Fitch Rates CenterPoint Houston's General Mortgage Bonds 'A'
KEY RATING DRIVERS
--Capital spending remains large;
--Credit metrics will weaken;
--Low risk T&D business;
--Will not pursue a REIT structure.
Downsized Capital Spending Remains Large
CEHE has reduced its capex plan in early 2016 by approximately $400 million over 2016-2019. Despite the cut, CEHE's capex remains elevated. The utility will invest approximately $790 million annually over 2016-2018 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 as a low-risk transmission and distribution utility. Fitch forecasts CEHE's funds from operations (FFO) fixed-charge coverage to average 5.3x and FFO adjusted leverage to average 4x 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. 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. In July 2016, Public Utility of Texas approved CEHE's DCRF settlement to increase annual DCRF charge by $45 million effective Sept. 1, 2016 through Aug. 31, 2017. Effective September 2017, the annualized charge will be $49 million if a new DCRF is not filed. CEHE bears no commodity risk and little volumetric risk on its commercial and industrial sales due to large proportions of demand charges.
Will Not Pursue a REIT Structure
Management has announced that it will no longer pursue a real estate investment trust (REIT) which Fitch views positively as Fitch considers a REIT structure as credit negative for the utility. 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.
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 the two entities.
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 FFO adjusted leverage exceeds 5x and/or FFO fixed-charge coverage is less than 4x on a sustained basis.
--CEHE's capex averages approximately $750 million per year from 2016-2020;
--CEHE's TCOS and DCRF mechanisms are available;
--Annual customer growth of approximately 1.8%-2%.