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���������ֳ� - New York - 15 Apr 2020: ���������ֳ� downgraded DTE Energy Company's (DTE) Long-Term Issuer Default Rating (IDR) to 'BBB' from 'BBB+' and revised the rating Outlook to Stable from Rating Watch Negative. The short-term IDR was affirmed at 'F2'. In addition, ���������ֳ� affirmed the Long-Term IDR of DTE Electric Company (DTEE) at 'A-' and DTE Gas Company (DTEG) at 'BBB+.' The rating Outlooks for DTEE and DTEG are Stable.

DTE was placed on Rating Watch Negative following the October 2019 announcement of an agreement to acquire M5 Louisiana Holdings, LLC, midstream pipeline and gathering system in Louisiana's Haynesville basin for $2.65 billion, including a deferred payment of $400 million payable upon completion of the Louisiana Energy Access Project (LEAP) pipeline in Q3 of 2020.

DTE's downgrade primarily reflects increased leverage and business risk associated with the recent midstream acquisition and additional business risk in its midstream segment given the 16% decline in the 2021 natural gas price in the ���������ֳ� price deck (from $2.50 to $2.10). ���������ֳ� projects that DTE's FFO leverage will weaken to 5.1x-5.2x during 2020-2021, 40-50bps above ���������ֳ�'s 'BBB+' sensitivity threshold before rebounding to around 4.7x-4.8x in 2022-2023. The company's growth in the midstream assets via acquisition, including Haynesville assets, the Link pipeline assets in 2016, and construction of NEXUS pipeline, indicates management strategy to grow this riskier segment to keep pace with the utility's strong growth, while raising consolidated leverage for a couple of years following each transaction.

The latest acquisition financing also increased parent-level debt to an above-average level of 44% of total debt as of Dec. 31, 2019. ���������ֳ� expects parent debt to decline over the forecast period, but still remain elevated at about 37% of the total debt.

The ratings and Outlooks consider uncertainty regarding the impact of the coronavirus at DTE's midstream business and electric and gas utility business. ���������ֳ� believes DTE, DTEE and DTEG are well-positioned to weather the economic effects of the coronavirus within its current rating category. DTE also has a history of successfully implementing contingency plans during events that adversely impact its utility sales, including the 2008-2009 recession.

Key Rating Drivers

Acquisition Pressures Credit Metrics: ���������ֳ� estimates consolidated FFO leverage will be 5.1x-5.2x in 2020-2021, which is above the current 'BBB+' negative sensitivities threshold by 40-50bps. EBITDA growth associated with the acquisition beginning in 2020 and the conversion of equity units in 2022 are the main drivers of deleveraging, with ���������ֳ� estimating leverage to decline to 4.7x-4.8x by 2022-2023. ���������ֳ� does not assign equity credit to the equity units. While leverage is expected to decline in 2022, it would still remain at or above the negative sensitivity threshold for 'BBB+' ratings. In addition, management has demonstrated willingness to increase near-term leverage and parent debt in acquiring nonregulated assets every couple of years. The latest acquisition financing also increased parent-level debt to an above-average level of 44% of total debt as of YE 2019. ���������ֳ� expects parent debt to decline over the forecast period, but still remain elevated at about 37% of the total debt by 2023.

Midstream Acquisitions Drive Business Mix: ���������ֳ� views the Gas Storage & Pipeline (GSP) segment as riskier than the regulated utilities. The GSP segment contributed about 17% of operating earnings in 2019 and is projected to increase to around 22% in 2020. ���������ֳ� expects DTE will continue to grow the non-utility GSP segment to keep pace with the utility investment in DTEE and DTEG. Late last year, DTE acquired 100% of the operational Blue Union Gathering System (BUGS) and LEAP, a 150 mile, 1.0 bcfd pipeline under construction from Momentum Midstream and Indigo. The Haynesville acquisition represented 65% of GSP's five-year capital program from 2018-2022 and pulled forward GSP investments. It also adds geographic diversity. Current five-year capex plan does not contemplate non-organic investment in the GSP segment, but includes about $2.2 billion to $2.7 billion of capital investment, of which about $1 billion will be spent in 2020 for LEAP completion. The utilities' $15 billion, five-year capital program is around 80% of DTE's capex. ���������ֳ� expects regulated utilities will remain around 75%-80% of EBITDA, contributing to predictable earnings and cash flow, and the non-utility segments, through organic growth and smaller bolt-on acquisitions, contribute around 20-25% of consolidated EBITDA through 2023.

