December 30, 2014 CenterPoint Energy Inc. (CNP-NYSE) Current Recommendation Prior Recommendation SUMMARY DATA NEUTRAL Underperform Date of Last Change 06/29/2009 Current Price (12/29/14) $24.29 Target Price $26.00 52-Week High $25.54 52-Week Low $21.54 One-Year Return (%) 9.02 Beta 0.44 Average Daily Volume (sh) 4,246,618 Shares Outstanding (mil) 430 Market Capitalization ($mil) $10,445 Short Interest Ratio (days) 1.84 Institutional Ownership (%) 79 Insider Ownership (%) 1 Annual Cash Dividend $0.95 Dividend Yield (%) 3.91 5-Yr. Historical Growth Rates Sales (%) N/A Earnings Per Share (%) 4.8 Dividend (%) 4.0 using TTM EPS 19.1 using 2014 Estimate 20.8 using 2015 Estimate 19.7 Zacks Rank *: Short Term 1 3 months outlook * Definition / Disclosure on last page 4 - Sell SUMMARY CenterPoint Energy reported favorable third-quarter 2014 results with both earnings and revenues surpassing the Zacks Consensus Estimate. The quarterly performance benefited primarily from an increased customer count. However, the bottom line decreased year over year due to higher operation and maintenance expenses. Gradual improvement in Houston s economy boosts the company s performance and will likely continue doing so in the future. A stable liquidity position backed by strong cash generation capacity and systematic investments in infrastructure projects will also drive upcoming results. However, uncertain outcomes of impending rate cases and dependence on retail electric providers for rate payments may impede growth. Thus, we are maintaining our Neutral recommendation in the stock. Risk Level * Type of Stock Low, Large-Blend Industry Util-Elec Pwr Zacks Industry Rank * 110 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2012 2,084 A 1,525 A 1,705 A 2,138 A 7,452 A 2013 2,388 A 1,894 A 1,640 A 2,184 A 8,106 A 2014 3,163 A 1,884 A 1,807 A 1,445 E 8,299 E 2015 2,120 E 1,366 E 1,966 E 8,386 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2012 $0.30 A $0.27 A $0.40 A $0.28 A $1.25 A 2013 $0.35 A $0.30 A $0.35 A $0.26 A $1.26 A 2014 $0.43 A $0.25 A $0.33 A $0.16 E $1.17 E 2015 $0.36 E $0.21 E $0.30 E $1.23 E Projected EPS Growth - Next 5 Years % 5 2014 Zacks Investment Research, All Rights reserved. www.zacks.com 10 S. Riverside Plaza, Chicago IL 60606
OVERVIEW Houston, TX-based CenterPoint Energy Inc. (CNP) is a domestic energy delivery company that provides electric transmission & distribution, natural gas distribution and competitive natural gas sales and services operations. The company serves over 5 million metered customers primarily in Arkansas, Louisiana, Minnesota, Mississippi, Oklahoma and Texas. The company owns interest in a midstream partnership (Midstream Partnership). CenterPoint Energy s reportable business segments include the following: Electric Transmission & Distribution: CenterPoint Houston engages in electric utility operations. It is a transmission and distribution electric utility that operates entirely within the state of Texas. On behalf of the retail electric providers (REPs), CenterPoint Houston delivers electricity. CenterPoint Houston provides transmission services under tariffs approved by the Texas Utility Commission. In Electric Reliability Council of Texas, Inc. (ERCOT), the end-users purchase their electricity directly from certificated REPs. CenterPoint Houston delivers electricity to REPs in its certificated service area by carrying lower-voltage power from the substation to retail electric customers. CenterPoint Houston s operations include construction and maintenance of electric transmission and distribution facilities, metering services, outage response services and call center operations. CenterPoint Houston s electric transmission business, along with those of other owners of transmission facilities in Texas, supports the operation of the ERCOT independent system operator (ERCOT ISO). Natural Gas Distribution: Natural Gas Distribution consists of intrastate natural gas sales to, and natural gas transportation and distribution for, residential, commercial, industrial and institutional customers. As of Dec 31, 2014, the segment serves customers in Arkansas, Louisiana, Minnesota, Mississippi, Oklahoma and Texas. Energy Services: The segment, through CenterPoint Energy Services, Inc. and its subsidiary, CenterPoint Energy Intrastate Pipelines, LLC, provides variable and fixed-priced physical natural gas supplies mainly to the commercial and industrial customers and electric and gas utilities. Midstream Investments: In Mar 2013, CenterPoint Energy inked a master formation agreement with OGE Energy Corp. and the affiliates of ArcLight Capital Partners, LLC to form Enable Midstream Partners as a private