OKLAHOMA CITY — An application authorizing CenterPoint Energy Resources to sell its natural-gas assets in Oklahoma, Arkansas and Texarkana, Texas, to Summit Utilities received final approval of the Oklahoma Corporation Commission on Tuesday.
CenterPoint serves almost 100,000 residential, commercial, industrial and transportation customers in western and southeastern Oklahoma.
Cities and towns in southwest Oklahoma that are supplied with natural gas by CenterPoint include Lawton, Elgin, Fletcher, Sterling, Altus, Apache, Blair, Burns Flat, Chickasha, Comanche, Duncan, Mangum, Marlow, Olustee, Temple, Cache, Geronimo and Martha.
The application still requires the blessing of Arkansas’ Public Service Commission. The parties in the case filed a settlement agreement Oct. 14 “and it is currently with the commission for consideration,” said Angela Sartori, senior analyst in the director’s office of the Arkansas commission. The commission will “endeavor to issue an order by Dec. 13,” she said.
Summit Utilities, Inc., a privately held holding company whose corporate headquarters are in Centennial, Colorado, signed a definitive agreement to acquire the Arkansas and Oklahoma gas distribution assets of CenterPoint Energy, Inc. for $2.15 billion in cash.
The transaction provides for the transfer of jurisdictional assets and customer accounts from CenterPoint Energy Resources Corp. to Summit Utilities Oklahoma, a subsidiary organized under Colorado law to acquire CERC’s Oklahoma assets. The acquisition will add more than half a million new consumers to Summit’s customer base.
Summit Utilities, Inc., owns natural gas distribution and transmission subsidiaries that operate in Arkansas, Colorado, Maine, Missouri and Oklahoma. Its subsidiaries include Arkansas Oklahoma Gas Corporation. Summit entities serve approximately 105,000 customers and operate more than 5,500 miles of distribution and transmission pipeline in those five states.
CenterPoint Energy, based in Houston, Texas, has approximately seven million metered customers in Oklahoma, Arkansas, Texas, Indiana, Louisiana, Minnesota, Mississippi and Ohio.
CenterPoint’s Arkansas and Oklahoma gas distribution systems combined serve approximately 525,000 customers and include 17,000 miles of gas main pipeline across Arkansas, Oklahoma and Texarkana, Texas.
CERC is a natural-gas utility that serves more than 100,000 customers — including 89,000 residential, 10,700 general service and small commercial customers, and 23 large volume customers — in 36 Oklahoma counties. CERC has approximately 100 employees in Oklahoma, said Cynthia L. Westcott, vice president of regional operations for Oklahoma and Arkansas.
Under the CenterPoint/Summit agreement, SUO is “committed to hiring CERC employees,” Steven E. Birchfield, executive vice president and chief financial officer of Summit Utilities, testified.
Summit Utilities expanding its ‘footprint’
Summit enlarged its footprint in Arkansas and Oklahoma in 2017 with its acquisition of Arkansas Oklahoma Gas Corp. based in Fort Smith, Arkansas.
Expanding its service territories in Arkansas and Oklahoma will provide Summit with additional scale and capacity to further its mission of providing service to natural gas customers in the region, Summit Utilities President and CEO Kurt Adams said.
The transaction is anticipated to close by the end of 2021, subject to customary closing conditions. Those include Hart-Scott-Rodino Act antitrust clearance and approval by the Oklahoma Corporation Commission, which occurred Tuesday, and by the Public Service Commission of Arkansas, which is still pending.
Oklahoma Corporation Commissioners Dana Murphy and Bob Anthony supported the final order, while Commissioner Todd Hiett endorsed the asset sale but dissented in part from the order.
A periodic rate case “is necessary to ensure the performance-based rate change (PBRC) plan continues to adequately balance the interests of the company and results in fair, just and reasonable rates,” Hiett wrote.
“Since the inception of CenterPoint Energy Resources Corp.’s PBRC (which began as a pilot program) in 2004, no rate case has been conducted for this company,” he said. “I dissented in part due to the final order not requiring a general rate case in the near future.” He also said he does not agree entirely with the analysis, findings and recommendations of Administrative Law Judge Linda S. Foreman, whose report was adopted in full in the commission’s final order.
