NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a rating of 'A' to DTE Electric Company's (DECo) $700 million issuance of general and refunding mortgage bonds comprising $350 million 10-year, 2014 series D mortgage bonds due March 1, 2025 and $350 million 30-year, 2014 series E mortgage bonds due July 1, 2044. The mortgage bonds will rank pari passu with DECo's existing secured mortgage debt.
Proceeds from the issuance will be used to repay $460 million of DECO's existing secured debt including $200 million 5.4% first mortgage bonds (FMB) due Aug 1, 2014, $200 million of 4.8% FMBs due Feb 15, 2015, $60 million of 5.25% of tax-exempt revenue refunding bonds due Aug. 1, 2029, and the remainder for general corporate purposes. The Rating Outlook for DECo is Stable.
Stable Outlook: DECo's Outlook reflects Fitch's expectations of stable earnings and cash flows throughout the forecast period due to DECo's regulated utility operations and a constructive regulatory environment in Michigan.
KEY RATING DRIVERS
--Constructive regulatory environment;
--Large but manageable capex program including environmental upgrades at coal plants;
--Improving service area economy.
DECO's ratings also consider a sufficient liquidity position, manageable debt maturities, and the ability to manage and fund a rising capex budget. The improving economy in Michigan, albeit from a depressed base, should provide tailwinds to operating results, and the regulatory environment in Michigan remains constructive. Credit concerns include the future effects of more stringent environmental regulations on DECo's predominantly coal-fired power generation portfolio.
2014 General Rate Case (GRC) Filing Expected: Fitch expects DECo to file its next GRC in late 2014 or early 2015 and to self-implement rates after six months, subject to refund. The expiration of securitization charges and continued low commodity price environment provide DECo sufficient headroom to seek base rate increases without any pressure on retail rates.
Revenue Decoupling Mechanism (RDM) Eliminated: On April 1, 2014, the Michigan Public Service Commission (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 Capex Program: DECo capex is expected to be approximately $1.6 billion in 2014 and average $1.2 billion in 2015 and 2016, significantly higher than prior years. Fitch expects capex to be funded by internal cash flows and a balanced mix of debt and equity. A significant portion will target environmental compliance, including environmental upgrades at the Monroe (3,047MW) and Belle River (1,034MW; represents 81% of DECo's capacity) power plants and renewable investments to meet Michigan's renewable portfolio standard (RPS) requirements. Michigan currently has an RPS target of 10% of retail sales by 2015. New pollution control equipment is needed on DECo's coal-fired generation fleet to comply with the Mercury and Air Toxic Standards (MATS) rule by 2015 and state regional haze requirements using Best Available Retrofit Technology.
Fitch Forecasts Solid Ratios: For the LTM ending March 31, 2014, DECo's EBITDAR coverage improved to 6.5x as compared to 6.3x for 2012 and primarily reflects extreme cold winter weather in DECo's service territory and revenue decoupler amortization. Leverage, as measured by debt-to-EBITDA, was low at 2.8x for the same period. Going forward, Fitch expects EBITDA coverage ratios to remain above 5.0x and anticipates leverage to weaken to 3.3x by 2016 due to increased capital spending needs associated with emissions compliance and renewable generation investments. Fitch recognizes DECo's earned return on equity (ROE) for the LTM ending March 31, 2014 approximated 11%, slightly above its authorized ROE of 10.5%.
Sufficient Liquidity: DECo has approximately $334 million of total liquidity available under its respective credit agreement as of March 31 2014, including $34 million of cash and cash equivalents. DECo's $300 million unsecured revolving credit facility matures in April of 2018. The facility has a maximum debt-to-capitalization covenant of 65% and, as of March 31, 2014, DECo was in compliance with a consolidated debt-to-capitalization ratio of 50% under its credit agreement.
Manageable Maturities: Debt maturities over the next five years are manageable and are as follows (excluding securitization maturities): $304 million in 2014, $210 million in 2015, $151 million in 2016, no maturities in 2017, and $300 million in 2018. Maturing debt will be funded through a combination of internal cash flows and external debt refinancings.
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 or sustained debt/EBITDA metrics above 3.6x could cause negative rating actions.
Future environmental rules that impact the operation of DTE's large coal fired generation fleet could also pressure the rating.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating U.S. Utilities, Power and Gas Companies, March 7, 2014;
--'Corporate Rating Methodology', May 28, 2014;
--'Parent and Subsidiary Rating Linkage', Aug. 5, 2013.
Applicable Criteria and Related Research:
Parent and Subsidiary Rating Linkage
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)