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Rating Action:

Moody's downgrades DTE to Baa1, affirms utility subsidiaries, outlook stable

25 Oct 2016

Approximately $12 billion of debt and credit facilities affected

New York, October 25, 2016 -- Moody's Investors Service downgraded the long-term ratings of DTE Energy Company (DTE), including its senior unsecured rating to Baa1 from A3, following its $1.3 billion debt funded acquisition of approximately 1.5 billion cubic feet (Bcf) a day of midstream pipeline and gathering assets in the southwest Marcellus / Utica shale regions. The action concludes the review for downgrade begun in September following DTE's announcement of the transaction. DTE's short-term rating for commercial paper was confirmed at P-2. Concurrently, Moody's assigned a rating of A2 to DTE subsidiary DTE Gas Company's (DTE Gas) $300 million senior unsecured bank credit facility and affirmed the existing ratings of DTE Gas and DTE Electric Company (DTE Electric, A2 stable). The rating outlooks for DTE, DTE Gas and DTE Electric are stable.

RATINGS RATIONALE

The downgrade of DTE is prompted by its increased exposure to gas midstream assets which, by their nature, have more volatile and lower quality earnings and cash flow streams than DTE's primary electric and gas utility, pipeline, and gas storage assets. The action considers acquisition financing that initially includes approximately $1.3 billion of additional debt. As a result of this increased leverage, we anticipate DTE's ratio of cash from operations excluding changes in working capital (CFO pre-W/C) to debt will fall below the high-teens range for the next few years. We also estimate that the percentage of parent company debt within DTE's capital structure will be above 30% versus around 22% as of year-end 2015. We view this additional leverage as increasing structural subordination risk at the parent company vis-à-vis its utility subsidiaries.

The transaction significantly increases DTE's midstream presence in the Appalachian basin. Although the asset purchase is consistent with DTE's growth strategy and existing expertise in managing natural gas assets, the revenues associated with the assets are predominately generated by volume based contracts with natural gas producers, which tend to be of lower credit quality. As result, we view DTE's midstream activities as having greater overall business risk than its regulated utility, pipeline and storage businesses.

The affirmation of DTE Electric's ratings reflects its operating profile as a vertically integrated utility in an above average regulatory environment in Michigan that provides for predictability of cash flows, limited regulatory lag, and credit metrics that are supportive of the rating. We expect the utility's capital program will remain elevated (approximately $1.5 billion per year) as the company invests to maintain operational reliability and to transform its predominantly coal-fired generation fleet into a more balanced portfolio with natural gas fuel and renewable technologies. Assuming continued supportive regulatory treatment on what is expected to be regular rate case filings, we anticipate the CFO pre-W/C to debt metric will remain in the low 20% range.

The affirmation of DTE Gas's ratings reflects its lower-risk business profile as a regulated gas utility operating in the credit supportive Michigan regulatory environment. DTE Gas is also engaged in a significant capital program (about $1.6 billion for 2016-2020) focused on a commission approved program for main replacement as well as investments in infrastructure to support DTE Gas's expanding pipeline investments. Given the supportive nature of the regulatory relationship, the benefits of limited regulatory lag, an infrastructure investment tracking mechanism and a revenue decoupling mechanism, we anticipate DTE Gas will generate stable cash flow and maintain a solid financial profile with a ratio of CFO pre-W/C to debt in the high teens to 20% range.

Rating Outlook

The stable outlook for DTE and its subsidiaries reflects our expectation of a continued supportive regulatory relationship in Michigan, stable utility cash flows, and our expectation that, beyond 2017, consolidated cash flow credit metrics at DTE will strengthen.

Factors that Could Lead to an Upgrade

A significant improvement in financial metrics, for example if DTE's ratio of CFO pre-W/C to debt were to increase to the low twenty percent range. At DTE Electric and DTE Gas, a ratio of CFO pre-W/C to debt in excess of the mid-twenties could put upward pressure on their ratings.

