Moody's cuts PSEG Energy to junk

Moody's Investors Service downgraded of PSEG Energy Holdings LLC to junk with a negative outlook and confirmed Public Service Enterprise Group Inc. with a negative outlook and PSEG Power LLC with a stable outlook. PSEG Energy Holdings's senior unsecured debt was cut to Ba3 from Baa3. Public Service Enterprise Group's senior unsecured debt was confirmed at Baa2, Enterprise Capital Trust I, II and III's preferred securities and junior subordinated debt at Baa3, PSEG Funding Trust II's preferred securities at Baa3 and PSEG Power 's senior unsecured debt and senior unsecured pollution control revenue bonds at Baa1.

Moody's said the downgrade of PSEG Energy Holdings reflects Moody's concerns about the risk profile and continued weak performance of the company's investments and clear indications from Public Service Enterprise Group that it does not intend to continue its past level of financial support to PSEG Energy Holdings. This included substantial infusions of equity in the past two years.

PSEG Energy Holdings' significant foreign investments and U.S. merchant power plants have continued to produce poor financial results, Moody's noted.

The rating action also reflects the company's sizeable lease portfolio that includes substantial exposure to several non-investment grade energy merchant lessees and considers that a significant portion of its assets are encumbered.

Moody's said it confirmed Public Service Enterprise Group with a negative outlook to reflect its reliance upon dividends from Public Service Electric and Gas, PSEG Power, and PSEG Energy Holdings. Moody's expects that future dividend contributions from PSEG Energy Holdings will be very modest due to its weak financial performance. Moreover, a greater percentage of the parent's consolidated earnings and cash flow is currently derived from its non-regulated business operations. The earnings and cash flow from the non-regulated operations are subject to greater volatility.

Moody's confirmed PSEG Power because of the relatively favorable outlook for coal-fired generation and nuclear generation with natural gas prices expected to remain above historic averages for some time. Power's capital spending is expected to decline, improving its free cash flow.

S&P cuts Kappa Beheer outlook

Standard & Poor's lowered its outlook on Kappa Beheer BV to stable from positive and confirmed its ratings including its subordinated debt at B.

S&P said the outlook revision is based on the reduced likelihood of Kappa Packaging's credit protection measures improving in the intermediate term to a level supportive of a higher rating as a result of weaker-than-anticipated cash generation.

Although the group has demonstrated an ability to produce fairly stable operating results through the cycle, the expected improvement in credit protection measures has been limited due to weaker-than-anticipated market conditions and volatile input prices, S&P commented.

Kappa Beheer's ratings reflect Kappa Packaging group's competitive cost position within a cyclical industry, good market positions of the group's board businesses, and an aggressive financial risk profile.

Moody's raises Telus outlook

Moody's Investors Service raised its outlook on Telus Corp. to positive from stable and confirmed its ratings including its C$1.6 billion 7.5% notes due 2006, $1.2 billion 7.5% notes due 2007 and $1.9 billion 8.0% notes due 2011 at Ba1.

Moody's said the positive outlook reflects Telus' continuing improvement in operating results beyond Moody's previous expectations. This, together with management's increased guidance for the remainder of 2003, as well as expected tax refunds and working capital improvements, have given Moody's greater confidence in Telus' ability to increase free cash flow and reduce debt through at least 2004.

The rating is supported by Telus' strong strategic position as one of the two principal incumbent telephony companies in Canada and one of just three principal national wireless operators, strongly improving profitability in the wireless sector, a regulatory environment that favors facilities-based competitors, Moody's view that the financial impact on the company of a new labor contract and/or a strike, should one occur, is manageable, and a new contract should lead to further operating efficiencies, and Moody's expectation that management actions, including any possible acquisitions, will be, at a minimum, neutral to Telus' creditworthiness, given the high priority management has placed on improving its credit metrics.

Telus' rating is constrained by the amount of debt in relation to expected free cash flow, declining incumbent wireline revenue which is, and will need to be, offset with continuing cost reductions, slowing growth in the wireless segment and the structural superiority of debt and payables at its main operating subsidiary.

Telus' free cash flow improved from negative C$1.5 billion in 2001 to positive $250 million for the 12 months ending June 30, 2003, Moody's noted, adding that it now expects free cash flow to exceed C$700 million in each of 2003 and 2004.

Fitch cuts Elektrownia Turow

Fitch Ratings downgraded Elektrownia Turow SA including cutting its €270 million guaranteed secured bonds maturing 2011 to B- from BB. The ratings remains on Rating Watch Negative.

Fitch said the action reflects the increasing probability that, consistent with the draft act the PPA securing the bonds will be unilaterally canceled.

Although the government still has not finalized and approved the act that will govern the restructuring, its submission to parliament is now expected in middle October. During the ongoing consultation period, banks and generators involved in the sector have requested various changes to the act.

But Fitch believes, based on discussions with the Ministry of Economy, that there will be no major changes in respect of the following key risks to the PPA secured creditors:

The draft act allows securitization bonds to be issued to be allocated to power generators in lieu of cash as a part of the compensation for the PPA cancellation. The proportion (currently believed not to exceed 20%), not being explicitly set by the act, adds further uncertainty.

A proportion of the total compensation associated with generating units under modernization at the time of cancellation of PPAs will be delayed until these units are commissioned.

Under the proposed sequence of events, the compensation for the operating units will be paid to power generators within 14 days after the cancellation of PPAs. As such, the 2011 bonds are expected to default (PPA cancellation is an event of default) before any compensation is received.

Unless 'execution' proceedings are instigated by the bonds' Security Trustee (which could only happen following non-payment), the compensation may be used for early prepayment of all secured debt, not just the PPA secured debt, which, in Fitch's view, would lead to a deterioration of the PPA secured creditor position.

S&P upgrades AGZ

Standard & Poor's upgraded AGZ Holding including raising AGZ Finance's €165 million 10% bonds due 2011 to B+ from B. The outlook is stable.

S&P said the action signals the strong resilience of AGZ Holding's operating earnings in a high crude price environment, continued significant free cash flow generation and deleveraging of its financial structure.

Also taken into consideration are the company's strong market positions in a stable industry with limited growth and competition.

AGZ Holding holds a 23% share of the French LPG distribution market, a stable sector with limited competition, some barriers to entry and a loyal customer base because of cash deposit arrangements.

Structured as an LBO, the company continues to be highly leveraged, with 83% gross debt to capital as of March 2003 (86% a year before). Cash flow generation is, however, adequate for the current BB rating, with funds from operations representing 18% of total debt and EBITDA gross interest coverage of 3.6x at year-end 2003, S&P said.

Thanks to cost saving initiatives, better management of logistics and tight control over working capital, S&P expects AGZ Holding to generate some €70 million of operating cash flow every year.

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