Fitch Upgrades CMS Energy, Affirms Consumers Energy; Outlooks Stable
NEW YORK -- February 21, 2014
Fitch Ratings has upgraded the long-term Issuer Default Rating (IDR) and
senior unsecured debt rating for CMS Energy Corp. (CMS) to 'BBB-'from 'BB+'.
Concurrently, Fitch affirmed the senior secured debt rating for the bank
credit facility at 'BBB-' and assigned a 'F3' short-term IDR. The Rating
Outlook for CMS is revised to Stable from Positive.
Fitch has affirmed the long-term IDR, debt ratings and short-term IDR for
Consumers Energy Co. (Consumers). A full list of ratings is provided at the
end of this release. The Rating Outlook for Consumers remains Stable.
CMS Upgrade and Stable Outlook: The company's improved credit profile is
sustainable, in Fitch's opinion. Key financial drivers include strong utility
earnings, a lower cost of debt, and effective cost control. Low-risk utility
operations contribute over 95% of consolidated earnings and Consumers
distributes 80% of its net income to the parent to support parent-level
funding obligations and the common dividend. The utility's financial profile
is solid, in Fitch's opinion, and benefits from supportive rate treatment in
Michigan. The 2008 Energy Law in Michigan provides the legislative framework
for balanced rate treatment, including minimizing regulatory lag and
mitigating exposure to commodity risk.
Key Rating Drivers:
--CMS' ownership of Consumers;
--Consumers' low-risk credit profile and supportive rate treatment in
--Large utility-centric capital plan which will increase Consumers' funding
--Highly levered consolidated capital structure, including a high level of
--Improving service territory demographics.
CMS Financial Metrics:
Fitch expects CMS' coverage metrics to remain at or near current levels and
forecasts EBITDA-to-interest to range between 4.0 times (x) and 4.4x over the
next five years. Leverage metrics reflect the high level of debt at CMS
relative to peers, with debt-to-EBITDA forecast at or below 4x toward the end
of the five-year forecast. Fitch considers effective cost control as key to
maintaining a stable financial profile, as well as balanced rate treatment to
mitigate regulatory lag at the utility during this capital intensive period.
Consolidated debt-to-capitalization, as calculated by Fitch, is high relative
to peers at 69%, at fiscal year end (FYE) Dec. 31, 2013. Approximately $2.4
billion or 30% of the company's consolidated long-term debt of $7.7 billion is
parent corporate debt, and structurally subordinated to that of the
subsidiaries. The high level of parent level debt remains a constraint in the
company's credit profile, and Fitch sees limited opportunities to de-lever the
parent over the next five-years due to utility funding capital funding
requirements, and a target 62% dividend payout ratio.
Consolidated Debt Maturities:
The consolidated debt maturity schedule is manageable, in Fitch's opinion,
with $425 million due in 2015, $530 million due in 2016, and $600 million due
in 2017. The company has actively re-financed its current maturities in this
lower interest rate environment, and has effectively reduced its cost of debt.
Fitch's assessment assumes CMS' and Consumers' access to debt capital market
financing remains unrestricted.
Total liquidity at FYE Dec. 31, 2013 was $1.3 billion, including $134 million
in cash-on-hand. Neither CMS nor Consumers are relying on bank credit for
short-term funding, and bank credit capacity is fully available. Total bank
credit is $1.2 billion and includes a $550 million facility at CMS and a $650
million facility at Consumers. All bank credit facilities expire in 2018, and
both companies have extended facility maturities to maintain five-year bank
Consumers' Stable Outlook:
The utility's Stable Outlook reflects a solid stand-alone financial profile,
and supportive rate treatment in Michigan. Fitch's outlook on Consumers
assumes solid financial metrics are sustainable over the next five-years, and
views the likelihood of a material change in Michigan's 2008 Energy Law (which
provides the legislative framework for rate treatment) as unlikely in the near
Supportive Rate Treatment:
The inclusion of rate design components designed to mitigate recovery lag,
including forward test years, support a stable utility credit profile. General
rate cases (GRCs) are determined within 12-months of filing with the Michigan
Public Service Commission (MPSC), and authorized interim rates can be
implemented by the utility within six months of the filing date (with the
permanent rate increase subject to true-up or refund). Additionally, an
automatic power supply cost recovery mechanism and a gas cost recovery
mechanism facilitate timely recovery of commodity costs. Neither the electric
nor natural gas utility rate plans include a revenue decoupling mechanism;
however, in Fitch's opinion, existing rate features are fair.
