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Rating Action:

MOODY'S DOWNGRADES CREDIT RATINGS OF NORTHWESTERN CORPORATION (SR.SEC. TO Baa1 AND SHORT-TERM DEBT TO PRIME-2); ALSO CONFIRMS CREDIT RATINGS OF MONTANA POWER COMPANY (SR. SEC. AT Baa1 AND SHORT-TERM DEBT AT PRIME-2)

20 Nov 2001
MOODY'S DOWNGRADES CREDIT RATINGS OF NORTHWESTERN CORPORATION (SR.SEC. TO Baa1 AND SHORT-TERM DEBT TO PRIME-2); ALSO CONFIRMS CREDIT RATINGS OF MONTANA POWER COMPANY (SR. SEC. AT Baa1 AND SHORT-TERM DEBT AT PRIME-2)

Approximately $1.6 Billion of Debt Securities Affected.

New York, November 20, 2001 -- Moody's Investors Service downgraded the long-term ratings of NorthWestern Corporation (Sr. Sec. to Baa1) and its short-term rating to Prime-2 from Prime-1. The outlook for NorthWestern's ratings is negative.

The action taken with respect to NorthWestern's ratings reflects the combined effects of a general weakening of the company's credit profile over the past year and Moody's expectations for a significant increase in NorthWestern's debt leverage and correspondingly weaker cash flow coverage ratios in the near-term. The latter scenario is expected because of the significant progress made by NorthWestern toward the planned purchase of the electric and gas transmission and distribution assets of Montana Power Company (MPC) for approximately $1.1 billion, including the assumption of approximately $488 million of MPC's existing debt and preferred securities. Moody's expects the remaining regulatory approvals to be obtained shortly, allowing for closing of the acquisition of the assets by late 2001, or early 2002, at the latest.

Concurrent with the downgrade of NorthWestern's ratings, Moody's confirmed the long-term ratings of Montana Power Company's securities (Sr. Sec. at Baa1) and the rating of MPC's short-term debt at Prime-2, which will be assumed by NorthWestern as part of the aforementioned purchase of MPC's assets. The outlook for the MPC ratings is also negative.

The confirmation of MPC's ratings assumes that although the MPC assets being acquired will initially reside in a separate legal entity (Montana Power LLC), that entity will be collapsed into a division of NW immediately after the closing. Under this scenario, we believe it is appropriate to establish MPC's ratings on par with those of NW. Moody's expects that the assets being acquired will be closely integrated with NorthWestern's existing utility businesses. Indeed, the cash flows generated by the operation of the MPC assets being acquired will be integral to servicing the higher consolidated debt burden created by the impending acquisition financing.

The downgrade of NorthWestern Corporation's ratings and the confirmation of Montana Power Company's ratings conclude the reviews for possible downgrade of NorthWestern's ratings and possible upgrade of Montana Power's ratings, which commenced October 2, 2000.

Furthermore, Moody's is continuing a review for possible downgrade of the Ba1 rating of MPC's $6.875 series preferred stock. This review was announced on July 20, 2001 when it became apparent that the $6.875 series of preferred stock would not be assumed by NorthWestern as part of its acquisition of electric and gas utility assets of MPC. Instead, we expect the obligation to be transferred to Touch America, Inc. as part of the business restructuring that will separate the existing telecommunications assets from MPC. Conclusion of the review of this rating awaits clarification as to where it will ultimately reside within the Touch America family. Touch America's issuer rating is currently B2.

NorthWestern Corporation's ratings downgraded include its senior secured debt to Baa1 from A1; senior unsecured debt and issuer ratings to Baa2 from A2; shelf registration for prospective issuance of senior secured debt, senior unsecured debt, subordinated debt, preferred stock, and preference stock to (P)Baa1/(P)Baa2/(P)Baa3/(P)Ba1/(P)Ba1 from (P)A1/(P)A2/(P)A3/(P)Baa1/(P)Baa1, respectively; and short-term debt rating to Prime-2 from Prime-1.

