NORTHWESTERN ENERGY

2013 ANNUAL INCENTIVE PLAN

I.      Introduction

NorthWestern Energy (NWE) utilizes the 2013 Annual Incentive Plan (Plan) to reward non-represented employees for their contributions toward achieving desired business results.

II.      Plan Objectives

This Plan is designed to achieve the following objectives:

III.      Plan Administration

The Plan is approved by NWE's Board of Directors (Board) and administered by the NWE Incentive Plan Administration Committee (Administration Committee) consisting of the President and CEO, and CFO. The Administration Committee is responsible for all aspects of administration of the Plan, and is responsible for resolving any conflicts or discrepancies that arise. The Administration Committee's decision on any matter associated with this Plan is final, subject to approval by the Board's Human Resources Committee.

IV.      Performance Period and Effective Date

The Plan becomes effective January 1, 2013, and will continue until December 31, 2013, which is the performance period. The Plan may be suspended and/or terminated by the Administration Committee, subject to approval by the Board, at any time, without prior notice and at its sole discretion.

V.      Other Considerations

All awards are subject to income tax withholding and garnishment requirements. No right or interest in the Plan is transferable or assignable.

Distributions under the Plan are at the discretion of the Administration Committee, subject to approval of the Board's Human Resources Committee. Awards will not be made under the Plan if, in the sole and final judgment of the Board, the overall financial condition of the Company is insufficient to support awards.

Distributions from the Plan do not provide any rights to continued employment. A distribution from the Plan in any one-performance period does not guarantee the participant a distribution or the right to participate in any subsequent performance period.

VI.      Participation and Eligibility

All non-represented regular full-time, regular part-time, limited part-time and supplemental employees of NWE employed on the last business day of the plan year are eligible to receive payment under the Plan provided they are actively employed by NWE for at least one full quarter of the plan year. To participate in the Plan, employees must have written goals and objectives consistent with NWE's goals and objectives.

These employee goals must target results that meet or exceed the normal requirements of the position and that contribute to meeting the goals and objectives of the company. Goals and objectives can be based on either individual or team performance; however, each employee must have at least one goal that contributes to cost reduction or process improvement.

Employees must meet acceptable performance standards, as defined and approved by the Administration Committee, to be eligible for an award. Employees who are under an active step of Progressive Discipline or employees whose performance is rated “unsatisfactory” are not eligible for an award. Employees whose performance is rated “partially met expectations” may, at the discretion of their supervisor, be eligible for an award from the discretionary pool.

Employees are eligible for a prorated incentive award based upon the amount of time served in an eligible status with NorthWestern Energy during the performance period if they:

Temporary and summer employees, as well as independent contractors, are not eligible to participate in the Plan.

VII.      Individual Awards

Awards to plan participants from the Performance Pool (Section IX) will be determined based on individual performance ratings that evaluate achievement against established goals and objectives as well as overall job performance. Supervisors will evaluate individual employee performance during the period covered by the Plan to determine individual awards.

VIII.      Target Incentives

Target incentive level for each participating employee is set by position and will be expressed as a percentage of base salary. Each participant's target incentive is subject to approval by the Administration Committee and any changes will be communicated in writing to participants. The Board will approve senior executive target incentive levels.

IX.      Performance Pool

The Plan is funded through achievement of targeted results on key organizational performance objectives, inclusive of costs associated with the Plan. After implementation, the Plan will be reviewed periodically to ensure that the desired results are being achieved.

The Performance Pool will be created based on four factors: net income, electric service reliability, customer satisfaction, and employee safety. Each of these measures will be calculated at the conclusion of the performance period. Periodic accruals will be made to provide for the Performance Pool at year-end. The Performance Pool will be funded in accordance with Table 1; however, no awards will be made unless at least 90% of the net income target is met. Officer awards will be modified based on each officer's goal performance during the Performance Period.

Footnotes: 1) The financial target is based on Board-approved budget for 2013; 2) If a work-related fatality occurs, the safety portion of the Annual Incentive Plan will be forfeited for all NWE employees unless it is determined by the Human Resources Committee that no actions on the part of the employee or the Company contributed to the incident. 3) Customer satisfaction results are based on independent JD Power residential electric and gas survey results.

