S&P confirms Lucent, off watch

Standard & Poor's confirmed Lucent Technologies Inc. and removed it from CreditWatch with negative implications including its $1.36 billion 6.45% debentures due 2029, $25 million 8% senior unsecured notes due 2015, $300 million 6.5% senior debentures due 2028, $500 million 5.5% senior notes due 2008 and $750 million 7.25% notes due 2006 at B- and $1 billion 8% redeemable convertible preferred stock and $1.75 billion 7.75% convertible trust preferred securities at CCC-. The outlook is negative.

S&P said the action reflects its view that Lucent's reduced operating losses and stabilizing cash flows, combined with its current liquidity, should enable it to sustain its industry position over the intermediate period.

But the negative outlook recognizes the significant challenges the company faces in a very uncertain communications marketplace, S&P added.

In late January 2003, Lucent reported sales of $2.08 billion for the December 2002 quarter, at the low end of the range projected in late October 2002, S&P noted. At the same time, the company reaffirmed its October 2002 guidance that sales in the March 2003 quarter would be about $2.5 billion.

Lucent's losses have abated as it cut its costs in light of sustained depressed business conditions, S&P said. The company's net loss from continuing operations for the December quarter was $264 million, an improvement from the $2.1 billion pro forma net loss posted in the September period.

Lucent expects to trim its losses further in the March period, part of its commitment to achieve breakeven net income on $2.5 billion in quarterly revenues, by the September 2003 quarter.

Still, industry conditions are highly challenging, as customers' spending plans are expected to be fluid well into 2004, and the company's revenue targets might not be achievable, S&P said.

Net cash used in operating activities of the company's continuing operations was $742 million, S&P said. For the balance of the fiscal year ending Sept. 30, 2003, the company expects cash outflows of about $600 million for previously announced restructuring actions, $300 million for interest and dividends, and $700 million for operating losses, working capital, and capital expenditures, combined.

S&P puts Chesapeake on positive watch

Standard & Poor's put Chesapeake Energy Corp. on CreditWatch with positive implications including its senior notes at B+, convertible preferred stock at CCC+ and bank facility at BB.

S&P said the positive watch follows Chesapeake's announcement that it has signed agreements to purchase oil and gas E&P assets from El Paso Corp. and Vintage Petroleum Inc. for a total consideration of $530 million.

Chesapeake is acquiring properties with low cost structures in its core Mid-Continent operating area that have a high degree of overlap with Chesapeake's operations, which should provide cost-reduction opportunities, S&P noted.

In addition, S&P said Chesapeake intends to fund the transactions with a high percentage of equity; Chesapeake has announced an offering of 8 million common shares (about $160 million of net proceeds are expected) and $200 million of convertible preferred securities with the balance funded with debt. Based on the cash flow characteristics of the acquired properties (which are reinforced by commodity price hedges), Chesapeake effectively will be adding the properties at a debt to EBITDA ratio of about 1.0x.

Chesapeake has hedged a high percentage of its 2003 production, which in combination with a favorable outlook for natural gas prices in 2003 will assure the company of ample cash flow for debt service, reserve replacement capital spending, and capital for growth, S&P said.

Chesapeake is issuing $300 million of new notes, which will improve financial flexibility by extending its debt maturity profile; following the expected financing, Chesapeake will have an undrawn $225 million revolving credit facility that matures in 2005, no material debt maturities until 2008, and a capital budget that should be funded internally, S&P added. Nevertheless, Chesapeake still remains highly indebted (about $0.72 per million cubic feet equivalent pro forma the El Paso and Vintage transactions) and intends to continue growing aggressively through acquisitions.

Fitch raises Chesapeake outlook

Fitch raised its outlook on Chesapeake Energy to positive from stable and confirmed its senior unsecured notes at BB-, bank facility at BB+ and convertible preferred stock at B.

Chesapeake Energy announced it has agreed to acquire $530 million of Mid-Continent natural gas assets in two transactions.

These transactions follow on the heels of Chesapeake's $300 million acquisition of Mid-Continent gas assets from Oneok, which was completed earlier this month.

The ratings reflect the conservative nature in which the transactions have been funded, Chesapeake's long-lived, focused natural gas reserve base and its modest but improving credit profile, Fitch said. The acquisition of ONEOK properties was also financed in a balanced manner with $150 million of equity and $150 million of debt.

