NEW YORK– Fitch Ratings has assigned a rating of ‘BB+’ to DTE Energy Company’s (DTE, IDR ‘BBB’ by Fitch) $200 million issuance of 5.25% Junior Subordinated debentures, 2012 series C, due Dec. 1, 2062.
The Junior Subordinated debentures rank junior to other unsecured debt of DTE. Proceeds from the issuance will be used for general corporate purposes, including the purchase of a portfolio of on-site energy projects.
In Fitch’s calculations, 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 Dec. 15, 2011. The Rating Outlook for DTE is Stable.
The Stable Outlook reflects the stable earnings and cash flows of DTE’s two regulated utility companies, Detroit Edison Co. (DECo, IDR ‘BBB+’; Outlook Stable) and Michigan Consolidated Gas Co. (MichCon, IDR ‘BBB’; Positive Outlook). DECo is the primary driver of consolidated cash flows and approximated 76% of consolidated EBITDA for the LTM ending June 30, 2012.
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, the ability to fund and manage a rising capital expenditure budget and an improving economy in Michigan. 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 $1.6 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.
Final MPSC Order: In October of last year, the MPSC authorized a $188 million permanent rate increase for DECo predicated upon a 10.5% ROE effective Oct. 29, 2011. The final order is consistent with Fitch’s expectations and indicative of continued regulatory support. The rate increase approved by the commission represents approximately 53% of the $357 million permanent electric revenue requirement deficiency supported by DECo.
RDM Eliminated: On Sept. 25 the MPSC approved a request by DECo to defer a $127 million gain from the elimination of its revenue decoupling mechanism (RDM) as stipulated by the Michigan Court of Appeals on April 10, and to amortize the gain to income in 2014, offsetting the need for new base rates until 2015.
MichCon files 2012 GRC: On April 20, 2012 MichCon filed its 2012 GRC with the MPSC and requested a rate increase of $77 million predicated on an 11% ROE. Notably, MichCon is requesting a five-year annual infrastructure tracking mechanism to recover costs associated with MichCon’s meter move out, main renewal, and pipeline integrity programs. MichCon plans to self-implement new rates on or after Nov. 1, 2012, and Fitch expects a decision by April 2013.
Large Capital Expenditure Program: Capital expenditures are forecast to average approximately $1.9 billion per year through 2014, a level that is significantly higher than prior years. Fitch expects capital expenditures to be funded by internal cash flows and a balanced 50% mix of debt and equity to maintain the present capital structures of DTE, DECo, and MichCon. Major projects include renewable and environmental investments at DECo; distribution system enhancements, and storage and transportation projects at MichCon; and pipeline and gathering development in the Marcellus Shale basin. A significant portion of capital spending will be on environmental compliance and renewable investments to meet renewable portfolio standards in the state.
Manageable Maturities: Debt maturities over the next five years are manageable and are as follows (excluding securitization maturities): $65 million in 2012, $634 million in 2013, $695 million in 2014 and $371 million in 2015. Maturing debt will be funded through a combination of internal cashflows and external debt refinancings.
Fitch Forecasts Solid Ratios: DTE’s credit metrics are consistent with Fitch’s ‘BBB’ IDR guidelines for utility parent companies. Fitch calculates DTE’s EBITDA and FFO coverage ratios at 4.6 times (x) and 5.0x, respectively, for the latest 12 months (LTM) ending June 30, 2012. DTE’s debt to EBITDA ratio was 3.7x. Going forward, Fitch expects coverage metrics for consolidated operations to approximate 5x through 2013, and anticipates leverage, as measured by debt to EBITDA, to remain under 4x during that same time period.
Expected Bonus Depreciation for 2012: DTE Energy expects to generate approximately $150 million of cash in 2012 from bonus depreciation deductions at DTE. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 provided for a special allowance for bonus depreciation in 2011 and 2012. Bonus depreciation rules allow a tax deduction of 50% this year, as opposed to 100% last year.
What Could Trigger a Ratings Upgrade?
–No positive rating actions are expected at this time.
What Could Trigger a Rating Downgrade?
–An unexpected increase in leverage to fund the large capital expenditure program;
–Inadequate or untimely return on capital investments.