CenterPoint agrees to sell its Southeast US gas utilities to Bernhard Capital

On Feb. 20, CenterPoint Energy Inc. said it reached an agreement through which Bernhard Capital Partners Management LP would acquire its local gas distribution businesses in Louisiana and Mississippi for $1.2 billion. CenterPoint Energy provides natural gas utility service to roughly 380,000 customers through its operations in the two states via its CenterPoint Energy Resources Corp. subsidiary.

➤ The proposed transaction requires approval from the Louisiana Public Service Commission and the Mississippi Public Service Commission, according to the announcement. Assuming all necessary regulatory approvals are secured, the parties expect the deal to be completed in the first quarter of 2025.

➤ Criteria for reviewing and approving mergers and acquisitions of regulated utilities in Louisiana and Mississippi are relatively stringent, and there is no specific time frame under which the regulatory bodies are required to render a decision on a proposed transaction.

➤ Regulatory Research Associates views the Louisiana regulatory environment as relatively balanced from an investor perspective.

➤ RRA views the Mississippi regulatory environment as more constructive than average from an investor perspective.

The companies have not yet filed for approval of the proposed transaction with regulators in either state, but CenterPoint Energy said successful competition of the transaction would allow it to support its "industry-leading capital plan" and to reprioritize "future capital investments ... of approximately $1 billion elsewhere across its regulated electric and natural gas utility footprint."

New Orleans-based Bernhard is pursuing the acquisition of the natural gas distribution businesses of Entergy Corp. in a separate transaction in the region.

Louisiana PSC

CenterPoint Energy Resources' (CER) two Louisiana operating divisions — Centerpoint Energy Arkla and CenterPoint Energy Entex — are subject to oversight by the PSC. The Arkla division provides utility service to roughly 131,000 customers across 10 parishes in northern Louisiana, and the Entex division provides utility service to about 117,000 customers across 20 parishes in central and southern Louisiana, according to commission orders dated May 19, 2022.

Utility alternative regulation information

Arkla and Entex have been operating under rate stabilization plans (RSPs), a form of alternative regulation, for many years.

The two operating divisions have separate RSPs in place with identical return parameters, including a benchmark 9.95% return on equity (ROE) and a 100-basis-point deadband. Each division submits annual RSP filings, and to the extent that the earned ROE falls outside of the deadband — below 9.45% or above 10.45% — rates are prospectively adjusted by the amount necessary to achieve the benchmark 9.95% ROE.

Arkla division

Arkla's most recent RSP filing (based on a test year ended June 30, 2023) is pending before the commission. It was filed Sept. 29, 2023, and specifies an RSP increase of $5.2 million. It also specifies a rate base of $188 million.

The most recent RSP decision rendered by the commission provided for the utility to implement a $1.2 million net RSP increase (based on a test year ended June 30, 2022). The April 5, 2023, commission ruling adopted a joint report filed by CER and the PSC staff March 3, 2023.

Entex division

Entex's most recent RSP filing Sept. 29, 2023, (based on a test year ended June 30, 2023) specifies a $4.4 million RSP increase. The filing specifies a rate base of $160 million. The proceeding is pending before the commission.

The PSC's most recent RSP decision for Entex was issued April 5, 2023, (based on a test year ended June 30, 2022) following a joint report submitted by CER and the commission staff. The PSC ruling authorized the division a $3.8 million net RSP increase.

Commission M&A approval criteria and information

The commission's rules regarding merger or acquisition approvals specify that "no utility or common carrier subject to the jurisdiction of the [PSC] shall sell, assign, lease, transfer, mortgage, or otherwise dispose of or encumber the whole or any part of its franchise, works, property, or system, nor by any means direct or indirect, merge or consolidate its utility works, operations, systems, franchises, or any part thereof, nor transfer control or ownership of any of the assets, common stock or other indicia of control of the utility to any other person, corporation, partnership, limited liability company, utility, common carrier, subsidiary, affiliated entity or any other entity nor merge or combine with another person, corporation, partnership, limited liability company, utility, common carrier, subsidiary, affiliated company or any other entity or divide into two or more utilities or common carriers, where the values involved in such action exceed one percent (1%) of the gross assets of such regulated utility or common carrier, or subsidiary thereof, nor in any way commit itself to take such action or affect any right, interest, asset, obligation, stock ownership, or control, involved in such action without prior full disclosure of the prior intendment and plan of such utility or common carrier with regard to such action and without prior official action of approval or official action of non-opposition by the Louisiana Public Service Commission."

