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Rating Action:

Moody's upgrades ratings on two National Grid US subsidiaries

05 Feb 2014

Approximately $1.2 Billion of Debt Affected

London, 05 February 2014 -- Moody's Investors Service has today upgraded the ratings of two US regulated utilities owned by National Grid plc (Baa1, stable) to A2 from A3. Those companies are The Brooklyn Union Gas Company (KEDNY, Gas Facilities Revenue Bonds issued by New York State Energy Research and Development Authority but backed by KEDNY) and KeySpan Gas East Corporation (KEDLI). Concurrently, Moody's has confirmed the ratings of Niagara Mohawk Power Corporation (NiMo, A3 senior unsecured) and New England Power Company (NEP, A3 senior unsecured). This rating action completes our review of KEDNY, KEDLI, NiMo and NEP initiated on December 13, 2013. The outlook on all of the ratings is stable.

RATINGS RATIONALE

UPGRADE OF RATINGS FOR KEDNY & KEDLI

The primary driver of today's rating action was Moody's more favorable view of the relative credit supportiveness of the US regulatory environment, as detailed in our September 2013 Request for Comment titled "Proposed Refinements to the Regulated Utilities Rating Methodology and our Evolving View of US Utility Regulation." Factors supporting this view include better cost recovery provisions, reduced regulatory lag, and generally fair and open relationships between utilities and their regulators. The US utility sector's low number of defaults, high recovery rates, and generally strong financial metrics provide additional corroboration for these upgrades.

The rating upgrades for KEDNY and KEDLI specifically takes into consideration: (1) the supportive New York regulatory environment, where a wide variety of de-risking provisions for utilities have been included in recent rate cases e.g. reduced regulatory lag, environmental true-ups and revenue decoupling; (2) additional creditor protection from various regulatory ring-fencing provisions e.g. explicit leverage and dividend restrictions plus a 'golden share' arrangement that reduces the probability of default in a distressed situation; (3) the low-risk nature of gas distribution in the United States; (4) relatively large customer base in the New York metropolitan area with some organic growth; and (5) the expectation of strong financial metrics under supportive rate plans.

CONFIRMATION OF RATINGS FOR NIMO AND NEP

While NiMo benefits from the same supportive regulatory environment as KEDNY and KEDLI, Moody's believes that the benefits to creditors remain adequately reflected in the A3 senior unsecured ratings of the issuer. For NiMo, RoE performance is expected to improve following its acceptance of a new multi-year rate plan in March 2013; however, the potential loss of certain tax credits related to 'bonus depreciation' will likely offset some of the benefit to financial ratios of this new rate plan.

The rating confirmation for NEP reflects our view of the continued supportive regulatory framework of the Federal Regulatory Energy Commission (FERC). However, our view is balanced against a complaint against NEP and other electricity transmission owners in the New England area regarding an appropriate base RoE, which is currently 11.14%. While it is too early in the process to determine the ultimate credit impact of the FERC's decision, any reduction in the base RoE could negatively affect the financial metrics of NEP.

STABLE OUTLOOK FOR KEDLI, NIMO AND NEP

The stable outlooks for KEDLI, NiMo and NEP reflect our opinion that the New York and FERC regulatory environment is generally supportive for cost recovery. Under these environments, KEDLI, NiMo and NEP should exhibit sound financial performance under performance-based rate plans, including stable and predictable earnings that support solid financial ratios.

WHAT COULD CHANGE THE RATING UP/DOWN

KEDNY

KEDNY's ratings could be upgraded if the NYPSC increased its supportiveness towards utilities versus its current approach or if financial metrics improved significantly such that cash flow to debt increased to the mid 20s in percentage terms, without the effects of bonus depreciation. Conversely, ratings could be downgraded if cash flow to debt metrics fell below the mid-to-high teens on a sustainable basis. Any rating change, either up or down, would also take into consideration the credit quality of the wider National Grid group.

KEDLI

KEDLI's ratings could be upgraded if the NYPSC increased its supportiveness towards utilities versus its current approach or if financial metrics improved significantly such that cash flow to debt increased to the mid 20s in percentage terms, without the effects of bonus depreciation. Conversely, ratings could be downgraded if cash flow to debt metrics fell below the mid-to-high teens on a sustainable basis. Any rating change, either up or down, would also take into consideration the credit quality of the wider National Grid group.

NIMO

NIMO's ratings could be upgraded if the NYPSC increased its supportiveness towards utilities versus its current approach or if financial metrics improved significantly such that cash flow to debt increased to the mid 20s in percentage terms, without the effects of bonus depreciation. Conversely, ratings could be downgraded if cash flow to debt metrics fell below the mid-to-high teens on a sustainable basis. Any rating change, either up or down, would also take into consideration the credit quality of the wider National Grid group.

NEP

NEP's ratings could be upgraded if the FERC increased its supportiveness towards utilities versus its current approach or if financial metrics improved significantly such that cash flow to debt increased to the mid 20s in percentage terms, without the effects of bonus depreciation. Conversely, ratings could be downgraded if cash flow to debt metrics fell below the mid-to-high teens on a sustainable basis. Any rating change, either up or down, would also take into consideration the credit quality of the wider National Grid group.

The following ratings were upgraded:

The Brooklyn Union Gas Company: from A3 to A2 the rated revenue bonds

KeySpan Gas East Corporation: from A3 to A2 senior unsecured issuer and debt ratings

The following ratings were confirmed:

Niagara Mohawk Power Corporation: the A2 and (P)A1 senior secured ratings, the A3 senior unsecured issuer and debt ratings, the (P)A3 senior unsecured debt ratings and the Baa2 preferred stock rating

New England Power Company: the A3 senior unsecured issuer rating, the Baa2 preferred stock rating and the Prime-2 short-term debt rating.

PRINCIPAL METHODOLOGY

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.

Scott Phillips
Vice President - Senior Analyst
Infrastructure Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Monica Merli
MD - Infrastructure Finance
Infrastructure Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's upgrades ratings on two National Grid US subsidiaries
No Related Data.
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