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Rating Action:

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)

16 Apr 2002
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.

New York
John Diaz
Managing Director
Corporate Finance
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Kevin G. Rose
Vice President - Senior Analyst
Corporate Finance
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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