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Rating Action:

MOODY'S UPGRADES CENTERPOINT ENERGY, INC. (SR. UNSEC. TO Ba1 FROM Ba2) AND CENTERPOINT ENERGY RESOURCES CORP (SR. UNSEC. TO Baa3 FROM Ba1); RATING OUTLOOK IS STABLE

22 Jul 2005
MOODY'S UPGRADES CENTERPOINT ENERGY, INC. (SR. UNSEC. TO Ba1 FROM Ba2) AND CENTERPOINT ENERGY RESOURCES CORP (SR. UNSEC. TO Baa3 FROM Ba1); RATING OUTLOOK IS STABLE

Approximately $9 Billion of Debt Securities Affected

New York, July 22, 2005 -- Moody's Investors Service upgraded the ratings of CenterPoint Energy, Inc. (CenterPoint), including its senior unsecured debt to Ba1 from Ba2. In addition, Moody's assigned a Not-Prime rating to CenterPoint's $1.0 billion commercial paper program. Moody's also upgraded the ratings of CenterPoint Energy Resources Corp. (CERC), including its senior unsecured debt to Baa3 from Bal. These rating actions conclude the review for possible upgrade that was initiated on March 24, 2005.

The ratings for CenterPoint Energy Houston Electric (CEHE) are affirmed. The rating outlook is stable for CenterPoint, CERC and CEHE.

The upgrade of CenterPoint's ratings reflects the following factors:

1) Significant progress in reducing debt.

2) CERC's modestly improving financial profile and stand-alone liquidity capacity.

3) The continued progress made to date regarding CEHE's regulatory True-up filings and its stand-alone liquidity capacity that addresses near-term refinancing risks.

4) Management's stated intentions to de-lever the company and address its highly levered capital structure.

The ratings also consider CenterPoint's relatively low business risk profile, as almost all of CenterPoint's consolidated cash flows, revenues and assets represent rate-regulated activities. From a credit perspective, Moody's views regulated utility operations positively, due to the relative stability and predictability in utility earnings and cash flows. In addition, both of CenterPoint's utility operating subsidiaries are expected to exhibit relatively stable to modestly improving credit metrics over the next several years, due to organic growth, rate relief and other regulatory developments, and refinancing higher cost debt.

Balanced against CenterPoint's low business risk profile is a highly levered capital structure and cash flow credit metrics that, while slowly improving, remain weak when compared to investment grade utility comparables.

CenterPoint's progress with its de-leveraging plan also reduces the potential for negative credit implications at CERC. CERC's rating upgrade acknowledges the steady rise in earnings and cash flows that have solidified its standalone credit profile. Margins are growing from numerous rate increases that CERC has obtained across its LDC divisions in recent years, and we expect incremental increases in the near term from those that are pending. In addition, margins are expected to increase from capital projects under construction in its pipeline/field services segment that are supported by firm contracts and improved regional fundamentals. Significantly, CERC retired $325 million of its 8.125% notes at maturity on 7/15/05, all with internal liquidity resources, resulting in lower debt levels (a 14% reduction in total debt since year-end 2004) than we had anticipated at this time. CERC's standalone liquidity remains ample even after the above debt repayment. Also not anticipated at the initiation of our rating review was CERC's implementation last month of a new expanded credit facility with more favorable terms that enhanced its external liquidity resources.

CEHE's Baa2 senior secured rating, while not formally under review, has been affirmed. We consider the transmission and distribution business as investment grade due to the relative stability and predictability of its regulated earnings and cash flows. Over the long-term, we expect CEHE to operate with approximately 60% adjusted total debt to capitalization; in the low to mid teen's for the percentage ratio of cash flows to adjusted total debt; and roughly 3x interest coverage. These metrics do not adjust for securitized Rate Reduction Bonds.

The stable rating outlook for CenterPoint and its rated subsidiaries reflects the improving credit profile of the company, balanced against substantial near-term financial leverage. Unlike most of its utility peer companies, CenterPoint maintains a relatively high proportion of consolidated debt at the parent holding company level. The approximately $3.5 billion of parent company debt represents about 40% of total debt. Over the near to intermediate term, we anticipate further improvement in CenterPoint's credit metrics, which is largely attributable to developments at CEHE. Ratings could be considered for an upgrade if CenterPoint improves its financial metrics while maintaining its low business risk profile. For example, a ratio of funds from operations (FFO) to adjusted total debt of approximately 15% on a sustainable basis, could cause consideration for an upgrade. CEHE could be considered for an upgrade if it could regularly produce FFO to adjusted total debt in the mid-to-high teen's, and improve its FFO to interest coverage metrics to approximately 3.5 to 4.0 times (unadjusted for securitization).

Additional rating upgrades for CERC appears unlikely in the near future as CERC continues to provide substantial dividends to support CenterPoint's debt service and external dividend needs. We expect that CenterPoint will manage dividends from CERC so as to keep the subsidiary's capital structure at around 48% (debt/debt+equity), inhibiting further credit accretion. CenterPoint and CERC are also viewed as having potential acquisition event risk, which could come to the fore as CenterPoint approaches the conclusion of its de-leveraging plan and turns more of its attention toward external growth. The credit metrics we assume in CERC's ratings and outlook include: FFO/fixed charges of roughly 3x, retained cash flow/adjusted debt of at least 10%, and adjusted debt/capital (less goodwill and other intangibles) at no higher than current levels (66% at 3/31/05).

The ratings for CenterPoint could be downgraded with a downgrade of one of the utility operating subsidiaries, or if the company fails to improve its financial credit metrics. For example, failure to produce a ratio of FFO to total debt of more than 10% or if leverage remains in the high 80% range over the next twelve to eighteen months. The ratings for CEHE could be downgraded if its financial credit metrics also declined to produce less than approximately 3.0x interest coverage or approximately 10% cash flow to total debt metrics. The ratings for CERC are not likely to be downgraded in the near-term.

CenterPoint Energy is headquartered in Houston, Texas.

New York
Daniel Gates
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
James Hempstead
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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