CenterPoint Energy, Inc. (CNP) Q3 2013 Earnings Report, Transcript and Summary

Good morning, and welcome to CenterPoint Energy's Third Quarter 2013 Earnings Conference Call with senior management. [Operator Instructions] I will now turn the call over to Carla Kneipp, Vice President of Investor Relations. Ms. Kneipp?

Thank you very much, Mackenzie. Good morning, everyone. Welcome to our third quarter 2013 earnings conference call. Thank you for joining us today. David McClanahan, President and CEO; Scott Prochazka, Executive Vice President and COO; and Gary Whitlock, Executive Vice President and CFO, will discuss our third quarter 2013 results and provide highlights on other key activities. We also have other members of management who may assist in answering questions following the prepared remarks. Our earnings press release and Form 10-Q are posted on our website, 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 would like to mention that a replay of this call will be available on CenterPoint Energy's Investor website and will be archived for at least 1 year. And with that, I will turn the call over to David.

Thank you, Carla, and good morning, ladies and gentlemen. Thank you for joining us today and thank you for your interest in CenterPoint Energy. Earlier this morning, we reported third quarter net income of $151 million or $0.35 per diluted share, compared to third quarter 2012 net income of $10 million or $0.02 per diluted share. Last year's results included 2 unusual items. A $252 million non-cash goodwill impairment charge associated with our competitive Energy Services business and a $136 million non-cash pretax gain associated with the acquisition of an additional interest in a gathering and processing joint venture. Excluding these 2 unusual items, net income in the third quarter of 2012 would've been $174 million, or $0.40 per diluted share. Operating income for the third quarter 2013 was $244 million. Following our May 1 formation of Enable Midstream Partners, we report our investment in our midstream operations as equity income rather than operating income. As a result, our operating income for the third quarter and the 9 months ended September 2013 are not comparable to prior periods. I am pleased with the performance of our regulated electric and natural gas utilities this quarter and Scott will review in more detail -- with them in more detail in a few minutes. I'll now discuss our midstream investments. CenterPoint Energy recognized $77 million of equity earnings from our investment in Enable Midstream Partners and an additional $3 million from our remaining ownership in SESH. This month, we expect to receive a cash distribution of approximately $70 million associated with Enable's third quarter results. Enable's transportation and storage segment continues to be challenged by ongoing low, seasonal and geographic price differentials, which reduced the demand for ancillary services and adversely impacted certain contract renewals. In addition, quarterly earnings were impacted by the costs associated with settling a legacy lawsuit and certain business development expenses that together totaled approximately $7 million. Enable's gathering and processing segment had a solid quarter despite relatively low commodity prices. Processing and wet gas gathering continues to do well, while dry gas gathering continues to be challenged by reduced drilling activity. Demand for new processing capacity continues to increase. In addition to the Muckler, [ph] Oklahoma processing plant currently under construction. The partnership recently approved a new 200 million cubic feet per day processing plant to be located in Bradley, Oklahoma. This plant is expected to go into service in early 2015. Once completed, it will be Enable's 13th major plant and we'll bring its total processing capacity to about 2.3 billion cubic feet per day. The construction of the partnership's Bakken crude oil gathering project continues to go well. Initial commissioning activities are underway and the first phase is expected to be in service later this month. The final phase of construction and commissioning will resume in the spring of 2014, weather permitting, and is expected to be completed in the first half of the year. The search for the Enable CEO is ongoing. This process has taken longer than we anticipated. However, we continue to see significant interest in the position and we remain disciplined in our search for the right person for this job. Before turning the call over to Scott, I'd like to take a moment to say thank you to the employees, shareholders and members of the financial and investment community that I have had the pleasure to work with during my 41 years at the company. Last week, we announced my plans to step down as CEO at the end of the year and the board's appointment of Scott Prochazka as the new President and CEO of CenterPoint Energy. I'm proud of what has been accomplished during my 12-year tenure as CEO of CenterPoint. CEOs often get too much credit for good company performance. In the case of CenterPoint, this truly was a team effort, starting at the top with my executive community made up of Gary Whitlock, Scott Rozzell, Tom Standish and Steve Schaefer before his retirement. But the success of CenterPoint is really due to the 8800 employees, who work hard every day to execute our plans regardless of the obstacles before them. I could not have asked for a better team. I'm excited about CenterPoint's future and the vision, energy and enthusiasm that Scott Prochazka will bring to the job. Scott knows our industry and company well. He is highly respected by our employees and he's motivated to serve our customers better every day and create shareholder value. Scott is going to be a great leader and CEO for CenterPoint. I'll now turn the call over to Scott for more detailed comments about the third quarter performance.

