CenterPoint 能源

On Aug. 3, Texas Gov. Greg Abbott directed state utilities regulators and the state's electric grid operator to pause data center approvals and audit all applications seeking interconnection to the Texas grid.

Why it matters: The audit aims to review data center tax breaks, power use, and environmental water use impacts. The announcement delays the current Batch Zero process, a centralized way of reviewing the roughly 474 gigawatts of Texas interconnection requests, the majority of which are data centers. CenterPoint Energy's transmission and distribution utility is well positioned to benefit from investments to connect data centers to the grid.

The bottom line: We are maintaining our $43 fair value estimate and Narrow Morningstar Economic Moat Rating for CenterPoint. We don't expect the moratorium to have a material impact on CenterPoint's near-term earnings. Management recently reaffirmed its 7%-9% annual earnings growth target, consistent with our expectations.

Long view: Our early read is that the moratorium could create delays for speculative data center projects, not projects with firm financial commitments. CenterPoint identified 14 GW of generation in Batch Zero for 2027-32. According to management, the 14 GW of load is supported by signed agreements with long-term commitments and $900 million of customer cash commitments and deposits. Management said that it has secured the materials and system capacity to serve the requested load. 

Coming up: With a closely contested gubernatorial election in Texas in November, we expect data centers to continue to be one of the key political debates. This could create headline risk for CenterPoint. We expect to have better insight into possible project delays or other impacts from the audits when CenterPoint rolls forward its capital investment plan later this year.

Our fair value estimate is $41 after incorporating year-to-date regulatory and financial updates.

We expect average annual earnings growth at the high end of management's 7%-9% guidance.

Our earnings growth forecast is supported by capital investment across the company's rate-regulated operations. We expect the company to invest $34 billion during the next five years, in line with management's forecast. We assume constructive regulatory treatment at all of its subsidiaries.

In our discounted cash flow valuation, we use a 5.9% cost of capital based on a 7% cost of equity. This is lower than the 9% rate of return we expect investors will demand for a diversified equity portfolio, reflecting CenterPoint's lower sensitivity to the economic cycle and lower degree of operating leverage.

We assign CenterPoint Energy a narrow moat rating.

State regulators have recognized the need for shareholders to earn an adequate return on investment. In exchange for earning a fair return for its shareholders, CenterPoint's utilities are expected to provide safe and reliable service at the lowest possible rates. This implicit contract between regulators and capital providers should, on balance, allow CenterPoint's regulated utilities to earn above their costs of capital, though observable returns might vary in the short run based on demand trends, investment cycles, operating costs, and access to financing.

CenterPoint is concentrating its growth expenditures in jurisdictions with favorable regulatory frameworks. At Houston Electric, CenterPoint's largest business unit, the utility has automatic rate recovery mechanisms for most of its capital investment plan. This reduces regulatory lag and the frequency of rate cases.

The company's natural gas distribution businesses also have favorable regulatory frameworks. In Texas, the Gas Reliability Infrastructure Program allows annual filings for incremental capital investments. In Minnesota's traditional regulatory framework, utilities can implement interim rates 60 days after filing a rate request, and the regulatory framework has been good to date.

CenterPoint is a pure-play regulated electric and gas utility with above-average long-term growth potential and constructive regulatory environments.

CenterPoint's capital investment plan supports the high end of management's 7%-9% annual earnings growth forecast.

Houston Electric's service territory is located in one of the most economically vibrant metro areas in the country, with recent customer growth averaging 2% annually.

Concerns over Houston Electric's response to Hurricane Beryl have heightened regulatory and political risk.

We think the 2019 Vectren merger was dilutive and destroyed shareholder value.

As with all regulated utilities, rising interest rates will raise financing costs and could make the dividend less attractive for income investors.