Fitch Affirms DTE Energy, DTE Electric Co. and DTE Gas Co.'s Ratings; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the existing ratings of DTE Energy Co. (DTE) and its regulated utility subsidiaries, DTE Electric Co. (DECo) and DTE Gas Co. (DTEGas), as follows:

DTE

--Long-term Issuer Default Rating (IDR) at 'BBB';

--Senior unsecured notes at 'BBB';

--Junior subordinated notes at 'BB+';

--Short-term IDR at 'F2';

--Commercial paper at 'F2'.

DTE Gas Co.

--Long-term IDR at 'BBB+';

--Senior secured at 'A';

--Short-term IDR at 'F2';

--Commercial paper at 'F2'.

DECO

--Long-term IDR at 'BBB+';

--Senior secured at 'A' ';

--Secured pollution control revenue bonds at 'A' ';

--Short-term IDR at 'F2';

--Commercial paper at 'F2'.

The Rating Outlooks for all entities is Stable, which reflects the stable earnings and cash flows generated by DECo and DTEGas. DECo is the primary driver of consolidated cash flows and comprised approximately 80% of consolidated EBITDA for DTE for the last 12 months (LTM) ending Sept. 30, 2013. More than $7 billion of consolidated long-term debt is affected by today's rating action. DTE's 'F2' short-term rating is largely driven by the stability in cash flows from its higher rated utility subsidiaries.

KEY RATING DRIVERS

--Constructive regulatory environment;

--Over 90% of consolidated earnings derived from regulated activities;

--Large but manageable capex program including environmental upgrades at coal plants;

--Attractive midstream investment opportunities;

--Sufficient liquidity; and

--Improving service area economy.

DTE's current ratings reflect the low risk of its utility businesses and a constructive state regulatory environment in Michigan. The company also benefits from a sufficient liquidity position, manageable debt maturities, and an improving economy in Michigan, albeit from a depressed base. 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 $1.8 billion), 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. The ratings also consider the solid operating performance of the company's regulated and non-regulated operations, and the expectation that the company will continue to effectively manage the risks associated with its modestly growing non-regulated businesses. The municipal bankruptcy in Detroit is not expected to impact DTE directly, nor further impair the service area economy.

Constructive Regulatory Environment: Since 2008, the regulatory environment in Michigan has been supportive of utility investment and has led to stable earnings and cash flows at DECo and DTEGas. The regulatory framework allows for full pass-through of fuel and purchased power costs, reasonable return on equity (ROE), and a timely resolution of rate proceedings. In addition, DECo and DTEGas have the ability to file rate cases with self-implementation if ROE dips below the authorized level (currently at 10.5%). Furthermore, a revenue decoupling mechanism at DTEGas helps to reduce exposure to regulatory lag.

Fitch expects DECo to file its 2013 General Rate Case (GRC) with the Michigan Public Service Commission (MPSC) by the end of this year and to self-implement new rates in early 2015, subject to refund. The expiration of securitization charges and continued low commodity environment provides DECo sufficient headroom to seek base rate increases without any pressure on the retail rates. For DTEGas, the MPSC approved a five-year annual infrastructure recovery tracking mechanism (IRM) as part of its 2012 GRC settlement. The IRM allows DTEGas to recover $77 million of annual infrastructure investments associated with meter move-out, main renewal, and pipeline integrity programs through 2017. Fitch believes that the IRM will help reduce future regulatory lag, lead to timely rate base and earnings growth, and obviates the need for new rate filings through 2016.

Growth in Other Businesses: The growth in non-utility businesses will be driven by growth in the Power and Industrial (P&I) business segment and the Gas, Storage, and Pipeline (GSP) segments. The P&I segment is supported by long-term PPA contracts with limited commodity risk. Fitch notes that the P&I segment remains a small part of consolidated operations and for the LTM period ending Sept. 30, 2013 comprised less that 10% of consolidated net income. Fitch expects this business segment to contribute up to 15% of consolidated net income by 2016.

Strong shipper demand has been driving growth opportunities for DTE's regulated GSP segment in the Marcellus Shale and Utica Basin. DTE's Bluestone lateral and gathering System, a natural gas pipeline that connects the Millennium and Tennessee Pipelines to gas from the Marcellus Shale basin, serving Southwestern Energy's natural gas production, is currently undergoing lateral expansions. For the LTM period ending Sept. 30, 2013, DTE's GSP segment approximated 10% of net income.

