CNP 1Q2018 Earnings (05/03/2018): We feel CNP is conservative; ENBL is sticky wicket; Vectren deal is good

Without sale of ENBL to fund Vectren Corp. (VVC) acquisition, VVC deal isn’t ST accretive, but we still like deal for MT-to-LT shareholder value
It’s now apparent that CNP doesn’t want to use ENBL to fund VCC deal, which is unfortunate. We’re apathetic re: internal spin of ENBL though curious as to purpose.
While CNP outperformed expectations for 1Q18, it’s keeping $1.50-$1.60 AEPS guidance for 2018E, which we feel is conservative
CNP’s almost $8B capital spending program forecasts 8.3% CAGR in rate base from 2017-to-2022, but earnings guidance for 2019-2020 is only 5%-7% CAGR. We believe CNP is being conservative
Appears that Enable Midstream Partners (ENBL) disposition would be through public market sales
With VVC deal we believe that CNP has made itself into a bigger target for all the right reasons, in our view
We believe demographics continue to provide tailwind. Dividend yield likely to stay strong too.

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CNP buys Vectren (04/24/2018): More to deal than first glance; We like this deal; CNP attractive target

Factual Information presented by CNP as we understand them to be

CNP announced the acquisition of Vectren Corp. (VVC) yesterday morning for cash payment of some $72/share
Details of the financing are uncertain other than $2.5B in equity and equity-like issue prior to closing
Balance of the transaction of some $3.5B is expected to be financed through a combination of short-term and long-term debt, including commercial paper; specific maturities were not disclosed
Closing is expected sometime in 1Q2019
CNP expects the transaction to be slightly accretive starting in 2020
EPS guidance is unchanged with 2018 remaining at $1.50-$1.60 and growing 5%-7% through 2020

Our analysis of the transaction

We believe that this transaction is strategically astute and presents investors with potential for MT-to-LT performance higher than stand-alone CNP
Ultimately, we believe that CNP would monetize some or all of its 54.1% ownership interest in ENBL to not only repay some of its acquisition debt financing, but also potentially to buy back some or all of its $2.5B equity issuance that underlies the financing for the acquisition
Regardless, … .

Conclusion

We like this transaction and look-forward to accelerating guidance to the upside
Given our assumption for how the financing of the transaction is ultimately executed, we believe that CNP presents a compelling investment scenario, particularly given its roughly 4.4% dividend yield
While this acquisition may be consummated partly as a defensive measure, we believe that upon completion of the VVC deal, CNP may … .

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CNP 4Q2017 Earnings (02/22/2018): We feel CNP is conservative; ENBL to be sold in pieces; upside coming

CNP’s new almost $8B capital spending program forecasts 8.3% CAGR in rate base from 2017-to-2022, but earnings guidance for 2019-2020 is only 5%-7% CAGR
We believe CNP is being conservative due to potential commodity price volatility from CES
Electric T&D spending is expected to be some $4.8B, leading to 7.8% CAGR in rate base for 2017-2022, while Natural Gas Distribution spending is forecast to be about $3.2B over next 5 years, leading to some 9.2% CAGR in rate base
Bailey-to-Jones transmission looks like it’s a go for mid-2021 CDO
While we tweaked down our ST-Target to $37 from $39, our NIV/share rose to $63 from $58 and we increased our estimates
Appears that Enable Midstream Partners (ENBL) disposition would be through public market sales
We believe demographics continue to provide tailwind. Dividend yield likely to stay strong too.

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2018 Industry Update: Economic growth should favor commodities-driven businesses in 2018

Warmer than normal winter:
Weak gas prices:
However, 4Q2017 and 1Q2018 power gross profit could be better than expectations:
Similarly, we’d expect natural gas infrastructure businesses to perform well for 4Q2017 and 1Q2018:
We expect economic growth to surpass 4% for 2018:
Strong economic performance should lead to strong power sector performance:
Commensurately, we expect natural gas infrastructure businesses to perform well:
Adjusted for seasonality, we expect natural gas prices to creep up throughout 2018 and, given normal weather, we’d expect natural gas prices to average at or just below $3.50 for 2018 with an exit price of some $3.65-$3.75:
Conclusion: Going into 2018, we believe that natural gas prices will stage a moderate recovery, but power margins should do better benefiting from accelerating economic activity. Individually, we continue to like… . However, the real star may be … . Among the utility names, we like … due to their growth prospects. We also look for … to outperform as … .

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GOP Tax Bill is win for utilities, power, infrastructure, and customers

GOP Tax Bill (GOPTB) looks to be positive for industries and companies in our coverage universe
Key aspects of GOPTB that affect our coverage industries and companies include, but not limited to:
21% corporate tax rate would be expected to reduce deferred income tax liability by some 40%
Interest expense deductibility capped at 30% of EBITDA for 2018-2021 and to 30% of EBIT after
100% investment deduction, except for utilities that would continue to deduct 100% interest
Preservation of existing investment tax credits (ITC) and production tax credits (PTC)
Repatriation of profits tax at 15.5% for cash and equivalent and 8% for non-liquid assets
Base-erosion & Anti-abuse Tax (BEAT) not impactful: If payments to foreign affiliates are 3% or more of a large company’s tax deductions then BEAT is imposed. We do not view this as relevant to companies that we cover, given 100% of PTC would be allowed to offset up to 80% of BEAT
AES Corp. faces large disqualification of interest expense deductibility but given its $3.7B in NOLs, we do not believe this to be an immediate issue; AES has time to remedy the situation:
NRG Energy shouldn’t have any issues with interest expense deductibility:
Exelon Corp. isn’t expected to have any problems with interest expense deductibility:
Cheniere Energy, oddly enough, shouldn’t have any problems with interest expense deductibility:
BKH, CNP, DUK, EIX, PCG, PNM, SRE should not have any issues with interest expense deductibility but may be able to use 100% investment deductibility to create win-win:
We note that the inability to deduct interest expense is limited to $0.21/$1 of lost deductibility
Loss of interest expense deduction could lead to some unexpected corporate behavior

