ITEM 1A. RISK FACTORS
You should carefully consider the risk factors described below, as well as all other information available to you, before making an investment in our common stock or other securities. Although the risks are organized by heading, and each risk is described separately, many of the risks are interrelated. You should not interpret the disclosure of any risk factor to imply that the risk has not already materialized. While we believe we have identified and discussed below the key risk factors affecting our business, there may be additional risks and uncertainties that are not presently known or that are not currently believed to be significant that may adversely affect our business, financial condition, results of operations or cash flows in the future.
Summary Risk Factors
The following is a summary of some of the risks and uncertainties that could adversely affect our business, financial condition, results of operations or cash flows in the future. You should read this summary together with the more detailed description of each risk factor contained below.
Regulatory, Legislative and Legal Risks
• Our ability to recover prudently incurred costs and earn authorized returns depends on regulatory outcomes;
• Changes in laws, energy policies, or regulatory frameworks may increase costs or limit growth;
• Environmental compliance requirements may require significant investments, which may or may not be recoverable, or early retirements of certain generating facilities;
• Exposure to litigation may delay projects or restrict operations;
• Reliability and safety compliance failures could result in substantial penalties; and
• Mandated QF purchases may increase costs and limit investment flexibility.
Operational Risks
• Utility operations involve hazards that may cause outages, injuries, or environmental harm;
• Increasing fire risk may lead to significant claims or penalties;
• System constraints may limit reliable service or access to lower-cost supply;
• Reliance on market purchases exposes us to price volatility and counterparty risks;
• Weather variability impacts loads, supply, hydrology, and financial performance;
• Fuel supply disruptions may increase costs or reduce generation availability;
• Decreasing customer usage may reduce revenues and increase system costs;
• Cyber and physical security threats may disrupt operations or compromise data;
• Supply-chain delays, inflation, and labor shortages may impair operations; and
• Workforce challenges may affect safety, operations, and project execution.
Liquidity and Financial Risks
• Insurance coverage may be insufficient for certain risks;
• Capital projects and acquisitions carry permitting, cost, and recovery risks;
• Access to capital markets may be constrained by interest rates or volatility;
• Energy transition policies and technologies present financial and operational risks;
• Credit rating downgrades would increase borrowing costs and collateral needs;
• QF minimum energy obligations may expose us to higher replacement power costs;
• Changes in tax laws may affect earnings and cash flows;
• Counterparty defaults may impact liquidity;
• Pension and benefit plan performance may increase costs; and
• We rely on subsidiary dividends subject to regulatory constraints.
Risks Related to the Merger
• The fixed exchange ratio creates variability in merger consideration value;
• Required approvals may delay, condition, or prevent merger completion;
• Deal protections and termination fees may discourage alternatives;
• Merger uncertainty may impact stock price, ratings, and operations; and
• Merger-related litigation may cause delays or additional costs.
Risks Relating to the Combined Company Following Completion of the Merger
• Integration challenges may delay or reduce anticipated synergies;
• NorthWestern shareholders will have reduced ownership and voting influence;
• Significant indebtedness may increase refinancing and interest-rate risks;
• Goodwill created in the merger may be subject to impairment;
• Tax attribute limitations may reduce expected NOL benefits;
• Future dividends are not assured; and
• Issuance of new Black Hills Common Stock could negatively impact the Black Hills Common Stock price
Regulatory, Legislative and Legal Risks
Our profitability depends on our ability to recover the costs of providing energy and utility services to our customers and earn a return on our capital investment in our utility operations. We are subject to potential unfavorable litigation, and state and federal regulatory outcomes. To the extent our incurred costs are deemed imprudent by the applicable regulatory commissions or certain regulatory mechanisms are not available, we may not recover some of our costs or collect them in a timely manner, which could adversely impact our results of operations and liquidity.
We are subject to comprehensive regulation by federal and state utility regulatory agencies, including siting and construction of facilities, customer service and rates that we can charge customers. Rate regulation is premised on providing an opportunity to earn a reasonable rate of return on invested capital and rates are generally set through a process called a rate review (or rate case) in which the utility commission analyzes our costs incurred during a historical test year and decides whether they may be included in our base rates. In addition to formal general rate reviews, we also have cost tracking mechanisms that are intended to allow us to recover prudently incurred costs. There can be no assurance that the applicable regulatory commission will judge all of our costs to have been prudently incurred or that the regulatory process in which rates are determined will result in rates that allow us the opportunity to earn our authorized return or provide for timely and full recovery of such costs. In 2025, the MPSC disallowed $30.9 million of capital costs that they deemed were not prudently incurred related to the construction of YCGS. In addition, each regulatory commission sets rates based in part upon their acceptance of an allocated share of total utility costs. When commissions adopt different methods to calculate inter-jurisdictional cost allocations, some costs may not be recovered. Differing schedules and regulatory practices between our state commissions and FERC us to the risk that we may not fully recover our costs due to timing of filings, specific calculations and issues such as cost allocation methodologies. We are required to have FERC approved cost based rates or FERC approved contract rates in order to sell electricity in the wholesale market. Absent these rates, we may be subject to refund of some or all of the revenue collected. Thus, the rates we are allowed to charge may or may not match our costs at any given time. regulatory rulings could have an impact on our results of operations and materially affect our ability to meet our financial obligations, including debt payments and the payment of dividends on our common stock.
We are subject to changing federal and state laws and regulations. Congress and state legislatures may enact legislation that adversely affects our operations and financial results.
We are subject to regulations under a wide variety of U.S. federal and state regulations and policies. Regulation affects almost every aspect of our business. Changes to federal and state laws and regulations are continuous and ongoing and the federal administration, the U.S. Congress, state legislatures and state administrations may enact and implement new laws and regulations that could adversely and materially affect us. For example, legislation and regulations may be enacted that require or facilitate alternative generation or storage which, in turn, could result in customers using less of our energy or facilities which could reduce our revenues and our growth opportunities. We cannot predict future changes in laws and regulations, how they will be implemented and interpreted, or the ultimate effect that this changing environment will have on us. There can be no assurance that laws, regulations and policies will not be changed in ways that have a material adverse effect on our operations, financial condition, results of operations, and cash flows.
We are subject to extensive and changing energy, and environmental laws and regulations with which compliance may be difficult and costly.
Our operations are subject to laws and regulations imposed by federal, state and local government authorities regarding energy policy, permitting/siting for energy projects, the environment, air and water quality, GHG emissions, protection of natural resources, migratory birds and other wildlife, solid waste disposal, coal ash and other environmental considerations.
In response to recent regulatory and judicial decisions and international accords, GHG emissions, most significantly CO 2 , could be restricted in the future as a result of federal or state legal requirements or litigation relating to GHG emissions. In 2024, the EPA released final rules that will potentially impose requirements on fossil fuel assets, however, in 2025, the EPA issued multiple Notices of Proposed Rulemaking that would remove these additional requirements on fossil fuel assets. There is no mandated timeline for final action on these rules. If these promulgated GHG and MATS Rules are implemented and enforced as currently written, they may affect our ability to reliably serve our customers and we could be subject to significant additional compliance costs that would affect our future financial position, results of operations, and cash flows if such costs are
not recovered through regulated rates. Such changes also could affect the manner in which we conduct our business and could require us to make substantial additional capital expenditures or abandon certain projects.
To the extent that costs exceed our estimated environmental liabilities, or we are not successful in recovering remediation costs or costs to comply with the proposed or any future changes in rules or regulations, our results of operations and financial position could be adversely affected. Certain environmental laws and regulations also provide for substantial civil and criminal fines for noncompliance which, if imposed, could result in material costs or liabilities.
In addition, there is a risk of environmental damage claims from private parties or government entities. We may be required to make significant expenditures in connection with the investigation and remediation of alleged or actual spills, personal injury or property damage claims, and the repair, upgrade or expansion of our facilities to meet future requirements and obligations under environmental laws.
We are also at risk of unfavorable litigation outcomes related to zoning and environmental permits. In 2023, due to lawsuits filed by the Montana Environmental Information Center and Sierra Club alleging that the environmental analysis conducted by the MDEQ prior to the issuance of the YCGS air quality construction permit was inadequate, the Montana District Court issued an order vacating our YCGS air quality permit pending the MDEQ addressing the identified deficiencies. While we eventually were successful in staying this order, and the air quality permit was subsequently reinstated, due to this litigation we paused construction for approximately three months, causing us to incur substantial additional costs. Adverse litigation outcomes, such as this, could cause us to delay or terminate projects, increase costs and impact our ability to service our customers.
Early closure of our owned and jointly owned electric generating facilities due to environmental risks, litigation or public policy changes could have a material adverse impact on our results of operations and liquidity.
While a majority of our Company-wide electric supply portfolio is carbon-free, it does include fossil-fuel resources. Environmental advocacy groups, certain investors and other third parties oppose the operation of fossil-fuel generation, expressing concerns about the environmental-related impacts from fossil fuels. This opposition may increase in scope and frequency depending on a number of variables, including the course of Federal and State laws and environmental regulations and the financial resources devoted to opposition efforts. These risks include litigation against us due to GHG or other emissions or coal combustion residuals disposal and storage; activist shareholder proposals; and increased activism before our regulators. We cannot predict the effect that any such opposition may have on our ability to operate and recover the costs of our generating facilities. In addition, defense costs associated with litigation can be significant and an adverse outcome could require substantial capital expenditures and could possibly require payment of substantial penalties or . Such payments or expenditures could affect results of operations, financial condition or cash flows if such costs are not recovered through regulated rates.
