Dean Foods Milks Acquisition Gains; SEMCO Faces Crunch

Dean Foods Company-- formerly Suiza Foods-- has effectively integrated its December 2001 acquisition of Dean Food Corp. and reduced its leverage since the $1.7 billion transaction. Based on this post-acquisition rebound, Moody's Investors Service has upgraded Dean's senior secured rating from Ba2 to Ba1. Since the purchase, Dean has become the largest fluid milk processor in the U.S. and the only one with national reach, Moody's states. Scale, a favorable cost position in the industry and customer and supply diversity also works in the Dallas-based dairy product company's favor. Moody's notes that Dean has durable cash flow, as milk is a food staple with stable demand levels. Additionally, Dean has realized over $100 million of cost savings, compared to the initial $60 million targeted after the acquisition.

The ratings are limited, however, by the company's leverage, low margins, high growth objectives, significant share repurchases and acquisition-oriented nature. The outlook is stable. Dean's $2.7 billion senior secured credit is secured by a perfected, first priority lien on most of its material tangible and intangible assets. The facility includes a six-year, $800 million revolver, a six-year, $900 million "A" loan and a seven-year $1 billion "B" piece.

* SEMCO Energy's lackluster debt reduction figures, highly leveraged balance sheet and limited room for capital expenditure reductions have caused Standard & Poor's to downgrade its credit rating from BBB to BBB-. Furthermore, debt covenants, including a debt-to-capital requirement of 65%, limit the Farmington Hills, Mich.-based energy company's flexibility. S&P also states that SEMCO is facing unseasonably warm temperatures in its service territories and lacks weather normalization adjustments. A negative outlook reflects SEMCO's hurdles to turn around the performance of its non-regulated businesses and reduce leverage. "We recognize the need to improve our capital structure and have identified significant measures [in order to do so]," responded Tom Connelly, director of investor relations for SEMCO.

SEMCO does have gas cost-recovery mechanisms in a majority of its territories, however, which partially mitigates the credit pressures, S&P notes. Also, the company is strengthened by strong customer growth, owned and leased storage capacity and a renewed management focus on the profitability of non-regulated operations. SEMCO's June 2002, $145 million credit agreement includes a three-year, $80 million revolver and a 364-day, $65 million facility with a one-year term-out option.