity rates for the remainder of the contract period would be reduced. CELP is disputing inputs in to the rate-setting formula, used by us and approved by the MPSC on an annual basis, to calculate energy and capacity payments for the contract years 2004, 2005 and 2006. CELP is claiming that NorthWestern breached the power purchase agreement causing damages, which CELP asserts are not presently known but believed to be approximately $22 million for contract years 2004, 2005 and 2006. A temporary restraining order was agreed to by the parties and has been issued restraining us from implementing the rates finalized by the MPSC order pending a decision on CELP's request for a preliminary injunction. We believe CELP has no basis for their complaint and intend to vigorously defend this action. On January 24, 2008, we commenced an adversary proceeding against CELP in the Delaware Bankruptcy Court seeking a declaration that no prior order of the Delaware Bankruptcy Court either limited or curtailed the rate setting authority of the MPSC.

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Relative to our joint ownership in Colstrip Unit 4, the Mineral Management Service of the United States Department of Interior (MMS) issued two orders to Western Energy Company (WECO) in 2002 and 2003 to pay additional royalties concerning coal sold to Colstrip Units 3 and 4 owners. The orders assert that additional royalties are owed as a result of WECO not paying royalties in connection with revenue received by WECO from the Colstrip Units 3 and 4 owners under a coal transportation agreement during the period October 1, 1991 through December 31, 2001. On April 28, 2005, the appeals division of the MMS issued an order that reduced the amount claimed due to the application of statute of limitations. The state of Montana issued a demand to WECO in May 2005 consistent with the MMS position outlined above on these transportation revenues. Further, on September 28, 2006, the MMS issued an order to pay additional royalties on the basis of an audit of WECO's royalty payments during the three years 2002 to 2004. WECO appealed these orders to the Interior Board of Land Appeals of the United States Department of Interior (IBLA) who affirmed the orders on September 12, 2007. WECO filed a complaint and request for declaratory ruling in the US District Court for the District of Columbia in January 2008 seeking relief from the orders issued by the MMS and affirmed by the IBLA, and we continue to monitor the appeals process. The Colstrip Units 3 and 4 owners and WECO currently dispute the responsibility of the expenses if the MMS position prevails. We believe that the Colstrip Units 3 and 4 owners have reasonable defenses in this matter. However, if the MMS position prevails and WECO prevails in passing the expense responsibility to the owners, our share of the alleged additional royalties would be 15 percent, or approximately $4.5 million, and ongoing royalty expenses related to coal transportation. While the percentage of our share of the alleged additional royalties is not expected to change, the estimated amount may increase after the MMS updates the assessment to reflect interest and ongoing royalty expenses for 2007.

We are also subject to various other legal proceedings and claims that arise in the ordinary course of business. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect our financial position, results of operations, or cash flows.

Disputed Claims Reserve

Upon consummation of our Plan of Reorganization, we established a reserve of approximately 4.4 million shares of common stock from the shares allocated to holders of our trade vendor claims in excess of $20,000 and holders of Class 9 unsecured claims. The shares held in this reserve may be used to resolve various outstanding unsecured claims and unliquidated litigation claims, as these claims were not resolved or deemed allowed upon consummation of our Plan. We have surrendered control over the common stock provided and the shares reserve is administered by our transfer agent; therefore we recognized the issuance of the common stock upon emergence. If excess shares remain in the reserve after satisfaction of all obligations, such amounts would be reallocated pro rata to the allowed Class 7 and 9 claimants.

(22) Common Stock

We have 250,000,000 shares authorized consisting of 200,000,000 shares of common stock with a $0.01 par value and 50,000,000 shares of preferred stock with a $0.01 par value. In addition, 2,265,957 shares of common stock are reserved for the incentive plan awards. For further detail of grants under this plan see Note 17.

Repurchase of Common Stock

On November 8, 2005, our Board of Directors authorized a common stock repurchase program that allowed us to repurchase up to $75 million of common stock under a specific trading plan. This plan was cancelled in May 2006. From the program's inception through December 31, 2005 we repurchased in open market transactions 96,442 shares of common stock for approximately $2.8 million. During 2006, we repurchased in open market transactions 121,306 shares of common stock for approximately $3.7 million.

Shares tendered by employees to us to satisfy the employees' tax withholding obligations in connection with the vesting of restricted stock awards totaled 33,196 and 16,664 during the years ended December 31, 2007 and 2006, respectively, and are reflected in treasury stock. These shares were credited to treasury stock based on their fair market value on the vesting date.

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(23) Segment and Related Information

We operate the following business units: (i) regulated electric, (ii) regulated natural gas, (iii) unregulated electric, and (iv) all other, which primarily consists of our remaining unregulated natural gas operations and our unallocated corporate costs. We have changed our management of the unregulated natural gas segment, moved certain customers to our regulated natural gas business unit and sold several customer contracts during 2007; therefore, the unregulated natural gas business unit will no longer be considered a reportable segment under SFAS No. 131. We have two remaining unregulated natural gas contracts that will be presented in the all other segment.

We evaluate the performance of these segments based on gross margin. The accounting policies of the operating segments are the same as the parent except that the parent allocates some of its operating expenses 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, are as follows (in thousands):

	Regulated						Unregulated
December 31, 2007	Electric			Gas			Electric			Other			Eliminations			Total
Operating revenues	$	736,657		$	363,584		$	74,231		$	56,748		$	(31,160	)	$	1,200,060
Cost of sales	389,681			235,958			18,079			54,222			(29,535		)	668,405
Gross margin	346,976			127,626			56,152			2,526			(1,625		)	531,655
Operating, general and administrative	133,091			52,008			28,662			9,430			(1,625		)	221,566
Property and other taxes	61,281			22,959			3,301			40			—			87,581
Depreciation	61,912			16,592			3,782			129			—			82,415
Operating income (loss)	90,692			36,067			20,407			(7,073		)	—			140,093
Interest expense	(39,132		)	(13,464		)	(2,849		)	(1,497		)	—			(56,942		)
Other income	801			505			57			1,065			—			2,428
Income tax (expense) benefit	(18,631		)	(8,509		)	(7,341		)	2,093			—			(32,388		)
Income (loss) from continuing operations	$	33,730		$	14,599		$	10,274		$	(5,412	)	$	—			53,191
Total assets	$	1,529,048		$	749,099		$	251,100		$	18,133		$	—		$	2,547,380
Capital expenditures	$	71,905		$	40,600		$	4,579		$	—		$	—		$	117,084

	Regulated						Unregulated
December 31, 2006	Electric			Gas			Electric			Other			Eliminations			Total
Operating revenues	$	661,710		$	359,701		$	83,007		$	76,959		$	(48,724	)	$	1,132,653
Cost of sales	332,786			240,788			16,639			70,480			(47,111		)	613,582
Gross margin	328,924			118,913			66,368			6,479			(1,613		)	519,071
Operating, general and administrative	125,359			58,560			40,219			17,690			(1,613		)	240,215
Property and other taxes	51,416			19,722			2,942			107			—			74,187
Depreciation	58,033			14,614			1,597			1,061			—			75,305
Ammondson verdict	—			—			—			19,000			—			19,000
Operating income (loss)	94,116			26,017			21,610			(31,379		)	—			110,364
Interest expense	(41,770		)	(12,503		)	—			(1,743		)	—			(56,016		)
Other income	3,244			2,062			147			3,612			—			9,065
Income tax (expense) benefit	(21,556		)	(5,489		)	(8,776		)	9,890			—			(25,931		)
Income (loss) from continuing operations	$	34,034		$	10,087		$	12,981		$	(19,620	)	$	—		$	37,482
Total assets	$	1,547,302		$	762,847		$	54,800		$	30,988		$	—		$	2,395,937
Capital expenditures	$	71,039		$	24,419		$	5,122		$	466		$	—		$	101,046

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	Regulated						Unregulated
December 31, 2005	Electric			Gas			Electric			Other			Eliminations			Total
Operating revenues	$	631,676		$	369,463		$	86,978		$	155,036		$	(77,403	)	$	1,165,750
Cost of sales	306,431			246,809			17,407			146,997			(75,889		)	641,755
Gross margin	325,245			122,654			69,571			8,039			(1,514		)	523,995
Operating, general and administrative	125,053			63,984			32,295			5,696			(1,514		)	225,514
Property and other taxes	49,297			19,872			2,903			15			—			72,087
Depreciation	57,172			14,771			1,043			1,427			—			74,413
Reorganization items	—			—			—			7,529			—			7,529
Operating income (loss)	93,723			24,027			33,330			(6,628		)	—			144,452
Interest expense	(46,331		)	(13,466		)	—			(1,498		)	—			(61,295		)
Other income	7,748			3,961			162			5,029			—			16,900
Income tax expense (benefit)	(23,198		)	(5,611		)	(13,597		)	3,896			—			(38,510		)
Income from continuing operations	$	31,942		$	8,911		$	19,895		$	799		$	—		$	61,547
Total assets	$	1,516,581		$	752,945		$	48,195		$	74,210		$	—		$	2,391,931
Capital expenditures	$	63,302		$	14,033		$	2,566		$	976		$	—		$	80,877

(24) Quarterly Financial Data (Unaudited)

Our quarterly financial information has not been audited, but, in management's opinion, includes all adjustments necessary for a fair presentation. Our business is seasonal in nature with the peak sales periods generally occurring during the summer and winter months. Accordingly, comparisons among quarters of a year may not represent overall trends and changes in operations. Amounts presented are in thousands, except per share data:

2007	First		Second		Third		Fourth
Operating revenues	$	366,565	$	259,608	$	265,863	$	308,024
Gross margin	147,287		118,353		126,842		139,173
Operating income	44,353		18,223		33,238		44,279
Net income	$	19,142	$	2,434	$	13,177	$	18,438
Average common shares outstanding	35,720		35,988		36,471		38,284
Income per average common share (basic):
Net income from continuing operations	$	0.54	$	0.07	$	0.36	$	0.48
Discontinued operations	—		—		—		—
Net income	0.54		0.07		0.36		0.48
Income per average common share (diluted):
Net income from continuing operations	$	0.51	$	0.06	$	0.35	$	0.52
Discontinued operations	—		—		—		—
Net income	0.51		0.06		0.35		0.52
Dividends per share	$	0.31	$	0.31	$	0.33	$	0.33
Stock price:
High	$	36.51	$	35.47	$	32.10	$	30.05
Low	35.32		30.60		25.30		26.97
Quarter-end close	35.43		31.81		27.17		29.50

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2006	First		Second			Third		Fourth
Operating revenues	$	361,482	$	232,186		$	234,637	$	304,348
Gross margin	141,810		114,460			123,723		139,078
Operating income	42,189		8,351			33,490		26,334
Net income (loss)	$	21,025	$	(2,446	)	$	11,398	$	7,923
Average common shares outstanding	35,584		35,511			35,510		35,613
Income (loss) per average common share (basic):
Net income from continuing operations	$	0.59	$	(0.08	)	$	0.32	$	0.23
Discontinued operations	0.00		0.01			0.00		0.00
Net income (loss)	0.59		(0.07		)	0.32		0.23
Income (loss) per average common share (diluted):
Net income from continuing operations	$	0.58	$	(0.08	)	$	0.31	$	0.19
Discontinued operations	0.00		0.01			0.00		0.00
Net income (loss)	0.58		(0.07		)	0.31		0.19
Dividends per share	$	0.31	$	0.31		$	0.31	$	0.31
Stock price:
High	$	32.75	$	35.18		$	35.15	$	35.80
Low	30.92		30.30			33.77		35.01
Quarter-end close	31.14		34.35			34.98		35.38

F - 39

SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS

NORTHWESTERN CORPORATION AND SUBSIDIARIES

Column A	Column B		Column C	Column D		Column E
Description	Balance at Beginning of Period		Charged to Costs and Expenses	Deductions		Balance End of Period
FOR THE YEAR ENDED DECEMBER 31, 2007 (in thousands)
RESERVES DEDUCTED FROM APPLICABLE ASSETS
Uncollectible accounts	$	3,240	2,705	(2,779	)	3,166
FOR THE YEAR ENDED DECEMBER 31, 2006 (in thousands)
RESERVES DEDUCTED FROM APPLICABLE ASSETS
Uncollectible accounts	$	2,164	3,892	(2,816	)	3,240
FOR THE YEAR ENDED DECEMBER 31, 2005 (in thousands)
RESERVES DEDUCTED FROM APPLICABLE ASSETS
Uncollectible accounts	$	2,104	2,024	(1,964	)	2,164

EX-10

Exhibit 10.2

$100,000,000

CREDIT AGREEMENT

among

COLSTRIP LEASE HOLDINGS, LLC,

as Borrower,

WESTLB AG, NEW YORK BRANCH,

as Lender,

WESTLB AG, NEW YORK BRANCH,

as Administrative Agent,

WESTLB AG, NEW YORK BRANCH,

as Collateral Agent,

and

WESTLB AG, NEW YORK BRANCH,

as Sole Lead Arranger, Bookrunner and Syndication Agent

Dated as of December 28, 2007

TABLE OF CONTENTS
			Page
SECTION 1		DEFINITIONS		2
	1.1		Defined Terms	2
	1.2		Other Definitional Provisions	18
SECTION 2		AMOUNT AND TERMS OF COMMITMENTS		19
	2.1		Commitments	19
	2.2		Procedure for Borrowing	19
	2.3		Repayment of Loan; Evidence of Debt	20
	2.4		Fees	20
	2.5		Optional Prepayments	20
	2.6		Mandatory Prepayments	20
	2.7		Conversion and Continuation Options	21
	2.8		Interest Rates and Payment Dates	22
	2.9		Computation of Interest and Fees	22
	2.10		Inability to Determine Interest Rate	23
	2.11		Pro Rata Treatment and Payments; Sharing of Payments; Set-off	23
	2.12		Requirements of Law	25
	2.13		Taxes	27
	2.14		Indemnity	28
	2.15		Illegality	29
	2.16		Change of Lending Office	29
	2.17		Replacement of Lender under Certain Circumstances	29
SECTION 3		REPRESENTATIONS AND WARRANTIES		30
	3.1		Corporate Existence; Compliance with Law	30
	3.2		Corporate Power; Authorization; Enforceable Obligations	30

	3.3		No Legal Bar	31
	3.4		No Material Litigation	31
	3.5		No Default	31
	3.6		Ownership of Property	31
	3.7		Intellectual Property	31
	3.8		Taxes	31
	3.9		Margin Stock Regulations	32
	3.10		Labor Matters and Acts of God	32
	3.11		ERISA	32
	3.12		Investment Company Act; Other Regulations	33
	3.13		Utility Regulatory Status	33
	3.14		No Partnerships, Joint Ventures or Subsidiaries	33
	3.15		Use of Proceeds	33
	3.16		Operative Documents and Other Contracts	33
	3.17		Representations and Warranties under the Participation Agreement	33
	3.18		Environmental Warranties	34
	3.19		Accuracy of Information, etc	35
	3.20		Solvency	35
	3.21		Collateral	35
	3.22		Separateness	36
	3.23		Required LLC Provisions	36
	3.24		Business; Indebtedness; Contracts	36
	3.25		Financial Information	36
	3.26		No Change	36
SECTION 4		CONDITIONS PRECEDENT		36

	4.1			Conditions to Closing and Funding	36
SECTION 5		AFFIRMATIVE COVENANTS			40
	5.1			Financial Statements	40
	5.2			Certificates; Other Information	41
	5.3			Payment of Obligations	41
	5.4			Conduct of Business and Maintenance of Existence; Compliance	42
	5.5			Maintenance of Property; Insurance	42
	5.6			Inspection of Property; Books and Records; Discussions	42
	5.7			Notices	42
	5.8			Environmental Matters	44
	5.9			Lease Payments	45
	5.10			First Priority Ranking	45
	5.11			Maintenance of Liens	45
	5.12			Certificate of Formation	45
	5.13			Separateness	45
	5.14			Approvals	45
	5.15			Operative Documents	45
	5.16			Taxes	45
	5.17			Transfer	46
	5.18			Further Assurances	46
SECTION 6			NEGATIVE COVENANTS		46
	6.1			Incurrence of Indebtedness	46
	6.2			Limitation on Liens	46
	6.3			Limitation on Fundamental Changes	47
	6.4			Limitation on Disposition of Property	47

	6.5		Limitation on Restricted Investments	47
	6.6		Limitation on Transactions with Affiliates	47
	6.7		Limitation on Changes in Fiscal Periods	47
	6.8		Limitation on Negative Pledge Clauses	47
	6.9		Limitation on Lines of Business	47
	6.10		Limitation on Contracts	47
	6.11		Operative Documents	47
	6.12		No Subsidiaries	48
	6.13		ERISA	48
	6.14		Environmental Matters	48
	6.15		Regulatory Status	48
	6.16		Margin Stock Regulations	48
SECTION 7		EVENTS OF DEFAULT		48
SECTION 8		THE AGENTS		51
	8.1		Appointment	51
	8.2		Delegation of Duties	52
	8.3		Exculpatory Provisions	52
	8.4		Reliance by Agents	53
	8.5		Notice of Default	53
	8.6		Non-Reliance on Agents and Other Lenders	53
	8.7		Indemnification	54
	8.8		Agent in Its Individual Capacity	54
	8.9		Collateral Agent May File Proofs of Claim	55
	8.10		Collateral Matters	56
	8.11		The Lead Arranger	56

SECTION 9		MISCELLANEOUS		56
	9.1		Amendments and Waivers	56
	9.2		Notices	58
	9.3		No Waiver; Cumulative Remedies	60
	9.4		Survival of Representations and Warranties	60
	9.5		Payment of Expenses	60
	9.6		Successors and Assigns; Participations and Assignments	60
	9.7		Counterparts	65
	9.8		Severability	65
	9.9		Integration	65
	9.10		GOVERNING LAW	65
	9.11		Submission To Jurisdiction; Waivers	65
	9.12		Acknowledgments	66
	9.13		Confidentiality	66
	9.14		Accounting Changes	67
	9.15		WAIVERS OF JURY TRIAL	67

SCHEDULES:
3.2	Consents, Authorizations, Filings and Notices
3.11	ERISA Disclosures
3.16	Contracts
3.17	Participation Agreement—Disclosures
3.23	Required LLC Provisions
EXHIBITS:
A	Form of Responsible Officer’s Certificate
B	Form of Note
C	Form of Lender Assignment Agreement
D	Form of Exemption Certificate
E	Form of Borrowing Notice
F	Form of Interest Period Notice
G	Form of Compliance Certificate

CREDIT AGREEMENT, dated as of December 28, 2007, among COLSTRIP LEASE HOLDINGS, LLC, a Delaware limited liability company (the “Borrower”), WESTLB AG, NEW YORK BRANCH, as Lender, WESTLB AG, NEW YORK BRANCH, as sole lead arranger, bookrunner and syndication agent (in such capacity, the “Arranger”) , WESTLB AG, NEW YORK BRANCH, as administrative agent (in such capacity, together with its successors and assigns, the “Administrative Agent”) and WESTLB AG, NEW YORK BRANCH, as collateral agent (in such capacity, together with its successors and assigns, the “Collateral Agent”) for the Secured Parties (as defined herein).

WITNESSETH:

WHEREAS, NorthWestern Corporation, a Delaware corporation (the “Sponsor”), (a) acquired from the GE OP (as defined herein) pursuant to the Acquisition Documents (as defined herein) and owns the Owner Participant Interest (as defined herein), including all right, title and interest in, to and under certain agreements and other documents pertaining to a lease financing of the Leased Interest in the 740 MW Colstrip Unit 4 coal-fired steam and electricity generating facility located in Colstrip, Montana (such facility and the leasehold ground interest in the site on which the facility is situated and any shared facilities necessary for its operation, the “Project”) and (b) is the sole beneficial owner of a statutory business trust formed under the laws of New York (the “Lessor”) pursuant to a Trust Agreement dated as of December 16, 1985 (the “Trust Agreement”) among the Owner Participant, the Corporate Trustee and the Individual Trustee (the Corporate Trustee and the Individual Trustee together, the “Owner Trustee”);

WHEREAS, the Lessor owns the Leased Interest in the Project and leases the Leased Interest to the Sponsor (in its capacity as lessee under the Lease, the “Lessee”), pursuant to that certain Lease Agreement dated as of December 16, 1985 between the Lessor and the Lessee (the “Lease”), and the Lessor also leases the leasehold ground interest in the Project to the Lessee pursuant to that certain Sublease dated as of December 16, 1985 between the Lessor and the Lessee (the “Sublease”);

WHEREAS, the Borrower is an indirect wholly-owned subsidiary of the Sponsor;

WHEREAS, on the date hereof the Sponsor has granted a first-priority security interest in the Owner Participant Interest to the Collateral Agent for the benefit of the Secured Parties pursuant to the Sponsor Security Agreement;

WHEREAS, the Borrower has requested and the Lender has agreed to extend credit to the Borrower, upon and subject to the terms and conditions hereinafter set forth;

NOW, THEREFORE, in consideration of the premises and the agreements hereinafter set forth, the parties hereto hereby agree as follows:

SECTION 1 DEFINITIONS

1.1          Defined Terms. As used in this Agreement, the terms listed in this Section 1.1 shall have the respective meanings set forth in this Section 1.1.

“Acquisition Documents”: the GE PSA, the Bill of Sale (as defined in the GE PSA), the Assignment and Assumption Agreement and all other documents executed pursuant to or in connection with any of the foregoing.

“Administrative Agent”: as defined in the preamble hereto.

“Affiliate”: as to any Person, any other Person that, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person. For purposes of this definition, “control” of a Person means the power, directly or indirectly, either to (a) vote ten percent (10%) or more of the securities having ordinary voting power for the election of directors (or persons performing similar functions) of such Person or (b) direct or cause the direction of the management and policies of such Person, whether by contract or otherwise.

“Agents”: the collective reference to the Administrative Agent and the Collateral Agent.

“Aggregate Exposure”: with respect to a Lender at any time on and after the Closing Date, an amount equal to the amount of such Lender’s Loan then outstanding.

“Aggregate Exposure Percentage”: with respect to a Lender at any time on and after the Closing Date, the ratio (expressed as a percentage) of such Lender’s Aggregate Exposure at such time to the sum of the Aggregate Exposures of all Lenders at such time.

“Agreement”: this Credit Agreement, as amended, restated, supplemented or otherwise modified from time to time.

“Applicable Margin”: with respect to a Eurodollar Loan, 1.250%, and with respect to a Base Rate Loan, 0.250%.

“Assignee”: as defined in Section 9.6(c).

“Assignment and Assumption Agreement”: as defined in the GE PSA.

"Assignor”: as defined in Section 9.6(c).

“Base Rate”: for any day, a fluctuating rate per annum equal to the higher of (i) the Federal Funds Effective Rate plus one-half of one percent (0.50%) and (ii) the rate of interest in effect for such day as publicly announced from time to time by WestLB as its “prime rate.” The “prime rate” is a rate set by WestLB based upon various factors including WestLB’s costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at,above, or below such announced rate. Any change in such rate announced by WestLB shall take effect at the

opening of business on the day specified in the public announcement of such change.

“Base Rate Loan”: a Loan for which the applicable rate of interest is based upon the Base Rate.

“Benefitted Lender”: as defined in Section 2.11(h).

“Board”: the Board of Governors of the Federal Reserve System of the United States (or any successor).

“Borrower”: as defined in the preamble hereto. “Borrower Contracts”: as defined in Section 3.16.

“Borrower LLC Agreement”: that certain LLC Agreement of the Borrower dated as of December 28, 2007 entered into by the Pledgor.

“Borrowing Notice”: with respect to the request for borrowing of the Loan hereunder, the notice from the Borrower, substantially in the form of, and containing the information prescribed by, Exhibit E, irrevocably delivered to the Administrative Agent.

“Borrower Security Agreement”: that certain Assignment and Security Agreement entered into as of the date hereof between the Borrower and the Collateral Agent.

“Business Day”: (a) for all purposes other than as covered by clause (b) below, a day other than a Saturday, Sunday or other day on which commercial banks in New York City are authorized or required by law to close and (b) with respect to all notices and determinations in connection with, and payments of principal and interest on, a Eurodollar Loan, any day which is a Business Day described in clause (a) and which is also a day for trading by and between banks in Dollar deposits in the interbank eurodollar market.

“Capital Lease Obligations”: with respect to any Person, the obligations of such Person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such Person under GAAP; and, for the purposes of this Agreement, the amount of such obligations at any time shall be the capitalized amount thereof at such time determined in accordance with GAAP.

“Cash Equivalents”: (a) marketable direct obligations issued by, or unconditionally guaranteed by, the United States government or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within one year from the date of acquisition; (b) certificates of deposit, time deposits, bankers acceptances, eurodollar time deposits or overnight bank deposits having maturities of six months or less from the date of acquisition issued by the Lender or by any commercial bank organized under the laws of the United States of America or any state thereof having combined capital and surplus of not less than five hundred million Dollars ($500,000,000); (c) commercial paper of an issuer rated at least A-2 by Standard & Poor’s or P-2 by Moody’s, or carrying an equivalent rating by a nationally recognized rating agency, if both of the two named rating agencies

cease publishing ratings of commercial paper issuers generally, and maturing within 270 days from the date of acquisition; (d) repurchase obligations of the Lender or of any commercial bank satisfying the requirements of clause (b) of this definition, having a term of not more than 30 days with respect to securities issued or fully guaranteed or insured by the United States government; (e) securities (including tax-exempt debt obligations) with maturities of one year or less from the date of acquisition issued or fully guaranteed by any state, commonwealth or territory of the United States, by any political subdivision or taxing authority of any such state, commonwealth or territory or by any foreign government, the securities of which state, commonwealth, territory, political subdivision, taxing authority or foreign government (as the case may be) are rated at least A by Standard & Poor’s or A-2 by Moody’s (or publicly traded or open-ended bond funds that invest exclusively in such securities); (f) securities with maturities of six months or less from the date of acquisition backed by standby letters of credit issued by the Lender or any commercial bank satisfying the requirements of clause (b) of this definition; (g) Dollar denominated debt obligations of corporations maturing within 12 months from the date of the acquisition rated at least A by Standard & Poor’s or A-2 by Moody’s; (h) shares of bond funds rated at least A by Standard & Poor’s or A-2 by Moody’s having weighted average maturities of 12 months or less; (i) auction rate securities rated at least AAA by Standard & Poor’s or Aaa by Moody’s; (j) debt obligations of corporations maturing within 12 months from the date of acquisition rated at least A by Standard & Poor’s or A-2 by Moody’s; and (k) shares of money market mutual or similar funds which invest exclusively in assets satisfying the requirements of clauses (a) through (j) of this definition.

“Change of Control”: any transaction or series of related transactions (including any merger or consolidation) the result of which is that the Sponsor fails to maintain, directly or indirectly, legally or beneficially, (a) one hundred percent (100%) of the Equity Interests of the Borrower or (b) management control of the Borrower.

“Closing Date”: the date on which the conditions precedent set forth in Section 4.1 shall have been satisfied and the Loan shall have been made, which date shall be not later than March 31, 2008.

“Code”: the Internal Revenue Code of 1986, as amended from time to time.

“Collateral”: (a) the Sponsor Collateral and (b) all assets of and Equity Interests in the Borrower, in each case of clause (a) and (b), whether now owned or hereinafter acquired and upon which a Lien is purported to be created by any Security Document then in effect or contemplated to be in effect.

“Collateral Agent”: as defined in the preamble hereto.

“Communications”: as defined in Section 9.2(c).

“Contractual Obligation”: as to any Person, any provision of any security issued by such Person or of any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its Property is bound.

“Corporate Trustee”: means The Bank of New York, a New York corporation, as corporate co-trustee, as successor to United States Trust Company of New York.

“Default”: any of the events specified in Section 7, whether or not any requirement for the giving of notice, the lapse of time, or both, has been satisfied.

“Defaulted Advance”: with respect to a Lender at any time, the portion of any amounts required to be paid or made available by such Lender to the Borrower pursuant to Section 2.2 at or prior to such time which has not been made by such Lender or by the Administrative Agent for the account of such Lender pursuant to Section 2.11(e) as of such time.

“Defaulted Amount”: with respect to a Lender at any time, any amount required to be paid by such Lender to the Administrative Agent or any other Lender hereunder or under any other Loan Document at or prior to such time which has not been so paid as of such time, including, without limitation, any amount required to be paid by such Lender to (a) the Administrative Agent pursuant to Section 2.2, and (b) any Agent pursuant to Section 8.7.

