Fitch Ratings Affirms Public Service Co. of New Hampshire.

NEW YORK -- Fitch Ratings has affirmed the senior secured rating of Public Service Company of New Hampshire (PSNH) at 'BBB+' and the indicative senior unsecured rating at 'BBB'. The Rating Outlook is Stable. Approximately $407 million of debt is affected.

PSNH's credit ratings reflect the predictable cash flows of its transmission and distribution operations, the improved regulatory environment in New Hampshire and solid financial performance. PSNH's balance sheet has been strengthened over the last several years as proceeds from securitization bond offerings and generation asset sales were used to reduce outstanding borrowings and a debt-like purchase power obligation. State restructuring legislation was modified in 2003 to extend the transition service period and delay the divestiture of PSNH's fossil and hydroelectric assets until at least April 2006. These generating assets are used to supply energy for transition service and default service load. Fuel and purchased power costs in excess of those reflected in the transition and default service charges are addressed through an annual stranded cost recovery charge reconciliation filing. Recovery of such deferred costs is subject to a New Hampshire Public Utility Commission (NHPUC) prudence review. Despite the ability to adjust generation rates semi-annually, PSNH's liquidity would be affected by an extended outage of the Merrimack coal facility (which provides a significant portion of its total power needs), particularly during a period of peak demand. Fitch notes that while the regulatory climate in New Hampshire has improved noticeably in recent years after two decades of tumult, the future regulatory framework in the state beyond early 2006 is yet to be determined.

The company continues to derive significant cash flow from the recovery of stranded costs via a non-bypassable surcharge (fixed at 3.4 cents per kwh). Credit metrics (such as the ratio of operating cash flow to interest expense and ratio of debt to operating cash flow) are currently very strong but are expected to weaken once stranded costs are fully recovered and as additional debt is issued to finance the company's capital spending program. An additional credit concern is the uncertainty around PSNH's pending rate case. A $21 million rate case was filed during late 2003 for determination of tariffs beyond the initial transition period, which ended in February 2004. In May 2004, the NHPUC staff and the Office of the Consumer's Advocate filed testimony supporting a $4 million and $14 million rate reduction, respectively. A decision is expected in late 2004.

Also, PSNH is indirectly exposed to the credit of its parent Northeast Utilities (NU) and NU's unregulated investments. NU, through its subsidiary NU Enterprises, Inc., is engaged in nonregulated generation and marketing activities. After several years of net losses (due largely to a Select Energy money-losing contract with CL&P), the nonregulated businesses have recently demonstrated improved financial performance. However, NU will remain exposed to the volumetric, price and credit risks associated with Select's provision of fixed price full requirements power to utilities in the Northeast. Any credit deterioration of NU could serve to constrain PSNH's ratings. PSNH participates in a shared money pool with its utility and non-utility affiliates and thus has some limited credit exposure to affiliate Select Energy.

A regulatory environment in New Hampshire that allows for reasonable recovery of growing capital expenses and increased operating costs and a regulatory structure that establishes a permanent mechanism to protect the utility from fluctuating commodity price costs could result in a positive rating action. A negative rating action could result from an inability to recover fuel and purchased power costs in excess of fixed tariffs or excessive reliance on spot market power procurement or variable rate debt.