limited partnership. On May 1, 2013, the parties completed the process and Enable Midstream Partners became the owner of considerably all of CERC Corp. s former Interstate Pipelines and Field Services operations. Other Operations: This division consists of office buildings and other real estate used for the company s business and other corporate activities that support its business operations. REASONS TO BUY A steady growth in the customer count has mainly driven CenterPoint Energy s performance over the last several quarters. During the third quarter of 2014, the company s customers under Electric Transmission & Distribution and Natural Gas Distribution segments increased around 2.2% and 1.1% year over year, respectively. In addition, customers of Energy Services also surged during the quarter from the prior-year level. Ongoing economic development in CenterPoint Energy s operating territories primarily boosted customer count. At 2013-end, the customer count under Electric Transmission & Distribution, Natural Gas Distribution and Energy Services increased roughly 2%, 1% and 7.2% year over year, respectively. The increasing customer headcount is expected to prevail in the future primarily due to economic recovery of Houston, subsequently boosting forthcoming utility demand. Equity Research CNP Page 2
CenterPoint Energy is investing substantially to expand its operations to cope with increasing utilities demand. The company is currently focused on upgrading infrastructure and improving reliability. CenterPoint Energy s capital expenditure during the third quarter had stood at around $0.36 billion, up 8.8% year over year on higher investments in both the Electric Transmission & Distribution and Natural Gas Distribution segments. The company intends to invest a total of $1.4 billion in 2014, higher than $1.27 billion a year ago. Under the Electric Transmission & Distribution division, CenterPoint Energy plans investments of roughly $3.7 billion through 2014 2018. This fund will be utilized primarily for system modernization initiatives, maintenance projects and installation of meter-reading technology. The company also plans to invest $0.3 billion to a construct a portion of the Brazos Valley Connection Project, previously known as the Houston Import Project. On the other hand, the company intends to spend around $2.2 billion under its for natural gas utilities through 2014 2018, primarily for replacing its aging infrastructure, implementation of modern technology and investments in the Minnesota Belt Line Project. These initiatives will collectively enable CenterPoint Energy to provide reliable services besides meeting increasing customer demand. CenterPoint Energy continues to maintain a stable liquidity position, which allows it to follow its systematic capital spending program. As of Sep 30, 2014, the company had cash and cash equivalents of $0.23 billion and available liquidity of around $2.03 billion under total bank facilities. In addition, the company showed its efficiency of holding a stable cash generating capacity. In the first nine months of 2014, CenterPoint Energy s operating cash flow was around $1.12 billion. the company cash flow from opertaing activities at 2013-end had stood at $1.61 billion. Apart from utilizing funds in infrastructure projects, a favorable financial positon will support CenterPoint Energy s practice of regular dividend payments. The company aims to increase its dividend at a compound annual growth rate of 8% 10% between 2014 and 2017. In the first nine months of 2014, the company paid around $0.31 billion as common dividends, up 14.6% year over year. These initiative will enable CenterPoint Energy to attract more investors to the stock. REASONS TO SELL The performance of CenterPoint Energy s regulated electricity and natural gas utilities depends upon rate relief at regular intervals in its different service areas. Any adverse decision in pending regulatory cases can impact the company s earnings substantially. The proceeds are used to finance a portion of its expansion program. An adverse regulatory decision will force the company to refund the incremental bill it has charged from its customers. A substantial portion of CenterPoint Energy s operations are located along the gulf coast of the U.S., a high-risk area with strong hurricane activity. This exposes the company s utility plants to damage and expenditures associated with storm-related restoration. In spite of having general liability and property insurance, insurance coverage may not cover all expenses incurred by the company. CenterPoint Energy s unit, CenterPoint Houston s performance depends primarily on timely payment of fees by retail electric providers (REP). The company supplies electricity to customers on behalf of the REP in exchange of fees. If any third-party provider fails to pay fees on time, CenterPoint Energy s performance will be impacted adversely. Equity Research CNP Page 3
