NORTHWESTERN CORP (Form: 10-Q, Received: 07/31/2008 06:00:43)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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 June 30, 2008

Or

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

For the transition period from to

Commission File Number: 1-10499

NORTHWESTERN CORPORATION

Delaware		46-0172280
(State of incorporation)		(I.R.S. Employer Identification No.)

3010 West 69 ^th Street, Sioux Falls, South Dakota		57108
(Address of principal executive offices)		(Zip Code)

	Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

	Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-
accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one).

Large Accelerated Filer x Accelerated Filer o Non-accelerated Filer o Smaller Reporting Company o

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

	Indicate by check mark whether the registrant has filed all documents and reports required to be filed by
Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by the court. Yes x No o

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

Common Stock, Par Value $.01

38,190,492 shares outstanding at July 25, 2008

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
	Consolidated Balance Sheets — June 30, 2008 and December 31, 200 7		5
	Consolidated Statements of Income — Three and Six Months Ended June 30, 2008 and 200 7		6
	Consolidated Statements of Cash Flows – Six Months Ended June 30, 2008 and 200 7		7
	Notes to Consolidated Financial Statements		8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		23
Item 3.	Quantitative and Qualitative Disclosure About Market Risk		42
Item 4.	Controls and Procedures		43
PART II. OTHER INFORMATION			44
Item 1.	Legal Proceedings		44
Item 1A.	Risk Factors		44
Item 4.	Submission of Matters to a Vote of Security Holders		46
Item 6.	Exhibits		47
SIGNATURES			48

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

Words or phrases such as “anticipates," “may," “will," “should," “believes," “estimates," “expects," “intends," “plans," “predicts," “projects," “targets," “will likely result," “will continue" or similar expressions identify forward-looking statements. Forward-looking statements involve risks and uncertainties, which could cause actual results or outcomes to differ materially from those expressed. We caution that while we make such statements in good faith and believe such statements are based on reasonable assumptions, including without limitation, management's examination of historical operating trends, data contained in records and other data available from third parties, we cannot assure you that our projections will be achieved. Factors that may cause such differences include, but are not limited to:

•

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

•

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

•

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

•

adverse changes in general economic and competitive conditions in our service territories.

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

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

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

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except share data)

		June 30,			December 31,
		2008			2007
ASSETS
Current Assets:
Cash and cash equivalents	$	24,242		$	12,773
Restricted cash		19,520			14,482
Accounts receivable, net of allowance		116,802			143,482
Inventories		47,304			63,586
Regulatory assets		21,190			27,049
Prepaid energy supply		2,791			3,166
Deferred income taxes		8,813			2,987
Other		43,861			10,829
Total current assets		284,523			278,354
Property, plant, and equipment, net		1,798,735			1,770,880
Goodwill		355,128			355,128
Regulatory assets		113,031			123,041
Other noncurrent assets		19,236			19,977
Total assets	$	2,570,653		$	2,547,380
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Current maturities of capital leases	$	1,836		$	2,389
Current maturities of long-term debt		19,285			18,617
Accounts payable		69,237			91,588
Accrued expenses		169,631			168,610
Regulatory liabilities		85,297			40,635
Total current liabilities		345,286			321,839
Long-term capital leases		37,412			38,002
Long-term debt		744,432			787,360
Deferred income taxes		100,987			74,046
Noncurrent regulatory liabilities		218,923			194,959
Other noncurrent liabilities		291,648			308,150
Total liabilities		1,738,688			1,724,356
Commitments and Contingencies (Note 14)
Shareholders’ Equity:
Common stock, par value $0.01; authorized 200,000,000 shares; issued and outstanding 39,335,958 and 38,972,551, respectively; Preferred stock, par value $0.01; authorized 50,000,000 shares; none issued		393			393
Treasury stock at cost		(10,781	)		(10,781	)
Paid-in capital		805,426			803,061
Retained earnings		23,835			16,603
Accumulated other comprehensive income		13,092			13,748
Total shareholders’ equity		831,965			823,024
Total liabilities and shareholders’ equity	$	2,570,653		$	2,547,380

See Notes to Consolidated Financial Statements

NORTHWESTERN CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(in thousands, except per share amounts)

		Three Months Ended June 30,					Six Months Ended June 30,

		2008			2007			2008			2007
OPERATING REVENUES	$	276,506		$	259,608		$	662,481		$		626,173
COST OF SALES		149,354			141,255			378,438				360,534
GROSS MARGIN		127,152			118,353			284,043				265,639
OPERATING EXPENSES
Operating, general and administrative		53,866			58,677			113,937				121,125
Property and other taxes		20,540			20,660			44,180				41,252
Depreciation		21,225			20,793			42,316				40,687
TOTAL OPERATING EXPENSES		95,631			100,130			200,433				203,064
OPERATING INCOME		31,521			18,223			83,610				62,575
Interest Expense		(15,848	)		(14,527	)		(31,849	)			(27,747	)
Other (Expense) Income		(161	)		359			422				737
Income Before Income Taxes		15,512			4,055			52,183				35,565
Income Tax Expense		(6,009	)		(1,621	)		(19,229	)			(13,989	)
Net Income	$	9,503		$	2,434		$	32,954		$		21,576
Average Common Shares Outstanding		38,973			35,988			38,973				35,855
Basic Earnings per Average Common Share	$	0.24		$	0.07		$	0.85		$		0.60
Diluted Earnings per Average Common Share	$	0.24		$	0.06		$	0.84		$		0.57
Dividends Declared per Average Common Share	$	0.33		$	0.31		$	0.66		$		0.62

See Notes to Consolidated Financial Statements

NORTHWESTERN CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

	Six Months Ended June 30,
		2008			2007
OPERATING ACTIVITIES :
Net Income	$	32,954		$	21,576
Items not affecting cash:
Depreciation		42,316			40,687
Amortization of debt issue costs, discount and deferred hedge gain		1,202			805
Amortization of restricted stock		2,364			4,259
Equity portion of allowance for funds used during construction		(282	)		(163	)
Gain on sale of assets		(110	)		—
Unrealized loss on derivative instruments		6,396			—
Deferred income taxes		21,115			12,712
Changes in current assets and liabilities:
Restricted cash		(5,038	)		(824	)
Accounts receivable		26,780			46,979
Inventories		16,282			3,126
Prepaid energy supply costs		375			(547	)
Other current assets		(288	)		(330	)
Accounts payable		(23,569	)		(18,314	)
Accrued expenses		(5,324	)		3,622
Regulatory assets		5,808			5,893
Regulatory liabilities		11,933			26,493
Other noncurrent assets		12,159			6,822
Other noncurrent liabilities		(20,419	)		(16,559	)
Cash provided by operating activities		124,654			136,237
INVESTING ACTIVITIES:
Property, plant, and equipment additions		(43,087	)		(52,608	)
Colstrip Unit 4 acquisition		—			(40,247	)
Proceeds from sale of assets		29			592
Cash used in investing activities		(43,058	)		(92,263	)
FINANCING ACTIVITIES:
Proceeds from exercise of warrants		—			10,600
Treasury stock activity		—			(6	)
Dividends on common stock		(25,722	)		(22,297	)
Issuance of long-term debt		55,000			—
Repayment of long-term debt		(85,939	)		(3,920	)
Line of credit repayments, net		(12,000	)		(30,000	)
Financing costs		(1,466	)		(281	)
Cash used in financing activities		(70,127	)		(45,904	)
Increase (Decrease) in Cash and Cash Equivalents		11,469			(1,930	)
Cash and Cash Equivalents, beginning of period		12,773			1,930
Cash and Cash Equivalents, end of period	$	24,242		$	—
Supplemental Cash Flow Information:
Cash paid during the period for:
Income taxes		43			1,274
Interest		24,479			18,993
Significant noncash transactions:
Assumption of debt related to Colstrip Unit 4 acquisition		—			20,438

See Notes to Consolidated Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Reference is made to Notes to Financial Statements

included in NorthWestern Corporation’s Annual Report)

(Unaudited)

(1) Nature of Operations and Basis of Consolidation

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

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

(2) New Accounting Standards

Accounting Standards Issued

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

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

Accounting Standards Adopted

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS No. 157), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS No. 157 became effective for most fair value measurements, other than leases and certain nonfinancial assets and liabilities, beginning January 1, 2008.

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

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

At June 30, 2008	Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)		Margin Cash Collateral Offset		Total Net Fair Value (1)

Regulated gas derivative asset (2)	$	—	$	38,449		$	—	$	—	$	38,449
Unregulated electric derivative liability	—		(6,396		)	—		—		(6,396		)
Net derivative asset	$	—	$	32,053		$	—	$	—	$	32,053

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

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

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

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities-including an amendment of FASB Statement No. 115 , which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value, with unrealized gains and losses related to these financial instruments reported in earnings at each subsequent reporting date. This option would be applied on an instrument by instrument basis. If elected, unrealized gains and losses on the affected financial instruments would be recognized in earnings at each subsequent reporting date. This statement is effective beginning January 1, 2008. We have assessed the provisions of the statement and elected not to apply fair value accounting to our eligible financial instruments. As a result, adoption of this statement had no impact on our financial results.

(3) Variable Interest Entities

FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities , or FIN 46R, requires the consolidation of entities which are determined to be variable interest entities (VIEs) when we are the primary beneficiary of a VIE, which means we have a controlling financial interest. Certain long-term purchase power and tolling contracts may be considered variable interests under FIN 46R. We have various long-term purchase power contracts with other utilities and certain qualifying facility plants. After evaluation of these contracts, we believe one qualifying facility contract may constitute a variable interest entity under the provisions of FIN 46R. We are currently engaged in adversary proceedings with this qualifying facility and, while we have made exhaustive efforts, we have been unable to obtain the information necessary to further analyze this contract under the requirements of FIN 46R. We continue to account for this qualifying facility contract as an executory contract as we have been unable to obtain the necessary information from this qualifying facility in order to determine if it is a VIE and if so, whether we are the primary beneficiary. Based on the current contract terms with this qualifying facility, our estimated gross contractual payments aggregate approximately $506.9 million through 2025, and are included in Contractual Obligations and Other Commitments of Management's Discussion and Analysis.

(4) Income Taxes

We have unrecognized tax benefits of approximately $112.0 million as of June 30, 2008. If any of our unrecognized tax benefits were recognized during 2008, they would have no impact on our effective tax rate. We do not anticipate that total unrecognized tax benefits will significantly change due to the settlement of audits or the expiration of statute of limitations within the next twelve months.

Our policy is to recognize interest and penalties related to uncertain tax positions in income tax expense. During the six months ended June 30, 2008, we have not recognized expense for interest or penalties, and do not have any amounts accrued at June 30, 2008 and December 31, 2007, respectively, for the payment of interest and penalties.

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

(5) Goodwill

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


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

(6) Other Comprehensive Income

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

Comprehensive income is calculated as follows (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
Net income	$	9,503		$	2,434		$	32,954		$	21,576
Other comprehensive income (loss), net of tax:
Reclassification of net gains on hedging instruments from OCI to net income		(297	)		(297	)		(594	)		(594	)
Foreign currency translation		20			151			(62	)		170
Comprehensive income	$	9,226		$	2,288		$	32,298		$	21,152

(7) Risk Management and Hedging Activities

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

•

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

•

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

•

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

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

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

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

Commodity Prices

Unregulated Electric - We use derivatives to optimize the value of our unregulated power generation asset. Changes in the fair value for power purchases and sales are recognized on a net basis in operating revenues or cost of sales in the consolidated income statement unless hedge accounting is applied. While our derivative transactions are entered into for the purpose of managing commodity price risk, hedge accounting is only applied where specific criteria are met and it is practicable to do so. In order to apply hedge accounting, the transaction must be designated as a hedge and it must be highly effective in offsetting the hedged risk. Additionally, for hedges of commodity price risk, physical delivery for forecasted commodity transactions must be probable. Transactions that are financially settled are presented on a net basis. For the six months ended June 30, 2008, we recorded unrealized losses in the income statement consistent with the mark-to-market method of accounting discussed above of approximately $6.4 million related to economic hedges where we have locked in forward prices.

Regulated Utilities - Certain contracts for the physical purchase of natural gas associated with our regulated gas utilities do not qualify for normal purchases under SFAS No. 133. Since these contracts are for the purchase of natural gas sold to regulated gas customers, the accounting for these contracts is subject to SFAS No. 71, Accounting for the Effects of Certain Types of Regulations (SFAS No. 71). We use derivative financial instruments to reduce the commodity price risk associated with the purchase price of a portion of our future natural gas requirements and minimize fluctuations in gas supply prices to our regulated customers. We record assets or liabilities based on the fair value of these derivatives, with offsetting positions recorded as regulatory liabilities or regulatory assets on the consolidated balance sheets. Upon settlement of these contracts, associated proceeds or costs are refunded to or collected from our customers consistent with regulatory requirements. At June 30, 2008 we had a derivative asset, included in other current assets in the consolidated balance sheet, and offsetting regulatory liability of $38.4 million.

Interest Rates

During 2006, we issued $170.2 million of Montana Pollution Control Obligations and $150 million of Montana First Mortgage Bonds. In association with these refinancing transactions, we implemented a risk management strategy of utilizing interest rate swaps to manage our interest rate exposures associated with anticipated refinancing transactions. These swaps were designated as cash-flow hedges under SFAS No. 133 with the effective portion of gains and losses, net of associated deferred income tax effects, recorded in accumulated other comprehensive income (AOCI) in our consolidated balance sheets. We settled $320.2 million of forward starting interest rate swap

agreements, and received aggregate settlement payments of approximately $14.6 million in 2006. We reclassify these gains from AOCI into interest expense in our consolidated statements of income during the periods in which the hedged interest payments occur. AOCI includes unrealized pre-tax gains related to these transactions of $12.2 million and $12.8 million at June 30, 2008 and December 31, 2007, respectively. We expect to reclassify approximately $1.2 million of pre-tax gains on these cash-flow hedges from AOCI into interest expense during the next twelve months. We have no further interest rate swaps outstanding.

(8) Segment Information

We operate the following business units: (i) regulated electric, (ii) regulated natural gas, (iii) unregulated electric, and (iv) all other, which primarily consists of our remaining unregulated natural gas operations and our unallocated corporate costs.

We evaluate the performance of these segments based on gross margin. The accounting policies of the operating segments are the same as the parent except that the parent allocates some of its operating expenses to the operating segments according to a methodology designed by management for internal reporting purposes and involves estimates and assumptions. Financial data for the business segments, are as follows (in thousands):

Three months ended,	Regulated						Unregulated
June 30, 2008	Electric			Gas			Electric			Other			Eliminations			Total
Operating revenues	$	178,967		$	80,531		$	16,569		$	8,653		$	(8,214	)	$	276,506
Cost of sales	87,196			49,885			11,624			8,395			(7,746		)	149,354
Gross margin	91,771			30,646			4,945			258			(468		)	127,152
Operating, general and administrative	34,503			15,735			3,219			877			(468		)	53,866
Property and other taxes	14,338			5,484			715			3			—			20,540
Depreciation	15,392			4,001			1,823			9			—			21,225
Operating income (loss)	27,538			5,426			(812		)	(631		)	—			31,521
Interest expense	(9,201		)	(3,286		)	(2,993		)	(368		)	—			(15,848		)
Other income (expense)	376			281			119			(937		)	—			(161		)
Income tax (expense) benefit	(6,646		)	(873		)	1,561			(51		)	—			(6,009		)
Net income (loss)	$	12,067		$	1,548		$	(2,125	)	$	(1,987	)	$	—		$	9,503
Total assets	$	1,543,185		$	754,213		$	256,036		$	17,219		$	—		$	2,570,653
Capital expenditures	$	18,748		$	9,864		$	518		$	—		$	—		$	29,130

Three months ended,	Regulated						Unregulated
June 30, 2007	Electric			Gas			Electric			Other			Eliminations			Total
Operating revenues	$	170,579		$	62,032		$	14,601		$	16,715		$	(4,319	)	$	259,608
Cost of sales	87,890			36,924			4,205			16,180			(3,944		)	141,255
Gross margin	82,689			25,108			10,396			535			(375		)	118,353
Operating, general and administrative	30,831			16,063			7,536			4,622			(375		)	58,677
Property and other taxes	14,453			5,345			856			6			—			20,660
Depreciation	15,280			4,107			954			452			—			20,793
Operating income (loss)	22,125			(407		)	1,050			(4,545		)	—			18,223
Interest expense	(9,848		)	(3,634		)	(677		)	(368		)	—			(14,527		)
Other income	205			40			6			108			—			359
Income tax (expense) benefit	(4,692		)	1,473			(196		)	1,794			—			(1,621		)
Net income (loss)	$	7,790		$	(2,528	)	$	183		$	(3,011	)	$	—		$	2,434
Total assets	$	1,483,660		$	731,352		$	118,604		$	20,325		$	—		$	2,353,941
Capital expenditures	$	16,156		$	14,681		$	1,301		$	—		$	—		$	32,138

Six months ended ,	Regulated						Unregulated
June 30, 2008	Electric			Gas			Electric			Other			Eliminations			Total
Operating revenues	$	375,586		$	252,174		$	36,973		$	16,575		$	(18,827	)	$	662,481
Cost of sales	190,251			171,193			18,656			16,159			(17,821		)	378,438
Gross margin	185,335			80,981			18,317			416			(1,006		)	284,043
Operating, general and administrative	69,873			33,659			6,896			4,515			(1,006		)	113,937
Property and other taxes	30,767			11,812			1,594			7			—			44,180
Depreciation	30,787			7,884			3,628			17			—			42,316
Operating income (loss)	53,908			27,626			6,199			(4,123		)	—			83,610
Interest expense	(18,459		)	(6,485		)	(6,169		)	(736		)	—			(31,849		)
Other income (expense)	585			559			132			(854		)	—			422
Income tax (expense) benefit	(12,333		)	(8,163		)	(154		)	1,421			—			(19,229		)
Net income (loss)	$	23,701		$	13,537		$	8		$	(4,292	)	$	—		$	32,954
Total assets	$	1,543,185		$	754,213		$	256,036		$	17,219		$	—		$	2,570,653
Capital expenditures	$	29,482		$	12,594		$	1,011		$	—		$	—		$	43,087

Six months ended ,	Regulated						Unregulated
June 30, 2007	Electric			Gas			Electric			Other			Eliminations			Total
Operating revenues	$	349,073		$	220,221		$	36,879		$	32,786		$	(12,786	)	$	626,173
Cost of sales	180,679			152,134			8,441			31,173			(11,893		)	360,534
Gross margin	168,394			68,087			28,438			1,613			(893		)	265,639
Operating, general and administrative	65,339			34,148			15,904			6,627			(893		)	121,125
Property and other taxes	28,644			10,941			1,635			32			—			41,252
Depreciation	30,658			8,057			1,370			602			—			40,687
Operating income (loss)	43,753			14,941			9,529			(5,648		)	—			62,575
Interest expense	(19,598		)	(6,486		)	(903		)	(760		)	—			(27,747		)
Other income	381			194			8			154			—			737
Income tax (expense) benefit	(9,156		)	(3,477		)	(3,652		)	2,296			—			(13,989		)
Net income (loss)	$	15,380		$	5,172		$	4,982		$	(3,958	)	$	—		$	21,576
Total assets	$	1,483,660		$	731,352		$	118,604		$	20,325		$	—		$	2,353,941
Capital expenditures	$	28,552		$	22,115		$	1,941		$	—		$	—		$	52,608

(9) Earnings Per Share

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

	Six Months Ended June 30, 2008	Six Months Ended June 30, 2007
Basic computation	38,972,529	35,854,902
Dilutive effect of
Restricted shares	448,939	530,655
Stock warrants	—	1,469,097
Diluted computation	39,421,468	37,854,654

	Three Months Ended June 30, 2008	Three Months Ended June 30, 2007
Basic computation	38,972,551	35,988,340
Dilutive effect of
Restricted shares	448,939	530,655
Stock warrants	—	1,355,872
Diluted computation	39,421,490	37,874,867

Warrants issued in 2004 were exercisable through the close of business November 1, 2007. A total of 406,519 warrants were exercised during the six months ended June 30, 2007. Warrants outstanding as of June 30, 2007 of 4,100,006 were dilutive and included in the 2007 earnings per share calculation.

(10) Employee Benefit Plans

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

		Pension Benefits						Other Postretirement Benefits
		Three Months Ended June 30,
			2008			2007			2008			2007
Components of Net Periodic Benefit Cost
	Service Cost	$	2,033		$	2,185		$	132		$	102
	Interest Cost		5,712			5,501			573			519
	Expected return on plan assets		(6,851	)		(6,388	)		(369	)		(310	)
	Amortization of prior service cost		63			61			—			—
	Recognized actuarial (gain) loss		(268	)		—			(193	)		—
Net Periodic Benefit Cost		$	689		$	1,359		$	143		$	311

		Pension Benefits						Other Postretirement Benefits
		Six Months Ended June 30,
			2008			2007			2008			2007
Components of Net Periodic Benefit Cost
	Service Cost	$	4,203		$	4,474		$	282		$	290
	Interest Cost		11,438			10,900			1,184			1,221
	Expected return on plan assets		(13,607	)		(12,211	)		(658	)		(535	)
	Amortization of prior service cost		123			121			—			(180	)
	Recognized actuarial (gain) loss		(409	)		—			(300	)		—
Net Periodic Benefit Cost		$	1,748		$	3,284		$	508		$	796

In January 2008, we contributed approximately $21.9 million to our pension plans.

(11) Regulatory Matters

Federal Energy Regulatory Commission (FERC) Transmission Rate Case - In October 2006, we filed a request with the FERC for an electric transmission revenue increase. Our requested increase pertains only to FERC jurisdictional wholesale transmission and retail choice customers representing approximately $8.6 million in revenue. In May 2007, we implemented interim rates, which are subject to refund plus interest pending final resolution. We filed settlement documents on February 15, 2008 and are awaiting FERC approval. The interim rate increase contributed approximately $0.4 million and $1.1 million for the three and six months ended June 30, 2008, respectively, to regulated electric margin.

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

•

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

•

Interim rates effective January 1, 2008;

•

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

•

A commitment of 21 MWs of unit contingent power from Colstrip Unit 4 at Mid-Columbia (Mid-C) Index prices minus $19 per MWH, but not less than zero, to electric supply for a period of 76 months beginning March 1, 2008; and

•

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

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

(12) Financing Activities

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

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

(13) Proposed Colstrip Unit 4 Transaction

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

Consistent with these terms, on June 30, 2008, we submitted a filing with MPSC to initiate a review process to determine if it would be in the public interest to place our interest in Colstrip Unit 4 into rate base at an equivalent value to the negotiated selling price including certain adjustments. If the filing with the MPSC is rejected, the electric utility’s regulated supply group will have an option to purchase power at a discount to Mid-C Index prices as existing contracts expire and power becomes available in future years. In addition, the transaction is conditioned upon FERC approval and other customary closing conditions. We expect to complete this process by the end of 2008.

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

(14) Commitments and Contingencies

Environmental Liabilities

Environmental laws and regulations are continually evolving, and, therefore, the character, scope, cost and availability of the measures we may be required to take to ensure compliance with evolving laws or regulations cannot be accurately predicted. The range of exposure for environmental remediation obligations at present is estimated to range between $19.8 million to $57.0 million. As of June 30, 2008, we have a reserve of approximately $31.2 million. We anticipate that as environmental costs become fixed and reliably determinable, we will seek insurance reimbursement and/or authorization to recover these in rates; therefore, we do not expect these costs to have a material adverse effect on our consolidated financial position, ongoing operations, or cash flows.

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

Coal-Fired Plants

We are joint owners in Colstrip Unit 4, a coal-fired power plant located in southeastern Montana, and three coal-fired plants used to serve our South Dakota customer supply demands. Citing its authority under the Clean Air Act, the EPA had finalized Clean Air Mercury Regulations (CAMR) that affected coal-fired plants. These regulations established a cap-and-trade program that would have taken effect in two phases beginning January 2010 and January 2018. Under CAMR, each state was allocated a mercury emissions cap and was required to develop regulations to implement the requirements, which could follow the federal requirements or be more restrictive. In February 2008 the EPA’s CAMR were turned down by the U.S. Court of Appeals for the District of Columbia Circuit; however, under this opinion, the EPA must either properly remove mercury from regulation under the hazardous air pollutant provisions of the Clean Air Act or develop standards requiring maximum achievable control technology for mercury emissions.

Montana has finalized its own rules more stringent than CAMR's 2018 cap that would require every coal-fired generating plant in the state to achieve reduction levels by 2010. The joint owners currently plan to install chemical injection technologies to meet these requirements. We estimate our share of the capital cost would be approximately $1 million, with ongoing annual operating costs of approximately $3 million. If the Montana rules are maintained in their current form and enhanced chemical injection technologies are not sufficiently developed to meet the Montana levels of reduction by 2010, then adsorption/absorption technology with fabric filters at the Colstrip Unit 4 generation facility would be required, which could represent a material cost. Recent tests have shown that it may be possible to meet the Montana rules with more refined chemical injection technology combined with adjustments to boiler/fireball dynamics at a minimal cost. We are continuing to work with the other Colstrip owners to determine the ultimate financial impact of these rules.

In June 2008 the Sierra Club filed a lawsuit in U.S. District Court in South Dakota against NorthWestern and the other joint owners of the Big Stone plant alleging certain violations of the Clean Air Act. For further discussion see the Litigation – Sierra Club section below.

Manufactured Gas Plants

Approximately $25.4 million of our environmental reserve accrual is related to manufactured gas plants. A formerly operated manufactured gas plant located in Aberdeen, South Dakota, has been identified on the Federal Comprehensive Environmental Response, Compensation, and Liability Information System (CERCLIS) list as contaminated with coal tar residue. We are currently investigating, characterizing, and initiating remedial actions at the Aberdeen site pursuant to work plans approved by the South Dakota Department of Environment and Natural Resources. In 2007, we completed remediation of sediment in a short segment of Moccasin Creek that had been impacted by the former manufactured gas plant operations. Our current reserve for remediation costs at this site is approximately $11.8 million, and we estimate that approximately $10 million of this amount will be incurred during the next five years.

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

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

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

Milltown Dam Removal

Our subsidiary, Clark Fork and Blackfoot, LLC (CFB), owns the former Milltown Dam site, and previously operated a three MW hydroelectric generation facility located at the confluence of the Clark Fork and Blackfoot Rivers. Dam removal activities were initiated during the first quarter of 2008 and are expected to be complete within a

year. Our remaining obligation to the State of Montana related to this site is approximately $0.6 million, which will be solely funded through the sale or transfer of land and water rights associated with the former Milltown Dam operations.

Other

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

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

•

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

•

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

LEGAL PROCEEDINGS

Magten/Law Debenture/QUIPS Litigation

On July 10, 2008 the Delaware Bankruptcy Court approved the global settlement agreement that resolves the Magten and Law Debenture appeals, the Magten v. Certain Current and Former Officers of CFB litigation, the Magten v. Bank of New York litigation and the Magten and Law Debenture v. NorthWestern Corporation and Certain Individuals. On July 23, 2008 the Ad Hoc Committee filed an appeal to the global settlement agreement, however, we and the other parties involved waived a closing condition and closed on the settlement on July 24, 2008. Under the approved global settlement agreement Magten, Law Debenture, their lawyers and the holders of the QUIPS, collectively received a cash payment of $23 million to be allocated amongst them in accordance with the terms of the global settlement agreement. The cash payment was funded by our repurchase of 782,059 shares held in the disputed claims reserve established under our confirmed Plan of Reorganization (the Plan). In addition, we received a reimbursement of previously incurred legal fees and expenses of $4 million under separate agreements for which no Court approval was requested.

On July 11, 2008, we filed a motion seeking bankruptcy court approval for the purchase of the remaining shares in the disputed claim reserve. The cash from such purchase would be used to make a surplus distribution of all of the remaining assets in the disputed claims reserve to unsecured creditors and debt holders in Class 7 and Class 9 under the Plan, other than the holders of the QUIPS. The motion allows unsecured creditors and debt holders in Class 7 and Class 9 to elect to receive their surplus distribution in stock and accrued dividends or cash. The bankruptcy court approved this motion in July.

Each matter, described below in greater detail, generally related to claims of certain holders of quarterly income preferred securities in our Chapter 11 bankruptcy case.

Magten and Law Debenture v. NorthWestern Corporation - Magten Asset Management Corporation (Magten) and Law Debenture Trust Company (Law Debenture) initiated an adversary proceeding, which we referred to as the QUIPS Litigation, against NorthWestern seeking among other things, to void the transfer of certain assets and liabilities of CFB to us. In essence, Magten and Law Debenture asserted that the transfer of the transmission and distribution assets acquired from the Montana Power Company was a fraudulent conveyance because it allegedly left CFB insolvent and unable to pay certain claims. The plaintiffs also asserted that they were creditors of CFB as a result of Magten owning a portion of the Series A 8.45% Quarterly Income Preferred Securities (QUIPS) for which Law Debenture serves as the Indenture Trustee. Plaintiffs sought , among other things, the avoidance of the transfer of assets, declaration that the assets were fraudulently transferred and were not NorthWestern’s property, the imposition

of constructive trusts over the transferred assets and the return of such assets to CFB.

Magten v. Certain Current and Former Officers of CFB - On April 19, 2004, Magten filed a complaint against certain former and current officers of CFB in U.S. District Court in Montana, seeking compensatory and punitive damages for alleged breaches of fiduciary duties by such officers in connection with the same transaction described above which is at issue in the QUIPS Litigation, namely the transfer of the transmission and distribution assets acquired from the Montana Power Company to NorthWestern.

Magten v. Bank of New York - In July 2006, Magten served a complaint against The Bank of New York (“BNY”) in an action filed in New York state court, seeking damages for alleged breach of contract, breach of fiduciary duty and negligence in connection with the same transaction described above which is at issue in the QUIPS Litigation. Specifically, Magten alleged that BNY, as the Indenture Trustee at the time of the 2002 transfer of assets from Montana Power Company to NorthWestern, should have taken steps to protect the QUIPS holders' interests by seeking to set aside the transfer and imposing a constructive trust on the assets. BNY has asserted a right to indemnification by NorthWestern for legal fees and costs incurred in defending against Magten's claims pursuant to the terms of the Indenture governing the QUIPS under which BNY served as Trustee.

Magten and Law Debenture v. NorthWestern Corporation and Certain Individuals - On April 15, 2005, Magten and Law Debenture filed an adversary complaint in the Bankruptcy Court against NorthWestern and certain former and current officers and directors seeking to revoke the Confirmation Order of NorthWestern’s Plan on the grounds that it was procured by fraud as a result of the alleged failure to adequately fund the Class 9 Disputed Claims Reserve with enough shares of new common stock to satisfy a potential full recovery on all disputed claims against NorthWestern's bankruptcy estate which were outstanding at the time the Plan became effective on November 1, 2004. The plaintiffs also alleged breach of fiduciary duty on the part of certain former and current officers in connection with the alleged under-funding of the Disputed Claims Reserve.

McGreevey Litigation

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

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

In June 2006, we and the McGreevey plaintiffs entered into an agreement to settle all claims brought by the McGreevey plaintiffs in all of the actions described above, wherein the McGreevey plaintiffs executed a covenant not to execute against us, and we quit claimed any interest we had in any claims we may or may not have under any applicable directors and officers liability insurance policy, against any insurers for contractual or extracontractual damages, and against certain defendants in the McGreevey lawsuits. In November 2006, this agreement was approved by the Delaware Bankruptcy Court and the claims were discharged. We filed a joint motion with the plaintiffs' attorneys in U.S. District Court in Montana to dismiss the claims against us in the McGreevey lawsuits. On March 16, 2007, the U.S. District Court in Montana denied the motion to dismiss us from the McGreevey lawsuits, questioning the benefits of the settlement to be received by the class members in the settlement and the authority of the plaintiffs' counsel to have negotiated the settlement without a class having been certified by the court. On January 11, 2008, the U.S. District Court in Montana suggested that the settlement agreement was invalid because the plaintiffs' attorneys had not secured the court's permission to engage in settlement discussions. The District Court enjoined the plaintiffs from taking any further action in any of these matters. The plaintiffs appealed the District Court’s January 11 ^th

injunction to the Ninth Circuit U.S. Court of Appeals, where on July 10, 2008, the Ninth Circuit U.S. Court of Appeals heard oral arguments; a determination is pending. We do not anticipate a resolution of this litigation before class representatives and class counsel are approved by the U.S. District Court in Montana. However, we believe that given the scope of the Order confirming the Plan and the injunctions issued by the Delaware Bankruptcy Court which channeled the claims to the D&O Trust, we have limited exposure to the plaintiffs for damages arising from the McGreevey claims. We will continue to vigorously defend against these claims and explore ways to remove ourselves from the lawsuits.

City of Livonia

In November 2005, we and our directors were named as defendants in a shareholder class action and derivative action entitled City of Livonia Employee Retirement System v. Draper, et al., pending in the U.S. District Court for the District of South Dakota. The plaintiff claimed, among other things, that the directors breached their fiduciary duties by not sufficiently negotiating with Montana Public Power Inc. and Black Hills Corporation, two entities that had made public, unsolicited offers to purchase NorthWestern. On April 26, 2006, the City of Livonia amended its complaint to add allegations that our directors had erred in choosing an offer from Babcock and Brown Infrastructure Limited (BBI) because it was not the most attractive offer they had received for the company. In December 2006, the plaintiffs agreed to dismiss the lawsuit with prejudice on the condition that the federal court would retain jurisdiction over any award of attorneys' fees. Plaintiffs filed a motion for attorneys' fees and costs seeking $9.9 million on the grounds that the Board's acceptance of the BBI offer was attributable to their efforts. On December 13, 2007, the federal court ordered additional simultaneous briefing on the issue of whether, in light of the BBI termination, the Livonia litigation had benefited our shareholders. In March 2008 the district court ruled that the plaintiffs’ lawyers should receive approximately $1.8 million in fees and costs. We had filed an appeal of the court’s order in the U.S. Court of Appeals for the Eighth Circuit, and had also filed a lawsuit in South Dakota state court against the insurance carrier as the carrier would not provide a definitive decision that any award of attorneys' fees would be reimbursed by insurance proceeds. We recorded a $1.8 million liability during the first quarter of 2008, pending the outcome of the appeal and lawsuit against the insurance carrier. In May 2008, this litigation was settled, resulting in a payment directly from our insurance carrier to the plaintiffs’ lawyers. We reversed the $1.8 million liability during the second quarter of 2008.

Ammondson

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

Sierra Club

On June 10, 2008, Sierra Club filed a complaint in the U.S. District Court for the District of South Dakota (Northern Division) against the Company and two other co-owners (the Defendants) of Big Stone Generating Station (Big Stone). The complaint alleges certain violations of the (i) Prevention of Significant Deterioration and (ii) New Source Performance Standards (NSPS) provisions of the Clean Air Act and certain violations of the South Dakota State Implementation Plan (South Dakota SIP). The action further alleges that the Defendants modified and operated

Big Stone without obtaining the appropriate permits, without meeting certain emissions limits and NSPS requirements and without installing appropriate emission control technology, all allegedly in violation of the Clean Air Act and the South Dakota SIP. Plaintiff alleges that Defendants’ actions have contributed to air pollution and visibility impairment and have increased the risk of adverse health effects and environmental damage. Plaintiff seeks both declaratory and injunctive relief to bring the Defendants into compliance with the Clean Air Act and the South Dakota SIP and to require Defendants to remedy the alleged violations. Plaintiff also seeks unspecified civil penalties, including a beneficial mitigation project. We believe that these claims are without merit and that Big Stone has been and is being operated in compliance with the Clean Air Act and the South Dakota SIP. The ultimate outcome of these matters cannot be determined at this time.

Other Litigation and Contingencies

FERC Investigation

During the second quarter of 2007, we voluntarily informed the FERC of several potential regulatory compliance issues related to our natural gas business. The FERC is conducting an ongoing investigation into these matters. Based on our current assessment we do not anticipate the outcome of the FERC’s investigation will have a material adverse effect on our financial position.

Colstrip Energy Limited Partnership

In December 2006, the MPSC issued an order finalizing certain qualifying facility rates for the periods July 1, 2003 through June 30, 2006. Colstrip Energy Limited Partnership (CELP) is a qualifying facility with which we have a power purchase agreement through 2025. Under the terms of the power purchase agreement with CELP, energy and capacity rates were fixed through June 30, 2004 (with a small portion to be set by the MPSC's determination of rates in the annual avoided cost filing), and beginning July 1, 2004 through the end of the contract, energy and capacity rates are to be determined each year pursuant to a formula. CELP filed a complaint against NorthWestern and the MPSC in Montana district court on July 6, 2007 which contests the MPSC’s order. CELP is disputing inputs in to the rate-setting formula, used by us and approved by the MPSC on an annual basis, to calculate energy and capacity payments for the contract years 2004, 2005 and 2006. CELP is claiming that NorthWestern breached the power purchase agreement causing damages, which CELP asserts are not presently known but believed to be approximately $22 million for contract years 2004, 2005 and 2006. If the MPSC's order is upheld in its current form, we anticipate reducing our QF liability by approximately $25 to $50 million as our estimate of energy and capacity rates for the remainder of the contract period would be reduced. A temporary restraining order was agreed to by the parties and has been issued restraining us from implementing the rates finalized by the MPSC order pending an ultimate decision on CELP's complaint. On June 30, 2008, the state district court judge granted our motions to enforce the contractual arbitration provision and to stay all discovery and proceedings against NorthWestern Energy, pending the decision of the required contract arbitration. The state district court, on June 30, 2008, also granted a motion by the MPSC to bifurcate, having the effect of separating the issues between contract/tort claims and the administrative appeal of the MPSC’s orders; which we supported. The order also stayed the appellate decision pending a decision in our arbitration proceedings. We believe that we will prevail in the arbitration and intend to vigorously defend our positions. Concurrently, an adversary proceeding against CELP requesting a declaratory judgment has been sought by us in the Delaware Bankruptcy Court. On July 10, 2008, the Bankruptcy Court held a hearing and verbally advised the parties that they are to settle a scheduling order which provides for briefing and a July 30, 2008 hearing on CELP’s motion to stay the proceedings.

Colstrip Unit 4 Coal Royalties

Relative to our joint ownership in Colstrip Unit 4, the Mineral Management Service of the United States Department of Interior (MMS) issued two orders to Western Energy Company (WECO) in 2002 and 2003 to pay additional royalties concerning coal sold to Colstrip Units 3 and 4 owners. The orders assert that additional royalties are owed as a result of WECO not paying royalties in connection with revenue received by WECO from the Colstrip Units 3 and 4 owners under a coal transportation agreement during the period October 1, 1991 through December 31, 2001. On April 28, 2005, the appeals division of the MMS issued an order that reduced the amount claimed based upon the applicable statute of limitations. The State of Montana issued a demand to WECO in May 2005 consistent with the MMS position outlined above on these transportation revenues. Further, on September 28, 2006, the MMS issued an order to pay additional royalties on the basis of an audit of WECO's royalty payments during the three years

2002 to 2004. WECO appealed these orders to the Interior Board of Land Appeals of the United States Department of Interior (IBLA) who affirmed the orders on September 12, 2007. WECO filed a complaint and request for declaratory ruling in the US District Court for the District of Columbia in January 2008 seeking relief from the orders issued by the MMS and affirmed by the IBLA, and we continue to monitor the appeals process. The Colstrip Units 3 and 4 owners and WECO currently dispute the responsibility of the expenses if the MMS position prevails. We believe that the Colstrip Units 3 and 4 owners have reasonable defenses in this matter. However, if the MMS position prevails and WECO succeeds in passing the expense responsibility to the owners, our share of the alleged additional royalties would be 15 percent, or approximately $6.0 million, and we would have ongoing royalty expenses related to coal transportation. While the percentage of our share of the alleged additional royalties is not expected to change, the estimated amount may increase as the MMS updates its assessment to reflect ongoing royalty and interest expenses.

Blue Dot Arbitration

During the second quarter of 2008, our subsidiary Blue Dot Services, LLC (Blue Dot) lost an arbitration matter with an insurance carrier and the insurance carrier was awarded $3.4 million plus interest related to a dispute that originated in 2007. The award was partially satisfied by $2.5 million in letter of credit draws by the insurance carrier. Blue Dot has approximately $300,000 in remaining cash and will likely need to liquidate through a bankruptcy filing. We classified Blue Dot as a discontinued operation in 2003. We do not anticipate Blue Dot’s ultimate liquidation will have a material adverse effect, if any, on our financial position.

MPSC Investigation

During the first quarter of 2008, the MPSC opened a proceeding to investigate our compliance with a 2004 MPSC order limiting our ability to provide loans, guarantees, advances, equity investments or working capital to subsidiaries or affiliates. This proceeding is in response to an MCC complaint that we violated the MPSC’s order when we purchased our previously leased interests in Colstrip Unit 4. We have provided documentation to the MPSC that we did not violate their order. The investigation is ongoing and we do not anticipate the outcome will have a material adverse effect, if any, on our financial position.

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 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

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

OVERVIEW

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

Highlights

Recent highlights include:

•

Improved net income of $7.1 million as compared with the second quarter of 2007 due to higher margins as discussed below;

•

Began trading on the New York Stock Exchange beginning May 1, 2008;

•

Announced a share buyback program for approximately 3.1 million shares, equal to the number of shares in our disputed claim reserve;

•

Concluded our review of strategic options related to our interest in Colstrip Unit 4 by signing a purchase and sale agreement with Bicent (Montana) Power Company LLC (Bicent) for $404 million in cash. The agreement allows us to explore the viability of placing the asset in rate base;

•

Obtained approval of the stipulated agreement in our Montana electric and natural gas rate case filings by the MPSC;

•

Secured an upgrade of our senior secured and senior unsecured credit ratings by Moody’s Investors Service (Moody’s), giving us an investment grade credit rating with each of the three independent credit-rating agencies that rate us, including Fitch Investors Service (Fitch) and Standard and Poor’s Rating Group (S&P); and

•

Received approval of the settlement with Magten by the Bankruptcy Court, which resolves the last significant claim in our bankruptcy case and provides for reimbursement of previously incurred legal fees and expenses of $4 million.

Proposed Colstrip Unit 4 Transaction

Magten Settlement

In July 2008, the US Bankruptcy Court approved a settlement agreement between NorthWestern, Magten Asset

Management (Magten), Law Debenture Trust Company of New York (Law Debenture) and the Plan Committee that resolves the litigation related to claims of holders of quarterly income preferred securities (QUIPS) in our Chapter 11 bankruptcy case. On July 23, 2008 the Ad Hoc Committee filed an appeal to the global settlement agreement, however, we and the other parties involved waived a closing condition and closed on the settlement on July 24, 2008. Under the approved global settlement agreement Magten, Law Debenture, their lawyers and the holders of the QUIPS, collectively received a cash payment of $23 million to be allocated amongst them in accordance with the terms of the global settlement agreement. The cash payment was funded by our repurchase of 782,059 shares held in the disputed claims reserve established under our confirmed Plan of Reorganization. This settlement resolves the last significant claim from the bankruptcy case, and also provided for reimbursement of previously incurred legal fees and expenses of $4 million. See Note 14 – Legal Proceedings for further discussion.