Performance-Based Rate Exams benefit utility customers
Afterward, Brandy Wreath, director of the commission’s Public Utility Division, said it is accurate that Arkansas Oklahoma Gas Corp. has not been subjected to a traditional utility rate case since 2004.
“But that was when we switched to an annual performance-based rate change plan,” he said.
Every year AOG submits data “and we audit them — every year,” Wreath said. “Each time we look at different pieces of their operations, especially things that did change but even things that didn’t. We look at depreciation and return-on-equity every year.”
AOG has 60,000 residential, commercial, industrial and agricultural customers in Arkansas and Oklahoma. AOG delivers natural gas to approximately 12,280 customers in five eastern Oklahoma counties via 754 miles of distribution mains, records reflect.
Ratepayers — a utility’s customers — benefit from these focused PBRC annual examinations in lieu of costly, periodic, comprehensive reviews, Wreath said.
Expenses in a traditional rate case “can range upward from $500,000 to $1 million,” because a utility must hire experts and prepare myriad comprehensive reports and charts, Summit Utilities CFO Birchfield testified.
That’s “an unnecessary cost borne by customers that can be avoided by continuing with the PBRC,” Birchfield said. In addition, a PBRC “provides the opportunity for more frequent, yet modest, changes in rates achieving a regulatory goal of gradualism while allowing the Corporation Commission and the state Attorney General closer supervision and annual review” of Summit’s financial performance.
Since inception of the PBRC process for CenterPoint Energy Resources Corp., approximately $8 million in credits have been returned to customers, including $2.46 million in credits the Corporation Commission authorized in 2020 and $883,697 the commission ordered to be refunded in 2022, the applicants related.
The state Attorney General’s Office was not opposed to the asset transfer but expressed some concerns about the transaction.
After the asset sale/transfer is completed, Summit Utilities will have to “scale up its resources” within 12 months, “effectively and efficiently,” to serve an organization “six times its current size,” the OCC was told by Todd F. Bohrmann, a regulatory analyst with the AG’s staff.
Summit to pay hefty premium for CERC assets
Bohrmann also noted that Summit Utilities will pay a hefty premium for CenterPoint’s natural gas assets in Oklahoma.
The net book value of CenterPoint Oklahoma’s assets was approximately $113 million on March 31 this year, according to Birchfield. If the $2.15 billion acquisition price is allocated on the number of customers in each state, “the Oklahoma share … is approximately $420 million,” Bohrmann said.
SUO’s parent company will acquire not only the $113 million in Oklahoma assets but also approximately $865 million of assets in Arkansas and Texas, too, “for a total of approximately $978 million in net book value,” said John Givens, a senior public utility regulatory analyst with the Corporation Commission. That’s “a total purchase premium of approximately $1.17 billion,” he testified.
Birchfield testified that Summit Utilities Oklahoma would not seek recovery of any acquisition premium “for a regulatory or ratemaking purpose.” Since 2009 Summit has grown its customer base by more than 20% per year while its revenues have increased by approximately 22% annually, Birchfield said. Last year Summit had net revenues of $98 million and a debt-to-capitalization ratio of 42%, he said.
Bohrmann said that although SUO may not directly seek to recoup the purchase premium via rates, “I believe SUO customers will nonetheless experience sustained, substantial base rate increases in the future…”
Summit “must believe that the present value of all future earnings from these assets is greater than the acquisition price,” Bohrmann testified. “To do otherwise would not be a rational economic and financial decision.”
SUO expects to increase its rate of capital investment “compared to the rate CenterPoint Oklahoma had been spending,” Bohrmann said. SUO pipeline replacement activities are projected to accelerate over the next decade, “from the current pace of 15 to 20 miles annually to as much as 40 miles per year,” he said; SUO has set a target of replacing more than 800 miles of pipeline over the next 20 years.
To reach this target, SUO expects capital spending to increase from the current $15 million to $20 million per year level to approximately $30 million per year during the next five years, he said.