Fitch Rates CMS Energy Senior Unsecured Offering 'BBB-'
NEW YORK -- February 24, 2014
Fitch Ratings has assigned a 'BBB-' rating to CMS Energy Corp.'s (CMS)
offering of senior unsecured notes. Proceeds will be used to redeem the 6.875%
senior notes due 2015, of which $125 million aggregate principal is
outstanding, to redeem the 4.25% senior notes due 2015, of which $250 million
aggregate principal is outstanding, and for general corporate purposes. The
notes will rank on parity in right of payment with all the existing senior
unsecured debt. The Rating Outlook is Stable.
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, with 80% of utility net income
distributed 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 rated treatment,
including minimizing regulatory lag and mitigating exposure to commodity risk.
Key Rating Drivers:
-- CMS' ownership of Consumers Energy Co. (Consumers, Long-term IDR 'BBB',
-- Supportive rate treatment in Michigan;
-- 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 Credit Profile:
The utility's rating and 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 term.
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
-- No positive rating action is currently under consideration.
-- Consolidated debt-to-EBTIDA higher than 4.5x on a sustainable basis would
lead to negative rating action.
-- 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.
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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Fitch Ratings, Inc.
Lindsay Minneman, +1-212-908-0592
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Glen Grabelsky, +1-212-908-0577
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