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20072008

Notice of Annual Meeting

and

Proxy Statement

NorthWestern Corporation

d/b/a NorthWestern Energy

125 S. Dakota Ave.3010 W. 69^th Street

Sioux Falls, SD 5710457108

www.northwesternenergy.com

July 9, 2007April 15, 2008

Dear Stockholder:

You are cordially invited to attend the 20072008 annual meeting of stockholders to be held at the Holiday Inn City Centre, 100New York Marriott Downtown Hotel, 85 West 8th Street, Sioux Falls, South Dakota,New York, N.Y., on Wednesday, August 8, 2007,May 21, 2008, at 10:00 a.m. local time.

At the meeting, stockholders will be voting on the election of directors and the ratification of our independent registered public accounting firm for 2007.2008. The proxy statement included with this letter provides you with information about the annual meeting and the business to be conducted.

Your vote is very important. Please consider the issues presented and vote your shares as promptly as possible by following the instructions on your proxy card. If your shares are held in an account at a brokerage firm, bank or other nominee, please follow the instructions you receive from them to vote your shares.

Thank you for your continued support of NorthWestern Corporation.

Very truly yours,

Michael J. Hanson

President and Chief Executive Officer

NorthWestern Corporation

d/b/a NorthWestern Energy

125 S. Dakota Avenue,3010 W. 69^th Street, Sioux Falls, South Dakota 5710457108

Notice of Annual Meeting of Stockholders

August 8, 2007May 21, 2008

To Our Stockholders:

The 20072008 annual meeting of stockholders of NorthWestern Corporation will be held on August 8, 2007,

May 21, 2008, beginning at 10:00 a.m. CentralEastern Daylight Time at the Holiday Inn City Centre, 100New York Marriott Downtown Hotel, 85 West 8th Street, Sioux Falls, South Dakota.New York, N.Y.

The purpose of the annual meeting is to consider and vote upon the following matters:

The above business matters are described in detail in the accompanying proxy statement.

The Board of Directors recommends a vote “FOR” each of the director nominees and the ratification of the independent registered public accounting firm.

The record date for determining the stockholders entitled to receive notice of and to attend and vote at the annual meeting and any adjournments or postponements of the annual meeting is June 29, 2007.March 28, 2008. This notice and proxy statement, voting instructions and NorthWestern’s Annual Report on Form 10-K and Quarterly Report on Form 10-Q are being mailed to stockholders on or about July 9, 2007.April 15, 2008.

The annual meeting is open to stockholders and those guests invited by us. The admission ticket enclosed with this proxy statement will be required for admittance to the meeting. If you wish to attend the annual meeting and your shares are held in an account at a brokerage firm, bank or other nominee (i.e., in “street name”), you will need to bring a copy of your brokerage statement or other documentation reflecting your stock ownership as of the record date. Additional information about attendance at the annual meeting is located in the Annual Meeting Guidelines on the last page of this proxy statement.

By Order of the Board of Directors,

Thomas J. Knapp

Vice President, General Counsel and Corporate Secretary

July 9, 2007April 15, 2008

Important Notice Regarding the Availability of Proxy Materials for the Stockholder Meeting to Be Held on May 21, 2008: The proxy statement and annual report to stockholders are available on the Internet athttp://www.northwesternenergy.com/2008Proxy.

TABLE OF CONTENTS

This proxy statement contains information related to the solicitation of proxies by the Board of Directors (the “Board”) of NorthWestern Corporation (“NorthWestern,” the “Company,” “we,” “us,” or “our”) in connection with the annual meeting of stockholders to be held on Wednesday, August 8, 2007,May 21, 2008, at 10:00 a.m. CentralEastern Daylight Time at the Holiday Inn City Centre, 100New York Marriott Downtown Hotel, 85 West 8th Street, Sioux Falls, South Dakota.New York, N.Y.

ABOUT THE ANNUAL MEETING

The proxy statement, annual report and voting instructions will be available for one year on the Company’s Web site athttp://www.northwesternenergy.com/2008proxy.

The annual meeting will be webcast (audio and slides) simultaneously with the live meeting. You may access the webcast from our Web site athttp://www.northwesternenergy.com.www.northwesternenergy.com. A replay of the webcast also will be available on our Web site through September 8, 2007.June 21, 2008.

Abstentions and “broker non-votes” count as present for establishing a quorum for the transaction of all business. Since there were 36,081,433 shares of common stock issued and outstanding and entitled to vote at the annual meeting as of the record date, the presence of holders of 18,040,717 shares will constitute a quorum.

The ratification of the appointment of Deloitte & Touche LLP as our independent registered public accounting firm for 20072008 requires the affirmative vote of the holders of a majority in voting power of the shares of our common stock present in person or represented by proxy at the annual meeting and entitled to vote thereon.

Voting by Mail.Holders of record may vote by completing, signing, dating and mailing the enclosed proxy card in the enclosed postage-paid envelope. If your shares are held in an account at a brokerage firm, bank or other nominee, please follow the instructions you receive from them to vote your shares.

Voting in Person at the Annual Meeting.Submitting your vote by proxy will not affect your right to attend the annual meeting and to vote in person. If you attend the annual meeting and wish to vote in person, you will be given a ballot at the annual meeting. Please note, however, that if your shares are held in “street name” by a broker, bank or other nominee and you wish to vote at the annual meeting, you must bring to the annual meeting a proxy from the recordholder of the shares authorizing you to vote at the annual meeting.

Electronic Voting.Many stockholders who hold their shares through a broker, bank or other nominee will have the option to submit their proxy cards or voting instruction cards electronically by using the Internet or telephone. If you hold your shares through a broker, bank or other nominee, you should check your voting instruction card forwarded by your broker, bank or other nominee to see which voting options are available. Our holders of record will not have the option to vote via the Internet or telephone.

We do not expect that any other matters will be brought before the annual meeting; however, by giving your proxy, you appoint the persons named as proxies as your representatives at the annual meeting. If an issue should arise for vote at the annual meeting that is not included in the proxy material, the proxy holders will vote your shares in accordance with their best judgment.

