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Rating Action:

Moody's cuts ratings of some National Grid USA subs

28 Aug 2007
Moody's cuts ratings of some National Grid USA subs

Approximately US$2.1 Billion of Debt Securities Affected

New York, August 28, 2007 -- Moody's Investors Service downgraded the ratings of New England Power Company (NEP; senior unsecured to A3 from A1 and short term ratings to P-2/VMIG-2 from P-1/VMIG-1), Massachusetts Electric Company (MECO; senior secured to A2 from A1 and short-term ratings to P-2/VMIG-2 from P-1/VMIG-1), and Narragansett Electric Company (NEC; senior secured to A2 from A1). Moody's also downgraded the rating of tax exempt debt obligations of Nantucket Electric Company (senior secured to A2 from A1), which are unconditionally guaranteed by MECO. The rating outlook for NEP, MECO, and NEC is stable. These actions conclude the review for possible downgrade of the ratings of all the companies, which was initiated on February 27, 2006.

At the same time, Moody's changed the direction of the review of the ratings for Niagara Mohawk Power Corporation (NIMO; A3 senior secured) to a review for possible upgrade whereas the ratings were previously under review for possible downgrade.

National Grid USA's Prime-2 short-term debt rating for commercial paper was not under review and is affirmed at that level.

The downgrade of ratings for NEP, MECO, Nantucket, and NEC primarily reflects the significant debt taken on by National Grid plc, the ultimate parent company in the United Kingdom, to fund the acquisition of the gas distribution assets of Southern Union Company for approximately US$500MM in August 2006, and the recently completed acquisition of KeySpan Corporation common stock for approximately US$7.3 billion, which closed on August 24, 2007. The significant interdependencies that exist within the National Grid family, including participation in National Grid USA's money pool (i.e. lending into or borrowing from the pool depending on individual circumstances) make it highly likely that National Grid plc will rely on most of its US-based subsidiaries to help service its increased debt load. Such dependence will, in the case of New York-based subsidiaries, be subject to complying with regulatory protections afforded by the New York Public Service Commission as part of the regulatory order approving the acquisition of KeySpan. The New England-based utilities will also remain subject to previously existing dividend restrictions under certain circumstances.

Given the interdependencies, the rating downgrades reflect our opinion that the ratings for the National Grid USA subsidiaries should be more closely aligned with the consolidated group rating of A3, as described in the January 2007 press release confirming the ultimate parent's ratings upon publication of Moody's Rating Methodology for European Complex Holding Company Structures. Moody's also notes that there are execution risks associated with achieving targeted integration savings, which management estimates could reach US$200 million per year over the next four years through the rationalization of overlapping functions and the sharing of best practices.

The change in direction for the review of NIMO's ratings to possible upgrade from possible downgrade takes into account the historically lower ratings for NIMO relative to its affiliated utility subsidiaries in the National Grid USA family and considers in part the underlying approach used in the aforementioned European rating methodology. In addition, the review for possible upgrade of NIMO's ratings takes into account that the late stage concessions agreed to by National Grid whereby certain regulatory protections that apply to KeySpan's New York-based utility subsidiaries will now also apply to NIMO. Moreover, NIMO has demonstrated improved financial performance over the past several years since its last upgrade in October 2004.

While we expect that National Grid plc will rely more heavily on NIMO than in recent years for dividends to help service acquisition-related debt at the ultimate parent level in the United Kingdom, the review for possible upgrade will consider the extent to which NIMO can sustain the generation of cash flow from operations (exclusive of changes in working capital) that covers interest and debt at levels that are more typically seen for regulated T&D utilities at the A3 senior unsecured rating level, according to Moody's Rating Methodology for Global Regulated Electric Utilities.

Meanwhile, the stable rating outlooks for NEP, MECO, and NEC capture our continuing opinion that the regulatory environment for the restructured electric utility industry in MA, NY, and RI is generally supportive. Under these environments, NIMO, NEP, MECO, NEC, and Nantucket should continue to exhibit sound financial performance under performance-based rate making plans in place. All the companies continue to generate stable and predictable earnings and cash flow to support solid cash flow coverage ratios that help to maintain fairly low standalone debt leverage.

Ratings downgraded include:

Massachusetts Electric Company (including Nantucket Electric Company debt unconditionally guaranteed by MECO):

Senior Secured Debt to A2 from A1; Senior Unsecured Debt and Issuer Rating to A3 from A2; Preferred Stock to Baa2 from Baa1; Senior Secured Shelf (P)A2 from (P)A1; short-term rating for tax-exempt debt in short-term mode to VMIG-2 from VMIG-1; and short-term rating for commercial paper to Prime-2 from Prime-1.

Narragansett Electric Company:

Senior Secured Debt to A2 from A1; Issuer Rating to A3 from A2; Preferred Stock to Baa2 from Baa1.

New England Power Company:

Senior Unsecured Debt and Issuer Rating to A3 from A1; Preferred Stock to Baa2 from Baa1; short-term rating for tax-exempt debt in short-term mode to VMIG-2 from VMIG-1; and short-term rating for commercial paper to Prime-2 from Prime-1.

Ratings under review for possible upgrade include:

Niagara Mohawk Power Corporation:

Senior Secured Debt rated A3; Senior Unsecured Debt rated Baa1; Issuer Rating of Baa1; Preferred Stock rated Baa3; shelf rating for Senior Secured Debt and Senior Unsecured Debt rated (P)A3 and (P)Baa1, respectively.

Ratings affirmed:

National Grid USA:

Short-term rating for commercial paper at Prime-2.

National Grid USA is an intermediate level holding company in the National Grid plc family, with headquarters in Westborough, Massachusetts. Niagara Mohawk Power Corporation, headquartered in Syracuse, New York, is a transmission and distribution utility. New England Power Company, headquartered in Westborough, MA, is a transmission utility. Massachusetts Electric Company, headquartered in Westborough, MA, is a transmission and distribution utility. Narragansett Electric Company, headquartered in Providence, RI, is a transmission and distribution utility. Nantucket Electric Company, headquartered in Nantucket, MA, is a transmission and distribution utility. The companies are all indirect subsidiaries of National Grid plc, headquartered in London, England.

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

New York
William L. Hess
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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