Fitch Affirms CenterPoint Energy's IDR at 'BBB'; Affirms Subsidiaries; Outlook Stable
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 IDRs 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 debt obligations are
affected. A full list of rating actions follows at the end of this
release.
KEY RATING DRIVERS
CenterPoint Energy, Inc. (CNP)
--Enable impact manageable but requires continued financial discipline;
--Pending strategic reviews could alter credit profile;
--Regulated operations drive performance;
--Consistent credit metrics.
CenterPoint Energy Houston Electric, LLC (CEHE)
--Low risk T&D business;
--Sizeable capital spending;
--Healthy credit metrics.
CenterPoint Energy Resources Corp. (CERC)
--Stable gas operations;
--Rating constrained by Enable.
Key Rating Drivers for CNP
--Manageable Enable Exposure; Continued Financial Discipline Required.
Fitch believes that CNP's financial exposure from its investment in
Enable Midstream Partners L.P. (Enable 'BBB-'/Stable Outlook) is
manageable currently. CNP's recent investment in Enable's $363 million
preferred securities is consistent with Fitch's expectation that CNP
would support Enable during times of financial stress, such as the
current period of constrained capital markets access for all Master
Limited Partnerships. Nevertheless, Fitch would like the extent of
support to be limited and would continuously assess such support in
conjunction with CNP's own financial leverage and credit metrics.
CNP currently has adequate headroom in its credit metrics to provide a
reasonable amount of financial support to Enable. Over the next five
years, excluding effects of securitization bonds at CEHE and
consolidating proportionately Enable's financials, Fitch estimates that
CNP will produce funds from operations (FFO) fixed charge coverage, on
average, of 4.3x and debt to operating EBITDAR of 4.2x. These metrics
remain in line with its rating category and are consistent with its
predominantly regulated business profile.
The capex reduction at its utilities and the cash and marketable
securities balance are expected to partially mitigate the needs for
material debt financing resulting from reduced distributions and
near-term capital calls from Enable if necessary. CNP recently cut the
utility capex for 2016 - 2019 by approximately $800 million from a
previous guidance aiming to better align spending with earnings growth.
Additionally, Fitch believes that management is committed to maintaining
its credit quality and will issue equity when needed.
However, should Enable's credit profile further deteriorate, Fitch would
evaluate the extent of parental support required against the need for
CNP to maintain its credit ratings.
Credit Profile Evolving
Fitch views favorably CNP's ongoing review of its investment in Enable.
A sale or spinoff could potentially improve CNP's business risk profile,
should the remaining entity be comprised almost entirely of regulated
utility operations. CNP's ratings in such a scenario would be assessed
based on a significantly improved risk profile and its ability to reduce
debt to offset the loss of earnings and cash flows from Enable.
CNP also announced recently that it is exploring the possibility of a
REIT structure for part or all of its electric utility business. Fitch
would generally view the REIT structure as negative to the existing
bondholders given the reduced financial flexibility. This is due to the
requirement to distribute at least 90% of net income to shareholders to
maintain the REIT status, continuous reliance on capital markets to fund
growth capex and distribution, and uncertainty regarding regulatory
treatment of such structure and tax benefits.
Regulated Operations Drive Performance
CNP's ratings and Outlook are primarily supported by stable earnings and
cash flow at its regulated electric and natural gas utility operations.
In 2015, 77% of consolidated operating income was derived from regulated
utilities. CERC's natural gas distribution operations benefit from
geographic diversity and various supportive recovery mechanisms. CEHE's
electric transmission and distribution (T&D) operations in Texas have
low operating risks. Mechanisms such as the Transmission Cost of Service
(TCOS) and Distribution Cost Recovery Factor (DCRF) allow frequent
recovery without rate case filings and provide a better opportunity for
CEHE to earn its authorized returns. Despite job loss in the energy
sector, customer growth continues to be healthy due to the improving
diversity of the local economy in the Houston area.
Key Rating Drivers for CEHE
Downsized Capital Spending
Management has recently reduced CEHE's capex plan by approximately $400
million over 2016 - 2019. Despite the cut, CEHE's capex remains
elevated. The utility plans to invest approximately $790 million
annually over the next three years and nearly $700 million each in 2019
and 2020, comparing to an annual run rate of ~$600 million before 2014.
