Executive Summary / Key Takeaways

• NorthWestern Energy (NWE) is undergoing a transformative period, marked by a pending all-stock merger with Black Hills Corporation , poised to create a larger, more resilient regional utility with an enhanced long-term EPS growth target of 5% to 7%.
• The company's strategic acquisition of additional Colstrip Units 3 and 4 interests for $0 significantly bolsters its generation capacity, moving it from a short to a long position, crucial for ensuring resource adequacy and attracting new large load customers like data centers.
• NWE reported Q3 2025 GAAP diluted EPS of $0.62 and non-GAAP diluted EPS of $0.79, affirming its 2025 earnings guidance of $3.53 to $3.65, despite headwinds from higher operating costs, merger-related expenses, and regulatory lag in Montana.
• Recent legislative successes in Montana, including a wildfire liability protection law and a transmission Certificate of Public Convenience and Necessity (CPCN), de-risk future investments and enhance the company's ability to execute its capital plan.
• NWE's five-year, $2.74 billion capital plan, an 11% increase over the prior plan, is self-funded with no planned equity, targeting 4% to 6% EPS growth, with incremental opportunities from data centers and regional transmission potentially pushing growth beyond 6%.

A Utility's Evolution: Forging Resilience in the Energy Landscape

NorthWestern Energy Group, Inc. (NWE), operating as NorthWestern Energy, stands as a foundational provider of electricity and natural gas services across Montana, South Dakota, Nebraska, and Yellowstone National Park, serving approximately 842,100 customers. Founded in 1923, NWE has a long history of delivering essential energy, expanding its footprint significantly in 2002 by entering the Montana market. The company's overarching strategy centers on robust infrastructure investment for a stronger and smarter grid, integrating diverse supply resources, continually improving operational efficiency, and committing to a net-zero carbon emissions goal by 2050.

The utility sector is currently experiencing profound shifts, driven by increasing energy demands, particularly from the burgeoning AI and data center industry, alongside evolving environmental regulations and the imperative for grid modernization. NWE's strategic moves reflect a proactive response to these trends, aiming to fortify its position and enhance shareholder value. The company's competitive landscape includes regional peers such as Black Hills Corporation , MDU Resources Group (MDU), and Xcel Energy (XEL), all vying for market share in similar service territories. While NWE maintains a strong regional focus and extensive infrastructure, larger players like Xcel Energy often possess greater scale and technological integration capabilities, potentially leading to higher efficiency in large-scale projects.

NWE's core technological differentiation lies in its commitment to a "smarter grid" through infrastructure investment. This includes automation in customer meters, distribution, and substations, enabling the use of proven new technologies to improve customer experience, enhance grid reliability, and bolster safety. While specific quantifiable performance metrics for these grid modernization efforts are not explicitly detailed, the strategic intent is clear: to create a more resilient and efficient energy delivery system. This focus on grid hardening and automation is critical for a utility operating in regions prone to extreme weather and wildfire risks, directly contributing to operational stability and customer satisfaction.

Strategic Acquisitions and Resource Fortification

A pivotal aspect of NWE's strategy has been its calculated approach to resource acquisition and legislative engagement. The company's history includes significant asset integration, such as the acquisition of ten hydroelectric facilities from Talen Montana in 2014, and more recently, the July 2025 completion of the Energy West natural gas distribution system acquisition for approximately $35.9 million, adding 33,000 customers and recognizing $10.3 million in goodwill primarily from efficiency opportunities.

However, the most impactful resource strategy revolves around the Colstrip power plant. NWE entered into definitive agreements to acquire Avista Corporation's (AVA) and Puget Sound Energy's interests in Colstrip Units 3 and 4 for $0, with completion expected on January 1, 2026. The Avista interest (222 megawatts) was deemed essential for achieving resource adequacy for Montana customers, while the Puget interest (370 megawatts) will elevate NWE's ownership to 55%. This increased ownership provides NWE with greater control over Colstrip's strategic direction, safeguarding its existing interests and potentially extending the plant's operational life beyond mandated closure deadlines set by other states. Management views Colstrip as an "energy hub" and a critical asset for serving customers on peak demand days, especially when intermittent renewables are not available.

To manage the costs associated with these acquisitions, NWE has pursued proactive regulatory measures. For the Avista Interests, a temporary PCCAM tariff waiver request was filed with the MPSC in August 2025, seeking a near-term cost-recovery mechanism to offset an estimated $18 million in annual incremental operating and maintenance costs. For the Puget Interests, NWE anticipates signing a contract in Q4 2025 to sell dispatchable capacity and energy through late 2027, with revenues expected to largely offset approximately $30 million in annual incremental operating and maintenance costs. A request for FERC approval of cost-based rates for the Puget Interests was submitted in October 2025, with an expected effective date of January 1, 2026. This dual approach demonstrates NWE's strategic flexibility in optimizing cost recovery and resource utilization.

Legislative Wins and Emerging Growth Vectors

NWE has also achieved significant legislative victories that de-risk its operations and enhance future investment opportunities. In May 2025, Montana enacted House Bill 490, a wildfire mitigation law that precludes common law strict liability claims for wildfire damages related to utility operations. This law establishes a negligence standard based on Montana-specific circumstances and creates a rebuttable presumption that the utility acted reasonably if it substantially followed an MPSC-approved wildfire mitigation plan. This is a crucial protection, shifting the burden of proof to plaintiffs and limiting non-economic and punitive damages, significantly reducing a major risk factor for utilities.