In particular, as described more fully below in Note 20 - Commitments and Contingencies to the Consolidated Financial Statements included herein, we are a co-owner of the coal-fired Colstrip Units 3 & 4 generating facility. The remaining depreciable life of our investments in Colstrip Units 3 & 4 is through 2042.
Increased risks of regulatory penalties could negatively impact our business.
We must comply with established reliability standards and requirements including Critical Infrastructure Protection Reliability Standards, which apply to NERC functions. NERC reliability standards protect the nations’ bulk power system against potential disruptions from cyber and physical security breaches. The FERC, NERC, or a regional reliability organization may assess penalties against any responsible entity that violates their rules, regulations or standards. Penalties for the most severe violations can reach nearly $1.2 million per violation, per day. If a serious reliability incident or other incidence of noncompliance did occur, it could have a material adverse effect on our operating and financial results.
Additionally, the Pipeline and Hazardous Materials Safety Administration, Occupational Safety and Health Administration and other federal or state agencies have penalty authority. In the event of serious incidents, these agencies have become more active in pursuing penalties. Some states have the authority to impose substantial penalties. If a serious reliability or safety incident did occur, it could have a material effect on our results of operations, financial condition or cash flows.
Federally mandated purchases of power from QFs, and integration of power generated from those projects in our system, may increase costs to our customers and decrease system reliability, limit our ability to make generation investments and adversely affect our business.
We are generally obligated under federal law to purchase power from certain QF projects, regardless of current load demand, availability of lower cost generation resources, transmission availability or market prices. Although some of these resources include a battery component, they are primarily intermittent generation whose prices may be in excess of market prices during times of lower customer demand, and may not be able to generate electricity during peak times. These resources typically do not meet the requirements set forth in our supply plans for resource procurement. These requirements to purchase supply that is inconsistent with customer need may have multiple impacts, including increasing the likelihood and frequency that we will be required to reduce output from owned generation resources, negatively impacting our ability to make our own generation investments and increasing the likelihood that we will need to upgrade or build additional transmission facilities to serve QF projects. Any of these results would increase costs to customers and impact our investment plan. Further, balancing load and power generation on our system is challenging, and we expect that operational costs will increase as a result of integration of these intermittent, non-dispatchable generation projects. If we are to timely recover those costs, those increased costs may affect our liquidity, results of operations and financial condition.
In addition, requirements to procure power from these sources could impact our ability to make generation investments depending upon the number and size of QF contracts we ultimately enter into. The cost to procure power from these QFs may not be a cost effective resource for customers, or the type of generation resource needed, resulting in increased supply costs that are inconsistent with resource plans developed based on a lowest cost and least risk basis while placing upward pressure on overall customer bills. This may impact our investment plans and financial condition. Finally, the requirement to procure power from these QF sources may impact our transmission system and require additional transmission facilities to be developed in order to integrate these resources, which also can impact overall customer bills.
Operational Risks
Our electric and natural gas operations involve numerous activities that may result in accidents, fires, system outages and other operating risks and costs that are unique to our industry.
Inherent in our electric transmission and distribution and natural gas transmission and distribution operations are a variety of hazards and operating risks, such as breakdown or failure of equipment or processes, interruptions in fuel supply, supply chain interruptions, labor disputes, operator error, and catastrophic events such as fires, electric contacts, leaks, explosions, floods and intentional acts of destruction. For our natural gas lines located near populated areas, including residential areas, commercial business centers, industrial sites and other public gathering areas, the level of potential damages resulting from these risks could be significant. These risks could cause a loss of human life, facility shutdown or significant damage to property, service , of customer load, environmental pollution, of our operations, and substantial financial to us and others.
Fire risk is significant in the western United States, including in our service territory. Various factors in recent years have contributed to increasing fire risk including dead and dying trees, warmer air temperatures, drought, wind, forest management practices, and land management practices. These factors increase the risk of a fire in both forests and grasslands. In forested areas, this issue has been heightened by mountain pine beetle and other infestations weakening and killing trees in our service territory. Residential and commercial development into the wildland-urban interface has also led to an increasing trend in the degree of destruction from wildfires.
Fires alleged to have been caused by our equipment potentially expose us to significant penalties and/or damage awards based on claims of strict liability, negligence, gross negligence, inverse condemnation, nuisance, trespass and others. Our equipment has been alleged to be involved in igniting wildfires although none have had a material adverse effect on our financial condition or results of operations.
For our electric generating facilities, operational risks include facility shutdowns due to breakdown or failure of equipment or processes, interruptions in fuel supply, labor disputes, operator error, catastrophic events such as fires, explosions, floods, and intentional acts of destruction or other similar occurrences affecting the electric generating facilities; and operational changes necessitated by environmental legislation, litigation or regulation. The loss of a major electric generating facility would require us to find other sources of supply or ancillary services, if available, and expose us to higher purchased power costs and potential litigation which may not be recovered from customers.
We maintain insurance against some, but not all, of these risks and losses. The occurrence of any of these events not fully covered by insurance could have a material adverse effect on our financial position and results of operations.
Additionally, during peak-load periods our electric and natural gas systems in Montana are constrained. These constraints limit our ability to transmit electric energy within Montana and access electric energy from outside the service area. Our electric transmission facilities are also interconnected with those of third parties, and thus operation of these facilities could be adversely affected by unexpected or uncontrollable events. Our natural gas system is also constrained, which limits our on-system deliverability and the ability to transport gas. We are similarly exposed to risk of interconnection with third-party pipelines and are dependent upon their operation to serve customers. These transmission constraints and events could result in failure to provide reliable service to customers due to the inability to deliver energy supply resources, or could result in significant cost increases due to the inability to access lower cost sources of energy supply.
Our electric and natural gas portfolios rely significantly on market purchases. This exposure adversely affects our ability to manage our operational requirements to reliably serve our customers, while exposing us to market volatility, which ultimately could adversely affect our results of operations and liquidity.
We are obligated to supply power to retail customers and certain wholesale customers and procure natural gas to supply fuel for our natural gas fired generation. Our need to acquire flexible energy supply and capacity in the market to meet our electric and natural gas load serving obligations exposes us to certain risks including the ability to reliably serve customers and significant uncertainty in the cost of supply, which may not be recoverable. We rely upon a combination of base-load supply from our owned and long-term contracted generation and market purchases to serve customers. During peak periods, power demand could exceed, and has exceeded, the available capacity of our owned and long-term contracted generation capacity, requiring us to purchase capacity and energy from the market. In the past, we have relied upon both in-state and out-of-state power purchase agreements for grid reliability and to physically serve customers. A significant number of base-load generation facilities, which may also serve to meet peak requirements, in the state and region have been retired or are scheduled to be retired in the next five to ten years.
This includes Colstrip Units 1 and 2, representing 614 MWs of generation on a capacity basis, which ceased operations in January 2020. A decrease in the state and region’s electric capacity, whether for operational reasons or litigation outcomes, may impair the reliability of the grid, particularly during peak demand periods. There can be no assurance that there will be available counterparties to contract with to serve our customers' needs, or that these counterparties will fulfill their obligations to us. There is also no assurance that the transmission capacity required to import market purchases will be available on transmission systems owned by us or by third parties. In addition, the suppliers under these agreements may experience financial or operational problems that inhibit their ability to fulfill their obligations to us. These conditions could result in an inability to physically deliver electricity to our customers. Losing electric service during extreme conditions carries significant consequences, as without our services our customers may be subjected to dire circumstances.
Commodity pricing is an inherent risk component of our business operations and our financial results. Even though rate regulation is premised on full recovery of prudently incurred costs and a reasonable rate of return on invested capital, there can be no assurance that our costs are recoverable, as discussed above. The prevailing market prices for electricity may fluctuate substantially over relatively short periods of time, potentially adversely impacting our results of operations, financial condition and cash flows due to our need for market purchases and the sharing component of the Montana PCCAM. During recent periods, we have had a significant under-collection of these costs impacting our results of operations and cash flows. As described more fully below in Note 5 - Regulatory Matters to the Consolidated Financial Statements included herein, while the MPSC has suspended the sharing component of the Montana PCCAM beginning on February 1, 2026, pending further review, there can be no assurances that a final order will be issued eliminating this sharing component.
In addition, our natural gas system serves both retail customers and the needs of natural gas fired electric generation. The natural gas system has capacity constraints that expose us to risks to be able to deliver natural gas during periods of peak demand.
Fluctuations in actual weather conditions, generation availability, transmission constraints, and generation reserve margins may all have an impact on market prices for energy and capacity and the electricity consumption of our customers on a given day. Extreme weather conditions may force us to purchase electricity in the short-term market on days when weather is unexpectedly severe, and the pricing for market energy may be significantly higher on such days than the cost of electricity in our existing generation and contracts. Unusually mild weather conditions could leave us with excess power which may be sold in the market at a loss if the market price is lower than the cost of electricity in our existing contracts.
Weather and weather patterns, including normal seasonal and quarterly fluctuations of weather, as well as extreme weather events, could adversely affect our ability to manage our operational requirements to serve our customers, and ultimately adversely affect our results of operations and liquidity.
