CenterPoint Energy Inc.'s $2.15 billion deal to sell its Arkansas and Oklahoma gas utility territories to Summit Utilities Inc. is a victory for both the Houston-based multi-utility and the local distribution company sector as a whole, analysts said.
The sale provides CenterPoint with $1.73 billion in before-tax proceeds to fund capital spending expansion plans, after accounting for $425 million to cover winter storm costs. The valuation on the LDC assets could also coax potential sellers to the table and dispel fears about stranded assets that have dogged the sector amid anti-gas sentiment and policy headwinds, according to analysts.
"This marks the inflection point that we highlighted in our '21 Outlook, as we see CNP transforming into a high growth, lower-risk utility," Guggenheim Partners LLC analyst Shahriar Pourreza said in a research note. "The transaction announced today also highlights the broader value of LDC assets for both CNP and the broader gas utility group."
CenterPoint progresses strategic plan, sets itself apart
For CenterPoint, a successful sale of the utilities was critical to its business transformation plan. The company intends to use the proceeds to fund $3 billion in incremental capital spending focused on its electric operations in Texas and Indiana. Following the announcement, consensus was emerging among analysts that CenterPoint outperformed expectations for the transaction.
In a note to clients, Goldman Sachs Group Inc. analyst Insoo Kim noted that the sale proceeds of $1.73 billion equaled 2.5 times the utilities' 2020 rate base of about $700 million, exceeding CenterPoint management's forecast that the assets would fetch a price equal to at least 1.5 times rate base.
Pourreza called the proceeds a "strong valuation mark" for CNP. To put it in context, he said it represented a multiple of about 23 times price-to-earnings, compared to an 18x PE multiple for the gas utility peer group.
Pourreza projected that CenterPoint would net $977 million in after-tax proceeds, above the firm's prior midpoint forecast of $650 million. He also expressed confidence that CenterPoint can successfully recycle those proceeds into organic growth. Moving forward, CenterPoint compares well against peers, noting its 6%-8% long-term EPS growth, supported by near-term rate base growth of 10%, and constructive regulatory markets in Texas, Indiana, Ohio and Minnesota, Pourreza added.
CenterPoint shares were up about 2% in afternoon trading and were within $1 of the stock's 52-week high at their intraday peak.
Guggenheim believes the LDC space has "fundamentally valuable assets," particularly in states with heating needs that have embraced energy choice. Oklahoma was among the first states to prohibit local governments from restricting gas use in buildings in 2020. Arkansas followed suit in March and sits at the center of the growing policy push across the central and southern U.S.
In marketing the assets, CenterPoint executives highlighted the constructive regulatory and policy environment in the region. Summit Utilities expanded into Arkansas and Oklahoma with its 2017 acquisition of Arkansas Oklahoma Gas Corp. With its latest acquisition, Summit is poised to grow its customer count five times over and more than triple its pipeline mileage.
"Today, we couldn't be more excited to announce our plans to serve more communities in these two great states with the acquisition of CenterPoint's Arkansas and Oklahoma gas distribution systems," Summit Utilities President and CEO Kurt Adams said in a news release.
Analysts see potential for more M&A
The transaction could bring other LDC operators like NiSource Inc. off the sidelines, Pourreza said. Guggenheim previously speculated that NiSource could put one or more of the gas utilities across its six-state footprint on the market, partly as a means of meeting equity needs. Even with those equity needs now partially resolved, divestment could simplify the business and provide capital to reinvest in renewable energy projects, Pourreza noted. In his view, Kentucky and Virginia are the most likely candidates for divestment.
KeyBanc Capital Markets Inc. analyst Sophie Karp also saw positive implications for "similarly exposed" utilities, particularly The Southern Co., but also Duke Energy Corp. and Midwest asset holders. "Overall, we expect the perception of LDC assets in gas-friendly regions to improve somewhat among investors following this transaction and alleviate concerns surrounding the importance of natural gas in the fuel mix," Karp said in a research note.
The transaction immediately stirred questions on earnings conference calls hosted by gas utility operators, which are just getting underway. Asked whether the strong valuation created an incentive to reduce debt through noncore utility sales, AltaGas Ltd. President and CEO Randy Crawford said the company has already achieved significant deleveraging through the recent sale of its U.S. storage and transportation assets. That allows AltaGas to fund its growth plans, transact opportunistically and invest in assets, even if they are not considered core to the business, Crawford said.
RBC Capital Markets analyst Robert Kwan pressed Crawford on whether the valuation made AltaGas rethink the rationale for M&A, specifically to drive shareholder value through sales rather than to cut debt. AltaGas owns Alaska gas distributor ENSTAR Natural Gas Co., Michigan LDC SEMCO ENERGY Gas Company and East Coast utility Washington Gas Light Co.
"To the extent that we can add value, that we can continue to improve it, leverage the asset and continue to grow per share, and that we bring a competitive advantage, that's what we'll do with these assets," Crawford said. "And to the extent that we're not able to do that and they're non-core, then we will look toward monetizing at fair value."