Fitch: CMS' 'BB+' IDR Unaffected by Dearborn Contract Terminations

Business Wire,  Dec 4, 2007  

Tags: content management system, Ford Motor Co., SNA, termination

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CHICAGO -- CMS Energy Corp.'s recent announcement that indirect subsidiary, Dearborn Industrial Generation LLC (DIG) has reached agreements to terminate unprofitable electricity sales agreements with Ford Motor Company and Severstal North America Inc. (SNA) will not have any effect on the ratings or Rating Outlook of CMS, according to Fitch Ratings. Under the terms of the termination agreements, CMS will make a one-time cash payment of $275 million to Ford and SNA. The termination agreement is conditioned upon the ability of Ford and SNA to return to electric service with the Detroit Edison Company. Fitch currently rates CMS' Issuer Default Rating (IDR) 'BB+' with a Stable Outlook.

CMS has sufficient liquidity to withstand the $275 million payout through its credit facilities. There was approximately $296 million available under credit facilities as of Sept. 30, 2007. The termination of these agreements is considered favorable and is a factor in Fitch's current ratings analysis.

DIG entered into the agreements (260 MW) with Ford and SNA in 1999 to provide steam and (or) electricity based on a fixed price schedule. The price of natural gas, the primary fuel used by DIG, is volatile and has increased substantially in recent years. Because the prices charged under DIG's contracts do not reflect current natural gas prices, DIG's financial performance has been impacted negatively. The long-term contracts have been a drag on CMS earnings for several years due to higher gas prices. However, since not all of its 710 mw of capacity is committed under these contracts, DIG has been selling portions of its electric capacity and (or) energy into the market at a profit; and engaging in hedging strategies to minimize its losses. With the termination of the Ford and SNA agreements, it is expected that DIG will post positive cash flows beginning in 2008.

CMS is a utility holding company whose primary subsidiary is Consumers Energy, a regulated electric and gas utility serving more than 3.5 million customers in Western Michigan. CMS also has operations in natural gas pipelines and independent power production. DIG is a 710 MW gas combined and simple cycle facility in Michigan.

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.

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