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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
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
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,
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,
Kevin G. Rose
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
William L. Hess
Corporate Finance Group
Moody's Investors Service
No Related Data.
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