CenterPoint Energy, Inc. (CNP -0.17%) is an electric utility holding company with a unique advantage that should be making more news among investors. It doesn't own any generation assets, which insulates the stock price against environmental risks while still allowing the company to benefit from regulated and unregulated utilities markets. That also enables a three-pronged approach to growth.
|
CenterPoint Energy, Inc. Metric |
Value |
|---|---|
|
Market cap |
$12.2 billion |
|
Dividend yield |
3.8% |
|
Total revenue, 2016 |
$7.53 billion |
|
Electric utility customers |
2.4 million |
|
Natural gas distribution customers |
3.4 million |
Data source: company presentation.
Careful investments in electric transmission and distribution and natural gas distribution have turned CenterPoint Energy into the 19th largest investor-owned electric utility and sixth largest gas distribution company in the United States. The stock has gained 14% year to date -- a healthy margin over the S&P 500 -- but there are several reasons bulls are excited about the future.
Image source: Getty Images.
1. Steady growth in utilities
At the moment CenterPoint Energy's electric transmission and distribution footprint is concentrated in Houston, which isn't exactly a bad thing. The company's wholly owned subsidiary, Houston Electric, provides electrons to 2.4 million metered customers over an expansive 5,000-square-mile area. It enjoys consistent residential customer growth of 2% per year and generates all of its earnings from regulated operations, which provides a high degree of predictability.
The same goes for CERC Corp., which is CenterPoint Energy's wholly owned natural gas distribution company. It serves 3.4 million customers in six states, although 80% of operating income was generated from Texas and Minnesota last year.
Utility businesses generally don't grow very quickly, but don't mistake that for a lack of importance. In the first quarter of 2017, electric and natural gas utilities generated 56% of total revenue and 88% of total operating income. These businesses provide a solid foundation that allow CenterPoint Energy to take bigger risks diversifying its holdings into higher-growth opportunities.
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2. Energy services
CenterPoint Energy needed to move into unregulated markets to find higher rates of growth. Although these are riskier than regulated services, well-managed strategies can take advantage of unaddressed pain points to deliver value to customers and shareholders. That's exactly what the company is doing with its energy services business segment, which represents all non-rate regulated sales of natural gas and services operations. It serves 33,000 commercial and industrial customers across 33 states, in addition to many residential customers.
Two acquisitions in the past 12 months and steady investments aimed at integrating them into CenterPoint Energy's portfolio are expected to allow the company to finish the year serving twice the customers and delivering twice the volume of natural gas than it did in 2015. The moves have combined to result in an influx of revenue, too. In the first quarter of 2017, the energy services business segment generated 174% more revenue than in the year-ago period. Operating income has been a little more difficult to come by for the segment, but that could change once the latest pieces are fully integrated and optimized.
3. Midstream investments
Image source: Getty Images.
What's even faster growing than unregulated energy services? Majority ownership of a tax-advantaged midstream energy company.
CenterPoint Energy owns 50% of the management rights in the general partner of Enable Midstream Partners LP (ENBL), 40% of the incentive distribution rights, and 14.5 million Series A preferred units. While it accounts for the investment using equity accounting methods, meaning they aren't fully consolidated on the income statement, the midstream operator provides a sizable amount of earnings and cash flow for the utility holding company.
As it turns a corner from a multi-year rut caused by lower-than-expected natural gas prices and heavy capital expenditures needed to build out its infrastructure network, Enable Midstream Partners LP is now poised to become an increasingly important cherry on top for CenterPoint Energy. Earnings provided by the midstream investment could grow up to 32% in 2017, compared with just 10% for the remainder of the business.
While it still represents a minority of total profits at just 24%, the midstream operator has yet to hit its stride. Enable Midstream Partners LP has established infrastructure, a clean balance sheet, and several new long-term partnerships coming online in the next few quarters. In other words, it could provide a majority of earnings for CenterPoint Energy stock within the next decade, which could be reinvested in additional growth opportunities or returned to shareholders -- or both.
What does it mean for investors?
CenterPoint Energy is a holding company with three major drivers for growth. It offers investors a slow and steady growth opportunity from traditional regulated utilities, including a heavy concentration in one of the fastest-growing natural gas markets in the country. It provides energy services and natural gas distribution to commercial and industrial customers across the nation, including 33 of the 48 contiguous states. And of course, it has made a huge bet on the midstream business of Enable Midstream Partners LP, which has the potential to deliver generous profits and cash flow for the long haul.
The bulls are excited about the prospects for all three business units -- and they may just be on to something.
