CenterPoint Energy, Inc. (CNP) Q2 2012 Earnings Report, Transcript and Summary

Good morning, and welcome to CenterPoint Energy's Second Quarter 2012 Earnings Conference Call with senior management. [Operator Instructions] I will now turn the call over to Carla Kneipp, Vice President of Investor Relations. Mrs. Kneipp [ph]?

Thank you very much, Sarah. Good morning, everyone. This is Carla Kneipp, Vice President of Investor Relations for CenterPoint Energy. I'd like to welcome you to our second quarter 2012 earnings conference call. Thank you for joining us today. David McClanahan, President and CEO, and Gary Whitlock, Executive Vice President and Chief Financial Officer, will discuss second quarter 2012 results, and Greg Harper, Senior Vice President and Group President of our Pipelines and Field Services businesses will provide highlights on [indiscernible] midstream acquisitions. In addition, we have other members of management with us who may assist in answering questions following the prepared remarks. Our earnings press release and Form 10-Q filed earlier today are posted on our website, which is centerpointenergy.com, under the Investors section. I remind you that any projections or forward-looking statements made during this call are subject to the cautionary statements on forward-looking information in the company's filings with the SEC. Before David begins, I'd like to mention that a replay of this call will be available through 6 p.m., Central Time, Thursday, August 9, 2012. To access the replay, please call (855) 859-2056 or (404) 537-3406 and enter the conference ID number 91655009. You can also listen to an online replay of the call through the website that I just mentioned. We will archive the call on CenterPoint Energy's website for at least one year. And with that, I will now turn the call over to David.

Thank you, Carla. Good morning, ladies and gentlemen. Thank you for joining us today, and thank you for your interest in CenterPoint Energy. This quarter was a good one for the company. We had a solid quarter from both a financial and operating standpoint. This morning, we reported net income of $126 million or $0.29 per diluted share. This compares to net income of $119 million or $0.28 per diluted share for the same quarter of 2011. Operating income for the second quarter was $302 million compared to $303 million last year. Houston Electric had a solid quarter, despite milder weather, compared to 2011. We reported operating income of $153 million, which was the same as the second quarter of 2011. Operating income benefited from the growth of more than 43,000 customers since the second quarter of last year. This represents a growth rate of 2%, which we believe will continue for the remainder of the year. We also benefited from the ongoing recognition of deferred equity returns associated with the company's recovery of true-up proceeds, and an increase in miscellaneous revenues, primarily from grants of right-of-way easements. Offsetting these benefits was a $15 million impact from the rate changes implemented in September 2011, and higher net transmission cost. In May, Houston Electric substantially completed the deployment of our advanced metering system, having installed approximately 2.2 million smart meters. We completed this $660 million project, on time and on budget, and I'm very proud of the many employees who contributed to the success of this deployment. Houston Electric is now focused on implementing our intelligent grid project, which will bring substantial automation and new functionality to our distribution system. This project, other system improvements and robust growth in our Houston service territory should drive capital expenditures of $500 million to…

Thank you, David, and good morning, everyone. Today, I would like to discuss a few items with you. First, I would like to discuss our 2012 earnings guidance. This morning, in our earnings release, we increased our earnings estimate to the range of $1.13 to $1.23 per diluted share. This is up from previously provided guidance of $1.08 to $1.20 per diluted share. This revision in guidance reflects an increase in earnings for 2012 of approximately $0.03 per diluted share associated with our 2 recent midstream acquisitions. Greg will describe these acquisitions and their earnings potential in more detail in his comments. In addition to the items I just mentioned, we have developed our earnings guidance range, based on performance to date, and by using a number of variables that may impact earnings such as commodity prices, throughput volume, weather, regulatory proceedings and effective tax rate. We have taken into account the benefit of debt reduction. However, we have not assumed additional earnings from the use of the remaining cash. Our revised guidance excludes a nonrecurring pretax gain of approximately $130 million. This gain will be recorded in the third quarter and is the result of remeasuring to fair value our regional 50% interest in the Waskom assets. As the year progresses, we will keep you updated on our earnings outlook. We continue to receive questions about the financing strategy of our midstream business, especially whether or not we have made a decision to form an MLP. We have $600 million to $700 million of available cash on hand, so there is no immediate need for financing. However, our confidence in our ability to make midstream investments over the long term continues to increase, and I expect this unit will ultimately need financing to support its expanding activities. Significant ongoing investments would make an MLP attractive. Of course, the capital and financing requirements of the company's other subsidiaries will play a role in this decision as well. Also, I wanted to mention that last week we were very pleased to learn that Moody's upgraded the ratings outlook of both the parent company and Houston Electric from stable to positive. This is a reflection of the consistent improvement in our credit metrics and the overall strength of the company -- financial strength of the company. We look forward to building from our strong base of assets and continuing our track record of strong performance for our shareholders. Finally, I would like to remind you of the $0.2025 per share dividend declared by the Board of Directors on July 25. We believe our dividend actions continue to demonstrate a strong commitment to our shareholders and the confidence the Board of Directors has in our ability to deliver sustainable earnings and cash flow. I will now turn the call over to Greg.

