Fitch Upgrades DTE Energy to 'BBB+' & DTE Electric to 'A-'; Affirms DTE Gas; Outlooks Stable
The DTE rating upgrade reflects the strong and relatively predictable earnings and cash flows of its core electric and natural gas distribution utilities. The rating action follows recent Michigan Public Service Commission (MPSC) regulatory orders that were more favourable than anticipated, in Fitch's opinion, and considers the credit supportive regulatory framework in Michigan. The rating also considers DTE's large, utility-focused capex program. Fitch estimates that greater than 90% of consolidated DTE earnings over the next several years will be from regulated business including utility and pipeline operations. DECo is expected to remain the primary driver of consolidated earnings and cashflows, comprising approximately two-thirds of consolidated EBITDAR through the latest LTM period.
The rating upgrade reflects DECo's strong credit metrics, relatively low leverage and a better than expected outcome in its recently settled 2015 general rate case (GRC). The DTEGas rating affirmation reflects the utility's solid operating performance and timely recovery of its large infrastructure replacement program through its recently increased cost recovery rider. The ratings also anticipate a balanced outcome in DTEGas' pending 2016 GRC.
The Stable Outlooks for DTE and its utility subsidiaries reflect an improving Michigan economy and assumes that the regulatory environment in the state will remain constructive from a credit point-of-view.
KEY RATING DRIVERS
New Energy Legislation: Fitch expects new energy legislation will be enacted in the first half of this year. Key features of two bills currently under consideration in the House and Senate include maintaining the current retail open access (ROA) cap at 10%, incorporating one-time election for customers that choose an alternative provider and capacity requirements. Both bills also propose overhauling the current Integrated Resource Planning (IRP) rules, eliminating self-implementation of rates and introducing a 10-month limit on GRC proceedings. The Senate bill would also authorize revenue decoupling for gas and electric utilities, which if adopted, would be a significant credit positive for DECo, in Fitch's opinion.
DECo 2016 GRC: DECo recently filed its 2016 GRC with the MPSC in Feb. and is requesting a provisional revenue decoupling mechanism that if approved, would be a credit positive. DECo is requesting a rate increase of $344 million based on a 10.5% ROE and a 50% equity ratio. DECo Plans to self-implement rates in six months and a decision is expected in January 2017 for new rates effective Feb. 1, 2017. The GRC filing follows a constructive outcome of DECo's recently settled 2015 GRC whereby DECo received approximately 68% of its requested revenue increase based on a 10.3% ROE.
DTEGas 2015 GRC: DTE filed its 2015 GRC with the MPSC last December and is requesting a rate increase of $183 million based on an ROE of 10.75% and a 52% equity ratio. DTEGas plans to self-implement rates in November 2016, and a decision by the MPSC is expected in December.
Fitch has conservatively modeled a 10% ROE for DECO and DTEGas which approximates recent industry averages. Additionally, the expiration of securitization charges, lower cost of service rates, surcharge reductions and a continued low commodity price environment provides headroom to offset upward pressure on customer bills. If the MPSC were to grant full recovery of DECo's revenue request in the utility's 2016 GRC filing, net rates for residential customers are expected to increase 7%, approximately equal to 2012 levels.
IRM Increase: In November 2015 the MPSC authorized DTEGas to expand the scope of its pipe replacement program by 86% to 123 miles per year and to increase the annual IRM surcharge by $50 million. The increased surcharge will be phased in over the next two years resulting in a total annual investment of $130 million. Fitch views the expansion of the IRM as a credit positive, providing timely cost recovery outside of GRC proceedings.
Constructive Regulatory Environment: 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. DECo's and DTEGas's current authorized ROE's of 10.3% and 10.5%, respectively compare favourably to recent industry averages and the utilities can self-implement rates if earned ROE dips below the authorized level. Furthermore, a revenue-decoupling mechanism and IRM at DTE Gas helps to reduce exposure to regulatory lag.
Growth in Non-Utility Businesses: Fitch expects growth in DTE's non-utility businesses driven by the Gas Storage and Pipeline (GSP) and the Power and Industrial (P&I) business segments. Strong demand has driven growth opportunities for DTE's regulated GSP segment in the Marcellus Shale and Utica Basin. DTE is currently moving forward with plans to build and increase capacity of its NEXUS, Bluestone and Vector pipelines to move Utica and Southwest Marcellus shale gas to markets in the U.S. Midwest and the Northeast.
DTE's GSP and P&I segments accounted for 10% and 11% of consolidated net operating income for 2014, respectively, and Fitch expects the two businesses combined may contribute up to 25% of consolidated net income by 2018. The GSP business is supported by higher FERC authorized returns, long-term contractual arrangements, and low regulatory risk. The P&I segment is primarily focused on renewable energy and industrial cogeneration projects with long-term power purchase agreement contracts with limited commodity price risk.
The NEXUS Gas pipeline project is moving forward as agreements with several local distribution companies and key shippers have been executed for the majority of pipeline capacity. 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 with project debt. DTE completed a FERC filing for the NEXUS pipeline in the fourth quarter of last year with an in-service target date during fourth-quarter 2017. The project is supported by take-or-pay contracts with shippers with an average term of 15 years.
