MOODY'S UPGRADES LONG-TERM SECURITY RATINGS OF THE UNITED ILLUMINATING COMPANY (SR. UNSEC. TO A3)
Moody's Investors Service upgraded the long-term debt and issuer ratings of The United Illuminating Company (UI) to A3 from Baa1, and upgraded the rating of the guaranteed cumulative preferred capital securities issued by its special purpose finance vehicle, United Capital Funding Partnership L.P. to "baa1" from "baa2". The ratings were upgraded to reflect the success that UI has achieved in transferring the price and volume risks associated with its role as supplier of last resort in the competitive retail electric market in Connecticut, as well as the good prospects for further reduction in UI's business and financial risk profiles once it completes the sale of its nuclear generation assets. The outlook for the company's ratings is stable.
Ratings upgraded are The United Illuminating Company's secured lease obligation bonds, unsecured pollution control bonds, notes and issuer rating to A3 from Baa1. Moody's also upgraded the guaranteed cumulative preferred capital securities issued by United Capital Funding Partnership L.P. to "baa1" from "baa2".
Moody's notes that while striving to become strictly a transmission and distribution (T&D) utility, UI is still required to arrange for power supplies to meet demands from customers who prefer not to select an alternative supplier as permitted under Connecticut electric industry restructuring legislation. Indeed, state regulators in Connecticut approved a contract arrangement between UI and an Enron Corp. affiliate, Enron Power Marketing Inc. (EPMI), in January, for exactly this purpose. Under the contract, EPMI will supply power to UI for UI's customers who elect the standard offer option instead of choosing a new power supplier, while also assuming all of the obligations associated with UI's remaining purchase power agreements. The net impact of the arrangement is that UI has effectively transferred to EPMI the price and volume risk that would otherwise be associated with its role as provider of last resort. The contract is in effect through the end of 2003.
At the same time, Moody's also believes that UI's efforts to divest its 17.5% and 3.685% interests in the Seabrook Nuclear Station and Millstone Nuclear Station No. 3, respectively, will benefit from the improved market for nuclear assets that has developed over the past year. The upgrade of UI's ratings assumes a satisfactory outcome from UI's recently approved plans to auction Millstone 3. Similarly, we assume that a satisfactory outcome will result from efforts to divest the company's share of Seabrook, although that process may take a while longer, pending settlement of certain legislative and regulatory issues surrounding Northeast Utilities' New Hampshire operations. Investors can take comfort in the fact that UI has written down its investments in Millstone 3 and Seabrook to $7.5 million and $37.5 million, respectively. The remaining net book cost in both instances is eligible for recovery as a regulatory asset through a competitive transition assessment in rates charged to T&D customers. Importantly, UI's share of any decommissioning costs will be recoverable through a non-bypassable systems benefits charge.
From a financial perspective, UI's management has prudently utilized proceeds from non-nuclear generation asset sales to strengthen the company's balance sheet and shore up its interest coverage ratios. Prospectively, Moody's expects that UI's financial performance will allow it to achieve and sustain a common equity ratio of about 48%, while generating funds from operations that will cover interest expense by over four times. These levels of protection for UI's fixed income investors stack up quite well when compared to other A3 rated companies in the industry who are following a similar business strategy.
Although UI's management has plans to grow its nonregulated business investments to the point of contributing up to 20% of consolidated earnings over the next several years, UI's investors will be better insulated from the higher business risks associated with such investments once the planned holding company structure is finalized. Approval from the Nuclear Regulatory Commission, which is expected shortly, is the last required regulatory approval to legally establish the holding company structure.
Finally, Moody's cautions investors that an element of event risk remains in UI's credit profile since it has made significant progress with regard to how its business can fit in a restructured industry. UI is still a more likely merger partner for a larger company looking to expand its T&D investments.
The United Illuminating Company is primarily an investor-owned electric utility, with modestly sized non-regulated business investments. Its headquarters are in New Haven, Connecticut.
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