TEXT-Fitch raises DTE Gas to 'BBB+', affirms DTE Energy, DTE Electric
Jan 25 - Fitch Ratings has upgraded the Issuer Default Ratings (IDRs) of DTE Gas Co. (DTEGas) one notch to 'BBB+' and revised the Rating Outlook to Stable from Positive. Additionally, Fitch affirmed the existing ratings of DTE Electric Co. (DECo) and the parent, DTE Energy Co. (DTE) as follows: DTE Gas Co. --Long-term IDR upgraded to 'BBB+' from 'BBB'; --Senior secured to upgraded 'A' from 'A-'; --Short-term IDR affirmed at 'F2'; --Commercial paper affirmed at 'F2'. DECO --Long-term Issuer Default Rating (IDR) affirmed at 'BBB+'; --Senior secured affirmed at 'A' '; --Secured pollution control revenue bonds affirmed at 'A' '; --Preferred stock affirmed at 'BBB-'; --Short-term IDR affirmed at 'F2'; --Commercial paper affirmed at 'F2' DTE --Long-term IDR affirmed at 'BBB'; --Senior unsecured notes affirmed at 'BBB'; --Junior subordinated notes affirmed at 'BB+'; --Short-term IDR affirmed at 'F2'; --Commercial paper affirmed at 'F2'. The Rating Outlooks for all entities is Stable. More than $7 billion of consolidated long-term debt is affected by today's rating action. DTE's 'F2' short term rating is largely derived from the cash flows from its higher rated utility subsidiaries. The upgrade of DTEGas' IDR reflects the expectation for modestly improved and sustained earnings and cash flows in 2013 following the partial settlement of its 2012 General Rate Case (GRC), an overall constructive regulatory environment, good liquidity, manageable maturities, and credit metrics commensurate with the rating category. DTE's current ratings reflect the low risk of its utility businesses, a constructive state regulatory environment in Michigan, and the strong operating profile of its generating assets. The company also benefits from a sufficient liquidity position, manageable debt maturities, the ability to fund and manage a rising capital expenditure budget, and an improving economy in Michigan. Credit concerns considered in the rating include a still weak service-area economy with above-average unemployment in the Detroit area, high level of parent-only debt (approximately $1.5 billion), customer attrition and conservation at DTEGas, and the future effects of more stringent environmental regulations on DECo's predominantly coal-fired power generation portfolio. The ability to recover capital and operating costs in the future is also a concern if the developing turnaround in the Michigan economy does not continue. Sensitivity / Rating Drivers: --Constructive regulatory environment; --Over 90% of consolidated earnings are derived from regulated activities; --Large but manageable capex program; --Strong liquidity; --Improving service area economy. DTEGas 2012 GRC; Partial Settlement: On Dec. 20 2012, DTEGas entered into a partial settlement agreement with the Michigan Public Service Commission (MPSC) which provides for a rate increase of $20 million based on a 10.5% ROE for rates effective Jan. 1, 2013 and reflects approximately 35% of the requested amount. Notably, DTEGas is requesting a five-year annual infrastructure recovery tracking mechanism (IRM) to recover costs associated with DTEGas's meter moveout, main renewal, and pipeline integrity programs. Fitch expects a final decision by the MPSC regarding the IRM by April. Adoption of the IRM will help reduce future regulatory lag and should lead to timely rate base and earnings growth. Final MPSC Order: In October of 2011, the MPSC authorized a $188 million permanent rate increase for DECo predicated upon a 10.5% ROE for rates effective Oct. 29, 2011. The final order is consistent with Fitch's expectations and indicative of continued regulatory support and represents approximately 53% of the $357 million permanent electric revenue requirement deficiency supported by DECo. DECo RDM Eliminated: In September of 2011, the MPSC approved a request by DECo to defer a $127 million gain from the elimination of its revenue decoupling mechanism (RDM) as stipulated by the Michigan Court of Appeals on April 10, 2011 and to amortize the gain to income in 2014, helping to offset the need for new base rates until 2015. Large Capital Expenditure Program: Capital expenditures are forecast to average approximately $2 billion per year through 2015, a level that is significantly higher than prior years. Fitch expects capital expenditures to be funded by internal cash flows and a balanced 50% mix of debt and equity to maintain the present capital structures of DTE, DECo, and