Read and follow the instructions on your proxy or voting instruction card carefully.

For the proposal relating to ratification of our independent registered public accounting firm, you may vote “FOR,” “AGAINST” or “ABSTAIN.” The failure to vote, either by not returning a properly executed proxy card or not voting in person at the annual meeting, will have no effect on the outcome of the voting on the ratification proposal. However, abstentions will have the same effect as voting “AGAINST” ratification of our independent registered public accounting firm.

If you sign your proxy card without indicating your vote, your shares will be voted “FOR” each of the nominees for director, “FOR” ratification of Deloitte & Touche LLP as our independent registered public accounting firm and in accordance with the recommendations of our Board on any other matters properly brought before the annual meeting for a vote.

registered in more than one name, you will receive more than one proxy card. Please vote each proxy and voting instruction card that you receive.

We will, on request, reimburse stockholders who are brokers, banks or other nominees for their reasonable expenses in sending proxy materials and annual reports to the beneficial owners of the shares they hold of record.

PROPOSAL 1

ELECTION OF DIRECTORS

In accordance with our current certificate of incorporation and our current bylaws, all members of our Board are elected annually, to serve until the next annual meeting of stockholders. Our bylaws currently authorize a Board consisting of not fewer than five nor more than eleven persons. Our Board has determined that, with the exception of Michael J. Hanson, all of the director nominees are independent as defined by the NASDAQ Marketplace Rules.

The nominees for election to the seven positions on our Board, selected by our Nominating and Corporate Governance Committee of the Board and proposed by our Board to be voted upon at the annual meeting, are

Stephen P. Adik, E. Linn Draper, Jr., Jon S. Fossel, Michael J. Hanson, Julia L. Johnson, Philip L. Maslowe and D. Louis Peoples.

Unless authority to vote for the election of directors has been specifically withheld, the persons named in the accompanying proxy intend to vote “FOR” the election of director nominees Adik, Draper, Fossel, Hanson, Johnson, Maslowe and Peoples to hold office as directors until the next annual meeting of stockholders in 20082009 and until their successors are elected and qualified. If the merger is completed, each of our directors will no longer be directors of the surviving corporation in the merger. The current directors, including those elected at the annual meeting, will serve only until the merger is completed. If the merger agreement is not completed, each of our directors is expected to serve a one-year term as described above. All nominees have advised the Board that they are able and willing to serve as directors.

If any nominee becomes unavailable for any reason (which is not anticipated), the shares represented by the proxies may be voted for such other person or persons as may be determined by the holders of the proxies (unless a proxy contains instructions to the contrary). In no event will the proxy be voted for more than seven nominees. Directors will be elected by a favorable vote of a plurality of the shares of voting stock present and entitled to vote, in person or by proxy, at the annual meeting. Accordingly, abstentions or “broker non-votes” as to the election of directors will not affect the election of the candidates receiving the plurality of votes; however, under our Majority Vote Policy, if a nominee for director receives more “WITHHOLD AUTHORITY” votes than “FOR” votes, such nominee shall immediately tender his/her resignation.resignation under the procedures in the Policy. Unless instructed to the contrary in the proxy, the shares represented by the proxies will be voted “FOR” the election of the seven nominees named above as directors.

Nominees

Stephen P. Adik, age 64,65, director since November 1, 2004, is the retired Vice Chairman (2001-2003) of NiSource Inc. (NYSE: NI), an electric and natural gas production, transmission and distribution company; formerly Senior Executive Vice President and Chief Financial Officer (1998-2001), and Executive Vice President and Chief Financial Officer (1996-1998), of NiSource. Mr. Adik serves on the Boards of Beacon Power (NASDAQ: BCON), a designer and manufacturer of power conversion and sustainable energy storage systems for the distributed generation, renewable energy, and backup power markets; and the Chicago SouthShore and South Bend Railroad, a regional rail carrier serving northwest Indiana.Indiana; and Dearborn Midwest Conveyor Company, a manufacturer and installer of conveyor equipment for the bulk materials and automotive industries.

E. Linn Draper, Jr., age 65, director66, Chairman of the Board since November 1, 2004, is the retired Chairman, President and Chief Executive Officer of American Electric Power Company (NYSE: AEP), a public utility holding company (1992-2004), Mr. Draper serves on the Boards of Alliance Data Systems Corporation (NYSE: ADS), a provider of transaction services, credit services and marketing services; Alpha Natural Resources Inc. (NYSE: ANR), a coal producer; Temple-Inland Inc. (NYSE: TIN), a corrugated packing and forest products and financial services business; and TransCanada (NYSE: TRP) transporter and marketer of natural gas and generator of electric power in Canada and the United States.

Jon S. Fossel, age 65,66, director since November 1, 2004, is the retired Chairman, President and Chief Executive Officer of Oppenheimer Management Corporation, a mutual fund investment company (“Oppenheimer”) (1989-1996). Mr. Fossel serves as nonexecutive chairman of the Board of UnumProvident Corporation (NYSE: UNM), a disability and life insurance provider.

Michael J. Hanson, age 48,49, director since May 20, 2005; is President and Chief Executive Officer since May 20, 2005; formerly President since March 2005; Chief Operating Officer since August 2003; formerly President and Chief Executive Officer of NorthWestern’s utility operations (1998-2003). Prior to joining NorthWestern, Mr. Hanson was General Manager and Chief Executive of Northern States Power Company of South Dakota and North Dakota in Sioux Falls, S.D. (1994-1998). Mr. Hanson serves on the Board of a NorthWestern subsidiary.

Julia L. Johnson, age 44,45, director since November 1, 2004, is President of NetCommunications, LLC, a strategy consulting firm specializing in the energy, telecommunications and information technology public policy arenas, since 2000; formerly Sr. Vice President-Communications & Marketing for Military Commercial Technologies, Inc. (MILCOM). Ms. Johnson served as Commission Chairman (1997-1999) and Commissioner (1992-1997) for the Florida Public Service Commission. Ms. Johnson serves on the Boards of Allegheny Energy Inc. (NYSE: AYE), an electric utility holding company; and MasTec, Inc. (NYSE: MTZ), a leading end-to-end voice, video, data and energy infrastructure solution provider.

