Fitch Ratings has affirmed the Long-term Issuer Default Rating (IDR) of
CenterPoint Energy, Inc. (CNP) at 'BBB'. Fitch has also affirmed the
Long-term IDR of CNP's subsidiaries CenterPoint Energy Houston Electric,
LLC (CEHE) and CenterPoint Energy Resources Corp. (CERC) at 'BBB+' and
'BBB' respectively. The Rating Outlook for all three companies is
Stable. Approximately $6 billion of outstanding long-term debt is
affected. A list of all rated debt is provided at the end of this press
release.
KEY RATING DRIVERS
CenterPoint Energy, Inc. (CNP)
Regulated Operations Drive Performance
CNP's ratings and Outlook reflect stable earnings and cash flow provided
by its regulated electric and natural gas utility operations. In 2014,
EBITDA from CNP's regulated utilities represented 72% of consolidated
EBITDA. Natural gas distribution operations, conducted through
subsidiary CERC, benefit from geographic diversity and various
supportive recovery mechanisms. Fitch considers CNP's electric
transmission and distribution (T&D) operations in Texas, operated by
CEHE, as low risk due to the lack of Provider of Last Resort (POLR)
obligations and commodity risks, and improving regulations that allows
CEHE to recover its expenses and investments without lengthy rate case
filings providing a better opportunity to earn its authorized returns.
Additionally, Texas and Houston economy has consistently outperformed
the national average and fosters steady customer growth for both
electric and gas operations.
Midstream Partnership Manages to Preserve Credit Quality
CNP's share of Enable Midstream Partners' (Enable) EBITDA represented
approximately 26% of consolidated EBITDA in 2014. Fitch affirmed
Enable's BBB IDR in January 2015 despite the challenging operating
environment. Enable's rating was primarily supported by its relatively
low leverage, significant fee-based earnings, scale of operation and
diversity of assets and customers. Fitch's primary credit concern for
Enable is the commodity and volume exposure associated with Enable's
gathering and processing segment which accounted for approximately 58%
of gross margin at the end of 2014. This segment generated 59% of the
gross margin from fee based contracts in 2014, over half of which was
volume dependent. 89% of the transportation and storage segment's gross
margin was from fee based contracts and 7% of which is volume dependent.
The gathering and processing volume will grow in the next few years but
at a slower pace. Enable has lowered the outlook for natural gas
gathering and processing volume for 2015 by 14% in its latest guidance
(based on midpoint guidance). To offset the anticipated volume
reduction, Enable is expected to reduce expansion capex by approximately
$375 million (based on midpoint guidance) or 30% from the previously
announced plan in late 2014.
Prudent Balance Sheet Management
The ratings affirmation incorporates Fitch's view that CNP management
will prudently manage its balance sheet as it pursues growth in the
regulated segment whether organically or through acquisitions,
unregulated expansions through Enable, and dividend growth. As CNP's
share of distribution from Enable is expected to reduce in the
foreseeable future, a balanced financing approach to fund CNP's dividend
and capex investments is crucial to maintaining its ratings. CNP targets
a dividend payout ratio of 60 - 70% of sustainable utility earnings and
90 - 100% of net cash distributions (after tax) from Enable Midstream
Partners.
Consistent Credit Metrics
Fitch expects CNP's credit metrics to decline as its regulated utilities
take on a sizeable capex program and the growth slows at the midstream
business, but to remain in line with its rating level. Over the next
five years, excluding effects of securitization bonds at CEHE and
including a proportional consolidation of Enable's financials, Fitch
estimates that CNP will produce funds from operations (FFO) fixed charge
coverage, on average, of 4.5x and Debt-to-EBITDA of 4.1x.
CenterPoint Energy Houston Electric, LLC (CEHE)
Low Risk T&D Business
CEHE's ratings and Stable Outlook reflect the low business risk of its
regulated electric transmission and distribution operations in Texas.
Fitch considers the regulatory environment in Texas to be improving and
reasonably supportive to CEHE's credit profile. CEHE has the ability to
earn a return on its transmission and distribution investments without
filing lengthy rate cases. In addition, CEHE bears no commodity risk and
does not maintain POLR requirements.
Rising Capital Spending
CEHE is executing a robust capex program in the next several years. The
company plans to invest $875 million per year compared to $635 million
annually in the previous five years. 43% of the spending focuses on
infrastructure improvements such as the proposed Brazos Valley
Connection project, 35% on customer growth and the remainder on
technology, reliability and maintenance. The capex program is expected
to boost rate base by 50% by 2019, or a compound annual growth rate of
8-10%. However, it will also elevate debt financing in order to mitigate
regulatory lag. CEHE is expected to upstream minimal amount of dividend
to CenterPoint Energy during the next few years.
