Centering at CenterPoint
After missteps, new CEO aims to refocus utility on core operations
CenterPoint Energy, struggling after a period of expansion, has reached a crossroads, and the direction it takes will be determined by a deal maker from the oil and gas industry.
The selection earlier this month of retired Halliburton CEO David Lesar to lead the Houston utility is raising speculation among analysts and investors that his task is to make one more big deal: sell CenterPoint. Both Lesar and CenterPoint deny a potential sale is in the works, but analysts point to several indicators that might suggest otherwise, including a recent change in compensation policies that eliminates vesting periods and allows Lesar and other executives to cash in millions of dollars in stock awards if the company is sold.
CenterPoint, analysts say, has become a takeover target as missteps over the past year have sent the company’s stock prices and market value plummeting more than 30 percent. Whether Lesar, the company’s third CEO in four months, has come to right the ship or just sell it not only has implications for the company, which employs nearly 5,000 in Houston, but also the entire region.
CenterPoint distributes power and natural gas to just about every home and business in Greater Houston.
Lesar, 67, made his reputation and fortune in fracking and military contracting during 17 years as Halliburton’s chief executive. He said his goal is to refocus CenterPoint on its core operations as a regulated Texas utility, retrenching after years of expansion into other businesses and markets.
His decision to again lead a large public company, he added, was
driven by the simple reason that he wasn’t ready to retire when he reached the mandatory retirement age at Halliburton two years ago.
“I love being a CEO,” he said. “I’m just not ready to leave the game yet.”
Active retirement
Lesar, a native of Wisconsin, first worked for Halliburton as an accountant with the nowdefunct Arthur Andersen, the accounting firm entangled in the Enron scandal early in this century. Hired by Halliburton in 1995 as a vice president, he rose to the top job five years later when CEO Dick Cheney left to join George W. Bush’s campaign as the vice presidential nominee.
Lesar led Halliburton through controversies during the Iraq war, including claims that its subsidiary, KBR, earned excessive profits for providing fuel, housing and other military support services through no-bid contracts. Halliburton later sold KBR.
Under Lesar, Halliburton became a leader in the North American hydraulic fracturing market, improving drilling efficiency and precision. He guided the company through the twoyear oil bust that began in 2014 as he tried to complete what would have been his biggest deal: the takeover of Houston rival Baker Hughes.
The merger, facing opposition from antitrust regulators, unraveled in 2016. The next year, Lesar retired as CEO, serving as executive chairman before leaving Halliburton in 2018.
Lesar subsequently started PetroStar Services, a San Antonio oil field services company that has operations in Texas, Louisiana, Wyoming and North Dakota. Lesar serves as executive chairman.
Lesar also served a year as interim CEO of Health Care
Service Corp. of Chicago, which owns Blue Cross & Blue Shield of Texas, Illinois and three other states. He gave up that job on June 1, a month after joining the board of CenterPoint.
New markets
When the Texas Legislature deregulated electricity nearly 20 years ago, it created competitive markets for wholesale and retail power, but kept transmission and distribution under regulated monopolies such as CenterPoint. CenterPoint’s rates and rates of return, a proxy for profits, are set by state regulators.
To earn more than the regulated rate of return, CenterPoint had to expand into unregulated markets. It ventured into the electricity brokerage business eight years ago, funneling customers to retail electricity providers for a fee, but shut down the business earlier this year.
CenterPoint also entered the home warranty business, selling plans to cover hot water heaters, air conditioning units and natural gas lines.
The push into unregulated markets came as utilities confronted challenges in their core business. CenterPoint supplies natural gas to 5 million residential, commercial and industrial customers in six states, but consumption is slipping as customers shift to electricity to heat homes and cook meals, said Michelle Michot Foss, a fellow in the Center for Energy Studies at Rice University’s Baker Institute.
CenterPoint also faces losses in transmission and distribution revenues as consumers embrace solar panels, battery-systems and on-site generators. H-E-B, the San Antonio grocery chain, routinely installs back-up power generators that kick into operation whenever power distributed by CenterPoint is interrupted.
H-E-B’s need to install backup generation because of frequent power interruptions damaged the utility’s recent rate case and delivered another blow to its bottom line. CenterPoint had to settle for a $13 million increase in transmission and distribution fees, down 90 percent from $161 million it requested.
