10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM10-Q

(Mark One)
x	QUARTERLY REPORT PURSUANT TO SECTION13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2008
Or
o	TRANSITION REPORT PURSUANT TO SECTION13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 1-10499

NORTHWESTERN CORPORATION

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

	Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No x
	Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-
accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one).
Large Accelerated Filer x        Accelerated Filer o        Non-accelerated Filer o        Smaller Reporting Company o
	Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes o No x
	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 the court. Yes x No o
	Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest
practicable date:

Common Stock, Par Value $.01

35,910,281 shares outstanding at October 24, 2008

NORTHWESTERN CORPORATION

FORM10-Q

INDEX

		Page
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS			3
PARTI. FINANCIAL INFORMATION			5
Item 1.	Financial Statements (Unaudited)		5
	Consolidated Balance Sheets — September 30, 2008 and December 31, 2007		5
	Consolidated Statements of Income — Three and Nine Months Ended September 30, 2008 and 2007		6
	Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2008 and 2007		7
	Notes to Consolidated Financial Statements		8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		40
Item 4.	Controls and Procedures		41
PARTII. OTHER INFORMATION			42
Item 1.	Legal Proceedings		42
Item 1A.	Risk Factors		42
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		45
Item 5.	Other Information		45
Item 6.	Exhibits		46
SIGNATURES			47

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

Words or phrases such as “anticipates," “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:

• 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;

• 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; and

• adverse changes in general economic and competitive conditions in the US financial markets and in our service territories.

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

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We undertake no obligation, except as required by law, 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 Securities and Exchange Commission (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.

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PART1. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

NORTHWESTERN CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except share data)

		September30,			December31,
		2008			2007
ASSETS
Current Assets:
Cash and cash equivalents	$	8,575		$	12,773
Restricted cash		16,166			14,482
Accounts receivable, net of allowance		108,540			143,482
Inventories		90,896			63,586
Regulatory assets		31,759			27,049
Prepaid energy supply		2,730			3,166
Deferred income taxes		15,076			2,987
Other		4,512			10,829
Total current assets		278,254			278,354
Property, plant, and equipment, net		1,816,150			1,770,880
Goodwill		355,128			355,128
Regulatory assets		124,534			123,041
Other noncurrent assets		19,748			19,977
Total assets	$	2,593,814		$	2,547,380
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Current maturities of capital leases	$	1,218		$	2,389
Current maturities of long-term debt		19,514			18,617
Accounts payable		72,340			91,588
Accrued expenses		224,856			168,610
Regulatory liabilities		50,296			40,635
Total current liabilities		368,224			321,839
Long-term capital leases		37,117			38,002
Long-term debt		805,851			787,360
Deferred income taxes		115,214			74,046
Noncurrent regulatory liabilities		220,642			194,959
Other noncurrent liabilities		292,537			308,150
Total liabilities		1,839,585			1,724,356
Commitments and Contingencies (Note 14)
Shareholders’ Equity:
Common stock, par value $0.01; authorized 200,000,000 shares; issued and outstanding 39,436,822 and 35,910,281, respectively; Preferred stock, par value $0.01; authorized 50,000,000 shares; none issued		394			393
Treasury stock at cost		(89,349	)		(10,781	)
Paid-in capital		805,511			803,061
Retained earnings		24,959			16,603
Accumulated other comprehensive income		12,714			13,748
Total shareholders’ equity		754,229			823,024
Total liabilities and shareholders’ equity	$	2,593,814		$	2,547,380

See Notes to Consolidated Financial Statements

5

NORTHWESTERN CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(in thousands, except per share amounts)

		ThreeMonthsEnded September 30,					NineMonthsEnded September 30,
		2008			2007			2008			2007
OPERATING REVENUES	$	272,244		$	265,863		$	934,725		$		892,036
COST OF SALES		130,503			139,021			508,941				499,555
GROSS MARGIN		141,741			126,842			425,784				392,481
OPERATING EXPENSES
Operating, general and administrative		63,411			52,486			177,348				173,611
Property and other taxes		21,718			20,393			65,898				61,645
Depreciation		21,292			20,725			63,608				61,412
TOTAL OPERATING EXPENSES		106,421			93,604			306,854				296,668
OPERATING INCOME		35,320			33,238			118,930				95,813
Interest Expense		(15,629	)		(14,633	)		(47,478	)			(42,380	)
Other Income		1,218			909			1,640				1,646
Income Before Income Taxes		20,909			19,514			73,092				55,079
Income Tax Expense		(7,530	)		(6,337	)		(26,759	)			(20,326	)
Net Income	$	13,379		$	13,177		$	46,333		$		34,753
Average Common Shares Outstanding		38,057			36,471			38,665				36,063
Basic Earnings per Average Common Share	$	0.35		$	0.36		$	1.20		$		0.96
Diluted Earnings per Average Common Share	$	0.35		$	0.35		$	1.19		$		0.93
Dividends Declared per Average Common Share	$	0.33		$	0.33		$	0.99		$		0.95

See Notes to Consolidated Financial Statements

6

NORTHWESTERN CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

	Nine MonthsEnded September 30,
		2008			2007
OPERATING ACTIVITIES:
Net Income	$	46,333		$	34,753
Items not affecting cash:
Depreciation		63,608			61,412
Amortization of debt issue costs, discount and deferred hedge gain		1,818			1,211
Amortization of restricted stock		2,699			5,889
Equity portion of allowance for funds used during construction		(432	)		(349	)
Gain on sale of assets		(154	)		(256	)
Unrealized gain on derivative instruments		(3,763	)		—
Deferred income taxes		28,831			18,018
Changes in current assets and liabilities:
Restricted cash		(1,684	)		2,262
Accounts receivable		35,027			46,989
Inventories		(27,310	)		(19,258	)
Prepaid energy supply costs		436			(949	)
Other current assets		597			874
Accounts payable		(20,001	)		(21,378	)
Accrued expenses		50,334			14,683
Regulatory assets		7,365			6,456
Regulatory liabilities		15,381			25,376
Other noncurrent assets		902			12,030
Other noncurrent liabilities		(23,238	)		(13,892	)
Cash provided by operating activities		176,749			173,871
INVESTING ACTIVITIES:
Property, plant, and equipment additions		(81,016	)		(77,905	)
Colstrip Unit 4 acquisition		—			(40,247	)
Proceeds from sale of assets		86			1,466
Cash used in investing activities		(80,930	)		(116,686	)
FINANCING ACTIVITIES:
Proceeds from exercise of warrants		—			25,329
Treasury stock activity		(78,568	)		(600	)
Dividends on common stock		(37,977	)		(34,426	)
Issuance of long-term debt		55,000			—
Repayment of long-term debt		(88,953	)		(8,448	)
Line of credit borrowings (repayments), net		52,000			(36,000	)
Financing costs		(1,519	)		(291	)
Cash used in financing activities		(100,017	)		(54,436	)
(Decrease) Increase in Cash and Cash Equivalents		(4,198	)		2,749
Cash and Cash Equivalents, beginning of period		12,773			1,930
Cash and Cash Equivalents, end of period	$	8,575		$	4,679
Supplemental Cash Flow Information:
Cash paid during the period for:
Income taxes		78			3,861
Interest		35,112			31,939
Significant noncash transactions:
Assumption of debt related to Colstrip Unit 4 acquisition		—			20,438

See Notes to Consolidated Financial Statements

7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Reference is made to Notes to Financial Statements

included in NorthWestern Corporation’s Annual Report)

(Unaudited)

(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, pursuant to the rules and regulations of the SEC. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that may affect the reported amounts of assets, liabilities, revenues and expenses during the reporting period. The unaudited consolidated financial statements reflect all normal recurring adjustments that are, in the opinion of management, necessary to fairly present our financial position, results of operations and cash flows. The actual results for the interim periods are not necessarily indicative of the operating results to be expected for a full year or for other interim periods. Although management believes that the condensed disclosures provided are adequate to make the information presented not misleading, management recommends that these unaudited consolidated financial statements be read in conjunction with audited consolidated financial statements and related footnotes included in our Annual Report on Form 10-K for the year ended December 31, 2007.

(2) New Accounting Standards

Accounting Standards Issued

In May 2008, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 162, The Hierarchy of Generally Accepted Accounting Principles (SFAS No. 162). SFAS No. 162 supersedes the existing hierarchy contained in the U.S. auditing standards. The existing hierarchy was carried over to SFAS No. 162 essentially unchanged. The Statement becomes effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to the auditing literature. The new hierarchy is not expected to change current accounting practice in any area.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133 (SFAS No. 161). SFAS No. 161 changes the disclosure requirements for derivative instruments and hedging activities, requiring enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133), and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This statement will become effective for our fiscal year beginning January 1, 2009. We are still evaluating the impact of SFAS No. 161, if any, but do not expect the statement to have a material impact on our consolidated financial statements.

Accounting Standards Adopted

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. SFAS No. 157 became effective for most fair value measurements, other than leases and certain nonfinancial assets and liabilities, beginning January 1, 2008.

8

The statement establishes a three-level fair value hierarchy and requires fair value disclosures based upon this hierarchy. The statement also requires that fair value measurements reflect a credit-spread adjustment based on an entity’s own credit standing. Consideration of our own credit risk did not have a material impact on our fair value measurements.

The following table sets forth by level within the fair value hierarchy our assets and liabilities that were measured at fair value on a recurring basis as of September 30, 2008 (in thousands):

At September 30, 2008	Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)		Margin Cash Collateral Offset		Total Net Fair Value (1)
Regulated gas derivative liability (2)	$	—	$	(12,127	)	$	—	$	—	$	(12,127	)
Unregulated electric derivative asset	—		3,763			—		—		3,763
Net derivative liability	$	—	$	(8,364	)	$	—	$	—	$	(8,364	)

(1) Fair value was determined using internal models based on quoted external commodity prices.

(2) The changes in the fair value of these derivatives are deferred as a regulatory asset or liability until the contracts are settled. Upon settlement, associated proceeds or costs are passed through the applicable cost tracking mechanism to customers.

We classify assets and liabilities within the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement of each individual asset and liability taken as a whole. Normal purchases and sales transactions, as defined by SFAS No. 133, and certain other long-term power purchase contracts are not included in the fair values by source table as they are not recorded at fair value. See Note 7 for further discussion.

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, 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 beginning January 1, 2008. We have assessed the provisions of the statement and elected not to apply fair value accounting to our eligible financial instruments. As a result, adoption of this statement had no impact on our financial results.

(3) 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 $500.6 million through 2025, and are included in Contractual Obligations and Other Commitments of Management's Discussion and Analysis.

9

(4) Income Taxes

We have unrecognized tax benefits of approximately $112.1 million as of September 30, 2008. If any of our unrecognized tax benefits were recognized during 2008, 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 nine months ended September 30, 2008, we have not recognized expense for interest or penalties, and do not have any amounts accrued at September 30, 2008 and December 31, 2007, respectively, for the payment of interest and penalties.

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

(5) Goodwill

There were no changes in our goodwill during the nine months ended September 30, 2008. Goodwill by segment is as follows for September 30, 2008 and December 31, 2007 (in thousands):

Regulated electric	$	241,100
Regulated natural gas		114,028
Unregulated electric		—
	$	355,128

(6) Other Comprehensive Income

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

Comprehensive income is calculated as follows (in thousands):

	ThreeMonthsEnded September 30,						NineMonthsEnded September 30,
	2008			2007			2008			2007
Net income	$	13,379		$	13,177		$	46,333		$	34,753
Other comprehensive income (loss), net of tax:
Reclassification of net gains on hedging instruments from OCI to net income		(297	)		(297	)		(891	)		(891	)
Foreign currency translation		(81	)		116			(143	)		286
Comprehensive income	$	13,001		$	12,996		$	45,299		$	34,148

(7) 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. 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.

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SFAS No. 133 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.

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.

While most of our derivative transactions are entered into for the purpose of managing commodity price risk, hedge accounting is only applied where specific criteria are met and it is practicable to do so. In order to apply hedge accounting, the transaction must be designated as a hedge and it must be highly effective in offsetting the hedged risk. Additionally, for hedges of commodity price risk, physical delivery for forecasted commodity transactions must be probable. We use the mark-to-market method of accounting for derivative contracts for which we do not elect or do not qualify for hedge accounting. Under the mark-to-market method of accounting, we record the fair value of these derivatives as assets and liabilities, with changes reflected in our consolidated statements of income. The market prices and quantities used to determine fair value reflect management’s best estimate considering various factors; however, future market prices and actual quantities will vary from those used in recording the derivative asset or liability, and it is possible that such variations could be material.

Commodity Prices

Unregulated Electric - We use derivatives to optimize the value of our unregulated power generation asset. Changes in the fair value for power purchases and sales are recognized on a net basis in operating revenues or cost of sales in the consolidated income statement unless hedge accounting is applied. While our derivative transactions are entered into for the purpose of managing commodity price risk, hedge accounting is only applied where specific criteria are met and it is practicable to do so. In order to apply hedge accounting, the transaction must be designated as a hedge and it must be highly effective in offsetting the hedged risk. Additionally, for hedges of commodity price risk, physical delivery for forecasted commodity transactions must be probable. Transactions that are financially settled are presented on a net basis. For the nine months ended September 30, 2008, we recorded unrealized gains in the income statement consistent with the mark-to-market method of accounting discussed above of approximately $3.8 million related to economic hedges where we have locked in forward prices.

Regulated Utilities - Certain contracts for the physical purchase of natural gas associated with our regulated gas utilities do not qualify for normal purchases under SFAS No. 133. Since these contracts are for the purchase of natural gas sold to regulated gas customers, the accounting for these contracts is subject to SFAS No. 71, Accounting for the Effects of Certain Types of Regulations (SFAS No. 71). We use derivative financial instruments to reduce the commodity price risk associated with the purchase price of a portion of our future natural gas requirements and minimize fluctuations in gas supply prices to our regulated customers. We record assets or liabilities based on the fair value of these derivatives, with offsetting positions recorded as regulatory liabilities or regulatory assets on the consolidated balance sheets. Upon settlement of these contracts, associated proceeds or costs are refunded to or collected from our customers consistent with regulatory requirements. At September 30, 2008 we had a derivative liability, included in other current liabilities in the consolidated balance sheet, and an offsetting current regulatory asset of $12.1 million.

Interest Rates

During 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 implemented a risk management strategy of utilizing interest rate swaps to manage our interest rate exposures associated with anticipated refinancing transactions. 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

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(AOCI) in our consolidated balance sheets. We settled $320.2 million of forward starting interest rate swap agreements, and received aggregate settlement payments of approximately $14.6 million in 2006. We reclassify these gains from AOCI into interest expense in our consolidated statements of income during the periods in which the hedged interest payments occur. AOCI includes unrealized pre-tax gains related to these transactions of $11.9 million and $12.8 million at September 30, 2008 and December 31, 2007, respectively. 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. We have no further interest rate swaps outstanding.

(8) Segment 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 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):

Three months ended,	Regulated						Unregulated
September 30, 2008	Electric			Gas			Electric			Other			Eliminations			Total
Operating revenues	$	208,020		$	45,651		$	20,091		$	7,889		$	(9,407	)	$	272,244
Cost of sales	113,299			22,803			(4,184		)	7,611			(9,026		)	130,503
Gross margin	94,721			22,848			24,275			278			(381		)	141,741
Operating, general and administrative	45,882			20,058			3,563			(5,711		)	(381		)	63,411
Property and other taxes	15,380			5,543			792			3			—			21,718
Depreciation	15,416			4,041			1,827			8			—			21,292
Operating income (loss)	18,043			(6,794		)	18,093			5,978			—			35,320
Interest expense	9,679			3,389			2,189			372			—			15,629
Other income	306			298			1			613			—			1,218
Income tax (expense) benefit	(3,477		)	3,750			(6,303		)	(1,500		)	—			(7,530		)
Net income (loss)	$	5,193		$	(6,135	)	$	9,602		$	4,719		$	—		$	13,379
Total assets	$	1,567,950		$	761,863		$	247,249		$	16,752		$	—		$	2,593,814
Capital expenditures	$	26,501		$	10,989		$	439		$	—		$	—		$	37,929

Three months ended,	Regulated						Unregulated
September 30, 2007	Electric			Gas			Electric			Other		Eliminations			Total
Operating revenues	$	202,093		$	37,051		$	18,795		$	17,167	$	(9,243	)	$	265,863
Cost of sales	109,924			16,252			5,225			16,535		(8,915		)	139,021
Gross margin	92,169			20,799			13,570			632		(328		)	126,842
Operating, general and administrative	31,431			13,342			7,791			250		(328		)	52,486
Property and other taxes	14,396			5,158			835			4		—			20,393
Depreciation	15,297			4,111			1,053			264		—			20,725
Operating income (loss)	31,045			(1,812		)	3,891			114		—			33,238
Interest expense	9,954			3,633			677			369		—			14,633
Other income	216			94			35			564		—			909
Income tax (expense) benefit	(7,988		)	1,993			(1,331		)	989		—			(6,337		)
Net income (loss)	$	13,319		$	(3,358	)	$	1,918		$	1,298	$	—		$	13,177
Total assets	$	1,509,756		$	739,507		$	120,020		$	16,425	$	—		$	2,385,708
Capital expenditures	$	15,811		$	7,280		$	2,205		$	—	$	—		$	25,296

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Nine monthsended,	Regulated						Unregulated
September 30, 2008	Electric			Gas			Electric			Other			Eliminations			Total
Operating revenues	$	583,606		$	297,825		$	57,064		$	24,464		$	(28,234	)	$	934,725
Cost of sales	303,550			193,996			14,472			23,770			(26,847		)	508,941
Gross margin	280,056			103,829			42,592			694			(1,387		)	425,784
Operating, general and administrative	115,755			53,717			10,459			(1,196		)	(1,387		)	177,348
Property and other taxes	46,147			17,355			2,386			10			—			65,898
Depreciation	46,203			11,925			5,455			25			—			63,608
Operating income	71,951			20,832			24,292			1,855			—			118,930
Interest expense	28,138			9,874			8,358			1,108			—			47,478
Other income (expense)	891			857			133			(241		)	—			1,640
Income tax expense	(15,810		)	(4,413		)	(6,457		)	(79		)	—			(26,759		)
Net income	$	28,894		$	7,402		$	9,610		$	427		$	—		$	46,333
Total assets	$	1,567,950		$	761,863		$	247,249		$	16,752		$	—		$	2,593,814
Capital expenditures	$	55,982		$	23,584		$	1,450		$	—		$	—		$	81,016

Nine monthsended,	Regulated						Unregulated
September 30, 2007	Electric			Gas			Electric			Other			Eliminations			Total
Operating revenues	$	551,166		$	257,272		$	55,674		$	49,953		$	(22,029	)	$	892,036
Cost of sales	290,603			168,386			13,666			47,708			(20,808		)	499,555
Gross margin	260,563			88,886			42,008			2,245			(1,221		)	392,481
Operating, general and administrative	96,770			47,490			23,695			6,877			(1,221		)	173,611
Property and other taxes	43,040			16,098			2,470			37			—			61,645
Depreciation	45,955			12,168			2,423			866			—			61,412
Operating income (loss)	74,798			13,130			13,420			(5,535		)	—			95,813
Interest expense	29,552			10,119			1,580			1,129			—			42,380
Other income	597			288			43			718			—			1,646
Income tax (expense) benefit	(17,144		)	(1,484		)	(4,983		)	3,285			—			(20,326		)
Net income (loss)	$	28,699		$	1,815		$	6,900		$	(2,661	)	$	—		$	34,753
Total assets	$	1,509,756		$	739,507		$	120,020		$	16,425		$	—		$	2,385,708
Capital expenditures	$	44,362		$	29,397		$	4,146		$	—		$	—		$	77,905

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(9) 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. 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:

	Nine Months Ended September 30, 2008	Nine Months Ended September 30, 2007
Basic computation	38,665,241	36,062,574
Dilutive effect of
Restricted shares	322,684	469,207
Stock warrants	—	1,000,483
Diluted computation	38,987,925	37,532,264

	Three Months Ended September 30, 2008	Three Months Ended September 30, 2007
Basic computation	38,057,346	36,471,146
Dilutive effect of
Restricted shares	322,684	469,207
Stock warrants	—	543,401
Diluted computation	38,380,030	37,483,754

We repurchased approximately 3.1 million shares during the three months ended September 30, 2008 as part of a previously announced share buyback program, which reduced the number of average shares outstanding. Warrants issued in 2004 were exercisable through the close of business November 1, 2007. A total of 979,351 and 1,385,870 warrants were exercised during the three and nine months ended September 30, 2007, respectively. Warrants outstanding as of September 30, 2007 of 3,120,655 were dilutive and included in the 2007 earnings per share calculation.

(10) Employee Benefit Plans

Net periodic benefit cost for our pension and other postretirement plans consists of the following for the three and nine months ended September 30, 2008 and 2007 (in thousands):

	PensionBenefits						OtherPostretirement Benefits
	ThreeMonthsEndedSeptember30,
	2008			2007			2008			2007
Components of Net Periodic Benefit Cost
Service cost	$	2,101		$	2,236		$	140		$	145
Interest cost		5,718			5,449			591			611
Expected return on plan assets		(6,803	)		(6,106	)		(329	)		(267	)
Amortization of prior service cost		62			61			—			—
Recognized actuarial gain		(205	)		—			(149	)		(89	)
Net Periodic Benefit Cost	$	873		$	1,640		$	253		$	400

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	PensionBenefits						OtherPostretirement Benefits
	NineMonthsEndedSeptember30,
	2008			2007			2008			2007
Components of Net Periodic Benefit Cost
Service cost	$	6,304		$	6,710		$	422		$	435
Interest cost		17,156			16,349			1,775			1,832
Expected return on plan assets		(20,410	)		(18,317	)		(987	)		(802	)
Amortization of prior service cost		185			182			—			—
Recognized actuarial gain		(614	)		—			(449	)		(269	)
Net Periodic Benefit Cost	$	2,621		$	4,924		$	761		$	1,196

Pension costs in Montana are included in expense on a pay as you go (cash funding) basis. In 2005, the MPSC authorized the recognition of pension costs based on an average of the annual funding to be made over a 5-year period for the calendar years 2005 through 2009, therefore our pension expense differs from the net periodic benefit cost. In January 2008, we contributed approximately $21.9 million to our pension plans.

(11) Regulatory Matters

Federal Energy Regulatory Commission (FERC) Transmission Rate Case - In October 2006, we filed a request with the FERC for an electric transmission revenue increase. We filed settlement documents on February 15, 2008, and on October 16, 2008, FERC approved the settlement.

Montana Electric and Natural Gas Rate Case- In July 2007, we filed a request with the Montana Public Service Commission (MPSC) for an 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 (MCC) filed a joint stipulation with the MPSC to settle our electric and natural gas rate cases. Specific terms of the stipulation included:

• An annual 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 megawatts (MW)s of unit contingent power from Colstrip Unit 4 at Mid-Columbia (Mid-C) Index prices minus $19 per MWH, but not less than zero, 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.

On July 1, 2008, the MPSC approved the stipulated agreement, finalizing the Montana electric and natural gas rate case.

Mill Creek Generating Station- In August 2008, we filed a request with the MPSC for advanced approval of a proposed $206 million, 200 MW natural gas fired facility. The Mill Creek Generating Station would provide regulating resources to balance our transmission system in Montana to maintain reliability and enable additional wind power to be integrated onto the network to meet future renewable energy portfolio needs. As part of the MPSC filing, we requested a capital structure of 50% equity and 50% debt and an authorized return on equity of 10.75%. The MPSC has 270 days from the filing date to issue a determination whether the plant will be allowed into rate base.