“Defaulting Lender”: at any time that the conditions precedent set forth in Section 4.1 have been satisfied or properly waived, a Lender if, at such time, such Lender owes a Defaulted Advance or a Defaulted Amount.

“Disposition”: with respect to any Property, any sale, lease, sale and leaseback, assignment, conveyance, transfer or other disposition thereof (or, in each case, any series of related dispositions); and the terms “Dispose” and “Disposed of” shall have correlative meanings.

“Dollars” and “$”: dollars in lawful currency of the United States of America.

“Environmental Affiliate”: the Sponsor, the Pledgor, the Lessee, the Lessor and any other Person, only to the extent of, and only with respect to any matter or actions of any of the foregoing for which, the Borrower or Lessee solely with respect to the Project could reasonably be expected to have liability as a result of the Borrower retaining, assuming, accepting or otherwise being subject to liability for Environmental Claims relating to any of the foregoing, whether the source of the Borrower’s obligation is by contract or operation of Law.

“Environmental Approvals”: any Governmental Approvals required under applicable Environmental Laws.

“Environmental Claim”: any written notice, claim, demand or similar written communication by any Person alleging potential liability or requiring or demanding remedial or responsive measures (including potential liability for investigatory costs, cleanup, remediation and mitigation costs, governmental response costs, natural resources damages, property damages, personal injuries, fines or penalties) in each such case (x) either (i) with respect to environmental contamination-related liabilities or obligations with respect to which the Borrower could reasonably be expected to be responsible that are, or could reasonably be expected to be, in excess of five hundred thousand Dollars ($500,000) in the aggregate, or (ii) that has or could reasonably be expected to result in a Material Adverse Effect and (y) arising out of, based on or resulting from (i) the presence, release or threatened release into the environment, of any Materials of Environmental Concern at any location, whether or not owned by such Person; (ii) circumstances forming the basis of any violation, or alleged violation, of any

Environmental Laws or Environmental Approvals; or (iii) exposure to Materials of Environmental Concern.

“Environmental Laws”: all Laws applicable to the Project relating to pollution or protection of human health, safety or the environment (including ambient air, surface water, ground water, land surface or subsurface strata), including Laws relating to emissions, discharges, releases or threatened releases of Materials of Environmental Concern, or otherwise applicable to the Project relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, management, remediation or handling of Materials of Environmental Concern.

“Environmental Permits”: any and all permits, licenses, approvals, registrations, notifications, exemptions and other authorizations required under any Environmental Law.

“Equity Interests”: any and all shares, interests, participations or other equivalents (however designated) of capital stock of a corporation, any and all equivalent ownership interests in a Person (other than a corporation) and any and all warrants, rights or options to purchase any of the foregoing.

“ERISA”: the Employee Retirement Income Security Act of 1974, as amended from time to time.

“ERISA Affiliate”: any Person, trade or business that, together with the Borrower, Pledgor or Lessee, is or was treated as a single employer under Section 414 of the Code or Section 4001 of ERISA.

“Eurocurrency Reserve Requirements”: for any day, as applied to a Eurodollar Loan, the aggregate (without duplication) of the maximum rates (expressed as a decimal fraction) of reserve requirements in effect on such day (including, without limitation, basic, supplemental, marginal and emergency reserves) under any regulations of the Board or other Governmental Authority having jurisdiction with respect thereto dealing with reserve requirements prescribed for eurocurrency funding (currently referred to as “Eurocurrency Liabilities” in Regulation D of the Board) maintained by a member bank of the Federal Reserve System.

“Eurodollar Base Rate”: for any Interest Period for any Eurodollar Loan:

(a)           the rate per annum equal to the rate determined by the Administrative Agent to be the offered rate that appears on the page of the Telerate screen (or any successor thereto) that displays an average British Bankers Association Interest Settlement Rate for deposits in Dollars (for delivery on the first day of such Interest Period) with a term equivalent to such Interest Period, determined as of approximately 11:00 a.m. (London time) two (2) Business Days prior to the first day of such Interest Period; or

(b)           if the rate referenced in the preceding clause (a) does not appear on such page or service or such page or service is not available, the rate per annum equal to the rate determined by the Administrative Agent to be the offered rate on such other page or other service

that displays an average British Bankers Association Interest Settlement Rate for deposits in Dollars (for delivery on the first day of such Interest Period) with a term equivalent to such Interest Period, determined as of approximately 11:00 a.m. (London time) two (2) Business Days prior to the first day of such Interest Period; or

(c)         if the rates referenced in the preceding clauses (a) and (b) are not available, the rate per annum determined by the Administrative Agent as the rate of interest at which deposits in Dollars for delivery on the first day of such Interest Period in same day funds in the approximate amount of the Eurodollar Loan being made, continued or converted and with a term equivalent to such Interest Period would be offered by WestLB to major banks in the London interbank eurodollar market at their request at approximately 4:00 p.m. (London time) two (2) Business Days prior to the first day of such Interest Period.

“Eurodollar Loan”: a Loan for which the applicable rate of interest is based upon the Eurodollar Rate.

“Eurodollar Rate”: with respect to each day during each Interest Period, a rate per annum determined for such day in accordance with the following formula (rounded upward to the nearest 1/100^th of 1%):

                    Eurodollar Base Rate                 

1.00 - Eurocurrency Reserve Requirements.

“Event of Default”: any of the events specified in Section 7, provided that any requirement for the giving of notice, the lapse of time, or both, has been satisfied.

“Federal Funds Effective Rate”: for any day, the weighted average (rounded upwards, if necessary, to the nearest 1/100 of 1%) of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average of the quotations for the day of such transactions received by the Administrative Agent from three federal funds brokers of recognized standing selected by it.

“Fee Letters”: (a) that certain Fee Letter dated as of the date hereof among the Administrative Agent, the Collateral Agent and the Borrower, and (b) that certain Fee Letter dated as of the date hereof between the Lead Arranger and the Borrower.

“FERC 203 Approval”: as defined in Section 4.1(n). “FERC 204 Approval”: as defined in Section 3.2.

"Funding Office”: the office specified from time to time by the Administrative Agent as its funding office by notice to the Borrower and the Lender.

“GAAP”: generally accepted accounting principles in the United States of America as in effect from time to time.

“GE OP”: SGE (New York) Associates, a New York partnership.

“GE PSA”: that certain Purchase and Sale Agreement dated as of October 30, 2007 between the Sponsor as purchaser and the GE OP as seller.

“Governmental Authority”: any nation or government, any state or other political subdivision thereof, any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative functions of or pertaining to government, and any securities exchange.

“Governmental Approvals”: any authorization, consent, approval, license, lease, ruling, permit, certification, exemption or filing for registration by or with any Governmental Authority.

“Granting Lender”: as defined in Section 9.6(g).

“Guarantee Obligation”: as to any Person (the “guaranteeing person”), any obligation, including a reimbursement, counterindemnity or similar obligation, of the guaranteeing person that guarantees or in effect guarantees, or which is given to induce the creation of a separate obligation by another Person (including any bank under any letter of credit) that guarantees or in effect guarantees any Indebtedness, leases, dividends or other obligations (the “primary obligations”) of any other third Person (the “primary obligor”) in any manner, whether directly or indirectly, including, without limitation, any obligation of the guaranteeing person, whether or not contingent, (i) to purchase any such primary obligation or any Property constituting direct or indirect security therefor, (ii) to advance or supply funds (1) for the purchase or payment of any such primary obligation or (2) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (iii) to purchase Property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (iv) otherwise to assure or hold harmless the owner of any such primary obligation against loss in respect thereof; provided, however, that the term Guarantee Obligation shall not include endorsements of instruments for deposit or collection in the ordinary course of business. The amount of any Guarantee Obligation of any guaranteeing person shall be deemed to be the lower of (a) an amount equal to the stated or determinable amount of the primary obligation in respect of which such Guarantee Obligation is made and (b) the maximum amount for which such guaranteeing person may be liable pursuant to the terms of the instrument embodying such Guarantee Obligation, unless such primary obligation and the maximum amount for which such guaranteeing person may be liable are not stated or determinable, in which case the amount of such Guarantee Obligation shall be such guaranteeing person’s maximum reasonably anticipated liability in respect thereof as determined by the Borrower in good faith.

“Indebtedness”: means, as to any Person at a particular time, without duplication, all of the following, whether or not included as indebtedness or liabilities in accordance with GAAP:

(a)            all obligations of such Person for or in respect of moneys borrowed or raised, whether or not for cash by whatever means (including acceptances, deposits, discounting, letters of credit, factoring, and any other form of financing which is recognized in

accordance with GAAP in such Person’s financial statements as being in the nature of a borrowing or is treated as “off-balance sheet” financing);

(b)            all obligations of such Person evidenced by bonds, debentures, notes, loan agreements or other similar instruments;

(c)            all obligations of such Person for the deferred purchase price of property or services;

(d)            all obligations of such Person under conditional sale or other title retention agreements relating to property or assets acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property or are otherwise limited in recourse);

(e)            the maximum amount of all direct or contingent obligations of such Person arising under letters of credit (including standby and commercial), bankers’ acceptances, bank guaranties, surety bonds and similar instruments;

(f)            all Capital Lease Obligations;

(g)           net obligations of such Person under any Swap Contract;

(h)           all obligations of such Person to purchase, redeem, retire, defease or otherwise make any payment in respect of any Equity Interests in such Person or any other Person or any warrants, rights or options to acquire such Equity Interests, valued, in the case of redeemable preferred interests, at the greater of its voluntary or involuntary liquidation preference plus accrued and unpaid dividends; and

(i)           all Guarantees of such Person in respect of any of the foregoing.

For all purposes hereof, the Indebtedness of any Person shall include the Indebtedness of any partnership or joint venture (other than a joint venture that is itself a corporation or limited liability company) in which such Person is a general partner or a joint venturer, unless such Indebtedness is expressly made non-recourse to such Person. The amount of any net obligation under any Swap Contract on any date shall be deemed to be the Swap Termination Value thereof as of such date.

“Indemnified Liabilities”: as defined in Section 9.5.

“Indemnitee”: as defined in Section 9.5.

“Indenture Event of Default”: as defined in the Participation Agreement.

“Indenture Trustee”: Deutsche Bank Trust Company Americas (f/k/a Bankers Trust Company), as indenture trustee.

“Individual Trustee”: Ming Ryan, an individual, as replacement individual owner trustee to Louis P. Young.

“Intellectual Property”: the collective reference to all rights, priorities and privileges relating to intellectual property, whether arising under United States, multinational or foreign laws or otherwise, including, without limitation, copyrights, copyright licenses, patents, patent licenses, trademarks, trademark licenses, technology, know-how and processes, and all rights to sue at law or in equity for any infringement or other impairment thereof, including the right to receive all proceeds and damages therefrom.

“Interest Payment Date”: (a) as to any Base Rate Loan, the last day of each March, June, September and December to occur while such Loan is outstanding and the date of any repayment or prepayment made in respect thereof (including the final maturity date of such Loan), (b) as to any Eurodollar Loan having an Interest Period of three months or shorter, the last day of such Interest Period and (c) as to any Eurodollar Loan having an Interest Period longer than three months, each day that is three months or a whole multiple thereof after the first day of such Interest Period and the date of any repayment or prepayment made in respect thereof (including the final maturity date of such Loan).

"Interest Period": as to any Eurodollar Loan, (a) initially, the period commencing on the Closing Date or conversion date, as the case may be, with respect to such Eurodollar Loan and ending one, three or six months thereafter, as selected by the Borrower in its Borrowing Notice or Interest Period Notice, as the case may be, given with respect thereto; and (b) thereafter, each period commencing on the last day of the next preceding Interest Period applicable to such Eurodollar Loan and ending one, three or six months thereafter as selected by the Borrower by irrevocable notice to the Administrative Agent not later than 11:00 a.m., New York City time, on the date that is three Business Days prior to the last day of the then current Interest Period with respect thereto; provided that, all of the foregoing provisions relating to Interest Periods are subject to the following:

(1)           if any Interest Period would otherwise end on a day that is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless the result of such extension would be to carry such Interest Period into another calendar month in which event such Interest Period shall end on the immediately preceding Business Day;

(2)          the Borrower may not select an Interest Period that would extend beyond the Maturity Date; and

(3)          any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of the calendar month at the end of such Interest Period.

“Interest Period Notice”: the notice from the Borrower, substantially in the form of, and containing the information prescribed by, Exhibit F, irrevocably delivered to the Administrative Agent.

“Investment”: any advance, loan, extension of credit (by way of guaranty or otherwise) or capital contribution to, or purchase of any Equity Interests, bonds, notes, debentures or other debt securities of, or any assets constituting an ongoing business from, or

any other investment in, any other Person.

“Lead Arranger”: as defined in the preamble hereto.

“Lease”: as defined in the recitals hereto.

“Lease Event of Default”: as defined in the Participation Agreement.

“Lease Indenture”: that certain Trust Indenture, Security Agreement and Mortgage dated as of December 16, 1985, between Owner Trustee and the Indenture Trustee, as amended from time to time prior to the date hereof.

“Lease Termination Agreement”: that certain Lease Termination Agreement dated as of the date hereof among the Borrower, the Lessee and the Collateral Agent in form and substance satisfactory to the Administrative Agent. “Leased Interest”: the property that is subject to the Transaction Documents, including a 19.28571% undivided interest in the Project and a 9.642885% undivided interest in certain common facilities used by the Project.

“Lender”: (a) on the Closing Date, WestLB AG, New York Branch, and (b) at any time after the Closing Date, WestLB AG, New York Branch and each other bank or other financial institution or entity, if any, that may from time to time become party to this Agreement as a “Lender” in accordance with Section 9.6.

“Lender Assignment Agreement”: as defined in Section 9.6(c).

“Lessee”: as defined in the recitals hereto.

“Lessor”: as defined in the recitals hereto.

“Lien”: any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), charge or other security interest or any preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement and any capital lease having substantially the same economic effect as any of the foregoing).

“Loan”: as defined in Section 2.1.

“Loan Documents”: collectively, this Agreement, the Borrower Security Agreement, the Sponsor Security Agreement, the Pledge Agreement, the Note, the Fee Letters and the Lease Termination Agreement.

“Material Adverse Effect”: a material adverse effect on (a) the business, assets, property, operations, condition (financial or otherwise) or prospects of the Borrower, the Owner Participant Interest, the Leased Interest or the Project, (b) the ability of the Borrower to perform its material obligations under the Loan Documents or the ability of the Lessee to perform its material obligations under the Operative Documents, or (c) the validity or enforceability of this Agreement or any of the other Loan Documents or the rights or remedies of the Agents or the Lender hereunder or thereunder.

“Materials of Environmental Concern”: any gasoline or petroleum (including crude oil or any fraction thereof) or petroleum products, polychlorinated biphenyls, urea-formaldehyde insulation, asbestos, pollutants, contaminants, radioactivity, and any other substances or forces of any kind, whether or not naturally occurring and whether or not any such substance or force is defined as hazardous or toxic under any Environmental Law, that is regulated pursuant to or could give rise to liability under any Environmental Law.

“Maturity Date”: the date that is two (2) years after the Closing Date.

“Montana Pension Plan”: the NorthWestern Energy, a Division of

NorthWestern Corporation, Pension Plan, a qualified defined benefit pension plan. “Moody’s”: Moody’s Investor Service, Inc.

“Multiemployer Plan”: a Plan that is a multiemployer plan as defined in Section 4001(a)(3) of ERISA.

“Non-Excluded Taxes”: as defined in Section 2.13(a).

“Non-Recourse Debt”: Indebtedness as to which the Borrower has no direct or indirect liability whether as primary obligor, guarantor, surety, provider of collateral security or through any other right or arrangement of any nature (including any election by the holder of such indebtedness) providing direct or indirect assurance of payment or performance of any such obligations in whole or in part.

“Non-U.S. Lender”: as defined in Section 2.13(d).

“Note”: as defined in Section 2.3(e).

“Obligations”: the unpaid principal of and interest on (including, without limitation, interest accruing after the maturity of the Loan and interest accruing after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Borrower, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding) the Loan and all other obligations and liabilities of the Borrower to the Administrative Agent or to the Lender, whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, which may arise under, out of, or in connection with, this Agreement, any other Loan Document or any other document made, delivered or given in connection herewith or therewith, whether on account of principal, interest, reimbursement obligations, fees, indemnities, costs, expenses (including, without limitation, all fees, charges and disbursements of counsel to the Administrative Agent or to the Lender that are required to be paid by the Borrower pursuant hereto) or otherwise.

“Omnibus Amendment”: means that certain Omnibus Amendment dated as of November 30, 2007, among the Lessee, the Owner Trustee, NorthWestern Corporation as Owner Participant, certain institutions as Loan Participants and the Indenture Trustee.

“Operative Documents”: as defined in the Participation Agreement and, without duplication, the Transaction Documents (it being understood, for the avoidance of doubt, that such documents include the Omnibus Amendment), as all such documents are in effect as of the date hereof.

“Organic Documents”: with respect to the Sponsor, its certificate of incorporation, its by-laws and all shareholder agreements, voting trusts and similar arrangements applicable to any of its authorized shares of capital stock and, with respect to the Borrower or the Pledgor, its certificate of formation or articles of organization and its limited liability company agreement.

“Other Taxes”: any and all present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies arising from any payment made hereunder or from the execution, delivery or enforcement of, or otherwise with respect to, this Agreement or any other Loan Document.

“Owner Participant”: as defined in the Participation Agreement, including by operation of Section 15 of the Participation Agreement.

“Owner Participant Interest”: the interest of the Owner Participant in, to and under: (i) the Participation Agreement, (ii) the Trust Agreement and (iii) each of the other Transaction Documents and all insurance policies and other agreements, documents and instruments required to be maintained or furnished in accordance with the Transaction Documents, including without limitation, the beneficial interest of the Owner Participant in the Trust Estate (as defined in the Trust Agreement), and all owner participant proceeds of each thereof, all pertaining to the Leased Interest.

“Owner Trustee”: as defined in the recitals hereto.

“Participant”: as defined in Section 9.6(b).

“Participation Agreement”: that certain Participation Agreement dated as of December 16, 1985, among the Owner Trustee, the Sponsor (as assignee of the GE OP), as Owner Participant, certain institutions as Loan Participants, the Lessee and the Indenture Trustee, as amended from time to time prior to the date hereof.

“PBGC”: the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of ERISA (or any successor).

“Permitted Liens”: as defined in Section 6.2.

“Person”: an individual, partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture, Governmental Authority or other entity of whatever nature.

“Plan”: an employee pension benefit plan (as defined in Section 3(3) of ERISA) subject to Title IV of ERISA or Section 412 of the Code that is sponsored or maintained by the Borrower, the Pledgor, the Lessee or any ERISA Affiliate, or in respect of which the Borrower or any ERISA Affiliate has any obligation to contribution or liability.

“Pledge Agreement”: the Pledge and Security Agreement, dated as of the date hereof among the Borrower, the Pledgor and the Collateral Agent.

“Pledgor”: NorthWestern Services LLC, a Delaware limited liability

company.

“Process Agent”: as defined in Section 9.11(c).

“Project”: as defined in the recitals hereto.

“Project Site”all real property where the Project is located, including but not limited to all real property subject to that certain Ground Lease dated as of December 16, 1985 between the Sponsor (as successor to The Montana Power Company) as lessor and the Owner Trustee as lessee.

“Property”: any right or interest in or to property of any kind whatsoever, whether real, personal or mixed and whether tangible or intangible.

“PUHCA”: as defined in Section 3.13(a).

“Register”: as defined in Section 9.6(d).

“Regulation T”: Regulation T of the Board as in effect from time to time.

“Regulation U”: Regulation U of the Board as in effect from time to time.

“Regulation X”: Regulation X of the Board as in effect from time to time.

“Related Fund”:with respect to the Lender, any fund that (x) invests in commercial loans and (y) is managed or advised by such Lender, by an Affiliate of such Lender or by the same investment advisor as such Lender.

“Reportable Event”: a “reportable event” within the meaning of Section 4043(c) of ERISA.

“Required LLC Provisions”: as defined in Section 3.23.

“Required Lenders”: at any time on and after the Closing Date, the Lender (other than Defaulting Lenders) holding more than 50% of the Total Loan then outstanding.

“Requirement of Law”: as to any Person, the certificate of formation and limited liability operating agreement or other organizational or governing documents of such Person, and any law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its Property or to which such Person or any of its Property is subject.

“Responsible Officer”: as to any Person, the chief executive officer, president or chief financial officer of such Person, but in any event, with respect to financial matters, the chief financial officer or treasurer of such Person, or any other officer of such Person designated as a Responsible Officer by any one of the foregoing.

“Restricted Investment”: an Investment other than in Cash Equivalents.

“SEC”: the Securities and Exchange Commission (or successors thereto or an analogous Governmental Authority).

“Secured Parties”: the Lender and the Agents.

“Security”: the security created in favor of the Collateral Agent pursuant to the Security Documents.

“Security Documents”: the Borrower Security Agreement, the Sponsor Security Agreement, the Pledge Agreement and the Lease Termination Agreement.

“Solvent”: with respect to any Person, as of any date of determination, (a) the amount of the “present fair saleable value” of the assets of such Person will, as of such date, exceed the amount of all “liabilities of such Person, contingent or otherwise”, as of such date, as such quoted terms are determined in accordance with applicable federal and state laws governing determinations of the insolvency of debtors, (b) the present fair saleable value of the assets of such Person will, as of such date, be greater than the amount that will be required to pay the liability of such Person on its debts as such debts become absolute and matured, (c) such Person will not have, as of such date, an unreasonably small amount of capital with which to conduct its business, and (d) such Person will be able to pay its debts as they mature. For purposes of this definition, (i) “debt” means liability on a “claim”, and (ii) “claim” means any (x) right to payment, whether or not such a right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured or (y) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured or unmatured, disputed, undisputed, secured or unsecured.

“South Dakota Pension Plan”: the NorthWestern Corporation Pension Plan, a qualified defined benefit pension plan.

“SPC”: as defined in Section 9.6(g).

"Sponsor”: as defined in the recitals hereto.

“Sponsor Collateral”: the collateral of the Sponsor described in, and upon which a Lien is purported to be created by, the Sponsor Security Agreement.

“Sponsor Security Agreement”: that certain Assignment and Security Agreement entered into as of the date hereof between the Sponsor and the Collateral Agent.

“Standard & Poor’s”: Standard & Poor’s Rating Group, a division of The McGraw-Hill Companies, Inc.

“Sublease”: as defined in the recitals hereto.

“Subsidiary”: as to any Person, a corporation, partnership, limited liability company or other entity of which shares of stock or other ownership interests having ordinary voting power (other than stock or such other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation, partnership or other entity are at the time owned, or the management of which is otherwise controlled, directly or indirectly through one or more intermediaries, or both, by such Person. Unless otherwise qualified, all references to a “Subsidiary” or to “Subsidiaries” in this Agreement shall refer to a Subsidiary or Subsidiaries of the Borrower.

“Swap Contract”: means (a) any and all rate swap transactions, basis swaps, credit derivative transactions, forward rate transactions, commodity swaps, commodity options, forward commodity contracts, equity or equity index swaps or options, bond or bond price or bond index swaps or options or forward bond or forward bond price or forward bond index transactions, interest rate options, forward foreign exchange transactions, cap transactions, floor transactions, collar transactions, currency swap transactions, cross-currency rate swap transactions, currency options, spot contracts, or any other similar transactions or any combination of any of the foregoing (including any options to enter into any of the foregoing), whether or not any such transaction is governed by or subject to any master agreement, (b) any and all transactions of any kind, and the related confirmations, which are subject to the terms and conditions of, or governed by, any form of master agreement published by the International Swaps and Derivatives Association, Inc., any International Foreign Exchange Master Agreement, or any other master agreement, including any such obligations or liabilities under any such master agreement and (c) for the avoidance of doubt, excludes any contract for the physical sale or purchase of any commodity.

“Swap Termination Value”: in respect of any one or more Swap Contracts, after taking into account the effect of any legally enforceable netting agreement relating to such Swap Contracts, (a) for any date on or after the date such Swap Contracts have been closed out and termination value(s) determined in accordance therewith, such termination value(s), and (b) for any date prior to the date referenced in clause (a), the amount(s) determined as the mark-to-market value(s) for such Swap Contracts, in accordance with the terms of the applicable Swap Contract, or, if no provision is made therein, as determined based upon one or more mid-market or other readily available quotations provided by any recognized dealer in such Swap Contracts (which may include the Lender or any Affiliate of the Lender).

“Termination Event”: (i) a Reportable Event with respect to any Plan, (ii) the initiation of any action by the Borrower, Pledgor or Lessee, any ERISA Affiliate or any Plan fiduciary to terminate any Plan (other than a standard termination under Section 4041(b) of ERISA) or the treatment of an amendment to a Plan as a termination under Section 4041(e) of ERISA (other than treatment as a standard termination under Section 4041(b) of ERISA), (iii) the institution of proceedings by the PBGC under Section 4042 of ERISA to terminate any Plan or to appoint a trustee to administer any Plan, (iv) the withdrawal of the Borrower, the Pledgor, the Lessee or any ERISA Affiliate from a Multiemployer Plan during a plan year in which the Borrower, the Pledgor or the Lessee or such ERISA Affiliate was a “substantial employer” as defined in Section 4001(a)(2) of ERISA (v) the partial or complete withdrawal of the Borrower, the Pledgor or the Lessee or any ERISA Affiliate from a Multiemployer Plan, or

(vi) the Borrower, the Pledgor or the Lessee or any ERISA Affiliate is in default (as defined in Section 4219(c)(5) of ERISA) with respect to payments to a Multiemployer Plan.

“Threat of Release”: as the term “threat of release” is used in CERCLA.

“Total Loan”: at any time, the aggregate amount of the Loan outstanding at such time.

“Transaction Documents”: as defined in the GE PSA.

“Transfer”: the direct or indirect transfer of 100% of the Owner Participant Interest from the Sponsor to the Borrower, in form and substance reasonably satisfactory to the Administrative Agent.

“Transferee”: as defined in Section 9.13.

“Trust Agreement”: as defined in the recitals hereto.

“UCC”: the Uniform Commercial Code as in effect from time to time in the State of New York.

“Unfunded Benefit Liabilities”: with respect to any Plan at any time, the amount (if any) by which (i) the present value of all accrued benefits calculated on an accumulated benefit obligation basis and based upon the actuarial assumptions used for accounting purposes (i.e., those determined in accordance with FASB statement No. 35 and used in preparing the Plan’s financial statements) exceeds (ii) the fair market value of all Plan assets allocable to such benefits, determined as of the then most recent actuarial valuation report for such Plan.

“WestLB” means WestLB AG, New York Branch.

“WestLB Entity”: WestLB or any of its affiliates.

1.2          Other Definitional Provisions. (a) Unless otherwise specified therein, all terms defined in this Agreement shall have the defined meanings when used in the other Loan Documents or any certificate or other document made or delivered pursuant hereto or thereto.

(b)          As used herein and in the other Loan Documents, and any certificate or other document made or delivered pursuant hereto or thereto, accounting terms relating to the Borrower not defined in Section 1.1 and accounting terms partly defined in Section 1.1, to the extent not defined, shall have the respective meanings given to them under GAAP.

(c)          The words “hereof”, “herein” and “hereunder” and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and Section, Schedule and Exhibit references are to this Agreement unless otherwise specified.

(d)          The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms.

(e)          The words “include,” “includes” and “including” shall be deemed to be followed by the phrase “without limitation”. The word “or” shall not be exclusive. The word “will” shall be construed to have the same meaning and effect as the word “shall”.

(f)           Unless the context requires otherwise (i) any definition of or reference to any agreement, instrument or other document herein shall be construed as referring to such agreement, instrument or other document, together with all schedules, exhibits and attachments thereto, as from time to time amended, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein), (ii) any reference herein to any Person shall be construed to include such Person’s successors and assigns, and, in the case of any Governmental Authority, any Person succeeding to its functions and capacities, and (iii) the words “asset” and “property” shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, securities, accounts and contract rights.

(g)          The term “knowledge”, and any other similar expression, in relation to the Borrower or Sponsor shall mean knowledge, after due inquiry, of any Responsible Officer of the Borrower or Sponsor, as the case may be, and any Person replacing any such Person as an officer or manager of the Borrower or Sponsor, as the case may be.