Additionally, Chesapeake's proved reserves, pro forma for the latest acquisition are nearly 2.75 Tcfe, which provide a reserve life of close to 12 years, Fitch noted. Furthermore, approximately 91% of Chesapeake's proved reserves are natural gas and are primarily located in the very familiar Mid Continent region.

Fitch expects Chesapeake to achieve synergies through its recent acquisition and to expand upon the current production from those properties.

Chesapeake has generated credit metrics consistent with its rating over the last 12 months. Interest coverage for the year ended Dec. 31, 2002, was approximately 4.4 times and debt-to-EBITDA was approximately 3.2x, Fitch said. Chesapeake's present debt on both an absolute ($1.9 billion pro forma for the proposed offering) and a proven barrel of oil equivalent ($4.32 per BOE pro forma for the acquisitions and bond offering) basis is high for the rating.

Moody's cuts Ahold

Moody's Investors Service downgraded Koninklijke Ahold NV including cutting its senior unsecured debt to B1 from Baa3 and subordinated debt to B2 from Ba1. The ratings remain on review for downgrade.

Moody's noted it began the review for downgrade after Ahold announced a material accounting restatement and continuing investigation into accounting irregularities at its US Foodservice operations.

The downgrade reflects Moody's view that the accounting announcement and related management turnover create significant uncertainty for debt holders.

Additionally, Moody's said it believes that Ahold has a large amount of short-term debt outstanding that relies on the continued and uncertain availability of bank lines as a source of alternate liquidity.

Moody's said the disclosure of accounting irregularities at US Foodservice and the expected impact on group operating earnings create considerable uncertainty about the company's future levels of earnings and cash flows. Further the disclosures may result in Ahold no longer being able to draw under its existing $2 billion syndicated committed term credit facility. Moody's notes that the company has stated that it has obtained €3.1 billion of commitments from a new syndicate of banks, of which €2.65 billion relates to a 364-day dual-tranche credit facility comprising secured and unsecured tranches.

Moody's considers the conditions precedent under the €2.65 billion facility may prove challenging for the company to satisfy given the ongoing accounting investigations at US Foodservice and the financial reporting requirements which comprise part of the conditions precedent. Without access to the existing $2 billion term credit facility or the new €2.65 billion 364-day facility, Ahold will be wholly reliant upon rolling over drawings under its existing uncommitted facilities, its operating cash-flows and cash balances.

S&P cuts Aquila, on watch

Standard & Poor's downgraded Aquila Inc. and put it on CreditWatch with negative implications. Ratings lowered include Aquila's senior secured debt, cut to B+ from BB, subordinated debt, cut to B from BB- and preferred stock, cut to B- from B+.

S&P said the action reflects concerns resulting from uncertainty surrounding the extension of Aquila's bank credit facility and waiver, which expire on April 12, reliance on asset sales to reduce debt levels, and weak cash flows from non-regulated operations.

As the date for extending or replacing its maturing credit facility nears, Aquila has still not completed its negotiations with the lenders, S&P noted. In particular the renegotiated terms of the credit facility, i.e. the provisions for security, remain undetermined at this time.

Should the waiver not be extended beyond April 12, Aquila would face tremendous liquidity pressures and with weak cash flow from operations, Aquila would not have the ability to repay its maturing debt obligations, S&P said.

In order to shore up its balance sheet and reduce debt, Aquila will need to continue to divest assets. However, weak market conditions may lead to increased execution risks for future asset sales, as evidenced by the delay in the sale of Avon Energy Partners Holdings, S&P added.

These near term concerns are exacerbated by depressed power prices and negative spark spreads which will continue to be a drag on Aquila's cash flow from operations on the regulated side of the business, S&P added. In addition, Aquila will face restructuring expenses in 2003 as it continues its transition to a traditional utility. This will lead to a further drain on cash flows.

Fitch cuts Northwest Airlines

Fitch Ratings downgraded Northwest Airlines, Inc.'s senior unsecured debt to B from B+, affecting $1.6 billion of debt. The outlook remains negative.

Fitch said it remains concerned about Northwest's ability to avoid further deterioration in its credit profile as fixed financing obligations (interest, rents, scheduled debt payments and required pension contributions) continue to rise even though the airline's continuing focus on liquidity preservation and cost control has supported the airline's ability to cope successfully with an adverse industry operating environment.

