Fitch Expects to Assign an Initial Rating of 'BBB' to CenterPoint and OGE's
Midstream Joint Venture
NEW YORK -- March 18, 2013
Fitch Ratings expects to assign CenterPoint Energy Inc. (CenterPoint, IDR
'BBB'; Stable Outlook by Fitch) and OGE Energy Corp.'s (OGE, IDR 'A-'; Stable
Outlook) planned midstream joint venture (CenterPoint/OGE Midstream JV or
Midstream JV) an initial Issuer Default Rating (IDR) of 'BBB'.
Fitch expects to initiate ratings at the proposed Midstream JV as follows:
--Long-term Issuer Default Rating (IDR) 'BBB';
--Senior unsecured debt 'BBB';
--Term loan 'BBB';
--Revolving credit facility 'BBB'.
Upon closing of the transaction, Fitch will continue to rate Enogex LLC
(Enogex, IDR 'BBB'; Stable Outlook) as follows based on the Midstream JV's
plan to guarantee the debt:
--Senior unsecured debt 'BBB'.
In addition, Fitch expects to rate the term loan 'BBB'.
The expected Outlook is Stable. Should material changes occur which differ
from Fitch's current expectations, the rating and Outlook could be revised.
CenterPoint plans to contribute its pipelines and field services businesses to
the JV and OGE will contribute 100% of Enogex. Currently, Enogex is
approximately 80% owned by OGE and 20% owned by ArcLight Capital Partners
The parties intend to create a private limited partnership which would
ultimately become a publicly traded master limited partnership (MLP). The
private partnership transaction may close in the next 30 - 60 days and an IPO
would occur approximately 6 -12 months after that subject to capital market
conditions. CenterPoint and OGE will each have 50% interest in the general
partner. Incentive distribution rights are to be split 40% to CenterPoint and
60% to OGE.
Limited partnership interests will be based on each of the three parties'
contribution to the new Midstream JV with CenterPoint having 59% of the LP
units, OGE 28% and ArcLight 13%.
KEY RATINGS DRIVERS
The combination of the midstream assets from the two sponsors should result in
a new entity with size, scope and increased diversity of geography, assets and
The midstream assets from CenterPoint and Enogex appear to be complementary
and create a good strategic fit. This could create opportunities for growth as
well as synergies which management estimates to be over $50 million.
Enogex's assets are primarily located in Oklahoma. CenterPoint also has
midstream assets in Oklahoma as well as in eight other states. The new
Midstream JV will have assets in both dry gas and liquids rich basins.
Fitch's concerns include execution and integration risk. There is also concern
that strategic spending could ramp up faster than currently expected or that
the new entity could make significant acquisitions to increase growth for
Liquidity: The Midstream JV plans to establish a $1.4 billion five year
revolving credit facility. Fitch expects the future revolver's size to be
adequate to meet liquidity needs. Near- term debt maturities for the new
Midstream JV include $200 million of Enogex notes maturing in 2014 and a $250
million Enogex term loan due in 2015.
Debt: Debt at the new entity will include Enogex's existing notes and term
loan, notes payable to a subsidiary of CenterPoint, the Midstream JV's planned
three year $1.05 billion term loan, and a five year $1.4 billion revolving
Leverage: The new entity is targeting leverage of 2.5x which is low for an MLP
with a 'BBB' rating. Fitch believes leverage may be in the range of 2.5 - 3.0x
by the end of 2014 depending on how growth opportunities are funded.
Capital Expenditures: As a limited partnership, Fitch expects the JV will
spend significantly to grow EBITDA to support distributions. Details on
spending are expected to be discussed when the company files an S-1.
Hedging: Currently, CenterPoint's two midstream assets for the Midstream JV do
not use material hedges nor does Enogex. Fitch will monitor how the new entity
manages its commodity exposure as well as its contract mix.
Positive: Future developments that may, individually or collectively, lead to
positive rating action include:
--Positive rating action is not expected but could occur if leverage fell
below 2.0x over a sustained period of time.
Negative: Future developments that may, individually or collectively, lead to
negative rating action include:
--Material changes in the planned transaction which creates a less favorable
credit profile than Fitch's expectations.
--Leverage (defined as debt to adjusted EBITDA) in excess of 3.75x on a
--Significant increases in commodity-based gathering and processing contracts
which would increase volatility of cash flows.
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Parent and Subsidiary Rating Linkage' (Aug. 8, 2012);
--'2013 Outlook: Midstream Services and MLPs' (Nov. 29, 2012);
--'Eagle Ford Shale Report: Midstream and Pipeline Sector Economics Driving
Growth' (Oct. 15, 2012);
--'Master Limited Partnerships 101' (Nov. 1, 2011).
Applicable Criteria and Related Research
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
2013 Outlook: Midstream Services and MLPs
Eagle Ford Shale Report (Midstream and Pipeline Sector ￢ﾀﾔ Economics Driving
Master Limited Partnerships 101
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Kathleen Connelly, +1-212-908-0290
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Peter Molica, +1-212-908-0288
Mark C. Sadeghian, CFA, +1-312-368-2090
Brian Bertsch, +1-212-908-0549
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