q10_033110.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

[Missing Graphic Reference]

FORM 10-Q

(mark one)
x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2010

OR

¨		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 1-10499

[Missing Graphic Reference]

NORTHWESTERN CORPORATION

Delaware		46-0172280
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
3010 W. 69th Street, Sioux Falls, South Dakota		57108
(Address of principal executive offices)		(Zip Code)
Registrant’s telephone number, including area code: 605-978-2900

	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 x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  No 

	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.

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 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

36,177,565 shares outstanding at April 16, 2010

NORTHWESTERN CORPORATION

FORM 10-Q

INDEX

		Page
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS		3
PART I. FINANCIAL INFORMATION		5
Item 1.	Financial Statements (Unaudited)	5
	Condensed Consolidated Balance Sheets — March 31, 2010 and December 31, 2009	5
	Condensed Consolidated Statements of Income — Three Months Ended March 31, 2010 and 2009	6
	Condensed Consolidated Statements of Cash Flows – Three Months Ended March 31, 2010 and 2009	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	35
Item 4.	Controls and Procedures	36
PART II. OTHER INFORMATION		37
Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	37
Item 6.	Exhibits	41
SIGNATURES		42

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 in this Quarterly Report, 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 parti es, we cannot assure you that we will achieve our projections. Factors that may cause such differences include, but are not limited to:

·	potential 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;

changes in availability of trade credit, creditworthiness of counterparties, 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 could adversely affect our liquidity and results of operations;

·	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 U.S. 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. We believe that at the time made, the expectations reflected in all of these forward-looking statements are and will be reasonable. However, 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 other reports on Form 10-Q, 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 Quarter ly 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 any of our forward-looking statements in this Quarterly Report on Form 10-Q or other public communications as a representation by us that our plans and objectives will be achieved, and you should not place undue reliance on such forward-looking statements.

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

PART 1. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

NORTHWESTERN CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except share data)


	March 31, 2010			December 31, 2009
ASSETS
Current Assets:
Cash and cash equivalents	$	7,128		$	4,344
Restricted cash	13,408			13,608
Accounts receivable, net	134,281			143,759
Inventories	28,136			47,305
Regulatory assets	53,194			40,509
Prepaid energy supply	3,411			2,535
Deferred income taxes	4,408			1,239
Other	8,457			11,528
Total current assets	252,423			264,827
Property, Plant, and Equipment, Net	1,996,483			1,964,121
Goodwill	355,128			355,128
Regulatory assets	180,300			182,382
Other noncurrent assets	30,303			28,674
Total assets	$	2,814,637		$	2,795,132
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of capital leases	$	1,218		$	1,197
Current maturities of long-term debt	6,353			6,123
Accounts payable	69,073			92,923
Accrued expenses	199,926			165,127
Regulatory liabilities	26,903			29,622
Total current liabilities	303,473			294,992
Long-term capital leases	35,261			35,570
Long-term debt	947,691			981,296
Deferred income taxes	181,284			161,188
Noncurrent regulatory liabilities	242,178			238,332
Other noncurrent liabilities	300,957			296,730
Total liabilities	2,010,844			2,008,108
Commitments and Contingencies (Note 12)
Shareholders' Equity:
Common stock, par value $0.01; authorized 200,000,000 shares; issued and outstanding 39,568,881 and 36,007,017, respectively; Preferred stock, par value $0.01; authorized 50,000,000 shares; none issued	396			395
Treasury stock at cost	(90,203		)	(90,228		)
Paid-in capital	808,017			807,527
Retained earnings	76,092			59,605
Accumulated other comprehensive income	9,491			9,725
Total shareholders' equity	803,793			787,024
Total liabilities and shareholders' equity	$	2,814,637		$	2,795,132

See Notes to Condensed Consolidated Financial Statements

NORTHWESTERN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(in thousands, except per share amounts)

	Three Months Ended March 31,
	2010			2009
Revenues
Electric	$	203,839		$	207,987
Natural gas	130,019			158,803
Other	315			4,113
Total Revenues	334,173			370,903
Operating Expenses
Cost of sales	172,827			208,010
Operating, general and administrative	58,308			65,419
Property and other taxes	22,968			24,289
Depreciation	22,875			22,722
Total Operating Expenses	276,978			320,440
Operating Income	57,195			50,463
Interest Expense	(17,050		)	(15,134		)
Other Income	753			591
Income Before Income Taxes	40,898			35,920
Income Tax Expense	(12,180		)	(13,107		)
Net Income	$	28,718		$	22,813
Average Common Shares Outstanding	36,169			35,934
Basic Earnings per Average Common Share	$	0.79		$	0.63
Diluted Earnings per Average Common Share	$	0.79		$	0.63
Dividends Declared per Average Common Share	$	0.34		$	0.335

See Notes to Condensed Consolidated Financial Statements

NORTHWESTERN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

	Three Months Ended March 31,
	2010			2009
OPERATING ACTIVITIES:
Net Income	$	28,718		$	22,813
Items not affecting cash:
Depreciation	22,875			22,722
Amortization of debt issue costs, discount and deferred hedge gain	531			462
Amortization of restricted stock	490			598
Equity portion of allowance for funds used during construction	(848		)	(116		)
Gain on sale of assets	(78		)	(269		)
Deferred income taxes	16,927			14,050
Changes in current assets and liabilities:
Restricted cash	200			(221		)
Accounts receivable	9,478			13,295
Inventories	19,169			35,812
Prepaid energy supply costs	(876		)	(1,285		)
Other current assets	3,090			4,095
Accounts payable	(17,467		)	(28,620		)
Accrued expenses	21,693			12,067
Regulatory assets	412			1,683
Regulatory liabilities	(2,719		)	(5,531		)
Other noncurrent assets	809			7,671
Other noncurrent liabilities	3,866			(34,096		)
Cash provided by operating activities	106,270			65,130
INVESTING ACTIVITIES:
Property, plant, and equipment additions	(57,796		)	(18,509		)
Proceeds from sale of assets	—			320
Cash used in investing activities	(57,796		)	(18,189		)
FINANCING ACTIVITIES:
Treasury stock activity	25			—
Dividends on common stock	(12,231		)	(12,039		)
Issuance of long-term debt	—			250,000
Repayment of long-term debt	(3,396		)	(103,309		)
Line of credit borrowings	201,000			237,000
Line of credit repayments	(231,000		)	(345,000		)
Financing costs	(88		)	(1,639		)
Cash (used in) provided by financing activities	(45,690		)	25,013
Increase in Cash and Cash Equivalents	2,784			71,954
Cash and Cash Equivalents, beginning of period	4,344			11,292
Cash and Cash Equivalents, end of period	$	7,128		$	83,246
Supplemental Cash Flow Information:
Cash paid during the period for:
Income Taxes	—			—
Interest	9,529			10,333
Significant non-cash transactions:
Capital expenditures included in trade accounts payable	5,950			1,045

See Notes to Condensed Consolidated Financial Statements

NOTES TO CONDENSED 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 661,000 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 generated and distributed electricity and distributed natural gas in Montana since 2002.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that may affect the reported amounts of assets, liabilities, revenues and expenses during the reporting period. Actual results could differ from those estimates. The unaudited Condensed Consolidated Financial Statements (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. Events occurring subsequent to March 31, 2010, have been evaluated as to their pot ential impact to the Financial Statements through the date of issuance.

The Financial Statements included herein have been prepared by NorthWestern, without audit, pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations; however, management believes that the condensed disclosures provided are adequate to make the information presented not misleading. Management recommends that these unaudited Financial Statements be read in conjunction with the audited Financial Statements and related footnotes included in our Annual Report on Form 10-K for the year ended December 31, 2009.

(2) New Accounting Standards

Accounting Standards Issued

There have been no new recent accounting pronouncements or changes in accounting pronouncements during the three months ended March 31, 2010, that are of significance, or potential significance, to us.

Accounting Standards Adopted

In June 2009, the Financial Accounting Standards Board (FASB) amended the accounting for variable interest entities, which was effective for us beginning January 1, 2010. This revised guidance changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar) rights should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. The statement includes the following significant provisions:

requires an entity to qualitatively assess the determination of the primary beneficiary of a variable interest entity (VIE) based on whether the entity (1) has the power to direct matters that most significantly impact the activities of the VIE, and (2) has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE,

·	requires an ongoing reconsideration of the primary beneficiary instead of only upon certain triggering events,

·	amends the events that trigger a reassessment of whether an entity is a VIE, and

for an entity that is the primary beneficiary of a VIE, requires separate balance sheet presentation of (1) the assets of the consolidated VIE, if they can be used to only settle specific obligations of the consolidated VIE, and (2) the liabilities of a consolidated VIE for which creditors do not have recourse to the general credit of the primary beneficiary.

We are required to consolidate VIEs if we are the primary beneficiary, which means we have a controlling financial interest. Certain long-term power purchase and tolling contracts may be considered variable interests. We have various long-term power purchase contracts with other utilities and certain qualifying facility (QF) plants. We have evaluated our inventory of long-term power purchase and tolling contracts under this guidance. We identified one QF contract that may constitute a VIE. The power purchase agreement was entered into in 1984 with a 35 megawatt coal-fired QF to purchase substantially all of the plant’s output over a substantial portion of its estimated useful life. We absorb a portion of the plant’s variability through the energy payment portion of the contract price. After making exhaustive efforts, we were unable to obtain the information from the plant necessary to determine whether it is a VIE or whether we are the primary beneficiary. The contract with the plant contains no provision which legally obligates the project to release this information to us. We have continued to account for this QF contract as an executory contract. Based on the current contract terms with this QF, our estimated gross contractual payments aggregate approximately $461.9 million through 2025.

(3) Income Taxes

Uncertain Tax Positions

We have unrecognized tax benefits of approximately $123.1 million as of March 31, 2010, including approximately $85.1 million that if recognized, would impact 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 statutes 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 three months ended March 31, 2010, we have not recognized expense for interest or penalties, and do not have any amounts accrued at March 31, 2010 and December 31, 2009, respectively, for the payment of interest and penalties.

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

(4) Goodwill

There were no changes in our goodwill during the three months ended March 31, 2010. Goodwill by segment is as follows for both March 31, 2010 and December 31, 2009 (in thousands):


Electric	$	241,100
Natural gas	114,028
	$	355,128

(5) Other Comprehensive Income

The following table displays the components of Accumulated Other Comprehensive Income (AOCI), which is included in Shareholders’ Equity on the Condensed Consolidated Balance Sheets (in thousands).

