NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a rating of 'BBB' to DTE Energy Company's (DTE; IDR 'BBB') $300 million issuance of five-year senior unsecured notes due Dec. 1, 2019. The senior unsecured notes will rank pari passu with existing unsecured debt.
Proceeds from the issuance will be primarily used to repay short-term borrowings and the remainder for general corporate purposes. The Rating Outlook for DTE is Stable.
Fitch's rating of DTE Energy Co. (DTE) reflects the stable earnings and cash flows of its two regulated utility subsidiaries, 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 79% of consolidated EBITDAR for the latest 12 months (LTM) ending Sept. 30, 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;
--Growing Midstream Investments;
--Improving service area economy.
DTE's current ratings and Stable Outlook 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.
New GRC Filing Expected: DECo currently plans to file its next GRC in the 2014 fourth quarter and to self-implement rates during the third quarter of 2015. For the LTM period ending Sept. 30, 2014 DECo's return on equity (ROE) approximated 10.7%, near its authorized ROE of 10.5%.
New Gas Generation; Changing Capacity Mix: DTE plans to purchase the 732MW natural gas fired Renaissance Power Plant located in Carson City, MI from LS Power Group for $240 million to address capacity needs in their service territory. The purchase is consistent with DTE's strategy of replacing older inefficient coal fired generation with natural gas and renewable energy. The transaction is expected to be completed during the first quarter of 2015. Going forward, DTE expects natural gas fired generation to approximate up to 50% of total generating capacity by 2030, a material improvement from 10% in 2013.
Growth in Diversified Businesses: The growth in non-utility businesses will be driven by the Gas, Storage, and Pipeline (GSP) and Power and Industrial (P&I) business segments. Strong shipper demand has been driving growth opportunities for DTE's FERC regulated GSP segment in the Marcellus Shale and Utica Basins. The P&I segment is supported by long-term power purchase agreement contracts with limited commodity risk. DTE's GSP and P&I segment approximated 11% and 10% of net income for 2013, respectively and Fitch expects these business segments may contribute up to 15% each of consolidated net income by 2019.
Earnings Growth driven by Capital Investments: DTE plans to grow earnings by 5% to 6% per year driven by capital investments totaling $2.2 billion in 2014 and $2 billion in 2015 and 2016, levels 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 growing pipeline and gathering investments in the Marcellus and Utica Shale basins at DTE. A significant portion of capital spending will be on emissions compliance and renewable investments to meet renewable portfolio standards in the state.
Nexus Gas Pipeline moves forward: DTE's NEXUS Gas Transmission (NGT) pipeline project continues to move forward as agreements with several LDC's and key shippers have been executed. DTE and Spectra Energy Corp. are lead developers of NGT, a 250-mile pipeline that will move up to 1.5 billion cubic feet (bcf) of Appalachian shale gas to markets in Michigan, Ohio, Chicago and Ontario, Canada. DTE's expected investment is $700 million to $1 billion. DTE expects to complete a FERC prefilng in the fourth quarter and NGT has an in-service target date of late 2017.
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.
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 coverage ratio at 4.9x for the LTM period ending Sept. 30, 2014. DTE's debt-to-EBITDAR ratio was 3.9x. Fitch expects DTE to be moderately FCF negative in the intermediate term and expects the majority of capex to be funded by internal cash flows, with the remainder to be funded by a roughly 50% mix of debt and equity to maintain the present balanced capital structure. 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 $1.2 billion of total liquidity available under its respective credit agreements as of Sept. 30 2014, including $60 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, 2014, DTE was in compliance with a consolidated debt to capitalization ratio of 50.2% under its credit agreement.
Manageable Maturities: Debt maturities over the next five years are manageable and are as follows (excluding securitization maturities): none in 2014, $150 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 4.25x 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' (March 11, 2014);
--'Corporate Rating Methodology' (May 28, 2014);
--'Parent and Subsidiary Rating Linkage' (Aug. 5, 2013).
Applicable Criteria and Related Research:
Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage