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DTE Energy Company’s ratings reflect the strong credit quality of its two regulated utility subsidiaries, DTE Electric Company (DTEE; A–/Stable) and DTE Gas Company (DTEG; BBB+/Stable), benefitting from a constructive regulatory environment in Michigan, offset by the higher business risk midstream operations. DTE’s regulated utilities anchor the company’s credit profile and comprised about 70% of consolidated EBITDA in 2018.

DTE’s revision to a Rating Watch Negative reflects increased leverage and business risk associated with the $2.65 billion acquisition of M5 Louisiana Holdings, LLC, which provides midstream services in the Haynesville region in Louisiana. While the Gas Storage and Pipelines (GSP) investment was part of a five-year program, ���������ֳ� believes this acquisition has a higher business risk than DTE’s existing midstream assets. Assuming the acquisition closes in 4Q19, ���������ֳ� estimates that DTE’s FFO leverage will weaken to 5.0x–5.1x in 2020–2021, 30bps–40bps above ���������ֳ�’s expectations, before rebounding toward the end of the 2019–2022 forecast.

DTE’s financial results over the LTM ended June 30, 2019 were in line with the leverage reduction, as expected under ���������ֳ�’s previous forecast. Continued deleveraging in 2019, absent the acquisition financing, and mitigation of Indigo’s Natural Resources LLC’s counterparty risk, could lead to future positive rating actions. Lower than estimated operating results at the Haynesville system, execution risk associated with completion of the LEAP pipeline, counterparty credit risk related to Indigo Natural Resources LLC (Indigo; not rated), the primary customer on the Haynesville system, or failure to deleverage could lead to future adverse rating actions, in ���������ֳ�’s opinion.