	Three Months Ended March 31,
	2010			2009
Net income	$	28,718		$	22,813
Other comprehensive income, net of tax:
Reclassification of net gains on hedging instruments from OCI to net income	(297		)	(297		)
Foreign currency translation	63			(49		)
Comprehensive income	$	28,484		$	22,467

(6) Risk Management and Hedging Activities

Nature of Our Business and Associated Risks

We are exposed to certain risks related to the ongoing operations of our business, including the impact of market fluctuations in the price of electricity and natural gas commodities and changes in interest rates. Commodity price risk is a significant risk due to our lack of ownership of natural gas reserves and our reliance on market purchases to fulfill a portion of our electric supply requirements within the Montana market. 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.

Objectives and Strategies for Using Derivatives

To manage our exposure to fluctuations in commodity prices we routinely enter into derivative contracts, such as fixed-price forward purchase and sales contracts. The objective of these transactions is to fix the price for a portion of anticipated energy purchases to supply our customers. These types of contracts are included in our electric and natural gas supply portfolios 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. We do not maintain a trading portfolio, and our derivative transactions are only used for risk management purposes. In addition, we may use interest rate swaps to manage our interest rate exposures associated with new debt issuances or to manage our exposure to fluctuations in interest rates on variable rate debt.

Accounting for Derivative Instruments

We evaluate new and existing transactions and agreements to determine whether they are derivatives. The permitted accounting treatments include: normal purchase normal sale; cash flow hedge; fair value hedge; and mark-to-market. Mark-to-market accounting is the default accounting treatment for all derivatives unless they qualify, and we specifically designate them, for one of the other accounting treatments. Derivatives designated for any of the elective accounting treatments must meet specific, restrictive criteria both at the time of designation and on an ongoing basis. 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.

Normal Purchases and Normal Sales

We have applied the normal purchase and normal sale scope exception (NPNS) to most of our contracts involving the physical purchase and sale of gas and electricity at fixed prices in future periods. During our normal course of business, we enter into full-requirement energy contracts, power purchase agreements and physical capacity contracts, which qualify for NPNS. All of these contracts are accounted for using the accrual method of accounting; therefore, there were no amounts recorded in the Financial Statements at March 31, 2010 and December 31, 2009. 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.

Mark-to-Market Accounting

Certain contracts for the purchase of natural gas associated with our gas utility operations do not qualify for NPNS. These are typically forward purchase contracts for natural gas where we lock in a fixed price; however the contracts are settled financially and we do not take physical delivery of the natural gas. We use the mark-to-market method of accounting for these derivative contracts as we do not elect hedge accounting. Upon settlement of these contracts, associated proceeds or costs are refunded to or collected from our customers consistent with regulatory requirements therefore we record a regulatory asset or liability based on changes in market value.

The following table represents the fair value and location of derivative instruments subject to mark-to-market accounting (in thousands). For more information on the determination of fair value see Note 7.

Mark-to-Market Transactions	Balance Sheet Location	March 31, 2010		December 31, 2009

Natural gas net derivative liability	Accrued Expenses	$	36,910	$	23,661

The following table represents the net change in fair value for these derivatives (in thousands):

	Unrealized loss recognized in Regulatory Assets
	Three Months Ended
Derivatives Subject to Regulatory Deferral	March 31, 2010			March 31, 2009

Natural gas	$	(13,249	)	$	(12,157	)

Credit Risk

We are exposed to credit risk primarily through buying and selling electricity and natural gas to serve customers. Credit risk is the potential loss resulting from counterparty non-performance under an agreement. We manage credit risk with policies and procedures for, among other things, counterparty analysis and exposure measurement, monitoring and mitigation. We may request collateral or other security from our counterparties based on the assessment of creditworthiness and expected credit exposure. It is possible that volatility in commodity prices could cause us to have material credit risk exposures with one or more counterparties.

We enter into commodity master arrangements with our counterparties to mitigate credit exposure, as these agreements reduce the risk of default by allowing us or our counterparty the ability to make net payments. The agreements generally are: (1) Western Systems Power Pool agreements – standardized power sales contracts in the electric industry; (2) International Swaps and Derivatives Association agreements – standardized financial gas and electric contracts; (3) North American Energy Standards Board agreements – standardized physical gas contracts; and (4) Edison Electric Institute Master Purchase and Sale Agreements – standardized power sales contracts in the electric industry.

Many of our forward purchase contracts contain provisions that require us to maintain an investment grade credit rating from each of the major credit rating agencies. If our credit rating were to fall below investment grade, it would be in violation of these provisions, and the counterparties could require immediate payment or demand immediate and ongoing full overnight collateralization on contracts in net liability positions.

The following table presents, as of March 31, 2010, the aggregate fair value of forward purchase contracts that do not qualify as normal purchases in a net liability position with credit risk-related contingent features, collateral posted, and the aggregate amount of additional collateral that we would be required to post with counterparties, if the credit risk-related contingent features underlying these agreements were triggered on March 31, 2010 (in thousands):

Contracts with Contingent Feature	Fair Value Liability		Posted Collateral (1)		Contingent Collateral

Credit rating	$	31,117	$	5,000	$	26,117

(1) Posted collateral as of March 31, 2010 consisted of letters of credit.

Interest Rate Swaps Designated as Cash Flow Hedges

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

We have used interest rate swaps designated as cash flow hedges to manage our interest rate exposures associated with new debt issuances. These swaps were designated as cash-flow hedges with the effective portion of gains and losses, net of associated deferred income tax effects, recorded in AOCI. We reclassify these gains from AOCI into interest expense during the periods in which the hedged interest payments occur. The following table shows the effect of these derivative instruments on the Financial Statements (in thousands):

Cash Flow Hedges	Amount of Gain Remaining in AOCI as of March 31, 2010		Location of Gain Reclassified from AOCI to Income		Amount of Gain Reclassified from AOCI into Income during the three months ended March 31, 2010

Interest rate contracts	$	10,167		Interest Expense	$	297

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. These gains relate to swaps previously terminated, and we have no current interest rate swaps outstanding.

(7) Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., an exit price). Measuring fair value requires the use of market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, corroborated by market data, or generally unobservable. Valuation techniques are required to maximize the use of observable inputs and minimize the use of unobservable inputs.

A fair value hierarchy that prioritizes the inputs used to measure fair value, and requires fair value measurements to be categorized based on the observability of those inputs has been established by the applicable accounting guidance. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs). The three levels of the fair value hierarchy are as follows:

·	Level 1 – Unadjusted quoted prices available in active markets at the measurement date for identical assets or liabilities;

·	Level 2 – Pricing inputs, other than quoted prices included within Level 1, which are either directly or indirectly observable as of the reporting date; and

·	Level 3 – Significant inputs that are generally not observable from market activity.

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. The table below sets forth by level within the fair value hierarchy the gross components of our assets and liabilities measured at fair value on a recurring basis. Normal purchases and sales transactions are not included in the fair values by source table as they are not recorded at fair value. See Note 6 for further discussion.

March 31, 2010	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
	(in thousands)
Restricted cash		12,883		—			—		—		12,883
Derivative asset (1)		—		603			—		—		603
Derivative liability (1)		—		(37,513	)		—		—		(37,513	)
Net derivative position		—		(36,910	)		—		—		(36,910	)
Total	$	12,883	$	(36,910	)	$	—	$	—	$	(24,027	)

(1)	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 present our derivative assets and liabilities on a net basis in the Condensed Consolidated Balance Sheets. The table above disaggregates our net derivative assets and liabilities on a gross contract-by-contract basis as required and classifies each individual asset or liability within the appropriate level in the fair value hierarchy, regardless of whether a particular contract is eligible for netting against other contracts. These gross balances are intended solely to provide information on sources of inputs to fair value and do not represent our actual credit exposure or net economic exposure. Increases and decreases in the gross components presented in each of the levels in this table also do not indicate changes in the level of derivative activities. Rather, the primary factors affecting the gross amounts are commodity prices.

Restricted cash represents amounts held in money market mutual funds. Fair value for the commodity derivatives was determined using internal models based on quoted forward commodity prices. We consider nonperformance risk in our valuation of derivative instruments by analyzing the credit standing of our counterparties and considering any counterparty credit enhancements (e.g., collateral). The fair value measurement of liabilities also reflects the nonperformance risk of the reporting entity, as applicable. Therefore, we have factored the impact of our credit standing as well as any potential credit enhancements into the fair value measurement of both derivative assets and derivative liabilities. Consideration of our own credit risk did not have a material impact on our fair value measurements.

Financial Instruments

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

	March 31, 2010				December 31, 2009
	Carrying Amount		Fair Value		Carrying Amount			Fair Value
Liabilities:
Long-term debt (including current portion)	$	954,044	$	991,489	$	987,419	$	1,034,122

The estimated fair value amounts have been determined using available market information and appropriate valuation methodologies; however, considerable judgment is necessarily required in interpreting market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that we would realize in a current market exchange.

We determined fair values for debt based on interest rates that are currently available to us for issuance of debt with similar terms and remaining maturities, except for publicly traded debt, for which fair value is based on market prices for the same or similar issues or upon the quoted market prices of U.S. treasury issues having a similar term to maturity, adjusted for our bond issuance rating and the present value of future cash flows.

(8) Regulatory Matters

Montana General Rate Case

In October 2009, we filed a request with the Montana Public Service Commission (MPSC) for an annual electric transmission and distribution revenue increase of $15.5 million, and an annual natural gas transmission, storage and distribution revenue increase of $2.0 million. The request was based on a 2008 test period, a return on equity of 10.9%, an equity ratio of 49.45% and rate base of $632.2 million and $256.6 million for electric and natural gas, respectively.

The procedural schedule for this rate case was temporarily suspended pending resolution of confidential treatment of various data requests, which was resolved in April 2010. We expect the procedural schedule to be reinstated during the second quarter of 2010 and the MPSC to issue a final order during the fourth quarter of 2010. We requested interim rate adjustments, which we expect to be considered after intervener testimony is filed. Final rate adjustments would become effective upon the issuance of a final order on this matter.

Montana Electric and Natural Gas Supply Trackers

Rates for our Montana electric and natural gas supply are set by the MPSC. Each year we submit electric and natural gas tracker filings for recovery of supply costs for the 12-month period ended June 30 and for the projected electric supply costs for the next 12-month period. The MPSC reviews such filings and makes its cost recovery determination based on whether or not our electric and natural gas energy supply procurement activities were prudent. If the MPSC subsequently determines that a procurement activity was imprudent, then it may disallow such costs.