OVERALL CONSOLIDATED RESULTS

The following is a summary of our results of operations for the three and six months ended June 30, 2008 and 2007. Our consolidated results include the results of our divisions and subsidiaries constituting each of our business segments. This discussion is followed by a more detailed discussion of operating results by segment.

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

	Three Months Ended June 30,
		2008			2007			Change		% Change
		(in millions)
Operating Revenues
Regulated Electric	$	179.0		$	170.6		$	8.4		4.9		%
Regulated Natural Gas		80.5			62.0			18.5		29.8
Unregulated Electric		16.5			14.6			1.9		13.0
Other		8.7			16.7			(8.0	)	(47.9	)
Eliminations		(8.2	)		(4.3	)		(3.9	)	(90.7	)
	$	276.5		$	259.6		$	16.9		6.5		%

	Three Months Ended June 30,
		2008			2007			Change		% Change
		(in millions)
Cost of Sales
Regulated Electric	$	87.2		$	87.9		$	(0.7	)	(0.8	)	%
Regulated Natural Gas		49.9			36.9			13.0		35.2
Unregulated Electric		11.6			4.2			7.4		176.2
Other		8.4			16.2			(7.8	)	(48.1	)
Eliminations		(7.8	)		(4.0	)		(3.8	)	(95.0	)
	$	149.3		$	141.2		$	8.1		5.7		%

	Three Months Ended June 30,
		2008			2007			Change		% Change
		(in millions)
Gross Margin
Regulated Electric	$	91.8		$	82.7		$	9.1		11.0		%
Regulated Natural Gas		30.6			25.1			5.5		21.9
Unregulated Electric		4.9			10.4			(5.5	)	(52.9	)
Other		0.3			0.5			(0.2	)	(40.0	)
Eliminations		(0.4	)		(0.3	)		(0.1	)	(33.3	)
	$	127.2		$	118.4		$	8.8		7.4		%

Consolidated gross margin for the three months ended June 30, 2008 was $127.2 million, an increase of $8.8 million, or 7.4%, as compared with gross margin of $118.4 million in the second quarter of 2007. The following summarizes components of the change:

	Gross Margin
	2008 vs. 2007
	(Millions of Dollars)
Rate increases	$	4.9
Regulated electric and gas volumes	3.0
Regulated electric QF supply costs	3.9
Regulated electric wholesale	2.0
Unregulated electric volumes	5.2
Unregulated electric pricing and fuel supply costs	(5.5		)
Unregulated electric unrealized loss on forward contracts	(5.2		)
Other	0.5
Improvement in Gross Margin	$	8.8

Improvements in gross margin were due to regulated electric and gas rate increases, increases in volumes from customer growth and usage, and lower qualifying facility (QF) supply costs based on actual QF pricing and output. In addition, we had improved electric wholesale margin due to increased plant availability. These improvements were partially offset by an overall decrease in our unregulated electric margin primarily due to a combination of lower average contracted prices and an increase in unrealized losses on forward contracts due to changes in forward prices of electricity. These forward contracts economically hedge a portion of our Colstrip Unit 4 output through 2009. The unrealized losses will reverse as the power is delivered and the underlying transactions are executed.

	Three Months Ended June 30,
		2008		2007		Change		% Change
		(in millions)
Operating Expenses
Operating, general and administrative	$	53.9	$	58.7	$	(4.8	)	(8.2	)	%
Property and other taxes		20.5		20.6		(0.1	)	(0.5	)
Depreciation		21.2		20.8		0.4		1.9
	$	95.6	$	100.1	$	(4.5	)	(4.5	)	%

Consolidated operating, general and administrative expenses were $53.9 million for the three months ended June 30, 2008 as compared with $58.7 million in the second quarter of 2007.

	Operating, General & Administrative Expenses
	2008 vs. 2007
	(Millions of Dollars)
Operating lease expense	$	(3.6	)
Legal and professional fees	(4.5		)
Other	3.3
Reduction in Operating, General & Administrative Expenses	$	(4.8	)

The reduction in operating, general and administrative expenses of $4.8 million was primarily due to decreased operating lease expense related to the purchase of our previously leased interest in Colstrip Unit 4 during 2007 (we expect operating lease expense to decrease $14.4 million in 2008) and lower legal and professional fees, which includes the reversal of the $1.8 million judgment related to the City of Livonia shareholder litigation that was previously recorded in the first quarter of 2008 due to an insurance recovery. In July 2008, we received a reimbursement of previously incurred legal fees in connection with the Magten settlement discussed above. This

receipt will reduce our operating, general and administrative expenses by $4.0 million during the third quarter of 2008.

Property and other taxes remained flat, with $20.5 million for the three months ended June 30, 2008 as compared to $20.6 million in the second quarter of 2007. Property taxes in 2007 are net of approximately $1.7 million collected through our Montana property tax tracker.

Depreciation expense was $21.2 million for the three months ended June 30, 2008 as compared with $20.8 million in the second quarter of 2007. The increase was primarily due to the purchase of our previously leased interest in Colstrip Unit 4.

Consolidated operating income for the three months ended June 30, 2008 was $31.5 million, as compared with $18.2 million in the second quarter of 2007. This $13.3 million increase was due to the $8.8 million increase in gross margin and lower operating expenses as discussed above.

Consolidated interest expense for the three months ended June 30, 2008 was $15.8 million, an increase of $1.3 million, or 9.0%, from the second quarter of 2007. This increase was primarily related to the additional debt incurred with the purchase of our previously leased interest in Colstrip Unit 4.

Consolidated income tax expense for the three months ended June 30, 2008 was $6.0 million as compared with $1.6 million in the second quarter of 2007. Our effective tax rate for 2008 was 38.7% as compared to 39.0% for 2007. While we reflect an income tax provision in our financial statements, we expect our cash payments for income taxes will be minimal through at least 2010, based on our anticipated use of net operating losses.

Consolidated net income for the three months ended June 30, 2008 was $9.5 million as compared with $2.4 million for the second quarter of 2007. This increase was primarily due to improved margins.

Six Months Ended June 30, 2008 Compared with the Six Months Ended June 30, 2007

	Six Months Ended June 30,
		2008			2007			Change		% Change
		(in millions)
Operating Revenues
Regulated Electric	$	375.6		$	349.1		$	26.5		7.6		%
Regulated Natural Gas		252.2			220.2			32.0		14.5
Unregulated Electric		37.0			36.8			0.2		0.5
Other		16.5			32.8			(16.3	)	(49.7	)
Eliminations		(18.8	)		(12.8	)		(6.0	)	(46.9	)
	$	662.5		$	626.1		$	36.4		5.8		%

	Six Months Ended June 30,
		2008			2007			Change		% Change
		(in millions)
Cost of Sales
Regulated Electric	$	190.3		$	180.7		$	9.6		5.3		%
Regulated Natural Gas		171.2			152.1			19.1		12.6
Unregulated Electric		18.7			8.4			10.3		122.6
Other		16.1			31.2			(15.1	)	(48.4	)
Eliminations		(17.8	)		(11.9	)		(5.9	)	(49.6	)
	$	378.5		$	360.5		$	18.0		5.0		%

	Six Months Ended June 30,
		2008			2007			Change		% Change
		(in millions)
Gross Margin
Regulated Electric	$	185.3		$	168.4		$	16.9		10.0		%
Regulated Natural Gas		81.0			68.1			12.9		18.9
Unregulated Electric		18.3			28.4			(10.1	)	(35.6	)
Other		0.4			1.6			(1.2	)	(75.0	)
Eliminations		(1.0	)		(0.9	)		(0.1	)	(11.1	)
	$	284.0		$	265.6		$	18.4		6.9		%

Consolidated gross margin was $284.0 million for the six months ended June 30, 2008, an increase of $18.4 million, or 6.9%, from gross margin in the same period of 2007. The following summarizes components of the change:

	Gross Margin
	2008 vs. 2007
	(Millions of Dollars)
Rate increases	$	10.6
Regulated electric and gas volumes	10.0
Regulated electric QF supply costs	3.5
Regulated electric wholesale	2.6
Unregulated electric volumes	8.1
Unregulated electric pricing and fuel supply costs	(11.8		)
Unregulated electric unrealized loss on forward contracts	(6.4		)
Other	1.8
Improvement in Gross Margin	$	18.4

Improvements in regulated electric and gas margin were due to an increase in rates, an increase in volumes from customer growth and usage, and lower qualifying facility (QF) supply costs based on actual QF pricing and output. In addition, we had improved electric wholesale margin due to increased plant availability. These improvements were partially offset by an overall decrease in our unregulated electric margin primarily due to a combination of lower average contracted prices and an unrealized loss on forward contracts as discussed above.

	Six Months Ended June 30,
		2008		2007		Change		% Change
		(in millions)
Operating Expenses
Operating, general and administrative	$	113.9	$	121.1	$	(7.2	)	(5.9	)	%
Property and other taxes		44.2		41.3		2.9		7.0
Depreciation		42.3		40.7		1.6		3.9
	$	200.4	$	203.1	$	(2.7	)	(1.3	)	%

Consolidated operating, general and administrative expenses were $113.9 million for the six months ended June 30, 2008 as compared with $121.1 million in the same period of 2007.

	Operating, General & Administrative Expenses
	2008 vs. 2007
	(Millions of Dollars)
Operating lease expense	$	(8.5	)
Legal and professional fees	(1.7		)
Other	3.0
Reduction in Operating, General & Administrative Expenses	$	(7.2	)

The reduction in operating, general and administrative expenses of $7.2 million was primarily due to decreased operating lease expense related to the purchase of our previously leased interest in Colstrip Unit 4 during 2007 (we expect operating lease expense to decrease $14.4 million in 2008) and lower legal and professional fees.

Property and other taxes were $44.2 million for the six months ended June 30, 2008 as compared to $41.3 million in the same period of 2007. Property taxes in 2007 are net of approximately $2.9 million collected through our Montana property tax tracker.

Depreciation expense was $42.3 million for the six months ended June 30, 2008 as compared with $40.7 million in the same period of 2007. The increase was primarily due to the purchase of our previously leased interest in Colstrip Unit 4.

Consolidated operating income for the six months ended June 30, 2008 was $83.6 million, as compared with $62.6 million in the same period of 2007. This $21.0 million increase was due to the $18.4 million increase in gross margin and lower operating expenses as discussed above.

Consolidated interest expense for the six months ended June 30, 2008 was $31.8 million, an increase of $4.1 million, or 14.8%, from the same period of 2007. This increase was primarily related to the additional debt incurred with the purchase of our previously leased interest in Colstrip Unit 4.

Consolidated income tax expense for the six months ended June 30, 2008 was $19.2 million as compared with $14.0 million in the same period of 2007. Our effective tax rate for 2008 was 38.7% as compared to 39.0% for 2007.

Consolidated net income for the six months ended June 30, 2008 was $33.0 million compared with $21.6 million for the same period of 2007. This increase was primarily due to higher operating income offset by higher interest and income tax expense as discussed above.

REGULATED ELECTRIC SEGMENT

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

Results

2008

2007

Change

% Change

(in millions)

Total Revenues

179.0

170.6

8.4

4.9

Total Cost of Sales

87.2

87.9

(0.7

)

(0.8

)

Gross Margin

91.8

82.7

9.1

11.0

% GM/Rev

51.3

48.5

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

	Gross Margin
	2008 vs. 2007
	(Millions of Dollars)
QF supply costs	$	3.9
Montana jurisdiction transmission and distribution rate increase	2.6
Wholesale	2.0
Customer growth and usage	0.5
FERC jurisdiction transmission interim rate increase (subject to refund)	0.4
Transmission volumes	(0.9		)
Other	0.6
Improvement in Gross Margin	$	9.1

This improvement is due to the annual adjustment of our QF related supply costs to reflect actual QF pricing and output, which was lower than our estimate; rate increases; and slightly higher wholesale margin due to increased plant availability. Lower transmission volumes with less demand to transmit energy for others across our lines partly offset these increases.

The following summarizes regulated electric volumes and customer counts for the three months ended June 30, 2008 and 2007:

	Volumes MWH
	2008		2007		Change			% Change
	(in thousands)
Retail Electric
Montana		498		461		37			8.0		%
South Dakota		105		103		2			1.9
Residential		603		564		39			6.9
Montana		756		754		2			0.3
South Dakota		200		193		7			3.6
Commercial		956		947		9			1.0
Industrial		773		746		27			3.6
Other		38		45		(7	)		(15.6	)
Total Retail Electric		2,370		2,302		68			3.0		%
Wholesale Electric		82		33		49			148.5		%

Average Customer Counts		2008		2007		Change			% Change
	Retail Electric
	Montana		265,820		262,209		3,611			1.4		%
	South Dakota		47,882		47,603		279			0.6
	Residential		313,702		309,812		3,890			1.3
	Montana		59,449		58,106		1,343			2.3
	South Dakota		11,522		11,373		149			1.3
	Commercial		70,971		69,479		1,492			2.1
	Industrial		71		70		1			1.4
	Other		5,559		5,699		(140	)		(2.5	)
	Total Retail Electric		390,303		385,060		5,243			1.4		%

	2008 as compared to:
Cooling Degree-Days	2007	Historic Average
Montana	37% colder	21% colder
South Dakota	84% colder	75% colder

Regulated electric volumes increased due primarily to customer growth. Regulated wholesale electric volumes increased due to increased plant availability as compared with 2007. Although the weather in our service territories was significantly colder than the prior year, our customer usage is not highly sensitive to these changes during the shoulder months between the heating and cooling seasons.

Six Months Ended June 30, 2008 Compared to the Six Months Ended June 30, 2007

Results

2008

2007

Change

% Change

(in millions)

Total Revenues

375.6

349.1

26.5

7.6

Total Cost of Sales

190.3

180.7

9.6

5.3

Gross Margin

185.3

168.4

16.9

10.0

% GM/Rev

49.3

48.2

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

	Gross Margin
	2008 vs. 2007
	(Millions of Dollars)
Customer growth, usage and colder weather	$	5.0
Montana jurisdiction transmission and distribution rate increase	4.7
QF supply costs	3.5
Wholesale	2.6
FERC jurisdiction transmission interim rate increase (subject to refund)	1.1
Transmission volumes	(0.9		)
Other	0.9
Improvement in Gross Margin	$	16.9

This improvement is primarily due to rate increases and increased volumes from customer growth, usage and colder weather, lower QF supply costs as discussed above, and improved wholesale margin due to increased plant availability. Lower transmission volumes with less demand to transmit energy for others across our lines partly offset these increases.

The following summarizes regulated electric volumes and customer counts for the six months ended June 30, 2008 and 2007:

	Volumes MWH
	2008		2007		Change			% Change
	(in thousands)
Retail Electric
Montana		1,167		1,096		71			6.5		%
South Dakota		264		251		13			5.2
Residential		1,431		1,347		84			6.2
Montana		1,555		1,542		13			0.8
South Dakota		422		396		26			6.6
Commercial		1,977		1,938		39			2.0
Industrial		1,534		1,480		54			3.6
Other		63		70		(7	)		(10.0	)
Total Retail Electric		5,005		4,835		170			3.5		%
Wholesale Electric		131		65		66			101.5		%

Average Customer Counts		2008		2007		Change			% Change
	Retail Electric
	Montana		265,962		262,191		3,771			1.4		%
	South Dakota		47,895		47,634		261			0.5
	Residential		313,857		309,825		4,032			1.3
	Montana		59,299		57,912		1,387			2.4
	South Dakota		11,427		11,279		148			1.3
	Commercial		70,726		69,191		1,535			2.2
	Industrial		71		71		—			—
	Other		5,106		5,146		(40	)		(0.8	)
	Total Retail Electric		389,760		384,233		5,527			1.4		%

	2008 as compared to:
Cooling Degree-Days	2007	Historic Average
Montana	37% colder	21% colder
South Dakota	84% colder	75% colder

Regulated electric volumes increased due primarily to customer growth, usage and colder weather during the first quarter of 2008. Regulated wholesale electric volumes increased due to increased plant availability as compared with 2007. There are no cooling degree days in the first three months of the year in our service territories; therefore, cooling degree-days are the same for the three and six months ended June 30, 2008.

REGULATED NATURAL GAS SEGMENT

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

Results

2008

2007

Change

% Change

(in millions)

Total Revenues

80.5

62.0

18.5

29.8

Total Cost of Sales

49.9

36.9

13.0

35.2

Gross Margin

30.6

25.1

5.5

21.9

% GM/Rev

38.0

40.5

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

	Gross Margin
	2008 vs. 2007
	(Millions of Dollars)
Colder weather and customer growth	$	3.4
South Dakota and Nebraska jurisdictions transportation and distribution rate increase	1.1
Montana jurisdiction transportation and distribution rate increase	0.8
Storage	0.2
Improvement in Gross Margin	$	5.5

This improvement is primarily due to increased volumes due to colder weather and 1.3% customer growth, along with rate increases.

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

	Volumes Dekatherms
	2008		2007		Change			% Change
	(in thousands)
Retail Gas
Montana		2,523		1,955		568			29.1		%
South Dakota		589		466		123			26.4
Nebraska		526		412		114			27.7
Residential		3,638		2,833		805			28.4
Montana		1,234		981		253			25.8
South Dakota		542		434		108			24.9
Nebraska		596		483		113			23.4
Commercial		2,372		1,898		474			25.0
Industrial		16		24		(8	)		(33.3	)
Other		29		20		9			45.0
Total Retail Gas		6,055		4,775		1,280			26.8		%

Average Customer Counts		2008		2007		Change			% Change
	Retail Gas
	Montana		155,546		152,968		2,578			1.7		%
	South Dakota		36,498		36,527		(29	)		(0.1	)
	Nebraska		36,344		36,109		235			0.7
	Residential		228,388		225,604		2,784			1.2
	Montana		21,770		21,308		462			2.2
	South Dakota		5,760		5,732		28			0.5
	Nebraska		4,519		4,513		6			0.1
	Commercial		32,049		31,553		496			1.6
	Industrial		305		312		(7	)		(2.2	)
	Other		139		141		(2	)		(1.4	)
	Total Retail Gas		260,881		257,610		3,271			1.3		%

	2008 as compared with:
Heating Degree-Days	2007	Historic Average
Montana	25% colder	10% colder
South Dakota	36% colder	12% colder
Nebraska	44% colder	10% colder

Regulated natural gas volumes increased due to colder weather and customer growth.

Six Months Ended June 30, 2008 Compared to the Six Months Ended June 30, 2007

Results

2008

2007

Change

% Change

(in millions)

Total Revenues

252.2

220.2

32.0

14.5

Total Cost of Sales

171.2

152.1

19.1

12.6

Gross Margin

81.0

68.1

12.9

18.9

% GM/Rev

32.1

30.9

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

	Gross Margin
	2008 vs. 2007
	(Millions of Dollars)
Colder weather and customer growth	$	5.9
South Dakota and Nebraska jurisdictions transportation and distribution rate increase	2.8
Montana jurisdiction transportation and distribution rate increase	2.0
Transfer of previously unregulated customers	0.7
Storage	0.6
Other	0.9
Improvement in Gross Margin	$	12.9

This improvement is primarily due to increased volumes due to colder weather and 1.3% customer growth along with rate increases.

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

	Volumes Dekatherms
	2008		2007		Change			% Change
	(in thousands)
Retail Gas
Montana		8,091		6,989		1,102			15.8		%
South Dakota		2,196		1,992		204			10.2
Nebraska		1,931		1,794		137			7.6
Residential		12,218		10,775		1,443			13.4
Montana		3,991		3,510		481			13.7
South Dakota		1,920		1,615		305			18.9
Nebraska		1,880		1,707		173			10.1
Commercial		7,791		6,832		959			14.0
Industrial		136		96		40			41.7
Other		82		108		(26	)		(24.1	)
Total Retail Gas		20,227		17,811		2,416			13.6		%

Average Customer Counts		2008		2007		Change			% Change
	Retail Gas
	Montana		155,652		152,953		2,699			1.8		%
	South Dakota		36,706		36,708		(2	)		—
	Nebraska		36,616		36,441		175			0.5
	Residential		228,974		226,102		2,872			1.3
	Montana		21,728		21,247		481			2.3
	South Dakota		5,799		5,764		35			0.6
	Nebraska		4,556		4,548		8			0.2
	Commercial		32,083		31,559		524			1.7
	Industrial		306		315		(9	)		(2.9	)
	Other		139		140		(1	)		(0.7	)
	Total Retail Gas		261,502		258,116		3,386			1.3		%

	2008 as compared with:
Heating Degree-Days	2007	Historic Average
Montana	14% colder	3% colder
South Dakota	11% colder	5% colder
Nebraska	12% colder	5% colder

Regulated natural gas volumes increased due to colder weather and customer growth.

UNREGULATED ELECTRIC SEGMENT

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

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

Results

2008

2007

Change

% Change

(in millions)

Total Revenues

16.5

14.6

1.9

13.0

Total Cost of Sales

11.6

4.2

7.4

176.2

Gross Margin

4.9

10.4

(5.5

)

(52.9

)

% GM/Rev

29.7

71.2

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

	Gross Margin
	2008 vs. 2007
	(Millions of Dollars)
Volumes	$	5.2
Average prices	(3.2		)
Unrealized loss on forward contracts	(5.2		)
Fuel supply costs	(2.3		)
Decline in Gross Margin	$	(5.5	)

The decrease in margin was primarily due to lower average contracted prices and higher fuel supply costs. In addition, we recorded an unrealized loss of $5.2 million during the second quarter of 2008 on forward contracts due to changes in forward prices of electricity. These contracts economically hedge a portion of our Colstrip Unit 4 output through 2009, and do not qualify for hedge accounting, therefore market value adjustments are included in cost of sales. The unrealized losses will reverse as the power is delivered and the underlying transactions are executed. An increase in volumes from higher plant availability partly offset these decreases.

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

	Volumes MWH
	2008	2007	Change	% Change
	(in thousands)
Wholesale Electric	416	307	109	35.5	%

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

We expect our margin to decrease throughout 2008 under the terms of our Colstrip Unit 4 commitments to Montana regulated electric supply discussed above. See the Overview section for additional information related to our Colstrip Unit 4 strategic review process.

Six Months Ended June 30, 2008 Compared to the Six Months Ended June 30, 2007

Results

2008

2007

Change

% Change

(in millions)

Total Revenues

37.0

36.8

0.2

0.5

Total Cost of Sales

18.7

8.4

10.3

122.6

Gross Margin

18.3

28.4

(10.1

)

(35.6

)

% GM/Rev

49.5

77.2

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

	Gross Margin
	2008 vs. 2007
	(Millions of Dollars)
Volumes	$	8.1
Average prices	(8.8		)
Unrealized loss on forward contracts	(6.4		)
Fuel supply costs	(3.0		)
Decline in Gross Margin	$	(10.1	)

The decrease in margin was primarily due to lower average contracted prices and higher fuel supply costs. In addition, as discussed above, we recorded an unrealized loss of $6.4 million during the first six months of 2008 related to economic hedges due to changes in forward prices of electricity. An increase in volumes from higher plant availability partly offset these decreases.

The following summarizes unregulated electric volumes for the six months ended June 30, 2008 and 2007:

	Volumes MWH
	2008	2007	Change	% Change
	(in thousands)
Wholesale Electric	891	735	156	21.2	%

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

LIQUIDITY AND CAPITAL RESOURCES

We utilize our revolver availability to manage our cash flows due to the seasonality of our business, and utilize any cash on hand in excess of current operating requirements to reduce borrowings. As of June 30, 2008, we had cash and cash equivalents of $24.2 million, and revolver availability of $178.4 million. During the six months ended June 30, 2008, we used existing cash to repay $42.9 million of debt, paid dividends on common stock of $25.7 million, property tax payments of $42.8 million and contributed $21.9 million to our pension plans.

Factors Impacting our Liquidity

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

The effect of this seasonality on our liquidity is also impacted by changes in the market prices of our electric and natural gas supply, which is recovered through various monthly cost tracking mechanisms. These energy supply tracking mechanisms are designed to provide stable and timely recovery of supply costs on a monthly basis during the July to June annual tracking period, with an adjustment in the following annual tracking period to correct for any under or over collection in our monthly trackers. Due to the lag between our purchases of electric and natural gas commodities and revenue receipt from customers, cyclical over and under collection situations arise consistent with the seasonal fluctuations discussed above; therefore we usually under collect in the fall and winter and over collect in the spring. Fluctuations in recoveries under our cost tracking mechanisms, which do not impact net income, can have a significant effect on cash flow from operations and make year-to-year comparisons difficult.

As of June 30, 2008, we are over collected on our current Montana natural gas and electric trackers by approximately $35.7 million, as compared with an over collection of $20.7 million as of June 30, 2007. This over collection is primarily due to increases in our electric supply rates during 2007 based on higher forward contracted prices. This has the effect of phasing in the supply cost increases over two years.

Cash Flows

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

		Six Months Ended June 30,
		2008			2007
Operating Activities
Net income	$	33.0		$	21.6
Non-cash adjustments to net income		73.0			58.3
Changes in working capital		27.0			66.0
Other		(8.4	)		(9.7	)
		124.6			136.2
Investing Activities
Property, plant and equipment additions		(43.1	)		(52.6	)
Sale of assets		—			0.6
Colstrip Unit 4 acquisition		—			(40.2	)
		(43.1	)		(92.2	)
Financing Activities
Net repayment of debt		(42.9	)		(33.9	)
Dividends on common stock		(25.7	)		(22.3	)
Other		(1.5	)		10.3
		(70.1	)		(45.9	)

Net Increase (Decrease) in Cash and Cash Equivalents	$	11.4		$	(1.9	)
Cash and Cash Equivalents, beginning of period	$	12.8		$	1.9
Cash and Cash Equivalents, end of period	$	24.2		$	—

Cash Provided by Operating Activities

As of June 30, 2008, cash and cash equivalents were $24.2 million, as compared with $12.8 million at December 31, 2007 and no cash and cash equivalents at June 30, 2007. Cash provided by operating activities totaled $124.6 million for the six months ended June 30, 2008 as compared with $136.2 million during the six months ended June 30, 2007. This decrease in operating cash flows was primarily related to the timing of accounts receivable collections, partially offset by decreased purchases of storage gas and higher net income.

Cash Used in Investing Activities

Cash used in investing activities totaled $43.1 million during the six months ended June 30, 2008, as compared with $92.2 million during the six months ended June 30, 2007. During the six months ended June 30, 2008 we invested $43.1 million in property, plant and equipment additions as compared with $52.6 million in 2007. In addition, in 2007 we used $40.2 million to complete the purchase of a portion of our previously leased interest in the Colstrip Unit 4 generating facility.

Cash Used in Financing Activities

Cash used in financing activities totaled $70.1 million during the six months ended June 30, 2008, as compared with $45.9 million during the six months ended June 30, 2007. During the six months ended June 30, 2008 we have made net debt repayments of $42.9 million and paid dividends on common stock of $25.7 million. During the six months ended June 30, 2007 we made debt repayments of $33.9 million and paid dividends on common stock of $22.3 million.

Sources and Uses of Funds

We believe that our cash on hand, operating cash flows, and borrowing capacity, taken as a whole, provide sufficient resources to fund our ongoing operating requirements, debt maturities, anticipated dividends and estimated future capital expenditures during the next twelve months. As of July 25, 2008, our availability under our revolving line of credit was approximately $180.7 million.

We announced a common stock repurchase program during the second quarter 2008, which allows us to repurchase approximately 3.1 million shares. This amount is equal to the number of shares in the disputed claims reserve established under our Plan of Reorganization that was confirmed by the bankruptcy court in 2004. We anticipate using approximately $75 million to $80 million to repurchase these shares during the remainder of 2008. There were no purchases during the second quarter of 2008.

Contractual Obligations and Other Commitments

We have a variety of contractual obligations and other commitments that require payment of cash at certain specified periods. The following table summarizes our contractual cash obligations and commitments as of June 30, 2008. See our Annual Report on Form 10-K for the year ended December 31, 2007 for additional discussion.

		Total		2008		2009		2010		2011		2012			Thereafter
	(in thousands)
Long-term Debt	$	763,717	$	9,684	$	120,045	$	23,605	$	6,578	$		3,792	$	600,013
Capital Leases	39,248		1,282		1,246		1,174		1,265		1,363			32,918
Future Minimum Operating Lease Payments	4,403		860		1,394		992		609		444			104
Estimated Pension and Other Postretirement Obligations (1)	87,300		2,100		22,200		22,600		21,500		18,900			N/A
Qualifying Facilities (2)	1,489,468		30,287		61,586		63,589		65,323		67,111			1,201,572
Supply and Capacity Contracts (3)	1,887,669		333,081		487,719		343,225		138,632		130,572			454,440
Contractual Interest Payments on Debt (4)	334,792		22,135		40,602		36,203		34,052		33,639			168,161
Total Commitments (5)	$	4,606,597	$	399,429	$	734,792	$	491,388	$	267,959	$		255,821	$	2,457,208

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

(2)

The QFs require us to purchase minimum amounts of energy at prices ranging from $65 to $138 per megawatt hour through 2032. Our estimated gross contractual obligation related to the QFs is approximately $1.5 billion. A portion of the costs incurred to purchase this energy is recoverable through rates authorized by the MPSC, totaling approximately $1.2 billion.

(3)	We have entered into various purchase commitments, largely purchased power, coal and natural gas supply and natural gas transportation contracts. These commitments range from one to 22 years.

(4)	Contractual interest payments include an assumed average interest rate of 3.9% on the $100 million floating rate nonrecourse loan through maturity in December 2009 and no revolver borrowings.

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

Credit Ratings

Fitch, Moody’s and S&P are independent credit-rating agencies that rate our debt securities. These ratings indicate the agencies’ assessment of our ability to pay interest and principal when due on our debt. As of July 25, 2008, our current ratings with these agencies are as follows:

	Senior Secured Rating	Senior Unsecured Rating	Corporate Rating	Outlook
Fitch (1)	BBB	BBB-	BBB-	Positive
Moody’s (2)	Baa2	Baa3	N/A	Positive
S&P (3)	A- (MT) BBB+ (SD)	BBB-	BBB	Stable

(1)	Fitch changed our outlook from stable to positive on June 23, 2008.

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

(3)	S&P upgraded our senior secured, senior unsecured, and corporate credit ratings during the first quarter of 2008 from BBB, BB-, and BB+, respectively, as reflected above.

In general, less favorable credit ratings make debt financing more costly and more difficult to obtain on terms that are economically favorable to us and impacts our trade credit availability.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and other assumptions that are believed to be proper and reasonable under the circumstances.

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

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 revolver and the Colstrip Lease Holdings (CLH) $100 million loan. The revolving credit facility bears interest at a variable rate (currently approximately 3.67% as of June 30, 2008) tied to the London Interbank Offered Rate (LIBOR) plus a credit spread. The CLH loan currently bears interest at approximately 4.04%, which is 1.25% over LIBOR. Based upon amounts outstanding as of June 30, 2008, a 1% increase in the LIBOR would increase our annual interest expense by approximately $1.0 million.

Commodity Price Risk

Commodity price risk is one of our most significant risks due to our lack of ownership of natural gas reserves or regulated electric generation assets within the Montana market, and our unregulated joint ownership interest in Colstrip Unit 4. Several factors influence price levels and volatilities. These factors include, but are not limited to, seasonal changes in demand, weather conditions, available generating assets within regions, transportation availability and reliability within and between regions, fuel availability, market liquidity, and the nature and extent of current and potential federal and state regulations.

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

In our unregulated electric segment we use forward contracts to manage our exposure to the market price of electricity. We have entered into unit-contingent forward contracts for the sale of a significant portion of the output. In addition, we have economically hedged a portion of our output through 2009. As of June 30, 2008 market prices exceeded our contracted forward sales prices by approximately $6.4 million. These market value adjustments will reverse as the power is delivered.

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

Counterparty Credit Risk

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

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We conducted an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on this evaluation, our principal executive officer and principal financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting during the three months ended June 30, 2008 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 14, Commitments and Contingencies, to the Consolidated Financial Statements for information about legal proceedings.

ITEM 1A.

RISK FACTORS

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

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

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

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

We are subject to regulation by federal and state governmental entities, including the FERC, MPSC, South Dakota Public Utilities Commission and Nebraska Public Service Commission. Regulations can affect allowed rates of return, recovery of costs and operating requirements. In addition, existing regulations may be revised or reinterpreted, new laws, regulations, and interpretations thereof may be adopted or become applicable to us and future changes in laws and regulations may have a detrimental effect on our business.

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

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

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

In addition to the requirements related to the mercury emissions rules noted above, there is a growing concern nationally and internationally about global climate change and the contribution of emissions of greenhouse gases including, most significantly, carbon dioxide. This concern has led to increased interest in legislation at the federal level, actions at the state level, as well as litigation relating to greenhouse emissions, including a recent US Supreme Court decision holding that the EPA has the authority to regulate carbon dioxide emissions from motor vehicles under the Clean Air Act. Increased pressure for carbon dioxide emissions reduction also is coming from investor

organizations. If legislation or regulations are passed at the federal or state levels imposing mandatory reductions of carbon dioxide and other greenhouse gases on generation facilities, the cost to us of such reductions could be significant.

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

Our range of exposure for current environmental remediation obligations is estimated to be $19.8 million to $57.0 million. We had an environmental reserve of $31.2 million at June 30, 2008. This reserve was established in anticipation of future remediation activities at our various environmental sites and does not factor in any exposure to us arising from new regulations, private tort actions or claims for damages allegedly associated with specific environmental conditions. To the extent that our environmental liabilities are greater than our reserves or we are unsuccessful in recovering anticipated insurance proceeds under the relevant policies or recovering a material portion of remediation costs in our rates, our results of operations and financial condition could be adversely affected.

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

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

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

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

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

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

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

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

Operation of electric generating facilities involves risks which can adversely affect energy output and efficiency levels. Most of our generating capacity is coal-fired. We rely on a limited number of suppliers of coal for our regulated generation, making us vulnerable to increased prices for fuel as existing contracts expire or in the event of

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

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

Our electric and natural gas utility business is seasonal, and weather patterns can have a material impact on our financial performance. Demand for electricity and natural gas is often greater in the summer and winter months associated with cooling and heating. Because natural gas is heavily used for residential and commercial heating, the demand for this product depends heavily upon weather patterns throughout our market areas, and a significant amount of natural gas revenues are recognized in the first and fourth quarters related to the heating season. Accordingly, our operations have historically generated less revenues and income when weather conditions are milder in the winter and cooler in the summer. In the event that we experience unusually mild winters or cool summers in the future, our results of operations and financial condition could be adversely affected. In addition, exceptionally hot summer weather or unusually cold winter weather could add significantly to working capital needs to fund higher than normal supply purchases to meet customer demand for electricity and natural gas.

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

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

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On May 21, 2008, we held our annual meeting of shareholders. At that meeting, the following matters were voted upon:

All of the Directors were elected to serve a one-year term as Directors until the 2009 Annual Meeting.

	VOTES FOR:		VOTES WITHHELD:
Stephen P. Adik		28,747,062		489,014
E. Linn Draper		28,746,192		489,884
Jon S. Fossel		28,750,349		485,727
Michael J. Hanson		28,750,272		485,804
Julia L. Johnson		28,751,838		484,238
Philip L. Maslowe		28,759,157		476,919
D. Louis Peoples		28,717,964		518,112

The ratification of Deloitte & Touche, LLP as our independent auditors was approved.

	FOR:	AGAINST:		ABSTAIN:
Votes	28,762,538		473,538		—

ITEM 6.			EXHIBITS
	(a)	Exhibits

Exhibit 4.1—Eighth Supplemental Indenture, dated as of May 1, 2008, by and between NorthWestern Corporation and The Bank of New York, as trustee under the General Mortgage Indenture and Deed of Trust dated as of August 1, 1993.

Exhibit 10.1—Purchase and Sale Agreement, dated June 9, 2008, among Bicent (Montana) Power Company LLC and NorthWestern Corporation.

Exhibit 99.1—Bond Purchase Agreement, dated May 1, 2008, between NorthWestern Corporation and initial purchasers.

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.

	N ORTHWESTERN C ORPORATION
Date: July 31, 2008	By:	/s/ BRIAN B. BIRD
		Brian B. Bird
		Chief Financial Officer
		Duly Authorized Officer and Principal Financial Officer

EXHIBIT INDEX

Exhibit Number		Description
*4.1		Eighth Supplemental Indenture, dated as of May 1, 2008, by and between NorthWestern Corporation and The Bank of New York, as trustee under the General Mortgage Indenture and Deed of Trust dated as of August 1, 1993.
*10.1		Purchase and Sale Agreement, dated June 9, 2008, among Bicent (Montana) Power Company LLC and NorthWestern Corporation.
*99.1		Bond Purchase Agreement, dated May 1, 2008, between NorthWestern Corporation and initial purchasers.
*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

THIS EIGHTH SUPPLEMENTAL INDENTURE, dated as of May 1, 2008 (the “Supplemental Indenture”), is made by and between NORTHWESTERN CORPORATION (formerly known as NorthWestern Public Service Company), a corporation organized and existing under the laws of the State of Delaware (the “Company”), the post office address of which is 3010 West 69th Street, Sioux Falls, South Dakota 57108, and THE BANK OF NEW YORK (successor to JPMorgan Chase Bank, N.A. (successor by merger to The Chase Manhattan Bank (National Association))), (the “Trustee”), as Trustee under the General Mortgage Indenture and Deed of Trust dated as of August 1, 1993, hereinafter mentioned, the post office address of which is 101 Barclay Street, New York, New York 10286;

WHEREAS, the Company has heretofore executed and delivered its General Mortgage Indenture and Deed of Trust dated as of August 1, 1993 (the “Original Indenture”), to the Trustee, for the security of the Bonds of the Company issued and to be issued thereunder (the “Bonds”); and

WHEREAS, the Company has heretofore executed and delivered to the Trustee seven indentures supplemental to the Original Indenture, the first dated as of August 15, 1993, the second dated as of August 1, 1995, each of the third, fourth and fifth dated as of September 1, 1995, the sixth dated as of February 1, 2003, and the seventh dated as of November 1, 2004 (the Original Indenture, as supplemented and amended by the aforementioned seven supplemental indentures and by this Supplemental Indenture, being hereinafter referred to as the “ Indenture ”); and

WHEREAS, the Company desires to create a new series of Bonds to be issued under the Indenture, to be known as First Mortgage Bonds, 6.05% Series due 2018 (the “First Mortgage Bonds of the 6.05% Series”), which First Mortgage Bonds of the 6.05% Series are to be issued on the basis of Retired Bonds pursuant to Section 4.04 of the Indenture; and

WHEREAS, the Company, in the exercise of the powers and authority conferred upon and reserved to it under the provisions of the Indenture, and pursuant to appropriate resolutions of the Board of Directors, has duly resolved and determined to make, execute and deliver to the Trustee a Supplemental Indenture in the form hereof for the purposes herein provided; and

WHEREAS, all conditions and requirements necessary to make this Supplemental Indenture a valid, binding and legal instrument have been done, performed and fulfilled and the execution and delivery hereof have been in all respects duly authorized;

NOW, THEREFORE, THIS INDENTURE WITNESSETH:

THAT the Company, in consideration of the acceptance or the purchase and ownership (as applicable) from time to time of the First Mortgage Bonds of the 6.05% Series and the service by the Trustee and its successors, under the Indenture and of One Dollar to it, duly paid by the Trustee at or before the ensealing and delivery of these presents, the receipt whereof is hereby acknowledged, hereby covenants and agrees to and with the Trustee and its successors in the trust under the Indenture, for the benefit of those who shall hold the Bonds as follows:

ARTICLE I.

DESCRIPTION OF FIRST MORTGAGE BONDS, 6.05% SERIES DUE 2018

Section 1. The Company hereby creates a new series of Bonds to be known as “First Mortgage Bonds, 6.05% Series due 2018.” The First Mortgage Bonds of the 6.05% Series shall be executed, authenticated and delivered in accordance with the provisions of, and shall in all respects be subject to, all of the terms, conditions and covenants of the Indenture, as supplemented and modified. The aggregate principal amount of First Mortgage Bonds of the 6.05% Series, which may be authenticated and delivered under the Indenture (except for First Mortgage Bonds of the 6.05% Series authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other First Mortgage Bonds of the 6.05% Series pursuant to the Indenture and except for First Mortgage Bonds of the 6.05% Series which, pursuant to the Indenture, are deemed never to have been authenticated and delivered under the Indenture) is limited to $55,000,000.

The commencement of the first interest period for the First Mortgage Bonds of the 6.05% Series shall be May 1, 2008. The First Mortgage Bonds of the 6.05% Series shall mature on May 1, 2018, and shall bear interest at the rate of 6.05% per annum, from May, 1 2008 or from the most recent date to which interest has been paid or duly provided for, payable semi-annually on the first day of May and the first day of November (each, an “Interest Payment Date”) in each year, commencing November 1, 2008. Any interest on any First Mortgage Bond of the 6.05% Series which is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the Person in whose name such First Mortgage Bond of the 6.05% Series (or one or more Predecessor Bonds) is registered at the close of business on the April fifteenth or October fifteenth, as the case may be (whether or not a Business Day) next preceding such Interest Payment Date. The First Mortgage Bonds of the 6.05% Series shall bear interest at the Default Rate under the circumstances set forth in the form of such Bond set forth in Section 3 of this Article I.

Section 2. The First Mortgage Bonds of the 6.05% Series shall be issued only as registered Bonds without coupons of the denomination of $1,000, or any integral multiple of $1 in excess of $1,000, appropriately numbered. The First Mortgage Bonds of the 6.05% Series may be exchanged, upon surrender thereof, at the office or agency of the Company in the Borough of Manhattan, The City of New York, State of New York, for one or more First Mortgage Bonds of the 6.05% Series of other authorized denominations, for the same aggregate principal amount, subject to the terms and conditions set forth in the Indenture.

First Mortgage Bonds of the 6.05% Series may be exchanged or transferred without expense to the registered owner thereof except that any taxes or other governmental charges required to be paid with respect to such transfer or exchange shall be paid by the registered owner requesting such transfer or exchange as a condition precedent to the exercise of such privilege, other than exchanges pursuant to Section 3.04, 5.06 or 14.06 of the Indenture, not involving any transfer.

The Trustee shall not register the transfer of any First Mortgage Bond of the 6.05% Series unless it receives a certificate in the form attached hereto as Appendix A.

