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Rating Action:

Moody's assigns Baa3 to UIL Holdings planned senior unsecured debt

04 Oct 2010

Approximately $450 million of securities affected

New York, October 04, 2010 -- Moody's Investors Service assigned a (P)Baa3 rating to UIL Holdings Corporation's shelf registration for prospective issuance of senior unsecured debt and a Baa3 rating to the company's proposed offering of $450 million of Notes. At the same time, Moody' affirmed UIL's Issuer Rating at Baa3 and its stable rating outlook, as well as all the existing ratings for its utility subsidiary, The United Illuminating Company (UI), including the Baa2 Issuer Rating and the Baa2 rating for all of its senior unsecured pollution control revenue refunding bonds. Moody's also maintained UI's current stable rating outlook.

Assignments:

..Issuer: UIL Holdings Corporation

....Multiple Seniority Shelf, Assigned (P)Baa3

....Senior Unsecured Regular Bond/Debenture, Assigned Baa3

RATINGS RATIONALE

The rating assignments and affirmation of ratings and stable outlooks take into account that UIL is advancing plans to acquire Southern Connecticut Gas Company (SCG: Baa2 Issuer Rating; stable outlook), Connecticut Natural Gas Company (CNG: Baa1 senior unsecured; stable outlook), and Berkshire Gas Company (BGC: Baa2 Issuer Rating; stable outlook), all local gas distribution subsidiaries of Iberdrola USA (IUSA: Baa3 unsecured bank revolver rating; stable outlook), which in turn is a subsidiary of Iberdrola S.A. (A3 senior unsecured; negative outlook). The cash purchase price for this transaction is $1.296 billion, including the assumption of approximately $411 million of net debt. Subject to requisite approvals from the Connecticut Department of Public Utility Control (DPUC), the Massachusetts Department of Public Utilities (MDPU), and Hart-Scott-Rodino Act approval, SCG, CNG, and BGC would become utility subsidiaries of UIL.

"The Baa3 senior unsecured debt rating for UIL considers the relatively conservative funding strategy being used by UIL, which includes the recently completed issuance of common stock that netted proceeds just over $500 million (including the exercise of over-allotment options) to balance the planned debt by UIL to finance the purchase, " said Kevin Rose, lead analyst for UIL at Moody's New York office. "The Baa3 rating also considers the increase in size, scale and scope of consolidated regulated utility operations and anticipated cost savings that would likely materialize as the LDCs come under UIL's ownership, while also diversifying the mix of revenues and cash flows between gas and electric operations which better balances summer and winter peaks" Rose added.

Although the incremental holding company debt will use up prior financial flexibility in UIL's rating, the Baa3 rating for UIL incorporates our view that its utility subsidiaries should have sufficient cash flow to support their respective individual operations and adequate flexibility to pay dividends to UIL in support of the parent's prospective standalone debt service and the common dividend to shareholders. Moody's expects that UIL's pro-forma consolidated credit metrics should, on average, remain reasonably in line with the Baa category range we consider to be appropriate for a holding company with predominantly regulated utility investments, according to the Moody's Rating Methodology for Regulated Electric and Gas Utilities, published in August 2009. For example, we currently expect that UIL's pro-forma percentage of cash flow before changes in working capital (CFO-pre WC) to debt will be maintained, on average, in the mid-teens and its CFO-pre WC to interest expense will be maintained near 3.3x, on average, following consummation of the purchase agreement.

UIL appears to be navigating well through the regulatory approval process, as evidenced by the MDPU's August 31, 2010 order determining that its approval is not required to complete the acquisition, and hearings to date at the DPUC related to UIL's request for approval to complete the acquisition appear to be going smoothly. Moreover, the applicable waiting period relating to UIL's filing for approval under the Hart-Scott-Rodino Act expired without comment, effectively clearing that hurdle, and the transaction is not subject to shareholder approval. Although it is not uncommon for regulatory approvals in these circumstances to be associated with various conditions that could lengthen or complicate the process, we see no cause for undue concern in the process to date. Also, previously cited concern that approvals in Connecticut could be influenced by pending state court challenges by IUSA related to recent rate case decisions for SCG and CNG have not materialized to date. Barring unforeseen delays, approval from the DPUC is expected by November 2010, in which case closing would likely follow no later than Q-1 2011.

Moody's will continue to monitor the regulatory approval process to be sure there are no material changes to existing terms and conditions of the purchase agreement. Such changes, although not considered likely at this stage, could cause us to revisit this rating action. Moody's will also further explore integration plans, prospects for cost savings, and the timing for achieving these. If unanticipated developments unfold as UIL carries out its strategic initiatives related to the purchase agreement, Moody's cannot rule out the possibility that rating adjustments may become necessary.

Meanwhile, the stable rating outlooks for UIL and UI continue to reflect Moody's view that UI will continue to receive supportive regulatory treatment of its investment in UI's T&D assets and effectively execute its plans to build peaking generation through GenConn, its joint venture with NRG, thus positioning UIL and UI to maintain financial metrics in-line with their respective rating levels.

In light of the incremental holding company debt being added to fund the planned acquisition of SCG, CNG, and BGC and the anticipated challenges of assimilating those companies into the UIL family and servicing the parent's significantly higher debt, the prospects for the ratings of UIL and UI to be upgraded in the near term appear to be limited. However, assuming the planned acquisitions proceed to closing, the ratings could be upgraded if the acquired companies are seamlessly assimilated into UIL's corporate family, and if future regulatory decisions are credit supportive leading to UIL's CFO Pre-W/C to interest and debt metrics being maintained near 4.0x and 20%, respectively, and UI's CFO Pre-W/C to interest and debt metrics to be maintained comfortably over 4.0x and 20%, respectively, for an extended period.

UIL's ratings could be downgraded if there is inadequate or untimely rate relief for UI, which negatively affects UI's ability to upstream sufficient dividends to UIL. Also, if UIL's CFO Pre W/C to interest and debt metrics fall below 3.0x and 13%, respectively, for an extended period of time, its ratings could be downgraded. Moreover, given the significant level of holding company debt and absence of any meaningful ring fencing protections for UI, any further incremental holding company debt could result in a widening of the notching between the ratings of UIL and UI.

Similarly, UI's ratings could be downgraded if there are financially challenging rate case decisions, which result in a more difficult operating environment for UI and cause its CFO Pre-W/C to interest and debt metrics to drop below 3.5x and 15%, respectively, for a sustained period of time.

The principal methodology used in rating UIL Holdings Corporation was Regulated Electric and Gas Utilities rating methodology published in August 2009. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

UIL Holdings Corporation is a holding company, whose principal subsidiary, The United Illuminating Company, is a regulated electric transmission and distribution utility. Its headquarters is located in New Haven, Connecticut.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service's information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of assigning a credit rating.

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Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

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

New York
A.J. Sabatelle
Senior Vice President
Infrastructure Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
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Moody's assigns Baa3 to UIL Holdings planned senior unsecured debt
No Related Data.
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