RECENT NEWS CenterPoint Energy Beats on Earnings on New Customers Nov 5, 2014 CenterPoint Energy, Inc. reported third-quarter 2014 earnings of $0.33 per share, surpassing the Zacks Consensus Estimate by 6.5%. The upside resulted primarily from a higher customer count in spite of mounting expenses and a milder summer. However, the reported number was 5.7% lower than the prior-year adjusted profit of $0.35 per share. Total Revenue CenterPoint Energy s total revenue for the reported quarter was $1,807 million, beating the Zacks Consensus Estimate by 6.2%. Quarterly revenues also increased 10.2% from $1,640 million in the yearago period. Operational Results Total expenses rose 12.8% year over year to $1,574 million, primarily due to a rise in operation and maintenance, natural gas and depreciation and amortization expenses. The company s operating income decreased 4.5% year over year to $233 million in the reported quarter. Interest expense in the reported quarter remained flat at $118 million as compared to the year-ago quarter. In the reported quarter, customer count increased by roughly 2% from the prior-year quarter leading to an improved sales volume. Segment Results The Electric Transmission & Distribution segment reported an operating income of $232 million, down 2.9% year over year. Natural Gas Distribution reported an operating loss of $8 million as compared to the operating income of $5 million in the year-ago quarter. The Energy Services segment s operating income was $6 million, up from $2 million a year ago. The operating income of the Other Operations segment was $3 million as compared to the operating loss of $2 million in the prior-year quarter. Financial Condition As of Sep 30, 2014, CenterPoint Energy reported cash and cash equivalents of $230 million, up from $208 million as of Dec 31, 2013. Total long-term debt was $7,797 million as of Sep 30, 2014, down from $7,817 million at the end of Dec 31, 2013. In the first nine months of 2014, the company s net cash from operating activities was $1,124 million, lower than $1,132 million in the year-ago period. In the reported quarter, CenterPoint Energy s total capital expenditures increased to $358 million from $329 million in the year-ago period, primarily on the back of higher investments in both the Electric Transmission & Distribution and Natural Gas Distribution segments. Equity Research CNP Page 4
Guidance CenterPoint Energy maintained its 2014 earnings guidance at $1.14 $1.21 per share. The company reaffirmed its 2014 earnings expectation from Midstream investments to be in the range of $0.42 to $0.45 per share. It has also reaffirmed its 2014 earnings forecast for its utility operations at $0.72 to $0.76 per share. VALUATION Shares of CenterPoint Energy are presently trading at 19.1 trailing 12-month multiple, compared to the 21.9x average for the industry and 19.2x for S&P 500. Over the last five years, the company s shares have traded in the range of 11.9x to 19.8x trailing 12-month earnings. Moreover, the company has a trailing 12-month ROE of 12.4%, higher than the industry average of 3.7%. Our $26.00 price objective reflects 7.2x trailing twelve month cash flow. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low CenterPoint Energy, Inc. (CNP) 20.8 19.7 5.0 6.7 19.1 19.8 11.9 Industry Average 28.5 19.3 6.3 8.9 21.9 55.6 15.6 S&P 500 17.8 16.6 10.7 16.1 19.2 19.6 12.0 PPL Corporation (PPL) 15.7 16.5 N/A 7.9 15.1 16.5 8.1 Public Service Enterprise Group Inc. (PEG) 15.8 15.8 2.6 8.1 15.6 15.1 9.5 Northeast Utilities (NU) 20.8 19.4 6.7 10.6 22.3 20.3 13.2 Calpine Corp. (CPN) 32.1 22.5 15.8 11.8 25.1 N/A 24.4 TTM is trailing 12 months; F1 is 2014 and F2 is 2015, CF is operating cash flow CenterPoint Energy, Inc. (CNP) P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA 2.3 2.6 1.8 12.4 1.7 3.9 7.6 Industry Average 1.7 1.7 1.7 3.7 1.0 3.6 10.3 S&P 500 7.2 9.8 3.2 23.3 N/A 1.9 N/A Equity Research CNP Page 5
Earnings Surprise and Estimate Revision History Equity Research CNP Page 6
DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of CNP. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1141 companies covered: Outperform - 15.8%, Neutral - 78.2%, Underperform 5.7%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Research Analyst Copy Editor Content Ed. Lead Analyst QCA Priyam Bhattacharya Sayantani Sinharoy Shrabana Mukherjee Shrabana Mukherjee Jewel Saha Equity Research CNP Page 7