Good morning and welcome to CenterPoint Energy’s Third Quarter 2019 Earnings Conference Call with senior management. [Operator Instructions] I will now turn the call over to David Mordy, Director of Investor Relations. Mr. Mordy, please go ahead, sir.

Thank you, Jumeirah. Good morning, everyone. Welcome to our third quarter 2019 earnings conference call. Scott Prochazka, President and CEO; and Xia Liu, Executive Vice President and CFO, will discuss our third quarter 2019 results and provide highlights on other key areas. Also with us this morning are several members of management, who will be available during the Q&A portion of our call. In conjunction with our call, we will be using slides, which can be found under the Investors section on our website, centerpointenergy.com. For a reconciliation of the non-GAAP measures used in providing earnings guidance in today’s call, please refer to our earnings news release and our slides on our website. Please note that we may announce material information using SEC filings, news releases, public conference calls, webcasts, and post to the Investors section of our website. In the future, we will continue to use these channels to communicate important information and encourage you to review our website. Today, management will discuss certain topics that will contain projections and forward-looking information that are based on management’s beliefs, assumptions and information currently available to management. These forward-looking statements are subject to risks or uncertainties. Actual results could differ materially based upon factors, including weather, regulatory actions, the economy, commodity prices and other risk factors noted in our SEC filings. We will also discuss guidance for 2019. The 2019 guidance basis EPS range excludes variables as provided in our press release, including certain merger impacts such as integration and transaction-related fees and expenses, including severance and other costs to achieve; and merger financing impacts in January prior to the completion of the merger; and potential impacts of the pending Houston Electric rate case. The 2019 guidance range considers factors described in our press release and slides, including operations and performance…

Thank you, David, and good morning, ladies and gentlemen. Thank you for joining us today, and thank you for your interest in CenterPoint Energy. I’m very pleased to report we had an excellent quarter. Turning to Slide 5, excluding merger impacts, this morning, we reported third quarter adjusted earnings on a guidance basis of $0.53 per diluted share compared with $0.39 in the third quarter of 2018. Given this strong performance, we expect full year guidance basis EPS to be near the upper end of our EPS guidance range of $1.60 to $1.70. Xia will cover our financials in greater detail shortly. Turning to Slide 6, let me begin my update on Houston Electric by sharing what sets Houston Electric apart. Since the beginning of this decade, Houston Electric has added over 400,000 customers, an increase of more than 20%. To keep pace with this growth and address needs for enhanced reliability and resiliency, the utility has invested close to $8 billion on transmission and distribution infrastructure, including approximately $1.5 billion of investment that is serving customers today but is not yet in rates. We work hard to provide safe, reliable, value-added service for our customers every day, and we have helped the city of Houston weather numerous storms, including Hurricane Harvey. In 2018, we were the recipient of the Edison Electric Institute’s Emergency Recovery Award for our restoration efforts following Hurricane Harvey and other severe storm incidents. Our performance can be largely credited to the investments we have made to harden and advance our system. Meanwhile, we’ve been able to keep rates low while achieving the highest residential customer satisfaction ranking among investor-owned utilities. Moving now to the status of the Houston Electric rate case, let me comment on a proposal for decision, or PFD, put forward by the…

Thank you, Scott, and good morning, everyone. I will now turn to the consolidated quarter-over-quarter guidance basis EPS drivers on Slide 16. Excluding merger impacts, for the quarter, we delivered $0.53 per diluted share compared with $0.39 for the same quarter last year. Our utilities provided a $0.23 positive variance. I would like to highlight four areas which contributed to our utility’s strong performance. First, operating income of the acquired Vectren utilities added $0.10 for the quarter; second, O&M savings provided a positive variance of $0.08; third, rate relief and customer growth provided a positive impact of $0.05; lastly, warmer-than-normal weather in our Houston Electric service territory provided approximately $0.03 of positive impact for the quarter. Our utilities continue to deliver strong results, and we are very pleased with their performance this quarter. Our nonutility businesses provided a combined positive variance of $0.10 quarter-to-quarter. Energy Services and Infrastructure Services performed as expected, providing a positive variance of $0.11. Midstream Investments provided a $0.01 negative variance. Merger financing and interest expenses are the primary drivers for the remaining negative variance of $0.19 partially offset by a positive variance of $0.03 driven by lower effective income tax rate. Turning to Slide 17, let me provide you some additional color on our utility businesses’ strong performance in the third quarter. Houston Electric added more than 48,000 customers year-over-year, which equates to approximately 2% growth. Our natural gas distribution business added more than 47,000 customers year-over-year in our legacy jurisdictions, which equates to approximately 1.4% growth. Including the over 1 million customers acquired from the merger, our natural gas distribution business is now the nation’s second largest gas utility by customer count, serving more than 4.5 million customers. As Scott mentioned, we continue to see momentum from our focus on O&M management. Looking at…

