MOODY'S DOWNGRADES ENERGY EAST CORPORATION'S UNSECURED RATINGS TO Baa2; ALSO DOWNGRADES RATINGS OF CERTAIN ENERGY EAST SUBSIDIARIES, WHILE CONFIRMING OTHERS; CONCURRENTLY, ROCHESTER GAS & ELECTRIC CORPORATION'S RATINGS DOWNGRADED (SR. SEC.TO Baa1)
Approximately $4.1 Billion of Debt Securities Affected.
New York, April 16, 2002 -- Moody's Investors Service downgraded the senior unsecured debt ratings
of Energy East Corporation to Baa2 from Baa1. Moody's also downgraded
the long-term debt ratings of two of Energy East's five utility
subsidiaries: New York State Electric & Gas Corporation's (NYSEG)
senior secured rating was downgraded to Baa1 from A3, and Southern
Connecticut Gas Company's (SCG) senior secured debt rating was downgraded
to A3 from A2. At the same time, Moody's confirmed the ratings
of two other Energy East utility subsidiaries: Central Maine Power
Company's (CMP) senior unsecured debt was confirmed at A3, and Connecticut
Natural Gas Corporation's (CNG) senior unsecured debt was confirmed at
A3. Energy East's other utility subsidiary, Berkshire Gas
Company, is not currently rated.
Concurrent with the rating actions for Energy East and its rated subsidiaries,
Moody's also downgraded the senior secured ratings of Rochester Gas &
Electric Corporation (RG&E) to Baa1 from A3.
The rating downgrades primarily reflect the expected near-term
closing of Energy East's merger with RGS Energy Group, Inc.
consistent with terms and conditions announced in February 2001.
Energy East has already prefunded roughly $350 million of the estimated
$750 million cash portion of the transaction with debt and trust
preferred securities issued during 2001. The remaining $400
million of debt financing relating to the transaction is expected to occur
just prior to closing, which is expected by mid-2002,
subject to the lone remaining regulatory approval from the Securities
and Exchange Commission.
Although a certain amount of event risk has been evident in Energy East's
credit profile in recent years, we believe that management is now
more focused on integrating its recent acquisitions, thereby supporting
a stable outlook for all of the above ratings. Today's rating actions
conclude a review of the long-term ratings of the aforementioned
companies for possible downgrade, which commenced February 21,
2001. The reviews were initiated following the announcement by
Energy East Corporation and RGS Energy Group, Inc. (parent
of RG&E) that their respective boards of directors unanimously approved
a definitive merger agreement totaling $2.4 billion (including
assumption of approximately $1.0 billion of RGS Energy debt).
Moody's believes that the lower ratings for Energy East and the aforementioned
utility companies whose ratings have been downgraded more appropriately
reflect Energy East's added debt burden. The added debt burden
at Energy East, which results from the RGS Energy transaction,
places increased demands on cash flow from the operating utility companies
who are the principal sources of cash flow to service the parent company's
obligations. The latter concern holds especially true as relates
to NYSEG, RG&E, and SCG, which have somewhat weaker
financial profiles and/or higher business risk profiles than CMP and CNG.
We note that NYSEG's capitalization ratios have improved considerably
in the past year and its common equity as a percentage of total capitalization
is expected to reach 45% in 2002. However, its common
equity ratio is not expected to reach the even higher levels previously
anticipated in conjunction with the former rating level. Furthermore,
the recently approved multi-year settlement of NYSEG's Price Protection
Plan resulted in a one-time 13% rate reduction, which
will result in lower earnings and cash flow for NYSEG compared to previous
levels. Thus, NYSEG's ratio of cash flow coverage of interest
expense is expected to be about 3.3 times for the foreseeable future.
This is lower than previous levels despite the expected lower level of
interest expense. We also note that NYSEG retains some exposure
to supply risk under its role of provider of last resort, and it
is in midst of a gas rate case. We believe a settlement of the
gas rate case, resulting in a multi-year performance-based
plan, is likely given recent experience in its electric proceeding.
