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25 Nov 2002
Approximately $1.350 Billion of Debt are Affected
New York, November 25, 2002 -- Moody's Investor's Service downgraded to Baa1 the senior unsecured debt
of Vectren Utility Holdings, Inc. (VUHI) a first-tier
subsidiary of Vectren Corporation (Parent, no public debt outstanding)
and intermediate holding company for its regulated utility subsidiaries
Indiana Gas Company, Inc. (IGC), Southern Indiana Gas
& Electric Co. (SIGECO) and Vectren Energy Delivery of Ohio
(VEDO) which is unrated. VUHI's debt is guaranteed jointly and
severally by its regulated utility subsidiaries, as it has no operating
assets of its own. The regulated utility business accounts for
over 70% of corporate earnings of Vectren. Also downgraded
to Baa1 is the senior unsecured debt of IGC and SIGECO. VUHI's
CP rating is downgraded to P-2. The outlook is stable.
Meanwhile, Moody's confirmed the Baa2 rating for the senior unsecured
debt of Vectren Capital Corporation (VCC), the funding arm for Vectren's
unregulated businesses. VCC's debt is guaranteed by the Parent,
which requires the Parent to maintain a positive net worth and to provide
funds for timely payment of VCC's debt service obligations. In
event of VCC's default, lenders have recourse against the Parent,
which in turn has the ability to extract dividends from the regulated
utilities to fund cash needs of the unregulated businesses. From
a state regulatory perspective, there are no statutory limitations
in Indiana or Ohio regarding the amount or timing of dividend payments
from any of the regulated utilities, nor is there any explicit requirement
that they maintain minimum levels of equity or maximum levels of debt.
By the same token, Vectren's unregulated businesses have in the
past and will continue to have in the future, the ability to transfer
capital to the utilities through the Parent, among the various entities.
This corporate flexibility in managing funds flows between the two sides
of the house is an important reason why the debt ratings on the non-regulated
side of Vectren are notched only one level below those of the regulated
side, rather than maintaining the previous three notch differential.
Overall, the non-regulated side of Vectren has also demonstrated
an ability to sustain profitability and generate cash flows that could
be either retained in the business or used to supplement the capital growth
requirements on the utility side.
This rating action concludes a review on the Vectren group commenced on
August 27, 2002. Moody's action reflects the declining credit
and fixed charge coverage measures over the past two years, which
have been weaker when compared with those of its A2 rated utility peers.
These credit measures were impacted by the effects of acquisitions and
integration costs, high gas costs stemming from the 2000-2001
winter that culminated in increased levels of bad debt expenses,
higher levels of debt financing, excise taxes and were followed
by warmer than normal weather in the 2001-2002 winter which further
depressed gas utility earnings. Moreover, unlike many other
gas distribution companies, the Vectren gas utilities have been
operating without the benefit of any weather normalization clauses or
weather insurance in any of their jurisdictions and their weather mitigation
efficiency is among the lowest in the industry. These structural
differences when coupled with higher leverage of VUHI (retained cash flow
to total debt of 11.3% and total debt to total capitalization
of 59% vs. average of 16% and 48%, respectively,
for "A2" rated utilities) serve to accentuate its credit measure deficiencies.
On the EBIT/Interest Expense and Funds From Operations to Fixed Charge
coverage side, VUHI's 2.7 and 3.9 do not compare favorably
with the A2 utility averages of 3.8 and 4.4, respectively.
Moody's notes that while the company plans on taking measures to specifically
address certain weaknesses in its capital structure and that of its operating
subsidiaries, these plans will take several quarters to implement
and the effects of their benefit as well as those of future earnings growth
will not be realized for some time.
On the NOx coal plant emissions front for SIGECO, Vectren advises
that it has reached a settlement agreement with the Indiana Office of
Utility Consumer Counselor for the recovery of environmental expenditures
in the approximate amount of $244 million, allowing for cost
recoveries to occur every six months (including a 12.25%
cost of equity capital recovery) to bring its emissions in compliance
with state and federal standards. While this settlement is still
subject to Indiana Utility Regulatory Commission (IURC) approval,
its acceptance would close a significant regulatory question that the
company has with respect to covering these necessary, but "non-productive"
costs of operation.
In arriving at a single senior unsecured long-term debt rating
for the various utilities, Moody's notes that Vectren operates the
three utility subsidiaries of VUHI as if they were one single utility
division, with each company remitting dividends to the Parent as
its earnings and capitalization permit, and each issuing debt through
VUHI as its needs may dictate. Any future short or long-term
debt needs would be issued through VUHI, which debt issuance would
be jointly and severally guaranteed by IGC, SIGECO and VEDO.
The rating also factors in the low returns on investments made by IGC
for its 47% share and VEDO for its 53% share for purchasing
the gas business from The Dayton Power and Light Company in 2000 at substantial
premium; no returns on capital are currently earned on the goodwill
portion of the acquisitions price.
Finally, while VCC has been unsuccessful in removing the $113MM
rating triggers imbedded in its unsecured notes that mature over ten years,
it has obtained the consent of its line banks to waive any cross-default
that may arise in its $170MM bank facility on account of a rating
trigger occurrence. Furthermore, Vectren is taking measures
to improve the liquidity and capitalization of the non-regulated
side of the business to better enable the funding of any such potential
cash call. Moody's will monitor the company's progress in this
The stable outlook is predicated on the assumption that the NOx settlement
will be approved by the IURC, Vectren Corporation will issue new
equity capital in 2003 to enable its operating subsidiaries to strengthen
their balance sheets and that the earnings and cash flows on both the
regulated and unregulated businesses continue to improve.
The following ratings are affected:
VUHI - from A2 senior unsecured debt to Baa1, from P-1
Commercial Paper to P-2;
IGC - from A2 senior unsecured debt to Baa1;
SIGECO - from A1 senior secured notes and First Mortgage Bonds
to A3, from A2 long-term issuer rating to Baa1, from
VMIG 1 pollution control revenue bonds to VMIG 2;
VCC - Baa2 senior unsecured notes, confirmed.
Vectren Corporation is based in Evansville, Indiana and is the holding
company for the company's non-regulated businesses and gas and
electric regulated utility businesses. Its first-tier subsidiaries
include Vectren Capital Corporation and Vectren Utility Holdings,
Inc., whose subsidiaries in turn include Indiana Gas Company,
Inc. and Southern Indiana Gas and Electric Company. The
non-regulated businesses consist principally of energy marketing
and services, coal mining, utility infrastructure services
Corporate Finance Group
Moody's Investors Service
MOODY'S DOWNGRADES VECTREN UTILITY HOLDINGS INC.'S DEBT AND THAT OF ITS RATED UTILITIES, INDIANA GAS AND SOUTHERN INDIANA GAS & ELECTRIC TO Baa1 (SR. UNS.); VUHI'S RATING FOR COMMERCIAL PAPER IS DOWNGRADED TO P-2 AND THE DEBT RATING OF VECTREN CAPITAL IS
Edward H. Tan
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
No Related Data.
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