Fitch Affirms CenterPoint Energy and Subsidiaries; Outlook Stable
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'.
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