NEW YORK--(Business Wire)--
Fitch Ratings views the recent rate order received by Consumers Energy Company
(Consumers) to be generally constructive and supportive of credit quality. The
Michigan Public Service Commission (MPSC) authorized a $139.4 million increase
to retail electric rates and a 10.7% rate of return equity (ROE). Major
components of the rate case include costs associated with new plant investments
including Clear Air Act compliance, higher operating and maintenance expense,
and Consumers' advanced metering infrastructure program. Favorably, the company
received approval for a pilot decoupling mechanism that goes into effect Dec. 1,
2009 and an uncollectible expense tracking mechanism that will allow rates to be
adjusted to collect or refund 80% of the difference between the level of
uncollectible expense included in rates and actual uncollectible expense. As
part of the order, Consumers is also able to recover the majority of its pension
expenses, which increased significantly over the past year as a result of weak
financial asset returns. As such, Fitch expects greater cash flow stability in
light of the still struggling Michigan economy.
At the same time, the order requires Consumers to reduce rates by $39.6 million,
which is the difference between the $179 million in self-implemented rates from
May 2009 and the final authorized base rate increase. The variance between
self-implemented rates and the final rate order is attributed largely to a lower
than requested ROE and lower tree trimming and forestry expenses. Amounts
collected under self-implemented rates between May 2009 and November 2009 that
exceed the final rate increase are now subject to refund. In addition, the MPSC
authorized a distribution to customers of approximately $72 million in proceeds
from the sale of the Palisades Nuclear Power Plant. Consumers' was also ordered
to establish a trust fund in the amount of approximately $163 million to cover a
pre-1983 liability to the U.S. Department of Energy for spent nuclear fuel
disposal costs.
This concludes Consumers' 2008 electric rate case, which was filed in November
2008, when the company requested a $214 million increase, premised on an 11%
ROE. In May 2009, Consumers self-implemented $179 million in new rates under the
new Michigan 2008 Energy Legislation, which provides for a streamlined
regulatory process to reduce regulatory lag.
Consumers benefits from solid credit protection measures, stable operating
performance and a constructive legislative and regulatory environment in
Michigan. Consumers' credit ratios are strong for the 'BBB+' category, with the
ratio of EBITDA to interest at 5.1 times (x) and cash flow interest coverage at
5.0x for the 12 month period ended Sept. 30, 2009. Leverage was 3.4x for the
same time period. Credit protection measures are forecasted to remain at or near
current levels over the ratings horizon as a result of the recent base rate
increase. Favorably, Consumers is managing its 2009 and 2010 debt maturities
through a series of planned re-financings.
Rating concerns facing Consumers relate to the struggling economy in Michigan,
driven by the distress of the automotive sector. Michigan's unemployment rate
was 15.3% as of September 2009. Nonetheless, management is forecasting a
moderate turnaround in 2010 with flat electric sales growth (versus a 4.4%
decline in 2009) as a result of the addition of new 'green' industrial and
commercial facilities, a resumption in manufacturing capacity at General Motors
(GM), and a broader market recovery within the state.
Consumers, a subsidiary of CMS Energy Corp, is a regulated electric and gas
utility serving more than 3.5 million customer in Michigan's Lower Peninsula.
Additional information is available at www.fitchratings.com.
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Fitch Ratings
Karen Anderson, 312-368-3165, Chicago
Karima Omar, 212-908-0592, New York
or
Media Relations:
Cindy Stoller, 212-908-0526, New York
Email: cindy.stoller@fitchratings.com
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