Thank you, and good morning to everyone. David, I appreciate the trust and confidence you and the board have placed in me. For those of you on the call, I look forward to interacting with you in a new capacity. I'm excited about the future of our company and believe we can build upon its 147-year history of excellence. Today I'm going to focus on the quarterly performance and current business environment of our 2 operating segments: Houston Electric and natural gas distribution. Houston Electric's third quarter 2013 core operating income was $207 million compared to $205 million in the prior year. The business continues to benefit from strong growth in our service territory, with the addition of more than 44,000 customers since September of 2012. We expect this 2% customer growth rate to remain through the end of the year and into the foreseeable future. During the quarter, we also benefited from increased usage, which was primarily attributable to favorable weather. These benefits were partially offset by increases in O&M, depreciation and property taxes. Residential throughput was up 4% compared to the same quarter last year. Combined commercial and industrial throughput was also up, increasing approximately 2% compared to the same period last year. Our commercial and virtually all of our industrial classes are built on-demand. So total throughput comparisons are not indicative of these customer classes' contribution to revenue. Favorable weather increased revenues by approximately $10 million this quarter. And for the year, weather has been essentially normal. Through September, right-of-way revenues were approximately $10 million, compared to about $24 million during the same period last year. By year-end, we anticipate 2013 annual right-of-way revenues to exceed last year's total of $27 million. Right-of-way revenues are dependent upon the construction plans of others and we expect these revenues will trend lower beginning next year. Houston Electric continues to have a robust capital plan that reflects the infrastructure investment needed to support service area growth, ongoing maintenance and system reliability. Through September of 2013, Houston Electric has invested $515 million, up nearly $100 million from the same period last year. We expect to invest approximately $720 million of capital by year-end, which is consistent with our capital plan. We anticipate continued high levels of investment next year to meet the infrastructure needs of our growing service area. This July, Houston Electric submitted a proposal to the Electric Reliability Council of Texas or ERCOT for construction of additional transmission capacity into the Houston region. To meet growing electric demand, new transmission capacity must be added to access power generation located in other parts of the state. We have proposed for consideration by ERCOT, 3 different options that involve facilities to be either wholly or partially owned by Houston Electric. If ERCOT recommends a Houston Electric ownership option, the company will initiate a process with the Public Utility Commission of Texas to seek approval to begin construction. Assuming PUC approval, construction will begin in 2017 at a cost of $300 million to $550 million, depending upon the options selected. Lastly, to help enhance stability of earnings, Houston Electric has entered into a weather hedge for the winter months of November through February 2014. From time to time, we will secure a weather hedge when implied economics are reasonable. This hedge is similar to the 1 gas operation as used effectively over the last several years to guard against the weather variability in jurisdictions that lack weather normalization adjustment writers. We believe this can provide similar revenue stability for Houston Electric this winter. Our Natural Gas Distribution unit performed well this quarter, earning $5 million of operating income compared to the same amount in the prior year. While the third quarter is generally the softest due to the seasonal nature of this business, performance is in line with our expectations for the quarter. Timely rate recovery mechanisms and continued customer growth increased quarterly revenues compared to the same period last year. These positive contributions were offset by increases in O&M, depreciation and property taxes. Gas operations performance year-to-date has exceeded our expectations and we anticipate a strong overall performance for the calendar year. Gas operations capital investment through the third quarter of this year was about $315 million, up more than $60 million from the same period last year. We anticipate investing approximately $430 million of capital by year-end. Investments in pipeline integrity initiatives continue to drive a sizable portion of our total capital expenditures. These investments not only serve to enhance the safety and reliability of our system but also will reduce operating expenses over time. We continue to see growth across our service territories, with the addition of approximately 24,000 gas customers since September 2012 and this pace is expected to continue. This August we filed a general rate case in Minnesota to increase overall base rates by $44.3 million annually, which includes moving into base rate $15 million of energy efficiency expenditures, now being recovered in a separate writer. Our filing is based upon a rate base of $700 million, which reflects the significant capital expenditures we have made across our Minnesota service territory, a full decoupling mechanism and an ROE of 10.3% with a 53% equity capital structure. Interim rates went into effect on October 1 and we expect a final decision around mid-2014. Finally, gas operations has once again entered into a weather hedge for certain jurisdictions to mitigate the impact of weather on our operating income for the period of October 2013 through April of 2014. Overall, our operating units had a great quarter and I believe we are well positioned to finish the year strong. And with that, I will turn the call over to Gary.

