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Summary CenterPoint currently yields nearly 5.35% and has $1.2B in cash reserves. Transmission and distribution income – nearly 50% of operating income – is geographically concentrated. It is largely considered to be a utility – however, a quarter of the income is derived from the MLP equity interest, which has been historically volatile. CenterPoint Energy (NYSE: CNP ) is a diversified pseudo-utility with a wide range of operations. The company operates a regulated natural gas utility business, a transmission and distribution arm, and retains ownership of substantial equity interest in Enable Midstream Partners (NYSE: ENBL ). CNP has been a favorite of investors chasing yield, but the shares have had trouble keeping up with the utility index over the past two years. Unfortunately for shareholders, the shares are down 20%, compared to a 20% gain for the broader utilities index. Contrary to what you might think, the dividend has actually been growing measurably the past two years, and the company now yields over 5.49%, well above historical averages. Is there an opportunity here for shareholders for both solid yield and capital appreciation? Business Operations CenterPoint’s strongest business unit in regards to operating income is its electric transmission and distribution business. This segment provides the infrastructure to connect power plants to substations which connect to the retail customer. This is a low-business risk, high-value business. Because the infrastructure is entirely pole/wire assets, there is significantly less regulatory and environmental risk compared to actual power generation. While this is a monopolistic business with very little risk, CenterPoint’s operations do have geographic risk in that the company only owns assets located in and around the House/Galveston metropolitan area. While this area has retained its strong growth even with the fallout of plummeting energy prices, there is no guarantee that this trend will continue. A reversal in the area’s fortune would result in a slowdown in demand for electricity, driving earnings down in this segment. The most stable and consistent business unit is CenterPoint’s intrastate natural gas distribution business. Compared to the transmission and distribution business that is concentrated in one area, this segment provides natural gas to more than three million customers in six states. Like other gas utilities, the company passes along the cost of the gas to customers, so there is little effect of gas price fluctuations on CenterPoint’s profitability aside from revenue numbers. Further cementing operating results, the company has weather normalization and decoupling mechanisms in place to limit the effects of seasonality and variations in customer demand in five of six states. This portion of CenterPoint is extremely well run, and earnings consistently bump up against the maximum allowed rate of return that the public utility commissions have set for the company (authorized return on equity in the 10% range). As mentioned, CenterPoint owns 55.4% of the limited partner units of Enable Midstream Partners, receiving 40% of the distribution rights. Operational control is split 50/50 between CenterPoint and OGE Energy (NYSE: OGE ). The reason for CenterPoint’s underperformance may largely lie with poor results from Enable. Enable’s first half of the year has been poor when compared to the 2014 results ($93M in operating income for Enable in 1H 2015, compared to $138M in 1H 2014). The downside action in Enable may have been overdone. Compared to many midstream companies like Kinder Morgan (NYSE: KMI ), the company is much less levered (2.6x net debt/EBITDA), making it better positioned to handle any long downturn in U.S. energy midstream operations. I think the weak recent share price performance is primarily related to the company’s short public history and heavy insider ownership. With very little track record and such a small percentage of the float open for trading, the shares have been volatile, scaring many retail and institutional investors away. Operating Results (click to enlarge) Revenue can vary widely year to year, especially within the natural gas distribution segment. As an example, revenue grew 40% from 2012 to 2014 ($959M), but operating income only grew 26% ($60M). This can cause operating margin decreases through no fault of the company as these operating margins decrease as the fixed cost of the natural gas being provided rises. Meanwhile, further putting pressure on operating margins has been a steady increase in operations and maintenance costs within the electric transmission and distribution segment. Between 2012 and 2014, revenue grew 12%. Regrettably, operations and maintenance costs grew 32%. While its maintenance capital expenditures will be recovered as part of capital plans eventually, these recoveries may not be as timely as investors might expect. (click to enlarge) 2014 was a concerning time for the company from a cash flow perspective. Cash from operations had fallen nearly $500M from 2012 levels, and capital expenditures were up tremendously. CenterPoint had to plug the hole with the $600M in proceeds from long-term debt it had raised late in the year prior. With $6.4B in net debt, the company is only moderately leveraged at 3.2x net debt/EBITDA. However, with CenterPoint keeping $1.2B in cash and cash equivalents on the balance sheet, it is prepared to weather any mild operational issues quite well. Conclusion When investing in CenterPoint, investors need to be aware they aren’t buying a company with 100% regulated utility operations. The higher dividend yield here is likely justified, given the volatility present in the Enable ownership. On the plus side, the natural gas operations are very well run, and the electric transmission business, while experiencing headwinds currently, is also solid. In my opinion, the shares likely trade around their fair value. Investors looking for yield can likely comfortably add some exposure to the company in the $17-18/share range. Scalper1 News
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