Philip L. Maslowe, age 60,61, director since November 1, 2004, was formerly Executive Vice President and Chief Financial Officer (1997-2002) of The Wackenhut Corporation, a security, staffing and privatized prisons corporation; formerly Executive Vice President and Chief Financial Officer (1993-1997) of Kindercare Learning Centers, a provider of learning programs for preschoolers. Mr. Maslowe serves on the Board of Delek US Holdings, Inc. (NYSE: DK), a diversified energy business focused on petroleum refining and supply and on retail marketing.

D. Louis Peoples, age 66,67, director since January 14, 2006, is President and Founder of Nyack Management Company, Inc., a nationwide general business consulting firm, since 2004;the retired Chief Executive Officer and Vice Chairman of the Board of Orange and Rockland Utilities, Inc. (1994-1999). Mr. Peoples serves on the Boards of the Center for Clean Air Policy and the Nevada Area Council, Boy Scouts of America.America and is a sponsor of and active participant in the Aspen Institute Forum on Energy, the Environment and the Economy.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR”

THE ELECTION OF THESE SEVEN NOMINEES.

BENEFICIAL OWNERSHIP OF COMMON STOCK

Except under special circumstances, our common stock is the only class of voting securities. The number of shares noted are those beneficially owned, as determined under the rules of the SEC, and such information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares as to which a person has sole or shared voting power or investment power and any shares which the person has the right to acquire within 60 days through the exercise of option, warrant or right.

Holdings of Major Stockholders

The following table sets forth information regarding whom we know to be the beneficial owners of more than 5 percent of our issued and outstanding common stock. Such information is based on a review of statements filed with the Securities and Exchange Commission (“SEC”) pursuant to Sections 13(d), 13(f) and 13(g) of the Exchange Act.

Holdings of Directors and Officers

The following table set forth certain information as of June 29, 2007,April 1, 2008, with respect to the beneficial ownership of shares of our common stock owned by stockholders holding more than 5% of our common stock,the nominees for director, the Named Executive Officers, and by all of our directors and executive officers as a group. Except under special circumstances, our common stock is the only class of voting securities. Such information (other than with respect to our directors and executive officers) is based on a review of statements filed with the Security and Exchange Commission (“SEC”) pursuant to Sections 13(d), 13(f) and 13(g) of the Exchange Act.

CORPORATE GOVERNANCE

Our Board oversees the business of NorthWestern. It establishes overall policies and standards for us and reviews the performance of our management. In addition, our Board presently has established an Audit Committee, a Nominating and Corporate Governance Committee and a Human Resources Committee and a Mergers and Acquisitions Committee whose functions are briefly described below.

Our Board has adopted a policy, in which attendance and participation by directors is considered during the Board’s self-evaluation, in determining continued service on the Board. The Board held 2416 regular and special meetings in 2006.2007. Each current director attended more than 75 percent of the aggregate of the meetings of the Board and of each committee on which he/she served. At our last annual meeting of stockholders in August 2006, six2007, all of the seven directors then serving were in attendance at the meeting.

Executive sessions without management in attendance are provided for at each regularly scheduled Board meeting and are chaired by our non-executive Chairman of the Board.

Determination of Independence

A majority of NorthWestern’s directors are required to be independent in accordance with the criteria set forth in NASDAQ Marketplace Rule 4200(a)(15) and IM-4200. As a part of its independence assessment, the Board considers whether any non-employee director or member of his or her immediately family has a material relationship with the Company that would impair the director’s independence. The Board’s determination of independence is based upon a review of the questionnaires submitted by each director, the Company’s relevant business records, publicly available information and the applicable SEC and NASDAQ requirements.

Based on its review, the Board determined that Messrs. Adik, Draper, Fossel, Maslowe, Peoples and Ms. Johnson, being all of the non-employee directors, are independent as defined by the NASDAQ Marketplace Rules.

Director Majority Vote Policy

In August 2006, the Board adopted a Majority Vote Policy for the election of directors. The policy provides that, in an uncontested election, any nominee for director who receives a greater number of “WITHHOLD AUTHORITY” votes “WITHHELD AUTHORITY” from his or her election than votes “FOR” such election (a "Majority“Majority Withheld Vote"Vote”) shall promptly tender his or her resignation following certification of the shareholder vote.

The Nominating and Corporate Governance Committee shall promptly consider the resignation offer, and a range of possible responses based on the circumstances that led to the Majority Withheld Vote, if known, and make a recommendation to the Board. The Board will act on the Nominating and Corporate Governance Committee’s recommendation within 90 days following certification of the shareholder vote. Thereafter, the Board will promptly disclose its decision-making process and decision regarding whether to accept the director’s resignation offer (or the reason(s) for rejecting the resignation offer, if applicable) in a Form 8-K furnished to the Securities and Exchange Commission.

Any director who tenders his or her resignation pursuant to this provision shall not participate in the Nominating and Corporate Governance Committee recommendation or Board action regarding whether to accept the resignation offer. However, if each member of the Nominating and Corporate Governance Committee received a Majority Withheld Vote at the same election, then the independent directors who did not receive a Majority Withheld Vote shall appoint a committee amongst themselves to consider the resignation offers and recommend to the Board whether to accept them. If the only directors who did not receive a Majority Withheld Vote in the same election

constitute three or fewer directors, all directors may participate in the action regarding whether to accept the resignation offers.offers, with each director recusing himself/herself from consideration of his/her resignation offer.

Code of Conduct

Our Board adopted our revised Code of Business Conduct and Ethics (“Code of Conduct”) on January 26, 2005,August 7, 2007, and reviews it annually. Our Code of Conduct sets forth standards of conduct for all of our officers, directors and employees and those of our subsidiary companies, including all full- and part-time employees and certain persons that provide services on our behalf, such as agents. Our Code of Conduct is available on our Web site athttp://www.northwesternenergy.com. We intend to post on our Web site any amendments to, or waivers from, our Code of Conduct. In addition, on August 26, 2003, our former Board adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, which provides for a complaint procedure that specifically applies to this code. This code of ethics along with the complaint procedures are also reviewed annually and are available on our Web site.

Committees of the Board

Audit Committee

Our Audit Committee provides oversight of (i) the financial reporting process, the system of internal controls and the audit process of NorthWestern, and (ii) our independent auditor. Our Audit Committee also recommends to the Board the appointment of our independent registered public accounting firm. As required by the Audit Committee Charter, each of the members of our Audit Committee is an independent director as defined by NASD Rule 4200(a)(15).

Our Audit Committee is composed of four nonemployeenon-employee directors who are financially literate in financial and auditing matters and are “independent” as defined by the SEC. The members of the Audit Committee are Chairman Stephen P. Adik, Jon S. Fossel, Philip L. Maslowe and D. Louis Peoples. Audit Committee Chairman Adik has been identified as the Audit Committee’s financial expert, as defined in Item 401(h)(2) of Regulation S-K. Our Audit Committee held sevennine meetings during 2006.2007.

Human Resources Committee

Our Human Resources (“HR”) Committee (“HR Committee”) sets generalacts on behalf of and with the concurrence of the Board with respect to matters relating to the Company concerning compensation, policybenefits, and other personnel plans for NorthWesternemployees; the election and has final approval power overappointment of executive officers and other officers;

the assessment of the performance of the CEO; and the compensation of our executive officers. The HR Committee also has final approval power over guidelines and criteria for officers’ bonuses and administers our incentive compensation and long-term equity plans.non-employee members of the Board. Our HR Committee is composed of not less than three nonemployee directors. Each of the members of our HR Committee is an independent director as defined by NASD Rule 4200(a)(15). The members of our HR Committee are Chairman Philip L. Maslowe, Stephen P. Adik and Julia L. Johnson. Our HR Committee held nineeight meetings during 2006.2007.

Nominating and Corporate Governance Committee

OurOn February 27, 2008, our Board changed the name of our Governance Committee is responsibleto be our Nominating and Corporate Governance (“NCG”) Committee and adopted a revised charter for this committee. Our NCG Committee assists the Board in identifying qualified individuals to fill vacancies on ourbecome Board recommending nominees to be voted upon atmembers, in determining the annual meetingcomposition of stockholders, recommending to the Board appointeesand its committees, in monitoring a process to serve on committees of ourassess Board effectiveness, and overseeingin developing and implementing the development and implementation of ourCorporation’s corporate governance policiesprinciples. Further, the NCG Committee reviews and code of ethics for employeesoversees the Corporation’s position on (a) corporate social responsibilities and (b) public policy issues that significantly affect the Board itself, including BoardCorporation, its shareholders, its customers and committee self-evaluation. The Governanceother key stakeholders. Our NCG Committee is composed of not less than three nonemployee directors. Each of the members of the GovernanceNCG Committee is an independent director as defined by NASD Rule 4200(a)(15). The members of our GovernanceNCG Committee are Chairman

Chairwoman Julia L. Johnson, Jon S. Fossel Julia L. Johnson and D. Louis Peoples. Our GovernanceNCG Committee held seventhree meetings during 2006.2007.

Our GovernanceNCG Committee will consider nominees for directors properly recommended by stockholders. A stockholder who wishes to submit a candidate for consideration at the annual meeting of stockholders must notify our Corporate Secretary in writing not less than 90 days nor more than 120 days prior to the first anniversary date of the preceding year’s annual meeting. The stockholder’s written notice must include information about each proposed nominee, including name, age, business address, principal occupation, and other information required in proxy solicitations. The nomination notice must also include the nominating stockholder’s name and address, the number of shares of our common stock beneficially owned by the stockholder, and any arrangements or understandings between the nominee and the stockholder. The stockholder must also furnish a statement from the nominee indicating that the nominee wishes and is able to serve as a director.

The GovernanceNCG Committee will evaluate each director candidate to determine whether such candidate should be recommended to the Board as a director nominee. In considering director candidates, the GovernanceNCG Committee will take into account whether a candidate has skills, experience and background that add to and complement the range of skills, experience and background of existing directors, based on the following: integrity, accomplishments, business judgment, experience and education, commitment, representation of stockholders, industry knowledge, independence and financial literacy.

Mergers and Acquisitions Committee

Our Mergers and Acquisitions Committee, or M&A Committee, was appointed by our Board on March 17, 2006, to review and assess, and assist the Board in reviewing and assessing, potential acquisitions, strategic investments, divestitures and the sale of control of NorthWestern. The M&A Committee has the authority to take all actions on behalf of the Board as is set forth in its charter. The M&A Committee consists of not less than three nonemployee members of the Board. Each of the members of the M&A Committee is an independent director as defined by NASD Rule 4200(a)(15). The members of the M&A Committee are Chairman D. Louis Peoples, Stephen P. Adik and Philip L. Maslowe. Our M&A Committee held 12 meetings during 2006.

The Company maintains on its Web site,http://www.northwesternenergy.com,copies of the charters of each of the committees of the Board, as well as the Code of Conduct.Board.

Communications with Our Board

Stockholders may send communications to our Board. Communications should be addressed to our Corporate Secretary at our principal offices at 125 S. Dakota Avenue,3010 W. 69^th Street, Sioux Falls, South Dakota 57104.57108. The Corporate Secretary will forward directly to the Board any communications received.

Section 16(a) Beneficial Ownership Reporting Compliance

Based solely on information furnished to us and contained in reports filed with the SEC, as well as written representations that no other reports were required, NorthWestern believes that during 20062007 all SEC filings of its directors and executive officers complied with the requirements of Section 16 of the Securities Exchange Act of 1934, as amended.

Transactions with Related Persons

The Audit Committee, in conjunction with the Vice President, General Counsel and Corporate Secretary, review and approve or ratify, when necessary, transactions involving related parties. Our

executive officers and directors annually complete a questionnaire that includes questions about related party transactions. To the extent described in the questionnaire, these transactions are brought to the attention of the Audit Committee for review and approval or ratification. Because the questionnaire alerts those individuals to seek approval of related party transactions, we expect such transactions will be brought to our attention.