Our electric and natural gas utility business is seasonal, and weather patterns can have a material impact on our financial performance. Demand for electricity and natural gas is often greater in the summer and winter months associated with cooling and heating. Because natural gas is heavily used for residential and commercial heating, the demand for this product depends heavily upon weather patterns throughout our market areas, and a significant amount of natural gas revenues are recognized in the first and fourth quarters related to the heating season. Accordingly, our operations have historically generated less revenue and income when weather conditions are milder in the winter and cooler in the summer. Unusually mild winters or cool summers could adversely affect our results of operations and financial position. In addition, exceptionally hot summer weather or unusually cold winter weather could add significantly to working capital needs to fund higher than normal supply purchases to meet customer demand for electricity and natural gas. Our sensitivity to weather volatility is significant due to the absence of regulatory mechanisms, such as those authorizing revenue decoupling, lost margin recovery, and other innovative rate designs.
Severe weather impacts, including but not limited to, blizzards, thunderstorms, high winds, microbursts, floods, fires, tornadoes and snow or ice storms can disrupt energy generation, transmission and distribution. We derive a significant portion of our energy supply from hydroelectric facilities, and the availability of water can significantly affect operations. Higher temperatures may decrease the Montana snowpack and impact the timing of run-off and may require us to purchase replacement power. Dry conditions, which exist in the West and in our service territory, also increase the threat of fires, which could threaten our communities and electric distribution and transmission lines and facilities. In addition, fires that are alleged to have been caused by our system could expose us to substantial property damage and other claims. Any damage caused as a result of fires could negatively impact our financial condition, results of operations or cash flows.
Extreme weather conditions, especially those of prolonged duration, create high energy demand on our own and/or other systems and increase the risk we may be unable to reliably serve customers, causing brownouts and/or blackouts of our electric systems, and loss of gas supply. Risk of losing electricity or gas supply during extreme weather carries significant consequences as without our services our customers may be subjected to dire circumstances. Additionally, extreme weather conditions may raise market prices as we buy short-term energy to serve our own system. To the extent the frequency of extreme weather
events increases, this could increase our cost of providing service. In addition, we may not recover all costs related to mitigating these physical and financial risks.
Our results of operations may be impacted by disruptions to fuel supply or the electric grid that are beyond our control.
We are exposed to risks related to performance of contractual obligations by our suppliers, which includes parties transporting natural gas. We are dependent on coal and natural gas for a significant portion of our electric generating capacity. We rely on suppliers to deliver coal and natural gas in accordance with short- and long-term contracts. We have certain supply and transportation contracts in place; however, there can be no assurance that the counterparties to these agreements will fulfill their obligations to supply and deliver coal and natural gas to us. For instance, there currently is litigation pending relating to adequacy of certain permits for the Rosebud Mine in Montana, which supplies coal to Colstrip and contains significant quantities of coal. In order to operate the Colstrip facility through its currently identified depreciable life of 2042, it will be necessary to identify and contract for coal supply subsequent to expiration of our current contract in 2033. Moreover, the suppliers under these agreements may experience financial or technical problems that inhibit their ability to fulfill their obligations to us. In addition, the suppliers under these agreements may not be required to supply or transport coal and natural gas to us under certain circumstances, such as in the event of a natural disaster. Deliveries may be subject to short-term interruptions or reductions due to various factors, including transportation , weather, availability of equipment and labor . or by our suppliers of coal and natural gas deliveries could our ability to deliver electricity and require us to incur additional expenses to meet the needs of our customers.
Also, because our generation and transmission systems are part of an interconnected regional grid, we face the risk of possible loss of business due to a disruption or black-out caused by an event such as a severe storm, generator or transmission facility outage on a neighboring system or the actions of a neighboring utility. Any such disruption could result in a significant decrease in revenues and significant additional costs to repair assets, which could have a material adverse impact on our financial position, results of operations and cash flows.
Our revenues, results of operations and financial condition are impacted by customer growth and usage in our service territories and may fluctuate with current economic conditions or response to price increases. We are also impacted by market conditions outside of our service territories related to demand for transmission capacity and wholesale electric pricing.
Our revenues, results of operations and financial condition are impacted by customer growth and usage, which can be impacted by a number of factors, including the voluntary reduction of consumption of electricity and natural gas by our customers in response to increases in prices and demand-side management programs, economic conditions impacting decreases in their disposable income, and the use of distributed generation resources or other emerging technologies for electricity. Advances in distributed generation technologies that produce power, including fuel cells, micro-turbines, wind turbines and solar cells, may reduce the cost of alternative methods of producing power to a level competitive with central power station electric production. Customer-owned generation itself reduces the amount of electricity purchased from utilities and may have the effect of inappropriately increasing rates generally and increasing rates for customers who do not own generation, unless retail rates are designed to collect distribution grid costs across all customers in a manner that reflects the benefit from their use. Such developments could affect the price of energy, could affect energy deliveries as customer-owned generation becomes more cost-effective, could require further improvements to our distribution systems to address changing load demands and could make portions of our electric system power supply and transmission and/or distribution facilities prior to the end of their useful lives. Such technologies could also result in further in commodity prices or demand for delivered energy.
Decreasing use per customer (driven, for example, by appliance and lighting efficiency) and the availability of cost-effective distributed generation, put downward pressure on load growth. There can be no assurance that load growth from large-load customers, such as data centers, will be realized. Reductions in usage, attributable to various factors could materially affect our results of operations, financial position, and cash flows through, among other things, reduced operating revenues, increased operating and maintenance expenses, and increased capital expenditures, as well as potential asset impairment charges or accelerated depreciation and decommissioning expenses over shortened remaining asset useful lives.
Demand for our Montana transmission capacity fluctuates with regional demand, fuel prices and weather related conditions. The levels of wholesale sales depend on the wholesale market price, market participants, transmission availability, the availability of generation, and the ongoing development of the Western EIM, among other factors. Declines in wholesale market price, availability of generation, transmission constraints in the wholesale markets, or low wholesale demand could reduce wholesale sales. These events could adversely affect our results of operations, financial position and cash flows.
Cyber and physical attacks, threats of terrorism and catastrophic events that could result from terrorism, or individuals and/or groups attempting to disrupt our business, or the businesses of third parties, may affect our operations in unpredictable ways and could adversely affect our liquidity and results of operations. Failure to maintain the security of personally identifiable information could adversely affect us.
Business Operations - We are subject to the potentially adverse operating and financial effects of terrorist acts and threats, as well as cyber attacks, physical security breaches and other disruptive activities of individuals or groups, and theft of our critical infrastructure information. Our generation, transmission and distribution facilities are deemed critical infrastructure and provide the framework for our service infrastructure. Cyber crime, which includes the use of malware, phishing attempts, computer viruses, and other means for disruption or unauthorized access has increased in frequency, scope, and potential impact in recent years. The advancement of artificial intelligence and large language models has given rise to additional vulnerabilities and potential entry points for cyber crime. Our assets and the information technology systems on which they depend are direct targets of, or are indirectly affected by, cyber attacks and other activities, including those that impact third party facilities that are interconnected to us. Any significant of these assets or systems could prevent us from fulfilling our business functions including delivering energy to our customers, and sensitive, confidential and other data could be compromised.
Security threats continue to evolve and transform. T he risk of cyber-based attacks is heightened due to recent geopolitical events as well as employees working and accessing our technology infrastructure remotely. We and our third-party vendors have been subject to, and will likely continue to be subject to, attempts to gain unauthorized access to systems, to confidential data, or to disrupt operatio ns. With the continuing rise in ransomware and other cyber-based threats we continuously analyze our technology platforms and monitoring for signs of potential intrusions. There is also a risk of exposure of confidential or proprietary data through the inadvertent use of open artificial intelligence tools. We periodically engage with our vendors, suppliers and contractors to establish that they are taking appropriate measures. None of these attempts has individually or in the aggregate resulted in a security incident with a material impact on our financial condition or results of operations. However, despite implementation of security and control measures, there can be no as surance that we will be able to prevent the access of our systems and data, or the of our operations, either of which could have a material impact.
These events, and governmental actions in response, could result in a material decrease in revenues and significant additional costs to repair and insure assets, and could adversely affect our operations by contributing to the disruption of supplies and markets for electricity, natural gas, oil and other fuels. These events could also impair our ability to raise capital by contributing to financial instability and reduced economic activity.
Personally Identifiable Information - Our information systems and those of our third-party vendors contain confidential information, including information about customers and employee s. Customers, shareholders, and employees expect that we will adequately protect their personal information. The regulatory environment surrounding information security and privacy is increasingly demanding. A data breach invol ving theft, improper disclosure, or other unauthorized access to or acquisition of confidential information could subject us to penalties for violation of applicable privacy laws, claims by third parties, and enforcement actions by government agencies. It could also reduce the value of proprietary information, and harm our reputation.
We maintain insurance against some, but not all, of these risks and losses. The occurrence of any of these events not fully covered by insurance could have a material adverse effect on our financial position and results of operations.
We may have difficulty cost-effectively completing certain operations activities and construction projects due to inflationary pressures or if our third-party business partners are unable to deliver ordered supplies or complete contracted services timely, including workforce shortages or macro supply chain disruptions.
