CenterPoint Aided by Continued Growth in Houston Area

Strategist

Andrew Bischof

Revenue segments as reported by the company.

Utility revenues

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Revenue Segments

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CenterPoint Energy's regulated utilities have significant growth investment opportunities. We expect the company to invest $21 billion over the next five years, supporting our expectation that management can achieve its 8% annual earnings growth target through 2024.

Management's 10-year, $43 billion-plus capital investment plan highlights its confidence in CenterPoint's natural gas business. The company aims to maintain its 60% electric/40% natural gas business mix. Beyond 2024, management expects 6%-8% annual earnings growth through 2030, in line with our earnings growth estimate from 2024-27. New investments will address customer growth; system reliability and resiliency; gas distribution safety and modernization; and renewable energy.

CenterPoint benefits from having over half of its business in Texas, where 2% annual customer growth is among the highest of its utilities peers. We expect additional capital investment opportunities at the company's largest subsidiary, Houston Electric, as a result of Houston's long-term master energy plan. Minnesota and Indiana, which represent approximately 30% of rate base, have among the highest population growth in the Midwest.

Shareholders have benefited from management's portfolio rotation. Centerpoint exited its partial ownership stake in Enable Midstream Partners when Enable merged with Energy Transfer. Management used the proceeds to reduce leverage and pay taxes associated with the transaction.

Last year, CenterPoint sold its natural gas distribution utilities in Oklahoma and Arkansas at a very attractive price. We think reallocating capital to areas with more attractive growth and regulatory support is a positive for shareholders. The asset sales should eliminate any equity needs to support its capital investment plan. These actions also shored up the company's balance sheet. 

Since cutting its dividend in 2020 due primarily to a distribution cut at its Enable midstream unit, management has returned to increasing its dividend, and we expect annual dividend increases to be in line with earnings growth.

Business Strategy & Outlook

We assign CenterPoint Energy a narrow moat rating.

For the most part, state regulators have recognized the need for shareholders to earn an adequate return on investment. In exchange for earning a fair return for its shareholders, CenterPoint's utilities are expected to provide safe and reliable service at the lowest possible rates. This implicit contract between regulators and capital providers should, on balance, allow CenterPoint's regulated utilities to earn above their costs of capital, though observable returns might vary in the short run based on demand trends, investment cycles, operating costs, and access to financing.

CenterPoint is concentrating its growth expenditures in jurisdictions with favorable regulatory frameworks. At Houston Electric, CenterPoint's largest business unit, the utility has automatic rate recovery mechanisms for approximately 95% of its capital plan. This reduces regulatory lag and the frequency of rate cases.

The company's natural gas distribution businesses also have favorable regulatory frameworks. In Texas, home to its largest gas distribution system, the Gas Reliability Infrastructure Program allows annual filings for incremental capital investments. In Minnesota's traditional regulatory framework, utilities can implement interim rates 60 days after filing a rate request, and the regulatory framework has been good to date.

Narrow

Economic Moat

CenterPoint Energy

CenterPoint Energy, Inc. is a holding company, which engages in the business of power generation and distribution. It operates through the following segments: CenterPoint Energy, Houston Electric, and CERC. The CenterPoint Energy segment consists of electric transmission and distribution services in the Texas gulf coast area in the ERCOT region and electric transmission and distribution services primarily to southwestern Indiana and includes power generation and wholesale power operations in the MISO region. The Houston Electric segment consists of electric transmission services to transmission services customers in the ERCOT region and distribution services to REPs serving the Texas gulf coast area. The CERC segment covers the Restructuring consisting of intrastate natural gas sales to, and natural gas transportation and distribution for residential, commercial, industrial and institutional customers in Indiana, Louisiana, Minnesota, Mississippi, Ohio and Texas, and permanent pipeline connections through interconnects with various interstate and intrastate pipeline companies through CEIP. The company was founded in 1866 and is headquartered in Houston, TX.

Earnings data Q2 2023

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