Furthermore, Montana's Senate Bill 301, a transmission bill, became law, providing a mechanism for obtaining a Certificate of Public Convenience and Necessity (CPCN) for large transmission projects. This offers greater certainty for investment recovery and streamlines the approval process, which is vital for NWE's plans for regional transmission expansion, including its involvement in the North Plains Connector project and a proposed Southwest Montana to Idaho line with Grid United. These transmission initiatives aim to bolster grid reliability, enable critical import/export capabilities, and allow customers to access emerging energy markets.

The company is actively pursuing opportunities with large load customers, particularly data centers, which represent a significant growth vector. NWE has signed nonbinding letters of intent with Sabey, Atlas Power, and Quantica Infrastructure for data center developments in Montana, with a combined energy service requirement expected to be 175 megawatts initially, growing to 1100 megawatts or more by 2030. NWE plans to file a large load tariff with the MPSC in Q4 2025, potentially in conjunction with an Energy Service Agreement (ESA) with Sabey, to serve these customers while protecting existing ratepayers. Management has indicated a willingness to serve these customers on a FERC-regulated basis if state approval for a new tariff is not forthcoming, underscoring its commitment to capturing this demand. The ability to serve these large loads is significantly enhanced by the increased capacity from the Colstrip acquisitions, which helps spread fixed costs over a larger kilowatt-hour base, benefiting all customers by lowering and stabilizing per-unit costs.

Financial Performance and Outlook

NorthWestern Energy's recent financial performance reflects both the benefits of strategic rate adjustments and the impact of ongoing investments and merger-related activities. For the three months ended September 30, 2025, consolidated net income decreased to $38.2 million from $46.8 million in the prior year. This decline was primarily attributed to higher operating expenses, including $7.6 million in merger-related costs, increased depreciation of $5.8 million, and higher interest expense of $38.4 million (up from $33.4 million in Q3 2024). These factors were partially offset by positive contributions from new rates and increased customer usage.

Despite the net income decrease, the company demonstrated strong operational margin growth. Consolidated gross margin for Q3 2025 increased by $24.3 million, or 23.6%, to $127.1 million, driven by higher retail rates, natural gas and electric usage, and increased electric transmission and natural gas transportation revenues. Similarly, consolidated utility margin, a non-GAAP measure, rose by $42.8 million, or 16.6%, to $300.1 million in Q3 2025. For the nine months ended September 30, 2025, consolidated utility margin increased by $94.6 million, or 11.8%, to $895.9 million.

The electric segment's utility margin grew by 16.3% in Q3 2025 and 11.1% for the nine-month period, benefiting from favorable weather in South Dakota, higher residential and commercial demand in Montana, and customer growth. The natural gas segment also saw robust utility margin growth of 18.7% in Q3 2025 and 14.9% for the nine-month period, driven by favorable weather in South Dakota and Nebraska, higher commercial demand, and customer growth.

Liquidity remains a focus, with total net liquidity at approximately $262.2 million as of September 30, 2025, including $6.2 million in cash and $256 million in revolving credit facility availability.

Cash provided by operating activities for the nine months ended September 30, 2025, was $338.3 million, a slight decrease from the prior year due to merger transaction costs and timing of accounts receivable collections.

The company's FFO to debt metric, which dipped below its 14% downside threshold in 2024 due to a lack of interim rate support in Montana, is expected to improve.

NWE affirmed its 2025 earnings guidance range of $3.53 to $3.65 per diluted share, with the final outcome of the Montana rate review (expected in Q4 2025 and retroactive to May 23) being a key assumption. The company's long-term EPS and rate base growth targets remain at 4% to 6%, supported by a five-year capital plan of $2.74 billion, an 11% increase over the previous plan, which is self-funded with no planned equity. Management anticipates that incremental opportunities from data centers and regional transmission could drive EPS growth beyond 6%, leading to a total return greater than 11% when combined with its 4-5% dividend yield.

Competitive Dynamics and Risk Mitigation

NWE operates in a regulated utility environment where competition primarily manifests in attracting new load and managing regulatory relationships. While direct competition for existing customers is limited by exclusive service territories, the company competes for large industrial and commercial customers, such as data centers, against other utilities and states. The ability to offer competitive tariffs and ensure resource adequacy, as NWE aims to do with its Colstrip capacity and proposed large load tariffs, is crucial.

Key risks include the successful integration of the pending merger with Black Hills Corporation , which involves potential delays, regulatory conditions, and the challenge of realizing anticipated synergies. The fixed exchange ratio of 0.98 shares of Black Hills for each NWE share means shareholders are exposed to market price fluctuations of both stocks. Environmental regulations, particularly the EPA's GHG and MATS rules, pose a risk to Colstrip Units 3 and 4, potentially requiring expensive upgrades with challenging compliance timelines. Regulatory lag in Montana, characterized by historic rate-making, continues to be a challenge, making it difficult to earn the authorized rate of return and necessitating frequent rate reviews. However, the recently enacted Montana wildfire law (HB 490) significantly mitigates liability risks, providing a strong defense against strict liability claims.

Conclusion

NorthWestern Energy is at a pivotal juncture, strategically positioning itself for enhanced scale and growth through its merger with Black Hills Corporation (BKH) and proactive resource management. The acquisition of Colstrip interests, coupled with legislative successes in Montana, underpins its ability to meet growing energy demands, particularly from the burgeoning data center industry. While the company faces inherent risks associated with regulatory lag and merger integration, its robust capital plan, commitment to grid modernization, and focus on operational efficiency provide a solid foundation. The potential for incremental growth opportunities, combined with a compelling dividend yield, suggests a promising outlook for investors seeking a resilient utility with a clear path to long-term value creation.