In light of the discouraging industry revenue outlook for 2003, characterized by weak passenger yields and still sluggish business travel demand, prospects for Northwest to generate strong operating cash flow this year remain poor, Fitch said. Senior management has made it clear in recent weeks that a reduction of labor costs will be a necessary component of the airline's effort to realign expenses with a revenue base that has been eroded substantially.

On top of scheduled debt maturities ($347 million in 2003 and $669 million in 2004) and aircraft capital spending requirements ($1.8 billion in 2003, with $1.6 billion already funded through new debt and leases), Northwest is facing a very large underfunded pension obligation, Fitch noted. Barring major changes in pension funding rules or asset return performance, underfunded pensions will present Northwest with growing cash flow challenges over the next several years. Fitch estimates that Northwest's pension plans were underfunded by approximately $3.2 billion on a projected benefit obligation basis as of Dec. 31, 2002. While Northwest has successfully negotiated a plan with the US Department of Labor to fund this year's required cash contribution of $223 million with shares of Pinnacle Airlines (Northwest's regional airline unit), cash funding requirements are expected to grow in 2004 and beyond.

Liquidity remains a source of strength for Northwest in comparison with the other high-cost major airlines, Fitch added. A year-end 2002 unrestricted cash balance of $2.1 billion represented 22% of Northwest's annual operating revenues (highest of the US majors). The airline's secured bank facility ($962 million) matures in 2005. Northwest's owned and unencumbered aircraft are primarily older, with little market value. As a result, incremental access to the capital markets is expected to be very limited for additional liquidity purposes.

S&P raises Plains All American

Standard & Poor's upgraded Plains All American Pipeline LP including raising its senior unsecured debt to BB+ from BB and removed it from CreditWatch with positive implications. The outlook is stable.

S&P said Plains All American's ratings now reflects is stand-alone creditworthiness after minority owner Plains Resources Inc. took actions to provide much greater separation between its oil and gas subsidiary and its general partner interest in Plains All American.

The ratings for Plains All American reflect its fair business position provided by the integration of, and synergies achieved through the partnership's crude oil gathering, storage, terminalling, and transportation assets, S&P said. The ratings also reflect an expectation of cash flow stability, a continuation of the company's policy to finance acquisitions in a balanced manner, and a moderate financial profile, necessitated by the high levels of cash distributions it issues as a result of its status as a master limited partnership.

Key to Plains All American's strategy of capitalizing on regional crude oil supply and demand imbalances and the resulting arbitrage opportunities is the partnership's large and growing storage capacity at Cushing, Okla., the designated delivery point for NYMEX-traded crude oil futures contracts, S&P said. Plains All American currently has 5.3 million barrels of terminalling and storage capacity in Cushing, or about 20% of that market.

While the partnership actively engages in crude oil trading, limitations on open positions are sufficient that this activity is not considered to be a significant detriment to credit quality, S&P noted.

Over the intermediate term, S&P said it expects EBITDA interest coverage between 3.5x and 4x, with return on permanent capital in the low teens, and funds from operations to total debt ranging between 20% and 25%. Total debt to total capitalization is expected to remain below 60%, with periodic short-term spikes for acquisitions until permanent financing is in place.

S&P cuts Ubiquitel notes, loan on positive watch

Standard & Poor's downgraded UbiquiTel Inc.'s corporate credit rating to SD from CC and cut UbiquiTel Operating Co.'s $150 million senior subordinated discount notes due 2010 to D from C but put UbiquiTel Operating's $120 million term A loan due 2007, $125 million term B loan due 2008 and $55 million revolving credit facility due 2007 at CC on CreditWatch with positive implications.

S&P said the CreditWatch listing reflects the potential for an upgrade upon review of the company's revised business plan.

The actions reflect completion of UbiquiTel's debt exchange offer for approximately $189.4 million of its 14% senior subordinated discount notes, S&P said. These notes are being exchanged for approximately $47.4 million of 14% senior discount notes due May 15, 2010. The rating is lowered to D because S&P considers it to be a distressed exchange, due to the discount to accreted value of the offer.

Fitch rates Northwest Pipeline notes BB-

Fitch Ratings said it expects to assign a BB- rating to Northwest Pipeline Corp.'s proposed $150 million senior notes due 2010 and that they will be on Rating Watch Evolving as are Northwest Pipeline's outstanding $360 million BB- senior unsecured notes. Parent Williams Cos., Inc. has a senior unsecured rating of B- on Rating Watch Evolving.

Northwest Pipeline's ratings incorporate its strong individual operating and financial profile, offset by the structural and functional ties between Northwest Pipeline and its financially stressed parent Williams.