Our annual electric supply cost tracker requests for the 12-month periods ended June 30, 2008 and June 30, 2009 were combined and are still pending final approval of the MPSC. During the fourth quarter of 2009, we entered into a settlement with the Montana Consumer Counsel agreeing to remove approximately $183,000 in labor costs and calculated lost revenues from the tracker. The MPSC conducted a hearing to review the filings and resulting settlement and briefing was completed in March 2010. We expect the MPSC to issue an order during the second quarter of 2010.

On June 2, 2009, we filed an annual gas cost tracker request with the MPSC for any unrecovered actual gas costs for the 12-month period ended June 30, 2009, and for the projected gas costs for the 12-month period ending June 30, 2010. On June 24, 2009, the MPSC issued an interim order, approving recovery of our projected gas costs pending its review. A procedural schedule has been established.

Montana Property Tax Tracker

In December 2009, we filed our annual property tax tracker (including other state/local taxes and fees) with the MPSC for an automatic rate adjustment, which reflected 60% of the change in 2009 actual property taxes and estimated property taxes for 2010. This filing also included an adjustment for property taxes related to Colstrip Unit 4 (Colstrip). In our 2008 filing requesting to include our interest in Colstrip in utility rate base, we estimated base property taxes would be approximately $5.5 million, by multiplying the rate base value by the latest known mill levy. This filing was approved by the MPSC. Actual 2009 Colstrip related property taxes were approximately $2.1 million and we proposed refunding 60% of the change to customers, consistent with previous MPSC orders. In January 2010, the MPSC issued an order requiring us to reset the base rates for Colstrip, effectively requiring us to refund 100% of the change in property taxes from our original 2008 filing. We disputed various aspects of the order and filed a Motion for Reconsideration with the MPSC. In March 2010, the MPSC issued an order on reconsideration to remove or clarify language from their initial order, but did not change the decision on recovery of property taxes.

Mill Creek Generating Station

In August 2008, we filed a request with the MPSC for advanced approval to construct a 150 megawatt (MW) natural gas fired facility. The Mill Creek Generating Station, estimated to cost approximately $202 million, will provide regulating resources to balance our transmission system in Montana to maintain reliability and enable wind power to be integrated onto the network to meet renewable energy portfolio needs. In May 2009, the MPSC issued an order granting approval to construct the facility, authorizing a return on equity of 10.25% and a preliminary cost of debt of 6.5%, with a capital structure of 50% equity and 50% debt. In addition, the MPSC determined the $81 million cost for the turbines is prudent, with the remainder of the project costs to be submitted to the MPSC for review and approval once construction of the facilit y is complete. Construction began in June 2009, and the plant is scheduled to be operational by December 31, 2010. As of March 31, 2010, we have capitalized approximately $119.8 million in construction work in process related to this project.

Our Federal Energy Regulatory Commission (FERC) Open Access Transmission Tariff (OATT) allows for pass-through of ancillary costs to our customers, including the regulating reserve service described above to be provided by the Mill Creek Generating Station under Schedule 3 (Regulation and Frequency Response). We anticipate making the appropriate FERC filings related to this project in the second quarter of 2010 in order to reflect the cost of service for the Mill Creek Generating Station under the OATT in Schedule 3.

Transmission Investment Projects

We are conducting open season processes for the proposed Mountain States Transmission Intertie and Collector Project to identify potential interest for new transmission capacity on these paths due to the changing nature of generation projects. The open seasons were initiated with an informational meeting for prospective bidders in March 2010. The open season process is designed to provide for a staged level of commitment by prospective users. Assuming sufficient interest, we would expect to make filings with FERC early in 2011. We have capitalized approximately $12.3 million of preliminary survey and investigative costs associated with these proposed transmission projects. We discuss these transmission investment opportunities further in the “Overview” section of Management’s Discussion and Analysis of Financial Conditi on and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2009.

Reliability Compliance

We completed our compliance audit for our Montana operations under the compliance monitoring and enforcement program of the WECC, a regional electric reliability organization, during 2009. WECC has responsibility for monitoring and enforcing compliance with the FERC approved mandatory reliability standards within the western interconnection of the Unites States. In connection with the compliance audit, WECC found no violations of the applicable standards. Since June 2007, we have identified and self-reported violations of 32 requirements to WECC. All but nine of these violations were dismissed or were subject to expedited dispositions with no penalties. During the fourth quarter of 2009, we reached a settlement agreement with WECC addressing six of the remaining nine violations for a total penalty of $80,000, which has been accrued. The settlement is pending formal North American Electric Reliability Corporation (NERC) and FERC approval. The remaining three violations all relate to one standard and this standard is pending a NERC interpretation. We also filed mitigation plans for two potential violations with the Midwest Reliability Organization (MRO) for our South Dakota operations. We have completed the mitigation measures in compliance with the plans and expect resolution with MRO during the second quarter of 2010 without material impact. We expect our compliance with NERC standards will be audited at least every three years.

(9) Segment Information

Our reportable business segments are primarily engaged in the electric and natural gas business. The remainder of our operations are presented as other. While it is not considered a business unit, other primarily consists of our remaining unregulated natural gas capacity contract, the wind down of our captive insurance subsidiary 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
March 31, 2010	Electric			Gas			Other			Eliminations		Total
Operating revenues	$	203,839		$	130,019		$	315		$	—	$	334,173
Cost of sales	91,065			81,762			—			—		172,827
Gross margin	112,774			48,257			315			—		161,346
Operating, general and administrative	40,016			17,893			399			—		58,308
Property and other taxes	16,773			6,154			41			—		22,968
Depreciation	18,504			4,363			8			—		22,875
Operating income (loss)	37,481			19,847			(133		)	—		57,195
Interest expense	(13,193		)	(3,145		)	(712		)	—		(17,050		)
Other income	457			269			27			—		753
Income tax (expense) benefit	(6,534		)	(5,739		)	93			—		(12,180		)
Net income (loss)	$	18,211		$	11,232		$	(725	)	$	—	$	28,718
Total assets	$	1,975,156		$	824,754		$	14,727		$	—	$	2,814,637
Capital expenditures	$	52,248		$	5,548		$	—		$	—	$	57,796

Three Months Ended
March 31, 2009	Electric			Gas			Other			Eliminations			Total
Operating revenues	$	207,987		$	158,803		$	4,651		$	(538	)	$	370,903
Cost of sales	94,748			108,938			4,324			—			208,010
Gross margin	113,239			49,865			327			(538		)	162,893
Operating, general and administrative	42,979			21,815			1,163			(538		)	65,419
Property and other taxes	18,017			6,227			45			—			24,289
Depreciation	18,391			4,323			8			—			22,722
Operating income (loss)	33,852			17,500			(889		)	—			50,463
Interest expense	(11,150		)	(3,068		)	(916		)	—			(15,134		)
Other income	291			268			32			—			591
Income tax (expense) benefit	(8,067		)	(5,475		)	435			—			(13,107		)
Net income (loss)	$	14,926		$	9,225		$	(1,338	)	$	—			22,813
Total assets	$	1,956,083		$	824,058		$	11,708		$	—		$	2,791,849
Capital expenditures	$	14,846		$	3,663		$	—		$	—		$	18,509

(10) Earnings Per Share

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

Average shares used in computing the basic and diluted earnings per share are as follows:

	Three Months Ended
	March 31, 2010	March 31, 2009
Basic computation	36,168,703	35,933,877
Dilutive effect of
Restricted stock and performance share awards (1)	337,371	388,296

Diluted computation	36,506,074	36,322,173

(1) Performance share awards are included in diluted weighted average number of shares outstanding based upon what would be issued if the end of the most recent reporting period was the end of the term of the award.

(11) Employee Benefit Plans

Net periodic benefit cost for our pension and other postretirement plans consists of the following (in thousands):

	Pension Benefits						Other Postretirement Benefits
	Three Months Ended March 31,
	2010			2009			2010			2009
Components of Net Periodic Benefit Cost
Service cost	$	2,333		$	1,981		$	121		$	133
Interest cost	6,019			6,081			391			621
Expected return on plan assets	(7,353		)	(6,539		)	(296		)	(319		)
Amortization of prior service cost	61			61			(441		)	—
Recognized actuarial gain	—			—			495			(154		)
Net Periodic Benefit Cost	$	1,060		$	1,584		$	270		$	281

We expect to contribute approximately $10 million to our pension plans during 2010.

(12) Commitments and Contingencies

ENVIRONMENTAL LIABILITIES

The operation of electric generating, transmission and distribution facilities, and gas transportation and distribution facilities, along with the development (involving site selection, environmental assessments, and permitting) and construction of these assets, are subject to extensive federal, state, and local environmental and land use laws and regulations. Our activities involve compliance with diverse laws and regulations that address emissions and impacts to air and water, and protection of natural resources. We continuously monitor federal, state, and local environmental initiatives to determine potential impacts on our financial results. As new laws or regulations are promulgated, our policy is to assess their applicability and implement the necessary modifications to our facilities or their operation to maintain ongoing complian ce.

Our environmental exposure includes a number of components, including remediation expenses related to the cleanup of current or former properties, and costs to comply with changing environmental regulations related to our operations. At present, the majority of our environmental reserve relates to the remediation of former manufactured gas plant (MGP) sites owned by us. We use a combination of site investigations and monitoring to formulate an estimate of environmental remediation costs for specific sites. Our monitoring procedures and development of actual remediation plans depend not only on site specific information but also on coordination with the different environmental regulatory agencies in our respective jurisdictions, therefore, while remediation exposure exists, it may be many years before costs become fixed and reliably deter minable.

Our liability for environmental remediation obligations is estimated to range between $22.4 million to $44.1 million. As of March 31, 2010, we have a reserve of approximately $31.8 million. Environmental costs are recorded when it is probable we are liable for the remediation and we can reasonably estimate the liability. Over time, as specific laws are implemented and we gain experience in operating under them, a portion of the costs related to such laws will become determinable, and we may seek authorization to recover such costs in rates or seek insurance reimbursement as applicable; therefore, we do not expect these costs to have a material adverse effect on our consolidated financial position or ongoing operations. There can be no assurance, however, of regulatory recovery.

Global Climate Change

We have a joint ownership interest in four electric generating plants, all of which are coal fired and operated by other companies. We have an undivided interest in these facilities and are responsible for our proportionate share of the capital and operating costs while being entitled to our proportionate share of the power generated. In addition, a significant portion of the electric supply we procure in the market is generated by coal-fired plants.