A review of the director and officer questionnaires revealed no material related party transactions during 2006.2007.

Move of Common Stock Listing to the New York Stock Exchange

The Company expects to move its common stock listing from NASDAQ to the New York Stock Exchange on May 1, 2008. We are in full compliance with all of the corporate governance requirements of NYSE Euronext.

COMPENSATION DISCUSSION AND ANALYSIS

General Philosophy

Our compensation philosophy is designed to provide a total compensation package to our executive officers that is competitive within the utility industry to enable us to attract, retain and motivate the appropriate talent for long-term success. We believe that totalTotal compensation should be reflective of individual performance should vary with ourand company performance in achieving financial and non-financial objectives, andobjectives. We also believe that any long-term incentivea significant portion of an executive’s compensation should be closely aligned“at risk” in the form of annual incentive awards that are paid, if earned, based on individual and company performance. Our executive compensation programs are therefore designed to:

Currently, no executive has an employment contract and perquisites are minimal.

Oversight of total targeted compensation is provided throughthe Executive Compensation Program

The HR Committee, in conjunction with the CEO, has overall responsibility to recommend to the Board persons to serve as executive officers and approval of base salary, annual and long-term incentives that arecompensation plans (including all awards made under the plans), welfare benefit plans and retirement plans for the executive officers.

The HR Committee conducts an annual performance assessment of the CEO and determines appropriate adjustments to all elements of total compensation based on performance measures thatperformance. The CEO performs assessments and recommends to the HR Committee total compensation adjustments for the remaining executive officers. The HR Committee has discretion to make adjustments to the CEO’s recommendations and recommends CEO and executive officer compensation to the Board for approval.

The Company’s Human Resources Department is responsible for administering the compensation and benefit our shareholders. Salary,plans and maintaining the executive compensation philosophy.

Targeted Overall Compensation and Competitive Analysis

We target market competitive base salary, annual cash incentive awards and long-term equity grants, are consistent with our overall compensation philosophy and are determined through review of market data provided by third party executive compensation consultants and include industry surveys and evaluation of proxy data from other utility companies.

Targeted Overall Compensation

We engageas well as total compensation. In 2007, the HR Committee engaged Towers Perrin, an executive compensation consultant,consulting firm, to assist us in establishingidentifying competitive compensation levels. As requested, Towers Perrin analyzesparticipates in HR Committee meetings and assists the HR Committee in developing the compensation program. Towers Perrin analyzed published survey data from several sources, focusingthat focuses on the energy and utility industry and using data regressed foris size-adjusted based on our revenues for appropriate market comparison. comparison, which includes Towers Perrin Compensation DataBank, Mercer Benchmark Database and Watson Wyatt Survey Report on Top Management Compensation. These surveys and the calculations to size-adjust by revenue are proprietary tools of the sponsoring organizations and as such, the individual companies to which we are compared are not disclosed.

The revenue-regressedsize-adjusted revenue data is the primary market reference for determining appropriatemarket competitive total compensation, base pay and annual incentive targets. Towers Perrin also provides proxy data for the five most highly compensated executives from 20 publicly traded utility companies. The proxy data is used as a reference to confirm the validity of the revenue-regressed survey data and is considered a secondary source for evaluating executive compensation levels. For long-term incentive purposes, Towers Perrin analyzesanalyzed expected values using the Towers Perrin Compensation DataBank, focusing on companies across industries and the energy services industry, specifically with annual revenues less than $3 billion. This data is utilized by the Human ResourcesThe HR Committee (HR Committee) of our Board and management used this data to determine an appropriate blend of direct compensation, which includes base salary and annual and long-term incentives, based on comparable positionspositions.

When determining the targeted compensation for executives, in addition to the industry. Following arebenchmarking data reviewed above, the companies included inHR Committee considers the proxy data review:scope of job, incumbent performance and internal comparison with other officer positions.

The components of total compensation for our executive officers are as follows:

Base Salary --Base salary is used to recognize experience, skills and knowledge that individuals bring to their roles.

Salary levels, for all executive officers, including the CEO, are generally targeted

within a range around the median of the regressed survey data provided by Towers Perrin, to be market competitive with adjustments based on individual performance and internal equity considerations. NorthWestern has established five officer market ranges for internal equity valuations. Positions are assigned to a market range by the CEO with consideration for additional roles the officer may have that are not typical of the market, how those roles relate to other officer roles within NorthWestern, and theperformance. The individual characteristics that the officer brings to the organization, such as experience, educational background and educational background.performance impact an officer’s base salary. Salaries for our executive officers range between 85% and 120% of the size-adjusted market midpoint, as provided by our compensation consulting firm.

Annual Cash Incentive Awards --

Annual cash incentive awards are used to motivate employees to meet and exceed annual objectives that are a part of our strategic plan and reflect the performance of NorthWestern, using both financial and non-financialoperational measures and the individual performance of the employee. OverallManagement annually proposes target metrics for company financial and operational performance, which are reviewed and approved annually by the HR Committee based on a reviewas well as the Board. At the end of data provided by our compensation consultants, various benchmarks and organizational goals. Thethe fiscal year, the HR Committee reviews data submitted by management as toon company performance against each of the targets and determines the final funding amount for each metric.metric, subject to Board approval. The HR Committee may use discretion in adjusting the final funding amounts from actual performance due to specific facts and circumstances. As described further below, individual performance is factored into the incentive calculation in the application of a performance multiple. The annual incentive plan covers all employees.

Each employee, includingCompany Performance

The incentive metrics and targets established for 2007 included both financial and operational measures. The financial measures are based on achieving Board-approved earnings before interest, taxes, depreciation and amortization (EBITDA) and operating, general and administrative (OG&A) expenses, exclusive of merger transaction and certain other Board-approved expenses. The company had to achieve at least 85% of the net income target in order to receive funding for the financial metrics.

