Fitch Ratings has upgraded Detroit Edison Company (DECo) and Michigan Consolidated Gas Co. (MichCon) and affirmed the parent DTE Energy, Inc. (DTE) ratings as follows:
DECO
--Long-term Issuer Default Rating (IDR) to 'BBB+' from 'BBB';
--Senior secured to 'A' from 'A-';
--Secured pollution control revenue bonds to 'A' from 'A-';
--Preferred stock to 'BBB-'from 'BB+';
--Short-term IDR affirmed at 'F2';
--Commercial paper affirmed at 'F2'.
MichCon
--Long-term IDR to 'BBB' from 'BBB-';
--Senior secured to 'A-' from 'BBB+';
--Short-term IDR affirmed at 'F2';
--Commercial paper affirmed at 'F2'.
DTE
--Long-term IDR affirmed at 'BBB';
--Senior unsecured notes affirmed at 'BBB';
--Junior subordinated notes affirmed at 'BB+';
--Short-term IDR affirmed at 'F2';
--Commercial paper affirmed at 'F2'.
Additionally, Fitch has revised the Rating Outlook at MichCon to Positive from Stable. All other Rating Outlooks are Stable. More than $7 billion of consolidated long-term debt is affected by today's rating action.
The upgrades at DECo and MichCon reflect improved and sustained earnings and cash flows following recent rate case orders, an overall constructive regulatory environment, good liquidity, manageable maturities, and strong credit metrics.
The Positive Rating Outlook at MichCon reflects Fitch's expectations of continued strong operating performance at the regulated utility, low leverage, and the anticipated continuation of constructive regulatory outcomes in future rate proceedings with the Michigan Public Service Commission (MPSC). MichCon currently operates under an MPSC authorized return on equity (ROE) of 11% and is expected to file its next rate case in the first half of this year.
The Stable Outlooks at DTE and DECo reflect the stable earnings and cash flows of DTE's primary regulated utility subsidiary. DTE's regulated operations accounted for more than 90% of consolidated funds from operations (FFO) for 2011, however, DECo is the primary driver of consolidated cash flows and comprised 74% of consolidated EBITDA for the LTM ending Sept. 30, 2011.
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 but improving 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 2011, 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.
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.
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 4.8 times (x) and 5.0x, respectively, for the latest 12 months (LTM) ending Sept. 30, 2011. DTE's debt to EBITDA ratio was 3.3x. 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.
DECo: For the LTM period ending Sept. 30, 2011, DECo's FFO coverage improved to 6.8x as compared to 6.2x for 2010, due in part to the positive impact of bonus depreciation. Leverage, as measured by debt to EBITDA, was 2.8x for the same period. Going forward, Fitch expects FFO coverage ratios to remain above 5.0x through 2014 and anticipates leverage, as measured by debt to EBITDA, to weaken to 3.0x by 2013 due to increased capital spending needs associated with emissions compliance and renewable investments.
MichCon: For the LTM period ending Sept. 30, 2011, MichCon's FFO coverage ratios improved to 5.9x as compared to 5.4x for 2010. Leverage, as measured by debt to EBITDA, was 3.4x for the same period. Going forward, Fitch expect FFO coverage measures to approximate 6x and anticipates leverage, as measured by debt to EBITDA, to remain under 4.0x, through 2014.
New Credit Facilities: In October, DTE renewed $1.8 billion of five-year unsecured revolving credit facilities, comprised of $1.1 billion at DTE, $300 million at DECo, and $400 million at MichCon. The facilities mature in 2016 and have a maximum debt to capitalization covenant of 65%. As of Sept. 30, 2011, DTE was in compliance with all financial covenants under their credit agreement.
Manageable Maturities: Debt maturities over the next five years are manageable and are as follows (excluding securitization maturities): $355 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.
Expected Bonus Depreciation for 2012: DTE Energy expects to generate approximately $50 million to $100 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.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 12, 2011);
--'Treatment of Hybrids in Nonfinancial Corporate and REIT Credit Analysis' (July 11, 2011);
--'Rating North American Utilities, Power, Gas and Water Companies, Special Report' (May 16, 2011);
--'Recovery Ratings and Notching Criteria for Utilities' (May 12, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=656516
Rating North American Utilities, Power, Gas, and Water Companies
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=625129
Recovery Ratings and Notching Criteria for Utilities
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648449
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