NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A' rating to CenterPoint Energy Houston Electric, LLC's (CEHE, Long-Term Issuer Default Rating [LT IDR] 'BBB+'/Stable Outlook) $300 million general mortgage bonds series Y due 2021.
KEY RATING DRIVERS
--Capital spending remains large;
--Credit metrics will weaken;
--A potential REIT structure;
--Low risk T&D business;
--Recent accounting error related to working capital doesn't affect rating.
Downsized Capital Spending Remains Large
CEHE has reduced its capex plan by approximately $400 million over 2016 - 2019. Despite the cut, CEHE's capex remains elevated. The utility will invest approximately $790 million annually over the next three years and nearly $700 million each in 2019 and 2020, comparing to approximately $600 million per year before 2014. Fitch expects CEHE to reduce upstream dividend to CenterPoint Energy Inc. (CNP, LT IDR 'BBB'/Stable Outlook) during this period.
Credit Metrics Will Weaken
Fitch expects CEHE's credit metrics to weaken primarily due to the sizeable capex program. Despite the weakening, the metrics will remain consistent with its rating level. Fitch forecasts CEHE's FFO fixed-charge coverage to average 5.3x and debt/operating EBITDAR to average 3.2x from 2016 to 2020. The projections assume CEHE will maintain its current corporate structure instead of a real estate investment trust (REIT).
A Potential REIT Structure
Fitch generally views a potential REIT structure for CEHE as credit negative. This is due to the requirement that REITs distribute at least 90% of net income to shareholders, a continuous reliance on capital markets to fund growth capex and distribution, and uncertainties regarding regulatory treatment of the tax benefits.
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 opportunity to earn returns on its T&D capital investments through transmission cost of service (TCOS) twice a year and distribution cost recovery factor (DCRF) mechanisms once a year. CEHE bears no commodity risk and little volumetric risk on its commercial and industrial sales due to large proportions of demand charges.
RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
--An upgrade is unlikely absent an upgrade at CEHE's parent CNP as Fitch intends to maintain a one-notch IDR differential between them.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--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.
KEY ASSUMPTIONS
--CEHE's capex averages approximately $750 million per year from 2016 - 2020;
--CEHE's TCOS and DCRF mechanisms are available and result in an average annual rate relief of approximately $60 million;
--Annual customer growth of approximately 1.8% - 2%;
--A REIT structure is not assumed.
Date of Relevant Rating Committee: March 17, 2016
Additional information is available on 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
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1004461
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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