The Trustee shall have no obligation or duty to monitor, determine or inquire as to compliance with any restrictions on transfer imposed under applicable law or under this Supplemental Indenture with respect to any transfer of any interest in a First Mortgage Bond of the 6.05% Series other than to require delivery of such certificates and other documentation or evidence as are expressly required by, and to do so if and when expressly required by, the terms of this Supplemental Indenture, and to examine the same to determine substantial compliance as to form with the express requirements hereof.

Section 3. The First Mortgage Bonds of the 6.05% Series and the Trustee’s Certificate of Authentication shall be substantially in the following forms respectively:

[Remainder of page Intentionally Blank]

[FORM OF BOND OF THE 6.05% SERIES DUE 2018]

THIS BOND HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”) AND MAY NOT BE OFFERED, SOLD, ASSIGNED, TRANSFERRED OR PLEDGED UNLESS REGISTERED PURSUANT TO THE PROVISIONS OF SUCH ACT OR AN EXEMPTION THEREFROM IS AVAILABLE, EXCEPT UNDER CIRCUMSTANCES WHERE NEITHER SUCH REGISTRATION NOR SUCH AN EXEMPTION IS REQUIRED BY LAW.

NORTHWESTERN CORPORATION

(Incorporated under the laws of the State of Delaware)

FIRST MORTGAGE BOND, 6.05% SERIES DUE 2018

No. R-

$___________

[Date]

[CUSIP No. 668074 A@6]

FOR VALUE RECEIVED , the undersigned, NorthWestern Corporation, (herein called the “Company,” which term shall include any Successor Corporation, as defined in the Indenture hereinafter referred to), a corporation organized and existing under the laws of the State of Delaware, hereby promises to pay to [____________], or registered assigns, the principal sum of [_____________________] DOLLARS (or so much thereof as shall not have been redeemed) on May 1, 2018, with interest (computed on the basis of a 360-day year of twelve 30-day months) (a) on the unpaid balance hereof at the rate of 6.05% per annum from May 1, 2008, or from the most recent date to which interest has been paid or duly provided for, payable semiannually, on the first day of May and November in each year, commencing November 1, 2008, until the principal hereof shall have become due and payable, and (b) to the extent permitted by law, on any overdue payment of interest and, during the continuance of an Event of Default, on such unpaid balance and on any overdue payment of any Make-Whole Amount, at a rate per annum from time to time equal to the greater of (i) Interest Rate plus 2% or (ii) 2% over the rate of interest publicly announced by The Bank of New York from time to time in New York, New York as its “base” or “prime” rate, payable semiannually as aforesaid (or, at the option of the registered holder hereof, on demand). Reference is hereby made to the further provisions of this First Mortgage Bond set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place.

[FORM OF TRUSTEE’S CERTIFICATE OF AUTHENTICATION]

This is one of the Bonds of the series designated therein referred to in the within-mentioned Indenture and Supplemental Indenture dated as of May 1, 2008.

THE BANK OF NEW YORK,

AS TRUSTEE

Authorized Signatory

Payments of principal of, interest on and any Make-Whole Amount with respect to this First Mortgage Bond are to be made in lawful money of the United States of America at The Bank of New York in New York, New York or at such other place as the Company shall have designated by written notice to the holder of this First Mortgage Bond. Any interest on this First Mortgage Bond which is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the Person in whose name this First Mortgage Bond (or one or more Predecessor Bonds) is registered at the close of business on the April fifteenth or October fifteenth, as the case may be (whether or not a Business Day) next preceding such Interest Payment Date.

This First Mortgage Bond is one of a series of First Mortgage Bonds, 6.05% Series due 2018 (herein called the “First Mortgage Bonds” ) issued pursuant to the Eighth Supplemental Indenture dated as of May 1, 2008 (as from time to time amended, the “Supplemental Indenture” ), between the Company and the Trustee named therein which amends and supplements the General Mortgage Indenture and Deed of Trust dated as of August 1, 1993, executed by the Company (under its then name, NorthWestern Public Services Company) to The Chase Manhattan Bank (National Association), the predecessor to The Bank of New York, as Trustee (the “ Trustee ”) (as amended and supplemented from time to time, the “Indenture” ) to which Indenture and all indentures supplemental thereto reference is hereby made for a description of the properties mortgaged and pledged, the nature and extent of the security, the rights of registered owners of the Bonds and of the Trustee in respect thereof, and the terms and conditions upon which the Bonds are, and are to be, secured. The Bonds may be issued in series, for various principal sums, may mature at different times, may bear interest at different rates and may otherwise vary as provided in the Indenture. The First Mortgage Bonds are also entitled to the benefits thereof and the Bond Purchase Agreement dated as of May 1, 2008 between the Company and the purchasers listed in Schedule A thereto (the “Bond Purchase Agreement” ). Each holder of this First Mortgage Bond will be deemed, by its acceptance hereof, to have made the representation set forth in Section 6.2 of the Bond Purchase Agreement. Unless otherwise indicated, capitalized terms used in this First Mortgage Bond shall have the respective meanings ascribed to such terms in the Supplemental Indenture.

This First Mortgage Bond is a registered First Mortgage Bond and, as provided in Section 3.05 of the Indenture but subject to the provisions of the Supplemental Indenture, upon surrender of this First Mortgage Bond for registration of transfer accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder’s attorney duly authorized in writing, a new First Mortgage Bond for a like principal amount will be issued to, and registered in the name of, the transferee. The Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this First Mortgage Bond is registered as the absolute owner hereof for the purpose of receiving payment and for all other purposes, and neither the Company, the Trustee nor any agent of the Company or the Trustee will be affected by any notice to the contrary.

This First Mortgage Bond is subject to optional redemption, in whole or from time to time in part, at the times and on the terms specified in the Supplemental Indenture, but not otherwise.

If an Event of Default occurs and is continuing, the principal of this First Mortgage Bond may be declared or otherwise become due and payable in the manner and upon the conditions provided for in the Indenture, at the price equal to the outstanding principal amount thereof, together with interest accrued on such principal amount.

This Bond shall not be entitled to any benefit under the Indenture or any indenture supplemental thereto, or become valid or obligatory for any purpose, until the form of certificate endorsed hereon shall have been signed by or on behalf of The Bank of New York, the Trustee under the Indenture, or a successor trustee thereto under the Indenture, or by an authenticating agent duly appointed by the Trustee in accordance with the terms of the Indenture.

IN WITNESSETH WHEREOF, NorthWestern Corporation has caused this First Mortgage Bond to be signed (manually or by facsimile signature) in its name by an Authorized Executive Officer, as defined in the Indenture, and its corporate seal (or a facsimile thereof) to be hereto affixed and attested (manually or by facsimile signature) by an Authorized Executive Officer, as defined in the Indenture.

Dated:

NORTHWESTERN CORPORATION

Authorized Executive Officer

ATTEST:

By_________________________________

Authorized Executive Officer

ARTICLE II.

ISSUE OF FIRST MORTGAGE BONDS OF THE 6.05% SERIES

Section 1. The Company hereby exercises the right to obtain the authentication of $55,000,000 principal amount of Bonds pursuant to the terms of Section 4.04 of the Indenture. All such Bonds shall be First Mortgage Bonds of the 6.05% Series.

Section 2. Such First Mortgage Bonds of the 6.05% Series may be authenticated and delivered prior to the filing for recordation of this Supplemental Indenture.

ARTICLE III.

REDEMPTION

Section 1. Whenever the Company shall propose to redeem less than all of the Outstanding First Mortgage Bonds of the 6.05% Series on any Redemption Date, the Bond Registrar, instead of selecting by lot, shall select the serial numbers of the First Mortgage Bonds of the 6.05% Series to be redeemed (in whole or in part) by prorating, as nearly as may be, the aggregate principal amount of the First Mortgage Bonds of the 6.05% Series to be redeemed among the registered owners of the First Mortgage Bonds of the 6.05% Series according to the principal amount thereof registered in their respective names. In any such pro ration, the Bond Registrar shall make such adjustments, reallocations and eliminations as it shall deem proper to the end that the principal amount of the First Mortgage Bonds of the 6.05% Series so prorated to any registered owner of the First Mortgage Bonds of the 6.05% Series shall be $1,000 or an integral multiple of $1 in excess thereof, by increasing or decreasing or eliminating the amount which would be allocable to any such registered owner on the basis of exact proportion by an amount not exceeding $1. The Bond Registrar in its discretion may determine the particular First Mortgage Bonds of the 6.05% Series (if there are more than one) registered in the name of any registered owner which are to be redeemed, in whole or in part. In any determination by pro ration pursuant to this Section, First Mortgage Bonds of the 6.05% Series registered in the name of the Company shall not be considered Outstanding and shall be excluded in making the determination of the First Mortgage Bonds of the 6.05% Series to be redeemed.

Notice of redemption of any First Mortgage Bonds of the 6.05% Series shall be given as provided in Section 5.04 of the Original Indenture. If given by mail, the mailing of such notice shall be a condition precedent to redemption, provided that any notice which is mailed in the manner provided in Section 5.04 of the Original Indenture shall be conclusively presumed to have been duly given whether or not the Holders receive such notice, and failure to give such notice by mail, or any defect in such notice, to the Holder of any such Bond designated for redemption in whole or in part shall not affect the validity of the redemption of any other such Bond.

Except for the determination of the serial numbers of the First Mortgage Bonds of the 6.05% Series to be redeemed (in whole or in part) by pro ration as provided in this Section when less than all of the First Mortgage Bonds of the 6.05% Series are to be redeemed on any Redemption Date and except for the changes in the giving of notice of redemption as provided in this Section, the procedures for redemption of the First Mortgage Bonds of the 6.05% Series shall be as provided in Article Five of the Original Indenture.

Section 2. The Company, with the approval of the Trustee, may enter into a written agreement with the Holder of any First Mortgage Bonds of the 6.05% Series providing that payment of such Bonds called for redemption in part only may be made directly by mail, wire transfer or in any other manner to the Holder thereof without presentation or surrender thereof if there shall be delivered to the Trustee an agreement (which may be executed in counterparts between the Company and such Holder (or other Person acting as agent for such Holder or for whom such Holder is a nominee) that payment shall be so made, and that in the event the Holder thereof shall sell or transfer any such Bonds (a) it will, prior to the delivery of such Bonds, either (i) surrender such Bonds to the Trustee to make a proper notation of the amount of principal paid thereon or (ii) surrender such Bonds to the Trustee against receipt of one or more First Mortgage Bonds of the 6.05% Series in an aggregate principal amount equal to the unpaid principal portion of the Bonds so surrendered, and (b) it will promptly notify the Company and the Trustee of the name and address of the transferee of any First Mortgage Bonds of the 6.05% Series so transferred. The Trustee shall not be liable or responsible to any such Holder or transferee or to the Company or to any other Person for any act or omission to act on the part of the Company or any such Holder in connection with any such agreement. The Company will indemnify and save the Trustee harmless against any liability resulting from any such act or omission and against any liability resulting from any action taken by the Trustee in accordance with the provisions of any such agreement. The Company will afford the benefits of this Section 2 to any Institutional Investor that is the direct or indirect transferee of any First Mortgage Bond of the 6.05% Series purchased by a Holder under the Bond Purchase Agreement and that has made the same agreement relating to such First Mortgage Bonds of the 6.05% Series as the Holders have made in this Section 2.

Section 3. Maturity. As provided therein, the entire unpaid principal balance of the First Mortgage Bonds of the 6.05% Series shall be due and payable on May 1, 2018.

Section 4. Optional Redemption with Make-Whole Amount. The Company may, at its option, upon notice as provided below, redeem at any time all, or from time to time any part of, the First Mortgage Bonds of the 6.05% Series, in an amount not less than $1,000,000 in the case of a partial redemption, at 100% of the principal amount so redeemed, and the Make-Whole Amount determined for the redemption with respect to such principal amount. The Company will give each holder of First Mortgage Bonds of the 6.05% Series to be redeemed written notice of each optional redemption under this Section 4 not less than 30 days and not more than 60 days prior to the date fixed for such redemption. Each such notice shall specify such date (which shall be a Business Day), the aggregate principal amount of the First Mortgage Bonds of the 6.05% Series to be redeemed on such date, the principal amount of each First Mortgage Bond held by such Holder to be redeemed (determined in accordance with Section 5), and the interest to be paid on the Redemption Date with respect to such principal amount being redeemed, and shall be accompanied by a certificate of a Senior Financial Officer as to the estimated Make-Whole Amount due in connection with such redemption (calculated as if the date of such notice were the date of the redemption), setting forth the details of such computation. Two Business Days prior to such Redemption Date, the Company shall deliver to the Trustee and to each Holder of First Mortgage Bonds of the 6.05% Series to be redeemed a certificate of a Senior Financial Officer specifying the calculation of such Make-Whole Amount as of the specified Redemption Date. The Trustee shall have no responsibility for any such calculation.

Section 5. Allocation in the Event of Partial Redemption. Subject to Article III, Section 1 above, in the case of each partial redemption of the First Mortgage Bonds of the 6.05% Series, the principal amount of the First Mortgage Bonds of the 6.05% Series to be redeemed shall be allocated among all of the First Mortgage Bonds of the 6.05% Series at the time Outstanding in proportion, as nearly as practicable, to the respective unpaid principal amounts thereof not theretofore called for redemption.

Section 6. Maturity; Surrender, Etc. In the case of each redemption of First Mortgage Bonds of the 6.05% Series pursuant to this Article III, the principal amount of each First Mortgage Bond to be redeemed shall mature and become due and payable on the date fixed for such redemption (which shall be a Business Day), together with interest on such principal amount accrued to such date and the applicable Make-Whole Amount, if any. From and after such date, unless the Company shall fail to pay such principal amount when so due and payable, together with the interest and Make-Whole Amount, if any, as aforesaid, interest on such principal amount shall cease to accrue. Any First Mortgage Bond paid or redeemed in full shall be surrendered to the Trustee and cancelled and shall not be reissued, and no First Mortgage Bond shall be issued in lieu of any redeemed principal amount of any First Mortgage Bond.

Section 7. Purchase of First Mortgage Bonds of the 6.05% Series. The Company will not and will not permit any Affiliate to purchase, redeem, prepay or otherwise acquire, directly or indirectly, any of the Outstanding First Mortgage Bonds of the 6.05% Series except upon the payment or redemption of the First Mortgage Bonds of the 6.05% Series in accordance with the terms of the Indenture. The Company will promptly cancel all First Mortgage Bonds of the 6.05% Series acquired by it or any Affiliate pursuant to any payment or redemption of First Mortgage Bonds of the 6.05% Series pursuant to any provision of the Indenture and no First Mortgage Bonds of the 6.05% Series may be issued in substitution or exchange for any such First Mortgage Bonds of the 6.05% Series, except pursuant to Section 5.06 of the Original Indenture.

Section 8. Make-Whole Amount.

“Make-Whole Amount” means, with respect to any First Mortgage Bond of the 6.05% Series, an amount equal to the excess, if any, of the Discounted Value of the Remaining Scheduled Payments with respect to the Called Principal of such First Mortgage Bond over the amount of such Called Principal, provided that the Make-Whole Amount may in no event be less than zero. For the purposes of determining the Make-Whole Amount, the following terms have the following meanings:

“Called Principal” means, with respect to any First Mortgage Bond of the 6.05% Series, the principal of such First Mortgage Bond that is to be redeemed pursuant to Section 4.

“Discounted Value” means, with respect to the Called Principal of any First Mortgage Bond of the 6.05% Series, the amount obtained by discounting all Remaining Scheduled Payments with respect to such Called Principal from their respective scheduled due dates to the Settlement Date with respect to such Called Principal, in accordance with accepted financial practice and at a discount factor (applied on the same periodic basis as that on which interest on

the First Mortgage Bonds of the 6.05% Series is payable) equal to the Reinvestment Yield with respect to such Called Principal.

“Reinvestment Yield” means, with respect to the Called Principal of any First Mortgage Bond, .50% over the yield to maturity implied by (i) the yields reported as of 10:00 a.m. (New York City time) on the second Business Day preceding the Settlement Date with respect to such Called Principal, on the display designated as “Page PX1” (or such other display as may replace Page PX1) on Bloomberg Financial Markets for the most recently issued actively traded on the run U.S. Treasury securities having a maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date, or (ii) if such yields are not reported as of such time or the yields reported as of such time are not ascertainable (including by way of interpolation), the Treasury Constant Maturity Series Yields reported, for the latest day for which such yields have been so reported as of the second Business Day preceding the Settlement Date with respect to such Called Principal, in Federal Reserve Statistical Release H.15 (or any comparable successor publication) for U.S. Treasury securities having a constant maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date.

In the case of each determination under clause (i) or clause (ii), as the case may be, of the preceding paragraph, such implied yield will be determined, if necessary, by (a) converting U.S. Treasury bill quotations to bond equivalent yields in accordance with accepted financial practice and (b) interpolating linearly between (1) the applicable U.S. Treasury security with the maturity closest to and greater than such Remaining Average Life and (2) the applicable U.S. Treasury security with the maturity closest to and less than such Remaining Average Life. The Reinvestment Yield shall be rounded to the number of decimal places as appears in the interest rate of the applicable First Mortgage Bond of the 6.05% Series.

“Remaining Average Life” means, with respect to any Called Principal, the number of years (calculated to the nearest one-twelfth year) obtained by dividing (i) such Called Principal into (ii) the sum of the products obtained by multiplying (a) the principal component of each Remaining Scheduled Payment with respect to such Called Principal by (b) the number of years (calculated to the nearest one-twelfth year) that will elapse between the Settlement Date with respect to such Called Principal and the scheduled due date of such Remaining Scheduled Payment.

“Remaining Scheduled Payments” means, with respect to the Called Principal of any First Mortgage Bond, all payments of such Called Principal and interest thereon that would be due after the Settlement Date with respect to such Called Principal if no payment of such Called Principal were made prior to its scheduled due date, provided that if such Settlement Date is not a date on which interest payments are due to be made under the terms of the First Mortgage Bonds of the 6.05% Series, then (solely for the purpose of determining the Remaining Scheduled Payments) the amount of the next succeeding scheduled interest payment will be reduced by the amount of interest accrued to such Settlement Date and required to be paid on such Settlement Date pursuant to Section 4.

“Settlement Date” means, with respect to the Called Principal of any First Mortgage Bond of the 6.05 % Series, the date on which such Called Principal is to be redeemed pursuant to Section 4 or has become.

ARTICLE IV.

AMENDMENTS TO MORTGAGE

SECTION 1. Section 1.03 of the Original Indenture is amended by adding at the end thereof the following additional paragraph:

Notwithstanding anything herein to the contrary, with respect to each Net Earnings Certificate required at any time at which (a) any of the First Mortgage Bonds of the 6.05% Series are Outstanding under the Indenture, and (b) any bonds are outstanding under the Company’s Mortgage and Deed of Trust, dated as of October 1, 1945 relating to the Company’s utility property in the states of Montana and Wyoming (the “Montana Mortgage”), the “Adjusted Net Earnings of the Company” shall be, and shall be stated in such Net Earnings Certificate to be, the lesser of (A) the amount (for the applicable period selected in accordance with paragraph (a) of this Section 1.03) determined in accordance with paragraph (a) of this Section 1.03 (and the other provisions of this Section 1.03 that are relevant to such paragraph) on the basis of (i) the items set forth in clauses (i) and (ii) of paragraph (a) of this Section 1.03 being such portions of such items of the Company as have been reasonably allocated by the Company to or from the Mortgaged Property as a plant or plants and an operating system or operating systems in a manner consistent with the manner of allocation utilized and/or to be utilized by the Company in making calculations of the “Adjusted Net Earnings of the Company” under and as defined in the Montana Mortgage, and (ii) the item set forth in clause (iv) of paragraph (a) of this Section 1.03 being calculated without regard to income derived by the Company from any electric and/or gas utility business of the Company in which the Mortgaged Property is not utilized (but otherwise in accordance this Section 1.03), and (B) the amount (for the applicable period selected in accordance with paragraph (a) of this Section 1.03) determined in accordance with paragraph (a) of this Section 1.03 (and the other provisions of this Section 1.03 that are relevant to such paragraph) without any allocation or distinction as to the derivation of the items set forth in any of the clauses of paragraph (a) of this Section 1.03, other than allocation or distinction between (i) the electric and/or gas utility business or businesses in which the Company is engaged (whether or not the Mortgaged Property is utilized in connection therewith), and (ii) the other business or businesses (if any) in which the Company is engaged (with such other business or businesses being given effect under the item set forth in clause (iv) of paragraph (a) of this Section 1.03). Each such Net Earnings Certificate shall contain a statement of the signers of such Net Earnings Certificate that, in the opinion of such signers, the allocations made in the calculations of “Adjusted Net Earnings of the Company” as set forth in such Net Earnings Certificate are in accordance with the requirements of this final paragraph of this Section 1.03.

SECTION 2. Section 3.01 of the Original Indenture is hereby amended by adding at the end thereof the following additional paragraph (d):

(d) In compliance with Iowa Code Section 654.12A, the following notice is given: NOTICE: This mortgage secures credit in the amount of Five Hundred Million Dollars ($500,000,000.00). Loans and advances up to this amount, together with interest, are senior to indebtedness to other creditors under subsequently recorded or filed mortgages and liens.

ARTICLE V.

THE TRUSTEE

The Trustee hereby accepts the trusts hereby declared and provided, and agrees to perform the same upon the terms and conditions in the Indenture set forth and upon the following terms and conditions:

The Trustee shall not be responsible in any manner whatsoever for or in respect of the validity or sufficiency of this Supplemental Indenture or the due execution hereof by the Company or for or in respect of the recitals contained herein, all of which recitals are made by the Company solely. In general, each and every term and condition contained in Article Eleven of the Indenture shall apply to this Supplemental Indenture with the same force and effect as if the same were herein set forth in full, with such omissions, variations and modifications thereof as may be appropriate to make the same conform to this Supplemental Indenture.

ARTICLE VI.

HOME OFFICE PAYMENT

So long as any Holder or its nominee shall be the Holder of any First Mortgage Bond of the 6.05 % Series, and notwithstanding anything contained in the Indenture or in such First Mortgage Bond of the 6.05 % Series to the contrary, the Company will pay all sums becoming due on such First Mortgage Bond of the 6.05 % Series for principal, Make-Whole Amount or premium, if any, and interest by the method and at the address specified for such purpose below such Holder’s name in Schedule A to the Bond Purchase Agreement dated as of May 1, 2008, or by such other method or at such other address as such Holder shall have from time to time specified to the Company and the Trustee in writing for such purpose, without the presentation or surrender of such First Mortgage Bond of the 6.05 % Series unless such Bond is to be paid or redeemed in full, in which case, as a condition to such payment, such Bond shall be presented and surrendered at the place of payment most recently designated by the Company pursuant to Section 3.05 of the Indenture. Prior to any sale or other disposition of any First Mortgage Bond of the 6.05 % Series held by a Holder or its nominee, such Holder will, at its election, either endorse thereon the amount of principal paid thereon and the last date to which interest has been paid thereon or surrender such First Mortgage Bond of the 6.05 % Series to the Trustee in exchange for a new First Mortgage Bond of the 6.05 % Series or First Mortgage Bonds of the 6.05 % Series pursuant to Section 3.05 of the Indenture, and in either case shall promptly notify the Company and the Trustee of the name and address of the transferee of any such Bond so sold or disposed of. The Company will afford the benefits of this Article VI to any Institutional Investor that is the direct or indirect transferee of any First Mortgage Bond of the 6.05 % Series purchased by a Holder under the Bond Purchase Agreement and that has made the same agreement relating to such First Mortgage Bond of the 6.05 % Series as the Holders have made in this Article VI.

ARTICLE VII.

MISCELLANEOUS PROVISIONS

Section 1. Except as otherwise defined herein or below, all capitalized terms used in this Supplemental Indenture have the meanings stated in the Indenture.

“Default Rate” means that rate of interest that is the greater of (i) 2% per annum above the rate of interest stated in clause (a) of the first paragraph of the First Mortgage Bonds of the 6.05% Series or (ii) 2% over the rate of interest publicly announced by The Bank of New York in New York, New York as its “base” or “prime” rate.

“Institutional Investor” means (a) any original purchaser of a First Mortgage Bond of the 6.05% Series, (b) any holder of a First Mortgage Bond of the 6.05% Series holding (together with one or more of its affiliates) more than 5% of the aggregate principal amount of the First Mortgage Bonds of the 6.05% Series then outstanding, (c) any bank, trust company, savings and loan association or other financial institution, any pension plan, any investment company, any insurance company, any broker or dealer, or any other similar financial institution or entity, regardless of legal form, and (d) any Related Fund of any holder of any First Mortgage Bond of the 6.05% Series.

“Related Fund” means, with respect to any holder of any First Mortgage Bond of the 6.05% Series, any fund or entity that (i) invests in Securities or bank loans, and (ii) is advised or managed by such holder, the same investment advisor as such holder or by an affiliate of such holder or such investment advisor.

“Securities” or “Security” shall have the meaning specified in Section 2(1) of the Securities Act.

“Securities Act” means the Securities Act of 1933, as amended from time to time, and the rules and regulations promulgated thereunder from time to time in effect.

“Senior Financial Officer” means the chief financial officer, principal accounting officer, treasurer or comptroller of the Company.

Section 2. This Supplemental Indenture may be simultaneously executed in any number of counterparts, each of which when so executed shall be deemed to be an original; but such counterparts shall together constitute but one and the same instrument.

IN WITNESS WHEREOF, said NorthWestern Corporation has caused this Indenture to be executed on its behalf by an Authorized Executive Officer as defined in the Indenture, and its corporate seal to be hereto affixed and said seal and this Indenture to be attested by an Authorized Executive Officer as defined in the Indenture; and The Bank of New York, in evidence of its acceptance of the trust hereby created, has caused this Indenture to be executed on its behalf by one of its Vice Presidents and its corporate seal to be hereto affixed and said seal and this Indenture to be attested by one of its Vice Presidents; all as of the ____ day of __________, 2008.

NORTHWESTERN CORPORATION

	By_____________________________
		Its Vice President and Chief Financial
		Officer

CORPORATE SEAL

ATTEST:

___________________________________

THE BANK OF NEW YORK

	By_____________________________
		Its Vice President

CORPORATE SEAL

ATTEST:

___________________________________

Vice President

STATE OF SOUTH DAKOTA	)
	)SS
COUNTY OF ___________	)

BE IT REMEMBERED, that on this ___ day of __________, 2008, before me, ______________________, a Notary Public within and for the County and State aforesaid, personally came Brian Bird, the Vice President and Chief Financial Officer of NorthWestern Corporation, a Delaware corporation, who is personally known to me to be such officer, and who is personally known to me to be the same person who executed as such officer the within instrument of writing, and such person duly acknowledged that he signed, sealed and delivered the said instrument as his free and voluntary act as such Vice President and Chief Financial Officer, and as the free and voluntary act of NorthWestern Corporation for the uses and purposes therein set forth.

IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed my official seal on the day and year last above written.

(NOTARIAL SEAL)	______________________________
	Notary Public

STATE OF NEW YORK	)
	)SS
COUNTY OF ___________	)

BE IT REMEMBERED, that on this ___ day of ____________, 2008, before me, ______________________, a Notary Public within and for the County and State aforesaid, personally came _____________________, the _______________ of The Bank of New York, who is personally known to me to be such officer, and who is personally known to me to be the same person who executed as such officer the within instrument of writing, and such person duly acknowledged that he signed, sealed and delivered the said instrument as his free and voluntary act as such ______________________, and as the free and voluntary act of The Bank of New York for the uses and purposes therein set forth.

IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed my official seal on the day and year last above written.

(NOTARIAL SEAL)	______________________________
	Notary Public

APPENDIX A

ASSIGNMENT CERTIFICATE

In connection with the undersigned’s assignment and transfer to the assignee identified below of that certain First Mortgage Bond of the 6.05 % Series issued by the Company to the undersigned dated ________________:

Assignee’s social security or tax I.D. number: ___________________________

Assignee’s name: _____________________________

Assignee’s address and zip code: ___________________________

___________________________

the undersigned hereby certifies that such First Mortgage Bond of the 6.05 % Series is being transferred as specified below:

CHECK ONE

(1) ☐ to the Company or a Subsidiary thereof; or

(2) ☐ to a person the transferor reasonably believes is a “qualified institutional buyer” (as defined in Rule 144A under the Securities Act of 1933) that purchases for its own account or for the account of a qualified institutional buyer to whom notice is given that such transfer is being made in reliance on Rule 144A, in each case pursuant to and in compliance with Rule 144A under the Securities Act of 1933; or

(3) ☐ outside the United States to a “foreign person” in compliance with Rule 904 of Regulation S under the Securities Act of 1933; or

(4) ☐ pursuant to an effective registration statement under the Securities Act of 1933; or

(5) ☐ pursuant to an exemption from the registration requirements of the Securities Act of 1933.

Unless one of items (1) through (5) above is checked, the Trustee or Bond Registrar will refuse to register the above-referenced First Mortgage Bond of the 6.05 % Series in the name of any person other than the registered Holder thereof; provided, however, that if item (3) or (5) is checked, the Company may reasonably require, prior to the registration of any such transfer of the First Mortgage Bond of the 6.05 % Series, additional information to confirm that such transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act of 1933.

If none of the foregoing items are checked, the Trustee or Bond Registrar shall not be obligated to register the First Mortgage Bond of the 6.05 % Series in the name of any person other than the Holder hereof unless and until the conditions to any such transfer of registration set forth herein and in the Eighth Supplemental Indenture shall have been satisfied.

Signed: ___________________________________

Name of Holder:____________________________

Name of Signatory:__________________________

Title of Signatory:___________________________

Dated:___________________

TO BE COMPLETED BY PURCHASER IF (2) ABOVE IS CHECKED

The undersigned represents and warrants that it is purchasing the First Mortgage Bond of the 6.05 % Series for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a “qualified institutional buyer” within the meaning of Rule 144A under the Securities Act of 1933 and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as the undersigned has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon the undersigned's foregoing representations in order to claim the exemption from registration provided by Rule 144A.

Dated:

Name:________________________

Title:_________________________

Execution Copy

PURCHASE AND SALE AGREEMENT

by and between

NORTHWESTERN CORPORATION

and

BICENT (MONTANA) POWER COMPANY LLC

Dated June 9, 2008

TABLE OF CONTENTS

				Page
ARTICLE 1		DEFINITIONS			1
	Section 1.1		Certain Defined Terms		1
	Section 1.2		Interpretation		12
ARTICLE 2		PURCHASE AND SALE OF THE COLSTRIP 4 INTERESTS			13
	Section 2.1		Purchase and Sale of Colstrip 4 Interests		13
	Section 2.2		Purchase Price		14
	Section 2.3		Purchase Price Adjustment		15
	Section 2.4		Allocation of Purchase Price; Tax Filings		16
	Section 2.5		Assumption of Liabilities		17
	Section 2.6		Real Property Taxes		17
	Section 2.7		Seller Releases		17
ARTICLE 3		CLOSING; CONDITIONS PRECEDENT			18
	Section 3.1		Closing		18
	Section 3.2		Closing Deliveries by Buyer		18
	Section 3.3		Closing Deliveries by Seller		19
	Section 3.4		Conditions Precedent to the Closing Obligations of Buyer		20
	Section 3.5		Conditions Precedent to the Closing Obligations of Seller		21
	Section 3.6		Failure to Close		22
ARTICLE 4		REPRESENTATIONS AND WARRANTIES OF SELLER			22
	Section 4.1		Organization and Good Standing		22
	Section 4.2		Authority		23
	Section 4.3		Enforceability		23
	Section 4.4		Title to Colstrip 4 Interests		23
	Section 4.5		No Violation or Breach		23
	Section 4.6		Consents		23
	Section 4.7		Actions Pending		24
	Section 4.8		Compliance with Applicable Law		24
	Section 4.9		Real Property		24
	Section 4.10		Operations and Maintenance Expenses		25
	Section 4.11		Material Changes since December 31, 2007		25
	Section 4.12		Brokerage Fees and Commissions		25
	Section 4.13		Bankruptcy		25
	Section 4.14		Tax Matters		25
	Section 4.15		Material Contracts		26
	Section 4.16		Licenses		26
	Section 4.17		Insurance		27
	Section 4.18		Environmental Laws		27
	Section 4.19		No Employees or Benefit Plans		28

TABLE OF CONTENTS

(Continued)

				Page
	Section 4.20		Legal Matters		28
	Section 4.21		Audit Information		29
	Section 4.22		Intellectual Property		29
	Section 4.23		Books and Records		29
	Section 4.24		No Options		29
	Section 4.25		Undisclosed Liabilities		29
	Section 4.26		Facility Operations		29
	Section 4.27		Affiliate Transactions		29
ARTICLE 5		REPRESENTATIONS AND WARRANTIES OF BUYER			29
	Section 5.1		Organization and Qualification		29
	Section 5.2		Authority		30
	Section 5.3		Enforceability		30
	Section 5.4		No Violation or Breach		30
	Section 5.5		Consents		30
	Section 5.6		No Disputes; Litigation		30
	Section 5.7		Brokerage Fees and Commissions		30
	Section 5.8		Bankruptcy		31
	Section 5.9		Financial Ability; Buyer LC		31
	Section 5.10		OFAC Compliance		31
	Section 5.11		Inspections		31
	Section 5.12		Regulatory Matters		31
ARTICLE 6		ACCESS AND CONFIDENTIALITY			32
	Section 6.1		General Access		32
	Section 6.2		Confidential Information		32
	Section 6.3		No Other Contact		33
ARTICLE 7		COVENANTS OF SELLER AND BUYER			33
	Section 7.1		Conduct of Business Pending Closing		33
	Section 7.2		Public Announcements		35
	Section 7.3		Actions by Parties		35
	Section 7.4		Further Assurances		35
	Section 7.5		Records		35
	Section 7.6		Regulatory and Other Authorizations and Consents Filings		36
	Section 7.7		Fees and Expenses		37
	Section 7.8		Casualty Loss		37

TABLE OF CONTENTS

(Continued)

				Page
	Section 7.9		Financing Corporation		38
	Section 7.10		Insurance Corporation		38
	Section 7.11		Right of First Refusal		38
	Section 7.12		MPSC Matters		39
ARTICLE 8		LIMITATIONS			39
	Section 8.1		Disclaimer of Warranties		39
	Section 8.2		Limitations of Damages		40
	Section 8.3		Limitations on Individual Liability		40
	Section 8.4		Environmental Waiver and Release		41
ARTICLE 9		INDEMNIFICATION			41
	Section 9.1		Indemnification
	Section 9.2		Third Party Claims		41
	Section 9.3		Survival		43
	Section 9.4		Limitations on Indemnification		43
	Section 9.5		Special Indemnity		44
	Section 9.6		Sole and Exclusive Remedy		45
ARTICLE 10		TERMINATION AND REMEDIES			45
	Section 10.1		Methods of Termination		45
	Section 10.2		Effect of Termination		46
	Section 10.3		Termination Fee; Letter of Credit		47
	Section 10.4		Buyer Termination Fee		47
	Section 10.5		No Liability		48
ARTICLE 11		DISPUTE RESOLUTION			48
	Section 11.1		Mutual Discussions		48
	Section 11.2		Arbitration		49
ARTICLE 12		OTHER PROVISIONS			50
	Section 12.1		Counterparts		50
	Section 12.2		Governing Law		50
	Section 12.3		Entire Agreement		50
	Section 12.4		Notices		50
	Section 12.5		Successors and Assigns		51
	Section 12.6		Amendments		51

iii

TABLE OF CONTENTS

(Continued)

		Page
Section 12.7	Agreement for Parties' Benefit Only	51
Section 12.8	Severability	52
Section 12.9	Transfer Taxes	52
Section 12.10	Bulk Sales or Transfer Laws	52
Section 12.11	No Waiver	52
Section 12.12	Cumulative Remedies	52
Section 12.13	Further Assurances	52
Section 12.14	Facsimile Signatures	53
Section 12.15	Specific Performance	53
Section 12.16	Effectiveness	53

TABLE OF CONTENTS

(Continued)

EXHIBITS AND SCHEDULES

Exhibits :

Exhibit A

Buyer’s Officer’s Certificate

Exhibit B

Excluded Assets

Exhibit C

Buyer LC

Exhibit D

Seller’s Officer’s Certificate

Exhibit F

Assignment and Assumption Agreement

Exhibit G-1

Power Purchase Agreement (Puget)

Exhibit G-2

Master EEI Power Purchase Agreement

Exhibit G-3

Power Purchase Agreement (90MW)

Exhibit G-4

Power Purchase Agreement (21MW)

Exhibit H

Confidentiality Agreement

Exhibit I

Balance Sheet Rules

Exhibit J

Current Assets

Exhibit K

Current Liabilities

Exhibit L

Waivers of Right of First Refusal

Exhibit M-1

BOP PPA

Exhibit M-2

Hardin PPA

Exhibit N

Mellon Transaction Documents

Exhibit O

SGE Transaction Documents

Schedules :

Schedule 2.1(b)

Real Property

Schedule 2.1(c)

Common Facilities and Associated Assets

Schedule 2.1(d)

Material Contracts

Schedule 2.4

Allocation of Purchase Price

Schedule 4.4

Title to Colstrip 4 Interests

Schedule 4.5

No Violation or Breach

Schedule 4.6

Seller’s Consents

Schedule 4.7

Actions Pending

Schedule 4.8

Compliance with Applicable Law

Schedule 4.9(a)

Liens

Schedule 4.10

Operations and Maintenance Expenses

Schedule 4.11

Material Changes

Schedule 4.12

Brokerage Fees

Schedule 4.14

Tax Matters

Schedule 4.15

Material Contracts

Schedule 4.16

Licenses

Schedule 4.17

Insurance

Schedule 4.18

Environmental Laws

TABLE OF CONTENTS

(Continued)

Schedule 4.21

Financial Statements

Schedule 4.24

Options

Schedule 4.25

Undisclosed Liabilities

Schedule 5.5

Buyer’s Consents

Schedule 7.1

Conduct of Business Pending Closing

PURCHASE AND SALE AGREEMENT

THIS PURCHASE AND SALE AGREEMENT (this “ Agreement ”), dated as of June 9, 2008, is by and between NORTHWESTERN CORPORATION, a Delaware corporation (“ Seller ”), and BICENT (MONTANA) POWER COMPANY LLC, a Delaware limited liability company (“ Buyer ”). Seller and Buyer are sometimes referred to herein individually as a “ Party ” and, collectively, as the “ Parties .”

RECITALS

WHEREAS, Seller is the Lessee of and the Owner Participant with respect to a thirty percent (30%) undivided interest in the 740MW Colstrip Unit 4, a coal-fired, base-load electric generation facility located in Colstrip, Montana (the “ Facility ”), and is also the fee owner of a thirty percent (30%) undivided interest in the land upon which the Facility is built and owner of certain related assets.

WHEREAS, Seller desires to sell and convey to Buyer, and Buyer desires to purchase and acquire from Seller, all of Seller’s interest in the Facility and related assets and rights described herein (collectively, the “ Colstrip 4 Interests ” as hereinafter defined), on the terms and subject to the conditions hereinafter set forth.

WHEREAS, Seller and Buyer are entering into this Agreement to evidence their respective duties, obligations, and responsibilities in respect of the purchase and sale of the Colstrip 4 Interests as contemplated herein.

WHEREAS, in order to induce Seller to enter into this Agreement, and as additional consideration therefor, concurrently with the execution and delivery hereof, Buyer is providing to Seller the Buyer LC (as hereinafter defined) in the form attached as Exhibit C hereto, to secure Buyer’s payment of the Termination Fee (as hereinafter defined).

WHEREAS, certain capitalized terms used herein and not otherwise defined shall have the meanings assigned to them in Article 1 hereof.

NOW, THEREFORE, in consideration of the foregoing and the representations, warranties, covenants and agreements contained in this Agreement, and intending to be legally bound, the Parties agree as follows:

ARTICLE 1

DEFINITIONS

Section 1.1 Certain Defined Terms. As used in this Agreement, the following terms have the respective meanings set forth below or set forth in the Sections referred to below:

“ AAA ” is defined in Section 11.2(a) .

“ Accounting Methodology ” means the accounting principles, methods and practices used in preparing Exhibits J, and K, applied on a consistent basis.

“ Action ” means any action, suit, investigation, proceeding, condemnation, or audit by or before any court or other Governmental Authority or any arbitration proceeding.

“ Affiliate ” means, as to the Person specified, any Person controlling, controlled by or under common control with such specified Person. The concept of control, controlling or controlled by as used in the aforesaid context means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of another, whether through the ownership of voting securities, by contract or otherwise. No Person shall be deemed an Affiliate of any Person solely by reason of the exercise or existence of rights, interests, or remedies under this Agreement.

“ Agreement ” is defined in the preamble.

“Allocation Schedule” is defined in Section 2.4 .

“ Applicable Law ” means any applicable statute, law (including common law), ordinance, regulation, rule, ruling, order, writ, injunction, decree, or other official act of or by any Governmental Authority.

“ Assignment and Assumption Agreement ” means an Assignment of the Material Contracts from Seller to Buyer to be dated as of the Closing Date and substantially in the form set forth on Exhibit F .

“ Balance Sheet Rules ” means, collectively, the Accounting Methodology and the rules set forth on Exhibit I ; provided, that in the event of any conflict between the Accounting Methodology and the rules set forth on Exhibit I , the rules set forth on Exhibit I shall apply.

“ BOP PPA ” means a power purchase agreement that shall be entered into between Buyer, as seller, and Seller, as buyer, for the sale of certain power from the Facility upon the terms and conditions set forth on Exhibit M-1 , in a form and subject to additional terms and conditions reasonably satisfactory to Buyer and Seller.

“ Business Day ” means any day which is not a Saturday, Sunday, or legal holiday in the state ofMontana.

“ Buyer ” is defined in the preamble.

“ Buyer LC ” is defined in Section 5.9 .

“ Buyer’s Consents ” means the consents, filings and notices required to be obtained by Buyer and delivered at the Closing as listed on Schedule 5.5 .

“ Closing ” means the consummation of the transaction contemplated by this Agreement as further defined in Section 3.1 .

“ Closing Date ” is defined in Section 3.1 .

“ Closing Documents ” means the documents to be delivered by Seller and Buyer at the Closing in accordance with Section 3.2 and Section 3.3 , respectively.

“ Closing Statement ” is defined in Section 2.3(b) .

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

“ Colstrip 4 Interests ” is defined in the Recitals and further defined in Section 2.1 .

“ Commercially Reasonable Efforts ” means efforts which are reasonably necessary to cause, or assist in, the consummation of the transactions contemplated by this Agreement and which do not require the performing Party to expend funds, incur expenses or assume liabilities other than those which are reasonable in nature and amount within the context of the transactions contemplated by this Agreement in order for the performing Party to satisfy its obligations hereunder.

