Regulatory Climate, Valuation Turn KeyBanc Bullish On NorthWestern Corp.

Utility NorthWestern Corp NWE is likely to be a beneficiary of a potential improvement in the regulatory climate in Montana, according to KeyBanc Capital Markets.

The Analyst

Analyst Paul Ridzon upgraded shares of NorthWestern from Sector Weight to Overweight and set a $60 price target.

The Thesis

The change in the regulatory climate in Montana is forecast as the makeup of the state's public service commission looks to become more balanced after the November elections, Ridzon said in a note. 

Montana accounts for 80 percent of the utility's earnings, the analyst said. With the more outspoken Travis Kavulla's term at the PSC expiring this year, the five-member, all-Republican commission will move toward a more balanced regulatory body, the analyst said.

This is projected to improve the stock's valuation, he said. 

The PSC is contemplating refunding the money from lower customer bills as a result of tax reform, which will lead to an incremental $8 million to $12 million cost for 2017. This would be corrected in the next rate case, Ridzon said. 

A court decision regarding the tenure of energy contracts is expected by the end of the year, the analyst said, adding that a legislative solution is the best path to clarity.

"Additionally, the stock trades at a 15-percent discount to small-cap regulated peers, which we believe incorrectly reflects the upcoming changes to the Montana PSC." 

The Price Action

NorthWestern shares have shed 10.2 percent in the year-to-date period.

The stock was up 0.51 percent at the time of publication Monday morning. 

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