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    CenterPoint Energy Inc (CNP)

    Q1 2024 Earnings Summary

    Reported on Jan 10, 2025 (Before Market Open)
    Pre-Earnings Price$29.22Last close (Apr 29, 2024)
    Post-Earnings Price$28.94Open (Apr 30, 2024)
    Price Change
    $-0.28(-0.96%)

    What went well

    • CenterPoint Energy reported an 8% increase in sales in Q1 2024 compared to the same quarter last year, adjusted for weather, driven by strong residential, commercial, and large industrial growth in the Greater Houston area. This reflects dynamic economic growth and increasing electrification across multiple sectors.
    • The company has a solid base plan with 10% rate base growth through the end of the decade and has increased its CapEx plans by over 10% since the 2021 Analyst Day, largely due to increased resiliency efforts. Significant opportunities ahead include industrial electrification, such as approximately 10 GW of hydrogen production in development to come online before 2030, requiring significant increases in electric transmission capacity and creating jobs that will drive further load growth.
    • CenterPoint Energy anticipates more tailwinds than headwinds, including legislative successes reducing regulatory lag, increased CapEx, and recycling capital into higher-return jurisdictions through asset sales. Despite higher interest rates and a modest equity program, these factors support their continued confidence in long-term growth and earnings guidance of 8% growth in 2024 and mid- to high end of the 6% to 8% range through 2030.

    What went wrong

    • Regulatory Uncertainty in Rate Cases: CenterPoint Energy is experiencing regulatory uncertainties, particularly with its Indiana electric rate case, where hearings have been delayed to explore potential settlements, making it difficult to predict outcomes.
    • Higher Interest Rates Impacting Financing Costs: The company acknowledges a "higher for longer" interest rate environment, which could increase financing costs and pressure earnings, necessitating a conservative approach to their capital programs.
    • Dependence on External Funding for Capital Expenditures: CenterPoint's incremental capital investment opportunities, including the $500 million resiliency plan, depend on securing federal and state funding. There is uncertainty about successfully obtaining these funds, and failure may require funding projects through their capital structure, potentially impacting their financial position.

    Q&A Summary

    1. System Resiliency Filing and CapEx Plans
      Q: How will lower approval of resiliency plan affect investments?
      A: Management is confident that even if the PUCT approves spending at the low end or below the $2.2 to $2.7 billion range for the system resiliency plan, they have abundant investment opportunities elsewhere. These include incremental CapEx on the gas side, accelerating next-generation smart meter deployment, and capitalizing on exponential load growth from industrial electrification and commercial fleets. Financing for these investments would remain aligned with the existing capital structure.

    2. Financing and Credit Metrics
      Q: What are your refinancing plans and options?
      A: Management is pleased with current credit metrics, reporting 14.6% FFO to debt based on Moody's calculation. They are pursuing efficient financing options, including DOE loan programs totaling over $2 billion already filed, evaluating hybrid securities, and hedging a portion of upcoming maturities. The aim is to fund incremental CapEx in line with the enterprise capital structure while optimizing financing costs.

    3. S&P Negative Outlook and Uri Impact
      Q: Will metrics improve as Uri impact fades?
      A: Yes, management expects credit metrics to improve as the Winter Storm Uri impact rolls off. They believe the S&P negative outlook is based on past events and are comfortable with the financial plan. The Uri impact is transitory, and they foresee growing cushions in their credit metrics with both Moody's and S&P going forward. The effect is due to S&P's methodology excluding securitization proceeds but including associated cash outflows, leading to a temporary impact.

    4. Indiana Rate Case Settlement Delay
      Q: Update on Indiana settlement delay and agreement likelihood?
      A: The hearing start was delayed by a day to explore potential settlement. Management is working constructively with stakeholders and is cautiously optimistic. Much of the CapEx in the Indiana electric filing has been previously presented to the IURC and stakeholders, including costs of coal transition and T&D investments for reliability and resiliency. More updates will be provided as available.

    5. Demand Growth and Cost Allocation
      Q: Any cost allocation issues due to load growth?
      A: Management sees less of an issue in their service territories. The growth in Texas and Indiana is driven by industrial load that creates significant jobs, unlike data centers or AI growth that can strain cost allocation. CenterPoint's diverse load growth from residential and industrial sectors keeps cost allocation impacts minimal compared to peers heavily driven by data centers.

    6. Growth Opportunities in Texas
      Q: Can you elaborate on growth opportunities in Texas?
      A: CenterPoint highlights that Texas offers unmatched dynamic growth, particularly in electric sales. Adjusted for weather, sales were up 8% over the prior year's first quarter, driven by strong residential, commercial, and large industrial growth. Opportunities include electrification at major ports, growth in the petrochemical complex, life sciences, and collective growth across various sectors, including data centers. They expect this growth to continue through the decade and beyond.

    7. Impact of State/Federal Incentives on EPS
      Q: How will state/federal incentives affect EPS?
      A: Management states the impact on EPS from pursuing state and federal incentives, such as grants and DOE loans, is very small. These financing options aim to provide better outcomes for customers by reducing costs. They plan to update their long-term EPS guidance after rate cases next year but note that tailwinds, including reduced regulatory lag, increased CapEx by over 10%, and the sale and reinvestment of assets, outweigh headwinds like higher interest rates and a modest equity program.

    8. Impact of Higher Interest Rates
      Q: How do higher interest rates affect your plan?
      A: Management acknowledges the higher-for-longer interest rate environment and notes they have planned conservatively for 2024 and beyond. They consistently incorporate conservatism across their plans to avoid surprises and ensure they can execute, finance, and recover their capital programs effectively, even if higher rates persist.

    9. Wildfire Mitigation and SRP Investment
      Q: What is the outlook for SRP investment and wildfire mitigation?
      A: Wildfire mitigation comprises $140 million, a small portion of the overall $2.2 to $2.7 billion System Resiliency Plan. With 60% of their system already underground and high relative humidity reducing wildfire risk, they believe current measures are sufficient under present conditions. Future opportunities lie in strengthening the distribution side to create a more resilient and reliable overhead electric system for customers, indicating potential for continued CapEx growth in subsequent filings.

    10. Resiliency Plan Approval Timeline and ROE
      Q: What is the timeline for resiliency plan approval and current ROEs?
      A: The resiliency plan approval is expected within about six months, potentially by the end of the calendar year, though as first-of-its-kind legislation, timing may vary. Historically, they have seen about 150 basis points of regulatory lag in Texas, which they have meaningfully reduced. Current earned ROEs are impacted by ongoing rate cases; thus, a normalized view will be clearer post-rate case when they regain access to the full complement of capital recovery mechanisms.

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