Fitch Ratings said Jan. 23 that it has affirmed the long-term Issuer Default Rating (IDR) of DTE Energy (NYSE: DTE) at ‘BBB’, and those of its regulated subsidiaries, DTE Electric (DECo) and DTE Gas, at ‘BBB+’.
The Rating Outlook for all entities is Stable. More than $8bn of consolidated long-term debt is affected by this rating action. DTE’s ‘F2’ short-term rating is largely derived from the stable cash flows from its higher rated utility subsidiaries. The Stable Outlook reflects the predictable earnings and cash flows of DTE’s two regulated utility companies.
DTE’s current ratings reflect the low risk of its regulated operations, a large capex program focused on growing utility and pipeline investments, a constructive regulatory environment, and an improving economy, Fitch said. Current ratings assume a reasonable outcome in DECo’s pending general rate case (GRC) and a timely return on invested capital. Credit concerns include a high level of parent-only debt (approximately $1.8 billion), moderate regulatory lag, and the future effects of more stringent environmental regulations on DECo’s predominantly coal-fired power portfolio.
Fitch noted about various developments for DTE Energy and its subsidiaries:
- “In December 2014, DECo filed its 2015 GRC with the Michigan Public Service Commission (MPSC) requesting a $370 million rate increase predicated on a 10.75% ROE and a 50% equity layer. The filing is based on a forward-looking test year and the rate increase primarily reflects $2.8 billion in new net plant additions. The new plant additions include the planned purchase of the 732 MW natural gas-fired Renaissance Power Plant from LS Power Group for $240 million as well as the planned purchase of a 300 MW Michigan-based simple-cycle natural gas-fired power plant. DECo plans to self-implement rates on or after July, 1, 2015, subject to refund, and a decision by the MPSC is expected by December.”
- “Recently, talks about customer choice have centered on eliminating retail open access and moving Michigan’s electricity market to full regulation after a previous bill introduced in the U.S. House to raise the customer choice cap beyond 10% did not get any traction. If retail open access was eliminated it could result in customers coming back to DECo amid tightening capacity markets in MISO, necessitating the need for new generation investments such as the planned purchase of the 732 MW gas fired Renaissance Power Plant. Fitch views the elimination of customer choice as positive for DECo.”
- “In December 2014, Michigan Governor Rick Snyder broadly outlined the state’s future energy policy goals by 2025 and indicated he would like to have new energy legislation in place this year when current Renewable Portfolio Standards and Energy Efficiency targets end. The governor emphasized the increased use of cleaner natural gas and wind resources while reducing the state’s reliance on less efficient coal generation and indicated he would seek to increase RPS and EE targets through 2025. DTE recovers its renewable investments under an annual renewable surcharge subject to MPSC approval. DTE expects natural gas-fired generation along with renewables to approximate up to 50% of total generating capacity by 2030, a material improvement from 10% in 2013 and in line with the governor’s energy policy goals. Fitch views DTE’s investments in renewable energy as favorable and, via the renewable energy surcharge, provides earnings growth in between GRC proceedings.”
- “Fitch views the regulatory environment in Michigan as constructive. The current regulatory framework allows for full pass-through of fuel and purchased power costs, reasonable ROE, forward-looking test years and a timely resolution of rate proceedings. In addition, DECo and DTE Gas have the ability to file rate cases with self-implementation if the ROE dips below the authorized level (currently at 10.5%). Furthermore, a revenue-decoupling mechanism and IRM at DTE Gas helps to reduce exposure to regulatory lag.”
- “DTE plans to spend $1.2 billion through 2017 on new pipeline and gathering investments in the Marcellus and Utica Shale basins to meet growing shipper demand, levels approximately 61% higher than the preceding three-year period. DTE is currently moving forward with plans to build and increase capacity of its Nexus and Vector pipelines to move Utica and Southwest Marcellus shale gas to markets in the U.S. Midwest, including Chicago, Ohio and Michigan, and Ontario, Canada. DTE completed a FERC pre-filing for the Nexus pipeline in the fourth quarter of 2014 (4Q’14) and has an in-service target date during 4Q’17. Agreements with several local distribution companies (LDCs) and key shippers have been executed. DTE is also making investments to expand capacity on its Bluestone and Millennium pipelines in the Marcellus Shale basin. The Bluestone expansion is expected to be completed by the 2Q’16. Fitch views DTE’s increasing investments in the FERC-regulated GSP segment as favorable due to higher ROE, lower regulatory risk, and long-term contractual arrangements.
- “Capital investments are expected to total approximately $7.2 billion through 2017, levels approximately 20% higher than the preceding three year period. Of the total capex, DECo plans to spend $4.7 billion, primarily on new generation, distribution investments and environmental compliance. DTE Gas plans to spend $1 billion on distribution system enhancements including storage and transportation projects. Due to the large capex program, both the regulated utilities will need equity support from the parent through 2017 to help maintain their balanced capital structures. In addition, growing natural gas pipeline investments will render DTE to be FCF negative in the intermediate term, in Fitch’s view. DTE will need to fund the deficit by a roughly 50% mix of debt and equity to maintain the present balanced capital structure. Fitch anticipates annual equity issuances at DTE totaling roughly $300 million per year through 2017 through its Dividend Reinvestment Programs (DRIP) and employee pension programs and approximately $300 million increase in parent only long-term debt per annum.”