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Rating Action:

Moody's upgrades NorthWestern Corp. to Baa1; assigns P-2 short-term rating

21 Jan 2011

Approximately $700 million of securities affected

New York, January 21, 2011 -- Moody's Investors Service upgraded the long-term ratings of NorthWestern Corporation (senior unsecured to Baa1 from Baa2); see list below for ratings affected. Moody's also assigned a Prime-2 short term rating to NorthWestern's recently established $250 million 4(2) commercial paper program. NorthWestern's rating outlook is stable.

Upgrades:

..Issuer: Forsyth (City of) MT, Rosebud County

....Senior Secured Revenue Bonds, Upgraded to A2, A2 from A3, A3

....Senior Secured Revenue Bonds, Upgraded to A2, A2 from A3, A3

..Issuer: NorthWestern Corporation

....Senior Secured First Mortgage Bonds, Upgraded to A2 from A3

....Senior Secured First Mortgage Bonds, Upgraded to A2 from A3

....Senior Secured First Mortgage Bonds, Upgraded to A2 from A3

....Senior Unsecured Bank Credit Facility, Upgraded to Baa1 from Baa2

Assignments:

..Issuer: NorthWestern Corporation

....Senior Unsecured Commercial Paper, Assigned P-2

Outlook Actions:

..Issuer: NorthWestern Corporation

....Outlook, Changed To Stable From Positive

RATINGS RATIONALE

"The upgrade of NorthWestern's long-term ratings reflects our expectation that the company's trend of solid financial performance is likely to be sustainable over the medium term and beyond, including financial credit metrics that would be considered strong within the Baa rating category according to our Rating Methodology for Regulated Electric and Gas Utilities, published in August 2009" said Vice President-Senior Analyst, Kevin Rose. The rating upgrades also take into account a satisfactory outcome in NorthWestern's latest general rate case, which resulted in an approximate $6.5 million (3%) electric rate increase and established a four-year pilot revenue decoupling mechanism for most of the company's electric customers. "The outcome in this case is yet another sign of credit supportive treatment by the Montana Public Service Commission (MPSC)" Rose added.

The assignment of the Prime-2 short-term rating reflects NorthWestern's proactive approach to maintaining sufficient internal and external liquidity and the company's sound overall credit quality as evidenced by its Baa1 long-term rating for senior unsecured debt.

Several factors have been contributing to NorthWestern's stronger metrics over the last several years, including debt reduction, refinancing at lower interest rates, and reasonably supportive regulatory treatment in its three regulatory jurisdictions. NorthWestern's cash flow from operations before the effects of working capital changes (CFO Pre-W/C) to interest and debt averaged over 4x and 20%, respectively, over the three fiscal years covering 2007 -- 2009, and stood at 4.2x and 21.4%, respectively, for the 12 months ended September 30, 2010. NorthWestern has also significantly reduced its level of debt as its debt to book capitalization ratio has fallen from approximately 77% in 2004 to approximately 52.2% at September 30, 2010, including Moody's standard adjustments. Management continues to target a range of 50% to 55% debt to book capitalization.

NorthWestern is focused on its utility operations, where it plans to spend about $580 million of maintenance capex over 2011 - 2014, fairly evenly distributed each year. Over this period we note that the utility capex budget will no longer include additional amounts for generation construction related to the 150 megawatt natural gas fired Mill Creek Generation Station, which was placed into commercial operation on January 1, 2011. The MPSC has approved rate base treatment for this plant premised on a 10.25% allowed return on equity and a 50/50 capital structure. Interim rates related to recovery of and return on this investment became effective with commercial operations and a true up of those rates will follow upon completion of a compliance filing to be made by NorthWestern no later than March 31, 2011.

Meanwhile, the pace of progress related to some of NorthWestern's potential growth investment opportunities in regulated electric transmission projects has slowed due to assorted issues including siting delays, economic conditions, and uncertainty about future potential for federal renewable portfolio standards. Nevertheless, NorthWestern's management team remains open to pursuing these projects, which include the potential for three separate transmission projects that could potentially result in growth capex exceeding $1 billion even if the projects are pursued in partnership with others. At this level of spending, NorthWestern would more than double its utility rate base over a multi-year period. Management emphasizes that such investments can be re-sized based on market and economic conditions, and will only be made if market demands make them economically viable and there is reasonable assurance that regulators will provide timely cost recovery and a reasonable opportunity to earn a fair return commensurate with the risk undertaken.

To supplement its cash flow from operations, we expect that NorthWestern will maintain sufficient alternate liquidity for its commercial paper program through a committed three-year $250 million revolving bank credit agreement expiring June 30, 2012 and led by Banc of America Securities LLC. The quality of the alternate liquidity provided by the $250 million facility is generally good, taking into account the multi-year term at its inception, same day availability, no ongoing material adverse change clause, and the absence of onerous financial covenants. Moreover, we anticipate that NorthWestern will begin to address renewal and extension of this facility later this year to ensure completion of the process well ahead of the expiration date.

The stable rating outlook reflects our view that NorthWestern is well positioned to continue producing solid financial results in spite of slowly improving economic conditions to support its Baa1 rating. It also assumes that NorthWestern continues to receive support from state regulators and follows conservative financing of growth initiatives that become economically viable.

NorthWestern's rating can be considered for an upgrade if it continues to receive regulatory support (especially in Montana) and its financial profile strengthens beyond current expectations as it carries out its strategic initiatives; for example, if the company successfully carries out its contemplated growth initiatives while demonstrating an ability to generate CFO Pre-W/C plus interest to interest coverage and CFO Pre-W/C to debt in the mid 4x range and near 25%, respectively, on a sustainable basis.

A downgrade of NorthWestern's ratings is unlikely in the near to intermediate term given the expected level of financial performance. However, an unexpected shift away from the current primary focus on regulated electric and gas utility operations that involves higher business risk without a commensurate improvement in financial ratios could lead to a downgrade. Also, if NorthWestern unexpectedly implements a more shareholder-friendly dividend policy or uses a significant amount of debt to finance various utility-related growth opportunities, then these strategies could cause us to take a negative rating or outlook action. Specifically with respect to credit metrics, if NorthWestern's future financial performance causes CFO Pre-W/C plus interest to interest coverage and CFO Pre-W/C to debt to fall below 4x and 20%, respectively, for an extended period, then a negative action could result.

The principal methodology used in this rating was Regulated Electric and Gas Utilities published in August 2009.

NorthWestern Corporation, headquartered in Sioux Falls, South Dakota, conducts regulated electric and gas utility operations in Montana, South Dakota, and Nebraska through its NorthWestern Energy division.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

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

New York
William L. Hess
MD - Utilities
Infrastructure Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's upgrades NorthWestern Corp. to Baa1; assigns P-2 short-term rating
No Related Data.
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