Temple University Investment Association CenterPoint Energy NYSE: CNP Leads: Ryne Dudley & Kyle...
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Transcript of Temple University Investment Association CenterPoint Energy NYSE: CNP Leads: Ryne Dudley & Kyle...
Temple University Investment Association
CenterPoint Energy NYSE: CNP
Leads: Ryne Dudley & Kyle Perkins Associate Analysts: Hinal Patel, Hicham Belkssir, Zachary
Maszlanka
Current: $20.79 Target: $21.99 Total Return: 10.57%
Company Overview• Subsidiaries
o CenterPoint Energy Houston Electric, LLCo CenterPoint Energy Resources Corporation
• Operationso Natural Gas Serviceso Electric Transmission and Distribution Serviceso Wholesale Energy services
• Geographic presenceo Arkansas o Louisiana o Minnesota o Mississippi o Oklahoma o Texas
Segment Overview
• Electric transmission and distributiono offers electric transmission and distribution services to end retail, industrial, and
commercial userso Regulated by FERC
• Natural Gas distributiono sells regulated intrastate natural gaso provides NG transportation services for residential, commercial, industrial, and
transportation customerso offers unregulated services comprising residential appliance repair and
maintenance services• Energy Services
o offers variable and fixed-priced physical natural gas supplies primarily to commercial and industrial customers
30%
36%
35%
2014 Revenue by segment
Electric transmission and distributionNatural gas didtribu-tionEnergy services
Industry Overview
Electric UtilitiesGas Distribution
Utilities• Structure
o Generation - Competitiveo Transmission - Regulatedo Distribution - Competitive
• US electric utilities sector is massive, producing about 20% of world’s total electric supply
• Demand for US electricity from commercial, industrial, and residential consumers is expected to increase about 29% in the period from 2012 to 2040.
• Structure
o Upstream operations: Exploration, production, gathering
• Competitiveo Midstream Operations: Transmission,
storage• Regulated
o Downstream Operations: Distribution• Competitive
• US shifting from a natural gas importer to exporter
Investment Thesis
5
• Undervalued on a 5 year P/E of 14.91x to itself• Undervaluation reasons - Rising interest rates - Credit Suisse Downgrade - ENBL lacking growth - Lowered 2015 guidance • Fair Value: 20.35x P/E, target price of $21.99• Coming Back to Fair Value: - ENBL growth, Increase Capex, Dividend Growth - Wide Economic Moat
Catalysts
6
• Increasing Capex - Doubling annual expenditures to $140 million - Potential projects costing ~$384 million would raise the
allowed net income by $14 million using the rate base formula
• Dividend Growth - Return from Capex going to shareholders - Positive dividend growth in the next 3 years, 11% in 2015
• ENBL Growth - Increased revenue when commodities turn up - CNP holds a 55.4% stake in this company
ENBL EBITDA
Economic Moats
Wide• CNPs operation as a
legal monopoly
• CNPs competitive energy services segment benefit from the economies of scale and purchasing power of the larger parent company
Positives & Risks
Positives• In late 2008, CNP
invested in electric grid technology
• Freeport LNGs construction of an LNG export terminal
• Not only the highest Return on Equity in our Comps, but in the entire utilities sector as a whole
Risks• REPS, which are Retail
Electric Providers are what revenues from consumers first go to
• Like all utility company's, CNP is adversely exposed to rising interest rates
• Continued low natural gas prices
Financials & Returns• ROE: ROA:Highest ROE in the sector Low ROA due to projects2015: 10.57% 2015: 2.9%
2016: 11.04% 2016: 3.2%
Financials
• Dividend Yield:
Current DY: 4.80% Projected 1 year growth: 11.63% Projected 3 year growth: 6.49%
• Operating Margin:
Operating Margin0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
18.00%
20.00%
CNP
2009 2010 2011 2012 2013 2014
Rate Cases
o 2 types of rate cases• Cost of gas / electricity• Costs of everything else
o Revenue collection• Rev requirement = Expenses + (rate base x cost of capital)
o Cost of Capital = Cost of debt + Shareholder expected return
o Return on rate base
CNP NI TEG CMS PNW
4.44% 2.87% 3.35% 2.99% 3.52%
Undervaluation
• 5 year P/E to itself• Why?
• Currently 14.73x• Target multiple
20.36
Reasons for Undervaluation
• Poor performance from ENBL
Reasons for Undervaluation
• Credit Suisse Downgradeo Outperform to underperformo Energy customer base layoffs
• Lowered Earnings Guidanceo 2014 guidance $1.14 - $1.21 per shareo 2014 actual $1.42 per shareo 2015 guidance $1.00 - $1.10 per share
Price Target
• P/E 5 year to itselfo Target multiple of 20.36x
• Consensus NFY EPS = $1.08
• 20.36 * 1.08 = $21.99
• Return = 10.57%o 4.80% dividend yieldo 5.77% price appreciation
Peer Group
Leverage
EBITDA Profit Operating Debt/
ROA ROE ROIC Margin Margin Margin Equity
Company LTM NFY LTM NFY LTM LTM LTM MRQ
CNP 9,102 14.5 18.6 7.34 10.25 2.59% 13.77% 2.53% 4.80% 21.13% 6.6% 10.13% 194.8% 4.44%
NI 13,907 24.6 22.7 13.13 11.82 3.12% 8.80% 2.56% 2.50% 27.1% 8.2% 18.3% 161.9% 2.87%TEG 5,944 15.3 20.4 12.73 11.94 2.37% 10.30% 1.99% 3.90% 12.0% 6.7% 10.3% 101.4% 3.35%CMS 9,857 20.4 18.3 10.24 9.4 3.93% 13.31% 2.26% 3.40% 24.9% 6.6% 16.1% 235.7% 2.99%PNW 7,158 18.12 16.4 8.07 7.9 3.65% 9.57% 2.82% 3.80% 37.5% 11.4% 23.2% 78.8% 3.52%Median 8,508 19.26 19.35 11.49 10.61 3.39% 9.94% 2.41% 3.60% 25.98% 7.44% 17.18% 131.69% 3.17%
Mean 9,217 19.61 19.45 11.04 10.27 3.27% 10.50% 2.41% 3.40% 25.4% 8.2% 17.0% 144.5% 3.18%
($ in millions except per share)
Market Cap
Return on Base
Rate
Margins
P/Diluted EPS TEV/EBITDA
Valuation Multiples Profitability Divident yield
• Selected for size and segments• Competition not a determinant
Conclusion
• Positiveso Investments in growth and efficiency
• Catalystso New CAPEX to raise rate baseo Dividend growth
• 20.36x P/E for $21.99• Expected return = 10.57%
Any Questions?
Appendix Charts5 year CNP vs S&P
Appendix ChartsCNP 5 year E/V to itself
Appendix Charts
CNP net plant in service
Appendix Charts
5 year P/E spread ratio to S&P
Appendix Charts
CNP supply chain based on revenues
Appendix ChartsS&P 500 vs S&P utilities sector