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05 May 2000
MOODY'S CONFIRMS SOUTHERN CONNECTICUT GAS COMPANY'S DEBT RATING (SR. SEC. AT A2)
Moody's Investors Service confirmed the rating of Southern Connecticut Gas Company (SCG)'s senior secured medium-term notes at A2, with a stable outlook. This rating action ends a rating review that we began in June 1999 in order to reassess SCG's rating versus the ratings of Energy East Corporation's (not rated) current and future subsidiaries.
Energy East acquired SCG's immediate parent Connecticut Energy Corporation (not rated) in February 2000 for $617 million, including assumption of $181 million of debt. Until then, Energy East's primary holding had been New York State Electric and Gas Corporation (rated Baa1 senior unsecured). By this year-end, however, we expect Energy East will have completed its acquisitions of three other gas and electric distribution companies in the Northeast: CTG Resources, Inc. (the parent of Connecticut Natural Gas Corporation, rated A3 senior unsecured), CMP Group (the parent of Central Maine Power Company, Baa1 senior unsecured), and Berkshire Energy Resources (not rated).
The confirmation of SCG's rating reflects our view that its fundamental financial strength is little changed on a standalone basis. We expect slight increases in its margins and cash flow from its rising customer growth rate. The stability of its earnings is derived from SCG's regulated rates and its predominantly captive firm customer base. Furthermore, its weather normalization adjustment helps to reduce its sensitivity to weather.
We expect that SCG will maintain its operating and capital costs at current or slightly lower levels. It is uncertain what SCG's net dividend to Energy East will be, but we expect that its new parent will make equity contributions so that SCG will maintain its equity at about 54% which is allowed in its regulated rates. In addition, Energy East may provide additional funds to SCG to finance growth projects. On its own, SCG had not had sufficient capital to fully invest in the growth opportunities in its service territory, where market saturation is about 50%.
We expect that over the next few years, Energy East will take steps to derive operational and financial synergies among its five subsidiaries, but a specific plan of how and when it would accomplish those synergies has yet to be determined.
The rating also takes into account the elimination of much of its regulatory uncertainty with the recent rate case decision with the Connecticut Department of Public Utility Control. From a credit perspective, the most important factor in the decision was the continuation of SCG's weather normalization clause. DPUC also lowered SCG's allowed return-on-equity to 10.71%, but this level of return is in line with current levels allowed in the industry.
Headquartered in Bridgeport, Connecticut, Southern Connecticut Gas Company, a subsidiary of Connecticut Energy Corporation, provides natural gas service in Fairfield, New Haven, and Middlesex counties. Connecticut Energy, in turn, is a subsidiary of Energy East Corporation.
No Related Data.
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