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Colstrip Unit 4 –We currently have two open dockets before the MPSC related to our FERC regulated joint ownership interest in the Colstrip Unit 4 generation facility, which represents approximately 30% or approximately 222 MWs at full load. See Note 12 – “Proposed Colstrip Unit 4 Transaction” and Note 14 – “Commitments and Contingencies – MPSC Investigation” for further discussion.

(12) Proposed Colstrip Unit 4 Transaction

In January 2008, we announced that we had retained a financial advisor to assist us in the evaluation of our strategic options related to our 30% ownership interest in Colstrip Unit 4. Options reviewed included selling our ownership through a competitive bid process, putting the asset in rate base in Montana, or retaining the asset and contracting future sales of the plant output. On June 10, 2008, we entered into an agreement to sell our interest in Colstrip Unit 4 for $404 million in cash, subject to certain working capital adjustments. The agreement provides a timeline of 120 days for us to explore the viability of placing this asset into our Montana utility rate base. The agreement also contains certain termination rights for both us and the buyer in which, under specified circumstances, we may be required to pay a termination fee of $6.3 million or the buyer may be required to pay a termination fee of $20 million.

Consistent with these terms, on June 30, 2008, we submitted a filing with MPSC to initiate a review process to determine if it would be in the public interest to place our interest in Colstrip Unit 4 into rate base at an equivalent value to the negotiated selling price including certain adjustments. If the filing with the MPSC is rejected, the electric utility’s regulated supply group will have an option to purchase power at a discount to Mid-C Index prices as existing contracts expire and power becomes available in future years. In addition, the transaction is conditioned upon FERC approval and other customary closing conditions. A hearing was conducted in September and we anticipate a ruling by the MPSC in mid-November. If the MPSC does not rate base at the equivalent value, we would expect to complete the process to sell Colstrip 4 to Bicent (Montana) Power Company (Bicent) by year-end although the agreement allows for closing to occur at anytime before the end of January 2009.

We have evaluated the potential sale of our interest in Colstrip Unit 4 for classification as held for sale under SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The held for sale classification only applies to assets where the sale is subject to terms that are usual and customary for sales of such assets, and the sale of the asset is considered probable. The term probable is used consistent with the meaning associated with it in paragraph 3(a) of SFAS No. 5, Accounting for Contingencies, and refers to a future sale that is "likely to occur." The provisions of the agreement allowing us to explore the rate base alternative do not constitute usual and customary terms and the transaction is not considered probable, as defined, due to the uncertainty surrounding this process with the MPSC. We have continued to reflect the assets and results of operations of Colstrip Unit 4 as continuing operations, and will reevaluate our classification as the process progresses.

(13) Financing Activities

During the second quarter of 2008, we issued $55 million of South Dakota First Mortgage Bonds at a fixed interest rate of 6.05% maturing May 1, 2018, and used the proceeds to redeem our 7.0%, $55 million South Dakota Mortgage Bonds due August 15, 2023. This transaction will reduce our annual interest expense by approximately $0.5 million.

In addition, we repaid our 5.85%, $7.6 million and 5.9%, $13.8 million South Dakota Pollution Control Bonds maturing in 2023. This transaction will reduce our annual interest expense by approximately $1.3 million.

(14) Commitments and Contingencies

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 September 30, 2008, we have a reserve of approximately $31.0 million for these obligations. 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. In addition, we are currently seeking insurance reimbursement of previously incurred costs

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that primarily related to historic generation facilities and if we receive any such reimbursements, they will be recognized in the period of receipt.

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 (low sulphur), 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 are joint owners in Colstrip Unit 4, a coal-fired power plant located in southeastern Montana, and 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 affected coal-fired plants. These regulations established a cap-and-trade program that would have taken effect in two phases beginning January 2010 and January 2018. Under CAMR, each state was allocated a mercury emissions cap and was required to develop regulations to implement the requirements, which could follow the federal requirements or be more restrictive. In February 2008 the EPA’s CAMR were turned down by the U.S. Court of Appeals for the District of Columbia Circuit; however, under this opinion, the EPA must either properly remove mercury from regulation under the hazardous air pollutant provisions of the Clean Air Act or develop standards requiring maximum achievable control technology for mercury emissions. On September 24, 2008, the EPA filed a petition for rehearing in the Clean Air Interstate Rule case.

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. The joint owners currently plan to install chemical injection technologies to meet these requirements. We estimate our share of the capital cost would be approximately $1 million, with ongoing annual operating costs of approximately $3 million. 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 June 2008, the Sierra Club filed a lawsuit in U.S. District Court in South Dakota against NorthWestern and the other joint owners of the Big Stone plant alleging certain violations of the Clean Air Act. For further discussion see the Litigation – Sierra Club section below.

Manufactured Gas Plants

Approximately $25.2 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 $11.6 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

17

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.

Milltown Dam Removal

Our subsidiary, Clark Fork and Blackfoot, LLC (CFB), owns the former Milltown Dam site, and previously operated a three MW hydroelectric generation facility located at the confluence of the Clark Fork and Blackfoot Rivers. Dam removal activities were initiated during the first quarter of 2008 and are expected to be complete within a year. Our remaining obligation to the State of Montana related to this site is approximately $0.6 million, which will be solely funded through the sale or transfer of land and water rights associated with the former 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, applicable insurance coverage, and the potential to recover some portion of prudently incurred remediation costs in rates, 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.

Legal Proceedings

Magten/Law Debenture/QUIPS Litigation

Magten Settlement

In July 2008, the US Bankruptcy Court approved a settlement agreement between NorthWestern, Magten Asset Management (Magten), Law Debenture Trust Company of New York (Law Debenture) and the Plan Committee that resolves the litigation related to claims of holders of quarterly income preferred securities (QUIPS) in our Chapter 11 bankruptcy case. On July 23, 2008 the Ad Hoc Committee filed an appeal to the global settlement agreement, however, we and the other parties involved waived a closing condition and closed on the settlement on July 24, 2008. Under the approved global settlement agreement Magten, Law Debenture, their lawyers and the holders of the QUIPS, collectively received a cash payment of $23 million to be allocated amongst them in accordance with the terms of the global settlement agreement. The cash payment was funded by our repurchase of 782,059 shares held in the disputed claims reserve established under our confirmed Plan of Reorganization, as discussed below. This settlement resolves the last significant claim from the bankruptcy case, and also provided for reimbursement of previously incurred legal fees and expenses of $4 million, which are reflected as a reduction of operating, general and administrative expenses.

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Disputed Claims Reserve

In July 2008, we obtained bankruptcy court approval for the purchase of the remaining shares in the disputed claims reserve. The motion allowed unsecured creditors and debt holders in Class 7 and Class 9 to elect to receive their surplus distribution in stock or cash. We repurchased 1.1 million shares from the disputed claims reserve for those claimants who elected a cash payment. In October 2008, we filed a motion requesting the Bankruptcy Court to determine the disputed claims reserve is taxable as a grantor trust, which we expect to be heard in November 2008. Upon resolution of this motion, we expect to distribute the remaining cash and shares in the disputed claims reserve to eligible claimants.

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), contends that the disposition of various generating and energy-related assets by The Montana Power Company are 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. (now CFB), 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 seeks, among other things, the avoidance of the transfer of assets from CFB to us, declaration that the assets were fraudulently transferred and were 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. The District Court enjoined the plaintiffs from taking any further action in any of these matters. The plaintiffs appealed the District Court’s January 11^th injunction to the Ninth Circuit U.S. Court of Appeals, where on July 10, 2008, the Ninth Circuit U.S. Court of Appeals heard oral arguments; a determination is pending. We do not anticipate a resolution of this litigation before class representatives and class counsel are approved by the U.S. District Court in Montana. However, we believe that given the scope of the Order confirming the Plan and the injunctions issued by the Delaware Bankruptcy Court which channeled the claims to the D&O Trust, we have limited exposure to the plaintiffs 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.

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 of reorganization, that we breached those contracts, and breached a covenant of good faith and fair dealing under

19

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 May 2005, the Bankruptcy Court found that it did not have jurisdiction over these contracts, dismissed our action against these former employees, and transferred our motion to terminate the contracts to Montana state court, thereby removing any claim from consideration in the resolution of our bankruptcy case. 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 to the Montana Supreme Court 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. Interest accrues on the verdict amount during the appeal process.

Sierra Club

On June 10, 2008, Sierra Club filed a complaint in the U.S. District Court for the District of South Dakota (Northern Division) against us and two other co-owners (the Defendants) of Big Stone Generating Station (Big Stone). The complaint alleges certain violations of the (i) Prevention of Significant Deterioration and (ii) New Source Performance Standards (NSPS) provisions of the Clean Air Act and certain violations of the South Dakota State Implementation Plan (South Dakota SIP). The action further alleges that the Defendants modified and operated Big Stone without obtaining the appropriate permits, without meeting certain emissions limits and NSPS requirements and without installing appropriate emission control technology, all allegedly in violation of the Clean Air Act and the South Dakota SIP. Sierra Club alleges that Defendants’ actions have contributed to air pollution and visibility impairment and have increased the risk of adverse health effects and environmental damage. Sierra Club seeks both declaratory and injunctive relief to bring the Defendants into compliance with the Clean Air Act and the South Dakota SIP and to require Defendants to remedy the alleged violations. Sierra Club also seeks unspecified civil penalties, including a beneficial mitigation project. We believe that these claims are without merit and that Big Stone has been and is being operated in compliance with the Clean Air Act and the South Dakota SIP.

The Defendants filed a Motion to Dismiss the Sierra Club complaint on August 12, 2008, based on certain of the claims being barred by statute of limitations and the remaining claims being an impermissible collateral attack on valid Clean Air Permits issued by the state of South Dakota. On September 22, 2008, the Sierra Club filed its response. Additionally on September 22, 2008, the Sierra Club sent a Notice of Intent to Sue for additional violations of the Clean Air Act at Big Stone, which are similar in nature and seek the same remedies as the June 2008 complaint. The ultimate outcome of these matters cannot be determined at this time.

Other Litigation and Contingencies

FERC Investigation

During the second quarter of 2007, we voluntarily informed the FERC of several potential regulatory compliance issues related to our natural gas business. We have an agreement in principle with the FERC to resolve these matters, and based on our current assessment we do not anticipate the FERC’s investigation will have a material adverse effect on our results of operations.

Colstrip Energy Limited Partnership

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. Under the terms of the power purchase agreement with CELP, energy and capacity rates were fixed through June 30, 2004 (with a small portion to be set by the MPSC's determination of rates in the annual avoided cost filing), 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. CELP filed a complaint against NorthWestern and the MPSC in Montana district court on July 6, 2007 which contests the MPSC’s order. 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

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$22 million for contract years 2004, 2005 and 2006. If the MPSC's order is upheld in its current form, we anticipate reducing our QF liability by approximately $25 to $50 million as our estimate of energy and capacity rates for the remainder of the contract period would be reduced. 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 an ultimate decision on CELP's complaint. On June 30, 2008, the state district court judge granted our motions to enforce the contractual arbitration provision and to stay all discovery and proceedings against us, pending the decision of the required contract arbitration. The state district court, on June 30, 2008, also granted a motion by the MPSC to bifurcate, having the effect of separating the issues between contract/tort claims and the administrative appeal of the MPSC’s orders; which we supported. The order also stayed the appellate decision pending a decision in our arbitration proceedings. An arbitration schedule has not yet been set. We believe that we will prevail in the arbitration and intend to vigorously defend our positions.

Colstrip Unit 4 Coal Royalties

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 based upon the applicable 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 succeeds in passing the expense responsibility to the owners, our share of the alleged additional royalties would be 15 percent, or approximately $6.0 million, and we would have ongoing royalty expenses related to coal transportation. The parties have an agreement in principle to resolve this dispute. If the matter is resolved as contemplated, it would not have a material impact on our results of operations and financial position. We expect to finalize the agreement by the end of 2008.

Blue Dot Arbitration

During the second quarter of 2008, our subsidiary Blue Dot Services, LLC (Blue Dot) lost an arbitration matter with an insurance carrier and the insurance carrier was awarded $3.4 million plus interest related to a dispute that originated in 2007. The award was partially satisfied by $2.5 million in letter of credit draws by the insurance carrier. Blue Dot has approximately $300,000 in remaining cash. On September 5, 2008, Blue Dot and its subsidiaries filed a petition for protection under Chapter 7 of the Bankruptcy Code in United States Bankruptcy Court for the District of Delaware. We classified Blue Dot as a discontinued operation in 2003. We do not anticipate Blue Dot’s ultimate liquidation will have a material adverse effect, if any, on our results of operations and financial position.

MPSC Investigation

During the first quarter of 2008, the MPSC opened a proceeding to investigate our compliance with a 2004 MPSC order limiting our ability to provide loans, guarantees, advances, equity investments or working capital to subsidiaries or affiliates. This proceeding is in response to an MCC complaint that we violated the MPSC’s order when we purchased our previously leased interests in Colstrip Unit 4. We have provided documentation to the MPSC that we did not violate their order.

The MCC has taken the position that we violated a Commission order and has sought remedies, which, if adopted, would have a material adverse financial effect on us. We do not believe that the MCC’s position is supported by the law or the facts and we vigorously disputed the MCC’s position that we violated a Commission order; however, if the MPSC finds a violation, we believe the remedies sought by the MCC are grossly disproportionate to

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any violation. A hearing was conducted in September and we anticipate a ruling by the MPSC by mid-November. We are unable to predict the outcome of this investigation at this time.

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

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

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

OVERVIEW

NorthWestern Corporation, doing business as NorthWestern Energy, provides electricity and natural gas to approximately 650,000 customers in Montana, South Dakota and Nebraska. For a discussion of NorthWestern’s business strategy, see Management’s Discussion and Analysis in our Annual Report on Form 10-K for the year ended December 31, 2007.

Highlights

Recent highlights include:

• Completed the share buyback program announced in the second quarter of 2008 of approximately 3.1 million shares at an aggregate cost of $77.7 million;

• Filed a request with the MPSC for advanced approval of the proposed $206 million, 200 MW Mill Creek Generating Station; and

• Submitted the Mountain States Transmission Intertie (MSTI) Major Facility Siting Application with the Montana Department of Environmental Quality.

Proposed Colstrip Unit 4 Transaction

In January 2008, we announced that we had retained a financial advisor to assist us in the evaluation of our strategic options related to our 30% ownership interest in Colstrip Unit 4. Options reviewed included selling our ownership through a competitive bid process, putting the asset in rate base in Montana, or retaining the asset and contracting future sales of the plant output. On June 10, 2008, we entered into an agreement to sell our interest in Colstrip Unit 4 for $404 million in cash, subject to certain working capital adjustments. The agreement provides a timeline of 120 days for us to explore the viability of placing this asset into our Montana utility rate base. The agreement also contains certain termination rights for both us and the buyer in which, under specified circumstances, we may be required to pay a termination fee of $6.3 million or the buyer may be required to pay a termination fee of $20 million.

Consistent with these terms, on June 30, 2008, we submitted a filing with the MPSC to initiate a review process to determine if it would be in the public interest to place our interest in Colstrip Unit 4 into rate base at an equivalent value to the negotiated selling price including certain adjustments. If the filing with the MPSC is rejected, the electric utility’s regulated supply group will have an option to purchase power at a discount to Mid-C Index prices as existing contracts expire and power becomes available in future years. In addition, the transaction is conditioned upon FERC approval and other customary closing conditions. A hearing was conducted in September and we anticipate a ruling by the MPSC in mid-November. If the MPSC does not rate base at the equivalent value, we would expect to complete the process to sell Colstrip 4 to Bicent by year-end although the agreement allows for closing to occur at anytime before the end of January 2009.

If the transaction with Bicent were completed, we would recognize a pre-tax gain of approximately $160 million; however our future net income would decrease due to the divestiture of our unregulated electric segment. If the asset is placed in Montana utility rate base, we would no longer present an unregulated electric segment and the results of operations of our interest in Colstrip Unit 4 would be reflected in the regulated electric segment.

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OVERALL CONSOLIDATED RESULTS

The following is a summary of our results of operations for the three and nine months ended September 30, 2008 and 2007. 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.

Three Months Ended September 30, 2008 Compared with the Three Months Ended September 30, 2007

	Three Months Ended September 30,
		2008			2007			Change		% Change
		(in millions)
Operating Revenues
Regulated Electric	$	208.0		$	202.1		$	5.9		2.9		%
Regulated Natural Gas		45.6			37.1			8.5		22.9
Unregulated Electric		20.1			18.8			1.3		6.9
Other		7.9			17.1			(9.2	)	(53.8	)
Eliminations		(9.4	)		(9.3	)		(0.1	)	(1.1	)
	$	272.2		$	265.8		$	6.4		2.4		%

	Three Months Ended September 30,
		2008			2007			Change		% Change
		(in millions)
Cost of Sales
Regulated Electric	$	113.3		$	109.9		$	3.4		3.1		%
Regulated Natural Gas		22.8			16.3			6.5		39.9
Unregulated Electric		(4.2	)		5.2			(9.4	)	(180.8	)
Other		7.6			16.5			(8.9	)	(53.9	)
Eliminations		(9.0	)		(8.9	)		(0.1	)	(1.1	)
	$	130.5		$	139.0		$	(8.5	)	(6.0	)	%

	Three Months Ended September 30,
		2008			2007			Change		% Change
		(in millions)
Gross Margin
Regulated Electric	$	94.7		$	92.2		$	2.5		2.7		%
Regulated Natural Gas		22.8			20.8			2.0		9.6
Unregulated Electric		24.3			13.6			10.7		78.7
Other		0.3			0.6			(0.3	)	(50.0	)
Eliminations		(0.4	)		(0.4	)		—		—
	$	141.7		$	126.8		$	14.9		11.8		%

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Consolidated gross margin for the three months ended September 30, 2008 was $141.7 million, an increase of $14.9 million, or 11.8%, as compared with gross margin of $126.8 million in the third quarter of 2007. The following summarizes components of the change:

	Gross Margin
	2008 vs. 2007
	(in millions)
Unregulated electric unrealized gain on forward contracts	$	10.2
Rate increases	3.8
Unregulated electric pricing and fuel supply costs	1.2
Regulated electric volumes and wholesale	(2.0		)
Other	1.7
Improvement in Gross Margin	$	14.9

Improvements in gross margin were primarily due to an unrealized gain on forward contracts due to changes in forward prices of electricity, as well as the reversal of previously recognized unrealized gains/losses as the underlying transactions are realized, which reduced our unregulated electric cost of sales. These forward contracts economically hedge a portion of our Colstrip Unit 4 output through 2009. Regulated electric and gas rate increases also contributed to the improvements in gross margin. These improvements were partially offset by lower volumes in our regulated and unregulated electric segments and higher wholesale electric supply costs.

	Three Months Ended September 30,
		2008		2007		Change	% Change
		(in millions)
Operating Expenses
Operating, general and administrative	$	63.4	$	52.5	$	10.9	20.8	%
Property and other taxes		21.7		20.4		1.3	6.4
Depreciation		21.3		20.7		0.6	2.9
	$	106.4	$	93.6	$	12.8	13.7	%

Consolidated operating, general and administrative expenses were $63.4 million for the three months ended September 30, 2008 as compared with $52.5 million in the third quarter of 2007.

	Operating, General & Administrative Expenses
	2008 vs. 2007
	(in millions)
Pension expense	$	11.4
Labor and benefits	2.8
Bad debt expense	1.4
Legal and professional fees	(4.3		)
Operating lease expense	(3.6		)
Other	3.2
Increase in Operating, General and Administrative Expenses	$	10.9

The increase in operating, general and administrative expenses of $10.9 million was primarily due to the following:

• Higher pension expense of $11.4 million related to the pension plan for our Montana employees (see note below);

• Increased labor and benefits costs due to a combination of compensation increases, severance costs and higher medical claims; and

• Higher bad debt expense based on higher average customer receivable balances.

Pension costs in Montana are included in expense on a pay as you go (cash funding) basis. In 2005, the MPSC authorized the recognition of pension costs based on an average of the annual funding to be made over a 5-year period

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for the calendar years 2005 through 2009. Based on plan asset market losses through September 2008, we have increased our 2009 funding projections for our Montana plan to approximately $47.0 million, which exceeds our estimated minimum funding requirements. In accordance with the MPSC’s 2005 authorization, this will result in annual pension expense for 2008 and 2009 of $37.5 million, which is approximately $15.2 million higher than our original projection. We will not know our actual funding requirement until the end of 2008 based on actual plan asset returns for the full year. Adjustments during the fourth quarter of 2008 could be significant.

Offsets to the increases discussed above include the following:

• The receipts of an insurance reimbursement and litigation settlement during the third quarter of 2008 of approximately $7.7 million, offset by higher legal and professional fees of $3.4 million primarily related to those same matters as well as our proposed Colstrip Unit 4 transaction; and

• Decreased operating lease expense related to the purchase of our previously leased interest in Colstrip Unit 4 during 2007 (we expect operating lease expense to decrease $14.4 million in 2008).

In addition, we anticipate receiving additional insurance proceeds ranging between $6.0 million and $8.0 million related to various matters that, if received, will reduce our operating, general and administrative expenses during the fourth quarter of 2008.

Property and other taxes were $21.7 million for the three months ended September 30, 2008 as compared with $20.4 million in the third quarter of 2007. Property taxes in 2007 are net of approximately $1.5 million collected through our Montana property tax tracker. We have been in process of protesting our 2007, 2006 and 2005 Montana property taxes and appealed our 2005 valuation in Montana state court. In September 2008, the court affirmed prior decisions made by the Montana Department of Revenue (MDOR) and the State Tax Appeals Board, however it returned the matter to the MDOR to make various corrections. During October we reached an agreement in principle with the MDOR to settle the dispute, which should result in a refund of approximately $4.6 million of previous taxes paid. Since we have a property tax tracker in Montana, a portion of this refund will likely be returned to customers; however, we will not be able to determine the amount until the agreement with the MDOR is finalized.

Depreciation expense was $21.3 million for the three months ended September 30, 2008 as compared with $20.7 million in the third quarter of 2007. The increase was primarily due to the purchase of our previously leased interest in Colstrip Unit 4.

Consolidated operating income for the three months ended September 30, 2008 was $35.3 million, as compared with $33.2 million in the third quarter of 2007. This $2.1 million increase was due to the $14.9 million increase in gross margin partly offset by the $12.8 million higher operating expenses discussed above.

Consolidated interest expense for the three months ended September 30, 2008 was $15.6 million, an increase of $1.0 million, or 6.8%, from the third quarter of 2007. This increase was primarily related to the additional debt incurred with the purchase of our previously leased interest in Colstrip Unit 4.

Consolidated other income for the three months ended September 30, 2008 was $1.2 million, an improvement of $0.3 million from the third quarter of 2007.

Consolidated income tax expense for the three months ended September 30, 2008 was $7.5 million as compared with $6.3 million in the third quarter of 2007. Our effective tax rate for 2008 was 36.0% as compared to 32.3% for 2007. The 2007 effective tax rate was lower than normal due to the deductibility during that period of previously incurred transaction related costs. 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 for the three months ended September 30, 2008 was $13.4 million as compared with $13.2 million for the third quarter of 2007. Higher margins were offset by higher operating expenses, interest and income tax expense as discussed above.

