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Why Shares of CenterPoint Energy Rose 11% in December

By John Bromels - Jan 6, 2020 at 3:36PM

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After a November setback, a new development has investors hoping for a turnaround.

What happened

Shares of CenterPoint Energy (CNP -1.70%), a gas and electric utility based in Houston, rose 11% in December, according to data provided by S&P Global Market Intelligence. This was a partial reversal from November, when the company's stock suffered a 15.5% decline.

So what

The reason for the December jump in CenterPoint's shares was a new development in the case that was responsible for the stock's big November drop.

Electrical transmission lines and towers

Houston-based CenterPoint Energy is hoping for a rate increase in its top market to help it outperform. Image source: Getty Images.

In November, the Public Utility Commission of Texas (PUCT) -- the agency that regulates CenterPoint's largest market, Houston -- denied the company's requested rate increase for Houston. CenterPoint's proposal would have allowed it to earn a 10.5% return on equity in the market, but PUCT instead approved a much lower 9.25% return on equity. During CenterPoint's Q3 2019 earnings call, CEO Scott Prochazka offered a bleak view of the company's outlook if that proposed lower rate went into effect. Disappointed investors promptly sold off the stock as analysts rushed to downgrade it. 

However, on Dec. 12, CenterPoint sent a letter informing PUCT that "CenterPoint Houston, Commission Staff, the Office of Public Utility Counsel, the City of Houston and Houston Coalition of Cities, the Gulf Coast Coalition of Cities, the Texas Coast Utilities Coalition, and Texas Industrial Energy Consumers have been engaged in discussions regarding a possible stipulation" regarding the rate increase, and requested the PUCT commissioners to defer further consideration until January. This seemed promising, and investors bid shares up on the news. 

Now what

In a follow-up letter to PUCT on Dec. 20, CenterPoint stated that "the parties will be working over the coming weeks to finalize the settlement documents for your review and consideration and plan to file them no later than January 9, 2020." The next open meeting of PUCT is on Jan. 16. 

Without further details on what might be in the works, it's impossible to know how the stock will react. It seems likely that the parties will propose a rate change to PUCT that will be somewhere between the 10.5% return requested by the company and the 9.25% return approved by PUCT, but it's unclear what exactly that might be, or what concessions CenterPoint will have to offer in return. 

One thing's for sure: Because Houston is CenterPoint's largest market, making up more than 25% of the company's revenue, how this case gets resolved is of paramount importance to CenterPoint shareholders. Smart investors should wait for the final word before buying or selling.

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