“ Committee ” has the meaning assigned to it under the Ownership and Operations Agreement.

“ Common Facilities Interest ” is defined in Section 2.1(c) .

“ Confidentiality Agreement ” is defined in Section 6.2 .

“ Current Assets ” means as of any date, the assets of Seller solely related to the Colstrip 4 Interests set forth on Exhibit J under the heading “Current Assets” and no other assets.

“ Current Liabilities ” means as of any date, the liabilities of Seller solely related to the Colstrip 4 Interests set forth on Exhibit K under the heading “Current Liabilities” and no other liabilities.

“Debt” of any Person means at any date, without duplication, (i) all obligations of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such Person to pay the deferred purchase price of property or services, except trade accounts payable arising in the ordinary course of business and payable not more than 12 months from the date of incurrence, (iv) all obligations of such Person as lessee under any lease of any property (whether real, personal or mixed) by that Person as lessee that, in conformity with GAAP, has been or would be required to be accounted for as a capital lease on the consolidated balance sheet of that Person, (v) the undrawn face amount of any outstanding letters of credit issued in favor of such Person, and all obligations of such Person to reimburse or prepay any bank or other Person in respect of amounts paid under a letter of credit, banker’s acceptance or similar instrument, (vi) all Debt or other monetary obligations (of such Person or of others) secured by any mortgage, lien, pledge, charge, security interest or encumbrance of any kind on any asset of such Person, whether or not such Debt or other monetary obligation is assumed by such Person, (vii) all

obligations of such Person to pay a specified purchase price for assets, goods, securities or services whether or not delivered or accepted (including take-or-pay arrangements and similar obligations), (viii) all obligations of such Person under conditional sale or other title retention agreements (even if the remedies of the sellers or lenders under such agreements in the event of a default thereunder are limited to the repossession or sale of the property or assets covered thereby), and (ix) all Debt or other monetary obligations of others in respect of which such Person has any contingent liability, including without limitation any guarantee.

“ Default Supply Hedge PPAs ” means a power purchase agreement or series of power purchase agreements to be entered into between Buyer and Seller or between Buyer and the counterparties to the Existing Default Supply Hedge PPAs which transfer the economic benefit of the Existing Default Supply Hedge PPAs to Buyer, in a form or forms reasonably satisfactory to Buyer and Seller.

“Default Interest Rate” means a rate of interest payable at the lesser of 2% over the rate of interest publicly announced by Citibank, N.A. from time to time in New York, New York as its “base” or “prime” rate, or the maximum rate permitted by applicable law

“ Designated Independent Accounting Firm ” is defined in Section 2.3(d) .

“ Direct Claim ” is defined in Section 9.2(c) .

“ Disclosure Schedule ” is defined in the preamble of Article 4 .

“ Dispute ” is defined in Section 11.1 .

“ Dispute Notice ” is defined in Section 11.1 .

“ Dispute Notice Response ” is defined in Section 11.1 .

“Employee Benefit Plans” means any contractual personnel policy, stock option plan, equity or equity based plan, bonus plan, change-in-control, retention, incentive award plan, severance pay plan or policy, deferred compensation plan or policy, executive compensation or supplemental income plan or policy, vacation, sick leave, disability, death benefit, group insurance, hospitalization, medical, dental, life or any other employee benefit plan or program, including, without limitation, each “employee benefit plan” within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), “multiemployer plan” within the meaning of Section 4001(a)(3) of ERISA and other employee benefit plan, program, policy, practice, agreement or arrangement, whether or not subject to ERISA.

“ Environmental Law ” is defined in Section 4.18.

“ Environmental Liabilities ” means any and all liabilities, claims, demands, costs, damages, losses, expenses, penalties, fines, interest, attorneys’ fees, court costs and other costs of suit incurred or imposed pursuant to (i) any order, notice of responsibility, directive, injunction, judgment or similar act (including settlements) by any

Governmental Authority to the extent arising out of a violation of Environmental Laws or (ii) any Action, claim or cause of action by a Governmental Authority or other third Person for personal injury, property damage, damage to natural resources or remediation or response costs to the extent arising out of or attributable to any violation of, or any remedial obligation under, any Environmental Law.

“ERISA Affiliate Liability” means any liabilities, obligations or responsibilities (whether contingent or otherwise) relating to any Employee Benefit Plan maintained by the Seller, and any trade or business (whether or not incorporated) which are or have ever been under common control, or which are or have ever been treated as a single employer, with the Seller under Section 414(b), (c), (m) or (o) of the Code (an “ ERISA Affiliate ”) or to which the Seller and any of their ERISA Affiliates contributed thereunder including any multiemployer plan, maintained by, contributed to, or obligated to contribute to, at any time, by the Seller or any of their ERISA Affiliates, including without limitation any liability (i) to the Pension Benefit Guaranty Corporation under Title IV of ERISA; (ii) with respect to non-compliance with the notice and benefit continuation requirements of COBRA; (iii) with respect to any non compliance with ERISA; or (iv) with respect to any suit, proceeding or claim which is brought against any ERISA Affiliate.

“Estimated Purchase Price” is defined in Section 2.3(b) .

“ Excluded Assets ” means those assets listed on Exhibit B .

“ Existing Default Supply Hedge PPAs ” mean the: (i) Power Confirmation, dated March 14, 2008, between Seller D-B-A NW Energy and BP Energy Company, trade sequence 801616; (ii) Power Confirmation, dated March 14, 2008, between Seller D-B-A NW Energy and BP Energy Company, trade sequence 801614; (iii) Power Confirmation, dated March 14, 2008, between Seller D-B-A NW Energy and BP Energy Company, trade sequence 801615; (iv) Confirmation Agreement, dated February 29, 2008, between Seller and Coral Power LLC, trade number 723; (v) Confirmation Agreement, dated February 29, 2008, between Seller and Coral Power LLC, trade number 725; (vi) Confirmation Agreement, dated February 29, 2008, between Seller and Coral Power LLC, trade number 774.; (vii) Confirmation Agreement, dated February 29, 2008, between Seller and Coral Power LLC, trade number 787; (viii) Confirmation, dated March 27, 2008, between Seller and Morgan Stanley Capital Group Inc; (ix) Confirmation Agreement, dated March 28, 2008, between Seller and Powerex Corporation, deal No. BRC588; and (x) Confirmation Agreement, dated March 28, 2008, between Seller and Powerex Corporation, deal No. BRC589.

“ Fundamental Representations ” is defined in Section 9.3.

“ Facility ” is defined in the Recitals.

“ FERC ” means the Federal Energy Regulatory Commission, or any successor to its functions.

“ FERC 203 Approval ” means the authorization from FERC to transfer certain of the Colstrip 4 Interests to Buyer pursuant to Section 203 of the Federal Power Act.

“ Financial Statements ” has the meaning set forth in Section 4.21.

“ GAAP ” means generally accepted accounting principles consistently applied as in effect on the date of this Agreement in the United States.

“ Good Operating Practices ” means the practices, methods and acts generally engaged in or approved by the independent electric power industry in the United States for similarly situated facilities in the United States during a particular time period, in a manner consistent with laws, reliability, safety and environmental protection, and taking into consideration the requirements of this Agreement, the Material Contracts and the other contracts affecting the operation of the Facility. Good Operating Practices are not necessarily intended to require the optimum or best practices, methods or acts to the exclusion of all others, but rather to include a spectrum of possible practices, methods or acts consistent with the immediately preceding sentence.

“ Governmental Authority ” means (i) the federal government of the United States of America, (ii) any state, county, municipality, or other governmental subdivision within the United States of America, and (iii) any executive, legislative or judicial court, department, commission, board, bureau, agency, or other instrumentality of the federal government of the United States of America or of any state, county, municipality, or other governmental subdivision within the United States of America.

“ Guarantee ” is defined in Section 5.9.

“ Guarantor ” is defined in Section 5.9.

“ Hardin Consents ” means the required third-party consents, if any, to the Hardin PPA under the financing documents of Buyer or any of its Affiliates.

“ Hardin PPA ” means a power purchase agreement that shall, subject to obtaining the Hardin Consents, be entered into between Buyer, as seller, and Seller, as buyer, for the sale of certain power from Buyer’s Hardin facility upon the terms and conditions set forth on Exhibit M-2 , in a form and subject to additional terms and conditions reasonably satisfactory to Buyer and Seller.

“ HSR Act ” means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

“ Indemnified Party ” is defined in Section 9.1 .

“ Indemnifying Party ” is defined in Section 9.1 .

“ Independent Accounting Firm ” means an independent accounting firm of national reputation.

“ Initial Closing Statement ” is defined in Section 2.3(b) .

“ Intellectual Property Rights ” means all common law and statutory rights associated with patents and industrial designs, copyrights, trademarks, trade names, service marks, service names, know-how, processes, trade secrets, inventions, proprietary rights, formulae, research, databases and computer programs.

“ Inspection ” means all tests, reviews, examinations, inspections, investigations, verifications, samplings and similar activities conducted by Buyer or its agents or representatives with respect to the Colstrip 4 Interests and the Facility.

“ Knowledge ” means, with respect to Seller, the actual knowledge of any fact, circumstance, or condition, assuming reasonable inquiry, by Paul Evans, Michael Barnes, Dan Rausch or Kendall Kliewer, and with respect to Buyer, the actual knowledge of any fact, circumstance, or condition, assuming reasonable inquiry, by Nazar Khan or Douglas Halliday.

“ Labor Laws ” means any and all laws relating in any manner to employment, employees and/or individuals performing work as consultants or contractors, including employment standards, employment of minors, employment discrimination, health and safety, labor relations, unions, withholding, wages and hours and overtime of any kind, workplace safety and insurance and pay equity.

“ Land ” is defined in Section 2.1(b) .

“ Licenses ” is defined in Section 4.16 .

“ Lien ” means any lien, security interest, charge, claim, mortgage, deed of trust, option, warrant, purchase right, lease, pledge, easement, right-of-way, encroachment, building or use restrictions, conditional sales agreement or other encumbrance.

“ Losses ” means any and all claims, liabilities, losses, causes of action, damages, judgments, obligations, deficiencies, demands, fines, penalties, litigation, lawsuits, administrative proceedings, administrative investigations, costs, and expenses, including reasonable attorneys’ fees, court costs, investigator expenses, and other costs of suit.

“ Make-Whole Premium ” means, collectively, any pre-payment penalties, premiums, other make-whole payments or similar transaction fees (including, but not limited to, reasonable attorney fees for Owner Trustees, Indenture Trustee and Noteholders as defined under the SGE Transaction Documents and the Mellon Transaction Documents), to the extent payable by Seller, incurred in connection with the prepayment of the notes issued under and the termination of the SGE Transaction Documents and Mellon Transaction Documents.

“ Material Adverse Effect ” or “ Material Adverse Change ” means (a) a material and adverse effect on (i) the ability of Seller or Buyer to consummate the transactions contemplated by this Agreement or otherwise to comply with its obligations hereunder or (ii) with respect to Seller, the business, assets, financial condition, or results of operations comprising the Colstrip 4 Interests, in each case taken as a whole; provided , however , that such determination shall exclude (A) any adverse change or effect principally

attributable to the announcement, pendency, or consummation of the transactions contemplated by this Agreement (including but not limited to any decrease in customer demand, any reduction in revenues, any disruption in supplier, partner or similar relationships, or any loss of employees attributable thereto but excluding any failure to obtain any consents or Required Regulatory Approvals); (B) any adoption, implementation, promulgation, issuance, repeal, modification, reinterpretation, or proposal of any Applicable Law, except to the extent such matters have an effect on the Facility that is disproportionate to the effect on other coal generation facilities in the WECC region; (C) changes or developments in national, regional, state, or local wholesale or retail markets for electric power, fuel, or related products (including but not limited to changes in commodity prices or the effects of actions by competitors), except to the extent such matters have an effect on the Facility that is disproportionate to the effect on other coal generation facilities in the WECC region; (D) changes or developments in national, regional, state, or local electric transmission or distribution systems, except to the extent such matters have an effect on the Facility that is disproportionate to the effect on other coal generation facilities in the WECC region; (E) changes or developments in financial or securities markets or the economy in general; (F) any outbreak or escalation of hostilities or the declaration by the United States of a national emergency or war; (G) any acts of terrorism, any other international or domestic calamity or crisis or geopolitical event, except to the extent such matters have an effect on the Facility that is disproportionate to the effect on other coal generation facilities in the WECC region; or (H) effects of weather or meteorological events, except to the extent such matters have an effect on the Facility that is disproportionate to the effect on other coal generation facilities in the WECC region.

“ Material Contracts ” means the agreements listed on Schedule 2.1(d) .

“ Mellon Asset ” means a 10.71429% undivided interest in the Facility, and a 5.357145% undivided interest in certain common facilities.

“ Mellon Lease Transaction ” means the interests of Seller as Lessee and Owner Participant in, to and under: (i) that certain Participation Agreement, dated as of December 16, 1985, originally among United States Trust Company of New York, as Owner Trustee; Burnham Leasing Corporation, as Owner Participant; certain Institutions listed therein, as Loan Participants; The Montana Power Company, as Lessee; and Bankers Trust Company, as Indenture Trustee; (ii) the Trust Agreement, dated as of December 16, 1985, originally among Burnham Leasing Corporation, United States Trust Company of New York, and Louis P. Young; and (iii) each of the other Mellon Transaction Documents and all insurance policies and other agreements, documents and instruments required to be maintained or furnished in accordance with the Mellon Transaction Documents, including without limitation, the beneficial interest of Seller in the Trust Estate (as defined in the Trust Agreement), and all owner participant proceeds of each thereof, all pertaining to the Mellon Asset.

“ Mellon Transaction Documents ” means with respect to the Mellon Lease Transaction all of the agreements, instruments, certificates, financing statements and other documents of any nature executed in connection therewith, including any

amendments, modifications or supplements thereof from time to time, including the documents listed and identified as such on Exhibit N and all “Operative Documents” (as such term is defined in the Mellon Transaction Documents).

“ Montana Generation PPAs ” means the power purchase agreements between Seller and Montana Generation, LLC relating to the sale of 90 MW and 21 MW of power from the Facility.

“ MPSC ” means the Montana Public Service Commission.

“ Objection Notice ” is defined in Section 2.3(d) .

“ O&M Expenses ” is defined in Section 4.10 .

“ Operator ” means PPL Montana, LLC, the operator of the Facility.

“ Ownership and Operations Agreement ” means the Ownership and Operation Agreement, dated May 6, 1981, as amended by Amendment No. 1 dated October 11, 1991 and Amendment No. 2 dated July 13, 1998, between MPC, Puget Sound Energy, Inc., Portland General Electric Company, the Washington Water Power Company (now Avista) and Pacific Power & Light Company (now PacifiCorp).

“ Party ” is defined in the preamble.

“ Permits ” means written permits, licenses, franchises, registrations, variances and approvals obtained from any Governmental Authority.

“ Permitted Liens ” means (i) Liens for Taxes not yet due and payable, pledges or deposits made in the ordinary course of business under workers’ compensation legislation, unemployment insurance Laws or similar Laws, good faith deposits made in the ordinary course of business in connection with bids, tenders or contracts, including rent security deposits (ii) in the case of real property, such state of facts as an accurate survey would show which do not materially and adversely impair the current or proposed use, occupancy or value of the property subject thereto, or easements, covenants, rights of way, encumbrances and other restrictions and irregularities to title which do not materially and adversely impair the current or proposed use, occupancy or value of the property subject thereto (iii) rights reserved to or vested but not yet asserted respecting any Colstrip 4 Interests or the Facility by any Governmental Authority by the terms of any franchise, grant, license, Permit or provision of Applicable Law, to purchase, condemn, appropriate or recapture, or designate a buyer of the real property, (iv) rights reserved to or vested in any municipality or public authority to control or regulate the use of the real property or to use the real property in any manner, including, but not limited to zoning and land use regulations and (v) mechanic and other similar liens for amounts not yet due or payable.

“ Person ” means any Governmental Authority or any individual, firm, partnership, corporation, limited liability company, joint venture, trust, unincorporated organization or other entity or organization.

“Post-Closing Indemnity Period” is defined in Section 9.4(d).

“ Power Purchase Agreements ” means (i) the Power Supply Subcontract Agreement to be entered into between the Buyer, and the Seller, as buyer, pursuant to which Buyer will sell to Seller the power necessary to meet Seller’s obligations under the Puget PPA in substantially the form attached hereto as Exhibit G-1 ; and (ii) a Master EEI Power Purchase and Sale Agreement and two confirmations thereunder to be entered into between the Buyer, as seller, and the Seller, as buyer, for 90MW and 21MW, respectively, and for a price equal to the price under and for a term equal to the Montana Generation PPAs, in substantially the forms attached hereto as Exhibit G-2 , Exhibit G-3 and Exhibit G-4 .

“ Project Users ” has the meaning assigned to it under the Ownership and Operations Agreement.

“ Puget PPA ” means the Power Sales Agreement, dated October 1, 1989, between Seller (as successor in interest to Montana Power Company) and Puget Sound Energy.

“ Purchase Price ” is defined in Section 2.2 .

“ Real Property ” means the Land, the Common Facilities Interest and the Facility (to the extent it constitutes real property), collectively.

“ Records ” means any and all of the books, records, contracts, agreements and files of the Seller existing on the Closing Date and pertaining to the Facility and Colstrip 4 Interests, excluding any information reasonably deemed confidential by Seller.

“ Required Regulatory Approvals ” means all applicable waiting periods (and any extensions thereof) under the HSR Act shall have expired or been terminated and the FERC 203 Approval.

“ Retained Liabilities ” is defined in Section 2.1.

“ Rules ” is defined in Section 11.2 .

“ Securities Act ” means the Securities Act of 1933, as amended, and the regulations promulgated thereunder.

“ Seller ” is defined in the preamble.

“ Seller’s Consents ” means the consents, filings and notices required to be obtained by Seller (other than the Required Regulatory Approvals) and delivered at the Closing as listed on Schedule 4.6 .

“ SGE Asset ” means the 19.28571% undivided interest in the Facility, and a 9.642885% undivided interest in certain common facilities.

“ SGE Lease Transaction ” means the interests of Seller as Lessee and Owner Participant in, to and under: (i) that certain Participation Agreement, dated as of December 16, 1985, originally among United States Trust Company of New York, as Owner Trustee; SGE (New York) Associates, as Owner Participant; certain Institutions listed therein, as Loan Participants; The Montana Power Company, as Lessee; and Bankers Trust Company, as Indenture Trustee; (ii) the Trust Agreement, dated as of December 16, 1985, originally among SGE (New York) Associates, United States Trust Company of New York, and Louis P. Young; and (iii) each of the other SGE Transaction Documents and all insurance policies and other agreements, documents and instruments required to be maintained or furnished in accordance with the SGE Transaction Documents, including without limitation, the beneficial interest of Seller in the Trust Estate (as defined in the Trust Agreement), and all owner participant proceeds of each thereof, all pertaining to the SGE Asset.

“ SGE Transaction Documents ” means with respect to the SGE Lease Transaction all of the agreements, instruments, certificates, financing statements and other documents of any nature executed in connection therewith, including any amendments, modifications or supplements thereof from time to time, including the documents listed and identified as such on Exhibit O and all “Operative Documents” (as such term is defined in the SGE Transaction Documents).

“ Site ” means the four unit, coal-fired, electric generation complex located on a 2,664-acre site in Colstrip, Montana.

“ Tax ” or “ Taxes ” means any and all taxes, including any interest, penalties, or other additions to tax that may become payable in respect thereof, imposed by any federal, state, local, or foreign government or any agency or political subdivision of any such government, which taxes shall include, all income or profits taxes, payroll and employee withholding taxes, unemployment insurance taxes, social security taxes, severance taxes, license charges, taxes on stock, sales and use taxes, ad valorem taxes, excise taxes, franchise taxes, gross receipts taxes, business license taxes, occupation taxes, real and personal property taxes, stamp taxes, environmental taxes, transfer taxes, workers’ compensation, and other obligations of the same or of a similar nature to any of the foregoing.

“ Tax Return ” means any and all returns, reports, declarations, statements, bills, schedules, claims for refund, or written information of or with respect to any Tax which is required to be supplied to any taxing authority, including any schedule or attachment thereto, and including any amendment thereof.

“ Termination Fee ” is defined in Section 10.3 .

“ Third Independent Accounting Firm ” is defined in Section 2.3(d) .

“ Third Party Claim ” is defined in Section 9.2(a).

“Third Party Closing Costs ” shall mean the customary third party closing costs that would have been payable by Seller in the event of a closing of the transaction

contemplated hereunder provided, that the Third Party Closing Costs shall in no event exceed $5,000,000.

“ Threshold ” is defined in Section 9.4 .

“ Transfer Taxes ” means any and all transfer Taxes (excluding Taxes measured by net income), including sales, real property, use, excise (including excise Taxes on petroleum, products of petroleum, petrochemicals, and other taxable substances), stock, stamp, documentary, filing, recording, permit, license, authorization and similar Taxes, filing fees and similar charges incurred by either Party in connection with the transactions contemplated hereby.

“ Working Capital ” means, at any date, the Current Assets minus the Current Liabilities, all as of such date as determined in accordance with GAAP, applied in a manner consistent with the Balance Sheet Rules.

“ Working Capital Adjustment ” is defined in Section 2.3(a) .

“ Working Capital Amount ” has the meaning set forth in Section 2.3(a)

Section 1.2 Interpretation. This Agreement shall not be construed against either Party, and no consideration shall be given or presumption made, on the basis of who drafted this Agreement or any particular provision hereof or who supplied the form of this Agreement. In construing this Agreement:

(a) all references in this Agreement to an “Article,” “Section”, “subsection”, “Exhibit”, or “Schedule” shall be to an Article, Section, subsection, Exhibit, or Schedule of this Agreement, unless the context requires otherwise;

(b) unless the context otherwise requires, the words “this Agreement,” “hereof,” “hereunder,” “herein,” “hereby” or words of similar import shall refer to this Agreement as a whole and not to a particular Article, Section, subsection, clause or other subdivision hereof;

(c) whenever the context requires, the words used herein shall include the masculine, feminine and neuter gender, and the singular and the plural;

(d) examples shall not be construed to limit, expressly or by implication, the matter they illustrate;

(e) the word “includes” and its derivatives means “includes, but is not limited to” and corresponding derivative expressions;

(f) a defined term has its defined meaning throughout this Agreement and in each Exhibit and Schedule hereto, regardless of whether it appears before or after the place where it is defined;

(g) each Exhibit and Schedule to this Agreement is a part of this Agreement, and should be construed in pari materia ;

(h) the headings and titles herein are for convenience only and shall have no significance in the interpretation hereof; and

(i) references to a law, rule, regulation, contract, agreement, or other document mean that law, rule, regulation, contract, agreement, or document as amended, modified, or supplemented, if applicable.

ARTICLE 2

PURCHASE AND SALE OF THE COLSTRIP 4 INTERESTS

Section 2.1 Purchase and Sale of Colstrip 4 Interests. On the terms and subject to the conditions hereof, Seller covenants and agrees to sell, assign and transfer to Buyer all of Seller’s right, title and interest in, and Buyer covenants and agrees to purchase from Seller, effective as of the Closing, all of Seller’s right, title and interest in, all of the assets, properties and rights of Seller owned and/or used in or relating to the Facility, free and clear of any and all Liens, other than Permitted Liens and the Excluded Assets (as hereinafter defined). The assets, properties and rights to be purchased or otherwise transferred to Buyer under this Agreement, all of which solely relate to the Facility and, except for Excluded Assets, constitute, or will constitute as of Closing, all of Seller’s interests in or to the Facility (collectively, the “ Colstrip 4 Interests ”), are as follows:

(a) [intentionally omitted];

(b) all of Seller’s ownership rights to the real property where the Facility is located and certain additional real property upon which some of the common facilities and assets described in subsection (c) below are located, as described on Schedule 2.1(b) (the “ Land ”);

(c) all of Seller’s interest in the common facilities and associated assets as described on Schedule 2.1(c) (the “ Common Facilities Interest ”);

(d) all of Seller’s rights under the contracts, leases and agreements related to the Facility and the Site that are set forth on Schedule 2.1(d) , and have not been amended except for such amendments as are set forth therein (the “ Material Contracts ”);

(e) all of Seller’s Current Assets (solely related to the Colstrip 4 Interests) as of the Closing Date;

(f) notwithstanding the provisions of Section 2.1(b)-(e) above, the Colstrip 4 Interests shall not include (and the Seller shall retain and the Buyer shall not assume):

(i) any obligation or liability related to or arising out of any of the Excluded Assets;

(ii) any obligation or liability related to or arising out of (x) any real property lease or sublease not included in the Real Property and (y) any contract not included in the Material Contracts;

(iii) any obligation or liability related to or arising out of any Real Property or Material Contract to the extent such obligation or liability relates to or arises out of the time period prior to the Closing;

(iv) any obligation or liability related to or arising out of Actions pending as of the Closing Date against the Seller or any of its Affiliates;

(v) any obligation or liability (including any future Actions) related to or arising out of the Seller’s conduct of the business or ownership of the Colstrip 4 Interests prior to the Closing;

(vi) any ERISA Affiliate Liability or any obligation or liability related to or arising out of any collective bargaining agreement of the Seller, whether prior to, on or after the Closing;

(vii) any ERISA Affiliate Liability or any obligation, liability or expense relating to or arising out of (i) the employment or termination of employment or consultancy of any employee or consultant, or former employee or consultant of the Operator, on or prior to the Closing (ii) any collective bargaining agreement of the Operator on or prior to the Closing (iii) compliance with or violations of any Labor Laws by the Operator on or prior to the Closing;

(viii) any obligation or liability of any kind or nature relating to Taxes of the Seller and, with respect to the Colstrip 4 Interests, for any period ending on or before the Closing Date (including any obligation or liability pursuant to any tax sharing agreement, tax indemnification or similar arrangement) and any Taxes payable by Seller in connection with the transactions contemplated hereby; and

(ix) any obligation or liability of Seller for any Debt.

All obligations and liabilities of the Seller other than with respect to the Colstrip 4 Interests (collectively, the “Retained Liabilities” ) shall remain and be the obligations and liabilities solely of the Seller.

Section 2.2 Pur chase Price. The aggregate purchase price and additional consideration for the sale and conveyance of the Colstrip 4 Interests shall be: (i) Four Hundred and Four Million Dollars ($404,000,000), subject to the adjustment as provided in Section 2.3(a) (the “ Purchase Price ”), (ii) the economic benefit received by Seller pursuant to (A) the BOP PPA and (B) Hardin PPA (but only if the Hardin PPA is entered into), and (iii) the Make-Whole Premium. The Estimated Purchase Price (as defined below) shall be paid in cash at the Closing, payable by wire transfer or delivery of other immediately payable funds to an account designated by Seller.

Section 2.3 Purchase Price Adjustment.

(a) The Purchase Price is premised upon Seller having as of the Closing Date and delivering to Buyer an aggregate Working Capital of Zero Dollars ($0) (the “ Working Capital Amount ”). Accordingly, the Purchase Price shall be (i) increased by the amount, if any, by which the Working Capital of Seller as of the Closing Date is greater than the Working Capital Amount or (ii) decreased by the amount, if any, by which the Working Capital of Seller as of the Closing Date is less than the Working Capital Amount. Any such adjustment to the Purchase Price shall be effected in accordance with this Section 2.3 (the “ Working Capital Adjustment ”).

(b) Seller agrees to prepare and deliver to Buyer at least five (5) Business Days prior to the Closing Date (i) a good faith estimate of the Working Capital of Seller as of the Closing Date, and the resulting Working Capital Adjustment, pursuant to clauses (i) and (ii) of Section 2.3(a) above (the “ Initial Closing Statement ”) and (ii) the resulting estimated Purchase Price (the “ Estimated Purchase Price ”). Within ninety (90) days after the Closing Date, Buyer shall prepare and deliver to Seller the actual Working Capital of Seller as of the Closing Date, and the Working Capital Adjustment, if any, pursuant to clauses (i) and (ii) of Section 2.3(a) above (the “ Closing Statement ”). Each of the Initial Closing Statement and the Closing Statement shall be prepared in accordance with the Balance Sheet Rules.

(c) If the Initial Closing Statement sets forth a Working Capital of Seller greater than the Working Capital Amount and a corresponding upward adjustment to the Purchase Price, then the Estimated Purchase Price payable on the Closing Date shall be increased by an amount equal to such Working Capital Adjustment. If the Initial Closing Statement sets forth a Working Capital of Seller less than the Working Capital Amount and a corresponding downward adjustment to the Estimated Purchase Price, then the Estimated Purchase Price payable on the Closing Date shall be decreased by an amount equal to such Working Capital Adjustment. If the Working Capital of Seller as set forth on the Closing Statement is different than that included on the Initial Closing Statement, then (i) to the extent that the Working Capital on the Closing Statement is greater than the Working Capital on the Initial Closing Statement, Buyer shall pay to Seller an amount equal to such difference plus interest at the Default Interest Rate from the Closing Date to the date of payment of the difference and (ii) to the extent that the Working Capital on the Closing Statement is less than the Working Capital on the Initial Closing Statement, Seller shall pay to Buyer an amount equal to such difference plus interest at the Default Interest Rate from the Closing Date to the date of payment of the difference, subject to Section 2.3(d) below. In each case, such payment shall be made in cash in immediately available funds within five (5) Business Days after the date the Closing Statement becomes final under Section 2.3(d). The Purchase Price shall be deemed to be increased or decreased (as the case may be) by the amounts calculated under this Section 2.3(c).

(d) Each Party shall make available to the other Party its work papers used to prepare its respective closing statement, and shall cooperate with the other Party in connection with the preparation thereof. Seller shall notify Buyer in writing within twenty (20) days after receipt by Seller of the Closing Statement of any objection to the items set forth therein, which notice shall include a reasonably detailed explanation of the reasons for each objection by Seller (an “ Objection Notice ”). Any item not so objected to

by Seller shall be conclusively deemed to have been approved by Seller and shall be conclusive and binding upon the Parties. If the Parties are unable to resolve all such disputes within thirty (30) days after the date of receipt by Buyer of the Objection Notice, then Buyer and Seller shall agree upon and designate one Independent Accounting Firm (the “ Designated Independent Accounting Firm ”) and the Designated Independent Accounting Firm shall, within thirty (30) days of its appointment, make a final and binding determination solely of the matters that remain in dispute and were properly included in the Objection Notice, and, based on such resolution, a final and binding determination of the Adjustment amount, if any. If Buyer and Seller are unable to agree upon a Designated Independent Accounting Firm, then each of the Buyer and Seller shall designate one Independent Accounting Firm and the two Independent Accounting Firms so selected shall, within ten (10) days after the date on which the later of the two Independent Accounting Firms are appointed, appoint a third Independent Accounting Firm (the “ Third Independent Accounting Firm ”) and the Third Independent Accounting firm shall, within thirty (30) days of its appointment, make a final and binding determination solely of the matters that remain in dispute and were properly included in the Objection Notice, and, based on such resolution, a final and binding determination of the Adjustment amount, if any. The Designated Independent Accounting Firm or the Third Independent Accounting Firm, as the case may be, shall act on the following basis: such Independent Accounting Firm shall act as an expert and not as an arbitrator; its terms of reference shall be to determine the appropriate Adjustment within thirty (30) days of its appointment, having strict regard to the application of the terms of this Agreement to the same (and, for the avoidance of doubt, disregarding other means of calculating the same, to the extent that such means are inconsistent with or not provided for in this Agreement); Buyer and Seller shall each provide such Independent Accounting Firm with all such information as it reasonably requires and the Independent Accounting Firm shall base its decision solely on such written submissions by Buyer and Seller and their respective representatives; such Independent Accounting Firm shall not hold any hearings, hear any oral testimony or otherwise seek or require any other evidence and it may not assign a value greater than the greatest value for such item claimed by either Party or smaller than the smallest value for such item claimed by either Party. The final written determination of such Independent Accounting Firm shall (in the absence of fraud or manifest error) be conclusive and binding on the Parties. The Independent Accounting Firms shall not have the power to amend or modify any terms of this Agreement. The costs of the Independent Accounting Firms shall be shared in proportion to its respective findings between Seller’s and Buyer’s positions.

Section 2.4 Allocation of Purchase Price; Tax Filings. The Purchase Price shall be allocated in compliance with section 1060 of the Code and the regulations promulgated thereunder. Buyer shall prepare and deliver to Seller an allocation schedule setting forth Buyer’s determination of the allocation (the “ Allocation Schedule ”) within thirty (30) days after the date hereof, which Allocation Schedule shall be subject to the approval of Seller, which shall not be unreasonably withheld or delayed. Seller shall have a reasonable opportunity to review and comment on the Allocation Schedule before granting such approval. The Allocation Schedule shall identify the transferor and transferee thereof, and shall be prepared in accordance with Treasury Regulation Section 1.1060-1 (or any comparable provision of state or local Tax law) or any

successor provision. Each of Buyer and Seller shall (i) timely file all forms (including Internal Revenue Service Form 8594) and Tax Returns required to be filed in connection with such allocation, (ii) be bound by such allocation for purposes of determining Taxes, (iii) prepare and file, and, if applicable, cause its Affiliates to prepare and file, its Tax Returns on a basis consistent with such allocation, and (iv) take no position, and cause its Affiliates to take no position, inconsistent with such allocation on any applicable Tax Return, in any audit or proceeding before any taxing authority, in any report made for Tax, financial accounting or any other purposes, or otherwise unless required by a “determination,” within the meaning of Section 1313(a)(1) of the Code. In the event that the allocation of the Purchase Price is disputed by any taxing authority, the Party receiving notice of such dispute shall promptly notify the other Party concerning the existence and resolution of such dispute.

Section 2.5 Assumption of Liabilities. Buyer shall assume and agree to pay, perform and discharge the Current Liabilities and the liabilities and obligations of Seller related to the Colstrip 4 Interests, including without limitation those liabilities and obligations contained in the Material Contracts, but solely with respect to liabilities or obligations arising solely during periods following the Closing Date.

Section 2.6 Real Property Taxes. To the extent not accounted for in the Working Capital Adjustment, real estate taxes due and payable in the year 2008 for the Real Property will be prorated between the Seller and the Buyer at the Closing Date based upon the respective periods of ownership during 2008; provided, however, that Seller shall be entitled to any property tax reductions or refunds for periods prior to the Closing Date (so long as such taxes or refunds are not included within Current Assets on the Initial Closing Statement or the Closing Statement); and provided further that the settlement with the Montana Department of Revenue in and of itself does not increase taxes for any period after the Closing Date. Prior to the Closing Date, Seller shall consult with Buyer respecting such reductions and shall not agree to any settlement that affects any period beyond the Closing Date without Buyer’s consent. Following the Closing Date, the Buyer shall consult with Seller respecting any reductions or increases that affect periods prior to the Closing Date and shall not agree to any settlements that increase taxes owed by, or decrease refunds or reductions owed to, Seller respecting periods prior to the Closing Date without Seller’s consent but shall control and conduct all negotiations, proceedings and communication with the Montana Department of Revenue and the Seller will reasonably cooperate with all such negotiations, proceedings and communication. The portion of such Taxes for which Seller shall be liable for a Tax period beginning before the Closing Date and ending after the Closing Date shall be determined by multiplying the amount of Taxes for the entire Tax period by a fraction, the numerator of which is the number of days in such Tax period prior to and including the Closing Date and the denominator of which is the total number of days in such Tax period.

Section 2.7 Seller Releases. Seller and Buyer shall use their Commercially Reasonable Efforts to cause the release and discharge of Seller from its obligations that arise after the Closing under the Material Contracts (the “ Section 2.7 Liabilities ”) as of the Closing Date, in written forms acceptable to the Seller.

ARTICLE 3

CLOSING; CONDITIONS PRECEDENT

Section 3.1 Closing. The closing of the transactions contemplated by this Agreement (the “ Closing ”) shall occur at the offices of Leonard, Street and Deinard, 150 South Fifth Street, Suite 2300, Minneapolis, Minnesota, commencing at 9:00 A.M. on either (i) the fifth (5 ^th ) Business Day after the satisfaction of all the conditions precedent to the Closing in accordance with Sections 3.4 and 3.5 hereof, or (ii) at such other time or place as may be mutually agreed upon by the Parties in writing; but in no event shall the Closing Date be sooner than the later of (A) September 30, 2008 or (B) 30 days after the date on which Seller has delivered to the Buyer both the MPSC Resolution Notice and the ROFR Resolution Notice (but not earlier than January 30, 2009 if such date of delivery is after November 15, 2008), without Buyer’s prior written approval. The date on which the Closing occurs is referred to herein as the “ Closing Date ”.

Section 3.2 Closing Deliveries by Buyer. At the Closing, Buyer shall deliver, or cause to be delivered, to Seller the following:

(1) The Purchase Price in cash in accordance with Section 2.2 hereof;

(2) A certificate of an authorized officer of Buyer, dated as of the Closing Date, in the form set forth in Exhibit A , certifying that (i) the representations and warranties of Buyer set forth in Article 5 are true, correct and complete as of the Closing Date, (ii) the conditions set forth in Section 3.4 have been fulfilled or waived and (iii) the covenants of Buyer set forth in Article 7 have been fulfilled or waived in writing by Seller.

(3) A duly executed copy of the Assignment and Assumption Agreement;

(4) A duly executed copy of each of the Power Purchase Agreements, the Default Supply Hedge PPAs and the BOP PPA;

(5) If the Hardin Consents shall have been obtained, a duly executed copy of the Hardin PPA; and

(6) Such other documents and certificates as Seller may reasonably request and which are customarily and ordinarily delivered in transactions similar to the transactions to be consummated at the Closing.

Section 3.3 C losing Deliveries by Seller. At the Closing, Seller shall execute and deliver, or cause to be executed and delivered, to Buyer the following:

(1) A duly executed copy of the Assignment and Assumption Agreement;

(2) A certificate of an authorized officer of Seller, dated as of the Closing Date, in the form set forth in Exhibit D , certifying that (i) the representations and warranties of Seller set forth in Article 4 are true, correct and complete as of the Closing Date, (ii) the conditions set forth in Section 3.5 have been fulfilled or waived and (iii) the covenants of Seller set forth in Article 7 have been fulfilled or waived in writing by Buyer;

(3) A duly executed copy of each of the Power Purchase Agreements, the Default Supply Hedge PPAs and the BOP PPA;

(4) If the Hardin Consents shall have been obtained, a duly executed copy of the Hardin PPA;

(5) A certificate that Seller is not a “foreign” person within the meaning of Section 1445 of the Code, which certificate shall set forth all information required by, and otherwise be executed in accordance with, Treasury Regulations Section 1.445-2(b)(2);

(6) A special or limited warranty deed conveying Seller’s interest in the Real Property subject to Permitted Liens (i.e., a deed (a) in which Seller warrants that the Real Property is free from all encumbrances made by the Seller other than Permitted Liens and that Seller will defend the same to the Buyer against the lawful claims and demands of all persons claiming by, through or under Seller, but against no other persons; and (b) that conveys any after-acquired title to the Real Property that Seller may subsequently obtain, but reserving for Seller, for so long as the Colstrip Project Transmission Agreement, dated May 6, 1981, as amended, is in effect, such easements as may be reasonably necessary for the purpose of owning, operating, maintaining, repairing, replacing, or removing any transmission facility and associated equipment in their current locations on the Real Property), all in a form reasonably acceptable to Buyer (which shall include language providing that such easements shall not, other than to a de minimis extent, adversely effect operations on the Real Property as currently conducted); and

(7) Such other documents and certificates as Buyer may reasonably request and which are customarily and ordinarily delivered in transactions similar to the transactions to be consummated at the Closing.

Section 3.4 Co nditions Precedent to the Closing Obligations of Buyer. The obligation of Buyer to proceed with the Closing contemplated hereby is subject to the fulfillment (in form and substance reasonably satisfactory to the Buyer) or waiver (by the Buyer, in its absolute discretion, by written notice to the Seller) on or prior to the Closing Date, or on or prior to such earlier date if specified below, of all of the following conditions:

(1) Seller shall have delivered to Buyer each of the documents described in Section 3.3 .

(2) The representations and warranties of Seller in Article 4 of this Agreement shall be true and correct without regard to any qualification respecting materiality or Material Adverse Effect on and as of the Closing Date except in such circumstances as shall not, individually or in the aggregate, have or reasonably be expected to have a Material Adverse Effect, and the covenants and agreements of Seller to be performed on or before the Closing Date shall have been performed in all material respects in accordance with this Agreement.

(3) Seller shall have obtained and provided copies to Buyer of all the Seller’s Consents required for the Closing listed in Schedule 4.6 .

(4) Seller shall have obtained and provided a copy to Buyer of the Required Regulatory Approvals and such approvals shall be in form and substance reasonably satisfactory (including no materially adverse conditions) to Buyer.

(5) No order or decree by any federal or state court or Governmental Authority which prevents the consummation of the sale of the Colstrip 4 Interests contemplated herein shall have been issued and remain in effect (each Party agreeing to use its Commercially Reasonable Efforts to have any such order or decree lifted) and no statute, rule or regulation shall have been enacted by any state or federal government or Governmental Authority which prohibits the consummation of the sale of the Colstrip 4 Interests.

(6) No event causing or constituting a Material Adverse Effect shall have occurred or be occurring.

(7) All liabilities and obligations resulting from or arising under the Mellon Transaction Documents and the SGE Transaction Documents shall have been prepaid, and the Mellon Transaction Documents and the SGE Transaction Documents shall have been terminated.

(8) Buyer and PPL Montana, LLC shall have entered into an agreement or agreements reasonably satisfactory to Buyer to either extend the term of and/or amend the: (i) Project Committee Vote Sharing Agreement, dated December 17, 1999, between The Montana Power Company and PPL Montana, LLC, and (ii) Generating Project Reciprocal Sharing Agreement, dated December 17, 1999, between The Montana Power Company and PPL Montana, LLC, in a manner that causes the material provisions of such agreements to remain in place after the termination of the SGE Transaction Documents and the Mellon Transaction Documents.

Section 3.5 Conditions Precedent to the Closing Obligations of Seller. The obligation of Seller to proceed with the Closing contemplated hereby is subject to the fulfillment (in form and substance reasonably satisfactory to the Seller) or waiver (by the Seller, in its absolute discretion, by written notice to the Buyer) on or prior to the Closing Date of all of the following conditions:

(1) Buyer shall have delivered to Seller each of the documents described in Section 3.2 .