Limited Impact from Coronavirus: The coronavirus pandemic is causing unprecedented disruptions to state and local economies as well as financial markets. Michigan, with an epicentre in Detroit, which is in DTE's service territory, currently has the third-highest number of cases in the U.S. While the situation remains fluid, ���������ֳ� believes the affect to DTEE will be manageable. DTEE derives approximately 33% of its MWh sales from residential customers, 38% from commercial and 22% from industrial. ���������ֳ� believes operational savings and increase in residential sales (with much higher margins than industrial and commercial sale) can mostly offset a reduction in commercial and industrial sales. Management projects they should be able to reduce their O&M somewhere between $130 million, savings that were achieved during the 2008-2009 downturn, to $200 million to offset the effects of economic slowdown. The uncollectible expenses could rise but should remain manageable. DTEE has a bad debt reserve in the rate structure of about $92 million. DTEE is expected to file another rate case this summer, where they could address any incremental bad debt expense and sales decline arising from the current crisis. Liquidity is adequate and has been recently increased by a parent term loan issuance and a revolver expansion. DTEE was also able to issue $1.7 billion of debt at very favourable rates. Debt maturities are manageable, and ���������ֳ� expects DTE to have continued access to the capital markets. There are only $362 million of maturities remaining in 2020, mostly at DTEE. For DTEG, ���������ֳ� projects limited concerns as the coronavirus-related economic slowdown comes during a seasonally low demand period for natural gas.

Increased Midstream Business Risk: DTE's midstream assets primarily operate under long-term contracts (average contract life is about nine to ten years). Eighty-five percent of revenues in 2020-2022 are expected to come from payments at minimum volume commitment (MVC) levels, and take or pay demand charges, while 15% is from re-contracting and growth from the MVC and demand charge levels. ���������ֳ� expects that the current low gas price environment, coupled with lower demand due to coronavirus and trade disputes on the economy could put pressure on the ability to grow beyond current contract levels in the near future.

The heightened business risk reflects the counterparty credit risk related to the primary customer Indigo Natural Resources (not rated by ���������ֳ�, but senior unsecured rated 'B3' at Moody's) on the Haynesville gathering and pipeline system. In addition, several of the counterparties at its other midstream assets in Marcellus and Utica have been downgraded in recent months due to the declining natural gas and oil prices that have put strain on their credit metrics. DTE's main counterparty on its gathering systems Bluestone and Susquehanna, Southwestern Energy Company (SWN, BB/ Negative), was put on the Negative Outlook in February. Antero Resources, a primary counterparty on DTE's link-gathering system, was also recently downgraded to 'B' from 'BB-' and put on a Rating Watch Negative. SWN is in a better position than Antero as it does not have any large near-term maturities. Most of DTE's counterparties are well hedged for 2020 at natural gas price levels of $2.50/mmbtu or higher with more uncertainty in 2021, partially hedged for 2021. Hedges, at prices well above current spot prices, should provide protection in the current low spot natural gas price environment. Indigo has a contractual commitment to pay down debt, using proceeds from the 2019 sale of their midstream assets to DTE, which should improve its credit quality.

Constructive Utility Regulatory Environment: The Michigan regulatory environment remains constructive from a credit perspective, evidenced by general rate case (GRC) outcomes, in which the MPSC approved authorized ROEs of 9.9%-10%, which is above industry averages for electric and gas utilities. The regulatory framework allows full pass-through of fuel and purchased power costs, forward-looking test years and timely 10-month review period for GRC resolution. DTEE and DTEG have GRCs pending, and ���������ֳ� believes the ROE will decline slightly but remain above the national average.

Utility-Focused Capex Program: DTE's $19 billion capital program in 2020-2024 is 80% utility-oriented, and total utility investment is $1 billion higher than the previous five-year plan. There is also an upside potential for capex investment at utilities of about $2 billion. The utilities are investing in distribution, environmental compliance projects, and gas, pumped storage, and wind generation. The spending, led by the utility and gas pipeline investments, is expected to render DTE's FCF negative in the intermediate term. ���������ֳ� expects the program to be funded with internal cash flow, debt and equity from the parent to maintain the utilities' regulatory capital structure.

DTE Electric

Constructive Regulatory Environment: The Michigan regulatory environment for electric utilities remains constructive from a credit perspective, evidenced by GRC outcomes, in which the MPSC approved authorized ROEs of around 10%, which is above industry averages. The regulatory framework allows full pass-through of fuel and purchased power costs, forward-looking test years and timely 10-month review period for GRC resolution. DTEE's May 2019 rate order is constructive, with a 6.2% rate increase, earning a 10% ROE on a 36.84% equity structure. DTEE is currently in a GRC proceeding, which is expected to resolve next month. ���������ֳ� estimates a constructive outcome of the GRC in-line with the historical results. ���������ֳ�'s believes annual DTEE rate case filings and prompt resolution of the cases allow for timely recovery of annual capital spending, offsetting the lack of infrastructure recovery mechanism for the electric utility.

