Moody's cuts CMS ratings

Moody's lowered the debt ratings of CMS Energy Corp., including the two convertible preferreds to Caa1 from B1, and its subsidiary Panhandle Eastern Pipeline Co.

The ratings remain under review for further possible downgrade.

Additionally, Moody's placed the ratings of Consumers Energy Co. on review for possible downgrade.

The downgrade was a result of CMS's announcement that its auditors would be unable to give an opinion on its restated financial statements when they are completed.

The downgrades reflect weak cash flow and high debt levels as well as limited financial flexibility and the challenge of refinancing upcoming debt maturities including the company's $450 million credit facility that comes due June 15.

CMS' market access is currently constrained by its need to restate 2000 and 2001 financial statements to eliminate the effects of round-trip trading with other energy companies.

The downgrades further reflect the difficulties CMS has had in executing an aggressive growth strategy and implementing exit strategies that provide real relief from the financial strains that have resulted.

Cash flows from projects have not kept pace with the aggressive deployment of capital.

Moreover, asset sales are now required at a time when asset prices are expected to come under pressure because of the significant number of properties that are up for sale by other firms.

The B2 senior implied rating of CMS reflects extremely weak financial flexibility.

The B2 rating on its bank credit facilities reflects the likelihood that the banks will require repayment from proceeds of the company's planned asset sales as well as a possible security interest in assets.

The B3 rating on senior unsecured notes have been notched down to B3 to reflect the junior position to be afforded bondholders in that instance. Additionally, the ratings of the company's subordinated debt have been differentiated based on senior and junior priority of claims.

S&P says Phelps Dodge deals having no impact on ratings

Standard & Poor's said that Phelps Dodge Corp.'s (BBB-/negative/A-3) $400 million common equity and $194 million mandatory convertibles will have no affect on its current ratings or outlook.

Proceeds from the offerings will be applied toward debt reduction.

Although the offering will aid the company in restoring its very weak credit measures, S&P said the key factors to maintaining the current ratings continue to be the degree and timing of economic recovery as well as copper price improvement.

Also an important factor will be the progress made in the company's "Quest for Zero" initiative targeting $400 million of sustainable cost reductions by the end of 2003.

Progress in and timing of its cost reductions are currently in line with S&P's expectations.

Moody's confirms Phelps Dodge mandatory at Ba2

Moody's confirmed the senior unsecured debt ratings of Phelps Dodge at Baa3, and preferred stock and junior convertible preferred stock at Ba2. The outlook is negative.

Ratings reflect continued progress in reducing cost base through the "Quest for Zero" program.

Phelps Dodge has achieved a current annualized run rate of $175 million of cost savings and expects to achieve $400 million more by the end of 2003.

The confirmation also considers Phelps Dodge's $600 million sale of equity and mandatory convertible preferreds. Moody's views this development as a positive indication of Phelps Dodge's efforts to improve its capital structure and reduce its interest burden.

Moody's estimates that as of March 31, the transaction would yield proforma EBITDA/interest of 2.7 times versus actual of 2.1time and proforma debt to capital of 40% compared with actual of 51%.

The rating also acknowledges Phelps Dodge's disciplined approach to managing copper production levels in a difficult industry environment.

Despite these operating strengths, Phelps Dodge will remain challenged by the need to drive down costs, significantly strengthen coverage ratios and improve earnings performance.

Moody's views the equity issue as providing Phelps Dodge a greater degree of time to continue to implement and achieve its objectives and work to improve fundamental performance.

The outlook reflects the need for Phelps Dodge to make steady progress in achieving the cost and operational improvements.

In the absence of such progress the rating could come under pressure.

The outlook also reflects the company's continued vulnerability to the timing and degree of recovery in the copper markets and therefore the timing of improvement in earnings and free cash flow.

Although copper prices have improved from the severe low reached in the latter part of 2001, demand fundamentals are not yet providing meaningful momentum to the price increases evidenced to date.

Moody's does not believe, however, that prices will retreat to the low levels reached in 2001 due to the production cutbacks that have been taken by producers and the decrease in supply that is now starting to be experienced in the market.

The outlook also considers Phelps Dodge's continued high, although improved, leverage position, anemic debt coverage ratios and the need to continue to achieve targeted savings.