Thank you, Gary. I'm pleased to report on 2 recent acquisitions that not only provide near-term earnings benefits, as Gary mentioned, but more importantly, position our field services and interstate pipeline businesses very well for the future. First, you may recall that in June, we signed an agreement with Martin Midstream to acquire their 50% interest in the Waskom joint venture asset, and several of the Prism Gas assets for approximately $275 million. This transaction closed on July 31, and we now own 100% of Waskom and are the operator of the facility. The purchase also includes Prism's Woodlawn gathering and processing system, and 3 smaller gathering systems: Mcleod, Hallsville and Darco. The Waskom assets include a recently expanded 320 million cubic feet per day natural gas processing facility, with 14,500 barrels per day of fractionation capacity. Along with the Harrison gathering system, a 75 million cubic feet per day gathering system connects to the Waskom plant. Fleet Long [ph] is a 30 million cubic feet per day gathering and processing system located in Harrison County, Texas, with 3 smaller gathering systems combined to gather and treat more than 40 million cubic feet per day of natural gas, and are located near our other newly acquired assets in East Texas and Northwest Louisiana. The majority of the throughput from the new gathering systems is connected to the Waskom plant with access to its extensive natural gas liquids markets in the Gulf Coast and Mid-Continent pipeline infrastructure. This acquisition, which positions us as the operator of key processing assets will provide a significant boost to our commercial efforts in the area. In particular, we have seen an increase in producer activity, due to the improved economics of producing liquids-rich natural gas in the Cotton Valley field, as well as other nearby…

Thank you, Greg. We will now open the call to questions. [Operator Instructions] Sarah, would you please give the instructions on how to ask a question?

[Operator Instructions] Our first question is from Carl Kirst with BMO Capital Markets.

If I could just follow-up on Greg, on that last comment you made, and appreciate the additional detail. Is that 7x EBITDA? And I guess, this is really more for Prism, the $28 million to $33 million of targeted income. Is the confidence in that coming from the level of synergies that you see, that you can take out? Or is it more coming or equally coming from an ongoing expected activity ramp, drilling ramp, in the area?

Yes. I think, definitely, the 3 components that I pointed out, Carl. It's definitely the synergies. We expect to see significant synergies as we operate these amongst the interstate pipelines we have and, obviously, the existing field services facilities in that area. But we are also see a richer gas stream already coming into the plant than what we saw last year and at the beginning of this year. We expect that to continue to increase in richness, based on some of the deals that we're negotiating and will be coming on by the end of the year. Plus, the producers that we are in concert with have given us their production profiles through 2013, so we see that ramp-up coming in, and that we expect the plant to full by year-end.

To be full by year end. Okay. And one other question if I could. Just the comment, make sure I heard it correctly, that looking at a Bakken crude oil gathering line and then recognizing -- might still be in negotiating phase, but I'd be curious if you could give us some more color, both how -- since you're not sort of currently a crude gathering player, how that came about, as well as what type of investment size might we be dealing with.

Yes, I'll take the first part and let David address the investment side, if we can. This is a relationship oriented deal. A very large producer, major assets, to take a look at that with them as their sole-sourced gatherer. If we can negotiate it with them. As far as crude versus natural gas liquids versus natural gas gathering, a few of the specs are a little bit different based on codes, the DOT codes. But other than that, it's welding pipe and operating a system. It's some pumps versus compression. We have the technical capabilities in-house. I'd also say that the Prism acquisition was very strategic since we're picking up employees that actually have experience in that area as well. So we feel very good about it. I feel very confident in our ability to execute on the capital. This preliminary survey and investigation processes is to confirm our capital that we anticipate. So that's actually why we're doing it. We want to measure that what we thought we could do, on a preliminary basis, is what we can go out there and execute on. And David, on the investment side?