Elevated Capital Program: DTEE plans to invest approximately $12 billion during 2020-2024. There is also an upside potential for capex investment of about $1.5 billion. The large program reflects DTEE's goals to reduce carbon emissions by investing in distribution and environmental-compliance projects and gas and wind generation. The investments will render DTEE FCF negative in the intermediate term. ���������ֳ� expects internal cash flow to fund the program, with debt and equity support from DTE to maintain the utility's regulatory capital structure.

Transition to Clean Energy Generation: The utility is retiring coal-fired generation and replacing it with wind and natural-gas-fired plants to meet its environmental targets and exceed Michigan's 15% Renewable Portfolio Standard by 2021. Under the Integrated Resource Plan (IRP) filed in March 2019 and resubmitted in March 2020, the company pledges to reduce CO2 emissions by 50% in 2030 and 80% by 2040 and shut down all coal-fired plants by 2040. The plan calls for three coal-fired plants with 2GW capacity to be retired in 2022 and replaced with the 1,100MW Blue Water Energy Center natural-gas-fired plant (costing around $1 billion), an $800 million upgrade of the Ludington Pumped Storage Power Plant (DTEE owns 50%) and additional renewable projects. ���������ֳ� believes these projects over the next five years will not present major technology or execution risks. The next IRP will be filed in 2023 and should address potential early retirements of remaining coal units.

Solid Financial Profile: ���������ֳ� estimates FFO leverage of 3.9x-4.0x through 2023, reflecting moderate pressure from high capital spending. ���������ֳ� believes the credit metrics are consistent with the current rating.

DTE Gas

Constructive Regulatory Environment: ���������ֳ� views the regulatory environment for natural gas utilities in Michigan as constructive. The regulatory framework allows full pass-through of fuel costs, forward-looking test years and timely resolution of rate proceedings. DTEG's currently authorized ROE of 10% compares favourably with industry averages. Furthermore, revenue decoupling and an infrastructure recovery mechanism (IRM) helps DTEG reduce exposure to regulatory lag.

Rate Case: DTEG filed a GRC in November 2019, asking for a rate increase of about $200 million based on a 10.5% ROE. The final order is expected by October 2020. ���������ֳ� estimates a constructive outcome of the GRC in-line with the historical result. The latest natural gas GRC in Michigan was resolved with an allowed ROE of 9.9%. DTEG last received a 1% rate increase and an above average 10% ROE on a 38.3% equity ratio in its general rate case in September 2018. DTEG usually files a rate case every other year, and the next rate case filing is expected in 2021.

Utility-Focused Capex Program: DTEG plans to spend $3 billion on capital investments in 2020-2024. This program is 20% higher than the 2019 plan. There is also an upside potential for capex investment of about $500 million. Capital projects are focused on distribution system enhancements, main renewals and pipeline integrity programs. The timely cost-recovery mechanism provided under the IRM is used for about 55% of the projects. The investments will render FCF negative in the intermediate term. ���������ֳ� expects the program will be funded with internal cash flow, debt and equity support to maintain DTEG's balanced capital structure.

Solid Operating Performance: DTEG's current and projected credit measures are supportive of its current rating. ���������ֳ� estimates adjusted debt/EBITDAR and FFO leverage to increase in 2020 to 4.6x and 4.8x, respectively, due to the increase in the capital program versus previous years, and improve to 4.2x and 4.5x, respectively, by 2023. Concerns over the modest increase in leverage are mitigated by the utility's IRM.

Parent/Subsidiary Linkage: ���������ֳ� applied a bottom-up approach in rating DTE and its subsidiaries. DTE's Long-Term IDR reflects a consolidated credit profile. The linkage between the parent and subsidiaries follows a weak parent/strong subsidiary approach. ���������ֳ� considers DTEE stronger than DTE due to the low-risk business-regulated utility operations and predictable cash flow. Legal ties are weak, as DTE does not guarantee the debt obligations of the subsidiaries and no cross defaults exist among DTE and its subsidiaries. Operational and strategic ties are robust, and DTEE remains the primary driver of earnings and cash flow to support parent-level dividends. DTEG also has operational and strategic ties to DTE, but does not contribute as large a portion of cash flow to its parent. ���������ֳ� has determined moderate linkage exists between DTE, DTEE and DTEG, and would limit the notching difference between the Long-Term IDRs of DTE and its subsidiaries to one to two notches.