S&P sees power pact with Duke positive for Sierra Pacific

Standard & Poor's noted the agreement of Sierra Pacific Resources (B+/negative watch) and Duke Energy (A+/stable) in which Duke Energy North America will supply the entire short power position of Sierra Pacific's two utility subsidiaries for the summer of 2002 and receive deferred payments is highly supportive of Sierra Pacific's credit quality.

Nevada Power, in particular, was facing a critical cash shortfall this summer as a result largely of the March 29 ruling by Nevada regulators to disallow about 50% of its very high-cost deferred energy purchases in 2001.

Under the agreement, Duke will provide up to 1,000 MW per hour to meet the short position of both utilities between June 15 and Sept. 15 that was caused by the cancellation of power supply contracts by Morgan Stanley, Enron and others, thereby reducing considerably the uncertainty of supply for Nevada Power for the summer.

Duke Energy has also agreed to an extended payment program covering costs under its existing power supply contracts with Nevada Power. The difference between these prices and those of the original contract will be repaid according to the terms of an undisclosed arrangement.

This agreement is a considerable boost to Nevada Power's liquidity since Duke is the its largest power supplier after Enron.

Nevada Power now faces a much smaller cash shortfall during the crucial summer season and the pressure to file for bankruptcy protection is significantly reduced.

The main source of uncertainty now is the outcome of negotiations with other power suppliers to extend payment obligations.

S&P will conduct a detailed evaluation of Sierra Pacific's liquidity position in the very near future to assess the credit impact of the Duke Energy agreement on Sierra Pacific and its subsidiaries.

Moody's cuts Stilwell outlook to negative

Moody's affirmed Stilwell Financial's ratings (senior at Baa1), but changed the outlook on the ratings to negative from stable.

The rationale for outlook is Moody's view that Stilwell's performance has lagged original expectations.

This performance has resulted from continued market depreciation and loss of assets under management, particularly at the firm's largest subsidiary, Janus Capital Management.

Stilwell continues to be subject to the risk of the loss of additional assets under management as a result of its concentration in the retail-oriented, growth company mutual fund segment.

Moody's said that Stilwell's initial substantial debt load was anticipated, but the firm's cash flows have been weaker than expected, and its pace of debt reduction has been slower than Moody's originally projected. Less robust debt reduction has served to keep Stilwell's financial leverage at levels that are relatively high for its industry.

High financial leverage is of particular concern as it relates to Stilwell given the concentration risk cited above. Positively, Moody's noted that Stilwell does continue to hold a substantial investment in DST Systems and that could be monetized in order to support its debt load, although this option would be costly.

Moody's said that a continuation of the negative trends in assets under management, earnings and cash flows would place greater negative pressure on Stilwell's rating.

Additionally, Moody's will monitor the firm's commitment to reducing its sizeable debt load.

S&P ups Valhi ratings

Standard & Poor's raised its corporate credit rating on Valhi Inc. to BB from BB- as a result of improvements to its financial profile. The outlook is stable.

Valhi has approximately $584 million of debt outstanding.

The rating actions recognized Valhi's improved financial profile following the proposed refinancing as well as ongoing efforts to reduce debt during the past few years.

Valhi's credit quality reflects a below-average business profile derived from a solid market position among the leading global TiO2 producers, a niche component products business and an aggressive financial profile. The firm also maintains equity positions in a titanium metals business and a small waste management company.

During the past year, continued economic weakness resulted in lower volumes and selling prices for the firm's products, although first-quarter results showed significant recovery in sales volumes.

Over the intermediate term, however, favorable industry dynamics, including consistent demand growth and the absence of large-scale capacity additions, should support modest improvement.

Capacity additions are expected to be limited to debottlenecks at existing facilities due to the current pricing environment, which remains well below the level necessary to promote the development of new greenfield projects.

In addition, the strategic or financial strategies of most TiO2 industry participants would appear supportive of a measured approach to new investment, at least until industry conditions are significantly improved.

Over the course of the business cycle, the ratios of total debt (adjusted to capitalize operating leases) to EBITDA and funds from operations to total debt should average near 3.0 times and in the 20%-25% range, respectively.

Dividend payments represent a meaningful use of cash, although free cash flow from operations has generally been more than sufficient to cover these payments. Liquidity is provided by availability under committed bank facilities.

The ratings are supported by progress toward the improvement of the financial profile, extension of debt maturities following the proposed refinancing and the expectation for improved TiO2 business conditions in the intermediate term.

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