NEW YORK--(BUSINESS WIRE)--Fitch Ratings maintains NorthWestern Corporation's (NorthWestern) 'BBB' Issuer Default Rating (IDR) on Rating Watch Positive pending receipt of the remaining regulatory approvals needed to complete the acquisition of PPL Montana's hydroelectric portfolio announced on Sept. 27, 2013.
Fitch expects to resolve the Watch upon receipt of final Federal Energy Regulatory Commission (FERC) approval of the transaction financing. Rating Watch Positive indicates ratings may be upgraded or affirmed at time of resolution.
NorthWestern will raise permanent financing including approximately $450 million of debt and $400 million of equity to complete the transaction which may occur in November 2014. Fitch expects to resolve the Watch ahead of NorthWestern's debt financing.
On Sept. 4, 2014, the Montana Public Service Commission (MPSC) voted to approve an order approving NorthWestern's acquisition of the net portfolio of 10 hydro facilities with an aggregate of 439MW of generation capacity. Key terms and conditions of the approval include an authorized rate base of $870 million predicated on a 52% debt and 48% equity capital structure, an authorized Return on Equity (ROE) of 9.8% and a financing order for 30 year debt at an interest cost capped at 4.25%. The terms and conditions of the MPSC approval are generally considered constructive and within Fitch's previous modeled forecasts.
Completing the financing plan entails heightened execution risk. At current interest rates, debt financing can be completed within the 4.25% interest rate cap; however, interest rates have been volatile over the last month and have exhibited an upward bias as the Federal Reserve's Quantitative Easing concludes is expected to conclude in October and the forward expectations for future interest rate hikes has been accelerated. Concomitantly, higher rates have already pressured equity valuations for dividend yielding stocks, including NorthWestern. While the transaction itself is earnings accretive, higher rates would likely lower NorthWestern's stock price resulting in a greater number of share issuance with requisite dividend requirements.
KEY RATING DRIVERS
Financing Plan Execution: NorthWestern will be raising approximately $850 million in acquisition financing consisting of $450 million of 30 year First Mortgage Bonds (FMB) and $400 million of equity. Equity and debt markets have been volatile in recent weeks and the financing plan is large relative to NorthWestern's $1.8 billion market capitalization adding further potential volatility. The terms and conditions of the MPSC approval authorize issuance of 30 year debt at an interest rate no higher than 4.25%, a rate that approximates Fitch's estimate of NorthWestern's current market financing costs. NorthWestern has an interest rate forward at 3.22% which protects against higher interest rates and spreads on 'A' category debt issuance have averaged approximately 100bps in recent weeks which provides little margin of error to obtain financing within the 4.25% cap. The risks evident in completing the debt financing carry over to raising equity as higher interest rates will likely pressure stock valuations creating potential dilution.
Incremental Improvement in Credit Metrics: Fitch expects the acquisition to generate EBITDA of approximately $94 million to $100 million. Based on completion of the financing plan at or near current market conditions, the acquisition will be accretive to earnings. Fitch projects modest improvement in coverage and leverage metrics with projected Debt to EBITDAR at between 4.0x and 4.2x and FFO Fixed Charge Coverage between 5.0x and 5.2x.
Low Risk Business Profile: NorthWestern derives 100% of its earnings and cash flows from its regulated electric and gas divisions in Montana, South Dakota, and Nebraska. The acquisition advances the reintegration of generation into the Montana operations and upon completion of the hydro purchase, NorthWestern expects to obtain 69% of its load from owned generation.
RATING SENSITIVITIES
Factors that could lead to a Positive Rating Action:
--Successful execution of NorthWestern's financing plan with leverage and coverage metrics near Fitch's current projects could lead to a rating upgrade.
Factors that could lead to a rating affirmation include:
--Less favorable financing terms that lead to leverage and coverage metrics that are weaker than Fitch currently models;
--Less robust metrics on an operating basis than currently expected. Debt to EBITDAR sustained above 4.25x would likely lead to an affirmation of current ratings.
Fitch Maintains the following ratings on Rating Watch Positive
NorthWestern Corporation
--Long Term IDR 'BBB'
--First Mortgage Bonds 'A-'
--Pollution Control Bonds A-'
--Senior unsecured/bank credit facility 'BBB+'
Fitch has affirmed the following ratings
--Short-term IDR at 'F2'
--Commercial paper at 'F2'
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 28, 2014);
--'Rating U.S. Utilities, Power, and Gas Companies (Sector Credit factors)' (March 11, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139
Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=735155
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=883755
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