MOODY'S LOWERS CREDIT RATINGS OF HOUSTON LIGHTING AND POWER (SEC. TO A3); RAISES THOSE OF HOUSTON INDUSTRIES (SR. UNSEC . TO Baa1); AND CONFIRMS NORAMS' (SR. UNSEC. AT Baa3)
New York, 12-12-96 -- Moody's downgraded the credit ratings of Houston Lighting and Power, upgraded the ratings of its parent, Houston Industries Inc., and confirmed those of NorAm Energy Corp. to reflect the corporate structure to be assumed early next year when Houston Industries completes its merger with Noram, as announced on August 12, 1996. Assuming receipt of necessary regulatory approvals, Houston Lighting and Power Company will be collapsed into its former parent and renamed Houston Industries Inc. The ratings realignment reflects this new corporate structure, as well as the assumption of over $1 billion in incremental leverage to finance the merger and effect the restructuring.
Securities that have been downgraded and which will be renamed Houston Industries Inc. are Houston Lighting & Power's first mortgage bonds and secured medium term notes to A3 from A2; its shelf registration for senior secured debt to (P) A3 from (P) A2; its unsecured pollution control bonds to Baa1 from A3; its counterparty rating to Baa1 from A3; its preferred stock to "baa1" from "a2"; and its short-term rating for commercial paper to Prime-2 from Prime-1. (The HII commercial paper program will be subsumed by a new finance company; therefore the HII commmercial paper rating will be withdrawn.)
Securities upgraded are Houston Industries Inc.'s unsecured debentures to Baa1 from Baa2, and its unsecured shelf registration to (P) Baa1 from (P) Baa2.
Ratings confirmed are NorAm Energy Corp.'s senior unsecured notes, medium-term notes, and debentures at Baa3; its bank debt at Baa3; its convertible subordinated debentures at Ba1; its shelf registration for senior unsecured debt at (P) Baa3; its shelf registration of subordinated debt at (P) Ba1; its shelf registration for preferred stock at (P) "ba1"; and the Trust Originated Preferred Securities issued by NorAm Financing I at "ba1." The downgrades of Houston Lighting and Power's ratings reflect the higher financial risk associated with the assumption of over $1 billion in incremental leverage to finance the acquisition and to complete the restructuring. While Houston Lighting and Power (HLP) and Houson Industries (HII) will be combined into the new HII, a downstream finance company will be created to house new bank facilities totalling over $2 billion. New HII has undertaken a support agreement with the banks which recognizes that the bank debt is subordinate to the obligations of new HII. Although new HII has ample free cash flow available to service this bank debt after it has met the obligations of outstanding securities, the existence of the support agreement prompted the downgrade in HLP's senior secured rating to A3 from A2.
Business risk has not increased by virtue of the merger and may decline once convergence synergies and efficiency savings are realized. The lowering of HLP's senior unsecured and counterparty ratings to Baa1 and its preferred stock rating to "baa1" reflect the lower priority of claims of these securities holders which would be junior to that of senior secured bondholders in a court of law.
Collapsing HLP into HII will remove the structural subordination of HII obligations to those of HLP. This prompted the upgrade of HII's debentures to Baa1 to reflect their status as senior unsecured debt, one notch below the new HII's senior secured rating. The new ratings continue to capture the risk inherent in management's aggressive offshore investment strategy for Houston Industries Energy, which continues to identify investment opportunities in a combination of new construction projects and existing facilities. While Moody's regards this strategy as risky for bondholders, the near term investment of new HII free cash flow in HIE projects and other non-regulated activities will be limited by certain provisions of the bank agreement until that debt is reduced to $1.5 Bn.
The confirmation of NorAm Energy Corp.'s ratings reflects the fact that new HII management has yet to indicate a specific course of action regarding NorAm's balance sheet. New HII may reduce NorAm's leverage if it proves to be economic for the overall company. However, in the absence of significant cost savings, it is unlikely that NorAm will be able to generate sufficient operating cash flow to cause a meaningful reduction in its leverage.
Most state commission approvals have either been received or are soon to be received. Moody's anticipates that the staff of the Securities and Exchange Commission will approve the new corporate structure early in 1997. Assuming all other approvals have been received by then, the merger will be completed shortly thereafter. Prior to completion of the merger, Houston Industries Inc. will continue as the parent company of Houston Lighting & Power Company, an electric utility headquartered in Houston, Texas. NorAm Energy Corporation, also headquartered in Houston, serves over 2.7 million customers through its Entex, Arkla, and Minnegasco natural gas distribution divisions. NorAm's major subsidiaries operate two regulated interstate natural gas pipelines (NorAm Gas Transmission and Mississippi River Transmission). The company also owns subsidiaries involved in natural gas gathering and processing, natural gas storage, and energy marketing.
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