(h)          Unless otherwise defined herein, terms used herein that are defined in the UCC shall have the respective meanings given to those terms in the UCC.

SECTION 2 AMOUNT AND TERMS OF COMMITMENTS

2.1          Commitments. (a) Subject to the terms and conditions hereof, the Lender agrees to make a Loan to the Borrower on the Closing Date in a principal amount of one hundred million Dollars ($100,000,000) (the “Loan”).

(b)          The Borrower shall repay the outstanding principal amount of the Loan on the Maturity Date.

2.2           Procedure for Borrowing. The Borrower may borrow on the Closing Date the principal amount of the Loan; provided that the Borrower shall deliver to the Administrative Agent a Borrowing Notice, which Borrowing Notice (a) must be received by the Administrative Agent prior to 11:00 a.m., New York City time, on the Closing Date, (b) shall be for a Base Rate Loan only and (c) shall be, once delivered by the Borrower, irrevocable. Upon receipt of such Borrowing Notice from the Borrower, the Administrative Agent shall promptly notify the Lender thereof. The Lender will make the Loan available to the Administrative Agent for the account of the Borrower at the Funding Office prior to 12:00 Noon, New York City time, on the Closing Date in funds immediately available to the Administrative Agent. Such borrowing will then be made available to the Borrower by the Administrative Agent in like funds as received by the Administrative Agent.

2.3           Repayment of Loan; Evidence of Debt. (a) The Borrower hereby unconditionally promises to pay to the Administrative Agent for the account of the Lender the then unpaid principal amount of the Loan on the Maturity Date, or on such earlier date on which the Loan becomes due and payable pursuant to this Section 2 or Section 7. The Borrower hereby further agrees to pay interest on the unpaid principal amount of the Loan from time to time outstanding from the date hereof until payment in full thereof at the rates per annum, and on the dates, set forth in Section 2.8.

(b)       The Lender shall maintain in accordance with its usual practice an account or accounts evidencing indebtedness of the Borrower to such Lender resulting from the Loan from time to time, including the amounts of principal and interest payable and paid to the Lender from time to time under this Agreement.

(c)       The Administrative Agent, on behalf of the Borrower, shall maintain the Register pursuant to Section 9.6(d), in which shall be recorded (i) the amount of the Loan made hereunder and the Note evidencing such Loan, (ii) the amount of any principal or interest due and payable or to become due and payable from the Borrower to the Lender hereunder and (iii) both the amount of any sum received by the Administrative Agent hereunder from the Borrower and the Lender’s share thereof.

(d)       The entries made in the Register and the account of the Lender maintained pursuant to Section 2.3(c) shall, to the extent permitted by applicable law, be prima facie evidence of the existence and amounts of the obligations of the Borrower therein recorded; provided, however, that the failure of the Lender or the Administrative Agent to maintain the Register or any such account, or any error therein, shall not in any manner affect the obligation of the Borrower to repay (with applicable interest) the Loan made to the Borrower by the Lender in accordance with the terms of this Agreement.

(e)       The Borrower agrees that, upon its receipt of notice of the request to the Administrative Agent by the Lender, the Borrower will promptly execute and deliver to such Lender a promissory note of the Borrower evidencing the Loan or any portion thereof held by such Lender, substantially in the form of Exhibit B (a “Note”), with appropriate insertions as to date and then outstanding principal amount; provided, that delivery of the Note shall not be a condition precedent to the occurrence of the making of the Loan on the Closing Date.

2.4       Fees. The Borrower agrees to pay to the Administrative Agent, the Collateral Agent and the Lead Arranger the fees in the amounts and on the dates agreed to in the Fee Letters (or otherwise from time to time agreed to in writing by the Borrower and the Lead Arranger, Administrative Agent or Collateral Agent). Once paid, any such fees shall not be refundable under any circumstances.

2.5         Optional Prepayments. The Borrower may at any time and from time to time prepay the Loan, in whole or in part, without premium or penalty (but including breakage costs, if any, pursuant to Section 2.14), upon irrevocable notice delivered to the Administrative Agent no later than 11:00 a.m., New York City time, three Business Days prior thereto, which notice shall specify the date and amount of such prepayment; provided, that if the Loan is prepaid on any day other than the last day of the Interest Period applicable thereto, the

Borrower shall also pay any amounts owing pursuant to Section 2.14. Upon receipt of any such notice the Administrative Agent shall promptly notify the Lender thereof. If any such notice is given, the amount specified in such notice shall be due and payable on the date specified therein, together with accrued interest to such date on the amount prepaid. Partial prepayments of the Loan shall be in an aggregate principal amount of one million Dollars ($1,000,000) or a whole multiple thereof. Amounts of the Loan prepaid pursuant to this Section 2.5 may not be reborrowed.

2.6           Mandatory Prepayments. The Borrower shall be required to prepay the Loan:

(a)         in an amount equal to any insurance proceeds received by the Borrower;

(b)         in an amount equal to the proceeds received by the Borrower of any Disposition of Property of the Borrower (including all or any portion of the Collateral) or of the Lessor; and

(c)         in an amount equal to the aggregate outstanding principal amount of the Loan in the event the Lease or any other Operative Document is terminated.

If the Loan or any portion thereof is prepaid pursuant to this Section 2.6 on any day other than the last day of the Interest Period applicable thereto, the Borrower shall also pay any amounts owing pursuant to Section 2.14. Amounts of the Loan prepaid pursuant to this Section 2.6 may not be reborrowed.

2.7 Conversion and Continuation Options. (a) The Borrower may elect from time to time to convert a Base Rate Loan to a Eurodollar Loan by giving the Administrative Agent an Interest Period Notice no later than 11:00 a.m., New York City time, three Business Days prior thereto (which notice shall specify the requested conversion to a Eurodollar Loan and the length of the initial Interest Period to be applicable to such Eurodollar Loan), provided that no Base Rate Loan may be converted into a Eurodollar Loan (i) when any Event of Default has occurred and is continuing and the Administrative Agent has, or the Required Lenders have, determined in its or their sole discretion not to permit such conversions or (ii) after the date that is one month prior to the Maturity Date. The Borrower may elect from time to time to convert a Eurodollar Loan to a Base Rate Loan by giving the Administrative Agent an Interest Period Notice no later than 11:00 a.m., New York City time, two Business Days prior thereto (which notice shall specify the requested conversion to a Base Rate Loan), provided that any such conversion of a Eurodollar Loan may be made only on the last day of an Interest Period with respect thereto. Upon receipt of any such notice the Administrative Agent shall promptly notify the Lender thereof.

(b)          The Borrower may elect to continue any Eurodollar Loan as such upon the expiration of the then current Interest Period with respect thereto by giving the Administrative Agent an Interest Period Notice no later than 11:00 a.m., New York City time, three Business Days prior to such expiration (which notice shall specify the requested continuation of the Eurodollar Loan and the length of the next Interest Period to be applicable

to such Eurodollar Loan), provided that no Eurodollar Loan may be continued as such (i) when any Event of Default has occurred and is continuing and the Administrative Agent has, or the Required Lenders have, determined in its or their sole discretion not to permit such continuations or (ii) after the date that is one month prior to the Maturity Date, and provided, further, that if the Borrower shall fail to give any required notice as described above in this paragraph or if such continuation is not permitted pursuant to the preceding proviso, such Loan shall be converted automatically to a Base Rate Loan on the last day of such then expiring Interest Period. Upon receipt of any such notice the Administrative Agent shall promptly notify the Lender thereof.

2.8 Interest Rates and Payment Dates. (a) If the Loan is a Eurodollar Loan, such Eurodollar Loan shall bear interest for each day during each Interest Period with respect thereto at a rate per annum equal to the Eurodollar Rate for such Interest Period plus the Applicable Margin with respect to a Eurodollar Loan.

(b)       If the Loan is a Base Rate Loan, such Base Rate Loan shall bear interest for each day on which it is outstanding at a rate per annum equal to the Base Rate in effect for such day plus the Applicable Margin with respect to a Base Rate Loan.

(c)       (i) If all or a portion of the principal amount of the Loan shall not be paid when due (whether at the stated maturity, by acceleration or otherwise), the Loan (whether or not overdue) (to the extent legally permitted) shall bear interest at a rate per annum that is equal to the rate that would otherwise be applicable thereto pursuant to the foregoing provisions of this Section 2.8 plus 2%, and (ii) if all or a portion of any interest payable on the Loan or other amount payable hereunder shall not be paid when due (whether at the stated maturity, by acceleration or otherwise), such overdue amount shall bear interest at a rate per annum equal to the rate then applicable to a Base Rate Loan (including the Applicable Margin) plus 2%, in each case, with respect to clauses (i) and (ii) above, from the date of such non payment until such amount is paid in full (after as well as before judgment).

(d) Interest shall be payable in arrears on each Interest Payment Date, provided that interest accruing pursuant to paragraph (c) of this Section 2.8 shall be payable from time to time on demand.

2.9 Computation of Interest and Fees. (a) Interest and fees payable pursuant hereto shall be calculated on the basis of a 360-day year for the actual days elapsed, except that, with respect to a Base Rate Loan, the interest thereon shall be calculated on the basis of a 365 (or 366, as the case may be) day year for the actual days elapsed. The Administrative Agent shall as soon as practicable notify the Borrower and the Lender of each determination of the Eurodollar Rate. Any change in the interest rate on the Loan resulting from a change in the Base Rate or the Eurocurrency Reserve Requirements shall become effective as of the opening of business on the day on which such change becomes effective. The Administrative Agent shall as soon as practicable notify the Borrower and the Lender of the effective date and the amount of each such change in interest rate.

(b)       Each determination of an interest rate by the  Administrative Agent pursuant to any provision of this Agreement shall be conclusive and binding on the Borrower and the Lender in the absence of manifest error. The Administrative Agent shall, at the request of the Borrower, deliver to the Borrower a statement showing the quotations used by the Administrative Agent in determining any interest rate pursuant to Section 2.9(a).

2.10      Inability to Determine Interest Rate. If prior to the first day of any Interest Period:

(a)       the Administrative Agent shall have reasonably determined (which determination shall be conclusive and binding upon the Borrower) that, by reason of circumstances affecting the relevant market, adequate and reasonable means do not exist for ascertaining the Eurodollar Rate for such Interest Period, or

(b)      the Administrative Agent shall have received notice from the Required Lenders that the Eurodollar Rate determined or to be determined for such Interest Period will not adequately and fairly reflect the cost to such Lenders (as conclusively certified by such Lenders) of making or maintaining their affected Loan or portion thereof during such Interest Period, the Administrative Agent shall give telecopy or telephonic notice thereof to the Borrower and the Lender as soon as practicable thereafter. If such notice is given (x) any Eurodollar Loan requested to be made on the first day of such Interest Period shall be made as a Base Rate Loan, (y) if the Loan was to have been converted or continued on the first day of such Interest Period to a Eurodollar Loan, the Loan shall remain as or be converted to, as the case may be, a Base Rate Loan, and (z) any outstanding Eurodollar Loan shall be converted, on the last day of the then current Interest Period with respect thereto, to a Base Rate Loan. Until such notice has been withdrawn by the Administrative Agent, the Loan shall continue as a Base Rate Loan.

2.11       Pro Rata Treatment and Payments Sharing of Payments Set-off. (a) To the extent “Lender” includes at such time any entity other than WestLB AG, New York Branch, each payment of interest in respect of the Loan and each payment in respect of fees payable hereunder shall be applied to the amounts of such obligations owing to the Lender pro rata according to the respective amounts then due and owing to such Lender.

(b)      To the extent “Lender” includes at such time any entity other than WestLB AG, New York Branch, each payment (including each prepayment) by the Borrower on account of principal of and interest on the Loan shall be made pro rata according to the respective outstanding principal amounts of the Loan then held by the Lender.

(c)       To the extent “Lender” includes at such time any entity other than WestLB AG, New York Branch, the application of any payment of the Loan (including optional and mandatory prepayments) shall be made ratably among the Lender based on each Lender’s aggregate outstanding principal amount of the Loan. Each payment of the Loan shall be accompanied by accrued interest to the date of such payment on the amount paid.

(d)       All payments (including prepayments) to be made by the Borrower hereunder, whether on account of principal, interest, fees or otherwise, shall be made without setoff or counterclaim and shall be made prior to 12:00 Noon, New York City time, on the due date thereof to the Administrative Agent, for the account of the Lender, at the office specified from time to time by the Administrative Agent as its payment office by notice to the Borrower and the Lender, in Dollars and in immediately available funds. Any payment made by the Borrower after 12:00 Noon, New York City time, on any Business Day shall be deemed to have been on the next following Business Day. If any payment on the Loan becomes due and payable on a day other than a Business Day, the maturity thereof shall be extended to the next succeeding Business Day unless the result of such extension would be to extend such payment into another calendar month, in which event such payment shall be made on the immediately preceding Business Day. In the case of any extension of any payment of principal pursuant to the preceding two sentences, interest thereon shall be payable at the then applicable rate during such extension.

(e)            The Administrative Agent may assume that the Lender is making the amount that would constitute such borrowing available to the Administrative Agent, and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower a corresponding amount. If such amount is not made available to the Administrative Agent by the required time on the Closing Date, the Lender shall pay to the Administrative Agent, on demand, such amount with interest thereon at a rate equal to the greater of (i) the Federal Funds Effective Rate and (ii) a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation, for the period until the Lender makes such amount immediately available to the Administrative Agent. A certificate of the Administrative Agent submitted to the Lender with respect to any amounts owing under this paragraph shall be conclusive in the absence of manifest error. If the borrowing is not made available to the Administrative Agent by the Lender within three Business Days after the Closing Date, the Administrative Agent, on demand, shall also be entitled to recover, and the Borrower shall pay to the Administrative Agent, such amount with interest thereon at the rate per annum applicable to a Base Rate Loan.

(f) Unless the Administrative Agent shall have been notified in writing by the Borrower prior to the date of any payment due to be made by the Borrower hereunder that the Borrower will not make such payment to the Administrative Agent, the Administrative Agent may assume that the Borrower is making such payment, and the Administrative Agent may, but shall not be required to, in reliance upon such assumption, make available to the Lender their respective pro rata shares of a corresponding amount. If such payment is not made to the Administrative Agent by the Borrower within three Business Days after such due date, the Administrative Agent shall be entitled to recover, on demand, from the Lender to which any amount which was made available pursuant to the preceding sentence, such amount with interest thereon at the rate per annum equal to the daily average Federal Funds Effective Rate. Nothing herein shall be deemed to limit the rights of the Administrative Agent or the Lender against the Borrower.

(g)      Upon receipt by the Administrative Agent of payments on behalf of the Lender, the Administrative Agent shall promptly distribute such payments to the Lender entitled thereto, in like funds as received by the Administrative Agent.

(h)       To the extent “Lender” includes at such time any entity other than WestLB AG, New York Branch, except to the extent that this Agreement provides for payments to be allocated to a particular Lender, if a Lender (a “Benefitted Lender”) shall at any time receive any payment of all or part of the Obligations owing to it, or receive any collateral in respect thereof (whether voluntarily or involuntarily, by set off, pursuant to events or proceedings of the nature referred to in Section 7(f), or otherwise), in a greater proportion than any such payment to or collateral received by any other Lender, if any, in respect of such other Lender’s Obligations, such Benefitted Lender shall purchase for cash from the other Lenders a participating interest in such portion of each such other Lender’s Obligations, or shall provide such other Lenders with the benefits of any such collateral, as shall be necessary to cause such Benefitted Lender to share the excess payment or benefits of such collateral ratably with each of the Lenders; provided, however, that if all or any portion of such excess payment or benefits is thereafter recovered from such Benefitted Lender, such purchase shall be rescinded, and the purchase price and benefits returned, to the extent of such recovery, but without interest.

(i) Upon the occurrence and during the continuance of an Event of Default, in addition to any rights and remedies of the Lender provided by law, the Lender shall have the right, without prior notice to the Borrower, any such notice being expressly waived by the Borrower to the extent permitted by applicable law, upon any amount becoming due and payable by the Borrower hereunder (whether at the stated maturity, by acceleration or otherwise), to set off and appropriate and apply against such amount any and all deposits (general or special, time or demand, provisional or final), in any currency, and any other credits, indebtedness or claims, in any currency, in each case whether direct or indirect, absolute or contingent, matured or unmatured, at any time held or owing by such Lender or any branch or agency thereof to or for the credit or the account of the Borrower. The Lender agrees promptly to notify the Borrower and the Administrative Agent after any such setoff and application made by such Lender, provided that the failure to give such notice shall not affect the validity of such setoff and application.

2.12 Requirements of Law. (a) If the adoption of or any change in any Requirement of Law or in the interpretation or application thereof or compliance by the Lender with any request or directive (whether or not having the force of law) from any central bank or other Governmental Authority made subsequent to the date hereof:

(i) shall subject the Lender to any tax of any kind whatsoever with respect to this Agreement or any Eurodollar Loan made by it, or change the basis of taxation of payments to such Lender in respect thereof (except for Non-Excluded Taxes covered by Section 2.13 and changes in the rate of tax on the overall net income of such Lender);

(ii)            shall impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, deposits or other liabilities in or for the account of, advances, loans or other extensions of credit by, or any other acquisition of funds by, any office of such Lender that is not otherwise included in the determination of the Eurodollar Rate hereunder; or

(iii)         shall impose on such Lender any other condition; and the result of any of the foregoing is to increase the cost to such Lender, by an amount which such Lender deems to be material, of making, converting into, continuing or maintaining a Eurodollar Loan, or to reduce any amount receivable hereunder in respect thereof, then, in any such case, the Borrower shall promptly pay such Lender, upon its demand, any additional amounts necessary to compensate such Lender for such increased cost or reduced amount receivable. If the Lender becomes entitled to claim any additional amounts pursuant to this Section 2.12, it shall promptly notify the Borrower (with a copy to the Administrative Agent) of the event by reason of which it has become so entitled.

(b)           If the Lender shall have reasonably determined that the adoption of or any change in any Requirement of Law regarding capital adequacy or in the interpretation or application thereof or compliance by such Lender or any corporation controlling such Lender with any request or directive regarding capital adequacy (whether or not having the force of law) from any Governmental Authority made subsequent to the date hereof shall have the effect of reducing the rate of return on such Lender’s or such corporation’s capital as a consequence of its obligations hereunder to a level below that which such Lender or such corporation could have achieved but for such adoption, change or compliance (taking into consideration such Lender’s or such corporation’s policies with respect to capital adequacy) by an amount deemed by such Lender to be material, then from time to time, after submission by such Lender to the Borrower (with a copy to the Administrative Agent) of a written request therefor, the Borrower shall pay to such Lender such additional amount or amounts as will compensate such Lender or such corporation for such reduction; provided that the Borrower shall not be required to compensate the Lender pursuant to this paragraph for any amounts incurred more than six months prior to the date that such Lender notifies the Borrower of such Lender’s intention to claim compensation therefor; and provided further that, if the circumstances giving rise to such claim have a retroactive effect, then such six-month period shall be extended to include the period of such retroactive effect.

(c)            A certificate as to any additional amounts payable pursuant to this Section 2.12 (and setting forth calculations in reasonable detail demonstrating the basis therefor) submitted by the Lender to the Borrower (with a copy to the Administrative Agent) shall be conclusive in the absence of manifest error. The obligations of the Borrower pursuant to this Section 2.12 shall survive the termination of this Agreement and the payment of the Loan and all other amounts payable hereunder.

2.13 Taxes. (a) All payments made by the Borrower under this Agreement shall be made free and clear of, and without deduction or withholding for or on account of, any present or future income, stamp or other taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed by the Governmental Authority of the jurisdiction under the laws of which any Agent or the Lender is organized or in which its principal office is located or, in the case of the Lender, in which its applicable lending office is located (other than any amounts imposed solely due to such Agent’s or such Lender’s having executed, delivered or performed its obligations or received a payment under, or enforced, this Agreement or any other Loan Document). If any such non-excluded taxes, levies, imposts, duties, charges, fees, deductions or withholdings (“Non-Excluded Taxes”) or any Other Taxes are required to be withheld from any amounts payable to any Agent

or the Lender hereunder, the amounts so payable to such Agent or such Lender shall be increased to the extent necessary to yield to such Agent or such Lender (after payment of all Non-Excluded Taxes and Other Taxes) interest or any such other amounts payable hereunder at the rates or in the amounts specified in this Agreement; provided, however, that the Borrower shall not be required to increase any such amounts payable to the Lender with respect to any Non-Excluded Taxes (i) that are attributable to such Lender’s failure to comply with the requirements of paragraph (d) or (e) of this Section 2.13 or (ii) that are United States withholding taxes imposed on amounts payable to such Lender immediately prior to the time such Lender becomes a party to this Agreement, except to the extent that such Lender’s assignor (if any) was entitled, at the time of assignment, to receive additional amounts from the Borrower with respect to such Non-Excluded Taxes pursuant to this paragraph (a).

(b)           In addition, the Borrower shall pay any Non-Excluded Taxes and Other Taxes to the relevant Governmental Authority in accordance with applicable law.

(c)           Whenever any Non-Excluded Taxes or Other Taxes are payable by the Borrower, as promptly as possible thereafter the Borrower shall send to the Administrative Agent for the account of the relevant Agent or Lender, as the case may be, a certified copy of an original official receipt received by the Borrower showing payment thereof. If the Borrower fails to pay any Non-Excluded Taxes or Other Taxes when due to the appropriate taxing authority or fails to remit to the Administrative Agent the required receipts or other required documentary evidence, the Borrower shall indemnify the Agents and the Lender for any incremental taxes, interest or penalties that may become payable by any Agent or the Lender as a result of any such failure. The agreements in this Section 2.13 shall survive the termination of this Agreement and the payment of the Loan and all other amounts payable hereunder.

(d) Each Lender (or Transferee) that is not a “U.S. Person” as defined in Section 7701(a)(30) of the Code (a “Non-U.S. Lender”) shall deliver to the Borrower and the Administrative Agent (or, in the case of a Participant, to the Lender from which the related participation shall have been purchased) two duly completed copies of either U.S. Internal Revenue Service Form W-8BEN or Form W-8ECI, or, in the case of a Non-U.S. Lender claiming exemption from U.S. federal withholding tax under Section 871(h) or 881(c) of the Code with respect to payments of “portfolio interest”, a duly completed statement substantially in the form of Exhibit D and a Form W-8BEN, or any subsequent versions thereof or successors thereto properly completed and duly executed by such Non-U.S. Lender claiming complete exemption from, or a reduced rate of, U.S. federal withholding tax on all payments by the Borrower under this Agreement and the other Loan Documents. Such forms shall be delivered by each Non-U.S. Lender on or before the date it becomes a party to this Agreement (or, in the case of any Participant, on or before the date such Participant purchases the related participation). In addition, each Non-U.S. Lender shall deliver such forms promptly upon the obsolescence or invalidity of any form previously delivered by such Non-U.S. Lender. Each Non-U.S. Lender shall promptly notify the Borrower at any time it determines that it is no longer in a position to provide any previously delivered certificate to the Borrower (or any other form of certification adopted by the U.S. taxing authorities for such purpose). Notwithstanding any other provision of this paragraph, a Non-U.S. Lender shall not be required to deliver any form pursuant to this paragraph that such Non-U.S. Lender is not legally able to deliver.

(e) Upon the request of Borrower, if the Lender is entitled to an exemption from or reduction of non-U.S. withholding tax under the law of the jurisdiction in which the Borrower is located, or any treaty to which such jurisdiction is a party, with respect to payments under this Agreement the Lender shall deliver to the Borrower (with a copy to the Administrative Agent), at the time or times prescribed by applicable law or reasonably requested by the Borrower, such properly completed and executed documentation prescribed by applicable law as will permit such payments to be made without withholding or at a reduced rate, provided that such Lender is legally entitled to complete, execute and deliver such documentation and in such Lender’s reasonable judgment such completion, execution or submission would not materially prejudice the legal position of such Lender.

2.14 Indemnity. The Borrower agrees to indemnify the Lender for, and to hold the Lender harmless from, any loss or expense that such Lender may sustain or incur as a consequence of (a) default by the Borrower in making a borrowing of a Eurodollar Loan after the Borrower has given a notice requesting the same in accordance with the provisions of this Agreement, (b) default by the Borrower in making any prepayment after the Borrower has given a notice thereof in accordance with the provisions of this Agreement or (c) the making of a prepayment of the Loan on a day that is not the last day of an Interest Period with respect thereto. Such indemnification may include an amount equal to the excess, if any, of (i) the amount of interest that would have accrued on the amount so prepaid, or not so borrowed for the period from the date of such prepayment or of such failure to borrow to the last day of such Interest Period (or, in the case of a failure to borrow the Interest Period that would have commenced on the date of such failure) in each case at the applicable rate of interest for the Loan provided for herein (excluding, however, the Applicable Margin included therein, if any) over (ii) the amount of interest (as reasonably determined by such Lender) that would have accrued to the Lender on such amount by placing such amount on deposit for a comparable period with leading banks in the interbank Eurodollar market. A certificate as to any amounts payable pursuant to this Section 2.14 (and setting forth calculations in reasonable detail demonstrating the basis therefor) submitted to the Borrower by the Lender shall be conclusive in the absence of manifest error. This covenant shall survive the termination of this Agreement and the payment of the Loan and all other amounts payable hereunder.

2.15 Illegality. Notwithstanding any other provision herein, if after the Closing Date the adoption of or any change in any Requirement of Law or in the interpretation or application thereof shall make it unlawful for any Lender to make or maintain a Eurodollar Loan as contemplated by this Agreement, such Lender’s Loan then outstanding as a Eurodollar Loan, if any, shall be converted automatically to a Base Rate Loan on the last day of the then current Interest Period with respect to such Loan or within such earlier period as required by law. If any such conversion of a Eurodollar Loan occurs on a day which is not the last day of the then current Interest Period with respect thereto, the Borrower shall pay to such Lender such amounts, if any, as may be required pursuant to Section 2.14.

2.16 Change of Lending Office. The Lender agrees that, upon the occurrence of any event giving rise to the operation of Section 2.12, 2.13(a) or 2.15 with respect to such Lender, it will, if requested by the Borrower, use reasonable efforts (subject to overall policy considerations of such Lender) to designate another lending office for the Loan or portion thereof affected by such event with the object of avoiding the consequences of such

event; provided, that such designation is made on terms that, in the sole judgment of such Lender, cause such Lender and its lending office(s) to suffer no economic, legal or regulatory disadvantage, and provided, further, that nothing in this Section 2.16 shall affect or postpone any of the obligations of the Borrower or the rights of the Lender pursuant to Section 2.12, 2.13(a) or 2.15.

2.17 Replacement of Lender under Certain Circumstances. The Borrower shall be permitted to replace the Lender with a replacement financial institution if such Lender (a) requests reimbursement for amounts owing pursuant to Section 2.12 or 2.13 or gives a notice of illegality pursuant to Section 2.15, (b) defaults in its obligation to make the Loan hereunder or (c) refuses to consent to any amendment, waiver or other modification of any Loan Document requested by the Borrower that requires the consent of the Lender and such amendment, waiver or other modification is consented to by the Required Lenders; provided that (i) such replacement does not conflict with any Requirement of Law, (ii) no Event of Default shall have occurred and be continuing at the time of such replacement, (iii) prior to any such replacement, the Lender shall have taken no action under Section 2.16 so as to eliminate the continued need for payment of amounts owing pursuant to Section 2.12 or 2.13 or to eliminate the illegality referred to in such notice of illegality given pursuant to Section 2.15, (iv) the replacement financial institution shall purchase, at par, the Loan and all other amounts owing to such replaced Lender on or prior to the date of replacement, (v) the Borrower shall be liable to such replaced Lender under Section 2.14 (as though Section 2.14 were applicable) if any Eurodollar Loan owing to such replaced Lender shall be purchased other than on the last day of the Interest Period relating thereto, (vi) the replacement financial institution, if not already a Lender, shall be reasonably satisfactory to the Administrative Agent, (vii) the replaced Lender shall be obligated to make such replacement in accordance with the provisions of Section 9.6 (provided that the Borrower shall be obligated to pay the registration and processing fee referred to therein), (viii) the Borrower shall pay all additional amounts (if any) required pursuant to Section 2.12 or 2.13, as the case may be, in respect of any period prior to the date on which such replacement shall be consummated, and (ix) any such replacement shall not be deemed to be a waiver of any rights that the Borrower, the Administrative Agent or any other Lender shall have against the replaced Lender.