Specifically, coal-fired plants have come under scrutiny due to their emissions of carbon dioxide, and in September 2009, the U.S. Court of Appeals for the Second Circuit reversed a federal district court’s decision and ruled that several states and public interest groups could sue five electric utility companies under federal common law for allegedly causing a public nuisance as a result of their emissions of greenhouse gases. In October 2009, the U.S. Court of Appeals for the Fifth Circuit reversed a federal district court and ruled that individuals damaged by Hurricane Katrina could sue a variety of companies that emit carbon dioxide, including electric utilities, for allegedly causing a public nuisance that contributed to their damages. Additional litigation in federal and state courts over these issues is continuing.

In addition to litigation during 2009, the Environmental Protection Agency (EPA) issued a finding that greenhouse gas emissions endanger the public health and welfare. The EPA’s finding indicated that the current and projected levels of six greenhouse gas emissions – carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons and sulfur hexafluoride contribute to climate change. In a related matter, the EPA also proposed rules that would require all new or modified “stationary sources,” such as power plants, that emit 25,000 tons of greenhouse gases per year to obtain permits incorporating the “best available control technology” for such emissions.

In September 2009, the EPA announced the adoption of the first comprehensive national system for reporting emissions of carbon dioxide and other greenhouse gases produced by major sources in the United States. The new reporting requirements will apply to suppliers of fossil fuel and industrial chemicals, manufacturers of motor vehicles and engines, as well as large direct emitters of greenhouse gases with emissions equal to or greater than a threshold of 25,000 metric tons per year, which includes certain of our facilities. The effective date for gathering the data is January 2010 with the first mandatory reporting due in March 2011.

In June 2009, the U.S. House of Representatives passed the American Clean Energy and Security Act of 2009, a bill introduced by Rep. Henry Waxman and Rep. Edward Markey and popularly known as the Waxman-Markey bill. The bill would regulate greenhouse gas emissions by instituting a cap-and-trade-system, in which an economy-wide cap on U.S. greenhouse gas emissions would be established starting in 2012 with a cap 3% below the baseline 2005 level. The cap would steeply decline over time until in 2050 it reaches 83% below the baseline level. Emission allowances, which are rights to emit greenhouse gases, would be both allocated for free and auctioned. In addition, the draft legislation contains a renewable energy standard of 25% by the year 2025 and an energy efficiency mandate for electric and natural gas utilities, as well as other require ments. Pending in the U.S. Senate is the Clean Energy Jobs and American Power Act introduced by Sens. John Kerry and Barbara Boxer, known as the Kerry-Boxer bill. The Kerry-Boxer bill also proposes to regulate greenhouse gas emissions by instituting a cap-and-trade-system, with primarily the same target levels proposed by the Waxman-Markey bill; however, the Kerry-Boxer bill is more aggressive in its 2020 target – a reduction to 20% below 2005 levels by 2020 (versus 17% in Waxman-Markey). Although the Waxman-Markey bill is widely viewed as the most probable climate change bill to be enacted into law, the prospects for passage of a similar bill by the U.S. Senate are uncertain.

Other nations have agreed to regulate emissions of greenhouse gases pursuant to the United Nations Framework Convention on Climate Change, also known as the “Kyoto Protocol,” an international treaty pursuant to which participating countries (not including the United States) have agreed to reduce their emissions of greenhouse gases to below 1990 levels by 2012. At the end of 2009, an international conference to develop a successor to the Kyoto Protocol issued a document known as the Copenhagen Accord. Pursuant to the Copenhagen Accord, the United States submitted a greenhouse gas emission reduction target of 17% compared to 2005 levels.

The Montana Governor’s office has joined the Western Regional Climate Initiative (WCI) and is expected to participate in any greenhouse gas emission control regulations that are adopted by the WCI. The WCI, which has a goal of reducing carbon dioxide emissions 15% below the 2005 levels by 2020, currently is developing greenhouse gas emission allocations, offsets, and reporting recommendations.

While we cannot predict the impact of any legislation until final, 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 and / or our customers could be significant. We are proactively involved in analyzing the impacts of current legislative efforts on our customers and shareholders and are participating in public policy forums related to these issues.

There is a gap between proposed emissions reduction levels and the current capabilities of technology, as there is no currently available commercial scale technology that would achieve the proposed reduction levels. Such technology may not be available within a timeframe consistent with the implementation of climate change legislation or at all. To the extent that such technology does become available, we can provide no assurance that it will be suitable or cost-effective for installation at the generation facilities in which we have a joint interest. We believe future legislation and regulations that affect carbon dioxide emissions from power plants are likely, although technology to efficiently capture, remove and sequester carbon dioxide emissions is not presently available on a commercial scale.

The proposed regulations and/or current litigation related to global climate change could have a material impact on our future capital expenditures and results of operations, but the costs are not determinable at this time. Our current capital expenditures projections do not include significant amounts related to environmental projects. We believe the cost of purchasing carbon emissions credits, or alternatively the proceeds from the sale of any excess carbon emissions credits would be included in our supply trackers and passed through to customers.

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

The endangerment finding also allows the EPA to regulate emissions from new light-duty vehicles under the Clean Air Act, which were finalized in March 2010. With the finalization of the regulation of greenhouse gases from light-duty vehicles, greenhouse gas emissions are subject to review under the Clean Air Act's Prevention of Significant Deterioration (PSD) (construction or modification of major sources) permit program. Sources subject to a PSD review for greenhouse gases would be required to use best available control technology to control greenhouse gas emissions.

Regional Haze and Visibility - The Clean Air Visibility Rule was issued by the EPA in June 2005, to address regional haze or regionally-impaired visibility caused by multiple sources over a wide area. The rule requires the use of Best Available Retrofit Technology (BART) for certain electric generating units to achieve emissions reductions from designated sources that are deemed to contribute to visibility impairment in Class I air quality areas. We have a 23.4% interest in Big Stone, a coal-fired power plant located in northeastern South Dakota, which is potentially subject to emission reduction requirements. At the request of the South Dakota Department of Environment and Natural Resources (DEN R), the plant operator submitted a model to the DENR in order to evaluate the impact of plant emissions on Class I air quality areas. On September 18, 2009 the DENR approved the modeling protocol and on November 2, 2009 the plant operator submitted to the DENR its analysis of what control technology should be considered BART for nitrogen oxides, sulfur dioxide, and particulate matter for the Big Stone plant. On January 15, 2010, the DENR provided a copy of South Dakota’s draft proposed Regional Haze State Implementation Plan (SIP). South Dakota’s draft proposed Regional Haze SIP recommends the sulfur dioxide and particulate matter emission control technology and emission rates that generally followed the plant operator’s BART ana lysis. The DENR recommended a Selective Catalytic Reduction technology for nitrogen oxide emission reduction instead of the plant operator recommended separated over-fire air. The estimated capital expenditures for the BART technologies based on the DENR proposal are approximately $200 - $300 million for Big Stone (our share would be 23.4%). The DENR proposes to require that BART be installed and operating as expeditiously as practicable, but no later than five years from EPA’s approval of the South Dakota Regional Haze SIP, which is expected no later than January 15, 2011. If the emissions reduction technology is required, we will seek to recover these costs through the ratemaking process. The South Dakota Public Utilities Commission (SDPUC) has allowed the recovery on a timely basis of the costs of environmental improvements; however, there is no precedent on a project o f this size.

Clean Air Mercury Rule - In March 2005, the EPA issued the Clean Air Mercury Regulations (CAMR) to reduce the emissions of mercury from coal-fired facilities through a market-based cap-and-trade program. Although the U.S. Court of Appeals for the District of Columbia Circuit struck down CAMR, the state of Montana finalized its own mercury emission rules that require, by 2010, every coal-fired generating plant in Montana to achieve reductions more stringent than CAMR's 2018 requirements. Chemical injection technologies were installed at Colstrip during the fourth quarter of 2009 to meet these requirements. If the enhanced chemical injection technologies are not sufficient to meet the required level s of reduction, then adsorption/absorption technology with fabric filters would be required, which could represent a material cost. We are continuing to work with the other Colstrip owners to assess compliance with these reduction levels.

Manufactured Gas Plants

Approximately $26.5 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 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 DENR. In 2007, we completed remediation of sediment in a short segment of Moccasin Creek that had been impacted by the former manufactured gas plant operations. Our current reserve for remediation costs at this site is approximately $12.8 million, and we estimate that approximately $10 million of this amount will be incurred during the next five ye ars.

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

In addition, we own or have responsibility for sites in Butte, Missoula and Helena, Montana on which former manufactured gas plants were located. An investigation conducted at the Missoula site did not require entry into the Montana Department of Environmental Quality (MDEQ) voluntary remediation program, but required preparation of a groundwater monitoring plan. The Butte and Helena sites were placed into the MDEQ's voluntary remediation program for cleanup due to excess 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 conditions at these sites; however, additional groundwater monitoring will be necessary. In Helena, we continue limited operation of an oxygen delivery system implemented to enha nce natural biodegradation of pollutants in the groundwater and we are currently evaluating limited source area treatment/removal options. Monitoring of groundwater at this site is ongoing and 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 or if any additional actions beyond monitored natural attenuation will be required.

Other

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

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

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

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

LEGAL PROCEEDINGS

Colstrip Energy Limited Partnership

In December 2006 and June 2007, the MPSC issued orders relating to certain QF rates for the period July 1, 2003 through June 30, 2006. Colstrip Energy Limited Partnership (CELP) is a QF with which we have a power purchase agreement through June 2024. 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, with the rates to be used in that formula derived from the annual MPSC QF rate review. CELP initially appealed the MPSC’s orders and then, in July 2007, filed a complaint against NorthWestern and the MPSC in Montana district court, which contested the MPSC’s orders. CELP disputed inputs into the underlying rates used in the formula, which initially are calculated by us and reviewed by the MPSC on an annual basis, to calculate energy and capacity payments for the contract years 2004-2005 and 2005-2006. CELP claimed that NorthWestern breached the power purchase agreement causing damages, which CELP asserted to be approximately $23 million for contract years 2004-2005 and 2005-2006. The parties stipulated that NorthWestern would not implement the final derived rates resulting from the MPSC orders, pending an ultimate decision on CELP's complaint. The Montana district court, on June 30, 2008, granted both a motion by the MPSC to bifurcate, having the effect of separating the issues between contract/tort claims against us and the administrative appeal of the MPSC’s orders and a motion by us to refer the claims against us to arbitration. The order als o stayed the appellate decision pending a decision in the arbitration proceedings. Arbitration was held in June 2009 and the arbitration panel entered its interim award in August 2009, holding that although NorthWestern failed to use certain data inputs required by the power purchase agreement, CELP was entitled to neither damages for contract years 2004-2005 or 2005-2006, nor to recalculation of the underlying MPSC filings for those years, effectively finalizing CELP's contract rates for those years. We requested clarification from the arbitration panel as to its intent regarding the applicable rates. On November 2, 2009, we received the final award from the arbitration panel which confirmed that the filed rates for 2004-2005 and 2005-2006 are not required to be recalculated. In affirming its interim award, the arbitration panel also denied CELP’s request for attorney fees, holding that each party would be responsible for its own fees. The fin al arbitration panel award is pending confirmation by the Montana district court, which held a hearing on April 9, 2010 and asked the parties to submit proposed orders by May 7, 2010. If confirmed, the arbitration award will require us to refile with the MPSC for a new determination of rates subsequent to June 30, 2006 using data inputs required by the power purchase agreement. CELP continues to dispute the results of the arbitration award, and due to the uncertainty around the resolution we are currently unable to predict the outcome of this matter.

