Morningstar | CenterPoint Increases Rate-Base Growth Outlook, but Lowers View of Enable; No Change to FVE
We are reaffirming our $29 per share fair value estimate after CenterPoint Energy reported solid 2018 adjusted earnings, lowered and narrowed its EPS guidance for 2020 after the Vectren merger, and provided an EPS growth outlook through 2023. 2018 adjusted earnings were $1.60 per share versus $1.37 in 2017. The results were in line with our estimate and $0.01 higher than consensus.The newly established 2019 adjusted earnings guidance of $1.60-$1.70 per share is below our estimate of $1.77, but we are not putting much emphasis on 2019 due in large part to the uncertainty of the timing of the merger closing. The $72 per share all-cash acquisition closed on Feb. 1; however, CenterPoint issued $2.8 billion of common equity and mandatory convertible preferred shares on Oct. 1, 2018 in anticipation of the transaction. We will likely lower our 2019 earnings estimate near the midpoint of guidance.
CenterPoint lowered and narrowed 2020 adjusted EPS guidance to $1.75-$1.90 versus the previous guidance, reaffirmed in November, of $1.76 to $1.98. During the earnings call, management indicated that the change was driven by their more conservative outlook for Enable Midstream Partners due to lower commodity pricing assumptions. This seems to be confirmed by the combined company five-year compound annual rate-base growth forecast increasing over 50 basis points, to 8.2%. Our rate-base CAGR assumption had been in line with the previous guidance. Thus, utility earnings from the combined company are likely even stronger than we forecast, driven by 2% customer growth at Houston Electric and 1% customer growth at CenterPoint's natural gas utilities.
CenterPoint initiated an EPS annual growth target of 5%-7% growth, using 2018 actual results of $1.60 as a starting point. We will likely modestly lower our post-merger EPS CAGR using a more conservative view of Enable’s contribution. This would result in our 2022 adjusted earnings estimate declining roughly $0.05, to approximately $2.10 per share. However, the small reduction in consolidated earnings will not have a material impact on our fair value estimate.
CenterPoint Energy owns interests in Enable Midstream Partners, LP. The company's subsidiaries own and operate electric transmission and distribution, electric generation and natural gas distribution facilities, supply natural gas to commercial and industrial customers and electric and natural gas utilities and provide underground pipeline construction and repair services, energy performance contracting and sustainable infrastructure services. The company's segments include: Houston Electric T&D, which consists of electric transmission and distribution services in the Texas Gulf Coast area; and Energy Services, which consists of non-rate regulated natural gas sales and services operations.
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