CNP Initiation Report

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Market Price (1/29/2016): $17.87/share; ST-Target: $21/share; NIV: $36/share

CNP: Getting paid to wait, again

CNP has benefitted from strong demographic growth in Texas, partly due to revival in oil and gas, E&P activity over the last several years. But, with currently depressed commodity prices, we fear that demographic growth may no longer be a factor until LNG exports start to swing back the pendulum, at least for natural gas. CNP is also significantly dependent on Enable Midstream Partners’ (ENBL) performance and cash distributions, a company which CNP exercises little direct control over. So, we agree with CNP’s decision to divorce itself from ENBL. But, acquisition of Continuum Energy’s retail business appears neutral to us. Married with the lack of significant utility-level growth projects, we believe CNP’s valuations may lag. But, its roughly 6% dividend yield is very attractive, possibly enough so for investors to be patient until CNP develops a strong portfolio of utility-growth projects or engages in strategic transactions. The relatively high dividend yield is also likely to help CNP to better weather the upcoming increases in interest rates. We look for strategic alternatives to ENBL, most desirable being another utility acquisition. We are also disappointed in CNP’s decision not to bid for Oncor.

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