Fitch Ratings on Feb. 5 flagged NorthWestern Corp. for a possible one-notch downgrade and revised the company's outlook to negative. The rating agency also affirmed the long-term issuer default rating of the company at BBB+.
In a note to investors, Fitch said the negative outlook is driven by NorthWestern's "weaker business risk profile stemming from continued regulatory headwinds in Montana coupled with expectations that leverage metrics will remain depressed through 2021."
Recent negative rulings against NorthWestern by the Montana Public Service Commission include a refusal to recover power supply costs related to a 2013 outage at the coal-fired Colstrip unit 4 and the dismissal of a lost revenue adjustment mechanism, which shielded margins from the impact of energy conservation.
In January 2018, NorthWestern, which does business in Montana as NorthWestern Energy, was also directed by Montana regulators to return nearly $3.5 million to customers after resolving an error in the way the utility allocates property tax expenses. The ruling shifted the recovery of a portion of property tax expense from retail customers to wholesale customers, according to Fitch.
Further, in NorthWestern's most recent gas rate case in 2017, the Montana Public Service Commission ordered a lower rate increase than what the settlement parties agreed on.
As a result of these decisions, Fitch expects that NorthWestern's next rate case filing in Montana, anticipated to occur by September, will present a "significant regulatory risk." The rating agency is also concerned that the commission's investigation into the utility's energy supply tracker mechanism could result in a final order that "meaningfully impairs" NorthWestern's ability to recover the majority of its purchased power and commodity supply costs, which would be a credit negative.
An adverse outcome in either the rate case or supply tracker mechanism investigation would likely trigger a one-notch downgrade, Fitch said.