Gonzales

We are a defendant – along with our predecessor entities the Montana Power Company (MPC) and pre-bankruptcy NorthWestern Corporation (NOR) – in an action (Gonzales Action) pending in the Montana Second Judicial District Court, Butte-Silver Bow County (Montana State Court), alleging fraud, constructive fraud and violations of the Unfair Claim Settlement Practices Act all arising out of the adjustment of workers’ compensation claims. Putnam and Associates, the third party administrator of such workers’ compensation claims, also is a defendant.

The Gonzales Action was first filed on December 18, 1999, against MPC (NOR acquired MPC in 2002) and was stayed due to the Chapter 11 bankruptcy filing of NOR. On August 10, 2005, the Bankruptcy Court approved a “Bankruptcy Settlement Stipulation” which permitted the Gonzales Action to proceed, assigned to plaintiffs NOR’s interest in MPC’s insurance policies (to the extent applicable to the allegations made by plaintiffs), released NOR from any and all obligations to the plaintiffs concerning such claims, and preserved plaintiffs’ right to pursue claims arising after November 1, 2004, relating to the adjustment of workers’ compensation claims. To date, no insurance carrier has indicated that coverage is available for any of the claims.

On September 30, 2009, the Montana State Court granted the plaintiffs’ motions to file a sixth amended complaint and partially granted the plaintiff’s motion for class certification. The Montana State Court excluded the fraud claims from its class certification. The new complaint seeks to hold us jointly and severally liable for the acts of MPC and NOR and alleges that we negligently/intentionally sabotaged plaintiffs’ ability to recover under the MPC insurance policies. Plaintiffs seek compensatory and punitive damages from all defendants. Due to the individual nature of the claims, we believe the class certification was improper under Montana law, and we continue to believe that the new complaint violates the bankruptcy stipulation. We have filed an appeal to the Supreme Court of the State of Montana with respect to t hese issues and intend to continue to defend the lawsuit vigorously. We also believe the sixth amended complaint violates the Bankruptcy Settlement Stipulation and have filed a motion with the Bankruptcy Court seeking enforcement of the Bankruptcy Settlement Stipulation. The motion before the Bankruptcy Court is pending. In addition, settlement discussions concerning these claims are ongoing.

Maryland Street

On March 16, 2009, Monsignor John F. McCarthy, the duly appointed personal representative for the Estate of Father James C. McCarthy, filed a lawsuit against NorthWestern and one of our employees in the District Court of Butte-Silver Bow County, Montana for injuries that Fr. McCarthy received in an April 2007 natural gas explosion that destroyed his four-plex residence. The complaint alleges negligence and strict liability with respect to the maintenance and operation of the natural gas distribution system that served the residence. Fr. McCarthy died in November 2007, allegedly because of injuries sustained in the explosion. The plaintiff seeks unspecified compensatory and punitive damages and other equitable relief, costs and attorney’s fees. The investigation of this incident is ongoing, and while we cannot predict an outcome, we intend to continue vigorously defending against the lawsuit.

Bozeman Explosion

On March 5, 2009, a natural gas explosion occurred in downtown Bozeman, Montana. The explosion resulted in one fatality, the destruction of or damage to several buildings and the businesses in them, and damage to other nearby properties and businesses. Twenty lawsuits have been filed against NorthWestern to date in the District Court of Gallatin County, Montana and a number of claims have been made. Our total available insurance coverage is approximately $150 million for known and potential claims. We have paid our deductible under these policies and our insurance carrier has assumed the defense and handling of the existing and anticipated future lawsuits and claims.

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. (Touch America) 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 Company L.L.C. (now Clark Fork and Blackfoot LLC), which plaintiffs claim is a successor to The Montana Power Company.

In October 2009, the parties reached a global settlement, which must be approved by the U.S. District Court in Montana and the Delaware Bankruptcy Court. In November 2009, the parties submitted documentation concerning the settlement to the U.S. District Court in Montana for its approval. Approval of the settlement by the U.S. District Court in Montana is still pending. In February 2010, the parties submitted documentation concerning the settlement to the Delaware Bankruptcy Court, which approved the settlement on February 23, 2010. A fairness hearing concerning the proposed settlement is scheduled for May 2010 with the U.S. District Court in Montana. If the court approves the settlement, we will receive approximately $2.0 million from the Touch America bankruptcy estate and have no remaining exposure in the litigation.

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) (South Dakota Federal District Court) against us and two other co-owners (the Defendants) of Big Stone Generating Station (Big Stone). The complaint alleged 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 alleged 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. S ierra Club alleged 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 sought 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 sought unspecified civil penalties, including a beneficial mitigation project. We believe these claims are without merit and that Big Stone was 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 March 31, 2009, the South Dakota Federal District Court entered a Memorandum Opinion and Order granting Defendants’ Motion to Dismiss the Sierra Club Complaint. On July 30, 2009, Sierra Club appealed the South Dakota Federal District Court’s decision to dismiss the complaint. On October 13, 2009, the United States Department of Justice (USDOJ) filed a motion seeking a 30-day extension of the time to file an amicus brief in support of the Sierra Club’s position. The Court of Appeals granted this motion, as well as our subsequ ent joint motion with the Sierra Club, extending the timeline. In accordance with the revised briefing schedule, the Sierra Club filed its brief on October 14, 2009, the USDOJ filed its amicus brief on November 24, 2009, we filed our brief on December 24, 2009 (the state of South Dakota served an amicus brief in support of our position on December 30, 2009), and on January 22, 2010, the Sierra Club filed its reply brief. Additionally, on March 15, 2010, we filed correspondence with the court submitting recent supplemental authority in support of our positions, to which the Sierra Club and USDOJ also submitted replies. Appellate briefing has concluded, and oral arguments are scheduled for May 11, 2010.

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.

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

OVERVIEW

NorthWestern Corporation, doing business as Northwestern Energy, provides electricity and natural gas to approximately 661,000 customers in Montana, South Dakota and Nebraska. For a discussion of NorthWestern’s business strategy, see Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2009.

SUMMARY

Significant achievements during the three months ended March 31, 2010 include:

·	Improvement in net income of approximately $5.9 million as compared with 2009, due primarily to reduced operating, general and administrative expenses; and

·	Improvement in operating cash flows of approximately $41.2 million, due to lower contributions to our qualified pension plans in 2010.

RESULTS OF OPERATIONS

Our consolidated results include the results of our business units constituting each of our business segments. The overall consolidated discussion is followed by a detailed discussion of gross margin by segment.

Non-GAAP Financial Measure

The following discussion includes financial information prepared in accordance with GAAP, as well as another financial measure, Gross Margin, that is considered a “non-GAAP financial measure.” Generally, a non-GAAP financial measure is a numerical measure of a company’s financial performance, financial position or cash flows that exclude (or include) amounts that are included in (or excluded from) the most directly comparable measure calculated and presented in accordance with GAAP. Gross Margin (Revenues less Cost of Sales) is a non-GAAP financial measure due to the exclusion of depreciation from the measure. The presentation of Gross Margin is intended to supplement investors’ understanding of our operating performance. Gross Margin is used by us to determine whether we are collecting the appropriate amount of energy costs from customers to allow recovery of operating costs. Our Gross Margin measure may not be comparable to other companies’ Gross Margin measure. Furthermore, this measure is not intended to replace operating income as determined in accordance with GAAP as an indicator of operating performance.

Outlook

The current weak economic conditions have resulted in weaker customer demand, among other things, and the outlook and timing of economic recovery remains uncertain. Industrial electric distribution volumes were down approximately 12% for the first quarter of 2010 as compared with 2009, resulting in a $1.4 million reduction to gross margin. We expect to continue to experience relatively flat residential demand as well as reduced commercial and industrial demand during 2010. In addition, the weak economic climate has impacted demand for our transmission capacity. In response, we have taken steps to manage our operating, general and administrative expenses and will continue to manage our costs consistent with the impact to our margin.

OVERALL CONSOLIDATED RESULTS

Three Months Ended March 31, 2010 Compared with the Three Months Ended March 31, 2009

	Three Months Ended March 31,
	2010		2009			Change			% Change
	(in millions)
Operating Revenues
Electric	$	203.8	$	208.0		$	(4.2	)	(2.0	)%
Natural Gas	130.0		158.8			(28.8		)	(18.1	)
Other	0.3		4.6			(4.3		)	(93.5	)
Eliminations	—		(0.5		)	0.5			100.0
	$	334.1	$	370.9		$	(36.8	)	(9.9	)%

	Three Months Ended March 31,
	2010		2009		Change			% Change
	(in millions)
Cost of Sales
Electric	$	91.0	$	94.8	$	(3.8	)	(4.0	)%
Natural Gas	81.8		108.9		(27.1		)	(24.9	)
Other	—		4.3		(4.3		)	(100.0	)
	$	172.8	$	208.0	$	(35.2	)	(16.9	)%

	Three Months Ended March 31,
	2010		2009			Change			% Change
	(in millions)
Gross Margin
Electric	$	112.8	$	113.2		$	(0.4	)	(0.4	)%
Natural Gas	48.2		49.9			(1.7		)	(3.4	)
Other	0.3		0.3			—			—
Eliminations	—		(0.5		)	0.5			100.0
	$	161.3	$	162.9		$	(1.6	)	(1.0	)%

Consolidated gross margin was $161.3 million for the three months ended March 31, 2010, a decrease of $1.6 million, or 1.0%, from gross margin in 2009. Primary components of this change include the following:

	Gross Margin
	2010 vs. 2009
	(in millions)
Electric and natural gas volumes	$	(3.4	)
Transmission capacity	(0.4		)
Commercial natural gas contract minimum usage requirement	0.6
Reclamation settlement	0.5
Operating expenses recovered in supply trackers	0.3
Other	0.8
Decrease in Consolidated Gross Margin	$	(1.6	)

This $1.6 million decline was primarily due to a decrease in electric volumes from lower industrial demand relating to the weak economic climate and lower gas volumes from warmer winter weather in Montana. These decreases were offset in part by recognition of revenues associated with a natural gas contract with minimum usage requirements that were not met and a settlement to recover previously incurred reclamation costs associated with the coal supply at Colstrip.

