Fitch Rates Consumers Energy Company's $250MM FMBs 'A-'
OREANDA-NEWS. Fitch Ratings has assigned an 'A-' rating to Consumers Energy Company's (Consumers) $250 million issuance of first mortgage bonds (FMBs). The 4.10%, 30-year FMBs mature Nov. 15, 2045 and will rank pari passu with Consumers' existing secured debt.
Net proceeds will be used for general corporate purposes.
KEY RATING DRIVERS
Solid Financial Profile
Consumers' stand-alone financial metrics are strong for the rating. For the latest 12 months (LTM) ended Sept. 30, 2015, funds from operations (FFO) fixed-charge coverage was 6.9x, FFO-adjusted leverage was 2.7x, and adjusted debt/EBITDAR was 2.7x. Fitch expects these key credit metrics to weaken under its conservative rating model, but remain supportive of Consumers' 'BBB' Issuer Default Rating (IDR). By the end of 2019, adjusted debt/EBITDAR is expected to weaken to 3.5x-3.7x, and FFO fixed-charge coverage is expected to be around 4.0x-4.5x.
The utility's solid financial profile is aided by management's focus on O&M cost reductions and parent CMS Energy Corporation's (CMS) net operating loss carryforwards (NOLs). The cost savings and cash flow benefit provided by the parent's 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.
Consumers' credit quality benefits from a stable and constructive regulatory environment in Michigan, and Fitch expects continued balanced outcomes in future rate case filings. The 2008 state energy law in Michigan created the legislative framework for a supportive regulatory environment, and legislation is in the works to provide further improvements. Regulatory lag is mitigated by the use of a forward test year, 6-month self-implementation, and a 12-month regulatory review period, which may be shortened under pending legislation. An automatic power supply cost recovery mechanism and a gas cost recovery mechanism also facilitate timely recovery of commodity costs.
Large Capex Plan
Management plans to spend about $7.5 billion in regulated capex over the 2015-2019 period. The capex plan includes about $3 billion for replacement and upgrades of the existing system, $900 million for environmental regulation compliance, $600 million for system reliability projects, and over $1 billion for gas infrastructure and new generation capacity. Fitch expects the utility to finance the capex in line with its authorized capital structure.
Fitch considers linkage between Consumers and CMS. Legal ownership structure, interdependency of CMS and Consumers for capital and liquidity, and lack of explicit ring-fencing are key elements linking their IDRs.
Fitch's key assumptions within the rating case for Consumers 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 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.
Positive: Consumers' IDR is linked to CMS' credit profile. A positive rating action at CMS and adjusted debt/EBITDAR of less than 3.6x on a sustainable basis could result in a rating upgrade.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include a failure to achieve, on a sustainable basis, adjusted debt/EBITDAR of 4.1x and a downgrade of CMS' IDR.
Fitch considers Consumers' liquidity to be adequate. Consumers primarily meets its short-term obligations through the issuance of commercial paper (CP) under its $500 million CP program. The utility's CP issuances are supported by a $650 million secured revolving credit facility, which matures May 27, 2020. Although outstanding CP does not reduce the revolver's available capacity, Consumers would not issue CP in an amount exceeding the available revolver capacity. At Sept. 30, 2015, Consumers had $68 million of CP outstanding and $9 million in letters of credit (LCs), leaving $641 million of availability under the revolver.
Consumers has a $30 million credit facility that matures on May 9, 2018, which is used for LCs. There was no availability under this facility at Sept. 30, 2015. In addition, Consumers has a $250 million accounts receivable sales program that will expire in November 2016. No accounts receivable had been transferred under the program at Sept. 30, 2015.
As is typical for a utility, Consumers' operations require modest cash on hand. The utility had $43 million of unrestricted cash and cash equivalents as of Sept. 30, 2015.