You know I think it is going to depend, in part, on our confirmation through this right away, in survey work. Between $100 million and $200 million is the relative size for just this particular system. Now, of course, our long-term desire is to be able to expand that system and serve other customers in the area as well. But, certainly, this individual -- just this project, would be in that range.

Your next question comes from the line of Andrew Weisel with Macquarie Capital.

Appreciate all the detail on the transactions. One thing that I'm little bit unsure of though is the commodity risk. So when you think about these 2 deals and your plans to invest organically around them, how do you think of the mix of fee-based arrangements versus percentage of proceeds?

Well, as you know, we are already 50% owners of Waskom. So we have just doubled our commodity exposure. But I think David and I have addressed, on several calls before, that nearly 50% of the Waskom inlet is based on fee-based. And we also have the right, if liquids prices go extremely down, we have the right convert all of the volumes to fee-based. So the right balance, I think we have a very good balance right now, with what we're taking on. Again, the Amoruso transaction is a volume commitment transaction, so that gives us guaranteed revenues with that stream. So, I think, as we go and balance our field services portfolio, we're looking at solid fee-based investments with some, investments have maybe a moderate level of commodity exposure.

I don't have anything to add there. I think we're comfortable with this amount of commodity exposure and the fact that we can move it into fixed fee if we decide that's what we want to do.

Great. And just one other question. Is you talked about the desire to keep the balance between the regulated and more unregulated businesses. A lot of the commentaries sounds like you have a ton of opportunity to invest in these nonregulated businesses, but historically the electric utility has been about 1/2 of operating earnings, becomes about 2/3 regulated when you add the gas distribution. Any high-level thoughts on maybe what those percentages might look like in 2, 3 years or so?

It's hard to say. We're spending a lot more money now, just organically, in our electric and gas distribution business than we did in the past. I expect that we're going to have more opportunities, just in our current footprint, to increase those investments. And we are going to -- we continue to look at things outside of our footprint. But when I think about our regulated side, and I include the interstate pipes in that, certainly, that's going to represent 75% or more of our earnings for the next 3 to 5 years. We do expect field services to become a more important component. But our regulated business is going to be our predominant asset and business, for our company, for long term.

[Operator Instructions] Our next question is from Ali Agha with SunTrust Robinson.

First of all, just flesh out a little more of your comments. I think I heard you say that the remaining cash that you have currently sitting, which I think is just north of $700 million on the true-up. You would expect to deploy that over the next 18 months? Did I hear that, right? And when should we see returns on that and how should we be quantifying or thinking about returns of that cash being put to use?

Yes, I think that, by the end of next year, I'm confident, we'll have deployed that cash. And I think, as we make these investments, we'll start realizing the benefit of many of those investments. To the extent it's in organic, new regulated investments, which some of it will be. There is a little lag associated with that. We do have trackers, both on the electric side and gas aside. So there could be a little lag. But it's not going to very much lag at all, with these investments, even on the regulated side. It will occur between now and the end of next year.

And my second question. If I think about the implications of that investment to the underlying earnings growth power of your company, could you gave us some sense of how we should think about -- let's take the 2012 base, what should be the earnings, annual earnings growth for the company, a, organically and then as cash has been deployed? How should we be thinking about the incremental change as that is happening?

Let's think about it from 2011 base, on a normalized basis, which is kind of the way we've described it in the past. Our goal is to be able to grow earnings for the company, in the 4% to 6% range annually. And that would not necessarily be smooth, it'll be a little bit lumpy, but that's on a 5-year basis. We have plenty of growth in our rate base, as you heard us say, for Houston Electric and our gas LDCs. And then the big growth is going to have come from our field services side and our midstream businesses. And what we're indicating this morning is we have a fair amount of confidence that we're going to be able to do that. The recent acquisitions, plus just the amount of activity we're involved with, gives us confidence we're going to be able to do that.

Just to be clear, sorry. One thing, to be clear on that. So the 4% to 6% would be there whether you deploy this excess cash or not? The cash deployment is not changing that equation?

Our objective is to grow at that rate, right? And so, we're going to be deploying some of this cash in that process, but that's our long-term growth potential. Near term, because of the amount of cash that we have in our regulated utilities, amount of investments, it will not necessarily be just straight line. It could be a little lumpy, but that's our long-term goal.

Our next question comes from the line of John Edwards with Crédit Suisse. John Edwards - Crédit Suisse AG, Research Division: If I could just follow up on the last question, maybe ask a different way. As far as the excess cash, what's your expectation for the incremental growth from deploying that cash?

