S&P ups Union Pacific to BBB

Standard & Poor's raised the corporate credit rating on Union Pacific Corp. to BBB from BBB- and its commercial paper rating to A-2 from A-3, reflecting improved operating performance and financial measures. S&P also raised Union Pacific's convertible preferreds to BB+ from BB.

And, S&P assigned preliminary BBB senior unsecured debt, BBB- subordinated debt and BB+ preferred stock ratings to Union Pacific's $1 billion Rule 415 shelf registration. The outlook is positive.

Omaha, Neb.-based Union Pacific is the largest railroad in the U.S. and has about $10.8 billion of debt, including off-balance sheet obligations.

The ratings reflect significant improvement in operating performance and credit protection measures, albeit from very weak levels, over the past few years, and S&P's expectation that the company will sustain the improvement.

Ratings reflect favorable risk characteristics of the U.S. freight railroad industry, Union Pacific's strong competitive position and moderate financial policies.

Union Pacific has now recovered operationally from its merger problems and has succeeded in restoring financial measures to near 1995-1996 levels, S&P said, despite the impact of weak economic conditions over the past year.

The operating ratio, which deteriorated to 95.4% in 1998, is now a respectable 81.6%.

A continued focus on efficiency improvement should translate into better operating results over time, S&P said, especially as the economy recovers.

The ratings assume that total debt/capital, including off balance sheet obligations and treating preferred stock as equity, will remain at or below the current 50% level, with EBITDA interest coverage of at least 4 times.

Continued success in improving operating performance and reducing debt could lead to a modest upgrade, S&P said.

Moody's cuts AT&T long term debt to Baa2

Moody's downgraded the long-term ratings of AT&T Corp., reflecting weakened revenue prospects for the long distance voice and data industry. The senior unsecured debt was cut to Baa2 from A3 and the guaranteed trust preferred stock issued by MediaOne Financing I to Baa3 from Baa1.

The ratings of all other securities issued by AT&T Broadband (formerly TCI Communications) and its subsidiaries, including MediaOne, are not affected by the rating action and remain on review for possible downgrade pending the resolution of the Comcast transaction, Moody's said.

AT&T's Prime-2 rating for commercial paper was confirmed.

The outlook is negative.

AT&T will feel the impact of increasing competitive pressures from the RBOCs and technology substitution and uncertainty particularly regarding its ability to offset the erosion in operating performance of its voice business, Moody's said.

The ratings also consider substantial debt reduction following the Comcast transaction, modest leverage and near term free cash flow generation of the telephony business, value of its brand, customer base and extensive network, modest capex needs and the benefits of past cost reduction efforts.

The downgrade anticipates that AT&T will be successful in its effort to spin off its broadband business to Comcast.

The negative outlook reflects the continuing price pressures for long distance voice and data carriers, as prices are expected to remain under pressure and volume will be subject to cyclical variability. AT&T will have a relatively unleveraged financial structure and solid interest coverage following the Comcast transaction.

If the company is unable to reverse the negative revenue trends, operating performance could continue to deteriorate, Moody's said, which may result in further rating action.

AT&T has sufficient access to liquidity for its near term needs, including the availability under its $8 billion 364-day facility which expires in December 2002. Moody's noted that this facility will need to be renegotiated in advance of Comcast transaction, since it would not be assignable to the telecom business following this rating action.

The $10 billion in public debt issued last November is structured to be retained by the telecom business.

Moody's keeps Sierra Pacific on review for downgrade

Moody's is continuing a review for possible downgrade of the long-term ratings of Sierra Pacific Resources and its utility subsidiaries, Nevada Power Co. and Sierra Pacific Power Co., following the decision by Nevada regulators to allow the company to recover $149 million of the $205 million in deferred energy costs that had built up on its books in 2001.

SPR's senior unsecured rating is currently at B2, while the utility subsidiaries both have senior secured debt currently rated at Ba2.

Notwithstanding the most recent regulatory actions, Sierra Pacific still faces a tight liquidity position, Moody's said.

In April, Sierra Pacific received confirmation of the bank lines at its utility companies,albeit these are now secured under the respective utility company general and refunding mortgage indentures, consistent with springing lien conditions in the related documents.

The utility bank facilities, which are sized at $200 million for Nevada Power and $150 million for Sierra Pacific Power, were fully drawn upon to repay maturing commercial paper balances, which now stand at zero for both utilities. Both facilities expire Nov. 28, 2002.

Moody's previously noted that the parent's $75 million credit line, which did not have any amounts outstanding, was terminated. Other aggressive capital and operating and maintenance cost saving initiatives throughout the organization, in addition to federal tax refund money also provided additional cash.

Meanwhile, the company is also continuing to pursue other options to add to liquidity and recently suspended future payments of its common dividend.

