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Rating Action:

MOODY'S DOWNGRADES LONG-TERM CREDIT RATINGS OF PUGET SOUND POWER & LIGHT (SR. SEC. TO Baa1); UPGRADES WASHINGTON ENERGY COMPANY SHORT-TERM DEBT RATING TO PRIME-2 AND WASHINGTON NATURAL GAS COMPANY LONG-TERM RATINGS (SR. SEC. TO Baa1)

10 Feb 1997
MOODY'S DOWNGRADES LONG-TERM CREDIT RATINGS OF PUGET SOUND POWER & LIGHT (SR. SEC. TO Baa1); UPGRADES WASHINGTON ENERGY COMPANY SHORT-TERM DEBT RATING TO PRIME-2 AND WASHINGTON NATURAL GAS COMPANY LONG-TERM RATINGS (SR. SEC. TO Baa1) New York, 2/10/1997 -- Moody's Investors Service downgraded the long-term credit ratings of Puget Sound Power & Light Company (Puget Power) and upgraded the credit ratings of Washington Energy Company (WEC) and its wholly-owned gas distribution subsidiary, Washington Natural Gas Company (WNG). The rating actions are in response to last Friday's approval by the companies' Boards of Directors to proceed with merger plans consistent with the terms and conditions in the Washington Utilities & Transportation Commission's (WUTC) order issued February 5, 1997. Under the merger plans, WEC and WNG will merge with and into Puget Power to form a new company, Puget Sound Energy, Inc. (PSE). Puget Sound Energy, as the surviving company, will assume the outstanding obligations of the former companies. The rating actions conclude a rating review which began on October 19, 1995. The outlook for the new ratings is stable.
Ratings downgraded include: Puget Power's senior secured debt, to Baa1 from A3; its preferred stock, to "baa2" from "baa1"; and its counterparty rating to Baa2 from Baa1. Puget Power's Prime-2 short-term rating for commercial paper was not under review.
Ratings upgraded include: Washington Energy's short-term rating for commercial paper, to Prime-2 from Prime-3; and Washington Natural Gas Company's senior secured debt, to Baa1 from Baa2, and its preferred stock to "baa2" from "baa3".
A stipulation and rate plan that forms the basis for the WUTC's approval, includes, among other things, an initial reduction in electric rates (about 3.2% for residential customers) in 1997, reflecting the net effects of the roll off of the periodic rate adjustment mechanism deferral and a modest general electric rate increase. This will be followed by a series of 1% or 1.5% electric rate increases in 1998-2001, depending on the rate class. Gas rates will remain at current levels through January 1, 1999, after which time gas margins will be reduced by 1%.
Although the approved rate increases offer price certainty for customers and are expected to support PSE's financial performance, they do little to enhance the company's competitive position in certain customer classes in the low-cost Pacific Northwest region. Indeed, absent reasonable success in efforts to renegotiate certain above market-priced power purchase contracts, PSE's competitive profile will be further burdened by higher costs for purchased power over the next several years. Moody's also notes that the absence of the periodic rate adjustment mechanism going forward subjects PSE to greater variability in earnings.
The merger does offer certain advantages for PSE going forward. Electric rate increases under the stipulation are lower than they would otherwise have been absent the merger. Furthermore, we believe PSE can be more efficient as a larger total energy company and is likely to achieve a significant percentage of the estimated $370 million of cost savings over the next ten years. And, there are undoubtedly additional savings beyond this level that could be achieved through implementing best practices and further paring of purchased power expenses and the capital expenditure budget. However, there is a great deal more uncertainty associated with achieving the higher level of savings. The company will therefore be challenged to maintain the higher level of financial flexibility necessary to compensate for increasing business risks.
Notwithstanding lower than anticipated debt outstanding for the predecessor companies at year end 1996 and other plans to further reduce debt, PSE will carry a heavier debt burden than Puget Power did on a book basis, reflecting the assumption of WEC/WNG obligations. As a result, fixed charge coverage ratios will be slightly lower than they were for the former Puget Power. More importantly, adjustments to reflect the company's fixed obligations under power purchase contracts results in even less financial flexibility and lower coverage ratios. This further highlights the need for PSE to be successful in avoiding increases in annual power purchase expenses. Puget Sound Power & Light Company was formerly an electric utility, headquartered in Bellevue, Washington.
Washington Energy Company, the former holding company and parent for the former Washington Natural Gas Company, a natural gas distribution utility, were headquartered in Seattle, Washington.
Puget Sound Energy Inc. is a combination electric and gas utility. Its headquarters will be in Bellevue, Washington, in the same facilities now occupied by Puget Power.
No Related Data.
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