We're trying to figure out another way to say it. John Edwards - Crédit Suisse AG, Research Division: I mean, 1%, 2%? I mean, on top of your 4% to 6% objective, would you expect that your investment opportunity set, or landscape that you're looking at, would you expect 1% to 2% on top of your sort of 5% objective or how should we think about that?

Yes. The fact that we have cash on our balance sheet doesn't change our opportunity set. What it does is it provides us a very good financing amount of dollar. We don't have to pay any incremental cost to this, we just have to put it to work. And I think that we're going to be able to do that. So I think -- we do factor in the fact that we don't have to pay any incremental cost for this $600 million, $700 million of cash we have on our balance sheet. So, from that standpoint, there's clearly an upside there. But the fact that we have the cash on our balance sheet really doesn't change our opportunity set and we'd be going after the same investments whether we had the money or not. John Edwards - Crédit Suisse AG, Research Division: Okay, all right. And then if we could just kind of revisit the MLP issue briefly. In terms of your thought process there, I guess there's some sort of a critical mass or sustainability you're trying to achieve. And maybe if you could just review that issue.

No. What we said this morning is that we're more and more confident that we're going to be able to invest regularly in this business. We said, I think in the past, that we need to see visibility of $300 million to $400 million of kind of ongoing annual capital expenditures in these businesses, and we're getting more and more confident we're going to be able to achieve that. And so, as Gary said, the MLP becomes very attractive from a financing standpoint as we see that come to fruition. So, certainly, the MLP is still on the table, and whenever we get to the point where we need financing, we will absolutely look at it.

Your next question comes from the line of Faisel Khan with Citigroup.

David, I was wondering if you could kind of differentiate if there's different skill set that's needed between building and operating, gathering and processing facilities for crude oil versus natural gas liquids?

Well, I think you need a -- there is a different skill set. I don't think it's necessarily harder or -- not harder, but you have to know what you're doing. I've actually spent a fair amount of time with Greg on this very subject, talking with him about do we have the skill sets, do we have the talent? And we have people on staff that have done this before. They're very familiar with it. And as Greg said, we have some folks that we are acquiring as part of this recent acquisition. That is going to further add to our internal capabilities. So, yes, you need different skill sets. But I think we have them and we can acquire those that we don't have.

Is it any more riskier to run kind of crude oil gathering in pipeline systems than it is to run kind of just natural gas and NGL systems?

Our internal staff does not believe this.

Okay. And then last question, maybe, just on the same topic. A lot of producers seem to want to hold onto their crude oil sort of gathering and processing systems while they seem okay kind of handing off the NGL natural gas gathering systems to the midstream companies. Is there any reason why you think that a lot of these companies are holding onto these assets are building out their own infrastructure rather than handing it off to someone like you?

The only thing I'd say -- I'm not sure we can answer that. But we've responded to RFPs that have a crude component in it. And then we talked to you about the one project that we're pursuing right now. So you may be correct, but our experience is that they're not necessarily holding onto the crude part of this. And I think, as commodity prices have fallen, you've seen producers want to let somebody else handle the infrastructure. And whether that continues or not, we'll just have to wait and see.

Okay. On Waskom, the fractionator there. Now that you control 100% of it, is there any desire to expand that fractionation unit or expand the entire system?

I think our anticipation is, based on some producer profile curves, we'll be hopefully looking at an expansion in the near term. But I'm not quite sure if the fractionation capacity is able to put on a whole new train.

Your next question comes from the line of Steve Fleishman with Bank of America Merrill Lynch.

Just on the -- I guess this might be for Greg, on the acquisition details. The numbers that you gave for Prism, and for the 2 projects, were those EBITDA or income numbers? The 28 to 30 and the 9 to 12.

Yes, the 9 to 12, operating income parameter, so was operating income. And 28 to 33 is operating income for Prism. The multiple that I mentioned, the 7x 2013, was on an EBITDA basis.

Okay. And that's off the $360 million spend?

Correct.

Okay. And, I mean, that's obviously, for an acquisition, this sector seems very attractive, given where most of the other types of properties trade. When you're looking at these other potential opportunities, are you seeing the potential to be able to get stuff in that area? Or...

I think the deals that David mentioned are going to be greenfield-type build-outs. So, hopefully, we would be building those at 4x to 6x. It's what you typically try to build-out new facilities at.

