Fitch Affirms UI & UIL; UI's Rtg Outlook Raised To Positive.

Business Editors

NEW YORK--(BUSINESS WIRE)--Nov. 7, 2001

Fitch has affirmed the ratings of The United Illuminating Company (UI) and its parent UIL Holdings Corporation (UIL).

Fitch rates UI's senior unsecured debt and senior secured lease obligations `A-` and UIL's implied senior unsecured debt `BBB+' and short term obligations `F2'. Fitch has also changed UI's Rating Outlook to Positive from Stable while maintaining UIL's Stable Rating Outlook.

UI's Positive Rating Outlook reflects the continuing improvement of the company's financial profile that resulted from generation asset sales, debt reduction, cost rationalization and stranded cost recovery. Having sold off its fossil generating assets in 1999 and its 3.68% ownership interest in Millstone Nuclear Plant Unit 3 in March 2001, the company has evolved to become predominantly a transmission and distribution electric company with low business risk and stable cash flow. The company will further reduce debt and eliminate any remaining nuclear operating exposure if it can successfully sell off its 17.5% ownership interest in Seabrook Station. The company expects to complete the sale of Seabrook Station in late 2002. Approval to initiate the auction process of Seabrook Station was granted by the New Hampshire Public Utility Commission and the Connecticut Department of Public Utility Control (DPUC). Since 1999 the company has used proceeds from the asset sales to pay down debt and reduce interest expenses. Credit protection measures have accordingly improved. In the next few years the company expects to maintain a debt/EBITDA ratio that is slightly above 2 times (x) and an EBITDA/interest coverage ratio above 7x, compared to the respective 3.4x and 4.4x in 1998. At the same time, the company has been accelerating amortization and recovery of stranded costs. It expects to recover the remaining $700 million of stranded costs by 2011.

The rating also considers several credit concerns, centered on the uncertain outcome of the pending rate case to be filed with the DPUC in November 2002, the power supply agreement with Enron Power Marketing Inc. (EPMI), and parent UIL's increasing investment in nonregulated businesses. By May 2002 the DPUC is expected to rule on a new rate plan to succeed the current 5-year rate plan that is expiring on Dec. 31, 2001. Secondly, while UI's supply contract with EPMI covers its provider of last resort obligation during the standard offer period and transfers volume and price risk to EPMI at a fixed price, it also exposes UI to the EPMI counterparty risk. Should EPMI fail to deliver the power, UI would have to replace the EPMI contract at market prices and seek approval from the DPUC to utilize the purchased power adjustment clause (PPAC) to recover replacement power costs. Fitch views this concern as manageable given UI's historical use of the PPAC to cover comparable costs and supportive language in the state's restructuring legislation. UI's parent UIL plans to invest in nonregulated businesses, funded by UI's dividends to UIL. UI has already distributed $100 million to UIL since UIL's formation in 2000. Going forward UI is allowed by a bond indenture to upstream to UIL distributions of $106.7 million more plus all future earnings. At present UIL's nonregulated investment portfolio is small relative to the utility.

UIL's key credit rating is supported by stable dividends from UI, whose dividends make up over 85% of UIL's projected cash flows in the next two years and over 75% from 2003-2005. In addition, UIL's total indebtedness is currently limited to $200 million by a bank revolver covenant. UIL's main credit risk, however, is the short operating history of its nonregulated and cyclical businesses. UIL, through subsidiary holding company United Resources Inc (URI), conducts its nonregulated activities through a passive investment vehicle and two operating subsidiaries, American Payment Systems (APS) and Xcelecom. APS is the nation's largest utility walk-in bill payment processor while Xcelecom is a leading provider of contracting electrical and voice-data-video integrated solutions, providing services to industrial, commercial, and institutional customers through regional markets of the eastern US. URI's passive investments include a 25% interest in a proposed 330MW transmission line across Long Island Sound with TransEnergie, a subsidiary of Hydro Quebec, and a 33.3% interest in a 520MW merchant generation plant located in Bridgeport, CT and operated by Duke Energy. While APS and Xcelecom contributed approximately $4.1 million in earnings for the nine months ended Sept. 30, 2001, URI's passive investments have lost money. In the next five years URI will rely on cash infusions from UIL to fund its growth and will contribute minimum cash during this period.

The United Illuminating Company is a regulated electric utility distribution service company serving about 318,000 retail customers in New Haven and Bridgeport and the surrounding southwestern Connecticut. UIL Holdings is a holding company parent of UI and URI, which in turn owns American Payment Systems Inc, Xcelecom, Inc., United Capital Investments, Inc. and United Bridgeport Energy Inc.