Fitch Revises Outlook for Detroit Edison to Positive; Affirms DTE and Subs

Business Wire, Nov 22, 2006

CHICAGO -- Fitch has revised the Rating Outlook for The Detroit Edison Company (DECo) to Positive from Stable. Additionally, Fitch has affirmed the 'BBB' Issuer Default Ratings (IDR) for the DTE Energy Company (DTE) and its subsidiaries, DECo and Michigan Consolidated Gas Co. (MichCon). The Rating Outlooks for DTE and MichCon are Stable. Approximately $6.9 billion of debt is affected. A detailed description of the ratings is shown below.

Fitch affirms the following, with a Positive Outlook:

Detroit Edison

--Issuer Default Rating (IDR) 'BBB';

--Senior secured debt 'A-';

--Senior Unsecured debt 'BBB ';

--Preferred stock 'BBB';

--Short-term commercial paper 'F2'.

Fitch affirms the following, with a Stable Outlook:

DTE Energy

--IDR 'BBB';

--Senior unsecured debt 'BBB';

--Trust preferred securities 'BBB-';

--Short-term commercial paper 'F2'.

Michigan Consolidated Gas

--IDR 'BBB'

--Senior secured debt 'A-';

--Short-term commercial paper 'F2'.

The ratings for DTE reflect the credit quality of DECo and MichCon, which benefit from predictable cash flow generation and favorable operating characteristics. DTE's recent announcement that it plans to divest a portion of its non-utility businesses (see below for further information) is seen as moderately favorable for credit quality. Currently, non-utility activities account for approximately 40% of consolidated net income. Fitch has historically viewed the non-utility operations as having medium business risk, and as such, once they are sold, consolidated business risk will not be considerably lowered. Long term, the company is targeting a business mix of 70% or higher utility to non-utility operations. From 2006-2009, the expected $1.2 billion of cash flows from the synfuel operations will result in robust cash flow coverages at DTE. Consolidated financial results have improved over the past two years due to rate increases at DECo and MichCon in 2004 and 2005, respectively, reductions in operating and maintenance expense, and increased cash flows from the synfuel operations. The ratio of consolidated EBITDA to interest and cash flow interest coverage were both over 4.0 times (x) for the 12-month period ended Sept. 30, 2006. Consolidated leverage, as measured by Debt to EBITDA, was 3.6x for the same period.

The Stable Outlook for DTE takes into consideration Fitch's expectation that the utilities will continue to perform and operate well, and that they have constructive outcomes to their anticipated rate cases. A financial decline at the utilities or an adverse regulatory outcome could negatively affect the ratings for all entities. Rating concerns facing the company primarily relate to the planned rate cases for both DECo and MichCon in 2007, continued higher capital spending through 2009, and a sluggish local economy in Michigan. If DTE is successful in completing all its planned asset sales and uses a significant portion of the proceeds to pay down debt, this could result in positive rating actions.

The Outlook revision for DECo to Positive from Stable is based on the increased focus on the utility business. DECo's credit metrics have historically been strong for its rating category, but the ratings have been constrained by linkage to the parent. DTE's prior business strategy of growing the non-utility businesses put a greater burden on the electric utility to consistently dividend up cash flows to the parent instead of reinvesting in utility operations. Therefore, the notching between DECo and DTE has been relatively narrow to reflect the close financial ties between the two companies. However, DTE has now decided to divest a portion of its non-utility operations and put a greater focus on the utility businesses. In addition, DECo's financial profile should continue to improve due to its 2004 rate case, as well as the recently implemented Customer Choice Tracker, which has stemmed the losses from Customer Choice. The ratio of EBITDA to interest and cash flow interest coverage were at 7.2x and 6.4x, respectively, for the 12-month period ended Sept. 30, 2006. Leverage, as measured by Debt to EBITDA, remains strong at 3.1x for the same period. Projected coverage metrics, assuming a reasonable outcome to the planned rate case in 2007, are expected to remain at or near current levels. Rating events that would lead to a positive rating action include a favorable outcome in the 2007 planned rate case or an upturn in the local economy, in particular the automotive sector.

In November 2006, DTE announced that it is looking at options to restructure a significant portion of its non-utility businesses and focus its growth strategy on building up its utility base. Non-utility businesses affected include non-utility peakers, unconventional gas production, power and industrial business, and fuel transportation and marketing. In total, the restructuring program could generate over $1 billion of net cash, which will be used to reduce debt and buyback shares. The exact percent of debt/stock will depend on various factors, such as monetization proceeds, synfuel 2007 production and the financial health of the utilities. Going forward, DTE has indicated that it will focus on gas midstream and storage, and power and industrial projects, including the Vector and Millennium Pipelines, and a Michigan gas storage field expansion. In addition, DTE will continue to be involved in coal-related activities with industrial partners. Remaining non-utility activities are expected to be self-funding with minimal parent support.