Fitch Ratings has affirmed the outstanding debt ratings
for CMS Energy Corp. (CMS) and its regulated electric and gas
subsidiary, Consumers Energy Co. (Consumers) as follows:
CMS
-- Senior secured bank loan at 'BB+';
-- Senior unsecured debt at 'BB-';
-- Preferred stock at 'B-';
-- Issuer default rating (IDR) at 'B+'.
Consumers
-- Senior secured debt at 'BBB-';
-- Senior unsecured debt at 'BB';
-- Preferred stock at 'BB-'.
The Rating Outlook for both companies is Stable. Approximately $7.4 billion of debt is affected.
The ratings affirmations are the result of a routine review. As a result of recently implemented IDR methodology and recovery analysis, Fitch revised upward the senior secured bank loan and unsecured debt ratings of CMS and revised downward the preferred stock rating on Nov. 7, 2005. This ratings revision reflects expected recovery of 100% on the secured bank loan and 62% for the unsecured bondholders.
The ratings for CMS are primarily supported by the stable cash flows of Consumers, as CMS is highly dependent on the utility for cash distributions to service parent debt obligations. Consumers benefits from solid stand-alone credit metrics, a low business risk profile, and an improving regulatory environment in Michigan. Any deterioration of credit quality at the utility would have a negative ratings impact on CMS. The Stable Outlook for Consumers takes into consideration Fitch's expectation that the company will receive reasonable outcomes to its rate filings, including an increased billing factor for the gas cost recovery (GCR) mechanism to accommodate higher gas costs. CMS continues to hold investments in various international assets, primarily power plants and natural gas pipelines in Latin America and the Middle East. While some of these projects, such as those in the UAE and Morocco, are cash flow positive and dividend up approximately $100 million in distributions per year, assets in Latin America have been written down and will be difficult to divest, due to the existing economic and political environment in the region.
Rating concerns facing CMS and Consumers relate to the continued high levels of consolidated debt relative to cash flows, the exposure of the regulated utility to a sluggish economy in Michigan -- in particular the declining automotive sector, and the increased business and financial risks associated with the international operations. Consumers receives about 3% of total electric revenues from a contract with GM and Delphi. The recent plant closing announcement will shut down two customers from Consumers; however, this will be partially mitigated by expansions from other industrial customers.
CMS' consolidated credit ratios are slightly weak for the 'BB-' category, with adjusted EBITDA to interest at 2.3 times (x) and cash flow coverage at 2.4x for the 12 month period ended Sept. 30, 2005. Credit ratios are forecasted to remain at current levels over the next few years. Consolidated debt leverage, as measured by the ratio of debt to adjusted EBITDA, is high at 6.1x at Sept. 30, 2005, and is not projected to decline materially over the next few years. CMS has embarked on a program to lower parent debt levels over the next three years through subsidiary cash dividends, tax sharing, and restructuring efforts. A meaningful reduction in leverage and subsequent improvement in credit measures would lead to a positive rating action.
CMS announced today that it plans to sell the Palisades nuclear power plant and will establish a competitive bid process with an anticipated close in 2007. Fitch notes that Consumers plans to enter into a long-term purchase power agreement with the new owner to continue to receive power. A failure to do so would cause the company to seek alternative power procurement options.
In the third quarter of 2005, CMS recorded a $385 million after-tax impairment charge related to Consumers' 49% ownership interest in Midland Cogeneration Venture (MCV). Fitch does not expect the charge to have an adverse effect on CMS' near-term liquidity position. The MCV charge will have an impact on the financing of and equity calculation for Consumers. The first mortgage debt the utility will be able to issue will be limited to $298 million over the next 12 months; however, Fitch expects Consumers to be able to address any liquidity needs with either second mortgage bonds, springing lien bonds, or even unsecured debt. While it is unlikely that the write-off will be addressed in the current electric rate case, given how far the case has progressed, going forward there is a potential risk that the Michigan Public Service Commission will factor in the adjusted capital structure in its rate making decisions.
