Category Archives: Utilities

NRG to buy Houston-based Direct Energy

NRG has agreed to buy Houston-based Direct Energy from Centrica for $3.6 billion in cash. The company expects to save $300 million in synergies, much of it from the elimination of duplicate headquarters and back office functions.

NRG is an integrated power company that has its head office in New Jersey. It has an operational head office in Houston as most of its retail revenues are in Texas. Its generating capacity is split more evenly between Texas, New York, Connecticut, Illinois and California.



Direct Energy was acquired by UK-based Centrica in 2000 for $912 million. At that time, Centrica (formerly a nationalized company called British Gas) was looking to grow internationally. Through Direct Energy, it subsequently acquired Clockwork, a home services franchise platform that operated brands such as One Hour Heating & Air Conditioning, Benjamin Franklin Plumbing and Mister Sparky Electric.

In recent years, Centrica has been losing market share in its home market. This forced it to retreat from its international operations. It sold Clockwork last year for $300 million.

When Direct Energy was acquired, its head office was in Toronto, Ontario.  The head office moved to Houston in 2012. It is one of the largest retail providers of electricity, with customers in all 50 states. The acquisition allows NRG to diversify its retail customer base.

NRG expects to achieve $300 million in synergies by 2023 while spending $220 million in one-off costs to do that. It doesn’t quantify how it gets to the $300 million but does state that there will be ‘facility savings with significant employee geographic overlap, co-loaded headquarters and branch offfices’.

The transaction is expected to close by the year end.

https://investors.nrg.com/events/event-details/business-update-call

 

 

Activist investor takes aim at Crown Castle

[UPDATE 7/29/2020 – Crown Castle has bowed to pressure and is making changes. The Board will not now nominate a non-employee director who is 72 or older. That means three directors will step down in 2021 and two in 2022. The company also said it will be reviewing its executive compensation policy].

Elliott Management, the activist investor, has gone public with its criticisms of Crown Castle. In short, Elliott believes the company has under performed because it has invested heavily in fiber investments which give a low return on investment.



Crown Castle has a market capitalization of $71 billion, the largest of any company with its head office in Houston. It owns 40,000 wireless towers in the US. The company is one of the big three US players in wireless towers along with American Tower (market cap $113 billion) and SBA Communications (market cap $32 billion).

The company suffered an accounting embarrassment in February when it admitted it had overstated equity by $463 million as it had recognized too much revenue on tower installation services. It had to restate its financial statements for 2017 and 2018. The SEC are still investigating.

Elliott stated it had a $1 billion economic interest in the company and has been conducting a private dialogue with the management for the past month.

Elliott is very complimentary about the tower business. As a market, tower leasing is very profitable and highly cash generative. For the Crown Castle’s tower business, EBITDA minus capex has been over $2 billion a year.

Low return Fiber business

However, while the other two big players are expanding into international towers, Crown Castle made the decision to expand into fiber. It owns 80,000 route miles of fiber in the US, primarily through five acquisitions made since 2012 for a combined $11 billion. According to Elliott, capex is 149% of EBITDA for the fiber business. As a result, towers have a return on investment of 20%, while fiber has a return of 3% (compared to a cost of capital of 8%).

Moving the goalposts on the compensation plan

Elliott also takes aim at the current Crown Castle compensation plan. Currently annual bonuses are based on only two metrics – adjusted EBITDA and Adjusted Funds from Operations (AFFO) per share. AFFO is a complicated non-GAAP metric but it is basically net income plus real estate depreciation. The major difference between the two metrics is interest expense. Neither metric takes into account discretionary capex.

Elliott also complains that, in 2018, Crown Castle changed its Long Term Incentive Plan so that instead of measuring total stockholder returns against its peers, it switched to measuring against a mix of the S&P 500 and a goal of 11.5% annualized return. Given the high growth rates in the tower business, this lowered the bar for achievement.

Entrenched Board

Elliott would also like to see changes to the Board. 8 of the 11 non-executive directors have served for at least 13 years. This includes two former CEOs of Crown Castle. The Chairman of the Board, Landis Martin has been in that role since 2002.

The company responded by stating it had a proven track record for creating shareholder value. It didn’t commit to any changes but said it would remain open to having a continuing dialogue with Elliott.

Elliott presentation on Crown Castle

Crown Castle responds to Elliott

 

Centerpoint appoints former Halliburton executive as its new CEO

Former Halliburton CEO Dave Lesar has been appointed the new CEO at Centerpoint Energy. He replaces Scott Prochazka, who left in February. He has been a non-Executive director since May.

Centerpoint is an electric and gas utility that serves more than 7 million metered customers in Arkansas, Indiana, Louisiana, Minnesota, Mississippi, Ohio, Oklahoma and Texas.



Mr Lesar joined Halliburton in 1993 and was Chairman and CEO from 2000 to 2017. For the past year he has been serving as the interim CEO at Health Care Service Corporation, the largest private health insurer in the US.

Compensation package

In his new role, Mr Lesar will receive a base salary of $1.35 million (same base as his predecessor). He will also receive a sign-on equity award of $1 million that will vest over three years. The company will also facilitate the relocation of Mr Lesar from Dallas to Houston by buying his Dallas residence for $1.2 million. (The head office of Halliburton was in Dallas until it moved to Houston in 2002).

Executive changes

Centerpoint has been in some turmoil recently. Former CEO Prochazka left with a cash severance payment of $7.3 million. He was also received the vesting of stock awards ($4.7 million) and the continued vesting of performance share units (could be worth up to $7.9 million).

In April, Xia Liu, the CFO, bolted after less than a year in the role, for a similar role at WEC Energy. Kristie Colvin, the Chief Accounting Officer, was appointed the interim CFO, pending the appointment of a new CEO.

In February, the company announced the sale of its Infrastructure Services and Energy Services divisions, in two separate transactions, for a combined $1.3 billion. The divisions made up about a third of Centerpoint’s total revenues, but weren’t very profitable. The company took a loss on sale of $234 million, after taking into account goodwill impairment.

Activist Investor

In May, Centerpoint also received new equity funding of $1.4 billion from a group of investors  that includes activist investor, Elliott Management. Elliott first invested in Centerpoint in 2015.

Elliott appears to be following a similar playbook to its investment in NRG Energy in 2017. NRG has its head office in New Jersey and its operations in Houston. It took over the retail operations of Houston’s Reliant Energy in 2009. It then overstretched itself after a series of acquisitions. Elliott’s pressure forced it into cost cutting and asset sales. I wouldn’t be surprised if Centerpoint is taken over within the next couple of years.

SEC Filing – Centerpoint appoints Lesar as CEO

 

 

 

FTC proposes $225m fine for company that made 1 billion illegal robocalls

The Federal Communications Commission has proposed a record $225 million fine against two related Houston companies. According to the FTC, the companies made 1 billion robocalls in the first five months of 2019, primarily on behalf of clients that sell short-term, limited-duration health insurance plans. Some of the calls were for extended vehicle warranties.

In a related action, the states of Arkansas, Indiana, Michigan, Missouri, North Carolina, Ohio and Texas have also filed a complaint in the Southern District of Texas against the companies and their owners.

Houston companies, Austin owners

The two Houston companies are Rising Eagle Capital and JSquared Telecom. They are registered to a residential address in NW Houston. The owners of the businesses are John C Spiller, II and Jakob Mears. They live in Austin.

The complaint alleges that Spiller and Mears operated Rising Eagle from January 2018 to January 2020, through which they placed billions of robocalls. On January 2019, they formed a new entity, JSquared Telecom. Spiller and Mears targeted numbers on the national ‘Do not call’ Registry list.

According to the Texas Attorney General, between January and May 2019, they placed 136 million robocalls to Texas residents. Interestingly the complaint filed in court only mentions 328 million robocalls (including the other states) in the first five months of 2019, not the 1 billion mentioned by the FTC. But who’s counting!

The calls would come from a number with the same area code and prefix of the recipient in order to mislead the recipient into believing the call was coming from someone known to the recipient. This practice is called neighborhood spoofing.

