NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A' rating to DTE Electric Co.'s (DECo: Issuer Default Rating 'BBB+') issuance of $375 million of 4% general and refunding mortgage bonds due April 1, 2043. The mortgage bonds are senior secured debt obligations of DECo and rank pari passu with other senior secured debt. Proceeds from the issuance will be used to redeem $51 million of 5.3% tax exempt revenue bonds, to reduce short-term borrowings and for general corporate purposes. The Rating Outlook for DECo is Stable.
The Stable Outlook reflects the stable earnings and cash flows of DECo's regulated utility operations, 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, 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.
Key Rating Drivers:
--Constructive regulatory environment;
--Large but manageable capex program including environmental upgrades at coal plants;
--Sufficient liquidity;
--Improving service area economy.
Final MPSC Order: In October of 2011, the Michigan Public Service Commission (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: DECo plans to spend $1.6 billion in 2013, and capital expenditures are forecast to average approximately $1.4 billion per annum 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 balanced capital structure. A significant portion of capital spending will be on environmental compliance, including scrubbers at the Monroe Power Plant (2,893 MW) and renewable investments to meet RPS in the state.
Solid Operating Performance: For 2012, DECo's EBITDA coverage increased to 6.9x as compared to 6.6x for 2011, primarily due to new rates as per the settled 2010 general rate case (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.
Sufficient Liquidity: DECo has approximately $200 million of total liquidity available under its $300 million unsecured revolving credit facility, including $30 million of cash and cash equivalents as of Dec. 31, 2012. The credit facility matures in October of 2016 and has a maximum debt-to-capitalization covenant of 65%. DECo was in compliance with all financial covenants under its credit agreement and had a debt-to-capitalization ratio of 52% as of Dec. 31, 2012.
Manageable Maturities: In the intermediate term, DECo's long-term debt maturities are sizable, with $1.4 billion scheduled to mature through 2016 as follows (including securitization maturities): $440 million in 2013, $500 million in 2014, $315 million in 2015, $151 million in 2016 and no maturities in 2017. Fitch expects maturing debt will be funded through a combination of internal cashflows and external debt refinancings.
Rating Sensitivities
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% 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
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685553
Rating North American Utilities, Power, Gas, and Water Companies
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=625129
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460
U.S. Utilities: Insatiable Thirst for Financing
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=687470
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