Large Capital Expenditure Program: DTE plans to spend $2.2 billion on capex this year and approximately $2 billion each year in 2015 and 2016, a level that is significantly higher than prior years. Capital spending will be primarily focused at the regulated utilities and includes environmental and renewable generation investments at DECo; distribution system enhancements, and storage and transportation projects at DTEGas; and pipeline and gathering development in the Marcellus Shale basin at DTE. A significant portion of capital spending will be on emissions compliance and renewable investments to meet renewable portfolio standards in the state. Fitch expects DTE to fund the majority of forecasted capex internally and the balance with external financing.

Solid Credit Metrics: DTE's current credit metrics are consistent with Fitch's 'BBB' IDR guidelines for utility parent companies (UPCs). Fitch calculates DTE's EBITDA and funds from operations (FFO) coverage ratios at 4.9x and 5.3x, respectively, for the LTM period ending Sept. 30, 2013. DTE's debt-to-EBITDA ratio was slightly high at 3.7x. Fitch expects credit metrics for consolidated operations to weaken through 2016 due to large capex programs at the utilities, moderate regulatory lag, and conservative assumptions regarding anticipated rate increases. Fitch anticipates debt to EBITDA to approach 4.0x in 2016.

DECo: For the LTM period ending Sept. 30, 2013, DECo's EBITDA coverage trended flat at 6.9x as compared to 2012. Leverage, as measured by debt-to-EBITDA, was 3.1x 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 2016 due to increased capital spending needs associated with emissions compliance and renewable generation investments. Fitch notes that DECo's earned ROE for the LTM ending Sept. 30, 2013 approximated 10.3%, close to its authorized ROE of 10.5%.

DTEGas: For the LTM period ending Sept. 30, 2013, DTEGas' EBITDA coverage ratio increased to 6.2x as compared to 5.4x for 2012 and primarily reflects new rates effective Jan. 1, 2013. Leverage, as measured by debt-to-EBITDA, was 2.9x 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 2016.

Sufficient Liquidity: DTE had approximately $1.5 billion of total liquidity available under its respective credit agreements as of Sept. 30, 2013, including $71 million of cash and cash equivalents. DTE's consolidated $1.8 billion five-year unsecured revolving credit facilities mature in 2018 and are comprised of $1.2 billion at DTE, $300 million at DECo, and $300 million at DTEGas. The facilities have a maximum debt-to-capitalization covenant of 65% and, as of Sept. 30, 2013, DTE was in compliance with a consolidated debt to capitalization ratio of 47.8% under its credit agreement.

Manageable Maturities: Debt maturities over the next five years are manageable and are as follows (excluding securitization maturities): $684 million in 2014, $350 million in 2015, $451 million in 2016, no maturities in 2017 and $400 million in 2018. Fitch expects maturing debt to be funded through a combination of internal cashflows and external debt refinancings.

RATING SENSITIVITIES

Positive Rating Action: No positive rating actions are expected at this time.

Negative Rating Action: An unexpected change in the regulatory environment that limits the utility's ability to recover cost of capital investments in a timely manner and sustained FFO/debt metrics below 20% at the regulated utilities could cause negative rating actions. Fitch expects consolidated credit metrics to be pressured through 2016 as a result of high capex at the utilities. Persistently weak consolidated leverage metrics beyond Fitch's current forecast period could lead to negative rating action for DTE.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology', Aug. 5, 2013;

--'Recovery Ratings and Notching Criteria for Utilities', Nov. 19, 2013;

--'Parent and Subsidiary Rating Linkage', Aug. 5, 2013.

Applicable Criteria and Related Research:

Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Recovery Ratings and Notching Criteria for Utilities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=722085

Parent and Subsidiary Rating Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685552

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=816974

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Daniel Neama, +1-212-908-0561
Associate Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Shalini Mahajan, CFA, +1-212-908-0351
Senior Director
or
Committee Chairperson
Glen Grabelsky, +1-212-908-0577
Managing Director
or
Media Relations
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com

Contacts

Fitch Ratings, Inc.
Primary Analyst
Daniel Neama, +1-212-908-0561
Associate Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Shalini Mahajan, CFA, +1-212-908-0351
Senior Director
or
Committee Chairperson
Glen Grabelsky, +1-212-908-0577
Managing Director
or
Media Relations
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com