FTC collection rate

The FTC appears to have little chance of collecting much of the fine in this case. According to a 2019 Wall Street Journal article, the FTC had levied $208 million in fines against robocallers, but collected only $6,790.

FTC $225 million proposed fine

Spiller – Southern district of Texas complaint 6.9.20

 

Oregon company relocates to Houston after new CEO appointment

Orbital Energy Group has relocated its corporate office from near Portland, Oregon to Houston. This follows the recent appointment of a new Houston-based CEO. The company used to be called CUI Global until the recent name change. The new head office is in the Greenspoint area of North Houston.

The CEO is Jim O’Neil. He was appointed a non-executive director in July 2019 and became CEO in October.  He spent 17 years at Houston-based Quanta Services, including five years as CEO before leaving in March 2016.

Not surprisingly, the company is pivoting to an energy infrastructure services company, like Quanta. It sold its power equipment manufacturing division for $35 million in two separate transactions in late 2019.  Then, in April 2020, it acquired Reach Construction, an engineering company that specializes in utility-scale solar power construction. The acquisition is based in North Carolina and was bought for an initial price of $37 million.

The remaining legacy business is Orbital Gas Systems which provides gas engineering solutions to utilities and other industries. It has operations in Houston and Staffordshire, UK. The company also recently started Orbital Power Systems, based in Dallas. This is an engineering and construction company specializing in electric transmission and distribution in the Southwest US.

The CFO is Daniel Ford. He joined the company in 2008 and is based in Portland.

Orbital (ticker OEG) currently has a market cap of $23 million and no debt. (The seller financed nearly all of the Reach acquisition price). The CEO stated that he expects to make 2-4 acquisitions a year.

I have added Orbital to the list of Houston-area public companies. You can see the complete list here.

 

10-K filing -Orbital Energy Group

 

Utility CFO resigns after less than a year

Xia Liu, CFO of Centerpoint Energy, has resigned to become the CFO at WEC Energy, a publicly-traded utility company based in Milwaukee. Her resignation from Centerpoint is effective immediately, though she will assist in an advisory capacity until May 1, 2020. She starts her new role at WEC on June 1, 2020



Kristie Colvin, currently the Chief Accounting Officer, has been appointed interim CFO. She has been with Centerpoint and its predecessor companies over the last 30 years.

Ms Liu joined the company in April last year. She was previously the CFO of Georgia Power Company and had spent 20 years in various roles at its parent company, Southern Co. She had a base salary of $550,000. Her new role at WEC will pay her $710,000 in base salary. Ms Liu will also receive a one-time bonus of $100,000 and a one-time restricted stock award worth $400,000.

Centerpoint is currently going through a transitional period. In February, CEO Scott Prochazka left with a $7 million cash severance and $8 million in vested stock awards. John Somerhalder, a director since 2016, was appointed interim CFO. A permanent CFO will not be named until after the appointment of a permanent CEO to replace Mr Somerhalder.

SEC filing – Centerpoint CFO resigns

CEO out at Houston retail energy company

Spark Energy stock price

Nathan Kroeker is out as the CEO of Spark Energy. He is replaced, on an interim basis, by founder and chairman, Keith Maxwell, who still owns approximately 66.5% of the stock.

The company was founded in 1999 and is headquartered in west Houston. It supplies energy to residential and commercial customers operating in 19 states.



It’s not clear what prompted the change. EBITDA rose in 2019 to $71 million and the company has net debt of only $66 million. Its share price is currently $6.20, down from $10 earlier in the year.

Mr Kroeker had been the CEO since April 2014. Prior to that. he was the CFO of Spark between 2010-2012. He had a base salary of $450,000. The SEC filing doesn’t mention any details of his severance package. However, the annual proxy for 2018, filed in April last year, stated that Mr Kroeker was entitled to severance of one year’s salary, payable in twelve monthly installments.

He will also get his 2019 earned bonus (the 2018 figure was $250,000) and a pro-rated 2020 target bonus. Mr Kroeker’s unvested stock awards will also vest. As the annual proxy statement for 2019 has not been filed, I can’t quantify their specific worth, but it is likely to be over $2 million.