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Nine Months Ended September 30, 2008 Compared with the Nine Months Ended September 30, 2007

	Nine Months Ended September 30,
		2008			2007			Change		% Change
		(in millions)
Operating Revenues
Regulated Electric	$	583.6		$	551.2		$	32.4		5.9		%
Regulated Natural Gas		297.8			257.3			40.5		15.7
Unregulated Electric		57.1			55.7			1.4		2.5
Other		24.4			49.9			(25.5	)	(51.1	)
Eliminations		(28.2	)		(22.0	)		(6.2	)	(28.2	)
	$	934.7		$	892.1		$	42.6		4.8		%

	Nine Months Ended September 30,
		2008			2007			Change		% Change
		(in millions)
Cost of Sales
Regulated Electric	$	303.5		$	290.6		$	12.9		4.4		%
Regulated Natural Gas		194.0			168.4			25.6		15.2
Unregulated Electric		14.5			13.7			0.8		5.8
Other		23.7			47.7			(24.0	)	(50.3	)
Eliminations		(26.8	)		(20.8	)		(6.0	)	(28.8	)
	$	508.9		$	499.6		$	9.3		1.9		%

	Nine Months Ended September 30,
		2008			2007			Change		% Change
		(in millions)
Gross Margin
Regulated Electric	$	280.1		$	260.6		$	19.5		7.5		%
Regulated Natural Gas		103.8			88.9			14.9		16.8
Unregulated Electric		42.6			42.0			0.6		1.4
Other		0.7			2.2			(1.5	)	(68.2	)
Eliminations		(1.4	)		(1.2	)		(0.2	)	(16.7	)
	$	425.8		$	392.5		$	33.3		8.5		%

Consolidated gross margin was $425.8 million for the nine months ended September 30, 2008, an increase of $33.3 million, or 8.5%, from gross margin in the same period of 2007. The following summarizes components of the change:

	Gross Margin
	2008 vs. 2007
	(in millions)
Rate increases	$	14.4
Unregulated electric volumes	6.8
Regulated gas volumes	6.2
Regulated electric volumes and wholesale	4.5
Unregulated electric unrealized gain on forward contracts	3.8
Regulated electric QF supply costs	3.5
Unregulated electric pricing and fuel supply costs	(10.0		)
Other	4.1
Improvement in Gross Margin	$	33.3

Improvements in regulated electric and gas margin were due to an increase in rates, an increase in volumes from customer growth and usage, and lower qualifying facility (QF) supply costs based on actual QF pricing and output. In

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addition, we had improved electric wholesale margin due to increased plant availability. Unregulated electric margin improved due to a combination of higher volumes and an unrealized gain on forward contracts as discussed above, partially offset by lower average contracted prices and higher fuel supply costs.

	Nine Months Ended September 30,
		2008		2007		Change	% Change
		(in millions)
Operating Expenses
Operating, general and administrative	$	177.3	$	173.6	$	3.7	2.1	%
Property and other taxes		66.0		61.7		4.3	7.0
Depreciation		63.6		61.4		2.2	3.6
	$	306.9	$	296.7	$	10.2	3.4	%

Consolidated operating, general and administrative expenses were $177.3 million for the nine months ended September 30, 2008 as compared with $173.6 million in the same period of 2007.

	Operating, General & Administrative Expenses
	2008 vs. 2007
	(in millions)
Operating lease expense	$	(12.1	)
Legal and professional fees	(6.0		)
Pension expense	11.4
Labor and benefits	5.3
Other	5.1
Increase in Operating, General and Administrative Expenses	$	3.7

The increase in operating, general and administrative expenses of $3.7 million was primarily due to decreased operating lease expense and legal and professional fees, offset by increased pension expense and labor and benefits as discussed above.

Property and other taxes were $66.0 million for the nine months ended September 30, 2008 as compared to $61.7 million in the same period of 2007. Property taxes in 2007 are net of approximately $4.4 million collected through our Montana property tax tracker.

Depreciation expense was $63.6 million for the nine months ended September 30, 2008 as compared with $61.4 million in the same period of 2007. The increase was primarily due to the purchase of our previously leased interest in Colstrip Unit 4.

Consolidated operating income for the nine months ended September 30, 2008 was $118.9 million, as compared with $95.8 million in the same period of 2007. This $23.1 million increase was due to the $33.3 million increase in gross margin partly offset by the $10.2 million higher operating expenses as discussed above.

Consolidated interest expense for the nine months ended September 30, 2008 was $47.5 million, an increase of $5.1 million, or 12.0%, from the same period of 2007. This increase was primarily related to the additional debt incurred with the purchase of our previously leased interest in Colstrip Unit 4.

Consolidated income tax expense for the nine months ended September 30, 2008 was $26.8 million as compared with $20.3 million in the same period of 2007. Our effective tax rate for 2008 was 36.6% as compared to 36.8% for 2007.

Consolidated net income for the nine months ended September 30, 2008 was $46.3 million compared with $34.8 million for the same period of 2007. This increase was primarily due to higher operating income partly offset by higher interest and income tax expense as discussed above.

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REGULATED ELECTRIC SEGMENT

Three Months Ended September 30, 2008 Compared with the Three Months Ended September 30, 2007

			Results
			2008				2007				Change		% Change
			(inmillions)
	Total Revenues	$		208.0		$		202.1		$		5.9		2.9	%
	Total Cost of Sales			113.3				109.9				3.4		3.1
	Gross Margin	$		94.7		$		92.2		$		2.5		2.7	%
% GM/Rev			45.5		%		45.6		%

The following summarizes the components of the changes in regulated electric margin for the three months ended September 30, 2008 and 2007:

	Gross Margin
	2008 vs. 2007
	(in millions)
Montana jurisdiction transmission and distribution rate increase	$	2.6
Cooler summer weather and customer usage	(1.8		)
Wholesale	(0.2		)
Other	1.9
Improvement in Gross Margin	$	2.5

This improvement is primarily due to rate increases partly offset by a weather-related net decrease in customer usage and lower wholesale margin due to lower average prices, offset in part by increased volumes.

The following summarizes regulated electric volumes, customer counts and cooling degree-days for the three months ended September 30, 2008 and 2007:

	VolumesMWH
	2008		2007		Change			% Change
	(inthousands)
Retail Electric
Montana		532		557		(25	)		(4.5	)	%
South Dakota		130		142		(12	)		(8.5	)
Residential		662		699		(37	)		(5.3	)
Montana		853		871		(18	)		(2.1	)
South Dakota		237		231		6			2.6
Commercial		1,090		1,102		(12	)		(1.1	)
Industrial		786		770		16			2.1
Other		88		95		(7	)		(7.4	)
Total Retail Electric		2,626		2,666		(40	)		(1.5	)	%
Wholesale Electric		71		54		17			31.5		%

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Average Customer Counts		2008		2007		Change		% Change
	Retail Electric
	Montana		265,258		261,769		3,489		1.3	%
	South Dakota		47,947		47,713		234		0.5
	Residential		313,205		309,482		3,723		1.2
	Montana		59,817		58,603		1,214		2.1
	South Dakota		11,605		11,447		158		1.4
	Commercial		71,422		70,050		1,372		2.0
	Industrial		71		71		—		—
	Other		7,640		7,506		134		1.8
	Total Retail Electric		392,338		387,109		5,229		1.4	%

	2008ascomparedto:
CoolingDegree-Days	2007	HistoricAverage
Montana	43% colder	13% warmer
South Dakota	23% colder	11% colder

Regulated electric volumes decreased due to cooler summer weather. Regulated wholesale electric volumes increased due to increased plant availability as compared with 2007.

Nine Months Ended September 30, 2008 Compared to the Nine Months Ended September 30, 2007

			Results
			2008				2007				Change		% Change
			(inmillions)
	Total Revenues	$		583.6		$		551.2		$		32.4		5.9	%
	Total Cost of Sales			303.5				290.6				12.9		4.4
	Gross Margin	$		280.1		$		260.6		$		19.5		7.5	%
% GM/Rev			48.0		%		47.3		%

The following summarizes the components of the changes in regulated electric margin for the nine months ended September 30, 2008 and 2007:

	Gross Margin
	2008 vs. 2007
	(in millions)
Montana jurisdiction transmission and distribution rate increase	$	7.3
QF supply costs	3.5
Customer growth, usage and colder winter weather	3.1
Wholesale	2.4
FERC jurisdiction transmission rate increase	1.1
Transmission volumes	(1.0		)
Other	3.1
Improvement in Gross Margin	$	19.5

This improvement is primarily due to rate increases, lower QF supply costs based on actual QF pricing and output, increased volumes from customer growth, usage and colder winter weather, and improved wholesale margin due to increased plant availability, offset in part by lower average prices in the third quarter of 2008. Lower transmission volumes with less demand to transmit energy for others across our lines partly offset these increases.

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The following summarizes regulated electric volumes, customer counts and cooling degree-days for the nine months ended September 30, 2008 and 2007:

	VolumesMWH
	2008		2007		Change			% Change
	(inthousands)
Retail Electric
Montana		1,699		1,653		46			2.8		%
South Dakota		394		393		1			0.3
Residential		2,093		2,046		47			2.3
Montana		2,408		2,413		(5	)		(0.2	)
South Dakota		658		627		31			4.9
Commercial		3,066		3,040		26			0.9
Industrial		2,320		2,250		70			3.1
Other		151		164		(13	)		(7.9	)
Total Retail Electric		7,630		7,500		130			1.7		%
Wholesale Electric		202		119		83			69.7		%

Average Customer Counts		2008		2007		Change		% Change
	Retail Electric
	Montana		265,727		262,050		3,677		1.4	%
	South Dakota		47,912		47,660		252		0.5
	Residential		313,639		309,710		3,929		1.3
	Montana		59,471		58,143		1,328		2.3
	South Dakota		11,486		11,335		151		1.3
	Commercial		70,957		69,478		1,479		2.1
	Industrial		71		71		—		—
	Other		5,951		5,933		18		0.3
	Total Retail Electric		390,618		385,192		5,426		1.4	%

	2008ascomparedto:
CoolingDegree-Days	2007	HistoricAverage
Montana	42% colder	8% warmer
South Dakota	32% colder	17% colder

Regulated electric volumes increased due primarily to customer growth, usage and colder winter weather. Regulated wholesale electric volumes increased due to increased plant availability as compared with 2007.

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REGULATED NATURAL GAS SEGMENT

Three Months Ended September 30, 2008 Compared with the Three Months Ended September 30, 2007

			Results
			2008				2007				Change		% Change
			(inmillions)
Total Revenues	$	45.6			$	37.1			$	8.5		22.9		%
Total Cost of Sales		22.8				16.3				6.5		39.9
Gross Margin	$	22.8			$	20.8			$	2.0		9.6		%
% GM/Rev		50.0		%		56.1		%

The following summarizes the components of the changes in regulated natural gas margin for the three months ended September 30, 2008 and 2007:

	Gross Margin
	2008 vs. 2007
	(in millions)
South Dakota and Nebraska jurisdictions transportation and distribution rate increase	$	0.7
Montana jurisdiction transportation and distribution rate increase	0.5
Colder weather and customer growth	0.2
Storage	0.1
Other	0.5
Improvement in Gross Margin	$	2.0

This improvement is primarily due to rate increases and increased volumes due to colder weather and 1.0% customer growth, primarily in Montana.

The following summarizes regulated natural gas volumes, customer counts and heating degree-days for the three months ended September 30, 2008 and 2007:

	VolumesDekatherms
	2008		2007		Change			% Change
	(inthousands)
Retail Gas
Montana		941		892		49			5.5		%
South Dakota		126		124		2			1.6
Nebraska		160		160		—			—
Residential		1,227		1,176		51			4.3
Montana		571		556		15			2.7
South Dakota		246		181		65			35.9
Nebraska		278		290		(12	)		(4.1	)
Commercial		1,095		1,027		68			6.6
Industrial		15		15		—			—
Other		7		5		2			40.0
Total Retail Gas		2,344		2,223		121			5.4		%

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Average Customer Counts		2008		2007		Change			% Change
	Retail Gas
	Montana		154,403		152,123		2,280			1.5		%
	South Dakota		36,169		36,261		(92	)		(0.3	)
	Nebraska		35,960		35,849		111			0.3
	Residential		226,532		224,233		2,299			1.0
	Montana		21,601		21,207		394			1.9
	South Dakota		5,684		5,712		(28	)		(0.5	)
	Nebraska		4,461		4,451		10			0.2
	Commercial		31,746		31,370		376			1.2
	Industrial		301		307		(6	)		(2.0	)
	Other		140		140		—			—
	Total Retail Gas		258,719		256,050		2,669			1.0		%

	2008ascomparedwith:
HeatingDegree-Days	2007	HistoricAverage
Montana	11% colder	8% warmer
South Dakota	42% colder	10% warmer
Nebraska	45% colder	6% colder

Regulated natural gas volumes increased due to colder weather and customer growth, primarily in our Montana service territory. The increase in South Dakota commercial volumes was substantially due to providing supply to a new ethanol customer for one month before they secured their own supply arrangements.

Nine Months Ended September 30, 2008 Compared to the Nine Months Ended September 30, 2007

			Results
			2008				2007				Change		% Change
			(inmillions)
Total Revenues	$	297.8			$	257.3			$	40.5		15.7		%
Total Cost of Sales		194.0				168.4				25.6		15.2
Gross Margin	$	103.8			$	88.9			$	14.9		16.8		%
% GM/Rev		34.9		%		34.6		%

The following summarizes the components of the changes in regulated natural gas margin for the nine months ended September 30, 2008 and 2007:

	Gross Margin
	2008 vs. 2007
	(in millions)
Colder weather and customer growth	$	6.2
South Dakota and Nebraska jurisdictions transportation and distribution rate increase	3.5
Montana jurisdiction transportation and distribution rate increase	2.5
Transfer of previously unregulated customers	0.7
Storage	0.7
Other	1.3
Improvement in Gross Margin	$	14.9

This improvement is primarily due to increased volumes from colder winter weather and 1.2% customer growth along with rate increases.

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The following summarizes regulated natural gas volumes, customer counts and heating degree-days for the nine months ended September 30, 2008 and 2007:

	VolumesDekatherms
	2008		2007		Change			% Change
	(inthousands)
Retail Gas
Montana		9,033		7,881		1,152			14.6		%
South Dakota		2,322		2,116		206			9.7
Nebraska		2,091		1,954		137			7.0
Residential		13,446		11,951		1,495			12.5
Montana		4,563		4,066		497			12.2
South Dakota		2,166		1,796		370			20.6
Nebraska		2,157		1,997		160			8.0
Commercial		8,886		7,859		1,027			13.1
Industrial		150		111		39			35.1
Other		89		114		(25	)		(21.9	)
Total Retail Gas		22,571		20,035		2,536			12.7		%

Average Customer Counts		2008		2007		Change			% Change
	Retail Gas
	Montana		155,236		152,677		2,559			1.7		%
	South Dakota		36,527		36,559		(32	)		(0.1	)
	Nebraska		36,397		36,244		153			0.4
	Residential		228,160		225,480		2,680			1.2
	Montana		21,685		21,234		451			2.1
	South Dakota		5,761		5,746		15			0.3
	Nebraska		4,524		4,516		8			0.2
	Commercial		31,970		31,496		474			1.5
	Industrial		304		312		(8	)		(2.6	)
	Other		140		140		—			—
	Total Retail Gas		260,574		257,428		3,146			1.2		%

	2008ascomparedwith:
HeatingDegree-Days	2007	HistoricAverage
Montana	14% colder	2% colder
South Dakota	12% colder	4% colder
Nebraska	12% colder	5% colder

Regulated natural gas volumes increased due to colder winter weather and customer growth in our Montana service territory.

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UNREGULATED ELECTRIC SEGMENT

Three Months Ended September 30, 2008 Compared with the Three Months Ended September 30, 2007

Our unregulated electric segment primarily consists of our 30% joint ownership interest in the Colstrip Unit 4 generation facility, which represents approximately 222 MWs at full load. We sell our Colstrip Unit 4 output 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 being provided 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 pricewith a floor of zero.

			Results
					2008					2007				Change			% Change
			(inmillions)
Total Revenues		$		20.1				$	18.8			$	1.3			6.9			%
Total Cost of Sales				(4.2		)			5.2				(9.4		)	(180.8		)
Gross Margin		$		24.3				$	13.6			$	10.7			78.7			%
	% GM/Rev				120.9		%			72.3	%

The following summarizes the components of the changes in unregulated electric margin for the three months ended September 30, 2008 and 2007:

	Gross Margin
	2008 vs. 2007
	(in millions)
Unrealized gain on forward contracts	$	10.2
Average prices	1.4
Volumes	(0.7		)
Fuel supply costs	(0.2		)
Improvement in Gross Margin	$	10.7

The improvement in margin was primarily due to an unrealized gain of $10.2 million, during the third quarter of 2008, on forward contracts due to changes in forward prices of electricity as well as the reversal of previously recognized unrealized gains/losses as the underlying transactions are realized. These contracts economically hedge a portion of our Colstrip Unit 4 output through 2009, and do not qualify for hedge accounting, therefore market value adjustments are included in cost of sales. A decrease in volumes from lower plant and transmission availability and higher fuel supply costs partly offset these increases.

The following summarizes unregulated electric wholesale volumes for the three months ended September 30, 2008 and 2007:

	VolumesMWH
	2008	2007	Change		% Change
	(inthousands)
Wholesale Electric	440	454	(14	)	(3.1	)	%

The decrease in energy available to sell as compared with 2007 was due to lower plant and transmission availability.

See the “Overview” section for additional information related to our Colstrip Unit 4 strategic review process.

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Nine Months Ended September 30, 2008 Compared to the Nine Months Ended September 30, 2007

			Results
					2008				2007				Change		% Change
			(inmillions)
Total Revenues		$		57.1			$	55.7			$	1.4		2.5		%
Total Cost of Sales				14.5				13.7				0.8		5.8
Gross Margin		$		42.6			$	42.0			$	0.6		1.4		%
	% GM/Rev				74.6	%			75.4	%

The following summarizes the components of the changes in unregulated electric margin for the nine months ended September 30, 2008 and 2007:

	Gross Margin
	2008 vs. 2007
	(in millions)
Volumes	$	6.8
Unrealized gain on forward contracts	3.8
Average prices	(6.8		)
Fuel supply costs	(3.2		)
Improvement in Gross Margin	$	0.6

The improvement in margin was primarily due to an increase in volumes from higher plant availability and an unrealized gain of $3.8 million during the first nine months of 2008 as discussed above. Lower average contracted prices and higher fuel supply costs partly offset these increases.

The following summarizes unregulated electric wholesale volumes for the nine months ended September 30, 2008 and 2007:

	VolumesMWH
	2008	2007	Change	% Change
	(inthousands)
Wholesale Electric	1,331	1,189	142	11.9	%

The increase in energy available to sell as compared with 2007 was due to increased plant availability.

LIQUIDITYAND 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 invest in our business and reduce borrowings. As of September 30, 2008, we had cash and cash equivalents of $8.6 million, an increase of $3.9 million as compared with September 30, 2007, reflecting cash generated by operating activities, and the receipt of cash from the net issuance of long-term debt of approximately $18.0 million. These inflows were partially offset by capital investments, the share repurchase program and the payment of common stock dividends. Revolver availability was $120.3 million as of September 30, 2008.

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 revolver, 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

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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. Fluctuations in recoveries under our cost tracking mechanisms, which do not impact net income, can have a significant effect on cash flow from operations and make year-to-year comparisons difficult.

As of September 30, 2008, we are over collected on our current Montana natural gas and electric trackers by approximately $11.3 million, as compared with an over collection of $18.6 million as of September 30, 2007.

Cash Flows

The following table summarizes our consolidated cash flows (in millions):

		Nine Months Ended September 30,
		2008			2007
Operating Activities
Net income	$	46.3		$	34.8
Non-cash adjustments to net income		92.6			85.9
Changes in working capital		60.1			55.1
Other		(22.3	)		(1.9	)
		176.7			173.9
Investing Activities
Property, plant and equipment additions		(81.0	)		(77.9	)
Sale of assets		0.1			1.4
Colstrip Unit 4 acquisition		—			(40.2	)
		(80.9	)		(116.7	)
Financing Activities
Net borrowing of debt		18.0			(44.4	)
Dividends on common stock		(38.0	)		(34.4	)
Treasury stock activity		(78.6	)		(0.6	)
Other		(1.4	)		25.0
		(100.0	)		(54.4	)
Net (Decrease) Increase in Cash and Cash Equivalents	$	(4.2	)	$	2.8
Cash and Cash Equivalents, beginning of period	$	12.8		$	1.9
Cash and Cash Equivalents, end of period	$	8.6		$	4.7

Cash Provided by Operating Activities

As of September 30, 2008, cash and cash equivalents were $8.6 million, as compared with $12.8 million at December 31, 2007 and $4.7 million cash and cash equivalents at September 30, 2007. Cash provided by operating activities totaled $176.7 million for the nine months ended September 30, 2008 as compared with $173.9 million during the nine months ended September 30, 2007. This increase in operating cash flows reflects cash generated by net income, offset in part by higher natural gas inventories and lower collections associated with the recovery of energy supply costs in 2008 as compared with 2007, which is discussed above in the “Factors Impacting our Liquidity” section.

Cash Used in Investing Activities

Cash used in investing activities totaled $80.9 million during the nine months ended September 30, 2008, as compared with $116.7 million during the nine months ended September 30, 2007. During the nine months ended September 30, 2008 we invested $81.0 million in property, plant and equipment additions as compared with $77.9 million in 2007. In addition, in 2007 we used $40.2 million to complete the purchase of a portion of our previously leased interest in the Colstrip Unit 4 generating facility.

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Cash Used in Financing Activities

Cash used in financing activities totaled $100.0 million during the nine months ended September 30, 2008, as compared with $54.4 million during the nine months ended September 30, 2007. Cash used to repurchase shares under our previously announced plan during the nine months ended September 30, 2008 was approximately $77.7 million. We also have net borrowings on our revolver of approximately $52.0 million, and have made debt repayments of $34.0 million. In addition, we paid dividends on common stock of $38.0 million. During the nine months ended September 30, 2007, we made debt repayments of $44.4 million and paid dividends on common stock of $34.4 million.

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 twelve months. As of October 24, 2008, our availability under our revolving line of credit was approximately $132.9 million.

The common stock repurchase program announced during the second quarter 2008 was completed during the third quarter of 2008.

We currently anticipate funding approximately $54.0 million to our pension plans in 2009 due to market losses on plan assets during 2008.

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 September 30, 2008. See our Annual Report on Form 10-K for the year ended December 31, 2007 for additional discussion.

		Total		2008		2009		2010		2011		2012			Thereafter
	(inthousands)
Long-term Debt	$	825,365	$	7,321	$	184,045	$	23,605	$	6,578	$		3,792	$	600,024
Capital Leases	38,335		336		1,280		1,174		1,265		1,363			32,917
Future Minimum Operating Lease Payments	4,286		400		1,495		1,085		686		513			107
Estimated Pension and Other Postretirement Obligations (1)	121,700		1,000		57,700		22,600		21,500		18,900			N/A
Qualifying Facilities (2)	1,474,325		15,144		61,586		63,589		65,323		67,111			1,201,572
Supply and Capacity Contracts (3)	1,689,988		167,675		473,040		321,672		142,448		130,718			454,435
Contractual Interest Payments on Debt (4)	331,488		12,951		46,482		36,203		34,052		33,639			168,161
Total Commitments (5)	$	4,485,487	$	204,827	$	825,628	$	469,928	$	271,852	$		256,036	$	2,457,216

(1) We have estimated cash obligations related to our pension and other postretirement benefit programs for five years, as it is not practicable to estimate thereafter. The 2009 funding amount reflects our current estimated funding requirements based on market losses on plan assets during 2008.

(2) The QFs require us to purchase minimum amounts of energy at prices ranging from $65 to $138 per megawatt hour through 2032. 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.

(3) 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 22 years.

