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 paying down a part of the existing debt as well as for general corporate purposes.
Consumers Energy's Long-Term Issuer Default Rating (IDR) is 'A-' with a Stable Rating Outlook.
Key Rating Drivers
Constructive Regulatory Environment: Fitch believes the Michigan regulatory environment remains constructive from a credit perspective as evidenced by credit supportive general rate case (GRC) outcomes in recent years. The Michigan Public Service Commission (MPSC) approved an authorized ROE of 9.9% in Consumer Energy's last GRC, which compares favorably with the industry average.
Supportive state legislation and MPSC policies mitigate regulatory lag through the use of a forward test year, a 10-month review period for 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 revenues approved by the MPSC. Fitch does not expect a material negative outcome in the pending audit ordered by MPSC in October 2022 to assess CMS Energy's (CMS) compliance with storm outages and safety regulations. Unexpected deterioration in Michigan rate regulation could result in future adverse rating actions.
Gas Base Rate Case: In December 2022, Consumers Energy filed a gas rate case requesting an annual rate increase of $212 million, based on a 10.25% authorized ROE and projected test year ending September 2024. The filing requests authority to recover costs of upgrading transmission infrastructure, transforming compression and storage operations and replacing aging distribution pipes. Fitch expects a final MPSC decision around October 2023.
Electric Base Rate Case: 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 a projected test year ending December 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.
In December 2022, Consumers Energy submitted a settlement agreement to the MPSC. The settlement, approved in January 2023, increases annual rates by approximately $155 million based on a 9.9% authorized ROE and the common equity ratio is 50.75%.
Solid Financial Profile: Fitch believes Consumers Energy's current and projected credit metrics are consistent with the current rating. Fitch projects leverage will remain within its sensitivities through 2022-2025. Fitch estimates FFO leverage of 4.5x in 2022, reflecting moderate pressure from high capital spending and elevated commodity costs. FFO leverage is expected to improve to 4.3x per year on average through 2025. Debt maturities are manageable, and Fitch expects the company to have continued access to capital markets.
Significant Capex Driven by Decarbonization Plans: Consumers Energy's current capital program is elevated at $14.3 billion for 2022-2026 with 45% allocated for gas infrastructure, 36% for electric distribution and supply and 19% for clean generation. Concerns regarding the large capex plan are mitigated by the MPSC's constructive ratemaking policies and alignment of planned capex with state energy policy. Consumers plans to eliminate coal from its generation mix in 2025, replacing it with low-emitting gas and non-emitting renewable generation facilities.
Cost Reductions and NOLs: Management's focus on cost reductions supports CMS' solid financial profile, reducing the negative near-term financial impact from the utility's large capex plans as well as macroeconomic pressures. In addition, the cash flow benefit from CMS Energy's net operating loss (NOL) carry forwards 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 continue to average 2% per year over the near term.
Parent/Subsidiary Linkage: There is parent subsidiary rating linkage between CMS Energy and Consumers Energy. Fitch determines CMS Energy's standalone credit profile (SCP) based upon consolidated metrics. Fitch considers Consumers Energy's SCP to be stronger than CMS Energy's SCP. Emphasis is placed on Consumers 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 also evaluated as porous.
CMS Energy centrally manages the treasury function for all of its entities; however, both the parent and Consumers Energy issue their own long-term debt. Due to the aforementioned linkage considerations, Fitch will limit the difference between the Long-Term IDRs of CMS Energy and Consumers Energy to two notches.
Derivation Summary
The credit profile of Consumers Energy is comparable to peers like DTE Electric Company (A-/Stable), Northern States Power Company-Minnesota (A-/Stable), Northern States Power Company-Wisconsin (A-/Stable), and Public Service Company of Colorado (A-/Stable). All four are regulated utilities with single state operations albeit in constructive environments.
FFO leverage at the electric peers is marginally stronger in the 3.8x-4.1x range; however, marginally weaker at DTE Gas Company (A-/Stable) in the 4.8x range. Fitch forecasts FFO leverage to average around 4.3x through 2025 at Consumers Energy.
Key Assumptions
Periodic rate case 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;
Dividend growth of 6%-8% per year;
Normal weather;
No material equity issuances till 2025 apart from the equity issuances planned during 2023 at the parent level for the acquisition of the Covert power generation unit by Consumers Energy.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to a 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 a 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
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 $1.1 billion revolving credit facility (RCF; increased from $850 million in December 2022). Consumers Energy's RCF will mature on Dec. 14, 2027 and is secured by the utility's FMBs. Consumers Energy had no CP borrowings and $29 million of LOCs outstanding as of Sept. 30, 2022, leaving $821 million of unused availability under its RCF.
Consumers Energy has a separate $250 million RCF that will mature on Nov. 19, 2024. This RCF had no borrowings and $62 million of LOCs outstanding at Sept. 30, 2022, leaving $188 million of availability. The facility is also secured by the utility's FMBs.
CMS Energy has a $550 million unsecured RCF that will mature on Dec. 14, 2027. As of September 2022, CMS Energy had $14 million of LOCs outstanding and no borrowings outstanding, leaving $536 million of availability under its RCF. It also has a fully utilized LOC of $50 million as of Sept. 30, 2022, which terminates in September 2024.
Issuer Profile
Consumers Energy Company is a regulated integrated electric and natural gas distribution utility in Michigan.
Summary of Financial Adjustments
Consumers Energy's securitization debt is removed from all financial metric calculations;
Consumers Energy's preferred stock is given 50% equity credit in the utility's financial metric calculations.
Date of Relevant Committee
18 January 2023
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 