We place significant reliance on our third-party business partners to supply materials, equipment and labor necessary for us to operate our utility and reliably serve current customers and future customers. As a result of current macroeconomic conditions, both nationally and globally, we have recently experienced issues with our supply chain for materials and components used in our operations and capital project construction activities. Issues include higher prices, potential tariffs on imported products, scarcities/shortages, longer fulfillment times for orders from our suppliers, workforce availability, and wage increases.
Should these economic conditions and issues continue, we could have difficulty completing the operational activities necessary to serve our customers safely and reliably, and/or achieving our capital investment program, which ultimately could result in higher customer utility rates, longer outages, and could have a material adverse impact on our business, financial condition and operations.
Failure to attract and retain an appropriately qualified workforce could affect our operations.
We require skilled labor to perform specialized utility functions. Turnover of key employees without appropriate replacements may lead to operating challenges and increased costs. Some of the challenges include lack of resources, loss of knowledge, and time required for replacement employees to develop necessary skills. Wage inflation nationally and increased competitive labor markets may make it difficult to attract employees. Failure to identify qualified replacement employees could result in decreased productivity and increased safety costs. If we are unable to attract and retain an appropriately qualified workforce, our operations could be negatively affected. We are also subject to multiple collective bargaining agreements. Future negotiation of these collective bargaining agreements could lead to work stoppages or other disruptions to our operations, which could adversely affect our financial condition and results of operations.
Liquidity and Financial Risks
We may be unable to obtain insurance coverage, and the coverage we currently have may not apply or may be insufficient to cover a significant loss.
Our ability to obtain insurance, as well as the cost of such insurance, could be impacted by developments affecting the insurance industry and the financial condition of insurers. Additionally, insurance providers could deny coverage or decline to extend coverage under the same or similar terms that are presently available to us. A loss for which we are not adequately insured could materially affect our financial results. The coverage we currently have in place may not apply to a particular loss, or it may not be sufficient to cover all liabilities to which we may be subject, including liability and losses associated with wildfires, natural gas and storage field explosions, cyber-security breaches, environmental hazards and natural disasters.
Our plans for future expansion through the acquisition of assets, capital improvements to existing assets, generation investments, and transmission grid expansion involve substantial risks.
Our business strategy includes significant investment in capital improvements and additions to modernize existing infrastructure, generation investments and transmission capacity expansion. The completion of generation and natural gas investments and transmission projects are subject to many construction and development risks, including, but not limited to, risks related to permitting, financing, regulatory recovery, escalating costs of materials and labor, meeting construction budgets and schedules, and environmental compliance. In addition, these capital projects may require a significant amount of capital expenditures. We cannot provide certainty that adequate external financing will be available to support such projects. Additionally, borrowings incurred to finance construction may adversely impact our leverage, which could increase our cost of capital.
Acquisitions include a number of risks, including but not limited to, regulatory approval, regulatory conditions, additional costs, the assumption of material liabilities, the diversion of our attention from daily operations to the integration of the acquisition, difficulties in assimilation and retention of employees, and securing adequate capital to support the transaction. The regulatory process in which rates are determined may not result in rates that produce full recovery of our investments, or a reasonable rate of return. Uncertainties also exist in assessing the value, risks, profitability, and liabilities associated with certain businesses or assets and there is a possibility that anticipated operating and financial synergies expected to result from an acquisition do not develop. The failure to successfully integrate future acquisitions that we may choose to undertake could have an adverse effect on our financial condition and results of operations.
Access to capital markets is critical to our operations and our capital structure. Increasing interest rates could have a material negative impact on our financial condition.
We have significant capital requirements that we expect to fund, in part, by accessing capital markets. As such, the state of financial markets and credit availability in the global, U.S. and regional economies impacts our financial condition. We could experience increased borrowing costs or limited access to capital on reasonable terms. We access long-term capital markets to finance capital expenditures, repay maturing long-term debt and obtain additional working capital from time-to-time. For example, we have $105 million of secured long-term debt and $150 million of short-term borrowings maturing in 2026. Our ability to access capital on reasonable terms is subject to numerous factors and market conditions, many of which are beyond our control. If we are unable to obtain capital on reasonable terms, it may limit or prohibit our ability to finance capital expenditures and repay maturing long-term debt. Our liquidity needs could exceed our short-term credit availability and lead to defaults on various financing arrangements. We would also likely be prohibited from paying dividends on our common stock.
We are subject to financial risks associated with the transition to a lower carbon economy.
The risks related to our transition to a lower-carbon economy, creates financial risk. Transition risks represent those risks related to the social and economic changes needed to shift toward a lower carbon future. These risks are often interconnected, representing policy and regulatory changes, technology and market risks, and risks to our reputation and financial performance.
Potential regulation associated with climate change legislation could pose financial risks to us. Although the U.S. is no longer a party to the United Nations' "Paris Agreement" on climate change, other potential legislation and regulation discussed above, could result in enforceable GHG emission reduction requirements that could lead to increased compliance costs for us.
As we expand our energy generation asset mix, the ability to integrate renewable technologies into our operations and maintain reliability and affordability is a risk. The intermittency of renewables remains a critical challenge particularly as cost-
efficient energy storage is still in development. Other technology risks include the need for significant upfront financial investments, lengthy development timelines, and the uncertainty of integration and scalability across our entire service territory.
There are also increasing risks for energy companies from shareholders currently invested in fossil-fuel energy companies concerned about the potential effects of climate change who may elect in the future to shift some or all of their investments into entities that emit lower levels of GHG emissions or into non-energy related sectors. Institutional investors and lenders who provide financing to fossil-fuel energy companies also have become more attentive to sustainable investing and lending practices and some of them may elect not to provide funding for fossil fuel energy companies. To the extent financial markets view climate change and GHG emissions as a financial risk, this could negatively affect our ability to access capital markets or cause us to receive less than ideal terms and conditions.
We may be subject to financial risks from private party litigation relating to GHG emissions. Defense costs associated with such litigation can be significant and an adverse outcome could require substantial capital expenditures and could possibly require payment of substantial penalties or damages. Such payments or expenditures could affect results of operations, financial condition or cash flows if such costs are not recovered through regulated rates.
We must meet certain credit quality standards. If we are unable to maintain investment grade credit ratings, our liquidity, access to capital and operations could be materially adversely affected.
A downgrade of our credit ratings to less than investment grade could adversely affect our liquidity. We continue to maintain our investment grade credit ratings. Certain of our credit agreements and other credit arrangements with counterparties require us to provide collateral in the form of letters of credit or cash to support our obligations if we fall below investment grade. Also, a downgrade below investment grade could hinder our ability to raise capital on favorable terms and would increase our borrowing costs. Higher interest rates on borrowings with variable interest rates could also have an adverse effect on our results of operations.
Our obligation to include a minimum annual quantity of power in our Montana electric supply portfolio at an agreed upon price per MWH could expose us to material commodity price risk if certain QFs under contract with us do not perform during a time of high commodity prices, as we are required to make up the difference.
As part of a stipulation in 2002 with the MPSC and other parties, we agreed to include a minimum annual quantity of power in our Montana electric supply portfolio at an agreed upon price per MWH through June 2029. This obligation is reflected in the electric QF liability, which reflects the unrecoverable costs associated with these specific QF contracts per the stipulation. The annual minimum energy requirement is achievable under normal operations of these facilities, including normal periods of planned and forced outages. However, to the extent the supplied power for any year does not reach the minimum quantity set forth in the settlement, we are obligated to purchase the difference from other sources. The anticipated source for any shortfall is the wholesale market, which would subject us to commodity price risk if the cost of replacement power is higher than contracted rates. To the extent the cost of replacement power is higher than contracted rates, our results of operations, cash flows and financial position could be adversely affected.
Changes in tax law may significantly impact our business.
We are subject to taxation by the various taxing authorities at the federal, state and local levels where we operate. Similar to the Tax Cuts and Jobs Act, sweeping legislation or regulation could be enacted by any of these governmental authorities which may affect our tax burden. Changes may include numerous provisions that affect businesses, including changes to corporate tax rates, business-related exclusions, and deductions and credits. The outcome of regulatory proceedings regarding the extent to which a change in corporate tax rate will affect our utility customers and the time period over which that change will occur could significantly impact future earnings and cash flows. Separately, a challenge by a taxing authority, changes in taxing authorities’ administrative interpretations, decisions, policies and positions, our ability to utilize tax benefits such as carryforwards or tax credits, or a deviation from other tax-related assumptions may cause actual financial results to deviate from previous estimates and therefore may impact our results of operations, cash flows and financial position.
We are subject to counterparty credit risk.
We enter into transactions to buy and sell power, natural gas, and transmission service. We could recognize financial losses as a result of volatility in the market value of these contracts or if a counterparty fails to perform. Certain of these contracts may result in the receipt of, or posting of, collateral with counterparties. Fluctuations in commodity prices that lead to the posting of collateral with counterparties negatively impact liquidity, and downgrades in our credit ratings may lead to additional collateral posting requirements.
We are a participant in the energy markets, including the EIM, and engage in direct and indirect power purchase and sale transactions in connection with that participation. The EIM has collateral posting requirements based on established credit criteria, but there is no assurance the collateral will be sufficient to cover obligations that counterparties may owe each other in the EIM and any such credit losses could be socialized to all EIM participants, including us. A significant failure of a participant in the EIM to make payments when due on its obligations could have a ripple effect on various of our counterparties in the power and gas markets if those counterparties experience ancillary liquidity issues, and could generally result in a decline in the ability of our counterparties to perform on their obligations.