Funding levels are computed by prorating if actual results lie between Threshold (50%) through Maximum (150%)

In calculating performance against target, adjustments may be made either positively or negatively for one-time events and extraordinary nonbudgeted items as approved by the B oard. This plan is subjected to any “clawback” provisions accepted by the Company in the future.

 

As soon as possible after the end of the Performance Period, NWE will calculate the actual performance as compared against the performance targets. Such calculations shall be finally determined in the sole discretion of the Board's Human Resources Committee or an appointed designee. Employees shall have no recourse, appeal or challenge available from this final determination. Summary results will be provided to employees.

X.      Performance Pool Distribution and Incentive Pay Calculation

Individual employee performance is a key consideration in calculating distribution of incentive pay. The Performance Pool will be allocated to each officer using total target incentive dollars at the end of the Performance Period for eligible employees in each functional unit, division or department adjusted based on the performance funding level achieved. The Performance Pool will be divided into two pools: a “Fixed Pool” and a “Discretionary Pool.” Fifty percent (50%) of the Performance Pool will be allocated to the Fixed Pool; the remaining fifty percent (50%) will be allocated to the Discretionary Pool. Each Eligible Employee that has a performance rating of met or exceeded expectations will receive a distribution from the Fixed Pool calculated as follows:

Employee's target incentive amount x performance funding level achieved x 50%

Each officer will then allocate the Discretionary Pool to the respective department supervisors, as appropriate, for further distribution based on either attainment of team or individual performance goals. Supervisors will submit recommended distributions to individual employees subject to the functional officer's and

Administration Committee approval. In no case will the total payouts in a given Performance Pool exceed the total dollars available for that Performance Pool.

XI.      Payment of Awards

Cash awards will be made in the same manner as each employee's normal payroll processing, either in the form of Company check or direct deposit. Awards will be paid out to employees in March 2013. Awards are considered ordinary income and subject to all appropriate taxes.

____________________________

Recommended by the Human Resources Committee on December 12, 2012

Approved by the Board of Directors on December 12, 2012

NORTHWESTERN ENERGY

2013 ANNUAL INCENTIVE PLAN

ADDENDUM 1

U Definitions

U Reliability Metric

System Reliability (MT and SD Electric Distribution System) is calculated by NorthWestern Energy and participating Institute of Electrical and Electronic Engineers, Inc. (IEEE) benchmarking utilities and is determined as follows:

System Average Interruption Duration Index (SAIDI) indicates the total duration of interruption for the average customer during a predefined period of time and is calculated as follows:

SAIDI (in minutes) = U sum of the customer interruption durations

total number of customers served

U Safety Metric

Safety performance is calculated by NorthWestern Energy and participating Edison Electric Institute (EEI) benchmarking utilities as defined by OSHA. OSHA recordable incident rates and lost time incident rates are the most common method of determining relative safety performance. OSHA has specifically defined what injuries and illnesses should be recorded, and of those recorded cases, which must be considered lost time. By utilizing the "total manhours worked" of a specific work group in the denominator, the resulting rate from the calculation can be used to compare different size departments, divisions, companies, etc. The 200,000 number and the total manhours worked number "normalize" the rate so comparisons can be made.

Lost time incident rate - this rate is calculated by taking the total number of all OSHA lost time cases, multiplying the number by 200,000, and dividing the number by the total number of manhours worked by a specific group. It is calculated via the following formula:

U total lost time cases x 200,000

total manhours worked

NORTHWESTERN ENERGY

2013 ANNUAL INCENTIVE PLAN

ADDENDUM 2

Reliability Analysis for 2013 Incentive Plan Design

Summary

The overall objective for inclusion of a reliability goal within the short term incentive plan is to insure focus is kept on maintaining a high level of system reliability. Historically NorthWestern's system has already operated at a high level of reliability, 1 P ^st P quartile performance when compared against IEEE benchmarks. While maintaining the focus on reliability is important we do have to balance this with other priorities and risks in the company including financial performance and other impacts of customer service. We also believe it is important to show continued improvement, however, achieving significant improvement over current overall levels of reliability may not be cost effective. As everyone is aware we have significant investment plans to maintain reliability over the long term. Because the current level of performance is already high and the fact that weather can swing results + or - 15 to 20%, establishing incentive targets that make sense has been a challenge.

