The decision by Standard & Poor's last week to lower the ratings of Washington Gas Light Co. securities means the utility faces higher costs for raising capital.
But the company also may take that piece of news to the area's public utility commissions to argue for higher rates.
In downgrading ratings on WGL's first mortgage bonds and preferred stock, Standard & Poor's blamed the action on the failure of the rate-making agencies in Maryland and the District of Columbia to be supportive of the gas company, as well as on heavy short-term interest costs. In other words, the public utility commissions were not allowing rates to rise sufficiently high, in S&P's view.
As a result, the gas company's major instrument for raising money to be paid back over the long term--its first mortgage bonds--were downgraded from single-A to single-A minus. Of approximately $185 million in long-term debt that WGL holds, roughly $160 million of that is in first mortgage bonds.
WGL has said that it expects it will need to raise approximately $60 million this year. It could do so through a variety of means, including bank loans, sale of additional common stock or mortgage bonds. ccording to figures supplied by market sources, the difference in the company's credit rating means that if WGL tried to raise $60 million using first mortgage bonds, it would pay $150,000 to $200,000 a year more in interest today than it would have paid before the rating change.
"It's unfortunate and will lead to higher costs," said WGL spokesman Paul Young.
"The reason for the donwgrading is that the company has been a victim of inadequate rate-making," said Eunice P. Reich, vice president in fixed-income research for Merrill Lynch. "The company can use the downgrading and can go to the regulators and say, 'Look at what you've done now. A recognized rating company has lowered our rating, and it will cost us more to raise money,' " she said.
In addition to increasing the interest costs WGL will have to pay if it decides to raise money with first mortgage bonds or preferred stock, the ratings change will reduce income to shareholders and eventually may lower the level at which WGL's stock is trading, Reich said.
On Friday, Washington Gas stock traded on the New York Stock Exchange at 26 3/4, down 3/8.