We believe that providing safe and reliable service to our customers’ satisfaction over the long-term is critical to maximizing shareholder value. As such, 45% of the 2007 incentive plan funding was based on achievement of various operational measures. The operational measures are targeted indices or averages for reliability, customer satisfaction and safety. The following table shows the associated weighting and final funding percentage for 2007 for each of the incentive metrics:

Individual Performance and Targets

Annually each executive officer, in consultation with the CEO, sets individual operational and financial performance goals supportive of corporate goals as applicable to their area of responsibility. The CEO and executive officers is assignedare evaluated against these goals to determine a performance rating. The Board determines the CEO’s rating and final award. Individual awards for executive officers other than the CEO are determined by the HR Committee, based on individualthe CEO’s assessment of the individual’s performance, against established goals forand reviewed and approved by the year. Board.

Individual target incentive opportunities are expressed as a percentage of base salary in accordance with market data provided by Towers Perrin. To determine individualdata. Individual payouts are calculated as follows:

Base Salary x Target Incentive % x Total Plan Payout % x Performance Multiple = Individual Payout

Assuming achievement of the achieved funding percentage is multiplied by the individual's target incentive opportunity, and then by a multiple based on the individual's performanceminimum financial metric threshold for the year. Thispayout, this formula provides for individual payouts ranging from 85 to130to 130 percent of the individual’s targetfunded incentive opportunity. Total annual cash incentive distributions for all employees cannot exceed the total plan percentage funding for the year.

For 2007, we paid 75% of target and over the last three years, the annual incentive plan has been funded at an average of 67% of target. For 2008, we replaced the EBITDA and OG&A expense metrics with net income as our financial incentive metric. The incentiveremaining metrics and targets establishedweightings for 2006 include both financial and operational measures. The financial measures2008 are targeted at budgeted operating income and cash flow from operations. The operational measures are targeted indices or averagesconsistent with those for safety, reliability and customer satisfaction. The following table shows the associated weighting and final funding percentage for 2006 for each of the incentive metrics:

(1)    The HR Committee reviewed 2006 performance against plan targets and made discretionary adjustments to fund at 45.3%. The impact on current operating income of the Ammondson verdict, BBI transaction related costs and certain litigation costs were considered in determining these adjustments. In addition, the HR Committee considered the previous items noted and the year over year timing impact of certain transactions on cash flow from operations.2007.

Long-term Equity Grants --Equity

Long-term equity grants are a key element of our total compensation package for executive officers. In November 2004, pursuant to the bankruptcy court’s confirmation order, restricted stock awards were granted to our executive officers and certain other management employees under the NorthWestern Corporation 2004 Special Recognition Grant Restricted Stock Plan (2004 Plan). These grants were awarded at emergence from bankruptcy to provide an immediate stake in the reorganized NorthWestern and linkage to shareholder interests. The grants under the 2004 Plan are subject to a Board established service-based vesting schedule over a period of four years.

In March 2005, the Board established the NorthWestern Corporation 2005 Long-Term Incentive

Plan (2005 LTIP), an equity-based plan, which provides for grants of stock options, share appreciation rights, restricted and unrestricted share awards, deferred share units and performance awards. There was a total of 700,000 shares designated for use under the 2005 LTIP, and all employees are eligible to receive grants.

We have elected to provide all long-term incentive awards for employeesmade in the form of restricted stock. The HR Committee considers a long-term focus to be particularly important in the utility industry given the long-term investment required. The long-term incentive percentage for the CEO and other executive officers ranges from 35% to 70% of base salary. The HR Committee does not consider any executive’s current stock holding to be so large as to warrant the reduction or elimination of further long-term incentive awards.

Retirement Benefits --

Retirement benefits are offered to all employees through tax-qualified plans, including company-funded pension plans and a 401(k) defined contribution plan. Executive officers, including the CEO, participate in these plans, and the terms governing the retirement benefits under these plans are the same as those available for other employees. These plansWe do not involvepresently offer any guaranteed minimum returns or above-market returns; the investment returns are dependent upon actual investment results.supplemental retirement benefits to executive officers.

Perquisites and Other Benefits --

The primary perquisites included in compensation for executive officers arewere vehicle allowances or personal use of company-provided vehicles, subject to eligibility and terms that apply to all employees as defined by policy. Vehicle allowances for all executive officers were terminated at the end of 2007, with a corresponding increase to base salary. Our healthcare, insurance, and other welfare and employee-benefit programs are generally the same for all eligible employees, including the CEO and executive officers. We share the cost of health and welfare benefits with our employees, which is dependent on the benefitsbenefit coverage option that each employee elects.

Description of the Human Resources Committee and Responsibilities

The HR Committee performs functions similar to that of a compensation committee. The HR Committee has overall responsibility to nominate persons to serve as executive officers and to review and recommend annual and long-term compensation plans and awards for the members of the Board and for the executive officers. HR Committee recommendations are subject to approval by the Board. The HR Committee also reviews and recommends to the Board any welfare benefit and retirement plans for officers and employees. The HR Committee Charter is available on the Company's Web site at http://www.northwesternenergy.com. The HR Committee met nine times during 2006.

The HR Committee conducts an annual performance assessment of the CEO and recommends for Board approval total compensation for the CEO. The HR Committee has authorized the CEO to establish total compensation for the remaining executive officers subject to HR Committee review. The HR Committee recommends Board approval of restricted stock grants for all equity-based compensation.

Human Resources Committee Interlocks and Insider Participation

The HR Committee is composed of Chairman Philip L. Maslowe, Stephen P. Adik and Julia L. Johnson. Each is an independent member as defined by NASD rule 4200(a)(15). None of the persons who served as members of our HR Committee during 20062007 are officers or employees or former employees of NorthWestern or any of our subsidiaries. In addition, no executive officer of NorthWestern or any of its subsidiaries served as a member of the Board or compensation committee of any other entity.

HUMAN RESOURCES COMMITTEE REPORT

The HR Committee reviewed and discussed the Compensation Discussion and Analysis with management. Based on this review and discussion, the HR Committee recommended to the Board that the Compensation Discussion and Analysis be included in NorthWestern's Proxy Statement.the proxy statement for the 2008 Annual Meeting of Stockholders.