SECTION 3 REPRESENTATIONS AND WARRANTIES

To induce the Agents and the Lender to enter into this Agreement and to make the Loan, the Borrower hereby represents and warrants to each Agent and the Lender that:

3.1 Corporate Existence Compliance with Law. The Borrower (a) is duly formed, validly existing and in good standing under the laws of the State of Delaware, (b) has the limited liability power and authority, and the legal right, to own and operate its Property, to lease the Property it operates as lessee and to conduct the business in which it is currently engaged, (c) is duly qualified as a foreign organization and in good standing under the laws of each jurisdiction where its ownership, lease or operation of Property or the conduct of its business requires such qualification except to the extent to so qualify and be in good standing could not in the aggregate reasonably be expected to have a Material Adverse Effect, and (d) is in compliance with all Requirements of Law except to the extent that the failure to comply therewith could not, in the aggregate, reasonably be expected to have a Material Adverse Effect.

3.2 Corporate Power Authorization Enforceable Obligations. The Borrower has the limited liability company power and authority, and the legal right, to make, deliver and perform the Loan Documents to which it is a party and to borrow hereunder. The Borrower has taken all necessary corporate action to authorize the execution, delivery and performance of the Loan Documents to which it is a party and to authorize the borrowings on the terms and conditions of this Agreement. No consent or authorization of, filing with, notice to or other act by or in respect of, any Governmental Authority or any other Person is required in connection with the borrowings hereunder or the execution, delivery, performance, validity or enforceability of this Agreement or any of the other Loan Documents or the transactions contemplated hereby or thereby, except (i) consents, authorizations, filings and notices described in Schedule 3.2, which consents, authorizations, filings and notices have been obtained or made and are in full force and effect (except as set forth in such Schedule 3.2), and (ii) consents, authorizations, filings or notices which, if not obtained, could not reasonably be expected to have a Material Adverse Effect. No comment or notice of protest or intervention has been filed with FERC by any third party in respect of the FPA Section 204 authorization issued by FERC on December 28, 2007 (the “FERC 204 Approval”) prior to or on the due date therefor, and the Borrower in good faith does not expect for the FERC 204 Approval to be overturned, amended or modified during the applicable appeal period therefor. This Agreement has been, and each other Loan Document upon execution will be, duly executed and delivered on behalf of the Borrower. This Agreement constitutes, and each other Loan Document upon execution will constitute, a legal, valid and binding obligation of the Borrower, enforceable against the Borrower in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors’ rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law).

3.3 No Legal Bar. The execution, delivery and performance of this Agreement and the other Loan Documents, the borrowings by the Borrower hereunder and the use of the proceeds thereof will not violate any Requirement of Law or any Contractual Obligation of the Borrower (other than violations which in the aggregate could not reasonably be expected to have a Material Adverse Effect and after taking into consideration all consents and waivers obtained by the Borrower prior to the date hereof) and will not result in, or require, the creation or imposition of any Lien on its properties or revenues pursuant to any Requirement of Law or any such Contractual Obligation.

3.4 No Material Litigation. No litigation, investigation or proceeding of or before any arbitrator or Governmental Authority is pending or, to the knowledge of the Borrower, threatened by or against the Borrower or against any of its properties or revenues (a) with respect to any of the Loan Documents or any of the transactions contemplated hereby or thereby, or (b) that could reasonably be expected to have a Material Adverse Effect.

3.5 No Default. The Borrower is not in default under or with respect to any of its Contractual Obligations in any respect that could reasonably be expected to have a Material Adverse Effect. No Default or Event of Default has occurred and is continuing.

3.6 Ownership of Property. The Borrower has title in fee simple to, or a valid leasehold interest in, or other appropriate property rights in, all its material real property,

and good title to, or a valid leasehold interest in, all of its Property. All Equity Interests in the Borrower are owned by the Pledgor. The Sponsor is as of the date hereof, and upon consummation of the Transfer the Borrower will be, the sole owner of the Owner Participant Interest.

3.7 Intellectual Property. The Borrower owns, or is licensed to use, all Intellectual Property necessary for the conduct of its business as currently conducted except for any such Intellectual Property that if it were not so owned or licensed could not reasonably be expected to have a Material Adverse Effect. No material claim has been asserted and is pending by any Person challenging or questioning the use of any Intellectual Property or the validity or effectiveness of any Intellectual Property, nor does the Borrower know of any valid basis for any such claim. The use of Intellectual Property by the Borrower does not infringe on the rights of any Person in any material respect except for such claims and infringements that, in the aggregate, could not reasonably be expected to have a Material Adverse Effect.

3.8 Taxes. The Borrower has filed or caused to be filed, completely and on a timely basis, all federal, state and other material tax returns that are required to be filed and has paid, completely and on a timely basis, all taxes shown to be due and payable on said returns or on any assessments made against it or any of its Property and all other taxes, fees or other charges imposed on it or any of its Property by any Governmental Authority (other than any amount the validity of which is currently being contested in good faith and with respect to which reserves in conformity with GAAP have been provided on the books of the Borrower); and no tax Lien has been filed, and, to the knowledge of the Borrower, no claim is being asserted, with respect to any such tax, fee or other charge. The Borrower is not and will not be taxable as a corporation for federal tax purposes, and Borrower has not and will not take any action to cause it to be treated as a corporation for any other taxing purpose if it would not, in the absence of such action, be taxable as a corporation for such purposes. The Borrower is not a party to any tax sharing agreement with any Person. The Borrower has not agreed to extend the statute of limitations period applicable to the assessment or collection of any tax. The Borrower is not currently under audit by any Governmental Authority with respect to any tax for any period, there are no claims for additional tax being pursued by any Governmental Authority with respect to the business, income or activities of Borrower and the Borrower has no knowledge of any such claims that have not yet been asserted by or are likely to be asserted by a Governmental Authority.

3.9 Margin Stock Regulations. The Borrower is not engaged in the business of extending credit for the purpose of “buying”, “purchasing” or “carrying” any “margin stock” (as defined or used in Regulation T, U or X of the Board), and no proceeds of the Loan or proceeds the Borrower receives under the Operative Documents will be used to buy, purchase or carry any margin stock or to extend credit to others for the purpose of buying, purchasing or carrying any such margin stock or otherwise in violation of Regulation T, U or X of the Board, or any regulations, interpretations or rulings thereunder.

3.10 Labor Matters and Acts of God. The Borrower does not have any employees, and there are no strikes, work stoppages, lockouts, grievances or other labor disputes against the Borrower, the Pledgor or the Lessee pending or, to the knowledge of the Borrower, threatened that (individually or in the aggregate) could reasonably be expected to have a Material Adverse Effect. Neither the business nor the Property of the Borrower, the

Pledgor or the Lessee, or the Project, is affected by any fire, explosion, accident, strike, lockout or other labor dispute, drought, storm, hail, earthquake, embargo, act of God or of the public enemy, or other casualty (whether or not covered by insurance), that could reasonably be expected to have a Material Adverse Effect.

3.11 ERISA. Except as set forth on Schedule 3.11, none of the Borrower, Pledgor or Lessee nor any of their ERISA Affiliates has (or within the five year period immediately preceding the date hereof had) any liability in respect of any Plan. None of the Borrower, Pledgor or Lessee nor any of their ERISA Affiliates has (or within the five year period immediately preceding the date hereof had) any liability in respect of any Multiemployer Plan. Except as set forth on Schedule 3.11, none of the Borrower, the Pledgor or the Lessee has any contingent liability with respect to any post-retirement benefit under any “welfare plan” (as defined in Section 3(1) of ERISA), other than liability for continuation coverage under Part 6 of Title I of ERISA. Schedule 3.11 sets forth the Unfunded Benefit Liabilities of each Plan and the projected benefit liabilities under FAS 106 for post-retirement benefits under any such welfare plan. No Termination Event is reasonably expected to occur with respect to any Plan or Multiemployer Plan.

3.12 Investment Company Act; Other Regulations. The Borrower is not an “investment company”, or a company “controlled” by an “investment company”, within the meaning of the Investment Company Act of 1940, as amended. The Borrower is not subject to regulation under any Requirement of Law that limits its ability to incur Indebtedness.

3.13 Utility Regulatory Status. (a) The Borrower is not subject to regulation under the Federal Power Act, the Public Utility Holding Company Act of 2005 (“PUHCA”) or state laws regulating activities of electric utilities, including rate or other financial or organizational regulation.

(b) The Lender will not solely as a result of entering into the Loan or consummating any transactions contemplated by the Loan, be subject to regulation under the Federal Power Act, PUHCA, or state laws regulating activities of electric utilities, including rate or other financial or organizational regulation; provided, however, that this representation and warranty in this Section 3.13(b) shall not apply with respect to remedies exercised by the Lender upon an Event of Default.

3.14    No Partnerships, Joint Ventures or Subsidiaries. The Borrower does not have any Subsidiaries. The Borrower is not a general partner or a limited partner in any general or limited partnership, a joint venturer in any joint venture or a member in any limited liability company.

3.15 Use of Proceeds. The Borrower shall use the proceeds of the Loan (a) to make a distribution to the Pledgor, which in turn will make a distribution to the Sponsor, and (b) to fund the payment of fees and expenses relating to the Acquisition, the Transfer and the transactions contemplated by this Agreement.

3.16 Operative Documents and Other Contracts. Schedule 3.16 specifies all contracts, agreements, instruments and other documents to which the Borrower is a party or by

which the Property of the Borrower is bound (including the Borrower LLC Agreement) (the “Borrower Contracts”). There is no default, event of default, event of loss or force majeure event under any of the Borrower Contracts or the Operative Documents. There is no default, event of default or claim for indemnity under, or material breach of any representation or warranty set forth in, the GE PSA or the other Acquisition Documents. The Borrower has delivered to the Administrative Agent copies of all Borrower Contracts, Operative Documents and Acquisition Documents, which copies are true, correct and complete in all material respects.

3.17        Representations and Warranties under the Participation Agreement. Other than as set forth on Schedule 3.17, the representations and warranties set forth in Section 5.1 and Section 9.1 of the Participation Agreement are true and correct in all material respects as of the date hereof (except for such representations and warranties that expressly on their terms relate to an earlier date, which representations and warranties are true and correct as of such earlier date).

3.18        Environmental Warranties.

(a)            (i) The Borrower (with respect to the Project), the Environmental Affiliates (with respect to the Project), and the Project are in compliance in all material respects with all applicable Environmental Laws, (ii) the Borrower and the Environmental Affiliates have all Environmental Approvals required to operate their businesses as presently conducted or as reasonably anticipated to be conducted and are in compliance in all material respects with the terms and conditions thereof, (iii) neither the Borrower nor any of the Environmental Affiliates has received any written communication (other than any such communication that the Administrative Agent has agreed in writing in not materially adverse) from a Governmental Authority that alleges that the Borrower or any Environmental Affiliate is not in compliance in all material respects with all Environmental Laws and Environmental Approvals, and (iv) there are no circumstances that may prevent or interfere in the future with the Borrower’s or any Environmental Affiliate’s compliance in all material respects with all applicable Environmental Laws and Environmental Approvals.

(b)            There is no Environmental Claim pending or, to the knowledge of the Borrower, threatened against the Borrower in relation to the Project or the Project. To the knowledge of the Borrower and the Sponsor, there is no Environmental Claim pending or threatened against any Environmental Affiliate.

(c)            To the knowledge of the Borrower and the Sponsor after due inquiry, there are no present or past actions, activities, circumstances, conditions, events or incidents, including the release, emission, discharge, presence or disposal of any Material of Environmental Concern, that could reasonably be expected to form the basis of any Environmental Claim against the Borrower or any Environmental Affiliate or could otherwise reasonably be expected to interfere with the Project.

(d)            Without in any way limiting the generality of the foregoing, (i) there are no locations on or off the Project Site in which the Borrower or, to the knowledge of Borrower, any Environmental Affiliate has stored, disposed or arranged for the disposal of Materials of Environmental Concern that could reasonably be expected to form the basis of an

Environmental Claim, (ii) there are no underground storage tanks located or to be located on the Project Site, (iii) there is no asbestos or lead paint contained in or forming part of any building, building component, structure or office space on the Project Site, and (iv) no polychlorinated biphenyls (PCBs) are or will be used or stored at the Project Site, except in such form, condition and quantity as could not reasonably be expected to result in an Environmental Claim.

(e) Neither the Borrower nor, to the knowledge of the Borrower and the Sponsor after due inquiry, any Environmental Affiliate has received any letter or request for information under Section 104 of the CERCLA, or comparable state laws, none of the operations of the Borrower or any Environmental Affiliate is the subject of any investigation by a Governmental Authority evaluating whether any remedial action is needed to respond to a release or threatened release of any Material of Environmental Concern at the Project or at any other location, including any location to which the Borrower or any Environmental Affiliate has transported, or arranged for the transportation of, any Material of Environmental Concern with respect to the Project.

3.19 Accuracy of Information, etc. All information, reports and other papers and data (other than projections) furnished to the Lender by the Borrower or on behalf of the Borrower were, in each case at the date thereof, complete and correct in all material respects, or have been subsequently supplemented by other information, reports or other papers or data, to the extent necessary to give the Lender a true and accurate knowledge of the subject matter in all material respects. All projections furnished by the Borrower were prepared and presented in good faith by the Borrower based upon facts and assumptions that the Borrower believed to be reasonable in light of current and foreseeable conditions, it being understood that projections are subject to significant uncertainties and contingencies, many of which are beyond the control of the Borrower and that no assurance can be given that the financial results set forth in such projections will actually be realized and the Borrower shall be under no obligation to update such projections. No document furnished or statement made in writing to the Lender by or on behalf of the Borrower in connection with the negotiation, preparation or execution of this Agreement contained as of the date thereof any untrue statement of a material fact, or omitted to state any such material fact necessary in order to make the statements contained therein not misleading.

3.20 Solvency. After giving effect to the transactions contemplated hereby, the incurrence of all Indebtedness and obligations being incurred in connection herewith and the Transfer, the Borrower will be Solvent.

3.21 Collateral. The security interests in the Collateral granted to the Collateral Agent pursuant to the Security Documents (a) constitute as to personal property included in the Collateral and, with respect to subsequently acquired personal property included in the Collateral, will constitute, a perfected security interest under the UCC to the extent a security interest can be perfected by filing or, in the case of the Equity Interests in the Borrower (such Equity Interests being “certificated securities” as defined in Article 8 of the UCC), by possession by the Collateral Agent; and (b) are, and, with respect to such subsequently acquired property, will be, as to Collateral perfected under the UCC as aforesaid, superior and prior to the rights of all third Persons now existing or hereafter arising whether by way of

mortgage, lien, security interests, encumbrance, assignment or otherwise. All such action as is necessary has been taken to establish and perfect for the benefit of the Collateral Agent rights in and to such Collateral to the extent the Collateral Agent’s security interest can be perfected by recording, filing, registration, giving of notice or other similar action. No filing, recordation, re-filing or re-recording other than those described in Section 4.1 (c)(ii) and continuation statements in respect thereof is necessary to maintain the perfection of the security interest in or Liens on the Collateral comprising personal property set forth in the Security Agreement, and all such filings will have been made to the extent the Collateral Agent’s security interest can be perfected by filing. The Collateral Agent has received all original certificates representing all issued and outstanding Equity Interests in the Borrower.

3.22     Separateness.

(a)          The Borrower maintains separate books of account from the Pledgor. The separate liabilities of the Borrower are readily distinguishable from the liabilities of each Affiliate of the Borrower, including the Pledgor.

(b)          The Borrower conducts its business solely in its own name in a manner not misleading to other Persons as to its identity.

(c)          The Borrower is in compliance with the provisions set forth on Schedule 3.23.

3.23      Required LLC Provisions. The Borrower LLC Agreement includes each  of the terms (collectively, the “Required LLC Provisions”) set forth in Schedule 3.23.

3.24 Business Indebtedness Contracts. Each of the Borrower and, to the knowledge of the Borrower and the Sponsor, the Lessor has not conducted any business other than the business contemplated by the Loan Documents and the Operative Documents applicable to the Borrower or the Lessor, as the case may be. The Borrower has no outstanding Indebtedness other than the Obligations, and the Lessor has no outstanding Indebtedness other than thirty-three million, two hundred forty-seven thousand and forty-six Dollars and six cents ($33,247,046.06) of Indebtedness under the Lease Indenture. The Borrower is not a party to or bound by any agreement, contract or instrument other than the Borrower Contracts, and, to the knowledge of the Borrower and the Sponsor, the Lessor is not a party to or bound by any agreement, contract or instrument other than the Operative Documents to which the Lessor is a party.

3.25 Financial Information. The financial statements of each of the Borrower and the Sponsor delivered pursuant to Section 4 have been prepared in accordance with GAAP, and fairly present in all material respects the financial condition of the Borrower or the Sponsor, as the case may be, as at the dates thereof and the results of its operations for the period then ended (subject to changes resulting from audit and normal year-end adjustments and the absence of footnotes).

3.26  No Change. Since October 30, 2007, there has been no development or event that has had or could reasonably be expected to have a Material Adverse Effect.

SECTION 4 CONDITIONS PRECEDENT

4.1          Conditions to Closing and Funding. The agreement of the Lender to make the Loan requested to be made by it hereunder is subject to the satisfaction, prior to or concurrently with the making of the Loan on the Closing Date, of the following conditions precedent:

(a)       Loan Documents. The Administrative Agent shall have received this Agreement and each other Loan Document, in form and substance reasonably satisfactory to the Lender, executed and delivered by a duly authorized officer of the Borrower.

(b)        Consummation of Acquisition Transaction; Borrower Contracts and Operative Documents. The Administrative Agent shall have received evidence reasonably satisfactory to it that the GE PSA and all other Acquisition Documents shall have been duly executed and delivered, and all of the transactions contemplated by the Acquisition Documents shall have been consummated, in each case in form and substance reasonably satisfactory to the Administrative Agent, and the Administrative Agent shall have received true, correct and complete copies of the Acquisition Documents certified as such by a Responsible Officer of the Borrower. The Administrative Agent shall have received true, correct and complete copies of the Borrower Contracts and the Operative Documents, certified as such by a Responsible Officer of the Borrower.

(c)       Lien Search; Perfection of Security. The Collateral Agent shall have been granted a first priority perfected security interest in all Collateral, and the Administrative Agent shall have received satisfactory copies or evidence, as the case may be, of the following actions in connection with the perfection of the Security:

(i)            completed requests for information or lien search reports, dated no more than five (5) days (or such other time period reasonably acceptable to the Administrative Agent) before the Closing Date, listing all effective UCC financing statements, fixture filings or other filings evidencing a security interest filed in Delaware and any other jurisdictions reasonably requested by the Administrative Agent that name the Borrower, the Pledgor or the Sponsor as a debtor, together with copies of each such UCC financing statement, fixture filing or other filings, which shall show no Liens other than Permitted Liens on the Collateral;

(ii)           UCC financing statements and other filings and recordations in proper form for filing in all jurisdictions that the Administrative Agent may deem necessary or desirable in order to perfect and protect the first priority Liens and security interests created under the Security Documents covering the Collateral, and each such UCC financing statement and other filing or recordation shall be duly filed on or prior to the Closing Date;

(iii)         the original certificate representing all Equity Interests in the Borrower shall have been delivered to the Collateral Agent, in each case together with a duly executed irrevocable proxy and a duly executed transfer power in the forms attached to the Pledge Agreement relating to such Equity Interests; and

(iv)          with respect to the Borrower, the Pledgor, the Sponsor and the Project, evidence of the making (which may be on the Closing Date) of all other actions, recordings and filings of or with respect to the Security Documents delivered pursuant to Section 4.1 that the Administrative Agent may deem necessary or desirable in order to perfect and protect the first-priority Liens created thereunder.

(d)          Indebtedness. The Administrative Agent shall have received evidence reasonably satisfactory to the Administrative Agent that (i) the Lessor has no Indebtedness other than thirty-three million two hundred forty-seven thousand forty-six Dollars and six cents ($33,247,046.06) of Indebtedness under the Lease Indenture, and (ii) the Borrower has no Indebtedness other than the Obligations.

(e)          Liens. The Administrative Agent shall have received evidence reasonably satisfactory to it that (i) the Property of the Borrower, including the Collateral, is free of any Liens other than Permitted Liens, (ii) the Equity Interests in the Borrower are free of any Liens, (iii) the Sponsor Collateral is free of any Liens other than Permitted Liens, and (iv) the Leased Interest is free of any Liens other than the lien held by the Indenture Trustee.

(f)           No Default or Event of Default. No Default or Event of Default shall have occurred and be continuing on the date hereof before or after giving effect to the requested funding of the Loan.

(g)          Approvals. All Governmental Approvals, including the FERC 204 Approval (but, for the avoidance of doubt, excluding the FERC 203 Approval), in form and substance reasonably satisfactory to the Administrative Agent, and all third party approvals necessary or, in the reasonable discretion of the Administrative Agent, advisable in connection with the transactions contemplated hereby and the continuing operations of the Borrower (including in respect of, and after, (i) the consummation of the transactions contemplated by the Acquisition Documents and (ii) the grant by the Sponsor of the security interest in the Owner Participant Interest, as contemplated by the Sponsor Security Agreement) shall have been duly obtained and be in full force and effect, and all applicable waiting periods (other than the appeal period in respect of the FERC 204 Approval) shall have expired without any action being taken or threatened by any competent authority that would restrain, prevent or otherwise impose materially adverse conditions on the financings contemplated hereby. No comment or notice of protest or intervention was filed with FERC by any third party in respect of the FERC 204 Approval prior to or on the due date therefor, and there is no reasonable likelihood that the FERC 204 Approval will be overturned, amended or modified during the applicable appeal period therefor.

(h)          Fees. The Lender and the Administrative Agent shall have received all fees required to be paid, and all expenses required to be reimbursed for which invoices have been presented (including reasonable fees, disbursements and other charges of counsel to the Agents), on or before the Closing Date. Without limiting the generality of the foregoing, all fees required to be paid under the Fee Letters as of the Closing Date shall have been paid in full. All such amounts will be paid with proceeds of the Loan made on the Closing Date and will be reflected in the funding instructions given by the Borrower to the Administrative Agent on or before the Closing Date.

(i)           Closing Certificate. The Administrative Agent shall have received certificates of the Borrower, the Pledgor, and the Sponsor, each dated the Closing Date, substantially in the form of Exhibit A, with appropriate insertions and attachments (including, without limitation, (i) the Organic Documents of each of the Borrower (including the Borrower LLC Agreement, which shall include the Required LLC Provisions), the Pledgor and the Sponsor, (ii) resolutions of each of the Borrower, the Pledgor and the Sponsor (as applicable) in respect of the Loan Documents, the Acquisition Documents and the Transfer, (iii) good standing certificates with respect to the Borrower, the Pledgor and the Sponsor, and (iv) the incumbency and signatures of the Responsible Officers of each of the Borrower, the Pledgor and the Sponsor duly authorized to execute and otherwise act with respect to each Loan Document to which it is party); and

(j)           Financial Statements. The Administrative Agent shall have received accurate and complete copies of the unaudited financial statements of (i) the Borrower as of November 30, 2007 and (ii) the Sponsor for the fiscal quarter ended September 30, 2007, in each case as certified by a Responsible Officer of the Borrower or the Sponsor, as the case may be.

(k)          Legal Opinions. The Administrative Agent shall have received the following executed legal opinions addressed to the Administrative Agent, the Collateral Agent and the Lender and in form and substance reasonably satisfactory to the Administrative Agent:

(i)           the legal opinion of Leonard, Street and Deinard, P.A., counsel to the Borrower, the Pledgor and the Sponsor;

(ii)         the legal opinion of in-house counsel to the Borrower, the Pledgor and the Sponsor; and

(iii)        the legal opinion of Browning, Kaleczyc, Berry & Hoven, P.C., Montana counsel to the Borrower, the Pledgor and the Sponsor.

(l)            PATRIOT Act. The Lender shall have received, sufficiently in advance of the Closing Date, all documentation and other information required by bank regulatory authorities under applicable “know your customer” and anti-money laundering rules and regulations, including without limitation the United States PATRIOT Act.

(m)          Representations and Warranties. Each of the representations and warranties made by each of the Borrower, the Pledgor and the Sponsor in or pursuant to the Loan Documents to which it is party (except to the extent applicable to an earlier date) shall be true and correct in all material respects on and as of the Closing Date.

(n)          FERC Transfer Application. The Borrower and the Sponsor shall have filed with FERC an application requesting FPA section 203 authorization for the Transfer, including request for disclaimer of jurisdiction (or grant of EWG status in the alternative) of the Borrower (the “FERC 203 Approval”), in form and substance reasonably satisfactory to the Administrative Agent.

(o)          Process Agent. The Administrative Agent shall have received, in  form and substance reasonably satisfactory to the Administrative Agent, acceptances from the Process Agent for each of the Borrower, the Pledgor and the Sponsor appointed under Section 9.11(c) and in effect on the Closing Date.

SECTION 5 AFFIRMATIVE COVENANTS

The Borrower hereby agrees that, so long as the Loan or other Obligation is owing to the Lender or any Agent hereunder, the Borrower shall:

5.1          Financial Statements. Furnish to the Administrative Agent (which shall make available such items to the Lender):

(a)           as soon as available, but in any event within 90 days after the end of each fiscal year of the Borrower, copies of (i) the audited balance sheet of the Borrower as at the end of such fiscal year and the related audited statements of income and cash flows of the Borrower for such fiscal year, and (ii) the audited consolidated balance sheet of the Sponsor as at the end of such fiscal year and the related audited consolidated statements of income and cash flows for such year, in each case (i) and (ii) setting forth in comparative form the actual figures as of the end of and for the previous year and reported on without a “going concern” or like qualification or exception, or qualification arising out of the scope of the audit, by Deloitte & Touche or other independent certified public accountants of nationally recognized standing; provided that delivering to the Administrative Agent copies of the Sponsor’s Annual Report on Form 10-K for such period shall satisfy the foregoing requirement (ii) in respect of the Sponsor; and

(b)           as soon as available, but in any event not later than 45 days after the end of each of the first three quarterly periods of each fiscal year of the Borrower, (i) the unaudited balance sheet of the Borrower as at the end of such quarter and the related unaudited statements of income and cash flows of the Borrower for such quarter and the portion of the fiscal year through the end of such quarter, and (ii) the unaudited consolidated balance sheet of Sponsor as at the end of such quarter and the related unaudited consolidated statements of income and cash flows of the Sponsor for such quarter and the portion of the fiscal year through the end of such quarter, in each case (i) and (ii) setting forth in comparative form the actual figures as of the end of and for the corresponding period in the previous year and certified by a Responsible Officer of the Borrower or Sponsor, as the case may be, as being fairly stated in all material respects (subject to normal year end audit adjustments and the absence of footnotes); provided that delivering to the Administrative Agent copies of the Sponsor’s Quarterly Report on Form 10-Q for such period shall satisfy the foregoing requirement (ii) in respect of the Sponsor.

(c)           All such financial statements required to be delivered pursuant to the foregoing Section 5.1(a) or (b) shall be complete and correct in all material respects and be prepared in reasonable detail and in accordance with GAAP applied consistently throughout the periods reflected therein and with prior periods (except as approved by such accountants or officer, as the case may be, and disclosed therein). Information required to be delivered in respect of the Sponsor pursuant to the foregoing Section 5.1(a) and (b) or pursuant to Section 5.2(c) below shall be deemed to have been delivered on the date on which Sponsor

provides notice (including notice by e-mail) to the Administrative Agent (which notice the Administrative Agent will convey promptly to the Lender) that such information has been posted on the SEC website on the Internet at sec.gov/edgar/searches.htm or at another website identified in such notice and accessible by the Lender without charge; provided that (i) such notice may be included in a certificate delivered pursuant to Section 5.2(a) or (b) and (ii) the Sponsor shall deliver paper copies of such information to the Administrative Agent, and the Administrative Agent shall deliver paper copies of such information to the Lender upon request.

