Fitch Rates CMS Energy Corp.'s New Senior Notes 'BB+'
2009-06-10 20:26:03 -
Fitch Ratings has assigned a 'BB+' rating to CMS Energy Corp.'s (CMS) $300 million 8.75% senior notes issuance, due June 15, 2019 and $150 million 5.50% convertible senior notes due June 15, 2029. Proceeds from the sales will be used to retire existing debt and for general corporate purposes. The Rating Outlook for CMS is Stable.
The ratings for CMS take into account the stable cash flows of its regulated electric and gas utility, Consumers Energy Co. (Consumers; Issuer Default Rating (IDR) 'BBB-', Stable Outlook, by Fitch). Consumers benefits from solid credit protection measures, stable operating performance and a constructive legislative and regulatory environment in Michigan, as evidenced by state legislation that increases certainty of cost recovery and reduces regulatory lag. CMS is highly dependent on Consumer's cash distributions to service parent debt obligations and pay common dividends.
Rating concerns facing CMS relate to the weak and still declining economy in Michigan, driven by the distress of the automotive sector, as well as significant cash contributions (approximately $200 million) to the company's defined benefit pension plan throughout 2009. CMS will fund these contributions with internally generated cash flows, which have benefited from low commodity prices and decreased capital spending.
In its November 2008 electric rate case filing, Consumers is seeking regulatory recovery for a majority of these pension expenses, but there may be a lag in the timing of recovery or a deficit in the amount received.
While Consumer's service territory has less concentration in the auto sector than does eastern Michigan, there is exposure to the manufacturers and suppliers. On June 1, 2009, General Motors Corp. (GM; IDR rated 'D') filed for Chapter 11 bankruptcy, and on April 30, 2009, Chrysler LLC (IDR rated 'D') filed for Chapter 11 bankruptcy. CMS's average receivables exposure (after-tax) to GM is estimated to be about $2 million, and less than $300,000 for Chrysler. CMS's auto-wide bankruptcy exposure, which includes equipment manufacturers, Tier 1 and other suppliers, is estimated to range between $10 million and $30 million on a pre-tax basis. Furthermore, plant closures or production ramp-downs could reduce load, and the company has forecasted an 11% decline in industrial electric sales in 2009 compared with the prior year. Industrial sales, including the auto sector, comprise approximately 18% of gross margin, or $290 million for 2008.
In November 2008, Consumers filed for a $214 million increase in electric rates and an 11% return on equity (ROE). Major components of the rate request include $50 million higher O&M expenses, $76 million increase in rate base (net plant and working capital) and $43 million in gross margin, primarily due to customer mix and sales decline in 2009.
The utility self-implemented a $179 million rate increase in May and a final order from the Michigan Public Service Commission is due on Nov.
14, 2009. On May 22, 2009, Consumers filed for a $114 million gas rate increase - $48 million associated with capital investment and cost of capital, $41 million associated with sales recovery, and approximately $25 million related to operations and maintenance, including uncollectibles and pension payments. Consumers also filed for an 11% ROE. If the Commission has not acted on the application within 180 days of the filing, the company may implement an increase up to the full amount of the rate request.
CMS is a utility holding company whose primary subsidiary is Consumers, a regulated electric and gas utility serving more than 3.5 million customers in Michigan's Lower Peninsula. CMS also has operations in natural gas pipelines and independent power production.
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