Northwest Pipeline is a participant in Williams' daily cash management program under which Northwest Pipeline makes periodic advances to Williams. Under a pending notice of proposed rule making at FERC, restrictions would be placed on an interstate pipeline's ability to participate in cash management or money pool arrangements based on certain credit criteria.

Fitch believes Northwest Pipeline would be able to adequately fund its operations if it were prohibited from participating in Williams' cash management program.

In addition, Northwest Pipeline's debt agreements, including proposed terms for the pending note issuance, provide limited restrictions on Northwest Pipeline's ability to make upstream cash dividends and/or inter-company advances to Northwest Pipeline.

Northwest Pipeline standalone credit measures have thus far not been impacted by Williams' weakened credit profile and remain consistent with investment grade, Fitch said. For the 12 month period ended Sept. 30, 2002, EBITDA to interest and total debt to EBITDA at NWP approximated 7.3 times and 1.9x, respectively.

S&P rates FairPoint notes B

Standard & Poor's assigned a B rating to FairPoint Communications Inc.'s proposed $225 million senior unsecured notes due 2010 and confirmed its existing ratings including its bank loans at B+ and subordinated debt at B-.

S&P said the outlook on the existing ratings remains negative but will be revised to stable once the new notes are issued and the bank credit agreement is amended, as these will enable the company to address near-term liquidity concerns.

The outlook on the senior secured bank loan rating has been revised to developing from negative. Once the amended bank credit agreement takes effect, the bank loan rating will be raised to BB- from B+, reflecting reduced commitment and less restrictive financial covenants, S&P said.

The corporate credit rating on FairPoint is based on the stability of its incumbent RLEC business, offset by high financial leverage and execution risks from potential acquisitions, S&P added. FairPoint's incumbent RLEC business, which provides services mostly in rural markets with less than 25 access lines per square mile, is stable due to limited competition, regulation allowing services to be priced on a rate of return basis, and solid Universal Service Fund (USF) support. These factors have allowed the company's EBITDA margin to be in the 50% to 60% range and access line turnover to be low.

S&P raises Polypore outlook

Standard & Poor's raised its outlook on Polypore Inc. to positive from stable and confirmed its ratings including its senior secured debt at B+.

S&P said the revision reflects Polypore's successful integration of the February 2002 purchase of Membrana, a manufacturer of specialty membranes that are mainly used in hemodialysis, thus reducing concerns over integration risk.

Additionally, as a result of solid industry fundamentals in both the medical membrane and the lithium ion battery separator markets, Polypore has been able to generate some free cash flow, which has been used for debt reduction, and has led to an improving credit profile, S&P said.

At Sept. 30, 2002, pro forma total debt to EBITDA was about 3.4x, and credit protection measures are expected to continue to strengthen over the near term. However, restricting the current rating is the company's limited financial flexibility, including meaningful debt maturities. Over the next two years the company has over $51 million in scheduled debt maturities.

S&P cuts Cogeco to junk

Standard & Poor's downgraded Cogeco Cable Inc. to junk including cutting its corporate credit rating to BB+ from BBB-, C$100 million 6.75% first priority senior secured notes due 2009, C$25 million operating bank facility and C$620 million senior secured bank facility to BBB- from BBB and C$125 million second priority senior secured notes due 2007 to BB+ from BBB-. The outlook is stable.

S&P said it lowered Cogeco because its credit measures that were not in line with the rating category.

Negative free cash flows, driven by acquisitions in 2000 and 2001 and capital expenditures associated with system upgrades and new services, resulted in increased leverage, while at the same time, heightened competition eroded EBITDA margins and weakened the company's business profile, S&P said.

Although in the past year Cogeco Cable made some progress in improving margins and free operating cash flows, S&P said it does not expect its financial profile will improve to historical levels in the medium term.

Lease-adjusted EBITDA interest coverage is 2.6x and total debt to EBITDA is 5.3x for the 12 months ended Nov. 30, 2002, S&P noted. Cogeco Cable's capital expenditures declined by 10.6% in 2002 to C$149.4 million, with gradual declines anticipated in the medium term. The company is expected to become free cash flow positive in 2004.

Moody's withdraws Cablecom ratings

Moody's Investors Service withdrew its Caa2 senior bank facility rating on Cablecom (Ostschweiz) AG due to limited information provided by Cablecom and the resultant inability to adequately monitor the company's ratings.

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