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Rating Action:

Moody's downgrades Vectren Utility Holdings and subsidiaries to A3 from A2; short-term rating to P-2 from P-1; outlook stable.

25 Oct 2019

Approximately $1.2 billion of debt securities affected.

Note: On November 04, 2019, the press release was corrected as follows: In the debt list, under Downgrades for Vectren Utility Holdings, Inc., the description of the Revolving Credit Facility was changed to Gtd Senior Unsecured Revolving Credit Facility. Revised release follows.

New York, October 25, 2019 -- Moody's Investors Service ("Moody's") today downgraded the ratings of Vectren Utility Holdings, Inc. (VUHI), including its senior unsecured rating to A3 from A2 and short-term rating for commercial paper to Prime-2 from Prime-1. Moody's also downgraded the ratings of its operating utility subsidiaries, Southern Indiana Gas & Electric Company (SIGECO), including its Issuer Rating to A3 from A2 and Indiana Gas Company, Inc. (IGC), including its senior unsecured rating to A3 from A2. The outlooks of VUHI, SIGECO and IGC are stable.

A complete list of rating actions is included below.

Downgrades:

..Issuer: Vectren Utility Holdings, Inc.

....Gtd Senior Unsecured Revolving Credit Facility, Downgraded to A3 from A2

....Gtd Senior Unsecured Regular Bond/Debenture, Downgraded to A3 from A2

....Senior Unsecured Commercial Paper, Downgraded to P-2 from P-1

..Issuer: Southern Indiana Gas & Electric Company

.... Issuer Rating, Downgraded to A3 from A2

....Senior Secured Regular Bond/Debenture, Downgraded to A1 from Aa3

..Issuer: Indiana Finance Authority

....Senior Secured Revenue Bonds, Downgraded to A1 from Aa3

..Issuer: Mount Vernon (City of) IN

....Senior Secured Revenue Bonds, Downgraded to A1 from Aa3

..Issuer: Warrick (County of) IN

....Senior Secured Revenue Bonds, Downgraded to A1 from Aa3

..Issuer: Indiana Gas Company, Inc.

....Senior Unsecured Medium Term Notes, Downgraded to A3 from A2

Outlook Actions:

..Issuer: Vectren Utility Holdings, Inc.

....Outlook, Changed To Stable From Negative

..Issuer: Southern Indiana Gas & Electric Company

....Outlook, Changed To Stable From Negative

..Issuer: Indiana Gas Company, Inc.

....Outlook, Changed To Stable From Negative

RATINGS RATIONALE

"VUHI's weaker financial profile is the primary driver of the ratings downgrade," said Robert Petrosino- Vice President - Sr. Analyst. "The decline in key financial credit metrics are expected to be permanent, thanks to higher levels of debt being incurred to fund capital expenditures," added Petrosino.

The downgrade of VUHI's senior unsecured rating to A3 from A2 primarily reflects the weaker financial profile. The ratio of VUHI's cash flow pre-working capital (CFO pre-w/c) to debt has declined to below 20% for the LTM period ending 30-June 2019 and is expected to stabilize near the 20% range over the next several years. For the three fiscal years 2016 to 2018, VUHI's average ratio of CFO pre-w/c to debt was 23.6%. The decline is primarily a function of the company's reliance on debt to finance its elevated capital expenditure program, but also reflects lower cash flows from the lingering effects of tax reform.

The rating action also reflects VUHI's elevated exposure to environmental risks, specifically the risks associated with carbon dioxide regulations at its SIGECO subsidiary. On 24 April 2019, the Indiana Utility Regulatory Commission (IURC), the regulator for VUHI's largest subsidiary, denied a petition for a Certificate of Convenience and Necessity to build an 850 MW combined cycle gas facility which was expected to replace approximately 730 MWs of coal-fired generation. Assuming a 50% capacity factor for both plants, this would have reduced SIEGCO's annual carbon dioxide emissions by roughly 1.3 million tons.

SIGECO had planned to transition its predominately coal-fired generation fleet to a more gas-fired generation mix under its 2016 Integrated Resource Plan (IRP). As a result, SIGECO's exposure to carbon transition risks is elevated compared to its sector peers. A new IRP is expected to be filed in May 2020.

VUHI's gas operations are lower risk local distribution companies operating under supportive regulatory rate constructs in Indiana and Ohio. VUHI's gas operations benefit from gas cost recovery, infrastructure investment trackers, decoupling, fixed-variable rate design, bad debt and energy efficiency programs.