Factors that Could Lead to a Downgrade

An adverse change in Michigan's supportive regulatory environment, or a decline in DTE Electric or DTE Gas' ratio of CFO pre-W/C to debt below the high-teens range could lead to downward rating movement. At DTE, if the ratio of CFO pre-W/C were to remain below the high-teens range beyond 2017, or if there were to be an increase in the business or financial risk of DTE's non-utility operations, there could be downward pressure on the ratings.

Downgrades:

..Issuer: DTE Energy Company

....Junior Subordinated Regular Bond/Debenture, Downgraded to Baa2 from Baa1

....Senior Unsecured Shelf, Downgraded to (P)Baa1 from (P)A3

....Subordinate Shelf, Downgraded to (P)Baa2 from (P)Baa1

....Senior Unsecured Bank Credit Facility, Downgraded to Baa1 from A3

....Senior Unsecured Regular Bond/Debenture, Downgraded to Baa1 from A3

Assignments:

..Issuer: DTE Gas Company

....Senior Unsecured Bank Credit Facility, Assigned A2

Outlook Actions:

..Issuer: DTE Electric Company

....Outlook, Remains Stable

..Issuer: DTE Energy Company

....Outlook, Changed To Stable From Rating Under Review

..Issuer: DTE Gas Company

....Outlook, Remains Stable

Confirmations:

..Issuer: DTE Energy Company

....Senior Unsecured Commercial Paper, Confirmed at P-2

Affirmations:

..Issuer: DTE Electric Company

.... Commercial Paper, Affirmed P-1

.... Issuer Rating, Affirmed A2

....Subordinate Shelf, Affirmed (P)A3

....Senior Unsecured Shelf, Affirmed (P)A2

....Senior Secured Shelf, Affirmed (P)Aa3

....Senior Secured First Mortgage Bonds, Affirmed Aa3

....Senior Secured Regular Bond/Debenture, Affirmed Aa3

....Senior Unsecured Bank Credit Facility, Affirmed A2

..Issuer: DTE Gas Company

.... Commercial Paper, Affirmed P-1

....Senior Secured First Mortgage Bonds, Affirmed Aa3

....Senior Secured Regular Bond/Debenture, Affirmed Aa3

..Issuer: Michigan Strategic Fund

....Senior Secured Revenue Bonds, Affirmed Aa3

....Underlying Senior Secured Revenue Bonds, Affirmed Aa3

..Issuer: Monroe (County of) MI, Economic Dev. Corp.

....Senior Secured Revenue Bonds, Affirmed Aa3

....Underlying Senior Secured Revenue Bonds, Affirmed Aa3

..Issuer: Superior (City of) WI

....Senior Secured Revenue Bonds, Affirmed Aa3

....Underlying Senior Secured Revenue Bonds, Affirmed Aa3

DTE is a holding company that owns two Michigan regulated utilities, DTE Electric Company (DTE Electric) and DTE Gas Company (DTE Gas), as well as investments in regulated natural gas pipelines and storage, non-utility power and energy projects, and energy trading.

On October 20, 2016, DTE purchased 100% of the 0.7 Bcf/day Appalachia Gathering System (AGS) and 40% of 1.5 Bcf/day Stonewall Gas Gathering (SGG), from Momentum Midstream. DTE also purchased 15% of SGG from Vega Energy Partners. The assets gather natural gas produced in the southwest Marcellus / Utica regions, and provide access to markets in the Midwest, Ontario and Northeast through interconnections with Columbia Gas Transmission, Texas Eastern Transmission and the NEXUS Gas Transmission project currently being developed by DTE and Spectra Energy. The transaction was funded with approximately equal amounts of senior unsecured notes, and equity units that include senior unsecured remarketable notes and a stock purchase contract to be exercised in 2019.

The principal methodology used in these ratings was Regulated Electric and Gas Utilities published in December 2013. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Laura Schumacher
VP - Senior Credit Officer
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Jim Hempstead
Associate Managing Director
Infrastructure Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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