Fitch Rates Consumers Energy Co.'s $425MM Issuance of First Mortgage Bonds
'A-'; Outlook Stable
NEW YORK -- May 15, 2013
Fitch Ratings has assigned an 'A-' rating to Consumers Energy Co.'s $425
million issuance of 3.95% First Mortgage Bonds due May 15, 2043. Proceeds will
be used to redeem $200 million of 6.00% First Mortgage Bonds due 2014, and
$225 million of 5.00% First Mortgage Bonds due 2015. The notes will rank on
parity in right of payment with all existing and future secured debt. The
Rating Outlook for Consumers Energy is Stable.
Stable Outlook: Consumers Energy's rating and Stable Outlook reflect the
utility's stand-alone financial profile. Low-risk regulated electric and gas
utility operations deliver predictable cash flows due largely to supportive
regulatory treatment in Michigan. Consumers Energy is the primary source of
cash flow to CMS Energy Corp. (IDR 'BB+', Positive Outlook).
Key Rating Drivers:
--Strong financial metrics;
--Constructive regulatory treatment;
--Large capital investment plan;
--Manageable re-financing needs.
Strong Financial Metrics: Fitch expects financial metrics to remain healthy
relative to guidelines for the risk profile and rating category, with
forecasts for EBITDA-to-interest to range between mid-5 times (x) in the near
term and debt-to-EBITDA to remain near 3.0x. FFO metrics are forecast to
weaken from current levels as the positive benefits associated with bonus
depreciation end, and with the up-tick in utility capital spending.
Supportive Regulatory Treatment: The inclusion of rate design components to
mitigate regulatory lag, as well as forward test years, supports a stable
utility credit profile. Consumers' electric and gas rate plans include an
automatic power supply cost recovery mechanism and a gas cost recovery
mechanism to facilitate timely recovery of commodity costs. Base rate orders
are filed by the utility annually, and are determine within 12 months of the
filing date. Interim rates can be self-implemented within six months of filing
date, unless otherwise directed by the MPSC, and are subject to a true-up or
Electric Rate Case Settled; Gas Pending: In a signal of continued regulatory
support, Consumers Energy has agreed to a partial settlement of its September
2012 electric rate filing with the Michigan Public Service Commission (MPSC).
On March 19, 2013 Consumers Energy was allowed to self-implement $110 million.
The permanent rate increase was $89 million and the utility will refund the
difference to customers. The authorized ROE remains at 10.3%. Consumers filed
its annual gas rate case with the MPSC on Feb. 1, 2013 for a rate increase of
$49 million based on a 10.5% ROE. The utility can implement interim rates as
of Aug. 1, 2013. Fitch expects Consumers will continue to file new rate cases
annually, particularly in consideration of high levels of capital investment.
Large Capex Plan: Consumers Energy could spend up to $7 billion over the next
five years on capital investments, including construction of the Thetford
Natural Gas-fired Plant. The utility is expected to file a Gas Plant
Certificate of Necessity in the second half of 2013, with an order effective
2014. Construction would start thereafter, with the majority of spending in
2015 and 2016, and commercial operation in 2017. Fitch's rating assumes the
company will earn a competitive return on its utility investment, and timely
recovery of related costs is a key driver for ratings stability during this
capital intensive period. Fitch's forecast assumes a balanced capital
structure, including incremental new debt at the utility.
Sufficient Liquidity: Consumers Energy's stand-alone bank credit capacity is
$650 million. The utility has executed a $500 million bank facility which
expires in December 2017, and a $150 million bank facility that expires in
April 2017. Available credit at March 31, 2013 was $648 million. An additional
$250 million of account receivable credit is also available.
Manageable Debt Re-financing Need: Debt maturities include $200 million due in
2014; $275 million due in 2015; $350 million due in 2016; and, $350 million
due in 2017. Fitch considers the re-financing risk as low and views access to
the capital markets as unrestricted.
--Execution of a large capital investment plan and related capital funding
needs limits positive rating action at this time.
--An adverse regulatory order that negatively impacts the financial position
of Consumers Energy could place pressure on ratings.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', Aug. 8, 2012;
--'Rating North American Utilities, Gas and Water Companies', May 16, 2011;
--'Recovery Ratings and Notching Criteria for Utilities', Nov. 13, 2012;
--'Parent and Subsidiary Rating Linkage', Aug 8, 2012.
Applicable Criteria and Related Research
Corporate Rating Methodology
Rating North American Utilities, Power, Gas, and Water Companies
Recovery Ratings and Notching Criteria for Utilities
Parent and Subsidiary Rating Linkage
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS.
PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK:
HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING
PUBLIC WEBSITE '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. FITCH MAY HAVE PROVIDED ANOTHER
PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS
OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN
EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER
ON THE FITCH WEBSITE.
Lindsay Minneman, +1 212-908-0592
Fitch Ratings, Inc.
One State Plaza
New York, NY 10004
Danny Neama, +1 212-908-0561
Glen Grabelsky, +1 212-908-0577
Brian Bertsch, +1 212-908-0549
Press spacebar to pause and continue. Press esc to stop.