Merger Of Equals Will Create A Leading Regional Utility Platform

Key Takeaways

• Black Hills is expected to convert its large hyperscale data center pipeline, regulated capital plan, and pending merger with NorthWestern Energy into higher long-term earnings power that is not yet fully visible in current results.
• The main thing that has to go right is that regulators across key states, especially Wyoming, Colorado, and Montana, support timely cost recovery on transmission, generation, and merger related investments while large-load customers follow through on their committed and negotiated projects.
• The current valuation implies the share price does not fully reflect the earnings trajectory implied by reaffirmed 2026 guidance, disciplined equity issuance, and the scale benefits expected from the NorthWestern Energy all-stock merger.

What Black Hills Does

Black Hills Corporation operates regulated electric and natural gas utilities in the United States through its Electric Utilities and Gas Utilities segments. The company generates, transmits, and distributes electricity to customers in Colorado, Montana, South Dakota, and Wyoming, and sells excess power to other utilities and marketing companies. It also owns non regulated power generation and mining assets, including a coal mine near Gillette, Wyoming. The company distributes natural gas to about 1,138,000 customers across Arkansas, Colorado, Iowa, Kansas, Nebraska, and Wyoming, owns extensive gas pipelines, storage sites, and gathering lines, and earns additional revenue from home appliance repair plans, gas and electrical infrastructure services, and other home repair service plans offered to its utility customers.

Catalysts

Black Hills is expected to translate its growing large load pipeline, active regulatory agenda, and pending all stock merger with NorthWestern Energy into earnings and cash flow that are not fully reflected in current financials. The company is also working to keep balance sheet metrics and equity needs in check, which could support valuation if investors gain more confidence in the durability of that plan.

• Accelerated demand growth from hyperscale data center customers remains a live driver, with a more than 3 GW pipeline in Wyoming and about 600 MW already included in the plan through 2030. This points to meaningful potential future increases in regulated revenue and earnings.
• The prospective 1.8 GW Cheyenne data center project, supported by up to US$377 million of refundable advances for long lead generation equipment, creates a path for additional capital deployment and future rate base. This would be expected to feed through to long term revenue and net income once facilities enter service.
• The pending all stock merger with NorthWestern Energy, which has secured FERC and six of seven required approvals with the final state decision expected in late 2026, is positioned to increase scale and jurisdictional diversity. This could support future earnings resilience and the credit profile once combined financials are reflected in results.
• Frequent rate reviews and new mechanisms such as the proposed Wyoming Large Customer Transmission Cost Adjustment Mechanism, which is designed so that large load customers bear associated transmission costs, may support future net margins by aligning sizable capital spending with cost recovery and limiting cross subsidisation of existing retail customers.
• Disciplined financing plans, including expected 2026 equity needs of only US$50 million to US$70 million and targeted FFO to debt of 14% to 15%, along with over US$650 million of revolver liquidity and a long record of annual dividend increases, could support earnings per share and investor confidence if sustained as large projects and merger related investments are executed.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Black Hills's revenue will grow by 17.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.0% today to 16.1% in 3 years time.
• Analysts expect earnings to reach $593.3 million (and earnings per share of $5.2) by about September 2029, up from $299.1 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $837.2 million in earnings, and the most bearish expecting $443.0 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 13.9x on those 2029 earnings, down from 18.7x today. This future PE is lower than the current PE for the US Integrated Utilities industry at 21.1x.
• Analysts expect the number of shares outstanding to grow by 1.03% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.24%, as per the Simply Wall St company report.

Risks

For the Black Hills share price narrative to play out positively, the company needs to keep converting its large capital program and data center pipeline into earnings growth without eroding its balance sheet. It also needs regulators and customers to support the pace and structure of investment recovery that current expectations imply.

• Heavy capital expenditure for projects such as large transmission lines, new generation and clean energy investments continues to add depreciation and financing costs. If future rate outcomes do not keep pace, this would pressure net margins and limit earnings growth.
• Warm winter weather already reduced earnings in early 2026. A pattern of mild seasons would weaken gas and electric usage and could leave revenue and earnings below a trajectory that assumes more normal demand.
• The growth story increasingly leans on a concentrated set of very large data center and technology customers in Wyoming. If these customers slow build outs, change technology needs or step back from projects under negotiation, the expected long term revenue and earnings uplift from the more than 3 GW pipeline would be at risk.

Valuation

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

• The analysts have a consensus price target of $84.8 for Black Hills based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be $3.7 billion, earnings will come to $593.3 million, and it would be trading on a PE ratio of 13.9x, assuming you use a discount rate of 7.2%.
• Given the current share price of $73.21, the analyst price target of $84.8 is 13.7% higher.
• 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.

See our latest analysis for Black Hills.