Fitch Ratings has assigned an 'A' rating to CenterPoint Energy Houston Electric, LLC's (CEHE) general mortgage bonds.
CEHE intends to use the proceeds from the offering for general limited liability company purposes, including capital expenditures, working capital, and the repayment of all or a portion of CEHE's borrowings under the CenterPoint Energy, Inc. (CNP) money pool. CEHE's Long-Term Issuer Default Rating (IDR) is 'BBB+'/Stable. CEHE is a wholly owned subsidiary of CNP.
Key Rating Drivers
Low Business Risk: CEHE is a pure transmission and distribution (T&D) utility operating in Texas with a relatively low operating risk profile, no commodity price risk and no provider-of-last resort obligations. It also has little volumetric risks on its large commercial and industrial sales due to large proportions of demand charges. Mechanisms such as the Transmission Cost of Service (TCOS) and Distribution Cost Recovery Factor (DCRF) facilitate cost recovery outside of base rate case filings and provide a reasonable opportunity for CEHE to earn its authorized ROE. These riders are essential for Texas utilities to mitigate regulatory lag.
Like TCOS, utilities are now allowed to make a filing for DCRF twice a year. However, utilities are not permitted to file a DCRF during a general rate case proceeding. These mechanisms do not permit recovery of operations and maintenance expenses. A utility is required to file a base rate case within four years of its last rate case order unless it can prove its earnings are 50 bps below the average ROE of the T&D utilities operating in ERCOT. In CEHE's case, the company has agreed to file a rate case within four years of the final order from the last rate case which concluded in March 2020. CEHE is expected to file a rate case in Q1 2024.
Mechanisms to Mitigate Inclement Weather: CEHE's service territory is prone to storms in the Gulf Coast. Over the years, CEHE has been investing heavily in improving storm-resiliency including upgrading 69kV lines to 138kV and replacing substation breakers and transformers. Storm costs above $100 million can be securitized, and amounts below $100 million can either be recorded and deferred for future recovery or collected through certain recovery mechanisms.
Mobile Generation Lease Approved: In 2021, following Winter Storm Uri in Texas, CEHE leased approximately 505MW of mobile power generators. These assets are considered 'temporary emergency electric energy facilities' (TEEEF) under the Texas Public Utility Regulatory Act (TPURA).
Following Public Utilities Commission of Texas (PUCT)'s approval in March 2023, a final order was issued in April 2023 allowing full recovery of $200 million of the TEEEF related costs as of Dec. 31, 2021. The approval removes some uncertainty related to TEEEF since PUCT hadn't yet established a rule to implement the law related to TEEEF prior to the approval. CEHE made the second filing in April 2023 to recover remaining TEEEF related costs.
Strong Customer Growth: Texas has been a population magnet and economic growth leader for decades, with a large and diverse economic base. Customer growth in CEHE's service territory has been consistently around 2% for the last 10 years. In 2022, the Houston area was the second fastest growing metropolitan region in the U.S. In addition, more than one third of Houston's 2022 population growth came from inflow of residents moving from outside the U.S. Houston hosts many exploration and production companies. However, field operations are largely outside CEHE's service territory.
Credit Metrics Expected to Improve: In the last few years, incorporating the negative rate case and effects of tax refund, CEHE's FFO leverage was slightly elevated. During the forecast period, Fitch expects CEHE's FFO leverage to improve to around 4.7x, better than its 5.0x downgrade sensitivity and consistent with the utility's current IDR of BBB+/Stable.
Parent-Subsidiary Rating Linkage: There is parent subsidiary linkage between CNP and CEHE. Fitch determines CNP's standalone credit profile (SCP) based on consolidated metrics. Fitch believes CEHE has a stronger standalone credit profile (SCP) than its corporate parent. Emphasis is placed on the subsidiary's status as a regulated utility. Legal ring fencing is considered porous given the general protections afforded by rate regulation. Access and control are also porous.
CEHE's corporate parent, CNP, manages the treasury function for its subsidiary utilities centrally. CEHE participates in CNP's money pool and relies on equity infusions from its corporate parent as necessary. However, CEHE has direct access to short- and long-term debt capital markets. CEHE does not guarantee the debt obligations of CNP. Due to these considerations, Fitch generally limits the difference in the Long-Term IDRs between CEHE and CNP to no more than two notches.
CEHE' s peer group includes AEP Texas (AEPTX; BBB/Stable) and Oncor Electric Delivery Company (Oncor; BBB+/Stable). All three entities are relatively low risk transmission and distribution utilities with operations in Texas and in the midst of executing large capex programs. CEHE's authorized ROE of 9.4% is the same as AEP Texas and compares to a 9.7% authorized ROE for Oncor Electric Delivery Company. CEHE, AEPTX and Oncor have identical commission-authorized equity ratios of 42.5%, which is low for the sector. Elevated capex programs at the three utilities have pressured credit metrics. Fitch expects CEHE's FFO leverage to average around 4.7x, compared with AEP Texas' 6x and Oncor's 5x over the next three years.
Balanced regulatory outcomes in upcoming rate proceedings;
Annual customer growth of 2%;
Continuation of TCOS and DCRF mechanisms.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
FFO leverage below 4x on a sustained basis.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
FFO leverage above 5x on a sustained basis;
Termination of TCOS and DCRF;
Signs of deterioration of regulatory relationship.
Liquidity and Debt Structure
Adequate Liquidity: In December 2022, CenterPoint Energy Houston Electric, LLC, its corporate parent, CenterPoint Energy, Inc., (CNP) and affiliate, CenterPoint Energy Resources (CERC) replaced their existing revolving credit facilities with three revolving credit facilities totaling $3.75 billion in aggregate commitments. In addition, Southern Indiana Gas and Electric Company (SIGECO) entered into a new $250 million credit facility bringing the total borrowing capacity under the four RCFs to $4.0 billion. Under the terms of the RCFs CEHE, CNP and CERC and SIGECO are able to borrow up to $300 million, $2.4 billion and $1.1 billion and $250 million, respectively. The credit facilities expire Dec. 6, 2027. As of June 30, 2023, CEHE's credit facility was fully-available. CEHE's long-term debt maturities are manageable, with no long-term debt scheduled to mature during 2023 and 2024.
CEHE's and CNP's credit facilities contain a financial covenant limit on its debt for borrowed money to capital ratio of below 67.5% for CEHE (65% for CNP). CEHE was in-compliance with the required ratio as defined under its credit agreement, as of June 30, 2023. The covenant threshold can be temporarily raised to 70% for both CNP and CEHE if CEHE experiences damage from a natural disaster and CEHE certifies it will likely incur more than $100 million in restoration costs in the next 12 months, all or part of which CEHE intends to recover through securitization. The temporary increase would remain in effect from the date CEHE delivers the certification until the completion of securitization, or the first anniversary of the certification or the revocation of such certification, whichever occurs first.
CEHE participates in CNP's money pool which facilitates short-term borrowing and lending between participants. CERC and CEHE can borrow and invest in the money pool. CEHE had money pool borrowings of $110 million as of June 30, 2023.
CEHE is a regulated T&D electric utility that operates wholly within the state of Texas and is a member of Electric Reliability Council of Texas (ERCOT).
Summary of Financial Adjustments
Fitch adjusts CEHE's financials to remove securitization-related revenue, interest and amortization expense and debt.
Date of Relevant Committee
14 August 2023
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.