Also, the specter of demands for collateral from the utility company energy suppliers, which have been forestalled to date, continues to loom on the horizon.

In the event that ongoing efforts to assure suppliers that they will continue to be paid are not successful, the suppliers' willingness to forbear on requests for collateral might end. In this scenario, the utility companies would not be in a position to meet the significant collateral calls, and the suppliers would likely claim a default has occurred under the terms of the contracts.

Meanwhile, Moody's said it continues to note that Sierra Pacific is trying to remedy its situation.

More importantly, management is still actively communicating with all of its suppliers, most of whom have signed confidentiality agreements, in order to obtain their support for extended payment terms under supply contracts and to fill summer supply voids created by Enron's recent decision to cease selling power to Sierra Pacific's utilities.

Given the pressure that remains on the utilities' credit quality, Sierra Pacific's ability to obtain sufficient access to the capital markets remains uncertain.

Moody's said it will follow progress in the ongoing discussions with suppliers and monitor reactions from the banks as well as assess Sierra Pacific's ability of the utilities to access the capital markets near term and the extent to which other steps to add to liquidity might be successful.

S&P keeps Sierra Pacific on negative watch

Standard & Poor's said the deferred power cost recovery decision by Nevada regulators allowing Sierra Pacific Power Co. (B+/Watch Neg/--) to recover $149 million out of $205 million in deferred costs will not affect ratings on Sierra Pacific Resources (SRP; B+/Watch Neg/--) or its utility subsidiaries, Nevada Power Co. (B+/Watch Neg/--) and Sierra Pacific Power.

S&P lowered the ratings of Sierra Pacific and subsidiaries to B+ in April 2002 following an analysis of the liquidity position of SRP pursuant to the regulators' decision to disallow $437 million of deferred power costs incurred by Nevada Power.

S&P factored in a disallowance for Sierra Pacific Power that is largely comparable with the commission's actual order today.

While this order is considerably more supportive than the nearly 50% disallowance for Nevada Power, Sierra Pacific continues to face a critical liquidity situation as the summer approaches.

Ongoing negotiations with power suppliers, which account for about half of the utility's summer energy needs, remain critical to Sierra Pacific's financial solvency.

S&P cuts PPL to BBB

Standard & Poor's lowered the corporate credit rating on PPL Corp. to BBB from BBB+ and the senior unsecured debt rating on PPL Capital Funding Inc. to BBB from BBB+. The corporate credit rating of PPL Energy Supply and senior secured rating of PPL Montana were affirmed at BBB.

The outlook on all ratings is stable.

The downgrade is based on the consolidated credit profile of the PPL group after deconsolidation of PPL Electric Utilities from the parent and reflects a weakening in PPL Corp.'s credit profile due to setbacks faced in international operations.

PPL Corp.'s ratings reflect above average competitive position due to PPL Energy Supply's status as the full-requirements, long-term (2001-2009) supplier of PPLEU's provider-of-last-resort obligations, above-average plant operations with high availability records, strong base load dispatch profile and consistent growth in the service territories served by PPLEU.

These strengths are offset by regulatory uncertainty in Montana, PPL's exposure to nuclear assets (20%), limited but increasing portfolio diversity by fuel source (currently 46% coal), substantial impairment in international assets, especially in Latin America and an aggressive financial profile with consolidated debt to capitalization at about 62% and consolidated debt per kilowatt (kW) at $245 per kW as of March 2002.

PPL Corp.'s overall financial profile remains aggressive. Including double leverage at PPL Capital of about $1.3 billion, debt capitalization at PPL Corp. is a high 66%, including off-balance sheet items.

In this regard, the cutback in capital expenditure is viewed positively from a financial standpoint, as much of the expansion was to be funded with debt and would have increased leverage further, S&P said. PPL Corp. has also filed a universal shelf registration with the SEC and anticipates raising $235 million of equity this year, including new common stock.

Debt protection measures are weak for the rated category, with funds from operation interest coverage at 3.6x in 2001 and likely to remain affected due to penalty payments ($150 million) already made in early 2002 for cancellation of turbine generator purchase contracts.

However, after including debt at PPL Capital, the financial cushion calculated in S&P's net revenue analysis averages around $40 per kilowatt-year, which is consistent with the BBB benchmarks.

The stable outlook reflects S&P's expectations for relatively stable earnings due to the long-term contract through 2009 with PPL Electric Utilities and through mid-2007 with Montana Power, and an asset base that is becoming increasingly diversified by fuel type, geography, and dispatch.

However, PPL's management will have to balance the level of debt financing in its capitalization with the pace of its domestic generation strategy.

Moody's ups Quest Diagnostic ratings

Moody's raised the ratings of Quest Diagnostics Inc., including the convertible notes due 2021 to Baa3 from Ba1, and assigned a Baa3 rating to its new $275 million senior unsecured term loan due 2007, following a review of the company's merger with Unilab.