The rules require the commission to examine whether a proposed merger involving utilities and/or utility holding companies subject to its jurisdiction is in the public interest, maintains or improves the financial condition of the resulting entity, affects the quality of service, provides net benefits to ratepayers, adversely affects competition, impacts the quality of the resulting entity's management, is fair and reasonable to the affected utility, is fair and reasonable to shareholders, is beneficial to the local economies served by the utility, preserves the jurisdiction of the PSC and the commission's ability to regulate and audit utilities, and requires conditions to prevent adverse consequences.

In addition, the commission must examine whether the purchaser is able to continue providing safe, reliable and adequate service to ratepayers; the history of compliance or noncompliance that the acquiring entity has had with regulatory bodies; whether the acquiring entity has the financial ability to operate the utility and maintain or upgrade the quality of the system; if any repairs or improvements are required, and the acquiring entity's ability to execute such tasks; the ability of the acquiring entity to obtain all necessary permits; the manner of financing the transaction and any impact that may have on utility assets and rates; and whether any conditions should be attached to the proposed transaction.

There is no statutory time limit within which the commission is required to adjudicate a merger or acquisition proposal.

The commission has generally been receptive to mergers. In its most recent merger decision involving a large energy utility, the PSC approved a deal that resulted in the 2016 acquisition of Cleco Corp. by Cleco Partners LP. Per the adopted settlement, ratepayers received credits of $136 million in July 2016, $7 million of economic development funds were to be provided for use in Cleco's service territory, and $6 million was to be invested in Cleco's community contribution funding over five years. The adopted settlement also provided for Cleco Partners subsidiary Cleco Power LLC to file a general rate case in June 2019, and to forgo rate increases via its formula rate plan during the interim period; Cleco Power to maintain a capital structure containing a common equity ratio of at least 48%, unless otherwise allowed by the PSC; and Cleco Power to refrain from making distributions if its equity ratio fell below 48% or if the company failed to maintain investor-grade metrics with at least two of the major rating agencies.

RRA's view of Louisiana's regulation of energy utilities

RRA views the Louisiana regulatory environment for energy utilities as relatively balanced from an investor point of view and has accorded the jurisdiction an Average/2 ranking.

The PSC consists of elected officials chosen by voters from five state districts.

Rate case activity is sparse as utilities in the state primarily operate under alternative regulation plans that provide for periodic rate adjustments. However, when rate cases do occur, they tend to be protracted.

The alternative regulation plans for the state's energy utilities contain earnings-sharing incentives and other constructive provisions that address various utility costs and investments in a timely manner, including new generation capacity. The plans have generally incorporated benchmark equity returns that were in line with or above prevailing industry averages at the time they were established.

Fuel, purchased power and gas commodity mechanisms are in place for the state's energy utilities.

Regarding storm costs, the state's electric utilities have been permitted to securitize service restoration costs and replenish their storm reserves through bond issuances since the mid-2000s. The electric utilities are also permitted to seek commission approval to securitize certain other costs, including abandoned plant costs.

Mississippi PSC

Mississippi Gas division

CER's Mississippi Gas division operating in the state is subject to oversight by the commission. The division serves nearly 133,000 customers, according to filings the utility submitted in May 2023.

Alternative regulation information

The utility operates under an alternative regulation paradigm known as the rate regulation adjustment that has been in place for many years. Under the current version of the adjustment, the utility's allowed ROE is calculated annually based on a discounted cash flow approach and a regression analysis plus a 12.5-basis-point flotation cost adjustment. If the utility's earned equity return falls more than 100 basis points below the allowed ROE, rates are adjusted by the amount necessary to achieve the allowed ROE. If the earned equity return exceeds the allowed return by more than 100 basis points, the portion of overearnings that exceed the allowed return by 50 basis points are to be allocated to ratepayers and shareholders in a 3-to-1 ratio. Notably, provisions of the rate regulation adjustment allow the company to implement interim rates while the PSC review of an adjustment proceeding is pending, subject to a cap based on 2% of the utility's test-year adjusted operating revenue.

