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23 Oct 2000
About $472 Million of Long-Term Debt Downgraded/$435 Million CP Program Newly-Rated
New York, October 23, 2000 -- Moody's Investors Service downgraded the ratings of Indiana Gas Company,
Inc., and Southern Indiana Gas & Electric Co.
(SIGECO). The short-term ratings of Indiana Gas and SIGECO
are confirmed. Moody's also assigned a Prime-2 commercial
paper rating to Vectren Utility Holdings, Inc. (VUHI).
Rating actions taken are as follows:
Indiana Gas Company, Inc. - Senior unsecured debt
downgraded to A2 from Aa2; shelf downgraded from (P)Aa2 to (P)A2;
Prime-1 rating confirmed.
Southern Indiana Gas & Electric Co. - First mortgage
bonds and senior secured notes downgraded to A1 from Aa2; shelf downgraded
from (P)Aa2/(P)"aa3" to (P)A1/(P)"a2"' VMIG 1 pollution control revenue
These rating actions end a rating review begun on September 18,
2000 because of our concerns about the negative credit impact of Vectren
Corp.'s (unrated) $425 million debt-financed acquisition
of DPL Inc.'s gas distribution assets on Indiana Gas and SIGECO.
We expect this acquisition to close at the end of this month.
Downgrades for Indiana Gas and SIGECO's ratings reflect the substantial
debt incurred by VUHI which must be serviced by its subsidiaries,
the largest ones being Indiana Gas and SIGECO. Indiana Gas's interest
expense will roughly double, while its EBITDA increases only by
less than a third. Unlike Indiana Gas, SIGECO will not directly
incur debt, but it could dividend or loan sums to its affiliates
to meet their cash needs.
Vectren's Corporate Structure
Vectren Corporation is a holding company, just formed this past
March from the merger of SIGCORP (the parent of SIGECO) and Indiana Energy
(the parent of Indiana Gas). The combined corporate structure has
been evolving since the merger. Vectren Corp. recently formed
VUHI as an intermediate holding company to hold its interests in its three
utilities: SIGECO, Indiana Gas, and Vectren Energy Delivery
of Ohio (VEDO, unrated). Vectren also owns stakes in an array
of unregulated businesses which came from SIGCORP and Indiana Energy.
These unregulated businesses are financed through a newly-formed
Vectren Capital Corp. (unrated), whose debt is fully and
unconditionally guaranteed by Vectren Corp.
Indiana Gas will acquire 47% of the DPL gas assets, and VEDO
will acquire the remaining 53%. To fund the purchase,
VUHI will issue $430 million of commercial paper and downstream
all of the proceeds to Indiana Gas and VEDO on a pro rata basis based
on their ownership. Each of Indiana Gas and VEDO will book a portion
of the proceeds as paid-in capital, the rest as debt.
We expect VUHI will soon issue long-term debt to refinance much
of its commercial paper. The rest may be paid down in the near-term
with a common stock offering and/or asset sales proceeds.
We expect Vectren to file for approval by state regulators a funding plan,
which allows VUHI issue both short-term and long-term debt
for Indiana Gas, SIGECO, and VEDO. By aggregating the
financing needs of the three relatively small utilities, this plan
may result in greater efficiency in financing and better access to capital
markets. VUHI will also help manage the working capital needs of
the utilities. Under this plan, each of Indiana Gas,
SIGECO, and VEDO will upstream any excess cash to VUHI to be allocated
as needed among the utilities.
In acquiring its stake in VEDO, Indiana Gas's debt will increase
by half. The resulting increase in interest expense will be greater
than the incremental cash flows from the acquisition. We expect
its coverages will be ample (EBITDA/interest in the 4 times range),
but significantly off from their historic levels (6 times range).
The effect of this transaction on Indiana Gas's capital structure will
be minimal, however, since VUHI will contribute to it equity
equal to the amount of debt incurred.
SIGECO will not be directly involved in financing the DPL acquisition
and will not directly incur debt. However, we believe that
SIGECO's ratings should be aligned with those of Indiana Gas, which
is about the same size and has a similar credit profile as SIGECO (VEDO
is considerably smaller and weaker than Indiana Gas and SIGECO).
Going forward, we expect the credit of VUHI, SIGECO,
Indiana Gas, and VEDO will become closely related for a number of
reasons. First, the VUHI financing plan, if approved,
will allow for relatively unrestricted flow of funds among the three utilities.
In addition, the Indiana regulation restricts neither utility dividends
to its parent nor short-term intercompany loans.
The Prime-2 rating for VUHI primarily reflects the credit strength
of its subsidiaries SIGECO and Indiana Gas. Being much smaller
than its sister utilities, VEDO will contribute much less cash to
VUHI. We expect VUHI's subsidiaries all will generate cash which
can be upstreamed to VUHI, and that VUHI will have sufficient cash
not only to meet its own debt service requirements, but also to
provide for most of Vectren Corporation's shareholder dividends.
VUHI's $435 million CP program is fully backed by a 364-day
Vectren Corporation, based in Evansville, Indiana, is
a holding company. Its subsidiaries include an intermediate holding
company, Vectren Utility Holdings, Inc., whose
subsidiaries include Indiana Gas Company, Inc., and
Southern Indiana Gas and Electric Company.
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653
MOODY'S DOWNGRADES RATINGS OF INDIANA GAS (SR. UNS. TO A2) AND SOUTHERN INDIANA GAS & ELECTRIC (SR. SEC. TO A1), ASSIGNS PRIME-2 TO VECTREN UTILITY HOLDINGS' CP PROGRAM
Vice President - Senior Analyst
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653
No Related Data.
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