The $6 billion acquisition last year of the Indiana utility Vectren has added to CenterPoint’s challenges as it tries to integrate sprawling operations that include regulated power and gas businesses in eight states, competitive energy businesses in 40 states, and ownership in power plants.
CenterPoint has sold some assets acquired in the Vectren deal, including two pipeline contractors in February. CenterPoint used the proceeds of that sale, $850 million, to pay down debt.
Falling stock
The architect of the Vectren deal, former CEO Scott M. Prochazka, departed the company suddenly in February, shortly after the rate case concluded.
CenterPoint’s stock has slid nearly 30 percent since the beginning of the year, to about $20 a share from $27. In the first quarter, the company reported a $1.2 billion loss, a sharp reversal from the $140 million profit during the same period in 2019.
Speculation that CenterPoint could end up for sale has been fueled by analyst reports identifying the utility as an acquisition target. Earlier this year, when asked about a potential sale, the interim CEO, John W. Somerhalder II, told analysts that CenterPoint had to consider all options.
What makes CenterPoint a particularly attractive target, analysts said, is the combination of a low share price and strong, growing markets, particularly Texas, in which it operates. The company’s unloading of assets to pay down debt — including the recent sale of its natural gas retail business — also would make CenterPoint attractive to buyers, according to a investment report cited by the research firm S&P Global.
CenterPoint went looking for an infusion of new capital this spring after the Texas rate case sliced its rate of return. It announced in May that it received $1.4 billion from private investment companies that have reputations for pressuring companies to divest operations or sell outright.
One is the New York hedge fund Elliott Management, which launched a proxy fight that forced the oil and gas producer Hess Corp. to divest its refining assets in 2013. Four years later, Elliott tried to force Hess to oust its CEO and sell the company.
Another is Bluescape Energy Partners, a Dallas private investment firm led by the former CEO of the Texas power company TXU. Bluescape frequently teams up with Elliott Management. The companies did not return phone calls seeking comment.
Three years ago, the two investors, which together owned 9.4 percent of the merchant power company NRG Energy, extracted a deal from the company that ultimately resulted in NRG launching a plan to divest $4 billion in assets, including wind and solar projects.
The appearance of these activist investors is a signal of what’s to come for a company struggling with low share prices, high debt and too many different kinds of assets, analysts said.
“It pretty well indicates that CenterPoint is in play,” said Ed Hirs, an energy economist with the University of Houston.
Not for sale
The selection of Lesar as CenterPoint CEO revved up speculation that CenterPoint would end up for sale, in part because of his experience in energy services, an industry comfortable with buying and selling companies and competitors, said Ramanan Krishnamoorti, chief energy officer at the University of Houston.
Lesar said CenterPoint is not for sale, But he is likely to continue CenterPoint’s recent moves to sell off non-core businesses to pay down debt and improve the balance sheet, analysts said.
In an interview, Lesar cited the difficulty of managing regulated and unregulated businesses because of differences in accounting, strategy and organization. With population and economic growth increasing demand for energy in Houston, he said he plans to refocus CenterPoint on its most valuable franchise, the regulated utility business in Texas.
“We have to take advantage of what is in our own backyard before we venture out of it,” Lesar said. ““I’m not naive to the fact that we have disappointed our shareholders over the last six to nine months.”
Lesar joined the CenterPoint board in May, when he was tapped to lead a business review and evaluation committee. Recommendations are due by October.
The board appointment brought Lesar back together with Milton Carroll, the CenterPoint executive chairman who also served on the Halliburton board. Carroll, chairman of Health Care Service Corp., was also Lesar’s boss at the health insurance company.
Carroll pointed to Lesar’s track record of vision, strategy implementation and operational experience over the past three decades. Lesar was the architect behind Halliburton’s efforts to lead the industry in growth, margins and returns, said Carroll.
Lesar said he knows he has work to do. CenterPoint needs to improve its relationships with regulators, whose decisions affect the future of the company, Lesar said. He also sees opportunities to transport electricity from solar and wind projects in remote parts of Texas to population centers.
“I wouldn’t have taken the job if I didn’t see more upside than downside,” he said. “And there is just tremendous upside here.”