We also extend credit to our customers in the ordinary course of business in each of our operating segments. Our customers' ability to pay depends on a variety of factors including macroeconomic conditions, local economic conditions, including unemployment rates, and industry conditions in which our commercial and industrial customers operate. Increased customer delinquencies and bad debts could adversely impact our operating results and liquidity.
Poor investment performance of plan assets of our defined benefit pension and postretirement benefit plans, in addition to other factors impacting these costs, could unfavorably impact our results of operations and liquidity.
Our costs for providing defined benefit retirement and postretirement benefit plans are dependent upon a number of factors. Assumptions related to future costs, return on investments and interest rates have a significant impact on our funding requirements related to these plans. These estimates and assumptions may change based on economic conditions, actual stock market performance and changes in governmental regulations. Without sustained growth in the plan assets over time and depending upon interest rate changes as well as other factors noted above, the costs of such plans reflected in our results of operations and financial position and cash funding obligations may change significantly from projections.
We have a holding company structure and rely on cash from our subsidiaries to pay dividends.
As a holding company, our primary assets are our investments in our subsidiaries, NW Corp and NWE Public Service. Substantially all operations are conducted by NW Corp (and its subsidiaries) and NWE Public Service. We depend on earnings, cash flows and dividends from our subsidiaries to pay dividends on our common stock. Regulatory, contractual and legal limitations, as well as subsidiary capital requirements, affect the ability of a subsidiary to pay dividends up to the parent entity and thereby could restrict or influence our ability or decision to pay dividends on our common stock, which could adversely affect our stock price.
Risks Related to the Merger
Because the exchange ratio is fixed and because the market prices of NorthWestern Common Stock and Black Hills Common Stock will fluctuate, NorthWestern shareholders cannot be certain of the market value of the Merger consideration they will receive in the Merger or the difference between the market value of the Merger consideration they will receive in the Merger and the market value of NorthWestern Common Stock immediately prior to the Merger.
The exchange ratio in the Merger is fixed and will not be adjusted in the event of any change in the stock prices of NorthWestern or Black Hills prior to the Merger. There may be a significant amount of time between the dates when the shareholders of NorthWestern or Black Hills vote on the Merger Agreement at the special meeting of each company and the date when the Merger is completed. The absolute and relative prices of shares of NorthWestern Common Stock and Black Hills Common Stock may vary significantly between the date the Merger Agreement, the date hereof, the date of the meetings and the date of the completion of the Merger. These variations may be caused by, among other things, changes in the businesses, operations, results or prospects of NorthWestern or Black Hills, market expectations of the likelihood that the Merger will be completed and the timing of completion, the prospects of post-merger operations, general market and economic conditions and other factors. In addition, it is impossible to predict accurately the market price of the Black Hills Common Stock to be received by NorthWestern shareholders after the completion of the Merger. Accordingly, the prices of NorthWestern Common Stock and Black Hills Common Stock on the date hereof and on the date of the meetings may not be indicative of their prices immediately prior to completion of the Merger and the price of the combined company common stock after the Merger is completed.
The ability of NorthWestern and Black Hills to complete the Merger is subject to various closing conditions, including the receipt of approval of NorthWestern and Black Hills stockholders and the receipt of consents and approvals from various governmental authorities, which may impose conditions that could adversely affect NorthWestern or Black Hills or cause the Merger to be abandoned. Failure to complete the Merger, or significant delays in completing the Merger, could negatively affect the trading price of NorthWestern common stock or other securities and the future business and financial results of NorthWestern.
To complete the Merger, NorthWestern and Black Hills stockholders must vote to approve a number of proposals related to the Merger and the Merger Agreement. Further, the Merger is subject to the satisfaction or waiver of certain closing conditions, including, (1) subject to certain conditions, the receipt of certain regulatory approvals, including expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act (the HSR Act), and approval from the FERC and certain state regulatory commissions, in each case on such terms and conditions that would not result in a material adverse effect on the combined company; (2) the absence of any court order or regulatory injunction prohibiting completion of the Merger; (3) the authorization for listing of shares of Black Hills Common Stock to be issued in connection with the Merger on the New York Stock Exchange (NYSE) or other mutually-agreed stock exchange; (4) subject to specified materiality standards, the accuracy of the representations and warranties of each party; (5) compliance by each party in all material respects with its covenants under the Merger Agreement; (6) the of a material effect on each party; and (7) receipt by each party of an opinion relating to the anticipated tax-free treatment of the Merger. If the foregoing conditions are not or waived, one or both of NorthWestern or Black Hills would not be required to complete the Merger.
NorthWestern and Black Hills have not yet obtained stockholder approval or all of the regulatory consents and approvals required to complete the Merger. Governmental or regulatory agencies could seek to block or challenge the Merger or could impose restrictions they deem necessary or desirable in the public interest as a condition to approving the Merger. NorthWestern and Black Hills will be unable to complete the Merger until the waiting period under the HSR Act has expired or been terminated and the required governmental approvals have been received. Regulatory authorities may impose certain requirements or obligations as conditions for their approval. The Merger Agreement may require NorthWestern and/or Black Hills to accept conditions from these regulators that could adversely impact the combined company. If the required governmental approvals are not received, or they are not received on terms that satisfy the conditions set forth in the Merger Agreement, then neither NorthWestern nor Black Hills will be obligated to complete the Merger.
There can be no assurance that a challenge to the Merger on antitrust grounds will not be made or, if such a challenge is made, of the result of such challenge. Additionally, even after the statutory waiting period under the antitrust laws and even after completion of the Merger, governmental authorities could seek to block or challenge the Merger as they deem necessary or desirable in the public interest. In addition, in some jurisdictions, a private party could initiate an action under the antitrust laws challenging or seeking to enjoin the Merger, before or after it is completed. NorthWestern or Black Hills may not prevail and may incur significant costs in defending or settling any action under the antitrust laws.
The special meetings at which the NorthWestern stockholders and the Black Hills stockholders will vote on the transactions contemplated by the Merger Agreement may take place before all regulatory approvals have been obtained and, in cases where they have not been obtained, before the terms of any conditions to obtain such regulatory approvals that may be imposed are known. As a result, if stockholder approval of the transactions contemplated by the Merger Agreement is obtained at such meetings, NorthWestern may make decisions after the meetings to waive a condition or approve certain actions required to obtain the necessary approvals without seeking further stockholder approval. Such actions could have an adverse effect on the combined company.
If NorthWestern and Black Hills are unable to complete the Merger, or there is a significant delay in completing the Merger, NorthWestern would be subject to a number of risks, including the following:
• NorthWestern would not realize the anticipated benefits of the Merger, including, among other things, increased operating efficiencies and future cost savings;
• the attention of management of NorthWestern may have been diverted to the Merger rather than to its own operations and the pursuit of other opportunities that could have been beneficial to NorthWestern;
• the potential loss of key personnel during the pendency of the Merger as employees may experience uncertainty about their future roles with the combined company;
• NorthWestern will have been subject to certain restrictions on the conduct of its business, which may prevent NorthWestern from making certain acquisitions or dispositions or pursuing certain business opportunities while the Merger is pending;
• the trading price of NorthWestern Common Stock or other securities may decline to the extent that the current market prices reflect a market assumption that the Merger will be completed; and
• the parties may be liable for damages to one another, or have to pay a termination fee, under the Merger Agreement.
NorthWestern can provide no assurance that the various closing conditions will be satisfied and that the required governmental approvals and other approvals will be obtained, or that any required conditions will not materially adversely affect the combined company following the Merger. In addition, NorthWestern can provide no assurance that these conditions will not result in the abandonment or delay of the Merger. The occurrence of any of these events individually or in combination could have a material adverse effect on NorthWestern's results of operations and the trading price of NorthWestern's Common Stock or other securities.
The Merger Agreement contains provisions that limit NorthWestern's ability to pursue alternatives to the Merger, could discourage a potential acquirer of NorthWestern from making a favorable alternative transaction proposal and, in certain circumstances, could require NorthWestern to pay a termination fee to Black Hills.