Recent Regulatory Developments:
A rate settlement was adopted in Consumers' electric GRC in May 2013 and the
natural gas GRC was suspended, and later withdrawn in 2013. The small size of
the natural gas rate increase request, coupled with the ability of the utility
to manage costs were, in Fitch's opinion, the primary drivers for the GRC
withdrawal. Electric rates were increased by $89 million and based on a 10.3%
return on equity (ROE). The natural gas authorized ROE is also 10.3%, which is
modestly higher than what Fitch views as the sector average. The utility
currently has neither an electric nor natural gas GRC pending with the MPSC,
with no new rate filings anticipated by Fitch earlier than mid-2014. Fitch
expects that capital cost recoveries will be the primary component of future
Utility Financial Metrics:
Consumers' financial metrics are forecast to remain solid relative to Fitch
guidelines for the rating and risk profile. Fitch forecasts EBITDA-to-interest
above 6.0x over the near term; however, higher interest costs could pressure
coverage metrics in the longer term. Effective cost control is key to
maintaining solid financial metrics absent new rates in 2014, in Fitch's
opinion. Funds from operations (FFO) interest coverage, as calculated by Fitch
at FYE Dec. 31, 2013 was 6.6x, and the rating forecast range is at the
higher-end of 4.0x by 2018. FFO metrics are expected to weaken as the positive
tax benefits associated with bonus depreciation are no longer a variable.
The five-year nearly $7 billion utility-centric capex budget includes new
generation and system reliability projects. Fitch forecasts annual capex in
the range of $1 billion-$1.6 billion over the next few years, with two-thirds
of spending on electric projects, and a third on natural gas. On Jan. 30,
2014, CMS announced its intention to purchase for $155 million a 540 MW
natural gas plant located in Jackson, MI. Simultaneously, the company put on
hold plans to construct the nearly $750 million 700 MW combined-cycle Thetford
plant, including the Certificate of Need pending with the MPSC. The new gas
plant will partially mitigate capacity shortfalls resulting from the planned
closure of seven small coal units in 2016. Fitch would expect the asset
purchase to be complete prior to the coal unit closures.
Fitch looks to timely recovery of capital costs as key to maintaining credit
quality during this capital intensive period, and considers the use of forward
test years as well as final rate determinations within 12-months of filing as
facilitators of timely recovery. Fitch's forecast includes incremental new
debt as a source of capital funding over the next few years, and expects the
utility capital structure will remain balanced with some equity support from
the parent. Access to the debt capital markets is viewed as unrestricted by
CMS and Consumers: No positive rating actions are currently under
CMS: Consolidated debt-to-EBTIDA higher than 4.5x on a sustainable basis would
lead to negative rating action.
Consumers: An adverse regulatory order that negatively impacts the utility's
financial position could place not only lead to negative rating action at the
utility, but also at the parent.
Fitch has upgraded the following ratings of CMS Energy Corp.:
--Long-term IDR to 'BBB-' from 'BB+';
--Senior unsecured debt to 'BBB-' from 'BB+'.
Fitch has assigned the following rating at CMS Energy Corp.:
--Short-term IDR at 'F3'.
Fitch has affirmed the following rating at CMS Energy Corp.:
--Senior secured debt (bank credit facility) at 'BBB-'.
The Rating Outlook for CMS has been revised to Stable from Positive.
Fitch has affirmed the following ratings at Consumers Energy Co.:
--Long-term IDR at 'BBB';
--Senior unsecured debt at 'BBB+';
--Senior secured debt at 'A-';
--Preferred Stock at 'BBB-';
--Short-term IDR at 'F3'.
The Rating Outlook for Consumers remains Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating North American Utilities, Gas and Water Companies' (May 16, 2011);
--'Recovery Ratings and Notching Criteria for Utilities' (Nov. 19, 2013);
--'Corporate Rating Methodology: Including Short-term Ratings and Parent and
Subsidiary Linkage' (Aug. 5, 2013).
Applicable Criteria and Related Research:
Rating North American Utilities, Power, Gas, and Water Companies
Recovery Ratings and Notching Criteria for Utilities
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
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Lindsay Minneman, +1-212-908-0592
Fitch Ratings, Inc.
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