(4) Contractual interest payments include an assumed average interest rate of 5.5% on the $100 million floating rate nonrecourse loan through maturity in December 2009 and an assumed average interest rate of 4.5% on an estimated revolving line of credit balance of $64.0 million through maturity in November 2009.

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

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Credit Ratings

Fitch, Moody’s and 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 October 24, 2008, our current ratings with these agencies are as follows:

	SeniorSecured Rating	SeniorUnsecured Rating	CorporateRating	Outlook
Fitch	BBB	BBB-	BBB-	Positive
Moody’s (1)	Baa2	Baa3	N/A	Positive
S&P	A- (MT) BBB+ (SD)	BBB-	BBB	Stable

(1) Moody’s upgraded our senior secured and senior unsecured credit ratings on July 9, 2008 from Baa3 and Ba2, respectively, as reflected above.

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.

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.

As of September 30, 2008, there have been no significant changes with regard to the critical accounting policies disclosed in Management’s Discussion and Analysis in our Annual Report on Form 10-K for the year ended December 31, 2007. The policies disclosed included the accounting for the following: goodwill and long-lived assets, qualifying facilities liability, revenue recognition, regulatory assets and liabilities, pension and postretirement benefit plans, and income taxes. We continually evaluate the appropriateness of our estimates and assumptions. Actual results could differ from those estimates.

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ITEM3. 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 Colstrip Lease Holdings (CLH) $100 million loan. The revolving credit facility bears interest at the lower of prime (currently 4.5%) or available rates tied to the London Interbank Offered Rate (LIBOR) plus a credit spread. The CLH loan currently bears interest at approximately 5.5%, which is 1.25% over LIBOR. Based upon amounts outstanding as of September 30, 2008, a 1% increase in the LIBOR would increase our annual interest expense by approximately $1.6 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, and our unregulated joint ownership interest in Colstrip Unit 4. Several factors influence price levels and volatility. 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 regulated 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 unregulated electric segment, we use forward contracts to manage our exposure to the market price of electricity. We have entered into unit-contingent forward contracts for the sale of a significant portion of the output. In addition, we have economically hedged a portion of our output through 2009. As of September 30, 2008, our contracted sales prices exceeded market prices by approximately $3.8 million. These market value adjustments will reverse as the power is delivered.

In our “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 a sales contract with a customer that provides 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.

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ITEM4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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 the end of the period covered by this report, our disclosure controls and procedures are effective.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting during the three months ended September 30, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PARTII. OTHER INFORMATION

 

ITEM1. LEGAL PROCEEDINGS

See Note 14, Commitments and Contingencies, to the Consolidated Financial Statements for information about legal proceedings.

 

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.

The agreement to sell our interest in Colstrip Unit 4 to Bicent will only be completed if certain conditions are met, including review of the option to place the asset in rate base and various federal regulatory approvals. We may not be able to obtain an equivalent selling price yielding the same economic value if the transaction is not completed.

On June 10, 2008, we entered into an agreement to sell our interest in Colstrip Unit 4 for $404 million in cash, subject to certain working capital adjustments. The agreement provides a timeline of 120 days for us to explore the viability of placing this asset into our Montana utility rate base. Consistent with these terms, on June 30, 2008, we submitted a filing with MPSC to initiate a review process to determine if it would be in the public interest to place our interest in Colstrip Unit 4 into rate base at an equivalent value to the negotiated selling price. If the MPSC does not include the asset in our Montana utility rate base as requested in the filing, we intend to complete the sale of Colstrip 4 pursuant to the terms of the purchase agreement. However, consummation of the sale is subject to significant conditions, and if those conditions are not fulfilled, or if Bicent (Montana) Power Company, the purchaser, does not perform its obligations under the purchase agreement, we may not be able to obtain a selling price equivalent to the current agreement.

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 liquidity and results of operations.

We are subject to regulation by federal and state governmental entities, including the FERC, MPSC, South Dakota Public Utilities Commission and Nebraska Public Service Commission. 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 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 liquidity and results of operations.

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

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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 for these matters of $31.0 million at September 30, 2008. 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 position 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 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.

Poor investment performance of plan assets of our defined benefit pension plans and post-retirement benefit obligations, in addition to other factors impacting these costs could unfavorably impact our results of operations and liquidity.

We have two defined benefit pension plans that cover substantially all of our employees, and a post-retirement medical plan for our Montana employees. The costs of providing these plans are dependent upon a number of factors, including rate of return on plan assets, discount rates, other actuarial assumptions, and future government regulation. While we have complied with the minimum funding requirements, our obligations for these plans exceed the value of plan assets. In addition, the Pension Protection Act of 2006 changed the minimum funding requirements for defined benefit pension plans beginning in 2008. Without sustained growth in the plan assets over time and depending upon the other factors noted above, we could be required to fund our plans with significant amounts of cash. Such cash funding obligations may change significantly from projections, and could have a material impact on our liquidity and results of operations.

Our plans for future expansion through the construction of power generation facilities, transmission grid expansion and capital improvements to current assets involve substantial risks. Failure to adequately execute and manage significant construction plans, as well as the risk of recovering such costs, could materially impact our results of operations and liquidity.

We have proposed capital investment projects in excess of $1 billion. The completion of these projects, which include investments in electric transmission projects, electric generation projects and natural gas pipelines, are subject to many construction and development risks, including, but not limited to, risks related to financing, regulatory recovery, obtaining and complying with terms of permits, escalating costs of materials and labor, meeting construction budgets and schedules, and environmental compliance. Should these efforts be unsuccessful, we could be

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subject to additional costs, termination payments under committed contracts, and/or the write-off of investments in these projects. We have capitalized approximately $4.3 million of costs associated with these projects as of September 30, 2008.

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 Qualifying Facilities (QF) 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 electric generating facilities 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 and operational 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.

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 must meet certain credit quality standards. If we are unable to maintain investment grade credit ratings, we would be required under certain credit 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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On May 23, 2008, we announced plans to initiate a share buyback program for approximately 3.1 million shares, which is equal to the number of shares in the disputed claims reserve established under our Plan of Reorganization that was confirmed by the bankruptcy court in 2004. We purchased 1.9 million shares from the disputed claims reserve and the remaining shares were purchased using privately negotiated transactions, at our discretion. The actual number and timing of share purchases were subject to market conditions, restrictions related to price, volume, timing, and applicable SEC rules. The total aggregate purchase price was approximately $77.7 million.

	Total Number of Shares Purchased	Average Price Paid per Share	Total Number of Shares Purchased Under Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plan
July 1, 2008 – July 31, 2008	782,059	24.98	782,059	2,362,618
August 1, 2008 – August 31, 2008	—	—	—	2,362,618
September 1, 2008 – September 30, 2008	2,346,568	24.77	2,346,568	16,050

 

ITEM 5. OTHER INFORMATION

 

On May 1, 2008, we announced that effective May 5, 2008, Thomas J. Knapp, would no longer serve in the capacity of vice president, general counsel and corporate secretary, but would remain with us as senior legal and governmental affairs advisor. On August 29, 2008, Mr. Knapp resigned as senior legal and governmental affairs advisor. His resignation did not result from any disagreement with NorthWestern concerning any matter relating to our operations, policies or practices.

Mr. Knapp’s resignation was deemed a termination without cause, and he executed a Waiver and Release Agreement effective September 5, 2008. Mr. Knapp is entitled to receive certain benefits under the NorthWestern Corporation 2006 Officer Severance Plan (the Officer Severance Plan), including (i) a lump-sum payment of $284,012, which equals Mr. Knapp’s current base salary, (ii) a pro-rata annual short-term incentive bonus, calculated at the end of the 2008 fiscal year and payable on or before March 15, 2009, (iii) reimbursement of any COBRA premiums paid by Mr. Knapp during the 12-month period following his separation from the Company, and (iv) outplacement services provided by a provider selected by us up to a maximum of $12,000 over the 12-month period following Mr. Knapp’s separation. The foregoing description of the Officer Severance Plan is qualified in its entirety by reference thereto, a copy of which is attached to the Company’s Current Report on Form 8-K dated March 31, 2006, and incorporated herein by reference.

In addition, we entered into a Consulting Agreement with Mr. Knapp on September 5, 2008 (the Agreement). The Agreement provides for compensation for certain agreed upon consulting services of $15,000 per month through the term of the Agreement, which expires December 31, 2008.

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ITEM 6.EXHIBITS

(a) Exhibits

Exhibit 10.1—NorthWestern Corporation 2005 Long-Term Incentive Plan, as amended October 31, 2007.

Exhibit 10.2—Waiver and Release of Thomas J. Knapp Executed September 5, 2008.

Exhibit 10.3—Consulting Agreement with Thomas J. Knapp Executed September 5, 2008.

Exhibit 31.1—Certification of chief executive officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002.

Exhibit 31.2—Certification of chief financial officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002.

Exhibit 32.1—Certification of chief executive officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Exhibit 32.2—Certification of chief financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

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

	NORTHWESTERN CORPORATION
Date: October 30, 2008	By:	/s/ BRIAN B. BIRD
		Brian B. Bird
		Chief Financial Officer
		Principal Financial Officer

EXHIBIT INDEX

Exhibit Number	Description
*10.1	NorthWestern Corporation 2005 Long-Term Incentive Plan, as amended October 31, 2007.
*10.2	Waiver and Release of Thomas J. Knapp Executed September 5, 2008.
*10.3	Consulting Agreement with Thomas J. Knapp Executed September 5, 2008.
*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 chief executive officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*32.2	Certification of chief financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Filed herewith

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EX-10

NORTHWESTERN CORPORATION

2005 LONG-TERM INCENTIVE PLAN

_______________________________

Effective March 10, 2005

_______________________________

Amended October 31, 2007

_______________________________

As approved by the Board of Directors

 on October 31, 2007

NORTHWESTERN CORPORATION

AMENDED AND RESTATED

2005 LONG-TERM INCENTIVE PLAN

1. Establishment, Purpose, and Types of Awards

NorthWestern Corporation (the “Company”) previously established this equity-based incentive compensation plan to be known as the “NorthWestern Corporation 2005 Long-Term Incentive Plan” (hereinafter referred to as the “Plan”), in order to provide incentives and awards to select Employees, Directors and Advisors of the Company and its Affiliates. This plan was developed in accordance with the “New Incentive Plan” provided for in the Second Amended and Restated Plan of Reorganization (“POR”) and bankruptcy court order confirming the POR (“Order”) and, as such, does not require shareholder approval. This amends and restates the Plan effective October 31, 2007.

The Plan permits the granting of the following types of awards (“Awards”) according to the Sections of the Plan listed here:

Section 6	Options
Section 7	Share Appreciation Rights
Section 8	Restricted and Unrestricted Share Awards
Section 9	Deferred Share Units
Section 10	Performance Awards

The Plan is not intended to affect and shall not affect any stock options, equity-based compensation, or other benefits that the Company or its Affiliates may have provided, or may separately provide in the future pursuant to any agreement, plan, or program that is independent of this Plan.

2. Defined Terms

Terms in the Plan that begin with an initial capital letter have the defined meaning set forth in Appendix A, unless defined elsewhere in this Plan or the context of their use clearly indicates a different meaning.

3. Shares Subject to the Plan

Subject to the provisions of Section 13 of the Plan, the number of Shares that the Company may issue for all Awards is the number of shares approved by the Committee to fund the Plan as set forth by approval date on Schedule 1. For all Awards, the Shares issued pursuant to the Plan shall be issued and outstanding Shares.

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SCHEDULE 1

Pursuant to Section 3 of the Plan, this Schedule 1 provides the number of restricted shares that the Human Resources Committee has approved by resolution to fund the Plan.

Number of Shares	Resolution Date
700,000	March 9, 2005
600,000	October 31, 2007

Shares that are subject to an Award that for any reason expires, is forfeited, is cancelled, or becomes unexercisable, and Shares that are for any other reason not paid or delivered under the Plan shall again, except to the extent prohibited by Applicable Law, be available for subsequent Awards under the Plan. In addition, any Shares that the Company retains from otherwise delivering pursuant to an Award either (i) as payment of the exercise price of an Award, or (ii) in order to satisfy the withholding or employment taxes due upon the grant, exercise, vesting, or distribution of an Award shall also be available for subsequent Awards under the Plan. Notwithstanding the foregoing, but subject to adjustments pursuant to Section 13 below, the number of Shares that are available for Incentive Share Options (“ISO”) Awards shall be determined, to the extent required under applicable tax laws, by reducing the number of Shares designated in the preceding paragraph by the number of Shares granted pursuant to Awards (whether or not Shares are issued pursuant to such Awards); provided that any Shares that are either purchased under the Plan and forfeited back to the Plan, or surrendered in payment of the Exercise Price for an Award shall be available for issuance pursuant to ISO Awards.

4. Administration

(a)           General. The Committee shall administer the Plan in accordance with its terms, provided that the Board may act in lieu of the Committee on any matter. The Committee shall hold meetings at such times and places as it may determine and shall make such rules and regulations for the conduct of its business as it deems advisable. In the absence of a duly appointed Committee or if the Board otherwise chooses to act in lieu of the Committee, the Board shall function as the Committee for all purposes of the Plan.

(b)          Committee Composition. The Committee shall initially consist of the Human Resources Committee of the Board of Directors. If and to the extent permitted by Applicable Law, the Committee may authorize one or more Reporting Persons (or other officers) to make Awards to Eligible Persons who are not Reporting Persons (or other officers whom the Committee has specifically authorized to make Awards). The Board may at any time appoint additional members to the Committee, remove and replace members of the Committee with or without Cause, and fill vacancies on the Committee however caused.

(c)           Powers of the Committee. Subject to the provisions of the Plan, the Committee shall have the authority, in its sole discretion:

(i)            to determine Eligible Persons to whom Awards shall be granted from time to time and the number of Shares, units, or SARs to be covered by each Award;

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(ii)          to determine, from time to time, the Fair Market Value of Shares;

(iii)          to determine, and to set forth in Award Agreements, the terms and conditions of all Awards, including any applicable exercise or purchase price, the installments and conditions under which an Award shall become vested (which may be based on performance), terminated, expired, cancelled, or replaced, and the circumstances for vesting acceleration or waiver of forfeiture restrictions, and other restrictions and limitations;

(iv)          to approve the forms of Award Agreements and all other documents, notices and certificates in connection therewith which need not be identical either as to type of Award or among Participants;

(v)           to construe and interpret the terms of the Plan and any Award Agreement, to determine the meaning of their terms, and to prescribe, amend, and rescind rules and procedures relating to the Plan and its administration; and

(vi)          in order to fulfill the purposes of the Plan and without amending the Plan, modify, cancel, or waive the Company’s rights with respect to any Awards, to adjust or to modify Award Agreements for changes in Applicable Law, and to recognize differences in foreign law, tax policies, or customs; and

(vii)        to make all other interpretations and to take all other actions that the Committee may consider necessary or advisable to administer the Plan or to effectuate its purposes.

Subject to Applicable Law and the restrictions set forth in the Plan, the Committee may delegate administrative functions to individuals who are Reporting Persons, officers, or Employees of the Company or its Affiliates.

(d)           Deference to Committee Determinations. The Committee shall have the discretion to interpret or construe ambiguous, unclear, or implied (but omitted) terms in any fashion it deems to be appropriate in its sole discretion, and to make any findings of fact needed in the administration of the Plan or Award Agreements. The Committee’s prior exercise of its discretionary authority shall not obligate it to exercise its authority in a like fashion thereafter. The Committee’s interpretation and construction of any provision of the Plan, or of any Award or Award Agreement, shall be final, binding, and conclusive. The validity of any such interpretation, construction, decision or finding of fact shall not be given de novo review if challenged in court, by arbitration, or in any other forum, and shall be upheld unless clearly arbitrary or capricious.

(e)           No Liability; Indemnification. Neither the Board nor any Committee member, nor any Person acting at the direction of the Board or the Committee, shall be liable for any act, omission, interpretation, construction or determination made in good faith with respect to the Plan, any Award or any Award Agreement. The Company and its Affiliates shall pay or reimburse any member of the Committee, as well as any Director, Employee, or Advisor who takes action in connection with the Plan, for all expenses incurred with respect to the Plan, and to the full extent allowable under Applicable Law shall indemnify each and every one of them for any claims, liabilities, and costs (including reasonable attorney’s fees) arising out of their good faith performance of duties under the Plan. The Company and its Affiliates may obtain liability insurance for this purpose.

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(f)           Installments. The right to a series of installment payments upon the distribution of an amount deferred pursuant to the Plan shall be treated as a right to a series of separate payments.

(g)           Compliance with Code Section 409A. The provisions of the Plan dealing with amounts subject to Code Section 409A shall be interpreted and administered in accordance with Section 409A and the applicable guidance issued by the Department of the Treasury with respect to the application of Section 409A.

Notwithstanding any provision of the Plan to the contrary, no payment subject to Code Section 409A, payable on account of a break in Continuous Service shall be made to a Participant who is a specified employee (within the meaning of Code Section 409A and the applicable guidance issued by the Department of the Treasury with respect to the application of Section 409A), as of the date of such Participant’s break in Continuous Service, within the six-month period following such Participant’s break in Continuous Service. Amounts to which such Participant would otherwise be entitled under the Plan during the first six months following the break in Continuous Service will be accumulated and paid on the first day of the seventh month following the Participant’s break in Continuous Service.

5. Eligibility

(a)           General Rule. The Committee may grant all Awards other than ISOs to any Eligible Person. The Committee may grant ISOs only to Employees (including officers who are Employees) of the Company or an Affiliate that is a “parent corporation” or “subsidiary corporation” within the meaning of Section 424 of the Code. A Participant who has been granted an Award may be granted an additional Award or Awards if the Committee shall so determine, if such person is otherwise an Eligible Person and if otherwise in accordance with the terms of the Plan.

(b)          Grant of Awards. Subject to the express provisions of the Plan, the Committee shall determine from the class of Eligible Persons those individuals to whom Awards under the Plan may be granted, the number of Shares subject to each Award, the price (if any) to be paid for the Shares or the Award and, in the case of Performance Awards, in addition to the matters addressed in Section 10 below, the specific objectives, goals and performance criteria that further define the Performance Award. Each Award shall be evidenced by an Award Agreement signed by the Company and, if required by the Committee, by the Participant. The Award Agreement shall set forth the material terms and conditions of the Award established by the Committee.

(c)           Limits on Awards. During the term of the Plan, no Participant may receive Options and SARs that relate to more than 200,000 Shares. The Committee will adjust these limitations pursuant to Section 13 below.

(d)           Replacement Awards. Subject to Applicable Laws (including any associated Shareholder approval requirements), the Committee may, in its sole discretion and upon such terms as it deems appropriate, require as a condition of the grant of an Award to a Participant that the Participant surrender for cancellation some or all of the Awards that have previously been granted to the Participant under this Plan or otherwise. An Award that is conditioned upon such surrender may or may not be the same type of Award, may cover the same (or a lesser or greater) number of Shares as such surrendered Award, may have other terms that are determined without regard to the terms or conditions of such surrendered Award, and may contain any other terms that the

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Committee deems appropriate. In the case of Options, these other terms may not involve an Exercise Price that is lower than the Exercise Price of the surrendered Option unless the Company’s shareholders approve the grant itself or the program under which the grant is made pursuant to the Plan.

6. Option Awards

(a)           Types; Documentation. The Committee may in its discretion grant ISOs to any Employee and Non-ISOs to any Eligible Person, and shall evidence any such grants in an Award Agreement that is delivered to the Participant. Each Option shall be designated in the Award Agreement as an ISO or a Non-ISO, and the same Award Agreement may grant both types of Options. At the sole discretion of the Committee, any Option may be exercisable, in whole or in part, immediately upon the grant thereof, or only after the occurrence of a specified event, or only in installments, which installments may vary. Options granted under the Plan may contain such terms and provisions not inconsistent with the Plan that the Committee shall deem advisable in its sole and absolute discretion.

(b)          ISO $100,000 Limitation. To the extent that the aggregate Fair Market Value of Shares with respect to which Options designated as ISOs first become exercisable by a Participant in any calendar year (under this Plan and any other plan of the Company or any Affiliate) exceeds $100,000, such excess Options shall be treated as Non-ISOs. For purposes of determining whether the $100,000 limit is exceeded, the Fair Market Value of the Shares subject to an ISO shall be determined as of the Grant Date. In reducing the number of Options treated as ISOs to meet the $100,000 limit, the most recently granted Options shall be reduced first. In the event that Section 422 of the Code is amended to alter the limitation set forth therein, the limitation of this Section 6(b) shall be automatically adjusted accordingly.

(c)           Term of Options. Each Award Agreement shall specify a term at the end of which the Option automatically expires, subject to earlier termination provisions contained in Section 6(h) hereof; provided, that, the term of any Option may not exceed ten years from the Grant Date. In the case of an ISO granted to an Employee who is a Ten Percent Holder on the Grant Date, the term of the ISO shall not exceed five years from the Grant Date.

(d)           Exercise Price. The exercise price of an Option shall be determined by the Committee in its discretion and shall be set forth in the Award Agreement, provided that (i) if an ISO is granted to an Employee who on the Grant Date is a Ten Percent Holder, the per Share exercise price shall not be less than 110% of the Fair Market Value per Share on the Grant Date, and (ii) for all other Options, such per Share exercise price shall not be less than 100% of the Fair Market Value per Share on the Grant Date.

(e)           Exercise of Option. The Committee shall in its sole discretion determine the times, circumstances, and conditions under which an Option shall be exercisable, and shall set them forth in the Award Agreement. The Committee shall have the discretion to determine whether and to what extent the vesting of Options shall be tolled during any unpaid leave of absence; provided, however, that in the absence of such determination, vesting of Options shall be tolled during any such leave approved by the Company.

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(f)           Minimum Exercise Requirements. An Option may not be exercised for a fraction of a Share. The Committee may require in an Award Agreement that an Option be exercised as to a minimum number of Shares, provided that such requirement shall not prevent a Participant from purchasing the full number of Shares as to which the Option is then exercisable.

(g)           Methods of Exercise. Prior to its expiration pursuant to the terms of the applicable Award Agreement, and subject to the times, circumstances and conditions for exercise contained with the applicable Award Agreement, each Option may be exercised, in whole or in part (provided that the Company shall not be required to issue fractional shares), by delivery of written notice of exercise to the secretary of the Company accompanied by the full exercise price of the Shares being purchased. In the case of an ISO, the Committee shall determine the acceptable methods of payment on the Grant Date and it shall be included in the applicable Award Agreement. The methods of payment that the Committee may in its discretion accept or commit to accept in an Award Agreement include:

(i)           cash or check payable to the Company (in U.S. dollars);

(ii)           other Shares that (A) are owned by the Participant who is purchasing Shares pursuant to an Option, (B) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which the Option is being exercised, (C) were not acquired by such Participant pursuant to the exercise of an Option, unless such Shares have been owned by such Participant for at least six months or such other period as the Committee may determine, (D) are all, at the time of such surrender, free and clear of any and all claims, pledges, liens and encumbrances, or any restrictions which would in any manner restrict the transfer of such shares to or by the Company (other than such restrictions as may have existed prior to an issuance of such Shares by the Company to such Participant), and (E) are duly endorsed for transfer to the Company;

(iii)          a cashless exercise program that the Committee may approve, from time to time in its discretion, pursuant to which a Participant may concurrently provide irrevocable instructions (A) to such Participant’s broker or dealer to effect the immediate sale of the purchased Shares and remit to the Company, out of the sale proceeds available on the settlement date, sufficient funds to cover the exercise price of the Option plus all applicable taxes required to be withheld by the Company by reason of such exercise, and (B) to the Company to deliver the certificates for the purchased Shares directly to such broker or dealer in order to complete the sale; or

(iv)          any combination of the foregoing methods of payment.

The Company shall not be required to deliver Shares pursuant to the exercise of an Option until payment of the full exercise price therefore is received by the Company.

(h)          Termination of Continuous Service. The Committee may establish and set forth in the applicable Award Agreement the terms and conditions on which an Option shall remain exercisable, if at all, following termination of a Participant’s Continuous Service. Subject to Section 15 hereof, the Committee may waive or modify these provisions at any time. To the extent that a Participant is not entitled to exercise an Option at the date of his or her termination of Continuous Service, or if the Participant (or other person entitled to exercise the Option) does not exercise the Option to the

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extent so entitled within the time specified in the Award Agreement or below in sub-paragraphs (i) through (v), as applicable, the Option shall terminate and the Shares underlying the unexercised portion of the Option shall revert to the Plan and become available for future Awards. In no event may any Option be exercised after the expiration of the Option term as set forth in the Award Agreement.

The following provisions shall apply to the extent an Award Agreement does not specify the terms and conditions upon which an Option shall terminate when there is a termination of a Participant’s Continuous Service:

(i)            Termination other than Upon Disability or Death or for Cause. In the event of termination of a Participant’s Continuous Service (other than as a result of Participant’s death, disability, retirement or termination for Cause), the Participant shall have the right to exercise an Option at any time within 90 days following such termination to the extent the Participant was entitled to exercise such Option at the date of such termination.

(ii)           Disability. In the event of termination of a Participant’s Continuous Service as a result of his or her being Disabled, the Participant shall have the right to exercise an Option at any time within one year following such termination to the extent the Participant was entitled to exercise such Option at the date of such termination.

(iii)          Retirement. In the event of termination of a Participant’s Continuous Service as a result of Participant’s retirement, the Participant shall have the right to exercise the Option at any time within six months following such termination to the extent the Participant was entitled to exercise such Option at the date of such termination.

(iv)         Death. In the event of the death of a Participant during the period of Continuous Service since the Grant Date of an Option, or within 30 days following termination of the Participant’s Continuous Service, the Option may be exercised, at any time within one year following the date of the Participant’s death, by the Participant’s estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent the right to exercise the Option had vested at the date of death or, if earlier, the date the Participant’s Continuous Service terminated.

(v)           Cause. If the Committee determines that a Participant’s Continuous Service terminated due to Cause, the Participant shall immediately forfeit the right to exercise any Option, and it shall be considered immediately null and void.

(i)            Reverse Vesting. The Committee in its sole and absolute discretion may allow a Participant to exercise unvested Options, in which case the Shares then issued shall be Restricted Shares having analogous vesting restrictions to the unvested Options.

(j)            Buyout Provisions. The Committee may at any time offer to buy out an Option, in exchange for a payment in cash or Shares, based on such terms and conditions as the Committee shall establish and communicate to the Participant at the time that such offer is made. In addition, but subject to any Shareholder approval requirement of applicable law, if the Fair Market Value for Shares subject to an Option is more than 33% below their exercise price for more than 30 consecutive business days, the Committee may unilaterally terminate and cancel the Option either

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(i) by paying the Participant, in cash or Shares, an amount not less than the Black-Scholes value of the vested portion of the Option, or (ii) subject to the approval of the shareholders of the Company, by irrevocably committing to grant a new Option, on a designated date more than six months after such termination and cancellation of such Option (but only if the Participant’s Continuous Service has not terminated prior to such designated date), on substantially the same terms as the cancelled Option, provided that the per Share exercise price for the new Option shall equal the per Share Fair Market Value of a Share on the date the new grant occurs.

7. Share Appreciate Rights (SARs)

(a)           Grants. The Committee may in its discretion grant Share Appreciation Rights to any Eligible Person, in any of the following forms:

(i)            SARs Related to Options. The Committee may grant SARs either concurrently with the grant of an Option or with respect to an outstanding Option, in which case the SAR shall extend to all or a portion of the Shares covered by the related Option. An SAR shall entitle the Participant who holds the related Option, upon exercise of the SAR and surrender of the related Option, or portion thereof, to the extent the SAR and related Option each were previously unexercised, to receive payment of an amount determined pursuant to Section 7(e) below. Any SAR granted in connection with an ISO will contain such terms as may be required to comply with the provisions of Section 422 of the Code and the regulations promulgated thereunder.

(ii)           SARs Independent of Options. The Committee may grant SARs which are independent of any Option subject to such conditions as the Committee may in its discretion determine, which conditions will be set forth in the applicable Award Agreement.

(iii)          Limited SARs. The Committee may grant SARs exercisable only upon or in respect of a Change in Control or any other specified event, and such limited SARs may relate to or operate in tandem or combination with or substitution for Options or other SARs, or on a stand-alone basis, and may be payable in cash or Shares based on the spread between the exercise price of the SAR, and (A) a price based upon or equal to the Fair Market Value of the Shares during a specified period, at a specified time within a specified period before, after or including the date of such event, or (B) a price related to consideration payable to the Company’s shareholders generally in connection with the event.

(b)          Exercise Price. The per Share exercise price of an SAR shall be determined in the sole discretion of the Committee, shall be set forth in the applicable Award Agreement, and shall be no less than 100% of the Fair Market Value of one Share. The exercise price of an SAR related to an Option shall be the same as the exercise price of the related Option. The exercise price of an SAR shall be subject to the special rules on pricing contained in Sections 6(d) and 6(j) hereof.

(c)           Exercise of SARs. Unless the Award Agreement otherwise provides, an SAR related to an Option will be exercisable at such time or times, and to the extent, that the related Option will be exercisable; provided that the Award Agreement shall not, without the approval of the shareholders of the Company, provide for a vesting period for the exercise of the SAR that is more favorable to the Participant than the exercise period for the related Option. An SAR may not have a term exceeding 10 years from its Grant Date. An SAR granted independently of any other Award

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will be exercisable pursuant to the terms of the Award Agreement, but shall not, without the approval of the shareholders of the Company, provide for a vesting period for the exercise of the SAR that is more favorable to the Participant than the exercise period for the related Option. Whether an SAR is related to an Option or is granted independently, the SAR may only be exercised when the Fair Market Value of the Shares underlying the SAR exceeds the exercise price of the SAR.

(d)           Effect on Available Shares. To the extent that an SAR is exercised, only the actual number of delivered Shares (if any) will be charged against the maximum number of Shares that may be delivered pursuant to Awards under this Plan. The number of Shares subject to the SAR and the related Option of the Participant will, however, be reduced by the number of underlying Shares as to which the exercise relates, unless the Award Agreement otherwise provides.

(e)           Payment. Upon exercise of an SAR related to an Option and the attendant surrender of an exercisable portion of any related Award, the Participant will be entitled to receive payment of an amount determined by multiplying –

(i)            the excess of the Fair Market Value of a Share on the date of exercise of the SAR over the exercise price per Share of the SAR, by

(ii)            the number of Shares with respect to which the SAR has been exercised.

Notwithstanding the foregoing, an SAR granted independently of an Option (i) may limit the amount payable to the Participant to a percentage, specified in the Award Agreement but not exceeding one-hundred percent (100%), of the amount determined pursuant to the preceding sentence, and (ii) shall be subject to any payment or other restrictions that the Committee may at any time impose in its discretion, including restrictions intended to conform the SARs with Section 409A of the Code.

(f)           Form and Terms of Payment. Subject to Applicable Law, the Committee may, in its sole discretion, settle the amount determined under Section 7(e) above solely in cash, solely in Shares (valued at their Fair Market Value on the date of exercise of the SAR), or partly in cash and partly in Shares. In any event, cash shall be paid in lieu of fractional Shares. Absent a contrary determination by the Committee, all SARs shall be settled in cash as soon as practicable after exercise. Notwithstanding the foregoing, the Committee may, in an Award Agreement, determine the maximum amount of cash or Shares or combination thereof that may be delivered upon exercise of an SAR.

(g)           Termination of Employment or Consulting Relationship. The Committee shall establish and set forth in the applicable Award Agreement the terms and conditions on which an SAR shall remain exercisable, if at all, following termination of a Participant’s Continuous Service. The provisions of Section 6(h) above shall apply to the extent an Award Agreement does not specify the terms and conditions upon which an SAR shall terminate when there is a termination of a Participant’s Continuous Service.

(h)          Buy-out. The Committee has the same discretion to buy-out SARs as it has to take such actions pursuant to Section 6(j) above with respect to Options.

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8. Restricted Shares, Restricted Share Units and Unrestricted Shares

(a)           Grants. The Committee may in its discretion grant restricted shares (“Restricted Shares”) to any Eligible Person and shall evidence such grant in an Award Agreement that is delivered to the Participant and that sets forth the number of Restricted Shares, the purchase price for such Restricted Shares (if any) and the terms upon which the Restricted Shares may become vested. In addition, the Company may in its discretion grant the right to receive Shares after certain vesting requirements are met (“Restricted Share Units”) to any Eligible Person and shall evidence such grant in an Award Agreement that is delivered to the Participant which sets forth the number of Shares (or formula, that may be based on future performance or conditions, for determining the number of Shares) that the Participant shall be entitled to receive upon vesting and the terms upon which the Shares subject to a Restricted Share Unit may become vested. The Committee may condition any Award of Restricted Shares or Restricted Share Units to a Participant on receiving from the Participant such further assurances and documents as the Committee may require to enforce the restrictions. In addition, the Committee may grant Awards hereunder in the form of unrestricted shares (“Unrestricted Shares”), which shall vest in full upon the date of grant or such other date as the Committee may determine or which the Committee may issue pursuant to any program under which one or more Eligible Persons (selected by the Committee in its discretion) elect to receive Unrestricted Shares in lieu of cash bonuses that would otherwise be paid.

(b)          Vesting and Forfeiture. The Committee shall set forth in an Award Agreement granting Restricted Shares or Restricted Share Units, the terms and conditions under which the Participant’s interest in the Restricted Shares or the Shares subject to Restricted Share Units will become vested and non-forfeitable. Except as set forth in the applicable Award Agreement or the Committee otherwise determines, upon termination of a Participant’s Continuous Service for any other reason, the Participant shall forfeit his or her Restricted Shares and Restricted Share Units; provided that if a Participant purchases the Restricted Shares and forfeits them for any reason, the Company shall return the purchase price to the Participant only if and to the extent set forth in an Award Agreement.

(c)           Issuance of Restricted Shares Prior to Vesting. The Company shall issue stock certificates that evidence Restricted Shares pending the lapse of applicable restrictions, and that bear a legend making appropriate reference to such restrictions. Except as set forth in the applicable Award Agreement or the Committee otherwise determines, the Company or a third party that the Company designates shall hold such Restricted Shares and any dividends that accrue with respect to Restricted Shares pursuant to Section 8(e) below.

(d)          Issuance of Shares upon Vesting. As soon as practicable after vesting of a Participant’s Restricted Shares (or Shares underlying Restricted Share Units) and the Participant’s satisfaction of applicable tax withholding requirements, the Company shall release to the Participant, free from the vesting restrictions, one Share for each vested Restricted Share (or issue one Share free of the vesting restriction for each vested Restricted Share Unit), unless an Award Agreement provides otherwise. No fractional shares shall be distributed, and cash shall be paid in lieu thereof.

(e)           Dividends Payable on Vesting. Whenever Shares are released to a Participant or duly-authorized transferee pursuant to Section 8(d) above as a result of the vesting of Restricted Shares or the Shares underlying Restricted Share Units are issued to a Participant pursuant to Section 8(d) above, such Participant or duly-authorized transferee shall also be entitled to receive (unless

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otherwise provided in the Award Agreement), with respect to each Share released or issued, an amount equal to any cash dividends (plus, in the discretion of the Committee, simple interest at a rate as the Committee may determine) and a number of Shares equal to any stock dividends, which were declared and paid to the holders of Shares between the Grant Date and the date such Share is released from the vesting restrictions in the case of Restricted Shares or issued in the case of Restricted Share Units.

(f)           Section 83(b) Elections. A Participant may make an election under Section 83(b) of the Code (the “Section 83(b) Election”) with respect to Restricted Shares. If a Participant who has received Restricted Share Units provides the Committee with written notice of his or her intention to make a Section 83(b) Election with respect to the Shares subject to such Restricted Share Units, the Committee may in its discretion convert the Participant’s Restricted Share Units into Restricted Shares, on a one-for-one basis, in full satisfaction of the Participant’s Restricted Share Unit Award. The Participant may then make a Section 83(b) Election with respect to those Restricted Shares. Shares with respect to which a Participant makes a Section 83(b) Election shall not be eligible for deferral pursuant to Section 9 below.

(g)           Deferral Elections. The Committee may permit a Participant who is a member of a select group of management or highly compensated employees (within the meaning of Title I of ERISA) to irrevocably elect to defer all or a percentage of the Shares that would otherwise be transferred to the Participant upon the vesting of such Award in accordance with this Section 8(g). Except as otherwise provided in this Section 8(g), an Award of Restricted Shares or Restricted Share Units awarded with respect to services to be performed by a Participant during a calendar year may be deferred at the election of the Participant only if the election to defer such Award is made and becomes irrevocable not later than the last day of the calendar year immediately preceding the calendar year during which services are to be performed.

In the case of the first year in which an Eligible Person becomes eligible to participate in the Plan (as defined in section 1.409A-1(c) of the final Treasury Regulations or the corresponding provision in subsequent guidance issued by the Department of the Treasury to include any other plan that would be considered together with this Plan as the same plan), as permitted by the Committee, the Eligible Person may make an initial deferral election within thirty (30) days after the date the Eligible Person becomes eligible to participate in the Plan, with respect to an Award of Restricted Shares or Restricted Share Units awarded with respect to services to be performed by the Eligible Person subsequent to the election.

In the case of an Award of Restricted Shares or Restricted Share Units that is subject to a vesting condition requiring the Participant to continue to provide services for a period of at least 12 months from the date of the Award, as permitted by the Committee, the Participant may make a deferral election within 30 days of receiving the Award provided that the election is made at least 12 months in advance of the date that the Award could first become vested (disregarding vesting on death or disability).

Any election to defer Awards pursuant to this Section 8(g) shall be on a form provided by and acceptable to the Committee. If a Participant makes an election to defer under this Section 8(g), the Shares subject to the election, and any associated dividends and interest, shall be credited to an account established pursuant to Section 9 hereof on the date such Shares would otherwise have been released or issued to the Participant pursuant to Section 8(d) above.

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9. Deferred Share Units

(a)           Elections to Defer. The Committee may permit any Eligible Person who is a Director, Advisor or member of a select group of management or highly compensated employees (within the meaning of Title I of ERISA) to irrevocably elect, on a form provided by and acceptable to the Committee (the “Election Form”), to forego the receipt of cash or other compensation (including the Shares deliverable pursuant to any Award other than Restricted Shares for which a Section 83(b) Election has been made), and in lieu thereof to have the Company credit to an internal Plan account (the “Account”) a number of deferred share units (“Deferred Share Units”) having a Fair Market Value equal to the Shares and other compensation deferred. These credits will be made at the end of each calendar month during which compensation is deferred. Each Election Form shall take effect on the first day of the next calendar year (or on the first day of the next calendar month in the case of an initial election by a Participant who is first eligible to defer hereunder) after its delivery to the Company, subject to Section 8(g) regarding deferral of Restricted Shares and Restricted Share Units and to Section 10(e) regarding deferral of Performance Awards, unless the Company sends the Participant a written notice explaining why the Election Form is invalid within five business days after the Company receives it. Notwithstanding the foregoing sentence: (i) Election Forms shall be ineffective with respect to any compensation that a Participant earns before the date on which the Company receives the Election Form, and (ii) the Committee may unilaterally make awards in the form of Deferred Share Units, regardless of whether or not the Participant foregoes other compensation.

(b)          Vesting. Unless an Award Agreement expressly provides otherwise, each Participant shall be 100% vested at all times in any Shares subject to Deferred Share Units.

(c)           Issuances of Shares. The Company shall provide a Participant with one Share for each Deferred Share Unit in five substantially equal annual installments that shall begin within 90 days of the date on which the Participant’s Continuous Service terminates and are distributable on each of the first four anniversaries thereof, unless –

(i)            the Participant has properly elected a different form of distribution, on a form approved by the Committee, that permits the Participant to select any combination of a lump sum and annual installments that are completed within ten years following termination of the Participant’s Continuous Service, and

(ii)           the Company received the Participant’s distribution election form at the time the Participant elects to defer the receipt of cash or other compensation pursuant to Section 9(a), provided that such election may be changed through any subsequent election that (A) is delivered to the Administrator at least twelve months before the date on which distributions are otherwise scheduled to commence pursuant to the Participant’s election and does not take effect for at least twelve months, and (B) defers the commencement of distributions by at least five years from the originally scheduled commencement date.

Fractional shares shall not be issued, and instead shall be paid out in cash.

(d)           Crediting of Dividends. Whenever Shares are issued to a Participant pursuant to Section 9(c) above, such Participant shall also be entitled to receive, with respect to each Share issued, a cash amount equal to any cash dividends (plus simple interest at a rate of five percent per annum, or such

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other reasonable rate as the Committee may determine), and a number of Shares equal to any stock dividends which were declared and paid to the holders of Shares between the Grant Date and the date such Share is issued.

(e)           Hardship Distributions from Accounts. In the event a Participant suffers a Hardship, the Participant may apply to the Committee for an immediate distribution of all or a portion of the Participant’s Account. The amount of any distribution hereunder shall be limited to the amount necessary to relieve the Participant’s Hardship, plus amounts necessary to pay taxes reasonably anticipated as a result of the distribution, after taking into account the extent to which the Hardship is or may be relieved through reimbursement or compensation by insurance or otherwise, by liquidation of the Participant’s assets (to the extent the liquidation of such assets would not itself cause severe financial hardship), or by cessation of the Participant’s deferrals under the Plan. The Committee shall determine whether a Participant has a qualifying Hardship and the amount which qualifies for distribution, if any. The Committee may require evidence of the purpose and amount of the need, and may establish such application or other procedures as it deems appropriate. Notwithstanding the foregoing, a financial need shall not constitute a Hardship unless it is for at least $100,000 for all Participants (or the entire vested principal amount of the Participant’s Accounts, if less). Hardship” means an unforeseeable emergency resulting in financial hardship of the Participant or beneficiary due to an illness or accident of the Participant or beneficiary, a spouse of the Participant or beneficiary or of a dependent (as defined in Code Section 152(a)) of a Participant or beneficiary; loss of the Participant’s or the beneficiary’s property due to casualty, or other similar or extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant or beneficiary. Whether a Participant or beneficiary is faced with an unforeseeable emergency permitting a distribution under the Plan shall be determined based upon the relevant facts and circumstances of each case, but in any case, its distribution shall not be allowed to the extent that such hardship is or may be relieved through reimbursement or compensation from insurance or otherwise, by liquidation of the Participant’s assets to the extent liquidation of such assets would not cause a severe financial hardship or be cessation of deferrals under the Plan. The amount of a distribution on account of a hardship shall be limited to the amount reasonably necessary to satisfy the emergency need plus amounts necessary to pay any federal, state or local income taxes or penalties reasonably anticipated to result from the distribution.

(f)           Unsecured Rights to Deferred Compensation. A Participant’s right to Deferred Share Units shall at all times constitute an unsecured promise of the Company to pay benefits as they come due. The right of the Participant or the Participant’s duly-authorized transferee to receive benefits hereunder shall be solely an unsecured claim against the general assets of the Company. Neither the Participant nor the Participant’s duly-authorized transferee shall have any claim against or rights in any specific assets, shares, or other funds of the Company.

10. Performance Awards

(a)           Performance Units. Subject to the limitations set forth in paragraph (c) hereof, the Committee may in its discretion grant Performance Units to any Eligible Person and shall evidence such grant in an Award Agreement that is delivered to the Participant which sets forth the terms and conditions of the Award. A Performance Unit is an Award which is based on the achievement of specific goals with respect to the Company or any Affiliate or individual performance of the Participant, or a combination thereof, over a specified period of time.

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(b)          Performance Compensation Awards. Subject to the limitations set forth in paragraph (c) hereof, the Committee may, at the time of grant of a Performance Unit, designate such Award as a “Performance Compensation Award” in order that such Award constitutes “qualified performance-based compensation” under Code Section 162(m), in which event the Committee shall have the power to grant such Performance Compensation Award upon terms and conditions that qualify it as “qualified performance-based compensation” within the meaning of Code Section 162(m). With respect to each such Performance Compensation Award, the Committee shall establish, in writing within the time required under Code Section 162(m), a “Performance Period,” “Performance Measure(s)”, and “Performance Formula(e)” (each such term being hereinafter defined). Once established for a Performance Period, the Performance Measure(s) and Performance Formula(e) shall not be amended or otherwise modified to the extent such amendment or modification would cause the compensation payable pursuant to the Award to fail to constitute qualified performance-based compensation under Code Section 162(m).

A Participant shall be eligible to receive payment in respect of a Performance Compensation Award only to the extent that the Performance Measure(s) for such Award is achieved and the Performance Formula(e) as applied against such Performance Measure(s) determines that all or some portion of such Participant’s Award has been earned for the Performance Period. As soon as practicable after the close of each Performance Period, the Committee shall review and certify in writing whether, and to what extent, the Performance Measure(s) for the Performance Period have been achieved and, if so, determine and certify in writing the amount of the Performance Compensation Award to be paid to the Participant and, in so doing, may use negative discretion to decrease, but not increase, the amount of the Award otherwise payable to the Participant based upon such performance.

(c)           Limitations on Awards. The maximum Performance Unit Award and the maximum Performance Compensation Award that any one Participant may receive for any one Performance Period shall not together exceed 200,000 Shares and $1,000,000 in cash. The Committee shall have the discretion to provide in any Award Agreement that any amounts earned in excess of these limitations will either be credited as Deferred Share Units, or as deferred cash compensation under a separate plan of the Company (provided in the latter case that such deferred compensation either bears a reasonable rate of interest or has a value based on one or more predetermined actual investments). Any amounts for which payment to the Participant is deferred pursuant to the preceding sentence shall be paid to the Participant in a future year or years not earlier than, and only to the extent that, the Participant is either not receiving compensation in excess of these limits for a Performance Period, or is not subject to the restrictions set forth under Section 162(b) of the Code.

(d)           Definitions.

(i)            “Performance Formula” means, for a Performance Period, one or more objective formulas or standards established by the Committee for purposes of determining whether or the extent to which an Award has been earned based on the level of performance attained or to be attained with respect to one or more Performance Measure(s). Performance Formulae may vary from Performance Period to Performance Period and from Participant to Participant and may be established on a stand-alone basis, in tandem or in the alternative.

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(ii)           “Performance Measure” means one or more of the following selected by the Committee to measure Company, Affiliate, and/or business unit performance for a Performance Period, whether in absolute or relative terms (including, without limitation, terms relative to a peer group or index): basic, diluted, or adjusted earnings per share; sales or revenue; earnings before interest, taxes, and other adjustments (in total or on a per share basis); basic or adjusted net income; returns on equity, assets, capital, revenue or similar measure; economic value added; working capital; total shareholder return; and product development, product market share, research, licensing, litigation, human resources, information services, mergers, acquisitions, sales of assets of Affiliates or business units. Each such measure shall be, to the extent applicable, determined in accordance with generally accepted accounting principles as consistently applied by the Company (or such other standard applied by the Committee) and, if so determined by the Committee, and in the case of a Performance Compensation Award, to the extent permitted under Code Section 162(m), adjusted to omit the effects of extraordinary items, gain or loss on the disposal of a business segment, unusual or infrequently occurring events and transactions and cumulative effects of changes in accounting principles. Performance Measures may vary from Performance Period to Performance Period and from Participant to Participant, and may be established on a stand-alone basis, in tandem or in the alternative.

