LNG Initiation Report

LNG: Triumphant re-revival is in question now ||

In our opinion, Cheniere should buy back all CCH HoldCo II Convertible Senior Notes (CCH Holdco 2 Convertibles). We don’t like complexity and dilutive effect on equity. We were confident of Cheniere’s revival under Charif Souki’s leadership, but wait to see, if new stewardship will have long-term vision, judgment, knowledge, experience, savvy and credibility to return stock to lofty levels of its recent past. We believe Sabine Pass LNG (SPL) is not the end, but should’ve been only first of three acts, the second which is Corpus Christi Liquefaction (CCL), but we believe there is potential for third act involving E&P, pipelines or marketing and trading (M&T) or all three. We look for Cheniere to roll-up CQP and CQH in long-term. We believe that CCL trains #4&5 will be some of the last liquefaction plants to be built in continental US. We’re not positive on Cheniere venturing into liquids export and equally unenthusiastic about foreign investments. We would like CCL 3 and even SPL 6 to have more merchant exposure. We believe that there are better ways to finance expansion program, but, long-term, company faces under-leverage problem. We’d like Cheniere to take excess cash flow to pay dividend after rolling up CQH and CQP and after its third act. Though loose now, we expect global LNG markets to tighten and expect Europe to continue to migrate towards hub pricing/trading, and Asia to start hub pricing/trading. We also expect US to become a baseload producer of LNG in concert with Qatar and Russia – in long-term Iran too – with countries like Australia and certain African and Asian producers to be swing producers.

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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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CNP 4Q2016 Earnings Note

Lower-risk but not necessarily lower return; continues to perform well ||

Raising our ST-Target to $34 from $28 and our NIV/share to $50 from $44 on our belief that CNP will perform at the higher end of 2017E AEPS and our concurrence with management that CNP will perform at the higher end or even above its targeted 4%-6% CAGR in AEPS in 2018. We agree with divestiture of Enable Midstream Partners (ENBL), and CNP gave OGE a 60-day right of first offer (ROFO) notice. We were mistaken about OGE taking advantage of its ROFO; appears CNP is still looking at 3rd-parties. Disposition of ENBL is likely dilutive, but lowers risk, which increases multiple, and proper redeployment of capital could make-up for the dilution, in our opinion. However, selling for stock makes little sense in terms of its risk profile, so we prefer sale for cash even with a tax consequence. It would not surprise us to see CNP delve back into pipeline business with proceeds from ENBL sale. Acquisition of Continuum isn’t dazzling us but signals serious commitment to Energy Services, and we’re not necessarily opposed to this modification in strategy. We are pleasantly surprised to see CNP guiding higher in 2017 and 2018. We believe that demographics continue to provide a tailwind and new Washington policies will provide additional uplift. Dividend yield likely to stay strong as well.

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CNP 4Q2016 Earnings Quick Note

Lower-risk but not necessarily lower return; continues to perform well ||

Note: Please note that due to 5 companies (NRG, CNP, PNM, LNG, SRE) reporting on one day, we will be writing Quick Notes for all of the companies reporting today followed by full notes later in the week

Maintaining 2017E AEPS guidance of $1.25-$1.33 and 4%-6% CAGR in AEPS through 2021
2017E Net income break-down: Utilities: $0.93-$0.97 and Mid-stream $0.31-$0.37 of which some $50MM in operating income is expected to be achieved from Energy Services
However, guiding 2018E AEPS to achieve upper-end or to exceed 4%-6% from 2017 actual
Assuming mid-point of 2017E guidance of some $1.29 and 6% growth in AEPS in 2018, this would place 2018E AEPS at some $1.37, close to our current estimate of $1.36 vs. consensus of $1.28
Achieved 4Q2016 AEPS of $0.26 vs. our and consensus estimate of $0.28
Going forward, CNP is expected to be a full cash tax payee
2017 and 2018 earnings power looks to be coming from not just regulatory filings at the utilities but also from demographics and Enable as well
Strategic initiative on Enable progressing slowly:

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CNP 3Q2016 Earnings Note

CNP going through transformation that could be value-add ||

Raising our NIV/share to $40 from $36. We agree with divestiture of CNP’s stake in Enable Midstream Partners (ENBL), and CNP gave OGE a 60-day right of first offer (ROFO) notice. We believe OGE would take advantage of the ROFO, and we believe that CNP would accept. 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, in our opinion. It would not surprise us to see CNP delve back into pipeline business with proceeds from ENBL sale. CNP appears to be open to doing stock deal for ENBL, but we’re not sure that would change anything strategically. However, we do not want to see ENBL proceeds go towards share repurchases. We strongly agree with decision not to convert its Texas T&D assets to a REIT. Acquisition of Continuum isn’t dazzling us but signals serious commitment to Energy Services, and we’re not necessarily opposed to this modification in strategy. However, lack of strong utility and other regulated growth projects hamper CNP’s valuations, in our opinion, despite a healthy dividend yield. However, we believe CNP’s targeted CAGR in AEPS of 4%-6% is well within sight and may take a boost with Continuum and redeployment of capital from sale of ENBL. Demographics continue to provide a tailwind.