Under the Merger Agreement, NorthWestern and Black Hills have agreed, subject to certain exceptions with respect to unsolicited proposals, not to directly or indirectly solicit competing acquisition proposals or to enter into discussions concerning, or provide confidential information in connection with, any unsolicited alternative acquisition proposals. Additionally, the NorthWestern board of directors and the Black Hills board of directors are each required to recommend the approval of the applicable transaction-related proposals to its respective stockholders, subject to certain exceptions. Prior to the approval of the transaction-related proposals by their respective stockholders, the NorthWestern board of directors or the Black Hills board of directors may change its recommendation in response to an unsolicited proposal for an alternative transaction, if such board of directors determines in good faith after consultation with its outside legal counsel and financial advisor that the proposal constitutes or would reasonably be expected to lead to a “Superior Black Hills Proposal” or “Superior NorthWestern Proposal”, as applicable (as such terms are defined in the Merger Agreement), and that failure to take such action would be inconsistent with their fiduciary duties under applicable law to the applicable company and its stockholders under applicable law, subject to complying with certain procedures set forth in the Merger Agreement. Prior to the approval of the transaction-related proposals by their respective stockholders, the NorthWestern board of directors and the Black Hills board of directors may also change its recommendation upon the occurrence of a “Black Hills Intervening Event” or “NorthWestern Intervening Event”, as applicable (as such terms are defined in the Merger Agreement), and such board of directors determines in faith after consultation with its outside legal counsel and financial advisor that to change its recommendation would be with its fiduciary duties under applicable law, subject to complying with certain procedures set forth in the Merger Agreement. The Merger Agreement is subject to a “-the-vote” provision, which means neither NorthWestern nor Black Hills would have an independent right to the Merger Agreement to accept a proposal. These provisions could a third party that may have an interest in acquiring all or a significant part of NorthWestern from considering or proposing that acquisition, even if such third party were prepared to pay consideration with a higher market value than the market value proposed to be received or realized in the Merger, or might result in a potential acquirer proposing to pay a lower price than it would otherwise have proposed to pay. As a result of these restrictions, NorthWestern may not be to enter into
an agreement with respect to a more favorable alternative transaction, or may be able to do so only by incurring potentially significant liability to Black Hills.
The Merger Agreement contains certain customary termination rights for each of NorthWestern and Black Hills; provided, that, either party would be required to pay to the other a termination fee equal to $100 million upon termination of the Merger Agreement in certain circumstances involving (i) a change in recommendation by such party’s board of directors (including, in certain circumstances, the failure of such party to publicly reaffirm its recommendation upon request) or (ii) a party entering into a definitive agreement in respect of a competing transaction within twelve months of termination of the Merger Agreement in certain circumstances involving a potential competing acquisition proposal.
NorthWestern is subject to risk of the Merger having adverse impact on its credit rating while the Merger is pending.
NorthWestern cannot be assured that its credit ratings will not be lowered as a result of the Merger or for any other reason, including the failure to consummate the Merger. Any reduction in NorthWestern's credit ratings, or the criteria used by rating agencies to determine such ratings, could adversely affect its ability to complete the Merger, its access to capital, its cost of capital and its other operating costs, and its ability to refinance or repay NorthWestern's existing debt and complete new financings, which could have a material adverse effect on NorthWestern's business, financial condition, results of operations or the trading price of its common stock or other securities.
The market prices of NorthWestern Common Stock and other securities may be subject to fluctuation while the Merger is pending.
The market price of NorthWestern Common Stock and other securities may fluctuate significantly while the Merger is pending, and any adverse developments related to the Merger or otherwise could result in holders of NorthWestern Common Stock or other securities losing some or all of the value of their investment. In addition, if the stock market experiences significant price and volume fluctuations, such fluctuations could be exacerbated by the pendency of the Merger, which could adversely affect the market for, or liquidity of, NorthWestern Common Stock or other securities, regardless of NorthWestern's actual operating performance.
Because the Merger Agreement contemplates that Black Hills will issue shares of Black Hills Common Stock to NorthWestern’s stockholders based upon a fixed exchange ratio (subject to certain adjustments for reclassifications, stock splits, and stock dividends), developments with respect to Black Hills and its shares of common stock may affect NorthWestern Common Stock irrespective of their relevance to standalone NorthWestern and even though NorthWestern may have no control over, or knowledge of, such developments. As a result, the market price of NorthWestern Common Stock during the pendency of the Merger may not accurately reflect the value of NorthWestern absent the Merger.
NorthWestern is subject to contractual restrictions in the Merger Agreement that may hinder its operations while the Merger is pending. The corollary restrictions applicable to Black Hills may not prevent Black Hills from taking actions that are adverse to NorthWestern or its stockholders.
The Merger Agreement includes certain customary restrictions with respect to the operation of NorthWestern's and Black Hills' respective businesses between the date of the Merger Agreement and the consummation of the Merger. These restrictions may prevent NorthWestern from pursuing otherwise attractive business opportunities and making other changes to its business prior to completion of the Merger or termination of the Merger Agreement.
Despite these mutual restrictions, NorthWestern and Black Hills will continue to operate their businesses independently of one another during the pendency of the Merger. The restrictions in the Merger Agreement, which are subject to numerous exceptions, may not be adequate to prevent Black Hills from taking actions that are adverse to NorthWestern or its stockholders.
NorthWestern will incur significant transaction and other costs in connection with the Merger.
NorthWestern has incurred and expects to incur additional significant costs associated with the Merger, including transaction fees and costs of combining the operations of the two companies. Additional unanticipated costs also may be incurred in the integration of the businesses of NorthWestern and Black Hills. Any net benefit from any anticipated elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the businesses, may not be achieved in the near term or at all. Transaction costs could have a material adverse impact on the results of operations of NorthWestern, and the failure to achieve the anticipated benefits and efficiencies from the Merger, or the incurrence of additional expenses, could have a material adverse impact on the results of operations of the combined company and its ability
to pay dividends after closing. In turn, the current or future market value of NorthWestern Common Stock or other securities could be adversely impacted.
Uncertainties associated with the Merger may cause a loss of management personnel and other key employees of NorthWestern and Black Hills, which could adversely affect the future business and operations of the combined company following the Merger.
Each of NorthWestern and Black Hills depends on the experience and industry knowledge of its officers and other key employees to execute its business plans. The success of the combined company after the Merger will depend in part on its ability to retain key management personnel and other key employees. Current and prospective employees of NorthWestern and Black Hills may experience uncertainty about their roles within the combined company following the Merger or other concerns regarding the timing and completion of the Merger or the operations of the combined company following the Merger, any of which may have an adverse effect on the ability of NorthWestern and Black Hills to retain or attract key management and other key personnel. If NorthWestern or Black Hills is unable to retain personnel, including NorthWestern’s or Black Hills’ key management, who are critical to the future operations of the companies, NorthWestern and Black Hills could face disruptions in their operations, loss of existing customers, loss of key information, expertise or know-how and unanticipated additional recruitment and training costs. In addition, the of key NorthWestern and Black Hills personnel could the anticipated benefits of the Merger. No assurance can be given that the combined company, following the Merger, will be to retain or attract key management personnel and other key employees of NorthWestern and Black Hills to the same extent that NorthWestern and Black Hills have previously been to retain or attract their own employees.
The business relationships of NorthWestern and Black Hills may be subject to disruption due to uncertainty associated with the Merger, which could have a material effect on the business, financial condition, cash flows and results of operations of NorthWestern or Black Hills pending the combined company and following the Merger.
Parties with which NorthWestern or Black Hills do business may experience uncertainty associated with the Merger, including with respect to current or future business relationships with NorthWestern or Black Hills following the Merger. NorthWestern’s and Black Hills’ business relationships may be subject to disruption as customers, distributors, suppliers, vendors, landlords, joint venture participants and other third parties with whom they do business may attempt to delay or defer entering into new business relationships, negotiate changes in existing business relationships or consider entering into business relationships with parties other than NorthWestern or Black Hills following the Merger. These disruptions could have a material and adverse effect on the business, financial condition, cash flows and results of operations, of NorthWestern or Black Hills, regardless of whether the Merger is completed, as well as a material and adverse effect on the combined company’s ability to realize the expected cost savings and other benefits of the Merger. The risk, and adverse effects, of any disruption could be exacerbated by a in completion of the Merger or of the Merger Agreement.
The Merger may not be accretive to NorthWestern's or Black Hills' earnings and may cause dilution to the combined company's earnings per share, which may negatively affect the current or future market price of NorthWestern Common Stock or other securities.
Expectations that the Merger will be accretive to earnings per share are based on preliminary estimates any of which may prove to be incorrect or may change materially. NorthWestern and Black Hills may encounter additional transaction and integration-related costs other than those they currently anticipate, may fail to realize all of the benefits anticipated in the Merger or may be subject to other factors that affect preliminary estimates or the ability of either company to realize operational efficiencies. Any of these factors could cause a decrease in NorthWestern's and Black Hills' earnings per share, or negatively affect the current or future market price of NorthWestern Common Stock or other securities.
If the Merger does not qualify as a “reorganization” within the meaning of Section 368(a) of the Code, certain NorthWestern stockholders may be required to pay substantial U.S. federal, state and/or local income taxes.
The Merger is intended to qualify as a “reorganization” within the meaning of Section 368(a) of the Code, and it is a condition to each party’s obligation to complete the Merger that it receive an opinion from counsel, dated as of the closing date of the Merger, to the effect that, on the basis of facts, representations and assumptions set forth or referred to in such opinion, the Merger will qualify as a “reorganization” within the meaning of Section 368(a) of the Code. However, the foregoing opinions of counsel will each be based on, among other things, the law in effect as of the date of the opinions, certain representations made by NorthWestern and Black Hills and certain assumptions, all of which must be consistent with the state of facts existing at the time of the Merger. If there is a change in law after the date of the opinions, or if any of these representations and assumptions are, or become, inaccurate or incomplete, an opinion may be invalid, and the conclusions reached therein could be jeopardized. In addition, no ruling has been or will be sought from the U.S. Internal Revenue Service
(IRS) as to the U.S. federal income tax consequences of the Merger and the other transactions contemplated by the Merger Agreement. There can be no assurance that the IRS will not assert, or that a court will not sustain, a position contrary to the conclusion set forth in any such opinion that the Merger will qualify as a “reorganization” within the meaning of Section 368(a) of the Code.