Thank you, Scott, and good morning to everyone. Before discussing various CenterPoint financial items, I'll provide an update on the Enable Midstream S-1 filing and IPO timeline. As I mentioned last quarter, we were required to conduct additional valuation work to determine fair value for the net assets of Enogex, which extended the time needed to prepare the S-1. This work and the related audit requirements are now substantially complete and we expect to be in a position to file the registration statement with the SEC later this quarter. Our goal remains to have a publicly traded master limited partnership in the first quarter of 2014. Turning to CenterPoint Energy related activities, we are very pleased to have extended our 3 revolving bank credit facilities. The amendments extend the maturity date of each of the facilities 2 years to 2018 and the pricing grid remains the same. We also made an improvement to the PAD facility, replacing the debt-to-EBITDA covenant with a debt to total capitalization covenant that is more in line with investment-grade utilities. In addition, the aggregate commitments under the FERC facility will reduce to $600 million from $950 million. The aggregate commitments under the CenterPoint Energy and CEHE facilities remain unchanged. We are very pleased to have in place 5-year facilities that are appropriately sized and competitively priced. During the third quarter, we redeemed $92 million of debt as well an additional $59 million of debt in October. For the full year, we will have reduced our debt by approximately $1.1 billion. The company has also benefited from a number of favorable actions by the rating agencies in 2013. Most recently, in August, Moody's upgraded the debt ratings of CenterPoint Energy and Houston Electric. CenterPoint Energy now has a senior unsecured rating of BAA2 and Houston Electric has a senior secured debt rating of A2. The rating of FERC senior unsecured debt was reaffirmed at BAA2 and the rating outlook for all 3 companies is now stable. Finally, let me discuss our 2013 earnings guidance. This morning, we reaffirmed our estimate of earnings on a guidance basis in the range of $1.17 to $1.25 per diluted share. Our guidance excludes the effects of the 2 unusual items resulting from the formation of the midstream partnership that we discussed in the second quarter earnings call. In addition to the normal guidance exclusions described in our press release, this range takes into consideration the closing of the midstream partnership on May 1, the performance to date of our businesses as well as an estimate of our portion of the partnership's earnings for the balance of 2013. The actual earnings of the partnership will be dependent on a number of variables, the most significant being commodity prices, volume throughput, ancillary services and the net synergies realized as the partnership's operations are integrated. In addition to the impact of our midstream partnership earnings, we continue to provide earnings guidance in the form of a range to reflect a number of other economic and operational variables such as weather, regulatory and judicial proceedings, effective tax rates and financing activities. In closing, I'd like to remind you of the $0.2075 per share quarterly dividend declared by our Board of Directors on October 23. We believe our dividend actions continue to demonstrate a strong commitment to our shareholders and the confidence of management and the Board of Directors in our ability to deliver sustainable earnings and cash flow. Thank you for your continued interest in CenterPoint Energy and I will turn the call back over to Scott.

