S&P cuts NRG ratings

Standard & Poor's lowered NRG Energy Inc.'s senior unsecured debt to B- from B+, reflecting its stand-alone credit quality.

The ratings remain on negative watch pending the outcome of other negotiations, notably with the construction facility banks concerning the $1 billion of required collateral and with First Energy concerning the $1.5 billion acquisition of power generating plants.

The downgrade was taken following the removal of a provision in the $800 million bank facility at parent company, Xcel Energy Inc. that linked a debt service default at NRG to the bank facility.

Removal of that cross-default, plus limits on the amount multi-state utility holding companies can invest in non-utility generating companies, support the argument for lowering NRG's rating to the level that better reflects NRG's own credit risk of default.

Xcel Energy has about $15 billion of consolidated debt outstanding.

Most importantly, while Xcel Energy's management has stated clearly its intent to support NRG through an orderly sale of assets and debt reduction, it will not do so through equity infusions or other transfers of funds beyond the limits imposed by the Public Utility Holding Company Act.

If Xcel's management is successful in negotiating settlements with First Energy and with the construction facility banks, NRG's ratings will be affirmed at the current level and removed from watch, although a negative outlook would be appropriate for NRG until the asset sales are concluded and debt is reduced.

At the same time, the ratings of Xcel and its utility subsidiaries would be affirmed and removed from watch.

If significant progress is made in selling assets and reducing debt, the strengthening of the consolidated financial profile could lead to higher debt ratings at the utilities and at Xcel Energy.

S&P affirms Chesapeake ratings

Standard & Poor's affirmed the ratings of Chesapeake Energy Corp., and assigned a B+ rating to its new $250 million of senior unsecured notes due 2012.

The independent petroleum company has about $1.5 billion of debt outstanding.

The outlook is positive.

Proceeds from the new notes will be used to repay all amounts outstanding under its bank credit facility, finance pending and future acquisitions.

Although the increased debt leverage resulting from pending acquisitions outweighs the current good operational news, S&P believes Chesapeake is still well positioned to digest such acquisitions and that cash flow from an eventual increase in natural gas prices will be used to deleverage its balance sheet long term.

The ratings reflect participation in a volatile, competitive and highly capital-intensive industry, plus an aggressive financial profile, partially mitigated by its competitive cost structure before financing requirements.

Chesapeake's proved reserves totaled about 1.86 billion cubic feet of natural gas equivalent as of March 31 and are highly exposed to North American natural gas, about 90%.

Financial flexibility remains adequate near term due to access to an undrawn $225 million bank credit facility maturing in September 2003, cash balances of $35 million as of June 30 and little near-term debt maturities.

The positive outlook reflects S&P's expectation of future deleveraging of Chesapeake Energy's financial profile.

Further transactions without significant equity financing will most likely result in a revision to a stable outlook.

Fitch affirms Chesapeake ratings

Fitch Rating affirmed the B rating on Chesapeake Energy Corp.'s convertible preferred stock and assigned a BB- rating to its $250 million senior note offering. The outlook is stable.

The new notes follow the $150 million convertible preferred offering in November 2001 and $250 million of 8.375% senior notes in late October, the proceeds of which were also used to fund several tuck-in acquisitions.

Chesapeake expects to add as much as 125 Bcfe of proved reserves consisting primarily of Mid-Continent developed natural gas reserves with initial average daily natural gas production of approximately 28,000 Mcfe. This would increase reserves by approximately 6.7% and daily production by about 6%. The valuation of the three transactions is about $1.35 per Mcfe.

The ratings reflect Chesapeake's long-lived, focused natural gas reserve base, the likelihood of increased production through its recent acquisitions and its modest credit profile, which assumes equity funding to help balance past and future transactions.

Chesapeake's proved reserves, pro forma for potential acquisitions are more than 2.0 Tcfe, which provide a reserve life in excess of 10 years. Additionally, some 90% of Chesapeake's proved reserves are natural gas and are primarily located in the very familiar Mid-Continent region.

Chesapeake has generated credit metrics consistent with its rating over the last 12 months.

Coverages, as measured by EBITDA-to-interest, are greater than 4.0 times for the latest 12-month period, and debt-to-EBITDA is about 3.0 times.

Chesapeake's present debt on both an absolute ($1.5 billion pro forma for proposed offering) and a proven barrel of oil equivalent ($4.38 per BOE pro forma for acquisitions and bond offering) basis is high for the rating.

Fitch expects these measures to improve in the intermediate term from any internally generated cash flow and through an equity-related transaction in the future.

Moody's rates XL preferreds at A3

Moody's has assigned an A3 rating to the perpetual retail preferred securities of XL Capital Ltd.

The outlook for the rating is stable.

The perpetual preferred securities are unsecured and subordinated obligations of XL Capital and rank junior to the subordinated debt and senior to the common shares.

According to Moody's, the A3 rating considers the subordinated status of the preferred securities relative to XL Capital's senior unsecured and subordinated debt, which are rated A1 and A2, respectively.

The rating is also fundamentally based on XL Capital's strong competitive positions in its three principal business segments - insurance, reinsurance and specialty financial services - overall good spread of risk, sound liquidity and strong capitalization.

The rating agency said the fundamental strengths are tempered somewhat by the intrinsic volatility of some of XL Capital's insurance and reinsurance businesses, increased financial leverage profile and debt service burden since 2001 and by convenants in credit facilities and certain debt obligations that may constrain financial flexibility.

Moody's added that XL Capital's strong internal liquidity position is supported by the earnings capacity of its principal subsidiary operations, as well as by the substantial dividend capacity of its major Bermuda-based subsidiaries, which account for much of its equity capitalization and which benefit from relatively modest dividend restrictions under Bermuda insurance regulatory guidelines.

The rating agency noted that these internal liquidity resources are complemented by XL Capital's access to multi-year lines of credit through a syndication with major international banking institutions.

Moody's noted that its current ratings on XL Capital Ltd and subsidiaries already contemplate a strategy to more fully deploy its capital resources. Moody's added, however, that with the issuance of the preferred securities it views XL Capital Ltd to be moderately leveraged at the current rating level, and that the stable outlook reflects the expectation that leverage will stabilize or be reduced over the near-to intermediate term.

Moody's added that it will continue to consider XL Capital's fixed charge coverage levels in the context of its debt servicing costs as well as its preferred and common share dividends, the latter of which have remained sizeable despite the company's recent operating volatility.

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