(2) The representations and warranties of Buyer contained in Article 5 of this Agreement shall be true and correct without regard to any qualification respecting materiality or Material Adverse Effect on and as of the Closing Date except in such circumstances as shall not, individually or in the aggregate, have or reasonably be expected to have a Material Adverse Effect, and the covenants and agreements of Buyer to be performed on or before the Closing Date shall have been performed in all material respects in accordance with this Agreement.

(3) Buyer shall have obtained and provided copies to Seller of all of Buyer’s Consents required for the Closing listed on Schedule 5.5 .

(4) Seller shall have obtained the Required Regulatory Approvals and such approvals shall be in form and substance reasonably satisfactory (including no materially adverse conditions) to Seller.

(5) Buyer shall have delivered the Purchase Price as provided in Article 2 hereof.

(6) Either Seller shall have been released from its obligations pursuant to the Mellon Transaction Documents and the SGE Transaction Documents or (ii) all liabilities and obligations resulting from or arising under the Mellon Transaction Documents and the SGE Transaction Documents shall have been prepaid and terminated (and Buyer shall have paid the Make-Whole Premium in an amount not to exceed $8,500,000).

(7) All Owners and Project Users (as such terms are defined in the Ownership and Operations Agreement) shall have either declined to exercise or executed a waiver substantially in the form attached hereto as Exhibit L with respect to their rights of first refusal contained in Section 24 of the Ownership and Operations Agreement.

(8) No order or decree by any federal or state court or Governmental Authority which prevents the consummation of the sale of the Colstrip 4 Interests contemplated herein shall have been issued and remain in effect (each Party agreeing to use its Commercially Reasonable Efforts to have any such order or decree lifted) and no statute, rule or regulation shall have been enacted by any state or federal government or Governmental

Authority which prohibits the consummation of the sale of the Colstrip 4 Interests.

(9) The MPSC has failed to issue an order on or before November 30, 2008, including the Colstrip 4 Interests in the rate base of Seller at a value at least equal to the Purchase Price plus the sum of (x) the Buyer Termination Fee and (y) the Make-Whole Premium less (z) the Third Party Closing Cost.

Section 3.6 Failure to Close. In the event of any failure to satisfy or waive the conditions precedent set forth in Sections 3.4 or 3.5 , the termination and other provisions of Article 10 shall govern to the extent applicable.

ARTICLE 4

REPRESENTATIONS AND WARRANTIES OF SELLER

As of the date of this Agreement and as of the Closing Date, Seller hereby represents and warrants to Buyer that the statements contained in this Article 4 (as modified and supplemented by the disclosure schedule delivered to Buyer by Seller contemporaneously herewith setting forth, among other things, items the disclosure of which is necessary or appropriate either in response to an express informational requirement contained in or requested by a provision of this Article 4 , or as an exception to one or more representations or warranties contained in this Article 4 (the “ Disclosure Schedule ” or “ Schedule ”)) are true and correct provided that the mere inclusion of an item in a Disclosure Schedule as an exception to a representation or warranty or covenant shall not be deemed an admission by a party that such item (or any undisclosed item or information of comparable or greater significance) represents a material exception or fact, event or circumstance with respect to the Seller. The Disclosure Schedule shall be arranged in sections and paragraphs corresponding to the numbered and lettered sections and paragraphs contained in this Article 4; provided, however, the disclosures in any section or paragraph of the Disclosure Schedule shall qualify as disclosures pursuant to any other sections or paragraphs under the Agreement where such disclosure is reasonably apparent on the face of such disclosures, whether or not repeated under any section number where such disclosure might be deemed appropriate.

Section 4.1 Organization and Good Standing. Seller is a corporation duly organized, validly existing, and in good standing under the laws of the State ofDelaware and each other jurisdiction where such qualification is required, except where the failure to be so qualified has not had, and is not reasonably likely to have, individually or in the aggregate, a Material Adverse Effect.

Section 4.2 Authority. Seller has all requisite power and authority to own, and to carry on its businesses related to, the Colstrip 4 Interests as now being conducted. Seller has all requisite power and authority and has obtained all other applicable governmental, statutory, regulatory or other consents, licenses, waivers or exemptions necessary to execute and deliver this Agreement and, upon fulfillment of the conditions precedent set forth in Section 3.5, the Closing Documents, and to perform its obligations hereunder and thereunder. The execution, delivery, and performance of this Agreement and the Closing Documents and the transactions contemplated hereby and thereby have been duly and validly authorized by all requisite action on the part of Seller.

Section 4.3 Enforceability. This Agreement has been, and the Closing Documents, when executed and delivered in accordance herewith, will be, duly and validly executed and delivered by Seller and, assuming due and valid authorization, execution and delivery hereof by Buyer, is a valid and binding agreement of Seller, enforceable against it in accordance with their respective terms, subject to (i) applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance and other similar laws of general application from time to time in effect that affect creditors’ rights generally, (ii) general principles of equity, and (iii) the power of a court to deny enforcement of remedies generally based upon public policy.

Section 4.4 Title to Colstrip 4 Interests. Seller owns the Colstrip 4 Interests free and clear of all Liens, other than Permitted Liens, those liens set forth on Schedule 4.9(a) and the liens set forth on Schedule 4.4 (which will be terminated or released as of the Closing).

Section 4.5 No Violation or Breach. Except as set forth in Schedule 4.5 , and assuming that all of the Required Regulatory Approvals and Seller’s Consents have been obtained, neither the execution and delivery of this Agreement nor the Closing Documents, nor the consummation of the transactions contemplated hereby or thereby and performance of the terms and conditions hereof or thereof by Seller will result in a violation or breach of, or default under, any provision of the Certificate of Incorporation of Seller, or any agreement, indenture or other instrument (including any Material Contract) under which Seller or the assets comprising the Facility is bound.

Section 4.6 Consents. No consent, approval, authorization or permit of, or filing with or notification to, any Person is required for or in connection with the execution and delivery of this Agreement or the Closing Documents by Seller or for, or in connection with, the consummation of the transactions and performance of the terms and conditions contemplated hereby and thereby by Seller, including the termination of the Mellon Transaction Documents and the SGE Transaction Documents contemplated by Section 3.4(7) except for (i) the Required Regulatory Approvals; (ii) the third-party consents, filings, and notices set forth on Schedule 4.6 , and (iii) immaterial consents, approvals, authorizations, permits, filings or notices. Neither the execution and delivery of this Agreement or the Closing Documents nor the consummation of the transactions and performance of the terms and conditions hereof or thereof by Seller requires the consent, approval, authorization or permit of the MPSC or the Montana Consumer Counsel.

Section 4.7 Actions Pending. Except as set forth on Schedule 4.7 , there is no Action pending, or to Seller’s Knowledge, threatened in writing against Seller related to the Facility, except for Actions that would not if adversely determined result in a payment of in excess of $1,000,000 in the aggregate, or would result in a Material Adverse Effect on the Colstrip 4 Interests or operation of the Facility or have a Material Adverse Effect on Seller’s ability to perform its obligations under the Closing Documents.

Section 4.8 Co mpliance With Applicable Law. Except as set forth on Schedule 4.8 , Seller has complied in a timely manner and in all material respects with all Applicable Laws that specifically apply to the Colstrip 4 Interests. Seller is not in default of any order, decree or judgment of any Governmental Authority or arbitrator related to the Colstrip 4 Interests and there are no unsatisfied judgments against the Seller related to the Colstrip 4 Interests.

Section 4.9 Real Property:

(a) Except as set forth on Schedule 4.9(a) , Seller has good and valid title to, or a valid leasehold interest in or a valid and enforceable right to use, all of the Real Property, free and clear of any Liens, except for Permitted Liens. The Real Property includes all of the rights and interests in real property that the Seller has with regard to or relating to the Facility and the Site.

(b) There are no actions pending or, to the Knowledge of the Seller, threatened, that would alter the current zoning classification of the Real Property or alter any Applicable Laws, covenants, conditions or restrictions that would adversely affect the continued use of the Facility by the Seller. The Seller has not received written notice from any insurance company or Governmental Authority of any defects or inadequacies in the Real Property or the improvements thereon that would adversely affect the insurability or usability of the Real Property or such improvements or prevent the issuance of new insurance policies thereon. To the Knowledge of the Seller, no fact or condition exists that would result in the discontinuation of any existing necessary utilities to the Real Property or the termination of current access to and from the Real Property. To the Knowledge of the Seller, no portion of the Real Property has been condemned, requisitioned, or otherwise taken by any public authority and there is no pending or, to the Knowledge of the Seller, threatened or contemplated condemnation actions or special assessments with respect to the Real Property. To the Knowledge of the Seller, no Governmental Authority has given notice of or intends to make an assertion of rights to the Colstrip 4 Interests or the Real Property, such as those described in subsection (iii) of the definition of Permitted Liens.

(c) The Seller is not a “foreign person” as that term is defined in § 1445 of the Internal Revenue Code of 1986, as amended (the “ Code ”), and applicable regulations.

(d) All water, sewer, telephone and other similar utility systems serving the Facility are installed and operating and are sufficient to enable the Facility to continue to be used and operated in the manner currently being used and operated.

Section 4.10 Operations and Maintenance Expenses. Attached as Schedule 4.10 is Seller’s pro-rata share of the operating and maintenance expenses incurred in connection with operating Colstrip 3 and 4 during the calendar years 2006 and 2007 (collectively, the “ O&M Expenses ”). The O&M Expenses present fairly Seller’s expenses to operate and maintain the Facility for the periods reflected therein.

Section 4.11 Material Changes since December 31, 2007. Since December 31, 2007, there has been no Material Adverse Change in the financial or trading position or in the prospects of the Seller as they relate to the Facility, or in the prospects of the Facility and, to Seller’s Knowledge, no event, fact or matter has occurred which is likely to give rise to any such change. Since December 31, 2007, and except for the transactions contemplated by this Agreement and as set forth in Schedule 4.11 , the ownership and operation of the Colstrip 4 Interests and the Facility has been carried on in the ordinary and usual course.

Section 4.12 Brokerage Fees and Commissions. Seller has not incurred any obligation or entered into any agreement for any investment banking, brokerage, or finder’s fee or commission in respect of the transactions contemplated by this Agreement or the Closing Documents, except as set forth on Schedule 4.12 , which shall be the sole responsibility of Seller.

Section 4.13 Bankruptcy. There are no bankruptcy, reorganization, or arrangement proceedings pending against, being contemplated by, or to Seller’s Knowledge, threatened against, Seller or to Seller’s Knowledge, the assets comprising the Facility.

Section 4.14 Tax Matters. With respect to the Colstrip 4 Interests, except as set forth in Schedule 4.14 .

(a) all Tax Returns required to be filed by the Seller related to the Colstrip 4 Interests on or before the Closing Date have been or will be timely filed with the appropriate taxing authorities in all jurisdictions in which such Tax Returns are required to be filed;

(b) such Tax Returns related to the Colstrip 4 Interests are or will be true and correct in all material respects, and all Taxes reported on such Tax Returns have been or will be timely paid;

(c) Seller has not extended or waived the application of any statute of limitations of any jurisdiction regarding the assessment or collection of any Tax related to the Colstrip 4 Interests;

(d) there are no audits, claims, assessments, levies, administrative proceedings, or lawsuits pending, or to the Knowledge of Seller, threatened against Seller and relating to the Colstrip 4 Interests by any Governmental Authority in respect of Taxes, no Governmental Authority has given notice of any intention to assert any deficiency or claim for additional Taxes against Seller in respect of the Colstrip 4 Interests, and all deficiencies for Taxes asserted or assessed against Seller in respect of the Colstrip 4 Interests have been fully or timely paid or settled;

(e) there are no Liens for Taxes (other than for current Taxes not yet due or payable, or for Taxes being contested in good faith through appropriate proceedings) upon the Colstrip 4 Interests;

(f) there are no Tax rulings, requests for rulings, or closing agreements relating to Seller which affect its liability for Taxes relating to the Colstrip 4 Interests for any period (or portion of a period) after the date hereof;

(g) Seller has provided to Buyer copies of all Tax audit reports affecting the Colstrip 4 Interests that have been issued with respect to the previous five (5) taxable years of Seller; and

(h) none of the Colstrip 4 Interests are interests (other than “indebtedness,” within the meaning of Section 163 of the Code) in an entity taxable as a corporation, partnership, trust, or real estate mortgage investment conduit for federal income tax purposes.

Section 4.15 Material Contracts. The Material Contracts set forth on Schedule 2.1(d) , the Mellon Transaction Documents and the SGE Transaction Documents are all of the material agreements, contracts, real and personal property leases arrangements relating to the Colstrip 4 Interests, to which Seller or any of its Affiliates is a party, all of which are valid and in full force and effect, except as disclosed on Schedule 4.15 . The Material Contracts, Mellon Transaction Documents, SGE Transaction Documents and those agreements identified as Excluded Assets include all of the agreements relating to all of the rights and interests that the Seller has with regard to the Facility and the Site. True and correct copies of the Material Contracts have been provided to Buyer. Except as otherwise set forth in Schedule 4.15 , no consent is required with respect to any of the Material Contracts in connection with the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby. The Material Contracts are legal, valid and binding obligations of the parties thereto, and Seller has performed all obligations required to be performed under the Material Contracts and is not in material default under or in material breach of any Material Contract and to Seller’s Knowledge such other party has performed all obligations required to be performed by such other party and no other party is in material default under or in breach of any Material Contract. To Seller’s Knowledge, no event has occurred that, with the passage of time or the giving of notice or both, would result in material default or material breach thereunder. Except as set forth in Schedule 4.15 , to Seller’s Knowledge, no Material Contract has been breached or cancelled by any other party thereto. The Seller has provided to the Buyer true and correct copies of all of the Mellon Transaction Documents and all of the SGE Transaction Documents.

Section 4.16 Licenses. Schedule 4.16 lists all the Permits, material licenses, permissions, authorizations and consents that are required for the ownership and operation of the Facility in the manner in which it has been owned or operated, or which are held by the Seller related to the Colstrip 4 Interests or Seller’s ownership of the Facility (the “ Licenses ”), true and correct copies of which have been provided, or will be provided prior to Closing, to Buyer. Except as set forth in Schedule 4.16 , the Licenses

are in full force and effect, are not limited in duration or subject to any unusual or onerous conditions and have been complied with in all material respects. Other than as set forth in Section 4.6, Seller makes no representation regarding the transferability or assignment of the Licenses to Buyer. As of the date of this Agreement, Seller has not received, since January 1, 2006, any written notification from any Governmental Authority alleging that it is in material violation of any of such License and Seller has no Knowledge of any such violation.

Section 4.17 Insurance. Schedule 4.17 lists all insurance policies maintained by Seller or Operator covering the Colstrip 4 Interests and/or the Facility. Seller’s insurance policies, and to the Knowledge of Seller, Operator’s insurance policies, are in full force and effect and fully paid covering all periods up to and including the date hereof and the Closing Date and to the knowledge of Seller, it has not received written notice of cancellation of any such insurance policies other than those policies the absence or cancellation of which would not reasonably be expected to have a Material Adverse Effect; provided, however, none of Seller’s insurance policies will be in effect after Closing. Except as set forth on Schedule 4.17 , no claim is outstanding against the Seller under any such policy of insurance and, to the Knowledge of the Seller, there are no circumstances likely to give rise to such a claim.

Section 4.18 Environmental Laws. The Facility has been operated and maintained in compliance with all Environmental Laws (as defined below) and in a manner that will not give rise to any liability under any Environmental Laws, except where the failure to comply would not, individually or in the aggregate, have a Material Adverse Effect and except as disclosed on Schedule 4.18 . “ Environmental Laws ” shall mean all federal, state or local laws, statutes, ordinances, regulations, by-laws, rules, judgments, orders, notice requirements, court decisions, agency guidelines, criteria, standards or directives, or principles of law, restrictions, licenses or approvals which (i) exist and are in effect as of the Closing Date, and (ii) regulate or relate to the protection or clean-up of the environment, the manufacture, sale, use, treatment, storage, transportation, handling or disposal of hazardous, toxic or otherwise dangerous substances, Hazardous Substances, wastes or materials (whether gas, liquid or solid), the preservation or protection of waterways, surface water, groundwater, drinking water, air, wildlife, plants or other natural resources, or the health and safety of persons or property including, without limitation, protection of the health and safety of employees, or impose liability in relation to the matters set out above under any principle of common and civil law and equity including, but not limited to, causes of action in nuisance, trespass, negligence, and strict liability.

Without limiting the generality of the foregoing, except as set forth in Schedule 4.18:

(a) Notice of Violation. Seller has not received any written notice at any time that the Facility is in violation of the provisions of any Environmental Law the violation of which would have a Material Adverse Effect, and there is no pending or threatened lawsuit, administrative, governmental or other legal action to that effect.

(b) Hazardous Substances . To Seller’s Knowledge, Operator has not used, generated, treated, stored, transported, disposed of, handled or permitted any Hazardous Substance (as defined below) on, under, about or from the Facility that would, individually or in the aggregate, likely cause a Material Adverse Effect, and except for quantities of any such Hazardous Substances stored or otherwise held on, under or about the Facility in material compliance with all Environmental Laws and which are necessary for the operation of the Facility. “ Hazardous Substance ” shall mean any quantity of asbestos in any form, urea formaldehyde, PCBs, radon gas, crude oil or any fraction thereof, all forms of natural gas, petroleum products or by-products, any radioactive substance, any toxic, infectious, reactive, corrosive, ignitable or flammable chemical, chemical compound or mixture thereof, any special waste, deleterious substances and any other hazardous substance, material or waste (as defined in or for purposes of any Environmental Law), whether solid, liquid or gas.

(c) Environmental Conditions. To Seller’s Knowledge, there are no present or past Environmental Conditions (as defined below) in any way relating to the Real Property or the Facility. “ Environmental Conditions ” means the introduction into the soil, groundwater or environment of the Facility (through leak, spill, release, discharge, escape, emission, dumping, disposal or otherwise) of any pollution prior to the Closing Date including, without limitation, any contaminant, irritant or pollutant or Hazardous Substance (whether upon the Real Property and whether such pollution constituted at the time thereof a violation of any Environmental Law) as a result of which the Seller or, after the Closing, the Buyer has or may become liable to any Person.

Section 4.19 No Employees or Benefits Plans. Seller does not have any employees that are stationed or provide services at, or with respect to, the Facility and Seller does not maintain, sponsor, contribute to, is not required or obligated to contribute to, and is not a party to any Employee Benefit Plan related to the Colstrip 4 Interests that are being transferred to the Buyer. The employees of the Operator are not employees of the Seller and will not as a result of this Agreement become employees of the Buyer and Buyer shall have no obligation to provide any such employee of the Operator with any compensation or benefits.

Section 4.20 Labor Matters.

(a) Seller is not a party to any collective bargaining or other labor union contract relating to the personnel servicing the Facility exists.

(b) To Seller’s Knowledge, there is no pending or threatened, labor dispute, strike, work stoppage, lockout or other labor controversy relating to the employees of Operator.

(d) The Operator is an independent contractor of Seller.

Section 4.21 Audit Information. Attached hereto as Schedule 4.21 are the two (2) plant audits for the periods of January 1 through December 31, 2004 and for the period between January 1, 2005 through December 31, 2006 (the “ Audit Information ”). To Seller’s Knowledge, the Audit Information fairly presents the operational and billing condition of the Facility as of the dates set forth therein.

Section 4.22 Intellectual Property. To Seller’s Knowledge, (i) the conduct of the Facility’s business, as currently conducted, does not infringe upon or otherwise violate the Intellectual Property Rights of any Person, and (ii) no Person is infringing upon or otherwise violating the Intellectual Property Rights of the Seller or the Facility.

Section 4.23 Books and Records. The records of the Seller relating to the Facility have been made available to Buyer prior to the execution of this Agreement.

Section 4.24 No Options. Except as set forth on Schedule 4.24 and the rights of first refusal granted pursuant to the Ownership and Operation Agreement, there are no outstanding options or other rights or agreements for the purchase from the Seller of any of the Colstrip 4 Interests.

Section 4.25 Undisclosed Liabilities. Except as set forth on Schedule 4.25 , the Colstrip 4 Interests are not subject to any liability or obligation (whether absolute, contingent or otherwise), except (a) liabilities arising in the ordinary course of business under any contract or commitment, (b) those liabilities or obligations incurred in the ordinary course of business since December 31, 2007, and (c) liabilities that have not had, and are not reasonably likely to have, individually or in the aggregate, a Material Adverse Effect.

Section 4.26 Facility Operations.. To the Knowledge of Seller, the Facility is currently in operating order consistent with past practices.

Section 4.27 Affiliate Transactions. Other than as disclosed by this Agreement, no Affiliate of Seller is a party to any material agreement related to the Facility .

ARTICLE 5

REPRESENTATIONS AND WARRANTIES OF BUYER

As of the date of this Agreement and as of the Closing Date, Buyer represents and warrants to Seller as follows and, except as expressly set forth to the contrary herein,acknowledges that the Seller has entered into this Agreement in reliance upon such representations and warranties:

Section 5.1 Organization and Qualification. Buyer is a limited liability company duly organized, validly existing, and in good standing under the laws of the State of Delaware, and has all requisite power and authority and all necessary permits to carry on its business as now being conducted.

Section 5.2 Authority. Buyer has all requisite power and authority to execute and deliver this Agreement and the Closing Documents and to perform its obligations hereunder and thereunder. The execution, delivery, and performance of this Agreement and the Closing Documents and the transactions contemplated hereby and thereby have been duly and validly authorized by all requisite action on the part of Buyer.

Section 5.3 Enforceability. This Agreement has been and, when executed and delivered in accordance herewith, the Closing Documents will be, duly and validly executed and delivered by Buyer and constitute valid and binding obligations of Buyer enforceable against it in accordance with their respective terms, subject to (i) applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, and other similar laws of general application from time to time in effect that affect creditors’ rights generally, (ii) general principles of equity, and (iii) the power of a court to deny enforcement of remedies generally based upon public policy.

Section 5.4 No Violation or Breach. Neither the execution and delivery of this Agreement or the Closing Documents nor the consummation of the transactions and performance of the terms and conditions hereof or thereof by Buyer will (i) result in a violation or breach of any provision of the certificate of incorporation, bylaws or other similar governing documents of Buyer or any material agreement, indenture or other instrument under which Buyer is bound or (ii) violate any Applicable Law other than such violations as would not, individually or in the aggregate, have a Material Adverse Effect.

Section 5.5 Consents. No consent, approval, authorization or permit of, or filing with or notification to, any Person is required for or in connection with the execution and delivery of this Agreement or the Closing Documents by Buyer or for, or in connection with, the consummation of the transactions and performance of the terms and conditions contemplated hereby and thereby by Buyer, except for (i) the Required Regulatory Approvals; (ii) the third-party consents, filings, and notices set forth on Schedule 5.5 , and (iii) consents, approvals, authorizations, permits, filings, or notices that, if not obtained or made, would not, individually or in the aggregate, have a Material Adverse Effect.

Section 5.6 No Disputes; Litigation. There is no Action pending, or to Buyer’s Knowledge, threatened in writing against Buyer, except for Actions that would not have a Material Adverse Effect on Buyer’s ability to perform its obligations under the Closing Documents.

Section 5.7 Brokerage Fees and Commissions. Neither Buyer nor any Affiliate of Buyer has incurred any obligation or entered into any agreement for any investment banking, brokerage, or finder’s fee or commission in respect of the transactions contemplated by this Agreement or the Closing Documents for which Seller or any of the Seller’s Affiliates shall incur any liability.

Section 5.8 Bankruptcy. There are no bankruptcy, reorganization, or arrangement proceedings pending against, being contemplated by, or to the Knowledge of Buyer threatened against, Buyer.

Section 5.9 Financial Ability; Buyer LC. As of the date of this Agreement, the Buyer has, or as of the Closing Date the Buyer will have, readily available pursuant to binding commitments, or funds in an amount sufficient to enable the Buyer to pay the Purchase Price. Simultaneous with the execution and delivery of this Agreement, Buyer has provided to Seller an irrevocable standby letter of credit in the stated amount of the Termination Fee (the “ Buyer LC ”) which shall permit, subject to the terms and conditions of this Agreement, Seller to draw upon the Buyer LC in payment of the Termination Fee.

Section 5.10 OFAC Compliance. Buyer, and all beneficial owners of Buyer, are in compliance with, the requirements of Executive Order No. 13224, 66 Fed. Reg. 49079 (Sept. 25, 2001) (the “ Order ”) and other similar requirements contained in the rules and regulations of the Office of Foreign Asset Control, Department of the Treasury (“ OFAC ”) and in any enabling legislation or other Executive Orders in respect thereof (the Order and such other rules, regulations, legislation and orders are collectively referred to as the “ Orders ”); and neither Buyer, nor any beneficial owner of Buyer: (i) is listed on the Specially Designated Nationals and Blocked Persons List maintained by OFAC pursuant to the Order and/or on any other list of terrorists or terrorist organizations maintained pursuant to any of the rules and regulations of OFAC or pursuant to any other applicable Orders (such lists are collectively referred to as the “ Lists ”); (ii) is a person or entity who has been determined by competent authority to be subject to the prohibitions contained in the Orders; or (iii) is owned or controlled by, or acts for or on behalf of, any person or entity on the Lists or any other person or entity who has been determined by competent authority to be subject to the prohibitions contained in the Orders.

Section 5.11 Inspections. Buyer acknowledges and agrees that it has, prior to its execution of this Agreement, had full opportunity to conduct and has completed to its satisfaction Inspections of the Colstrip 4 Interests and the Facility. As of the date hereof and without limiting its rights pursuant to Section 6.1 , Buyer acknowledges that it is satisfied through such review and Inspections that no further investigation and study on or of the Colstrip 4 Interests or the Facility are necessary for the purposes of acquiring the Colstrip 4 Interests.

Section 5.12 Regulatory Matters.

(a) Buyer represents that its acquisition of the Colstrip 4 Interests would not reasonably be expected to result in (i) a denial of any Required Regulatory Approvals primarily based upon Buyer’s ability to exercise horizontal or vertical market power or (b) a denial of any Required Regulatory Approvals primarily based upon any increase in Buyer’s horizontal or vertical market power in the NorthWestern balancing authority area using the standards adopted by FERC in Order No. 697.

(b) Buyer represents that it or its Affiliates has currently effective authorization to make sales of wholesale power and ancillary services at market-based

rates and that it has made all material compliance filings regarding such market-based rate authorization.

(c) Buyer represents that it does not need approval from any Governmental Authority, other than the Required Regulatory Approvals, to acquire the Colstrip 4 Interests.

ARTICLE 6

ACCESS AND CONFIDENTIALITY

Section 6.1 General Access. Seller shall, until the Closing Date (or the earlier termination of this Agreement), (i) give Buyer and its authorized representatives reasonable access to all Records, personnel, offices and other facilities and properties related to the Colstrip 4 Interests, (ii) permit Buyer to make such copies and inspections thereof as Buyer may reasonably request, and (iii) furnish Buyer with such financial and operating data and other information with respect to the Facility and the Colstrip 4 Interests as Buyer may from time to time reasonably request; provided, that any such access shall be conducted at Buyer’s expense, at a reasonable time and on reasonable notice, under the reasonable supervision of Seller’s personnel and in such a manner as to maintain the confidentiality of such information, this Agreement, and the transactions contemplated hereby and not to interfere with the normal operation of the business of Seller or the Facility; and provided, further, that Buyer and its representatives shall comply with all applicable safety rules, regulations and procedures implemented by Seller or Operator, as the case may be. Buyer agrees to indemnify and hold harmless, release, and defend Seller and its Affiliates and their respective officers, directors, agents, employees, representatives, consultants, and advisors from and against any and all Losses arising, in whole or in part, from the acts or omissions of the Buyer, its Affiliates, and their respective officers, directors, agents, employees, representatives, consultants, and advisors arising under this Section 6.1 in connection with Buyer’s inspection of the Facility and other assets and records of Seller relating to the Colstrip 4 Interests prior to the Closing, respecting claims for personal injuries, property damage, and reasonable attorneys’ fees and expenses relating thereto. Nothing in this Article 6 shall be construed to permit Buyer or its representatives to have access prior to the Closing to any files, records, contracts, or documents of Seller not relating to the Facility or Colstrip 4 Interests or to any bids or offers received by Seller for the sale of any of the Colstrip 4 Interests, it being agreed that all such bids or offers shall be the sole property of Seller.

Section 6.2 Confidential Information. Buyer agrees to maintain in confidence all information made available to it under this Agreement and to cause its officers, directors, agents, employees, representatives, consultants, and advisors to maintain in confidence all information made available to them under this Agreement, all as provided in that certain confidentiality agreement dated February 26, 2008 (the “ Confidentiality Agreement ”), by and between Seller and Buyer, a copy of which is attached hereto as Exhibit H , and the terms of which are incorporated herein by reference and made a part of this Agreement; provided that the Confidentiality Agreement shall terminate upon Closing or two years following the date hereof. In the event that terms of the Confidentiality Agreement and this Agreement conflict, the terms of this agreement shall

control. The Seller shall keep confidential, and shall cause its Affiliates and advisors, consultants, employees and agents to keep confidential, all information relating to the Colstrip 4 Interests and the Facility following the Closing.

Section 6.3 No Other Contact. Prior to the Closing (or the earlier termination of this Agreement), Buyer shall not contact or correspond with any prospective alternative purchaser of the Colstrip 4 Interests or any regulatory body or other Governmental Authority or other Person associated with the Colstrip 4 Interests or the Facility, their business and operations or the transactions contemplated by this Agreement, except (i) with the prior written consent of Seller not to be unreasonably withheld, (ii) with respect to matters that are entirely unrelated to the Colstrip 4 Interests or the Facility, their business and operations or the transactions contemplated by this Agreement, (iii) as are in the public domain, and (iv) as may be required by any Applicable Law or any Governmental Authority.

ARTICLE 7

COVENANTS OF SELLER AND BUYER

Section 7.1 Conduct of Business Pending Closing. Seller covenants and agrees that:

(a) Exclusivity . Upon execution of this Agreement and except as noted below, Seller grants Buyer the exclusive right to acquire the Colstrip 4 Interests until the earlier of the Closing or termination of this Agreement. During such exclusivity period, Seller agrees to: (a) deal with Buyer, or its representatives, exclusively with regard to all aspects of the acquisition of the Colstrip 4 Interests, and (b) refrain, directly or indirectly, from soliciting, initiating, encouraging, or engaging in any discussions or negotiations with any Person or entering into any agreement, commitment, understanding or transaction with any Person concerning any proposal regarding the acquisition of the Colstrip 4 Interests, or providing any business, financial or other information relating to any such transaction to any person or entity. Notwithstanding the foregoing, Buyer and Seller acknowledge and agree that nothing in this Section 7.1, Section 7.2 or elsewhere in this Agreement shall restrict or impair Seller’s right or obligation to: (i) provide a right of first refusal to the Project Users under the Ownership and Operation Agreement, and (ii) engage in discussions with the MPSC and/or to make a filing with the MPSC requesting that the MPSC issue an order providing that the Colstrip 4 Interests be included in the rate base of the Seller at a value at least equal to the Purchase Price plus the sum of (i) the Buyer Termination Fee and (ii) the Make-Whole Premium less (iii) the Third Party Closing Costs and Seller may take all actions necessary to pursue such discussions and/or order including, without limitation, providing a copy of this Agreement to the MPSC; provided that Seller shall keep Buyer reasonably informed in respect of the status and substance of such discussions or filing. Notwithstanding anything to the contrary in this Agreement, in no event shall Buyer be required to provide information to, appear before or participate in hearings by or other discussions with the MPSC or the Montana Consumer Counsel. Notwithstanding, Seller shall notify the Buyer in writing immediately upon any Project User exercising a right of first refusal and nothing in this Section 7.1 shall be construed as limiting the termination rights of the Buyer or Seller

under Article 10 or Buyer’s or Seller’s rights if any party shall exercise such right of first refusal.

(b) Conduct of Business . Pending the Closing, and except as provided for in Section 7.1(a) or as reasonably necessary under emergency circumstances (or if required or prohibited pursuant to Applicable Law), and always subject to and consistent with the extent of Seller’s rights and limitations under the Ownership and Operations Agreement, Seller shall comply with the following:

(1) Seller shall conduct its business related to the Facility, and utilize its Commercially Reasonable Efforts to cause the Facility to conduct its business, in the ordinary course in accordance with past practice, and not make any material change with respect thereto;

(2) Seller shall use Commercially Reasonable Efforts to preserve intact the Colstrip 4 Interests in accordance with Good Operating Practices;

(3) Seller shall take all reasonable steps to preserve and protect the Colstrip 4 Interests;

(4) Seller shall use Commercially Reasonable Efforts to cause the Facility to be in compliance with all Applicable Laws and Licenses;

(5) except as set forth on Schedule 7.1 , Seller shall not assign, terminate, amend, give any consent with respect to or waive any rights under, in any material respect, any Material Contract;

(6) Seller shall not take any action or enter into any commitment with respect to or in contemplation of any liquidation, dissolution, recapitalization, reorganization, or other winding up of its business or operations related to the Colstrip 4 Interests;

(7) Seller shall not grant any express further Lien on any of the Colstrip 4 Interests, except for Permitted Liens, those Liens that will be terminated, without cost to Purchaser, at Closing;

(8) Seller shall provide prompt written disclosure to the Buyer of all relevant information which comes to the attention of the Seller in relation to any fact or matter (whether existing on or before the date of this Agreement or arising afterwards) which may constitute a breach of any of the Seller’s warranties; and

(9) Seller shall give Buyer at least five Business Days’ prior notice of (i) any meeting of or vote by the Committee (as that term is defined in the Ownership and Operations Agreement) or (ii) any meeting or other correspondence with PP&L Montana, LLC (or its representative) to

determine the use of the Shared Vote (as that term is defined in the Project Committee Vote Sharing Agreement). Seller shall vote against any action that is prohibited pursuant to Section 7.1(b) .

Section 7.2 Public Announcements. Without the prior written approval of the other Party, no Party shall issue, or permit any agent or Affiliate of such Party to issue, any press releases or otherwise make, or cause any agent or Affiliate of such Party to make, any public statements with respect to this Agreement or the Closing Documents or the transactions contemplated hereby or thereby, except when and to the extent that such release or statement is deemed in good faith by the releasing Party to be required by Applicable Law or under the applicable rules and regulations of a stock exchange or market on which the securities of the releasing Party or any of its Affiliates are listed. In each case to which such exception applies, the releasing Party will use its reasonable efforts to provide a copy of such release or statement to the other Party and incorporate any reasonable changes which are suggested by the non-releasing Party prior to releasing or making the statement.

Section 7.3 Actions by Parties. Each Party agrees to use Commercially Reasonable Efforts to satisfy the conditions to the Closing set forth in Sections 3.4 and 3.5 ; provided, however, that Seller shall not be deemed to have breached its obligations under this Section 7.3 by pursuing the discussions and/or filing with the MPSC described in clause (ii) of Section 7.1(a) .

Section 7.4 Further Assurances. Seller and Buyer each agree that from time to time after the Closing, it will execute and deliver or cause its respective Affiliates to execute and deliver such further agreements, certificates, documents or opinions and take (or cause its respective Affiliates to take) such other action, as may be reasonably necessary to carry out the purposes and intents of this Agreement. If at any time any Party shall reasonably request any further action by any other Party to carry out the purposes of this Agreement and the Closing Documents or to further effectuate the transactions contemplated hereby, such other Party, shall promptly take such action (including the prompt execution and delivery of further instruments and documents).

Section 7.5 Records.

(a) Maintenance . Buyer agrees to maintain the Records until the seventh (7th) anniversary of the Closing Date, or if any of the Records pertain to any claim or dispute pending on the seventh (7th) anniversary of the Closing Date (or such later date), Buyer shall maintain any of the Records designated by Seller until such claim or dispute is finally resolved and the time for all appeals has been exhausted. Buyer shall give Seller reasonable notice and an opportunity to retain any Records relating to Taxes in the event that Buyer determines to destroy or dispose of them during such period. After the Closing Date, except as might result in a waiver of any attorney/client, work product or like privilege or violate Applicable Laws, Buyer shall provide Seller and its representatives during normal business hours, and upon reasonable notice, reasonable access to, and the right to copy, the Records existing as of the Closing Date, at Seller’s cost and expense, for the purposes of:

(1) complying with any Applicable Law affecting Seller’s ownership of the Colstrip 4 Interests prior to the Closing Date;

(2) preparing any audit of the books and records of any third party relating to the Colstrip 4 Interests or the Facility prior to the Closing Date, or responding to any audit prepared by such third parties;

(3) preparing Tax Returns;

(4) responding to or disputing any Tax audit; or

(5) asserting, defending, or otherwise dealing with any inquiry, investigation, claim or dispute under this Agreement or with respect to the Colstrip 4 Interests or the Facility.

(b) Privilege . Buyer shall not after the Closing Date intentionally waive the attorney/client, work product, or like privilege of Seller or its Affiliates with respect to any of the Records existing as of the Closing Date, without Seller’s prior written consent.

Section 7.6 Regulatory and Other Authorizations and Consents Filings.

(a) General. Each Party shall use Commercially Reasonable Efforts to obtain all authorizations, consents, orders, and approvals of, and to give all notices to and make all filings with, all Governmental Authorities and third parties that may be or become necessary for its execution and delivery of, and the performance of its obligations under, this Agreement and will cooperate fully with the other Party in promptly seeking to obtain all such authorizations, consents, orders, and approvals, giving such notices, and making such filings.

(b) Required Regulatory Approvals. Without limiting the generality of the undertakings pursuant to Section 7.6(a) above, each Party shall (i) use its Commercially Reasonable Efforts to: gather and obtain all necessary information to complete the filings, which shall be prepared and filed by Seller, seeking the Required Regulatory Approvals (including all reports, studies, and exhibits related thereto); consult with the other Party regarding any such filings, consider and incorporate all reasonable comments (if any) submitted by the other Party or its representatives; and the Seller shall make such filings as soon as practicable following the execution and delivery of this Agreement, if not already completed; (ii) prior to and during the pendency of any notice and approval period with respect to such filings, (1) consult with the other Party prior to providing any supplemental information to the applicable regulatory authority and provide prompt written notice to the other Party of all discussions and correspondence with the applicable regulatory authorities that reasonably relates to or bears upon such filings, and (2) use all Commercially Reasonable Efforts and act in good faith to expedite and obtain the Required Regulatory Approvals. In furtherance and not in limitation of the foregoing, each of the Parties agrees to use its Commercially Reasonable Efforts to file Notification and Report Forms under the HSR Act and similar applications with any other applicable Governmental Authority whose approval is required in connection with the consummation of the purchase by Buyer of the Colstrip 4 Interests as promptly as

practicable following the date of this Agreement, the date of which shall be mutually agreed upon by Buyer and Seller.

(c) Transfer. If the transfer of any instrument, contract, license, lease, permit, or Material Contract to Buyer hereunder shall require the consent of any party thereto other than Seller, then such item shall not be assigned to or assumed by Buyer, if an actual or attempted assignment thereof would constitute a breach thereof or default thereunder. In such case, Seller and Buyer shall cooperate and each shall use Commercially Reasonable Efforts to obtain such consents to the extent required by such other parties and, if and when any such consents are obtained, to transfer the applicable instrument, contract, license, lease, permit, or Material Contract. If any such consent cannot be obtained, Seller shall cooperate in any commercially reasonable arrangement designed to obtain for Buyer all benefits, obligations and privileges of the applicable instrument, contract, license, lease, permit, or document.

(d) Third Party Consents. Seller shall use its Commercially Reasonable Efforts, and Buyer shall use its Commercially Reasonable Efforts to assist Seller, in obtaining any and all consents of third parties and Governmental Authorities necessary or advisable in connection with the transactions contemplated by this Agreement and the Closing Documents, including the provision by Buyer to such third parties and Governmental Authorities of such publicly available financial statements and other publicly available financial information with respect to Buyer and its parent company or companies as such third parties or Governmental Authorities may reasonably request.

Section 7.7 Fees and Expenses. Except as otherwise expressly provided in this Agreement, all fees and expenses, including fees and expenses of counsel, financial advisors, and accountants, incurred in connection with this Agreement and the Closing Documents and the transactions contemplated hereby, shall be paid by the Party incurring such fee or expense, whether or not the Closing shall have occurred; provided , that all filing fees and other expenses required in connection with any filings under the HSR Act shall be borne 50% by Buyer and 50% by Seller.

Section 7.8 Caualty Loss.

(a) If, from the date of this Agreement to the date of Closing, the Facility is damaged or destroyed by any casualty event or is taken, in part or in whole, by any Governmental Authority, then Seller shall deliver to Buyer, no later than 45 days following such event, a good faith and reasonable estimate of (1) in the case of such a casualty event, the sum of (a) the cost of restoring the Facility to a condition substantially similar to its condition immediately prior to such casualty event plus (b) the amount of any lost profits with respect to the Colstrip 4 Interests reasonably expected to accrue after Closing as a result of such casualty event, or (2) in the case of such a taking, the reduction in the value of the Colstrip 4 Interests as a result of such taking. Such good faith and reasonable estimate in the case of clauses (1) and (2) shall be net of and after giving effect to (without double-counting) (i) any insurance, condemnation award or other third party proceeds received by the Seller, (ii) any tax benefits related thereto, (iii) any amounts expended by the Seller prior to Closing to restore damage caused by

such casualty event (provided that any such restoration efforts and expenditures by Seller must in all events be reasonably satisfactory to Buyer) and (iv) adjustments relating to such casualty event or condemnation that are to be included in Working Capital (as applicable, such estimate being a “ Casualty Estimate ”). Any Casualty Estimate shall be prepared based on the best reasonably available information as of the date of such Casualty Estimate and if the Closing is expected to occur prior to the expiration of the 45 day period referenced above then the determination of such Casualty Estimate shall not delay, impair or otherwise affect the Closing Date except that the Closing Date shall be extended, if necessary, to the fifth Business Day after such Casualty Estimate is made.

(b) Notwithstanding the provisions of Section 7.8(a), if Buyer objects to Seller’s estimate pursuant to Section 7.8(a) within five (5) Business Days of receipt thereof, then (a) such estimate shall be deemed to not be the Casualty Estimate and (b) Seller shall cause an independent firm reasonably acceptable to Buyer and Seller to prepare the appropriate estimate, which estimate shall be the Casualty Estimate.

(c) Buyer may elect to reduce the Purchase Price by an amount equal to such Casualty Estimate in which case Seller shall have no further liability hereunder due to such casualty or condemnation event and such casualty or condemnation event shall not otherwise affect the Closing, provided that at the Closing, Seller shall turn over all insurance or taking proceeds paid to Seller and not yet spent on restoration. If a Casualty Estimate with respect to a casualty or condemnation event is greater than $20,000,000, then Buyer may, by written notice to Sellers, elect to terminate this Agreement in accordance with Section 10.1.

