Fitch Ratings has assigned an 'A-' rating to Consumers Energy's $375 million issuance of 2.85% first mortgage bonds due 2022. Proceeds from the offering will be used primarily to redeem a portion of the $375 million aggregate principal amount of 5.375% first mortgage bonds, due 2013. The new notes rank equally in right of payment with existing senior secured obligations of Consumers Energy. The Rating Outlook is Stable.
Fitch's rating of Consumers Energy reflects a constructive regulatory environment in Michigan. Utility rate orders are determined within 12-months of filing, utilize forward test years, allow for returns moderately higher than the national average, and include mechanisms designed to facilitate the timely recovery of fuel costs and non-fuel costs. Additionally, service area demographics are improving relative to recession lows.
Strong Financial Metrics
Fitch forecasts Consumers Energy's credit ratios to remain strong relative to guidelines for the 'BBB' rating category, with the ratios of EBITDA-to-interest and funds from operations (FFO)-to-debt at approximately 5.5 times (x) and 21%, respectively through 2014. Fitch's projections are predicated on the continuation of annual rate increases and timely regulatory recoveries, all of which are contingent on the regulatory environment remaining balanced, which Fitch anticipates will be the case. Additionally, capital funding needs will increase the pace with which the utility accesses the debt capital markets, with forecasts for debt-to-capital forecast to increase to 53% through 2016. The current rating can sustain the additional long-term debt.
Solid Liquidity Profile
Fitch considers Consumers Energy to have a sufficient liquidity position, relative to funding needs. Total utility borrowing capacity at Dec. 31, 2011 was $650 million, of which $1 million was drawn. The utility's primary sources of liquidity are a $500 million bank credit facility, due in March 2016 and a $150 million bank credit facility, due in April 2017. Additional sources of liquidity are a $30 million revolver (used for letters of credit), due in September 2014 and a $250 million accounts receivable program, which is renewed annually.
Manageable Funding Needs
Fitch anticipates Consumers Energy will continue to have the access to debt capital markets required to manage its increasing financing needs. While utility long-term debt maturities are manageable, with $375 million due in 2013, $200 million due in 2014; $275 million due in 2015; and, $350 million due in 2016; the utility is expected to increase the pace with which it accesses the debt capital markets to fund its substantial multi-year capital investment plan. Consistent with management's commitment to an investment strategy focused on regulated utility investments, the five-year $6.6 billion capital plan expected to deliver system upgrades and rate base growth. As mentioned, funding of the substantial utility capital plan will require higher debt and equity financing to complete.
Positive Rating Action Trigger
No positive rating action is envisioned for Consumers Energy at this time. The March 2012 upgrade of the utility's credit ratings was driven by a greater weighting applied to Consumers Energy's stand-alone financial profile. The utility's ratings are constrained by its parent company credit profile, which has a sizeable amount of stand-alone parent company debt and relies on Consumers Energy, as its primary operating subsidiary, to upstream cash to support the common dividend and stand-alone debt obligations.
Negative Rating Action Trigger
An adverse regulatory order that negatively impacts the financial position of the utility could place pressure on the credit rating.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 12, 2011);
--'Rating North American Utilities, Power, Gas, and Water Companies' (May 16, 2011);
--'Recovery Ratings and Notching Criteria for Utilities' (May 12, 2011);
--'Parent and Subsidiary Rating Linkage' (Aug. 12, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Rating North American Utilities, Power, Gas, and Water Companies
Recovery Ratings and Notching Criteria for Utilities
Parent and Subsidiary Rating Linkage
Lindsay Minneman, +1-212-908-0592
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Donna McMonagle, +1-212-908-0258
Glen Grabelsky, +1-212-908-0577
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