Merger And Data Center Hurdles Will Expose Long Term Earnings Fragility

Catalysts

About NorthWestern Energy Group

NorthWestern Energy Group is a regulated utility that provides electricity and natural gas to customers in Montana, South Dakota and Nebraska.

What are the underlying business or industry changes driving this perspective?

• The pending merger with Black Hills is built around expectations of higher long term EPS growth and a stronger balance sheet. If regulatory approvals in FERC or the three key states are delayed or denied, integration benefits and cost savings may not materialize, which would pressure longer term earnings and limit any upside to return on invested capital.
• Management is positioning large data center load as a major opportunity, with three development agreements in place and Quantica framed at up to 1.1 gigawatts by around 2031. Failure to convert these agreements into Energy Service Agreements by the end of 2026 would mean the anticipated load driven revenue and associated earnings contribution may not emerge.
• The Large New Load tariff filed with the Montana commission is intended to protect existing customers and allow new high usage customers to pay for incremental infrastructure. If regulators impose stricter terms or delay approval, recovery of new transmission and generation costs could lag, compressing net margins on any new data center volumes.
• Incremental ownership of Colstrip increases annual operating costs by about US$48 million. If low market power prices persist or recovery continues to lag, the gap between costs and recoveries could weigh on earnings quality and limit cash available for reinvestment.
• The capital plan of US$3.2b from 2026 through 2030 excludes potential regional transmission projects and additional generation for large loads. If those projects move ahead without timely regulatory approval or cost recovery, leverage could rise and returns on that extra capital may fall short of expectations for EPS growth and future net margins.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more pessimistic perspective on NorthWestern Energy Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming NorthWestern Energy Group's revenue will grow by 3.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 10.2% today to 14.8% in 3 years time.
• The bearish analysts expect earnings to reach $272.0 million (and earnings per share of $4.31) by about May 2029, up from $167.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 15.0x on those 2029 earnings, down from 26.6x today. This future PE is lower than the current PE for the US Integrated Utilities industry at 21.4x.
• The bearish analysts expect the number of shares outstanding to grow by 0.2% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.98%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The company is reaffirming 2026 earnings guidance of $3.68 to $3.83 per share and a long term EPS growth rate target of 4% to 6%, and the first quarter adjusted EPS of $1.31 is already 7.4% above the prior year quarter. If this guidance and growth range continue to be supported by execution, it would challenge the view that earnings and the share price must decline.
• The pending merger with Black Hills has already received shareholder approval and settlements with key interveners in Montana, Nebraska and South Dakota, and management highlights potential benefits such as a stronger balance sheet, doubled rate base and broader investment opportunities. If regulatory approvals are achieved and integration delivers these benefits, the combined company could see support for earnings and return on invested capital.
• Long term data center demand is already translating into 3 development agreements, including Quantica’s planned ramp from 25 megawatts to 1.1 gigawatts around 2031 and an aggregate large load queue framed at 1,500 megawatts by 2030. If even a portion of these projects move to Energy Service Agreements, associated usage could support revenue growth and capital deployment tied to those loads.
• The capital plan of $3.2b from 2026 through 2030 is described as executable, low risk and essential to meet customer needs, and management expects to fund 2026 without issuing new common equity. If this plan is carried out within current regulatory frameworks and earns allowed returns, it could underpin both rate base expansion and earnings.
• Wildfire legislation in Montana and South Dakota and the planned South Dakota wildfire mitigation plan provide a clearer framework for risk management and cost recovery, and the Large New Load tariff filing in Montana is explicitly designed to protect existing customers from cost shifting. If these regulatory structures function as intended, they can limit downside to net margins and support more predictable earnings over time.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for NorthWestern Energy Group is $54.0, which represents up to two standard deviations below the consensus price target of $69.1. This valuation is based on what can be assumed as the expectations of NorthWestern Energy Group's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $78.5, and the most bearish reporting a price target of just $54.0.
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be $1.8 billion, earnings will come to $272.0 million, and it would be trading on a PE ratio of 15.0x, assuming you use a discount rate of 7.0%.
• Given the current share price of $72.49, the analyst price target of $54.0 is 34.2% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.