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.
Moody's Investors Service
Kevin G. Rose
Vice President - Senior Analyst
Moody's Investors Service