The outlook is stable.

Moody's is keeping Unilab ratings on review until the acquisition is finalized and the status of the Unilab debt is determined.

The upgrade reflects Quest's ability to sustain positive operating trends, including sound cash flow generation. With the acquisition of American Medical Laboratories Inc. and the pending acquisition of Unilab, the company has further solidified its leading market position.

Impacting the ratings, Moody's noted that the company will now face issues relating to integrating two companies simultaneously. In addition, Moody's believes that the company may need to rely on product mix shift and volume increases to support positive operating trends since cost trends will likely outpace price increases.

Moody's also noted that Medicare and Medicaid pricing has been flat while managed care pricing will continue to be subject to constraints especially as managed care companies themselves grapple with rising cost trends and a potentially less favorable premium environment.

Finally, Moody's noted that there are some very preliminary proposals in Congress to make changes to Medicare that contemplate some type of competitive bidding procedures for labs. It is still too early to determine the probability that this may occur, in what form and what the impact could be on the industry, as well as the company.

The stable outlook anticipates that favorable operating trends, including cash flow generation, will continue. It also anticipates that Quest will reduce leverage quickly, even with total debt increasing significantly after both acquisitions - up to about $1.7 billion from $820 million.

We do not envision significant acquisition activity in the near to intermediate term but that Quest would continue to use cash flow, in part, to reduce debt.

As such, Moody's expects continued improvement to the company's credit profile.

Furthermore, while CFO/Total Debt will decline in 2002 to the mid-20% range from the mid-40% range for FYE 2001, Moody's expects Quest's focus on debt reduction and its improved operating trends will drive CFO/Total Debt levels back to the 30% to 40% range (mid-20% range on an adjusted debt basis) toward the end of 2003 and beyond.

A portion of the review focused on Quest's capital structure and the degree of on-going reliance on short-term debt. Moody's noted that the company's actions in terms of the partial refinancing of its 364-day bridge facility have demonstrated the company's focus on reducing its reliance on short term financing instruments.

Fitch rates new Lincoln National notes A+

Fitch Ratings assigned a rating of A+ to Lincoln National Corp.'s proposed $250 million of five-year senior notes. The outlook is stable.

Proceeds from the note sale will be used to reduce outstanding commercial paper and to prefund the maturity of $100 million of senior notes due July 15, 2002.

Lincoln National, based in Philadelphia, Pa., markets a broad range of insurance and asset accumulation products and financial advisory services primarily to the affluent market segment.

At March 31, the company reported consolidated assets of $97.85 billion, common equity of $5.13 billion and over $260 billion of individual life insurance in force.

Moody's confirms El Paso ratings

Moody's confirmed the debt ratings (Baa2 senior unsecured, convertible preferreds at Baa3) of El Paso Corp. and its subsidiaries, following the company's announcement of a repositioning in which it will reduce its involvement in energy trading. The outlook is stable.

El Paso initiated a plan to reduce over $2 billion of debt by issuing $1.5 billion in equity and selling $800 million of assets, downsize its energy trading business and limit liquidity allocated to it and increase its investment in its core gas business. The company said it would cut half its energy trading staff and limit working capital investment in trading to $1 billion.

Moody's believes these steps are positive, because they reduce El Paso's leverage, strengthen its equity base and make its cash flows more predictable.

While Moody's recognizes the plan has execution risk, El Paso has the ability to make significant near-term progress, since many elements of the plan are within El Paso's control.

Since last December, El Paso has had in place a comprehensive debt reduction program that led to its issuing $862 million of common stock and selling $1.75 billion of assets.

El Paso's latest plan includes reducing additional debt and, if consummated, will help to bring the company's debt levels more in line with cash flow and business risk profile.

Furthermore, El Paso's plan to downsize its energy trading business will help to improve the quality of its earnings and limit the unpredictable and potentially substantial requirements in working capital.

The rating and outlook assume that El Paso will make incremental investments over the long term, using an appropriate amount of equity financing.

S&P says El Paso plan supports credit quality

Standard & Poor's said it views El Paso Corp.'s (BBB+/Stable/A-2) announcement to strategically reposition itself by limiting its investment in and exposure to energy trading, as well as increasing its investment in core natural gas businesses, as supportive of the firm's credit quality.

Restructuring the merchant energy segment, including downsizing operations, limiting working capital investment and narrowing its scope of business activities, will result in a marked improvement in El Paso's financial stability and flexibility, due to the trading unit's reduced need for capital and liquidity.

These restructuring measures will also produce a more stable, consolidated cash flow mix.

Importantly, the company's plan to build on the quick progression of its balance sheet enhancement program by issuing $1.5 billion of equity securities and selling $800 million of natural gas gathering assets to subsidiary El Paso Energy Partners LP further signifies its commitment to credit quality and current ratings.

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