Fitch Rates Detroit Edison's $300MM Senior Notes 'A-'; Outlook Stable

Business Wire,  June 6, 2008  

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CHICAGO -- Fitch Ratings has assigned a 'A-' rating to Detroit Edison Co.'s (DECo) $300 million issuance of 5.60% senior notes, series G, due June 15, 2018. Proceeds from the sale will be used to repay short-term indebtedness and for general corporate purposes. DECo's Rating Outlook is Stable.

The senior notes will be issued under a supplemental indenture, and will be secured by the pledge of a like amount of DECo's first mortgage bonds (FMBs; rated 'A-' by Fitch). The indenture provides for the release of the collateral when there is less than 5% of DECo's net tangible assets or 5% of net capitalization in FMBs outstanding other than those securing senior notes.

Currently, DECo has $885 million of outstanding FMBs not subject to release provisions. Of this amount, $549 million of outstanding FMBs will not mature or be subject to redemption prior to 2011. Therefore the release date is not expected to occur prior to 2011, however, the outstanding FMBs could be redeemed before the first call date by a tender offer. After the release of property, notes issued under this indenture will instead be secured by substitute mortgage bonds.

DECo's ratings take into account the company's solid credit protection measures, stable operating performance and historically constructive regulatory environment in Michigan. Rating concerns facing the utility primarily relate to DECo's exposure to a weak local economy, in particular the automotive sector; and a 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 baseload capital spending program without first attaining regulatory approvals for timely recovery of these costs. While the parent company, DTE Energy (DTE; IDR rated 'BBB' with a Negative Outlook), has sold assets, parent debt has not yet been meaningfully reduced.

In April 2008, the Michigan House of Representatives passed House Bill (HB) 5524, which would provide for significant changes to Michigan's electricity regulatory framework if enacted into law. Overall, Fitch considers the legislation, as proposed, supportive of the credit of investor-owned electric utilities operating within the state because it would increase certainty of cost recovery and reduce regulatory lag. However, the bill now moves onto the Senate, where considerable modifications could occur. Senate action is expected by mid-summer.

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. 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. While personnel turnover at the MPSC has resulted in some regulatory uncertainty, Fitch expects a reasonable outcome from the new commission.

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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