VUHI issues debt to support portions of its subsidiaries' financing needs. All VUHI's subsidiaries provide a full and unconditional, joint and several guarantee of all of VUHI's debt. As a result, the credit quality of VUHI benefits from the diversity of its utility operations and its subsidiaries are examined on a consolidated basis.

Liquidity

VUHI's liquidity profile is adequate. VUHI's liquidity is supported by the cash flow generated by its regulated subsidiaries. The company also has $400 million of short-term borrowing capacity through a credit facility that expires in July 2022. The facility backstops a $400 million commercial paper program that provides borrowing capacity for the entire utility group.

As of 30 June 2019, VUHI had $297 million of commercial paper outstanding. The credit facility and commercial paper program are fully guaranteed by SIGECO, IGC, and Vectren Energy Delivery Ohio, Inc. (VEDO, Not Rated). The utilities obtain liquidity by issuing promissory notes to VUHI and participating in VUHI's money pool.

There is one financial covenant contained in VUHI's credit agreement requiring that the ratio of total debt to consolidated total capitalization not exceed 65%. VUHI was in compliance with this covenant as of 30 June 2019.

Over the next twelve months, Moody's expects VUHI to generate approximately $425 million in cash flow from operations. Moody's also expects capital expenditures will be around $586 million, which is higher than the $475 million average over the last five years and upstream dividends to the ultimate parent company, CenterPoint Energy Inc., are expected to average around $77 million, for a payout ratio of around 40%, in-line with historical levels.

VUHI's next maturity is $100 million of senior unsecured notes due in April 2020. IGC has $10 million of notes maturing in June of 2025, while SIGECO has $38.2 million of notes with a mandatory put on 01 September 2020.

Rating Outlook

The stable outlook reflects VUHI's consolidated credit metrics that are expected to stabilize with the ratio of VUHI's consolidated CFO pre-WFC to debt to stay steady around 20%. The stable outlook also reflects an expectation that credit supportive regulatory environments, in Indiana for SIGECO and IGC and in Ohio for VEDO, will continue.

The stable outlook for SIGECO reflects the consolidated financial metrics of VUHI with its CFO pre-WC to debt expected to stabilize around 20%. The stable outlook also reflects the expectation that the regulatory environment will remain credit supportive in Indiana as SIGECO works to transition its generation to cleaner resources

The stable outlook for IGC reflects the consolidated financial metrics of VUHI with its CFO pre-WC to debt expected to stabilize around 20%. The stable outlook also reflects the expectation that the regulatory environment will remain credit supportive in Indiana including the timely recovery of its capital investments.

Factors that could lead to an upgrade

Due to the cross guarantees between VUHI, SIGECO, IGC and VEDO, improvement in one entity's credit quality could lead to an upgrade of all rated entities with an improvement in financial measures closer to historical levels including CFO pre-WC to debt of over 21%. Ratings may also be upgraded if VUHI's regulatory environments become more credit supportive, thereby reducing risks and increasing returns.

Factors that cold lead to a downgrade

Due to the cross guarantees between VUHI, SIGECO, IGC and VEDO, deterioration in one entity's credit quality could lead to a downgrade of all rated entities. VUHI's, SIGECO and IGC's rating could be downgraded if financial measures continue to deteriorate including CFO pre-WC to debt below 18%. Ratings may also be downgraded if VUHI's regulatory environments become less credit supportive, thereby increasing risks and decreasing returns.

Profile

Vectren Utility Holdings, Inc. is as the intermediate holding company for three operating public utilities: Indiana Gas Company, Inc., Southern Indiana Gas & Electric Company, and Vectren Energy Delivery of Ohio, Inc. (not rated). Indiana Gas provides energy delivery services to approximately 598,000 natural gas customers located in central and southern Indiana. SIGECO provides energy delivery services to approximately 146,000 electric customers and approximately 112,000 gas customers located near Evansville in southwestern Indiana. SIGECO also owns and operates electric generation assets to serve its electric customers and sales in the wholesale power market. VEDO provides energy delivery services to approximately 320,000 natural gas customers located near Dayton in west-central Ohio.

VUHI was acquired by CenterPoint Energy, Inc. (Baa2 stable) on February 1, 2019 through the acquisition of its parent Vectren Corp. VUHI's ownership by CenterPoint should provide benefits of scale, scope, diversity and best practices.

The principal methodology used in these ratings was Regulated Electric and Gas Utilities published in June 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Robert Petrosino
Vice President - Senior Analyst
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Michael G. Haggarty
Associate Managing Director
Infrastructure Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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