5.2          Certificates; Other Information. Furnish to the Administrative Agent (which shall make available such items to the Lender):

(a)       concurrently with the delivery of the financial statements referred to in Section 5.1(a), a certificate of the independent certified public accountants reporting on such financial statements stating that in making the examination necessary therefor no knowledge was obtained of any Default, Event of Default, Lease Event of Default or Indenture Event of Default (or event that with notice or the passage of time, or both, would cause the same), except as specified in such certificate (it being understood that such certificate shall be limited to the items that independent certified public accountants are permitted to cover in such certificates pursuant to the professional standards and customs of their profession);

(b)      concurrently with the delivery of any financial statements pursuant to Section 5.1(a) or 5.1(b), a certificate in the form of Exhibit G of a Responsible Officer of the Borrower stating that, to the best of such Responsible Officer’s knowledge, (x) the Borrower during such period has observed or performed all of its covenants and other agreements, and satisfied every condition, contained in this Agreement and the other Loan Documents to which it is a party to be observed, performed or satisfied by it, and (y) the Lessee during such period has observed or performed all of its covenants and other agreements, and satisfied every condition, contained in the Operative Documents to which it is a party to be observed, performed or satisfied by it, and, in each case, that such Responsible Officer has obtained no knowledge of any Default, Event of Default, Lease Event of Default or Indenture Event of Default (or event that with notice or the passage of time, or both, would cause the same) except as specified in such certificate; and

(c)     promptly, such additional financial and other information as the Lender may, through the Administrative Agent, from time to time reasonably request.

5.3           Payment of Obligations. Pay, discharge or otherwise satisfy at or before maturity or before they become delinquent, as the case may be, all its obligations of whatever nature, material to the Borrower (including the Obligations), except (other than in respect of this Agreement or any other Loan Document) where the amount or validity thereof is currently being contested in good faith and reserves in conformity with GAAP with respect thereto have been provided on the books of the Borrower.

5.4 Conduct of Business and Maintenance of Existence Compliance. (a) (i) Preserve, renew and keep in full force and effect its organizational existence and (ii) take all reasonable action to maintain all rights, privileges and franchises necessary or desirable in the normal conduct of its business, except, in each case, as

otherwise permitted by Section 6.3 and except, in the case of clause (ii), to the extent that failure to do so could not, in the aggregate, reasonably be expected to have a Material Adverse Effect and (b) comply with all Contractual Obligations and Requirements of Law, except to the extent that failure to comply therewith could not, in the aggregate, reasonably be expected to have a Material Adverse Effect.

5.5 Maintenance of Property Insurance. (a) Keep all material Property and systems useful and necessary in its business in good working order and condition, ordinary wear and tear and casualties excepted, and (b) maintain with financially sound and reputable insurance companies insurance on all its material Property in at least such amounts and against at least such risks as are usually insured against in the same general area by companies engaged in the same or a similar business.

5.6 Inspection of Property Books and Records Discussions. (a) Keep proper books of records and account in which full, true and correct entries in conformity with GAAP and all Requirements of Law shall be made of all dealings and transactions in relation to its business and activities and (b) upon reasonable prior notice, permit representatives of the Lender to visit and inspect any of its properties (to the extent practicable) and examine and make abstracts from any of its books and records at any reasonable time and as often as may reasonably be desired and to discuss the business, operations, properties and financial and other condition of the Borrower, with officers and employees, if any, of the Borrower and with its independent certified public accountants.

5.7 Notices. Within five days after the Borrower has knowledge of such event or circumstance under clause (a) below, within ten days after the Borrower has knowledge of such event or circumstance under clause (b), (c) or (f) below, and within thirty days after the Borrower knows or has reason to know of such event or circumstance under clause (d) or (e) below, give notice to the Administrative Agent of:

(a)       the occurrence of any Default or Event of Default or any default or event of default under the Operative Documents

(b)       any (i) default or event of default under any Contractual Obligation of the Borrower or (ii) litigation, investigation or proceeding which may exist at any time between the Borrower and any Governmental Authority, that in either case, if not cured or if adversely determined, as the case may be, could reasonably be expected to have a Material Adverse Effect

(c)       any litigation or proceeding affecting the Borrower or the Sponsor (i) in which the amount involved, in the case of the Borrower, is one million Dollars ($1,000,000) or more, or in the case of the Sponsor, is ten million Dollars ($10,000,000) or more, and in either case is not covered by insurance, (ii) in which injunctive or similar relief is sought which if such relief is obtained could reasonably be expected to have a Material Adverse Effect, or (iii) which directly relates to any Loan Document or Operative Document;

(d)       any of the events described below to the extent such event could reasonably be expected to result in a Material Adverse Effect, together with a duly executed certificate of an Authorized Officer of the Borrower setting forth the details of each such event and the action that the Borrower proposes to take with respect thereto, together with a copy of any

notice or filing from the PBGC, Internal Revenue Service or Department of Labor or that may be required by the PBGC or other U.S. Governmental Authority with respect to each such event:

(i)            any Termination Event with respect to a Plan or a Multiemployer Plan has occurred or will occur that could reasonably be expected to result in any liability to the Borrower;

(ii)           any condition exists with respect to a Plan that presents a material risk of termination of a Plan (other than a standard termination under Section 4041(b) of ERISA) or imposition of an excise tax or other material liability on the Borrower;

(iii)          an application has been filed for a waiver of the minimum funding standard under Section 412 of the Code or Section 302 of ERISA under any Plan of the Borrower or any ERISA Affiliate;

(iv)          the Borrower, the Pledgor, the Lessee or any Plan fiduciary has engaged in a “prohibited transaction,” as defined in Section 4975 of the Code or as described in Section 406 of ERISA, that is not exempt under Section 4975 of the Code and Section 408 of ERISA that could reasonably be expected to result in liability to the Borrower;

(v)           if the Borrower, the Pledgor, the Lessee or any ERISA Affiliate files any disclosure on Form 8-K or otherwise pursuant to the Securities Exchange Act of 1934 in respect of Unfunded Benefit Liabilities under any Plan, the Borrower shall provide promptly, or shall cause the Pledgor, the Lessee or such ERISA Affiliate to provide promptly, as the case may be, a copy of such disclosure to the Administrative Agent, and the Administrative Agent shall provide a copy thereof to the Lender;

(vi)          any condition exists with respect to a Multiemployer Plan that presents a risk of a partial or complete withdrawal (as described in Section 4203 or 4205 of ERISA) from a Multiemployer Plan that could reasonably be expected to result in any liability to the Borrower, the Pledgor or the Lessee;

(vii)        (vii) a “default” (as defined in Section 4219(c)(5) of ERISA) occurs with respect to payments to a Multiemployer Plan and such default could reasonably be expected to result in any liability to the Borrower, the Pledgor or the Lessee;

(viii)        a Multiemployer Plan is in “reorganization” (as defined in Section 418 of the Code or Section 4241 of ERISA) or is “insolvent” (as defined in Section 4245 of ERISA);

(ix)          the Borrower, the Pledgor or the Lessee and/or any of their ERISA Affiliates has incurred any potential withdrawal liability (as defined in accordance with Title IV of ERISA); or

(x)           there is an action brought against the Borrower, the Pledgor or the Lessee or any of their ERISA Affiliates under Section 502 of ERISA with respect to its failure to comply with Section 515 of ERISA.

(xi)          any demand letter from the PBGC notifying the Borrower, the Pledgor or the Lessee of its final decision finding liability and the date by which such liability must be paid, a copy of such letter, together with a duly executed certificate of the president or chief financial officer of the Borrower, the Pledgor or the Lessee, as applicable, setting forth the action the Borrower, the Pledgor or the Lessee proposes to take with respect thereto.

(e)           any notice that any Governmental Authority may deny any application for a material Environmental Permit sought by, or revoke or refuse to renew any material Environmental Permit held by, the Lessee in connection with the Project; and

(f)            any development or event that has had or could reasonably be expected to have a Material Adverse Effect.

Each notice pursuant to this Section shall be accompanied by a statement of a Responsible Officer setting forth details of the occurrence referred to therein and stating what action the Borrower (or, if applicable, the Sponsor) proposes to take with respect thereto. For purposes of this Section 5.7, the Borrower shall be deemed to have knowledge of an event or circumstance if (i) the chief executive officer, president, chief financial officer, treasurer, general counsel or any assistant general counsel of the Borrower or the Sponsor has actual knowledge or receives written notice thereof or (ii) any other officer of the Borrower or the Sponsor charged with responsibility for the matter that is the subject of such notice requirement knows or should have known that such notice was required.

5.8   Environmental Matters. (a) (i) Comply in all respects with, and ensure  compliance in all respects by the Environmental Affiliates, with all Environmental Laws, (ii) keep the Project free of any Lien imposed pursuant to any Environmental Law, (iii) pay or cause to be paid when due and payable by the Borrower any and all costs required in connection with any Environmental Laws, including the cost of identifying the nature and extent of the presence of any Materials of Environmental Concern in, on or about the Project (to the extent applicable to the Borrower or any Environmental Affiliate), and the cost of delineation, management, remediation, removal, treatment and disposal of any such Materials of Environmental Concern, and (iv) use its best efforts to ensure that no Environmental Affiliate takes any action or violates any Environmental Law that could reasonably be expected to result in an Environmental Claim.

(b) To the extent applicable to the Borrower or any Environmental Affiliate, not use or allow the Project to generate, manufacture, refine, produce, treat, store, handle, dispose of, transfer, process or transport Materials of Environmental Concern other than in compliance in all material respects with Environmental Laws.

5.9   Lease Payments. Cause the Lessee to make all rent and other payments  due to the Lessor under the Lease and the other Operative Documents.

5.10 First Priority Ranking. Cause its payment obligations with respect to the Loan to constitute direct senior secured obligations of the Borrower and to rank senior in priority of payment, in right of security and in all other respects to all other Indebtedness of the Borrower.

5.11 Maintenance of Liens. Take or cause to be taken all action necessary or desirable to maintain and preserve the Lien of the Security Documents and the first-ranking priority thereof.

5.12  Certificate of Formation. Observe all of the separateness and other provisions and procedures of its certificate of formation and Borrower LLC Agreement.

5.13  Separateness. Comply at all times with the separateness and other provisions set forth on Schedule 3.22.

5.14 Approvals. Maintain in full force and effect, in the name of the Borrower, all Governmental Approvals and third party approvals necessary or, in the reasonable discretion of the Administrative Agent, advisable in connection with the transactions contemplated hereby.

5.15 Operative Documents. (a) Pay, perform, discharge or otherwise satisfy, and cause the Lessor to pay, perform, discharge or otherwise satisfy, in each case before maturity or before they become delinquent, all of the obligations under the Operative Documents applicable to the Borrower or the Lessor, as the case may be.

(b) Preserve, maintain and enforce all of its interests, rights, remedies and benefits, and cause the Lessor to preserve, maintain and enforce all of the Lessor’s interests, rights, remedies and benefits, under the Operative Documents.

5.16 Taxes. (a) File or cause to be filed, completely and on a timely basis, all tax returns that are required to be filed and will pay or cause to be paid, completely and on a timely basis, all taxes shown to be due and payable on said returns or on any assessments made against it or any of its Property and all other taxes, fees or charges imposed on it or any of its Property by any Governmental Authority (other than any amount the validity of which is currently being contested in good faith and with respect to which reserves in conformity with GAAP have been provided on the books of the Borrower), and (b) not make any election or take any other action to be taxable as a corporation for any federal, state or local tax purpose.

5.17 Transfer. (a) Use commercially reasonable efforts to obtain, and cause the Sponsor to use commercially reasonable efforts to obtain, (i) the FERC 203 Approval and (ii) the approval of the Indenture Trustee in respect of the Transfer as described in the Omnibus Amendment, each in form and substance satisfactory to the Administrative Agent, and (b) if the approvals described in clause (a) are obtained, cause the Transfer to be consummated within thirty (30) days after the date of such approvals, in form and substance reasonably satisfactory to the Administrative Agent, and deliver evidence satisfactory to the Administrative Agent of the same.

5.18 Further Assurances. From time to time execute and deliver, or cause to be executed and delivered, such additional instruments, certificates or documents, and take such actions, as the Administrative Agent may reasonably request for the purposes of implementing or effectuating the provisions of this Agreement and the other Loan Documents. Upon the exercise by the Administrative Agent or the Lender of any power, right, privilege or remedy pursuant to

this Agreement or the other Loan Documents which requires any consent, approval, recording, qualification or authorization of any Governmental Authority, the Borrower will execute and deliver, or will cause the execution and delivery of, all applications, certifications, instruments and other documents and papers that the Administrative Agent or the Lender may be required to obtain from the Borrower forsuchgovernmental consent, approval, recording, qualification or

authorization.

SECTION 6 NEGATIVE COVENANTS

The Borrower hereby agrees that, so long as the Loan or other Obligation is owing to the Lender or any Agent hereunder, the Borrower shall not, directly or indirectly, and shall cause the Lessor not to, directly or indirectly:

6.1 Incurrence of Indebtedness. Create, incur, issue, assume, guarantee or otherwise become directly or indirectly liable, contingently or otherwise, with respect to (collectively, “Incur”) any Indebtedness (other than, in the case of the Lessor, the Indebtedness of the Lessor described in Section 4.1(d)).

6.2 Limitation on Liens. Create, incur, assume or suffer to exist any Lien upon any of its Property (including the Owner Participant Interest and the other Collateral), whether now owned or hereafter acquired, except for (such liens, “Permitted Liens”):

(a)          Liens for taxes not yet due or that are being contested in good faith, provided that adequate reserves with respect thereto are maintained on the books of the Borrower, in conformity with GAAP;

(b)            any attachment or judgment Lien not constituting an Event of Default; and

(c)            in the case of the Lessor, such Liens incurred by the Lessor pursuant to the express terms of the Operative Documents.

6.3 Limitation on Fundamental Changes. Enter into any merger, consolidation or amalgamation, or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution) or issue any Equity Interests to any Person other than the Pledgor.

6.4 Limitation on Disposition of Property. Dispose of any of its Property or business, whether now owned or hereafter acquired.

6.5 Limitation on Restricted Investments. Make any Restricted Investments; provided, however, that this Section 6.5 shall not restrict the making of any distributions by the Borrower to its owners.

6.6 Limitation on Transactions with Affiliates. Other than (a) the Operative Documents in effect as of the date hereof, or (b) the Transfer, enter into any transaction, including, without limitation, any purchase, sale, lease or exchange of Property, the rendering of any service or the payment of any management, advisory or similar fees, with any Affiliate unless such transaction is upon fair and reasonable terms no less favorable to the Borrower than it

would obtain in a comparable arm’s length transaction with a Person that is not an Affiliate.

6.7 Limitation on Changes in Fiscal Periods. Permit the fiscal year of the Borrower or the Lessor to end on a day other than December 31 or change the Borrower’s or the Lessor’s method of determining fiscal quarters.

6.8 Limitation on Negative Pledge Clauses. Enter into or suffer to exist or become effective any agreement that prohibits or limits the ability of the Borrower or the Lessor, as the case may be, to create, incur, assume or suffer to exist any Lien upon any of its Property or revenues, whether now owned or hereafter acquired, to secure the Obligations other than (a) this Agreement and the other Loan Documents, and (b) the Operative Documents to which it is a party.

6.9 Limitation on Lines of Business. Enter into any business except for (a) in the case of the Borrower, the ownership of the Owner Participant Interest upon consummation of the Transfer and the other Property that Borrower owns as of the date hereof, and actions incidental to such ownership and (b) in the case of the Lessor, as provided by the express terms of the Operative Documents.

6.10 Limitation on Contracts. Enter into any Contractual Obligations other than (a) in the case of the Borrower, this Agreement and the other Loan Documents, the Borrower Contracts and the Operative Documents to which it is a party or to which it will become a party as a result of the Transfer, and (b) in the case of the Lessor, the Operative Documents to which it is a party.

6.11 Operative Documents. Amend, modify, supplement, terminate or waive, or permit the amendment, modification, supplement, termination or waiver of, any Operative Document to which the Borrower or the Lessor, as the case may be, is a party other than as permitted by the express terms of the Loan Documents.

6.12 No Subsidiaries. Create or acquire any Subsidiary or enter into any partnership or joint venture.

6.13 ERISA. (a) Engage in, or permit the Lessee, the Lessor, the Sponsor or the Pledgor to engage in, any prohibited transactions under Section 406 of ERISA or under Section 4975 of the Code, (b) incur any obligation or liability in respect of any Plan (other than the Montana Pension Plan or the South Dakota Pension Plan), Multiemployer Plan or employee welfare benefit plan providing post-retirement welfare benefits (other than a plan providing continuation coverage under Part 6 of Title I of ERISA), (c) with respect to the Montana Pension Plan, incur any Unfunded Benefit Liabilities exceeding one hundred million Dollars ($100,000,000), or (d) with respect to the South Dakota Pension Plan, incur Unfunded Benefit Liabilities exceeding fifteen million Dollars ($15,000,000).

6.14 Environmental Matters. Permit (i) any underground storage tanks to be located on the Project Site, (ii) any asbestos to be contained in or form part of any building, building component, structure or office space at the Project Site, (iii) any polychlorinated biphenyls (PCBs) to be used or stored on any property owned or leased by the Borrower or the Lessor or (iv) any other Materials of Environmental Concern to be used, stored or otherwise be

present at the Project Site, except in material compliance with applicable Environmental Laws.

6.15 Regulatory Status. Take any action which, or fail to take any action the failure of which, would cause Borrower or the Lender to become subject to regulation under the Federal Power Act, PUHCA or state laws regulating activities of electric utilities, including rate or other financial or organizational regulation.

6.16 Margin Stock Regulations. Directly or indirectly apply any part of the proceeds of the Loan or any proceeds it receives under the Operative Documents to the “buying,” “purchasing” or “carrying” of any margin stock within the meaning of Regulations T, U or X of the Board, or any regulations, interpretations or rulings thereunder.

SECTION 7 EVENTS OF DEFAULT

If any of the following events shall occur and be continuing:

(a)      the Borrower shall fail to pay any principal of the Loan when due in accordance with the terms hereof; or the Borrower shall fail to pay any interest on the Loan or any other amount payable hereunder or under any other Loan Document, within five days after any such interest or other amount becomes due in accordance with the terms hereof or thereof; or

(b)      any representation or warranty made or deemed made by the Borrower herein or in any other Loan Document or that is contained in any certificate, document or financial or other statement furnished by it at any time under or in connection with this Agreement or any such other Loan Document shall prove to have been inaccurate in any material respect on or as of the date made or deemed made or furnished; or

(c)       the Borrower shall default in the observance or performance of any agreement contained in clause (i) or (ii) of Section 5.4(a), 5.9, 5.10, 5.11, 5.12, 5.15 or Section 6 of this Agreement; or

(d)      the Borrower shall default in the observance or performance of any other agreement contained in this Agreement or any other Loan Document, other than as provided in paragraphs (a) through (c) of this Section, and such default shall continue unremedied for a period of 30 days; or

(e)       a Lease Event of Default or Indenture Event of Default shall have occurred and be continuing; or

(f)       (i) the Borrower shall commence any case, proceeding or other action (A) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (B) seeking appointment of a receiver, trustee, custodian, conservator or other similar official for it or for all or any substantial part of its assets, or the Borrower shall make a general assignment for the benefit of its creditors; or (ii) there shall be commenced against the Borrower any case, proceeding or other action of a nature referred to in

clause (i) above that (A) results in the entry of an order for relief or any such adjudication or appointment or (B) remains undismissed, undischarged or unbonded for a period of 60 days; or (iii) there shall be commenced against the Borrower any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its assets that results in the entry of an order for any such relief that shall not have been vacated, discharged, or stayed or bonded pending appeal within 60 days from the entry thereof; or (iv) the Borrower shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clause (i), (ii), or (iii) above; or (v) the Borrower shall generally not, or shall be unable to, or shall admit in writing its inability to, pay its debts as they become due; or

(g)      (i) Any Termination Event shall occur, (ii) any Plan shall incur an “accumulated funding deficiency” (as defined in Section 412 of the Code or Section 302 of ERISA), whether or not waived, (iii) the Borrower shall engage in a transaction that is prohibited under Section 4975 of the Code or Section 406 of ERISA, (iv) the Borrower or any of its ERISA Affiliates shall fail to pay when due any amount it has become liable to pay to the PBGC, any Plan or a trust established under Title IV of ERISA, (v) a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that a Plan must be terminated or have a trustee appointed to administer it, (vi) the Borrower or any of its ERISA Affiliates shall suffer a partial or complete withdrawal from a Multiemployer Plan or is in “default” (as defined in Section 4219(c)(5) of ERISA) with respect to payments to a Multiemployer Plan, (vii) a proceeding shall be instituted against the Borrower, the Pledgor or the Lessee to enforce Section 515 of ERISA, (viii) the aggregate amount of the then “current liability” (as defined in Section 41 2(l)(7) of the Code, as amended) of all accrued benefits under such Plan or Plans (other than the Montana Pension Plan and the South Dakota Pension Plan) shall exceed the then current value of the assets allocable to such benefits by more than five hundred thousand Dollars ($500,000) at such time, (ix) with respect to the Montana Pension Plan, the aggregate funded ratio of such plan (value of assets over current liabilities as defined in Section 412(l)(7) of the Code, as amended) shall decline by more than twenty-five percent (25%) from the aggregate funded ratio as of December 31, 2007, (x) with respect to the South Dakota Pension Plan, the aggregate funded ratio of such plan (value of assets over current liabilities as defined in Section 412(l)(7) of the Code, as amended) shall decline by more than twenty-five (25%) from the aggregate funded ratio as of December 31, 2007, or (xi) any other event or condition shall occur or exist with respect to any Plan that would subject the Borrower to any material tax, material penalty or other material liability; or

(h)      one or more judgments or decrees shall be entered against the Borrower involving for the Borrower a liability (to the extent not covered by insurance as to which the relevant insurance company has acknowledged coverage) of two million five hundred thousand Dollars ($2,500,000) or more, and all such judgments or decrees shall not have been vacated, discharged, stayed or bonded pending appeal within 30 days from the entry thereof; or

(i)      any Change of Control shall occur; or

(j)       any Security Document or financing statement shall for any reason (other than pursuant to the terms thereof) (i) cease to create a valid and perfected first priority Lien on and security interest in the Collateral purported to be covered thereby or (ii) fail to provide the Collateral Agent with rights, titles, interests remedies, powers or privileges intended

to be created and provided thereby or any of such rights, titles, interests, remedies, powers or privileges shall cease to be in full force and effect; or

(k)      any portion of the Collateral (other than a portion that is immaterial) shall be damaged, seized or appropriated; or

(l)       (i) any Governmental Approval the loss of which could reasonably be expected to result in a Material Adverse Effect shall cease to be in full force and effect, or (ii) any Environmental Approval is the subject of an Environmental Claim;

(m)      any Environmental Claim shall have occurred with respect to the Borrower, the Project or any Environmental Affiliate, (B) any release, Threat of Release, emission, discharge or disposal of any Material of Environmental Concern shall occur, and such event could reasonably be expected to form the basis of an Environmental Claim against the Borrower, the Project or any Environmental Affiliate, or (C) any violation or alleged violation of any Environmental Law or Environmental Approval shall occur that would reasonably result in an Environmental Claim against the Borrower or the Project or, to the extent the Borrower may have liability, any Environmental Affiliate that, in the case of any of Section 7(m)(A), (B) or (C), could reasonably be expected to result in liability for the Borrower in an amount greater than five hundred thousand Dollars ($500,000) for any single claim or one million Dollars ($1,000,000) for all such claims during any twelve (12) month period or could otherwise reasonably be expected to result in a Material Adverse Effect; provided that such an occurrence shall not constitute an Event of Default if (x) the estimated liability associated therewith is reasonably expected to be less than two million five hundred thousand Dollars ($2,500,000) net of any insurance proceeds that have actually been paid to, and received by, the Borrower or the Collateral Agent as loss payee in connection therewith, or as reduced by taking into account any amounts that the Borrower demonstrates, to the reasonable satisfaction of the Administrative Agent, within ten (10) Business Days following such occurrence, will be available as and when needed, without conditions, from sources (including insurance proceeds and documented voluntary equity contributions made to the Borrower for the purpose of covering such costs) other than proceeds of the Loan, to cover such costs (and such occurrence could not otherwise reasonably be expected to result in a Material Adverse Effect) and, within ninety (90) days of such occurrence, such liability is reduced below the threshold set forth above this proviso from sources other than Loan proceeds, (y) there have been no more than two (2) occurrences of the nature described in this Section 7(m) during the immediately preceding twelve (12) month period and (z) during such cure period, the Borrower undertakes any remedial or responsive actions then required to be undertaken under applicable Law;

then, and in any such event, (A) if such event is an Event of Default specified in clause or (ii) of paragraph (f) above with respect to the Borrower, automatically the Loan hereunder (with accrued interest thereon) and all other amounts owing under this Agreement and the other Loan Documents shall immediately become due and payable, and (B) if such event is any other Event of Default, with the consent of the Required Lenders, the Administrative Agent may, or upon the request of the Required Lenders, the Administrative Agent shall, take one or more of the following actions: (i) by notice to the Borrower, declare the Loan hereunder (with accrued interest thereon) and all other amounts owing under this Agreement and the other Loan Documents to be due and payable forthwith, whereupon the same shall immediately become due and payable, (ii) terminate the Lease pursuant to the terms of the Lease Termination

Agreement and (iii) exercise any or all remedies provided for under this Agreement or the other Loan Documents.

SECTION 8 THE AGENTS

8.1 Appointment. (a) The Lender hereby irrevocably designates and appoints the Agents as its agents under this Agreement and the other Loan Documents, and the Lender irrevocably authorizes each Agent, in such capacity, to take such action on its behalf under the provisions of this Agreement and the other Loan Documents and to exercise such powers and perform such duties as are expressly delegated to such Agent by the terms of this Agreement and the other Loan Documents, together with such other powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary elsewhere in this Agreement, no Agent shall have any duties or responsibilities, except those expressly set forth herein, or any fiduciary relationship with the Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against any Agent.

(b) The Lender hereby irrevocably appoints WestLB as its Collateral Agent under and for purposes of each Loan Document to which it is a party. WestLB hereby accepts this appointment and agrees to act as the Collateral Agent for the Secured Parties in accordance with the terms of this Agreement. The Lender hereby irrevocably appoints and authorizes the Collateral Agent to act as its agent for purposes of acquiring, holding and enforcing any and all Liens on Collateral granted by the Borrower or the Pledgor to the Collateral Agent in order to secure any of the Obligations, together with such powers and discretion as are reasonably incidental thereto. In this connection any co-agents, sub-agents and attorneys-in-fact appointed by the Collateral Agent pursuant to Section 8.2 for purposes of holding or enforcing any Lien on the Collateral (or any portion thereof) granted under the Security Documents, or for exercising any rights and remedies thereunder at the direction of the Collateral Agent, as the case may be, shall be entitled to the benefits of all provisions of this Section 8 and Section 9 as though such co-agents, sub-agents and attorneys-in-fact were the Collateral Agent under the Loan Documents. Notwithstanding any provision to the contrary contained elsewhere in any Loan Document, the Collateral Agent shall not have any duties or responsibilities except those expressly set forth herein or in the other Loan Documents to which the Collateral Agent is party.

8.2 Delegation of Duties. Each Agent may execute any of its duties under this Agreement and the other Loan Documents by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. No Agent shall be responsible for the negligence or misconduct of any agents or attorneys-in fact selected by it with reasonable care.

8.3           Exculpatory Provisions. Neither any Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or affiliates shall be (i) liable for any action lawfully taken or omitted to be taken by it or such Person under or in connection with this Agreement or any other Loan Document (except to the extent that any of the foregoing are found by a final and nonappealable decision of a court of competent jurisdiction to have resulted from its or such Person’s own gross negligence or willful misconduct) or (ii) responsible in any manner to

the Lender for any recitals, statements, representations or warranties made by the Borrower or any officer thereof contained in this Agreement or any other Loan Document or in any certificate, report, statement or other document referred to or provided for in, or received by the Agents under or in connection with, this Agreement or any other Loan Document or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document or for any failure of the Borrower to perform its obligations hereunder or thereunder. The Agents shall not be under any obligation to the Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the properties, books or records of the Borrower.

