Executive Summary / Key Takeaways

• NorthWestern Energy (NWE) is a regulated electric and natural gas utility focused on infrastructure investment, resource integration, and operational efficiency across Montana, South Dakota, and Nebraska, aiming for a 4%-6% long-term EPS and rate base growth.
• Recent strategic moves, including the no-cost acquisitions of incremental Colstrip ownership and the Energy West gas system, are bolstering energy supply, enhancing reliability, and positioning NWE to serve emerging large load customers like data centers.
• First quarter 2025 results showed solid performance with net income increasing to $76.9 million, driven by rate recovery, favorable volumes from colder weather, and transmission revenues, despite rising operating costs and interest expense.
• The ongoing Montana rate review is critical for NWE to recover significant capital investments and earn closer to its authorized return, with the timing of final outcomes and interim rate implementation impacting near-term earnings distribution and credit metrics.
• Significant risks include adverse regulatory decisions, environmental compliance costs (EPA rules), and wildfire liability, though recent Montana legislation offers crucial liability protections.

Setting the Scene: A Century of Service and Strategic Evolution

NorthWestern Energy Group, operating as NorthWestern Energy (NWE), traces its roots back to 1923, establishing itself as a provider of essential electricity and natural gas services across the Upper Midwest. Its footprint expanded significantly in 2002 with entry into the Montana market, including Yellowstone National Park, complementing its long-standing operations in South Dakota and Nebraska. This history is foundational to NWE's identity as a regulated utility deeply embedded in the communities it serves, currently reaching approximately 809,000 customers.

NWE's overarching strategy centers on delivering safe, reliable, and innovative energy solutions while creating value for stakeholders. This involves continuous infrastructure investment to build a stronger and smarter grid, integrating diverse supply resources to balance reliability, cost, and sustainability, relentlessly pursuing operating efficiency, and maintaining financial discipline. The company has also set a long-term goal to achieve net zero carbon emissions by 2050, reflecting broader industry trends towards decarbonization.

The utility landscape in NWE's service territory includes larger, multi-state players like Xcel Energy (XEL) and Black Hills Corporation (BKH), as well as more regionally focused entities such as MDU Resources Group (MDU). While NWE operates as a regulated monopoly within its specific service areas, it competes for capital and faces competitive pressures related to cost, reliability, and adapting to evolving energy markets and customer demands, including the rise of distributed energy resources and large industrial loads. Compared to larger peers like XEL, NWE operates on a smaller scale, which can impact cost structure and R&D capacity. However, NWE leverages its deep regional focus and operational expertise to maintain high reliability standards, particularly crucial in its often rural and weather-sensitive service areas.

Central to NWE's operational strategy is the strategic deployment of technology to enhance grid performance and mitigate risks. This includes automation in customer meters, distribution systems, and substations, aimed at improving the customer experience and enhancing grid reliability and safety through the use of proven new technologies. Furthermore, in response to increasing wildfire risks, NWE has implemented advanced technologies for situational awareness and monitoring, allowing the company to monitor its system with unprecedented capability. While NWE does not highlight proprietary technological differentiators in the same vein as a manufacturing company, its strategic adoption and integration of these operational technologies are critical to its ability to provide reliable service, manage costs, and address significant operational risks like wildfires. This technological focus supports NWE's core mission and is increasingly important for demonstrating prudence and efficiency in regulatory proceedings, contributing to the long-term health of the business and its ability to recover investments.

Performance and Strategic Momentum

NWE's financial performance in the first quarter of 2025 demonstrated solid growth, building on strategic initiatives and favorable conditions. Consolidated net income rose to $76.9 million, or $1.25 per diluted share, compared to $65.1 million, or $1.06 per diluted share, in the first quarter of 2024. This improvement was primarily fueled by the positive impacts of recently implemented rates, higher electric and natural gas retail volumes driven by colder weather and customer growth, and increased electric transmission revenues. These gains were partially tempered by higher operating expenses, including depreciation and interest expense, and the effects of Montana property tax tracker collections.

The company's utility margin, a key metric reflecting revenues less direct energy supply costs, increased by a robust 9.2%, or $27.8 million, reaching $328.4 million in Q1 2025. This margin expansion underscores the effectiveness of rate adjustments and volume growth in covering core operating costs. The electric segment saw a 6.5% increase in utility margin, while the natural gas segment experienced a significant 17.8% increase, highlighting strong performance across both core businesses. Operating expenses, excluding fuel and purchased power, saw a modest increase of $5.2 million, influenced by higher depreciation, generation maintenance, and insurance costs, particularly wildfire risk premiums.

NWE's strategic actions are directly aimed at strengthening its resource portfolio and expanding its operational footprint. The no-cost acquisitions of incremental ownership interests in Colstrip Units 3 and 4 from Avista (AVA) and Puget Sound are transformative, increasing NWE's total ownership to 55% effective January 1, 2026. This move is designed to secure a reliable, dispatchable generation source at zero upfront capital cost, providing energy independence for Montana, enhancing grid reliability, and creating a significant capacity surplus. This excess capacity is crucial for serving potential new large load customers, such as data centers, which have shown substantial interest in NWE's service territory. The company is actively working with multiple parties, including LOIs with Atlas and Sabi, to bring these loads online, initially under existing tariffs, with potential for new tariff structures and generation build-out for future large-scale demand.

