Bank of America Securities: Upgrades Black Hills Corporation (BKH.US) rating to "Neutral" with potential to improve fundamentals through merger with NorthWestern (NWE.US)

Bank of America Securities published a research report, upgrading the rating of the American utility company Black Hills Corporation (BKH.US) from "underperform" to "neutral" and raising the target price from $57 to $64. Bank of America Securities believes that the strategic positioning and fundamental outlook of the merged company are expected to improve to a certain extent compared to the independent Black Hills Corporation. Previously, Black Hills Corporation and NorthWestern Energy Group (NWE.US) announced an all-stock merger transaction worth $15.4 billion. Under the agreement, NorthWestern shareholders will receive 0.98 shares of Black Hills Corporation stock for each share held. This will increase the ownership of Black Hills Corporation shareholders to 56% and NorthWestern shareholders to 44%. The merged company's board of directors will consist of 11 members, with 6 designated by Black Hills Corporation and 5 by NorthWestern. The transaction does not require the issuance of new shares to raise funds. Bank of America Securities raised the target price of Black Hills Corporation to $64 to reflect the latest price earnings ratios of the electricity and natural gas business sectors, which are now 16.1 times (up from 15.1 times) and 15.7 times (up from 15.1 times) respectively. The forecasted earnings per share for the company for the fiscal years 2025/2026/2027 remain unchanged at $4.09/$4.31/$4.56, awaiting further details on capital expenditure plans, synergies, delivery performance, and post-merger capital allocation. Management expects a 5-7% earnings per share growth post-merger, up from the previous forecast of 4-6%. The transaction is expected to be completed within 12 to 15 months, subject to approval from the U.S. Federal Energy Regulatory Commission and regulatory agencies in states such as Montana, South Dakota, and Nebraska. Bank of America Securities notes that while the transaction does not require new equity, it highlights the importance of internal financing. Management has not yet discussed dividend strategies, but the merged entity may need to reevaluate its payout ratio to utilize retained earnings to support capital expenditure.