Potential multistate utility conglomerate set to receive regulatory scrutiny

After announcing plans Aug. 18 to merge in a $15.4 billion transaction, NorthWestern Energy Group Inc. and Black Hills Corp. must now convince the Montana Public Service Commission, South Dakota Public Utilities Commission and other regulators of the proposed deal's merits.

In addition, regulatory approval may be required from the Arkansas Public Service Commission. Various federal agencies are also required to approve the proposed transaction before it can proceed.

➤ Regulatory Research Associates views the proposed merger of NorthWestern Energy and Black Hills as positive from an investor perspective. With its substantially expanded geographic and economic footprint, the combined enterprise would yield new regulated electric and gas transmission and distribution projects focused on reliability, resiliency and demand growth. These investments would, in turn, support continued access to capital, improved long-term earnings and rate base growth, and provide a strong foundation for the merged entity's credit metrics.

➤ As has been the case since late 2022, US utilities remain focused on strengthening their balance sheets as they navigate economic uncertainty. Since then, multiple utilities have initiated internal strategic reviews and begun the process of divesting assets or selling minority interests in projects to raise cash and to facilitate capital reallocation. Earlier in August, Duke Energy Corp. announced plans to sell about 20% of Duke Energy Florida LLC to Brookfield Asset Management Ltd. for $6 billion in cash to fund its capital expenditure program.

➤ RRA views the Montana and Kansas regulatory climates as somewhat restrictive from an investor point of view. South Dakota, Colorado and Wyoming are viewed as balanced, while Arkansas, Nebraska and Iowa are relatively more constructive from an investor perspective.

The companies expect to begin filing the relevant state and federal regulatory applications in the fourth quarter. Shareholder meetings are expected in the second quarter of 2026, and receipt of required regulatory approvals to close the transaction is expected in the fourth quarter of 2026. The companies expect to close the transaction in 12 to 15 months.

Combined, NorthWestern and Black Hills would serve approximately 2.1 million customers across Arkansas, Colorado, Iowa, Kansas, Montana, Nebraska, South Dakota and Wyoming. The new entity's electric utilities would serve about 700,000 customers and operate around 38,000 miles of electric lines and 2.9 GW of owned generation capacity fueled by a mix of thermal, hydro and wind resources. Its gas utilities would serve approximately 1.4 million customers and operate about 59,000 miles of gas lines.

Approximately 31% of the combined company's $11.4 billion rate base would be in Montana upon closing, if approved by regulators, followed by South Dakota (17%) and Colorado (13%) and Wyoming (9%). About 10% of the merged company's utility plant would be regulated by the Federal Energy Regulatory Commission. Electric rate base would make up about 61% of the company's operations, with gas consisting of the balance. Approximately 75% of future capital expenditures would be earmarked for base electric and gas transmission and distribution investments, and about 16% would be for electric generation.

Montana

The Montana Public Service Commission (PSC) has jurisdiction over corporate reorganizations and material affiliate transactions. While there are no statutes explicitly stating the precise standards the PSC is to employ when reviewing a merger application, the commission has said that it "has jurisdiction over and must approve any sale or transfer of a public utility, its assets or utility obligations in order to assure generally that utility customers will receive adequate service and facilities, that utility rates will not increase as a result of the sale or transfer, and that the acquiring entity is fit, willing and able to assume the service responsibilities of a public utility."

The PSC has further stated that it must determine whether the transaction is in the public interest, taking into consideration the fair value of the properties and the business of the public utility involved. Nearly all transactions before the PSC in recent years have been asset-level deals.

In 2017, Canada-based Hydro One Ltd. and US-based Avista Corp. filed for PSC approval of the proposed acquisition of Avista by Hydro One for $5.3 billion in cash and the assumption of debt. In 2018, the PSC approved the proposed acquisition and a settlement in which the parties agreed to $4.5 million in community funding. The money was to be provided by the shareholders and would not have been recovered in rates. The deal was eventually terminated due to opposition in other jurisdictions.

In 2006, NorthWestern and Babcock & Brown Infrastructure Ltd. (B&B) reached a definitive agreement, whereby B&B was to acquire NorthWestern. However, the PSC ultimately rejected the acquisition, finding that the proposed transaction presented "risk of harm to NorthWestern's financial integrity" and to Montana ratepayers. Specifically, the PSC said that "the proposed ownership of NorthWestern presents the likelihood that NorthWestern's capital structure will deteriorate and become unacceptably leveraged" due to B&B's intention "to extract excessive equity" from NorthWestern in order to recover the merger acquisition premium.

