Fitch Affirms Detroit Edison IDR at 'BBB'; Outlook Revised to Stable

Business Wire,  Nov 29, 2007  

Tags: Fitch, Microsoft Outlook

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CHICAGO -- Fitch Ratings has affirmed the following ratings on Detroit Edison Company (DECo) and revised its Rating Outlook to Stable from Positive:

--Long-term Issuer Default Rating (IDR) at 'BBB';

--Short-term IDR at 'F2';

--Senior secured debt at 'A-';

--Preferred stock at 'BBB';

--Short-term commercial paper at 'F2'.

Approximately $3.9 billion of debt is affected.

The Outlook revision to Stable reflects the unlikelihood of a ratings upgrade for DECo in the near to medium term due to: DECo's exposure to a weak local economy, in particular the automotive sector; and DECo's large capital expenditure program through 2012, which may be extended should the utility follow through on its plan to build a nuclear power plant. A large portion of DECo's capital investments will be for environmental compliance costs, which DECo will be able to recover through future rate cases, but there will be regulatory lag. The Stable Outlook takes into consideration Fitch's expectation that DECo will continue to maintain a solid financial and operating profile, receive a reasonable outcome in its pending electric rate case and not embark on a large capital spending program without first attaining timely recovery of these costs. While the parent company, DTE Energy (DTE, IDR 'BBB', and Outlook Stable), has sold assets, parent debt has not yet been meaningfully reduced.

DECo's credit protection measures are generally consistent with its current rating category. Recent financial performance was negatively impacted by higher operating costs, resulting in the ratios of EBTIDA to interest and funds from operations (FFO) to interest were 5.9 times (x) and 4.2x, respectively, for the twelve month period ended Sept. 30, 2007. Leverage, as measured by the ratio of Debt to EBITDA, was 3.1x for the same period. Fitch projects that credit fundamentals will return to historical levels beginning in 2008, with EBITDA to interest above 6.0x and FFO interest coverage above 5.0x. Leverage is expected to remain below 3.0x over the next several years.

In April 2007, DECo filed a general rate case with the Michigan Public Service Commission (MPSC) for a $123 million rate increase; which was later increased to $199 million to include merger control premium costs incurred from the 2001 merger with MCN Energy and costs associated with the new Michigan Business Tax. The majority of the initial rate increase is comprised of environmental compliance costs and inflationary increases. A return on equity of 11.25% was requested, based on a 50/50 debt/equity capital structure. A final decision from the MPSC is expected sometime in 2008. Personnel turnover at the MPSC has resulted in some regulatory uncertainty. DECo's most recent rate case was in November 2004, when the company received a $335.8 million rate increase with an 11% authorized ROE. DECo also received trackers for Electric Choice and pension expense. In 2006, the MPSC issued a Show Cause order that ultimately reduced the rate increase by $79 million annually. The Show Cause order expires on April 12, 2008, resulting in the reinstatement of the $79 million of revenues.

DECo has started the application process for a new nuclear unit on its existing Fermi site. The company is interested in taking advantage of the substantial tax credits (up to $320 million) derived from provisions in the 2005 Energy Policy Act should construction proceed on a new nuclear unit. To qualify for these tax credits, a combined operating license for construction and operation must be docketed by the Nuclear Regulatory Commission no later than Dec. 31, 2008. Preparation and approval of a combined operating license can take up to four years, and is estimated to cost at least $60 million. Management has stated that construction on a new nuclear facility will not begin without a meaningful cost recovery mechanism in place.

DECo, a wholly-owned subsidiary of DTE, is a regulated electric utility that serves approximately 2.2 million customers in Michigan.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

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