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Rating Action:

Moody's downgrades NSTAR, NSTAR Electric, and Connecticut Light & Power; affirms NU and its other subsidiaries

09 Apr 2012

Approximately $5 billion debt instruments downgraded

New York, April 09, 2012 -- Moody's Investors Service today downgraded the long-term ratings of NSTAR and NSTAR Electric Company (NSTAR Electric), including their senior unsecured ratings to A3 (from A2) and A2 (from A1), respectively. Moody's downgraded NSTAR's short-term rating for commercial paper to Prime-2 from Prime-1 and affirmed NSTAR Electric's Prime-1 short term commercial paper rating. These rating actions conclude the review for possible downgrade that commenced on February 16, 2012. The rating outlooks of NSTAR and NSTAR Electric are stable.

Moody's also downgraded the ratings of Connecticut Light & Power Company (CL&P), including the senior unsecured rating to Baa2 from Baa1. The rating outlook is stable.

Concurrently, Moody's affirmed the ratings of Northeast Utilities (NU; sr unsecured: Baa2), Public Service Company of New Hampshire (PSNH; Issuer rating: Baa2), Western Massachusetts Electric Company (WMECO; sr unsecured (Baa2) and Yankee Gas Services (YGS; Issuer rating: Baa2). The outlook is stable.

The downgrade of the ratings of NSTAR and NSTAR Electric is triggered by the anticipated completion this week of the stock-for-stock merger of equals between NU and NSTAR announced in October 2010. This follows approval last week by the Connecticut Public Utility Regulatory Administration (PURA) and the Massachusetts Department of Public Utilities (MDPU) of settlement agreements relating to the merger that were entered into earlier this year between several of the entities within the merged group and various constituencies in Connecticut and Massachusetts.

RATINGS RATIONALE

"While acknowledging that the transaction has not resulted in incremental leverage and the complementary nature of the operations amid the group's substantial capital expenditure program in distribution and transmission rate base, the rating action is largely driven by Moody's opinion that the combined company will operate as one system from a liquidity and a capital deployment standpoint" said Natividad Martel, an Assistant Vice President at Moody's. "This opinion is underpinned by the absence of restrictions under the Massachusetts comprehensive settlement agreements that would limit NSTAR's ability to upstream dividend distributions to NU or other terms that would encourage separateness." NSTAR and NSTAR Electric will now become key components of a financially weaker organization, narrowing the gap between the ratings of the entities within the newly combined NSTAR and NU corporate family. Further supporting this view is Moody's expectation that NSTAR and NSTAR Electric will use their short-term debt arrangements to aid the merged group in funding its capital requirements. That said, the stable outlook reflects our expectation that NSTAR and NSTAR Electric will remain free cash flow positive and exhibit credit metrics that are commensurate with the low and mid-range of the A-rating category, respectively, despite the 44 month base distribution rate freeze in place for NSTAR Electric under the terms of the Massachusetts settlement agreements.

The downgrade of CL&P's ratings reflects the significant deterioration recorded in its credit metrics at year-end 2011, with CFO pre-W/C to debt and CFO pre-W/C interest coverage of 16.1% and 4.4x, respectively, and our view that the utility will continue to report credit metrics that are more commensurate with the Baa2 rating category.

The affirmation of the ratings of NU, PSNH, WMECO and YGS reflects our opinion that the transaction is generally credit supportive for NU and its other subsidiaries since NU can benefit from NSTAR group's positive free cash flows. This somewhat reduces the group's anticipated reliance on debt to fund its investment program amid our expectation that those subsidiaries will maintain their pre-merger historical target dividend payout ratio of 60%. As a result, we expect NU will report better consolidated credit metrics despite lower metrics at CL&P, better positioning the NU holding company at its current rating Baa2 category.

NU's Baa2 senior unsecured rating also takes into consideration the structural subordination that will exist upon completion of the merger for parent level debt-holders relative to the existing debt outstanding at the utility subsidiaries, particularly at the largest companies within the merged group, namely CL&P and NSTAR.

The stable outlooks reflect our expectation that each of the entities will report credit metrics that are commensurate with their current rating category.

Following the downgrades of the ratings of NSTAR, NSTAR Electric and CL&P limited prospects exist for an upgrade of their respective ratings as well as NU's ratings over the near term.

Additional negative pressure on the ratings of NSTAR and NSTAR Electric could be triggered if a more aggressive financial policy is implemented following the completion of their merger and/or if their prospective credit metrics decline significantly and become less well positioned in the low and mid-range of the A rating category, particularly in light of the expected expiration this year of tax savings associated with bonus depreciation. Specifically the ratings could be downgraded if they report CFO Pre-W/C to debt, CFO pre-W/C interest coverage and RCF to debt below 22%, 4.5x, and 17%, on a sustainable basis.

CL&P's rating could experience additional negative momentum if over the medium term it exhibits further deterioration in its credit metrics such that it records CFO pre-W/C to debt, CFO pre-W/C interest coverage and RCF to debt below 15%, 3.0x, and 11%, respectively, on a sustainable basis.

NU's rating could come under pressure if the ratings of any of its largest subsidiaries is downgraded again in the future given the structural subordination embedded in its ratings. A downgrade could be also triggered by a substantial deterioration in the consolidated credit metrics as a result of the implementation of aggressive financial policies after the merger, such that it reports consolidated CFO pre-W/C to debt, CFO pre-W/C interest coverage, RCF to debt below 15%, 3.0x, 11%, respectively, for an extended period of time.

The ratings of PSNH, WMECO and YGS could be upgraded if they are able to achieve a significant improvement in their financial profiles, such that they report CFO pre-W/C to debt, interest coverage and RCF to debt in excess of 20%, 4.0x, and 15%, respectively, on a sustainable basis, after excluding the cash savings associated with bonus depreciation.