Clean Power Plan: DTE's strategy to shift to cleaner generation resources (natural gas and renewables) coupled with new environmental investments and announced coal plant retirements leaves it well positioned to comply with the new emissions targets under the clean power plan. The clean power plan targets a state wide reduction in carbon of 32% by 2030, using 2005 as a baseline year. DTE has until Sept. 2016 to file initial compliance plans with the EPA. Renewable investments are recoverable outside of GRC proceedings via the state's renewable energy surcharge.
Large Capex Program: DTE plans to spend $10.6 billion on capital investments through 2015-2018 including investments in the NEXUS pipeline, levels approximately 46% higher than the preceding four-year period. Capital spending will be primarily focused at the regulated utilities and includes increasing investments in GSP and P&I business segments, as well. Due to the large capex program at the regulated utilities, both will need equity support from the parent through 2018 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 with a balanced mix of debt and equity.
Bonus Depreciation Extended: Fitch expects future funding needs will be partly financed with anticipated equity issuances totaling $800 million through 2018 through DTE's dividend reinvestment and employee pension programs. Extended bonus depreciation legislation last year has reduced anticipated equity needs by roughly $400 million over the forecast period.
DTE: Fitch expects DTE's credit metrics to remain commensurate with the 'BBB+' IDR guidelines for utility companies through the forecast period and projects FFO coverage to remain above 5.0x and FFO leverage to approximate 4.0x through 2018. Fitch expects the majority of DTE's capex to be funded by internal cash flows and the remainder with a mix of debt and equity, maintaining the company's balanced capital structure.
DECo: Fitch forecasts strong credit metrics at DECo that are consistent with the current 'A-' rating through the forecast period. Fitch estimates EBITDAR coverage ratios will remain above 6.0x and that debt/EBITDAR will approximate 3.3x through 2018.
DTEGas: Fitch expects DTEGas credit metrics to remain commensurate with the current rating category through the forecast period and projects EBITDAR coverage measures above 5.0x and anticipates debt/EBITDAR will approximate 4.0x through 2018.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for DTE include:
--Assumes 10% authorized ROE at both DECo and at DTEGas.
--Assumes a constructive regulatory environment in Michigan.
--Capex program totalling $10.6 billion through 2015-2018.
--Manageable maturities including $477 million in 2016, no maturities in 2017, and $410 million in 2018.
RATING SENSITIVITIES
DTE Energy, Inc.
Future developments that either individually or combined could lead to positive rating actions include:
--Due to the recent credit upgrade no positive rating actions are expected at this time.
Future developments that either individually or combined could lead to negative rating actions include:
--Sustained FFO Leverage above 4.5x. Persistently weak consolidated leverage metrics beyond Fitch's current forecast period could lead to negative rating action for DTE.
DTE Electric Co.
Future developments that either individually or combined could lead to positive rating actions include:
--Sustained Debt-to-EBITDAR of better than 3.25x;
--Constructive outcome in pending and future GRCs;
--Adoption of a revenue decoupling mechanism.
Future developments that either individually or combined could lead to negative rating actions include:
--An adverse change in Michigan's regulatory climate;
--Sustained debt-to-EBITDAR metrics in the 3.5x-3.75x range.
DTE Gas Co.
Future developments that either individually or combined could lead to positive rating actions include:
--A better than expected outcome in the utility's pending GRC.
--Sustained debt-to-EBITDAR metrics at 3.5x or below.
Future developments that either individually or combined could lead to negative rating actions include:
--An unexpected adverse change in the regulatory environment that limits the utility's ability to recover its costs in a timely manner;
--Sustained debt-to-EBITDAR metrics in the 3.75x-4.00x range.
LIQUIDITY
Sufficient Liquidity: DTE has approximately $1.8 billion of total liquidity available under its respective credit agreements as of Sept. 30, 2015, including $67 million of unrestricted cash and cash equivalents. DTE's consolidated five-year unsecured revolving credit facilities mature in April 2020 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 51% under its credit agreement as of Sept. 30, 2015.
Manageable Maturities: Debt maturities over the next four years are manageable and are as follows (excluding securitization maturities): $477 million in 2016, no maturities in 2017, and $410 million in 2018. Maturing debt will be funded through a combination of internal cashflows and external debt refinancings.
FULL LIST OF RATING ACTIONS
DTE
--Long-term IDR upgraded to 'BBB+' from 'BBB';
--Senior unsecured notes upgraded to 'BBB+' from 'BBB';
--Junior subordinated notes upgraded to 'BBB-' from 'BB+';
--Short-term IDR affirmed at 'F2';
--Commercial paper affirmed at 'F2'.
DECO
--Long-term Issuer Default Rating (IDR) upgraded to 'A-' from 'BBB+';
--Senior secured upgraded to 'A+' from A;
--Secured pollution control revenue bonds upgraded to 'A+' from A;
--Short-term IDR affirmed at 'F2';
--Commercial paper affirmed at 'F2'.
The following ratings have been affirmed with a Stable Outlook:
DTE Gas Co.
--Long-term IDR at 'BBB+';
--Senior secured at 'A';
--Short-term IDR at 'F2';
--Commercial paper at 'F2'.
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