CenterPoint Energy (CNP) is a balanced utility focused on regulated electric transmission, regulated natural gas distribution, regulated gas pipelines, and unregulated gas processing. About 90% of revenues are either regulated (75%) or based on long-term contracts (15%), giving the company stability in earnings, dividends, and cash flow. Investors should note CNP owns no electric power generating facilities.
Based in Houston, TX and founded in 1882, CNP offers interesting exposure to FERC-regulated high-voltage electric transmission lines and natural gas infrastructure. Transmission assets are regulated by the FERC, a federal agency, rather than the states. To encourage investment in improving and expanding high-voltage transmission networks, the feds typically allow higher ROE than the average state utility board. This structural difference permits greater profits for the same investment dollar, benefiting companies with transmission assets such as CNP.
CNP is separated into several operating segments as follows with corresponding percentage of anticipated 2012 total operating profits and potential profit growth rates:
% of Total Operating Profit
Anticipated Growth Rate
Natural Gas Distribution
Natural Gas Sales
From the S&P stock report, the following is a description of each operating segment:
The CenterPoint Energy Houston Electric (CEHE) utility serves more than 2 million customers in a 5,000 square mile territory that includes the cities of Houston and Galveston, TX, and (with the exception of Texas City), nearly all of the Houston/Galveston metropolitan area. Following the deregulation of the industry in Texas, wholesale and retail suppliers pay the company to deliver the electricity over its transmission lines.
The natural gas subsidiary, CenterPoint Energy Resources Corp. (CERC), serves about 3.3 million residential, commercial and industrial customers in Arkansas, Louisiana, Minnesota, Mississippi, Oklahoma and Texas. In 2011, approximately 41% of total demand was accounted for by residential customers, and about 59% was from commercial and industrial customers.
CERC's interstate pipeline business owns and operates approximately 8,000 miles of gas transmission lines primarily located in Arkansas, Illinois, Louisiana, Missouri, Oklahoma and Texas. It also owns and operates six natural gas storage fields with a combined daily volume of about 1.3 billion cubic feet per day.
CERC's field services business owns and operates around 3,900 miles of gathering pipelines and processing plants that collect, treat and process natural gas primarily from three regions located in major producing fields in Arkansas, Oklahoma, Louisiana and Texas.
Recently, CNP received a final ruling on a multi-year rate case that was settled in favor of the company to the tune of $1.6 billion. Early in 2012, CNP issued bonds to turn the rate settlement into immediate cash flow to fund an aggressive cap ex program of $5.5 billion between 2012 and 2016. Operating cash flow less payment of dividends should generate between $1.2 and 1.5 billion annually, sufficient to fund most of the cap ex budget. Unlike some peers, CNP does not anticipate issuing dilutive secondary share offerings to fund its cap ex program and this advantage for shareholders should not go unnoticed. Management has approximately $600 million in capital from bond proceeds waiting to be deployed. Below is the anticipated cap ex budget by operating segment going out to 2016:
Natural Gas Distribution
Natural Gas Sales
Much like several of its utility peers with natural gas pipelines and storage facilities, CNP may consider dropping these assets down into a Master Limited Partnership (MLP). Spectra Energy (SE) has been successful in this regard. An article outlining SE is found here. National Fuel Gas (NFG) is another utility with natural gas infrastructure that could develop a MLP in an effort to unlock shareholder value. An article on NFG is found here. If CNP decides to take this route, the 2013 estimated pre-income tax operating income from the pipeline and field service segments should total $577 million, or about $1.34 per share, on a one for one spinoff basis. Comparing Spectra Energy Partners (SEP) and Enterprise Partners (EPD) current P/E ratios of 18 and 21 respectively, it would seem a MLP spin-off could be very profitable for current CNP shareholders.
Management is looking to expand their pipeline and field service footprint into the Bakken Shale and may announce a new $150 million investment in that area. Maps outlining current locations of field service assets and CNP's pipeline network are shown below:
Field Service Asset Map
Pipeline Asset Maps
When earnings are announced in a few weeks, EPS for 2012 is expected to be $1.21. Based on a 5.5% growth rate, mainly from inclusion of a growing rate base and an expansion of assets, earnings could reach $1.45 in 2015.
Dividend growth has been slowing. 5-yr average dividend growth is 5.6%, but 3-yr average growth is 2.6% and 1-yr is 1.2%. With a current payout ratio of about 65%, dividend growth acceleration back to the 5-yr average will depend on creating better earnings growth. Management has a 5-yr average return on invested capital of 6.5%, about industry average, but trailing 12 month ROIC comes up a bit light at 3.1% versus an industry average of 4.4%. S&P Equity Ranking positions CNP as "B", or below average, for 10-yr consistency in earnings and dividend growth. CNP has a beta of 0.63.
5-year price Chart Compared to S&P Utility ETF (XLU):
While fully valued at its current price of $20.50 and a P/E of 16.9, CNP offers a 4.07% yield based on a recently increased dividend of $0.83. Going forward, a price target of $23 could bring total annual returns of around 9.0%. Buying on market weakness could goose up anticipated investor returns to potentially double digits. Investors should put CNP on their radar screen.
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