Other ratings also downgraded include the trust preferred securities of NWPS Capital Financing I and NorthWestern Capital Financing I, which are special purpose finance subsidiaries of NorthWestern Corporation, to Baa3 from A3; as well as the ratings of the shelf registrations for prospective issuance of trust preferred securities of NorthWestern Capital Financing I, NorthWestern Capital Financing II, NorthWestern Capital Financing III, and NorthWestern Capital Financing IV, all of which are special purpose finance subsidiaries of NorthWestern Corporation, to (P) Baa3 from (P)A3.

Montana Power Company's ratings confirmed include its senior secured debt at Baa1; senior unsecured debt and issuer ratings at Baa2; preferred stock at Ba1; and short-term debt rating at Prime-2.

Other ratings also confirmed include the trust preferred securities of Montana Power Capital I, a special purpose finance subsidiary of Montana Power Company, at Baa3.

Montana Power Company ratings continuing under review for possible downgrade includes its Ba1 rated $6.875 series of preferred stock.

Moody's notes that the near-term closing of NorthWestern's acquisition of MPC's electric and gas utility transmission and distribution assets will further strengthen and expand the company's existing core gas and electric utility business. The additional cash flows generated by the acquired assets should initially result in roughly an 80/20 split of consolidated cash flows between utility and nonutility operations, respectively. Indeed, Moody's believes that the strategy of expanding NorthWestern's less-risky gas and electric utility business shores up the foundation upon which management can continue to grow its more-risky investments in nonutility businesses. The latter businesses include heating, ventilation, air conditioning (HVAC), plumbing, and telecommunications and data services, as well as propane distribution. As the nonutility businesses mature and grow, Moody's cautions fixed income investors that the relative mix of utility versus nonutility cash flows is expected to shift more towards 70/30, respectively, over the next several years.

Notwithstanding NorthWestern's recent $76 million common equity offering, Moody's is concerned about NorthWestern's significant increase in recourse debt and debt-like obligations that will be taken on as a result of the acquisition of MPC's utility assets. Moody's expects that the initial financing for this transaction will be bridge funded with approximately $600 million of debt. Layering this debt on top of the assumed $488 million of debt and trust preferred securities and other new debt issued by NorthWestern in recent years will leave the company with a much more debt-heavy capital structure, even after adjustments to carve out non-recourse obligations tied to nonutility businesses.

Consistent with management's past practice of aiming to balance financing of its investments with a mix of debt and common equity, Moody's expects that NorthWestern will strive to take out the acquisition financing with a combination of debt or debt-like hybrid securities and common equity. The expectation of another material, near-term common equity issuance as part of the take-out financing is an important factor in Moody's rating determinations. Furthermore, the rating determinations assume that management will continue to carefully manage NW's capital structure and issue additional common equity, if necessary, to achieve more financial flexibility. Therefore, the rating outlooks are negative, pending successful completion of the near-term common equity offering, which is anticipated during the first half of 2002, as well as progress toward successful integration of the acquired assets into the NW family. Indeed, the take-out financing strategy, in combination with modest anticipated synergy savings and other significant cost saving initiatives over the near-term, should relieve some of the financial pressure created by financing associated with this acquisition of assets. Yet, the net result of management's strategy is still expected to leave NorthWestern dependent on improvements in cash flow from more-risky nonutility businesses, and adjusted capitalization and cash flow coverage of interest ratios will be weaker on a prospective basis when compared to the previously anticipated levels that were factored into the former ratings.

NorthWestern Corporation, headquartered in Sioux Falls, South Dakota, is a diversified service and solutions company with investments in electric and gas utility assets, retail propane distribution and energy services, as well as HVAC, plumbing, and telecommunications and data services.

Montana Power Company, headquartered in Butte, Montana, is a diversified electric and gas transmission and distribution utility. It is far along in its plans to divest all of its assets, except for its telecommunications business, which does business under the name, Touch America, Inc.

New York
John Diaz
Managing Director
Corporate Finance
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Kevin G. Rose
Vice President - Senior Analyst
Corporate Finance
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and services rendered by it fees ranging from JPY100,000 to approximately JPY550,000,000.

MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

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