I think, when it goes the acquisitions, I think this is on the low side. But, it really goes to the fact that we had facilities and operations in and around our Prism assets. And with this acquisition, we're going to be able to do more with the combination of all of these that somebody that wasn't in our position couldn't do. We were in a unique position to be able to do this, and so that's what we're trying to capitalize on here. If it was in an area that we didn't operate in. For us to get this kind of multiple is probably pretty hard.

I would also add that we have very good relationships, both with Martin Midstream and also, as I mentioned in my remarks, with Encana. And these deals come about through those types of relationships as opposed to them taking these assets out to bid.

Okay, great. And then just in thinking about this. I mean, '13 is the first full year. I'm not sure you've gotten -- will you have, essentially, the full benefit from these investments in '13 or will there be some additional benefit after that?

Yes. I think, one reason why we give 2013, that is a first full operational year. We think, obviously we'll integration expenses here, through the balance of this year, plus we're ramping up production. I think, it's going to take 2 full years for all of the synergies to play out for the fullest effect. But 2013 is going to be a good representation.

Your next question comes from the line of Carl Kirst with BMO Capital.

Just 2 cleanup questions, actually on the second quarter, specifically. One, I didn't know and appreciate the weather impact on the LDC side. May was pretty hot down here, as you guys know. Did CE get a weather bump as well? I mean, it looks like it was 14% warmer than normal, but I don't know if we got a bump in the EBIT?

Yes, let me kind of explained that. The LDC impact was in April. And it was -- there's usually some weather, especially in Minnesota, in some of our Northern areas. And we didn't get any weather. And so that was $4 million or $5 million impact on the LDC. Certainly, May and June didn't impact the LDC. On the other hand, last year, at Houston Electric, the second quarter was really warm. And so when you compare this year to last year, we were behind, probably $8 million, $9 million. We made up that. Now, compared to normal though, we were ahead. We were ahead of normal weather, probably in that same range, $8 million, $10 million.

Okay. So net collectively, we probably had a small weather benefit for the quarter?

Compared to normal.

Compared to normal, right.

That's right.

And then second question, if I could, just to kind of dot the Is. The midstream volumes for the second quarter, can we continue to split that out via legacy and shale?

It's certainly getting tougher, Carl. Most of our -- especially, as we add in these new assets going forward but...

[indiscernible]

36% was traditional this quarter. So it's looking like 60-40, it's going to kind of hold there. As I tried to look at the quarter compared to the previous quarter, our traditional plays, we still saw some erosion of volumes there. We're offsetting those volumes with the Amoruso and Prism, but it's probably in the 1% to 2% decline range, from last quarter, our traditional basins, and that will continue unless we get some drilling in those areas. But it's not a real steep decline, because once these things kind of get through the big steep decline the first year or 2, then it's an annual decline but at a much more slower rate.

Your next question comes from the line of Ali Agha with SunTrust Robinson.

David, just one follow-up question. The past you've told us you're, obviously, not a traditional utility company, given your mix. You're more of a conglomerate of assets. So when you look your mix right now, the cash sitting on your balance sheet, do you believe that the public equity market is correctly valuing your stock? Or is there a scenario to unlock shareholder value by separating out the company. I understand the argument on the financing need. But forgetting that for a second. Just from unlocking shareholder value, do you think you're properly priced in the market today or could there be shareholder value unlocked if you were to look at yourselves as 2 separate companies?

A fair question, Ali. I would say that we try to provide enough clarity around all of our businesses that you can do some of the parts valuation and get full value. I think, conglomerates, if that's what you want to call it typically don't -- they always trade at a little bit of a discount. There's value, some, in conglomerates. We talk about the value of our balanced portfolio of electric and natural gas, and we truly see that as a value to our shareholders. But we continue to look for ways to unlock value. Some people have said MLPs will do that. We're certainly are sensitive to that and continue to study that. But we want to make sure our company is trading at full value. I would say that our view is we still have some upside it. And we continue to try to make sure there's enough information in the market that the market can properly value us.

So one follow-up on that. In that context, as you're looking at your investment opportunities and you're looking at potentially investing in their own stock. From a return perspective, if your stock, in your mind, is not being valued today, do share buybacks have a higher degree in your scheme of investments?

Good question again. I would say that, our analysis of that, based on the alternative, which is to invest in these kind of projects, it's better to invest than buy back stock. That's been our conclusion. I guess it's obvious, we'd be buying back stock if we didn't think that.

Since we do not have any further questions, I will now turn the call back to David for a few comments.