Fitch Discusses Northeast Generation's 'BBB-' Rating Affirmation.

CHICAGO -- Earlier today, Fitch Ratings affirmed and removed from Rating Watch Negative the 'BBB-' rating on Northeast Generation Company's (NGC) $320 million senior secured bonds due 2026. The affirmation and Rating Watch removal concludes detailed discussions with Energy Capital Partners (ECP) encompassing ECP's business plan and financial expectations following its intended acquisition of NGC.

Fitch had originally placed NGC's secured bonds on Rating Watch Negative on Nov. 7, 2005 following the announcement that NGC's indirect parent, Northeast Utilities, (NU, rated BBB by Fitch) is exiting the competitive generation and retail energy marketing businesses. On July 24 of this year, NU and ECP announced the intended acquisition of NGC and a separate facility (Mt Tom) by ECP.

Upon completion of the acquisition, the ownership structure will essentially mirror the current organization. ECP will create a new holding company (NE Energy) that will arrange acquisition financing; no additional indebtedness at NGC is planned. The assets will be operated and maintained by an affiliate service company (NE Energy Services) and the assets' output will be sold to (or in the case of Mt. Tom, dedicated to) an affiliate marketing company (NE Energy Management). ECP has advised that a substantial majority of the personnel responsible for the daily operations, maintenance, management and marketing functions will be retained at acquisition. NE Energy Services' and NE Energy management's expected scopes of business are limited to NGC and Mt Tom.

The contract between NGC and NE Energy Management will be extended through 2014 and will be structured to assure NGC's debt service coverage ratio (DSCR) is at least 1.5 times (x). Although the output from Mt Tom will be available to support NE Energy Management's payment obligations, there is no assurance Mt Tom will not be sold by NE Energy. Accordingly, Fitch has assumed that only the cash flow derived from NGC assets will be available to service NGC's debt.

It must be noted that there are no structural provisions that limit the transfer of funds from NE Energy Management to NE Energy. Although monthly payments received by NGC from NE Energy Management will be held by a project level trustee for the benefit of NGC bondholders, any surplus profits earned by NE Energy Management from the sale of NGC's output are expected to be transferred to NE Energy. Fitch views this as a structural weakness, analogous to quarterly distributions from a project that pays semi-annual debt service.

Fitch believes that NGC's cash flows will be more than sufficient in the near term, though there is a fair degree of uncertainty if these levels will be sustained throughout the life of the bonds. ECP has executed financial hedges to fix the price received for conventional hydroelectric production through 2011. In addition, recent structural changes to the forward capacity and ancillary service markets have resulted in a meaningful increase in NGC's cash flow.

Fitch believes that the inherent flexibility of the pumped storage assets does provide the opportunity to realize value that other facilities would not be able to achieve. However, the intricacies of operating the facility introduce additional uncertainty to any projection of the facility's financial performance.

ECP's projections of the cash flow derived from NGC assets (i.e. excluding Mt Tom) through 2016 suggest exceptionally strong coverage of NGC's debt service obligations. In an attempt to approximate the minimum financial performance that should be achievable over the long term, Fitch incorporated somewhat conservative assumptions that, by 2016, reduced cash flows by approximately $70 million a year below ECP forecasts. In order to measure the portfolio's performance during a year of extreme market downturn combined with a drought, Fitch imposed additional stresses that resulted in an incremental reduction of approximately $30 million a year. The financial performance remains strong for the rating category in both Fitch scenarios, as DSCRs typically are in excess of 3x in the conservative base case and 2x in the stress case.

If the structure of the capacity markets continues to evolve, Fitch believes that the associated capacity revenues could return to previous levels at some point prior to maturity of NGC's debt. If capacity revenues do return to historic levels, DSCRs could drop to 1.3x in the conservative base case and below breakeven in the market stress scenario. To be clear, Fitch does not expect a significant change to the capacity market pricing, but acknowledges it to be a possibility.

Although the financial projections are stronger than normal for the rating category, the uncertainty in the long term capacity market as well as the anticipated quarterly transfers from ECP Energy are potential concerns that temper the rating to the assigned level. Fitch will monitor the developments of the capacity markets and will adjust the ratings if a significant change is anticipated.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.