NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB' rating to CMS Energy Corporation's (CMS) issuance of senior unsecured notes. The 10-year notes mature Feb. 15, 2027 and will rank pari passu with CMS' existing unsecured debt.
Net proceeds will be used to redeem CMS' $250 million 5.05% senior notes due 2018 and for general corporate purposes.
KEY RATING DRIVERS
Ownership of Consumers
CMS' ratings benefit from the company's ownership of regulated utility Consumers Energy Company (Consumers, 'A-'/Outlook Stable), which accounts for greater than 95% of consolidated EBITDA. Consumers' low-risk integrated electric and natural gas distribution operations bolster credit quality. Fitch expects Consumers to remain CMS' lone core business and primary driver of consolidated growth over the long term, further strengthening CMS' consolidated earnings mix.
Constructive Regulatory Environment
Ratings incorporate 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 MPSC authorizes the utility's integrated electric and natural gas distribution operations a return on equity of 10.3%, which is greater than the national average.
Parent-Level Debt
Approximately one-third of consolidated debt (excluding debt at CMS' Utah-based bank subsidiary EnerBank USA) is parent-level debt, which significantly increases consolidated leverage and constrains CMS' ratings. Fitch expects adjusted debt/EBITDAR to average around 4.4x-4.7x through 2018 and for the amount of parent-level debt to remain fairly stable, with additional issuances primarily used to refinance maturing debt.
At Sept. 30, 2016, consolidated debt was slightly more than $9.9 billion, which includes $5.85 billion at Consumers. Excluding the nearly $1.2 billion of debt at EnerBank, which is a self-funding entity, and roughly $340 million of securitization debt at Consumers, CMS and Consumers had an aggregate of approximately $8.4 billion of debt. Of that adjusted consolidated amount, $2.9 billion, or 35%, was parent-only debt.
Large Capex Plan
Consumers has a large capex plan that management forecasts to total $17 billion over 2016-2025, with another $3 billion of potential additional capex opportunities. Despite the large capex plan, Fitch expects Consumers' financial profile to remain strong, benefiting from constructive regulation and cash savings from operating & maintenance (O&M) expense reductions, bonus depreciation, and CMS' net operating loss carryforwards (NOLs), which will be used to help fund growth capex.
O&M Reductions and NOLs
Management's focus on reducing O&M expense at Consumers provides 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 bonus depreciation and 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. Fitch expects ongoing O&M expense reductions to average 2%-3% per year.
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 return on equity 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: A positive rating action is not expected in the near term due to the significantly large amount of parent-level debt. However, a positive rating action could occur if Fitch were to expect adjusted debt/EBITDAR to improve to less than 4.2x and FFO-adjusted leverage to improve to less than 4.5x on a sustained basis.
Negative Rating Action: A negative rating action could occur if Fitch were to expect adjusted debt/EBITDAR to weaken to greater than 4.8x and FFO-adjusted leverage to weaken to greater than 5.2x on a sustained basis.
LIQUIDITY
Fitch considers CMS' liquidity to be adequate. CMS has a $550 million revolving credit facility (RCF), which matures May 27, 2021. CMS' RCF is secured by its ownership of Consumers' common stock. As of Sept. 30, 2016, CMS had $1 million of letters of credit (LCs) outstanding and no amounts borrowed, leaving $549 million of availability under its RCF.
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 RCF. Consumers' RCF matures May 27, 2021 and is secured by its first mortgage bonds (FMBs). Although the amount of outstanding CP does not reduce the RCF's available capacity, Consumers states that it would not issue CP in an amount exceeding the available RCF capacity. As of Sept. 30, 2016, Consumers had $75 million of CP borrowings and $7 million of LCs outstanding, leaving $568 million of unused availability under its RCF.
Consumers has full availability under a separate $250 million RCF that matures Nov. 23, 2017, and it has a fully used $30 million LC facility that matures May 9, 2018. Both facilities are secured by Consumers' FMBs.
CMS' operations require modest cash on hand. At Sept. 30, 2016, the company had $339 million of unrestricted cash and cash equivalents, $21 million of which was at Consumers, which should be sufficient to cover near-term cash needs.
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 - Effective from 17 August 2015 to 27 September 2016 (pub. 17 Aug 2015)
https://www.fitchratings.com/site/re/869362
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