NWN's ratings reflect the earnings and cash flow predictability provided by the company's gas utility franchise, a demonstrated track record of profitable customer growth, and the recent emergence of a more constructive regulatory environment in Oregon.
The August 2003 resolution of a major rate case filing eliminates near-term regulatory uncertainty and provides NWN with a reasonable 10.2% return on equity (ROE), along with mechanisms to recover planned near-term capital investments as well as rising operating costs related to pension and employee healthcare. Notably, the Oregon Public Utility Commission (OPUC) approved for the first time a provision for weather normalization, a factor which should help ease the ongoing impact of warm weather on NWN's credit profile.
NWN's firm residential and commercial customer base, constituting about 87% of gross margin, is not subject to significant competitive risk. In addition, despite weak economic conditions throughout the Pacific Northwest, internal customer growth has continued due to the positive impact of low interest rates on new home construction. Although industrial related volumes have experienced moderate erosion, the overall impact on NWN's margins have generally been mitigated through rate design changes.
Fitch expects NWN's credit protection measures to moderately weaken in 2003 and 2004 due to increased capital expenditures associated with the expansion of NWN's gas delivery network. However, projected credit ratios remain consistent with the 'A' category when taking into consideration the added cash flow predictability provided by NWN's new weather normalized rate structure. Fitch expects pretax interest coverage to approximate 3.0 times (x) over the next several years with cash interest coverage of about 4.0x. Consistent with the capital structure guidelines approved under the OPUC rate settlement, NWN targets to maintain an approximate 50% debt to capital ratio and can be expected to issue additional common equity to maintain this percentage range.