Fitch Affirms PPL Montana P-T Ctfs at 'BBB'.

CHICAGO -- Fitch Ratings affirms PPL Montana, LLC's (PPLM) pass-through trust certificates due 2020 at 'BBB'. The rating reflects PPLM's credit quality on a stand-alone basis, independent of the credit quality of its owner. Projected financial performance, the primary driver of PPLM's credit quality, is dependent upon long-term prices and volatility in the electricity market. PPLM's merchant portfolio occupies a highly advantageous position on the dispatch curve, minimizing volumetric risks. Fitch expects fixed-charge coverage ratios to exceed 3.0 times (x) over the long term as originally projected, absent any regulatory restrictions on the price PPLM receives for wholesale power.

In September 2005, the Federal Energy Regulatory Commission (FERC) initiated a hearing to determine whether PPLM should maintain its market-based rate authority after finding that PPLM had failed to meet the wholesale market share screening test within the Northwestern Corp. (NOR) control area. The finding is not conclusive, and PPLM has filed additional analyses to support its application for renewal of market-based rate authority.

If FERC revokes PPLM's market-based rate authority, PPLM will be permitted to sell wholesale power within the NOR control area only at cost-based rates established by FERC. PPLM also may be obligated to return the excess of market prices over cost-based rates for wholesale power sold subsequent to Nov. 1, 2005. However, PPLM has sufficient liquidity to support a refund, as a relatively small proportion of PPLM's output is currently sold on the wholesale spot market.

While the final outcome of the FERC proceedings is uncertain, Fitch considers it unlikely that PPLM's credit quality would be meaningfully impaired if it loses market-based rate authority, assuming that a reversion to cost-based rates within Montana would not prevent PPLM from selling wholesale power outside the NOR control area at market-based rates. Fitch believes PPLM could absorb the additional transmission costs incurred to export power without significant detriment to financial performance. However, dependence on wholesale power exports could expose PPLM to potential transmission constraints if additional generating capacity is brought on-line without a corresponding expansion of the transmission grid.

Even if FERC revokes PPLM's market-based rate authority, PPLM may be allowed to execute retail transactions without price restrictions, reducing PPLM's reliance on wholesale revenues. Additionally, PPLM has sold forward or otherwise hedged a significant proportion of portfolio capacity over the next three years, providing PPLM with sufficient time to revise its power-marketing strategy if necessary. However, it is uncertain whether payments received by PPLM for energy deliveries under existing wholesale contracts, including the NOR power purchase agreements (PPA), would be affected by an adverse FERC ruling. Approximately 40% of on-peak portfolio capacity is committed to NOR under two separate PPAs expiring June 2007. The fixed contractual rate of $32/MWh is well below current-market power prices.

Other developments include the settlement of outstanding litigation concerning the Colstrip Transmission System (CTS). PPLM paid NOR $9 million as part of the settlement, and both parties have withdrawn all claims in connection with the litigation. The effect of the settlement payment on PPLM's financial performance is considered minor. NOR filed suit against PPLM in 2002, claiming breach of contract for PPLM's failure to purchase NOR's share of the CTS.

PPLM continues to dispute $28 million of property taxes paid to the Montana Dept. of Revenue between 2000 and 2005. In March 2005, the State Tax Appeal Board issued a ruling on disputed taxes for the 2000 to 2002 period, granting PPLM a tax refund of approximately $6 million. Both PPLM and the State of Montana have appealed to the State District Court. A favorable ruling could improve PPLM's cost structure going forward, but the final outcome cannot be determined at this time.

PPLM owns, operates, and leases a portfolio of 13 hydroelectric and coal-fired generating facilities with an aggregate net capacity of approximately 1,157 MW. The portfolio, located entirely within Montana, includes leased interests in Colstrip, the second-largest coal-fired facility west of the Mississippi River. The certificates were issued by a pass-through trust to fund the owner-lessors' acquisition of the leased Colstrip assets, which represent 25% of Colstrip's 2,094-MW capacity and 46% of total portfolio capacity.

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