NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A+' rating to Consumers Energy Company's (Consumers) $450 million issuance of first mortgage bonds (FMBs). The 3.25%, 30-year FMBs mature Aug. 15, 2046 and rank pari passu with Consumers' existing secured debt.
Net proceeds will be used toward the repayment of Consumers' $173 million of 5.5% FMBs due Aug. 15, 2016 and for general corporate purposes.
The Rating Outlook on Consumers' 'A-' Long-Term Issuer Default Rating (IDR) is Stable.
KEY RATING DRIVERS
Constructive Regulatory Environment: Consumers' ratings primarily reflect the constructive regulatory environment overseen by the Michigan Public Service Commission (MPSC). Supportive state legislation and MPSC policies have mitigated regulatory lag through the use of a forward test year, six-month self-implementation, and power supply and gas cost recovery mechanisms. The utility also benefits from a 10.3% authorized return on equity (ROE), which is greater than the national average.
2016 Electric Rate Case: In March 2016 Consumers filed with the MPSC for an electric rate increase of $225 million. The filing also requests approval of an investment recovery mechanism that would allow for recovery of $222 million of incremental investments that Consumers plans to make over 2017-2019. A ruling by the MPSC is expected by March 2017. Consumers plans to implement an interim electric rate increase of $170 million, or 4.2%, on Sept. 1, 2016.
Balanced 2016 Gas Rate Decision: In April 2016 the MPSC approved a settlement agreement authorizing a natural gas base rate annual increase of $40 million, or 2.4%. The increase represents about 55% of Consumers' revised requested amount of $72.4 million. The settlement assumes a 10.3% authorized ROE.
Strong Financial Profile: Consumers has a strong financial profile. Fitch expects adjusted debt/EBITDAR to average around 2.7x-3.2x through 2018, FFO-adjusted leverage to average around 2.8x-3.3x, and FFO fixed-charge coverage to average around 7.0x.
O&M Reductions and NOLs: Management's focus on O&M expense reductions supports the strong financial profile, lessening the negative near-term financial impact from the utility's large capex program. In addition, the cash flow benefit from bonus depreciation and parent CMS Energy Corporation's (CMS; 'BBB'/Outlook Stable) net operating loss carryforwards (NOLs) enables the utility to invest more internal capital into improving the reliability of its service while minimizing the need for external sources of capital.
Large Capex Plan: Consumers has a large capex plan projected to total $8.6 billion over 2016-2020. Despite the large capex plan, Fitch expects Consumers' financial profile to remain strong, benefiting from constructive regulation and cash savings from O&M reductions, bonus depreciation, and NOLs to help fund growth.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for CMS and Consumers include:
--Periodic general rate case filings to recover Consumers' investment in rate base and associated costs. Fitch has assumed an average ROE of 10.3%;
--O&M cost reductions averaging 2%-3% per year;
--Average annual electric sales growth of 1% and flat natural gas sales volume;
--Total capex of $17 billion over 2016-2025;
--Earnings per share growth of 5%-7% in 2016 and 6%-8% thereafter.
RATING SENSITIVITIES
Positive Rating Action: The utility's Long-Term IDR is constrained by CMS's more leveraged credit profile and is limited to a two-notch differential from that of CMS. An upgrade of CMS's Long-Term IDR combined with expectations for Consumers' adjusted debt/EBITDAR to improve to less than 3.0x and FFO-adjusted leverage to remain less than 3.5x on a sustained basis could result in a positive rating action.
Negative Rating Action: Developments that may, individually or collectively, lead to a negative rating action include a material deterioration of the Michigan regulatory environment, expectations for adjusted debt/EBITDAR to exceed 3.5x and for FFO-adjusted leverage to exceed 4.0x on a sustained basis, and a downgrade to CMS's Long-Term IDR.
LIQUIDITY
Fitch considers Consumers' liquidity to be adequate. Consumers primarily meets its short-term liquidity needs through the issuance of commercial paper (CP) under its $500 million CP program, which is supported by its $650 million revolving credit facility (RCF). Although the amount of outstanding CP does not reduce the RCF's available capacity, Consumers has stated that it would not issue CP in an amount exceeding the available capacity of the RCF. The RCF matures May 27, 2021 and is secured by the utility's FMBs. As of June 30, 2016, Consumers had no CP borrowings and $7 million of letters of credit (LC) outstanding, leaving $643 million of unused availability under its RCF.
Consumers has full availability under a separate $250 million RCF that matures Nov. 23, 2017 and a fully used $30 million LC facility that matures May 9, 2018. Both facilities are secured by Consumers' FMBs.
Consumers' operations require modest cash on hand. At June 30, 2016, the utility had $117 million of unrestricted cash and cash equivalents.
Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below:
--Operating leases are capitalized using the 8x rent expense method;
--Securitization debt is removed from all financial metric calculations.
Date of Relevant Rating Committee: March 1, 2016.
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
Recovery Ratings and Notching Criteria for Utilities (pub. 04 Mar 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=878227
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1009842
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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