(iii)          “Performance Period” means one or more periods of time (of not less than one fiscal year of the Company), as the Committee may designate, over which the attainment of one or more Performance Measure(s) will be measured for the purpose of determining a Participant’s rights in respect of an Award.

(e)           Deferral Elections. At any time prior to the date that is at least six months before the close of a Performance Period (or any shorter period within such window that the Committee selects) with respect to an Award of either Performance Units or Performance Compensation, the Committee may permit a Participant who is a member of a select group of management or highly compensated employees (within the meaning of Title I of ERISA) to irrevocably elect, on a form provided by an acceptable to the Committee, to defer the receipt of all or a percentage of the cash or Shares that would otherwise be transferred to the Participant upon the vesting of such Award, provided that the following criteria are met:

(i)            the Participant performs services continuously from a date no later than the date upon which the performance criteria are established through a date no earlier than the date upon which the Participant makes an initial deferral election;

(ii)           the performance criteria must established in writing no later than ninety (90) days after the commencement of the Performance Period; and

(iii)          in no event may an election to defer Performance Units or Performance Compensation be made after such compensation has become both substantially certain to be paid and readily ascertainable.

If the Participant makes this election, the cash or Shares subject to the election, and any associated interest and dividends, shall be credited to an account established pursuant to Section 9 hereof on the date such cash or Shares would otherwise have been released or issued to the Participant pursuant to Section 10(a) or Section 10(b) above.

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11. Taxes

(a)           General. As a condition to the issuance or distribution of Shares pursuant to the Plan, the Participant (or in the case of the Participant’s death, the person who succeeds to the Participant’s rights) shall make such arrangements as the Company may require for the satisfaction of any applicable federal, state, local or foreign withholding tax obligations that may arise in connection with the Award and the issuance of Shares. The Company shall not be required to issue any Shares until such obligations are satisfied. If the Committee allows the withholding or surrender of Shares to satisfy a Participant’s tax withholding obligations, the Committee shall not allow Shares to be withheld in an amount that exceeds the minimum statutory withholding rates for federal and state tax purposes, including payroll taxes.

(b)          Default Rule for Employees. In the absence of any other arrangement, an Employee shall be deemed to have directed the Company to withhold whole shares and collect from his or her cash compensation an amount sufficient to satisfy the fractional share amounts for such tax obligations from the next payroll payment otherwise payable after the date of the exercise of an Award.

(c)           Special Rules. In the case of an Employee where the next payroll payment is not sufficient to satisfy such tax obligations, with respect to any remaining tax obligations, in the absence of any other arrangement and to the extent permitted under the Applicable Law, the Employee shall be deemed to have elected to have the Company withhold from the Shares or cash to be issued pursuant to an Award that number of Shares having a Fair Market Value determined as of the applicable Tax Date (as defined below) equal to the amount required to be withheld. For purposes of this Section, the Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined under the Applicable Law (the “Tax Date”).

(d)           Surrender of Shares. If permitted by the Committee, in its discretion, a Participant may satisfy the minimum applicable tax withholding and employment tax obligations associated with an Award by surrendering Shares to the Company (including Shares that would otherwise be issued pursuant to the Award) that have a Fair Market Value determined as of the applicable Tax Date equal to the amount required to be withheld. In the case of Shares previously acquired from the Company that are surrendered under this Section, such Shares must have been owned by the Participant for more than six months on the date of surrender (or such longer period of time the Company may in its discretion require).

(e)           Income Taxes and Deferred Compensation. Participants are solely responsible and liable for the satisfaction of all taxes and penalties that may arise in connection with Awards (including any taxes arising under Section 409A of the Code), and the Company shall not have any obligation to indemnify or otherwise hold any Participant harmless from any or all of such taxes. The Administrator shall have the discretion to organize any deferral program, to require deferral election forms, and to grant or to unilaterally modify any Award in a manner that (i) conforms with the requirements of Section 409A of the Code with respect to compensation that is deferred and that vests after December 31, 2004, (ii) voids any Participant election to the extent it would violate Section 409A of the Code, and (iii) causes the issuance of the Shares subject to the Award (provided that the Committee has determined that issuance of such Shares at the time of vesting is not a “permissible distribution event” within the meaning of Section 409A of the Code) to be automatically deferred until the earliest date on which issuance of the Shares in unrestricted form

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will constitute a permissible distribution event pursuant to paragraphs (i), (ii), (iii), (v), or (iv) of Section 409A(a)(2)(A) of the Code. The Administrator shall have the sole discretion to interpret the requirements of the Code, including Section 409A, for purposes of the Plan and all Awards.

12. Non-Transferability of Awards

(a)           General. Except as set forth in this Section 12, or as otherwise approved by the Committee for a select group of management or highly compensated Employees, Awards may not be sold, pledged, assigned, hypothecated, transferred or disposed of in any manner other than by will or by the laws of descent or distribution. The designation of a beneficiary by a Participant will not constitute a transfer. An Award may be exercised, during the lifetime of the holder of an Award, only by such holder, the duly-authorized legal representative of a Participant who is Disabled, or a transferee permitted by this Section 12.

(b)          Limited Transferability Rights. Notwithstanding anything else in this Section 12, the Committee may in its discretion provide that an Award other than an ISO may be transferred, on such terms and conditions as the Committee deems appropriate, either (i) by instrument to the Participant’s “Immediate Family” (as defined below), (ii) by instrument to an inter vivos or testamentary trust (or other entity) in which the Award is to be passed to the Participant’s designated beneficiaries, or (iii) by gift to charitable institutions. “Immediate Family” means any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, and shall include adoptive relationships. Any transferee of a Participant's rights shall succeed to and be subject to all of the terms of the Plan and the Award Agreement (and any amendments thereto) granting the transferred Award.

13. Adjustments Upon Changes in Capitalization, Merger or Certain Other Transactions

(a)           Changes in Capitalization. The Committee shall equitably adjust the number of Shares covered by each outstanding Award, and the number of Shares that have been authorized for issuance under the Plan but as to which no Awards have yet been granted or that have been returned to the Plan upon cancellation, forfeiture, or expiration of an Award, as well as the price per Share covered by each such outstanding Award, to reflect any increase or decrease in the number of issued Shares resulting from a stock-split, reverse stock-split, stock dividend, combination, recapitalization or reclassification of the Shares, or any other increase or decrease in the number of issued Shares effected without receipt of consideration by the Company. In the event of any such transaction or event, the Committee may provide in substitution for any or all outstanding Options under the Plan such alternative consideration (including securities of any surviving entity) as it may in good faith determine to be equitable under the circumstances and may require in connection therewith the surrender of all Options so replaced. In any case, such substitution of securities shall not require the consent of any person who is granted Options pursuant to the Plan. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be required to be made with respect to, the number or price of Shares subject to any Award.

(b)          Dissolution or Liquidation. In the event of the dissolution or liquidation of the Company other than as part of a Change in Control, each Award will terminate immediately prior to

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the consummation of such action, subject to the ability of the Committee to exercise any discretion authorized in the case of a Change in Control.

(c)          Change in Control. In the event of a Change in Control, the following shall occur:

(i)            the vesting of Awards shall accelerate so that Awards shall vest (and, to the extent applicable, become exercisable) as to the Shares that otherwise would have been unvested and provide that repurchase rights of the Company with respect to Shares issued upon exercise of an Grant shall lapse as to the Shares subject to such repurchase right; or

(ii)           The Committee shall arrange or otherwise provide for the payment of cash or other consideration to Participants in exchange for the satisfaction and cancellation of outstanding Awards.

Notwithstanding the above, in the event a Participant holding an Grant assumed or substituted by the Successor Corporation in a Change in Control is Involuntarily Terminated by the Successor Corporation in connection with, or within 12 months following consummation of, the Change in Control, then any assumed or substituted Grant held by the terminated Participant at the time of termination shall accelerate and become fully vested, and any repurchase right applicable to any Shares shall lapse in full. The acceleration of vesting and lapse of repurchase rights provided for in the previous sentence shall occur immediately prior to the effective date of the Participant’s termination.

(d)           Certain Distributions. In the event of any distribution to the Company’s shareholders of securities of any other entity or other assets (other than dividends payable in cash or stock of the Company) without receipt of consideration by the Company, the Committee may, in its discretion, appropriately adjust the price per Share covered by each outstanding Award to reflect the effect of such distribution.

14. Time of Granting Awards.

The date of grant (“Grant Date”) of an Award shall be the date on which the Committee makes the determination granting such Award or such other date as is determined by the Committee, provided that in the case of an ISO, the Grant Date shall be the later of the date on which the Committee makes the determination granting such ISO or the date of commencement of the Participant’s employment relationship with the Company.

15. Modification of Awards and Substitution of Options.

(a)           Modification, Extension, and Renewal of Awards. Within the limitations of the Plan, the Committee may modify an Award to accelerate the rate at which an Option or SAR may be exercised (including without limitation permitting an Option or SAR to be exercised in full without regard to the installment or vesting provisions of the applicable Award Agreement or whether the Option or SAR is at the time exercisable, to the extent it has not previously been exercised), to accelerate the vesting of any Award, to extend or renew outstanding Awards, or to accept the cancellation of outstanding Awards to the extent not previously exercised either for the granting of new Awards or for other consideration in substitution or replacement thereof. Notwithstanding the foregoing provision, no modification of an outstanding Award shall materially and adversely affect

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such Participant’s rights thereunder, unless either the Participant provides written consent or there is an express Plan provision permitting the Committee to act unilaterally to make the modification.

(b)          Substitution of Options. Notwithstanding any inconsistent provisions or limits under the Plan, in the event the Company or an Affiliate acquires (whether by purchase, merger or otherwise) all or substantially all of outstanding capital stock or assets of another corporation or in the event of any reorganization or other transaction qualifying under Section 424 of the Code, the Committee may, in accordance with the provisions of that Section, substitute Options for options under the plan of the acquired company provided (i) the excess of the aggregate fair market value of the shares subject to an option immediately after the substitution over the aggregate option price of such shares is not more than the similar excess immediately before such substitution and (ii) the new option does not give persons additional benefits, including any extension of the exercise period.

16. Term of Plan.

The Plan shall continue in effect for a term of ten (10) years from its effective date as determined under Section 20 below, unless the Plan is sooner terminated under Section 17 below.

17. Amendment and Termination of the Plan.

(a)           Authority to Amend or Terminate. Subject to Applicable Laws, the Board may from time to time amend, alter, suspend, discontinue, or terminate the Plan.

(b)          Effect of Amendment or Termination. No amendment, suspension, or termination of the Plan shall materially and adversely affect Awards already granted unless either it relates to an adjustment pursuant to Section 13 above, or it is otherwise mutually agreed between the Participant and the Committee, which agreement must be in writing and signed by the Participant and the Company. Notwithstanding the foregoing, the Committee may amend the Plan to eliminate provisions which are no longer necessary as a result of changes in tax or securities laws or regulations, or in the interpretation thereof.

18. Conditions Upon Issuance of Shares.

Notwithstanding any other provision of the Plan or any agreement entered into by the Company pursuant to the Plan, the Company shall not be obligated, and shall have no liability for failure, to issue or deliver any Shares under the Plan unless such issuance or delivery would comply with Applicable Law, with such compliance determined by the Company in consultation with its legal counsel.

19. Reservation of Shares.

The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan.

20. Effective Date.

This Plan shall become effective on the date of its approval by the Board; provided that this Plan shall not be submitted to the Company’s shareholders for approval pursuant to Section 1145 of the U.S. Bankruptcy Code.

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21. Controlling Law.

All disputes relating to or arising from the Plan shall be governed by the internal substantive laws (and not the laws of conflicts of laws) of the State of Delaware, to the extent not preempted by United States federal law. If any provision of this Plan is held by a court of competent jurisdiction to be invalid and unenforceable, the remaining provisions shall continue to be fully effective.

22. Laws And Regulations.

(a)           U.S. Securities Laws. This Plan, the grant of Awards, and the exercise of Options and SARs under this Plan, and the obligation of the Company to sell or deliver any of its securities (including, without limitation, Options, Restricted Shares, Restricted Share Units, Deferred Share Units, and Shares) under this Plan shall be subject to all Applicable Law. In the event that the Shares are not registered under the Securities Act of 1933, as amended (the “Act”), or any applicable state securities laws prior to the delivery of such Shares, the Company may require, as a condition to the issuance thereof, that the persons to whom Shares are to be issued represent and warrant in writing to the Company that such Shares are being acquired by him or her for investment for his or her own account and not with a view to, for resale in connection with, or with an intent of participating directly or indirectly in, any distribution of such Shares within the meaning of the Act, and a legend to that effect may be placed on the certificates representing the Shares.

(b)          Other Jurisdictions. The Company may adopt rules and procedures relating to the operation and administration of this Plan to accommodate the specific requirements of local laws.

23.          No Shareholder Rights. Neither a Participant nor any transferee of a Participant shall have any rights as a shareholder of the Company with respect to any Shares underlying any Award until the date of issuance of a share certificate to a Participant or a transferee of a Participant for such Shares in accordance with the Company’s governing instruments and Applicable Law. Prior to the issuance of Shares pursuant to an Award, a Participant shall not have the right to vote or to receive dividends or any other rights as a shareholder with respect to the Shares underlying the Award, notwithstanding its exercise in the case of Options and SARs. No adjustment will be made for a dividend or other right that is determined based on a record date prior to the date the stock certificate is issued, except as otherwise specifically provided for in this Plan.

24.          No Employment Rights. The Plan shall not confer upon any Participant any right to continue an employment, service or consulting relationship with the Company, nor shall it affect in any way a Participant’s right or the Company’s right to terminate the Participant’s employment, service, or consulting relationship at any time, with or without Cause.

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NORTHWESTERN CORPORATION

2005 LONG-TERM INCENTIVE PLAN

__________

Appendix A: Definitions

__________

As used in the Plan, the following definitions shall apply:

“Advisor” means any person, including an advisor, who is engaged by the Company or any Affiliate to render services and is compensated for such services.

“Affiliate” means, with respect to any Person (as defined below), any other Person that directly or indirectly controls or is controlled by or under common control with such Person. For the purposes of this definition, “control,” when used with respect to any Person, means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of such Person or the power to elect directors, whether through the ownership of voting securities, by contract or otherwise; and the terms “affiliated,” “controlling” and “controlled” have meanings correlative to the foregoing.

“Applicable Law” means the legal requirements relating to the administration of options and share-based plans under applicable U.S. federal and state laws, the Code, any applicable stock exchange or automated quotation system rules or regulations, and the applicable laws of any other country or jurisdiction where Awards are granted, as such laws, rules, regulations and requirements shall be in place from time to time.

“Award” means any award made pursuant to the Plan, including awards made in the form of an Option, an SAR, a Restricted Share, a Restricted Share Unit, an Unrestricted Share, a Deferred Share Unit and a Performance Award, or any combination thereof, whether alternative or cumulative, authorized by and granted under this Plan.

“Award Agreement” means any written document setting forth the terms of an Award that has been authorized by the Committee. The Committee shall determine the form or forms of documents to be used, and may change them from time to time for any reason.

“Board” means the Board of Directors of the Company.

“Cause” for termination of a Participant’s Continuous Service will exist if the Participant is terminated from employment or other service with the Company or an Affiliate for any of the following reasons: (i) the Participant’s willful failure to substantially perform his or her duties and responsibilities to the Company or deliberate violation of a material Company policy; (ii) the Participant’s commission of any material act or acts of fraud, embezzlement, dishonesty, or other willful misconduct; (iii) the Participant’s material unauthorized use or disclosure of any proprietary information or trade secrets of the Company or any other party to whom the Participant owes an obligation of nondisclosure as a result of his or her relationship with the Company; or (iv) Participant’s willful and material breach of any of his or her obligations under any written agreement or covenant with the Company.

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The Committee shall in its discretion determine whether or not a Participant is being terminated for Cause. The Committee’s determination shall, unless arbitrary and capricious, be final and binding on the Participant, the Company, and all other affected persons. The foregoing definition does not in any way limit the Company’s ability to terminate a Participant’s employment or consulting relationship at any time, and the term “Company” will be interpreted herein to include any Affiliate or successor thereto, if appropriate.

“Change in Control” means, for purposes of the interpretation of this Plan in conformance with section 409A of the Code and the applicable guidance issued by the Department of the Treasury with respect to the application of section 409A, with respect to a Plan Participant, a Change in Control event must relate to: (i) the corporation for which the Participant is performing services at the time of the Change in Control event, (ii) the corporation that is liable for the payment of the deferred compensation (or all corporations liable for the payment if more than one corporation is liable), or (iii) a corporation that is a majority shareholder of a corporation identified in part (i) or part (ii) above, or any corporation in a chain of corporations in which each corporation is a majority shareholder of another corporation in the chain, ending in a corporation identified in part (i) or part (ii) above. For purposes of this provision, a majority shareholder is a shareholder owning more than fifty percent (50%) of the total fair market value and total voting power of such corporation. Also, for purposes of this provision, section 318(a) of the Code applies to determine stock ownership. Additionally, for purposes of this provision and in conformance with section 409A and the applicable guidance issued by the Department of the Treasury with respect to the application of section 409A, a change in the ownership of a corporation or a change in the effective control of a corporation is determined in accordance with the provisions described below in this definition.

(i)            A change in the ownership of a corporation shall occur on the date that any one person, or more than one person acting as a group, in one transaction or a series of transactions, directly or indirectly, acquires ownership of stock of the corporation that, together with stock held by such person or group, constitutes more than fifty percent (50%) of the total fair market value or total voting power of the stock of the corporation. However, if any one person or more than one person acting as a group, is considered to own more than fifty percent (50%) of the total fair market value or total voting power of the stock of the corporation, the acquisition of additional stock by the same person or persons shall not be considered to cause a change in the ownership of the corporation (or to cause a change in the effective control of the corporation). An increase in the percentage of stock owned by any one person, or persons acting as a group, as a result of a transaction, in one transaction or a series of transactions, directly or indirectly, in which the corporation acquires its stock in exchange for property shall be treated as an acquisition of stock for purposes of this provision.

(ii)           For purposes of paragraph (i) above, persons will not be considered to be acting as a group solely because they purchase or own stock of the same corporation at the same time, or as a result of the same public offering. However, persons will be considered to be acting as a group if they are owners of a corporation that enters

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into a merger, consolidation, purchase or acquisition of stock, or similar business transaction with the corporation. If a person, including an entity, owns stock in both corporations that enter into a merger, consolidation, purchase or acquisition of stock, or similar transaction, such shareholder is considered to be acting as a group with other shareholders in a corporation prior to the transaction giving rise to the change and not with respect to the ownership interest in the other corporation.

(iii)          A change in the effective control of a corporation shall occur on the date that either:

(A) any one person, or more than one person acting as a group, in one transaction or a series of transactions, directly or indirectly, acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) ownership of stock of the corporation possessing thirty-five percent (35%) or more of the total voting power of the stock of the corporation; or

(B) a majority of members of the board of directors of the corporation is replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the members of the board of directors of the corporation prior to the date of the appointment or election, provided that for purposes of this subparagraph (B) the term “corporation” shall be determined in accordance with the requirements of section 409A of the Code and the applicable guidance issued by the Department of the Treasury with respect to the application of section 409A of the Code.

(iv)          A change in the ownership of a substantial portion of the assets of a corporation shall occur on the date that any one person, or more than one person acting as a group acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) assets from the corporation that have a total gross fair market value equal to or more than forty percent (40%) of the total gross fair market value of all of the assets of the corporation immediately prior to such acquisition or acquisitions. For this purpose, gross fair market value means the value of the assets of the corporation, or the value of the assets being disposed of, determined without regard to any liabilities associated with such assets.

The provisions of this Appendix regarding the definition of the term “Change in Control,” shall be determined and administered in accordance with section 409A and the applicable guidance issued by the Department of the Treasury with respect to the application of section 409A.”

“Code” means the U.S. Internal Revenue Code of 1986, as amended.

“Committee” means the Human Resources Committee of the Board of Directors or one or more committees or subcommittees of the Board appointed by the Board to administer the Plan in accordance with Section 4 above. With respect to any decision involving an Award

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intended to satisfy the requirements of Section 162(m) of the Code, the Committee shall consist of two or more Directors of the Company who are “outside directors” within the meaning of Section 162(m) of the Code. With respect to any decision relating to a Reporting Person, the Committee shall consist of two or more Directors who are disinterested within the meaning of Rule 16b-3.

“Company” means NorthWestern Corporation, a Delaware corporation; provided, however, that in the event the Company reincorporates to another jurisdiction, all references to the term “Company” shall refer to the Company in such new jurisdiction.

“Continuous Service” means the absence of any interruption or termination of service as an Employee, Director or Advisor. Continuous Service shall not be considered interrupted in the case of: (i) sick leave; (ii) military leave; (iii) any other leave of absence approved by the Committee, provided that such leave is for a period of not more than 90 days, unless reemployment upon the expiration of such leave is guaranteed by contract or statute, or unless provided otherwise pursuant to Company policy adopted from time to time; (iv) changes in status from Director to advisory director or emeritus status; or (iv) in the case of transfers between locations of the Company or between the Company, its Affiliates, or their respective successors. A change in status between service as an Employee, Director, and an Advisor may not, in and of itself, mandate a determination that an interruption of Continuous Service has occurred. Whether an interruption in Continuous Service has occurred which shall constitute an event triggering payment under the Plan shall be determined and administered in accordance with section 409A and the applicable guidance issued by the Department of the Treasury with respect to the application of section 409A.

“Deferred Share Units” mean Awards pursuant to Section 9 of the Plan.

“Director” means a member of the Board, or a member of the board of directors of an Affiliate.

“Disability” means, with respect to a Participant, the Participant is: (i) unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months; (ii) by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months, receiving income replacement benefits for a period of not less than three (3) months under an accident and health plan covering employees of the Company; or (iii) determined to be totally disabled by the Social Security Administration.”

“Eligible Person” means any Advisor, Director or Employee and includes non-Employees to whom an offer of employment has been extended.

“Employee” means any person whom the Company or any Affiliate classifies as an employee (including an officer) for employment tax purposes. The payment by the Company of a director’s fee to a Director shall not be sufficient to constitute “employment” of such Director by the Company.

“Exchange Act” means the Securities Exchange Act of 1934, as amended.

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“Fair Market Value” means, as of any date (the “Determination Date”) means: (i) the closing price of a Share on the New York Stock Exchange or the American Stock Exchange (collectively, the “Exchange”), on the Determination Date, or, if shares were not traded on the Determination Date, then on the nearest preceding trading day during which a sale occurred; or (ii) if such stock is not traded on the Exchange but is quoted on NASDAQ or a successor quotation system, (A) the last sales price (if the stock is then listed as a National Market Issue under The Nasdaq National Market System) or (B) the mean between the closing representative bid and asked prices (in all other cases) for the stock on the Determination Date as reported by NASDAQ or such successor quotation system; or (iii) if such stock is not traded on the Exchange or quoted on NASDAQ but is otherwise traded in the over-the-counter, the mean between the representative bid and asked prices on the Determination Date; or (iv) if subsections (i)-(iii) do not apply, the fair market value established in good faith by the Board.

“Grant Date” has the meaning set forth in Section 14 of the Plan.

“Incentive Share Option or ISO” hereinafter means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code, as designated in the applicable Award Agreement.

