Income Opportunities

Press Release Source: Fitch Ratings on Friday October 8, 2010, 11:37 am EDT

NEW YORK–(BUSINESS WIRE)– Fitch Ratings has affirmed the ratings for CenterPoint Energy, Inc. (CNP), CenterPoint Energy Resources Corp. (CERC) and CenterPoint Energy Houston Electric, LLC (CEHE). The Rating Outlook for each company is Stable. a full rating list is shown below. Approximately $6.6 billion of outstanding long-term debt is affected.

CNP’s ratings are supported by upstream dividend payments from its mostly regulated subsidiaries, a diverse business mix across electric and gas operations and conservative risk management strategy that limits exposure to commodity price movements. Fitch acknowledges the consistent progress that management has made in reducing the consolidated leverage; CNP enhanced its capital structure by issuing 25.3 million shares in June 2010 with gross proceeds of $326 million. Nonetheless, holding company leverage remains relatively high as a result of legacy stranded costs issues.

Fitch notes that management has been taking advantage of its strategically located natural gas infrastructure to grow the non-regulated field services business. so far, the growth has primarily come from contractual, fee-based revenue arrangements with a very small variable component to margins. It is Fitch’s expectation that the regulated and non-regulated fee-based businesses will continue to contribute more than 90% of the consolidated operating income of CNP. Fitch expects capital spending needs to reduce to a level that can be funded primarily through internally generated cash flow beyond 2010. The liquidity position is strong with minimal borrowings under the existing credit facilities, both at CNP and each of its subsidiaries. Fitch expects the consolidated Funds Flow from Operations (FFO) to total debt to improve to approximately 17% and total debt to EBITDA at 3.6 times (x) by the end of 2012.

The Stable Outlook for CNP assumes that the electric and gas utilities, pipelines and field services businesses will continue to perform well and the sensitivity of cash flows and working capital needs to changes in commodity prices will remain low. The Outlook also incorporates the expectation that CNP will be able to complete its anticipated debt issuances and refinancings. Improvement in leverage and coverage ratios through cash flow growth or other means is key to any improvement in CNP’s current ratings or Outlook.

Fitch’s primary credit concern for CNP is the still highly leveraged consolidated balance sheet and weak coverage ratios relative to the rating guidelines as a result of the legacy stranded costs incurred from generation asset divestitures in 2004, despite gradual improvement. Other concerns include disproportionate growth of non-regulated operations, which have relatively higher business risk and the potential for an unfavorable decision in the stranded cost litigation.

CERC’s ratings and Stable Outlook are supported by stable and predictable cash flows from its regulated local gas distribution companies (LDCs) as well as contractual cash flows from its interstate pipelines and field services businesses. The LDCs cash flows are stabilized through purchase gas adjustment mechanisms. Fitch expects the LDCs to earn close to their authorized ROEs in 2010, in contrast to a history of under-earning, aided by weather and rate relief. a significant majority of the interstate pipeline capacity is subscribed leading to high visibility in cash flows. Cash flows at CERC’s field services segment, though non-regulated, are mainly tied to stable, fee-based revenue streams, thus, minimizing large exposure to movements in commodity prices. over the last 15 months, the field services segment has entered into long-term gas gathering and treating agreements with creditworthy counterparties. The predominantly fee-based nature of these agreements and throughput guarantees mitigates Fitch’s concern around the growing proportion of field services operations in the overall business mix at CERC. CERC also owns a competitive natural gas marketing business. in this business, CERC takes no commodity risk and management has implemented an internal cap on working capital requirements to limit its collateral exposure to falling natural gas prices.

CERC’s credit ratios in 2010 are modestly lower than Fitch’s guidelines for a ‘BBB’-rated issuer but are expected to improve over the forecast period. Fitch expects CERC’s FFO to total debt to improve to approximately 18% and total debt to EBITDA at 3.6x over the next two years. Key rating drivers considered include the overall business mix at CERC, contract demand and uncontracted margins at the pipeline segment, throughput growth at the LDCs, likely outcome of the pending and potential rate case at regulated businesses, and execution of the capex plan at the field services segment.

Fitch would be concerned if management were to pursue a debt financed expansion strategy or disproportionately grow commodity sensitive, non-fee based businesses. Other concerns include sensitivity of operating income and collateral needs to the falling commodity prices.

