Description

With so few good long value ideas, pour your-self a cup of coffee, read this piece and then consider going short any of three trust preferred issues of Northwestern Corp. Symbols are as follows:

NTHLQ Northwestern Capital Financing I
NTHMQ Northwestern Capital Financing II
NTHZQ Northwestern Capital Financing III


Northwestern diversified outside the power business and destroyed all shareholder wealth.

On Sept. 14, 2003, NorthWestern voluntarily filed Chapter 11 BK with the intention of reorganizing. The filing was with the U.S. Bankruptcy Court for the District of Delaware. NorthWestern is the parent of the utility division NorthWestern Energy, Expanets Inc. (telecommunications), and Blue Dot Inc. (heating, air conditioning, and ventilation service). Expanets and Blue Dot were not part of the Chapter 11 filing so as to expedite the sale of both entities. NorthWestern Energy provides electric and natural gas distribution service to 598,000 customers in Montana, South Dakota, and Nebraska.

NorthWestern has about $530 million of secured debt (first mortgage bonds, general mortgage bonds, pollution control bonds, and a $390 million secured bank loan that is also secured by a lien on the utility assets. As of Sept. 30, 2003, $865 million of unsecured debt and $365 million of trust preferred stock were outstanding. Northwestern also has $30 million of regulatory tax liens outstanding. NorthWestern is current on its interest payments to secured debt holders, but has discontinued principal and interest payments to unsecured debt holders and dividend payments to the trust preferred holders. The secured debt is associated with the utility operations and is secured by the assets of the utility operating divisions NorthWestern Montana and NorthWestern South Dakota. The asset pools are not commingled and in the event of liquidation the debt holders could only look to the assets of the division that originally issued the debt. The secured bank loan that was borrowed in December 2002 is secured by a combination of both utilities' assets.

The capital structure includes $105 million of unsecured debt that was issued by the former NorthWestern Public Service Co. (the forerunner of NorthWestern Energy/South Dakota) and $40 million of unsecured debt issued by the former Montana Power (the forerunner of NorthWestern Energy/Montana). It is unlikely that the unsecured debt issued by the former utilities will have priority over any other unsecured debt issued at the corporate level, due to the flat corporate structure created by NorthWestern when it made the two utilities operating divisions and eliminated NorthWestern Energy LLC. The remaining $720 million of unsecured debt was issued in 2002 by NorthWestern to acquire the Montana Power assets and the telecommunications company, Expanets.

NorthWestern intends to emerge from reorganization as a utility company ONLY. It recently closed on the sale of Expanets to Avaya Inc at a sale price of approximately $150 million. Northwestern expects to net about $70 to $80 million in cash from the sale. In addition, the company has either sold or closed many of the individual operation sites of its heating, air conditioning, and ventilation subsidiary BlueDot.

Valuation

What is left is a power company. The EBITDA for the most recent 12 months (Oct. 1, 2002 to Sept. 30, 2003) was $218 million (for the utilities only). The Montana Public Service Commission and the South Dakota Public Utility Commission regulate the utilities and the current EBITDA reflects the most recent cost structure and rates that the commissions have approved.

Based on the most recent 12-month EBITDA of $218 million and a 7.0X EBITDA multiple, the value of NorthWestern is about $1.5 billion. Add the $75 million in proceeds from the sale of Expanets yields a bankruptcy estate of $1.575 billion. It is assumed that operations during bankruptcy are cash flow neutral after interest on secured debt (which is being paid) interest on subordinated debt (which is not being paid but will be considered in allocating value in the estate) and normal ongoing operating capx.

Class Claim Recovery Value of Claim

Tax Liens $ 30 million 100% $ 30 million

Secured Debt $920 million 100% $920 million

Unsecured Debt $865 million 69% $610 million

Trade Creditors $277 million 5% $ 15 million

Trust Preferred $382 million 0% $ 0

Common Stock 0% $ 0

Total $2.444 billion $1.575 billion


The valuation is supported by recent utility sales, such as CILCORP 6.5X EBITDA and Portland General Electric Co. 6.8X EBITDA.

The trust preferred is currently selling at 30% of face value or total value of approximately $115 million. The trust preferred are subordinate to all unsecured debt and trade payables, therefore, it is highly likely that the bankruptcy reorganization plan when filed by Northwestern will allow for NO recovery to the trust preferred. My best guess is that the secured debt will be reinstated at face and all unsecured debt will be converted to equity in the reorganized Northwestern.

The catalyst will be the filing of the reorganization plan by Northwestern Corp. The filing is scheduled for January 12, 2004. It is very possible though that Northwestern will ask for and be granted an extension of six to nine months to file its plan. Nevertheless, that is not long to wait for a 100% return.

Not that I rely on company statements to date to handicap values here but it does not hurt the argument to read what Northwestern has indicated regarding its equity securities to date: Here are a excerpts from filings:

From the September 30th 10Q

We believe that holders of certain claims and interests will receive no distributions under the Plan of Reorganization.

“Under Chapter 11, the rights and treatment of pre-petition creditors and equity security holders may be substantially altered. At this time, it is not certain what effect the Chapter 11 proceedings will have on our creditors and common stockholders. Under the priority scheme established by Chapter 11, certain post-petition liabilities and pre-petition liabilities need to be satisfied before stockholders are entitled to receive any distribution. The ultimate recovery to our creditors and common stockholders, if any, will not be determined until confirmation of a plan of reorganization. No assurance can be given as to what values, if any, ultimately will be ascribed in the Chapter 11 proceedings to each of these constituencies. Under any plan of reorganization in the Chapter 11 proceedings, management of NorthWestern expects that unsecured claims against the Company will be satisfied at a fraction of their face value, and that there will be no value available for distribution to the common stockholders of the Company. Because of this possibility, any investment in the Company is highly speculative. Accordingly, we urge that appropriate caution be exercised with respect to existing and future investments in any equity or debt securities of the Company”.

“Our common shares are now quoted on Nasdaq's OTC Bulletin Board. The fact that our common stock and all series of our trust preferred securities are not listed on the New York Stock Exchange or any other major exchange could reduce the liquidity of such securities and make it more difficult for a stockholder to obtain accurate quotations as to the market price of such securities. Reduced liquidity of our common stock and all series of our trust preferred securities also may reduce our ability to access the capital markets in the future. In addition, under any plan of reorganization in the Chapter 11 proceedings, it is likely that our existing equity securities will be cancelled and that we will issue new equity securities to certain of our creditors upon our emergence from Chapter 11 in full or partial satisfaction of creditor claims.”

Enough said. Short the preferred and you’ll have plenty of spending money by next Christmas.

Catalyst

Filing of Reorganization Plan