Fitch Affirms NorthWestern Corp's IDR at 'BBB': Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB' long-term Issuer Default Rating (IDR) of NorthWestern Corp. (NWE) and all instrument ratings as shown at the end of this release. The Rating Outlook is Stable. The action affects approximately $1 billion of debt.

The rating affirmation reflects the stability of cash flows from NWE's regulated electric and gas businesses. The rating also reflects the expectation of improved credit protection measures in 2011 with the start of commercial operation of Mill Creek, NWE's new 150 megawatts (MW) gas-fired power plant. NWE's service territory in Montana, South Dakota, and Nebraska has remained vibrant during the national economic downturn with below average unemployment. While a recent rate case outcome in Montana was below Fitch's original projections, Fitch still expects credit measures in 2011 to compare favorably to 2010, and to other rating category peers.

Key Rating Drivers:

--Stable and predictable regulated utility operations and conservative rate based investment strategy;

--Cash flows are strong with net operating loss carry-forwards effectively sheltering income over Fitch's five year time horizon;

--2011 operating results will benefit from the inclusion into rate base of the Mill Creek Generating Facility which went into service Jan. 1, 2011;

--Rating concerns are largely centered on uncertainty regarding future regulatory decisions, below average allowed returns on equity and regulatory lag.

Cash Flows Bolster Credit Profile:

Cash flows are strong and are supported by NWE net operating loss (NOL) carry-forwards that effectively shelter net income from taxes for the next five years. NOLs total approximately $434 million at year-end 2010; recent bonus depreciation tax rules have effectively extended the life of NOLs for approximately two years beyond Fitch's original estimate of 2014. Consequently, NorthWestern is one of the few companies in Fitch's utility universe that is free cash flow positive, and internal cash flows are expected to fund a large percentage of NorthWestern's future growth capex projects.

2010 a Transition Year:

Operating results in 2010 were moderately below Fitch's expectations. However, Fitch expects improvement in 2011 mostly reflecting the addition of Mill Creek to the company's rate base and modestly higher revenues as new rates from NWE's 2009 rate case were implemented Jan. 1, 2011. Key coverage measures, (EBITDA to interest and funds from operations [FFO] to interest), 3.9 times (x) and 4.4x, respectively in 2010 are expected to improve to 4.9x and 4.5x, respectively in 2011. Fitch expects NWE to maintain a capital structure comprised of approximately 55% debt and 45% equity. NWE is a divisionally structured utility and does not have a holding company. Consequently, it tends to have modestly higher leverage ratios than regulated utilities that are subsidiaries of holding companies with parent level debt.

2009 General Rate Case:

The Montana Public Service Commission approved a $6.4 million annual increase in electric revenues based on an authorized ROE of 10% and $1 million decrease in natural gas revenues based on an authorized return on equity (ROE) of 10.25%, effective Jan. 1, 2011. NWE originally filed for a revenue increase of $15.5 million in electric rates and $2 million in natural gas rates. NWE has appealed certain aspects of the electric utility's lost revenue adjustment mechanism with its related reduction of the authorized ROE to 10% from 10.25%. Fitch does not expect the outcome of the appeal to be material to its credit opinion.

Capex to Decline in 2011:

With the completion of the Mill Creek generating facility, annual capital expenditures are expected to decline to approximately $140 million in 2011. In October, 2010, NWE purchased a majority interest in the Battle Creek Natural Gas Field in Blaine County, MT for approximately $11.4 million. Production is expected to serve NWE's natural gas customers and the company expects to seek MPSC approval to add this asset to its regulated rate base. NWE recently announced an asset purchase agreement for a 40MW wind project in Montana for approximately $78 million, subject to MPSC pre-approval. Fitch expects NWE to pursue additional renewable generation investments and other generation assets as a large percentage of its Montana electric load is supplied by purchased power with contracts expiring through 2014 and 2015. Similar to Mill Creek, further investments in generation assets will potentially result in improved operating cash flow measures.

NWE is also considering a number of potential transmission investments, the largest of which is the Mountain States Intertie Transmission Project (MSTI). The MSTI project, which would be FERC regulated, would connect into Idaho and provide access to California and the west coast. The project will cost over $1 billion to develop and would require partners and significant levels of external debt and equity financing. Should this project proceed, Fitch assumes the financing structure would be neutral to NorthWestern's credit profile.

NorthWestern Corp. is a divisionally structured utility serving 398,000 electric customers and 265,000 natural gas customers in Montana, South Dakota, and Nebraska.

Fitch affirms the following with a Stable Outlook

--Long-term IDR at 'BBB';

--Short-term IDR at 'F2';

--First Mortgage Bonds at 'A-';

--Pollution Control Revenue Bonds at 'A-'; (City of Forsyth, Rosebud County, Montana);

--Bank Credit Facility at 'BBB+';

--Senior Unsecured Debt at 'BBB+'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 16, 2010)

--'Utilities Sector Notching and Recovery Ratings' (March 16, 2010)

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646

Utilities Sector Notching and Recovery Ratings

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=504546

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