In RRA's view, the regulatory climate in Montana has merited ongoing observation. Interim rate increases approved as part of base rate cases have become a point of dispute between regulators and the state's electric and gas utilities — in contrast to historical precedent — and two new commissioners joined the PSC earlier this year.

Generally, Montana's regulatory climate has been somewhat restrictive from an investor point of view in recent years. On July 31, 2024, RRA raised its ranking of Montana regulation to Average/3 from Below Average/1 to reflect constructive aspects of electric and gas rate case decisions issued in 2023 by the PSC for NorthWestern's utility operations. The commission relies upon historical test periods, which, coupled with an average rate base valuation methodology, exacerbates regulatory lag.

The PSC is currently adjudicating three rate cases, including electric and gas proceedings for NorthWestern — Docket 2024-05-053 (elec) and Docket 2024-05-053 (gas) — and a gas proceeding (Docket 2024-05-061) for MDU Resources Group Inc. subsidiary Montana-Dakota Utilities Co.

In May, NorthWestern implemented its initially requested electric rates, reflecting a $156.5 million rate increase, effective on an interim basis and subject to refund, after regulators failed to issue a timely order within the rate case's statutory time frame. On July 1, the PSC voted 3-2 to allow NorthWestern to implement the $66.4 million settled electric rate increase, though multiple litigated issues remain outstanding in the case, including power plant construction costs and power cost recovery. A gas settlement agreement that yielded a $17.6 million rate increase remains in effect until the PSC's final order in the proceedings, which remain pending.

In January, with a refreshed slate of commissioners following the November 2024 general elections, the PSC authorized Montana-Dakota Utilities an approximately $7.7 million (10.25%) interim gas rate increase, effective Feb. 1, finding that a revenue hike is necessary to allow the company to recover its prudently incurred costs and earn a fair rate of return. The order followed an October 2024 decision denying the utility an interim rate increase. The proceeding remains ongoing.

Nebraska

The Nebraska Public Service Commission began regulating investor-owned gas utilities in 2003. Currently, only two such utilities operate in the state: Black Hills subsidiary Black Hills Nebraska Gas LLC (BHNG) and NorthWestern subsidiary NorthWestern Energy Public Service Corp.

The commission has jurisdiction over mergers and acquisitions, and state statutes prohibit the PSC from approving any proposed transaction that could adversely affect a utility's ability to serve its ratepayers. The proposed merger of Black Hills and NorthWestern could leave only one investor-owned gas utility in Nebraska, potentially drawing additional scrutiny from regulators and intervenors.

BHNG serves approximately 304,000 gas customers, while Northwestern provides gas distribution services to roughly 43,000 customers in the state. Despite historically quiet utility regulatory activity, both utilities have recently initiated rate proceedings with the commission.

In June, the commission approved a settlement in a small gas rate case for NorthWestern (Docket NG-122), which was agreed upon by the affected municipalities — North Platte, Kearney, Grand Island and Alda. The approved agreement authorized a $2.4 million rate increase based on 9.55% return on equity (ROE).

Meanwhile, BHNG has a pending rate case (Docket NG-124) in which it seeks a $53.4 million rate increase, driven by factors such as inflation and infrastructure investments. The proposal includes transferring $18.5 million from the company's system safety and integrity rider to base rates, resulting in a net increase of $34.9 million. The filing reflects a 10.50% return on equity (50.52% of capital) and a 7.63% return on a rate base valued at $785.3 million. In addition, the utility is seeking to implement a weather normalization adjustment mechanism to stabilize revenues against weather variability, similar to the one in place for Black Hills' Kansas subsidiary.

In June, RRA lowered its ranking of Nebraska regulation to Average/2 from Average/1, reflecting an effort to maintain balance in its ranking distribution and acknowledging the state's limited innovative or proactive developments compared to other jurisdictions. From an investor perspective, RRA views the Nebraska regulatory environment as somewhat more constructive than average.

The PSC's historical merger activity includes the 2006 proposed sale of NorthWestern to Babcock & Brown Infrastructure Ltd., which was never consummated due to rejection by the Montana PSC. In 2016, the commission approved Black Hills' acquisition of SourceGas Holdings, leading to the creation of Black Hills Nebraska Gas in 2019 after the consolidation of the company's Nebraska gas assets.

