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Rating Action:

Moody's affirms Baa1 Issuer Rating of Electric Transmission Texas LLC, outlook stable

13 Jun 2018

New York, June 13, 2018 -- Moody's Investors Service, ("Moody's") affirmed Electric Transmission Texas, LLC's (ETT) Baa1 Issuer Rating with a stable outlook.

Outlook Actions:

..Issuer: Electric Transmission Texas, LLC

....Outlook, Remains Stable

Affirmations:

..Issuer: Electric Transmission Texas, LLC

.... Issuer Rating, Affirmed Baa1

RATINGS RATIONALE

"Although we see a notable weakening in ETT's financial profile going forward, driven first by a rate reduction included in its 2017 rate settlement and then by a second rate reduction due to tax reform, we view the current Baa1 rating as appropriate given the company's low-risk, transmission only business profile and strong investment grade sponsorship", said Nana Hamilton, AVP-Analyst. ETT is a 50/50 joint venture between American Electric Power Company (Baa1 stable) and Berkshire Hathaway Energy Company (A3 stable).

Following a determination that ETT was significantly over-earning its authorized return on equity (ROE), the Public Utilities Commission of Texas (PUCT) approved a settlement agreement effective March 2017 that reduced ETT's annual revenue requirement by $46 million. The settlement also established a forward base line revenue requirement of about $327 million based on a 9.6% ROE, a 40% equity layer and a rate base valuation of $2.5 billion. As a result, ETT's cash flow from operations excluding changes in working capital (CFO pre-WC) was lower by approximately $20 million in 2017 relative to 2016 and its ratio of CFO pre-WC to debt declined from to 14.2% in 2017 from 16% in 2016.

In May 2018, ETT made an interim transmission cost of service (TCOS) filing with the PUCT to reflect the lower tax rate incorporated in last year's tax reform bill, which the company expects to result in a further revenue requirement reduction of approximately $27 million. As a pass-through entity, ETT collects estimated tax expense in its revenue requirement but does not pay taxes. Therefore we expect the tax reform impact to result in a reduction in cash flow, such that the ratio of CFO pre-WC to debt will likely decline further to the 12%-13.5% range over the next few years. We project a CFO pre-WC to debt closer to 12% in the near term but see a gradual improvement to above 13% over the next two years as the company modestly reduces its debt balance.

Although weaker than historical results, we view a 13% ratio of CFO pre-WC to debt as sufficient for the current rating when we take into account ETT's low business risk, transmission only utility profile under the credit supportive regulatory jurisdiction of the PUCT and the quality and support of ETT's investment grade parent companies.

Outlook

The stable outlook reflects our expectation that, in spite of a projected weaker financial profile as a result of reduced operating cash flow due to the 2017 rate settlement and the cash impact of tax reform, ETT will maintain financial metrics commensurate with its current rating, including CFO pre-WC to debt in the low teens range. The stable outlook also assumes that the Texas regulatory environment will remain credit supportive.

What could change the rating up

The rating could be upgraded if there is an improvement in cash flow or reduction in leverage resulting in stronger financial metrics, for example, CFO pre-WC to debt near the high teens, for a sustained period of time

What could change the rating down

The rating could be downgraded if financial metrics decline such that CFO pre-WC to debt is sustained below 13%; or if a less credit supportive regulatory environment were to develop in Texas.

Electric Transmission Texas, LLC (ETT), headquartered in Austin, Texas, is a 50/50 joint venture between American Electric Power Company (Baa1 stable) and Berkshire Hathaway Energy Company (A3 stable). ETT owns and operates transmission lines within the Electric Reliability Council of Texas (ERCOT) and is regulated by the Public Utility Commission of Texas (PUCT).

The principal methodology used in these ratings was Regulated Electric and Gas Utilities published in June 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Nana Hamilton
Asst Vice President - Analyst
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Jim Hempstead
MD - Utilities
Infrastructure Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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