2009-11-10 22:21:05 -

Fitch Ratings views the recent rate order received by Consumers Energy Company (Consumers) to be generally constructive and supportive of credit quality. The Michigan Public Service Commission (MPSC) authorized a $139.4 million increase to retail electric rates and a 10.7% rate of return equity (ROE). Major components of the rate case include costs associated with new plant investments including Clear

Air Act compliance, higher operating and maintenance expense, and Consumers' advanced metering infrastructure program. Favorably, the company received approval for a pilot decoupling mechanism that goes into effect Dec. 1, 2009 and an uncollectible expense tracking mechanism that will allow rates to be adjusted to collect or refund 80% of the difference between the level of uncollectible expense included in rates and actual uncollectible expense. As part of the order, Consumers is also able to recover the majority of its pension expenses, which increased significantly over the past year as a result of weak financial asset returns. As such, Fitch expects greater cash flow stability in light of the still struggling Michigan economy.

At the same time, the order requires Consumers to reduce rates by $39.6 million, which is the difference between the $179 million in self-implemented rates from May 2009 and the final authorized base rate increase. The variance between self-implemented rates and the final rate order is attributed largely to a lower than requested ROE and lower tree trimming and forestry expenses. Amounts collected under self-implemented rates between May 2009 and November 2009 that exceed the final rate increase are now subject to refund. In addition, the MPSC authorized a distribution to customers of approximately $72 million in proceeds from the sale of the Palisades Nuclear Power Plant. Consumers' was also ordered to establish a trust fund in the amount of approximately $163 million to cover a pre-1983 liability to the U.S. Department of Energy for spent nuclear fuel disposal costs.

This concludes Consumers' 2008 electric rate case, which was filed in November 2008, when the company requested a $214 million increase, premised on an 11% ROE. In May 2009, Consumers self-implemented $179 million in new rates under the new Michigan 2008 Energy Legislation, which provides for a streamlined regulatory process to reduce regulatory lag.

Consumers benefits from solid credit protection measures, stable operating performance and a constructive legislative and regulatory environment in Michigan. Consumers' credit ratios are strong for the 'BBB+' category, with the ratio of EBITDA to interest at 5.1 times (x) and cash flow interest coverage at 5.0x for the 12 month period ended Sept. 30, 2009. Leverage was 3.4x for the same time period. Credit protection measures are forecasted to remain at or near current levels over the ratings horizon as a result of the recent base rate increase.

Favorably, Consumers is managing its 2009 and 2010 debt maturities through a series of planned re-financings.

Rating concerns facing Consumers relate to the struggling economy in Michigan, driven by the distress of the automotive sector. Michigan's unemployment rate was 15.3% as of September 2009. Nonetheless, management is forecasting a moderate turnaround in 2010 with flat electric sales growth (versus a 4.4% decline in 2009) as a result of the addition of new 'green' industrial and commercial facilities, a resumption in manufacturing capacity at General Motors (GM), and a broader market recovery within the state.

Consumers, a subsidiary of CMS Energy Corp, is a regulated electric and gas utility serving more than 3.5 million customer in Michigan's Lower Peninsula.

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Fitch RatingsKaren Anderson, 312-368-3165, ChicagoKarima
Omar, 212-908-0592, New YorkorMedia Relations:Cindy
Stoller, 212-908-0526, New YorkEmail: cindy.stoller@fitchratings.com : mailto:cindy.stoller@fitchratings.com