Before we take your questions, I'd like to take a moment to share a few thoughts with you. Many of you have met with and have known David McClanahan for a long time. You know him to be a visionary, an industry leader and a statesman. Throughout his tenure, David has been focused on creating value for all of our stakeholders, our shareholders, our customers, our employees and the communities in which we do business. I have heard it said that his retirement marks the end of an era and I can assure you that the employees of the company, including me, feel this way. His leadership, disciplined approach to business decision-making and personal integrity have set a high standard for each of us. On behalf of all the employees of the company, thank you, David, for everything you have done to make CenterPoint Energy a great company. And on a personal level, I want to thank you for your friendship and counsel. David is the first member of his leadership team to retire. During 2014, Scott Rozzell, Tom Standish and Gary Whitlock all turned 65 and have indicated their intentions to retire as well. In the coming quarters, we will be announcing several senior level retirements. While the exact timing of each departure has not been finalized, they will be staggered to ensure a smooth and effective transition. We have given much thought to the broader succession plan and the incoming executive team will possess the knowledge, experience and leadership necessary to carry CenterPoint Energy forward. We are in the process of finalizing all of the related personnel moves and will be ready to share more details regarding the incoming leadership team in the near future. With the upcoming change in leadership and the creation of Enable Midstream Partners, we've taken the opportunity to refresh our vision and strategy. Our work acknowledges and builds upon a great heritage of success but appropriately reflects our change portfolio and the business conditions we face today and anticipate to face in the future. We look forward to sharing it with you early next year. In the meantime, we will continue to focus on what we do well: Grow and operate safe and reliable utilities. I am honored to have the opportunity to build on David's success and I'm excited about the bright future of CenterPoint Energy. And with that, Carla, I'll turn the call over to you.

Thank you, Scott. As a reminder, since the midstream partnership plans to pursue an IPO, we are restricted by SEC regulations in the details that we can discuss. [Operator Instructions] Mackenzie?

[Operator Instructions] Our first question is from Andrew Weisel with Macquarie Capital.

So it sounds like a lot of the changes will be coming in the next 12 months or so. Is there going to be -- or do we expect an analyst day or something early next year? And will there be any allusions to changes in the company at EEI next week?

Andrew, this is Scott. We have been contemplating an Analyst day but we have not yet put one -- formalized one and put in place, but we have been having conversations internally about that. As far as the meeting at EEI or the discussions at EEI, we'll be able to talk a bit about how we're seeing things evolve, but suffice it to say, we have got a great strategy to date and our changes and what we're going to focus on in the future, I think, are going to be fairly intuitive in terms of our focus around utility.

Okay. I'll keep my next questions a little more short-term oriented then. In terms of Enable, the CEO announcement hopefully will be coming soon. How should we think about the timing between that and the S-1 being filed? I know you can't get too specific, but it is fair to assume that the incoming CEO and CFO will need some time to get comfortable with the numbers before the S-1 as printed?

I don't think before it's printed, Andrew . I think we'll file the S-1. That's our intention. Obviously, before we go out on the road and market the IPO, we'd want the CEO and CFO in place and completely familiar and brought into our plans. But the -- we have a strong management team today. They are putting together the financial plans that will be reflected in the S-1. So I think, we're in good shape today. But obviously before early next year or during the first quarter, we need to have that CEO, CFO in place.

Okay, that's helpful. Then on the electric utility usage trend, I probably ask this every quarter, but I see the account growth is strong at 2%. How should we think about the weather normalized load growth because you said it was a benefit?

Yes. Andrew, I think the way to think about weather normalized, we're seeing usage on a weather normalized basis to be more or less flat. Weather calculations -- or weather normalization calculations can be a little tricky at times and they're not perfect in terms of precision. So you may see some noise up or down on a quarter-to-quarter basis. But as we look over the long term, we see usage remaining about even on a weather-adjusted basis.

Okay, great. Then lastly, the O&M trends at the utilities, both electric and gas, if you can sort of give any high-level thoughts on the magnitude of the year-over-year changes that we've been seeing in recent quarters and maybe an early look at what next year's O&M trends might look like?