The ratings of PSNH, WMECO and YGS could be downgraded if they record a substantial deterioration in their credit metrics, such that they report CFO pre-W/C to debt, CFO pre-W/C interest coverage and RCF to debt falls below 15%, 3.0x, 12%, respectively, for an extended period of time.

The principal methodology used in these ratings was Regulated Electric and Gas Utilities published in August 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Downgrades:

..Issuer: Connecticut Development Authority

....Senior Secured Revenue Bonds, Downgraded to A3 from A2

....Senior Unsecured Revenue Bonds, Downgraded to Baa2 from Baa1

..Issuer: Connecticut Light and Power Company

.... Issuer Rating, Downgraded to Baa2 from Baa1

....Pref. Stock Preferred Stock, Downgraded to Ba1 from Baa3

....Pref. Stock Preferred Stock, Downgraded to Ba1 from Baa3

....Senior Secured First Mortgage Bonds, Downgraded to A3 from A2

....Senior Secured First Mortgage Bonds, Downgraded to A3 from A2

....Senior Secured First Mortgage Bonds, Downgraded to A3 from A2

....Senior Secured Shelf, Downgraded to (P)A3 from (P)A2

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

....Senior Unsecured Revenue Bonds, Downgraded to Baa2 from Baa1

..Issuer: New Hampshire St. Business Finance Authority

....Senior Unsecured Revenue Bonds, Downgraded to Baa2 from Baa1

..Issuer: NSTAR

.... Issuer Rating, Downgraded to A3 from A2

....Senior Unsecured Bank Credit Facility, Downgraded to A3 from A2

....Senior Unsecured Commercial Paper, Downgraded to P-2 from P-1

....Senior Unsecured Regular Bond/Debenture, Downgraded to A3 from A2

....Senior Unsecured Shelf, Downgraded to (P)A3 from (P)A2

..Issuer: NSTAR Electric Company

.... Issuer Rating, Downgraded to A2 from A1

....Multiple Seniority Shelf, Downgraded to (P)A2, (P)Baa1 from (P)A1, (P)A3

....Multiple Seniority Shelf, Downgraded to (P)A2, (P)Baa1 from (P)A1, (P)A3

....Pref. Stock Preferred Stock, Downgraded to Baa1 from A3

....Senior Unsecured Bank Credit Facility, Downgraded to A2 from A1

....Senior Unsecured Regular Bond/Debenture, Downgraded to A2 from A1

....Senior Unsecured Shelf, Downgraded to (P)A2 from (P)A1

Outlook Actions:

..Issuer: Connecticut Light and Power Company

....Outlook, Changed To Stable From Negative

..Issuer: NSTAR

....Outlook, Changed To Stable From Rating Under Review

..Issuer: NSTAR Electric Company

....Outlook, Changed To Stable From Rating Under Review

Confirmations:

..Issuer: NSTAR Electric Company

.... Commercial Paper, Confirmed at P-1

After completion of the merger between Northeast Utilities (NU) and NSTAR, shareholders will hold around 56% and 44%, respectively, of the post-transaction company. NU will be the surviving corporate entity and maintain dual headquarters in Hartford and Boston, while NSTAR LLC, the successor entity of NSTAR, will become a wholly-owned subsidiary ranking second largest within the consolidated group with total assets of around $8.1 billion as of December 31, 2011.

NSTAR LLC will be the parent holding company of the regulated electric transmission and distribution utility, NSTAR Electric Company, as well as the local gas distribution utility, NSTAR Gas Company (not rated). NSTAR LLC also owns some other small non-regulated subsidiaries, including a telecommunication company (NSTAR Com) and liquefied natural gas service (Hopkinton) operations. As of December 31 2011, NSTAR Electric reported consolidated assets approximated $6.8 billion.

Headquartered in Berlin, Connecticut Light and Power Company with more than 1.2 million customers is the state's largest regulated electric transmission and distribution utility. After completion of the merger CL&P will rank as the group's largest subsidiary with total assets of approximately $8.8 billion at year-end 2011, closely followed by NSTAR that reported assets of around US$ 8.1 billion at the end of 2011.

Headquartered in Manchester, Public Service Company of New Hampshire is the largest utility in New Hampshire (NH) serving approximately 70% of the retail customers in the state (about 500,000). This vertically integrated regulated electric utility has an installed generating capacity of 1,200MW. PSNH will rank as the group's third largest subsidiary with total assets of approximately $3.1 billion.

Headquartered in Springfield, Western Massachusetts Electric Company is a regulated electric transmission and distribution (T&D) utility serving over 200,000 retail customers in 59 communities in western Massachusetts. WMECO will remain the group's smallest electric utility with total assets of approximately $1.5 billion at year-end 2011.

Headquartered in Berlin, Yankee Gas Services Company is Connecticut's largest local gas distribution company with over 200,000 customers. At year-end 2011, YGS recorded assets of $1.5 billion.

NU's subsidiaries are regulated at the state level by their respective public utility commissions in Connecticut (PURA), Massachusetts (MDPU), and New Hampshire (NHPUC), and are also subject to the Federal Energy Regulatory Commission (FERC) purview which oversees the group's transmission business and PSNH's hydro-electric license conditions.

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant 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 relevant 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 relevant 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.

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

Moody's considers the quality of information available on the rated entities, obligations or credits satisfactory for the purposes of issuing these ratings.

Moody's adopts all necessary measures so that the information it uses in assigning the ratings is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

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

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's 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 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.

Natividad Martel
Asst Vice President - Analyst
Infrastructure Finance Group
Moody's Investors Service, Inc.

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 downgrades NSTAR, NSTAR Electric, and Connecticut Light & Power; affirms NU and its other subsidiaries
No Related Data.
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