WGL Holdings took issue Tuesday with a downgrade of its commercial paper rating to Not Prime from Prime-3 by Moody’s Investors Service, stating that the rating agency’s decision lacked sufficient explanation.

“We disagree with Moody’s action,” said CFO Frederic M. Kline. “Moody’s focuses on Washington Gas Energy Services, the retail energy marketing subsidiary of WGL Holdings,…[and believes it] lacks the scale and balance sheet to maintain an investment grade rating on a stand-alone basis. However, Moody’s has never explained what it would consider an acceptable level of leverage.”

Kline said that WGL Holdings equity ratio, exclusive of its investment in utility Washington Gas Light Co., is 40% of total capital based on average daily short-term debt outstanding and is appropriate for the businesses being financed.

Moody’s lowered the holding company’s commercial paper rating affecting about $50 million of debt securities, because of concerns about WGL’s decision to fund its retail marketing business, Washington Gas Energy Services, Inc. (WGES), primarily with short term debt, “which, given the company’s growth, has resulted in rising financial leverage underpinned by a permanent layer of working capital that is currently financed primarily with commercial paper.

“This heavy reliance on short term debt has resulted in a capital structure that is not consistent with investment grade and which is vulnerable to increases in interest rates due to the low margins in the business, the company’s exposure to one primary electricity supplier [bankrupt Mirant Corp.] and the inherent volatility and cyclicality in power and gas prices. Furthermore, WGES will require significant amounts of additional working capital on an ongoing basis,” Moody’s said.

Kline said WGL finds it difficult to understand Moody’s concerns about the scale of the retail business, which has a substantial presence in the Washington, DC, area, Northern Virginia and Maryland. It is “the leading retail supplier of unregulated natural gas and electricity in our region with a large diversified customer base,” he said. “As Moody’s recognizes, our retail energy marketing business has been profitable. It has delivered earnings in four of the five years ended Sept. 30, 2003, and we anticipate record net income from our retail energy marketing business in fiscal year 2004.”

Moody’s affirmed the Prime-1 commercial paper rating and A2 long-term debt rating and stable outlook of Washington Gas Light Co., the holding company’s regulated utility subsidiary.

WGL said that it has a $175 million line of credit that expires in April 2007 that can be used as backup financing for its commercial paper program. The line of credit is significantly greater than the current level of short-term debt outstanding and the amount expected to be outstanding in the near future. This ratings action by Moody’s does not affect the company’s access to this line of credit, WGL said.

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