“Involuntary Termination” means termination of a Participant’s Continuous Service under the following circumstances occurring on or after a Change in Control: (i) termination without Cause by the Company or an Affiliate or successor thereto, as appropriate; or (ii) voluntary termination by the Participant within 60 days following (A) a material reduction in the Participant’s job responsibilities, provided that neither a mere change in title alone nor reassignment to a substantially similar position shall constitute a material reduction in job responsibilities; (B) an involuntary relocation of the Participant’s work site to a facility or location more than 50 miles from the Participant’s principal work site at the time of the Change in Control; or (C) a material reduction in Participant’s total compensation other than as part of an reduction by the same percentage amount in the compensation of all other similarly-situated Employees, Directors or Advisors.

“Non-ISO” means an Option not intended to qualify as an ISO, as designated in the applicable Award Agreement.

“Option” means any stock option granted pursuant to Section 6 of the Plan.

“Participant” means any holder of one or more Awards, or the Shares issuable or issued upon exercise of such Awards, under the Plan.

“Performance Awards” mean Performance Units and Performance Compensation Awards granted pursuant to Section 10.

“Performance Compensation Awards” mean Awards granted pursuant to Section 10(b) of the Plan.

“Performance Unit” means Awards granted pursuant to Section 10(a) of the Plan which may be paid in cash, in Shares, or such combination of cash and Shares as the Committee in its sole discretion shall determine.

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“Person” means any natural person, association, trust, business trust, cooperative, corporation, general partnership, joint venture, joint-stock company, limited partnership, limited liability company, real estate investment trust, regulatory body, governmental agency or instrumentality, unincorporated organization or organizational entity.

“Plan” means this NorthWestern Corporation 2005 Long-Term Incentive Plan.

“Reporting Person” means an officer, Director, or greater than ten percent shareholder of the Company within the meaning of Rule 16a-2 under the Exchange Act, who is required to file reports pursuant to Rule 16a-3 under the Exchange Act.

“Restricted Shares” mean Shares subject to restrictions imposed pursuant to Section 8 of the Plan.

“Restricted Share Units” mean Awards pursuant to Section 8 of the Plan.

“Rule 16b-3” means Rule 16b-3 promulgated under the Exchange Act, as amended from time to time, or any successor provision.

“SAR” or “Share Appreciation Right” means Awards granted pursuant to Section 7 of the Plan.

“Share” means a share of common stock of the Company, as adjusted in accordance with Section 13 of the Plan.

“Ten Percent Holder” means a person who owns stock representing more than ten percent (10%) of the combined voting power of all classes of stock of the Company or any Affiliate.

“Unrestricted Shares” mean Shares awarded pursuant to Section 8 of the Plan.

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AMENDMENT NO. 1 TO THE

NORTHWESTERN CORPORATION

2005 LONG-TERM INCENTIVE PLAN

WHEREAS, NorthWestern Corporation (the “Company”) sponsors the NorthWestern Corporation 2005 Long-Term Incentive Plan (the “Plan”), and

WHEREAS, Section 17 of the Plan permits the Board of Directors of the Company (the “Board”) to amend the Plan from time to time, provided that in certain cases in which an amendment materially and adversely affects an award already granted, such amendment must either be agreed to by the participant who has received the award or must be an amendment to eliminate provisions which are no longer necessary as a result of a change in law, and Section 4(c) of the Plan enables the Human Resources Committee of the Board to modify award agreements under the Plan for changes in applicable law, and

WHEREAS, the Plan, as a non-qualified deferred compensation plan, is subject to the provisions of Internal Revenue Code Section 409A, generally effective in 2005; and

WHEREAS, the Department of the U.S. Treasury and the IRS issued final regulations (“Final Regulations”) interpreting the statutory provisions of Internal Revenue Code §409A effective April 17, 2007; and

WHEREAS, pursuant to the Final Regulations, non-qualified deferred compensation plans and documents must be operationally compliant with the final regulations by January 1, 2008 to conform with the Code and Final Regulations; and

WHEREAS, the Board has determined that the amendment of the Plan to comply with Code section 409A will not materially and adversely affect any outstanding awards granted under the Plan, and therefore participants are not required to agree to the amendment of their outstanding awards, and further that the amendment of the Plan, including the elimination and revision of certain plan provisions, is necessary to comply with Code section 409A.

NOW, THEREFORE, effective as of October 31, 2007, the Plan is hereby amended as follows:

1. Section 4 Administration is amended by adding the following new subsections (f) and (g) at the end of such section:

“(f)         Installments. The right to a series of installment payments upon the distribution of an amount deferred pursuant to the Plan shall be treated as a right to a series of separate payments.

(g)          Compliance with Code Section 409A. The provisions of the Plan dealing with amounts subject to Code Section 409A shall be interpreted and administered in accordance with Section 409A and the applicable guidance issued by the Department of the Treasury with respect to the application of Section 409A.

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Notwithstanding any provision of the Plan to the contrary, no payment on account of a break in Continuous Service shall be made to a Participant who is a specified employee (within the meaning of Code Section 409A and the applicable guidance issued by the Department of the Treasury with respect to the application of Section 409A) as of the date of such Participant’s break in Continuous Service, within the six-month period following such Participant’s break in Continuous Service. Amounts to which such Participant would otherwise be entitled under the Plan during the first six months following the break in Continuous Service will be accumulated and paid on the first day of the seventh month following the Participant’s break in Continuous Service.”

2. Section 8(g) Deferral Elections is amended by deleting such section and inserting the following Section 8(g) in lieu thereof:

“(g)         Deferral Elections. The Committee may permit a Participant who is a member of a select group of management or highly compensated employees (within the meaning of Title I of ERISA) to irrevocably elect to defer all or a percentage of the Shares that would otherwise be transferred to the Participant upon the vesting of such Award in accordance with this Section 8(g). Except as otherwise provided in this Section 8(g), an Award of Restricted Shares or Restricted Share Units awarded with respect to services to be performed by a Participant during a calendar year may be deferred at the election of the Participant only if the election to defer such Award is made and becomes irrevocable not later than the last day of the calendar year immediately preceding the calendar year during which services are to be performed.

In the case of the first year in which an Eligible Person becomes eligible to participate in the Plan (as defined in section 1.409A-1(c) of the final Treasury Regulations or the corresponding provision in subsequent guidance issued by the Department of the Treasury to include any other plan that would be considered together with this Plan as the same plan), as permitted by the Committee, the Eligible Person may make an initial deferral election within thirty (30) days after the date the Eligible Person becomes eligible to participate in the Plan, with respect to an Award of Restricted Shares or Restricted Share Units awarded with respect to services to be performed by the Eligible Person subsequent to the election.

In the case of an Award of Restricted Shares or Restricted Share Units that is subject to a vesting condition requiring the Participant to continue to provide services for a period of at least 12 months from the date of the Award, as permitted by the Committee, the Participant may make a deferral election within 30 days of receiving the Award provided that the election is made at least 12 months in advance of the date that the Award could first become vested (disregarding vesting on death or disability).

Any election to defer Awards pursuant to this Section 8(g) shall be on a form provided by and acceptable to the Committee. If a Participant makes an election to defer under this Section 8(g), the Shares subject to the election, and any associated dividends and interest, shall be credited to an account established pursuant to Section 9 hereof on the date such Shares would otherwise have been released or issued to the Participant pursuant to Section 8(d) above.”

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3. Section 9(c) Issuance of Shares is amended by deleting such section and inserting the following Section 9(c) in lieu thereof:

“(c)          Issuance of Shares. The Company shall provide a Participant with one Share for each Deferred Share Unit in five substantially equal annual installments that shall begin within 90 days of the date on which the Participant’s Continuous Service terminates and are distributable on each of the first four anniversaries thereof, unless –

(i)            the Participant has properly elected a different form of distribution, on a form approved by the Committee, that permits the Participant to select any combination of a lump sum and annual installments that are completed within ten years following termination of the Participant’s Continuous Service, and

(ii) the Company received the Participant’s distribution election form at the time the Participant elects to defer the receipt of cash or other compensation pursuant to Section 9(a), provided that such election may be changed through any subsequent election that (A) is delivered to the Administrator at least twelve months before the date on which distributions are otherwise scheduled to commence pursuant to the Participant’s election and does not take effect for at least twelve months, and (B) defers the commencement of distributions by at least five years from the originally scheduled commencement date.

Fractional shares shall not be issued, and instead shall be paid out in cash.”

4. Section 9(e) Hardship Distributions from Accounts is amended by adding the following paragraph at the end of such section:

“Hardship” means an unforeseeable emergency resulting in financial hardship of the Participant or beneficiary due to an illness or accident of the Participant or beneficiary, a spouse of the Participant or beneficiary or of a dependent (as defined in Code Section 152(a)) of a Participant or beneficiary; loss of the Participant’s or the beneficiary’s property due to casualty, or other similar or extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant or beneficiary. Whether a Participant or beneficiary is faced with an unforeseeable emergency permitting a distribution under the Plan shall be determined based upon the relevant facts and circumstances of each case, but in any case, its distribution shall not be allowed to the extent that such hardship is or may be relieved through reimbursement or compensation from insurance or otherwise, by liquidation of the Participant’s assets to the extent liquidation of such assets would not cause a severe financial hardship or be cessation of deferrals under the Plan. The amount of a distribution on account of a hardship shall be limited to the amount reasonably necessary to satisfy the emergency need plus amounts necessary to pay any federal, state or local income taxes or penalties reasonably anticipated to result from the distribution.”

5. Section 10(e) Deferral Elections is amended by deleting such section and inserting the following Section 10(e) in lieu thereof:

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“(e)        Deferral Elections. At any time prior to the date that is at least six months before the close of a Performance Period (or any shorter period within such window that the Committee selects) with respect to an Award of either Performance Units or Performance Compensation, the Committee may permit a Participant who is a member of a select group of management or highly compensated employees (within the meaning of the Code) to irrevocably elect, on a form provided by an acceptable to the Committee, to defer the receipt of all or a percentage of the cash or Shares that would otherwise be transferred to the Participant upon the vesting of such Award, provided that the following criteria are met:

(i)           the Participant performs services continuously from a date no later than the date upon which the performance criteria are established through a date no earlier than the date upon which the Participant makes an initial deferral election;

(ii)         the performance criteria must established in writing no later than ninety (90) days after the commencement of the Performance Period; and

(iii)        in no event may an election to defer Performance Units or Performance Compensation be made after such compensation has become both substantially certain to be paid and readily ascertainable.

If the Participant makes this election, the cash or Shares subject to the election, and any associated interest and dividends, shall be credited to an account established pursuant to Section 9 hereof on the date such cash or Shares would otherwise have been released or issued to the Participant pursuant to Section 10(a) or Section 10(b) above.”

6. Appendix A is amended by deleting the definition of “Change in Control” and inserting the following definition in lieu thereof:

7. “Change in Control” means, for purposes of the interpretation of this Plan in conformance with section 409A of the Code and the applicable guidance issued by the Department of the Treasury with respect to the application of section 409A, with respect to a Plan Participant, a Change in Control event must relate to: (i) the corporation for which the Participant is performing services at the time of the Change in Control event, (ii) the corporation that is liable for the payment of the deferred compensation (or all corporations liable for the payment if more than one corporation is liable), or (iii) a corporation that is a majority shareholder of a corporation identified in part (i) or part (ii) above, or any corporation in a chain of corporations in which each corporation is a majority shareholder of another corporation in the chain, ending in a corporation identified in part (i) or part (ii) above. For purposes of this provision, a majority shareholder is a shareholder owning more than fifty percent (50%) of the total fair market value and total voting power of such corporation. Also, for purposes of this provision, section 318(a) of the Code applies to determine stock ownership. Additionally, for purposes of this provision and in conformance with section 409A and the applicable guidance issued by the Department of the Treasury with respect to the application of

31

section 409A, a change in the ownership of a corporation or a change in the effective control of a corporation is determined in accordance with the provisions described below in this definition.

(v)           A change in the ownership of a corporation shall occur on the date that any one person, or more than one person acting as a group, in one transaction or a series of transactions, directly or indirectly, acquires ownership of stock of the corporation that, together with stock held by such person or group, constitutes more than fifty percent (50%) of the total fair market value or total voting power of the stock of the corporation. However, if any one person or more than one person acting as a group, is considered to own more than fifty percent (50%) of the total fair market value or total voting power of the stock of the corporation, the acquisition of additional stock by the same person or persons shall not be considered to cause a change in the ownership of the corporation (or to cause a change in the effective control of the corporation). An increase in the percentage of stock owned by any one person, or persons acting as a group, as a result of a transaction, in one transaction or a series of transactions, directly or indirectly, in which the corporation acquires its stock in exchange for property shall be treated as an acquisition of stock for purposes of this provision.

(vi)          For purposes of paragraph (i) above, persons will not be considered to be acting as a group solely because they purchase or own stock of the same corporation at the same time, or as a result of the same public offering. However, persons will be considered to be acting as a group if they are owners of a corporation that enters into a merger, consolidation, purchase or acquisition of stock, or similar business transaction with the corporation. If a person, including an entity, owns stock in both corporations that enter into a merger, consolidation, purchase or acquisition of stock, or similar transaction, such shareholder is considered to be acting as a group with other shareholders in a corporation prior to the transaction giving rise to the change and not with respect to the ownership interest in the other corporation.

(vii)        A change in the effective control of a corporation shall occur on the date that either:

(C) any one person, or more than one person acting as a group, in one transaction or a series of transactions, directly or indirectly, acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) ownership of stock of the corporation possessing thirty-five percent (35%) or more of the total voting power of the stock of the corporation; or

(D) a majority of members of the board of directors of the corporation is replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the members of the board of directors of the corporation prior to the date of the appointment or election, provided that for purposes of this subparagraph (B) the term “corporation” shall be determined in accordance with the requirements of section 409A of the Code and

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the applicable guidance issued by the Department of the Treasury with respect to the application of section 409A of the Code.

(viii)       A change in the ownership of a substantial portion of the assets of a corporation shall occur on the date that any one person, or more than one person acting as a group acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) assets from the corporation that have a total gross fair market value equal to or more than forty percent (40%) of the total gross fair market value of all of the assets of the corporation immediately prior to such acquisition or acquisitions. For this purpose, gross fair market value means the value of the assets of the corporation, or the value of the assets being disposed of, determined without regard to any liabilities associated with such assets.

The provisions of this Appendix regarding the definition of the term “Change in Control,” shall be determined and administered in accordance with section 409A and the applicable guidance issued by the Department of the Treasury with respect to the application of section 409A.”

8. Appendix A is amended by deleting the definition of “Continuous Service” and inserting the following definition in lieu thereof:

“ “Continuous Service” means the absence of any interruption or termination of service as an Employee, Director or Advisor. Continuous Service shall not be considered interrupted in the case of: (i) sick leave; (ii) military leave; (iii) any other leave of absence approved by the Committee, provided that such leave is for a period of not more than 90 days, unless reemployment upon the expiration of such leave is guaranteed by contract or statute, or unless provided otherwise pursuant to Company policy adopted from time to time; (iv) changes in status from Director to advisory director or emeritus status; or (iv) in the case of transfers between locations of the Company or between the Company, its Affiliates, or their respective successors. A change in status between service as an Employee, Director, and an Advisor may not, in and of itself, mandate a determination that an interpretation of Continuous Service has occurred. Whether an interruption in Continuous Service has occurred which shall constitute an event triggering payment under the Plan shall be determined and administered in accordance with section 409A and the applicable guidance issued by the Department of the Treasury with respect to the application of section 409A.”

9. Appendix A is amended by deleting the definition of “Disability” and inserting the following definition in lieu thereof:

“ “Disability” means, with respect to a Participant, the Participant is: (i) unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months; (ii) by reason of any medically determinable physical or mental impairment that can be expected to result in

33

death or can be expected to last for a continuous period of not less than twelve (12) months, receiving income replacement benefits for a period of not less than three (3) months under an accident and health plan covering employees of the Company; or (iii) determined to be totally disabled by the Social Security Administration.”

10. Certain statutory references to the Internal Revenue Code have been corrected to refer to ERISA where appropriate in the Plan.

In all other respects, the Plan shall remain in full force and effect.

IN WITNESS WHEREOF, the undersigned has executed this Amendment as approved by the Board of Directors at its regular meeting on October 31, 2007.

NORTHWESTERN ENERGY
By	/s/ Michael J. Hanson
Its	President and CEO

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EX-10

WAIVER AND RELEASE

This Waiver and Release, ("Release", undersigned and dated as of September 5, 2008, ("Release"), is entered into by and between NorthWestern Corporation, d/b/a NorthWestern Energy, a Delaware corporation with its principal place of business located at 3010 West 69^th Street, Sioux Falls, South Dakota, 57108, its officers, agents, directors, employees, successors, subsidiaries, insurers, parents and/or affiliated companies, and assigns ("NWEC or Company") and Thomas J. Knapp ("Knapp" or "You"), a Maryland resident, to settle all issues between us in connection with Knapp's severance of employment. NWEC and Knapp are collectively referred to herein as the "Parties".

NOW, THEREFORE, in consideration of the foregoing premises and further in consideration of the mutual covenants, conditions and agreements contained in this Release and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereto do hereby agree as follows:

1. Benefits Payable. In exchange for this Release, Knapp will receive a severance payment of $284,012.00 (Two Hundred Eighty-four Thousand and Twelve Dollars) less all applicable taxes and deductions to be paid in the next regularly scheduled payroll cycle occurring seven (7) days after he signs this Release. In his last regularly scheduled payroll check, Knapp shall receive his accrued but unpaid vacation.

Knapp will be eligible for a pro-rated 2008 incentive award based on the amount of time served in an eligible status during the performance period to be calculated at the end of the performance period, payable in accordance with the terms of the 2008 Employee Incentive Plan, and paid at the same time as other participants in the Plan are paid, but in any event, no later than March 15, 2009. Such award will be calculated assuming a personal performance factor of 100 percent and an individual performance rating of at least "meets expectations".

With respect to COBRA continuation premiums, for the twelve (12) month period following the date of termination, NWEC will continue to pay the same percentage of premiums as it was paying for group health and other group insurance coverage subject to COBRA continuation, immediately prior to the date of termination. For the same twelve (12) month period, Knapp will pay the employee portion of such COBRA premiums, and will be reimbursed for each COBRA premium he pays in the first regularly scheduled pay period of each applicable month. Outplacement services with a service provider of Knapp's choice, will be provided up to $12,000 (Twelve thousand dollars) during the twelve (12) month period following the date employment is terminated.

Whether or not Knapp signs this Agreement, he will retain such interests as he may have as a former employee of NWEC in any NWEC benefit plans, including, but not limited to, any pension, or 401K plans. He shall further retain such rights as he may have to elect to continue certain health and other benefits under COBRA and comparable state laws.

2. Employment Severance. Knapp's last date of employment shall be August 29, 2008 (the "Severance Date"), contingent upon signing this Waiver and Release.

3. Claims Released. In exchange for the benefits payable, Knapp for himself, his heirs, executors, administrators, successors, assigns and trustees irrevocably and unconditionally releases NWEC, its current, former and future, parent, subsidiary and related companies, its directors, trustees, officers, employees, agent, attorneys, successors, and assigns, and all persons acting by, through, under, or in concert with any of them (the "Released Parties"), from all actions, causes of action, suits, debts, charges, complaints, claims, obligations, promises, contracts, agreements, controversies, damages, judgments, rights, costs, losses, expenses, liabilities and demands of any nature, whether known or unknown, whether actual or potential, whether specifically mentioned herein or not, in law or equity, whether statutory or common law, whether federal, state, local, or otherwise, as a result of any act that has heretofore occurred, including, without limitation that Knapp may have arising out of or related to his employment with or separation from, NWEC ("Claims"). Knapp is releasing the following claims which include, without limitation, claims under his original employment terms, which are canceled as of the Severance Date with no further benefits or payments to be provided thereunder, the WARN Act, as amended, any and all claims of wrongful discharge or breach of contract, any and all claims for equitable estoppel, except as provided in Section 1 above, any and all claims for employee benefits, including, but not limited to, any and all claims under the Employee Retirement Income Security Act of 1974, as amended, and any and all claims of employment discrimination on any basis, including, but not limited to, any and all claims under Title VII of the Civil Rights Act of 1964, as amended, under the Age Discrimination in Employment Act of 1967, as amended, under the Civil Rights Act of 1866, 42 U.S.C. §1981, under the Civil Rights Act of 1991, as amended, under the Americans with Disabilities Act of 1990, as amended, under the Family and Medical Leave Act of 1993, under the Immigration Reform and Control Act of 1986, as amended, under the Fair Labor Standards Act, as amended, 29 U.S.C. §201 et seq., the Older Workers Benefit Protection Act, as amended, the Wrongful Discharge from Employment Act, 39-2­901 et seq., MCA, any federal, state or local law enforcing express or implied employment contracts or requiring an employer to deal with employees fairly or in good faith including 27-1-221, MCA, any federal, state, or local laws prohibiting employment discrimination, such as in the State of South Dakota, any claim filed in NWEC's bankruptcy proceedings, and any and all claims under any other federal, state, or local labor law, civil rights law, fair employment practices law, or human rights law, any and all claims of slander, libel, defamation, invasion of privacy, intentional or negligent infliction of emotional distress, intentional or negligent misrepresentation, fraud, and prima facie tort, any and all claims for monetary recovery, including but not limited to, back pay, front pay, liquidated, compensatory, and punitive damages, and attorneys' fees, experts' fees, disbursements and costs which against the Released Parties, that Knapp ever had, now have, or hereafter can, shall, or may have, for, upon, or by reason of any matter, cause, or thing whatsoever from the beginning of time to the date of Knapp's execution of this Release. Knapp will never file any lawsuit, complaint or claim based on any Claims, and Knapp will withdraw with prejudice any such lawsuit, complaint, or claim that may already be pending in any court or administrative agency. Knapp promises never to seek any damages, remedies, or other relief for himself personally (any right to which Knapp hereby waives) by filing or prosecuting a charge with any administrative agency with respect to the Claims purportedly released by this Release. Notwithstanding any provision to the contrary, this subsection shall not apply (a) to challenges to the ADEA release, to the extent, if any, prohibited by applicable law; (b) to claims to enforce Knapp's rights under this Agreement, (c) to claims that cannot legally be released under applicable law; (d) to claims by Knapp for benefits under benefit plans in which he maintains an interest as a former employee of NWEC, (e) to all rights and claims of contribution and of indemnification Knapp may have, whether under this Agreement, under the NWEC's Bylaws, by common law, statute, or otherwise, and (f) to rights and claims Knapp may have under any policies of directors and officers liability insurance.

NWEC hereby releases Knapp and his heirs, successors or assigns, from all actions, causes of action, suits, debts, charges, complaints, claims, obligations, promises, contracts, agreements, controversies, damages, judgments, rights, costs, losses, expenses, attorneys' fees, liabilities and demands of any nature, whether known or unknown, whether actual or potential, whether specifically mentioned herein or not, in law or equity, whether statutory or common law, whether federal, state, local, or otherwise, as a result of any act that has heretofore occurred (all hereinafter referred to as "NWEC Claims"). NWEC further will never file any lawsuit, complaint, or claim based on any NWEC Claims, and NWEC will withdraw with prejudice any such lawsuit. Notwithstanding any provision to the contrary, this subsection shall not apply (a) to claims to enforce NWEC's rights under this Agreement, and (b) to claims that Knapp has committed fraud or willful misconduct.

4. No admission of Liability. This Release is not an admission of guilt or wrongdoing by any released party. Knapp acknowledges that he has not suffered any age or other discrimination or wrongful treatment by any released party.