With respect to RG&E, we note that the company is also in midst
of regulatory proceedings seeking rate increases for both the electric
and gas sectors, to recover higher costs of service not presently
included in its existing rates. We believe it is quite possible
that RG&E can achieve a settlement in these proceedings that is similar
in nature to the multi-year performance-based rate plan
that NYSEG has been able to obtain, as well as those that Energy
East's other utility subsidiaries have been able to obtain in Maine,
Connecticut, and Massachusetts. Nevertheless, RG&E
faces increased demands on its cash flow as a result of a more material
amount of fixed obligations that exist at Energy East compared to its
current parent, RGS Energy. In the event that Energy East
moves to divest the remainder of RG&E's generating assets, including
its 100% ownership of the 480-megawatt Ginna nuclear plant,
its business and financial risk profiles would improve, all other
factors equal. Meanwhile, we expect that Energy East will
manage RG&E's capital structure to include something close to the
level of common equity upon which it can earn a return on. Given
the recent New York Public Service Commission decision in NYSEG's electric
proceedings, we expect this to be near the 45% level.
Assuming supportive outcomes in the pending rate proceedings, we
expect that RG&E's prospective cash flow coverages of interest can
be maintained near four times.
The downgrade of SCG's ratings reflects the current weakness in its capitalization
ratios and cash flow coverage of interest expense, offset in part
by a supportive multi-year performance-based rate plan.
The downgrade also takes into account the fact that Energy East has some
flexibility to rely less on SCG for dividend support, which might
allow for gradual improvement in these credit protection measures.
However, even with expected gradual improvement in SCG's financial
profile, we believe the lower rating level more appropriately reflects
the prospective level of credit risk present.
In confirming the ratings of CMP and CNG, Moody's notes that the
respective financial and business risk profiles of these companies provide
more flexibility for them to absorb the increased demands for cash from
the parent company than is the case for Energy East's other utility subsidiaries.
A complete list of the ratings downgraded follows:
Energy East Corporation senior unsecured debt to Baa2 from Baa1;
and its shelf registration rating for senior unsecured debt to (P)Baa2
from (P)Baa1; Energy East Capital Trust I trust preferred securities
to Baa3 from Baa2; and Energy East Capital Trust I and II shelf registrations
for trust preferred securities to (P)Baa3 from (P)Baa2.
New York State Electric & Gas Corporation senior secured debt to Baa1
from A3; its senior unsecured debt and issuer ratings to Baa2 from
Baa1; its preferred stock to Ba1 from Baa3; its shelf registration
for senior secured debt to (P)Baa1 from (P)A3; and its shelf registration
for preferred stock to (P)Ba1 from (P)Baa3. NYSEG's short-term
debt rating for commercial paper was not under review for downgrade and
remains at Prime-2.
Southern Connecticut Gas Company senior secured debt to A3 from A2.
Rochester Gas & Electric Corporation senior secured debt to Baa1 from
A3; its senior unsecured debt and issuer ratings to Baa2 from Baa1;
its preferred stock to Ba1 from Baa3; its shelf registration for
senior secured debt/senior unsecured debt/preferred stock to (P)Baa1/(P)Baa2/(P)Ba1,
respectively, from (P)A3/(P)Baa1/(P)Baa3, respectively.
A complete list of the ratings confirmed follows:
Central Maine Power Company senior unsecured debt and issuer ratings at
A3; and its preferred stock ratings at Baa2.
Connecticut Natural Gas Company senior unsecured debt at A3.
Energy East Corporation is a holding company for five regulated utility
energy distribution subsidiaries in the New York/New England region and
has modest investments in energy-related nonregulated businesses.
Its headquarters are in Albany, New York.
Rochester Gas & Electric Corporation, currently a wholly-owned
subsidiary of RGS Energy Group, Inc., is a regulated
combination electric and gas utility, which maintains headquarters
in Rochester, New York.
Moody's Investors Service
Kevin G. Rose
Vice President - Senior Analyst
Moody's Investors Service