NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB' long-term Issuer Default Rating (IDR) of NorthWestern Corp. (NWE) and all instrument ratings as shown in the full list of ratings at the end of this release. Fitch has also maintained the Positive Rating Outlook. Approximately $1 billion of debt is affected by this action.
The rating affirmation reflects the stability of cash flows from NWE's regulated electric and gas businesses. The Positive Outlook reflects Fitch's expectations of improved earnings in 2013 following a very mild winter heating season in 2012. The outcome of several potentially significant events, including a pending decision on the Montana Natural Gas General Rate Case and NorthWestern's appeal to the Federal Energy Regulatory Commission (FERC) of an administrative law judge's decision regarding revenue allocation of the Dave Gates Generating Station, as well as the potential for new generation investments to replace power purchase agreements (PPAs) which serve a substantial portion of NorthWestern's load in Montana and expire in 2014, precludes consideration of an upgrade at this time.
Fitch expects continued modest growth as NWE's service territory in Montana, South Dakota, and Nebraska has remained relatively vibrant and NWE has experienced positive trends in customer and unit sales growth. Challenges include maintaining a balanced capital structure as capital expenditures are expected to remain elevated over the next few years with planned new generation projects, environmental upgrades, and potential new transmission projects.
KEY RATING DRIVERS:
--Low risk credit profile with all cash flows generated from regulated assets.
--Strong cash flows with net operating loss (NOL) carry forwards effectively sheltering income at least through 2016.
--Earnings growth as investments in regulated generation and transmission projects are completed and enter rate base.
--Moderately higher leverage with an expected large capex budget and resultant regulatory lag until projects enter rate base.
--One-time items including the $47 million recovery on the favorable judgment regarding litigation with the Colstrip Energy Limited partnership or the $24 million impairment charge related to the abandonment of the proposed Mountain States Transmission Intertie are not material to Fitch's credit analysis or ratings assignments.
Capex to Remain Elevated: Over the last few years NWE has made large investments in generation, acquiring 222MW of Colstrip Unit IV, developing the Dave Gates Generating Station, a 150MW natural gas fired facility that came on line in 2011, and purchasing the Spion Kop Wind Farm in 2012.
Fitch models capex to range between $225 million to $300 million annually over the next few years. Large projects include the build-out of the 60MW Aberdeen natural gas fired peaking plant with commercial operation in 2014 and the environmental upgrades to the Big Stone coal-fired generating plant of which NorthWestern's share is estimated to be approximately $119 million. By 2014, the bulk of NWE's PPAs with PPL Montana will mature and Fitch expects NorthWestern to pursue rate-based generation to replace the expiring PPAs. While Fitch has not modeled any external financing which will be required to make such investments, Fitch expects any such investment to be credit neutral with NorthWestern's capital maintained and requisite regulatory pre-approvals obtained.
The bulk of NorthWestern's assets are in Montana. The Montana Public Service Commission (MPSC) is elected and has three new members serving four year terms expiring in 2017. Recent MPSC decisions have been constructive but the new Commission adds some uncertainty with a GRC pending as well as the Commission's approach to NorthWestern's possible purchase of generation assets to replace PPAs.
FERC Decision on Dave Gates Generating Station at Mill Creek (DGGS): In March 2012, the company proposed allocating 20% of the DGGS revenue requirement to FERC jurisdictional customers, based on past practices. In June 2012, a hearing was held before a FERC Administrative Law Judge (ALJ) to consider this proposed allocation methodology. In September 2012, the ALJ concluded that the company should only recover approximately 4.4% of the revenue requirement from the FERC customers, resulting in an annual revenue shortfall of $8.2 million from NorthWestern's rate filing. This initial decision is nonbinding and the company appealed. The company has continued to bill customers at interim rates and the cumulative deferred revenue related to this project has been $16.5 million.
Strong Cash Flow: NWE produces strong cash flow, aided by net operating loss carry forwards. Bonus depreciation has the effect of extending NOLs (NOLs are approximately $255 million) as a shelter to net income through at least 2016. NOLs expire on a rolling basis beginning in 2023. NWE can finance a large percentage of its growth capex projects with internally generated cash. As a regulated utility with 100% of earnings and cash flows from regulated assets, Fitch considers NorthWestern's liquidity as strong and further supported by its NOL position.
Modest Commodity Risk: NWE's tariff structure benefits from commodity and purchase power recovery mechanisms; pension and property taxes are on trackers, and energy efficiency and conservation losses are on recovery mechanisms.
NorthWestern Corp. is a divisionally structured utility serving 673,200 combined electric and natural gas customers in Montana, South Dakota, and Nebraska.
RATING SENSITIVITIES
Positive Rating Triggers
Constructive outcome to The Montana Natural Gas Rate Case and a more favorable decision from the pending FERC appeal along with sustained operating performance based on normalized weather could result in a ratings upgrade.
Negative Rating Triggers
Regulatory decisions that result in inadequate earnings and/or untimely recovery of cash flows could result in a revision of the Outlook to Stable from Positive.
During a period of high capex and investment, the addition of higher leverage to NorthWestern's balance could result in a rating downgrade.
Fitch has affirmed the following ratings with a Positive Outlook:
NorthWestern Corporation
--Long-term IDR at 'BBB';
--Short-term IDR at 'F2';
--Commercial paper at 'F2';
--First mortgage bonds at 'A-';
--Senior unsecured at 'BBB+';
--Pollution control bonds at 'A-'.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--Corporate Rating Methodology, Aug. 8, 2012;
--Recovery Ratings and Notching Criteria for Utilities, Aug. 8, 2012;
--Parent and Subsidiary Rating Linkage, Aug. 8, 2012;
--Rating North American Utilities, Power, Gas, and Water Companies, May 16, 2011.
Applicable Criteria and Related Research
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460
Recovery Ratings and Notching Criteria for Utilities
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=693750
Parent and Subsidiary Rating Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685552
Rating North American Utilities, Power, Gas, and Water Companies
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=625129
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