Conclusion: Net effect of GOPTB looks to be positive, more so if utility holding companies are permitted to use non-utility subs to take advantage of the 100% capital investment deduction

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CNP 3Q2017: Predictability, stability, reliability, and flexibility, the CNP way

Raising ST-Target to $39 from $36 and NIV/share to $58 from $55 on 3Q2017 results and 2017 guidance
CNP believes it will finish year at or around high-end of its guidance, which reaffirms our belief CNP will perform at higher end of 2017E AEPS guidance, if not above, and we concur with CNP that it will perform at higher end or even above its targeted 4%-6% CAGR in AEPS thru 2018
We agree with Enable Midstream Partners (ENBL) divestiture and chosen sale method seems to be for stock, although we’d prefer cash and redeployment into a transformative acquisition even with the tax burden given bargain basement asset prices
However, stock transaction for ENBL tells us CNP prefers to continuously invest in CNP and buyer’s stock would be used as equity financing for organic expansion
We maintain CNP is best owner of Oncor, but now CNP has BIG target on its back
Wouldn’t surprise us if CNP delved back into pipelines, but strictly pipelines only
We like new tranny project into Freeport, TX, but await approval and more details before modeling.

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CNP 2Q2017 Earnings: Fate of ENBL decided, CNP looks forward to utility strength

Fate of ENBL decided, CNP looks forward to utility strength || Raising ST-Target to $36 from $35 and NIV/share to $55 from $51 on 2Q2017 results which reaffirms our belief CNP will perform at higher end of 2017E AEPS guidance, if not above it, and our concurrence with management that CNP will perform at higher end or even above its targeted 4%-6% CAGR in AEPS thru 2018. We agree with divestiture of Enable Midstream Partners (ENBL) and chosen disposition method seems to be for stock, although we’d prefer cash. We continue to believe CNP is best owner of Oncor but no movement from CNP. Transaction for stock on ENBL indicates to us continued steady investment in CNP and buyer’s stock would be used as equity financing for internal expansion. We note this is a conservative strategy but doesn’t preclude major strategic initiatives, just that there’s none on the plate in the foreseeable future. Wouldn’t surprise us if CNP delved back into pipeline business at a later date, but strictly pipelines only. We continue to support CNP’s commitment to natural gas retail services. We’re pleasantly surprised to see CNP continue to guide higher in 2017 and 2018. We believe demographics continue to provide tailwind and new Washington policies are likely to provide additional uplift. Dividend yield likely to stay strong too. We like new tranny project into Freeport, TX.

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CNP 1Q2017 Earnings Note

Lower-risk but not necessarily lower return; continues to perform well ||
Raising our ST-Target to $35 from $34 and our NIV/share to $51 from $50 on 1Q2017 results which reaffirms our belief that CNP will perform at higher end of 2017E AEPS guidance, if not above it, and our concurrence with management that CNP will perform at higher end or even above its targeted 4%-6% CAGR in AEPS through 2018. We agree with divestiture of Enable Midstream Partners (ENBL); CNP expects to provide more color at or before 2Q17 earnings call. ENBL disposition is likely dilutive, but lowers risk, which increases multiple, and proper redeployment of capital could make-up for dilution, in our opinion. But, selling for stock is irrational in terms of its risk profile, so we prefer cash sale even with tax consequences. But we are no longer certain that CNP is serious about divesting ENBL. Wouldn’t surprise us if CNP delved back into pipeline business with proceeds from ENBL sale. Acquisition of Continuum signals serious commitment to Energy Services, and we’re not necessarily opposed to this modification in strategy. We’re pleasantly surprised to see CNP guiding higher in 2017 and 2018. We believe demographics continue to provide tailwind and new Washington policies will provide additional uplift. Dividend yield likely to stay strong as well. We like the new tranny project into Freeport, TX.

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CNP 2017 AEPS Guidance range of $1.25-$1.33 in-line with our expectations

2017 AEPS Guidance range of $1.25-$1.33 in-line with our expectations ||

Company provides 2017 AEPS guidance of $1.25-$1.33 vs. our conservative estimate of some $1.26 and consensus of about $1.25
Also provides capital spending guidance of some $1.5B vs. our estimate of about $1.43B
Houston Electric: $922MM
Gas Distribution: $534MM
Other: About $44MM (our assumption based on $1.5B total 2017 capex guidance)
Total: $1,500MM
2017 guidance includes a 54.1% interest in Enable Midstream partners
CNP is expecting to hold its 4Q2016 earnings call on February 28, 2017 at 11AM EST
Analyses & Conclusion:

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