CenterPoint Energy

Moat: 2/5

Understandability: 1/5

Balance Sheet Health: 3/5

CenterPoint Energy is a public utility holding company, providing electricity transmission and distribution, natural gas distribution, and other energy services in multiple states.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: CenterPoint Energy operates primarily as a regulated utility. This means its earnings are largely governed by regulatory frameworks, and its business model revolves around building, maintaining, and operating the infrastructure necessary to deliver electricity and natural gas to its customers. The company serves approximately 7 million metered customers across Texas, Louisiana, Indiana, Mississippi, Ohio, and Arkansas. The company is primarily focused on energy delivery and has several segments including: Electric Transmission and Distribution, Natural Gas Distribution, and Energy Systems Services.

Electric Transmission and Distribution: This segment, the largest revenue contributor, involves the transportation of high-voltage electricity through transmission lines and the distribution of electricity through lower-voltage lines to customers.
Natural Gas Distribution: This segment focuses on the distribution of natural gas through pipelines to various customer groups including residential, commercial, and industrial.
Energy Systems Services: This segment includes sales of appliances, building and repairing of pipelines and services relating to Energy Systems Group.

Industry and Competitive Landscape:

The utilities industry is generally considered a stable one, but it faces challenges such as increasing weather volatility, competition from alternative energy sources, rising interest rates, and regulatory changes. CenterPoint is a player in an industry characterized by high capital expenditures and high barriers to entry due to the extensive infrastructure needed to operate. They also face the risk of customers switching to other energy sources or generating their own. As the industry moves more towards renewables, the companies with the right technology and strategies to incorporate this transition will likely be winners.

Competitive Positioning: The most significant differentiation for CenterPoint is its geographic presence within its service territories and the diversified nature of its business (gas and electric transmission/distribution), its customer base and regulated status. In addition to the geographic presence which is an advantage because few competitors are likely to step into those jurisdictions given high barriers to entry and its established presence; the utility has long term contracts with municipalities to allow them to operate with the necessary regulatory approvals. It also benefits from its integrated operations that allows for a more stable business with both the gas and electric distribution and transmission services.

Moat Assessment: 2/5 While CenterPoint benefits from some degree of protection from competition through regulation, its moat is not very wide and not very durable. This earns a moat rating of 2/5. The main moats they have are:

Regulation: CenterPoint’s regulated nature provides some insulation from competition as entry into these utility markets are not easy due to the large infrastructure required to start such businesses. This creates a barrier to entry and offers a level of pricing power, although it is regulated.
Economies of scale and network effects In distribution and transmission, its business has benefits from its scale through having several established networks already built out. The incremental cost to each consumer after the initial fixed costs are already paid by the previous consumer, are very low.

However, these advantages are limited by several factors:

Regulation as a double edged sword: Regulation can increase returns on capital, but it also limits pricing power in many cases.
Competition with alternative energy: There is an increasing trend towards the usage of cleaner energy solutions such as solar and wind power; this is a threat to utilities that might not be able to successfully transition towards more of these energy resources. Also, customers may opt to install solar panels at their own facilities reducing their consumption from the power grid.
Relatively low switching costs: Even though it can be tough to leave the service of one utility provider, customers can switch to other providers and even utilize self-generation solutions. The customer is ultimately just paying for electricity or natural gas so if a new provider with better service and price is made available they can easily switch over and leave the current provider, meaning switching costs are limited.

Overall, the combination of the above indicates a moat rating of 2/5.

Risks to the Moat and Business Resilience:

Regulatory Changes: Changes in regulatory frameworks could affect the company’s profitability. Any change in authorized rates of return or the rules for cost recovery may limit future earnings.
Increased Competition: Although utilities are monopolies in some areas, the increasing focus on cleaner energy generation may bring about new competition. Customers may also start generating their own energy, thereby reducing the demand for power and making it necessary for the company to adapt to the change.
Adverse Weather Conditions: Severe weather can damage infrastructure, leading to outages and increased expenses. Hurricanes and winter storms, like the winter storm Uri and subsequent Uri-related costs, have had a huge impact on operations in the past. Any further weather related incidents will also cause the company to have more costs to deal with that could impact earnings.
Interest Rate Risk: Increasing interest rates can increase borrowing costs, affecting profitability and cash flows.
Inflation: Inflation could increase operation and maintenance costs and labor costs, affecting profitability.
Cybersecurity: Cyber security breaches could affect company operations, leading to a decline in performance.
Fuel Costs: Increases in fuel prices have an immediate impact on costs, especially in the natural gas distribution business.