Further strategic expansion includes the planned acquisition of Energy West Montana's natural gas distribution system for approximately $39 million, expected to close in Q2 or Q3 2025. This tuck-in acquisition adds approximately 33,000 customers, integrating well with NWE's existing operations and offering efficiencies like single billing in areas like Great Falls.

Regional transmission development is another key growth avenue. NWE is involved in the North Plains Connector project, a high-voltage DC line aimed at connecting Montana to central North Dakota, enhancing regional grid resilience and market access. While a significant federal grant for this project has seen delays due to an Executive Order, NWE remains committed, planning investment upon regulatory approvals targeted for 2026.

Regulatory Landscape and Financial Health

Navigating the regulatory environment is paramount for NWE, given its status as a regulated utility. The company is actively engaged in rate reviews across its jurisdictions to ensure the timely recovery of its substantial capital investments and the opportunity to earn its authorized rate of return. The Montana electric and natural gas rate review, filed in July 2024, is a critical proceeding. While interim rates were partially approved effective December 1, 2024, the timing and final outcome remain subject to MPSC approval, with a hearing scheduled to commence on June 9, 2025. NWE has reached settlements on certain aspects of the case, including a full natural gas settlement and a partial electric settlement, but key issues like the revenue requirement for the Yellowstone County Generating Station and the PCCAM base remain contested. The company intends to implement rebuttal rates, subject to refund, if revised interim rates are not approved and a final order is not received by May 23, 2025. Similarly, a settlement has been reached in the Nebraska natural gas rate review, pending NPSC approval.

The impact of regulatory lag, particularly in Montana's historic rate-making framework, poses a challenge to NWE's ability to consistently earn its authorized return. This lag, coupled with the delay in interim rate relief in late 2024, negatively impacted NWE's FFO to debt metric, causing it to fall below the 14% downside threshold at the end of 2024. While Q1 2025 saw the metric just above this threshold, management emphasizes the need to build cushion and highlights that continued delays in rate recovery in early 2025 could keep the metric slightly below the threshold. Maintaining a strong balance sheet and credit quality is essential for NWE to attract capital at a reasonable cost to fund its ongoing capital plan.

NWE's 5-year capital investment plan stands at $2.74 billion, an 11% increase over the prior plan. This plan is focused on low-risk, highly executable projects across electric and gas T&D and includes a dispatchable generation resource in South Dakota. Crucially, the company states this plan is sized to be financed without the need for equity issuance under current assumptions. Liquidity remains adequate, with approximately $630 million in total net liquidity as of March 31, 2025, and debt financing needs for 2025 completed. The company targets a 50%-55% debt to total capital ratio and a 60%-70% dividend payout ratio.

Risks and Outlook

Despite strategic progress and investment plans, NWE faces significant risks. Adverse regulatory outcomes in ongoing rate reviews could constrain earnings and impact financial condition. Compliance costs associated with potential future environmental regulations, such as the EPA's GHG and MATS rules for coal plants, could require substantial investment (e.g., estimated $200M-$250M for NWE's share of Colstrip baghouses), the recovery of which would require regulatory support. Wildfire risk remains a material concern, potentially leading to damages exceeding insurance coverage, although recent Montana legislation (HB 490) provides crucial liability protections by establishing a statutory standard of care and limiting certain damages. Supply chain constraints, inflation, and commodity price volatility also pose ongoing operational and financial risks.

Looking ahead, NWE is affirming its long-term 4%-6% EPS and rate base growth targets, underpinned by its capital plan and strategic initiatives. While specific 2025 EPS guidance is withheld pending the outcome of the Montana rate review hearing, the company anticipates a lower contribution from Q2 2025 earnings (~10% of the full year) due to the timing of rate implementation relative to cost incurrence, with earnings expected to be weighted towards the second half of the year. The potential for growth beyond the 4%-6% range exists through incremental opportunities like serving large load customers and further regional transmission development. The successful integration of the Energy West acquisition and the operational benefits from increased Colstrip ownership in 2026 are key factors in the medium-term outlook.

Conclusion

NorthWestern Energy is a regulated utility executing a clear strategy of investing in essential infrastructure and securing reliable energy supply to serve its growing customer base across Montana, South Dakota, and Nebraska. The company's recent strategic acquisitions of incremental Colstrip ownership and the Energy West gas system, coupled with its focus on grid modernization and wildfire mitigation technology, position it to enhance reliability, manage costs, and capitalize on emerging growth opportunities like data centers and regional transmission. While NWE demonstrated solid financial performance in Q1 2025, driven by rate recovery and favorable volumes, the ongoing Montana rate review represents a critical near-term catalyst. The outcome of this proceeding will significantly influence NWE's ability to recover its substantial investments, improve its credit metrics, and achieve more consistent earnings growth towards its 4%-6% long-term target. Investors should monitor the progress of the Montana rate case, the timelines for large load customer agreements, and the execution of the capital plan, while remaining mindful of regulatory and environmental risks. NWE's commitment to its investment plan and strategic pursuit of growth, particularly in securing cost-effective supply and enabling new demand, forms the core of its investment thesis, albeit one currently navigating the complexities of its regulatory environment.