Under the most recent rate regulation adjustment ruling, the commission authorized CER's Mississippi Gas division to implement a $6.9 million rate increase (based on a test year ended Dec. 31, 2022). The Oct. 3, 2023, decision followed a settlement reached by the utility and the Mississippi Public Utilities Staff. The adopted settlement specified a rate base of $265.5 million.

CER is expected to file its 2023 rate regulation adjustment in May 2024.

Commission M&A review criteria and information

Any sale, lease, assignment, transfer or disposal of any portion of a certificate of public convenience and necessity (CPCN) or of any "substantial part" of public utility property is subject to PSC oversight and approval. PSC rules state that commission approval is necessary for "all direct or indirect transfers of utility property or [CPCNs], including but not limited to, transfers of [a] controlling interest in the corporate stock of an existing certificated utility to any person, firm, partnership or other corporation."

State law requires that in its review of a proposed transaction involving the rate-based facilities of a public utility, the PSC "shall include, as a prerequisite to its finding that the transaction is consistent with the public interest, a finding that, upon the consummation of the transaction proposed: (a) (i) the native load customers of the public utility will continue to have a first priority to the use and/or benefit of such facilities, or (ii) any loss of such first priority by native load customers to the use and/or benefit of such facilities is not contrary to the public interest; and, (b) any native load customers served by any transmission facilities shall be served on the same basis as before the transaction."

There is no statutory time frame under which the commission is required to render a decision regarding a proposed merger transaction.

In 2013, the commission rejected a proposed transaction through which ITC Holdings Corp. would have acquired the transmission assets of Entergy Mississippi LLC. In its decision, the commission ruled that "customers would not be served on an equivalent basis as before the transaction because approval would unbundle retail transmission service and upend the ... regulatory regime centered on commission regulation of [Entergy Mississippi] as a vertically integrated monopoly, while raising rates and permanently ceding effective state authority to the federal government." In light of the PSC's ruling, the parties formally canceled the transaction later that year.

RRA's view of Miss. regulatory environment for energy utilities

RRA views the state's regulatory climate for energy utilities as more constructive than average and accords Mississippi an Above Average/3 rating.

The commissioners are elected from three judicial districts. The state's energy utilities have operated under formula-based alternative regulation plans (ARPs) for many years. In practice, this has somewhat limited the commission's ability to politicize regulatory matters. The ARPs provide for annual rate adjustments and generally reflect timely recognition of new investment and fluctuations in operating costs. When specified, authorized returns calculated under the plans, which include incentive provisions, have tended to exceed prevailing industry averages.

In a pending proceeding of note, Rankin County has appealed to the state Supreme Court certain aspects of a July 2022 decision pertaining to Entergy Mississippi's ARP.

In briefs filed with the court in August 2023 and January 2024, Rankin County asserts, among other things, that the commission erroneously adopted a rate adjustment that was "not reasonably supported by the record" and was unsupported by the provisions and parameters of the ARP. The plaintiff also contends that the commission abused its authority and violated due process rights by sealing certain records in the proceeding, stating that the public record has been "handicapped by a process where the [PSC] has abandoned any suggestion that it seeks to enforce the public access laws." The court's review of the appeal is ongoing.

Aside from this legal matter, the state's electric utilities have riders in place pertaining to fuel and purchased power expenses, as well as other items such as environmental compliance, transmission and energy efficiency costs. The electric utilities have also been permitted to utilize securitization bonds to recover storm costs.

^{Regulatory Research Associates is a group within S&P Global Commodity Insights.
S&P Global Commodity Insights produces content for distribution on S&P Capital IQ Pro.
For a complete, searchable listing of RRA's in-depth research and analysis, please go to the S&P Capital IQ Pro Energy Research Library.
For a full listing of  past and pending rate cases, rate case statistics and upcoming events, visit the S&P Capital IQ Pro Energy Research Home Page.
This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.}