Fitch expects CEHE to reduce upstream dividend to CNP during this period.
Stable Customer Growth
CEHE's service territory has historically delivered strong population
and economic growth relative to national averages. Despite the
struggling energy sector, the unemployment rate in Texas was 4.7% in
December 2015, slightly below the national average of 5%. Driven by a
more diversified economy and job additions in non-energy sectors,
customer growth in CEHE's service territory was a robust 2% in 2015.
Credit Metrics Well Positioned
Fitch expects CEHE's credit metrics to weaken modestly primarily due to
the sizeable capex program, but remain well positioned for its rating
level in the next several years. Fitch forecasts CEHE's FFO fixed charge
coverage to average 5.3x and debt to operating EBITDAR to average 3.2x
from 2016 to 2020.
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 and CEHE has the ability
to earn a return on its transmission and distribution investments
without filing rate cases.
Key Rating Drivers for CERC
Midstream Investment A Constraint
Before and after Enable was formed, Fitch had equalized CERC's IDR and
its senior unsecured ratings due to its investments in the midstream
business. If a sale or a spinoff of Enable investment is executed and if
CERC is comprised of almost entirely regulated utility operations, its
senior unsecured ratings could receive a one-notch uplift from its IDR,
according to Fitch's notching criteria for regulated utility operating
companies. Fitch would view a sale or spinoff of Enable to likely
improve CERC's business risk profile; however, CERC's pro-forma ratings
in this scenario would be determined by its ability to pay down debt and
the ultimate capital structure.
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.
RATING SENSITIVITIES
CNP:
Positive:
--Positive rating actions appear unlikely in the foreseeable future
given the struggling midstream segment. In addition, the pending
strategic reviews around Enable and a REIT structure for CEHE could have
mixed impact on the consolidated credit profile. Nevertheless, in the
event that an external sale or spinoff of Enable investment is executed
and the remaining entity would contain almost entirely regulated utility
operations, depending on the final capital structure, a positive rating
action may be considered.
Negative:
--Substantial increase in leverage to provide financial support to
Enable;
--If debt to operating EBITDAR 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 since Fitch intends to
maintain a one-notch IDR differential between CEHE and CNP.
Negative:
--If the regulatory environment becomes contentious such that it is
unable to receive timely and reasonable recovery in rates;
--If debt to operating EBITDAR exceeds 4.2x and/or FFO fixed charge
coverage is less than 4x on a sustained basis.
CERC:
Positive:
--Positive rating actions appear unlikely given the struggling midstream
segment. Nevertheless, in the event that a sale or spinoff of Enable
investment is executed and that the remaining entity would be comprised
almost entirely of regulated utility operations, depending on the final
capital structure, a positive rating action may be considered;
--Senior unsecured debt rating could receive one-notch uplift from IDR
if a sale or spinoff of Enable investment is executed such that
pro-forma CERC becomes almost fully regulated.
Negative:
--Ratings will be negatively impacted if the regulatory construct
governing the gas distribution subsidiaries becomes unfavorable;
--Debt to operating EBITDAR 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 approximately $750 million per year and $450
million per year for CERC's gas utilities;
--CEHE's TCOS and DCRF mechanisms are available and result in an average
annual rate relief of approximately $60 million;
--Combining rate cases and annual mechanisms, gas operations rate relief
averages approximately $50 million per year;
--Annual customer growth at CEHE of approximately 1.8% - 2% and 0.8% -
1% at CERC;
--A modest amount of equity issuance;
--No additional equity support for Enable (except for modest amount of
reductions of Enable's distribution to CNP);
--Maintain existing organizational structure.
Fitch affirms the following ratings:
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';
--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'.
The Rating Outlooks are Stable.
Date of Relevant Rating Committee: March. 17, 2016
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362
Treatment and Notching of Hybrids in Non-Financial Corporate and REIT
Credit Analysis (pub. 29 Feb 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=878264
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1001206
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1001206
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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