Fitch Ratings has affirmed CMS Energy Co.'s (CMS) Long-Term Issuer Default Rating (IDR) at 'BBB' and Consumers Energy Company's (Consumers Energy) IDR at 'A-'.
The Rating Outlook for both entities is Stable. Fitch has also affirmed the Short-Term IDRs for both entities at 'F2'.
CMS's ratings continue to derive support from its predominantly regulated utility operations at Consumers Energy in a constructive regulatory environment in Michigan. Sizeable capex plans at Consumers Energy result from sharpening focus on decarbonization and reliability. Nevertheless, Fitch projects that Consumers Energy's FFO leverage will average 4.1x through 2028 aided by increasing base rates and monetization of tax credits. Despite notable parent level debt, CMS's FFO leverage is also expected to remain consistent with its rating, averaging 5.2x through 2028.
Key Rating Drivers
CMS Energy Corporation
Predominantly Regulated Utility Business: CMS Energy derives over 95% of consolidated EBITDA from the relatively low-risk, regulated electric and gas utility operations at Consumers Energy. A constructive regulatory environment in Michigan supports the utility's operations and consequentially CMS's rating. Non-utility operations remain largely limited to power generation at Northstar Clean Energy Company. Fitch estimates that the contribution from non-utility operations to consolidated EBITDA will remain at approximately 5%.
Solid Credit Metrics: Fitch expects CMS Energy's FFO leverage to average 5.2x through 2028 supporting its current rating. Parent level debt (including 50% equity credit applied for hybrid debt and excluding securitization debt), is expected to remain considerable, averaging 23% of the total through 2024-2028. Nevertheless, robust earnings at Consumers Energy are expected to support CMS's credit metrics.
Continuing Cost Reductions and NOLs: Management's continued focus on cost reductions supports CMS's solid financial profile, mitigating the adverse financial effects arising from substantial capital expenditure plans, climatic disruptions, and broader economic challenges. Furthermore, utilizing CMS Energy's accumulated net operating losses (NOLs) provides a cash flow advantage. This facilitates increased reinvestment of company funds into service reliability enhancements, while concurrently reducing dependence on external financing. Fitch anticipates a sustained trend of operational cost savings, managing expenses like employee, taxes and financing, projecting an average annual reduction of 2% during the forecast period.
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.
Consumers Energy Company
Constructive Regulatory Environment: Fitch believes the regulatory environment in Michigan under the Michigan Public Service Commission (MPSC) remains mostly constructive from a credit perspective. The regulatory framework allows for full pass-through of fuel costs and purchased power, forward-looking test years and a timely 10-month review period for general rate case resolution. Consumers Energy's natural gas utility business also benefits from partial revenue decoupling, via weather normalization. Furthermore, Consumers Energy's authorized ROE of 9.9% compares favorably with industry averages.
Increasing storm activity in Michigan and resultant power outages have attracted regulatory focus on reliability. In March-2023, the MPSC tightened performance standards for utilities by way of enhanced outage credits and updated reliability standards. An MPSC-led straw proposal for additional potential financial incentives and disincentives has also been underway since August 2023.
In Fitch's view, the risk of performance-based penalties is manageable within Consumer Energy's current credit profile. Fitch also does not expect a material negative outcome in the pending audit ordered by MPSC in October 2022 to assess CMS's compliance with storm outages and safety regulations during the 2021 storms in Michigan. The final audit report is expected in summer 2024.
Electric Base Rate Case: In March 2024, the MPSC approved a largely constructive settlement authorizing an increase in Consumers Energy's annual rates by approximately $92 million based on a 9.9% authorized ROE and 50% equity thickness. The originally requested rate increase was $207 million, based on a 10.25% authorized ROE, which was reduced to $168.9 million by Consumers Energy in November 2023. In addition, the MPSC partially approved an infrastructure recovery mechanism for two years as well as an undergrounding pilot program. Fitch expects Consumer Energy's next electric rate case to be filed in 2Q 2024.
Gas Base Rate Case: In August 2023, the MPSC approved a largely constructive settlement authorizing an increase in Consumers Energy's annual rates by approximately $95 million based on a 9.9% authorized ROE and 51% equity thickness compared to a requested rate increase of $212 million, based on a 10.25% authorized ROE. The rates allow for recovery of new gas infrastructure investment and related costs.
In December 2023, Consumers Energy filed a gas rate case requesting an annual rate increase of $169 million, based on a 10.25% authorized ROE and projected test year ending September 2025. Fitch expects a decision in line with other recent decisions at MPSC by October-2024.
Decarbonization and Reliability Driven Capex: Consumers Energy's current capital program is elevated at $17 billion for 2024-2028 increasing from $15.5 billion for 2023-2027. The increased capex is predominantly focused on system reliability and decarbonization initiatives, with 37% allocated for gas infrastructure, 43% for electric distribution and supply and 20% for clean generation. Consumers Energy is also on track to eliminate coal from its generation mix in 2025, replacing it with low-emitting gas and non-emitting renewable generation facilities. Consumers Energy was authorized to securitize previous coal retirements costs and has received proceeds of $646 million in 2023. Fitch expects continued regulatory support for Consumer Energy's future decarbonization efforts as well.
Fitch believes that an upward revision in capex is possible, given the increasing focus on reliability and the string of legislation passed in Michigan in 2023 that targets 100% clean generation by 2040 in MISO. Fitch also notes that Consumers Energy is expected to file its new Renewable Energy Plan in 2H24. However, any concerns regarding the large capex plan are mitigated by the MPSC's constructive ratemaking policies and alignment of planned capex with state policy. Furthermore, the new energy legislations provide expanded incentives for energy efficiency and could also lend improved economics for PPAs, which are beneficial in Fitch's view.
