Fitch Ratings has assigned an 'A+' rating to Consumers Energy Company's proposed first mortgage bonds (FMBs).
The FMBs will rank pari passu with Consumers Energy's existing secured debt. Net proceeds will be used for general corporate purposes.
Consumers Energy's Long-Term Issuer Default Rating (IDR) is 'A-'/Outlook Stable.
Key Rating Drivers
Constructive Regulatory Environment: Consumers Energy operates within a constructive regulatory environment overseen by the Michigan Public Service Commission (MPSC). Supportive state legislation and MPSC policies mitigate regulatory lag through the use of a forward test year, a 10-month review period for general rate cases (GRCs) and power supply and gas cost recovery mechanisms. Consumers Energy's natural gas utility business also benefits from partial revenue decoupling, which annually reconciles Consumers Energy's actual weather-normalized, non-fuel revenues with the revenues approved by the MPSC.
Recent Rate Cases: In December 2021, Consumers Energy filed its gas rate case with the MPSC seeking an annual rate increase of $278 million, based on a 10.5% authorized return on equity (ROE). This ROE is higher than average, which is supportive of credit . In July 2022 the case was approved with an increase of $170 million, at 9.9% ROE.
In April 2022, Consumers Energy filed its Electric rate case requesting an annual rate increase of $272 million, based on a 10.25% authorized ROE for projected 12 months ending Dec 2023. The filing requests authority to recover investments associated with distribution system, reliability, solar generation, environmental compliance, enhanced technology, and approval of an unrecovered surcharge of $6 million of distribution investments. Fitch expects an outcome within the standard review period of 10 months, that is consistent with previous favorable outcomes.
Large Capex Plan: In June 2022, the MPSC also approved a settlement agreement governing Consumer Energy's integrated resource plan focusing on reliability over the next 20 years. Key highlights include the closure of all remaining J.H. Campbell coal units, purchase of the 1.2GW of Covert Gas Generating Facility Plant, continued operations of the KARN peakers till 2031 and development of over 8GW of solar generation by 2040. Of Note, the purchase of the Covert facility will cost $815 million and the transaction is expected to close in 2023 enabling the Company's goal of elimination of coal from its generation mix by 2025.
Consumers Energy has a large capex plan totaling $14.3 billion over 2022-2026. Roughly 35% of this capex is for electric utility operations, including existing generation, 20% for new clean energy generation and 45% for natural gas utility operations. Concerns regarding the large capex plan are mitigated by the MPSC's constructive ratemaking policies and approved Integrated Resource Plan, including use of a forward test year, which allows for timely recovery of capex.
Cost Reductions and NOLs: Management's focus on cost reductions supports Consumers Energy's solid financial profile, reducing the negative near-term financial impact from the utility's large capex plan. In addition, the cash flow benefit from CMS Energy's net operating loss (NOL) carryforwards 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 operating cost reductions to average 2% per year.
Solid Financial Profile: Consumers Energy has a solid financial profile. FFO leverage was 3.9x at YE 2021, below Fitch's sensitivity threshold after being higher in 2020 at 5.4x due to $683 million of one-time pension contributions, but Fitch expects FFO leverage to return within the rating sensitivity threshold in 2021. Fitch forecasts FFO leverage to average around 4.1x through 2024 and total debt with equity credit/operating EBITDA around 4.0x.
Fitch expects that Consumer Energy's credit metrics may be slightly higher than the near-term forecast period given large deferred fuel and purchased power balances given the high commodity prices. Fitch considers the defferals to be timing differences and excludes the cash flow impact from FFO, but includes the debt impact in FFO leverage. Fitch's treatment of the deferred balances anticipates favorable regulatory outcomes for recovery thereof.
Parent/Subsidiary Linkage: There is a parent subsidiary link between CMS Energy and Consumers Energy. Fitch determines CMS Energy's standalone credit profile (SCP) based upon consolidated metrics and a bottom-up approach in determining the rating on Consumers Energy. Fitch considers Consumers Energy to have a SCP stronger than CMS Energy. Emphasis is placed on CMS Energy's status as a regulated entity. Legal ring fencing is considered porous given the general protections afforded by economic regulation. Access and control are evaluated as porous.
