AEP, CMS mandatories should get strong boost from common dividend cuts, Wachovia says

By Ronda Fears

Nashville, Jan. 24 - While CMS Corp. and American Electric Power Co. Inc. shares and mandatories took hard hits Friday on news of cuts in their common stock dividends, Wachovia Securities, Inc. convertible analyst Kimberlee Brody noted the move would boost the value of the mandatories substantially.

CMS said it has decided to suspend common dividends immediately, eliminating the 18 cent quarterly payout to save over $100 million a year.

AEP approved its 60 cent quarterly dividend for first quarter but management plans to seek a 42% reduction beginning in the second quarter, which will save $340 million annually.

In reports Friday, Brody said that in dollar terms the AEP would get at $3.14 point boost from the company's plan and the CMS mandatory moves up 79c in value on its decision.

Brody calculated the AEP mandatory, at a price of 38.65 with the common at $26.89, at 2.05% cheap to theoretical fair value at the lower dividend rate, using a credit spread of 200 basis points over Treasuries and 36% volatility in the stock.

While both mandatories fell precipitously, it was much less than for the common stocks. Furthermore, the AEP mandatory regained considerable ground in the last hour of trading.

AEP's mandatory (Baa2/BBB+) lost 0.7 point on the day, or 1.8%, to close at 37.95. An hour before the close, the issue was down 1.79 points. The common ended down $1.29, or 4.8%, to $25.60.

Brody calculated the CMS mandatory, at a price of 16.25 with the common at $8.54, at 2.56% cheap to theoretical fair value with the elimination of the dividend, using a credit spread of 1,000 bps over Treasuries and 60% volatility.

CMS' mandatory (Ca) fell 3.35 points on the day, or 20.6%, to end at 12.9. The common closed down $2.47, or 29%, to $6.07.

AEP management said it plans to request the quarterly common dividend be cut to 35c from 60c. It is part of a three-part plan unveiled by AEP on Friday designed to strengthen its balance sheet, along with reporting a wider than expected loss for 2002 and lowering its 2003 outlook.

For 2002, the company posted a net loss of $519 million, or $1.57 a share, versus net profits of $971 million, or $30.1 a share, in 2001. Revenues, however, gained to $14.5 billion from $12.7 billion. The company said $1.5 billion in write-offs was a big factor in the deterioration.

AEP cut its 2003 earnings guidance to a range of $2.50 to $2.70 per share, due to the expectation that earnings from utility operations will be flat and non-utility investments will erode further.

"The last year has been a tough and turbulent one for AEP and others in our industry because of a series of negative events in the energy sector," E. Linn Draper Jr., AEP's chief executive said.

"We are not out of the woods yet, but AEP is still a strong company,"

Draper said AEP also recognizes the need to evaluate the possibility of issuing equity, saying it "may be necessary to further strengthen our balance sheet and maintain credit quality." The company aims to maintain a strong BBB rating, he said.

Standard & Poor's put AEP's ratings on negative watch following the large write-offs recorded by the company in its fourth quarter 2002 earnings and said that until there is greater clarity with regard to the company's plans, the possibility remains of a downgrade.

Standard & Poor's said CMS' move would have no immediate effect on its credit quality but said it provides a slight positive contribution to liquidity.

CMS, in addition to the dividend elimination, said it now expects that its 2002 net loss will be wider than previously thought. A company spokeswoman said the company has not set a firm date to release 2002 earnings but it will likely be the first or second week of February.

The company now sees a 2002 net loss of $4.25 to $4.75 per share.

"By conserving cash [in eliminating the dividend], our liquidity is strengthened, and we are in a better position to meet the challenges facing our company and our industry," said CMS chief executive Ken Whipple.

The move, he added, "also eliminates the need for CMS Energy to access the capital markets in 2003."

S&P noted that CMS's liquidity position has dramatically improved as a result of the Panhandle Pipeline sale, which will enable it to adequately meet about $1.3 billion of debt and bank facility maturities in 2003.

Key factors negatively affecting the 2003 versus 2002 earnings, however, include the loss of income resulting from the sale of the Panhandle properties and other assets, CMS said, along with higher interest costs and lower electric sales.

Currently, CMS is nearly fully drawn under its $1.2 billion of bank facilities, although the company holds cash on hand from recent asset sales. Additional planned asset sales, S&P said, should enable the company to meet about $1 billion of maturities in 2004.

Whipple said CMS aims to maintain a consolidated cash balance of about $400 million, split about equally between CMS Energy and Consumers Energy.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.