Stock Story: CenterPoint Energy

CNP – an attractive US utility in a high growth jurisdiction

When we make investments in infrastructure companies at Milford, we adhere to the school of thought that buying great companies in the best industries with strong company dynamics, at a price that is at least fair today, makes for better investment outcomes. Such companies have higher potential for peer outperformance. This can be driven by an increase in valuation, an improvement in operational performance, a thematic tailwind, or something else. In the case of CenterPoint Energy our investment thesis is based on a combination of the above.

Short-term stress can create long-term opportunities

CenterPoint, as a US regulated utility is responsible for owning and operating transmission and distribution networks, to ensure energy is reliably delivered to customers at an affordable rate. CenterPoint operates as a monopoly, so the amount it can charge its customers is regulated, making returns highly predictable. The company’s largest market is in Houston, Texas (along with some smaller operations in the US Midwest), so the success of CenterPoint and Houston are tied closely together.

The metro Houston area is home to over 7 million peopleⁱ, with a GDP of almost US$700 billionⁱⁱ, making the city larger than the country of New Zealand on both measuresⁱⁱⁱ. If metro Houston was a country, it would rank in the top 25 largest economies in the world^iv. Each year the population grows by over 100,000 people^v, and while the core of Houston’s economy is built on the energy industry, there are large and growing health care, biomedical research, logistics and aerospace industries making it a dynamic economy. These characteristics make Houston an attractive market to operate in.

During 2024, Houston was hit directly by Hurricane Beryl, which ended up being a much more severe storm than was forecast. Storm-costs are generally recovered by regulated utilities through higher future customer energy bills. In this case however CenterPoint was criticised by politicians and its regulators for being under-prepared for the storm, increasing the risk that it might not be able to recover costs from customers. The stock fell almost 20% (from a high of US$31 in June to a low of US$26 in August^vi) representing a fall in its market capitalisation of over US$3 billion. While there were some clear operational shortcomings in CenterPoint’s storm response, this drop in value created an attractive investment entry-point, as we estimated the negative impact from the storm was more than reflected in the fall in share price. We recognised there was a risk the regulator could take a more punitive approach by levying a penalty on the company. However, such is not the most common practice and we believed this risk was manageable. In the event, the regulator did not impose a penalty, but instead approved a settlement as part of its rate case that meant CenterPoint did not recover all the storm costs (though the majority will be recovered).

Positioned for Long-term Value Creation

Milford was well prepared to assess and ultimately capitalise on this period of weakness, as we had met with management in Houston during a research trip a few months prior. We initiated our position in August 2024 and have held since.

Looking beyond short-term disruptions, CenterPoint is positioned well for long-term growth. The Houston economy is growing strongly, and there are multiple avenues for growth projections to increase further. Industrial demand growth from re-shoring and near-shoring in the US, electrification, low energy prices, and a highly skilled population, are all working in Houston’s favour. CenterPoint management expects the peak power transported on its poles and wires in Houston to increase 50% by the end of 2031^vii. This power demand increase will require significant investments in the grid, that will support solid earnings growth for the company. In addition, there are significant investments required to improve the resiliency of the grid to improve on the capability to weather future storms.
We also like that CenterPoint is responsible for transmission and distribution (ie the poles and wires of the electric grid) rather than the generation facilities that produce power. While this may limit some of the growth potential from increased power demand, it also means CenterPoint is not exposed to the fluctuations in power prices that some other Texas electric utilities experience. In our view this makes CenterPoint a more stable and predictable utility with a true monopoly position.

Milford Investment Thesis

Our approach to long-term valuation allows us to evaluate companies like CenterPoint amid a challenging period, and adjust our position to capitalise on opportunities for long-term value creation. Since we made our initial investment in CenterPoint, it has performed well operationally and is on its way to repairing relationships with regulators and other stakeholders that were damaged by its response to Hurricane Beryl. The stock has outperformed the broader infrastructure market and its local US Utility peers over this period, and it is up over 25% since we initiated our position in the company^viii.

We see a good long-term risk-reward trade-off with CenterPoint, and we view the company as being strategically well positioned to benefit from Houston’s demographic growth and economic development, as well as broad increases in power demand growth from the health of the US economy.

^{[i] https://www.houston.org/houston-data/talking-points}

^{[ii] https://www.houston.org/houston-data/economy-glance-january-2025}

^{[iii] https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?most_recent_value_desc=true}

^{[iv] https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?most_recent_value_desc=true}

^{[v] https://www.houston.org/houston-data/talking-points}

^{[vi] See chart below}