CMS is a holding company whose primary subsidiary is Consumers, a regulated electric and gas utility serving more than 3.4 million customers in Western Michigan. CMS also has operations in natural gas pipelines and independent power production.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
CMS
-- Senior secured bank loan at 'BB+';
-- Senior unsecured debt at 'BB-';
-- Preferred stock at 'B-';
-- Issuer default rating (IDR) at 'B+'.
Consumers
-- Senior secured debt at 'BBB-';
-- Senior unsecured debt at 'BB';
-- Preferred stock at 'BB-'.
The Rating Outlook for both companies is Stable. Approximately $7.4 billion of debt is affected.
The ratings affirmations are the result of a routine review. As a result of recently implemented IDR methodology and recovery analysis, Fitch revised upward the senior secured bank loan and unsecured debt ratings of CMS and revised downward the preferred stock rating on Nov. 7, 2005. This ratings revision reflects expected recovery of 100% on the secured bank loan and 62% for the unsecured bondholders.
The ratings for CMS are primarily supported by the stable cash flows of Consumers, as CMS is highly dependent on the utility for cash distributions to service parent debt obligations. Consumers benefits from solid stand-alone credit metrics, a low business risk profile, and an improving regulatory environment in Michigan. Any deterioration of credit quality at the utility would have a negative ratings impact on CMS. The Stable Outlook for Consumers takes into consideration Fitch's expectation that the company will receive reasonable outcomes to its rate filings, including an increased billing factor for the gas cost recovery (GCR) mechanism to accommodate higher gas costs. CMS continues to hold investments in various international assets, primarily power plants and natural gas pipelines in Latin America and the Middle East. While some of these projects, such as those in the UAE and Morocco, are cash flow positive and dividend up approximately $100 million in distributions per year, assets in Latin America have been written down and will be difficult to divest, due to the existing economic and political environment in the region.
Rating concerns facing CMS and Consumers relate to the continued high levels of consolidated debt relative to cash flows, the exposure of the regulated utility to a sluggish economy in Michigan -- in particular the declining automotive sector, and the increased business and financial risks associated with the international operations. Consumers receives about 3% of total electric revenues from a contract with GM and Delphi. The recent plant closing announcement will shut down two customers from Consumers; however, this will be partially mitigated by expansions from other industrial customers.
CMS' consolidated credit ratios are slightly weak for the 'BB-' category, with adjusted EBITDA to interest at 2.3 times (x) and cash flow coverage at 2.4x for the 12 month period ended Sept. 30, 2005. Credit ratios are forecasted to remain at current levels over the next few years. Consolidated debt leverage, as measured by the ratio of debt to adjusted EBITDA, is high at 6.1x at Sept. 30, 2005, and is not projected to decline materially over the next few years. CMS has embarked on a program to lower parent debt levels over the next three years through subsidiary cash dividends, tax sharing, and restructuring efforts. A meaningful reduction in leverage and subsequent improvement in credit measures would lead to a positive rating action.
CMS announced today that it plans to sell the Palisades nuclear power plant and will establish a competitive bid process with an anticipated close in 2007. Fitch notes that Consumers plans to enter into a long-term purchase power agreement with the new owner to continue to receive power. A failure to do so would cause the company to seek alternative power procurement options.
In the third quarter of 2005, CMS recorded a $385 million after-tax impairment charge related to Consumers' 49% ownership interest in Midland Cogeneration Venture (MCV). Fitch does not expect the charge to have an adverse effect on CMS' near-term liquidity position. The MCV charge will have an impact on the financing of and equity calculation for Consumers. The first mortgage debt the utility will be able to issue will be limited to $298 million over the next 12 months; however, Fitch expects Consumers to be able to address any liquidity needs with either second mortgage bonds, springing lien bonds, or even unsecured debt. While it is unlikely that the write-off will be addressed in the current electric rate case, given how far the case has progressed, going forward there is a potential risk that the Michigan Public Service Commission will factor in the adjusted capital structure in its rate making decisions.
CMS is a holding company whose primary subsidiary is Consumers, a regulated electric and gas utility serving more than 3.4 million customers in Western Michigan. CMS also has operations in natural gas pipelines and independent power production.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
© 2005 Business Wire