After analyzing past reliability performance and IEEE benchmarking data from the 2010 survey management is again recommending an approach for establishing targets that we believe aligns with our overall goal of improving reliability over time, and aligns with actual customer experience.

Considering all of the observations listed below management recommends utilizing the same methodology as was used in 2012

SAIDI excluding MEDs - 7.5% of the total incentive plan

Threshold performance: 123 minutes - Using the best match for similar operating companies in the IEEE survey achieve 1 P ^st P quartile performance. The best match for similar operating companies is combined rural and suburban mediums sized IOU's. 1 P ^st P quartile performance in the 2010 survey Is 119 min.

Target performance: 105 minutes - using the approach described above achieve a 20% improvement over the gap of NWE 5yr average results (105 min) and 89 min. 89 is 1 P ^st P Quartile performance of all reporting companies including urban and companies that do not report transmission. Gap = 105 - 89= 16 20% of the gap = 3.2 min. 20% improvement of the gap from 5 yr avg. = 105 - 3.2 min = 101.8 min.

Maximum performance: 91 minutes - 89 minutes is an improvement over the best reported SAIDI excluding MEDs of 90.87 min and is 1 P ^st P Quartile performance of all reporting companies including urban and companies that do not report transmission.

SAIDI including MEDs - 7.5% of the total incentive plan

Threshold performance: 195 minutes - Using the best match for similar operating companies in the IEEE survey achieve 1 P ^st P quartile performance. The best match for similar operating companies is combined rural and suburban mediums sized IOU's. 1 P ^st P quartile performance in the 2009 survey Is 162 min.

Target performance: 129 minutes - using the approach described above achieve a 20% improvement over the gap of NWE 5yr average results (132 min) and 107 min. 107 is best reported Northwestern SAIDI estimated in 2011 including MEDs and is better than 1 P ^st P Quartile performance of all reporting companies including urban and companies that do not report transmission, which is 125 min. Gap = 132 - 107= 25.0 20% of the gap = 5.0 min. 20% improvement of the gap from 5 yr avg. = 132.0 - 5.0 min = 127 min.

Maximum performance: 113 minutes - 107 minutes is the better of Northwestern best historical 5 year performance or Industry 1 P ^st P Quartile performance of all reporting companies including urban and companies that do not report transmission for SAIDI including MED's. Industry 1 P ^st P Quartile is 125 minutes, NorthWestern's best is 107 min.

Observations

Several key observations can be made after analyzing NWE results over the past 5 yrs and the 2010 IEEE benchmarking data (see tables with historical NWE results in plan document:

Northwestern utilizes three common Industry metrics when measuring reliability:

SAIDI is measured with and without Major Event Days (MEDs). Excluding Major Event Days, using an IEEE equation to consistently determine if an event meets the criteria, is a way for the industry to compare metrics taking out major weather events such as hurricanes, ice storms or other major storms. Comparing data against benchmarks excluding MEDs is a good way to look at a more accurate picture of system performance; however it is also important to look at data including MEDs because it is the reliability that customers experience.

In general SAIDI is an overall metric factoring both restoration time and frequency, which makes it a good metric to use at a high level when comparing overall system performance. This is also the metric that management recommends to be used when establishing targets for incentive purposes.

CUSTOMER SATISFACTION

Customer satisfaction is an important element of operating a utility focused on understanding and meeting customer and community needs. To this end, NorthWestern includes customer satisfaction in its annual incentive plan with a target of 15 percent to drive focus on and reward employees for meeting or exceeding customer expectations.

Customer satisfaction, for the 2013 Annual Incentive Plan, is measured by the well tested and broadly utilized JD Power residential electric and gas customer satisfaction surveys/ studies.

The JD Power model includes the following six components:

2013 Customer Satisfaction Threshold, Target and Maximum Targets:

2013 Customer Satisfaction Program Parameters:

2013 Customer Satisfaction Metric Recommendation

NorthWestern Corporation

Executive Retirement/Retention Program

Restricted Share Unit Award Agreement

(Granted Under the Amended and Restated 2005 Long-Term Incentive Plan)

The Executive Retirement/Retention Program is designed to provide the executives of NorthWestern Corporation (together with its subsidiaries, the “ Company ”) with a reward for their years of service with the Company when they retire. This program is in lieu of a comprehensive supplemental retirement/pension plan for executives as provided by other companies, as well as a retention incentive to continue their employment with, and to advance the interests of, the Company. This award to Grantee will be governed by this Agreement and the Company's Amended and Restated 2005 Long-Term Incentive Plan (the “ Plan ”).

