Wilson, a private consultant hired by the Montana Consumer Counsel to scrutinize the deal on behalf of Montana ratepayers, says the planned purchase by Babcock and Brown Infrastructure looks like a bad deal for NorthWestern's 320,000 electric and gas customers.
Starting Wednesday, the state Public Service Commission will hold formal hearings in Helena on whether to approve the $2.2 billion deal.
BBI strongly disputes Wilson's testimony and will cross-examine him during the hearing.
Below, we take a closer look at Wilson's main arguments - and the countering statements from Babcock and Brown.
EXTRACTING THE CASH: Using information from a mathematical model that BBI used to evaluate its offer, Wilson says the Australian company plans to have NorthWestern Corp. pay dividends to its new owners that are much higher than NorthWestern pays to current shareholders.
The amounts, over 40 years, are more than twice what NorthWestern currently pays, says Wilson.
This level of payouts to investors will create a company that has little or no cash reserves to deal with emergencies and that will be highly leveraged with debt, Wilson says.
“Payouts of this magnitude are plainly unrealistic and unsustainable, and if made, would be expected to severely cripple NorthWestern Energy's finances and its ability to meet service obligations at reasonable rates,” he wrote.
BBI does not disagree with the basic numbers quoted by Wilson - after all, the numbers came from BBI and NorthWestern. But the company says Wilson has taken those numbers out of context and blown their importance out of proportion.
BBI Chief Financial Officer Jonathan Sellar says the payout levels are projections, are not cast in stone, and could change depending on “local conditions.”
“Whatever money is left over, that is the money that will be left over,” he says. “It will depend on the conditions of the day and what is needed to run the business.”
THE ENTIRE COMPANY, OR JUST THE UTILITY? BBI's primary criticism of Wilson's analysis is that he based it on finances for all of NorthWestern, which is more than just the Montana utility.
NorthWestern, based in Sioux Falls, S.D., has utility operations in Montana, South Dakota and Nebraska. It also operates or plans to operate lines of business separate from the Montana utility, such as building a new transmission line that will move wholesale power from Montana to markets in the Southwest.
The payouts noted by Wilson are for the entire company, and therefore don't directly affect the Montana utility or its ratepayers, BBI executives say. However, the Montana utility still accounts for about two-thirds of the entire business.
BBI points out that the debt and costs Montana utility ratepayers are responsible for - in regulatory lingo, the utility “rate base” - is controlled by the Public Service Commission.
Investor payouts or dividends, some of which come from cash generated by nonutility ventures, won't change the rate base without commission approval, and the commission isn't likely to allow negative changes to occur, BBI argues.
MONEY STILL MATTERS: It's true that the utility is financially “fenced” off from the nonutility portions of NorthWestern. Also, the Public Service Commission does control the rate base, which determines rates paid by customers to NorthWestern for transporting electricity and natural gas.
But does that mean the Montana utility is immune to the financial health of the entire company?
Wilson says no. If BBI creates a highly leveraged company by extracting too much cash, the financial weakness could come back to bite utility consumers in Montana, he argues.
The PSC does have the ultimate say over utility rates in Montana, he concedes. But if the utility's owner gets in financial trouble and is short on cash, several things can happen that may affect ratepayers, he implies.
One, the company's cost of borrowing money will be higher, and that cost will get passed on to ratepayers. Two, the company could face bankruptcy or some other financial crisis and therefore come begging to the PSC, saying a rate increase is needed to save the company.
BBI executives insist these scenarios won't happen, saying PSC controls prevent any financial problems related to non-utility investments from affecting the Montana utility.
HOW DO YOU PAY DIVIDENDS THAT EXCEED YOUR EARNINGS? Paying out cash to your investors that exceeds net earnings of the company may sound impossible, but it's something BBI plans or hopes to do.
One way BBI/NorthWestern could do it is through something that Wilson calls “phantom taxes.”
Right now, through rates determined by the PSC, NorthWestern's Montana utility customers are paying for the company's taxes. The level of taxation for which customers pay was determined in the last rate case 10 years ago.
But because of NorthWestern's bankruptcy in 2003 and other factors, the company's actual taxes are much less, meaning the company is left with a large pile of unused cash that had been earmarked for taxes.
Wilson said BBI plans to take $200 million from this pot in the next five years and pay it to investors as profit. That means the PSC couldn't do anything to get any of the money back to ratepayers.
BBI says these tax advantages were created by financial losses in companies outside the utility, and therefore shouldn't be available to the utility or its customers.
Nonetheless, Wilson says NorthWestern, under BBI, should be required to get PSC approval before distributing payouts more than 100 percent of net earnings of NorthWestern. BBI is opposed to this restriction.
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