Fitch Rates Consumers Energy Co.'s $325MM Issuance of First Mortgage Bonds
'A-'; Outlook Stable
NEW YORK -- August 6, 2013
Fitch Ratings has assigned an 'A-' rating to Consumers Energy Co.'s $325
million issuance of 3.375% first mortgage bonds due Aug. 15, 2023. Proceeds
will be used for general corporate purposes, including utility capital
expenditures. The notes will rank on parity in right of payment with all
existing and future secured debt. The Rating Outlook 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
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:
--Supportive regulatory treatment;
--Healthy financial profile tied to execution of a cost reduction plan;
--Execution of a sizeable capital investment plan, and timely recovery of
--Sufficient liquidity and manageable funding needs.
Supportive Regulatory Treatment: The inclusion of rate design components to
mitigate regulatory lag, including the use of forward test years in utility
rate filings and power supply cost recovery mechanisms, are supportive of
utility credit quality. The utility currently has no rate case filings pending
with the Michigan Public Service Commission (MPSC). The electric rate case
filed in September 2012 was settled in May 2013 with permanent base rates
increased by $89 million and the return on equity (ROE) held at 10.3%. A few
weeks later, in June, the utility suspended indefinitely its gas base rate
In the absence of new electric and gas base rate filings in 2013, Fitch will
look to the company achieving its cost reduction targets to mitigate
deterioration in financial performance during this capital intensive period.
Recovery of capital costs is the largest component of utility rate requests.
With the utility opting to stay-out, Fitch expects the earliest new rates
could be effective will be January 2015.
Strong Financial Metrics: Fitch expects financial metrics to remain healthy
relative to guidelines for the risk profile and rating category, with rating
forecasts for EBITDA-to-interest to range between the mid-5 times (x) and
debt-to-EBTDA above 3.0x over the forecast period. Fitch's forecast considers
higher leverage to fund capital investments, and assumes the utility achieves
its cost reduction targets. Funds from operations (FFO) metrics are forecast
to weaken from current levels as the positive benefits associated with bonus
Large Capex Plan: Consumers Energy's capital investment plan now includes $750
million for construction of the Thetford natural gas-fired plant. The utility
filed for the Certificate of Necessity (CoN) with the MPSC in July, and
construction may start upon receipt of the CoN in mid-2014. Thetford is
expected to satisfy a peak demand capacity gap currently met through market
purchases. Commensurate with construction of the Thetford plant, Consumers
Energy has mothballed seven small coal plants. Total capital spending over the
five-year period ending in 2018 is forecast just under $7 billion. Fitch's
rating assumes the utility earns a competitive return on capital investments,
and timely recovery of related costs. As discussed, with no rate increases
anticipated by Fitch earlier than January 2015, cost control is a key driver
of ratings stability.
Sufficient Liquidity: Consumers Energy's stand-alone bank credit capacity is
$650 million. The utility executed a $500 million bank facility with expires
in December 2017, and a $150 million bank facility that expires in April 2017.
Available credit at June 30, 2013 was $648 million. An additional $250 million
of account receivable credit is also available.
--Execution of a large capital investment plan and related capital funding
needs limits positive rating action at this time.
--An inability to manage utility costs throughout the period Consumers Energy
opts to stay-out of base rate filings may pressure financial metrics during a
period of elevated capital spending.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', Aug. 5, 2013;
--'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: Including Short-Term Ratings and Parent and
Rating North American Utilities, Power, Gas, and Water Companies
Recovery Ratings and Notching Criteria for Utilities
Parent and Subsidiary Rating Linkage
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Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Brian Bertsch, +1-212-908-0549 (New York)
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