DTEGas. Major projects include renewable and environmental investments at DECo; distribution system enhancements, and storage and transportation projects at DTEGas; and pipeline and gathering development in the Marcellus Shale basin. A significant portion of capital spending will be on environmental compliance and renewable investments to meet renewable portfolio standards in the state. Fitch Forecasts Solid Ratios: DTE's credit metrics are consistent with Fitch's 'BBB' IDR guidelines for utility parent companies. Fitch calculates DTE's EBITDA and FFO coverage ratios at 4.9x and 5.5x, respectively, for the LTM ending Sept. 30, 2012. DTE's debt-to-EBITDA ratio was 3.4x. Going forward, Fitch expects credit metrics for consolidated operations to remain near current levels but anticipates leverage as measured by debt-to-EBITDA to increase to 3.8x by 2015 due to increased capital spending needs at the regulated utilities. DECo: For the LTM period ending Sept. 30, 2012, DECo's EBITDA coverage increased to 7.0x as compared to 6.6x for 2011, primarily due to new rates as per the settled 2010 GRC. Leverage, as measured by debt-to-EBITDA, was 2.8x for the same period. Going forward, Fitch expects EBITDA coverage ratios to remain above 5.0x and anticipates leverage, as measured by debt-to-EBITDA, to weaken to 3.3x by 2015 due to increased capital spending needs associated with emissions compliance and renewable investments. DTEGas: For the LTM period ending Sept. 30, 2012 DTEGas' EBITDA coverage ratio trended flat at 4.9x as compared to 2011. Leverage, as measured by debt-to-EBITDA, was 3.6x for the same period. Going forward, Fitch expect EBITDA coverage measures to remain above 5.0x and anticipates leverage, as measured by debt-to-EBITDA, to remain under 4.0x, through 2015. Strong Liquidity: DTE currently has approximately $1.7 billion of total liquidity available under its respective credit agreements, including $59 million of cash and cash equivalents. DTE's consolidated $1.8 billion five-year unsecured revolving credit facilities mature in 2016 and are comprised of $1.1 billion at DTE, $300 million at DECo, and $400 million at DTEGas. The facilities have a maximum debt-to-capitalization covenant of 65% and, as of Sept. 30, 2012 DTE was in compliance with all financial covenants under its credit agreement. Manageable Maturities: Debt maturities over the next five years are manageable and are as follows (excluding securitization maturities): $623 million in 2013, $684 million in 2014, $350 million in 2015, $450 million in 2016 and no maturities in 2017. Maturing debt will be funded through a combination of internal cashflows and external debt refinancings. Expected Bonus Depreciation for 2012: DTE Energy expects to generate approximately $50 million to $100 million of cash in 2012 from bonus depreciation deductions at DECo. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 provided for a special allowance for bonus depreciation in 2011 and 2012. As part of the budget compromise, bonus depreciation rules allow a tax deduction of 50% in 2013, the same as 2012. DTE Plans for Up to $900 million of New Equity (2013 to 2015): DTE plans to issue up to $300 million of equity per year during the 2013 to 2015 timeframe through their DRIP and employee pension programs. The maximum amounts of equity that can be raised annually through the DRIP and employee pension programs is roughly $100 million and $200 million, respectively. The majority of planned equity issuances are used to fund DTE's pension plan. What Could Cause a Rating Upgrade: No rating upgrades are expected at this time. What Could Cause a Rating Downgrade: --An unexpected change in the regulatory environment that limits the utility's ability to recover cost of capital investments in a timely manner. --Sustained FFO/Debt metrics below 20% at the regulated utilities could cause negative rating actions. Additional information is available on 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: --'U.S. Utilities: Insatiable Thirst for Financing' (Sept. 25, 2012) --'Corporate Rating Methodology' (Aug. 8, 2012); --'Rating North American Utilities, Power, Gas and Water Companies' (May 3, 2012); --'Short-Term Ratings Criteria for Non-Financial Corporates' (Aug. 9, 2012). Applicable Criteria and Related Research: Short-Term Ratings Criteria for Non-Financial Corporates Rating North American Utilities, Power, Gas, and Water Companies Corporate Rating Methodology
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