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Rating Action:

Moody's affirms ratings of UIL Holdings Corporation, The United Illuminating Company, The Berkshire Gas Company, Connecticut Natural Gas Corporation, and The Southern Connecticut Gas Company, and maintains their outlook at stable.

27 Feb 2015

Approximately $1.7 billion of securities affected

New York, February 27, 2015 -- Moody's Investors Service affirmed all the ratings of UIL Holdings Corporation (UIL, senior unsecured Baa2), and its subsidiaries United Illuminating Company (Baa1), Berkshire Gas Company (Baa1), Connecticut Natural Gas Corporation (A3), and Southern Connecticut Gas Company (Baa1). The outlook for each rated issuer remains at stable.

RATINGS RATIONALE

The rating affirmations follow the recent announcement that the Board of Directors of UIL and Iberdrola USA (IUSA Baa1 negative) agreed to merge in a transaction creating a combined entity with an enterprise value of $17.9 billion. Under the agreement, the newly formed company will be listed on the New York Stock Exchange with Iberdrola S.A. (Baa1 negative) owning 81.5% and UIL shareholders holding the remaining 18.5%. The merger is structured as a stock-for-stock exchange with UIL shareholders receiving one share of the newly-listed US company for each UIL share and a cash payment of $10.50, or about $600 million on an aggregate basis. Moody's expects IUSA will fund the $600 million with cash on hand.

"The affirmation of the ratings UIL and its rated utility subsidiaries considers the un-levered nature of the transaction which allows the new parent company to gain scale and geographic diversification without the eroding effects of incremental debt " said Lesley Ritter, Analyst. "However, although the new parent company will be well capitalized and is expected to generate healthy credit metrics on a consolidated basis, UIL's creditors remain subordinated to the parent's cash flows, and the funds available for UIL-level debt service remain unchanged".

Based on currently available information, Moody's estimates that combined company will generate healthy pro-forma consolidated credit metrics. IUSA's strong balance sheet makes up for UIL's high leverage and its weaker financial ratios. As a result we expect the combined company to generate CFO pre-WC to debt and debt to capitalization near 30% and 35%, respectively. UIL's high leverage will keep its credit metrics low for the rating with CFO pre-WC to debt remaining near 15%.

The transaction joins two northeast energy companies with operations across four northeastern states, creating a company with an $8.3 billion rate base, 3.1 million customers and generating over 70% of net income from low risk regulated utilities. IUSA is a fully-owned subsidiary of Iberdrola S.A. with an asset base split roughly 50/50 between its three transmission and distribution, A-rated, regulated utility operations representing a consolidated rate base of about $6.1 billion, and an unregulated renewable business, Iberdrola Renewables Holdings, Inc. (Baa1 negative). UIL Holdings is the parent of four A/Baa-rated regulated utilities split with 60% of the operating cash flow derived from transmission and distribution operations and 40% from natural gas local distribution companies. UIL's unregulated operations are negligible and not material to its operating cash flow generation.

The proposed merger is expected to close by the end of 2015. The transaction has received unanimous approval at both companies' Boards of Directors but requires approval from the Massachusetts and Connecticut state regulators, majority shareholder approval, as well as customary Federal sign offs. No approval will be required from the Maine and New York regulatory commissions. While it is premature to predict the outcome of any of these proceedings, it remains possible that additional merger conditions will be imposed by the Massachusetts and Connecticut regulators.

Notwithstanding the scale benefits and improved financial profile attained by merging the two companies, it is not uncommon for regulatory issues to sometimes complicate and delay the consummation of any utility merger. As we gain more clarity concerning the regulatory approvals, we will comment accordingly. Also, as the companies provide additional disclosures around legal structures, integration plans from both a financial and operating perspective, rating and/or outlook refinements may follow, as needed. In particular, given Iberdrola's centralized approach to liquidity management and reliance on intercompany loans, Moody's will look to gain a greater understanding of the new company's liquidity arrangements. Separately, potential ring-fencing provisions imposed by Massachusetts and Connecticut regulators such as limitations on lending, dividend restrictions or credit ratings triggers, as well as bankruptcy protections will be key in determining ratings for UIL and its utility subsidiaries: The United Illuminating Company (Baa1 stable), Connecticut Natural Gas Corporation (A3 stable), The Southern Connecticut Gas Company (Baa1 stable), and The Berkshire Gas Company (Baa1 stable).

Outlook Actions:

..Issuer: Berkshire Gas Company

....Outlook, Remains Stable

..Issuer: Connecticut Natural Gas Corporation

....Outlook, Remains Stable

..Issuer: Southern Connecticut Gas Company

....Outlook, Remains Stable

..Issuer: UIL Holdings Corporation

....Outlook, Remains Stable

..Issuer: United Illuminating Company

....Outlook, Remains Stable

Affirmations:

..Issuer: Berkshire Gas Company

.... Issuer Rating, Affirmed Baa1

..Issuer: Connecticut Natural Gas Corporation

....Senior Unsecured Medium-Term Note Program, Affirmed (P)A3

....Senior Unsecured Regular Bond/Debenture, Affirmed A3

..Issuer: New Hampshire (State of) Business Fin. Auth.

....Senior Unsecured Revenue Bonds, supported by United Illuminating Company, Affirmed Baa1

..Issuer: Southern Connecticut Gas Company

.... Issuer Rating, Affirmed Baa1

....Senior Secured First Mortgage Bonds, Affirmed A2

....Senior Secured Medium-Term Note Program, Affirmed (P)A2

....Senior Secured Regular Bond/Debenture, Affirmed A2

..Issuer: UIL Holdings Corporation

.... Issuer Rating, Affirmed Baa2

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa2

..Issuer: United Illuminating Company

.... Issuer Rating, Affirmed Baa1

The principal methodology used in these ratings was Regulated Electric and Gas Utilities published in December 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Lesley Ritter
Analyst
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

William L. Hess
MD - Utilities
Infrastructure Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's affirms ratings of UIL Holdings Corporation, The United Illuminating Company, The Berkshire Gas Company, Connecticut Natural Gas Corporation, and The Southern Connecticut Gas Company, and maintains their outlook at stable.
No Related Data.
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