Thank you, Xia. We will now open the call to questions. In the interest of time, I’ll ask you to limit yourself to one question and a follow-up. Jumeirah?

[Operator Instructions] Thank you. Our first question is from Ali Agha and SunTrust.

Thank you. Good morning.

Good morning, Ali.

Good morning. Scott, I believe it was as recent as the last earnings call at which you had reiterated a consolidated long-term growth rate of 5% to 7% for CenterPoint off the 2018 actual base. Is that no longer operative now?

Ali, we have postponed talking about the growth rate until we get clarity on the earnings around the CEHE rate case. And I think Xia also indicated that going forward, we intend to talk about growth excluding Enable. So those are the two pieces that have entered into the equation now. But of those two, the biggest is really getting clarity on the Houston Electric rate proceeding.

Okay. And on the rate proceeding, can you at least give us – I know you laid out some markers in the slide deck. But to put it in some context, can you give us some sense of – if this proposed decision does become final relative to expectations, how big of a negative it should be?

Yes. It’s – clearly, the PFD is not a good outcome. We’ve tried to communicate that. Maybe one way to think about it is relative to current rates, we’ve assumed that we would at least be recovering the additional investment, the over – the $1 billion-plus of investment that we have already put in service that is not yet in rates. If we just recovered that piece, so that would be an increase, if you will, in rates from where we were, whereas the PFD has suggested a decrease. So that is a – that’s a sizable or a notable difference. Additionally, the reductions in FFO were not anticipated as well. We will be in a better position to describe the actual impacts of that as we get clarity. And I just want to reiterate, while the PFD is challenging, the commission has yet to weigh in on this, and we remain confident in the process and hopeful that the commission will reach a more balanced decision as they look at the facts.

Right. And just one quick follow-up. Are you still committed to all the nonutility businesses? Are they still considered core as far as you’re concerned?

The nonutility businesses are a source of cash generation for us for our utilities. That’s how we look at them. We mentioned on the last call, and I’ll just reiterate, that our regular cadence of activity is to continually evaluate each of our businesses to figure out if they are providing the maximum value possible to shareholders, and we continue to do that on an ongoing basis.

Thank you.

Thank you, Ali.

Our next question is from Michael Weinstein and Credit Suisse.

Hi, good morning.

Good morning.

Could you comment a little bit about your strategic plans for the nonregulated businesses, particularly the Infrastructure Services business going forward? Are you – do you intend to hold on to them long term? Or are we looking at a full divestiture at some point?

I think the best way to answer that is maybe a reiteration of what I had just mentioned to Ali, and that is we see those businesses today as a source of cash for investment in our utility businesses. And as part of a regular course of management, we evaluate whether businesses are providing the maximum value to shareholders as they possibly can. And we look at that on a regular basis, as does our Board. So we continue to think about our businesses in that context with an eye towards value maximization.

And for Xia, just wondering if – it looks like you found about $100 million worth of O&M reductions so far. And I’m wondering if – just generally speaking ahead of the fourth quarter review, are you pleasantly surprised with what you’re finding? Or are you optimistic about the future? Have you – how’s the review going so far?

It’s going very well. The part of the $100 million is what we expected, which is the synergies that we set forth a target of $50-plus million this year. So we are ahead of that. I think the team has done a really good job from day one getting costs out and continue to focus on basically turning every rock to see where we can find additional synergies. So the team has done a really good job this year improving processes and achieving synergies. At the same time, we reiterated our focus on overall O&M efficiency focus. So over the past several quarters, we have seen the results from the continued focus on that. I think all businesses have made their commitment in looking at the overall spending plan and make sure we are basically doing everything we can to become more efficient. So I’m very optimistic about the future, about our continued focus on that aspect. At the same time, I think it would allow us to continue to focus on capital deployment and grow our utility infrastructure.

