Fitch raises CenterPoint Energy, CenterPoint Energy Houston

May 21 – Fitch Ratings has upgraded the Issuer Default Rating (IDR) of CenterPoint Energy, Inc. (CNP) to ‘BBB’ from ‘BBB-‘ and upgraded CNP’s senior unsecured rating to ‘BBB’ from ‘BBB-‘.

Fitch also upgraded the IDR of CNP’s subsidiary CenterPoint Energy Houston Electric, LLC (CEHE) to ‘BBB+’ from ‘BBB’ and upgraded CEHE’s senior unsecured rating to ‘A-‘ from ‘BBB+’. Fitch affirmed the IDR of CNP’s subsidiary CenterPoint Energy Resources Corp. (CERC) at ‘BBB’. The short-term IDR of CERC was downgraded to ‘F3’ from ‘F2’, reflecting alignment with the short-term ratings of its parent.

The Rating Outlook for all three companies is Stable. Approximately $6 billion of outstanding long-term debt is affected.

CNP’s rating and Outlook primarily reflect the consistent progress that has been               made in improving financial flexibility and reducing consolidated leverage. CNP reduced debt by approximately $600 million this year, representing approximately one-third of true-up proceeds. The rating and Outlook also reflect Fitch’s expectation that CNP will utilize the remaining proceeds in a balanced mix of transactions or investments, including additional debt reduction, capital expenditure in existing businesses, growth investments and/or M&A transactions in the non-regulated operations that will grow proportionally with its regulated operations.

Additionally, the rating and Outlook also assume that, on a consolidated basis, if a master limited partnership (MLP) were to be established for any or all of CERC’s midstream assets, it would be structured in a way that would likely be credit neutral to CNP and its subsidiaries.

Fitch expects CNP’s regulated and fee-based operations to continue to contribute a large majority of the consolidated operating income and that the sensitivity of cash flow and working capital needs to changes in commodity prices will remain low.

Fitch believes that the deleveraging coupled with low business risk profile should be able to support CNP’s credit metrics at a level that is more consistent with a ‘BBB’ rated utility. Fitch expects CNP to produce consolidated Funds Flow from Operations (FFO) to Debt in the high teens to low 20% and Debt to EBITDA in the low 3x in the next few years.

The event risk at CNP has increased due to the uncertainty surrounding the use of the remaining true-up proceeds and management’s expressed interested in an MLP CNP and CERC’s ratings will be more closely aligned due to Fitch’s expectations that the uncertainty of the use of remaining proceeds will be mostly associated with investments in CERC.

Fitch expects that majority of the proceeds to be allocated in the field services area primarily due to the abundance of the opportunities in the sector and the strategic inclination of management. Fitch would be concerned if management were to pursue any significant commodity sensitive, unregulated or un-contracted investments or an MLP that would substantially alter the overall risk profile of the company from financial and operational standpoints.

CEHE’s IDR and Stable Outlook reflect the low business risk of its regulated electric transmission and distribution operations in Texas Fitch considers the regulatory and economic environment in Texas reasonably supportive to CEHE’s credit profile. CEHE has the ability to earn a return on its transmission and distribution investments with minimal regulatory lag. In addition, CEHE bears no commodity risk and does not maintain the provider of last resort requirement like T&Ds in other jurisdictions.

Fitch expects CEHE’s credit metrics to position well within its rating category in the next 12 to 18 months, albeit modestly weaker than 2011 due to expected normal weather and a rate reduction implemented in September 2011. Fitch forecasts CEHE’s FFO to total debt to stabilize around low to mid-20% and total debt to EBITDA in the high 2x to low 3x in the next few years.

Fitch would be concerned if the regulatory supportiveness in Texas takes on a negative tone. Fitch also believes that CEHE’s current lack of participation in the state’s prioritized initiative Competitive Renewable Energy Zone (CREZ) project could be a modest constraint to its future rate base growth and ratings against its peers over the long term.

CERC’s IDR and Stable Outlook assume that the expected growth investments in the field services area will be conducted in a prudent manner and that CERC’s credit profile will not substantially deteriorate as a result. Fitch expects CERC to continue to derive the majority of its cash flow from its geographically diversified regulated operations with added stability from its fee-based operations. CERC’s cash flows from its LDCs are stabilized through diversified and overall supportive regulatory mechanisms in six states. Its pipelines are mostly located near the natural gas supply basins and end-user markets. Over 90% of the interstate pipeline capacity is subscribed with high visibility in cash flows. Cash flows at CERC’s field services segment, though unregulated, are mainly tied to contractual fee-based revenue streams, thus minimizing large exposure to volume risk as a result of movements in natural gas prices and mitigating Fitch’s concern around the growing proportion of field services operations in the overall business mix at CERC. The collateral requirements at CERC’s competitive natural gas marketing business are sensitive to natural gas price movements. To mitigate the risk, management has implemented an internal cap on working capital requirements to limit its collateral exposure to falling natural gas prices. Fitch would be concerned if management were to disproportionately grow commodity sensitive, non-fee based businesses.

Fitch upgrades, affirms, or assigns the following ratings with a Stable Outlook:

CenterPoint Energy, Inc.              

–Upgrades IDR to ‘BBB’ from ‘BBB-‘;

–Upgrades Senior Unsecured Notes and pollution control revenue bonds to ‘BBB’ from ‘BBB-‘;

–Upgrades Secured pollution control revenue bonds to ‘A’ from ‘A-‘;

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

–Assigns Junior Subordinated Debenture (ZENS) at ‘BB+’             

CenterPoint Energy Houston Electric

–Upgrades IDR to ‘BBB+’ from ‘BBB’;

–Upgrades First Mortgage Bonds to ‘A’ from ‘A-‘;

–Upgrades Secured pollution control revenue bonds to ‘A’ from ‘A-‘;

–Upgrades General Mortgage Bonds to ‘A’ from ‘A-‘;

–Upgrades Unsecured Credit Facility to ‘A-‘ from ‘BBB+’;

–Affirms Short-term IDR at ‘F2’.

CenterPoint Energy Resources Corp.

–Affirms IDR at ‘BBB’;

–Affirms Senior Unsecured Notes at ‘BBB’.

Fitch downgrades the following rating with a Stable Outlook:

CenterPoint Energy Resources Corp.

–Short-term IDR/Commercial paper to ‘F3’ from ‘F2’.