Derivation Summary

The credit profile of DTE is weaker than its peers Dominion Energy, Inc. (DEI; BBB+/Stable) and Sempra Energy ( BBB+/Stable), which are parent holding companies anchored by regulated utility operations and midstream assets. All have significant parent-level debt. DTE's consolidated operations are smaller than Dominion and Sempra. In terms of cash flow from regulated utilities, DTE's regulated cash flow of about 78% in 2019 is higher than Dominion's, whose regulated cash flow was around 70% in 2019 and close to Sempra's at around 80%. Utility cash flow is projected to decrease to an average of 72% of total cash flow over the forecast period. ���������ֳ� anticipates FFO leverage of 5.1-5.2x in 2020 and 2021, improving to 4.7x-4.8x in 2022 and 2023, which is similar to Dominion with FFO leverage projected at 4.8x and less favorable to Sempra at mid-4.0x after 2020, when Cameron LNG, LLC comes online.

DTEE compares favorably with peers Consumers Energy Company (A-/Stable) and Northern States Power Company-Wisconsin (NSP; A-/Stable). All are regulated electric utilities with supportive regulatory environments and favorable recovery mechanisms. DTEE and Consumers both operate in Michigan and are similarly sized, while NSP is smaller and also operates in a single state under one regulator. DTEE's financial profile compares favorably with Consumers' but less so with NSP's. DTEE's leverage is rising as it progresses through its elevated capital program, which is in line with its peers. ���������ֳ� forecasts FFO-adjusted leverage to average 3.9x-4.0x at DTEE through 2023, slightly weaker than 3.7x-3.9x at Consumers and 3.5x-3.8x at NSP.

DTEG's business risk profile compares well to peers Southwest Gas Corporation (SWG; A-/Stable) and Wisconsin Gas LLC (A-/Stable) as regulated local distribution companies (LDC). ���������ֳ� views LDCs as a low-risk business. Each benefits from supportive regulatory environments and favorable recovery mechanisms. SWG's business profile is more favorable than its peers, stemming from regulatory diversity in three states and above-average customer growth. DTEG's Long-Term IDR is lower than peers due to its higher leverage driven by a large capex program. DTEG's financial profile is slightly weaker than peer WI Gas and in line with SWG. DTEG and SWG forecast FFO leverage around 4.5x-4.8x during the 2020-2023 forecast period. WI Gas has a more favorable financial profile with forecast leverage metrics around 4.7x in 2020 and improving to 4.1x by 2022.

Key Assumptions

--Constructive regulatory environment in Michigan with 9.9% ROE for DTEE and DTEG in line with historic results; DTEE files GRCs annually and DTEG files a GRC in 2019 and 2021;

--Capex program totalling $19 billion, with $15 billion at utilities, from 2020-2024;

--O&M reduction in 2020 to offset negative effects of economic slowdown on sales;

--Industrial and commercial sales declines of 30% and 20%, respectively, in 2020, with a 2% increase in residential sales to reflect the economic impact of the coronavirus on gas utility operations; gradual recovery to normal levels in 2021 and beyond;

--A 1.5% decline in natural gas deliveries in 2020 and recovery in 2021 to reflect a modest economic impact of the coronavirus on gas utility operations;

--Capital structure commensurate with regulatory structure;

--Midstream EBITDA assumes revenues from existing MCVs and demand charges plus a modest upside growth potential.

RATING SENSITIVITIES

DTE:

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:

--While not anticipated at this time given the sizable capital program and elevated leverage, sustained improvement in FFO-adjusted leverage of 4.7x or lower through the forecast period;

--Decrease in business risk resulting in 80% or more earnings coming from regulated utility business.

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:

--A significant deviation from the current business risk with the regulated businesses comprising 60%-65% of consolidated cash flow due to growth in the non-utility businesses;

--An adverse change in Michigan's regulatory environment;

--Sustained weakening in FFO-adjusted leverage of 5.3x or higher through the forecast period.

DTEE

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:

--Sustained FFO leverage of 3.5x or better,

--Given the linkage to DTE, any upward revision to DTE's IDR.

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:

--A one-notch downgrade at the parent DTE;

--An adverse change in Michigan's regulatory environment;

--Sustained FFO leverage greater than 4.5x.

DTEG

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:

--Sustained FFO leverage at or below 4.0x.

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:

--An unexpected change in the regulatory environment that limits the utility's ability to recover cost of capital investments in a timely manner;

--Sustained FFO leverage greater than 5.0x.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit /site/re/10111579.

Liquidity and Debt Structure

DTE Energy had around $1.6 billion of available liquidity at Dec. 31, 2019, consisting of cash and amounts available under revolving credit facility. Liquidity is adequate and has been recently increased by a $500 million parent-funded term loan issuance and a $200 million unfunded credit facility. DTEE was also able to issue a $1.7 billion of debt at very favorable rates. Debt maturities are manageable, and ���������ֳ� expects DTE to have continued access to the capital markets. There are only $362 million of maturities remaining in 2020, mostly at DTEE.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

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Applicable Models

Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).

• Corporate Monitoring & Forecasting Model (COMFORT Model), v7.8.0 (1)

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