Fitch Ratings has assigned a rating of 'BB+' to DTE Energy Company's (DTE, IDR 'BBB' by Fitch) $280 million issuance of 6.5% Junior Subordinated debentures, 2011 Series I, due Dec. 1, 2061. The Junior Subordinated debentures rank junior to other unsecured debt of DTE. Proceeds from the issuance will be used to retire $280 million of outstanding Trust Preferred securities, comprised of $180 million of 7.8% Trust Preferred securities due 2032 and $100 million of 7.5% Trust Preferred securities due 2044.
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 of Hybrids in Corporate and REIT Credit Analysis' dated July, 11, 2011. The Rating Outlook for DTE is Stable.
The Stable Outlook of DTE Energy Co. reflects the stable earnings and cash flows of its two regulated utility companies, Detroit Edison Co. (DECo, IDR 'BBB'; Positive Outlook) and Michigan Consolidated Gas Co. (MichCon, IDR 'BBB'; Stable Outlook). DECo is the primary driver of consolidated cash flows and made up 74% of consolidated EBITDA for the LTM ending Sept. 30, 2011.
The company'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 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 GRC Order: In October 2011, the Michigan Public Service Commission authorized a $175 million permanent rate increase for DECo predicated upon a 10.5% return on equity effective Oct. 29, 2011. The final order is consistent with Fitch's expectations and supportive of DTE's current ratings. The rate increase approved by the commission represents approximately 49% of the $357 million permanent electric revenue requirement deficiency supported by DECo.
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 4.8x and 5.0x, respectively, for the LTM ending Sept. 30, 2011. DTE's debt to EBITDA ratio was 3.3x. The 2011 GRC order will sustain credit metrics over the next couple of years.
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): $343 million in 2012, $623 million in 2013, $684 million in 2014 and $350 million in 2015. Maturing debt will be funded through a combination of internal cashflows and external debt refinancings.
Large Capital Expenditure Program: Capital expenditures are forecast to average approximately $1.6 billion per year through 2013, a level that is significantly higher than prior years. Fitch expects capital expenditures to be funded by internal cash flows and a prudent mix of debt and equity. 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. The majority of capital spending will be on environmental compliance and renewable investments to meet renewable portfolio standards in the state.
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 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 of Hybrids in Corporate and REIT Credit Analysis
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=642132
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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