NEW YORK--(BUSINESS WIRE)--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;
--Sufficient liquidity;
--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 refund.
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.
Rating Sensitivities:
--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
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460
Rating North American Utilities, Power, Gas, and Water Companies
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=625129
Recovery Ratings and Notching Criteria for Utilities
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=693750
Parent and Subsidiary Rating Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685552
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=791197
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