Colorado

By law, the Colorado Public Utilities Commission (PUC) has authority over mergers involving utilities and has required certain "ring-fencing" provisions in the context of merger approvals. Applicants seeking PUC merger approval must meet a public interest standard. Specifically, state law requires PUC approval for the transfer of: a certificate of public convenience and necessity; a controlling interest in a utility, whether the transfer of control is effected by the transfer of assets, by the transfer of stock, by merger or by other form of business combination; or, the transfer of assets subject to the jurisdiction of the commission outside the normal course of business.

More broadly speaking, developments over the past several years point to increased risk for investors of gas utilities in Colorado. Legislation enacted in 2023, SB 23-291, requires gas utilities to file for gas price risk management plans to address the volatility of fuel costs recovered from customers under the gas cost adjustment (GCA) mechanism. The law also directed the PUC to develop mechanisms to "align utility and ratepayer interests" in the fuel procurement process.

In December 2024, the PUC amended the GCA rules to comply with the new law, introducing provisions that allocate gas commodity cost volatility risk to utilities instead of allowing a dollar-for-dollar pass-through. While this presents a nonrecovery risk for the company, it offers an opportunity to retain a portion of savings if costs fall below a benchmark level.

The 2023 legislation followed a law enacted in 2021 that directed the gas utilities to file gas infrastructure plans and clean heat plans (CHPs) to achieve CO₂ and methane emission reductions of 4% by 2025 and 22% by 2030, relative to a 2015 baseline. While the legislation allows CHP cost recovery through a rider, it requires gas utilities to remove incentives for customers to establish gas service on their property. In April 2025, the PUC voted to restart Black Hills Colorado Gas Inc.'s CHP process as it grapples with the legal question of whether it can require a gas utility to promote electrification. Black Hills had sought rehearing of the commission's approval of a modified settlement agreement in March in Docket 23A-0633G that required the utility to include substantial electrification in its CHP.

The Colorado Energy Office has also been tasked to evaluate the risk posed by stranded or underutilized gas infrastructure investments and the related annual rate impact of their recovery on utility customers. By contrast, a new grid modernization adjustment clause is in effect for electric distribution upgrades and improvements that support Colorado's electrification and decarbonization goals.

Regarding traditional ratemaking issues, recent rate cases have been more contentious, with certain parties recommending that the PUC depart from historical commission practice and rely on a capital structure other than a utility's actual stand-alone capital structure when setting the authorized return on rate base. There have also been challenges to the use of the utility's actual cost of debt within this process.

Black Hills Colorado Electric's last Colorado rate case concluded earlier this year with an order that lowered its authorized equity component of its capital structure to a level that more closely resembles parent Black Hills Corp., and authorized an ROE that was well below the prevailing industry average (Docket No. 24AL-0275E). Black Hills Colorado Gas implemented a $20.2 million rate increase in February 2024 following a PUC order that also authorized a below-average return on equity (Docket 23AL-0231G).

The Colorado regulatory environment is generally viewed as balanced from an investor viewpoint by RRA.

South Dakota

In 2007, a state law was enacted requiring the South Dakota Public Utilities Commission (PUC) to approve any acquisition or merger involving a South Dakota-jurisdictional electric or gas utility with another entity before the transaction can be completed.

Specifically, the law: requires a company to hold all utility-related assets in a legal entity separate from those of its non-regulated affiliates; requires that a utility's secured debt be used only for utility-related purposes; and, prohibits a utility from extending credit to, pledging utility assets as collateral for the benefit of, or guaranteeing any obligations of, any of its non-regulated affiliates. If a utility were found to violate these provisions, it would have two years within which to comply with the standards. The PUC is permitted to waive any of the aforementioned provisions if it determines that such action "would not pose an undue risk" to the utility and would be in the public interest.

In 2016, Black Hills paid approximately $1.17 billion in cash and assumed $720 million of debt to acquire SourceGas Holdings. The acquisition closed that year, following approval from the Colorado PUC. The transaction was not required to be approved by the South Dakota PUC.

RRA considers the regulatory climate in South Dakota to be relatively balanced from an investor perspective. Even though the commissioners are elected, which is generally seen as riskier for investors, the climate has been relatively stable in recent years.

Black Hills Power serves approximately 78,000 electric customers in South Dakota. NorthWestern serves 65,300 electric customers and 50,500 natural gas customers in the state.

Arkansas

RRA views utility regulation before the Arkansas Public Service Commission (PSC) as slightly more constructive than average from an investor point of view. Notably, Black Hills and NorthWestern have indicated that approval from the Arkansas PSC may not be required for this transaction.