8.4 Reliance by Agents. Each Agent shall be entitled to rely, and shall be fully protected in relying, upon any instrument, writing, resolution, notice, consent, certificate, affidavit, letter, telecopy, telex or teletype message, statement, order or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to the Borrower), independent accountants and other experts selected by such Agent. The Agents may deem and treat the payee of any Note as the owner thereof for all purposes unless such Note shall have been transferred in accordance with Section 9.6 and all actions required by such Section in connection with such transfer shall have been taken. Each Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document, or to institute any legal proceedings arising out of or in connection with this Agreement or any other Loan Document, unless it shall first receive such advice or concurrence of the Required Lenders (or, if so specified by this Agreement, all Lenders or any other instructing group of Lenders specified by this Agreement) as it deems appropriate or it shall first be indemnified to its satisfaction by the Lender against any and all liability and expense that may be incurred by it by reason of taking or continuing to take any such action or instituting any such legal proceeding. Each Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement and the other Loan Documents in accordance with a request of the Required Lenders (or, if so specified by this Agreement, all Lenders or any other instructing group of Lenders specified by this Agreement), and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Lenders and all future holders of the Loan.

8.5 Notice of Default. No Agent shall be deemed to have knowledge or notice of the occurrence of any Default or Event of Default hereunder unless such Agent shall have received notice from the Lender or the Borrower referring to this Agreement, describing such Default or Event of Default and stating that such notice is a “notice of default”. In the event that the Administrative Agent shall receive such a notice, the Administrative Agent shall give notice thereof to the Lenders. The Administrative Agent shall take such action with respect to such Default or Event of Default as shall be reasonably directed by the Required Lenders (or, if so specified by this Agreement, all Lenders or any other instructing group of Lenders specified by this Agreement); provided that unless and until the Administrative Agent shall have received such directions, the Administrative Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interests of the Lender.

8.6 Non-Reliance on Agents and Other Lenders. The Lender expressly acknowledges that neither any of the Agents nor any of their respective officers, directors, employees, agents, attorneys-in-fact or affiliates have made any representations or warranties to it and that no act by any Agent hereafter taken, including any review of the affairs of the Borrower or any affiliate of the Borrower, shall be deemed to constitute any representation or warranty by any Agent to the Lender. The Lender represents to the Agents that it has, independently and without reliance upon any Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, operations, property, financial and other condition and creditworthiness of the Borrower and its affiliates and made its own decision to make its Loan hereunder and enter into this Agreement. The Lender also represents that it will, independently and without reliance upon any Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigation as it deems necessary to inform itself as to the business, operations, property, financial and other condition and creditworthiness of the Borrower and its affiliates. Except for notices, reports and other documents expressly required to be furnished to the Lender by the Administrative Agent hereunder, no Agent shall have any duty or responsibility to provide the Lender with any credit or other information concerning the business, operations, property, condition (financial or otherwise), prospects or creditworthiness of the Borrower or any affiliate of the Borrower that may come into the possession of such Agent or any of its officers, directors, employees, agents, attorneys-in-fact or affiliates.

8.7 Indemnification. The Lender agrees to indemnify each Agent in its capacity as such (to the extent not reimbursed by the Borrower and without limiting the obligation of the Borrower to do so), ratably according to their respective Aggregate Exposure Percentages in effect on the date on which indemnification is sought under this Section 8.7 (or, if indemnification is sought after the date upon which the Loan shall have been paid in full, ratably in accordance with such Aggregate Exposure Percentages immediately prior to such date), for, and to save each Agent harmless from and against, any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever that may at any time (including, without limitation, at any time following the payment of the Loan) be imposed on, incurred by or asserted against such Agent in any way relating to or arising out of, the Commitments, this Agreement, any of the other Loan Documents or any documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or any action taken or omitted by such Agent under or in connection with any of the foregoing; provided that the Lender shall not be liable for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements that are found by a final and nonappealable decision of a court of competent jurisdiction to have resulted from such Agent’s gross negligence or willful misconduct. The agreements in this Section 8.7 shall survive the payment of the Loan and all other amounts payable hereunder.

8.8 Agent in Its Individual Capacity. Each Agent and its affiliates may make loans to, accept deposits from and generally engage in any kind of business with the Borrower as though such Agent were not an Agent. With respect to its Loan made or renewed by it, each Agent shall have the same rights and powers under this Agreement and the other Loan

Documents as the Lender and may exercise the same as though it were not an Agent, and the terms “Lender” and “Lenders” shall include each Agent in its individual capacity. Successor Agents. (a) The Administrative Agent may resign as Administrative Agent upon 10 days’ notice to the Lender and the Borrower. If the Administrative Agent shall resign as Administrative Agent under this Agreement and the other Loan Documents, then the Required Lenders shall appoint from among the Lender a successor agent for the Lender, which successor agent shall (unless an Event of Default under Section 7(a) or Section 7(f) with respect to the Borrower shall have occurred and be continuing) be subject to approval by the Borrower (which approval shall not be unreasonably withheld or delayed), whereupon such successor agent shall succeed to the rights, powers and duties of the Administrative Agent, and the term “Administrative Agent” shall mean such successor agent effective upon such appointment and approval, and the former Administrative Agent’s rights, powers and duties as Administrative Agent shall be terminated, without any other or further act or deed on the part of such former Administrative Agent or any of the parties to this Agreement or any holders of the Loan. If no successor agent has accepted appointment as Administrative Agent by the date that is 10 days following a retiring Administrative Agent’s notice of resignation, the retiring Administrative Agent’s resignation shall nevertheless thereupon become effective, and the Lender shall assume and perform all of the duties of the Administrative Agent hereunder until such time, if any, as the Required Lenders appoint a successor agent as provided for above.

(b) After any retiring Agent’s resignation as Agent, the provisions of this Section 8 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement and the other Loan Documents.

8.9 Collateral Agent May File Proofs of Claim. (a) In case of the pendency of any insolvency or liquidation proceeding relative to the Borrower or the Pledgor (including any event relative to the Borrower described in Section 7(f)), the Collateral Agent (irrespective of whether the principal of the Loan shall then be due and payable as herein expressed or by declaration or otherwise and irrespective of whether the Collateral Agent or the Lender shall have made any demand on the Borrower) shall be entitled and empowered, but shall not be obligated, by intervention in such proceeding or otherwise:

(i)      to file and prove a claim for the whole amount of the principal and interest owing and unpaid in respect of the Loan and all other Obligations that are owing and unpaid and to file such other documents as may be necessary or advisable in order to have the claims of the Lender (including any claim for the reasonable compensation, expenses, disbursements and advances of the Lender and its agents and counsel and all other amounts due the Lender under Section 2.4, 2.14 and Section 9.5) allowed in such judicial proceeding; and

(ii)     to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same.

(b)          Any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by the Lender to make such payments to the Collateral Agent and, in the event that the Collateral Agent consents to the making of such payments directly to the Lender,

to pay to the Collateral Agent any amount due for the reasonable compensation, expenses, disbursements and advances of the Agents and their respective agents and counsel, and any other amounts due the Agents under Section 2.4, Section 2.14 and Section 9.5.

(c)          Nothing contained herein shall be deemed to authorize the Collateral Agent to authorize or consent to or accept or adopt on behalf of the Lender any plan of reorganization, arrangement, adjustment or composition affecting the Obligations or the rights of the Lender or to authorize the Collateral Agent to vote in respect of the claim of any Lender in any such proceeding.

8.10 Collateral Matters. (a) The Lender irrevocably authorizes the Collateral Agent to release any Lien on any property granted to or held by the Collateral Agent under any Loan Document for the benefit of the Lender (i) upon the occurrence of the date on which all amounts payable in respect of the Obligations have been irrevocably and indefeasibly paid in full in cash (other than obligations under the Loan Documents that by their terms survive and with respect to which no claim has been made by the Lender), (ii) if approved, authorized or ratified in writing in accordance with Section 9.1 or (iii) as permitted pursuant to the terms of the Loan Documents.

(b)       Upon request by the Collateral Agent at any time and from time to time, the Lender will confirm in writing the Collateral Agent’s authority to release its interest in particular types or items of property pursuant to this Section 8.11. In each case as specified in this Section 8.11, the Collateral Agent will, at the Borrower’s expense, execute and deliver to the Borrower or the Pledgor, as the case may be, such documents as such Person may reasonably request to evidence the release of such item of Collateral from the assignment and security interest granted under the Security Documents in accordance with the terms of the Loan Documents and this Section 8.11.

(c)       Except for the safe custody of any Collateral in its possession and the accounting for moneys actually received by it hereunder or under any of the other Loan Documents to which it is party, the Collateral Agent shall have no duty as to any Collateral, as to ascertaining or taking action on other matters relative to any Collateral, whether or not the Collateral Agent is deemed to have knowledge of such matters, or as to taking any necessary steps to preserve rights against any parties or any other rights pertaining to any Collateral (including the filing of UCC continuation statements). The Collateral Agent shall be deemed to have exercised appropriate and due care in the custody and preservation of any Collateral in its possession if such Collateral is accorded treatment substantially equal to that which other collateral agents accord similar property.

8.11 The Lead Arranger. The Lead Arranger, in its capacity as such, shall have no duties or responsibilities, and shall incur no liability, under this Agreement and the other Loan Documents.

SECTION 9 MISCELLANEOUS

9.1 Amendments and Waivers. Neither this Agreement or any other Loan Document, nor any terms hereof or thereof, may be amended, supplemented or modified

except in accordance with the provisions of this Section 9.1. The Required Lenders and the Borrower may, or (with the written consent of the Required Lenders) the Administrative Agent and the Borrower may, from time to time, (a) enter into written amendments, supplements or modifications hereto and to the other Loan Documents (including amendments and restatements hereof or thereof) for the purpose of adding any provisions to this Agreement or the other Loan Documents or changing in any manner the rights of the Lender or of the Borrower hereunder or thereunder or (b) waive, on such terms and conditions as may be specified in the instrument of waiver, any of the requirements of this Agreement or the other Loan Documents or any Default or Event of Default and its consequences; provided, however, that no such waiver and no such amendment, supplement or modification shall, without the consent of the requisite Lender specified below:

(i)            forgive the principal amount or extend the Maturity Date of the Loan, reduce the stated rate of any interest or fee payable under this Agreement (except in connection with the waiver of applicability of any post-default increase in interest rates (which waiver shall be effective with the consent of the Required Lenders)) or extend the scheduled date of any payment thereof, in each case without the consent of each Lender directly affected thereby;

(ii)           amend, modify or waive any provision of this Section or reduce any percentage specified in the definition of Required Lenders, consent to the assignment or transfer by the Borrower of any of its rights and obligations under this Agreement and the other Loan Documents, in each case without the consent of all the Lenders;

(iii)          amend, modify or waive any condition precedent to closing and funding of the Loan set forth in Section 4 (including, without limitation, the waiver of an existing Default or Event of Default required to be waived in order for the Loan to be made) without the consent of the Required Lenders;

(iv)          reduce the percentage specified in the definition of Required Lenders without the consent of all of the Lenders;

(v)            amend, modify or waive any provision of Section 8, or any other provision affecting the rights, duties or obligations of any Agent, without the consent of any Agent directly affected thereby;

(vi)          amend, modify or waive any provision of Section 2.11 without the consent of each Lender directly affected thereby; or

(vii)         (vii) impose restrictions on assignments and participations that are more restrictive than, or additional to, those set forth in Section 9.6 without the consent of all the Lenders.

Any such waiver and any such amendment, supplement or modification shall apply equally to each of the Lenders and shall be binding upon the Borrower, the Lenders, the Agents and all future holders of the Loan. In the case of any waiver, the Borrower, the Lender and the Agents shall be restored to their former position and rights hereunder and under the other Loan

Documents, and any Default or Event of Default waived shall be deemed to be cured and not continuing; but no such waiver shall extend to any subsequent or other Default or Event of Default, or impair any right consequent thereon. Any such waiver, amendment, supplement or modification shall be effected by a written instrument signed by the parties required to sign pursuant to the foregoing provisions of this Section; provided, that delivery of an executed signature page of any such instrument by facsimile or email transmission shall be effective as delivery of a manually executed counterpart thereof.

9.2         Notices. (a) All notices, requests and demands to or upon the respective parties hereto to be effective shall be in writing (including by telecopy), and, unless otherwise expressly provided herein, shall be deemed to have been duly given or made when delivered, or three Business Days after being deposited in the mail, postage prepaid, or, in the case of telecopy notice, when received, addressed (i) in the case of the Borrower and the Agents, as follows, (ii) in the case of the Lender, as set forth in an administrative questionnaire delivered to the Administrative Agent or, in the case of a Lender which becomes a party to this Agreement pursuant to a Lender Assignment Agreement, in such Lender Assignment Agreement, or (iii) in the case of any party, to such other address as such party may hereafter notify to the other parties hereto:

The Borrower:	Colstrip Lease Holdings, LLC
	3010 West 69th Street
	Sioux Falls, South Dakota 57108
	Attention:	c/o Paul Evans,
		Treasurer, NorthWestern Corporation
	Facsimile:	(605) 978-2845
	Telephone:	(605) 978-2851

With copies to:	NorthWestern Energy
	600 Market Road
	Huron, SD 57350
	Attention:	Donna Haeder,
		Director of Risk Management
	Facsimile:	(605) 353-8211
	Telephone:	(605) 353-7555

and	NorthWestern Corporation
	3010 West 69th Street
	Sioux Falls, South Dakota 57108
	Attention:	Lori Urinko
		Law Department
	Facsimile:	(605) 978-2910
	Telephone:	(605) 978-2830

The Administrative Agent:	WestLB AG, New York Branch
	1211 Avenue of the Americas
	New York, NY 10036
	Attention:	Andrea Bailey
	Facsimile:	(212) 302-7946
	Telephone:	212-597-1158
	E-mail: NYC_Agency_Services@WestLB.com

The Collateral Agent:	WestLB AG, New York Branch
	1211 Avenue of the Americas
	New York, NY 10036
	Attention:	Andrea Bailey
	Facsimile:	(212) 302-7946
	Telephone:	212-597-1158
	E-mail: NYC_Agency_Services@WestLB.com

provided that any notice, request or demand to or upon the Agent or the Lender shall not be effective until received.

(b)            Notices and other communications to the Lender hereunder may be delivered or furnished by electronic communications pursuant to procedures approved by the Administrative Agent; provided that the foregoing shall not apply to notices pursuant to Section 2 unless otherwise agreed by the Administrative Agent and the Lender. The Administrative Agent or the Borrower may, in its reasonable discretion, agree to accept notices and other communications to it hereunder by electronic communications pursuant to procedures approved by it; provided that approval of such procedures may be limited to particular notices or communications.

(c)            So long as WestLB is the Administrative Agent, the Borrower hereby agrees that it will provide to the Administrative Agent all information, documents and other materials that it is obligated to furnish to the Administrative Agent pursuant to the Loan Documents, including all notices, requests, financial statements, financial and other reports, certificates and other information materials, but excluding any such communication that (i) relates to the making of the Loan by the Lender, (ii) relates to the payment of any principal or other amount due under this Agreement prior to the scheduled date therefor, (iii) provides notice of any Default or Event of Default or (iv) is required to be delivered to satisfy any condition precedent to the Closing Date or the making of the Loan by the Lender (all such non-excluded communications being referred to herein collectively as “Communications”), by transmitting the Communications in an electronic/soft medium in a format acceptable to the Administrative Agent to ny_agency services@westlb.com. The Administrative Agent agrees that the receipt of the Communications by the Administrative Agent at such e-mail address shall constitute effective delivery of the Communications to the Administrative Agent for purposes of the Loan Documents. In addition, the Borrower agrees to continue to provide the

Communications to the Administrative Agent in the manner specified in the Loan Documents but only to the extent requested by the Administrative Agent.

9.3 No Waiver; Cumulative Remedies. No failure to exercise and no delay in exercising, on the part of any Agent or the Lender, any right, remedy, power or privilege hereunder or under the other Loan Documents shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law.

9.4 Survival of Representations and Warranties. All representations and warranties made herein, in the other Loan Documents and in any document, certificate or statement delivered pursuant hereto or in connection herewith shall survive the execution and delivery of this Agreement and the making of the Loan and other extensions of credit hereunder.

9.5 Payment of Expenses. The Borrower agrees (a) to pay or reimburse the Agents for all their reasonable out of pocket costs and expenses incurred in connection with the syndication of the credit facility contemplated hereunder (other than fees payable to syndicate members) and the development, preparation and execution of, and any amendment, supplement or modification to, this Agreement and the other Loan Documents and any other documents prepared in connection herewith or therewith, and the consummation and administration of the transactions contemplated hereby and thereby, including, without limitation, the reasonable fees and disbursements and other charges of counsel to the Administrative Agent and the charges of Intralinks, (b) to pay or reimburse the Agents and, if incurred during the continuance of an Event of Default, the Lender for all its costs and expenses incurred in connection with the enforcement or preservation of any rights under this Agreement, the other Loan Documents and any other documents prepared in connection herewith or therewith, including, without limitation, the fees and disbursements of counsel (including the allocated fees and disbursements and other charges of in-house counsel) to the Lender and of counsel to the Agents, (c) to pay, indemnify, or reimburse the Lender and the Agents for, and hold the Lender and the Agents harmless from, any and all recording and filing fees and any and all liabilities with respect to, or resulting from any delay in paying, stamp, excise and other taxes, if any, which may be payable or determined to be payable in connection with the execution and delivery of, or consummation or administration of any of the transactions contemplated by, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, this Agreement, the other Loan Documents and any such other documents, and (d) to pay, indemnify or reimburse the Lender, each Agent, their respective affiliates, and their respective officers, directors, trustees, employees, advisors, agents and controlling persons (each, an “Indemnitee”) for, and hold each Indemnitee harmless from and against any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever incurred by an Indemnitee or asserted against any Indemnitee by any third party or by the Borrower arising out of, in connection with, or as a result of (i) the execution or delivery of this Agreement, any other Loan Document or any agreement or instrument contemplated hereby or thereby, the performance by the parties hereto or thereto of their respective obligations hereunder or thereunder or the consummation of the transactions contemplated hereby or thereby, (ii) the Loan or the use or proposed use of the proceeds therefrom, (iii) any actual or alleged

presence or release of Materials of Environmental Concern on or from any property owned, occupied or operated by the Borrower or the Lessor, or any Environmental Claim related in any way to the Borrower or the Lessor or any of their respective properties, or (iv) any actual or prospective claim, litigation, investigation or proceeding relating to any of the foregoing, whether based on contract, tort or any other theory, whether brought by any third party or by the Borrower, and regardless of whether any Indemnitee is a party thereto (all the foregoing in this clause (d), collectively, the “Indemnified Liabilities”), provided, that the Borrower shall have no obligation hereunder to any Indemnitee with respect to Indemnified Liabilities to the extent such Indemnified Liabilities are found by a final and nonappealable decision of a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of such Indemnitee. No Indemnitee shall be liable for any damages arising from the use by unauthorized persons of information, data, reports or other materials sent through electronic, telecommunications or other information transmission systems that are intercepted by such persons (unless it is finally judicially determined that such interception was directly a result of the gross negligence or willful misconduct of such Indemnitee) or for any special, indirect, consequential or punitive damages in connection with the credit facility contemplated hereunder. Without limiting the foregoing, and to the extent permitted by applicable law, the Borrower agrees not to assert, and hereby waives all rights for contribution or any other rights of recovery with respect to, claims, demands, penalties, fines, liabilities, settlements, damages, costs and expenses of whatever kind or nature, under or related to Environmental Laws, that any of them might have by statute or otherwise against any Indemnitee. All amounts due under this Section 9.5 shall be payable not later than 30 days after written demand therefor. Statements payable by the Borrower pursuant to this Section shall be submitted to Paul Evans (facsimile (605) 978-2845; telephone (605) 978-2851) at the address of the Borrower set forth in Section 9.2(a), or to such other Person or address as may be hereafter designated by the Borrower in a notice to the Administrative Agent. The agreements in this Section shall survive repayment of the Loan and all other amounts payable hereunder.

9.6  Successors and Assigns; Participations and Assignments.

(a)           This Agreement shall be binding upon and inure to the benefit of the Borrower, the Lender, the Agents, all future holders of the Loan and their respective successors and assigns, except that the Borrower may not assign or transfer any of its rights or obligations under this Agreement or any other Loan Document without the prior written consent of the Agents and the Lender.

(b)           The Lender may, in the ordinary course of its business, without the consent of the Borrower, in accordance with applicable law, at any time sell to one or more banks, financial institutions or other entities (each, a “Participant”) participating interests in the Loan owing to such Lender or any other interest of such Lender hereunder and under the other Loan Documents. In the event of any such sale by the Lender of a participating interest to a Participant, such Lender’s obligations under this Agreement to the other parties to this Agreement shall remain unchanged, such Lender shall remain solely responsible for the performance thereof, such Lender shall remain the holder of any such Loan for all purposes under this Agreement and the other Loan Documents, and the Borrower and the Agents shall continue to deal solely and directly with such Lender in connection with such Lender’s rights and obligations under this Agreement and the other Loan Documents. In no event shall any

Participant under any such participation have any right to approve any amendment or waiver of any provision of any Loan Document, or any consent to any departure by the Borrower therefrom, except to the extent that such amendment, waiver or consent would require the consent of all Lenders pursuant to Section 9.1. The Borrower agrees that if amounts outstanding under this Agreement and the Loan are due or unpaid, or shall have been declared or shall have become due and payable upon the occurrence of an Event of Default, each Participant shall, to the maximum extent permitted by applicable law, be deemed to have the right of setoff in respect of its participating interest in amounts owing under this Agreement to the same extent as if the amount of its participating interest were owing directly to it as a Lender under this Agreement, provided that, in purchasing such participating interest, such Participant shall be deemed to have agreed to share with the Lender the proceeds thereof as provided in Section 2.11(h) as fully as if such Participant were a Lender hereunder. The Borrower also agrees that each Participant shall be entitled to the benefits of Sections 2.12, 2.13 and 2.14 with respect to its participation in the Loan outstanding from time to time as if such Participant were a Lender; provided that, in the case of Section 2.13, such Participant shall have complied with the requirements of said Section, and provided, further, that no Participant shall be entitled to receive any greater amount pursuant to any such Section than the transferor Lender would have been entitled to receive in respect of the amount of the participation transferred by such transferor Lender to such Participant had no such transfer occurred.

(c)           Any Lender (an “Assignor”) may, in the ordinary course of its business, in accordance with applicable law and upon written notice to the Administrative Agent, at any time and from time to time assign to any Lender or any affiliate, Related Fund or, with the consent of the Borrower (not to be unreasonably withheld or delayed, and provided that if a Default or Event of Default has occurred and is continuing, the Borrower’s consent shall not be required) and the Administrative Agent, to an additional bank, financial institution or other entity (an “Assignee”) all or any part of its rights and obligations under this Agreement pursuant to a Lender Assignment Agreement, substantially in the form of Exhibit C (“Lender Assignment Agreement”), executed by such Assignee and such Assignor (and, where the consent of the Administrative Agent and, in the absence of any Default or Event of Default, Borrower is required pursuant to the foregoing provisions, by the Administrative Agent and, if applicable, Borrower) and delivered to the Administrative Agent for its acceptance and recording in the Register; provided that with respect to assignments of the Loan, no such assignment to an Assignee (other than any Lender or any Affiliate or Related Fund thereof) shall be in an aggregate principal amount of less than five million Dollars ($5,000,000) (other than in the case of an assignment of all of a Lender’s interests under this Agreement) and, after giving effect thereto, such Assignor shall hold a portion of the Loan aggregating at least five million Dollars ($5,000,000) (if holding any), unless otherwise agreed by the Borrower and the Administrative Agent. Upon such execution, delivery, acceptance and recording, from and after the effective date determined pursuant to such Lender Assignment Agreement, (x) the Assignee thereunder shall be a party hereto and, to the extent provided in such Lender Assignment Agreement, have the rights and obligations of a Lender hereunder with the Loan as set forth therein, and (y) the Assignor thereunder shall, to the extent provided in such Lender Assignment Agreement, be released from its obligations under this Agreement (and, in the case of a Lender Assignment Agreement covering all of an Assignor’s rights and obligations under this Agreement, such Assignor shall cease to be a party hereto, except as to Section 2.12, 2.13 and 9.5 in respect of the period prior to such effective date). Notwithstanding any provision of this Section, the

consent of the Borrower shall not be required for any assignment that occurs at any time when any Event of Default shall have occurred and be continuing. For purposes of the minimum assignment amounts and minimum hold amounts set forth in this paragraph, multiple assignments to or by two or more Related Funds shall be aggregated.

(d)           The Administrative Agent shall, on behalf of the Borrower, maintain at its address referred to in Section 9.2(a) a copy of each Lender Assignment Agreement delivered to it and a register (the “Register”) for the recordation of the names and addresses of the Lender and the principal amount of the Loan owing to, such Lender from time to time. The entries in the Register shall be conclusive, in the absence of manifest error, and the Borrower, each Agent and the Lender shall treat each Person whose name is recorded in the Register as the owner of the Loan or a portion thereof and any Notes evidencing such Loan recorded therein for all purposes of this Agreement. Any assignment of the Loan or a portion thereof, whether or not evidenced by a Note, shall be effective only upon appropriate entries with respect thereto being made in the Register (and each Note shall expressly so provide). Any assignment or transfer of all or part of a Loan evidenced by a Note shall be registered on the Register only upon surrender for registration of assignment or transfer of the Note evidencing such Loan, accompanied by a duly executed Lender Assignment Agreement; thereupon one or more new Notes in the same aggregate principal amount shall be issued to the designated Assignee, and the old Notes shall be returned by the Administrative Agent to the Borrower marked “canceled”. The Register shall be available for inspection by the Borrower or the Lender (with respect to any entry relating to such Lender’s Loan or portion thereof) at any reasonable time and from time to time upon reasonable prior notice.

(e)           Upon its receipt of a Lender Assignment Agreement executed by an Assignor and an Assignee (and, in any case where the consent of any other Person is required by Section 9.6(c), by each such other Person) together with payment by the applicable Assignor or Assignee to the Administrative Agent of a registration and processing fee of two thousand five hundred Dollars ($2,500) (treating multiple, simultaneous assignments by or to two or more Related Funds as a single assignment) (except that no such registration and processing fee shall be payable (y) in connection with an assignment by or to a WestLB Entity or (z) in the case of an Assignee which is already a Lender or is an affiliate or Related Fund of a Lender or a Person under common management with a Lender), the Administrative Agent shall (i) promptly accept such Lender Assignment Agreement and (ii) on the effective date determined pursuant thereto record the information contained therein in the Register and give notice of such acceptance and recordation to the Borrower. The Borrower, at its own expense, promptly upon receipt of a request by the Administrative Agent, shall execute and deliver to the Administrative Agent (in exchange for the Note of the assigning Lender) a new Note to the order of such Assignee in an amount equal to the Commitment assumed or acquired by it pursuant to such Lender Assignment Agreement. Such new Note or Notes shall be dated the effective date of the relevant assignment and shall otherwise be in the form of the Note or Notes replaced thereby.

(f)            For avoidance of doubt, the parties to this Agreement acknowledge that the provisions of this Section 9.6 concerning assignments of the Loan or a portion thereof and Notes relate only to absolute assignments and that such provisions do not prohibit assignments creating security interests in the Loan or a portion thereof and Notes, including, without limitation, any pledge or assignment by the Lender of the Loan or a portion thereof or Note to

any Federal Reserve Bank in accordance with applicable law.

(g)           Notwithstanding anything to the contrary contained herein, any Lender (a “Granting Lender”)may grant to a special purpose funding vehicle (an “SPC”), identified as such in writing from time to time by the Granting Lender to the Administrative Agent and the Borrower, the option to provide to the Borrower all or any part of the Loan that such Granting Lender would otherwise be obligated to make to the Borrower pursuant to this Agreement; provided that (i) nothing herein shall constitute a commitment by any SPC to make the Loan and (ii) if an SPC elects not to exercise such option or otherwise fails to provide all or any part of such Loan, the Granting Lender shall be obligated to make such Loan pursuant to the terms hereof. The making of a Loan by an SPC hereunder shall utilize the Commitment of the Granting Lender to the same extent, and as if, such Loan were made by such Granting Lender. Each party hereto hereby agrees that no SPC shall be liable for any indemnity or similar payment obligation under this Agreement (all liability for which shall remain with the Granting Lender). In furtherance of the foregoing, each party hereto hereby agrees (which agreement shall survive the termination of this Agreement) that, prior to the date that is one year and one day after the payment in full of all outstanding commercial paper or other indebtedness of any SPC, it will not institute against, or join any other person in instituting against, such SPC any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings under the laws of the United States or any state thereof. In addition, notwithstanding anything to the contrary in this Section 9.6(g), any SPC may (A) with notice to, but without the prior written consent of, the Borrower and the Administrative Agent and without paying any processing fee therefor, assign all or a portion of its interests in the Loan to the Granting Lender or, with the prior written consent of the Borrower and the Administrative Agent (which consent shall not be unreasonably withheld), to any financial institutions providing liquidity and/or credit support to or for the account of such SPC to support the funding or maintenance of the Loan, and (B) disclose on a confidential basis any non-public information relating to its Loan or portion thereof to any rating agency, commercial paper dealer or provider of any surety, guarantee or credit or liquidity enhancement to such SPC; provided that non-public information with respect to the Borrower may be disclosed only with the Borrower’s consent which will not be unreasonably withheld. This Section 9.6(g) may not be amended without the written consent of any SPC with the Loan or portion thereof outstanding at the time of such proposed amendment.