If the Merger does not qualify as a “reorganization” within the meaning of Section 368(a) of the Code, each NorthWestern stockholder will recognize gain or loss, for U.S. federal—and applicable state and local—income tax purposes equal to the value of the Black Hills stock received in the Merger (plus any cash received in respect of fractional shares) minus the stockholder’s adjusted tax basis in the stockholder’s NorthWestern stock. Depending on the amount of gain, if any, that is recognized, a NorthWestern stockholder that is subject to U.S. federal, state, or local income taxes may incur a significant income tax liability.
NorthWestern and/or Black Hills may be subject to litigation challenging the Merger while it is pending, and an unfavorable judgment or ruling in any such lawsuits could prevent or delay the consummation of the Merger and/or result in substantial costs.
Lawsuits in connection with the Merger while it is pending may be filed against NorthWestern, Black Hills, any parties to the Merger Agreement and/or their respective directors and officers, which could prevent or delay the consummation of the Merger and/or result in additional costs to us. The ultimate resolution of any such lawsuit cannot be predicted with certainty, and an adverse ruling in any such lawsuit may cause the Merger to be delayed or not to be completed and/or result in additional costs to NorthWestern and Black Hills, which could cause NorthWestern and Black Hills not to realize some or all of the anticipated benefits of the Merger. The defense or settlement of any lawsuit that remains unresolved at the time the Merger is consummated may adversely affect the combined company’s business, financial condition, results of operations and cash flows. NorthWestern cannot currently predict the outcome of or reasonably estimate the possible loss or range of loss from any such lawsuit.
Risks Relating to the Combined Company Following Completion of the Merger
Failure to successfully combine the businesses of NorthWestern and Black Hills in the expected time frame or at all may adversely affect the future results of the combined company, and, consequently, the value of the Black Hills common stock to be received by the NorthWestern shareholders in the Merger.
The success of the Merger will depend, in part, on the ability of the combined company to realize in a timely fashion the anticipated benefits and efficiencies from combining the businesses of NorthWestern and Black Hills. The process of integration may reveal that benefits and efficiencies are less than anticipated and may result in additional expenses, all of which could reduce the anticipated benefits of the Merger.
Achieving the anticipated benefits of the Merger is subject to a number of uncertainties, including:
• whether United States federal and state public utility, antitrust and other regulatory authorities whose approval is required to complete the Merger impose conditions on the Merger, which may have an adverse effect on the combined company, including its ability to achieve the anticipated benefits of the Merger;
• the ability of the two companies to combine certain of their operations or take advantage of expected growth opportunities;
• general market and economic conditions;
• general competitive factors in the marketplace; and
• higher than expected costs required to achieve the anticipated benefits of the Merger.
Failure to achieve the anticipated benefits and efficiencies from the Merger, or the occurrence of additional expenses, could have a material adverse impact on the results of operations of the combined company and its ability to pay dividends after closing. In turn, the market value of the combined company’s common stock could be adversely impacted.
NorthWestern stockholders will have a reduced ownership and voting interest after the Merger and will exercise less influence over management.
It is currently anticipated that NorthWestern stockholders and Black Hills stockholders will hold approximately 44 percent and 56 percent, respectively, of the combined company’s common stock then-issued and outstanding after the completion of the Merger. Consequently, NorthWestern stockholders, as a group, will have reduced ownership and voting power in the combined company compared to their current ownership and voting power in NorthWestern. As a result of the reduced ownership percentages, current NorthWestern stockholders will have less influence on the management and policies of the combined company than they had with NorthWestern. Further, provisions of the Merger Agreement will result in individuals designated by Black Hills, and not previously subject to a vote of NorthWestern stockholders, holding six out of eleven positions on the combined company board of directors and there will be changes to the management of the combined company.
The market price of the combined company's Common Stock after the completion of the Merger may be affected by factors different from those that historically have affected or currently affect NorthWestern Common Stock.
Upon completion of the Merger, NorthWestern stockholders who receive Merger consideration will become holders of Black Hills Common Stock, which will trade on the NYSE or other mutually-agreeable exchange under a new name and ticker to be announced. NorthWestern's business differs from that of Black Hills and certain adjustments may be made to the combined company as a result of the Merger. The financial position of the combined company after completion of the Merger may differ from NorthWestern's financial position before the completion of the Merger, and the results of operations and/or cash flows of the combined company after the completion of the Merger may be affected by factors different from those currently affecting the financial position or results of operations and/or cash flows of NorthWestern and Black Hills, respectively. Accordingly, the market price of the combined company's common stock after the completion of the Merger may be affected by factors different from those currently affecting the market prices of NorthWestern Common Stock and Black Hills Common Stock, respectively, in the absence of the Merger. In addition, general fluctuations in stock markets could adversely affect the market for, or liquidity of, the combined company's common stock, regardless of the combined company’s actual operating performance.
The failure to integrate the businesses and operations of NorthWestern and Black Hills successfully in the expected time frame may adversely affect the combined company's future results.
NorthWestern and Black Hills have operated and, until the completion of the Merger, will continue to operate independently. Following the completion of the Merger, their respective businesses may not be integrated successfully. It is possible that the integration process could result in the loss of key NorthWestern employees or key Black Hills employees; the loss of customers, service providers, vendors or other business counterparties, the disruption of either company’s or both companies’ ongoing businesses, inconsistencies in standards, controls, procedures and policies, potential unknown liabilities and unforeseen expenses, delays, or regulatory conditions associated with and following completion of the Merger; or higher-than-expected integration costs and an overall post-completion integration process that takes longer than originally anticipated. Specifically, the following challenges, among others, must be addressed in integrating the operations of NorthWestern and Black Hills in order to realize the anticipated benefits of the Merger:
• combining the companies’ operations and corporate functions and the resulting difficulties associated with managing a larger, more complex, diversified business;
• combining the businesses of NorthWestern and Black Hills in a manner that permits the combined company to achieve the cost savings and operating synergies anticipated to result from the Merger;
• avoiding delays in connection with the completion of the Merger or the integration process;
• integrating personnel from the two companies and minimizing the loss of key employees;
• identifying and eliminating redundant functions and assets;
• harmonizing the companies’ operating practices, employee development and compensation programs, internal controls and other policies, procedures and processes;
• maintaining existing agreements with customers, service providers, vendors and other business counterparties and avoiding delays in entering into new agreements with prospective customers, service providers, vendors and other business counterparties;
• addressing possible differences in business backgrounds, corporate cultures and management philosophies;
• consolidating the companies’ operating, administrative and information technology infrastructure and financial systems; and
• establishing the combined company’s headquarters in Rapid City, South Dakota.
In addition, at times the attention of certain members of either company’s or both companies’ management and resources may be focused on completion of the Merger and the integration of the businesses of the two companies and diverted from day-to-day business operations or other opportunities that may be beneficial, which may disrupt each company’s ongoing operations and the operations of the combined company. Furthermore, following the Merger, the board of directors and executive leadership of the combined company will consist of former directors from each of NorthWestern and Black Hills and former executive officers from each of NorthWestern and Black Hills, respectively. Combining the boards of directors and management teams of each company into a single board and a single management team could require the reconciliation of differing priorities and philosophies.
Each of NorthWestern and Black Hills may have liabilities that are not known to the other party.
Each of NorthWestern and Black Hills may have liabilities that the other party failed, or was unable, to discover in the course of performing its respective due diligence investigations. NorthWestern and Black Hills may learn additional information about the other party that materially adversely affects it, such as unknown or contingent liabilities and liabilities related to compliance with applicable laws. As a result of these factors, the combined company may incur additional costs and expenses and may be forced to later write-down or write-off assets, restructure operations or incur impairment or other charges that could result in the combined company reporting losses. Even if NorthWestern's and Black Hills' respective due diligence has identified certain risks, unexpected risks may arise and previously known risks may materialize in a manner not consistent with its expectations. If any of these risks materialize, this could adversely affect the combined company’s financial condition and results of operations and could contribute to market perceptions about, or price movements of, the combined company’s common stock following the Merger.
Each of NorthWestern and Black Hills and their respective subsidiaries has substantial amounts of indebtedness. Consequently, the combined company will have substantial indebtedness following the Merger. As a result, the rating of the combined company’s indebtedness could be downgraded, and it may be difficult for the combined company to pay or refinance its debts or take other actions, and the combined company may need to divert its cash flow from operations to debt service payments.
The combined company’s debt service obligations with respect to this indebtedness could have an adverse impact on its earnings and cash flows for as long as the indebtedness is outstanding.
The combined company’s indebtedness could also have important consequences to holders of the common stock of the combined company. For example, it could:
• make it more difficult for the combined company to pay or refinance its debts as they become due during adverse economic and industry conditions because any decrease in revenues could cause the combined company to not have sufficient cash flows from operations to make its scheduled debt payments;
• require a substantial portion of the combined company’s cash flows from operations to be used for debt service payments, thereby reducing the availability of its cash flow to fund working capital, capital expenditures, acquisitions, dividend payments and other general corporate purposes;
• result in a downgrade in the rating of the combined company’s indebtedness, which could limit its ability to borrow additional funds or increase the interest rates applicable to its indebtedness;
• increase the risk of default on debt obligations of the combined company;
• limit the flexibility of the combined company in planning for or reacting to changes in its business and the industry in which it operates;
• increase the exposure of the combined company to a rise in interest rates, which would generate greater interest expense or the costs of obtaining applicable interest rate fluctuation hedges; or
• require that additional or more stringent terms, conditions or covenants be placed on the combined company.