CMS Energy centrally manages the treasury function for all of its entities; however, each subsidiary issues its own long-term debt. Due to the aforementioned linkage considerations, Fitch will limit the difference between the Long-Term IDR's of CMS Energy and Consumers Energy to two notches.
Derivation Summary
The credit profile of Consumers Energy is well positioned compared with those of peers DTE Electric Company (A-/Stable) and DTE Gas Company (BBB+/Stable) and comparable to those of Northern States Power Company-Minnesota (A-/Stable) and Northern States Power Company-Wisconsin (A-/Stable). Fitch considers the regulatory environment in Michigan to be constructive. Financial metrics are similar for Consumers Energy and its peers. Fitch forecasts FFO leverage to average around 4.1x through 2024 at Consumers Energy.
Key Assumptions
Periodic GRC filings to recover Consumers Energy's investment in rate base and associated costs;
Operating cost reductions averaging 2% per year;
Flat annual electric and natural gas sales growth;
Total utility capex in line with management's assumptions;
Earnings per share growth of 6%-8% per year;
Normal weather.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
FFO leverage expected to be less than 3.5x on a sustained basis;
A positive rating action on Consumers Energy would also require an equally positive rating action on its parent, CMS Energy. Fitch's parent/subsidiary linkage results in a maximum two-notch difference between the Long-Term IDRs of CMS Energy and Consumers Energy.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
FFO leverage expected to exceed 4.5x on a sustained basis;
A material deterioration of the Michigan regulatory environment that results in less-timely cost recovery or significantly weaker financial metrics;
A downgrade to CMS Energy's Long-Term IDR.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Adequate Liquidity: Fitch considers liquidity for CMS Energy and Consumers Energy to be adequate.
Consumers Energy primarily meets its short-term liquidity needs through the issuance of CP under its $500 million CP program, which is supported by its $850 million RCF. Consumers Energy's RCF will mature on June 5, 2024 and is secured by the utility's first mortgage bonds (FMBs). Although the amount of outstanding CP does not reduce the RCF's available capacity, Consumers Energy states it would not issue CP in an amount exceeding the available RCF capacity. Consumers Energy had no CP borrowings and $13 million of LCs outstanding as of June 30, 2022, leaving $837 million of unused availability under its RCF.
Consumers Energy entered into a $1.0 billion delayed draw unsecured term loan in July 2022. The term loan matures in January 2024 and will be used to fund working capital and for general corporate purposes. Consumers Energy has a separate $250 million RCF that will mature on Nov. 19, 2023. This RCF had no borrowings and $61 million of LCs outstanding at June 30, 2022, leaving $189 million of availability This facility is secured by the utility's FMBs. Consumers Energy also had a fully used $30 million LC facility that matured on April 18, 2022.
CMS Energy's operations require modest cash on hand. The company had $96 million of unrestricted cash and cash equivalents at June 30, 2022, and Consumers Energy had $26 million of consolidated cash and cash equivalents at the same date.
CMS Energy and Consumers Energy have manageable long-term debt maturity schedules over the next five years. At the parent level, CMS Energy has $250 million of 3.875% senior unsecured notes due March 1, 2024. The utility has $300 million of 0.35% FMBs due June 1, 2023; $325 million of 3.375% FMBs due Aug. 15, 2023; $250 million of 3.125% FMBs due Aug. 31, 2024 and $51.5 million of 3.19% FMBs due Dec. 15, 2024.
Issuer Profile
Consumers Energy is a regulated integrated electric and natural gas distribution utility in Michigan.
Summary of Financial Adjustments
Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity are disclosed below:
Consumers Energy's securitization debt is removed from all financial metric calculations.
Date of Relevant Committee
08 October 2021
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
CONSUMERS ENERGY COMPANY 