Mr Maxwell will receive a salary of $1 for his interim CEO role, though he is paid $250,000 in fees for his non-Executive chairman position.

Spark appointed Jim Jones as its new CFO in June 2019. He replaced Rob Lane, who stepped down to become the CFO at Sunnova Energy, which went public in July.

SEC filing – Spark Energy CEO

Centerpoint Energy CEO steps down

Scott Prochazka, CEO of Centerpoint Energy, has resigned from his position with immediate effect.  John Somerhalder, a director of the company, has been appointed interim CEO while the Board conducts a search for a new CEO. The Board determined that ‘now is the right time for a new leader with a fresh strategic perspective.’



Centerpoint Energy has a market capitalization of $13.7 billion.  It has nearly $35 billion in assets and serves 7 million customers in 8 states.

Mr Prochazka has been with the company since 2001 and had been CEO since January 2014. He had a base salary of $1.323 million. According to the 2018 proxy statement, technically there are no formal severance payments due to Mr Prochazka, unless it is a change of control.

[UPDATE 03-09-20 The company has filed a separation agreement and it’s a whopper. Mr Prochazka will get a lump sum cash payment of $7,348,584. His 2016-2018 stock awards will also vest. It’s hard to tell, but they are probably worth about the same again]

When CFO Bill Rogers retired in March 2019, the Compensation Committee gave him a special lump-sum cash payment of $360,000 (about 60% of his base salary). He also had joined the company in 2001.

Xia Liu was appointed as the new CFO in April 2019.

SEC filing – Centerpoint CEO resigns

SEC Filing – Separation Agreement

Houston woman charged with embezzlement

A Houston woman, Beverly Davis, has been charged with embezzlement and theft of assets from her employer, a local labor union.

Ms Davis was an employee of the Communications Workers of America Local 6222. The local represents AT&T workers and is based in the Greenspoint area of Houston. The charges allege that from 2010 to 2017 she used union funds to pay for personal expenses and other authorized charges.



According to the Information sheet filed in the Southern District of Texas, the amount involved is $85,537. The charge sheet doesn’t give any more details than what is listed in the press release. There are no details of the personal expenses or how she was able to carry out the alleged embezzlement.

If convicted, Davis faces up to five years in federal prison and a possible $10,000 maximum fine.

[Update 12-13-19 Ms Davis has pleaded guilty. Also pleading guilty is Evelyn Smith. Ms Smith was the secretary/treasurer between 2005 and 2018. She took $50,968 in union funds between 2011-2018]

https://www.justice.gov/usao-sdtx/pr/local-woman-charged-embezzling-thousands-her-job

Contrasting fortunes for two Houston IPO’s pricing this week

There were contrasting fortunes for the two Houston-based companies that were pricing their Initial Public Offerings this week.

Sunnova Energy International, a residential solar energy provider, priced its IPO at $12 per share.  That’s below the expected range of between $16 and $18 per share. However the company is selling the same number of shares (17.6 million). At that price, the company will raise $221 million and have a market value of $1.1 billion.  The shares will begin trading on the NYSE on July 25 under the symbol NOVA.



Castle Biosciences, based in Friendswood, priced its IPO at $16 per share. That’s at the top end of the expected range of $14 to $16 per share. Also the company also increased the number of shares on offer from 3.3 million to 4.0 million. The gross proceeds are expected to be $64 million. The shares will also begin trading on July 25, but on the Nasdaq under the symbol CSTL.

The company is a commercial-stage dermatological company that uses genomes to provide physicians and their patients with more accurate treatment decisions. The main product is a multi-gene expression profile test that predicts the risk of metastasis or recurrence for patients diagnosed with invasive cutaneous melanoma, a deadly skin cancer.

I’ve added the two companies to the list of Houston-area public companies which you can see here. However I have deleted American Midstream from the list, whose deal to go private was completed yesterday.

Sunnova IPO pricing press release

Castle Biosciences IPO pricing press release