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Rating Action:

Moody's changes CenterPoint Energy Inc. rating outlook to negative; ratings affirmed

24 Apr 2018

Up to $2,350 Million of Debt Securities Affected

New York, April 24, 2018 -- Moody's Investors Service, ("Moody's") affirmed all the ratings of CenterPoint Energy Inc. (CenterPoint), including its Baa1 senior unsecured rating and Prime-2 short-term rating for commercial paper, and changed the rating outlook to negative from stable.

Outlook Actions:

..Issuer: CenterPoint Energy, Inc.

....Outlook, Changed To Negative From Stable

Affirmations:

..Issuer: Brazos River Authority, TX

....Senior Secured Revenue Bonds, Affirmed A1

....Underlying Senior Secured Revenue Bonds, Affirmed A1

....Senior Unsecured Revenue Bonds, Affirmed Baa1

..Issuer: CenterPoint Energy, Inc.

.... Issuer Rating, Affirmed P-2

.... Issuer Rating, Affirmed Baa1

....Subordinate Conv./Exch. Bond/Debenture, Affirmed Baa2

....Senior Unsecured Bank Credit Facility, Affirmed Baa1

....Commercial Paper, Affirmed P-2

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa1

..Issuer: Matagorda County Navigation District 1, TX

....Senior Secured Revenue Bonds, Affirmed A1

....Underlying Senior Secured Revenue Bonds, Affirmed A1

....Senior Unsecured Revenue Bonds, Affirmed Baa1

....Underlying Senior Unsecured Revenue Bonds, Affirmed Baa1

RATINGS RATIONALE

"CenterPoint is acquiring $4.1 billion rate base, 65% of which are low-risk natural gas distribution businesses," said Robert Petrosino, Vice President-Senior Analyst. "CenterPoint sees enough strategic value that it is willing to utilize its balance sheet, increase its holding company leverage and weaken its key financial credit ratios in order to complete the acquisition of Vectren Corp."

The negative outlook for CenterPoint primarily reflects the financing decisions associated with the acquisition. CenterPoint plans to fund the $8.5 billion acquisition with $6.0 billion of debt (approximately 70% of the total financing mix, including $2.5 billion assumed debt and $3.5 billion of incremental debt) and $2.5 billion of new equity (approximately 30% of the total financing mix).

Moody's calculates that CenterPoint is paying approximately 1.9x projected year end 2018 rate base of approximately $4.1 billion and an 8x multiple to the $100 million of EBITDA generated from Vectren's non-utility business for the year end December 2017. On a price to earnings basis, CenterPoint is paying approximately 25x Vectren's 2018 mid-point projected earnings. It should be noted that Vectren owns and operates non-utility business, including Infrastructure Services and Energy Services, which provide underground pipeline construction and repair and energy contracting for renewables, distributed generation and combined heat and power projects, respectively. Vectren's business mix is primarily regulated utility operations, as reflected through Vectren Utility Holdings, Inc. (A2 stable), which makes up approximately 80% of Vectren's consolidated operations.

Over the past few years, CenterPoint has been generating stable financial metrics, including a ratio of cash flow from operations before changes in working capital (CFO pre-W/C) to debt in the high-teens range. On a pro-forma basis, Moody's calculates that CenterPoint is acquiring Vectren at an approximately 7.5% ratio of cash flow to debt. This ratio, which is dilutive to CenterPoint's historical ratio of 18% over the past 3-year average, includes approximately $460 million in Vectren CFO and the total $6.0 billion in debt being utilized to finance the acquisition.

Moreover, CenterPoint's holding company debt as a percentage of total debt will increase to over 25% of consolidated debt, a material increase from historical levels that were below 15%.

From a credit perspective, the acquisition does provide some positive qualitative aspects including the geographic and regulatory diversity in the constructive regulatory environments of Indiana and Ohio. Vectren's utility businesses are predominately low risk electric and natural gas operations with long-term customer growth expectations in the 0.5-1.0% range. With this acquisition, CenterPoint is re-entering the power generation business, but in small scale of less than 1,300 MWs. This generation fleet includes several coal-fired generating pants, which increases the riskiness of those assets for CenterPoint. That said, Vectren also provides CenterPoint a similar level of rate base growth with expected annual capital expenditures of approximately $500 million. Moody's estimates that the rate base will be over $13 billion on a pro forma basis and CenterPoint's proforma business mix improves to 65% regulated and 35% non-regulated from 60% regulated and 40% non-regulated (based on net income contribution).

Pending regulatory approvals and financing, the acquisition is expected to close first quarter 2019.

Factors That Could Lead to an Upgrade

CenterPoint is stepping farther away from any rating upgrade considerations because the company is relying primarily on debt to fund the acquisition of Vectren. However, CenterPoint could be upgraded with a material de-risking of its businesses, especially with respect to its midstream operations. Ratings could also be upgraded with a material reduction in leverage, where the ratio of CFO to debt rose to the low 20% range on a sustainable basis, and the ratio of parent holding company debt to total consolidated debt fell to the low-teen's range.

Factors That Could Lead to a Downgrade

CenterPoint's ratings are more likely to be downgraded based on the financing decisions being made around the Vectren acquisition. A one notch downgrade is likely at or before the closing date of the Vectren acquisition if the transaction is financed as currently envisioned, resulting in a deterioration of key credit metrics including CFO pre-W/C to debt in the mid-teens range on a pro forma basis.

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.

CenterPoint Energy, Inc. (CenterPoint) headquartered in Houston, Texas, is a primarily regulated electric and natural gas distribution company with a joint venture interest in a midstream master limited partnership (MLP). CenterPoint operates through two wholly owned subsidiaries, CenterPoint Energy Houston Electric, LLC (CEHE) and CenterPoint Energy Resources Corp. (CERC). CEHE is a regulated electric transmission and distribution (T&D) utility serving the greater Houston area. CERC is a local gas distribution company (LDC) with divisions in six states and has a 54.1% limited partner (LP) economic interest in Enable Midstream Partners, L.P. (Enable). Also, CERC is the parent of CenterPoint Energy Services (CES), which is a natural gas marketing business that sells non-rate-regulated natural gas and related services to approximately 31,000 commercial, industrial and wholesale customers in 33 states.

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.

Robert Petrosino
Vice President - Senior Analyst
Project 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
Project 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.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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