Fitch Places NorthWestern Corp's Ratings On Rating Watch Positive
NEW YORK -- September 27, 2013
Fitch Ratings has placed the 'BBB' Issuer Default Rating (IDR) and all
outstanding long-term debt ratings of NorthWestern Corporation (NWE) on Rating
Watch Positive following the announcement of its agreement to acquire a 633 MW
hydroelectric generation portfolio from PPL Montana for $900 million. The
previous Rating Outlook for NWE was Positive. Fitch has also affirmed NWE's
short- term IDR and commercial paper ratings at 'F2'. A complete list of
ratings appears at the end of this release.
The acquisition of the hydro generation assets advances the reintegration of
the Montana utility with owned-generation. Pro-forma for the acquired hydro
assets, approximately 60% of Montana electric load would initially be produced
by owned generation assets with the balance procured through power purchase
agreements. NWE is likely to continue to add generation, however, as a large
hydro facility, the Kerr Dam included in the purchase from PPL Montana, is
itself subject to pre-existing purchase option with a third party which Fitch
expects will be executed in September 2015. In that case, the net capacity of
the purchase hydro assets is 439MW.
The acquisition would significantly expand NWE's rate base by almost 50% to
$2.9 billion and is contingent upon NWE receiving approval from the Montana
Public Service Commission (MPSC) to acquire the assets. Such approval could
take at least nine to twelve months. Other customary requisite approvals and
reviews include the Federal Energy Regulatory Commission and Hart-Scott-Rodino
Fitch believes that pro-forma for the acquisition, NWE's credit profile would
be marginally incrementally stronger than its current credit profile which is
already strong for the rating (reflected in the Positive Outlook). Resolution
of the Watch will be contingent upon MPSC approval and the terms and
conditions of any such approval. Key variables of any MPSC approval include:
--Allowed Authorized Return on Equity (ROE)
--Amount allowed into Rate Base
Fitch's concerns primarily center on the large financing required to close the
transaction. Under the proposed financing terms, NWE will need to raise the
majority of the $900 million purchase price in the capital markets in a
combination of debt and equity which could be a late third quarter 2014 or
2014 fourth quarter event. In recent months, equity and fixed income markets
have been volatile contributing to variability in Fitch's financial modeling
for the transaction. Fitch models assume a capital structure of approximately
54% debt and long term financing costs approximately 50bps above current
levels. Higher interest costs and/or lower equity valuation for NWE common
stock to be issued would reduce the attractiveness of this asset purchase.
In conjunction with the acquisition, NWE has obtained an acquisition bridge
facility which Fitch considers to be back-up liquidity in the event of capital
market instability at the time of closing.
KEY RATING DRIVERS:
--Low-risk credit profile with all cash flows derived from regulated assets;
--Strong cash flows with net operating loss (NOL) carry forwards sheltering
income at least through 2017;
--Earnings growth as investments in regulated generation and transmission
projects are completed and enter rate base;
--Moderately higher leverage reflecting divisional corporate structure as
NorthWestern does not have a parent holding company;
--Large capex budget and resultant regulatory lag until projects enter rate
Fitch projects modest customer growth driven by the strong economic
underpinnings of the three state service area, Montana, South Dakota, and
Nebraska. Pro-forma for the acquisition beginning in calendar year 2015, Fitch
projects key credit metrics, including EBITDA to Interest and FFO to Interest
each to be sustained at or above 5.0x.
The ratings may be upgraded by one notch upon consummation of the acquisition
and terms and conditions of such regulatory approval.
As the ratings are on Watch Positive, Fitch does not currently anticipate a
Fitch has placed the following ratings on Rating Watch Positive:
--Long-term IDR 'BBB'
--First Mortgage Bonds 'A-'
--Pollution Control Bonds 'A-'
Fitch has affirmed the following ratings:
Short-term IDR at 'F2'
Commercial paper at 'F2'
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research
--'Recovery ratings and Notching Criteria For Utilities' (Nov. 13, 2012);
--'Corporate Rating Methodology' (Aug. 5, 2013).
Applicable Criteria and Related Research:
Recovery Ratings and Notching Criteria for Equity REITs
Corporate Rating Methodology - Effective from 8 August 2012 - 5 August 2013
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Glen Grabelsky, +1 212-908-0577
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Shalini Mahajan, +1 212-908-0351
Michael Weaver, +1 312-368-3156
Brian Bertsch, +1 212-908-0549
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