Section 7.9 Financing Cooperation. At Buyer’s request, Seller shall, and shall use its Commercially Reasonable Efforts to: (i) cause the other Project Users to provide reasonable cooperation with Buyer and Buyer’s lenders in connection with Buyer obtaining financing for the consummation of the transactions contemplated hereby, including making representatives of Seller available at reasonable times in connection with the syndication of any debt financing and, (ii) assist Buyer in obtaining all customary waivers, estoppels, approvals, opinions, transfer documents and consents from counterparties to the Material Contracts.

Section 7.10 Insurance Cooperation. Seller shall use Commercially Reasonable Efforts to assist Buyer in making arrangements to obtain customary insurance with respect to the Colstrip 4 Interests.

Section 7.11 Right of First Refusal. Without limiting the generality of the undertakings pursuant to Section 7.3 above, Seller shall use its Commercially Reasonable Efforts to: (i) within five (5) Business Days of the date hereof, notify the Owners and Project Users (as such terms are defined in the Ownership and Operations Agreement) concerning their execution of a waiver substantially in the form attached hereto as Exhibit L with respect to their rights of first refusal contained in Section 24 of the Ownership and Operations Agreement, (ii) use its Commercially Reasonable Efforts to satisfy the condition to the Closing set forth in Section 3.5(7), and (iii) keep Buyer reasonably informed in respect of the status and substance of such discussions, including

by providing copies of all relevant correspondence to Buyer. Seller shall immediately notify Buyer if at any time any Project User or Owner (as such terms are defined in the Ownership and Operations Agreement) shall exercise or indicate their intent to exercise any such right of first refusal. Seller shall (a) as soon as practicable, but in any event no later than October 15, 2008, notify Buyer in writing that the condition set forth in Section 3.5(7) has been satisfied (the “ ROFR Resolution Notice ”), or (b) no later than October 15, 2008, notify Buyer in writing that the condition set forth in Section 3.5(7) has not yet been satisfied (the “ ROFR Continuation Notice ”)

Section 7.12 MPSC Matters. Without limiting the generality of the undertakings pursuant to Section 7.3 above, Seller shall use its Commercially Reasonable Efforts to: (i) prior to June 30, 2008, commence discussions with the MPSC and/or make a filing with the MPSC described in clause (ii) of Section 7.1(a) (such filing to include a request that the MPSC act within 120 days of the date of such filing), and (ii) keep Buyer reasonably informed in respect of the status and substance of such discussions or filing. Seller shall (a) as soon as practicable, but in any event no later than November 30, 2008, notify Buyer in writing that (1) the MPSC has failed to issue an order including the Colstrip 4 Interests in the rate base of Seller at a value at least equal to the Purchase Price plus the sum of (x) the Buyer Termination Fee and (y) the Make-Whole Premium less (z) the Third Party Closing Costs, and (2) that Seller has irrevocably waived its right to terminate this Agreement pursuant to Section 10.1(c)(3) (the “ MPSC Resolution Notice ”), or (b) no later than November 30, 2008, notify Buyer in writing that the MPSC has issued an order including the Colstrip 4 Interests in the rate base of Seller at a value at least equal to the Purchase Price plus the sum of (x) the Buyer Termination Fee and (y) the Make-Whole Premium less (z) the Third Party Closing Costs (the “ MPSC Inclusion Notice ”).

ARTICLE 8

LIMITATIONS

Section 8.1 Disclaimer of Warranties.

(a) Information. Except as provided in Article 4, Seller makes no representation or warranty, express, implied, at common law, statutory or otherwise, with respect to the accuracy or completeness of the information, records, and data now, heretofore, or hereafter made available to Buyer in connection with this Agreement (including any description of the Colstrip 4 Interests or the Facility; revenue, price and expense assumptions; electricity demand forecasts; or environmental information or any other information furnished to Buyer by Seller or any Affiliate of Seller or any director, officer, employee, counsel, agent, or advisor thereof).

(b) "AS IS" SALE. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN ANY OTHER PROVISION OF THIS AGREEMENT, IT IS THE EXPLICIT UNDERSTANDING OF EACH PARTY THAT NOTHING IN THIS AGREEMENT SHALL IMPLY OR BE CONSTRUED TO MEAN THAT SELLER OR ANY OF ITS AFFILIATES ARE MAKING ANY REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS, IMPLIED, AT COMMON LAW,

STATUTORY OR OTHERWISE, EXCEPT FOR THE REPRESENTATIONS OR WARRANTIES EXPRESSLY SET FORTH IN ARTICLE 4 OF THIS AGREEMENT, AND IT IS FURTHER UNDERSTOOD BY THE PARTIES THAT BUYER, WITH SUCH EXCEPTIONS, TAKES THE COLSTRIP 4 INTERESTS " AS IS " AND " WHERE IS ." WITHOUT LIMITING THE GENERALITY OF THE IMMEDIATELY PRECEDING SENTENCE, EXCEPT AS PROVIDED IN ARTICLE 4 OF THIS AGREEMENT, SELLER HEREBY EXPRESSLY DISCLAIMS AND NEGATES ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AT COMMON LAW, STATUTORY, OR OTHERWISE, RELATING TO (I) THE CONDITION OF THE FACILITY OR ANY OF THE COLSTRIP 4 INTERESTS (INCLUDING ANY IMPLIED OR EXPRESS WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OR OF CONFORMITY TO MODELS OR SAMPLES OF MATERIALS), OR (II) THE STATUS OF OR PERFORMANCE BY THE SELLER OR ANY CONTRACTING PARTY WITH RESPECT TO ANY MATERIAL CONTRACT. BUYER HAS AGREED NOT TO RELY ON ANY REPRESENTATION MADE BY SELLER WITH RESPECT TO THE CONDITION, QUALITY, OR STATE OF THE COLSTRIP 4 INTERESTS AND THE FACILITY, EXCEPT FOR THOSE IN THIS AGREEMENT. THE PROVISIONS CONTAINED IN THIS AGREEMENT ARE THE RESULT OF EXTENSIVE NEGOTIATIONS BETWEEN BUYER AND SELLER, AND NO OTHER ASSURANCES, REPRESENTATIONS OR WARRANTIES WERE MADE BY SELLER IN THE INDUCEMENT THEREOF, EXCEPT AS PROVIDED HEREIN.

Section 8.2 Limitations of Damages. Notwithstanding anything to the contrary contained in this Agreement, Seller and Buyer agree that the recovery by either Party of any damages suffered or incurred by such Party as a result of any breach of any representation or warranty by the other Party of any of its obligations under this Agreement shall be limited to the actual damages suffered or incurred by the non-breaching Party as a result of the breach by the breaching Party of its representations and warranties herein and in no event shall the breaching Party be liable to the non-breaching Party for any incidental, special, consequential, exemplary or punitive damages suffered or incurred by the non-breaching Party as a result of the breach by the breaching Party of any of its representations and warranties herein. Nothing in this Section 8.2 shall limit the right of any party to recover with respect to any claim of damages asserted by any Third Party.

Section 8.3 Limitations on Individual Liability. Buyer agrees, to the fullest extent permitted by law, that none of Seller, and its directors, officers, employees, shareholders, members, Affiliates, controlling persons, agents, advisors or representatives shall have any liability or responsibility whatsoever to Buyer or its directors, officers, employees, Affiliates, controlling persons, agents or representatives on any basis (including in contract or tort, under federal or state securities laws or otherwise) based upon any information provided or made available, or statements made (including in materials furnished in the data room, in presentations by Seller’s management or otherwise), to Buyer or its directors, officers, employees, Affiliates, controlling persons, advisors, agents or representatives (or any omissions therefrom), including in respect of the specific representations and warranties of Seller set forth in this Agreement, except

that the foregoing limitations shall not apply to Seller insofar as Seller makes the representations and warranties set forth in Article 4 of this Agreement, but always subject to the limitations and restrictions contained in this Article 8 .

Section 8.4 Environmental Waiver and Release. From and after the Closing, all rights or remedies, other than pursuant to this Agreement, that Buyer may have against Seller at or under Applicable Law with respect to any Environmental Liabilities or any other environmental matters are waived.

ARTICLE 9

INDEMNIFICATION

Section 9.1 Indemnification. From and after the Closing, subject to the other terms and limitations set forth in this Agreement, including Section 8.2 , Section 9.3 and Section 9.4 , each Party (the “ Indemnifying Party ”) shall indemnify, defend, reimburse, and hold harmless the other Party, (each such Person, an “ Indemnified Party ” and, collectively, the “ Indemnified Parties ”) from and against any and all Losses asserted against or incurred by any Indemnified Party relating to, resulting from or arising out of (i) any breach of the representations and warranties made in this Agreement by the Indemnifying Party, (ii) any breach of the covenants or obligations of the Indemnifying Party or any of its Affiliates under this Agreement, (iii) with respect to the Seller as an Indemnifying Party and the Buyer as the Indemnified Party, any Retained Liabilities and (iv) with respect to the Buyer as an Indemnifying Party and the Seller as the Indemnified Party, any Section 2.7 Liabilities.

Section 9.2 Third Party Claims.

(a) If any Indemnified Party receives notice of the assertion of any claim or of the commencement of any claim, action, or proceeding made or brought by any Person who is not a party to this Agreement or any Affiliate of a Party to this Agreement (a “ Third Party Claim ”) with respect to which indemnification is to be sought from an Indemnifying Party, the Indemnified Party shall give such Indemnifying Party reasonably prompt written notice thereof, but in any event such notice shall not be given later than ten (10) calendar days after the Indemnified Party’s receipt of written notice of such Third Party Claim. Such notice shall describe the nature of the Third Party Claim in reasonable detail and shall indicate the estimated amount, if practicable, of the Loss that has been or may be sustained by the Indemnified Party. The Indemnifying Party will have the right to participate in or, by giving written notice to the Indemnified Party, to elect to assume the defense of any Third Party Claim at such Indemnifying Party’s expense and by such Indemnifying Party’s own counsel, provided that the counsel for the Indemnifying Party who shall conduct the defense of such Third Party Claim shall be reasonably satisfactory to the Indemnified Party; provided, that nothing in this Section 9.2 shall be construed as allowing the Indemnifying Party to assume the defense of any Third Party Claim if (i) it is reasonably foreseeable that the damages sought in such Third Party Claim (together with the reasonably foreseeable damages relating to any unresolved claims for indemnification and any indemnifications theretofor made pursuant to this Agreement) are likely to exceed the Threshold (as defined below) or (ii) the matter

involves potential criminal sanctions against Buyer. The Indemnified Party shall cooperate in good faith in such defense at the Indemnifying Party’s expense. If an Indemnifying Party elects not to assume, or fails to assume, the defense of any Third Party Claim, the Indemnified Party may compromise or settle such Third Party Claim over the objection of the Indemnifying Party, which settlement or compromise shall conclusively establish the Indemnifying Party’s liability pursuant to this Agreement.

(b) Except respecting Third Party Claims that the Indemnifying party is not entitled to defend, if, within ten (10) calendar days after an Indemnified Party provides written notice to the Indemnifying Party of any Third Party Claims, the Indemnified Party receives written notice from the Indemnifying Party that such Indemnifying Party has elected to assume the defense of such Third Party Claim, the Indemnifying Party will not be liable for any legal expenses subsequently incurred by the Indemnified Party in connection with the defense thereof for so long as the Indemnifying Party shall continue the diligent defense of such Third Party Claim. Without the prior written consent of the Indemnified Party, the Indemnifying Party shall not enter into any settlement of any Third Party Claim which would lead to liability or create any financial or other obligation or restriction on the part of the Indemnified Party. If a firm offer is made to settle a Third Party Claim that would not lead to liability or the creation of a financial or other obligation or restriction on the part of the Indemnified Party and the Indemnifying Party desires to accept and agree to such offer, the Indemnifying Party shall give written notice to the Indemnified Party to that effect. If the Indemnified Party fails to consent to such firm offer within ten (10) calendar days after its receipt of such notice, the Indemnifying Party shall be relieved of its obligations to defend such Third Party Claim and the Indemnified Party may contest or defend such Third Party Claim. In such event, the maximum liability of the Indemnifying Party as to such Third Party Claim will be the amount of such settlement offer plus reasonable costs and expenses paid or incurred by Indemnified Party up to the date of said notice.

(c) Any claim by an Indemnified Party on account of a Loss which does not result from a Third Party Claim (a “ Direct Claim ”) shall be asserted by giving the Indemnifying Party reasonably prompt written notice thereof, stating the nature of such claim in reasonable detail and indicating the estimated amount, if practicable. The Indemnifying Party shall have a period of thirty (30) calendar days within which to respond to such Direct Claim. If the Indemnifying Party does not respond within such thirty (30) calendar day period, the Indemnifying Party shall be deemed to have accepted such claim. If the Indemnifying Party fails to accept such claim, the Indemnified Party will be free to seek enforcement of its right to indemnification under this Agreement.

(d) If the amount of any Loss, at any time subsequent to the making of an indemnity payment in respect thereof, is reduced by recovery, settlement or otherwise under or pursuant to any insurance coverage, or pursuant to any claim, recovery, settlement or payment by, from or against any other entity, the amount of such reduction, less any costs, expenses or premiums incurred in connection therewith (together with interest thereon from the date of payment thereof at the publicly announced prime rate then in effect) shall promptly be repaid by the Indemnified Party to the Indemnifying Party.

(e) A failure to give timely notice as provided in this Section 9.2 shall not affect the rights or obligations of any Party hereunder except if, and only to the extent that, as a result of such failure, the Party which was entitled to receive such notice was actually prejudiced as a result of such failure.

Section 9.3 Survival. Each covenant and agreement contained in this Agreement or in any Closing Document delivered pursuant hereto shall survive the Closing and be enforceable until such covenant or agreement has been fully performed. All representations and warranties contained in this Agreement (other than Fundamental Representations and the representations and warranties contained in Sections 4.14 (Tax Matters) and 4.18 (Environmental Laws)) shall survive for a period of twelve (12) months after the Closing and shall thereafter expire. All representations and warranties set forth in Sections 4.1 (Organization and Good Standing), 4.2 (Authority), 4.3 (Enforceability), 4.4 (Title to Colstrip 4 Interests), 4.12 (Brokerage Fees and Commissions) and Sections 5.1 (Organization and Good Standing), 5.2 (Authority), and 5.3 (Enforceability) and 5.7 (Brokerage Fees and Commissions) (the “ Fundamental Representations ”) and any claim related to fraud or intentional misrepresentation shall survive indefinitely. All representations and warranties set forth in Section 4.14 (Tax Matters) shall survive until the date that is 30 days after the termination of the applicable statute of limitations (including all periods of extension, whether automatic or permissive). All representations and warranties set forth in Section 4.18 (Environmental Laws) shall survive until the date that is two (2) years after the Closing and shall thereafter expire. Any representation or warranty with respect to which a claim has been delivered for a breach thereon prior to the expiration of the applicable survival period shall survive until such claim is resolved.

Section 9.4 Limitations on Indemnification.

(a) Dollar Limitations . Anything to the contrary notwithstanding, (a) no Indemnifying Party shall be obligated to make any payment for indemnification respecting any breach of representation or warranty in this Agreement under this Article 9 in excess of five percent (5%) of the Purchase Price, and (b) no Indemnifying Party shall be obligated to make any payment for indemnification for any breach of representation or warranty under this Article 9 until such party’s aggregate indemnification obligations exceed $500,000 (the “ Threshold ”), whereupon such party shall be obligated to pay all such indemnification obligations in excess of the Threshold; provided , however , the limitations in this Section 9.4(a) shall not apply to breaches of the Fundamental Representations or the representations and warranties contained in Sections 4.14 (Tax Matters) or 4.19 (No Employees or Benefits).

(b) Mitigation . Any indemnifiable Loss shall be net of (A) the dollar amount of any insurance or other proceeds, net of any reasonable costs, expenses or premiums, actually received by the Indemnified Party with respect to such Loss and (B) Tax benefits to the Indemnified Party, to the extent actually realized by the Indemnified Party. Any Party seeking indemnity hereunder shall use Commercially Reasonable Efforts to assert claims (including both costs of defense and indemnity) under applicable insurance policies with respect to any such Loss and the reasonable costs of such Commercially

Reasonable Efforts shall be an indemnifiable claim under this Agreement. The Indemnified Party shall use Commercially Reasonable Efforts to mitigate all losses, damages and the like relating to a claim under these indemnification provisions, including availing itself of any defenses, limitations, rights of contribution, claims against third Persons and other rights at law or equity, which shall include the reasonable expenditure of money to mitigate or otherwise reduce or eliminate any loss or expenses for which indemnification would otherwise be due, provided that the Indemnifying Party shall pay the Indemnified Party for the reasonable expenditures in undertaking the mitigation in advance.

(c) Materiality. Determinations of indemnity, including any determination or calculation regarding Losses, shall be made without regard to any qualification respecting materiality or Material Adverse Effect.

(d) Retained Liabilities. Notwithstanding the foregoing, without limiting the Buyer’s right to indemnification under Section 9.1(a) generally, Seller’s liability and obligation for Losses arising out of Section 9.1(a)(iii) in respect of Retained Liabilities shall not be subject to the Threshold or any limitation pursuant to Sections 8.2, 9.3 , 9.4(a) , or 9.4(b) ; provided, however , that for eighteen (18) months following the Closing Date (the “Post-Closing Indemnity Period” ), the threshold and limitations contained in Section 8.2 , Section 9.3 and Section 9.4 shall not apply in the event Buyer incurs Losses arising from the liabilities described in Section 2.1(f)(iii) or Section 2.1(f)(v) ; provided further , that, following the Post-Closing Indemnity Period, the threshold and the limitations contained in Section 8.2 , Section 9.3 and Section 9.4 shall apply in the event Buyer incurs Losses arising from the liabilities described in Section 2.1(f)(iii) or Section 2.1(f)(v) but only so long as such Losses were a result of a breach by Seller of a representation contained in this Agreement that was subject to such limitations (but without regard to survival period).

Section 9.5 Special Indemnity. Notwithstanding any other provision to the contrary in this Agreement, from and after the Closing, the Seller as the Indemnifying Party shall indemnify, defend, reimburse, and hold harmless the Buyer as the Indemnified Party from and against any and all Losses asserted against or incurred by the Buyer relating to, resulting from or arising out the Buyer being required to participate in or respond to any Action before any federal or state court or Governmental Authority challenging the legality of the transactions contemplated by this Agreement or otherwise involving the performance of this Agreement including, without limitation, the proceedings described in the second sentence of Section 7.1(a) . Seller’s liability and obligation for Losses arising out of this Section 9.5 shall not be subject to the Threshold or any limitation pursuant to Sections 8.2, 9.3, 9.4(a), or 9.4(b).

Section 9.6 Sole and Exclusive Remedy. Except for the right to specific performance granted under Section 12.15 following the Closing, the rights set forth in this Article 9 shall be Buyer’s sole and exclusive remedy against the Seller for misrepresentations or breaches of covenants contained in this Agreement and the Closing Documents or in connection with the transactions contemplated herein; provided, however, that nothing herein shall prevent Buyer from bringing an action based upon allegations of fraud.

ARTICLE 10

TERMINATION AND REMEDIES

Section 10.1 Methods of Termination. This Agreement and the transactions contemplated hereby may be terminated prior to the Closing Date as follows:

(a) at any time by mutual written agreement of Seller and Buyer; or

(b) by either Seller or Buyer upon the material breach of this Agreement by the other, to be effective, if curable, upon the breaching Party’s failure to cure within five (5) Business Days of notice given, and if incurable, upon notice given, provided that the Party seeking to terminate has complied with and fulfilled its obligations and undertakings under this Agreement in all material respects; or

(1) at any time after any final, non-appealable decision is made by the applicable Governmental Authority denying any Required Regulatory Approval; or

(2) at any time after January 30, 2009 if the Closing has not yet occurred; or

(3) at any time effective upon written notification to Buyer in the event that the MPSC has issued an order including the Colstrip 4 Interests in the rate base of Seller at a value at least equal to the Purchase Price plus the sum of (i) the Buyer Termination Fee and (ii) the Make-Whole Premium less (iii) the Third Party Closing Costs;

provided further , that the event triggering Seller’s termination right did not result from the failure by Seller to fulfill any undertaking or commitment provided for herein on the part of Seller that is required to be fulfilled on or prior to the Closing Date or any such applicable date.

(d) by Buyer, in the following events:

(1) at any time prior to the Closing if a Material Casualty Loss has occurred that is not completely covered by insurance or, at Seller’s option, by a combination of insurance and a reduction in the Purchase Price in an amount equal to the reasonable commercial value of such loss that is not covered by insurance, as determined by Seller with Buyer’s consent, not to be unreasonably withheld;

(2) at any time after any final, non-appealable decision is made by the applicable Governmental Authority denying any Required Regulatory Approval;

(3) at any time after January 30, 2009 if the Closing has not yet occurred;

(4) at any time effective upon written notification to Seller in the event that the MPSC has issued an order including the Colstrip 4 Interests in the rate base of Seller at a value at least equal to the Purchase Price plus the sum of (i) the Buyer Termination Fee and (ii) the Make-Whole Premium less (iii) the Third Party Closing Costs;

(5) at any time after November 30, 2008, if any order or decree by any federal or state court or Governmental Authority exists which would delay or otherwise impair the consummation of the sale of the Colstrip 4 Interests;

(6) at any time if any Project User exercises a right of first refusal offered to it by the Seller (pursuant to the terms of the Ownership and Operations Agreement);

(7) at any time in accordance with Section 7.8 ;

(8) if (i) Seller has failed to deliver to the Buyer the ROFR Resolution Notice by October 15, 2008 or (ii) Seller has failed to deliver to the Buyer the MPSC Resolution Notice by November 30, 2008; or

(9) at any time if the Make-Whole Premium exceeds $8,500,000 (assuming Buyer has used Commercially Reasonable Efforts to negotiate in good faith such amount); provided, that Buyer shall not have the right to terminate under this clause (9) if Seller, in its sole and absolute discretion, elects to reduce the Purchase Price by the amount of the Make-Whole Premium that is in excess of $8,500,000

provided , that the event triggering Buyer’s termination right did not result from the failure by Buyer to fulfill any undertaking or commitment provided for herein on the part of Buyer that is required to be fulfilled on or prior to the Closing Date or any such applicable date.

Section 10.2 Effect of Termination. In the event either Party desires to terminate this Agreement pursuant to Section 10.1 , written notice thereof shall promptly be given by the terminating Party to the other Party, and this Agreement shall terminate effective as of the later of the date such notice is received (or such later effective date as may be set forth therein) or the expiration of any cure period. If this Agreement is terminated as provided in Section 10.1 , all filings, applications and other submissions made to any Governmental Authority with respect to the transactions contemplated by this Agreement and the Closing Documents (other than any filings, applications and other

submissions made by Seller that do not involve Buyer) shall, to the extent practicable, be withdrawn from the Governmental Authority to which they were made; and except for those obligations set forth in Article 6 , pursuant to which the Parties shall continue to be bound, no Party shall have any further obligation hereunder; provided, that such termination shall not be construed to limit or waive any right with respect to any breach of this Agreement occurring prior to such termination.

Section 10.3 Termination Fee; Letter of Credit. Seller may immediately draw upon the Buyer LC in an amount equal to Twenty Million Dollars ($20,000,000) (the “ Termination Fee ”) if this Agreement is terminated by Seller pursuant to Sections 10.1(b) or 10.1(c)(2) , provided that Seller shall not be in breach of this Agreement in such a manner that would entitle Buyer to terminate this Agreement in accordance with Section 10.1(b) , and provided further , that in the case of termination pursuant to Section 10.1(c)(2) , the failure of the Closing Date to occur was due to the breach by Buyer of its obligations to complete the transactions contemplated hereby when required to do so in accordance with this Agreement. The Parties acknowledge and agree that if Seller shall terminate this Agreement as provided immediately above, Seller’s damages would be difficult or impossible to quantify with reasonable certainty, and accordingly the payment provided for in this Section 10.3 is a payment of liquidated damages (and not penalties) which is a based on the Parties’ estimate of the damages Seller will suffer or incur as a result of the event giving rise to such payment and the resultant termination of this Agreement. Buyer irrevocably waives any right it may have to raise as a defense that any such liquidated damages are excessive or punitive. For greater certainty, the Parties agree that the right to receive payment of the amount determined pursuant to this Section 10.3 in the manner provided herein is the sole and exclusive remedy of Seller in the event of a termination pursuant to this Section 10.3 and Seller irrevocably waives any right it may have to seek equitable remedies including but not limited to specific performance, or to seek additional expenses or damages from Buyer with respect to such termination.

Section 10.4 Buyer Termination Fee. In the event:

(a) that Buyer terminates this Agreement pursuant to Section 10.1(d)(4) , Section 10.1(d)(5) , Section 10.1(d)(6) or Section 10.1(d)(8) ; or

(b) that Seller terminates this Agreement pursuant to Section 10.1(c)(3) ;

(provided that in each case, Buyer was not in material breach of this Agreement in such a manner that would entitle Seller to terminate this Agreement in accordance with Section 10.1(b) ), Seller shall pay to Buyer an amount equal to Six Million Two Hundred Fifty Thousand Dollars ($6,250,000) (the “ Buyer Termination Fee ”). The Buyer Termination Fee shall be paid to Buyer or its designee by the Seller by wire transfer of same-day funds on the first (1st) Business Day following the date of termination of this Agreement, which shall not be subject to any set-off or counterclaim. The Parties acknowledge and agree that if Buyer or Seller shall terminate this Agreement as provided immediately above, Buyer’s damages would be difficult or impossible to quantify with reasonable certainty, and accordingly the payment provided for in this Section 10.4 is a payment of liquidated damages (and not penalties) which is a based on the Parties’

estimate of the damages Buyer will suffer or incur as a result of the event giving rise to such payment and the resultant termination of this Agreement. Seller irrevocably waives any right it may have to raise as a defense that any such liquidated damages are excessive or punitive. For greater certainty, Buyer agrees that the right to receive payment of the amount determined pursuant to this Section 10.4 in the manner provided herein is the sole and exclusive remedy of Buyer in the event of a termination covered by clauses (a), (b) or (c) of this Section 10.4 and Buyer irrevocably waives any right it may have to seek equitable remedies including but not limited to specific performance, or to seek additional expenses or damages from Seller with respect to such termination but no limitation is intended on Buyer’s remedies in the event of a termination under Section 10.1(b) or 10.1(c)(2) by reason of the breach by Seller to complete the transaction contemplated hereby when required to do so in accordance with this Agreement.

Section 10.5 No Liability. There shall be no liability of any shareholder, partner, member, director, officer, employee, advisor or representative of Buyer or Seller or any Affiliate thereof, whether to Buyer or Seller, as the case may be, or any other Person (including any shareholder, partner, member, director, officer, employee, advisor or representative thereof) in connection with any liability or other obligation of Buyer or Seller or any Affiliate thereof, whether hereunder or otherwise in connection with the transactions contemplated hereby.

ARTICLE 11

DISPUTE RESOLUTION

Section 11.1 Mutual Discussions. If any dispute or difference of any kind whatsoever shall arise between the Parties in connection with, or arising out of, this Agreement or the Closing Documents, or the interpretation, performance, breach, termination or validity hereof or thereof, including without limitation any claim based on contract, text or statute (the “ Dispute ”), the Parties shall attempt to settle such Dispute in the first instance by mutual discussions in accordance with this Section 11.1 . Within seven (7) Business Days of the receipt by either Party of a notice from the other Party of the existence of a Dispute referring to this Article 11 (the “ Dispute Notice ”), the receiving Party shall reply with a written response (a “ Dispute Notice Response ”). Both the Dispute Notice and the Dispute Notice Response shall include (i) a statement of the relevant Party’s position with regard to the Dispute and a summary of arguments supporting such position; and (ii) the name and title of the executive who will represent that Party in attempting to resolve the Dispute pursuant to this Section 11.1 . Within seven (7) Business Days of delivery of the Dispute Notice Response, the designated executives shall meet and attempt to resolve the Dispute. All negotiations pursuant to this clause shall be confidential and shall be treated as compromise and settlement negotiations, and no oral or documentary representations or offers made by the Parties during such negotiations shall be admissible for any purpose in any subsequent proceedings.

Section 11.2 Arbitration. If any Dispute is not resolved within thirty (30) Days of receipt of a Dispute Notice pursuant to Section 11.1 , then, upon either Party’s request, the Dispute shall be finally and exclusively resolved by arbitration as follows:

(a) The arbitration shall be held accordance with the Commercial Arbitration Rules (the “ Rules ”) of the American Arbitration Association (the “ AAA ”), then in effect, except as modified herein. The arbitration shall be held, and the award shall be issued in Chicago, Illinois.

(b) The Parties shall appoint an arbitrator satisfactory to both parties. If the arbitrator is not appointed within the time limit provided herein, such arbitrator shall be appointed by the AAA by using a listing, striking and ranking procedure in accordance with the Rules. Any arbitrator appointed by the AAA shall be a retired judge, preferably from a Federal District Court or Federal Court of Appeals, or a practicing attorney with no less than twenty (20) years of experience and an experienced arbitrator and if possible shall have experience with disputes relating to electric power infrastructure.

(c) The hearing shall be held, if possible, within four (4) months after the appointment of the arbitrator, or as soon thereafter as is reasonably practicable.

(d) By agreeing to arbitration, the entities signing this Agreement do not intend to deprive any court of its jurisdiction to issue a pre-arbitral injunction, pre-arbitral attachment, or other order in aid of arbitration proceedings and the enforcement of any award. Without prejudice to such provisional remedies as may be available under the jurisdiction of a court, the arbitrator shall have full authority to grant provisional remedies and to direct the entities signing this Agreement to request that any court modify or vacate any temporary or preliminary relief issued by such court, and to award damages for the failure of any entity signing this Agreement to respect the arbitrator’s orders to that effect.

(e) Any arbitration proceedings, decision or award rendered hereunder and the validity, effect and interpretation of this arbitration agreement shall be governed by the Federal Arbitration Act, 9 U.S.C. §1 et seq. In arriving at their decision, the arbitrator shall be bound by the terms and conditions of this Agreement and the Closing Documents and shall apply the governing law of this Agreement as designated in Section 12.2 hereof.

(f) Any controversy concerning whether a Dispute is an arbitrable Dispute or as to the interpretation or enforceability of this paragraph shall be determined by the arbitrator.

(g) The arbitrator is not empowered to award damages in excess of compensatory damages, and each Party hereby irrevocably waives any right to recover punitive, exemplary or similar damages with respect to any Dispute. The award, which shall be in writing and shall state the findings of fact and conclusions of law upon which it is based, shall be final and binding on the Parties and shall be the sole and exclusive remedy among the Parties regarding any claims, counterclaims, issues or accounting presented to the arbitrator. Judgment upon any award may be entered in any court of competent jurisdiction. In appropriate circumstances, the arbitrator shall have the authority to order a termination of this Agreement.

(h) The arbitrator’s award shall allocate, in their discretion, among the Parties to the arbitration all costs of the arbitration, including the fees and expenses of the arbitrator and reasonable attorneys’ fees, costs and expert witness expenses of the Parties. The award shall be final and binding on the Parties and may be enforced in any court having jurisdiction.

ARTICLE 12

OTHER PROVISIONS

Section 12.1 Counterparts. This Agreement may be executed in one or more counterparts, all of which, taken together, shall be considered one and the same agreement, and shall become effective when one or more counterparts have been signed by each of the Parties and delivered to the other Party.

Section 12.2 Governing Law. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND THE TRANSACTIONS CONTEMPLATED HEREBY SHALL BE GOVERNED BY, ENFORCED, AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS.

Section 12.3 Entire Agreement. This Agreement and the Confidentiality Agreement and the Schedules and Exhibits hereto and thereto contain the entire agreement between the Parties with respect to the subject matter hereof and supersedes any prior agreements, understandings, representations, or warranties between the Parties.

Section 12.4 Notices. All notices hereunder shall be sufficiently given for all purposes hereunder if in writing and delivered personally, sent by documented overnight delivery service or, to the extent receipt is confirmed, by United States mail, or telecopy to the appropriate address or number as set forth below.

Notices to Seller shall be addressed as follows:

NorthWestern Corporation

3010 West 69 ^th Street

Sioux Falls, SD 57108

Attention: General Counsel

Telecopy No.:

with copies to:

Leonard, Street and Deinard, P.A.

150 South Fifth Street, Suite 2300

Minneapolis, MN 55042

Attention: Tammie Ptacek

Telecopy No.: (612) 335-1657

or at such other address and to the attention of such other Person as Seller may designate by written notice to Buyer.

Notices to Buyer shall be addressed to:

Bicent (Montana) Power Company LLC

103 North Washington Street

Easton, MD 21601

Attention: President

Facsimile: (410) 770-9705

with copies to:

Paul, Weiss, Rifkind, Wharton & Garrison LLP

1285 Avenue of the Americas

New York, NY 10019

Attention: Carl L. Reisner, Esq.

Facsimile: (212) 757-3990

or at such other address and to the attention of such other Person as Buyer may designate by written notice to Seller.

Notice given by overnight delivery or mail shall be effective upon actual receipt. Notice given by telecopier shall be effective upon actual receipt if received during the recipient’s normal business hours, or at the beginning of the recipient’s next Business Day after receipt if not received during the recipient’s normal business hours. All notices by telecopier shall be confirmed by the recipient Party to the Party giving such notice promptly after transmission in writing by certified mail or overnight delivery.

Section 12.5 Successors and Assigns. The rights and obligations of the Parties shall not be assigned or delegated by either Party, other than with the written consent of the other Party, which may be withheld in such Party’s sole discretion; provided, however, that notwithstanding the foregoing, Buyer may freely transfer its obligations hereunder to any subsidiary or financing source of Buyer, without Seller’s prior consent, provided that Buyer shall remain liable for all obligations of Buyer hereunder that may be assumed by such subsidiary or financing source. Subject to the preceding sentence, this Agreement shall be binding upon and inure to the benefit of the Parties and their successors and assigns.

Section 12.6 Amendments. This Agreement may not be modified or amended except by an instrument or instruments in writing signed by both Parties.

Section 12.7 Agreement for the Parties’ Benefit Only. This Agreement is not intended to confer upon any Person not a Party hereto any rights or remedies hereunder, and no Person, other than the Parties and the Indemnified Parties is entitled to rely on any representation, warranty, covenant, or agreement contained herein.

Section 12.8 Severability. If any term or other provision of this Agreement is invalid, illegal, or incapable of being enforced by any Applicable Law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect. Upon such determination that any term or other provision is invalid, illegal, or incapable of being enforced, the Parties shall negotiate in good faith to modify this Agreement so as to give effect to the original intent of the Parties as closely as possible in an acceptable manner to the end that the transactions contemplated hereby are fulfilled to the extent possible.

Section 12.9 Transfer Taxes. Payment of all Transfer Taxes, if any, resulting from the transactions contemplated by this Agreement shall be shared equally by Buyer and Seller. Buyer shall prepare and timely file all Tax Returns or other documentation relating to such Taxes; provided, however, that to the extent required by Applicable Law, Seller shall join in the execution of any such Tax Returns or other documentation relating to such Taxes. Buyer shall provide to Seller copies of each Tax Return described in the proviso of the immediately preceding sentence at least fifteen (15) days prior to the date on which such Tax Return is required to be filed.

Section 12.10 Bulk Sales or Transfer Laws. Buyer hereby waives compliance by Seller with the provisions of the bulk sales or transfer laws of all applicable jurisdictions. Seller agrees to pay all claims of creditors which could be asserted against Buyer because of such noncompliance. Seller indemnifies Buyer against any liability or expense, including attorneys’ fees, incurred by Buyer by reason of the failure of Seller to pay such claims.

Section 12.11 No Waiver. No failure or delay by a party to this Agreement in exercising any right or remedy provided by law or under or pursuant to this Agreement shall impair such right or remedy or operate or be construed as a waiver or variation of it or preclude its exercise at any subsequent time and no single or partial exercise of any such right or remedy shall preclude any other or further exercise of it or the exercise of any other right or remedy.

Section 12.12 Cumulative Remedies. The rights and remedies of the parties under or pursuant to this Agreement are cumulative, may be exercised as often as such party considers appropriate and are in addition to its rights and remedies under general law.

Section 12.13 Further Assurances. The parties agree to use commercially reasonable efforts to perform (or procure the performance of) all further acts and things, and execute and deliver (or procure the execution and delivery of) such further documents, and may be required by Applicable Law or as either of the parties may reasonably require, whether on or after the Closing, to implement and/or give effect to this Agreement and the Closing Documents and the transactions contemplated herein and therein and for the purpose of vesting in the Buyer the full benefit of the Colstrip 4 Interests, rights and benefits to be transferred to the Buyer under this Agreement and the Closing Documents.

Section 12.14 Facsimile Signatures. Signatures delivered by facsimile or pdf on this Agreement or any document executed in connection herewith shall be binding to the same extent as an original.

Section 12.15 Specific Performance. Except as provided for in Section 10.4 , Seller hereby acknowledges and agrees that money damages would not be a sufficient remedy for any breach of this Agreement by Seller, that Buyer would suffer irreparable harm as a result of any such breach, and that, in addition to all other remedies available under this Agreement or at law or in equity, Buyer shall be entitled to specific performance and injunctive or other equitable relief as a remedy for any such breach or threatened breach, without posting any bond, security or other undertaking. In the event of any action by Buyer to enforce this Agreement, and except as provided for in Section 10.4 , Seller hereby waives the defense that there is an adequate remedy at law.

Section 12.16 Effectiveness. Notwithstanding Section 5.9 or anything else to the contrary in this Agreement (i) the Parties acknowledge that the Buyer LC has not been delivered to the Seller simultaneous with the execution and delivery of this Agreement, (ii) this Agreement shall not be effective unless and until the Buyer LC is delivered to the Seller, and (iii) if the Buyer LC is not delivered by the Buyer to the Seller before Tuesday June 10, 2008 at 3:00 PM New York City time, this Agreement shall automatically terminate and be null and void and of no further force or effect, without liability of either Party to the other Party, and no Party shall have any further obligation hereunder.

IN WITNESS WHEREOF, this Agreement has been signed by or on behalf of each of the Parties as of the day first above written.

Seller:

NORTHWESTERN CORPORATION

By:

/s/ Michael J. Hanson

Name: Michael J. Hanson

Title: President and Chief Executive Officer

Buyer:

BICENT (MONTANA) POWER COMPANY LLC

By:

/s/ Paul B. Prager

Name: Paul B. Prager

Title: President

EXECUTION COPY

NORTHWESTERN CORPORATION

$55,000,000

First Mortgage Bonds, 6.05% Series due 2018

______________

BOND PURCHASE AGREEMENT

______________

Dated May 1, 2008

TABLE OF CONTENTS

SECTION		HEADING	PAGE
Section 1		Description of Bonds	1
Section 2		Sale and Purchase of Bonds	1
Section 3		Closing	2
Section 4		Conditions to Closing	2
	Section 4.1.	Representations and Warranties	2
	Section 4.2.	Performance; No Default	2
	Section 4.3.	Compliance Certificates	2
	Section 4.4.	Opinions of Counsel	3
	Section 4.5.	Purchase Permitted By Applicable Law, Etc	3
	Section 4.6.	Sale of Other Bonds	3
	Section 4.7.	Payment of Special Counsel Fees	4
	Section 4.8.	Private Placement Number	4
	Section 4.9.	Changes in Corporate Structure	4
	Section 4.10.	Funding Instructions	4
	Section 4.11.	Commission Approval	4
	Section 4.12.	UCC Financing Statements and the Supplement	4
	Section 4.13.	Compliance with Indenture	4
	Section 4.14.	Proceedings and Documents	4
Section 5		Representations and Warranties of the Company	4
	Section 5.1.	Organization; Power and Authority	4
	Section 5.2.	Authorization, Etc	5
	Section 5.3.	Disclosure	5
	Section 5.4.	Organization and Ownership of Shares of Subsidiaries; Affiliates	5
	Section 5.5.	Financial Statements; Material Liabilities	6
	Section 5.6.	Compliance with Laws, Other Instruments, Etc	6
	Section 5.7.	Governmental Authorizations, Etc	6
	Section 5.8.	Litigation; Observance of Agreements, Statutes and Orders	7
	Section 5.9.	Taxes	7
	Section 5.10.	Title to Property; Leases	7
	Section 5.11.	Licenses, Permits, Etc	8
	Section 5.12.	Compliance with ERISA	8
	Section 5.13.	Private Offering by the Company; Qualification of Indenture	9
	Section 5.14.	Use of Proceeds; Margin Regulations	9
	Section 5.15.	Existing Indebtedness; Future Liens	9
	Section 5.16.	Foreign Assets Control Regulations, Etc	10
	Section 5.17.	Status under Certain Statutes	10
	Section 5.18.	Environmental Matters	10
	Section 5.19.	Lien of Indenture	11

	Section 5.20.	Filings	11
	Section 5.21.	Class	12
Section 6		Representations of the Purchasers	12
	Section 6.1.	Purchase for Investment	12
	Section 6.2.	Source of Funds	12
Section 7		Information as to Company	14
	Section 7.1.	Financial and Business Information	14
	Section 7.2.	Officer’s Certificate	16
	Section 7.3.	Visitation	17
Section 8		Covenants	18
Section 9		Expenses, Etc	18
	Section 9.1.	Transaction Expenses	18
	Section 9.2.	Survival	18
Section 10		Survival of Representations and Warranties; Entire Agreement	18
Section 11		Amendments and Waivers	19
Section 12		Notices	19
Section 13		Indemnification	19
Section 14		Miscellaneous	20
	Section 14.1.	Successors and Assigns	20
	Section 14.2.	Accounting Terms	20
	Section 14.3.	Severability	20
	Section 14.4.	Construction, Etc	20
	Section 14.5.	Counterparts	20
	Section 14.6..	Governing Law	20
	Section 14.7.	Jurisdiction and Process; Waiver of Jury Trial	20

Schedule A		Information Relating to Purchasers

Schedule B		Defined Terms

Schedule 4.12		UCC Filings

Schedule 5.3		Disclosure Materials

Schedule 5.4		Subsidiaries of the Company and Ownership of Subsidiary Stock

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Schedule 5.5	Financial Statements

Schedule 5.7	Required Approvals

Schedule 5.15	Existing Indebtedness

Schedule 5.20	Filings

Exhibit A	Form of Supplement

Exhibit 4.4(a)(i)	Form of Opinion of Special Counsel for the Company

Exhibit 4.4(a)(ii)	Form of Opinion of Local Counsel for the Company

Exhibit 4.4(a)(iii)	Form of Opinion of General Counsel for the Company

Exhibit 4.4(b)	Form of Opinion of Special Counsel for the Purchasers

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FIRST MORTGAGE BONDS, 6.05% SERIES DUE 2018

May 1, 2008

TO EACH OF THE PURCHASERS LISTED IN

Schedule A Hereto:

Ladies and Gentlemen:

NorthWestern Corporation (formerly known as NorthWestern Public Service Company), a corporation organized and existing under the laws of the State of Delaware (the “Company” ), agrees with each of the purchasers whose names appear at the end hereof (each, a “Purchaser” and, collectively, the “Purchasers” ) as follows:

Section 1.

