Fitch Ratings Assigns 'BBB+' To DTE's Equity Security Units

Business Wire, June 17, 2002

Business Editors

CHICAGO--(BUSINESS WIRE)--June 17, 2002

Fitch Ratings has assigned a rating of 'BBB ' to DTE Energy's (DTE) proposed $150 million issuance of equity security units. Each unit will consist of a senior note due on August 16, 2007, and a purchase contract requiring the holder to buy DTE common stock on August 16, 2005. The senior note will initially be held as a component of the equity security units and be pledged to DTE to secure the investor's obligation to purchase common shares under the purchase contract. The senior note represents a senior unsecured obligation of DTE, and the rating established for the equity units and the senior notes is consistent with Fitch's existing rating for the senior unsecured debt of DTE. Proceeds from the issuance will be used by DTE for general corporate purposes, including the repayment of short-term debt. The Rating Outlook for DTE is currently Stable.

Holders of the units will receive fixed quarterly contract adjustment payments from DTE relating to the purchase contract. Also, DTE will make fixed quarterly interest payments on the senior notes at an initial rate until the earlier of a successful remarketing of the senior note or the stock purchase date, after which DTE will pay interest on the reset rate. The contract adjustment payments on the purchase contracts are deferrable until August 16, 2005, but DTE will not have the option to defer the interest payments on the senior note. Subject to certain exceptions and fulfillment of certain events, holders of the equity security units may withdraw the pledged senior note and create 'stripped units' by substituting, as pledged securities, specified zero-coupon treasury securities that will pay the amount due under the purchase contract. The creation of the stripped units will allow the senior notes to trade separately. The return to investors will depend upon the value of the DTE common stock at the contract settlement date. The rating does not comment on the expected performance of the common equity of DTE.

DTE's credit profile is primarily derived from its regulated utility subsidiaries, Detroit Edison (senior secured rated 'A-') and Michigan Consolidated Gas (MichCon, senior secured rated 'A'). Detroit Edison's integrated electric utility business is stable, and the utility benefits from favorable restructuring legislation. Operating performance at the electric utility has been strong, with generating units posting decreasing production costs and high capacity factors. DTE relies on the receipt of upstream dividends from Detroit Ed to service parent-company debt and pay common dividends, and the dividend payout ratio is relatively high. MichCon, a gas distribution utility, is characterized by its low business risk, competitive gas rates, stable credit protection and leverage measures and good supply, transportation and storage arrangements. Upstream dividends from MichCon will be used first to service securities of DTE Enterprises (DTEE, formerly MCN Energy Group) and to support fixed obligations of MCN Energy Enterprises (the holding company for the non-regulated business ventures of DTEE) if necessary.

Credit concerns facing the company include the high level of consolidated leverage at DTE for the 'BBB ' category (55.5% as of March 31, 2002, excluding $1.75 billion of Detroit Edison transition bonds), primarily attributable to debt related to the 2001 merger with MCN Energy. Additionally, DTE has some exposure to weak steel industry through ownership interests in two facilities that provide coke to two bankrupt steel companies. Detroit Edison has moderate commodity risk due to fixed electric tariffs in Michigan through 2004, and is forecasted to continue to have higher capital spending over the next several years for environmental compliance. In 2002, volatile weather in Michigan will be a risk as DTE's annual storm reserve was depleted in the first quarter. Going forward, the impact of Electric Choice in Michigan will be small in the near term, but may result in loss of retail electric load in the later years.

Consolidated financial performance in 2001 was negatively impacted by various factors, including the effects of a weak economy on the electric industrial sector and warm weather on the gas distribution segment. During the first quarter of 2002, Detroit Edison's service territory experienced two severe storms, and the utility spent approximately $25 million in O&M expenses to restore power to customers who lost service. However, DTE has been successful at achieving targeted merger synergies, primarily through head count reduction and completed asset sales. DTE is projecting approximately $100 million of additional asset sales in 2002, including additional MCN out of region assets.

DTE is a holding company whose largest subsidiary is Detroit Edison, a regulated electric utility. In May 2001, DTE completed its acquisition of the MCN Energy Group, now DTE Enterprises (DTEE). Under the terms of the agreement, DTE acquired all outstanding shares of MCN for $2.3 million in a combined stock and cash transaction, and assumed $1.5 billion of MCN consolidated debt. DTEE's primary subsidiary is MichCon, a regulated natural gas company.