Fitch Ratings has affirmed the ratings for CMS Energy Corp. and upgraded the Issuer Default Rating (IDR) for Consumers Energy Co. to 'BBB' from 'BBB-', the senior secured debt rating to 'A-' from 'BBB+', the senior unsecured debt rating to 'BBB+' from 'BBB', and the preferred stock rating to 'BBB-' from 'BB+'. Fitch has assigned the short-term IDR of Consumers Energy at F3. The Rating Outlooks remain Stable.
The rating for CMS Energy Trust I is withdrawn. The $29 million principal outstanding on the 7.75% Trust Preferred Securities was redeemed on Feb. 29, 2012.
Affirmation of CMS Energy's Ratings
CMS' rating and Stable Outlook are supported by its ownership of Consumers Energy, an integrated regulated utility located in Michigan which consistently delivers strong earnings. Management remains committed to an investment strategy focused on investments in Consumers Energy. The five-year $6.6 billion capital plan will deliver system upgrades and rate base growth.
Fitch continues to monitor the company's financing activity as the substantial level of stand-alone parent debt is a legacy credit concern. Given a large capex program at the utility, Fitch sees only limited opportunity for parent company de-leveraging over the next three to five year period. Fitch considers the company's consolidated liquidity position and Consumers Energy's debt capital market access as sufficient relative to funding needs.
Upgrade of Consumers Energy's Ratings
The rating upgrade is driven by a greater weighting applied to Consumers Energy's stand-alone financial profile as outlined in Fitch's criteria entitled 'Parent and Subsidiary Rating Linkage', Aug. 12, 2011. In Fitch's view, the standalone credit measures of Consumers Energy warrants a two notch uplift from its parent company's IDR.
Consumers Energy's Stable Outlook is supported by 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 mitigate sales volume volatility and to facilitate the timely recovery of fuel costs and non-fuel costs. Additionally, service area demographics are improving relative to recession lows.
Consumers Energy's rating is constrained by its parent company credit profile, as well as its own large multi-year capital expenditure program that will require higher debt and equity financing to complete. CMS Energy 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.
Positive Rating Action Trigger
A substantial reduction in parent level debt would improve the parent company credit profile, and coupled with continued strong financial metrics at Consumers Energy, could lead to a ratings upgrade. Fitch does not believe a material level of de-leveraging will occur over the next two years.
Negative Rating Action Trigger
An adverse regulatory order that negatively impacts the financial position of Consumers Energy could place pressure on both the parent and subsidiary credit ratings.
Stable Financial Metrics
Fitch forecasts consolidated credit ratios to remain consistent with guidelines for the 'BB+' rating category, with the ratios of EBITDA-to-interest and FFO-to-debt at approximately 3.8 times (x) and 16%, respectively through 2014. Fitch anticipates a slight downward trend to FFO metrics starting in 2015 following the full utilization of CMS' NOL's. Fitch views managing costs as a key determinant to maintaining cash flow metrics consistent with expectations; and, would look toward a substantial reduction in stand-alone debt as a key driver to an improved credit profile.
Fitch forecasts Consumer Energy's credit ratios to remain strong relative to guidelines for the 'BBB' rating category, with the ratios of EBITDA-to-interest and FFO-to-debt at approximately 5.5x 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. Also, capital funding needs at Consumers Energy 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
The consolidated liquidity position at CMS Energy remains sufficient relative to funding needs with approximately $1.2 billion in consolidated borrowing capacity available at Dec. 31, 2011. CMS Energy has a five-year $550 million credit facility expiring in March 2016. Consumers Energy has a separate five-year $500 million credit facility, also expiring in March 2016; and, a $150 million credit facility, expiring in August 2013. The execution in 2011 of two new multi-year credit facilities for a combined $1.05 billion in borrowing capacity mitigates concern related to liquidity position and bank credit market access.
Moderate Funding Needs
CMS Energy consolidated maturities are manageable with $389 million due in 2012; $566 million due in 2013; $493 million in 2014; $699 million due in 2015; and, $350 million due in 2016. Fitch anticipates CMS Energy and Consumers Energy will continue to have the access to debt capital markets required to manage financing needs, including re-financing maturities in a timely and cost effective manner.
Fitch has affirmed the following:
CMS Energy
--IDR at 'BB+';
--Senior Secured Debt at 'BBB-';
--Senior Unsecured Debt at 'BB+'.
Fitch has upgraded the following:
Consumers Energy
--IDR to 'BBB' from 'BBB-';
--Senior Secured Debt to 'A-' from 'BBB+';
--Senior Unsecured Debt to 'BBB+' from 'BBB';
--Preferred Stock to 'BBB-' from 'BB+'.
Fitch has assigned the following:
Consumers Energy
--Short-term IDR at 'F3'.
The Rating Outlooks remain at Stable.
Fitch has withdrawn the following:
CMS Energy Trust I
--Trust Preferred at 'BB-'.
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. 16, 2011);
--'Rating North American Utilities, 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
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229
Rating North American Utilities, Power, Gas, and Water Companies
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=625129
Recovery Ratings and Notching Criteria for Utilities
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648449
Parent and Subsidiary Rating Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647210
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