CenterPoint Energy (CNP): A Resilient Utility Powering Ahead

Published on September 24, 2024 | Ticker: CNP

CenterPoint Energy, Inc. (NYSE: CNP) is a leading electric and natural gas utility company serving millions of customers across Texas, Indiana, Louisiana, Minnesota, Mississippi, and Ohio. With a strong focus on operational excellence, customer-centric investments, and strategic growth initiatives, CenterPoint Energy has positioned itself as a resilient and forward-looking utility player in the industry.

Financial Highlights

For the fiscal year 2023, CenterPoint Energy reported annual net income of $917 million, annual revenue of $8.696 billion, annual operating cash flow of $3.877 billion, and annual free cash flow of -$524 million. In the first quarter of 2024, the company delivered strong financial results, reporting non-GAAP earnings per share (EPS) of $0.55, which represents over one-third of its full-year 2024 non-GAAP EPS guidance at the midpoint.

The company's first-quarter performance was driven by several factors, including growth in rate recovery, which contributed $0.09, and continued strong organic growth in the Houston area, which has averaged 1-2% annually over the last 30 years. While weather and usage were $0.02 favorable compared to the same quarter of 2023, increases in operation and maintenance (O&M) expenses and interest expenses partially offset these positive factors.

Resilient Growth Strategy

CenterPoint Energy's strategic focus on enhancing system resiliency, supporting customer growth, and driving operational efficiency has been a key driver of its long-term success. The company's 10-year capital investment plan of $44.5 billion is expected to drive a nearly 10% rate base compound annual growth rate (CAGR) through 2030, supporting strong earnings growth throughout the remainder of the decade.

Business Overview

CenterPoint Energy operates through two primary business segments: Electric and Natural Gas. The Electric segment provides electric transmission and distribution services in the Texas Gulf Coast area and electric transmission and distribution services primarily to southwestern Indiana. The Natural Gas segment engages in intrastate natural gas sales, transportation, and distribution services to residential, commercial, industrial, and institutional customers in Indiana, Louisiana, Minnesota, Mississippi, Ohio, and Texas.

Regulatory Landscape and Outlook

CenterPoint Energy has been actively engaged in various regulatory proceedings across its service territories, seeking constructive outcomes that balance the needs of its customers and shareholders. The company recently announced a settlement agreement for its Texas Gas rate case, which will result in an annual revenue requirement increase of approximately $5 million, or an average increase of well under 0.1% for its Houston-area residential customers.

In Minnesota, the company filed a rate case in November 2023, requesting revenue increases of $85 million and $52 million for 2024 and 2025, respectively. The interim rates for 2024 were approved in mid-December and went into effect on January 1, 2024. The company anticipates hearings for the 2025 interim rates to occur in the middle of December 2024.

For its Indiana Electric operations, CenterPoint Energy filed a rate case in December 2023, requesting a revenue requirement increase of $190 million. This increase is primarily driven by the company's investments in connection with its electric generation transition plan, as it moves away from coal-fired generation towards more efficient and cost-effective fuel sources, such as renewables and natural gas.

In its largest jurisdiction, Houston Electric, the company filed a rate case in March 2024, seeking a revenue requirement increase of approximately 2.6%, or $60 million. This modest request is a testament to CenterPoint Energy's relentless focus on reducing O&M expenses by 1-2% per year on average, the roll-off of securitization charges, and the strong organic growth in the Houston area.

Resiliency Investments and Opportunities

One of the key highlights of CenterPoint Energy's recent activities is its filing of a system resiliency plan with the Public Utility Commission of Texas (PUCT). The plan proposes investments ranging from $2.2 billion to $2.7 billion over a three-year period, aimed at enhancing the resiliency of the company's electric transmission and distribution system in the Greater Houston area.

The proposed investments include measures such as system hardening, grid modernization, flood mitigation, information technology upgrades, physical security enhancements, and vegetation management. If approved, the high end of the filing could increase CenterPoint Energy's total capital expenditures from $44.5 billion to $45 billion over its 10-year plan through 2030.

In addition to the resiliency plan, CenterPoint Energy sees significant opportunities for incremental capital investments, including local gas transmission pipeline capacity in the Greater Houston area, acceleration of its next-generation smart meter deployment, and supporting the growing industrial electrification and hydrogen production trends in the region.

Financing and Credit Metrics

CenterPoint Energy remains focused on maintaining a strong balance sheet and credit profile to support its growth initiatives. As of the end of the first quarter of 2024, the company's calculated funds from operations (FFO) to debt ratio was 14.6%, based on Moody's methodology. The company anticipates delivering on a 100-150 basis point cushion above Moody's targets on a full-year 2024 basis.

To fund its capital investments, the company is actively pursuing various financing options, including federal and state-based loan and cost-matching programs, as well as its modest $250 million at-the-market (ATM) equity program, of which approximately 75% has been completed as of the first quarter of 2024.

Risks and Challenges

While CenterPoint Energy's growth story appears promising, the company faces several risks and challenges, including:

1. Regulatory uncertainty: The company's operations are subject to the decisions and policies of various state regulatory authorities, which could impact its ability to recover investments and earn authorized returns.

2. Weather and climate-related risks: Severe weather events, such as hurricanes, tornadoes, and winter storms, could disrupt the company's operations and increase restoration costs.

3. Commodity price volatility: Fluctuations in natural gas and other commodity prices could affect the company's cost of service and its ability to recover those costs through customer rates.

4. Cybersecurity threats: As a critical infrastructure provider, CenterPoint Energy is exposed to the risk of cyber attacks, which could disrupt its operations and compromise customer data.

5. Transition to clean energy: The company's efforts to reduce greenhouse gas emissions and transition its generation fleet may result in increased capital expenditures and regulatory challenges.

Outlook and Conclusion

CenterPoint Energy's strong first-quarter performance, coupled with its robust long-term growth strategy, positions the company well to navigate the evolving utility landscape. The company's focus on system resiliency, customer-centric investments, and operational efficiency, combined with its constructive regulatory relationships, suggest a promising outlook for CenterPoint Energy's future.

Despite the challenges faced by the industry, CenterPoint Energy's diversified business model, geographic footprint, and disciplined financial management provide a solid foundation for sustainable growth. As the company continues to execute on its strategic initiatives, investors can expect to see ongoing improvements in the company's financial performance and shareholder value creation.

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