S&P cuts Semco rating to BB-

Standard & Poor's said it lowered its corporate credit rating on gas distribution company Semco Energy Inc. to BB- from BB. The outlook is negative.

The rating action reflects the reduction in Semco's expected cash flow, which pressures an already weak financial profile, the agency said.

S&P said cash flow deterioration has continued unabated at Semco in 2003, which precipitates this latest ratings downgrade. Credit stability at this level is incumbent on the sale of Alaska Pipeline Co., the construction services business breaking even on a cash flow basis, and Semco's ability to continue to work successfully with its bank group.

Lower construction services EBITDA figures underpinning the company's announcement on Nov. 12 show a dramatic decline from amounts management had projected as recently as June 2003.

Semco's liquidity is below average. Given limited prospects for internally generated cash flow beyond what is necessary to fund capital expenditures, the sale of Alaska Pipeline is imperative to provide needed debt reduction.

The sale of Semco's construction services unit could provide additional funds, as could common dividend elimination (the company currently pays about $8.5 million annually) or trust preferred dividend suspension (the company currently pays about $4.1 million annually that could be deferred up to five years). With respect to its equity base, Semco's market-to-book ratio hovers around only 1x after repeated dividend cuts.

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