The state remains traditionally regulated and has not restructured its energy market. Some of the state's larger energy utilities operate under formula rate plans (FRPs) in lieu of traditional base rate cases. The ROEs established under the FRPs may generally be lower than industry averages, but the plans streamline the rate case processes and reduce regulatory lag.

SB 307, enacted during the 2025 legislative session, allows the state's electric and gas utilities to utilize a rider to recover the costs associated with "strategic investments" that are not otherwise recoverable through their existing PSC-approved rates.

Black Hills Energy Arkansas, Inc. (BHEA) provides gas utility service to roughly 190,000 customers, has not operated under an FRP and has had its rates set through the traditional base rate case process. In a 2024 proceeding before the PSC, BHEA was authorized a $29.1 million rate increase premised upon a 9.85% return on equity (39.64% of a regulatory capital structure) and a 6.10% return on a $958.6 million rate base, pursuant to a settlement. The authorized equity return was in line with prevailing market averages at that time.

The PSC has generally been receptive to merger proposals and utilizes a public interest standard in its deal reviews.

In 2016, following a settlement, the PSC approved Black Hills' proposed acquisition of Source Gas Arkansas, which is now BHEA. The salient terms of the adopted settlement included implementation of a modest base rate reduction, a rate case stay-out period and certain conditional restrictions on dividend payments.

Wyoming

In Wyoming, Black Hills subsidiaries Cheyenne Light Fuel and Power Co. (CLF&P) and Black Hills Power Inc. provide electric services to a combined roughly 46,000 customers, while Black Hills Wyoming Gas LLC (BHWG) serves roughly 135,000 gas customers.

CLF&P's most recent rate case (Docket 20003-214-ER-22) concluded in 2023, when the Wyoming Public Service Commission adopted a settlement authorizing the utility a $20.1 million electric rate increase. The increase reflects a 9.75% return on equity (52.00% of capital) and a 7.48% return on a rate base valued at $464.7 million. In a small electric rate case decided in 2014, Black Hills Power was authorized a 9.90% ROE.

In January 2024, a settlement was approved in BHWG's most recent rate case, where the utility was authorized a $15.1 million rate hike. After the transfer to base rates of roughly $1.2 million that was being collected through a rider, the net rate increase was $13.9 million. The approved settlement reflected a 9.85% return on equity (51.00% of a hypothetical capital structure) and a 7.33% return on a rate base valued at $450.8 million.

The Wyoming regulatory climate is relatively balanced from an investor point of view, and RRA accords Wyoming regulation an Average/2 ranking. In recent years, base rate proceedings that have come before the Wyoming PSC have been resolved via settlements, and the authorized equity returns in these cases have generally been at or somewhat above industry averages.

Kansas

In Kansas, where Black Hills Kansas Gas Utility Co LLC (BHKGU) serves roughly 120,000 customers, energy utility regulation has been somewhat restrictive from an investor perspective over the past few years. Base rate proceedings before the Kansas Corporation Commission (KCC) are typically resolved via "black box" settlements that do not specify any rate-of-return parameters.

The company's recently concluded rate case (Docket 25-BHCG-298-RTS) gave rise to a $15.2 million base rate increase following a settlement; a $294.8 million rate base was specified. After consideration of amounts previously recovered through the gas system reliability surcharge (GSRS) rider, the net rate increase is $10.8 million. For purposes of calculating GSRS rate changes and in an upcoming "abbreviated" rate proceeding, an 8.37% carrying charge is to be utilized. The abbreviated rate case is expected to be initiated within the next several months, as permitted by state law. Such a filing would facilitate recovery of the costs associated with the company's planned investments through Dec. 31, 2025.

The most recent rate case decision for BHKGU that specified an ROE was issued in 2000, when the KCC established an 11.25% ROE.

Iowa

Black Hills Iowa Gas Utility Co LLC (BHIGU) provides service to about 160,000 customers in Iowa, where energy utility regulation is generally constructive from an investor perspective. The Iowa Utilities Commission (IUC) has authorized the use of constructive ratemaking techniques that allow for timely rate recognition of utility infrastructure investments and increases in certain costs, while also maintaining the state's standing as a relatively low-cost provider of utility service.

BHIGU's most recent rate proceeding (Docket RPU-2024-0001) was decided in November 2024, when the IUC adopted a settlement authorizing a $15.0 million base rate hike that reflected a $393.8 million rate base. The IUC noted that the agreement did not specify an ROE; however, the commission said the ROE would likely have been between 9.64% and 9.87%, aligning closely with the prevailing national average for gas distribution utilities.

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