In consideration of the mutual promises and covenants contained in this Agreement, the Grantee and the Company each agree as follows:

ARTICLE I - G rant of Restricted Share Units

Subject to the terms of the Plan, the Company hereby grants to [___Individual_____] (the “ Grantee ”) [___#____] Restricted Stock Units (“ RSUs ”) on [_______Date________] (the “ Grant Date ”), payment of which depends on the continued service of the Grantee and the achievement of certain performance objectives as set forth in this Agreement.

ARTICLE II - Vesting of Restricted Share Units

Section 1. Conditions; Vesting. Except as otherwise provided in ARTICLE III, ARTICLE IV and ARTICLE V of this Agreement, the RSUs covered by this Agreement shall become vested and non-forfeitable on December 31, 2017 (the “ Vesting Date ”), provided that (a) the Grantee's “Continuous Service,” as defined in Appendix A of the Plan, with the Company continues through the Vesting Date and (b) the Company meets or exceeds the Performance Measure set forth in Section 2.3 below.

Section 2. Performance Period. The Performance Period for which the Performance Measure is applicable is five calendar years beginning on January 1, 2013, and ending on December 31, 2017.

Section 3. Performance Measure. The Performance Measure applicable to the Performance Period is established by the Human Resources Committee (the “ Committee ”) of the Board of Directors of the Company (the “ Board ”) and requires the Company's net income for the calendar year of at least three of the five full calendar years during the Performance Period to exceed the Company's net income for the calendar year 2012. For purposes of the Performance Measure, “net income” shall be as reflected in the Company's audited consolidated financial statements for the applicable calendar year. Following the Performance Period, the Committee shall determine whether the Performance Measure has been satisfied for the Performance Period and shall recommend that the Board approve the vesting of the RSUs. In calculating the Performance Measure, the Committee may make adjustments, as approved by the Board, either positively or negatively for one-time events and extraordinary nonbudgeted items. Upon vesting pursuant to this ARTICLE II, the RSUs shall be paid as provided in ARTICLE VII.

ARTICLE III - Cha nge in Control

In accordance with Section 13 of the Plan, if a “Change in Control,” as defined in Appendix A of the Plan, occurs prior to the Vesting Date at a time when the RSUs have not been forfeited, the Performance Measure shall be deemed to be satisfied, and the RSUs will vest as of the closing date of the Change in Control. Upon vesting pursuant to this ARTICLE III, the RSUs shall be paid as provided in

ARTICLE VII. In the event that due to the acceleration of vesting of the RSUs upon a Change in Control, Grantee would, but for this ARTICLE III, be subject to the excise tax provisions of Internal Revenue Code (“ Code ”) Section 4999 as a result of “parachute payments” described in Code Section 280G (whether pursuant to the terms of this Agreement or any other plan, program, agreement or arrangement), the number of RSUs with respect to which vesting is accelerated pursuant to this ARTICLE III (the “ Payments ”) shall be reduced in such amount that is required to reduce the aggregate present value of such parachute payments to a dollar less than an amount equal to three times the Grantee's “base amount” (as such term is defined in Code Sections 280G(b)(3)(A) and 280G(d)(1) and (2)) so that the Grantee is not subject to the tax under Code Section 4999 and no tax deduction is disallowed by reason of Code Section 280G, provided that the reduction described herein shall be made only after all reductions are made under other plans, programs or agreements applicable to the Grantee that provide for similar reductions; and provided further that the reduction described herein shall only be made if the net amount of the Payments, as so reduced (and after subtracting the net amount of federal, state, municipal and local income taxes on such reduced Payments and after taking into account the phase out of itemized deductions and personal exemptions attributable to such reduced Payments), is greater than or equal to the net amount of the Payments without such reduction (but after subtracting the net amount of federal, state, municipal and local income taxes on such Payments and the amount of excise tax to which the Grantee would be subject in respect of such unreduced Payments and after taking into account the phase out of itemized deductions and personal exemptions attributable to such unreduced Payments).