Description of Bonds.

The Company will authorize the issue and sale of $55,000,000 aggregate principal amount of its First Mortgage Bonds, 6.05% Series due May 1, 2018 (the “Bonds” ). The Bonds will be issued under and secured by a General Mortgage Indenture and Deed of Trust dated as of August 1, 1993 from the Company to The Bank of New York (successor to The Chase Manhattan Bank (National Association)) as Trustee (the “Original Indenture” ), as amended and supplemented by seven supplemental indentures including the first dated as of August 15, 1993, the second dated as of August 1, 1995, each of the third, fourth and fifth dated as of September 1, 1995, the sixth dated as of February 1, 2003 and the seventh dated as of November 1, 2004 and as further supplemented and amended by an eighth supplemental indenture dated as of May 1, 2008 (the “Supplement” ) which will be substantially in the form attached hereto as Exhibit A, with such changes therein, if any, as shall be approved by the Purchasers and the Company. The Original Indenture, as supplemented by each of the aforementioned eight supplemental indentures, including the Supplement, is hereinafter referred to as the “Indenture.” Certain capitalized and other terms used in this Agreement are defined in Schedule B; and references to a “Schedule” or an “Exhibit” are, unless otherwise specified, to a Schedule or an Exhibit attached to this Agreement.

Section 2.

Sale and Purchase of Bonds.

Subject to the terms and conditions of this Agreement, the Company will issue and sell to each Purchaser and each Purchaser will purchase from the Company, at the Closing provided for in Section 3, Bonds in the principal amount specified opposite such Purchaser’s name in Schedule A at the purchase price of 100% of the principal amount thereof. The Purchasers’ obligations hereunder are several and not joint obligations and no Purchaser shall have any liability to any Person for the performance or non-performance of any obligation by any other Purchaser hereunder.

Section 3.

Closing.

The sale and purchase of the Bonds to be purchased by each Purchaser shall occur at the offices of Chapman and Cutler LLP, 111 West Monroe, Chicago, IL, at 10:00 a.m., Chicago time, at a closing (the “Closing” ) on May 1, 2008 or on such other Business Day thereafter on or prior to May 2, 2008 as may be agreed upon by the Company and the Purchasers. At the Closing the Company will deliver to each Purchaser the Bonds to be purchased by such Purchaser in the form of a single Bond (or such greater number of Bonds in denominations of at least $1,000 as such Purchaser may request) dated the date of the Closing, authenticated by the Trustee and registered in such Purchaser’s name (or in the name of its nominee), against delivery by such Purchaser to the Company or its order of immediately available funds in the amount of the purchase price therefor by wire transfer of immediately available funds for the account of the Company to account number 153910224325 at US BANK N.A., 800 Nicollet Mall, Minneapolis, MN 55402, ABA number 123000848, account name NORTHWESTERN CORPORATION GENERAL ACCOUNT. If at the Closing the Company shall fail to tender such Bonds to any Purchaser as provided above in this Section 3, or any of the conditions specified in Section 4 shall not have been fulfilled to such Purchaser’s satisfaction, such Purchaser shall, at its election, be relieved of all further obligations under this Agreement, without thereby waiving any rights such Purchaser may have by reason of such failure or such nonfulfillment.

Section 4.

Conditions to Closing.

Each Purchaser’s obligation to purchase and pay for the Bonds to be sold to such Purchaser at the Closing is subject to the fulfillment to such Purchaser’s reasonable satisfaction, prior to or at the Closing, of the following conditions:

Section 4.1. Representations and Warranties . The representations and warranties of the Company in this Agreement shall be correct when made and at the time of the Closing.

Section 4.2. Performance; No Default . The Company shall have performed and complied with all agreements and conditions contained in this Agreement required to be performed or complied with by it prior to or at the Closing and after giving effect to the issue and sale of the Bonds (and the application of the proceeds thereof as contemplated by Section 5.14) no Default or Event of Default shall have occurred and be continuing.

Section 4.3. Compliance Certificates . The Company shall have performed and complied with all agreements and conditions contained in the Indenture which are required to be performed or complied with by the Company for the issuance of the Bonds. In addition the Company shall have delivered the following certificates:

(a) Officer’s Certificates . The Company shall have delivered to such Purchaser (i) an Officer’s Certificate certifying that the conditions specified in Section 4 have been fulfilled, (ii) an Officer’s Certificate regarding no Event of Default pursuant to Section 4.01(a)(vi) of the Indenture and (iii) an Officer’s Certificate regarding retired

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bonds pursuant to Section 4.04(b)(ii) of the Indenture, in each case, dated the date of the Closing.

(b) Secretary’s Certificate . The Company shall have delivered to such Purchaser a certificate of its Secretary or Assistant Secretary, dated the date of Closing, certifying as to the resolutions attached thereto and other corporate proceedings relating to the authorization, execution and delivery of the Bonds and this Agreement.

Section 4.4. Opinions of Counsel . Such Purchaser shall have received opinions in form and substance satisfactory to such Purchaser, dated the date of the Closing (a) (i) from Leonard, Street and Deinard, counsel for the Company, (ii) from local counsel to the Company, and (iii) from general counsel for the Company covering the matters set forth in Exhibits 4.4(a)(i), 4.4(a)(ii) and 4.4(a)(iii), respectively, and covering such other matters incident to the transactions contemplated hereby as such Purchaser or its counsel may reasonably request (and the Company hereby instructs its counsel to deliver such opinions to the Purchasers) and (b) from Chapman and Cutler LLP, the Purchasers’ special counsel in connection with such transactions, substantially in the form set forth in Exhibit 4.4(b) and covering such other matters incident to such transactions as such Purchaser may reasonably request.

Section 4.5. Purchase Permitted By Applicable Law, Etc . On the date of the Closing such Purchaser’s purchase of Bonds shall (a) be permitted by the laws and regulations of each jurisdiction to which such Purchaser is subject, without recourse to provisions (such as section 1405(a)(8) of the New York Insurance Law) permitting limited investments by insurance companies without restriction as to the character of the particular investment, (b) not violate any applicable law or regulation (including, without limitation, Regulation T, U or X of the Board of Governors of the Federal Reserve System) and (c) not subject such Purchaser to any tax, penalty or liability under or pursuant to any applicable law or regulation, which law or regulation was not in effect on the date hereof. If requested by such Purchaser, such Purchaser shall have received an Officer’s Certificate certifying as to such matters of fact regarding the Company and its Subsidiaries as such Purchaser may reasonably specify to enable such Purchaser to determine whether such purchase is so permitted.

Section 4.6. Sale of Other Bonds . Contemporaneously with the Closing the Company shall sell to each other Purchaser and each other Purchaser shall purchase the Bonds to be purchased by it at the Closing as specified in Schedule A.

Section 4.7. Payment of Special Counsel Fees . Without limiting the provisions of Section 9, the Company shall have paid on or before the Closing the reasonable fees, charges and disbursements of the Purchasers’ special counsel referred to in Section 4.4 to the extent reflected in a statement of such counsel rendered to the Company at least one Business Day prior to the Closing.

Section 4.8. Private Placement Number . A Private Placement Number issued by Standard & Poor’s CUSIP Service Bureau (in cooperation with the SVO) shall have been obtained for the Bonds.

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Section 4.9. Changes in Corporate Structure . The Company shall not have changed its jurisdiction of incorporation or organization, as applicable, or been a party to any merger or consolidation or succeeded to all or any substantial part of the liabilities of any other entity, at any time following the date of the most recent financial statements referred to in Schedule 5.5.

Section 4.10. Funding Instructions . At least three Business Days prior to the date of the Closing, each Purchaser shall have received written instructions signed by a Responsible Officer on letterhead of the Company confirming the information specified in Section 3 including (i) the name and address of the transferee bank, (ii) such transferee bank’s ABA number and (iii) the account name and number into which the purchase price for the Bonds is to be deposited.

Section 4.11. Commission Approval . The Federal Energy Regulatory Commission (the “FERC” ) shall have issued an appropriate order authorizing the issue and sale of the Bonds, and said order shall remain in full force and effect as of the date of Closing. The issuance and effectiveness of such order shall be a condition precedent to the Company’s obligations to sell the Bonds.

Section 4.12. UCC Financing Statements and the Supplement . All UCC Financing Statements, the Supplement, or other instruments with respect thereto as may be necessary, shall have been duly filed or recorded by any debtor party in such manner and in such places as is described in Schedule 4.12 (the “Collateral Filings” ) and no other UCC Financing Statements or instruments shall be required to be filed to perfect the security interests and liens of the Trustee in the Mortgaged Property created by or pursuant to the Indenture that can be perfected by filing a UCC Financing Statement under the UCC.

Section 4.13. Compliance with Indenture. The Company shall have performed and complied with all agreements and conditions contained in the Indenture which are required to be performed or complied with by the Company for the issuance of the Bonds.

Section 4.14. Proceedings and Documents . All corporate and other proceedings in connection with the transactions contemplated by this Agreement and all documents and instruments incident to such transactions shall be satisfactory to such Purchaser and its special counsel, and such Purchaser and its special counsel shall have received all such counterpart originals or certified or other copies of such documents as such Purchaser or such special counsel may reasonably request.

Section 5.

Representations and Warranties of the Company.

The Company represents and warrants to each Purchaser that:

Section 5.1. Organization; Power and Authority . The Company is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, and is duly qualified as a foreign corporation and is in good standing in each jurisdiction in which such qualification is required by law, other than those jurisdictions as to which the failure to be so qualified or in good standing could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. The Company has the

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corporate power and authority to own or hold under lease the properties it purports to own or hold under lease, to transact the business it transacts and proposes to transact, to execute and deliver the Financing Agreements and to perform the provisions hereof and thereof.

Section 5.2. Authorization, Etc . The Financing Agreements have been duly authorized by all necessary corporate action on the part of the Company, and the Financing Agreements constitute, and upon execution and delivery thereof by the Company and authentication by the Trustee, each Bond will constitute, a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as such enforceability may be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors’ rights generally and (ii) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law).

Section 5.3. Disclosure . The Company, through its agent, Deutsche Bank Securities, Inc., has delivered to each Purchaser a copy of a Memorandum, dated March 17, 2008 (the “Memorandum” ), relating to the transactions contemplated hereby. The Memorandum fairly describes, in all material respects, the general nature of the business and principal properties of the Company and its Subsidiaries. This Agreement, the Memorandum and the documents, certificates or other writings delivered to the Purchasers by or on behalf of the Company in connection with the transactions contemplated hereby and identified in Schedule 5.3, and the financial statements listed in Schedule 5.5 (this Agreement, the Memorandum and such documents, certificates or other writings and such financial statements delivered to each Purchaser prior to March 31, 2008 being referred to, collectively, as the “Disclosure Documents” ), taken as a whole, do not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading in light of the circumstances under which they were made. Except as disclosed in the Disclosure Documents, since December 31, 2007, there has been no change in the financial condition, operations, business, properties or prospects of the Company or any Subsidiary except changes that individually or in the aggregate could not reasonably be expected to have a Material Adverse Effect. There is no fact known to the Company that could reasonably be expected to have a Material Adverse Effect that has not been set forth herein or in the Disclosure Documents.

Section 5.4. Organization and Ownership of Shares of Subsidiaries; Affiliates . (a) Schedule 5.4 contains (except as noted therein) complete and correct lists (i) of the Company’s Subsidiaries, showing, as to each Subsidiary, the correct name thereof, the jurisdiction of its organization, and the percentage of shares of each class of its capital stock or similar equity interests outstanding owned by the Company and each other Subsidiary, (ii) of the Company’s Affiliates, other than Subsidiaries, and (iii) of the Company’s directors and senior officers.

(b) All of the outstanding shares of capital stock or similar equity interests of each Subsidiary shown in Schedule 5.4 as being owned by the Company and its Subsidiaries have been validly issued, are fully paid and nonassessable and are owned by the Company or another Subsidiary free and clear of any Lien (except as otherwise disclosed in Schedule 5.4).

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(c) Each Subsidiary identified in Schedule 5.4 is a corporation or other legal entity duly organized, validly existing and in good standing under the laws of its jurisdiction of organization, and is duly qualified as a foreign corporation or other legal entity and is in good standing in each jurisdiction in which such qualification is required by law, other than those jurisdictions as to which the failure to be so qualified or in good standing could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Each such Subsidiary has the corporate or other power and authority to own or hold under lease the properties it purports to own or hold under lease and to transact the business it transacts and proposes to transact.

(d) No Subsidiary is a party to, or otherwise subject to any legal, regulatory, contractual or other restriction (other than this Agreement, the agreements listed on Schedule 5.4 or Schedule 5.15 and customary limitations imposed by corporate law or similar statutes) restricting the ability of such Subsidiary to pay dividends out of profits or make any other similar distributions of profits to the Company or any of its Subsidiaries that owns outstanding shares of capital stock or similar equity interests of such Subsidiary.

Section 5.5. Financial Statements; Material Liabilities . The Company has delivered to each Purchaser copies of the financial statements of the Company and its Subsidiaries listed on Schedule 5.5. All of said financial statements (including in each case the related schedules and notes) fairly present in all material respects the consolidated financial position of the Company and its Subsidiaries as of the respective dates specified in such Schedule and the consolidated results of their operations and cash flows for the respective periods so specified and have been prepared in accordance with GAAP consistently applied throughout the periods involved except as set forth in the notes thereto (subject, in the case of any interim financial statements, to normal year-end adjustments). The Company and its Subsidiaries do not have any Material liabilities that are not disclosed on such financial statements or otherwise disclosed in the Disclosure Documents.

Section 5.6. Compliance with Laws, Other Instruments, Etc . The execution, delivery and performance by the Company of the Financing Agreements will not (i) contravene, result in any breach of, or constitute a default under, or result in the creation of any Lien (other than the continuing Lien of the Indenture) in respect of any property of the Company or any Subsidiary under, any indenture, mortgage, deed of trust, loan, purchase or credit agreement, lease, corporate charter or by-laws, or any other agreement or instrument to which the Company or any Subsidiary is bound or by which the Company or any Subsidiary or any of their respective properties may be bound or affected, (ii) conflict with or result in a breach of any of the terms, conditions or provisions of any order, judgment, decree, or ruling of any court, arbitrator or Governmental Authority applicable to the Company or any Subsidiary or (iii) violate any provision of any statute or other rule or regulation of any Governmental Authority applicable to the Company or any Subsidiary.

Section 5.7. Governmental Authorizations, Etc. No consent, approval, authorization, or order of, or filing with, or declaration with, any Governmental Authority or body or any court is required for the consummation of the transactions contemplated by the Financing Agreements in connection with the issuance and sale of the Bonds by the Company except for filings with or the orders of the FERC, or as have already been obtained and which are set forth in Schedule 5.7.

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The issuance and sale of the Bonds has been authorized by order of the FERC, which is in full force and effect. No comment or notice of protest or intervention has been filed with the FERC by any third party in respect of the FPA Section 204 authorization issued by FERC on March 26, 2008 (the “FERC 204 Approval” ), and the Company in good faith does not expect the FERC 204 Approval to be overturned, amended or modified during the applicable appeal period therefor.

Section 5.8. Litigation; Observance of Agreements, Statutes and Orders . (a) There are no actions, suits, investigations or proceedings pending or, to the knowledge of the Company, threatened against or affecting the Company or any Subsidiary or any property of the Company or any Subsidiary in any court or before any arbitrator of any kind or before or by any Governmental Authority that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect.

(b) Neither the Company nor any Subsidiary is in default under any term of any agreement or instrument to which it is a party or by which it is bound, or any order, judgment, decree or ruling of any court, arbitrator or Governmental Authority or is in violation of any applicable law, ordinance, rule or regulation (including without limitation Environmental Laws or the USA Patriot Act) of any Governmental Authority, which default or violation, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect.

Section 5.9. Taxes . The Company and its Subsidiaries have filed all tax returns that are required to have been filed in any jurisdiction, and have paid all taxes shown to be due and payable on such returns and all other taxes and assessments levied upon them or their properties, assets, income or franchises, to the extent such taxes and assessments have become due and payable and before they have become delinquent, except for any taxes and assessments (i) the amount of which is not individually or in the aggregate Material or (ii) the amount, applicability or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which the Company or a Subsidiary, as the case may be, has established adequate reserves in accordance with GAAP. The Company knows of no basis for any other tax or assessment that could reasonably be expected to have a Material Adverse Effect. The charges, accruals and reserves on the books of the Company and its Subsidiaries in respect of Federal, state or other taxes for all fiscal periods are adequate. The Federal income tax liabilities of the Company and its Subsidiaries have been finally determined (whether by reason of completed audits or the statute of limitations having run) for all fiscal years up to and including the fiscal year ended December 31, 1999.

Section 5.10. Title to Property; Leases . The Company has good and marketable fee simple title to all properties owned by it which are subject to the Indenture, subject only (a) to the Lien of the Indenture, (b) to Permitted Liens (as defined in the Indenture) and (c) to minor exceptions and defects which do not, in the aggregate, materially interfere with the use by the Company of such properties for the purposes for which they are held, materially detract from the value of said properties or in any material way impair the security afforded by the Indenture. Such properties constitute and comprise substantially all of the utility properties directly owned by the Company in the States of South Dakota, North Dakota, Nebraska and Iowa. All leases

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that individually or in the aggregate are Material are valid and subsisting and are in full force and effect in all material respects.

Section 5.11. Licenses, Permits, Etc . (a) The Company and its Subsidiaries own or possess all licenses, permits, franchises, authorizations, patents, copyrights, proprietary software, service marks, trademarks and trade names, or rights thereto, that individually or in the aggregate are Material, without known conflict with the rights of others.

(b) To the best knowledge of the Company, no product of the Company or any of its Subsidiaries infringes in any material respect any license, permit, franchise, authorization, patent, copyright, proprietary software, service mark, trademark, trade name or other right owned by any other Person.

(c) To the best knowledge of the Company, there is no Material violation by any Person of any right of the Company or any of its Subsidiaries with respect to any patent, copyright, proprietary software, service mark, trademark, trade name or other right owned or used by the Company or any of its Subsidiaries.

Section 5.12. Compliance with ERISA . (a) The Company and each ERISA Affiliate have operated and administered each Plan in compliance with all applicable laws except for such instances of noncompliance as have not resulted in and could not reasonably be expected to result in a Material Adverse Effect. Neither the Company nor any ERISA Affiliate has incurred any liability pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans (as defined in section 3 of ERISA), and no event, transaction or condition has occurred or exists that could reasonably be expected to result in the incurrence of any such liability by the Company or any ERISA Affiliate, or in the imposition of any Lien on any of the rights, properties or assets of the Company or any ERISA Affiliate, in either case pursuant to Title I or IV of ERISA or to such penalty or excise tax provisions or to section 401(a)(29) or 412 of the Code or section 4068 of ERISA, other than such liabilities or Liens as would not be individually or in the aggregate Material.

(b) The present value of the aggregate benefit liabilities under each of the Plans (other than Multiemployer Plans), determined as of the end of such Plan’s most recently ended plan year on the basis of the actuarial assumptions specified for funding purposes in such Plan’s most recent actuarial valuation report, did not exceed the aggregate current value of the assets of such Plan allocable to such benefit liabilities by more than $50,000,000 in the aggregate for all Plans. The term “benefit liabilities” has the meaning specified in section 4001 of ERISA and the terms “current value” and “present value” have the meaning specified in section 3 of ERISA.

(c) The Company and its ERISA Affiliates have not incurred withdrawal liabilities (and are not subject to contingent withdrawal liabilities) under section 4201 or 4204 of ERISA in respect of Multiemployer Plans that individually or in the aggregate are Material.

(d) The expected postretirement benefit obligation (determined as of the last day of the Company’s most recently ended fiscal year in accordance with Financial Accounting Standards Board Statement No. 106, without regard to liabilities attributable to continuation coverage

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mandated by section 4980B of the Code) of the Company and its Subsidiaries is not more than $40,000,000.

(e) The execution and delivery of this Agreement and the issuance and sale of the Bonds hereunder will not involve any transaction that is subject to the prohibitions of section 406 of ERISA or in connection with which a tax could be imposed pursuant to section 4975(c)(1)(A)-(D) of the Code. The representation by the Company to each Purchaser in the first sentence of this Section 5.12(e) is made in reliance upon and subject to the accuracy of such Purchaser’s representation in Section 6.2 as to the sources of the funds used to pay the purchase price of the Bonds to be purchased by such Purchaser.

Section 5.13. Private Offering by the Company; Qualification of Indenture . (a) Neither the Company nor anyone acting on its behalf has offered the Bonds or any similar securities for sale to, or solicited any offer to buy any of the same from, or otherwise approached or negotiated in respect thereof with, any person other than the Purchasers and not more than 50 other Institutional Investors, each of which has been offered the Bonds at a private sale for investment. Neither the Company nor anyone acting on its behalf has taken, or will take, any action that would subject the issuance or sale of the Bonds to the registration requirements of Section 5 of the Securities Act or to the registration requirements of any securities or blue sky laws of any applicable jurisdiction.

(b) Neither the execution and delivery of the Financing Agreements nor the consummation of the transactions contemplated thereby, including the issuance and sale of the Bonds , will require the qualification of the Indenture under the Trust Indenture Act of 1939, as amended.

Section 5.14. Use of Proceeds; Margin Regulations . The Company will apply the proceeds of the sale of the Bonds as set forth in Section 6 of the Memorandum. No part of the proceeds from the sale of the Bonds hereunder will be used, directly or indirectly, for the purpose of buying or carrying any margin stock within the meaning of Regulation U of the Board of Governors of the Federal Reserve System (12 CFR 221), or for the purpose of buying or carrying or trading in any securities under such circumstances as to involve the Company in a violation of Regulation X of said Board (12 CFR 224) or to involve any broker or dealer in a violation of Regulation T of said Board (12 CFR 220). Margin stock does not constitute more than 5% of the value of the consolidated assets of the Company and its Subsidiaries and the Company does not have any present intention that margin stock will constitute more than 5% of the value of such assets. As used in this Section, the terms “margin stock” and “purpose of buying or carrying” shall have the meanings assigned to them in said Regulation U.

Section 5.15. Existing Indebtedness; Future Liens . (a) Except as described therein, Schedule 5.15 sets forth a complete and correct list of all outstanding Indebtedness of the Company and its Subsidiaries as of December 31, 2007 (including a description of the obligors and obligees, principal amount outstanding and collateral therefor, if any, and Guaranty thereof, if any), since which date there has been no Material change in the amounts, interest rates, sinking funds, installment payments or maturities of the Indebtedness of the Company or its Subsidiaries. Neither the Company nor any Subsidiary is in default and no waiver of default is currently in

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effect, in the payment of any principal or interest on any Indebtedness of the Company or such Subsidiary and no event or condition exists with respect to any Indebtedness of the Company or any Subsidiary that would permit (or that with notice or the lapse of time, or both, would permit) one or more Persons to cause such Indebtedness to become due and payable before its stated maturity or before its regularly scheduled dates of payment.

(b) Except as disclosed in Schedule 5.15, neither the Company nor any Subsidiary has agreed or consented to cause or permit in the future (upon the happening of a contingency or otherwise) any of its property, whether now owned or hereafter acquired, to be subject to a Lien.

(c) Neither the Company nor any Subsidiary is a party to, or otherwise subject to any provision contained in, any instrument evidencing Indebtedness of the Company or such Subsidiary, any agreement relating thereto or any other agreement (including, but not limited to, its charter or other organizational document) which limits the amount of, or otherwise imposes restrictions on the incurring of, Indebtedness of the Company, except as specifically indicated in Schedule 5.15.

Section 5.16. Foreign Assets Control Regulations, Etc . (a) Neither the sale of the Bonds by the Company hereunder nor its use of the proceeds thereof will violate the Trading with the Enemy Act, as amended, or any of the foreign assets control regulations of the United States Treasury Department (31 CFR, Subtitle B, Chapter V, as amended) or any enabling legislation or executive order relating thereto.

(b) Neither the Company nor any Subsidiary (i) is a Person described or designated in the Specially Designated Nationals and Blocked Persons List of the Office of Foreign Assets Control or in Section 1 of the Anti-Terrorism Order or (ii) engages in any dealings or transactions with any such Person. The Company and its Subsidiaries are in compliance, in all material respects, with the USA Patriot Act.

(c) No part of the proceeds from the sale of the Bonds hereunder will be used, directly or indirectly, for any payments to any governmental official or employee, political party, official of a political party, candidate for political office, or anyone else acting in an official capacity, in order to obtain, retain or direct business or obtain any improper advantage, in violation of the United States Foreign Corrupt Practices Act of 1977, as amended, assuming in all cases that such Act applies to the Company.

Section 5.17. Status under Certain Statutes . Neither the Company nor any Subsidiary is subject to regulation under the Investment Company Act of 1940, as amended, the Public Utility Holding Company Act of 2005, as amended, or the ICC Termination Act of 1995, as amended.

Section 5.18. Environmental Matters . (a) Neither the Company nor any Subsidiary has knowledge of any claim or has received any notice of any claim, and no proceeding has been instituted raising any claim against the Company or any of its Subsidiaries or any of their respective real properties now or formerly owned, leased or operated by any of them or other assets, alleging any damage to the environment or violation of any Environmental Laws, except, in each case, such as could not reasonably be expected to result in a Material Adverse Effect.

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(b) Neither the Company nor any Subsidiary has knowledge of any facts which would give rise to any claim, public or private, of violation of Environmental Laws or damage to the environment emanating from, occurring on or in any way related to real properties now or formerly owned, leased or operated by any of them or to other assets or their use, except, in each case, such as could not reasonably be expected to result in a Material Adverse Effect.

(c) Neither the Company nor any Subsidiary has stored any Hazardous Materials on real properties now or formerly owned, leased or operated by any of them and has not disposed of any Hazardous Materials in a manner contrary to any Environmental Laws in each case in any manner that could reasonably be expected to result in a Material Adverse Effect; and

(d) All buildings on all real properties now owned, leased or operated by the Company or any Subsidiary are in compliance with applicable Environmental Laws, except where failure to comply could not reasonably be expected to result in a Material Adverse Effect.

Section 5.19. Lien of Indenture . The Indenture (excluding the Supplement) constitutes, and the Indenture, when the Supplement shall have been duly filed for recording and recorded, will constitute, a valid and enforceable first mortgage lien for the equal and proportionate security of the mortgage bonds issued or to be issued thereunder, upon substantially all of the physical properties of the Company (other than the Excepted Property) which are specifically described therein as subject to the lien thereof and which are used or useful in the conduct of the Company’s utility business in South Dakota, North Dakota, Nebraska and Iowa, free from all prior liens, charges or encumbrances other than (a) Permitted Liens (as defined in the Indenture); and (b) in the case of property acquired after the date of the original execution and delivery of the Indenture, vendors’ liens, purchase money mortgages and any other liens thereon at the time of acquisition thereof, except to the extent that enforceability of such lien may be limited by the effect that the law of the jurisdictions in which the physical properties covered thereby are located may have upon the remedies provided in the Indenture. Such limitations, however, do not make the remedies afforded inadequate for the realization of the material benefits of the security provided by the Indenture; provided that (x) enforceability of such lien may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors’ rights, and (y) the availability of specific performance, injunctive relief, or other equitable remedies is subject to the discretion of the court before which any proceeding therefor may be brought. The after-acquired property clause in the Indenture subjects to the lien thereof all after-acquired utility property of the Company’s utility business in South Dakota, North Dakota, Nebraska and Iowa as provided therein (except such after-acquired property as may be deemed to be Excepted Property or is otherwise expressly excepted from the lien of the Indenture), provided, however, that with respect to after-acquired real property in the states of Nebraska and Iowa, a supplemental indenture must be recorded in order to subject such after-acquired property to the Lien of the Indenture.

Section 5.20. Filings . Except for those filings described in Schedule 5.20, no filing or recording of the Supplement is necessary to perfect the lien of the Indenture upon the properties now owned by the Company and intended to be subject thereto or to extend such lien for the benefit of the Bonds to be issued thereunder; no re-recording or refiling of the Indenture or any other instruments or documents (except for periodic filings which extend the effectiveness of

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financing statements) is required to preserve and protect the lien of the Indenture. Under the present laws of the states in which the property intended to be subject to the lien of the Indenture is located, no further supplemental indentures or other instruments or documents are required to be executed, filed and/or recorded to extend the lien of the Indenture to after-acquired property; however, the Company is required pursuant to Section 6.08 of the Indenture to promptly record and file the Supplement.

Section 5.21. Class “A” Bonds . No Class “A” Bonds or other obligations are outstanding under any Class “A” Mortgage as of the date of Closing.

Section 6.

Representations of the Purchasers.

Section 6.1. Purchase for Investment . Each Purchaser severally represents that it is purchasing the Bonds for its own account or for one or more separate accounts maintained by such Purchaser or for the account of one or more pension or trust funds and not with a view to the distribution thereof, provided that the disposition of such Purchaser’s or their property shall at all times be within such Purchaser’s or their control. Each Purchaser severally represents that it and each party referenced in the preceding sentence on whose account Bonds are purchased by such Purchaser is an “accredited investor” within the meaning of Regulation D promulgated under the Securities Act. Each Purchaser understands that the Bonds have not been registered under the Securities Act and may be resold only if registered pursuant to the provisions of the Securities Act or if an exemption from registration is available, except under circumstances where neither such registration nor such an exemption is required by law, and that the Company is not required to register the Bonds and that a legend will be placed on the Bonds reflecting these circumstances.

Section 6.2. Source of Funds . Each Purchaser severally represents that at least one of the following statements is an accurate representation as to each source of funds (a “Source”) to be used by such Purchaser to pay the purchase price of the Bonds to be purchased by such Purchaser hereunder:

(a) the Source is an “insurance company general account” (as the term is defined in the United States Department of Labor’s Prohibited Transaction Exemption ( “PTE” ) 95-60) in respect of which the reserves and liabilities (as defined by the annual statement for life insurance companies approved by the National Association of Insurance Commissioners (the “NAIC Annual Statement” )) for the general account contract(s) held by or on behalf of any employee benefit plan together with the amount of the reserves and liabilities for the general account contract(s) held by or on behalf of any other employee benefit plans maintained by the same employer (or affiliate thereof as defined in PTE 95-60) or by the same employee organization in the general account do not exceed 10% of the total reserves and liabilities of the general account (exclusive of separate account liabilities) plus surplus as set forth in the NAIC Annual Statement filed with such Purchaser’s state of domicile; or

(b) the Source is a separate account that is maintained solely in connection with such Purchaser’s fixed contractual obligations under which the amounts payable, or

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credited, to any employee benefit plan (or its related trust) that has any interest in such separate account (or to any participant or beneficiary of such plan (including any annuitant)) are not affected in any manner by the investment performance of the separate account; or

(c) the Source is either (i) an insurance company pooled separate account, within the meaning of PTE 90-1 or (ii) a bank collective investment fund, within the meaning of the PTE 91-38 and, except as disclosed by such Purchaser to the Company in writing pursuant to this clause (c), no employee benefit plan or group of plans maintained by the same employer or employee organization beneficially owns more than 10% of all assets allocated to such pooled separate account or collective investment fund; or

(d) the Source constitutes assets of an “investment fund” (within the meaning of Part V of PTE 84-14 (the “QPAM Exemption” )) managed by a “qualified professional asset manager” or “QPAM” (within the meaning of Part V of the QPAM Exemption), no employee benefit plan’s assets that are included in such investment fund, when combined with the assets of all other employee benefit plans established or maintained by the same employer or by an affiliate (within the meaning of Section V(c)(1) of the QPAM Exemption) of such employer or by the same employee organization and managed by such QPAM, exceed 20% of the total client assets managed by such QPAM, the conditions of Part I(c) and (g) of the QPAM Exemption are satisfied, neither the QPAM nor a person controlling or controlled by the QPAM (applying the definition of “control” in Section V(e) of the QPAM Exemption) owns a 5% or more interest in the Company and (i) the identity of such QPAM and (ii) the names of all employee benefit plans whose assets are included in such investment fund have been disclosed to the Company in writing pursuant to this clause (d); or

(e) the Source constitutes assets of a “plan(s)” (within the meaning of Section IV of PTE 96-23 (the “INHAM Exemption” )) managed by an “in-house asset manager” or “INHAM” (within the meaning of Part IV of the INHAM Exemption), the conditions of Part I(a), (g) and (h) of the INHAM Exemption are satisfied, neither the INHAM nor a person controlling or controlled by the INHAM (applying the definition of “control” in Section IV(d) of the INHAM Exemption) owns a 5% or more interest in the Company and (i) the identity of such INHAM and (ii) the name(s) of the employee benefit plan(s) whose assets constitute the Source have been disclosed to the Company in writing pursuant to this clause (e); or

(f) the Source is a governmental plan; or

(g) the Source is one or more employee benefit plans, or a separate account or trust fund comprised of one or more employee benefit plans, each of which has been identified to the Company in writing pursuant to this clause (g); or

(h) the Source does not include assets of any employee benefit plan, other than a plan exempt from the coverage of ERISA.

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As used in this Section 6.2, the terms “employee benefit plan,” “governmental plan,” and “separate account” shall have the respective meanings assigned to such terms in section 3 of ERISA.

Section 7.

Information as to Company.

Section 7.1. Financial and Business Information . The Company shall deliver to each holder of Bonds that is an Institutional Investor:

(a) Quarterly Statements — within 60 days (or such shorter period as is 15 days greater than the period applicable to the filing of the Company’s Quarterly Report on Form 10-Q (the “Form 10-Q” ) with the SEC regardless of whether the Company is subject to the filing requirements thereof) after the end of each quarterly fiscal period in each fiscal year of the Company (other than the last quarterly fiscal period of each such fiscal year), duplicate copies of,

(i) a consolidated balance sheet of the Company and its Subsidiaries as at the end of such quarter, and

(ii) consolidated statements of income, changes in stockholders’ equity and cash flows of the Company and its Subsidiaries, for such quarter and (in the case of the second and third quarters) for the portion of the fiscal year ending with such quarter,

setting forth in each case in comparative form the figures for the corresponding periods in the previous fiscal year, all in reasonable detail, prepared in accordance with GAAP applicable to quarterly financial statements generally, and certified by a Senior Financial Officer as fairly presenting, in all material respects, the financial position of the companies being reported on and their results of operations and cash flows, subject to changes resulting from year-end adjustments, provided that delivery within the time period specified above of copies of the Company’s Form 10-Q prepared in compliance with the requirements therefor and filed with the SEC shall be deemed to satisfy the requirements of this Section 7.1(a), provided, further, that the Company shall be deemed to have made such delivery of such Form 10-Q if it shall have timely made such Form 10-Q available on “EDGAR” and on its home page on the worldwide web (at the date of this Agreement located at: http//www.northwesternenergy.com) and shall have given each Purchaser prompt notice of such availability on EDGAR and on its home page in connection with each delivery (such availability and notice thereof being referred to as “Electronic Delivery” );

(b) Annual Statements — within 105 days (or such shorter period as is 15 days greater than the period applicable to the filing of the Company’s Annual Report on Form 10-K (the “Form 10-K” ) with the SEC regardless of whether the Company is subject to the filing requirements thereof) after the end of each fiscal year of the Company, duplicate copies of

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(i) a consolidated balance sheet of the Company and its Subsidiaries as at the end of such year, and

(ii) consolidated statements of income, changes in stockholders’ equity and cash flows of the Company and its Subsidiaries for such year,

setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail, prepared in accordance with GAAP, and accompanied by an opinion thereon of independent public accountants of recognized national standing, which opinion shall state that such financial statements present fairly, in all material respects, the financial position of the companies being reported upon and their results of operations and cash flows and have been prepared in conformity with GAAP, and that the examination of such accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards, and that such audit provides a reasonable basis for such opinion in the circumstances,

provided that the delivery within the time period specified above of the Company’s Form 10-K for such fiscal year (together with the Company’s annual report to stockholders, if any, prepared pursuant to Rule 14a-3 under the Exchange Act) prepared in accordance with the requirements therefor and filed with the SEC, shall be deemed to satisfy the requirements of this Section 7.1(b), provided, further, that the Company shall be deemed to have made such delivery of such Form 10-K if it shall have timely made Electronic Delivery thereof;

(c) SEC and Other Reports — promptly upon their becoming available, one copy of (i) each financial statement, report, notice or proxy statement sent by the Company or any Subsidiary to its principal lending banks as a whole (excluding information sent to such banks in the ordinary course of administration of a bank facility, such as information relating to pricing and borrowing availability) or to its public securities holders generally, and (ii) each regular or periodic report, each registration statement (without exhibits except as expressly requested by such holder), and each prospectus and all amendments thereto filed by the Company or any Subsidiary with the SEC and of all press releases and other statements made available generally by the Company or any Subsidiary to the public concerning developments that are Material; provided that the Company shall be deemed to have made such delivery of such materials in clauses (i) and (ii) of this Section 7.1(c) if it shall have timely made Electronic Delivery thereof (to the extent delivery in such manner is available).

(d) Notice of Default or Event of Default — promptly, and in any event within five days after a Responsible Officer becoming aware of the existence of any Default or Event of Default or that any Person has given any notice or taken any action with respect to a claimed default hereunder or that any Person has given any notice or taken any action with respect to a claimed default, a written notice specifying the nature and period of existence thereof and what action the Company is taking or proposes to take with respect thereto;

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(e) ERISA Matters — promptly, and in any event within five days after a Responsible Officer becoming aware of any of the following, a written notice setting forth the nature thereof and the action, if any, that the Company or an ERISA Affiliate proposes to take with respect thereto:

(i) with respect to any Plan, any reportable event, as defined in section 4043(c) of ERISA and the regulations thereunder, for which notice thereof has not been waived pursuant to such regulations as in effect on the date hereof; or

(ii) the taking by the PBGC of steps to institute, or the threatening by the PBGC of the institution of, proceedings under section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan, or the receipt by the Company or any ERISA Affiliate of a notice from a Multi-employer Plan that such action has been taken by the PBGC with respect to such Multi-employer Plan; or

(iii) any event, transaction or condition that could result in the incurrence of any liability by the Company or any ERISA Affiliate pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans, or in the imposition of any Lien on any of the rights, properties or assets of the Company or any ERISA Affiliate pursuant to Title I or IV of ERISA or such penalty or excise tax provisions, if such liability or Lien, taken together with any other such liabilities or Liens then existing, could reasonably be expected to have a Material Adverse Effect;

(f) Notices from Governmental Authority — promptly, and in any event within 30 days of receipt thereof, copies of any notice to the Company or any Subsidiary from any Federal or state Governmental Authority relating to any order, ruling, statute or other law or regulation that could reasonably be expected to have a Material Adverse Effect;

(g) Supplemental Indentures — promptly, and in any event within five days after the execution and delivery thereof, a copy of any indenture supplemental to the Indenture that the Company from time to time may hereafter execute and deliver; and

(h) Requested Information — with reasonable promptness, such other data and information relating to the business, operations, affairs, financial condition, assets or properties of the Company or any of its Subsidiaries (including, but without limitation, actual copies of the Company’s Form 10-Q and Form 10-K) or relating to the ability of the Company to perform its obligations hereunder and under the Bonds as from time to time may be reasonably requested by any such holder of Bonds.

Section 7.2. Officer’s Certificate . Each set of financial statements delivered to a holder of Bonds pursuant to Section 7.1(b) shall be accompanied by a certificate of a Senior Financial

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Officer setting forth (which, in the case of Electronic Delivery of any such financial statements, shall be by separate concurrent delivery of such certificate to each holder of Bonds):

Event of Default — a statement that such Senior Financial Officer has reviewed the relevant terms hereof and has made, or caused to be made, under his or her supervision, a review of the transactions and conditions of the Company and its Subsidiaries from the beginning of the quarterly or annual period covered by the statements then being furnished to the date of the certificate and that such review shall not have disclosed the existence during such period of any condition or event that constitutes a Default or an Event of Default or, if any such condition or event existed or exists (including, without limitation, any such event or condition resulting from the failure of the Company or any Subsidiary to comply with any Environmental Law), specifying the nature and period of existence thereof and what action the Company shall have taken or proposes to take with respect thereto.

Section 7.3. Visitation . The Company shall permit the representatives of each holder of Bonds that is an Institutional Investor:

(a) No Default — if no Default or Event of Default then exists, at the expense of such holder and upon reasonable prior notice to the Company, to visit the principal executive office of the Company, to discuss the affairs, finances and accounts of the Company and its Subsidiaries with the Company’s officers, and (with the consent of the Company, which consent will not be unreasonably withheld) its independent public accountants, and (with the consent of the Company, which consent will not be unreasonably withheld) to visit the other offices and properties of the Company and each Subsidiary, all at such reasonable times and as often as may be reasonably requested in writing; and

(b) Default — if a Default or Event of Default then exists, at the expense of the Company to visit and inspect any of the offices or properties of the Company or any Subsidiary, to examine all their respective books of account, records, reports and other papers, to make copies and extracts therefrom, and to discuss their respective affairs, finances and accounts with their respective officers and independent public accountants (and by this provision the Company authorizes said accountants to discuss the affairs, finances and accounts of the Company and its Subsidiaries), all at such times and as often as may be requested.

Section 8.

Covenants.

(a) The Company will not, and will not allow any Subsidiary to, issue Class “A” Bonds under any Class “A” Mortgage or to incur any other obligations under any Class “A” Mortgage while the Bonds are outstanding.

(b) The Company shall file the Supplement in a timely manner in all locations necessary in South Dakota, North Dakota, Nebraska and Iowa and in any event, the Company

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shall use commercially reasonable best efforts to file such Supplement within 30 days of the date of Closing.

Section 9.

Expenses, Etc.

Section 9.1. Transaction Expenses. Whether or not the transactions contemplated hereby are consummated, the Company will pay all costs and expenses (including reasonable attorneys’ fees of a special counsel and, if reasonably required by the Required Holders, local or other counsel) incurred by the Purchasers and each other holder of a Bond in connection with such transactions and in connection with any amendments, waivers or consents under or in respect of any Financing Agreement (whether or not such amendment, waiver or consent becomes effective), including, without limitation: (a) the costs and expenses incurred in enforcing or defending (or determining whether or how to enforce or defend) any rights under any Financing Agreement or in responding to any subpoena or other legal process or informal investigative demand issued in connection with any Financing Agreement, or by reason of being a holder of any Bond, (b) the costs and expenses, including financial advisors’ fees, incurred in connection with the insolvency or bankruptcy of the Company or any Subsidiary or in connection with any work-out or restructuring of the transactions contemplated hereby and by the Bonds and (c) the costs and expenses incurred in connection with the initial filing of any Financing Agreement and all related documents and financial information with the SVO provided, that such costs and expenses under this clause (c) shall not exceed $3,000 per series. The Company will pay, and will save each Purchaser and each other holder of a Bond harmless from, all claims in respect of any fees, costs or expenses, if any, of brokers and finders (other than those, if any, retained by a Purchaser or other holder in connection with its purchase of the Bonds).

