MOODY'S DOWNGRADES LONG-TERM DEBT RATINGS OF NORTHWESTERN PUBLIC SERVICE COMPANY (SR. SEC. TO A2)
New York, 07-14-95 -- Moody's Investors Service downgraded the long-term credit ratings of Northwestern Public Service Company (NWPS) and confirmed the company's short-term debt rating for commercial paper, concluding a review begun May 18, 1995. The rating actions primarily reflect the significant increase in business risk associated with NWPS's planned acquisition of Synergy Group Incorporated, a propane retail distribution company. Moody's expects the company's future financial performance to support a stable outlook for the revised ratings. However, additional nonregulated investments could pressure the rating, depending on the size and nature of the businesses and the mode of financing of the investments. In conjunction with the rating action, Moody's assigned a (P)A2/ (P)"a3" rating to a $200 million global shelf registration of securities to be offerred by Northwestern Public Service Company and its affiliated NWPS Capital Financing I, a statutory business trust.
Ratings downgraded are Northwestern Public Service Company first mortgage bonds to A2 from Aa3, shelf registration of secured debt to (P)A2 from (P)Aa3, unsecured pollution control revenue bonds to A3 from A1, and the company's counterparty rating to A3 from A1. NWPS's short-term debt rating for commercial paper, which also had been under review for possible downgrade, is confirmed at Prime-1.
NWPS's acquisition of Synergy for approximately $100 million, net of the anticipated sale of certain Synergy branch locations to an unrelated third party, is expected to close by mid-August 1995. Permanent financing for NWPS's imminent acquisition of Synergy is expected to be provided by a combination of mortgage bonds, trust preferred securities, and common stock to be issued under the company's recently filed global shelf registration.
The propane industry is subject to significant earnings and cash flow volatility due to extreme weather conditions. Although Moody's expects a joint management agreement between NWPS and Empire Gas Corporation to facilitate cost reductions and improvement in Synergy's historically weak financial performance, the increased reliance on less predictable cash flows to cover higher fixed charges adds a much greater element of risk for NWPS's bondholders. Furthermore, the intended acquisition of Synergy represents a more aggressive approach to nonregulated business investments for NWPS. Upon closing, the acquisition of Synergy will increase NWPS's total nonregulated business investments, which include the company's estimated $36 million portfolio of cash and marketable securities, to over 40% of its consolidated assets versus just 27% at December 31, 1994.
Notwithstanding the increased credit risks relating to NWPS's nonregulated business activities, the company's utility business maintains a sound operating profile. A competitive cost structure precludes the need for future rate increases and should protect NWPS from any significant customer loss in the future. Existing base load generating capacity is adequate until well into the next century, which should allow NWPS to internally fund its utility construction budget, the rating agency noted.
Empire Gas Corporation, headquartered in Lebanon, Mo., is the eleventh largest retail distributor of propane in the United States.
Synergy Group, Inc., headquartered in Farmingdale, N.Y., is a retail distributor of propane in the United States. It currently has about 152 branches located in 23 states and serves about 200,000 customers.
Northwestern Public Service Company, headquartered in Huron, South Dakota, is a combination electric and gas utility, which also has additional investments in nonregulated businesses.
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