	Three Months Ended March 31,
	2010		2009		Change			% Change
	(in millions)
Operating Expenses (excluding cost of sales)
Operating, general and administrative	$	58.3	$	65.4	$	(7.1	)	(10.9	)%
Property and other taxes	23.0		24.3		(1.3		)	(5.3	)
Depreciation	22.9		22.7		0.2			0.9
	$	104.2	$	112.4	$	(8.2	)	(7.3	)%

Consolidated operating, general and administrative expenses were $58.3 million for the three months ended March 31, 2010 as compared with $65.4 million for the three months ended March 31, 2009. Primary components of this change include the following:

	Operating, General & Administrative Expenses
	2010 vs. 2009
	(Millions of Dollars)
Insurance reserves	$	(3.0	)
Compensation	(2.2		)
Pension	(0.6		)
Postretirement health care	(0.5		)
Operating expenses recovered in supply trackers	0.3
Other	(1.1		)
Decrease in Operating, General & Administrative Expenses	$	(7.1	)

The decrease in operating, general and administrative expenses of $7.1 million was primarily due to the following:

·	Lower insurance reserves due to claims incurred in the prior year and a favorable arbitration decision in the first quarter of 2010;

·	Decreased compensation costs primarily from a combination of lower headcount, more time spent by employees on capital projects rather than maintenance projects (which are expensed), and lower severance costs;

·	Lower pension expense, however, based on current assumptions we expect the annual pension expense to be comparable with 2009 due to the regulatory treatment of our Montana pension plan; and

·	Lower postretirement health care costs due to an amendment to the plan in 2009.

Property and other taxes were $23.0 million for the three months ended March 31, 2010 as compared with $24.3 million in the first quarter of 2009. This decrease was due to lower estimated property valuations.

Depreciation expense was $22.9 million for the three months ended March 31, 2010 as compared with $22.7 million in the first quarter of 2009.

Consolidated operating income for the three months ended March 31, 2010 was $57.2 million, as compared with $50.5 million in the first quarter of 2009. The increase was primarily due to lower operating expenses partly offset by the $1.6 million decrease in gross margin discussed above.

Consolidated interest expense for the three months ended March 31, 2010 was $17.1 million, an increase of $2.0 million, or 13.2%, from 2009. This increase was primarily due to increased debt outstanding, offset in part by $0.7 million capitalized for the debt portion of allowance for funds used during construction (AFUDC), primarily related to the Mill Creek Generating Station. We expect annual interest expense for 2010 to be comparable with 2009 due to the increase in AFUDC.

Consolidated other income for the three months ended March 31, 2010 was $0.8 million, as compared with $0.6 million in the first quarter of 2009. This includes an increase of approximately $0.7 million related to the equity portion of AFUDC. We expect to capitalize approximately $5.7 million of AFUDC related to the Mill Creek Generating Station through the remainder of the year.

Consolidated income tax expense for the three months ended March 31, 2010 was $12.2 million as compared with $13.1 million for the first quarter of 2009. The effective tax rate in 2010 was 29.8% as compared with 36.4% for the same period of 2009, and we expect our effective tax rate for 2010 to be approximately 30%. These effective tax rates differ from the federal tax rate of 35% primarily due to the effects of tax credits, state income taxes, utility rate-making, and other permanent book-to-tax differences. Our effective tax rate has been significantly impacted by a tax accounting method change for repair costs during September 2009, which resulted in an income tax benefit of $3.4 million during the first quarter of 2010. Our effective tax rate for the year ended December 31, 2009 of 17.2% reflected the impact of a tax accounting metho d change for repairs for both 2009 and 2008, which will impact the comparability of income tax expense for 2010 and 2009. In addition, as we did not receive approval of the tax accounting method change until the third quarter of 2009, quarterly income tax expense during 2010 will not be comparable with 2009. 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 2014, based on our projected taxable income and anticipated use of consolidated net operating loss carryforwards.

Consolidated net income for the three months ended March 31, 2010 was $28.7 million as compared with $22.8 million for the first quarter of 2009. The increase was primarily due to higher operating income and lower income tax expense, offset in part by higher interest expense as discussed above.

ELECTRIC SEGMENT

Three Months Ended March 31, 2010 Compared with the Three Months Ended March 31, 2009

	Results
	2010		2009		Change			% Change
	(in millions)
Retail revenue	$	170.4	$	180.5	$	(10.1	)	(5.6	)%
Transmission	11.5		11.9		(0.4		)	(3.4	)
Wholesale	11.0		11.1		(0.1		)	(0.9	)
Regulatory amortization and other	10.9		4.5		6.4			142.2
Total Revenues	203.8		208.0		(4.2		)	(2.0	)
Total Cost of Sales	91.0		94.8		(3.8		)	(4.0	)
Gross Margin	$	112.8	$	113.2	$	(0.4	)	(0.4	)%

	Revenues				Megawatt Hours (MWH)		Avg. Customer Counts
	2010		2009		2010	2009	2010	2009
	(in thousands)
Retail Electric
Montana	$	63,596	$	66,094	680	679	270,923	269,003
South Dakota	12,845		13,547		176	171	48,422	48,194
Residential	76,441		79,641		856	850	319,345	317,197
Montana	66,218		68,892		788	796	60,799	60,202
South Dakota	15,808		16,673		238	228	11,622	11,475
Commercial	82,026		85,565		1,026	1,024	72,421	71,677
Industrial	7,767		10,947		676	765	71	72
Other	4,205		4,311		24	24	4,623	4,643
Total Retail Electric	$	170,439	$	180,464	2,582	2,663	396,460	393,589
Wholesale Electric
Montana	$	9,934	$	9,823	204	204	N/A	N/A
South Dakota	1,078		1,308		39	39	N/A	N/A
Total Wholesale Electric	$	11,012	$	11,131	243	243	N/A	N/A

The following summarizes the components of the changes in electric margin for the three months ended March 31, 2010 and 2009:

	Gross Margin
	2010 vs. 2009
	(Millions of Dollars)
Retail volumes	$	(1.4	)
Transmission capacity	(0.4		)
Operating expenses recovered in supply tracker	0.7
Reclamation settlement	0.5
Other		0.2
Decrease in Gross Margin	$	(0.4	)

This decline in margin and volumes are due largely to decreases in industrial demand relating to the weak economic climate, and to a lesser degree, decreases in transmission capacity demand. These decreases were offset in part by: (i) higher revenues for operating, general and administrative expenses primarily related to customer efficiency programs, which are recovered from customers through the supply trackers and therefore have no impact on operating income; and (ii) decreased cost of sales due to a settlement to recover previously incurred reclamation costs associated with the coal supply at Colstrip. In addition, average electric supply prices decreased resulting in lower retail revenues and cost of sales in 2010 as compared with 2009.

NATURAL GAS SEGMENT

Three Months Ended March 31, 2010 Compared with the Three Months Ended March 31, 2009

	Results
	2010		2009		Change			% Change
	(in millions)
Retail revenue	$	118.4	$	144.4	$	(26.0	)	(18.0	)%
Wholesale and other	11.6		14.4		(2.8		)	(19.4	)
Total Revenues	130.0		158.8		(28.8		)	(18.1	)
Total Cost of Sales	81.8		108.9		(27.1		)	(24.9	)
Gross Margin	$	48.2	$	49.9	$	(1.7	)	(3.4	)%

	Revenues				Dekatherms (Dkt)		Customer Counts
	2010		2009		2010	2009	2010	2009
	(in thousands)
Retail Gas
Montana	$	44,620	$	55,524	4,954	5,383	158,294	157,395
South Dakota	14,551		18,690		1,567	1,577	37,574	37,105
Nebraska	12,833		15,443		1,448	1,316	36,875	36,813
Residential	72,004		89,657		7,969	8,276	232,743	231,313
Montana	22,413		28,271		2,484	2,735	22,090	22,046
South Dakota	13,268		14,296		1,732	1,497	5,962	5,887
Nebraska	9,506		10,942		1,355	1,231	4,606	4,582
Commercial	45,187		53,509		5,571	5,463	32,658	32,515
Industrial	826		803		94	79	292	299
Other	390		476		51	52	146	142
Total Retail Gas	$	118,407	$	144,445	13,685	13,870	265,839	264,269

	2010 as compared with:
Heating Degree-Days	2009	Historic Average
Montana	5% warmer	6% warmer
South Dakota	2% colder	8% colder
Nebraska	10% colder	7% colder

The following summarizes the components of the changes in natural gas margin for the three months ended March 31, 2010 and 2009:

	Gross Margin
	2010 vs. 2009
	(Millions of Dollars)
Warmer winter weather	$	(2.0	)
Operating expenses recovered in supply tracker	(0.4		)
Commercial natural gas contract minimum usage requirement	0.6
Other	0.1
Decrease in Gross Margin	$	(1.7	)

The decline in margin and volumes is primarily due to warmer winter weather in Montana and a reduction in operating, general and administrative expenses recovered from customers through the supply tracker related to customer efficiency programs, offset in part by recognition of revenues associated with a contract with minimum usage requirements that were not met. In addition, average natural gas supply prices decreased resulting in lower retail revenues and cost of sales in 2010 as compared with 2009, with no impact to gross margin.

LIQUIDITY AND CAPITAL RESOURCES

We utilize our revolver availability to manage our cash flows due to the seasonality of our business, and utilize any cash on hand in excess of current operating requirements to invest in our business and reduce borrowings. As of March 31, 2010, our total net liquidity was approximately $215.5 million, including $7.1 million of cash and $208.4 million of revolving credit facility availability. Revolver availability was $229.4 million as of April 16, 2010. We plan to issue $225 million of First Mortgage Bonds during the second quarter of 2010 to refinance existing debt.

Factors Impacting our Liquidity

Supply Costs - 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 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 r ecoveries under our cost tracking mechanisms can have a significant effect on cash flow from operations and make year-to-year comparisons difficult.

As of March 31, 2010, we are under collected on our current Montana natural gas and electric trackers by approximately $4.0 million, as compared with an under collection of $19.8 million as of December 31, 2009, and an over collection of $3.5 million as of March 31, 2009.

