CenterPoint Energy explores REIT model, and sale or spin-off of pipeline business

CenterPoint Energy Inc. officials revealed Monday (Feb. 1) that the Houston-based energy company is exploring the use of the Real Estate Investment Trust (REIT) business model for all or part of the utility businesses, which includes the company’s regulated natural gas operations in Arkansas.

CenterPoint, which has significant operations in Arkansas, quietly publicized the possible deal in a news release announcing that the Houston energy giant was evaluating “strategic alternatives” for the company’s 50-50 stake in Enable Midstream Partners, a publicly traded master limited partnership the Houston natural gas utility operator jointly controls with Oklahoma City-based OGE Energy Corp.

“The REIT structure has recently received significant attention in the regulated utility industry in Texas and could have substantial potential for CenterPoint,” Company President and CEO Scott Prochazka said in the news release. “We will continue to study the possibilities and monitor developments, including related regulatory proceedings and will present any findings to our shareholders at the appropriate time.”

CenterPoint initially said it is evaluating a possible sale or spin-off of Enable Midstream under section 355 of the U.S. Internal Revenue Code, which allows the company to make a tax-free distribution of stock for a legitimate business purpose provided that it not being used principally as a device to bail out earnings and profits. CenterPoint owns a 50% general partner stake and a 55.4% limited partner interest in Enable.

“We are pleased with our investment in Enable, which has grown its distributions during 2015 and continues to enjoy volume growth despite a challenging commodity price environment. With continued connections and drilling activity across its system, Enable is well-positioned for long-term growth as commodity markets recover,” Prochazka said. “We believe that now is the right time to explore options for unlocking the value of our strategic investment, reflecting our continuous commitment to drive value for shareholders.”

CenterPoint Energy, which reported annual revenues of $8 billion in 2014, is a domestic energy delivery company that includes electric transmission & distribution, natural gas distribution and energy services operations. The company serves more than 5 million metered customers primarily in Arkansas, Louisiana, Minnesota, Mississippi, Oklahoma and Texas.

The possible sale or spin-off of Enable is not surprising, analysts say, given that many natural gas companies have mothballed their drilling operations and no longer need midstream pipeline and distribution networks to get their product to market. In the third quarter, the CenterPoint’s midstream investments in Enable reported an equity loss of $794 million, including a pre-tax impairment charges of $862 million.

It has only been nearly two years since CenterPoint and OG&E held an initial public offering for the master limited partnership headquartered in Oklahoma City. Enable’s assets include nearly 12,300 miles of gathering pipelines, 13 major processing plants with 2.3 billion cubic feet per day of processing capacity, approximately 7,900 miles of interstate pipelines, and some 2,200 miles of intrastate pipelines and eight storage facilities comprising 87.5 billion cubic feet of storage capacity.

Just last week, Enable signed a deal with CenterPoint under which the Houston energy giant purchased $363 million of preferred equity to help fund its stake in the Oklahoma partnership. Enable will repay the notes set to mature in 2017 back to CenterPoint, once the expected deal is approved by Enable’s board directors by the end of the first quarter.

In response to declining the lack of activity among natural gas drillers, Enable has reduced its capital expansion plans for fiscal 2016 by 66% to only $375 million. As part of the planned capital reduction, Enable is delaying a new 200 million cubic feet per day (MMcf/d) natural gas processing plant in Oklahoma’s Anadarko Basin until late 2017.

“I believe these announcements are an effective response to today’s challenging market conditions,” said Enable President and CEO Rod Sailor.

On the regulated side of the business, CenterPoint serves as the holding company for natural gas utilities in Arkansas, Oklahoma, Louisiana, Texas and Minnesota. Those utilities produced $265 million of operating income for CenterPoint in the third quarter of 2015, compared with $233 million for the same quarter of the prior year.

In November, CenterPoint Energy Arkansas filed an application with the Arkansas Public Service Commission (APSC) to change the company’s natural gas distribution rates that will push up the average residential customer’s bill by $6.68 per month.

Arkansas’ largest gas utility has nearly 430,000 residential, commercial and industrial customers across the state. If the PSC approves the filing, CenterPoint expects the new rates would go into effect in the third quarter of 2016 and would generate approximately $35.6 million in additional revenue each year. The effect on individual monthly bills will vary depending on natural gas use and customer class, officials said.

Like other major corporations that own income-producing real estate or assets, including retailers, department store chains and telecom companies, utility operators are also exploring the use of REIT structures to take money-losing assets off the books and offer favorable tax benefits to investors seeking higher dividends. Such a deal, however, would have to be approved by Arkansas utility regulators.

CenterPoint officials said there can be no assurances either of its strategic reviews involving Enable and the company’s utility business leads to any specific action or deals.  The Houston-based energy giant also said it does not intend to disclose further developments on Enable or the utility business unless its board of director approves a specific action in consultation with its financial and legal advisors.