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Rating Action:

MERGER ANNOUNCEMENT TRIGGERS REVIEW FOR UPGRADE OF EASTERN EDISON'S LONG-TERM CREDIT RATINGS; CONFIRMATION OF CREDIT RATINGS OF THE NEW ENGLAND ELECTRIC SYSTEM COMPANIES

01 Feb 1999
MERGER ANNOUNCEMENT TRIGGERS REVIEW FOR UPGRADE OF EASTERN EDISON'S LONG-TERM CREDIT RATINGS; CONFIRMATION OF CREDIT RATINGS OF THE NEW ENGLAND ELECTRIC SYSTEM COMPANIES Moody's Investor's Service placed the long-term credit ratings of Eastern Utilities Associates' (EUA) wholly-owned subsidiary, Eastern Edison Company, under review for possible upgrade and concurrently confirmed the Prime-1 short-term rating of the New England Electric System, along with the A1 long-term credit ratings of its principal subsidiaries, New England Power Co., Massachusetts Electric Co. and Narragansett Electric Co. The outlook for the confirmed ratings remains stable. The Ba1 issuer and unsecured debt ratings of another EUA subsidiary, EUA Cogenex Corp., is confirmed with a negative outlook, pending further clarification of NEES' plans to maximize the value of that investment. The rating actions are in response to today's announcement of a merger agreement whereby the New England Electric System will acquire 100% of the outstanding common stock of Eastern Utilities Associates in a cash transaction.

Eastern Edison Company ratings under review for upgrade are its senior secured debt rating of Baa1, its senior unsecured debt and issuer ratings of Baa2, its preferred stock rating of "baa2" , and its global shelf registration ratings of (P)Baa1/(P)Baa2/(P)"baa2" for prospective issuance of secured debt, unsecured debt, and preferred stock, respectively.

The merger agreement is based on a share price of $31, subject to upward adjustment depending on the actual timing for the closing of the deal. The $31 per share price represents a market value for EUA's common equity of roughly $632 million. The price represents a 5% premium over EUA's closing price as of Friday, January 29, 1999 and approximately a 23% premium over its closing price in early December 1998, which was prior to upward price pressure fueled by merger speculation. Subsequent to closing, it is expected that Eastern Edison and EUA Cogenex, as well as EUA's other wholly-owned subsidiaries will initially retain their separate legal identities as subsidiaries of NEES. Within a relatively short time period, however, a more likely structure to evolve would include merging Eastern Edison and EUA's other utility subsidiaries, Newport Electric Company and Blackstone Valley Electric Company into NEES' utility subsidiaries operating in Massachusetts and Rhode Island, while combining Montaup Electric Company with NEES' transmission company, New England Power Company. The merger agreement is subject to several regulatory and EUA shareholder approvals. Management is hopeful that this transaction can move forward in parallel with ongoing efforts by National Grid Group plc to acquire NEES in a debt-financed transaction and that both transactions can close by early 2000.

The review of Eastern Edison's ratings will consider the financial benefits and reduction in business risk associated with its strategy to exit the generation sector. Progress with regard to these efforts has been significant. Eastern Edison recently closed on the sale of its 280-megawatt share of Canal Unit 2 and has pending agreements for the sale of its remaining non-nuclear generating assets as well as its share of the Seabrook nuclear plant. Most recently, the company reached an agreement to assign ownership of all of its remaining long-term power purchase contracts and entitlements to Constellation Power Source, a power marketing affiliate of Baltimore Gas & Electric Company. Indeed, this progress could result in a rating upgrade without consideration of the potential effects of a successful merger with NEES. The review for upgrade of Eastern Edison's ratings will further consider the prospects for timely receipt of the many regulatory approvals required to close the proposed merger, the extent to which expected synergy savings can be achieved, and the likelihood that Eastern Edison's affiliation with a much larger and financially sound parent company can further enhance its credit quality.

Rating confirmations for the NEES companies reflect Moody's assumption that the financial and business risk profile of these companies will remain largely unchanged from present expectations. Funding for the acquisition is expected to be manageable given generation asset divestiture proceeds and synergy savings, in addition to any support provided by the National Grid.

Eastern Edison Company is an electric utility subsidiary and EUA Cogenex Corp. is an energy services subsidiary of Easten Utilities Associates, headquartered in Boston, MA. NEES is a public utility holding company, headquartered in Westborough, MA.

No Related Data.
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