S&P cuts Mirant, on watch

Standard & Poor's downgraded Mirant Corp. and put it on CreditWatch with negative implications. Ratings lowered include Mirant's senior unsecured debt and bank loans, cut to B from BB and preferred stock, cut to CCC from B, Mirant Americas Generation Inc.'s senior unsecured debt and bank loans, cut to B from BB, and Mirant Mid Atlantic LLC's senior secured passthrough certificates, cut to B from BB.

S&P said it took the actions because it has concluded that Mirant's creditworthiness has deteriorated materially due to depressed power prices, high leverage, and insufficient cash resources to meet debt obligations over the next two years.

The CreditWatch placement reflects uncertainty about the outcome of Mirant's efforts to restructure debt in advance of the mid-July 2003 maturity of a $1.125 billion term loan, S&P added. The continuing delay in the release of Mirant's audited financial statements is also a factor in the placement of the company on CreditWatch with negative implications.

Mirant has insufficient liquidity and operating cash flow to meet its upcoming debt maturities and will require an extension of bond and bank loan maturities or a restructuring of its debt profile to avoid default, S&P said. Renegotiation risk and the possibility of onerous terms place additional pressure on the ratings.

The company's plan relies on asset sales in 2003 and on a reduction in collateral requirements through reduced trading and marketing activities. Depressed asset market prices and industry uncertainties could hinder execution of this plan.

Merchant cash flow prospects are unfavorable due to low power prices in the U.S., which could remain depressed for the next several years, and due to lower trading and marketing volumes for electricity and gas, S&P said.

The lack of closure on the company's audited financials for 2002 and re-audit of financials for 2000 and 2001 contributes to uncertainty.

Numerous lawsuits brought against Mirant, mostly related to California operations, could further pressure an already-weak financial condition.

S&P rates US Airways B

Standard & Poor's assigned a B rating to US Airways with a negative outlook. Ratings on aircraft-backed debt that had not defaulted during the airline's Chapter 11 bankruptcy reorganization were confirmed or upgraded and removed from CreditWatch positive including its equipment trust certificates, raised to BB- from CCC+ and passthrough certificates series 1998-1A, raised to A from BBB+, series 1998-1B to BBB from BBB-, series 1998-1C to BB- from B, series 1999-1A to A+ from BBB+, series 1999-1B to BBB+ from BBB-, series 1999-1C to BB- from B, series 2000-3C to BB- from B and series 2001-1C to BB- from B. Passthroughs series 1996A were confirmed at B+ and removed from CreditWatch.

S&P said US Airways' corporate credit rating reflects the current very weak airline revenue outlook and resulting likelihood of further losses, but benefits from the company's improved cost structure and reduced debt and lease burden achieved in its bankruptcy reorganization.

The airline emerges from Chapter 11 with improved liquidity and increased flexibility to use regional jets, but still faces challenges from risks relating to the Iraq war and potential renewed terrorism, as well as from rising low-cost competition, S&P said.

The company previously forecast a pretax and net loss of $225 million in 2003, and that loss is likely to deepen with the effects of the Iraq war. US Airways has cash and available bank lines of about $1.3 billion, having received a $240 million equity investment, a 90% federally guaranteed $1 billion credit line, and a $360 million facility provided by General Electric Capital Corp.

US Airways reduced its capacity, already cut following the Sept. 11, 2001, attacks, by a further 13% in bankruptcy, and shifted passengers to smaller regional jets, which are well suited to the airline's markets and will be used more extensively in the future, S&P noted. Cost reductions are forecast to average $1.9 billion annually over the next six years (about $1.5 billion lower in 2003), relative to what they would otherwise have been.

Moody's rates Aquila loan B2

Moody's Investors Service assigned a B2 rating to the proposed $430 million three-year secured credit facility of Aquila, Inc. and confirmed the company's existing ratings including its senior unsecured debt at Caa1, subordinate debt at Caa3 and preferred stock at Ca. The outlook is negative.

Moody's said the rating on the credit facility reflects the terms and conditions of the facility, including an assessment of the benefits and limitations of the collateral in the event of default. The facility benefits from collateral that includes assets of two regulated utility divisions. Coverage by directly pledged hard assets of the regulated utility divisions is relatively thin at closing, excluding properties on which the lenders will hold a second lien. The facility also is secured by the common stock of Aquila's substantial Canadian subsidiary, but Moody's does not attribute substantial value for notching purposes because of the residual nature of this claim. However, the facility also provides for the addition of further collateral upon regulatory approval for pledge of assets by five regulated divisions. Moody's considers it likely that regulatory approval will be received in at least some cases in the near term.

Aquila's ratings reflect weak cash flow generation relative to total debt despite recent asset divestitures; asset sales proceeds which do not reduce debt incurred to purchase the same assets; liquidity concerns related to unwinding its trading business; and the quality of the collateral as mostly stock in subsidiaries, Moody's said.

The ratings reflect Moody's concern that asset sales do not allow sufficient cash flow to repay parent debt to a level consistent with the expected cash generation of the remaining businesses.

Fitch puts Pacific Gas on positive watch

Fitch Ratings put Pacific Gas & Electric Co.'s outstanding securities on Rating Watch Positive including its first mortgage bonds at DDD and preferred stock at D.

The move is pending a detailed review that will focus on the outlook for continuing current payments and ultimate recovery.

Although Pacific Gas & Electric has been in Chapter 11 bankruptcy proceedings since April 2001, the debtor in possession has made current payments on first mortgage bonds, senior unsecured notes, and junior subordinated debentures that provide the credit support for trust preferred securities since May 2002, Fitch noted. Over the course of its Chapter 11 proceedings, the utility amassed unrestricted cash reserves of $3.3 billion as of Dec. 31, 2002.

Two plans of reorganization are currently under consideration by the US Bankruptcy Court. Barring a settlement agreement emerging from court ordered negotiations to achieve a compromise plan of reorganization, it is unlikely that a reorganization plan will be confirmed until late in the third quarter of 2003, at the earliest.

However, both plans of reorganization, contemplate that all secured and unsecured debt and trust preferred instruments would be paid in full, Fitch said.

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