NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a rating of 'BBB' to DTE Energy Company's (DTE; IDR 'BBB') $350 million issuance of 3.5% 10-year senior unsecured notes, 2014 series C, due June 1, 2024. The senior unsecured notes will rank pari passu with existing unsecured debt.
Proceeds from the issuance will be primarily used to repay $300 million of DTE's 7.625% senior notes maturing on May 15, 2014 and the remainder for general corporate purposes. The Rating Outlook for DTE is Stable.
The Stable Outlook reflects the stable earnings and cash flows of DTE's two regulated utility companies, DTE Electric Co. (DECo; IDR 'BBB+', Outlook Stable) and DTE Gas Co. (DTEGas; IDR 'BBB+', Outlook Stable). DECo is the primary driver of consolidated cash flows and approximated 77% of consolidated EBITDAR for the latest 12 months (LTM) ending March 31, 2014.
KEY RATING DRIVERS
--Constructive regulatory environment;
--Over 90% of consolidated earnings are derived from regulated activities;
--Large but manageable capex program including environmental upgrades at coal plants;
--Improving service area economy.
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, 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.
Constructive Regulatory Environment: In DECo's last settled rate case, the Michigan Public Service Commission (MPSC) authorized a $188 million permanent rate increase predicated upon a 10.5% return on equity (ROE) for rates effective Oct. 29, 2011. The outcome is indicative of continued regulatory support and represented approximately 53% of the $357 million permanent electric revenue requirement requested by DECo. DECo currently plans to file its next GRC in late 2014 or early 2015 and to self-implement rates after 6 months.
Revenue Decoupling Mechanism (RDM) Eliminated: On April 1, 2014, the MPSC approved DECo's application to suspend the remaining amortization to income of its $127 million gain from the elimination of its RDM as of June 30, 2014 and to complete the remainder of the amortization over the six month period from January to June of 2015. In the event base rates are increased prior to July 1, 2015, DECo will cease amortization of the gain and refund to customers the unamortized balance. Originally, in September 2012, the MPSC approved DECo's request to defer and amortize the gain to income in 2014 at a rate of approximately $10.6 million per month.
Large Capital Expenditure Program: DTE plans to spend $2.3 billion on capex in 2014 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 Forecasts Solid Ratios: DTE's credit metrics are commensurate with Fitch's 'BBB' IDR guidelines for utility parent companies (UPCs). Fitch calculates DTE's EBITDAR and funds from operations (FFO) fixed charge coverage ratios at 4.9x and 5.2x, respectively, for the LTM period ending March 31, 2014. DTE's debt-to-EBITDAR ratio was 3.5x. Fitch expects credit metrics for consolidated operations to remain near current levels, but anticipates leverage as measured by Debt to EBITDAR to remain below 4.0x through 2016 despite increased capital spending needs at the regulated utilities.
Sufficient Liquidity: DTE has approximately $1.6 billion of total liquidity available under its respective credit agreements as of March 31 2014, including $98 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 March 31, 2014, DTE was in compliance with a consolidated debt to capitalization ratio of 48.6% under its credit agreement.
Manageable Maturities: Debt maturities over the next five years are manageable and are as follows (excluding securitization maturities): $260 million in 2014, $350 million in 2015, $451 million in 2016, no maturities in 2017, and $400 million in 2018. Maturing debt will be funded through a combination of internal cashflows and external debt refinancings.
Positive Rating Action: No positive rating actions are expected at this time.
Negative Rating Action: Sustained debt-to-EBITDAR metrics above 4.0x 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:
--'Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)', March 11, 2014;
--'Recovery Ratings and Notching Criteria for Utilities', Nov. 19, 2013;
--'Corporate Rating Methodology', Aug. 5, 2013.
Applicable Criteria and Related Research:
Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)
Recovery Ratings and Notching Criteria for Utilities
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage