6 Min Read
Feb 27 - Fitch Ratings has affirmed the ratings for CMS Energy Corp. (CMS) and Consumers Energy Co. (Consumers). The Rating Outlook for CMS has been revised to Positive from Stable, and the Rating Outlook for Consumers remains at Stable. Key Rating Drivers: --CMS's ownership of a regulated integrated utility with a low-risk stable credit profile; --Fitch's assessment of the regulatory environment in Michigan as supportive; --The up to $7 billion five-year capital spending plan is consistent with management's strategy to invest in its regulated operations; --Fitch's expectation that capital funding needs will increase the pace with which the utility accesses the debt capital markets; --Fitch sees limited opportunity for parent company deleveraging over the next five-year period. Positive Outlook for CMS: CMS's rating and revised Outlook are supported by ownership of Consumers, an integrated regulated utility located in Michigan with a stable credit profile. Consolidated financial metrics are improving, largely due to a strong utility financial profile. Fitch forecasts EBITDA-to-interest at or near 4.0x through 2017, which is consistent with Fitch guidelines for the 'BBB-' rating category. Fitch's forecast for funds from operations (FFO)-to-debt ranges between a current ratio of approximately 18% to around 15% over the forecast period, and reflects the positive cash benefits associated with the recent extension of bonus depreciation which, coupled with the company's net operating losses (NOLs) outstanding limits CMS's cash tax obligation through 2016. Fitch continues to monitor the company's financing activity as the high nominal level of parent debt is a legacy credit concern. At Sept. 30, 2012, total parent debt was nearly $2.4 billion, or 33% of total consolidated debt (Fitch adjusted) and 23% of total capital (Fitch adjusted). Fitch sees limited opportunity for parent company deleveraging over the next five-year period due to a large utility capital plan, and expects the parent to maintain the utility capital structure during this capital intensive period. Disproportionate growth in the already high level of parent company debt could place pressure on the parent company rating. Affirmation of Consumers: Consumers' rating and Stable Outlook reflect the utility's stand-alone financial profile, and Fitch's assessment of the regulatory environment in Michigan as supportive. Financial metrics for the utility remain healthy relative to Fitch guidelines for the rating category and risk profile. Fitch forecasts EBITDA-to-interest to range between mid-5x and mid-6x, and debt-to-EBITDA to remain near 3.0x. FFO metrics are forecast to weaken from current levels as the positive benefits associated with bonus depreciation end, and with the up-tick in utility capital spending. Execution of an up to $7 billion utility capital investment plan and related funding needs limits positive rating action at Consumers at this time. Fitch's rating assumes the company will earn a good return on its utility investment, and timely recovery of related costs is a key driver for ratings stability during this capital intensive period. The inclusion of rate design components to mitigate regulatory lag, as well as forward test years, supports a stable utility credit profile. Consumers' rate plans include an automatic power supply cost recovery mechanism and a gas cost recovery mechanism to facilitate timely recovery of commodity costs. Base rate orders are filed by the utility annually, and are determined with 12 months of the filing date. Authorized interim rates can be implemented within six months of the filing date, and the permanent rate increase is subject to true-up or refund. Solid Liquidity Profile: CMS had a consolidated liquidity position of $1.3 billion at Dec. 31, 2012, including nearly $1.2 billion in availability under three separate multi-year bank credit facilities, and $93 million in cash on hand. Fitch considers the company's liquidity position as sufficient relative to funding needs. The execution of multi-year credit facilities mitigates concern related to both liquidity and bank credit market access. Additionally, of the $1.2 billion consolidated bank credit capacity, no one bank is exposed for greater than 6.43% or $77.2 million. Manageable Debt Maturity Schedule: Fitch considers the consolidated debt maturity schedule to be manageable, with $0 due in 2013, $450 million due in 2014, $650 million due in 2015, $530 million due in 2016, and $600 million due in 2017. Fitch views the re-financing risk as low. Rating Sensitivities: --Continued improvement in parent company financial metrics could lead to a ratings upgrade; --Execution of a large capital investment plan and related capital funding needs limits positive rating action for Consumers at this time; --An adverse regulatory order that negatively impacts the financial position of Consumers could place pressure on both the parent company and subsidiary ratings. Fitch has affirmed the following: CMS Energy Corp. --IDR at 'BB+'; --Senior secured debt at 'BBB-'; --Senior unsecured debt at 'BB+'. Consumers Energy Co. --IDR at 'BBB'; --Senior secured debt at 'A-'; --Senior unsecured debt at 'BBB+'; --Preferred stock to 'BBB-'; --Short-term IDR at 'F3'. The Rating Outlook for CMS Energy Corp. is revised to Positive from Stable. The Rating Outlook for Consumers Energy Co. remains Stable.