CEHE’s rating and Stable Outlook reflect the low business risk of its regulated electric transmission and distribution operations in Texas. CEHE provides electric delivery service to roughly 2 million customers, primarily in Houston, on behalf of retail electric providers (REPs) under tariffs approved by the Public Utilities Commission of Texas (PUCT). Houston has historically been an attractive service territory and sales have recovered after slowing down in 2008 and the first half of 2009. in addition, due to a high proportion of demand charges, CEHE bears little volumetric risk on its large commercial and industrial sales, which comprise a majority of its sales mix.

The regulatory environment in Texas has stabilized and the deregulation seems to be working well. CEHE bears no commodity risk. The risk of bad debt due to potential defaults by the REPs has been minimized due to credit requirements imposed by the PUCT and the depressed commodity environment. Additionally, by PUC rule, CEHE can reserve any bad debt resulting from a REP default. CEHE has the ability to earn a return on its transmission investments with minimal regulatory lag. on its distribution operations, the utility modestly under-earned its allowed ROE in 2009 on a weather-adjusted basis and, in July 2010, filed for a distribution base rate increase of $76 million (which was subsequently revised to $93 million) for new rates to be effective in 2011. The rate filing also requests an increase of $18 million for wholesale transmission customers. CEHE’s rate request is based on 11.25% ROE and 50% equity ratio. in its recommendation, the PUC Staff recommended a disappointing 9.67% ROE. however, the Staff did recommend a 45% equity ratio, which is an improvement over CEHE’s current equity ratio of 40%. a final decision by the PUCT is expected by the end of the year.

Fitch expects a strengthening of CEHE’s credit metrics over the forecast period based on an expectation of a constructive outcome in the pending rate case. Fitch forecasts CEHE’s FFO to total debt to stabilize around 19% and total debt to EBITDA at 2.9x; these metrics are strong compared to Fitch’s guideline ratios for a ‘BBB’-rated utility. The consideration of a positive rating action for CEHE is tied to the outcome of the pending stranded cost litigation. Key rating drivers considered include customer growth, likely outcome of the pending rate case and the stranded cost litigation, and execution of the capex plan.

Rating concerns include uncertainty regarding the outcome of the pending rate case and the potential for an unfavorable decision in the stranded cost litigation. in addition, event risk for CEHE seems to be higher given the region’s vulnerability to hurricanes. however, CEHE has been authorized to recover most of the storm recovery costs arising from Hurricane Ike via securitization and amended its $1.2 billion revolver facility to permit covenant relief in case a large storm hits its service territory. Additionally, legislation has been passed in Texas that allows utilities to securitize prospective storm costs.

Fitch affirms the following ratings with a Stable Outlook:

CenterPoint Energy, Inc.

–Senior Unsecured Notes and pollution control revenue bonds at ‘BBB-’;

–Secured pollution control revenue bonds at ‘A-’;

–Trust Preferred at ‘BB’;

–Short-term IDR/Commercial paper at ‘F3′.

CenterPoint Energy Resources Corp.

–Senior Unsecured Notes at ‘BBB’;

–Short-term IDR/Commercial paper at ‘F2′.

CenterPoint Energy Houston Electric

–First Mortgage Bonds at ‘A-’;

–Secured pollution control revenue bonds at ‘A-’;

–General Mortgage Bonds at ‘A-’;

–Unsecured Credit Facility at ‘BBB+’;

–Short-term IDR at ‘F2′.

Additional information is available at ‘fitchratings.com’.

Applicable Criteria and Related Research:

–’Corporate Rating Methodology’, Aug. 16, 2010

–’Credit Rating Guidelines for Regulated Utility Companies’ July 31, 2007;

–’U.S. Power and Gas Comparative Operating Risk (COR) Evaluation and Financial Guidelines’ Aug. 22, 2007;

–’Utilities Sector Notching and Recovery Ratings’, March 16, 2010.

Applicable Criteria and Related Research:

Corporate Rating Methodology

fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646

Credit Rating Guidelines for Regulated Utility Companies

fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=334652

U.S. Power and Gas Comparative Operating Risk (COR) Evaluation and Financial Guidelines

fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=338030

Utilities Sector Notching and Recovery Ratings

fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=504546

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY’S PUBLIC WEBSITE ‘WWW.FITCHRATINGS.COM’. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE ‘CODE OF CONDUCT’ SECTION OF THIS SITE.

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Written by Tim on October 9, 2010 under Affiliate Marketing Companies.

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