NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB-' rating to CMS Energy Corporation's (CMS) $250 million issuance of senior unsecured notes. The 3.60%, 10-year notes mature Nov. 15, 2025 and will rank pari passu with CMS' existing unsecured debt.
Net proceeds will be used for general corporate purposes.
KEY RATING DRIVERS
Ownership of Consumers
The low-risk regulated electric and natural gas utility operations of CMS' subsidiary, Consumers Energy Company (Consumers), contribute greater than 95% of CMS' consolidated EBITDA. Fitch expects Consumers to remain CMS' lone core business and primary driver of consolidated growth over the long term. Consumers' rate base is expected to grow to about $16.5 billion at the end of 2019 from approximately $12 billion at the end of 2014, further strengthening CMS' consolidated earnings mix.
Consumers' credit quality benefits from a stable and constructive regulatory environment in Michigan. Regulatory lag is mitigated by the use of a forward test year, six-month self-implementation, and a 12-month regulatory review period, which may be shortened under pending state legislation. An automatic power supply cost recovery mechanism and a gas cost recovery mechanism facilitate timely recovery of commodity costs.
High Leverage
Leverage at CMS is high compared to its peers, and Fitch expects no significant reduction in parent-level debt over the next two years. Consolidated debt was $8.9 billion at Sept. 30, 2015. About $2.4 billion, or 27%, of the consolidated leverage is parent-only debt.
Fitch-adjusted consolidated debt is expected to rise over the forecast period (2015-2019) to help fund the large capex program at Consumers. Fitch assumes continued reasonable access to debt capital markets by CMS and Consumers for additional borrowings to supplement internally generated funds for financing the growth capex.
Supportive Financial Profile
Fitch projects CMS' consolidated leverage adjusted consolidated debt/EBITDAR to be between 4.3x and 4.5x through 2019. These metrics remain within Fitch guidelines for a utility holding company with a 'BBB-' Issuer Default Rating (IDR). Fitch expects funds from operations (FFO)-based fixed-charge ratio to decline to around 4.0x by 2019. The modest weakening of credit metrics over the forecast period reflects a large investment cycle at Consumers and Fitch's expectations for a rising interest rate environment.
Management's focus on O&M cost reductions at Consumers is expected to provide support to the consolidated financial profile, lessening the negative near-term financial impact from the utility's large capex program. In addition, the cash flow benefit from CMS' net operating loss carryforwards (NOLs) enable the utility to invest more internal capital into improving the reliability of its service and growing rate base while minimizing the need for external sources of capital.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for CMS include:
--Rate base growing to approximately $16.5 billion by the end of 2019 from $12 billion at the end of 2014;
--Periodic General Rate Case (GRC) applications to recover Consumers' investment in rate base and associated costs. Fitch has assumed an average return on equity (ROE) of 10.3%;
--Expected equity support to Consumers by CMS in the range of $150 million-$175 million annually;
--Annual electricity sales volume growth of about 0.5% between 2016 and 2019 and flat natural gas sales volume;
--Management's O&M cost reduction target of $100 million by 2018, achieved with the expected change in the fuel mix, reduced employee count, restructured benefit plans, and installation of smart meters.
RATING SENSITIVITIES
Positive: Improvement of the consolidated debt to EBITDAR ratio to a range of 3.75x-4.00x on a sustainable basis could lead to a positive rating action.
Negative: Future developments that may lead to a negative rating action include a material deterioration in the Michigan regulatory environment and an increase in adjusted debt/EBITDAR to greater than 4.5x on a sustainable basis.
LIQUIDITY
Fitch considers CMS' liquidity to be adequate. CMS primarily meets its short-term obligations through drawings under its $1.2 billion secured revolving credit facility, which matures May 27, 2020. CMS earmarks $650 million of that facility for use by Consumers, which mainly uses it to support the utility's $500 million commercial paper (CP) program.
At Sept. 30, 2015, CMS had $3 million of letters of credit (LCs) outstanding, leaving $547 million of availability under its portion of the revolver. Consumers had $68 million of CP outstanding and $9 million in LCs, leaving $641 million of availability under its portion of the revolver.
CMS' operations require modest cash on hand. The company had $150 million of unrestricted cash and cash equivalents as of Sept. 30, 2015, which should be sufficient to cover its near-term cash needs.
Date of Relevant Rating Committee: April 21, 2015.
Additional information is available on www.fitchratings.com.
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=993775
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https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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