Cash Needs Put CMS in a Cold, Hard Place

If cash is truly king, as the new stock market mantra implies, then CMS Energy ( CMS) won't be spending much time in the royal party.

The debt-saddled Michigan-based energy concern has a number of worries, what with the near collapse of the once-lucrative energy-trading business and a regulatory cloud looming over the industry's business and accounting practices. But some investors say CMS' biggest problem is its pocketbook. They say the company soon will confront a liquidity shortfall similar to the one that only last month had restructuring rumors swirling around Williams ( WMB) and Dynegy ( DYN).

To satisfy upcoming credit payments -- including two in the next six months -- CMS must peddle new securities and some core assets in a market flooded with offerings. In the meantime, the company is fielding demands for additional cash that it doesn't appear to have.

Yet CMS, which declined to answer specific questions about its financial situation, continues to trade well above the distressed levels of its cash-strapped counterparts. Its shares dropped 48 cents Wednesday, to $10.80.

"CMS has a tiny sand pile of cash arrayed against a tidal wave of obligations," said Peter Cohan, a Massachusetts author and investment strategist with no investment in the company. "Their liquidity position is just awful."

Junkyard Blues

CMS' long-term debt load, including $1.8 billion in off balance sheet guarantees, is approaching $8 billion. That leaves the company sagging beneath a 70% debt-to-capital ratio that could send it to the poorhouse, some observers say.

Sliding
Sector's woes drag CMS

"Anything over 50% is considered a red flag," said Kurt Wulff, a career energy analyst who owns the independent research firm McDep Associates and has no financial stake in the company. "I'm generally nervous about infrastructure stocks with a sliver of equity and a mountain of debt."

But the company's short-term obligations worry some people even more. CMS ended the second quarter with a scant $264 million in the bank. Since then, the company has managed to renew $1.3 billion worth of credit lines, but only after pledging virtually all of its assets except its flagship utility, which is restricted from use as collateral. And it has been placed on a very short lease, facing repayment of nearly all its new credit by the end of next year.

This week, a deadline came and went for CMS to satisfy the first of two new collateral requirements triggered by credit downgrades last month.

CMS had until Tuesday to post $110 million in credit support for construction loans extended to its pipeline operation. The company refused to disclose how -- or even if -- it met this obligation.

Instead, CMS spokesman Kelly Farr referenced a recent analyst call in which the company could provide little reassurance to investors.

"We are working with these parties to find mutually satisfactory arrangements," Chief Operating Officer Allen Wright said during the Aug. 7 conference call. But "there can be no assurance that such arrangements will be completed, or that litigation may not result."

Wright was addressing multiple collateral disputes, one of which has already triggered legal action. American Home Assurance, an issuer of surety bonds, is suing CMS in an attempt to collect $190 million in required collateral the company has yet to pledge. A second surety company has the right to demand that CMS pledge an additional $113 million in collateral.

"We need the cash for other purposes," Wright said in the recent conference call. "We think we can provide other structures that will be satisfactory."

Critics scoffed at the idea of surety insurance companies accepting noncash collateral. And AHAC, for one, already has described CMS' lack of compliance as "unacceptable."

Thin Cushion

Currently, much of the cash on CMS' books is tied up in its regulated businesses, leaving the parent with just $70 million at last official count.

CMS expects a much-needed cash infusion this quarter, when it's scheduled to close on the $232 million sale of its oil and gas properties. But the company will quickly face its first bank repayment, a $150 million short-term loan due Dec. 15.

And from there, critics say, things could get hairy.

In a move viewed as desperate, CMS recently launched a restructuring plan that, if successful, will strip the company down to little more than a Michigan utility with some international power plants (including underperformers in Argentina) and a small trading operation. CMS plans to sacrifice some of its best assets -- most notably its interstate natural gas pipelines -- in its latest rush for cash.

But some believe that CMS will net far less than the $950 million expected from its gas transmission business, including its valuable Panhandle and Trunkline pipelines.

For starters, they say, CMS received only 77% of the sale price it anticipated from its oil and gas company. And even if the pipelines do fetch a favorable price, they say, a CMS subsidiary owes Panhandle $290 million that a buyer would no doubt expect to be repaid.

"Inter-company loans don't always show up in total debt," one short-seller explained. "So nobody's even talking about this, especially when management doesn't discuss it on earnings calls even when questions are asked about the total debt load on the assets being sold."

All told, some estimate that CMS will net only $660 million from the sale of its gas transmission business. Nearly half of that money will be gobbled up by a second loan payment due in December.

By then, CMS expects to issue up to $300 million worth of equity-linked securities. But some are skeptical about the feasibility of that plan as well.

"Why would somebody want to buy that equity?" Cohan asked. "This company can't even certify its financial statements."

The Perfect Storm

Indeed, CMS is one of only 16 major public companies -- four of them from the energy sector -- whose top executives failed to certify their companies' financial statements by the Aug. 14 deadline, according to Securities and Exchange Commission figures.

CMS blamed the delay on a reaudit triggered by its improper use of revenue-boosting "round-trip" energy trades. Last month, CMS paid a steep price for that accounting practice, when Arthur Andersen withdrew its past certification of CMS' books just days before the company was slated to renew its unsecured short-term credit lines.

By then, CMS had spent excess proceeds from its $2.4 billion in asset sales to pay down long-term debt. So when the company sat down with its lenders, owing hundreds of millions of dollars with no term-out provisions, it had little bargaining power.

Some believe that CMS walked away from the table with breathing room and very little else.

The Art of Valuation

Critics, evaluating CMS's historical performance and cash-raising plans, estimate that the parent holding company could run entirely out of money in just over two years.

And the parent is ultimately what stockholders own.

"This is what Wall Street seems to be missing," said one short-seller. "If the parent goes bankrupt -- even if the utility it owns does not -- then, in most cases, shareholders lose their equity."

They marvel that CMS has maintained a double-digit stock price that other, supposedly less vulnerable energy companies have lost. Given the impaired condition of the parent company, they say, CMS should be trading for well under $3 a share.

Karl Miller, a former Wall Street executive who held leadership positions at both Enron and El Paso, said CMS is one of many vulnerable players in the energy-trading industry. Miller now operates an investment fund that's seeking to snatch up valuable assets from energy companies that he believes have been poorly managed for years.

"CMS is a classic takeover candidate," Miller said. "A lot of these firms will not exist in 18 to 24 months."

And the shareholders?

"Many experts believe some of these companies are technically insolvent," Miller said. "And on paper, shareholders may already be wiped out."

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