NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a rating of 'BBB-' to DTE Energy Company's (DTE; Issuer Default Rating: 'BBB+') $280 million issuance of junior subordinated debentures, 2016 series F, due Dec. 15, 2076. The junior subordinated debentures rank junior to other unsecured debt of DTE. Proceeds from the issuance will be used to redeem a like amount of higher couponed junior subordinated debentures due 2061. The Rating Outlook is Negative.
In Fitch's analysis, this instrument qualifies for 50% equity treatment due to the coupon deferral option, as specified in the criteria report titled 'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis' dated Feb. 29, 2016.
KEY RATING DRIVERS
DTE Acquires Midstream Assets: DTE recently acquired midstream pipeline and gathering assets in the Marcellus/Utica basin for $1.3 billion comprised of the Appalachian Gathering System (AGS) and a 55% ownership interest in the Stonewall Gas Gathering System (SGG).
Leverage Pressures Credit Metrics: Fitch estimates consolidated pro forma FFO leverage at DTE will weaken to approximately 5x in 2017 from under 4x in 2015 as a result of the recent midstream pipeline and gathering asset acquisition before improving to 4.6x in 2018 and 4.3x in 2019. Deleveraging is expected to be a function of EBITDA growth associated with the acquisition and commercial operation of the Nexus pipeline in late 2017 as well as conversion of $675 million of equity units in 2019. Fitch projects DTE's FFO fixed coverage will approximate 5x or better through 2019.
New GRC Filings at Utilities: Fitch has assumed a reasonable outcome in DTE Electric Co.'s (DECo; 'A-'/Negative) and DTE Gas Co.'s (DTE Gas; 'BBB+'/Stable) pending general rate cases (GRC) and has modeled an earned 10% return on equity (ROE) for DECo and DTE Gas. Fitch expects the regulatory environment in Michigan to remain credit supportive.
DECo filed its 2016 GRC with the Michigan Public Service Commission (MPSC) in February 2016. DECo supports a $344 million rate increase based on a 10.5% ROE and a 50% equity ratio. DECO self-implemented a $245 million base rate increase in July for new rates effective Aug. 1, 2016, subject to refund, and a final decision by the MPSC is expected in January 2017. The filing also includes a provisional revenue decoupling mechanism that, if approved, would be a credit positive.
DTE Gas filed its 2015 GRC with the MPSC in December 2015 and is requesting a rate increase of $183 million based on an ROE of 10.75% and a 52% equity ratio. DTE Gas self-implemented a $103 million base rate increase in October for new rates effective Nov. 1, 2016, subject to refund, and a final decision by the MPSC is expected in December 2016.
New Energy Legislation: In a long awaited decision, Michigan's Clean Energy Plan recently cleared Michigan's Senate and Fitch expects that new energy legislation could be finalized by the end of the year, pending approval by Michigan's House of Representatives and Governor Rick Snyder. The Senate introduced the Michigan Clean Energy Plan in July 2015, composed of two bills, Senate Bill (SB) 437 and SB 438. The bills were recently amended to increase Michigan's renewable portfolio standard to 15% by 2021 from 10% currently, which helped to garner bipartisan support. The legislation also sets a 35% clean energy goal by 2025 through a combination of renewable resources and energy efficiency investments.
The legislation, as currently proposed, is not expected by Fitch to have a material impact on DTE's ratings; however, it would authorize revenue decoupling for gas and electric utilities, which would be a significant credit positive for DECo if adopted. Key features include maintaining the current retail open-access cap at 10%, incorporating a one-time election for customers that choose an alternative provider and minimum capacity requirements for load-serving entities. The new energy legislation would also overhaul the current integrated resource planning rules, eliminating self- implementation of rates and introducing a 10-month limit on GRC proceedings.
The NEXUS Gas pipeline project is moving forward pending receipt of its final Environmental Impact Statement on Nov. 30 and Fitch expects the FERC to issue a final decision for approval in the first quarter of 2017 (1Q17). DTE and Spectra Energy Corp. are joint developers of the 250-mile 1.5 Bcf Nexus gas pipeline and DTE's expected investment is $1 billion which will be funded at the parent and potentially funded after in service with project debt. Assuming FERC approval and permitting, Fitch expects DTE to begin construction in February 2017 and commercial operation in 4Q17. The project is currently 70% contracted and supported by take-or-pay contracts with shippers with an average term of 15 years. Additionally, DTE's AGS and SGG investments are 80% contracted with an average tenor of 10 years.
Large Capex Program: DTE plans to spend $10.8 billion on capital investments over 2016-2019, including its $1 billion investment in the NEXUS pipeline, levels approximately 54% higher than the preceding four-year period. Capital spending will be primarily focused on the regulated utilities (approximating 75% of total) and includes meaningful investment in the Gas Storage and Pipeline and Power & Industrial business segments. Because of the large capex program at the regulated utilities, both will need equity support from the parent through 2019 to help maintain balanced capital structures. Growing natural gas pipeline and utility investments will render DTE FCF-negative in the intermediate term and Fitch expects DTE to fund the deficit primarily with debt.
Fitch's key assumptions within the rating case for DTE include:
--Constructive regulatory environment in Michigan;
--Nexus pipeline enters service in late 2017;
--Large capex program totalling $10.8 billion through 2016-2019;
--Long-term debt maturities including $165 million in 2016, no maturities in 2017, $410 million in 2018, and $427 million in 2019.
Future developments that either individually or combined could lead to positive rating actions include:
--Due to the recent midstream acquisition and Negative Outlook no positive rating actions are expected at this time. However, unexpected constructive developments resulting in FFO adjusted leverage of 4x or better could lead to future rating upgrades.
Future developments that either individually or combined could lead to negative rating actions include:
--Material delays associated with permitting and constructing the NEXUS pipeline and absent any improvement in FFO leverage below 4.5x through the forecast period could lead to negative rating actions.
DTE's liquidity position is sufficient with approximately $1.6 billion of total liquidity available under its respective credit agreements as of Sept. 30, 2016, including $66 million of unrestricted cash and cash equivalents. DTE's consolidated five-year unsecured revolving credit facilities mature in April 2021 and are composed of $1.2 billion at DTE, $400 million at DECo, and $300 million at DTE Gas. The facilities have a maximum debt-to-capitalization covenant of 65% and DTE was in compliance with consolidated debt-to-capitalization of 50% under its credit agreement as of Sept. 30, 2016. Debt maturities over the next five years are manageable and are as follows: no maturities remaining in 2016, no maturities in 2017, $410 million in 2018, $427 million in 2019, and $650 million in 2020.
Disclosure: There were no financial statement adjustments made that were material to the rating rationale outlined above.
Date of Relevant Rating Committee: Sept. 27, 2016.
Additional information is available on www.fitchratings.com
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
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