ARTICLE IV - Dis ability or Death

In the event of the Grantee's Disability (as defined in Appendix A of the Plan) or death prior to the Vesting Date (and at a time when the RSUs have not been forfeited), the RSUs covered by this Agreement will vest as of the date of such Disability or death, and the Company shall pay to the Grantee or his or her executor or administrator, as the case may be, as soon as practicable after such Disability or death (but in any event not later than the 90th day thereafter), a number of Shares equal to the RSUs granted pursuant to this Agreement.

ARTICLE V - Retireme nt

If the Grantee's Continuous Service with the Company terminates before the end of the Performance Period due to the Grantee's Retirement (and at a time when the RSUs have not otherwise been forfeited), a pro rata portion of the RSUs covered by this Agreement shall be forfeited (based on the number of full months during the Performance Period, minus the number of full months of the Grantee's Continuous Service with the Company during the Performance Period). The vesting of any RSUs covered by this Agreement that are not forfeited by this ARTICLE V shall be determined in accordance with ARTICLE II above as if Grantee had remained employed by the Company through the end of the Performance Period. Notwithstanding the provisions of ARTICLE VII, any RSUs that vest pursuant to this ARTICLE V shall be paid in full in common stock of the Company within a reasonable period following the later to occur of (a) the first business day of the seventh month following the Grantee's Retirement, and (b) the Vesting Date. For purposes of this Agreement, “Retirement” shall mean a termination of the Grantee's Continuous Service with the Company after the Grantee has (y) attained age 50 and completed at least five years of Continuous Service or (z) attained age 65. Further, “Retirement” shall exclude any termination of the Grantee's Continuous Service for Cause.

ARTICLE VI - Forfeiti ng of Restricted Share Units

Except as otherwise provided by ARTICLE III, ARTICLE IV or ARTICLE V of this Agreement, if the Grantee's Continuous Service with the Company terminates before the Vesting Date or the performance objective set forth in ARTICLE II is not satisfied, the RSUs covered by this Agreement will be forfeited in their entirety. In addition, in the event that the Grantee shall intentionally commit an act prior to the Vesting Date that the Board determines to be adverse to the interests of the Company, the RSUs

covered by this Agreement shall be forfeited at the time of that determination notwithstanding any other provision of this Agreement. Finally, in the event that the Board determines to cancel the grants made by this Agreement, the RSUs covered by this Agreement shall be forfeited at the time of that determination notwithstanding any other provision of this Agreement.

ARTICLE VII - D eferral and Payment of Restricted Share Units

Section 4. Mandatory Deferral of RSUs. Following vesting of the RSUs pursuant to ARTICLE II, ARTICLE III and ARTICLE V, the number of vested RSUs shall be credited to an account for the Grantee as soon as practicable after the last calendar year of the Performance Period and the determination by the Committee (or the independent members of the Board) of satisfaction of the Performance Measure, but in no event shall such crediting occur after two and a half months from the end of the Performance Period. The RSUs credited to the Grantee's account will represent the number of Common Shares that the Company will issue to the Grantee pursuant to Section 7.2 below. The RSUs credited to the Grantee's account shall be treated, solely for purposes of administration and accounting, as the equivalent of Deferred Share Units (as defined in Appendix A of the Plan). For the avoidance of doubt, the RSUs shall not constitute Deferred Share Units for purposes of any provision of the Plan, including, without limitation, any provision regarding the crediting of dividends, participant elections or hardship distributions.

Section 5. Payment of RSUs. Subject to ARTICLE V, payment of the vested RSUs will be made in the form of Common Shares and will be made in five substantially equal annual installments, beginning on the first business day of the seventh month following the date on which the Grantee's Continuous Service terminates and continuing on each of the next four anniversaries of such initial payment date (or the next following business day if any such anniversary does not fall on a business day). Distributions shall be subject to withholding for all amounts that the Company is required to withhold under federal, state or local tax law. This tax withholding obligation will be satisfied by the liquidation of Common Shares otherwise payable pursuant to this Award.

Section 6. Dividends. The Grantee's account will be credited with cash or stock dividend equivalents related to the vested RSUs for dividends declared after the date that the RSUs become vested and until the RSUs are paid. Cash dividend equivalents will be credited as additional vested RSUs.

