S&P cuts SEMCO ratings

Standard & Poor's lowered the ratings of SEMCO Energy Inc., including senior unsecured debt to BBB- from BBB and its preferreds to BB from BB+. The outlook remains negative.

The downgrade reflects a variety of credit measures, including the inability of the gas distribution segment to produce enough excess cash flow from continuing operations to make meaningful debt reductions and a highly leveraged balance sheet, S&P said.

Total debt comprises roughly 65% of capital and total fixed-charges that reduce funds from operations to total debt below 12%.

S&P also noted debt covenants, particularly a debt-to-total capital requirement of 65%, limit financial flexibility.

The pressures are partially mitigated by gas cost-recovery mechanisms in the majority of SEMCO's service territories and strong customer growth and limited potential for customer switching, among other strengths, S&P added.

The outlook reflects hurdles to turn around the performance of nonregulated businesses and reduce leverage, which would improve credit measures.

Moody's puts Ahold on review for downgrade

Moody's Investors Service placed the Baa3 senior unsecured long term ratings of Koninklijke Ahold NV and guaranteed entities, together with the Ba1 rated subordinated debt issues, on review for possible downgrade.

The review follows Ahold's disclosure of a material overstatement of its operating earnings from its U.S. foodservice business that may exceed $500 million for 2001 and 2002, the resignation of its CEO and CFO and the significant level of uncertainty from the combination of these events, Moody's said.

The review will also look into the potential subordination of bondholders as a result of the announcement that the new liquidity facility includes a secured tranche. Moody's said the circumstances increase the risk of rating migration and the review may lead to Ahold's ratings being lowered by more than one notch.

S&P cuts Ahold to junk, on watch

Standard & Poor's downgraded Ahold Koninklijke NV to junk and put it on CreditWatch with negative implications. Ratings lowered include Ahold's €1.5 billion 5.875% bonds due 2008, €200 million 6.375% notes due 2007, €55 million 5.625% notes due 2008, and CSK3 billion floating-rate notes due 2005, cut to BB+ from BBB, €680.67 million 3% convertible bonds due 2003, €90.756 million 5.875% bonds due 2005, €90.756 million 6.75% subordinated bonds due 2003 and €920 million 4% subordinated notes due 2005, cut to BB from BBB- and €400 million cumulative preferred shares, cut to BB- from BB+, Ahold USA Holdings Inc.'s €226.89 million 6.25% bonds due 2006, cut to BB+ from BBB, Ahold Finance Europe BV's €40 million 5.625% notes due 2008, cut to BB+ from BBB, Ahold Finance USA Inc.'s $1 billion bonds due 2029, $700 million 8.25% bonds due 2010, €1.5 billion 6.375% notes due 2005 and £500 million 6.5% bonds due 2017, cut to BB+ from BBB, and Albert Heijn BV's €136.134 million 5.875% bonds due 2007, cut to BB+ from BBB. S&P also cut Ahold Lease 2001-A Pass Through Trusts class A-1 and A-2 to BB+ from BBB+.

S&P said the actions reflect Ahold's weaker financial profile and uncertainties with respect to its liquidity position following its announcement that it will restate its financial accounts for 2002 and previous years. Ahold also announced that its chief executive and chief financial officer are to leave the group.

As a result of these earnings overstatements, Ahold's expected 2002 debt measures, which were already modest for the previous ratings, will be significantly weaker and, therefore, no longer commensurate with an investment-grade rating, S&P added.

In addition, although Ahold has obtained a 364-day €3.1 billion facility from a syndicate of banks, with an EBITA-to-interest coverage covenant of 2.5x, its liquidity position remains at risk until the full extent of the restatement of its accounts is clarified, S&P said. In any case, Ahold's leeway under the covenant mentioned above is likely to remain tight.

Moody's confirms Devon

Moody's Investors Service confirmed the Baa2 senior unsecured debt ratings of Devon Energy Corp., and its other ratings, in response to its planned merger with Ocean Energy Inc. The outlook remains negative.

The confirmation reflects, among other factors, the all-stock transaction, increased size and diversity of the combined resource base, increased visibility for near-term production growth and additional exploration opportunities, Moody's said.

The negative outlook reflects pro forma leverage at year end 2002 that remains high for the Baa2 rating level, with total adjusted debt at about $6.25 per proved developed BOE, a high total full-cycle cost structure and significant challenges associated with production growth in North America.

Moody's recognizes the merger has the potential to address several of the factors contributing to the current negative ratings outlook.

However, the combined companies will still need to deliver on debt reduction, lowering the cost structure and achieving projected near term production growth targets.

Fitch cuts Aquila, still on watch

Fitch Ratings downgraded the senior unsecured rating of Aquila, Inc. to B+ from BB, affecting $3 billion of debt. The ratings remain on Rating Watch Negative.

Fitch said the action reflects Aquila's limited financial flexibility, tighter than expected liquidity position, and weak cash flow from non-regulated operations, as well as an increase in execution risks surrounding the renegotiation of existing bank facilities.

The rating watch continues pending resolution of bank group negotiations and a review of an updated business plan.

Aquila's liquidity position and cash flows are weaker than previously anticipated, Fitch noted. Due to weak spark spreads available in the power market, net revenues from power facilities under tolling arrangements are inadequate to fully cover the cash capacity payment obligations that total approximately $118 million in 2003. Fitch expects the combination of high gas prices and low electricity spot prices to persist over the next several months.

Secondly, when Aquila was downgraded below investment grade, a $130 million accounts receivable facility was wound down, Fitch said. This facility was not replaced by a new $80 million receivables facility prior to year-end 2002, as anticipated.

Finally, Aquila has made slower than expected progress in selling of Avon Energy Partners Holding the U.K. operations, and has rejected bids for the sale of these assets as inadequate.

Aquila has until April 12, 2003 to reach an agreement for additional covenant relief with lenders to its $650 million revolving credit facilities. On April 12, an existing waiver of the minimum interest coverage covenant under these facilities will expire, Fitch noted. Aquila previously reported that it expects to remain out of compliance with this covenant through Dec. 31, 2003. If Aquila is unable to negotiate necessary relief, the lenders could declare borrowings immediately due and payable, which would trigger cross-defaults to Aquila's other debt as well as to guaranteed obligations, including certain synthetic leases and the Aquila Canada Finance bank facility.

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