Moody’s Investors Service on Friday assigned a “SGL-4” speculative liquidity rating to CMS Energy (CMS) because of its weak liquidity position, unregulated growth initiatives and its continued reliance on asset sales to reduce debt.

The ratings agency, which confirmed CMS’s “B2” senior implied rating, said the speculative liquidity rating “reflects the company’s weak liquidity position given the current pressures on financial performance associated with its historical unregulated growth initiatives, a continuing reliance on asset sales as part of its debt reduction strategy, and large ongoing capital requirements partially offset by an aggressive financing program over the last 90 days which has provided significant cash balances.”

Moody’s analysts said the rating assumes that CMS’s cash balances “will diminish significantly over the next 12 months as existing maturities are met,” which will leave the company with only a “nominal cushion to support unforeseen contingencies.” CMS “will remain challenged to stay in compliance with its debt covenants particularly in regards to its interest coverage test as leverage will likely remain high.”

According to the ratings agency, CMS’s near-term cash flow performance continues to be affected by its decision in the 1990s to diversify into unregulated businesses and to fund them with high levels of debt capital. “Many of these transactions have underperformed expectations and sales of the assets have taken place at levels below book value, stressing cash flows and leaving the capital structure with an ongoing debt burden.”

As CMS transforms itself to become more reliant on dividends from its utilities for cash flow, Moody’s warned that the company “must continue to invest capital to support the regulator’s goal for reliability and customer service and to grow earnings levels.” However, capital requirements are expected to remain high for CMS, and “when considered along with the capital levels other affiliates are planning to deploy, are not expected to be financed through internal sources.”

To meet the expected shortfall, Moody’s believes that CMS will have to continue to sell assets to access capital markets. “Nonetheless, we anticipate that a large part of the maturing debt obligations of CMS Energy through 2004 will be met by the latest round of financing activity in which the company accessed various debt markets for a total approximating $2.3 billion.”

Cash resources at CMS will be augmented in the near term by its closing on the Panhandle Eastern Pipe Line Co. sale, said Moody’s. However, analysts warned that none of CMS’s other options are assured to ensure liquidity. “These include a favorable outcome on Consumers Energy’s requests before the Michigan Public Service Commission to securitize the capital expenditures associated with its Clean Air Requirements and its nuclear program, and to increase rates in its gas operations.” CMS does, however, have some flexibility in meeting its pension obligations, said Moody’s.

“We anticipate that the existing SGL-4 rating could be raised when there is greater certainty surrounding the company’s liquidity options including seeking additional cash resources dedicated to the parent company level.”

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