Temple University Investment Association

CenterPoint Energy NYSE: CNP

Leads: Ryne Dudley & Kyle Perkins Associate Analysts: Hinal Patel, Hicham Belkssir, Zachary

Maszlanka

Current: $20.79 Target: $21.99 Total Return: 10.57%

Company Overview• Subsidiaries

o CenterPoint Energy Houston Electric, LLCo CenterPoint Energy Resources Corporation

• Operationso Natural Gas Serviceso Electric Transmission and Distribution Serviceso Wholesale Energy services

• Geographic presenceo Arkansas o Louisiana o Minnesota o Mississippi o Oklahoma o Texas

Segment Overview

• Electric transmission and distributiono offers electric transmission and distribution services to end retail, industrial, and

commercial userso Regulated by FERC

• Natural Gas distributiono sells regulated intrastate natural gaso provides NG transportation services for residential, commercial, industrial, and

transportation customerso offers unregulated services comprising residential appliance repair and

maintenance services• Energy Services

o offers variable and fixed-priced physical natural gas supplies primarily to commercial and industrial customers

30%

36%

35%

2014 Revenue by segment

Electric transmission and distributionNatural gas didtribu-tionEnergy services

Industry Overview

Electric UtilitiesGas Distribution

Utilities• Structure

o Generation - Competitiveo Transmission - Regulatedo Distribution - Competitive

• US electric utilities sector is massive, producing about 20% of world’s total electric supply

• Demand for US electricity from commercial, industrial, and residential consumers is expected to increase about 29% in the period from 2012 to 2040.

• Structure

o Upstream operations: Exploration, production, gathering

• Competitiveo Midstream Operations: Transmission,

storage• Regulated

o Downstream Operations: Distribution• Competitive

• US shifting from a natural gas importer to exporter

Investment Thesis

5

• Undervalued on a 5 year P/E of 14.91x to itself• Undervaluation reasons - Rising interest rates - Credit Suisse Downgrade - ENBL lacking growth - Lowered 2015 guidance • Fair Value: 20.35x P/E, target price of $21.99• Coming Back to Fair Value: - ENBL growth, Increase Capex, Dividend Growth - Wide Economic Moat

Catalysts

6

• Increasing Capex - Doubling annual expenditures to $140 million - Potential projects costing ~$384 million would raise the

allowed net income by $14 million using the rate base formula

• Dividend Growth - Return from Capex going to shareholders - Positive dividend growth in the next 3 years, 11% in 2015

• ENBL Growth - Increased revenue when commodities turn up - CNP holds a 55.4% stake in this company

ENBL EBITDA

Economic Moats

Wide• CNPs operation as a

legal monopoly

• CNPs competitive energy services segment benefit from the economies of scale and purchasing power of the larger parent company

Positives & Risks

Positives• In late 2008, CNP

invested in electric grid technology

• Freeport LNGs construction of an LNG export terminal

• Not only the highest Return on Equity in our Comps, but in the entire utilities sector as a whole

Risks• REPS, which are Retail

Electric Providers are what revenues from consumers first go to

• Like all utility company's, CNP is adversely exposed to rising interest rates

• Continued low natural gas prices

Financials & Returns• ROE: ROA:Highest ROE in the sector Low ROA due to projects2015: 10.57% 2015: 2.9%

2016: 11.04% 2016: 3.2%

Financials

• Dividend Yield:

Current DY: 4.80% Projected 1 year growth: 11.63% Projected 3 year growth: 6.49%

• Operating Margin:

Operating Margin0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%

20.00%

CNP

2009 2010 2011 2012 2013 2014

Rate Cases

o 2 types of rate cases• Cost of gas / electricity• Costs of everything else

o Revenue collection• Rev requirement = Expenses + (rate base x cost of capital)

o Cost of Capital = Cost of debt + Shareholder expected return

o Return on rate base

CNP NI TEG CMS PNW

4.44% 2.87% 3.35% 2.99% 3.52%

Undervaluation

• 5 year P/E to itself• Why?

• Currently 14.73x• Target multiple

20.36

Reasons for Undervaluation

• Poor performance from ENBL

Reasons for Undervaluation

• Credit Suisse Downgradeo Outperform to underperformo Energy customer base layoffs

• Lowered Earnings Guidanceo 2014 guidance $1.14 - $1.21 per shareo 2014 actual $1.42 per shareo 2015 guidance $1.00 - $1.10 per share

Price Target

• P/E 5 year to itselfo Target multiple of 20.36x

• Consensus NFY EPS = $1.08

• 20.36 * 1.08 = $21.99

• Return = 10.57%o 4.80% dividend yieldo 5.77% price appreciation

Peer Group

Leverage

EBITDA Profit Operating Debt/

ROA ROE ROIC Margin Margin Margin Equity

Company LTM NFY LTM NFY LTM LTM LTM MRQ

CNP 9,102 14.5 18.6 7.34 10.25 2.59% 13.77% 2.53% 4.80% 21.13% 6.6% 10.13% 194.8% 4.44%

NI 13,907 24.6 22.7 13.13 11.82 3.12% 8.80% 2.56% 2.50% 27.1% 8.2% 18.3% 161.9% 2.87%TEG 5,944 15.3 20.4 12.73 11.94 2.37% 10.30% 1.99% 3.90% 12.0% 6.7% 10.3% 101.4% 3.35%CMS 9,857 20.4 18.3 10.24 9.4 3.93% 13.31% 2.26% 3.40% 24.9% 6.6% 16.1% 235.7% 2.99%PNW 7,158 18.12 16.4 8.07 7.9 3.65% 9.57% 2.82% 3.80% 37.5% 11.4% 23.2% 78.8% 3.52%Median 8,508 19.26 19.35 11.49 10.61 3.39% 9.94% 2.41% 3.60% 25.98% 7.44% 17.18% 131.69% 3.17%

Mean 9,217 19.61 19.45 11.04 10.27 3.27% 10.50% 2.41% 3.40% 25.4% 8.2% 17.0% 144.5% 3.18%

($ in millions except per share)

Market Cap

Return on Base

Rate

Margins

P/Diluted EPS TEV/EBITDA

Valuation Multiples Profitability Divident yield

• Selected for size and segments• Competition not a determinant

Conclusion

   

• Positiveso Investments in growth and efficiency

• Catalystso New CAPEX to raise rate baseo Dividend growth

• 20.36x P/E for $21.99• Expected return = 10.57%

Any Questions?

  

Appendix Charts5 year CNP vs S&P

Appendix ChartsCNP 5 year E/V to itself

Appendix Charts

CNP net plant in service

Appendix Charts

5 year P/E spread ratio to S&P

Appendix Charts

CNP supply chain based on revenues

Appendix ChartsS&P 500 vs S&P utilities sector