There can be no assurance that the combined company will be able to repay or refinance such borrowings and obligations.
In addition, the Merger will result in NorthWestern becoming a wholly owned subsidiary of Black Hills. The combined company may decide to incur additional indebtedness at subsidiaries of Black Hills, which could have an effect on outstanding securities, including because such subsidiary indebtedness is “structurally senior” to the indebtedness of its parent company with respect to the assets of such subsidiary.
The combined company may fail to realize all of the anticipated benefits of the Merger.
The success of the Merger will depend, in part, on the combined company’s ability to realize the anticipated benefits and cost savings from combining Black Hills’ and NorthWestern’s businesses and operational synergies. The anticipated benefits and cost savings of the Merger may not be realized fully or at all, may take longer to realize than expected, may not be realized or could have other adverse effects that are not foreseen, in which case, among other things, the Merger may not be accretive to free cash flow and may not generate significant discretionary cash flow to return to shareholders via share buybacks or other means. Some of the assumptions that NorthWestern and Black Hills have made, such as the achievement of the anticipated benefits related to the geographic, commodity and asset diversification and the expected size, scale, inventory and financial strength of the combined company, may not be realized. The integration process may, for each of NorthWestern and Black Hills, result in the loss of key employees, the disruption of ongoing businesses or inconsistencies in standards, controls, procedures and policies. In addition, there could be potential unknown liabilities and expenses associated with the Merger that could impact the combined company.
The future results of the combined company following the Merger will suffer if the combined company does not effectively manage its expanded operations.
Following the Merger, the size, geographic footprint and complexity of the combined company will increase significantly compared to the business of each of NorthWestern and Black Hills. The combined company’s future success will depend, in part, upon its ability to manage this expanded business, which will pose substantial challenges for management, including challenges related to the management and monitoring of new operations and geographies and associated increased costs and complexity. The combined company may also face increased scrutiny from, and/or additional regulatory requirements of, governmental authorities as a result of the significant increase in the size, geographic footprint and complexity of its business. There can be no assurances that the combined company will be successful or that it will realize the expected operating efficiencies, cost savings or other benefits currently anticipated from the Merger.
There is no guarantee that the combined company will declare and pay dividends following the Merger.
Although each of NorthWestern and Black Hills has returned capital to its respective stockholders in the past, including through cash dividends on their respective shares of common stock, the board of directors of the combined company may determine not to declare dividends or use other means to return capital to its stockholders in the future or may reduce the amount, proportion or rate of capital returned to its stockholders through dividends or other means in the future. Decisions on whether, when, by what means and in what amounts to return capital to its stockholders will remain in the discretion of the board of directors of the combined company (as reconstituted following the Merger). Any dividend payment or share
repurchase amounts will be determined by the board of directors of the combined company from time to time, and it is possible that the board of directors of the combined company may increase or decrease the amount of dividends paid or shares repurchased in the future, or determine not to declare dividends and/or repurchase shares in the future, at any time and for any reason. We expect that any such decisions will depend on the combined company’s financial condition, results of operations, cash balances, cash requirements, future prospects, the outlook for commodity prices and other considerations that the board of directors of the combined company deems relevant, including, but not limited to:
• whether the combined company has enough discretionary cash flow to return capital to its stockholders due to its cash requirements, capital spending plans, cash flows or financial position;
• the combined company’s desire to maintain or improve the credit ratings on its debt; and
• applicable restrictions under South Dakota law. Stockholders should be aware that they have no contractual or other legal right to dividends that have not been declared.
The combined company is expected to record a significant amount of goodwill as a result of the Merger, and such goodwill could become impaired in the future.
Accounting standards in the United States require that one party to the Merger be identified as the acquirer. In accordance with these standards, the Merger will be accounted for as an acquisition of NorthWestern’s Common Stock by Black Hills and will follow the acquisition method of accounting for business combinations. NorthWestern's assets and liabilities will be consolidated with those of Black Hills on the combined company’s financial statements. The excess of the consideration transferred over the fair values of NorthWestern’s assets and liabilities will be recorded as goodwill.
The combined company will be required to assess goodwill for impairment at least annually. To the extent goodwill becomes impaired, the combined company may be required to incur material charges relating to such impairment. Such a potential impairment charge could have a material impact on the combined company's future operating results and statements of financial position which may, in turn, have a material adverse effect on the trading price or liquidity of the combined company's securities.
The combined company's ability to utilize NorthWestern's and/or Black Hills' historic net operating loss carryforwards and certain other tax attributes may be limited.
As of December 31, 2025, NorthWestern had U.S. federal net operating loss carryforwards (NOLs) of approximately $452.2 million, which do not expire. As of December 31, 2025, Black Hills had NOLs of approximately $380.1 million, which also do not expire. However, the NOLs of each of NorthWestern and Black Hills can only be used to offset 80% of U.S. federal taxable income. The combined company's ability to utilize these NOLs and other tax attributes to reduce future taxable income following the closing of the Merger depends on many factors, including its future income, which cannot be assured, and which will be determined after the Merger on a consolidated basis with that of NorthWestern and Black Hills. It is possible that the amount of NOLs and other tax attributes that the combined company is able to utilize in any tax period ending after the closing of the Merger may be less than the amount that NorthWestern and Black Hills together (or either of them separately) would have been able to use had the Merger not taken place.
Additionally, Section 382 of the Code (Section 382) and Section 383 of the Code generally impose an annual limitation on the amount of NOLs and certain other tax attributes that may be used to offset taxable income when a corporation has undergone an “ownership change” (as determined under Section 382). An ownership change generally occurs if one or more stockholders (or groups of stockholders) who are each deemed to own at least 5% of such corporation’s stock increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. In the event that an ownership change occurs with respect to NorthWestern and/or Black Hills, utilization of NorthWestern and/or Black Hills' NOLs would be subject to an annual limitation under Section 382, generally determined by multiplying (1) the fair market value of its stock at the time of the ownership change by (2) the long-term tax-exempt rate published by the IRS for the month in which the ownership change occurs, subject to certain adjustments. Any unused annual limitation may be carried over to later years.
The completion of the Merger may cause NorthWestern and/or Black Hills to undergo an ownership change under Section 382, which would trigger a limitation (calculated as described above) on NorthWestern's ability to utilize its and/or Black Hills' historic NOLs and other tax attributes.
Future sales or issuances of Black Hills Common Stock could have a negative impact on the Black Hills Common Stock price.
Under the terms of the Merger Agreement, NorthWestern stockholders will receive a fixed exchange ratio of 0.98 shares of Black Hills Common Stock for each share of NorthWestern Common Stock they own at the close of the Merger. Based on the 61,422,945 shares of NorthWestern Common Stock outstanding as of January 26, 2026, Northwestern stockholders would receive approximately 60,194,486 shares of Black Hills Common Stock upon the closing of the Merger. The treatment of outstanding equity awards of each of NorthWestern and Black Hills will vary depending on the type of award, its terms and conditions, and determinations made or to be made by each company or its board of directors, but additional shares, or cash in respect of share equivalents, would be issued to settle equity awards, and such shares are not reflected in the share totals included in the preceding sentence. The Black Hills Common Stock that NorthWestern stockholders will receive upon the exchange of NorthWestern Common Stock for the Merger consideration or in settlement of outstanding equity awards generally may be sold immediately in the public market. It is possible that some former NorthWestern stockholders may seek to sell some or all of the shares of Black Hills Common Stock they receive as Merger consideration, and the Merger Agreement contains no restriction on the ability of former NorthWestern stockholders to sell such shares of Black Hills Common Stock following completion of the Merger. Other Black Hills stockholders may also seek to sell shares of Black Hills Common Stock held by them following completion of the Merger. These sales or other dispositions of a significant number of shares of Black Hills Common Stock (or the perception that such sales or other dispositions may occur), coupled with the increase in the outstanding number of shares of Black Hills Common Stock as a result of the Merger (as well as any increase resulting from future issuances of Black Hills Common Stock), may affect the market for Black Hills Common Stock in an manner and may cause the price of Black Hills Common Stock to fall.
Future disclosures relating to the Merger may not align with investor expectations.
In connection with the Merger, Black Hills filed a registration statement on Form S-4, including a prospectus and joint proxy statement for the NorthWestern stockholders' meeting and the Black Hills stockholders' meeting. Information contained in such registration statement and other future disclosures relating to the Merger, which include (among other things) detailed background about the process leading the Merger, prospective financial information reviewed by the NorthWestern and Black Hills board of directors in connection with the Merger, and updated historical financial information of NorthWestern and Black Hills and pro forma financial information of the combined company, may not align with investor expectations. Such disclosures, the anticipation of such disclosures, or reactions to such disclosures could have an adverse effect on the business of NorthWestern and trading price or liquidity of NorthWestern Common Stock or other securities. Persons making investment decisions about NorthWestern securities prior to such disclosures will be required to do so without the benefit of such information and with the risk that such information may not align with their expectations or that it may have an unexpected impact on NorthWestern or the trading price or liquidity of its securities.