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CNP Acquisition of Atmos Energy Marketing (AEM) is value-add by some $3.50/share given unit acquisition cost of $0.10/MCF/Year

Acquisition of Atmos Energy Marketing (AEM) is value-add by some $3.50/share given unit acquisition cost of $0.10/MCF/Year ||

CNP announced acquisition of Atmos Energy Marketing’s (AEM), retail commercial and industrial gas services business for $40MM
Purchase price of $40MM
Expands presence to 32 states from 26 states
Throughput volume is estimated at some 0.4TCF/Year
Combined with CNP’s existing Energy Services business, total throughput volume increases to about 1.0TCF/Year
Post-close customers would number some 33,000 commercial and industrial (C&I) and 65,000 individual Choice retail customers
Transaction is expected to close early 2017
Deal financing is expected from cash on hand, operating cash flow, or short-term borrowings
Analysis:
Unit purchase price is estimated at some $0.10/MCF/Year

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CNP 2Q2016 Earnings Note

We expect ENBL sale for cash to spur strategic redirection and growth ||

Raising our NIV/share to $40 from $36. We agree with divestiture of CNP’s stake in Enable Midstream Partners (ENBL), and CNP gave OGE a 60-day right of first offer (ROFO) notice. We believe OGE would take advantage of the ROFO, and we believe that CNP would accept. 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, in our opinion. It would not surprise us to see CNP delve back into pipeline business with proceeds from ENBL sale. CNP appears to be open to doing stock deal for ENBL, but we’re not sure that would change anything strategically. However, we do not want to see ENBL proceeds go towards share repurchases. We strongly agree with decision not to convert its Texas T&D assets to a REIT. Acquisition of Continuum isn’t dazzling us but signals serious commitment to Energy Services, and we’re not necessarily opposed to this modification in strategy. However, lack of strong utility and other regulated growth projects hamper CNP’s valuations, in our opinion, despite a healthy dividend yield. However, we believe CNP’s targeted CAGR in AEPS of 4%-6% is well within sight and may take a boost with Continuum and redeployment of capital from sale of ENBL. Demographics continue to provide a tailwind.

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CNP: Hunt withdraws from Oncor bid; opportunity for CNP

Unsurprisingly, Hunt has withdrawn its current offer for Oncor
Equally predictable was that much of Hunt’s decision to withdraw its offer had to do with PUCT’s determination to share tax savings more equitably between investors and Oncor customers
It seems that Hunt is willing to resubmit its bid for Oncor that would be viewed by all as a more fair and just sharing of the tax benefits
We would assume that if the new bid includes more sharing of tax benefits, by definition, the price offered would be lower
Regardless, we believe that this opens up an opportunity for CNP to enter the fray

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REIT tax advantage is an illusion

REIT tax advantage is an illusion ||

One advantage of converting a utility into a real estate investment trust (REIT) is the supposed tax advantage in that the REIT no longer pays taxes but through rates, taxes continue to be collected.
One argument that was put forth to justify for collecting money for taxes that are not paid by the company from consumers is that regulators routinely allow for collection of taxes that are not paid by other forms of pass-through entities such as limited partnerships.
We are of the opinion that taxes being collected by other pass-through entities is for the taxes that would be paid by the recipients of the distribution to ensure after-tax equivalency across corporate structures.
We would also argue that the after-tax “return-on” portion of the pass-through distributions is competitive with other forms of business entities, but the “tax-advantage” comes in the form of the “return-of” capital portion, which, by definition, would be free from tax burdens.
Therefore, we’d argue that taxes collected by the Oncor-REIT would be to allow for tax-equivalency as compared to other business structures, but not to reward investors with cash that they did not earn.

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CNP 1Q2016 Earnings Note

CNP: We expect CNP to beat its guidance in 2016 ||

Raising our ST-Target to $26 and NIV to $36 from $21 and $33, respectively. We agree with divestiture of CNP’s stake in Enable Midstream Partners (ENBL), but no update on status was provided. 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 don’t see CNP making 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. Acquisition of Continuum closed as of 4/1/2016. This deal isn’t dazzling us but signals serious commitment to Energy Services business, and we’re not necessarily opposed to this modification in strategy. Retail strategy seems more tactical/execution vs. bold strategic moves. This isn’t glamorous, but done correctly could have good results for shareholder value. However, lack of strong utility and other regulated growth projects hamper CNP’s valuations, in our opinion, despite a healthy dividend yield, but we believe CNP’s targeted CAGR in AEPS of 4%-6% is well within sight and may take a boost with Continuum and redeployment of capital from disposition of ENBL. Demographics continue to provide a tailwind.

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