No, we target our O&M in kind of the 2% to 3% range and short of some timing issues where we might be moving some expenses around from quarter-to-quarter. I think we track on that. I think what may be clouding the numbers a little bit is the key costs expense that's in electric. If you pull that out, the remaining expense, the O&M, those types of things is more around 2.5%. The key costs expense in there has an offset in revenue.

Our next question is from Matt Tucker at KeyBanc Capital Markets.

First question, you mentioned the S-1 filing should occur this quarter. Should we expect it to be kind of almost any day now, this month or closer to the end of the year? Any more color you can give us on the timing there?

I would say it would be anytime between later this month and the mid-Feb-- mid-December. We're not going to wait until the end of December to file it, but I think it's getting very close. So our intent is to file it as soon as we got every T crossed and I dotted, but we are very close.

And then now that you had a full quarter of operations at the partnership, any update on your expectations for realizing synergies there? And do you feel like you've already started to realize synergies today?

I think we have more clarity around it. Over the last quarter, we put a full management team in place from the top down through a number of levels. We're starting to get more clarity around asset synergies, where we can start utilizing the different assets of the 2 entities to create value for the partnership. There is more -- a lot more clarity around that. And clearly, we're going to have some more cost synergies as we move forward. Those we've made some progress on but that's mainly a 2014, 2015 kind of event as we reshape the way we -- services are delivered to the partnership. A lot of them will be moving away from the parent company and put into partnership. And we expect we're going to find a fair amount of savings when that happens.

Great, that's very helpful. And just last question on the weather hedge at CenterPoint Houston, could you elaborate a little bit on the economics that make them attractive options this year?

Yes, the hedge is structured where we value heating degree [ph] day. And depending on whether that's favorable for us or against us, we hedge about 80% of that value. So the idea is that if it's favorable for us, there is a payment to the counterparty. If it's not favorable for us, they would pay us. But the reason it works for us and we entered into one is it's -- when you pick the strike points on this, the economics are such that it's evenly balanced up or down. So it ends up just being a way to essentially no implied costs or very little implied costs. It's a way to protect against variability if we were to have extreme weather.

Our next question is from Charles Fishman at MorningStar.

The transmission options that you've proposed to ERCOT, is that incremental to your previously disclosed capital expenditures for Houston Electric? And I guess, specifically, does that change the 5% CAGR rate base growth?

Yes, Charles, that investment would be incremental to what we have previously published in terms of our capital plan. So to the extent that those materialize, it would increase our overall investment and our rate base and therefore our earnings over the longer term.

And could you give a range of the 3 options?

Well, they're all -- physically, they are all in the same region. And the difference between them would be the starting point in our territory and the termination point, either in somebody else's territory or another part of our own territory. But they're all in the northwest portion of our region. And the difference in price is associated with the difference in length between the 2 endpoints.

And let's say the lowest cost option versus the highest cost, can you -- have you disclosed that in...

Well, as I mentioned, I think the range of the $300 million to the $550 million represents range of the options.

Our next question is from Sarah Akers with Wells Fargo.

Any change to your thoughts on when the MLP will be accretive to standalone CenterPoint EPS? Are you still thinking about 2015?

Sarah, I think that's right. We haven't really looked at that since we made that disclosure in our last call, but I feel -- I think we feel pretty comfortable that it'll be accretive in the 2015 time frame.

Great. And then one question on the Bakken, are you seeing the work that Enable is doing there, generating additional discussions with other developers in that area?

Yes, we are. We are looking at other opportunities in that region. And it is generated because of the work we're doing for XTO, Exxon Mobil in that area. So yes, I think we are seeing more interest in us doing that kind of project as a result of not only getting this one, but we've made really good progress. We've made certain commitments and we've been able to deliver on those commitments. I think our engineering and construction has been excellent. And I think that all helps when you're out looking at other projects.

Our next question is from Steven Fleishman at Wolfe Research.

So first, I'm just curious if you have any better sense or thought process on how you might look at dividend policy next year with the MLP being effective in getting the dividends from it?