Growth Capital Expenditures – In July 2009, we began construction of the Mill Creek Generating Station, a 150 MW natural gas fired facility, estimated to cost $202 million. During the first quarter of 2010, we capitalized approximately $36.9 million in construction work in process related to this project. We expect to spend an additional $82 million on this project during the remainder of 2010.

Credit Ratings

Fitch Ratings (Fitch), Moody’s Investors Service (Moody’s) and Standard and Poor’s Rating Group (S&P) are independent credit-rating agencies that rate our debt securities. These ratings indicate the agencies’ assessment of our ability to pay interest and principal when due on our debt. As of April 16, 2010, our current ratings with these agencies are as follows:

	Senior Secured Rating	Senior Unsecured Rating	Outlook
Fitch	A-	BBB+	Stable
Moody’s	A3	Baa2	Positive
S&P	A-	BBB	Stable

(1)	Fitch upgraded our senior secured and senior unsecured credit rating on April 15, 2010, from BBB+ to A- and BBB to BBB+, 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 impact our trade credit availability. A security rating is not a recommendation to buy, sell or hold securities. Such rating may be subject to revision or withdrawal at any time by the credit rating agency and each rating should be evaluated independently of any other rating.

Cash Flows

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

	Three Months Ended March 31,
	2010			2009
Operating Activities
Net income	$	28.7		$	22.8
Non-cash adjustments to net income	39.9			37.4
Changes in working capital	33.0			31.3
Other	4.7			(26.4		)
	106.3			65.1

Investing Activities
Property, plant and equipment additions	(57.8		)	(18.5		)
Sale of assets	—			0.3
	(57.8		)	(18.2		)

Financing Activities
Net (repayment) borrowing of debt	(33.4		)	38.7
Dividends on common stock	(12.2		)	(12.0		)
Other	(0.1		)	(1.7		)
	(45.7		)	25.0

Net Increase in Cash and Cash Equivalents	$	2.8		$	71.9
Cash and Cash Equivalents, beginning of period	$	4.3		$	11.3
Cash and Cash Equivalents, end of period	$	7.1		$	83.2

Cash Provided by Operating Activities

As of March 31, 2010, cash and cash equivalents were $7.1 million as compared with $4.3 million at December 31, 2009 and $83.2 million at March 31, 2009. Cash provided by operating activities totaled $106.3 million for the three months ended March 31, 2010 as compared with $65.1 million during the three months ended March 31, 2009. This increase in operating cash flows is primarily related to contributions of $43.2 million to our qualified pension plans during the first quarter of 2009.

Cash Used in Investing Activities

Cash used in investing activities increased by approximately $39.6 million as compared with the first quarter of 2009 due primarily to increased property, plant and equipment additions related to the Mill Creek Generating Station project as discussed above.

Cash (Used in) Provided by Financing Activities

Cash used in financing activities totaled approximately $45.7 million in the first quarter of 2010 as compared with cash provided by financing activities of approximately $25.0 million during the three months ended March 31, 2009. During the first quarter of 2010 we made debt repayments of $33.4 million and paid dividends on common stock of $12.2 million. During the first quarter of 2009 we issued debt of $250.0 million, made debt repayments of $211.3 million, and paid dividends on common stock of $12.0 million.

Sources and Uses of Funds

We require liquidity to support and grow our business and use our liquidity for working capital needs, capital expenditures, investments in or acquisitions of assets, to repay debt and, from time to time, to repurchase common stock. We anticipate that our ongoing liquidity requirements will be satisfied through a combination of operating cash flows, borrowings, and as necessary, the issuance of debt or equity securities, consistent with our objective of maintaining a capital structure that will support a strong investment grade credit rating on a long-term basis. The amount of capital expenditures and dividends are subject to certain factors including the use of existing cash, cash equivalents and the receipt of cash from operations. A material adverse change in operations or available financing could impact our ability to fund our curre nt liquidity and capital resource requirements, and we may defer capital expenditures as necessary.

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 March 31, 2010. See our Annual Report on Form 10-K for the year ended December 31, 2009 for additional discussion.

	Total		2010		2011		2012		2013		2014		Thereafter
	(in thousands)
Long-term Debt	$	954,044	$	2,733	$	6,578	$	39,792	$	—	$	225,000	$	679,941
Capital Leases	36,479		907		1,282		1,372		1,468		1,582		29,868
Future minimum operating lease payments	3,581		1,146		1,161		765		157		134		218
Estimated Pension and Other Postretirement Obligations (1)	50,064		12,864		13,800		13,800		4,800		4,800		N/A
Qualifying Facilities (2)	1,381,946		47,940		65,323		67,111		69,816		72,354		1,059,402
Supply and Capacity Contracts (3)	1,653,336		270,354		240,775		186,692		162,476		119,869		673,170
Other Purchase Obligations (4)	44,946		44,946		—		—		—		—		—
Contractual interest payments on debt (5)	508,637		45,321		54,230		53,223		52,512		52,512		250,839
Total Commitments (6)	$	4,633,033	$	426,211	$	383,149	$	362,755	$	291,229	$	476,251	$	2,693,438

(1) We have only estimated cash obligations related to our pension and other postretirement benefit programs for five years, as it is not practicable to estimate thereafter. These estimates reflect our expected cash contributions, which may be in excess of minimum funding requirements.

(2) The QFs require us to purchase minimum amounts of energy at prices ranging from $65 to $167 per megawatt hour through 2029. Our estimated gross contractual obligation related to the QFs is approximately $1.4 billion. A portion of the costs incurred to purchase this energy is recoverable through rates authorized by the MPSC, totaling approximately $1.1 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 19 years.

(4) This represents contractual purchase obligations related to Mill Creek Generating Station construction project.

(5) Contractual interest payments include our revolving credit facility, which has a variable interest rate. We have assumed an average interest rate of 3.25% on an estimated revolving line of credit balance of $36.0 million through maturity in June 2012.

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management’s discussion and analysis of financial condition and results of operations is based on our condensed 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 March 31, 2010, there have been no significant changes with regard to the critical accounting policies disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2009. 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.

ITEM 3. 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 revolving credit facility. The revolving credit facility bears interest at the lower of prime or available rates tied to the London Interbank Offered Rate (LIBOR) plus a credit spread, ranging from 2.25% to 4.0% over LIBOR. As of March 31, 2010, the applicable spread was 3.0%, resulting in a borrowing rate of 3.25%. Based upon amounts outstanding as of March 31, 2010, a 1% increase in the LIBOR would increase our annual interest expense by approximately $3.6 million.

Commodity Price Risk

Commodity price risk is a significant risk due to our lack of ownership of natural gas reserves and our reliance on market purchases to fulfill a portion of our electric supply requirements within the Montana market. 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 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.

Counterparty Credit Risk

We are exposed to counterparty credit risk related to the ability of our counterparties to meet their contractual payment obligations, and the potential non-performance of counterparties to deliver contracted commodities or services at the contracted price. We have risk management policies in place to limit our transactions to high quality counterparties, and continue to monitor closely the status of our counterparties, and will take action, as appropriate, to further manage this risk. This includes, but is not limited to, requiring letters of credit or prepayment terms. There can be no assurance, however, that the management tools we employ will eliminate the risk of loss.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We have established disclosure controls and procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934 are recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and accumulated and reported to management, including the principal executive officer and principal financial officer to allow timely decisions regarding required disclosure.

We conducted an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on this evaluation, our principal executive officer and principal financial officer have concluded that, as of 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 March 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Note 12, Commitments and Contingencies, to the 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 common stock or other securities.

Economic conditions and instability in the financial markets could negatively impact our business.

Our operations are impacted by local, national and worldwide economic conditions. The consequences of a prolonged recession may include a lower level of economic activity and uncertainty regarding energy prices and the capital and commodity markets. A lower level of economic activity has resulted in a decline in energy consumption and a decrease in customers’ ability to pay their accounts, which may adversely affect our liquidity, results of operations and future growth. While our territories have been less impacted than other parts of the country, we have experienced declines in electric and natural gas usage per customer and lower electric transmission sales, due in part to the recession. In addition, demand for our Montana transmission capacity is impacted by market conditions in states to the South and West of our service terri tory, which have been more significantly impacted by the economic downturn.

Access to the capital and credit markets, at a reasonable cost, is necessary for us to fund our operations, including capital requirements. We rely on a revolving credit facility for short-term liquidity needs due to the seasonality of our business, and on capital markets to raise capital for growth projects that are not otherwise provided by operating cash flows. Instability in the financial markets may increase the cost of capital, limit our ability to draw on our revolving credit facility and/or raise capital. If we are unable to obtain the liquidity needed to meet our business requirements on favorable terms, we may defer growth projects and/or capital expenditures.

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, SDPUC and Nebraska Public Service Commission (NPSC). Regulations can affect allowed rates of return, recovery of costs and operating requirements. For example, in our 2008 proceeding related to Colstrip, the MPSC approved a 10% return on equity and 6.5% cost of debt for the expected 34-year life of the plant. 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. The outcome of our Montana electric and natural gas rate case filed in 2009 could have a significant impact on our liquidity and results of operations. The filing is based upon a 2008 test period, and we anticipate a final determination on the filing during the fourth quarter of 2010, which creates a delay between the timing of when such costs are incurred and when the costs are recovered from customers. This lag can adversely impact our cash flows. 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 also subject to the jurisdiction of FERC with regard to electric system reliability standards. We must comply with the standards and requirements established, which apply to the NERC functions for which we have registered in both the Midwest Reliability Organization for our South Dakota operations and the WECC for our Montana operations. To the extent we are deemed to not be compliant with these standards, we could be subject to fines or penalties.

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, coal ash and other environmental considerations. We believe that we are in 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, 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 u s to make substantial additional capital expenditures.

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 U.S. Supreme Court decision holding that the EPA relied on improper factors in deciding not to regulate carbon dioxide emissions from motor vehicles under the Clean Air Act and two federal courts of appeal have reinstated nuisance claims against emitters of carbon dioxide, including several utility companies, alleging that such emissions contribute to global warming. Increased pressure for carbon dioxide emissions reduction also is coming from investor organizations. If legislation or regulations are passed at the federal or state levels imposing mandatory reductions of carbon dioxide and other greenhouse gases on generation facilities, the cost to us of such reductions could be significant.

Many of these environmental laws and regulations create permit and license requirements and provide for substantial civil and criminal fines which, if imposed, could result in material costs or liabilities. We cannot predict with certainty the occurrence of private tort allegations or government claims for damages associated with specific environmental conditions. We may be required to make significant expenditures in connection with the investigation and remediation of alleged or actual spills, personal injury or property damage claims, and the repair, upgrade or expansion of our facilities to meet future requirements and obligations under environmental laws.