5. Consideration of Release. NWEC advised Knapp to take this Release home, read it, and carefully consider all of its terms before signing it. NWEC gave Knapp at least twenty-one (21) days in which to consider this Release. Knapp waives any right he may have to additional time beyond this consideration period within which to consider this Release. Knapp understands that he has seven (7) days after signing this Release to revoke it. If Knapp chooses to revoke this Release, Knapp agrees to provide such revocation in writing, accompanied by any sums received pursuant to this Release, to be received by the Vice President, General Counsel and Corporate Secretary by the end of the seven (7) day period. NWEC, in writing, advised Knapp to discuss this Release with his own attorney (at Knapp's own expense) during this period if Knapp wished to do so. Knapp has carefully read this Release, fully understands what it means, and is entering into it voluntarily. Knapp is receiving valuable consideration in exchange for his execution of this Release that he would not otherwise be entitled to receive.

6. Company Property. Knapp agrees to return to NWEC, by his Severance Date, all files, memoranda, documents, records, copies of the foregoing, credit cards, and any other property of NWEC or its affiliates in his possession. Knapp will permanently retain his BlackBerry, the phone number associated with the Blackberry as well as the laptop computer and associated equipment.

7. False Claims Representations and Promises. Knapp has disclosed to NWEC any information he has concerning any conduct involving NWEC or any affiliate that he has any reason to believe may be unlawful or that involves any false claims to the United States. Knapp promises to cooperate fully in any investigation NWEC or any affiliate undertakes into matters occurring during his employment with NWEC or any affiliate. Knapp understands that nothing in this Release prevents his from cooperating with any U.S. government investigation. In addition, to the fullest extent permitted by law, Knapp hereby irrevocably assigns to the U.S. government any right he may have to any proceeds or awards in connection with any false claims proceedings against NWEC or any affiliate.

8. Non-Disclosure, Return of Proprietary Information, and Inventions and Patents. NWEC and Knapp agree that during his employment with NWEC, Knapp has received and become acquainted with confidential, proprietary, and trade secret information of NWEC including, but not limited to, information regarding NWEC business programs, plans, and strategies; finances; customers and prospective customers; suppliers and vendors; marketing plans and results; personnel matters regarding NWEC employees, officers, directors, and owners; manners of operation and services provided; negotiating positions and strategies; legal arguments, theories, claims, investigations, and audits; or information regarding the operation and business of NWEC. Knapp acknowledges that such information has been developed or acquired by NWEC through the expenditure of substantial time, effort, and money, that such information provides NWEC with strategic and business advantages over others who do not know or use such information, and that NWEC has implemented specific policies and practices to keep such information secret. Knapp agrees that he shall not during the term of employment or at any time thereafter, directly or indirectly:

A. Use for his own purpose or for the benefit of any person or entity other than NWEC, or otherwise disclose or permit others to obtain access to, any proprietary of confidential information to any individual or entity unless such disclosure has been authorized in writing by NWEC or is otherwise required by law. Information or material that is not novel or copyrighted or patented may nonetheless be proprietary information. Proprietary information shall not include, however, any information that is or becomes generally known to the industries in which NWEC competes through sources independent of NWEC or Knapp or through authorized publication by NWEC to persons other than NWEC employees. Nothing about this Section (8) will be interpreted as prohibiting Knapp from using his generalized knowledge of and expertise in the utilities industry in future employment settings.

B. Except as required by law, give or disclose any records containing confidential information or material to, or permit any inspection or copying of such records by, any individual or entity other than in the authorized course and scope of such individual's or entity's employment or retention by NWEC. In addition, Knapp shall promptly return to NWEC all such records upon resignation hereunder and shall not use or retain any such records thereafter. Records subject to this subsection shall include, but not be limited to, all correspondence, memoranda, files, analyses, studies, reports, notes, documents, manuals, books, lists, financial, operating, or marketing records, computer software, magnetic tape, or electronic or other media or equipment of any kind that may be in the possession or under Knapp's control or accessible to his which contain or may be derived from proprietary or confidential information covered by this section. All such records are and will remain the sole property of NWEC.

9. Public Statements. Except as necessary to secure other employment or for other necessary reasons, Knapp agrees that he will make no public statements concerning the severance of his employment with NWEC. NWEC by its Board of Directors and senior management, and Knapp also agree neither party will make any disparaging remarks to any third parties concerning the other party. Knapp further agrees that he will not disparage NWEC's business capabilities, products, plans, or management to any customer, potential customer, vendor, suppler, contractor or subcontractor of NWEC so as to affect adversely the good will or business of NWEC. NWEC by and through its Board of Directors and senior management agrees that it will refrain from making any adverse, derogatory or disparaging comments or statements about Knapp or his performance during his employment with NWEC; that they will be supportive of Knapp's attempts to secure future employment; and will provide Knapp with a mutually agreeable letter of recommendation. If either party is contacted by the media concerning Knapp's departure from NWEC, either party may explain that Knapp was unable to move his family to Sioux Falls, South Dakota and left NWEC to pursue other business opportunities.

10. Consequences of Violating Promises:

A. General Consequences. In addition to any other remedies or relief that may be available, upon any breach of this Agreement (for this purpose, a breach will include proof that a representation was false when made), the breaching party agrees to pay the reasonable attorneys' fees and any damages the non-breaching party incurs as a result of such breach (such as by suing a Released Party over a released Claim). Each party further agrees that the minimum damages for each breach will be half of the attorney's fees the non-breaching party incurs as a result of the breach, which is a reasonable estimate of the value of the time the non-breaching party is likely to have to spend seeking a remedy for the breach. Knapp further agrees that NWEC would be irreparably harmed by any actual or threatened violation of Section 8 of this Waiver and Release and that NWEC will be entitled to an injunction prohibiting Knapp from committing any such violation.

B.Challenges to Validity. Should Knapp attempt to challenge the enforceability of Section 3 of this Release, Knapp agrees first (1) to deliver a certified check to NWEC for all amounts he has received because he signed this Release (2) to direct in writing that all future benefits or payments Knapp is to receive because he signed this Release be suspended, and (3) to invite NWEC to cancel this Release. If NWEC accepts Knapp's offer, this Release will be canceled. If it rejects Knapp's offer, NWEC will notify Knapp and deposit the amount Knapp repaid, plus all suspended future benefits and payments, in an interest-bearing account pending a determination of the enforceability of this Release. If the Release is determined to be enforceable, NWEC is to pay Knapp the amount in the account, less any amounts Knapp owes NWEC. If the Release is determined to be unenforceable, the amount credited to the account shall be paid to the entities that paid the consideration for this Release in proportion to their payments, and the suspension of future benefits or payments shall become permanent.

C.ADEA Claims. This section shall not apply to ADEA Claims to the extent, if any, prohibited by applicable law.

11. Successors and Assigns. This Release shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, successors, legal representatives, and assigns. However, neither this Release nor any right or interest hereunder shall be assignable by Knapp, Knapp's beneficiaries, or legal representatives, except as provided by law or pursuant to referenced benefit policy documents.

12. Severability and Reformation. The provisions of this Release are severable. If any provision of this Release shall be determined to be invalid, illegal, or unenforceable, in whole or in part, neither the validity of the remaining parts of such provision nor the validity of any other provision of this Release shall in any way be affected thereby. In lieu of such invalid, illegal, or unenforceable provision, there shall be added automatically as part of this Release a provision as similar in terms to such invalid, illegal, or unenforceable provision as may be possible and be valid, legal, and enforceable. Each party also agrees that, without receiving further consideration, it will sign and deliver such documents and do anything else necessary in the future to make the provisions of this Release effective.

13. Taxes. Knapp understands that NWEC will withhold all applicable income and payroll taxes. Knapp understands that he will be responsible for paying any additional taxes that may become due on any of the payments provided herein. If Knapp fails to pay any taxes due and owing on any of the payments, or any taxing authority alleges that Knapp has failed to do so or that NWEC is responsible for the payment of these taxes, for any reason, except to the extent that NWEC was responsible for the error (for example, an error in withholding), Knapp agrees to be fully responsible for any judgments or orders, fines and penalties, and that he will indemnify NWEC including, but not limited to, the satisfaction of judgments, orders, fines or penalties in the payment of NWEC's defense by counsel of its choice in such proceedings. The taxability of the amounts contained herein shall not affect the validity of this Release.

14. Governing Law and Jurisdiction. This Agreement shall be governed by, and construed in accordance with, the laws of the State of South Dakota, without reference to conflict of laws principles thereof. The Parties also hereby irrevocably and unconditionally submit to the jurisdiction of any South Dakota state court or federal court sitting in South Dakota and any appellate court from any such court, in any suit, action or proceeding arising out of or relating to this Agreement, or for recognition or enforcement of any judgment resulting from any such suit, action or proceeding, and each party hereby irrevocably and unconditionally agrees that all claims in respect of any such suit, action or proceeding may be heard and determined in such South Dakota state court or, to the extent permitted by law, by removal or otherwise, in such federal court.

15. Further Assurances. Each party agrees to take all further actions and to execute and deliver all further documents and instruments that are reasonably necessary or appropriate in order to effectuate the purposes of this Agreement and the transactions contemplated hereby.

16. Waiver. Any failure by a party hereto to comply with any obligation, agreement or condition contained herein may only be waived in a writing executed by the party granting the waiver, but such waiver or failure to insist upon strict compliance with such obligation, agreement or condition shall not operate as a waiver of, or estoppel with respect to, such failure or any subsequent or other failure. All remedies hereunder are cumulative and are not exclusive of any other remedies provided by law.

17. Entire Agreement. This Agreement, the Indemnification Agreement between the parties dated as of April 11, 2006, and the Consulting Agreement between the parties dated as of August 26, 2008, set forth the entire agreements and understandings of the parties relating to the subject matter hereof, and supersede all prior agreements and arrangements, written or oral, relating to the subject matter hereof.

18. Amendment. This Agreement may be amended only by a written instrument executed by both of the parties hereto.

19. Successors or Survivors and Assigns. This Agreement shall inure to the benefit of, and be binding upon, the parties hereto and their respective successors. NWEC may assign this Agreement without the prior consent of Knapp or his successors and assigns. Nothing in this Agreement, express or implied, is intended to confer on any person other than the parties hereto and the Released Parties, or their respective successors or permitted assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement.

20. Notice. Any notice required or permitted by this Agreement shall be in writing and shall be deemed delivered when delivered personally or by overnight courier or sent by telegram, fax, or email, or forty-eight (48) hours after being deposited in the U.S. mail, as certified or registered mail, with postage prepaid, and addressed to the party to be notified at such party's address or fax number set forth on the signature page hereto, as appropriate, which address or fax number may be subsequently modified by a written notice delivered in accordance with this section.

TAKE THIS RELEASE HOME, READ IT, AND CAREFULLY CONSIDER ALL OF ITS PROVISIONS BEFORE SIGNING IT: IT INCLUDES A RELEASE OF KNOWN AND UNKNOWN CLAIMS. IF YOU WISH, YOU SHOULD TAKE ADVANTAGE OF THE FULL CONSIDERATION PERIOD AFFORDED BY SECTION 5 AND YOU SHOULD CONSULT YOUR ATTORNEY.

Thomas J. Knapp		NorthWestern Corporation
By:		By:
Address: 7116 Darby Road		Its: Vice President, General Counsel
	Bethesda, Maryland 20817		and Corporate Secretary
Date:                   , 2008		Date:                   , 2008

EX-10

CONSULTING AGREEMENT

This Consulting Agreement, dated as of September 5, 2008, (the "Agreement"), is entered into by and between NorthWestern Energy ("NWEC" or "Company"), a Delaware corporation with its principal place of business located at 3010 West 69^th Street, Sioux Falls, South Dakota, 57108 and Thomas J. Knapp ("Knapp" or "Consultant"), a Maryland resident. NWEC and Knapp are collectively referred to herein as the "Parties."

WHEREAS, Knapp was employed with NWEC through August 29, 2008; and

WHEREAS, the Company and Knapp amicably agree to terminate his employment; and

WHEREAS, NWEC is agreeable to ending Knapp's employment with NWEC and entering into a agreement with Knapp with agreed upon consulting services to NWEC for the period September 1, 2008 through December 31, 2008, unless terminated by NWEC, by Knapp or on the date Knapp has secured other employment unless extended by mutual agreement; and

WHEREAS, Knapp desires to provide certain consulting services;

NOW, THEREFORE, in consideration of the mutual promises made herein, and for other good and valuable consideration, the parties hereby agree as follows:

1. Engagement.

a. NWEC agrees to engage Knapp, and Knapp agrees to provide certain agreed upon consulting services on behalf of NWEC as more fully described in Exhibit A attached hereto and incorporated herein by reference (hereinafter "Consulting Services.") It is the intent of the Parties and it is understood and agreed that, in the performance of such Consulting Services under the terms of this Agreement, and any amendments thereto, Knapp shall perform such Consulting Services as an independent contractor with respect to NWEC, and not as an employee of NWEC, it being specifically agreed that the relationship is and shall remain that of independent parties to a contractual relationship as set forth in this Agreement.

b. The Parties agree that NWEC shall determine the Consulting Services to be performed by Knapp under this Agreement, subject to the conditions set forth within this Agreement. Knapp understands and agrees that in performing such Consulting Services. Knapp agrees that he may not transfer, assign or subcontract his obligations under this Agreement without the express written consent of NWEC.

c. For the purposes of this Agreement, it is understood and agreed by the Parties that Knapp shall perform the Consulting Services from 7116 Darby Road, Bethesda, Maryland 20817 or such other location as Knapp determines or the Company requires. Knapp may be required to travel in performance of the Consulting Services but only upon approval by NWEC.

d. NWEC is not responsible for payroll withholdings, and shall not withhold FICA or taxes of any kind from any payments that it owes Knapp.

e. Knapp agrees that neither Knapp his employees, employees of a business entity for which Knapp serves as an employee, partner or other type of owner, shall be entitled to receive any benefits which employees of NWEC are entitled to receive. Further, Knapp agrees that he is not eligible to receive and is not covered by NWEC workers' compensation, unemployment compensation, health insurance, life insurance, paid vacations, paid holidays, incentive compensation, pension, or profit sharing, or any similar employee benefit.

f. Knapp shall be solely responsible for paying his employees, if any, and shall be solely responsible for paying any and all taxes, FICA, workers' compensation, unemployment compensation, health insurance, life insurance, paid vacations, paid holidays, pension, profit sharing and other similar benefits for Knapp and his employees, servants and agents. Knapp shall also be responsible for likewise paying any employees of a business entity for whom Knapp serves as an employee, partner or other type of owner as well as any third party entities or individuals with whom he may contract. Knapp will indemnify and hold harmless NWEC from any and all loss or liability, including attorney's fees, arising from his failure to make any of these payments or withholdings, or provide these benefits, if any.

g. If the Internal Revenue Service or any other governmental agency should question or challenge Knapp's independent consulting status, Knapp and NWEC shall have the right to participate in any discussion or negotiation occurring with any agency or agencies, regardless of with whom or by whom these discussions or negotiations are initiated.

2. Work. Knapp shall perform the work as more particularly described in Exhibit A.

a. Knapp agrees to comply with all applicable laws, codes and regulations and other instructions, standards of conduct, policies and procedures established and/or promulgated by NWEC, orally or in written or electronic form, which may be amended from time to time.

b. Knapp shall report on legal matters to the Vice President, General Counsel and Corporate Secretary and on governmental affairs matters to the Vice President, Government and Regulatory Affairs of NorthWestern Energy, unless otherwise instructed.

c. Knapp shall have access to only the following NWEC property: Company email system, computer equipment, cellular phone, corporate jet and other resources mutually agreed upon for business purposes.

3. Compensation. Knapp shall be paid a retainer fee for work rendered to NWEC in the amount of $15,000.00 (Fifteen Thousand Dollars) to be paid within the first five (5) working days after acceptance of this agreement by both parties and thereafter the same amount to be paid within the first five (5) days of each subsequent month covered by this Agreement. A Form 1099 shall be issued each year for all payments made. No deductions will be made from these checks.

4. Intellectual Property. Knapp shall make no use of NWEC trademarks, trade names, service marks, copyrights or other intellectual property of NWEC, NWEC engage in any program or activity that makes use of or contains any reference to NWEC, its trademarks, trade names, service marks, or copyrights except with written consent of NWEC, expressed in a duly executed license agreement or otherwise. By executing this Agreement, NWEC hereby grants Knapp its written consent to refer to NWEC in discussions and through forms, correspondence or other documentation provided and/or approved by NWEC. Knapp shall report to NWEC all violations of NWEC's intellectual property and other proprietary rights and other works immediately upon discovery of such violations by Knapp.

5. Covenants of Knapp. Knapp covenants as follows:

a. Knapp shall exercise reasonable efforts to not at any time, during or after the term of this Agreement, directly or indirectly divulge or otherwise disclose to anyone other than an employee of NWEC the procedures and policies of NWEC, or other information which is confidential or proprietary to NWEC, unless under legal obligation to do so or unless NWEC gives its prior written consent to such disclosure.

b. All books, records, notes, reports, copies, advertising, contracts, documents and other information or writings relating to NWEC's business or its customers, employees, contractors, or agents, whether prepared by Knapp or otherwise coming into the possession of Knapp, are and shall remain the exclusive property of NWEC and shall be returned to NWEC upon termination of this Agreement or upon demand. No copies shall be retained by Knapp.

c. Knapp acknowledges that each of the foregoing matters is important and material to the business and success of NWEC and agrees that any breach of this paragraph 5 is a material breach of this Agreement, from which Knapp may be enjoined and for which Knapp shall be liable for to NWEC for appropriate compensatory damages which arise from the breach, together with interest and costs.

6. Non-Exclusive Agreement. The work performed for NWEC under this Agreement is not intended to be exclusive. Knapp shall be free to undertake additional consulting activities for another party provided that such activities do not interfere with the timely execution of the Work set forth in this Agreement. Knapp agrees to request the consent of NWEC for any consulting activities with any entity in order to insure that a material conflict does not exist. To the extent such conflict involves the provision of legal services, NWEC's Law Department will determine if the conflict can be waived. To the extent such conflict involves the provision of non-legal services, NWEC shall not unreasonably withhold such consent.

7. Indemnification. To the maximum extent permitted by law, Knapp shall defend, indemnify and hold harmless NWEC and its related and affiliated companies and all divestitures, directors, officers and employees, and hold them from all obligations, costs, fees, losses, liabilities, claims, judgments, actions, damages and expenses suffered, incurred or sustained by NWEC, its related and affiliated companies and all their respective directors, officers and employees which, in connection with this Agreement, arise out of or are related to (a) Knapp's intentional wrongdoing, intentional breach of duty, fraud, and/or intentional violation of any applicable laws, rules and regulations of federal or state governmental and regulatory agencies; (b) any activity by Knapp outside the scope of this Agreement; or (c) claims for benefits, compensation, damages or other amounts by any individual employed or retained by Knapp. Nothing about this provision shall in any way diminish or restrict any rights or claims Knapp may have for indemnification, including any under the Indemnification Agreement dated April 11, 2006 between the parties, or under any other agreement, statute, or common law theory.

8. Expenses. Knapp shall be reimbursed by NWEC for reasonable and verifiable expenses within thirty (30) days of presentation.

9. Term and Termination. This Agreement is effective as of September 1, 2008 and shall continue in effect through December 31, 2008. NWEC may terminate this Agreement for cause upon written notice to Knapp. Cause shall be defined as the failure of Knapp to cure after being provided written notification of a breach of the terms of this Agreement, failure to fulfill the duties and conditions of this Agreement, violation of NorthWestern's Code of Business Conduct and Ethics, or a violation of any of the laws and regulations applicable to the Work within this Agreement. If NWEC terminates for cause, no payments will be due Knapp under this Agreement. In the event NWEC elects to terminate this Agreement for convenience, NWEC shall pay Knapp a termination fee equal to $60,000.00 (Sixty Thousand Dollars) less the cumulative amount of all fees paid to Knapp prior to the termination date. In the event that Knapp secures other employment, Knapp agrees to use his best efforts to negotiate terms that would allow him to fulfill the terms of this Agreement. All such notices shall be delivered via email or US mail to NWEC's Vice President, General Counsel and Corporate Secretary or Knapp at the address indicated herein or to such other place as designated in writing by the Parties.

10. Assignment. Knapp may not assign his rights or delegate his duties under this Agreement without the prior written consent of NWEC. However, NWEC's rights and obligations under this Agreement may be assigned and delegated upon written notice to Knapp.

11. Waiver. Waiver by NWEC of any breach by Knapp shall not operate or be construed as a waiver of any subsequent breach by Knapp.

12. Law, Jurisdiction and Venue. The validity, interpretation, and performance of this Agreement shall be controlled by and construed in accordance with the laws of the State of South Dakota..

13. Arbitration of Disputes. NWEC and Knapp agree to resolve any claims they may have with each other through final and binding arbitration in accordance with the then current arbitration rules and procedures for disputes governing arbitrations administered by the Judicial Arbitration and Mediation Service (JAMS).

14. Entire Agreement. This Agreement constitutes the entire Agreement between the parties with respect to the consulting arrangement between the parties hereof and supersedes any other agreement relating to any consulting arrangement. It specifically does not supersede and has no effect on the Waiver and Release between the parties, any of Knapp's rights to severance benefits under that agreement, or the Indemnification Agreement between the parties dated April 11, 2006. This Agreement may be modified or amended only by an instrument in writing signed by both parties hereof.

15. Captions. The captions stated herein are for convenience only and are not intended to alter any of the provisions of this Agreement.

Thomas J. Knapp		NorthWestern Corporation
By: /s/ THOMAS J. KNAPP		By: /s/ MIGGIE CRAMBLIT
Address: 7116 Darby Road		Its: Vice President, General Counsel
	Bethesda, Maryland 20817		and Corporate Secretary
Date: September 13 ,2008		Date: September 5, 2008

EXHIBIT A

All requests for service by Knapp from NWEC will be communicated from NWEC officers or NWEC outside counsel.

Initial Services include, but are not limited to, the following:

• Continued work on Colstrip 4 Rate Base Docket and Investigation

• Continued work to finalize the Touch America settlement

• Continued work to build relationships with NWEC's congressional delegations

EX-31

EXHIBIT 31.1

CERTIFICATION PURSUANT TO

17 CFR 240. 13a-14

PROMULGATED UNDER

SECTION302 OF THE SARBANES-OXLEY ACT OF 2002

I, Robert C. Rowe, certify that:

1. I have reviewed this report on Form 10-Q 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 functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which 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: October 30, 2008

/s/ ROBERT C. ROWE

Robert C. Rowe

President and Chief Executive Officer

EX-31

Exhibit31.2

CERTIFICATION PURSUANT TO

17 CFR 240.13a-14

PROMULGATED UNDER

SECTION302 OF THE SARBANES-OXLEY ACT OF 2002

I, Brian B. Bird, certify that:

1. I have reviewed this report on Form 10-Q 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 functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which 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: October 30, 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. SECTION1350,

AS ADOPTED PURSUANT TO SECTION906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of NorthWestern Corporation (the “Company”) on Form 10-Q for the period ended September 30, 2008, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Robert C. Rowe, 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: October 30, 2008	/s/ ROBERT C. ROWE
	Robert C. Rowe
	President and Chief Executive Officer

EX-32

Exhibit32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION1350,

AS ADOPTED PURSUANT TO SECTION906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of NorthWestern Corporation (the “Company”) on Form 10-Q for the period ended September 30, 2008, 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: October 30, 2008	/s/ BRIAN B. BIRD
	Brian B. Bird
	Vice President and Chief Financial Officer