Section 9.2. Survival. The obligations of the Company under this Section 9 will survive the payment or transfer of any Bond, the enforcement, amendment or waiver of any provision of this Agreement or the Bonds, and the termination of this Agreement and the discharge of the Indenture.

Section 10.

Survival of Representations and Warranties; Entire Agreement.

All representations and warranties contained herein shall survive the execution and delivery of this Agreement and the Bonds, the purchase or transfer by any Purchaser of any Bond or portion thereof or interest therein and the payment of any Bond, and may be relied upon by any subsequent holder of a Bond, regardless of any investigation made at any time by or on behalf of such Purchaser or any other holder of a Bond. All statements contained in any certificate or other instrument delivered by or on behalf of the Company pursuant to this Agreement shall be deemed representations and warranties of the Company under this Agreement. Subject to the preceding sentence, the Financing Agreements embody the entire agreement and understanding between each Purchaser and the Company and supersede all prior agreements and understandings relating to the subject matter hereof.

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Section 11.

Amendments and Waivers.

Any term of this Agreement may be amended and the observance of any term hereof may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of the Company and the holders of more than 50% in principal amount of the Bonds at the time outstanding. Any amendment or waiver effected in accordance with this Section 11 shall be binding upon each holder of any Bond at the time outstanding, each future holder of any Bond and the Company. Bonds directly or indirectly held by the Company or any Affiliate of the Company shall not be deemed outstanding for purposes of determining whether any amendment or waiver has been effected in accordance with this Section 11.

Section 12.

Notices.

All notices and communications provided for hereunder shall be in writing and sent (a) by telecopy if the sender on the same day sends a confirming copy of such notice by a recognized overnight delivery service (charges prepaid), or (b) by registered or certified mail with return receipt requested (postage prepaid), or (c) by a recognized overnight delivery service (with charges prepaid). Any such notice must be sent:

(i) if to any Purchaser or its nominee, to such Purchaser or nominee at the address specified for such communications in Schedule A, or at such other address as such Purchaser or nominee shall have specified to the Company in writing,

(ii) if to any other holder of any Bond, to such holder at such address as such other holder shall have specified to the Company in writing,

(iii) if to the Company, to the Company at its address set forth at the beginning hereof to the attention of the Treasurer, or at such other address as the Company shall have specified to the holder of each Bond in writing; or

(iv) if to the Trustee, to the Trustee at its address set forth in Section 1.08 of the Indenture or at such other address as the Trustee shall have specified to the Company and each other party hereto in writing.

Notices under this Section 12 will be deemed given only when actually received.

Section 13.

Indemnification.

The Company hereby agrees to indemnify and hold the Purchasers harmless from, against and in respect of any and all loss, liability and expense (including reasonable attorneys’ fees) arising from any misrepresentation or nonfulfillment of any undertaking on the part of the Company under this Agreement, or from any misrepresentation in, or omission from, this Agreement or any other instrument given, or to be given, to the Purchasers pursuant to this Agreement. The indemnification obligations of the Company under this Section 13 shall survive

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the execution and delivery of this Agreement, the delivery of the Bonds to the Purchasers and the consummation of the transactions contemplated herein.

Section 14.

Miscellaneous.

Section 14.1. Successors and Assigns. All covenants and other agreements contained in this Agreement by or on behalf of any of the parties hereto bind and inure to the benefit of their respective successors and assigns (including, without limitation, any subsequent holder of a Bond) whether so expressed or not.

Section 14.2. Accounting Terms. All accounting terms used herein which are not expressly defined in this Agreement have the meanings respectively given to them in accordance with GAAP. Except as otherwise specifically provided herein, (i) all computations made pursuant to this Agreement shall be made in accordance with GAAP, and (ii) all financial statements shall be prepared in accordance with GAAP.

Section 14.3. Severability. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall (to the full extent permitted by law) not invalidate or render unenforceable such provision in any other jurisdiction.

Section 14.4. Construction, Etc. Each covenant contained herein shall be construed (absent express provision to the contrary) as being independent of each other covenant contained herein, so that compliance with any one covenant shall not (absent such an express contrary provision) be deemed to excuse compliance with any other covenant. Where any provision herein refers to action to be taken by any Person, or which such Person is prohibited from taking, such provision shall be applicable whether such action is taken directly or indirectly by such Person.

For the avoidance of doubt, all Schedules and Exhibits attached to this Agreement shall be deemed to be a part hereof.

Section 14.5. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original but all of which together shall constitute one instrument. Each counterpart may consist of a number of copies hereof, each signed by less than all, but together signed by all, of the parties hereto.

Section 14.6. Governing Law. This Agreement shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the law of the State of New York excluding choice-of-law principles of the law of such State that would permit the application of the laws of a jurisdiction other than such State.

Section 14.7. Jurisdiction and Process; Waiver of Jury Trial. (a) The Company irrevocably submits to the non-exclusive jurisdiction of any New York State or federal court sitting in the Borough of Manhattan, The City of New York, over any suit, action or proceeding

-20-

arising out of or relating to this Agreement or the Bonds. To the fullest extent permitted by applicable law, the Company irrevocably waives and agrees not to assert, by way of motion, as a defense or otherwise, any claim that it is not subject to the jurisdiction of any such court, any objection that it may now or hereafter have to the laying of the venue of any such suit, action or proceeding brought in any such court and any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum.

(b) The Company consents to process being served by or on behalf of any holder of Bonds in any suit, action or proceeding of the nature referred to in Section 14.7(a) by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, return receipt requested, to it at its address specified in Section 12 or at such other address of which such holder shall then have been notified pursuant to said Section. The Company agrees that such service upon receipt (i) shall be deemed in every respect effective service of process upon it in any such suit, action or proceeding and (ii) shall, to the fullest extent permitted by applicable law, be taken and held to be valid personal service upon and personal delivery to it. Notices hereunder shall be conclusively presumed received as evidenced by a delivery receipt furnished by the United States Postal Service or any reputable commercial delivery service.

(c) Nothing in this Section 14.7 shall affect the right of any holder of a Bond to serve process in any manner permitted by law, or limit any right that the holders of any of the Bonds may have to bring proceedings against the Company in the courts of any appropriate jurisdiction or to enforce in any lawful manner a judgment obtained in one jurisdiction in any other jurisdiction.

(d) THE PARTIES HERETO HEREBY WAIVE TRIAL BY JURY IN ANY ACTION BROUGHT ON OR WITH RESPECT TO THIS AGREEMENT, THE BONDS OR ANY OTHER DOCUMENT EXECUTED IN CONNECTION HEREWITH OR THEREWITH.

* * * * *

-21-

If you are in agreement with the foregoing, please sign the form of agreement on a counterpart of this Agreement and return it to the Company, whereupon this Agreement shall become a binding agreement between you and the Company.

Very truly yours,

NORTHWESTERN CORPORATION

Name:

Its:

-22-

This Agreement is hereby accepted and agreed to as of the date thereof.

ING USA ANNUITY AND LIFE INSURANCE COMPANY

RELIASTAR LIFE INSURANCE COMPANY

ING LIFE INSURANCE AND ANNUITY COMPANY

By:

ING Investment Management LLC, as Agent

Name: Christopher P. Lyons

Title:

Senior Vice President

-23-

This Agreement is hereby accepted and agreed to as of the date thereof.

HARTFORD LIFE INSURANCE COMPANY

By:

Hartford Investment Management Company, Its Agent and Attorney-in-Fact

Name:

Title:

-24-

This Agreement is hereby accepted and agreed to as of the date thereof.

PHYSICIANS LIFE INSURANCE COMPANY

By:

Hartford Investment Management Company, Its Investment Manager

Name:

Title:

-25-

Acknowledgement and Consent

The undersigned hereby acknowledges receipt of an executed copy of this Agreement.

THE BANK OF NEW YORK, as Trustee

Authorized Signatory

-26-

INFORMATION RELATING TO PURCHASERS

Name and Address of Purchaser

Principal Amount of
Bonds to Be Purchased

ING USA Annuity and Life Insurance Company

c/o ING Investment Management LLC

5780 Powers Ferry Road NW, Suite 300

Atlanta, Georgia 30327-4347

Attention: Private Placements

Fax Number: (770) 690-5057

$13,000,000

Payments

All payments on account of the Notes shall be made by wire transfer of immediately available funds for credit to:

The Bank of New York Mellon

ABA #021000018

	Account:	IOC 566/INST’L CUSTODY (for scheduled principal and interest
		payments)

	IOC 565/INST’L CUSTODY (for all payments other than scheduled
	principal and interest)

For further credit to: ING USA/Acct. 136373

Reference: PPN: 668074 A@6

Each such wire transfer shall set forth the name of the Company, the full title (including the coupon rate, issuance date and final maturity date) of the Bonds on account of which such payment is made, a reference to the PPN, and the due date and application (as among principal, premium and interest) of the payment being made.

Notices

All notices with respect to payments and written confirmation of each such payment to be addressed:

ING Investment Management LLC

5780 Powers Ferry Road NW, Suite 300

Atlanta, Georgia 30327-4347

Attention: Operations/Settlements

Fax Number: (770) 690-4886

SCHEDULE A

(to Bond Purchase Agreement)

All other notices and communications to be addressed as first provided above.

Name of Nominee in which Notes are to be issued: None

Taxpayer I.D. Number: 41-0991508

A-2

Name and Address of Purchaser

Principal Amount of
Bonds to Be Purchased

ReliaStar Life Insurance Company

c/o ING Investment Management LLC

5780 Powers Ferry Road NW, Suite 300

Atlanta, Georgia 30327-4347

Attention: Private Placements

Fax Number: (770) 690-5057

$11,300,000

Payments

All payments on account of the Notes shall be made by wire transfer of immediately available funds for credit to:

The Bank of New York Mellon

ABA #021000018

	Account:	IOC 566/INST’L CUSTODY (for scheduled principal and interest
		payments)

	IOC 565/INST’L CUSTODY (for all payments other than scheduled
	principal and interest)

For further credit to: RLIC/Acct. 187035

Reference: PPN: 668074 A@6

Notices

All notices with respect to payments and written confirmation of each such payment to be addressed:

ING Investment Management LLC

5780 Powers Ferry Road NW, Suite 300

Atlanta, Georgia 30327-4347

Attention: Operations/Settlements

Fax Number: (770) 690-4886

All other notices and communications to be addressed as first provided above.

A-3

Name of Nominee in which Notes are to be issued: None

Taxpayer I.D. Number: 41-0451140

A-4

Name and Address of Purchaser

Principal Amount of
Bonds to Be Purchased

ReliaStar Life Insurance Company

c/o ING Investment Management LLC

5780 Powers Ferry Road NW, Suite 300

Atlanta, Georgia 30327-4347

Attention: Private Placements

Fax Number: (770) 690-5057

$200,000

Payments

All payments on account of the Notes shall be made by wire transfer of immediately available funds for credit to:

The Bank of New York Mellon

ABA #021000018

	Account:	IOC 566/INST’L CUSTODY (for scheduled principal and interest
		payments)

	IOC 565/INST’L CUSTODY (for all payments other than scheduled
	principal and interest)

For further credit to: RLIC REIN/Acct. 301612

Reference: PPN: 668074 A@6

Notices

All notices with respect to payments and written confirmation of each such payment to be addressed:

ING Investment Management LLC

5780 Powers Ferry Road NW, Suite 300

Atlanta, Georgia 30327-4347

Attention: Operations/Settlements

Fax Number: (770) 690-4886

All other notices and communications to be addressed as first provided above.

A-5

Name of Nominee in which Notes are to be issued: None

Taxpayer I.D. Number: 41-0451140

A-6

Name and Address of Purchaser

Principal Amount of
Bonds to Be Purchased

ING Life Insurance and Annuity Company

c/o ING Investment Management LLC

5780 Powers Ferry Road NW, Suite 300

Atlanta, Georgia 30327-4347

Attention: Private Placements

Fax Number: (770) 690-5057

$7,500,000

Payments

All payments on account of the Notes shall be made by wire transfer of immediately available funds for credit to:

The Bank of New York Mellon

ABA #021000018

	Account:	IOC 566/INST’L CUSTODY (for scheduled principal and interest
		payments)

	IOC 565/INST’L CUSTODY (for all payments other than scheduled
	principal and interest)

For further credit to: ILIAC/Acct. No. 216101

Reference: PPN: 668074 A@6

Notices

All notices with respect to payments and written confirmation of each such payment to be addressed:

ING Investment Management LLC

5780 Powers Ferry Road NW, Suite 300

Atlanta, Georgia 30327-4347

Attention: Operations/Settlements

Fax Number: (770) 690-4886

All other notices and communications to be addressed as first provided above.

A-7

Name of Nominee in which Notes are to be issued: None

Taxpayer I.D. Number: 71-0294708

A-8

Name and Address of Purchaser

Principal Amount of
Bonds to Be Purchased

ING Life Insurance and Annuity Company

c/o ING Investment Management LLC

5780 Powers Ferry Road NW, Suite 300

Atlanta, Georgia 30327-4347

Attention: Private Placements

Fax Number: (770) 690-5057

$1,000,000

Payments

All payments on account of the Notes shall be made by wire transfer of immediately available funds for credit to:

The Bank of New York Mellon

ABA #021000018

	Account:	IOC 566/INST’L CUSTODY (for scheduled principal and interest
		payments)

	IOC 565/INST’L CUSTODY (for all payments other than scheduled
	principal and interest)

For further credit to: ILIAC SA/Acct. No. 216106

Reference: PPN: 668074 A@6

Notices

All notices with respect to payments and written confirmation of each such payment to be addressed:

ING Investment Management LLC

5780 Powers Ferry Road NW, Suite 300

Atlanta, Georgia 30327-4347

Attention: Operations/Settlements

Fax Number: (770) 690-4886

All other notices and communications to be addressed as first provided above.

A-9

Name of Nominee in which Notes are to be issued: None

Taxpayer I.D. Number: 71-0294708

A-10

Name and Address of Purchaser

Principal Amount of
Bonds to Be Purchased

Hartford Life Insurance Company

c/o Hartford Investment Management Company

c/o Investment Department - Private Placements

Regular Mailing Address:

P. O. Box 1744

Hartford, Connecticut 06144-1744

Overnight Mailing Address:

55 Farmington Avenue

Hartford, Connecticut 06105

Facsimile: (860) 297-8884

$5,000,000
$5,000,000
$5,000,000
$5,000,000

Payments

All payments by wire transfer of immediately available funds to:

JP Morgan Chase

4 New York Plaza

New York, New York 10004

ABA No.: 021000021

Chase NYC/Cust

A/C #900-9-000200 for F/C/T G06641-CRC

Attn: Bond Interest/Principal – NorthWestern Corporation, First Mortgage Bonds, 6.05% Series due 2018

PPN # 668074 A@6 Prin $________ Int $________

with sufficient information to identify the source and application of such funds.

Notices

All notices and communications to be addressed as first provided above, except notices with respect to payments, and written confirmation of each such wire transfer to be addressed to:

Hartford Investment Management Company

c/o Portfolio Support

Regular Mailing Address:

P.O. Box 1744

Hartford, Connecticut 06144-1744

Overnight Mailing Address:

55 Farmington Avenue

Hartford, Connecticut 06105

Telefacsimile: (860) 297-8875/8876

A-11

Name of Nominee in which Notes are to be issued: None

Taxpayer I.D. Number: 06-0974148

A-12

Name and Address of Purchaser

Principal Amount of
Bonds to Be Purchased

Physicians Life Insurance Company

c/o Hartford Investment Management Company

c/o Investment Department - Private Placements

Regular Mailing Address:

P. O. Box 1744

Hartford, Connecticut 06144-1744

Overnight Mailing Address:

55 Farmington Avenue

Hartford, Connecticut 06105

Facsimile: (860) 297-8884

$2,000,000

Payments

All payments by wire transfer of immediately available funds to:

The Northern Trust Company

ABA # 071 000 152

Account # 5186041000

F/C/T Physicians Life Insurance Company - (26-27103-QPL)

Attn: INC/DIV

PPN # 668074 A@6 Prin $________ Int $________

Ref: NorthWestern Corporation, First Mortgage Bonds, 6.05% Series due 2018

with sufficient information to identify the source and application of such funds.

Notices

All notices and communications to be addressed as first provided above, except notices with respect to payments, and written confirmation of each such wire transfer to be addressed to:

Physicians Life Insurance Company

2600 Dodge Street

Omaha, NE 68131

Attention: Steve Scanlon

Facsimile: (402) 633-1096

Name of Nominee in which Notes are to be issued: ELL & CO.

Taxpayer I.D. Number: 47-0529583

A-13

DEFINED TERMS

As used herein, the following terms have the respective meanings set forth below or set forth in the Section hereof following such term:

“Affiliate” means, at any time, and with respect to any Person, any other Person that at such time directly or indirectly through one or more intermediaries Controls, or is Controlled by, or is under common Control with, such first Person, and, with respect to the Company, shall include any Person beneficially owning or holding, directly or indirectly, 10% or more of any class of voting or equity interests of the Company or any Subsidiary or any corporation of which the Company and its Subsidiaries beneficially own or hold, in the aggregate, directly or indirectly, 10% or more of any class of voting or equity interests. As used in this definition, “Control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. Unless the context otherwise clearly requires, any reference to an “Affiliate” is a reference to an Affiliate of the Company.

“Anti-Terrorism Order” means Executive Order No. 13,224 of September 24, 2001, Blocking Property and Prohibiting Transactions with Persons Who Commit, Threaten to Commit or Support Terrorism, 66 U.S. Fed. Reg. 49, 079 (2001), as amended.

“Bonds” is defined in Section 1.

“Business Day” means for the purposes of any other provision of this Agreement, any day other than a Saturday, a Sunday or a day on which commercial banks in New York, New York are required or authorized to be closed.

“Capital Lease” means, at any time, a lease with respect to which the lessee is required concurrently to recognize the acquisition of an asset and the incurrence of a liability in accordance with GAAP.

“Class “A” Bonds” is defined in the Indenture.

“Class “A” Mortgage” is defined in the Indenture.

“Closing” is defined in Section 3.

“Code” means the Internal Revenue Code of 1986, as amended from time to time, and the rules and regulations promulgated thereunder from time to time.

“Collateral Filings” is defined in Section 4.12.

“Company” means NorthWestern Corporation, a Delaware corporation, d/b/a NorthWestern Energy, or any successor.

SCHEDULE B

(to Bond Purchase Agreement)

“Default” means an event or condition the occurrence or existence of which would, with the lapse of time or the giving of notice or both, become an Event of Default.

“Electronic Delivery” is defined in Section 7.1(a).

“Environmental Laws” means any and all Federal, state, local, and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or governmental restrictions relating to pollution and the protection of the environment or the release of any materials into the environment, including but not limited to those related to Hazardous Materials.

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the rules and regulations promulgated thereunder from time to time in effect.

“ERISA Affiliate” means any trade or business (whether or not incorporated) that is treated as a single employer together with the Company under section 414 of the Code.

“Event of Default” is defined in the Indenture.

“FERC” is defined in Section 4.11.

“Financing Agreements” means this Agreement, the Indenture and the Bonds.

“Form 10-K” is defined in Section 7.1(b).

“Form 10-Q” is defined in Section 7.1(a).

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

“Governmental Authority” means

(a) the government of

(i) the United States of America or any State or other political subdivision thereof, or

(ii) any other jurisdiction in which the Company or any Subsidiary conducts all or any part of its business, or which asserts jurisdiction over any properties of the Company or any Subsidiary, or

(b) any entity exercising executive, legislative, judicial, regulatory or administrative functions of, or pertaining to, any such government.

B-2

“Guaranty” means, with respect to any Person, any obligation (except the endorsement in the ordinary course of business of negotiable instruments for deposit or collection) of such Person guaranteeing or in effect guaranteeing any indebtedness, dividend or other obligation of any other Person in any manner, whether directly or indirectly, including (without limitation) obligations incurred through an agreement, contingent or otherwise, by such Person:

(a) to purchase such indebtedness or obligation or any property constituting security therefor;

(b) to advance or supply funds (i) for the purchase or payment of such indebtedness or obligation, or (ii) to maintain any working capital or other balance sheet condition or any income statement condition of any other Person or otherwise to advance or make available funds for the purchase or payment of such indebtedness or obligation;

(c) to lease properties or to purchase properties or services primarily for the purpose of assuring the owner of such indebtedness or obligation of the ability of any other Person to make payment of the indebtedness or obligation; or

(d) otherwise to assure the owner of such indebtedness or obligation against loss in respect thereof.

In any computation of the indebtedness or other liabilities of the obligor under any Guaranty, the indebtedness or other obligations that are the subject of such Guaranty shall be assumed to be direct obligations of such obligor.

“Hazardous Material” means any and all pollutants, toxic or hazardous wastes or other substances that might pose a hazard to health and safety, the removal of which may be required or the generation, manufacture, refining, production, processing, treatment, storage, handling, transportation, transfer, use, disposal, release, discharge, spillage, seepage or filtration of which is or shall be restricted, prohibited or penalized by any applicable law including, but not limited to, asbestos, urea formaldehyde foam insulation, polychlorinated biphenyls, petroleum, petroleum products, lead based paint, radon gas or similar restricted, prohibited or penalized substances.

“holder” means, with respect to any Bond the Person in whose name such Bond is registered in the register maintained by the Company.

“Indebtedness” with respect to any Person means, at any time, without duplication,

(a) its liabilities for borrowed money and its redemption obligations in respect of mandatorily redeemable Preferred Stock;

(b) its liabilities for the deferred purchase price of property acquired by such Person (excluding accounts payable arising in the ordinary course of business but including all liabilities created or arising under any conditional sale or other title retention agreement with respect to any such property);

B-3

(c) (i) all liabilities appearing on its balance sheet in accordance with GAAP in respect of Capital Leases and (ii) all liabilities which would appear on its balance sheet in accordance with GAAP in respect of Synthetic Leases assuming such Synthetic Leases were accounted for as Capital Leases;

(d) all liabilities for borrowed money secured by any Lien with respect to any property owned by such Person (whether or not it has assumed or otherwise become liable for such liabilities);

(e) all its liabilities in respect of letters of credit or instruments serving a similar function issued or accepted for its account by banks and other financial institutions (whether or not representing obligations for borrowed money);

(f) the aggregate Swap Termination Value of all Swap Contracts of such Person; and

(g) any Guaranty of such Person with respect to liabilities of a type described in any of clauses (a) through (f) hereof.

Indebtedness of any Person shall include all obligations of such Person of the character described in clauses (a) through (g) to the extent such Person remains legally liable in respect thereof notwithstanding that any such obligation is deemed to be extinguished under GAAP.

“Indenture” is defined in Section 1.

“Institutional Investor” means (a) any Purchaser of a Bond, (b) any holder of a Bond holding (together with one or more of its affiliates) more than 5% of the aggregate principal amount of the Bonds then outstanding, (c) any bank, trust company, savings and loan association or other financial institution, any pension plan, any investment company, any insurance company, any broker or dealer, or any other similar financial institution or entity, regardless of legal form, and (d) any Related Fund of any holder of any Bond.

“Lien” means, with respect to any Person, any mortgage, lien, pledge, charge, security interest or other encumbrance, or any interest or title of any vendor, lessor, lender or other secured party to or of such Person under any conditional sale or other title retention agreement or Capital Lease, upon or with respect to any property or asset of such Person (including in the case of stock, stockholder agreements, voting trust agreements and all similar arrangements).

“Material” means material in relation to the business, operations, affairs, financial condition, assets, properties, or prospects of the Company and its Subsidiaries taken as a whole.

“Material Adverse Effect” means a material adverse effect on (a) the business, operations, affairs, financial condition, assets or properties of the Company and its Subsidiaries taken as a whole, or (b) the ability of the Company to perform its obligations under this Agreement and the Bonds, or (c) the validity or enforceability of this Agreement or the Bonds.

B-4

“Memorandum” is defined in Section 5.3.

“Mortgaged Property” is defined in the Indenture.

“Multiemployer Plan” means any Plan that is a “multiemployer plan” (as such term is defined in section 4001(a)(3) of ERISA).

“NAIC” means the National Association of Insurance Commissioners or any successor thereto.

“Officer’s Certificate” means a certificate of a Senior Financial Officer or of any other officer of the Company whose responsibilities extend to the subject matter of such certificate.

“PBGC” means the Pension Benefit Guaranty Corporation referred to and defined in ERISA or any successor thereto.

“Person” means an individual, partnership, corporation, limited liability company, association, trust, unincorporated organization, business entity or Governmental Authority.

“Plan” means an “employee benefit plan” (as defined in section 3(3) of ERISA) subject to Title I of ERISA that is or, within the preceding five years, has been established or maintained, or to which contributions are or, within the preceding five years, have been made or required to be made, by the Company or any ERISA Affiliate or with respect to which the Company or any ERISA Affiliate may have any liability.

“Preferred Stock” means any class of capital stock of a Person that is preferred over any other class of capital stock (or similar equity interests) of such Person as to the payment of dividends or the payment of any amount upon liquidation or dissolution of such Person.

“property” or “properties” means, unless otherwise specifically limited, real or personal property of any kind, tangible or intangible, choate or inchoate.

“PTE” is defined in Section 6.2(a).

“Purchaser” is defined in the first paragraph of this Agreement.

“Qualified Institutional Buyer” means any Person who is a “qualified institutional buyer” within the meaning of such term as set forth in Rule 144A(a)(1) under the Securities Act.

“Related Fund” means, with respect to any holder of any Bond, any fund or entity that (i) invests in Securities or bank loans, and (ii) is advised or managed by such holder, the same investment advisor as such holder or by an affiliate of such holder or such investment advisor.

“Required Holders” means, at any time, the holders of at least 51% in principal amount of the Bonds at the time outstanding (exclusive of Bonds then owned by the Company or any of its Affiliates).

B-5

“Responsible Officer” means any Senior Financial Officer and any other officer of the Company with responsibility for the administration of the relevant portion of this Agreement.

“SEC” shall mean the Securities and Exchange Commission of the United States, or any successor thereto.

“Securities” or “Security” shall have the meaning specified in Section 2(1) of the Securities Act.

“Securities Act” means the Securities Act of 1933, as amended from time to time, and the rules and regulations promulgated thereunder from time to time in effect.

“Senior Financial Officer” means the chief financial officer, principal accounting officer, treasurer or comptroller of the Company.

“Subsidiary” means, as to any Person, any other Person in which such first Person or one or more of its Subsidiaries or such first Person and one or more of its Subsidiaries owns sufficient equity or voting interests to enable it or them (as a group) ordinarily, in the absence of contingencies, to elect a majority of the directors (or Persons performing similar functions) of such second Person, and any partnership or joint venture if more than a 50% interest in the profits or capital thereof is owned by such first Person or one or more of its Subsidiaries or such first Person and one or more of its Subsidiaries (unless such partnership or joint venture can and does ordinarily take major business actions without the prior approval of such Person or one or more of its Subsidiaries). Unless the context otherwise clearly requires, any reference to a “Subsidiary” is a reference to a Subsidiary of the Company.

“Supplement” is defined in Section 1.

“SVO” means the Securities Valuation Office of the NAIC or any successor to such Office.

“Swap Contract” means (a) any and all interest rate swap transactions, basis swap transactions, basis swaps, credit derivative transactions, forward rate transactions, commodity swaps, commodity options, forward commodity contracts, equity or equity index swaps or options, bond or bond price or bond index swaps or options or forward foreign exchange transactions, cap transactions, floor transactions, currency options, spot contracts or any other similar transactions or any of the foregoing (including, but without limitation, any options to enter into any of the foregoing), and (b) any and all transactions of any kind, and the related confirmations, which are subject to the terms and conditions of, or governed by, any form of master agreement published by the International Swaps and Derivatives Association, Inc., any International Foreign Exchange Master Agreement.

“Swap Termination Value” means, in respect of any one or more Swap Contracts, after taking into account the effect of any legally enforceable netting agreement relating to such Swap Contracts, (a) for any date on or after the date such Swap Contracts have been closed out and termination value(s) determined in accordance therewith, such termination value(s), and (b) for

B-6

any date prior to the date referenced in clause (a), the amounts(s) determined as the mark-to-market values(s) for such Swap Contracts, as determined based upon one or more mid-market or other readily available quotations provided by any recognized dealer in such Swap Contracts.

“Synthetic Lease” means, at any time, any lease (including leases that may be terminated by the lessee at any time) of any property (a) that is accounted for as an operating lease under GAAP and (b) in respect of which the lessee retains or obtains ownership of the property so leased for U.S. federal income tax purposes, other than any such lease under which such Person is the lessor.

“Trustee” is defined in the Indenture.

“USA Patriot Act” means United States Public Law 107-56, Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT ACT) Act of 2001, as amended from time to time, and the rules and regulations promulgated thereunder from time to time in effect.

B-7

UCC FILINGS

DELAWARE:

1.	Amendment to Delaware Secretary of State filing no. 30353915 to assign the interest of the secured party from JPMorgan Chase Bank, N.A., Trustee to The Bank of New York, Trustee

IOWA:

1.	Amendment to Iowa Secretary of State filing no. K483584 to change the name of the secured party of record from The Chase Manhattan Bank (National Association), Trustee to JPMorgan Chase Bank, N.A., Trustee

2.	Amendment to Iowa Secretary of State filing no. K483584 to assign the interest of the secured party from JPMorgan Chase Bank, N.A., Trustee to The Bank of New York, Trustee

3.	Amendment to Iowa Secretary of State filing no. K483584 to change the name of the debtor of record from Northwestern Public Service Company to NorthWestern Corporation

4.	Amendment to Iowa Secretary of State filing no. K483584 to add the legal description of property upon which fixtures are located

NEBRASKA:

1.	Amendment to Nebraska Secretary of State filing no. 595076 to change the name of the secured party of record from The Chase Manhattan Bank (National Association), Trustee to JPMorgan Chase Bank, N.A., Trustee

2.	Amendment to Nebraska Secretary of State filing no. 595076 to assign the interest of the secured party from JPMorgan Chase Bank, N.A., Trustee to The Bank of New York, Trustee

3.	Amendment to Nebraska Secretary of State filing no. 595076 to change the name of the debtor of record from Northwestern Public Service Company to NorthWestern Corporation

4.	Amendment to Nebraska Secretary of State filing no. 595076 to add the legal description of property upon which fixtures are located

SCHEDULE 4.12

(to Bond Purchase Agreement)

5.	Amendment to Nebraska Secretary of State filing no. 9904357808-7 to assign the interest of the secured party from JPMorgan Chase Bank, N.A., Trustee to The Bank of New York, Trustee

6.	Amendment to Nebraska Secretary of State filing no. 9904357808-7 to add the legal description of property upon which fixtures are located

7.	Amendment to Nebraska Secretary of State filing no. 9904357808-7 to correct indexed name of Debtor from “North Western Corporation” to “NorthWestern Corporation”

NORTH DAKOTA:

1.	Amendment to North Dakota Secretary of State filing no. 93-00358967 to change the name of the secured party of record from The Chase Manhattan Bank (National Association) to JPMorgan Chase Bank, N.A., Trustee

2.	Amendment to North Dakota Secretary of State filing no. 93-00358967 to assign the interest of the secured party from JPMorgan Chase Bank, N.A., Trustee to The Bank of New York, Trustee

3.	Amendment to North Dakota Secretary of State filing no. 93-00358967 to change the name of the debtor of record from Northwestern Public Service Company to NorthWestern Corporation

4.	Amendment to North Dakota Secretary of State filing no. 93-00358967 to add the legal description of property upon which fixtures are located

4.12-2

DISCLOSURE DOCUMENTS

The Agreement and schedules thereto

The Memorandum

SCHEDULE 5.3

(to Bond Purchase Agreement)

SUBSIDIARIES OF THE COMPANY AND

OWNERSHIP OF SUBSIDIARY STOCK

Name of Company	Jurisdiction of its Organization	Percentage Owned
NorthWestern Services, LLC	Delaware	100
Canadian-Montana Pipeline Corporation	Canada	100
Montana Generation, LLC(1)	Delaware	100
Clark Fork and Blackfoot, LLC	Montana	100
Colstrip Lease Holdings, LLC(1)(2)	Delaware	100
NorthWestern Investments, LLC	Delaware	100
Blue Dot Services, LLC(3)	Delaware	100
Blue Dot Capital, LLC(3)	Delaware	100
Risk Partners Assurance Ltd.	Delaware	100

(1)	NorthWestern Services, LLC is the parent of Colstrip Lease Holdings, LLC and Montana Generation, LLC.

(2)	The membership interests of Colstrip Lease Holdings, LLC have been pledged to secure the $100,000,000 Credit Agreement between Colstrip Lease Holdings, LLC and WestLB AG, New York Branch, as lender, listed on Schedule 5.15.

(3)	NorthWestern Investments, LLC, is the parent of Blue Dot Services, LLC, who is the parent to Blue Dot Capital, LLC.

SENIOR OFFICERS OF THE COMPANY:

Michael J. Hanson

Brian B. Bird

Patrick R. Corcoran

David G. Gates

Thomas J. Knapp

Curtis T. Pohl

Bobbi L. Schroeppel

Gregory G. A. Trandem

DIRECTORS OF THE COMPANY:

E. Linn Draper, Jr.

Michael J. Hanson

Stephen P. Adik

Julia L. Johnson

Jon S. Fossel

Philip L. Maslowe

D. Louis Peoples

SCHEDULE 5 .4

(to Bond Purchase Agreement)

FINANCIAL STATEMENTS

Audited financial statements of the Company for the fiscal year ended December 31, 2007 included in the Company’s Form 10-K for the period then ended filed on February 26, 2008.

Audited financial statements for the fiscal year ended December 31, 2006 included in the Company Form 10-K for the period.

Audited financial statements for the fiscal period ended December 31, 2005 included in the Company’s Form 10-K for the period.

SCHEDULE 5 .5

(to Bond Purchase Agreement)

REQUIRED APPROVALS

Other than FERC approval, no other regulatory approvals are required in connection with the transactions contemplated by the Financing Agreements.

SCHEDULE 5 .7

(to Bond Purchase Agreement)

EXISTING INDEBTEDNESS

A. SECURED SENIOR DEBT

1. General Mortgage Indenture and Deed of Trust dated August 1, 1993 between The Chase Manhattan Bank (National Association), as Trustee and NorthWestern Public Service Company (now known as NorthWestern Corporation), as Issuer, as amended and supplemented, pursuant to which $55.0 million of 7.00% Mortgage Bonds of NorthWestern due 2018 have been issued (to be refinanced with the proceeds of this transaction). Collateral: substantially all of the utility properties directly owned by the Company in the States of South Dakota, North Dakota, Nebraska and Iowa, subject to certain exceptions, and After Acquired Property (as defined therein).

2. First Mortgage and Deed of Trust, dated as of October 1, 1945, by and between NorthWestern Corporation (as successor to The Montana Power Company), as Issuer, and Guaranty Trust Company of NY and Arthur E. Burke (now The Bank of New York and Ming Ryan), as trustees, as amended and supplemented, pursuant to which the following Mortgage Bonds have been issued:

(a) $170.2 million of 4.65% First Mortgage Bonds of NorthWestern Corporation due 2023 were issued to secure the obligations of NorthWestern Corporation under a Loan Agreement, dated as of May 9, 2006, between NorthWestern Corporation and the City of Forsyth, pursuant to which the City of Forsyth loaned an aggregate amount of $170,205,000 to NorthWestern Corporation, received from the proceeds of the City of Forsyth Pollution Control Revenue Bonds Series 2006, 4.65% series, due 2023; and

(b) $150.0 million of 6.04% First Mortgage Bonds of Northwestern Corporation due 2016.

Collateral: substantially all of the utility properties directly owned by the Company in the States of Montana and Wyoming, subject to certain exceptions, and After Acquired Property (as defined therein).

3. Loan Agreement, dated as of June 1, 1993, by and between Grant County and the Borrower, pursuant to which Grant County loaned an aggregate amount of $6.4 million to the Borrower, received from the proceeds of the 5.90% Grant County Series 1993A Pollution Control Revenue Bonds, due 2023. Collateral: All of the Company’s interest (an undivided 23.4% share) in certain pollution control facilities at the Big Stone Plant in Grant County, South Dakota.

4. Loan Agreement, dated as of June 1, 1993, by and between Grant County and the Borrower, pursuant to which Grant County loaned an aggregate amount of $3.4 million to the Borrower, received from the proceeds of the 5.90% Grant County Series 1993B Pollution Control Revenue Bonds, due 2023. Collateral: All of the Company’s interest (an undivided

SCHEDULE 5 .15

(to Bond Purchase Agreement)

23.4% share) in certain pollution control facilities at the Big Stone Plant in Grant County, South Dakota.

5. Loan Agreement, dated as of June 1, 1993, by and between the City of Salix and the Borrower, pursuant to which the City of Salix loaned an aggregate amount of $4.0 million to the Borrower, received from the proceeds of the 5.90% City of Salix Series 1993 Pollution Control Revenue Bonds, due 2023. Collateral: All of the Company’s interest (an undivided 8.68% share) in certain pollution control facilities located at the George Neal Generating Station near Salix, Iowa.

6. Sale Agreement, dated as of June 1, 1993, by and between Mercer County and the Borrower, pursuant to which Mercer County loaned an aggregate amount of $7,550,000 to the Borrower, received from the proceeds of the 5.85% Mercer County Series 1993 Pollution Control Revenue Bonds, due 2023. Collateral: All of the Company’s interest (an undivided 10% interest) in certain pollution control facilities located at the Coyote Plant in Mercer County, North Dakota.

7. Assumption of certain obligations of Montana Power, as grantor and servicer of MPC Natural Gas Funding Trust, issuer of $27.7 million of 6.2% Transition Bonds Due 2012 which are secured by a pledge of certain utility related revenues.

8. Indenture and First Supplemental Indenture from NorthWestern to U.S. Bank National Association, as Trustee, both dated as of November 1, 2004, pursuant to which $225,000,000 of 5.875% Senior Secured Notes due 2014 have been issued. This indenture places restrictions on the amount of Indebtedness of the Company. Collateral: $161,000,000 of Montana First Mortgage Bonds, Collateral (2004) Series C, issued under and secured by the Montana Mortgage described in paragraph 2 above, and $64,000,000 of South Dakota First Mortgage Bonds, Collateral (2004) Series C, issued under and secured by the South Dakota Mortgage described in paragraph 1 above.

B. CAPITAL LEASES

1. Master Lease Agreement No. TFG/NR 052303 dated May 23, 2003 between Tetra Financial Group, L.L.C. and NorthWestern Corporation d/b/a/ NorthWestern Energy ($1,059,543 as of 12/31/07). Collateral: The equipment subject to the Master Lease.

2. Various vehicle capital leases under the Lease Agreement dated April 24, 2002 between Automotive Rentals, Inc. and NorthWestern Corporation ($511,227 as of 12/31/07). Collateral: The vehicles subject to the Lease Agreement.

C. COLSTRIP LEASE OBLIGATIONS

1. $44.9 million of assumed debt in connection with the purchase of the Owner Participant interest of our 222 MW leased interest in the 740 MW coal-fired steam electric generation unit known as Colstrip Unit 4 located in Colstrip, Montana. Collateral: All of the

5.15.-2

Owner Trust’s interests in the Colstrip 4 facility, and the Company is the beneficial owner of the Owner Trust.

2. $100.0 million Credit Agreement, dated December 28, 2007, among Colstrip Lease Holdings, LLC, as borrower, and West LB AG, New York Branch, as lender. Collateral: The membership interests of Colstrip Lease Holdings, LLC and a portion of the Company’s owner participant interest in Colstrip 4. The loan is otherwise non-recourse to the Company.

D. UNSECURED INDEBTEDNESS

$200 million Credit Agreement, dated as of June 30, 2005, as amended, among NorthWestern Corporation, as borrower, the several lenders from time to time parties thereto, Deutsche Bank Securities Inc. and Lehman Brothers Inc., as joint lead arrangers, Lehman Commercial Paper Inc., as syndication agent, Union Bank of California, N.A. and KeyBank National Association, as co-documentation agents, and Deutsche Bank AG New York Branch, as administrative agent and collateral agent. This Indenture places restrictions on the amount of Indebtedness of the Company.

5.15.-3

FILINGS

See Schedule 4.12.

SCHEDULE 5.20

(to Bond Purchase Agreement)

FORM OF SUPPLEMENT

[See Attached]

EXHIBIT A

(to Bond Purchase Agreement)

FORM OF OPINION OF SPECIAL COUNSEL

TO THE COMPANY

[See Attached]

EXHIBIT 4.4(a)(i)

(to Bond Purchase Agreement)

FORM OF OPINION OF LOCAL COUNSEL

TO THE COMPANY

[See Attached]

EXHIBIT 4.4(a)(ii)

(to Bond Purchase Agreement)

FORM OF OPINION OF GENERAL COUNSEL

OF THE COMPANY

[See Attached]

EXHIBIT 4.4(a)(iii)

(to Bond Purchase Agreement)

FORM OF OPINION OF SPECIAL COUNSEL

TO THE PURCHASERS

[See Attached]

EXHIBIT 4.4(b)

(to Bond Purchase Agreement)

EXHIBIT 31.1

CERTIFICATION PURSUANT TO

17 CFR 240. 13a-14

PROMULGATED UNDER

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Michael J. Hanson, certify that:

1.	I have reviewed this 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 officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)

evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

(a)

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting 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: July 31, 2008
/s/ MICHAEL J. HANSON
Michael J. Hanson
President and Chief Executive Officer

Exhibit 31.2

CERTIFICATION PURSUANT TO

17 CFR 240.13a-14

PROMULGATED UNDER

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Brian B. Bird, certify that:

1.	I have reviewed this 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 function):

(a)

all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date: July 31, 2008
/s/ BRIAN B. BIRD
Brian B. Bird
Vice President and Chief Financial Officer

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 June 30, 2008, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael J. Hanson, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

The Report fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: July 31, 2008		/s/ MICHAEL J. HANSON
		Michael J. Hanson
		President and Chief Executive Officer

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 June 30, 2008, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Brian B. Bird, Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

The Report fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: July 31, 2008	/s/ BRIAN B. BIRD
	Brian B. Bird
	Vice President and Chief Financial Officer