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.

We are subject to physical and financial risks associated with climate change.

Physical risks from climate change could include changes in weather conditions, such as an increase in changes in precipitation and extreme weather events. Our customers' energy needs vary with weather conditions, primarily temperature and humidity. For residential customers, heating and cooling represent their largest energy use. To the extent weather conditions are affected by climate change, our customers' energy use could increase or decrease depending on the duration and magnitude of the changes. Increased energy use due to weather changes may require us to invest in additional electric generation assets, transmission and other infrastructure to serve increased loads. Decreased energy use due to weather changes could result in decreased revenues. Extreme weather conditions in general increase the stress on our system. Weather condit ions outside of our service territories could have an impact on our results of operations through impacts to the market prices for supply and transmission capacity. We purchase and sell electric and natural gas supply depending upon system needs and market opportunities. Extreme weather conditions creating high energy demand on our own and/or other systems may raise market prices as we buy short-term energy to serve our own system. Severe weather impacts our service territories, primarily through thunderstorms, tornadoes and snow or ice storms. To the extent the frequency of extreme weather events increase, this could increase our cost of providing service. Changes in precipitation resulting in droughts or water shortages could adversely affect our ability to provide electricity to customers, as well as increase the price they pay for energy. We may not recover all costs related to mitigating these physical and financial risks.

To the extent climate change impacts a region's economic health, it also may impact our revenues. Our financial performance is tied to the health of the regional economies we serve. The price of energy, as a factor in a region's cost of living as well as an important input into the cost of goods, has an impact on the economic health of our communities. The cost of additional regulatory requirements, such as a tax on greenhouse gases or additional environmental regulation, would normally be borne by consumers through higher prices for energy and purchased goods. To the extent financial markets view climate change and emissions of greenhouse gases as a financial risk, this could negatively affect our ability to access capital markets or cause us to receive less than ideal terms and conditions.

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 are required to procure our entire natural gas supply and a large portion of our Montana electric 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 and post-retirement benefit plans, in addition to other factors impacting these costs, could unfavorably impact our results of operations and liquidity.

Our costs for providing defined benefit retirement and postretirement benefit plans are dependent upon a number of factors, including rate of return on plan assets, discount rates, other actuarial assumptions, and government regulation. Due to the unprecedented volatility in equity markets, we experienced plan asset market gains during 2009 in excess of 20%, and plan asset market losses during 2008 in excess of 30%. Without sustained growth in the plan assets over time and depending upon the other factors noted above, the costs of such plans reflected in our results of operations and financial position and cash funding obligations may change significantly from projections.

Our plans for future expansion through transmission grid expansion, the construction of power generation facilities 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 are primarily investments in electric transmission projects and electric generation projects, is 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. In addition, there are projects proposed by other parties that may result in direct competition to our proposed transmission expansion.

Our proposed capital investment projects are based on assumptions regarding future growth and resulting power demand that may not be realized. The timing and extent of the recovery of the economy, and its impact on demand cannot be predicted. Additionally, our customers may undertake further individual energy conservation measures, which could decrease the demand for electricity. We may increase our transmission and/or baseload capacity and have excess capacity if anticipated growth levels are not realized. The resulting excess capacity could exceed our obligation to serve retail customers or demand for transmission capacity and, as a result, may not be recoverable from customers.

The construction of new generation and expansion of our transmission system will require a significant amount of capital expenditures. We cannot provide certainty that adequate external financing will be available to support these projects. Additionally, borrowings incurred to finance construction may adversely impact our leverage, which could increase our cost of capital. We may pursue joint ventures or similar arrangements with third parties in order to share some of the financing and operational risks associated with these projects, but we cannot be certain we will be able to successfully negotiate any such arrangement. Furthermore, joint ventures or joint ownership arrangements also present risks and uncertainties, including those associated with sharing control over the construction and operation of a facility and reliance on the other party’s financial or operational strength.

We have filed for and received advanced approval from the MPSC to construct the Mill Creek Generating Station. The MPSC determined the cost of the gas turbines is prudent, with the remainder of the project costs to be submitted for review upon completion of construction. A portion of these future costs could potentially be deemed imprudent, which we would not be able to recover from customers.

Should our efforts be unsuccessful, we could be subject to additional costs, termination payments under committed contracts, and/or the write-off of investments in these projects. As of March 31, 2010, we have capitalized approximately $119.8 million in construction work in process associated with the Mill Creek Generating Station and $12.3 million in preliminary survey and investigative costs associated with transmission projects.

Our obligation to include a minimum annual quantity of power in our Montana electric supply portfolio at an agreed upon price per MWh could expose us to material commodity price risk if certain QFs under contract with us do not perform during a time of high commodity prices, as we are required to supply any quantity deficiency. In addition, we are subject to price escalation risk with one of our largest QF contracts.

As part of a previous stipulation with the MPSC and other parties, we agreed to include a minimum annual quantity of power in our Montana electric supply portfolio at an agreed upon price per MWh. 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 obligation.

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. The anticipated source for any quantity deficiency is the wholesale market which, in turn, would subject us to commodity price volatility.

In addition, we are subject to price escalation risk with one of our largest QF contracts due to variable contract terms. In estimating our QF liability, we have estimated an annual escalation rate of 1.9% over the term of the contract (through June 2024). To the extent the annual escalation rate exceeds 1.9%, our results of operations and financial position could be adversely affected.

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 electric 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 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, and intentional acts of destruction or other similar occurrences affecting the electric generating facilities. The loss of a major electric 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 positi on 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, our liquidity, access to capital and operations could be materially adversely affected.

A downgrade of our credit ratings to less than investment grade could adversely affect our liquidity. Certain of our credit agreements and other credit arrangements with counterparties require us to provide collateral in the form of letters of credit or cash to support our obligations if we fall below investment grade. Also, a downgrade below investment grade could hinder our ability to raise capital on favorable terms and increase our borrowing costs.

Our secured credit ratings are also tied to our ability to invest in unregulated ventures due to an existing stipulation with the MPSC and MCC, which establishes diminishing limits for such investment at certain credit rating levels. The stipulation does not limit investment in unregulated ventures so long as we maintain credit ratings on a secured basis of at least BBB+ (S&P) and Baa1 (Moody’s). For a further discussion of how a lack of liquidity and access to adequate capital could affect our operations, please see the Risk Factor above, “Economic conditions and instability in the financial markets could negatively impact our business.”

ITEM 6. EXHIBITS

(a) Exhibits

Exhibit 10.1— Waiver and Release of Miggie E. Cramblit executed January 5, 2010 (incorporated by reference to Exhibit 10.1 of NorthWestern Corporation's Current Report on Form 8-K, dated January 5, 2010, Commission File No.1-10499).

Exhibit 10.2— Consulting agreement with Miggie E. Cramblit, executed January 6, 2010 (incorporated by reference to Exhibit 10.2 of NorthWestern Corporation's Current Report on Form 8-K, dated January 5, 2010, Commission File No.1-10499).

Exhibit 10.3—NorthWestern Energy 2010 Annual Incentive Plan (incorporated by reference to Exhibit 99.1 of NorthWestern Corporation’s Current Report on Form 8-K, dated February 12, 2010, Commission File No. 1-10499).

Exhibit 10.4— Form of NorthWestern Corporation Long-Term Performance Incentive Restricted Stock Award Agreement (incorporated by reference to Exhibit 99.2 of NorthWestern Corporation’s Current Report on Form 8-K, dated February 12, 2010, Commission File No. 1-10499).

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.

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: April 23, 2010	By:	/s/ BRIAN B. BIRD
		Brian B. Bird
		Chief Financial Officer
		Duly Authorized Officer and Principal Financial Officer

EXHIBIT INDEX

Exhibit Number		Description
10.1		Waiver and Release of Miggie E. Cramblit executed January 5, 2010 (incorporated by reference to Exhibit 10.1 of NorthWestern Corporation's Current Report on Form 8-K, dated January 5, 2010, Commission File No.1-10499).
10.2		Consulting agreement with Miggie E. Cramblit, executed January 6, 2010 (incorporated by reference to Exhibit 10.2 of NorthWestern Corporation's Current Report on Form 8-K, dated January 5, 2010, Commission File No.1-10499).
10.3		NorthWestern Energy 2010 Annual Incentive Plan (incorporated by reference to Exhibit 99.1 of NorthWestern Corporation’s Current Report on Form 8-K, dated February 12, 2010, Commission File No. 1-10499).
10.4		Form of NorthWestern Corporation Long-Term Performance Incentive Restricted Stock Award Agreement(incorporated by reference to Exhibit 99.2 of NorthWestern Corporation’s Current Report on Form 8-K, dated February 12, 2010, Commission File No. 1-10499).
*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

EX-31.1 2 exhibit31-1.htm EXHIBIT 31.1 exhibit31-1.htm

EXHIBIT 31.1

CERTIFICATION PURSUANT TO

RULE 13a-14(a)/15d-14(a)

PROMULGATED UNDER

SECTION 302 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;

The registrant’s other certifying officer(s) 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: April 23, 2010
/s/ ROBERT C. ROWE
Robert C. Rowe
President and Chief Executive Officer

EX-31.2 3 exhibit31-2.htm EXHIBIT 31.2 exhibit31-2.htm

Exhibit 31.2

CERTIFICATION PURSUANT TO

RULE 13a-14(a)/15d-14(a)

PROMULGATED UNDER

SECTION 302 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;

(a)

(b)

(c)

(d)

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)

(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: April 23, 2010
/s/ BRIAN B. BIRD
Brian B. Bird
Vice President, Chief Financial Officer and Treasurer

EX-32.1 4 exhibit32-1.htm EXHIBIT 32.1 exhibit32-1.htm

EXHIBIT 32.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of NorthWestern Corporation (the “Company”) on Form 10-Q for the period ended March 31, 2010, 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: April 23, 2010		/s/ ROBERT C. ROWE
		Robert C. Rowe
		President and Chief Executive Officer

EX-32.2 5 exhibit32-2.htm EXHIBIT 32.2 exhibit32-2.htm

Exhibit 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of NorthWestern Corporation (the “Company”) on Form 10-Q for the period ended March 31, 2010, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Brian B. Bird, Vice President, Chief Financial Officer and Treasurer 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: April 23, 2010	/s/ BRIAN B. BIRD
	Brian B. Bird
	Vice President, Chief Financial Officer and Treasurer

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