9.7 Counterparts. This Agreement may be executed by one or more of the parties to this Agreement on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. Delivery of an executed signature page of this Agreement by facsimile or email transmission shall be effective as delivery of a manually executed counterpart hereof. A set of the copies of this Agreement signed by all the parties shall be lodged with the Borrower and the Administrative Agent.

9.8 Severability. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.

9.9 Integration. This Agreement and the other Loan Documents represent the entire agreement of the Borrower, the Agents, the Lead Arranger and the Lender with respect to the subject matter hereof and thereof, and there are no promises, undertakings, representations or warranties by the Lead Arranger, any Agent or the Lender relative to subject matter hereof not expressly set forth or referred to herein or in the other Loan Documents.

9.10 GOVERNING LAW.THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK WITHOUT REGARD TO THE PRINCIPLES OF CONFLICT OF LAWS THEREOF OTHER THAN SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK.

9.11         Submission To Jurisdiction; Waivers. The Borrower hereby irrevocably

and unconditionally:

(a)            submits for itself and its Property in any legal action or proceeding relating to this Agreement and the other Loan Documents to which it is a party, or for recognition and enforcement of any judgment in respect thereof, to the non-exclusive general jurisdiction of the courts of the State of New York, the courts of the United States of America for the Southern District of New York, and appellate courts from any thereof;

(b)            consents that any such action or proceeding may be brought in such courts and waives any objection that it may now or hereafter have to the venue of any such action or proceeding in any such court or that such action or proceeding was brought in an inconvenient court and agrees not to plead or claim the same;

(c)            (c)          (i) appoints CT Corporation System, with an office on the date hereof at 111 Eighth Avenue, New York, New York 10011 (the “Process Agent”) as its agent to receive on behalf of itself and its properties services of copies of the summons and complaint and any other process that may be served in any such action or proceeding in the State of New York, (ii) agrees that if for any reason the Process Agent shall cease to act as such for the Borrower, the Borrower shall designate a new agent in New York City on the terms and for the purposes of this Section 9.11(c) reasonably satisfactory to the Administrative Agent, (iii) agrees that such service may be made by mailing or delivering a copy of such process to the Borrower in care of the Process Agent at the Process Agent’s above address, and (iv) authorizes and directs the Process Agent to accept such service on its behalf;

(d)            agrees that, as an alternative method of service of process, service of process in any such action or proceeding may also be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to the Borrower at its address set forth in Section 9.2(a) or at such other address of which the Administrative Agent shall have been notified pursuant thereto;

(e)            agrees that nothing herein shall affect the right to effect service of process in any other manner permitted by law or shall limit the right to sue in any other jurisdiction; and

(f)             waives, to the maximum extent not prohibited by law, any right it may have to claim or recover in any legal action or proceeding referred to in this Section 9.11 any special, exemplary, punitive or consequential damages.

9.12        Acknowledgments. The Borrower hereby acknowledges that:

(a)          it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Loan Documents;

(b)          none of the Lead Arranger, the Agents or the Lender has any fiduciary relationship with or duty to the Borrower arising out of or in connection with this Agreement or any of the other Loan Documents, and the relationship between the Lead Arranger, the Agents and the Lender, on one hand, and the Borrower on the other hand, in connection herewith or therewith is solely that of creditor and debtor; and

(c)          no joint venture is created hereby or by the other Loan Documents or otherwise exists by virtue of the transactions contemplated hereby among the Lead Arranger, the Agents and the Lender, or among the Borrower and the Lender.

9.13        Confidentiality. Each of the Agents and the Lender agrees to keep confidential all non-public information provided or made available to it by, or on behalf of, the Borrower in connection with this Agreement and the transactions contemplated hereby; provided that nothing herein shall prevent any Agent or the Lender from disclosing any such information (a) to the Lead Arranger, any Agent, any other Lender or any affiliate of any thereof, (b) to any Participant or Assignee (each, a “Transferee”) or prospective Transferee that agrees to comply with the provisions of this Section or substantially equivalent provisions, (c) to any of its employees, directors, agents, attorneys, accountants and other professional advisors, (d) upon the request or demand of any Governmental Authority or self-regulatory organization having jurisdiction over it, (e) in response to any order of any court or other Governmental Authority or self-regulatory organization or as may otherwise be required pursuant to any Requirement of Law, (f) in connection with any litigation or similar proceeding relating to any Obligation, this Agreement, any other Loan Document or any transaction contemplated hereby or thereby, (g) that has been publicly disclosed other than in breach of this Section 9.13, (h) to the National Association of Insurance Commissioners or any similar organization or any nationally recognized rating agency that requires access to information about a Lender’s investment portfolio in connection with ratings issued with respect to such Lender or (i) in connection with the exercise of any remedy hereunder or under any other Loan Document. Notwithstanding anything to the contrary in the foregoing sentence or any other express or implied agreement, arrangement or understanding, the parties hereto hereby agree that, from the commencement of discussions with respect to the financing provided hereunder, any party hereto (and each of its employees, representatives, or agents) is permitted to disclose to any and all persons, without limitation of any kind, the tax structure and tax aspects of the transactions contemplated hereby, and all materials of any kind (including opinions or other tax analyses) related to such tax structure and tax aspects.

9.14        Accounting Changes. In the event that any “Accounting Change” (as defined below) shall occur and such change results in a change in the method of calculation of financial covenants, standards or terms in this Agreement, then the Borrower and the Administrative Agent agree to enter into good faith negotiations in order to amend such

provisions of this Agreement so as to equitably reflect such Accounting Change with the desired result that the criteria for evaluating the Borrower’s financial condition shall be the same after such Accounting Change as if such Accounting Change had not been made. Until such time as such an amendment shall have been executed and delivered by the Borrower, the Administrative Agent and the Required Lenders, all financial covenants, standards and terms in this Agreement shall continue to be calculated or construed as if such Accounting Change had not occurred. “Accounting Change” refers to any change in accounting principles required by the promulgation of any rule, regulation, pronouncement or opinion by the Financial Accounting Standards Board of the American Institute of Certified Public Accountants or, if applicable, the SEC.

9.15 WAIVERS OF JURY TRIAL.TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, THE BORROWER, THE AGENTS AND THE LENDER HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN.

[signature page follows]

IN WITNESS WHEREOF, the parties hereto have caused this Credit Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written.

COLSTRIP LEASE HOLDINGS, LLC, as

Signature Page to Colstrip Lease Holdings, LLC

$100,000,000 Credit Agreement

WESTLB AG, NEW YORK BRANCH,

as Sole Lead Arranger, Bookrunner and

Syndication Agent

WESTLB AG, NEW YORK BRANCH,

as Administrative Agent

WESTLB AG, NEW YORK BRANCH,

as Collateral Agent

Signature Page to Colstrip Lease Holdings, LLC

$100,000,000 Credit Agreement

WESTLB AG, NEW YORK BRANCH,

as Lender

Signature Page to Colstrip Lease holdings, LI.,C

$1.00,000,000 Credit Agreement

SCHEDULE 3.2

CONSENTS, AUTHORIZATIONS, FILINGS AND NOTICES

1. The Sponsor is subject to regulation under the Federal Power Act (“FPA”). The Sponsor applied to the Federal Energy Regulatory Commission (the “FERC”) for any authority necessary to pledge the Owner Participant interest as contemplated by the Sponsor Security Agreement pursuant to its “Application of Northwestern Corporation for Authorization under Section 204 of the Federal Power Act and Request for Shortened Comment Period” dated December 5, 2007, Docket No. ES08-7-000. The Sponsor obtained authorization from the FERC pursuant to Section 204 consistent with the foregoing application pursuant to the FERC’s Order_                                     _dated December ____, 2007, Docket No. ES08-7-000, authorizing, among other things, the Sponsor to enter into the Sponsor Security Agreement.

2. The Sponsor is subject to regulation under the FPA. The Sponsor applied to the FERC for authority to consummate the Transfer as contemplated by the Credit Agreement pursuant to its “Application of Northwestern Corporation Requesting Federal Power Action Section 203 Authorization, Petition for Issuance of a Declaratory Order or, in the Alternative, an Order Granting Determination of Exempt Wholesale Generator Status, and Expedited Consideration” dated December 19, 2007, Docket Nos. EC08-____-000, EL08-____-000 and EG08-____-000. The application is still pending before the FERC.

SCHEDULE 3.11

ERISA DISCLOSURES

1. NorthWestern Corporation Pension Plan.

As of December 31, 2006, Unfunded Liability is $9,848,663.

2. NorthWestern Energy, a Division of NorthWestern Corporation Pension Plan.

                As of December 31, 2006, Unfunded Liability is $76,614,094.

3. NorthWestern Corporation Flexible Benefits Plan (retiree health).

                As of December 31, 2006, Projected Benefit Obligation is $ 43,025,921.

SCHEDULE 3.16

CONTRACTS

1. Limited Liability Company Agreement of Colstrip Lease Holdings, LLC dated December 28, 2007.

SCHEDULE 3.17

PARTICIPATION AGREEMENT—DISCLOSURES

1. 5.1.1. Due Organization. Contrary to the first sentence of Section 5.1.1. of the Participation Agreement, Owner Participant is a Delaware corporation duly organized and validly existing under the laws of the State of Delaware and has the corporate power and authority to enter into and perform its obligations under the Participation Agreement and each other Operative Document to which it is or will be a party.

2. 5.1.3. No Violation. Because the Owner Participant is a Delaware corporation (and not a general partnership), the statement with respect to Owner Participant’s execution, delivery and performance of the Participation Agreement and each other Operative Document to which it is or will be a party is not and will not be inconsistent with the Owner Participant’s Partnership Agreement is updated as follows: The execution and delivery by Owner Participant of the Participation Agreement and each other Operative Document to which it is or will be a party is not and will not be, and the performance by Owner Participant of its obligations under each will not be inconsistent with the Owner Participant’s Organic Documents.

3. 9.1.1. Due Incorporation. Contrary to the statement that the Lessee is a corporation duly organized and validly existing and in good standing under the laws of the State of Montana, the Lessee is a corporation duly organized and validly existing and in good standing under the laws of the State of Delaware.

4. 9.1.7. Title of Interest. The second sentence of Section 9.1.7 of the Participation Agreement is replaced with the following: Unit 4 and the Unit 4 Site are owned by the Co-Owners as tenants in common in the following respective percentages: (i) NorthWestern Corporation 30%; (ii) Puget Sound Power & Light Company 25%, (iii) Portland General Electric Company 20%, (iv) Avista Corporation 15%, (v) Pacific Corporation 10% (such respective percentages, the Project Share Percentages”).

5. 9.1.8. Location of Chief Place of Business and Chief Executive Office, etc. Section 9.1.8 of the Participation Agreement is updated as follows: The chief place of business and chief executive office of the Lessee and the office where it keeps its records concerning its accounts or contract rights is 3010 West 69th Street, Sioux Falls, SD 57108.

6. 9.1.13(ii). Regulation. Notwithstanding Section 9.1.13(ii) of the Participation Agreement with regard to Lessee, Lessee is a “public utility” within the meaning of the Federal Power Act and is subject to regulation under the Federal Power Act.

SCHEDULE 3.23

REQUIRED LLC PROVISIONS

Required LLC Provisions

The Borrower LLC Agreement shall include each of the following provisions (collectively, the “Required LLC Provisions”; capitalized terms used herein, except as otherwise defined herein, have the meanings provided in the Credit Agreement):

A. So long as any Obligation remains outstanding, the Borrower shall, and the

Northwestern Member shall cause the Borrower to:

(1) maintain full and complete financial records in accordance with generally accepted accounting principles and maintain its books, records and bank accounts as official records separate from those of any other Person;

(2) maintain separate financial statements, showing its assets and liabilities separate and apart from those of any other Person, and not have its assets listed on any financial statement of any other Person; provided, however, that the Borrower’s assets may be included in a consolidated financial statement of its Affiliate provided that (a) appropriate notation shall be made on such consolidated financial statements to indicate the separateness of the Borrower from such Affiliate and to indicate that the Borrower’s assets and credit are not available to satisfy the debts and other obligations of such Affiliate or any other Person and (b) such assets shall also be listed on the Borrower’s own separate balance sheets;

(3) at all times hold itself out to the public and all other Persons as a legal entity separate from the Member and from any other Person (including any Affiliate);

(4) conduct its business only in its own name and strictly comply with all organizational formalities to maintain its separate existence, including maintaining its own records, books, resolutions and other entity documents;

(5) not use any trade names, fictitious names, assumed names or “doing business” names that are similar to any used by any Affiliate and not share any common logo with any Affiliate;

(6) correct any known misunderstanding regarding its separate identity and not identify itself as a department or division of any other Person;

(7) not hold itself out to be responsible for or have its credit or assets available to satisfy the debts or obligations of any other Person;

(8) file its own tax returns separate from those of any other Person (except to the extent that the Borrower is treated as a “disregarded entity” for tax purposes and is not required to file tax returns under applicable law) and pay any taxes required to be paid under applicable law;

(9) not commingle its assets with assets of any other Person (including not participating in any cash management system with any Person) and hold its own assets in its own name;

(10) maintain its assets in such a manner that it will not be costly or difficult to segregate, ascertain or identify its individual assets from those of any Person;

(11) pay its own liabilities and expenses only out of its own funds;

(12) not share any overhead, office space or personnel expenses with any Person;

(13) pay the salaries of its own employees, if any, only from its own funds;

(14) not enter into any transaction with any Affiliate of the Borrower except on commercially reasonable terms similar to those available to unaffiliated parties in an arm’s-length transaction, other than capital contributions or capital distributions permitted under the terms and conditions of the Credit Agreement and the certificate of formation;

(15) use separate stationery, internet addresses, invoices and checks bearing its own name;

(16) except for Permitted Liens, not pledge its assets for the benefit of any other Person;

(17)not make loans or advances to any Person or buy or hold evidence of indebtedness issued by any other Person (other than cash or investment-grade securities or to employees for business expenses incurred in the ordinary course of business);

(18) not assume or guarantee any obligation of any Person, including any Affiliate, or become obligated for the debts of any other Person;

(19) after the Transfer (as defined in the Credit Agreement) be solvent and maintain adequate capital in light of its contemplated business purpose, transactions and liabilities;

(20) not acquire any obligation or securities of the Member or any Affiliate of the Borrower;

(21) not form, acquire or hold any subsidiary (whether corporate, partnership, limited liability company or other) or own any equity interest in any other entity;

(22) not become involved in the day-to-day management of any other Person;

(23) hold regular meetings, as appropriate, to conduct the business of the Borrower, and observe all customary organizational and operational formalities;

(24) not incur any Indebtedness (other than Permitted Indebtedness) without the prior written consent of the Administrative Agent;

(25) cause its Member, officers, agents and other representatives to act at all times in a manner consistent with and in furtherance of the foregoing and in the best interests of itself; and

(26) to the extent restricted by the Loan Documents, not amend, alter or change the terms of its Organic Documents in any material respect without the consent of the Administrative Agent.

B. The Northwestern Member shall be the sole Member of the Borrower.

C. All interests in the Borrower shall be securities governed by Article 8 of the Uniform Commercial Code and shall be evidenced by certificates. The certificated interests shall be in registered form within the meaning of Article 8 of the Uniform Commercial Code.

D. The Borrower shall not conduct any business or activity other than businesses and

activities permitted by the Credit Agreement (i.e., holding the Owner Participant interest).

EXHIBIT A

to Credit Agreement

[FORM OF] CERTIFICATE OF RESPONSIBLE OFFICER OF

[BORROWER] [PLEDGOR] [SPONSOR]

December [], 2007

Reference is made to that certain Credit Agreement, dated as of December 28, 2007 (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), by and among Colstrip Lease Holdings, LLC, a Delaware limited liability company (the “Borrower”), WestLB AG, New York Branch, as Lender, WestLB AG, New York Branch, as Administrative Agent for the Lender (the “Administrative Agent”), WestLB AG, New York Branch, as Collateral Agent for the Secured Parties (the “Collateral Agent”) and WestLB AG, New York Branch, as Sole Lead Arranger, Bookrunner and Syndication Agent. Capitalized terms used but not otherwise defined herein have the respective meanings set forth in the Credit Agreement.

The undersigned, being a duly appointed Responsible Officer of [the Borrower] [NorthWestern Services, LLC (the “Pledgor”)] [NorthWestern Corporation (the “Sponsor”)] hereby certifies to the Administrative Agent, solely in his capacity as Responsible Officer of the [Borrower] [Pledgor][Sponsor] and not in his individual capacity, as follows:

1. Organic Documents. Attached hereto as Exhibit A-1 are true and correct copies of the Organic Documents of the [Borrower][Pledgor][Sponsor]. The Organic Documents are in full force and effect, no term or condition thereof has been amended from the forms attached as Exhibit A-1, and there is no material breach, material default or material violation thereunder that has occurred and is continuing.

2. Resolutions. Attached hereto as Exhibit A-2 are true and correct copies of(i) the resolutions of the [Borrower’s sole member] [Pledgor’s sole member][Sponsor’s board of directors], which resolutions are in full force and effect and which authorize the execution, delivery and performance of each Loan Document to which the [Borrower] [Pledgor][Sponsor] is a party and the consummation of the transactions contemplated thereby, [(ii) the execution, delivery and performance of each of the Acquisition Documents and the consummation of the transactions contemplated thereby,]¹ [and (iii) the execution, delivery and performance of each of the documents in respect of the Transfer and the consummation of the transactions contemplated thereby]².

3. Good Standing Certificate. Attached hereto as Exhibit A-3 is a true and correct Good Standing Certificate of the [Borrower] [Pledgor][Sponsor] for the State of Delaware.

1 For Sponsor’s certificate only.

2 For  Borrower’s and Sponsor’s certificates only.

4. Representations and Warranties. Each of the representations and warranties made by the [Borrower] [Pledgor][Sponsor] in the Loan Documents to which it is a party is true and correct in all material respects on and as of the Closing Date (except with respect to any representation and warranty that expressly refers to an earlier date).

5. No Default. No Default or Event of Default by the [Borrower, Pledgor or Sponsor] [Pledgor][Sponsor]³ has occurred and is continuing or would occur as a result of the borrowing of the Loan [by the Borrower].⁴

6. [Acquisition Documents, Borrower Contracts and Operative Documents. Attached hereto as Exhibit A-4 are true, correct and complete copies of each of the Acquisition Documents, the Borrower Contracts and the Operative Documents. It is further certified that the GE PSA and all other Acquisition Documents have been duly executed and delivered, and all of the transactions contemplated by the Acquisition Documents have been consummated.]⁵

7. [Governmental Approvals. All Governmental Approvals, including the FERC 204 Approval (but, for the avoidance of doubt, excluding the FERC 203 Approval), in form and substance reasonably satisfactory to the Administrative Agent, and all third party approvals necessary or, in the reasonable discretion of the Administrative Agent, advisable in connection with the transactions contemplated by the Credit Agreement and the other Loan Documents and the continuing operations of the Borrower (including in respect of, and after, (i) the consummation of the transactions contemplated by the Acquisition Documents and (ii) the grant by the Sponsor of the security interest in the Owner Participant Interest, as contemplated by the Sponsor Security Agreement) have been duly obtained and are in full force and effect, and all applicable waiting periods (other than the appeal period in respect of the FERC 204 Approval) have expired without any action being taken or threatened by any competent authority that would restrain, prevent or otherwise impose materially adverse conditions on the financings contemplated by the Credit Agreement and the other Loan Documents. No comment or notice of protest or intervention was filed with FERC by any third party in respect of the FERC 204 Approval prior to or on the due date therefor, and the Borrower in good faith does not expect for the FERC 204 Approval to be overturned, amended or modified during the applicable appeal period therefor.]⁶

^{8.         [Financial Statements. Attached hereto as Exhibit A-5 are accurate and complete copies of the unaudited financial statement of [the Borrower for the period ended November 30, 2007.]7 [the Sponsor for the fiscal quarter ended September 30, 2007.]8}

3 First bracketed language is for Borrower’s certificate only. Second is for Pledgor’s certificate only. Third is for Sponsor’s certificate only.

4 For Pledgor’s and Sponsor’s certificates only.

5 For Borrower’s certificate only.

6 For Borrower’s certificate only.

7 For Borrower’s certificate only

8 For Sponsor’s certificates only.

9. [Equity Interest Certificate. Attached hereto as Exhibit A-6 is the original certificate representing all Equity Interests in the Borrower together with a duly executed irrevocable proxy and a duly executed transfer power.]⁹

10. [Indebtedness. The undersigned hereby certifies that, as of the date hereof, including after giving effect to the requested funding of the Loan, (i) the Lessor has no Indebtedness other than thirty-three million two hundred forty-seven thousand forty-six Dollars and six cents ($33,247,046.06) of Indebtedness under the Lease Indenture, and (ii) the Borrower has no Indebtedness other than the Obligations.]¹⁰

11. [Liens. The undersigned hereby certifies further that (i) the Property of the Borrower, including the Collateral, is free of any Liens other than Permitted Liens, (ii) the Equity Interests in the Borrower are free of any Liens, (iii) the Sponsor Collateral is free of any Liens other than Permitted Liens, and (iv) the Leased Interest is free of any Liens other than the lien held by the Indenture Trustee.]¹¹

12. [FERC Transfer Application. Attached hereto as Exhibit A-7 is an application filed by the Sponsor and the Borrower with FERC requesting the FERC 203 Approval regarding the Transfer.]¹²

13. [Process Agent. Attached hereto as Exhibit A-8 are acceptances from the Process Agent for each of the Borrower, the Pledgor and the Sponsor appointed under Section 9.11(c) of the Credit Agreement and in effect on the Closing Date.]¹³

14. Incumbency. The following named individual is a duly appointed Responsible Officer of the [Borrower] [Pledgor][Sponsor] authorized to execute and otherwise act with respect to each Loan Document to which the [Borrower][Pledgor][Sponsor] is or will become a party. The signature set forth opposite [his] [her] name and title is [his] [her] true and authentic signature:

Name Title Signature

[_________] [_________] [_________]

[Remainder of page intentionally left blank]

9 For Borrower’s certificate only.

10 For Borrower’s certificate only.

11 For Borrower’s certificate only.

12 For Borrower’s certificate only. 13 For Borrower’s certificate only.

IN WITNESS WHEREOF, the undersigned has executed this Certificate of Responsible Officer of the [Borrower] [Pledgor][Sponsor] as of the day and year first written above.

[COLSTRIP LEASE HOLDINGS, LLC] [NORTHWESTERN SERVICES, LLC] [NORTHWESTERN CORPORATION]

By:

Name:

Title:

I, [                              , being a duly appointed Responsible Officer of the [Borrower][Pledgor][Sponsor], do hereby certify that the following named individual is a duly appointed Responsible Officer of the [Borrower] [Pledgor][Sponsor] authorized to execute and otherwise act with respect to each Loan Document to which it is or will become a party. The signature set forth opposite his name and title is his true and authentic signature:

Name Title Signature

[_________] [_________]

By:

Name:

Title:

[Signature Page to Certificate of Responsible Officer of[Borrower][Pledgor][Sponsor]

Exhibit A-1

Organic Documents

Exhibit A-2

Resolutions

Exhibit A-3

Good Standing Certificate

Exhibit A-4

Acquisition Documents, Borrower Contracts and Operative Documents

Exhibit A-5

Financial Statements

Exhibit A-6

Equity Interests Certificate

Exhibit A-7

FERC Transfer Application

Exhibit A-8

C T Letter

EXHIBIT B

to Credit Agreement

[FORM OF NOTE]

Note

$[100,000,000] New York, NY

[_________],20[ ]

FOR VALUE RECEIVED, COLSTRIP LEASE HOLDINGS, LLC (the "Borrower"), HEREBY PROMISES TO PAY to the order of WESTLB AG, NEW YORK BRANCH (the "Lender"), at its offices located at 121 1 Avenue of the Americas, New York, NY 10036, the principal sum of one hundred million Dollars ($100,000,000) or, if less, the aggregate unpaid principal amount of the Loan made by the Lender to the Borrower under the Credit Agreement, dated as of December 28, 2007 (as amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement") among the Borrower, WestLB AG, New York Branch, as Lender, WestLB AG, New York Branch, as Administrative Agent for the Lender, WestLB AG, New York Branch, as Collateral Agent for the Secured Parties and WestLB AG, New York Branch, as Sole Lead Arranger, Bookrunner and Syndication Agent. Capitalized terms used herein but not otherwise defined herein shall have the respective meanings set forth in the Credit Agreement.

The Borrower also promises to pay (i) interest on the unpaid principal amount hereof from the date hereof until paid in full at the rates and at the times provided in the Credit Agreement and (ii) fees at such times and at such rates and amounts as specified in the Credit Agreement.

Principal, interest and fees are payable in lawful money of the United States of America and in immediately available funds, at the times and in the amounts provided in the Credit Agreement.

This Note is entitled to the benefits and is subject to the terms and conditions of the Credit Agreement, and is entitled to the benefits of the security provided under the Security Documents. As provided in the Credit Agreement, this Note is subject to mandatory prepayment and voluntary prepayment, in whole or in part. The Borrower agrees to make prepayment of principal on the dates and in the amounts specified in the Credit Agreement.

The Credit Agreement, among other things, contains provisions for acceleration of the maturity hereof upon the happening of certain stated events.

The Lender is hereby authorized, at its option, either (i) to endorse on the schedule attached hereto (or on a continuation of such schedule attached to this Note and made a part hereof) an appropriate notation evidencing the date and amount of the Loan evidenced hereby and the date and amount of each principal payment in respect thereof, or (ii) to record such Loan and such payments in its books and records. Such schedule or such books and records, as the case may be, shall constitute, absent manifest error, prima facie evidence of the accuracy of the information contained therein, but in no event shall any failure by the Lender to endorse or record pursuant to

clauses (i) and (ii) be deemed to relieve the Borrower from any of its obligations.

The Borrower hereby waives presentment, demand, protest or notice of any kind in connection with this Note.

The Borrower agrees to pay all costs and expenses, including without limitation attorneys' fees, incurred in connection with the interpretation or enforcement of this Note, in accordance with and to the extent provided by the Credit Agreement.

THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, UNITED STATES OF AMERICA, WITHOUT REFERENCE TO CONFLICTS OF LAWS (OTHER THAN SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW).

	COLSTRIP LEASE HOLDINGS, LLC,
By:
Name:
Title:

Schedule to

Note

LOAN AND PAYMENTS OF PRINCIPAL

Date Amount of Loan Amount of Principal Paid or Prepaid Unpaid Principal Balance Notation Made By

EXHIBIT C

to Credit Agreement

[FORM OF]

LENDER ASSIGNMENT AGREEMENT

This LENDER ASSIGNMENT AGREEMENT (this "Agreement"), dated as of

[ ], is by and between [ ____________] (the "Assignor") and [ ____________]

(the "Assignee").

RECITALS

WHEREAS, the Assignor is party to the Credit Agreement (as amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement"), dated as of December 28, 2007, by and among Colstrip Lease Holdings, LLC (the “Borrower”), WestLB AG, New York Branch, as Lender, WestLB AG, New York Branch, as Administrative Agent for the Lender, WestLB AG, New York Branch, as Collateral Agent for the Secured Parties, and WestLB AG, New York Branch, as Sole Lead Arranger, Bookrunner and Syndication Agent;

WHEREAS, Assignor desires to assign certain of its interests under the Credit Agreement to Assignee in accordance with Section 9.6(c) thereof;

WHEREAS, as provided under the Credit Agreement, Assignor is a Lender of the Loan;

WHEREAS, Assignor proposes to sell, assign and transfer to the Assignee, and the Assignee proposes to accept and assume from the Assignor, a opercent ([ ]%) interest in all of the rights and obligations of the Assignor under the

Credit Agreement and the other Loan Documents, all on the terms and subject to the conditions of this Agreement (such interest in such rights and obligations being hereinafter referred to as the "Assigned Interest"); and

WHEREAS, after giving effect to the assignment and assumption under this Agreement, the respective portions of the Loan of Assignor and Assignee shall be in the amounts set forth on Annex C-1.

