Following similar action taken by Moody’s Investors Service earlier in the week, Standard & Poor’s Ratings Services (S&P) said Thursday that it lowered its corporate credit rating on Peoples Energy Corp. to “A-” from “A+” with a current outlook of stable. The agency noted that Chicago-based Peoples Energy has about $946 million in outstanding debt. In addition, S&P lowered the corporate credit rating on Peoples Energy’s Peoples Gas Light & Coke Co. subsidiary to “A-” from “AA-“.

“The corporate credit rating for Peoples Energy Corp. reflects the above average financial and business risk profiles of the consolidated entity, consisting of two regulated gas distribution subsidiaries, Peoples Gas Light & Coke Co. and the much smaller North Shore Gas Co., and nonregulated businesses,” said S&P in its note.

The credit rating agency said it is concerned over increasing business risk with the growing share of nonregulated businesses — oil and gas production, midstream services, power generation, and retail energy services — as well as bond protection measures that have slipped in recent years. It added that the nonregulated business segment gets the lion share of projected capital spending over the next few years, about 60% of the total. Because of this, S&P weighed the risk associated with the nonregulated businesses at a level higher than its current share of earnings. Despite the higher risk inherent in these businesses, management’s financing strategy is expected to be moderate, with the use of nonrecourse project debt and asset-secured financing.

S&P said Peoples has avoided serious risk taking and appears to have prudent risk-management procedures in place. It also considers the company’s liquidity to be adequate. The current stable outlook for Peoples Energy “recognizes a stable and predictable cash contribution by the regulated utilities with diverse gas supply and a favorable competitive position,” S&P said. “Upside credit potential is limited by the higher risk inherent in the company’s diversification program and increased leverage.”

Earlier in the week, Moody’s cited concerns about increased leverage and business risk associated with Peoples Energy’s diversification strategy as reason for its downgrade. The agency reduced Peoples rating and the long-term ratings of the securities issued by its two utility subsidiaries. Moody’s added that the rating outlooks are negative.

Moody’s made the following changes:

Moody’s said the utilities’ short-term ratings were not currently under review. It added that the rating actions end a review for downgrade initiated on April 19, 2002. Moody’s said the downgrades “reflect the increase in Peoples’ leverage over the past few years (from 42% debt-to-capital in fiscal 1998 to 54% as of June 30, 2002) and our expectation that the company’s high dividend payout and plan to continue to nurture its diversified businesses will deter leverage from decreasing materially from current levels.”

In response to the Moody’s downgrade, Peoples came out swinging by reiterating its strong financial position. “While we are disappointed in the actions taken by Moody’s today, we are pleased to retain strong ratings that reflect the financial strength of both our utility subsidiaries and our parent company,” said Thomas M. Patrick, CEO of Peoples Energy. “During this fiscal year, we have successfully paid down $300 million of debt, significantly strengthening our balance sheet and credit ratios. Our strategy remains focused on our core Midwest gas distribution business and low-risk expansion of our other energy businesses.”

Looking ahead, the company reaffirmed its earnings guidance for fiscal 2002 at the high end of the $2.70 to $2.80 per share range before the special third quarter charge to boost the reserve for uncollectibles. The company also gave a range of $2.70 to $2.80 per share for fiscal 2003. “Our previously communicated earnings outlook remains unchanged by these ratings actions, and we retain excellent liquidity,” said Patrick.

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