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Rating Action:

MOODY'S ASSIGNS Aaa RATING BASED ON BOND INSURANCE AND Baa3 UNDERLYING RATING TO REVENUE BONDS WITH PENNICHUCK WATER WORKS AS THE UNDERLYING BORROWER

07 Oct 2005
MOODY'S ASSIGNS Aaa RATING BASED ON BOND INSURANCE AND Baa3 UNDERLYING RATING TO REVENUE BONDS WITH PENNICHUCK WATER WORKS AS THE UNDERLYING BORROWER

Approximately $50 Million of Securities Affected

New York, October 07, 2005 -- Moody's Investors Service assigned a rating of Aaa to the proposed issuance of $50 million of water facility revenue bonds, 2005 series A, B, and C, by the Business Finance Authority of the State of New Hampshire. The underlying borrower is Pennichuck Water Works, Inc. (PWW). The Aaa rating is based on a bond insurance policy to be provided by Ambac Assurance Corporation (Ambac), and is subject to review of final documentation. Proceeds from the offering will be used to fund capital spending for rate regulated water facilities over the next several years.

Moody's also assigned a Baa3 underlying rating to the senior unsecured water facility revenue bonds. The underlying rating considers that the obligation of PWW to provide funds for repayment of the water facility revenue bonds will be unsecured and rank pari-passu with PWW's other senior unsecured debt. PWW has no secured debt and its indenture has a negative pledge provision requiring that the water facility revenue bonds be granted security in the event that PWW were to issue secured debt.

PWW's underlying rating reflects: 1) the generally low level of business risk associated with regulated water utility operations; 2) reasonably supportive regulatory treatment by the New Hampshire Public Utility Commission (NHPUC), which is expected to continue; and 3) expectations that the company will use equity funding for a portion of its large capital spending program that will increase its regulated rated base. PWW received a $15 million common equity infusion from parent holding company Pennichuck Corporation following a secondary offering of common stock in June.

The underlying rating also takes into consideration challenges that include: 1) an approximately $60 million capital expenditure program to comply with environmental standards and augment existing infrastructure over the next several years; 2) the need for timely and adequate rate relief during the capital program period in order to maintain existing financial ratios; 3) the small size of the company, which makes it more vulnerable to unexpected financial or operating shocks; and 4) the costs and uncertainties associated with ongoing eminent domain proceedings under which the City of Nashua, New Hampshire is attempting to acquire the utility assets of PWW.

PWW is the largest of Pennichuck Corporation's three regulated water utility subsidiaries, providing service to approximately 25,000 customers in Nashua, New Hampshire and 10 surrounding municipalities. The New Hampshire Public Utility Commission (NHPUC) regulates PWW's rates. The NHPUC's most recent decision granted PWW close to 80% of the rate relief requested and allowed the utility to track legal expenses related to the eminent domain proceedings, which would facilitate a future filing to request recovery. Given the critical importance for credit quality of timely and adequate recovery of increased costs and capital spending, it is noteworthy that the NHPUC recently acknowledged PWW's planned capital spending program as being in the public interest.

The aforementioned challenges and PWW's small size are likely to limit upside rating potential in the intermediate term. However, a combination of better than expected regulatory support, favorable resolution of the eminent domain proceeding, growth that is financed with a conservative mix of debt and equity and results in sustainably stronger financial ratios, such as a ratio of FFO to debt above 10% and FFO coverage of interest above 2.8 times, could result in an upgrade of PWW's underlying rating.

Factors that could result in a downgrade of PWW's underlying rating include: weaker than expected financial performance because of poor execution on strategic initiatives or unsupportive regulation that results in an expected on-going ratio of FFO to debt below 8% and FFO coverage of interest below 2.4 times; loss of significant customers; higher legal costs or potentially adverse outcomes for the eminent domain proceeding; and growth of higher risk unregulated businesses.

Pennichuck Water Works, Inc. is a regulated water utility company, whose parent, Pennichuck Corporation, also owns two other, considerably smaller water utilities, and has modest-sized investments in non-regulated activities. Pennichuck Water Works, Inc. and its parent, Pennichuck Corporation, maintain headquarters in Merrimack, New Hampshire.

New York
Daniel Gates
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Kevin G. Rose
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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