NOW, THEREFORE, in consideration of the foregoing and the mutual agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

Section 1. Definitions. All capitalized terms not otherwise defined herein shall have the respective meanings set forth in the Credit Agreement.

Section 2. Assignment.

              (a) As of the effective date set forth on the signature page to this Agreement (the "Effective Date"), subject to and in accordance with the Credit Agreement, the Assignor irrevocably sells, transfers, conveys and assigns, without recourse, representation or warranty (except as expressly set forth herein), to Assignee, and the Assignee irrevocably purchases from the Assignor, the Assigned Interest, which shall include (i) all of Assignor's rights and obligations

in its capacity as a Lender with respect to the Assigned Interest under the Credit Agreement, each other Loan Document, and any other documents or instruments delivered pursuant thereto or in connection therewith to the extent related to the Assigned Interest and (ii) to the extent permitted to be assigned under applicable Law, all claims, suits, causes of action and any other right of the Assignor (in its capacity as a Lender), to the extent related to the Assigned Interest, against any Person, whether known or unknown, arising under or in connection with the Credit Agreement, each other Loan Document, and any other documents or instruments delivered pursuant thereto or the loan transactions governed thereby or in any way based on or related to any of the foregoing, including, but not limited to, contract claims, tort claims, malpractice claims, statutory claims and all other claims at law or in equity (the foregoing rights, obligations and interests, collectively, the "Assigned Rights").

              (b) Upon acceptance and recording of the assignment and assumption made pursuant to this Agreement by the Administrative Agent, from and after the Effective Date, the Administrative Agent shall make all payments in respect of the Assigned Interest and the Assigned Rights (including all payments of principal, interest, fees and other amounts) to the Assignor for amounts that have accrued prior to the Effective Date and to the Assignee for amounts that have accrued from and including the Effective Date. The Assignor and the Assignee shall make all appropriate adjustments in payments by the Administrative Agent for periods prior to the Effective Date or with respect to the making of this assignment directly between themselves. Each of the Assignor and the Assignee agrees that if it receives any amount under the Credit Agreement or any other Loan Document that is for the account of the other, it shall hold the same for the other to the extent of the other's interest therein and shall pay promptly the same to the other.

Section 3. Payments. As consideration for the sale, assignment and transfer contemplated in Section 2 hereof, the Assignee shall pay to the Assignor, on the Effective Date, in the lawful currency of the United States and in immediately available funds, an amount equal to [ ]Dollars ($[]), without set-off, counterclaim or deduction of any kind. [As a condition to the Effective Date, Assignee shall pay to the Administrative Agent in the lawful currency of the United States and in immediately available funds the registration and processing fee of two thousand five hundred Dollars ($2,500), without set-off, counterclaim or deduction of any kind.]^'

Section 4. Representations, Warranties and Undertakings.

              (a) The Assignor (i) represents and warrants that (A) it is the legal and beneficial owner of the Assigned Interest and such Assigned Interest is free and clear of any Lien or adverse claim and (B) it has full power and authority, and has taken all action necessary, to execute and deliver this Agreement and to consummate the transactions contemplated hereby; and (ii) makes no representation or warranty and assumes no responsibility with respect to (A) any statements, warranties or representations made in or in connection with the Credit Agreement or the other Loan Documents or the execution, legality, validity, enforceability or genuineness, or sufficiency of value of the Credit Agreement, the other Loan Documents, or any other instrument or document furnished pursuant thereto or in connection therewith or (B) the financial condition of the Borrower, the Pledgor or the Sponsor, or the performance or observance by the Borrower or any other Person of any of its obligations under the Credit Agreement, any other Loan Document, or any other instrument or document furnished pursuant thereto or in connection therewith.

              ( b)  The Assignee (i) represents and warrants that it has full power and authority, and has taken all action necessary, to execute and deliver this Agreement and to consummate the transactions contemplated hereby and to become a Lender under the Credit Agreement and the other Loan Documents, (ii) acknowledges and confirms that it has received a copy of the Credit Agreement, each other Loan Document and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Agreement and to purchase the Assigned Interest and assume the Assigned Rights, on the basis of which it has made such analysis and decision independently and without reliance on the Administrative Agent or any other Secured Party, (iii) agrees that it will, independently and without reliance upon the Administrative Agent, the Borrower, or any other Secured Party and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement or any other Loan Document, (iv) appoints and authorizes each Agent to take such action as agent on its behalf and to exercise such powers under the Credit Agreement or the other Loan Documents as are delegated to such Agent by the terms thereof, together with such powers as are reasonably incidental thereto and (v) will perform in accordance with their terms all of the obligations that by the terms of the Loan Documents are required to be performed by it as a Lender. The Assignee further confirms and agrees that in becoming a Lender and in making the Loan or portion thereof under the Credit Agreement, such actions have and will be made without recourse to, or representation or warranty, by any Secured Party.

              (c) The Assignee further agrees to furnish the tax form required by Section [] (if so required) of the Credit Agreement no later than the Effective Date.

Section 5. Effectiveness.

              (a) The effectiveness of the sale, assignment and transfer hereunder is subject to (i) the due execution and delivery of this Agreement by the Assignor and the Assignee, and the Borrower if required under Section 9.6(c) of the Credit Agreement, (ii) the receipt by the Assignor of the payment provided for in Section 3(a) hereof, [(iii) consent by the Administrative Agent to this Agreement and the assignment contemplated hereby,] [(iv) the receipt by the Administrative Agent of the registration and processing fee provided for in Section 3(b) hereof,] and (v) the registration of such assignment by the Administrative Agent in the Register in accordance with Section 9.6(d) of the Credit Agreement.

^'If applicable

(b) Simultaneously with the execution and delivery by the parties hereto of this Agreement to the Administrative Agent for its recording in the Register, the Assignor shall deliver its Note (if any) to the Administrative Agent and may request that new Notes be executed and delivered to [the Assignor and] the Assignee and reflecting [the outstanding principal of Assignor and] the assigned and assumed outstanding principal of the Assignee (plus, if the Assignee is already a Lender, the amount of its outstanding principal immediately prior to the assignment effected hereby). Any such new Note shall carry the rights to unpaid accrued interest that were carried by any applicable superseded Note(s) such that no loss of interest shall result therefrom. Any applicable new Note executed and delivered in accordance with the foregoing shall have set forth thereon a legend substantially in the following form:

"This Note is issued in replacement of [describe replaced note] and, notwithstanding the date of this Note, this Note carries all of the rights to unpaid interest that were carried by such replaced Note, such that no loss of interest shall result from any such replacement."

If the Assignee is already a Lender, it shall (promptly following its receipt of such new Note payable to it) mark as “canceled” the prior Note (if any) held by it and return it to the Borrower.

              (c)  Except as otherwise provided in the Credit Agreement, effective as of the Effective Date:

                            (i) the Assignee shall be deemed automatically to have become a party to, and the Assignee agrees that it will be bound by the terms and conditions set forth in, the Credit Agreement, and shall have all the rights and obligations of a "Lender" under the Credit Agreement and the other Loan Documents as if it were an original signatory thereto or an original Lender thereunder with respect to the Assigned Interest and the Assigned Rights; and

                            (ii) the Assignor shall relinquish its rights (but shall continue to be entitled to the benefits of Sections 2.12 (Requirements ofLaw), 2.13 (Taxes) and 9.5 (Payment of Expenses) of the Credit Agreement) and be released from its obligations under the Credit Agreement and the other Loan Documents to the extent specified herein.

Section 6. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, UNITED STATES OF AMERICA, WITHOUT REFERENCE TO CONFLICTS OF LAWS (OTHER THAN SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW).

Section 7. Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of this Agreement by telecopy or portable document format ("pdf") shall be effective as delivery of a manually executed counterpart of this Agreement.

Section 8. Further Assurances. The Assignor and the Assignee hereby agree to execute and deliver such other instruments, and take such other action, as either party or the Administrative Agent may reasonably request in connection with the transactions contemplated by this Agreement including, without limitation, the delivery of any notices to the Borrower or the Agents that may be required in connection with the assignment contemplated hereby.

Section 9. Binding Effect; Amendment. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and assigns, subject, however, to the provisions of the Credit Agreement. No provision of this Agreement may be amended, waived or otherwise modified except by an instrument in writing signed by each party hereto and by the Administrative Agent.

Section 10. Administrative Agent Enforcement. The Administrative Agent shall be entitled to rely upon and enforce this Agreement against the Assignor and the Assignee in all respects.

[The remainder of this page is intentionally blank. The next page is the signature page.]

IN WITNESS WHEREOF, the Assignor and the Assignee have caused this Lender Assignment Agreement to be executed by their duly authorized officers.

The effective date for this Agreement is [the date this Agreement is acknowledged and accepted by the Administrative Agent [and the Borrower]] [ , 20o (the "Trade Date")].

[ASSIGNOR ]
	By:
		Name:
		Title:

[ASSIGNEE ]
	By:
		Name:
		Title:

	[COLSTRIP LEASE HOLDINGS, LLC
By:
		Name:
		Title:]2

Accepted and Acknowledged this ___ day of , 20___

WESTLB AG, NEW YORK BRANCH, as

Administrative Agent

By:
	Name:
	Title:

By:
	Name:
	Title:

2 If required under Section 9.6(c) of the Credit Agreement.

Annex C-1

to Lender Assignment Agreement

Loan	Assignor's Outstanding Loan Pre-Assignment	Percentage (of Assignor's interests) Assigned	Assignor's Outstanding Loan Post-Assignment	Assignee's Outstanding Loan Post-Assignment3*
Loan	$	%	$	$

3 If Assignee is already a Lender, this number should be calculated taking into account only that portion of the Loan assumed by Assignee pursuant to this Agreement.

EXHIBIT D

to Credit Agreement

[FORM OF] EXEMPTION CERTIFICATE

Reference is made to the Credit Agreement (as amended, modified or otherwise supplemented from time to time in accordance with its terms, the "Credit Agreement"), dated as of December 28, 2007, by and among Colstrip Lease Holdings, LLC, a Delaware limited liability company, as Borrower, WestLB AG, New York Branch, as Lender, WestLB AG, New York Branch, as Administrative Agent for the Lender, WestLB AG, New York Branch, as Collateral Agent for the Secured Parties, and WestLB AG, New York Branch, as Sole Lead Arranger, Bookrunner and Syndication Agent. Capitalized terms used herein but not otherwise defined herein shall have the respective meanings set forth in the Credit Agreement.

The undersigned Non-U.S. Lender hereby certifies as follows:

1. The Non-U.S. Lender is the beneficial owner of any and all interests in the Obligations that it holds.

2. The Non-U.S. Lender is not a "United States person" as defined in Code Section 7701(a)(30). Code Section 7701(a)(30) defines a United States person as a citizen or resident of the United States; a domestic partnership; a domestic corporation; an estate (other than a foreign estate); and a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United States persons have the authority to control all substantial decisions of the trust.

3. The Non-U.S. Lender is not a "bank" described in Section 881(c)(3)(A) of the Code.

4. The Non-U.S. Lender undertakes to notify the Borrower and Administrative Agent promptly upon the obsolescence or invalidity of this Exemption Certificate if, following the execution date hereof, any statement herein ceases to be true at any time while the Non-U.S. Lender is entitled to payments of interest by the Borrower under the Loan Documents.

The undersigned Non-U.S. Lender acknowledges that this Exemption Certificate is executed and delivered in order to substantiate its entitlement to an exemption from U.S. withholding tax under the Code. Further, the undersignedindividual certifies that it has the requisite authority to execute and deliver this document for the Non-U.S. Lender.

[NAME OF NON-U.S. LENDER]

By:

Print Name:

Title:

Date:

EXHIBIT E

to Credit Agreement

[FORM OF]

BORROWING NOTICE

This Borrowing Notice (this "Borrowing Notice"),dated as of December [ ], 2007, is delivered to WestLB AG, New York Branch, as administrative agent (the "Administrative Agent"), pursuant to Section 2.2 (Procedure for Borrowing) of the Credit Agreement, dated as of December 28, 2007 (as amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement"), by and among Colstrip Lease Holdings, LLC, a Delaware limited liability company, as Borrower, WestLB AG, New York Branch, as Lender, the Administrative Agent, WestLB AG, New York Branch, as Collateral Agent for the Secured Parties, and WestLB AG, New York Branch, as Sole Lead Arranger, Bookrunner and Syndication Agent. This Borrowing Notice sets forth certain undertakings and representations of the Borrower with respect to the transactions contemplated by the Credit Agreement. Capitalized terms used herein but not otherwise defined herein shall have the respective meanings set forth in the Credit Agreement.

WHEREAS, the Borrower wishes to propose a borrowing of the Loan under the Credit Agreement in accordance with Section 2.2 (Procedure for Borrowing) of the Credit Agreement and on the terms and conditions set forth therein and herein; and

WHEREAS, to induce the Lender to extend credit under the Credit Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Borrower hereby agrees as follows:

Section 1. Borrowing Request. The Borrower hereby irrevocably proposes the borrowing of the Loan (the "Proposed Loan Borrowing") in the amount of one hundred million Dollars ($100,000,000) requested to be funded as a Base Rate Loan.

The borrowing date proposed for such Proposed Loan Borrowing is December [], 2007 (the "Closing Date"). The Borrower hereby certifies that this

Borrowing Notice is being delivered to the Administrative Agent prior to 11:00 a.m. New York City time on the Closing Date.

Section 2. Requested Transfers. The Borrower hereby requests that on the Closing Date the Administrative Agent deliver by wire transfer, in immediately available funds, the proceeds of such Proposed Loan Borrowing to [Borrower to specify Account No. and wiring instructions].

Section 3. Certifications. The Borrower certifies that as of the Closing Date:

(i) each of the conditions to the Proposed Borrowing set forth in Section 4.1 (Conditions to Closing and Funding) of the Credit Agreement has been satisfied;

(ii) the Borrower is in compliance with all conditions set forth in Section 4.1 (Conditions to Closing and Funding) of the Credit Agreement, on and as of the Closing Date, before and after giving effect to such Proposed Loan Borrowing and to the application of the proceeds therefrom;

(iii) each of the representations and warranties made by each of the Borrower, the Pledgor and the Sponsor in the Loan Documents is true and correct in all material respects on and as of such Closing Date (except to the extent applicable to an earlier date), before and after giving effect to the Proposed Loan Borrowing and to the application of the proceeds of such Proposed Loan Borrowing;

(iv) no Default or Event of Default has occurred and is continuing or would occur as a result of the Proposed Loan Borrowing;

(v) since October 30, 2007, there has been no development or event that has had or could reasonably be expected to have a Material Adverse Effect;

(vi) the Loan requested will be used for the purposes set forth in Section 3.15 (Use of Proceeds); and

              (vii) all and each of the statements contained in this Borrowing Notice are true and correct.

Section 4.Governing Law. THIS BORROWING NOTICE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, UNITED STATES OF AMERICA, WITHOUT REFERENCE TO CONFLICTS OF LAWS (OTHER THAN SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW).

The undersigned is executing this Borrowing Notice not in its individual capacity but in its capacity as a Responsible Officer of the Borrower.

[The remainder of this page is intentionally blank. The next page is the signature page.]

IN WITNESS WHEREOF, the undersigned has caused this Borrowing Notice to be duly executed and delivered as of the day and year first written above.

COLSTRIP LEASE HOLDINGS, LLC

By:
	Name:
	Title:

EXHIBIT F

to Credit Agreement

[FORM OF]

INTEREST PERIOD NOTICE

Ladies and Gentlemen:

This Interest Period Notice (this “Interest Period Notice”), dated as of December o, 2007, is delivered to WestLB AG, New York Branch, as administrative agent (the “Administrative Agent”) pursuant to Section 2.7 (Conversion and Continuation Options) of the Credit Agreement, dated as of December 28, 2007 (the “Credit Agreement”) by and among Colstrip Lease Holdings, LLC, a Delaware limited liability company, as Borrower, WestLB AG, New York Branch, as Lender, the Administrative Agent, WestLB AG, New York Branch, as Collateral Agent for the Secured Parties, and WestLB AG, New York Branch, as Sole Lead Arranger, Bookrunner and Syndication Agent. Capitalized terms used herein but not otherwise defined herein shall have the respective meanings set forth in the Credit Agreement.

The Borrower hereby delivers to the Administrative Agent this irrevocable Interest Period Notice and (i) elects to [convert the Loan from a [Base Rate Loan to a Eurodollar Loan] [Eurodollar Loan to a Base Rate Loan at the end of the current Interest Period for the Loan]] [continue the Loan as a Eurodollar Loan at the end of the current Interest Period for the Loan] [and (ii) in the case of [conversion to] [continuation as] a Eurodollar Loan, requests the duration for the immediately succeeding Interest Period for the Loan set forth on Schedule 1 hereto.

The Borrower hereby certifies that, in the case of a [conversion to] [continuation as] a Eurodollar Loan, the Maturity Date of the Loan is not to occur before the last day of the requested Interest Period.

In connection herewith, the Borrower hereby further certifies that no Event of Default has occurred and is continuing.

This Interest Period Notice is being delivered on or before 11:00 a.m. New York City time at least [three (3) Business Days prior to the first day of the requested new Interest Period, in the case of [conversion to] [continuation as] a Eurodollar Loan] [two (2) Business Days prior to the requested date of conversion, in the case of conversion to a Base Rate Loan] as set forth on Schedule 1 hereto.

[The remainder of this page is intentionally blank. The next page is the signature page.]

IN WITNESS WHEREOF, the undersigned has caused this Interest Period Notice to be duly executed by a Responsible Officer as of the date first above written.

COLSTRIP LEASE HOLDINGS, LLC

By:

Name:

Title:

Schedule 1

to Interest Period Notice

CURRENT	REQUESTED	PRINCIPAL	CURRENT	DURATION OF	REQUESTED
TYPE OF	TYPE OF	AMOUNT	INTEREST	IMMEDIATELY	CONVERSION
LOAN	LOAN		PERIOD	SUCCEEDING	OR
			ENDS ON	INTEREST	CONTINUATION
(Base Rate	(Base Rate			PERIOD	DATE TO BEGIN
Loan or Eurodollar	Loan or Eurodollar		(only if current type	REQUESTED1	ON
Loan)	Loan)		of Loan is a Eurodollar	(only if converting or continuing as a
			Loan)	Eurodollar Loan)
		$

1 At the Borrower's election, the duration of such Interest Period shall be either one (1), three (3) or six (6) months.

EXHIBIT G

to Credit Agreement

[FORM OF] COMPLIANCE CERTIFICATE

December o, 2007

Reference is made to Section 5.1 [(a)][(b)], [5.2(a)], [5.2(b)] [and/or] [5.3] of that certain Credit Agreement, dated as of December 28, 2007 (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement"),by and among COLSTRIP LEASE HOLDINGS, LLC, a Delaware limited liability company (the “Borrower”), WestLB AG, New York Branch, as Lender, WestLB AG, New York Branch, as Administrative Agent for the Lender (the “Administrative Agent”), WestLB AG, New York Branch, as Collateral Agent for the Secured Parties (the “Collateral Agent”) and WestLB AG, New York Branch, as Sole Lead Arranger, Bookrunner and Syndication Agent. Capitalized terms used but not otherwise defined herein have the respective meanings set forth in the Credit Agreement.

The undersigned, being a duly appointed Responsible Officer¹ of the Borrower, hereby certifies to the Administrative Agent, solely in his capacity as Responsible Officer of the Borrower and not in his individual capacity, that:

1.² This compliance certificate (this “Compliance Certificate”) is being delivered within [90 days after the end of the fiscal year of the Borrower ended []] [45 days after the end of the fiscal quarter of the Borrower ended []].

2. Pursuant to Sections 5.1 (a)(i) and 5.1(c) of the Credit Agreement, attached hereto as [Exhibit 1] are true, correct and complete copies of the audited balance sheet of the Borrower as at the end of the fiscal year ended [] and the related audited statements of income and cash flows of the Borrower for such fiscal year, in each case setting forth in comparative form the actual figures as of the end of and for the previous year and reported on without a “going concern” or like qualification or exception, or qualification arising out of the scope of the audit by Deloitte & Touche or other independent certified public accountants of nationally recognized standing.

3. Pursuant to Sections 5.1 (a)(ii) and 5.1(c) of the Credit Agreement, attached hereto as [Exhibit 2] are true, correct and complete copies of the audited consolidated balance sheet of the Sponsor as at the end of the fiscal year ended [j and the related audited consolidated statements of income and cash flows of the Sponsor for such fiscal year, in each case setting forth in comparative form the actual figures as of the end of and for the previous year, reported on without a “going concern” or like qualification or exception, or qualification arising out of the scope of the audit, by Deloitte & Touche or other independent certified public accountants of nationally recognized standing; provided that delivering to the Administrative Agent copies of the Sponsor’s Annual Report or Form 10-K for such period shall satisfy the foregoing

 

1 Must be CFO or treasurer.

2 Certificate should only include the applicable numbered paragraphs.

requirement of this Paragraph. It is further certified that such financial statements are complete and correct in all material respects and have been prepared in reasonable detail and in accordance with GAAP applied consistently throughout the periods reflected therein and with prior periods (except as approved by such accountants or officer, as the case may be, and disclosed therein).

4. Pursuant to Sections 5.1 (b)(ii) and 5.1(c) of the Credit Agreement, attached hereto as [Exhibit 3] are the unaudited consolidated balance sheet of the Sponsor as at the end of the fiscal quarter ended [j and the related unaudited consolidated statements of income and cash flows of the Sponsor for such quarter and the portion of the fiscal year through the end of such quarter, in each case setting forth in comparative form the actual figures as of the end of and for the corresponding period in the previous year, which financial statements are fairly stated in all material respects (subject to normal year end audit adjustments and the absence of footnotes); provided that delivering to the Administrative Agent copies of the Sponsor’s Quarterly Report or Form10-Q for such period shall satisfy the foregoing requirement of this Paragraph. It is further certified that such financial statements are complete and correct in all material respects and have been prepared in reasonable detail and in accordance with GAAP applied consistently throughout the periods reflected therein and with prior periods (except as approved by such accountants or officer, as the case may be, and disclosed therein).

5. Pursuant to Sections 5.1 (b)(i) and 5.1(c) of the Credit Agreement, attached hereto as [Exhibit 4] are the unaudited balance sheet of the Borrower as at the end of the fiscal quarter ended [j and the related unaudited statements of income and cash flows of the Borrower for such quarter and the portion of the fiscal year through the end of such quarter, in each case setting forth in comparative form the actual figures as of the end of and for the corresponding period in the previous year, which financial statements are fairly stated in all material respects (subject to normal year end adjustments and the absence of footnotes). It is further certified that such financial statements are complete and correct in all material respects and have been prepared in reasonable detail and in accordance with GAAP applied consistently throughout the periods reflected therein and with prior periods (except as approved by such accountants or officer, as the case may be, and disclosed therein).

6. Pursuant to Section 5.2(a) of the Credit Agreement, attached hereto as [Exhibit 5] is a certificate of the independent certified public accountants reporting on Sponsor’s audited consolidated balance sheet or Borrower’s audited balance sheet, as the case may be, as at the end of the fiscal year ended [J, stating that in making the examination necessary therefor no knowledge was obtained of any Default, Event of Default, Lease Event of Default or Indenture Event of Default (or event that with notice or the passage of time, or both, would cause the same) except as specified in such certificate.

7. Pursuant to Section 5.2(b) of the Credit Agreement, to the best of the undersigned’s knowledge, (i) the Borrower during the period relating to the financial statement delivered concurrently with this certificate has observed or performed all of its covenants and other agreements, and satisfied every condition, contained in the Credit Agreement and the other Loan Documents to which it is a party to be observed, performed or satisfied by it, and (ii) the Lessee during such period has observed or performed all of its covenants and other agreements,

and satisfied every condition, contained in the Operative Documents to which it is a party to be observed, performed or satisfied by it, and, in each case, that the undersigned has obtained no knowledge of any Default, Event of Default, Lease Event of Default or Indenture Event of Default (or event that with notice or the passage of time, or both, would cause the same) [except as specified in such certificate].

8. [Pursuant to Section 5.2(c) of the Credit Agreement, attached hereto as [Exhibit 6] is additional financial and other information as the Lender has requested through the Administrative Agent.]³

[Remainder of page intentionally left blank]

3 If applicable.

IN WITNESS WHEREOF, the undersigned has executed this Compliance Certificate as of the day and year first written above.

[COLSTRIP LEASE HOLDINGS, LLC] [NORTHWESTERN CORPORATION]

By:

Name:

Title:

[Signature Page to Compliance Certificate]

EX-12

Exhibit 12.1

NorthWestern Corporation
Computation of Ratio of Consolidated Earnings to Consolidated Fixed Charges
			Successor Company								Predecessor Company
			Year Ended December 31,						November 1, - December 31, 2004		January 1, - October 31, 2004		Year Ended December 31, 2003
			2007		2006		2005
			(in thousands, except ratios)
Earnings:
	Income (loss) before income taxes	$	85,579	$	63,413	$	100,057	$	(11,450	) $	547,520	$	(71,630	)
	Add: Fixed charges as below		63,280		66,327		71,636		13,283		83,670		162,571
	Less: Distributions on preferred securities of subsidiary trust
			—		—		—		—		—		(14,945	)
	Total	$	148,859	$	129,740	$	171,693	$	1,833	$	631,190	$	75,996
Fixed Charges:
	Interest charges	$	56,942	$	56,016	$	61,295	$	11,021	$	72,822	$	147,626
	Interest on rent expense		6,338		10,311		10,341		2,262		10,848		—
	Distributions on redeemable preferred securities of subsidiary trust		—		—		—		—		—		14,945
	Total	$	63,280	$	66,327	$	71,636	$	13,283	$	83,670	$	162,571
Ratio of earnings to fixed charges			2.35		1.96		2.40		—		7.54		—
Earnings to fixed charges deficit		$	—	$	—	$	—	$	(11,450	) $	—	$	(86,575	)

EX-23

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statements No. 333-122428 and 333-124624 on Form S-8, and Registration Statement No. 333-123450 on Form S-3 of our reports dated February 26, 2008, relating to the consolidated financial statements and financial statement schedule of NorthWestern Corporation and subsidiaries (the “Company”) (which report expresses an unqualified opinion and includes an explanatory paragraph regarding the Company’s adoption of a new accounting standard), and the effectiveness of the Company’s internal control over financial reporting, appearing in this Annual Report on Form 10-K of the Company for the year ended December 31, 2007.

/s/ DELOITTE & TOUCHE LLP

Minneapolis, Minnesota

February 26, 2008

EX-31

EXHIBIT 31.1

CERTIFICATION PURSUANT TO

17 CFR 240. 13a-14

PROMULGATED UNDER

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Michael J. Hanson, certify that:

1. I have reviewed this annual report on Form 10-K of NorthWestern Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting that are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:February 26, 2008

/s/ MICHAEL J. HANSON

Michael J. Hanson

President and Chief Executive Officer

EX-31

Exhibit 31.2

CERTIFICATION PURSUANT TO

17 CFR 240.13a-14

PROMULGATED UNDER

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Brian B. Bird, certify that:

1. I have reviewed this annual report on Form 10-K of NorthWestern Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d 15(e) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):

(a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting that are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting.

Date: February 26, 2008

/s/ BRIAN B. BIRD

Brian B. Bird

Vice President and Chief Financial Officer

EX-32

EXHIBIT 32.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of NorthWestern Corporation (the “Company") on Form 10-K for the period ended December 31, 2007, as filed with the Securities and Exchange Commission on the date hereof (the “Report"), I, Michael J. Hanson, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

1) The Report fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: February 26, 2008	/s/ MICHAEL J. HANSON
	Michael J. Hanson
	President and Chief Executive Officer

EX-32

Exhibit 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of NorthWestern Corporation (the “Company") on Form 10-K for the period ended December 31, 2007, as filed with the Securities and Exchange Commission on the date hereof (the “Report"), I, Brian B. Bird, Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

1) The Report fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: February 26, 2008	/s/ BRIAN B. BIRD
	Brian B. Bird
	Vice President and Chief Financial Officer