Despite these risks, CenterPoint is resilient due to the regulated nature of the industry. The company’s revenue streams are mostly reliable and predictable, and it provides essential services that are always in demand, meaning it has a stable cash generation ability. However, major changes or problems could be quite destructive.

Financials In-Depth: CenterPoint’s financial performance is a mixed bag. Let’s explore in detail:

Revenues: Revenues are generated primarily from the delivery of electricity and natural gas to customers. Revenues have been growing over the years, primarily as a result of customer growth and rate changes.
Margins: Operating margins are not impressive. They hover around 10 to 15 percent. This is because most operating costs are fixed, and thus, the company must utilize those assets efficiently to obtain a good operating margin. However, a high capital intensity is inherent in these types of businesses, meaning the company must spend a substantial portion of revenues to maintain its current assets. This limits the amount available to improve net margin.
Profits: Due to the low margins, net profit of the company is also relatively low. Profitability is dependent on regulatory allowances and weather conditions, and so the profit can be quite volatile.

Here’s an in-depth look at some key financial numbers (as of latest quarterly report: 2024/09):

Cash from operations: $1.1 billion (last 9 months), up significantly from prior year, but also include regulatory deferrals.
Total Revenues: $6.9 billion (last 9 months).
Net Income: $594 million (last 9 months)
Net Debt: $16.6 Billion, with Interest expense of $723 million in the previous 9 months.
Goodwill and Acquired Intangibles: $2.2 Billion.
Adjusted Operating Income: $1.4Billion for the last 9 months.

Balance Sheet Health: 3/5 CenterPoint’s balance sheet health is average with high debt and long-term liabilities. 3/5. Some observations are:

Debt-heavy: The company carries substantial amount of debt, with a large percentage of it maturing in 5-10 years. This creates a risk if the company fails to manage it properly, and also puts pressure to maintain high earnings. The company must make high interest payments, which adds pressure to profitability and net income. It also makes the company more vulnerable to increases in interest rates, which could harm its debt servicing capabilities. However, most of it is long-term in nature, thus somewhat reducing the short term risk.
Intangibles: The company also has a considerable amount of intangible assets and goodwill on the balance sheet, reflecting numerous acquisitions in the past. These assets may be written down in the future if the acquisitions turn out to be unprofitable.
Long-Term Liabilities: The company has several long-term liabilities (mostly for pensions), which adds to the burden of the company and may require additional capital to fulfil if the plans are underfunded.
Positive cash flow: The company has a consistent cash flow from operations, thus it is capable of making debt and liability payments.
Regulatory stability: It operates within a regulated environment, thus it is unlikely that their financial health could deteriorate due to competition or price wars. The regulations also provide a degree of assurance for stability.

A rating of 3/5 has been given because while the company generates a stable cash flow, the level of debt and non-tangible assets make the balance sheet a little less stable.

Management’s View: In the latest earnings calls, management has pointed towards improvement in the company’s operations and cost management. Emphasis was placed upon implementing the Texas Resilience Plan to improve the infrastructure and deliver more reliable service to customers. The management has also emphasized a move to more renewable sources and also the improving of customer service as a way to grow revenue and provide more value for stakeholders. They did acknowledge the impacts of rising energy prices, extreme weather, and also supply chain issues on performance. Management has also acknowledged that they are targeting 7-9% earnings per share growth rate over the long-term period. They have emphasized investment in new infrastructure which they intend to capture in future earnings.

Understandability Rating: 1/5 CenterPoint’s business model is simple at the surface: it generates money through delivery of electricity and natural gas to customers. The company is primarily regulated, thus it also has to adhere to regulations. However, its financial statements are extremely complex due to multiple adjustments for mark-to-market value, non-controlling interests, equity equivalents, etc. It also includes several complicated segments, making it extremely difficult for non-financial professionals to understand fully. This merits a rating of 1/5 for understandability.