Human Resources Committee

Philip L. Maslowe, Chairman

Stephen P. Adik

Julia L. Johnson

COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS

We are required to disclose compensation earned during 2007 and 2006 for our Chief Executive Officer, Chief Financial Officer, and each of the three most highly compensated persons who were executive officers as of December 31, 2006. In addition, we are required to disclose compensation for up to two additional individuals that we would have provided information on if not for the fact that they no longer were serving as an executive officer at the end of fiscal 2006.2007. Collectively, these officers are referred to inas Named Executive Officers (“NEOs”).

Summary Compensation Table

The following table sets forth the compensation earned during 2007 and 2006 for services in all capacities by the NEOs:

Non-equity Incentive Plan Compensationincentive plan compensation includes amounts earned under the NorthWestern Energy 20062007 Employee Incentive Plan. The HR Committee reviewed 20062007 performance against plan targets and made discretionary adjustments to fundthe plan funded at 45.3%75%. In determining the discretionary adjustments, the HR Committee considered the impact of the Ammondson verdict, BBI related transaction costs and certain litigation costs on operating income. In addition, the HR Committee considered the previous items noted and the year over year timing impact of certain transactions on cash flow from operations. Officer awards varied from the funded level based on guidelines applicable to all employees to reflect individual performance, as noted in the Compensation Discussion and Analysis.follows:

Grants of Plan-Based Awards

There were no grants of plan-based awards during 2007.

PursuantUpon emergence from bankruptcy in 2004, a New Incentive Plan was established pursuant to our Plan of Reorganization, which set aside 2,265,957 shares for the termsBoard to establish equity-based compensation plans for employees and directors. Stockholder approval of the Merger AgreementNew Incentive Plan was not required under the provisions of the Plan of Reorganization. Upon emergence from bankruptcy, 228,315 shares of restricted stock were granted and approved by the Bankruptcy Court, with BBI,a vesting schedule determined by the Board. The vesting schedule for awards granted under the 2004 Plan was as follows: 50% on November 1, 2004; 10% on November 1, 2005; 20% on November 1, 2006; and 20% on November 1, 2007. In March 2005, the Board established the NorthWestern Corporation 2005 Long-Term Incentive Plan (“2005 LTIP”), an equity-based plan, which provides thatfor grants of stock options, share appreciation rights, restricted and unrestricted share awards, deferred share units and performance awards. We have elected to provide all of the shares available under the 2005 LTIP may be awarded before completion of the transaction, the Board approved granting in November the remaining shares available under the 2005 LTIPlong-term incentive awards for employees in the form of restricted stock. The awards2005 LTIP was initially funded with 700,000 shares of restricted stock from the New Incentive Plan and substantially all of those shares were granted to employees, executives and directors executiveprior to 2007 as follows: (1) 400,000 shares were allocated for broad-based employee grants; (2) 191,761 shares were granted to officers, management and certain other employees were based onnon-employee directors; and (3) 83,132 shares have been used for non-employee director annual stock grants and deferred stock units related to deferred Board compensation. On October 31, 2007, the survey data provided by Towers Perrin, which was used to establish long-term incentive targets (expressed as a percentage of base salary). The resulting value was converted to a number of shares using a share price of $37 based on the expected value that would be realized upon successful completion of the BBI transaction. The Board established a service-based vesting schedule over a period of five years for these awards as noted below; however,approved funding the 2005 LTIP provides for accelerated vesting and cash settlement inwith an additional 600,000 shares of restricted stock from the eventshares set forth above; however, none of a change in control. These awards vest as follows:

these shares have been awarded to date.

EQUITY COMPENSATION

Outstanding Equity Awards at Fiscal Year-End

This table contains information regarding outstanding equity-based awards, including the potential dollar amounts realizable with respect to each award, and requires separate disclosure of option exercise prices and expiration dates for each award, as applicable.

The vesting schedule for the 2006 grants is noted above. The vesting schedule for awards granted under the 2004 Plan is as follows: 50% on November 1, 2004; 10% on November 1, 2005; 20% on November 1, 2006; and 20% on November 1, 2007.

The market value is as of December 31, 2006,2007, and was determined utilizing the closing stock price. Dividends are not paid or accrued on any unvested shares under either plan.shares.

In November 2006, the HR Committee and Board approved awarding the remaining shares available under the 2005 LTIP in the form of restricted stock (66,438 shares for NEOs). In doing so, the HR Committee and Board considered (1)the terms of the proposed Merger Agreement with BBI allowed for all of the shares available under the 2005 LTIP to be awarded before completion of the transaction, without any impact on the selling price; and (2) the fact that all supplemental retirement benefits, which are typical for executives in the utility industry, had been terminated prior to or during NorthWestern's bankruptcy.

The Board did not establish any performance targets for these awards; however, they did establish a service-based vesting schedule over a period of five years as follows:

No equity awards were made to executives in 2007.

Option Exercises and Stock Vests

This table shows the dollar amounts realized pursuant to the vesting or exercise of equity-based awards during the last fiscal year.

Shares vested during 20062007 represent restricted shares granted on November 1, 2004 upon emergence from bankruptcy and shares granted on November 6, 2006 under the 2004 Plan.2005 LTIP as discussed above. The value realized is determined by the fair market value of our common stock on the date of vesting. This value is taxable compensation to the NEOs on the date vested pursuant to Internal Revenue Code (“Code”) Section 83(a).

POST EMPLOYMENT COMPENSATION

Pension Benefits

The present value of accumulated benefits was calculated assuming benefits commence at age 65 and using the discount rate, mortality assumption and assumed payment form consistent with those disclosed in Note 16 of the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2007. While the present values in the table above are required to be calculated assuming benefits commence at age 65, the cash balance available if the individual were to terminate service as of December 31, 2007 was as follows.

We have two defined benefit retirement plans, one applicable to our Montana employees and one applicable to our South Dakota and Nebraska employees. Mr. Hanson, Mr. Bird, Mr. Knapp and Mr. TrandemAll NEOs are participants in the retirement plan applicable to South Dakota and Nebraska employees. Mr. Gates participates in the Montana plan.

