Citing concerns about increased leverage and business risk associated with the company’s diversification strategy, Moody’s Investors Service on Monday downgraded the ratings of Peoples Energy Corp. and the long-term ratings of the securities issued by its utility subsidiaries, Peoples Gas Light and Coke Co. and North Shore Gas Co. The ratings agency added that the rating outlooks are negative. The utilities’ short-term ratings were not under review.

The following rating actions were taken:

Moody’s said the rating actions end a review for downgrade initiated on April 19, 2002. The agency 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 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 reiterated 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.

The ratings agency said with the exception of financing a major acquisition — which is not currently foreseen — Peoples will not likely issue equity. “The negative outlooks reflect our concerns that the parent, as the financing vehicle for its diversified businesses, is not likely to be self-funding for the foreseeable future,” Moody’s said in its downgrade. “The dividend rate is high, given the diversified businesses’ capital needs and business risks.”

Labeling the company’s utility subsidiaries as the only reliable source of income, Moody’s allowed that Peoples’ diversified subsidiaries — oil and gas production, power generation, midstream delivery services, and retail energy services — are still developing and are not likely to upstream any significant amount of free cash flow to the parent company for the foreseeable future. Moody’s said it expects that the company will limit further diversification and will maintain its business mix at about what it is currently.

According to the ratings agency, Peoples derives about 75% of its earnings from regulated gas distribution, and the rest from its diversified businesses: about 12% from oil and gas production, 5% from power generation, 7% from midstream delivery, and the rest from retail energy services and other activities. “With our outlook, Moody’s will monitor Peoples’ ability to husband its capital so that any incremental debt is kept in line with equity accreted,” Moody’s said. “Given the current investor sentiment favoring steadier earnings and a less favorable business environment for power and other wholesale energy services, Peoples has reduced its earnings growth expectations.”

Going forward, Moody’s said its concerns will remain focused on the performance of its oil and gas production and power generation businesses, which are Peoples’ largest diversified businesses, and which will make up the majority of non-utility investments over the next few years.

Based in Chicago, Peoples is a holding company with subsidiaries engaged in gas distribution, power generation, midstream services, retail energy services, and oil and gas production.

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