Fitch Rates DTE Energy Co's $300MM Jr Subordinated Debentures 'BBB-'; Outlook Stable
Fitch Ratings has assigned a rating of 'BBB-' to DTE Energy Company's (DTE, Issuer Default Rating: 'BBB+'/Outlook Stable) $300 million issuance of junior subordinated debentures, 2016 series B, due June 1, 2076. The junior subordinated debentures rank junior to other unsecured debt of DTE. Proceeds from the issuance will be used to redeem a like amount of maturing unsecured notes.
In Fitch's analysis, 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 Feb. 29, 2016.
DTE's ratings and Stable Outlook reflect the relatively predictable earnings and cash flows of its core electric and natural gas utilities and credit-supportive regulatory framework in Michigan. The ratings also consider 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. In addition, the ratings and Outlook reflect an improving Michigan economy and assume that the regulatory environment in the state will remain constructive from a credit point-of-view.
KEY RATING DRIVERS
New Energy Legislation Expected: Fitch had expected new energy legislation in Michigan to be enacted in the first half of 2016, but the Flint water crisis has delayed action in the House and Senate, and Fitch now anticipates the passage of a new energy bill in the second half of the year.
The legislation, as currently proposed, is not expected by Fitch to have a material impact on the ratings of DTE. Key features of two bills currently under consideration in the House and Senate include maintaining the current retail open-access cap at 10%, incorporating a one-time election for customers that choose an alternative provider and minimum capacity requirements for load-serving entities. Both bills would overhaul the current integrated resource planning rules, eliminating self-implementation of rates and introducing a 10-month limit on general rate case (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 DTE Electric CO. (DECo, IDR: 'A-'/ Outlook Stable), DTE's integrated electric utility subsidiary, in Fitch's opinion.
DECo 2016 GRC: DECo filed its 2016 GRC with the Michigan Public Service Commission (MPSC) in February of this year. DECo supports a $344 million rate increase based on a 10.5% return on equity (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 filing also includes a provisional revenue decoupling mechanism that, if approved, would be a credit positive. The GRC filing follows a constructive outcome in DECo's settled 2015 GRC. In that proceeding, the MPSC-authorized rate increase represented approximately 68% of DECo's requested revenue increase based on a 10.3% ROE.
DTEGas 2015 GRC: DTE Gas Co. (DTEGas, IDR: 'BBB+'/Outlook Stable) 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.
Constructive Regulatory Environment: Fitch believes the regulatory environment in Michigan is credit supportive. 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 ROEs of 10.3% and 10.5%, respectively, compare favorably 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 infrastructure replacement mechanism (IRM) at DTEGas mitigates regulatory lag.
Large Capex Program: DTE plans to spend $8 billion on capital investments over 2016-2018 including investments in the NEXUS pipeline, levels approximately 34% higher than the preceding three-year period. Capital spending will be primarily focused on the regulated utilities and includes increasing investments in GSP and P&I business segments as well. Because of 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: The extension of bonus depreciation rules late last year is expected to result in $300 million - $400 million of additional cash flow over the next five years, reducing anticipated equity needs. Fitch expects future funding needs will be partly financed with anticipated equity issuances totaling $200 million - $300 million through 2018 through DTE's dividend reinvestment and employee pension programs.
Solid Credit Metrics: Fitch estimates that DTE's credit metrics will remain commensurate with 'BBB+' IDR guidelines for utility companies. FFO coverage is projected by Fitch to be 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.
--10% authorized returns on equity (ROEs) at both DECo and at DTEGas.
--Constructive regulatory environment continues in Michigan.
--Capex program totalling $8 billion through 2016-2018.
--Manageable maturities including $477 million in 2016, no maturities in 2017, and $410 million in 2018.
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; however, sustained FFO leverage better than 4.0x through the forecast period could lead to a positive rating action.
Future developments that either individually or combined could lead to negative rating actions include:
--Unexpected deterioration in Michigan regulation and cost overruns related to DTE's large capex program or other factors resulting in sustained FFO leverage above 4.5x and/or persistently weak consolidated leverage metrics beyond Fitch's current forecast period could lead to negative rating action for DTE.
Sufficient Liquidity: DTE has approximately $1.6 billion of total liquidity available under its respective credit agreements as of March 31, 2016, including $35 million of unrestricted cash and cash equivalents. DTE's consolidated five-year unsecured revolving credit facilities mature in April 2021 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 March 31, 2016.
Manageable Maturities: Debt maturities over the next three years are manageable and are as follows: $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.
Date of Relevant Committee: Feb. 5, 2016.
Additional information is available at www.fitchratings.com
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