CNP 4Q2015 Earnings Note

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Market Price (2/26/2016): $18.53/share; ST-Target: $21/share; NIV: $33/share

CNP: Reorganizing, simplifying, and streamlining

We agree with divestiture of CNP’s stake in Enable Midstream Partners (ENBL). Although timing is poor, CNP would sell cheap but also have opportunity to buy cheap. Disposition of ENBL is likely to be dilutive, but lowers risk, which increases multiple, and proper redeployment of capital could make-up for the dilution. We’d like to see CNP at least make a bid for Oncor T&D assets in Texas. We are less than thrilled at the prospect of converting CNP’s T&D assets in Texas to a REIT; we don’t believe this is in the best interest of the customers and, therefore, not in the best interests of shareholders. Acquisition of Continuum isn’t dazzling us but signals serious commitment to Energy Services business, and we’re not necessarily opposed to this modification in strategy, especially if ENBL is no longer part of the equation. Regardless, lack of strong utility and other regulated growth projects hamper CNP’s valuations, in our opinion, despite a healthy dividend yield. However, the good news is that we believe CNP’s targeted CAGR in AEPS of 4%-6% is well within sight and may take a boost with close of Continuum and redeployment of capital from the disposition of ENBL. Demographics continue to provide a tailwind.

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