Solid Service Territory
CEHE's service territory has historically delivered strong population
and economic growth relative to national averages. The unemployment rate
in Texas was 4.6% in December 2014, below the national average of 5.6%.
At the peak of the financial crisis, the unemployment rate was 8.2%
compared to the national average of 10%. Houston metropolitan area's
unemployment rate was 4.1% in December 2014. Driven by the strong and
diversified economy, CEHE has seen a healthy customer growth of 2%
annually in the last few years.
Credit Metrics Well Positioned
Fitch expects CEHE's credit metrics to weaken, but remain well
positioned for its rating level in the next several years. Fitch
forecasts CEHE's FFO fixed charge coverage to average 5.2x and
debt-to-EBITDA to average 3.1x from 2015 to 2018.
CenterPoint Energy Resources Corp. (CERC)
Stable Utility Earnings
CERC's IDR and Outlook incorporate Fitch's expectations that the company
will continue to derive the majority of its earnings and cash flows from
regulated natural gas distribution operations. CERC's gas operations
benefit from diversified service territories and overall supportive
recovery mechanisms such as decoupling, weather normalization and the
Gas Reliability Infrastructure Program in Texas.
Rising Capital Spending
Capital spending at CERC's gas operations for the next five years will
average $549 million annually, compared to $363 million in the past five
years. 76% of spending is focused on system maintenance and improvements
with the remaining on customer growth and technology. Rate base is
expected to grow by 55% by 2019. The gas operations are subject to
shorter regulatory lag relative to the electric operations as over 50%
of the investments are expected to be recovered through annual rate
mechanisms instead of rate case filings.
Midstream Guarantee
CERC provides a limited guarantee for $1.1 billion of Enable's notes.
The guarantee is subordinated to CERC's existing senior debt and is of
collection not payment and is subject to automatic release in May 2016.
RATING SENSITIVITIES
CNP:
Positive
--Ratings could be upgraded if CERC or CEHE is upgraded or parent level
debt is materially reduced.
Negative
--Ratings could be lowered if CEHE, CERC or Enable is downgraded or;
--If Debt to EBITDA exceeds 4.5x and/or FFO fixed charge Coverage is
less than 4x on a sustained basis.
CEHE:
Positive
--An upgrade is unlikely absent an upgrade at CNP and CERC and due to
the elevated capex program.
Negative
--Ratings could be downgraded if the regulatory environment becomes
contentious such that it is unable to receive timely and reasonable
recovery in rates or;
--If Debt/EBITDA exceeds 4.2x and/or FFO fixed charge coverage is less
than 4x on a sustained basis.
CERC:
Positive
--Ratings could be upgraded if Enable demonstrates a sound operational
and financial track record, and upstreams stable distributions.
Negative
--Ratings will be negatively impacted if the regulatory construct
governing the gas distribution subsidiaries becomes unfavorable or;
--Debt to EBITDA exceeds 4.5x on a sustained basis and/or FFO fixed
charge coverage is less than 4x on a sustained basis.
KEY ASSUMPTIONS
--CEHE's capex averages $875 million per year and $549 million per year
for CERC's gas operations;
--CEHE's TCOS and DCRF mechanisms are available and result in annual
rate relief of $61 million;
--Combining rate cases and annual mechanisms, gas operations rate relief
will average $50 million per year in the next five years;
--Annual customer growth at CEHE of approximately 1.8%-2% and 0.8%-1% at
CERC.
Fitch affirms the following ratings with a Stable Outlook:
CenterPoint Energy, Inc.
--Long-term IDR at 'BBB';
--Senior unsecured notes and pollution control revenue bonds at 'BBB';
--Secured pollution control revenue bonds at 'A';
--Junior Subordinated Debenture (ZENS) at 'BB+';
--Short-term IDR/Commercial paper at 'F2'.
CenterPoint Energy Houston Electric, LLC
--Long-term IDR at 'BBB+';
--First mortgage bonds at 'A';
--Secured pollution control revenue bonds at 'A';
--General mortgage bonds at 'A';
--Unsecured Credit Facility at 'A-';
--Short-term IDR at 'F2'.
CenterPoint Energy Resources Corp.
--Long-term IDR at 'BBB';
--Long-term senior unsecured notes at 'BBB';
--Short-term IDR/Commercial paper at 'F2'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014);
--'Recovery Ratings and Notching Criteria for Utilities' (Nov. 13, 2013);
--'Parent and Subsidiary Rating Linkage' (Aug. 5, 2013);
--'Rating U.S. Utilities, Power and Gas Companies, (March 9, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Recovery Ratings and Notching Criteria for Utilities -- Effective Nov.
18, 2014 - March 5, 2015
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=813608
Parent and Subsidiary Rating Linkage Fitch's Approach to Rating Entities
within a Corporate Group Structure
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=714476
Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=735155
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=981701
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