Section 7. Unsecured Rights to RSUs. The RSUs shall at all times constitute an unsecured promise of the Company to pay benefits as they come due. The right of the Grantee to receive benefits hereunder shall be solely an unsecured claim against the general assets of the Company. The Grantee shall not have any claim against or rights in any specific assets, share, or other funds of the Company.

Section 8. No Deferral Election. The Grantee agrees not to make an election covering this Award under the NorthWestern Corporation 2009 Officers Deferred Compensation Plan.

ARTICLE VIII - Non- Assignability

The RSUs and the Common Shares subject to this grant are personal to the Grantee and may not be sold, exchanged, assigned, transferred, pledged, encumbered or otherwise disposed of by the Grantee until they are paid as provided in this Agreement; provided , however , that the Grantee's rights with respect to such RSUs and Common Shares may be transferred by will or pursuant to the laws of descent and distribution. Any purported transfer or encumbrance in violation of the provisions of this ARTICLE VIII shall be void, and the other party to any such purported transaction shall not obtain any rights to or interest in such RSUs or Common Shares.

ARTICLE IX - Adju stments

In the event of any change in the number of outstanding Common Shares by reason of a merger, consolidation, reorganization, recapitalization, or similar transaction, or in the event of a stock dividend, stock split, or distribution to shareholders (other than normal cash dividends), the Committee shall adjust the number and class of shares subject to unvested RSUs. No adjustment provided for in this ARTICLE IX shall require the Company to issue any fractional share.

ARTICLE X - Compliance with Se ction 409A of the Code

To the extent applicable, it is intended that this Agreement and the Plan comply with the provisions of Section 409A of the Code, so that the income inclusion provisions of Section 409A(a)(1) of the Code do not apply to the Grantee. This Agreement and the Plan shall be administered in a manner consistent with this intent, and any provision that would cause the Agreement or the Plan to fail to satisfy Section 409A of the Code shall have no force and effect unless and until amended to comply with Section 409A of the Code (which amendment may be retroactive to the extent permitted by Section 409A of the Code and may be made by the Company without the consent of the Grantee). References to Section 409A of the Code will also include any proposed, temporary or final regulations, or any other guidance, promulgated with respect to such Section by the U.S. Department of the Treasury or the Internal Revenue Service.

ARTICLE XI - Miscellaneo us

Section 9. Interpretation. The contents of this Agreement are subject in all respects to the terms and conditions of the Plan as approved by the Board, which are hereby incorporated herein by reference. The interpretation and construction by the Board and/or the Committee of any provision of the Plan or this Agreement shall be final and conclusive upon the Grantee, the Grantee's estate, executor, administrator, beneficiaries, personal representative and guardian and the Company and its successors and assigns. Unless otherwise indicated, the capitalized terms used in this Agreement shall have the same meanings as set forth in the Plan.

Section 10. Fractional Shares. Any fractional share payable under this Agreement will not be issued, and instead shall be paid out in cash.

Section 11. No Right to Employment. The grant of the RSUs is discretionary and will not be considered to be an employment contract or a part of the Grantee's terms and conditions of employment or of the Grantee's salary or compensation.

Section 12. Successors and Assigns. This Agreement, and the terms and conditions of the Plan, shall bind, and inure to the benefit of, the Grantee, the Grantee's estate, executor, administrator, beneficiaries, personal representative and guardian and the Company and its successors and assigns.

Section 13. Governing Law. This Agreement will be governed by and construed in accordance with applicable United States federal law and, to the extent not preempted by such federal law, in accordance with the laws of the State of Delaware, without giving effect to the principles of conflict of laws thereof.

Section 14. Amendment or Termination. Any amendment to the Plan shall be deemed to be an amendment to this Agreement to the extent that the amendment is applicable hereto. The terms and conditions of this Agreement may not be modified, amended or waived, except by an instrument in writing signed by a duly authorized executive officer of the Company. Notwithstanding the foregoing, no amendment shall adversely affect the Grantee's rights under this Agreement without the Grantee's consent.

IN WITNESS WHEREOF, the parties hereto have duly executed this Restricted Share Unit Award Agreement, to be duly executed on their behalf, as of the day and year first above written.