Supportive Financial Profile: Fitch believes Consumers Energy's FFO leverage will remain well within its sensitivities averaging 4.1x through 2028. Any pressure from capex plans is largely offset by incremental earnings from rate base growth, continued O&M savings and ability to monetize tax credits on renewable projects using the tax credit transferability provisions of the Inflation Reduction Act.
Fitch estimates Consumers Energy to sell about $400 million of tax credits over the forecast period using the tax credit transferability provisions of the Inflation Reduction Act. Fitch also assumes that any changes in the ability to monetize tax credits at the projected levels would result in adjustments to Consumer Energy's financial plan that support the current credit metrics.
Derivation Summary
CMS Energy Corporation
The credit profile of CMS Energy is comparable to its peer utility holding company DTE Energy Company (BBB/Stable) as both operate gas and electric utilities in a single state, Michigan. Other utility parents, Xcel Energy Inc. (BBB+/Negative) and WEC Energy Group, Inc. (BBB+/Stable), both, operate multistate regulated utilities primarily in constructive environments and therefore have greater geographic diversification which partly drives their higher ratings. Further, Xcel's business risk has increased in recent years due to the wildfire activity across its utilities. CMS, DTE and WEC operate in the service territories with limited exposure to wildfire risk.
A sizeable parent level debt of about 23% throughout the forecast period pressurizes CMS Energy's consolidated FFO leverage which is expected to average 5.2x through 2028 slightly better than the 5.3x estimated at DTE. In comparison, FFO leverage is estimated to average 4.9x through 2024-2027 for WEC and range between 4.8x-5.2x through 2028 for Xcel, supporting their higher ratings.
Consumers Energy Company
The credit profile of Consumers Energy is comparable to peers like DTE Electric Company (A-/Stable), Northern States Power Company-Minnesota (A-/Stable) and 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 generally constructive environments.
Fitch forecasts FFO leverage to average around 4.1x through 2028 at Consumers Energy. Financial metrics at the peers are marginally stronger with leverage forecasted to average 3.8x through 2026 at DTEE and range 3.8x-4.0x for NSP-Wisconsin and 3.4x-3.8x for NSP-Minnesota through 2028.
Key Assumptions
Constructive regulatory environment in Michigan with authorized ROE of 9.9% for both electric and gas utility operations;
Gas rate case decision in 3Q24;
Annual rate case filings;
Largely 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 in 2024 (other than the conversion of equity forwards and CMS's running DRIP) and subsequently $350 million annually through 2028.
RATING SENSITIVITIES
CMS Energy Corporation
Factors that could, individually or collectively, lead to a positive rating action/upgrade:
FFO leverage expected to be less than 4.8x on a sustained basis.
Factors that could, individually or collectively, lead to a negative rating action/downgrade:
FFO leverage expected to exceed 5.8x on a sustained basis.
Consumers Energy Company
Factors that could, individually or collectively, lead to positive rating action/upgrade:
A positive rating action on Consumers Energy would also require an equally positive rating action on its parent, CMS, under Fitch's Parent and Subsidiary Linkage Criteria;
FFO leverage expected to be less than 3.5x on a sustained basis;
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;
A downgrade to CMS Energy's Long-Term IDR.
Liquidity and Debt Structure
Fitch considers liquidity for CMS Energy and Consumers Energy to be adequate.
CMS Energy has a $550 million unsecured revolving credit facility (RCF) that will mature on Dec. 14, 2027. As of Dec. 31, 2023, CMS Energy had $24 million of LCs outstanding and no borrowings outstanding, leaving $526 million of availability under its RCF. CMS also has a fully utilized LC of $50 million as of Dec. 31, 2023, which terminates in September 2024.
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 RCF (as of Dec. 31, 2023). Consumers Energy's RCF will mature on Dec. 14, 2027 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 $93 million of CP borrowings and $27 million of LCs outstanding as of Dec. 31, 2023, leaving $1 billion of unused availability under its RCF. Consumers Energy has a separate $250 million RCF that will mature on Nov. 18, 2025. This RCF had no borrowings and $48 million of LCs outstanding at Dec. 31, 2023, leaving $202 million of availability. The facility is secured by the utility's FMBs.
CMS Energy's operations require modest cash on hand. The company had $237 million of unrestricted cash and cash equivalents at Dec. 31, 2023, $35 million of which was at Consumers Energy. At the parent level, CMS has $250 million of bonds expiring in 2025 followed by $300 million in 2026, $625 million in 2027 and $800 million in 2028. Consumers Energy has bond maturities of $302 million in 2024 and subsequently lower maturities of $116 million in 2025, $237 million in 2026, $263 million in 2027 and $843 million in 2028. In Fitch's view, the aforementioned debt maturities remain manageable given the history of successful refinancing. Fitch expects CMS and Consumers Energy to have continued access to the capital markets.
CMS and Consumers Energy were compliant with consolidated debt/capitalization of 70% and 65%, respectively, as defined under the credit agreement, as of Dec. 31, 2023.
Issuer Profile
CMS Energy is an energy holding company whose principal operating subsidiary is Consumers Energy Company, a regulated integrated electric and natural gas distribution utility in Michigan.
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
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
CONSUMERS ENERGY COMPANY 
