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CenterPoint sees boost from tax reform as questions over Enable exit continue

Hurricane Harvey, which brought record-breaking flooding to the Houston area last summer, tested CenterPoint Energy Inc.'s operations but demonstrated the value in previous reliability and grid-hardening projects, CEO Scott Prochazka said.

Many utilities across the country rushed to aid CenterPoint, whose regulated electric utility CenterPoint Energy Houston Electric LLC serves the Houston area, in its recovery from Harvey, and Prochazka said the company was pleased to return the favor when Puerto Rico was hit by Hurricane Maria. "When energy delivery systems are devastated, we respond," he said.

CenterPoint announced its fourth-quarter 2017 earnings Feb. 22, reporting adjusted net income of $141 million, or 33 cents per share, beating the S&P Capital IQ consensus normalized EPS estimate of 29 cents. The result, which excludes a one-time tax benefit of $1.11 billion, or $2.56 per share, related to federal tax reform completed at the end of 2017, compares to fourth-quarter 2016 adjusted net income of $113 million, or 26 cents per share.

Prochazka called tax reform a win for customers and said the company will use existing rate mechanisms to return certain benefits to customers. He said the lower federal rate will lead to an approximately $300 million increase in forecast year-end 2019 average rate base. According to CFO Bill Rogers, CenterPoint's effective tax rate for 2017 was 36% and will fall to 21% in 2018. The reduced rates are expected to provide an increase of about 10 cents in 2018 diluted EPS, primarily associated with the company's unregulated businesses. CenterPoint subsidiary Enable Midstream Partners also has an option to fully expense capital investments, resulting in greater tax shield for CenterPoint, Rogers said.

Tax reform would also impact the capital gains rate if CenterPoint were to sell any of its investment in Enable, he said. CenterPoint had intended to exit its stake in Enable through a sale but scuttled those plans in December 2017 after failing to achieve a "mutually acceptable" agreement. Since then, the company has been exploring other options. Rogers and Prochazka said there is no timeline for a possible sale and CenterPoint does not need to exit Enable to fund broader capital investments.

"We've got a very large capital budget, as you've seen, $8.3 billion over the next five years, that we can invest organically and can grow our core utility business through that investment with known returns," Rogers said. "To the extent we were to look at anything outside of that, we have to weigh the returns available against what we can get internally."

Rogers said CenterPoint does not require the sale of Enable to support the strength of its balance sheet and credit metrics in 2018. Neither Rogers or Prochazka would confirm when Enable or any of its units would be sold, but both executives said they were focusing on the company's operations as a whole.

"We are now in the mode of focusing on selling units in a constructive fashion over a longer period of time to reduce our exposure to the commodity space," Prochazka said. "We don't have any specificity on what that looks like other than to say, over a period of time, we intend to reduce our exposure and ownership here."