Standard & Poor’s lowered the corporate credit rating on CMS Energy Corp.’s subsidiaries utility and pipeline subsidiaries, Consumers Energy Co. and CMS Panhandle Pipeline Cos, to double-‘B’, which is in line with the ratings of the parent company. S&P also lowered the senior unsecured rating on CMS Energy to single-‘B’-plus and removed all the ratings of CMS and its subsidiaries from CreditWatch with negative implications. The outlook for the company is still negative.

“The ratings downgrade for CMS Energy and its subsidiaries reflects the company’s use of the stock of subsidiary CMS Enterprises, which includes CMS Panhandle Pipeline, as security in certain bank facilities to obtain longer-term financing to weather its current liquidity position,” said Standard & Poor’s credit analyst William Ferara.

CMS announced Monday that it is cutting its common dividend 50%, to an annual rate of 72 cents a share, as a condition of agreements with a group of 21 banks on five credit facilities totaling $1.3 billion (see Daily GPI, July 16). The facilities are secured credits with mandatory pre-payment conditions based on the proceeds from asset sales and capital market issuances. CMS was also required to limit its quarterly dividend payments to about 18 cents a share. It also must receive $250 million in net cash proceeds from the planned issuance of equity or equity-linked securities by the end of this year in order to pay a dividend after Dec. 31, 2002. CMS also is close to securing agreements to sell 10 businesses worth an estimated $500 million by the end of this year and another $395 million in assets in 2003. The asset sales will be used to pay off the credit facilities.

In Standard & Poor’s view, CMS Energy’s actions indicate that the risk of default of CMS Energy and its subsidiaries is the same, since the company relied on an operating subsidiary to meet its own financial commitments during a time of financial stress. Historically, the corporate credit ratings of Consumers Energy and CMS Panhandle were separated from that of CMS Energy, based on Standard & Poor’s judgment that the two subsidiaries would not be used to support its liquidity.

CMS Energy’s liquidity position is stretched, since current borrowings and notices of intent to borrow under the current $1.3 billion of new bank facilities is nearly 100%, S&P noted. “Also evident is the glaring need for the company to complete at least the majority of pending asset sales in short order…and issue $250 million of equity-linked securities to reduce borrowings.”

The Michigan-based company has about $7 billion in debt. On a consolidated basis, adjusted funds from operations (FFO) to average total debt of about 15% and adjusted FFO interest coverage of 2.5 times and three times are slightly weak for current ratings, S&P said. Adjusted debt leverage is expected to trend down to near 60% when the company’s debt reduction goals are met.

S&P’s negative outlook reflects the uncertainty posed by an SEC inquiry and CMS Energy’s board of directors’ special committee investigation into the ’round-trip’ trades. Additional challenges for CMS Energy include execution risk in completing planned asset sales, maintaining adequate liquidity over the near-term, and generating cash flow and reducing debt sufficient enough to produce credit protection measures commensurate for its current rating, S&P said.

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