NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'A-' rating to Consumer Energy Corporation's (Consumer, Fitch Issuer Default Rating 'BBB'; Outlook Stable) upcoming issuance of two tranches of $250 million each in first mortgage bonds (FMBs) with a ten and a 50-year maturity respectively. These notes rank pari passu with Consumer's other FMBs, including any future FMB issuances. The company intends to use the net proceeds from this offering for general corporate purposes.
Consumer's IDR reflects a strong utility-business based financial profile and a supportive regulatory regime in Michigan. Timely recovery of commodity costs in the rate design components mitigate regulatory lag and the use of forward test years for the recovery of capital cost and the return on invested capital support the credit profile. Fitch's financial forecast assumes a sustainable financial metrics over the rating horizon (2014-2016) and no material adverse change in Michigan's 2008 Energy Law, at least in the near term.
KEY RATING DRIVERS
Low-risk regulated business profile: Consumer is a regulation-based, monopolistic utility operating in Michigan State. The company's 'BBB' IDR reflects a low-risk, cost-of-service based regulatory framework in Michigan that allows timely recovery of operating costs and a reasonable rate of return on invested capital.
Supportive Regulatory Framework: Michigan's regulatory construct for utilities include rate components designed to mitigate recovery lag, include fuel adjustment clause and the forward test year. 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).
Solid Financial Profile: Consumers' standalone financial metrics forecast is projected to remain solid relative to Fitch guidelines for the BBB rating. EBITDAR based credit metrics, interest coverage (EBITDAR/interest) and leverage (adjusted debt/EBITDAR), as calculated by Fitch at LTM ending June 30, 2014 were 6.96x and 2.65x respectively. Under Fitch's conservative financial model, these ratios to be between 5x-6x for EBITDAR based interest coverage and 3.5x-4.0x for the EBITDAR based leverage through 2018. Effective cost controls is key to maintaining solid financial metrics absent GRC increases in 2014 and a part of 2015, in Fitch's opinion. Pressure from rising interest rate environment, low growth, and debt financing of negative FCF are integral to Fitch's forecast.
High Capex Projected: The five-year, nearly $7 billion capex plan 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. Fitch relies on timely recovery of capital costs as key to maintaining credit quality during the intense capex cycle and considers the use of forward test years as well as final rate determinations within 12-months of filing as the facilitator for the timely recovery. Fitch's forecast includes incremental new debt as a source of capital funding and expects the utility capital structure will remain balanced with some equity support from the parent.
Parent Subsidiary Linkage: Fitch has tightened the ratings notch between Consumer and its parent, CMS Energy Co. (CMS, 'BBB-'/Outlook Stable), based on the legal, operational and strategic ties between the two companies.
Positive Rating Action: Execution of a large capital plan and related capital funding needs limits positive rating action for the utility at this time.
Negative Action: An adverse regulatory order that negatively affects the financial position of Consumers could place pressure on both the parent company and subsidiary ratings. Increase in Consumer's EBITDA based leverage (adjusted debt/EBITDA) to 3.5x or higher on a sustainable basis will also lead to a rating downgrade.
Liquidity at the end of June 30, 2014 was $748 million, including $650 million available through revolving credit facilities maturing in December 2018. Debt maturities due within next 12 months are about $67 million and are manageable in Fitch's opinion.
Additional information is available on www.fitchratings.com
Applicable Criteria and Related Research:
--'Rating U.S. Utilities, Power and Gas Companies', March 7, 2014;
--'Corporate Rating Methodology', May 28, 2014;
--'Parent and Subsidiary Rating Linkage', Aug. 5, 2013.
Applicable Criteria and Related Research:
Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage