2009-06-26 20:26:05 -
Fitch Ratings will establish credit ratings for Otter Tail Corporation (OTTR) and its subsidiary Otter Tail Power (OTP) upon a corporate reorganization expected to occur on July 1, 2009 in which the electric utility OTP will become a subsidiary of a new parent holding company.
Prior to the planned reorganization, the utility is the parent company.
The Issuer Default Rating
(IDR) of OTTR will be 'BBB-' and that of its subsidiary OTP 'BBB'. The expected Rating Outlook for both companies is Stable. A full list of the rating actions appears below.
The largest of OTTR's subsidiaries is OTP, a regulated electric utility that serves in the three states of Minnesota, North and South Dakota.
OTTR's business portfolio also includes Varistar, a subsidiary that holds a diverse set of highly cyclical industrial businesses operating in fragmented and competitive markets; Varistar generally does not benefit from advantageous size and scale in those markets. The holding company IDR of 'BBB-' considers the cash flow variability of this unusual blend of businesses as well as the moderate debt leverage of the utility and low debt leverage at the parent company.
To arrive at the ratings and Stable Rating Outlook for the new parent company reflecting the consolidated group, Fitch considered the potential effects of an adverse economic climate lingering through 2010 and into 2011 with material effect on Varistar's diversified business portfolio. In stress cases, the low debt leverage supporting the industrial/ non-utility business portfolio mitigated the effects of the stress.
OTP's IDR of 'BBB' reflects the simple business profile of the electric utility and supportive regulatory mechanisms in its three-state area of Minnesota, North and South Dakota, including tracker mechanisms to recover some operating costs from consumers. The ratings established for the utility are consistent with OTP's projected credit ratios and consistent with those of peer utilities rated by Fitch.
Operating cash flow of the utility business is susceptible to some lags in recovery of higher costs of fuel and purchased power, as in 2008, and depends on ongoing rate increases to recover capital investment in increased investment in utility assets. Fitch expects that OTP's near-term operating income and credit measures are likely to be reduced by low power price realization for sales of excess power into the wholesale power market, at the same time that OTP is accelerating capital expenditures for wind projects to take advantage of available federal incentives for renewable energy projects. Fitch's ratings of OTTR and OTP take into consideration moderate ring-fencing of the utility subsidiary from its parent and other affiliates, a factor that reduces but does not eliminate linkage between the ratings of OTTR and OTP.
Adequate near-term liquidity is provided under separate revolving credit facilities for OTTR (available until Oct. 2010) and OTP (to July 2011).
OTP and OTTR will rely on external capital market financing in 2009 and 2010 to fund a relatively high level of new investment in the utility and to refund $165 million of debt of OTP coming due in 2011. Fitch anticipates that management will finance its long-term capital needs with a mix of debt and equity financing.
OTTR had 2008 revenues of over $1.3 billion. The company's businesses are classified into six segments: Electric Utility (includes the production, transmission, distribution and sale of electric energy in MN, ND and SD under the name Otter Tail Power Company.); Plastics (businesses producing polyvinyl chloride (PVC) pipe.); Manufacturing (production of wind towers, contract machining, metal parts stamping and fabrication, and production of waterfront equipment, material and handling trays and horticultural containers.); Health Services (sale of diagnostic medical equipment, patient monitoring equipment and related supplies and accessories); Food Ingredient Processing (owns and operates potato dehydration plants); and Other Business Operations (businesses in residential, commercial and industrial electric contracting industries, fiber optic and electric distribution systems, wastewater and HVAC systems construction, transportation and energy services.)
The following ratings are established, with a Stable Outlook.
Otter Tail Corporation (OTTR)
--Long-term IDR 'BBB-';
--Short-term IDR 'F3';
--Senior Unsecured 'BBB-';
--Preferred Stock 'BB+'.
Otter Tail Power (OTP)
--Long-term IDR 'BBB';
--Short-term IDR 'F3';
--Senior Unsecured 'BBB+';
Pollution Control Revenue Bonds 'BBB+'.
--Mercer County (ND) 4.85% Pollution Control Refunding Revenue Bonds due Sept. 1, 2022;
--Grant Count (SD)4.65% Pollution Control Refunding Revenue Bonds due Sept.1, 2017;
--Grant Count (SD) Variable Rate Pollution Control Refunding Revenue Bonds due Dec. 1, 2012;
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com :
.
Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
Fitch Ratings, New YorkEllen Lapson, CFA, +1-212-908-0504Glen
Grabelsky, +1-212-908-0577Cindy Stoller, +1-212-908-0526 (Media
Relations)
cindy.stoller@fitchratings.com : mailto:cindy.stoller@fitchratings.com