No, Steve. This is Gary. I think it's just as we said in the previous quarter. Clearly, going forward, I think the way to think about our dividend policy will be the earnings from the regulated utilities would certainly pay a portion of that. And then I do think that in terms of the cash distributions, our objective most likely will be to pay a significant portion of those cash earnings to our shareholders. So but the specifics of that, I'll ask you to please wait until the first quarter and we will be much more clear on our policy in the first quarter.

Okay. And then just also on the electric and gas utility businesses, rough sense of kind of updated views on rate base growth potential over the next 3 to 5 years?

Well, Steven, I think the last we had said was it is going to be in the 3 -- depending on the utility, in the 3% to 5% range in terms of rate base or in terms of growth. And on the -- that's on electric. And then the gas side may be slightly higher. I can tell you as we are modifying and going through the planning process today and we're looking at capital requirements going forward, there tends to be a drive, given all the growth that we see towards. That number may be moving north as opposed to south. So we've still got strong investment opportunities and we're going to continue to have strong rate base growth as a result of that.

Our next question is from John Tiani [ph] at Calendar Capital [ph].

Considering the delay and the difficulty in hiring a CEO and filing the S-1, why not consider the transaction that Devin at crossed text did [ph]? Can you help us understand why you don't think that's a better way to maximize the value of Enable for shareholders?

John, I don't think we ever commented on that transaction, but we continue to look at alternative ways. And if there's another way to get public and create more shareholder for our value, we'll certainly consider that. But that specific transaction, I don't think it's appropriate for us to comment on. The idea of joining with an existing public entity is not something that we haven't looked at or considered.

[Operator Instructions] Our last question is from Ali Agha at SunTrust Robinson Humphrey.

David, can you give us some insight into why it's taking longer than expected to get a CEO in place for the MLP? Is it getting the right financial incentives? Is there an issue about strategy? I mean, just give us some insight into why it's taking so long.

Ali, let me give a few general comments. It isn't about money and it's not about strategy. I think the folks we talked to, they look at what we've created here and they see the value creation potential and they get excited about it. Now I will tell you that this is a fairly small universe of executives we look at. Most of them are working executives that have a job today. There's all kinds of things that come up in these discussions from the time you start until you time you finish. And we just haven't been able to connect on with the right person yet. But we still have a lot of interest about people in it. We're still working actively. But this isn't about us saying we're not going to pay enough money or somebody looks at our strategy and goes, "Gosh, I don't want to be any part of that." It's just -- it's a small universe of executives that really -- because this is something that a company that's large, it's has a lot of complexity but it has a lot of opportunity and we need to have the right person to execute on our strategy.

Okay. And when I look at the kind of rate base growth numbers you guys talked about on the regulated side, in that 3% to 5% -- or 4% to 5% range, and what you see your equity ownership contributing on the MLP side, can you remind us again, when we look at it on a combined basis, what kind of long-term annualized earnings growth should be produced by CenterPoint going forward?

Ali, this is Scott. I think the way I think of this is we've got the earnings contributions of the utility, which are fairly straightforward in terms of how we've communicated our rate base growth and our recovery. And that ends up being in the 3% to 5% type range. And then we've got the earnings contributions associated with the midstream venture. And that is going to have a higher growth rate. But what is the most important from a value creation standpoint is the cash that's generated from the entity and how that manifests itself in our dividend growth profile and -- so I think there's a distinction between the earnings growth rate and the dividend profile that's going to really be the indicator I think that the latter being the indicator of the value that comes from the combined entity.

I see, got it. And last question, just to clarify, David, to your point that you made earlier. So as you look at the Enable assets, did I hear you right, that you've looked at potentially other ways to take it public but feel that the standalone IPO is still the best option? Or did I not hear you right and you're looking at other options besides the standalone IPO? I just want to be clear about what you're saying.

Let me just say this, Ali. We are moving ahead full speed on our own IPO and make -- doing it public, but that doesn't rule out any other alternatives, either. We continue to look as we push forward 100%. We are -- if something would come along and we think it's a better alternative, we would execute on that, but we're not going to slow down this term process.

We will now end the call. Thank you very much for participating today. We appreciate your support and have a nice day.

This concludes CenterPoint Energy's Third Quarter 2013 Earnings Conference Call. Thank you for your participation.