Under the cash balance formula of the South Dakota and Nebraska plan, a participant'sparticipant’s account grows based upon (1) contributions by NorthWestern made once per year,annual pay credits, and (2) annual interest credits based on the average Federal 30-year Treasury Bill rate for November of the preceding year. Contribution ratesPay credits range from 3%3 percent to 7.5% (3%7.5 percent (3 percent for all new employees) for compensation below the taxable wage base and are doubled for compensation above the taxable wage base. Upon termination of employment, an employee, or if deceased, his or her beneficiary, may elect to receive a lump sum equal to the cash balance in the account, a monthly annuity if age 55 or greater, or defer receiving benefits until they are required to take a minimum distribution.

Under the defined benefit retirement plan applicable to Montana employees, a participant's account grows based upon (1) contributions by NorthWestern made once per year, and (2) interest credits at the rate of 6% per year. Contribution rates range from 3% to 12% for compensation below the taxable wage base and from 1.5% to 6% for compensation above one half of the taxable wage base. Upon termination of employment, an employee who is at least 50 years of age with 5 years of service may begin receiving a monthly annuity or defer receiving benefits until they are required to take a minimum distribution.

To be eligible for thesethis retirement plans,plan, an employee must be 21 years of age and have worked at least one year for NorthWestern, working at least 1,000 hours in that year. Non-employee directors are not eligible to participate. The present value of accumulated benefits was calculated by Mercer Human Resources Consulting, the administratoractuary for our pension plans, using participant data provided by us.

Termination or Change In Control Arrangements

Severance Agreements

Each of ourOur NEOs are participants in our 2006 Officer Severance Plan (Officer Plan). The Officer Plan was reviewed by the HR Committee with recommendations from advisors and approved by the Board. The Officer Plan provides for the payment of severance benefits in the event an officer is involuntarily terminated without “cause.” “Cause” generally is defined in the Officer Plan as (i) any form of illegal conduct or gross misconduct that results in substantial damage to NorthWestern, (ii) failure to comply with our Code of Conduct, (iii) willful failure to perform duties or (iv) willful and continued conduct injurious to us. For this purpose, involuntary termination does not include a termination resulting from a participant’s death or disability. The severance benefits payable under the Officer Plan include:

(i) a lump-sum cash payment equal to 1 times annual base pay, (ii) a pro-rata short-term incentive bonus, (iii) reimbursement of COBRA premiums paid by the participant during the 12-month period following the participant’s termination date, and (iv) $12,000 of outplacement services during the 12-month period following the participant’s termination date.

The Officer Plan also provides for change of control severance benefits in the event an eligible officer is terminated within 18 months after a change of control of NorthWestern. Change of control is generally defined in the Officer Plan as (i) an acquisition of more than 50% of the combined voting power of our securities, (ii) a change in the majority of our Board in any 12-month period, (iii) a merger, or (iv) the sale or disposition of all or substantially all of our assets. Under the change of control provisions, severance benefits are payable in the event an eligible officer is involuntarily terminated by us without cause or in the event of a voluntary termination by the participant with "good“good reason,"” within 18 months after a change of control. "Good reason"“Good reason” is generally defined in the Officer Plan as (i) a reduction in annual compensation in excess of 15% or $10,000, whichever is greater, (ii) relocation of more than 50 miles, (iii) the failure to provide an equivalent or better position with the successor organization or (iv) the failure to obtain satisfactory agreement from the successor to assume and agree to perform the Officer Plan. The change of control benefits include: (i) a lump-sum cash payment equal to 2 times Compensation to the Chief Executive Officer and Chief Financial Officer and 1.5 times Compensation to all other eligible officers (where Compensation is defined under Section 1.7 of the Officer Plan as annual base salary plus target annual short-term incentive pay), (ii) a pro-rata short-term incentive bonus, (iii) reimbursement of COBRA premiums paid by the participant during the 18-month period following the participant'sparticipant’s termination date, and (iv) $12,000 in outplacement services during the 12-month period following the participant'sparticipant’s termination date. In addition, the 2005 LTIP provides for accelerated vesting in the event of a change of control.

In the event any benefits payable under the Officer Plan result in an excess parachute payment under section 280G of the Internal Revenue Code of 1986, as amended, such change of control severance benefits is limited to the greater of: (i) the largest amount which may be paid without any portion of such amount being

subject to excise tax imposed by Code Section 4999, or (ii) the change of control benefits payable under the Officer Plan without regard to such limitation, less any excise tax imposed under Code Section 4999.

The HR Committee engaged Towers Perrin to evaluate severance and change of control practices, particularly related to other utilities and believed it was important to implement a plan to ensure retention of key employees in the event of employment uncertainty related to the proposed BBI transaction. The HR Committee believes the approved plan established a balance between the need to retain key employees without providing an overly generous benefit.

The Officer Plan was set to expire on March 31, 2008. On March 28, 2008, our Board approved extending the Officer Plan through September 30, 2008, while a more comprehensive review of severance and LTIP benefits is conducted.

The following table shows the amount of potential cash severance that would have been payable, based on an assumed termination date of December 31, 2007, to our NEOs under the normal severance provisions of the plan including the amount that each executive officer would be entitled to be reimbursed for outplacement expenses and reimbursement of costs for continuing coverage and other benefits under our group health, dental and life insurance plans to each executive officer. Severance benefits are not provided for terminations with cause.

The following table shows the amount of potential cash severance that would have been payable, based on an assumed termination date of December 31, 2007, to our NEOs under the change of control severance provisions of the plan including any accelerated restricted stock vesting. The Officer Plan does not provide tax gross up payments. SeveranceChange of control benefits are not provided for terminations with cause. The amounts are based on an assumed termination date of December 31, 2006.

Nonqualified Deferred Compensation

We do not provide any nonqualified defined contribution or other deferred compensation plans.

Employment Agreements

No member of our Board or management has entered into an employment agreement with our subsidiaries or us.

DIRECTOR COMPENSATION

Compensation to our nonemployee directors consists of an annual cash retainer, an annual unrestricted stock award, an annual cash retainer for the chair of each committee of the Board, and meeting attendance fees. The following table shows the rates for nonemployee director compensation for 2007.