Thank you very much.

Our next question is from Shar Pourreza and Guggenheim.

Hi, good morning. It’s actually Constantine here for Shar. I just wanted to congratulate you guys on a good quarter.

Hi, Constantine.

A couple of questions here. Understanding that it’s an early outlook on the capital plan, but can you kind of give a little bit of color on any moving pieces that you’ve kind of seen that you can address at this time versus prior expectations? And how does that early outlook kind of correspond to keeping the utility growth intact? Or is there anything incremental?

Yes. Sure. The – as I shared just now, we expect about – over $100 million increase from – for 2019 compared to what we previously communicated with you for the year. And for the 2020 to 2024 period, we expect the overall aggregate amount to be similar to what we shared with you from the prior five-year plan. The timing of it could be different, and that one key factor is the IRP. We’re finalizing the IRP in Indiana. So the timing of that will be incorporated as well as the continued need from our legacy utilities and from the new acquired gas. So I would say that overall, from an aggregate standpoint, we see we will maintain at a similar level for the next five years.

And so kind of as this kind of plan gets formulated, can you give a little bit of color how it fits with the kind of strategic objectives that you outlined of kind of growing the utility earnings? Does that have a kind of a purely organic objective at this point?

Yes. Grow utilities, continuing to focus on O&M management and try to be smart about allocating capital and try to achieve closer to our allowed ROEs.

And just one quick follow-up on that. So with kind of the O&M management kind of that you highlighted on the call, so it looks like some pretty good numbers from kind of where we’re sitting. Is there kind of specific programs going forward that you see going on? And kind of how deep do you see that pool? And just if you can, any kind of statements on the kind of recurring nature of the savings program kind of moving past 2020?

I think the best way to answer that is we’re very pleased with where we are so far, and we’re pleased about the projected year-end numbers. And we think that will be a good starting point going forward. And as we apply a similar discipline, we expect the momentum to continue into the future years.

Perfect. Thanks.

Our next question is from Julien Dumoulin-Smith and Bank of America Merrill Lynch.

Hey, good morning team.

Good morning, Julien.

So a couple of follow-ups here. On the strategic decisions here, how do you think about the balance sheet into 2020 and potential needs to raise capital against? Also, I think if I can square it, your slides also specifically say a five-year utility outlook, obviously ex Enable. But I just want to make sure I understand. I mean are we to think about the other ex Enable businesses being potentially on the table here to address balance sheet needs? Or how are you thinking about them at this point? And then I have a follow-up.

So Julien, the way I would think about it is what I’ve said earlier, right? Today, we – the nonutility businesses and the non-Enable nonutility businesses are a source of cash for us today. So when we talk about providing a look going forward, it would be for the portfolio excluding Enable. That’s one way to think about it. You had another part to your question.

The balance sheet

The balance sheet. I’ll let Xia talk to the balance sheet portion.

Yes. Julien, the CEHE rate case will be a very important component of that decision. And that’s part of the reason why we are not ready to share the equity financing number yet because like Scott mentioned, the FFO reduction, that in itself would impact the financing needs to maintain similar credit metrics. So we’re not quite ready to address that yet, but we’re fully aware that maintaining our credit quality is very important. Continuing to find ways to strengthen the balance sheet is another priority.

Got it. All right. Fair enough. And then, again, kudos on the cost cuts this year indeed. Can you talk briefly about how you think about that going forward? I mean, obviously, we’ve got a big pending rate case. I understand that. At the same time, how do you think about narrowing that gap going forward? How do you think about earned returns across the utility business this year and into next and potentially continuing to narrow that gap?

Yes. Julien, I’ll start and maybe Xia may want to add. We had every intention of continuing our discipline around expense management. I would say the driving force that allowed us to make a sizable move this year was the merger, but we think of the savings that we have today as a new starting point from which to manage our expense equation going forward. And we will continue to be very focused on managing expense. The actual numbers associated, we’re still working those out, but we see the gains that we’ve made to date as establishing a new level from which to work.

But to clarify briefly, if you can, what kind of gap are we talking about today versus prospectively that we can achieve, if you will?

From an O&M perspective?

Yes. As in – or from an earned return perspective, how much of a gap is there to narrow in your mind, given some of the cost reduction that we’re talking about?

Yes, Julien, trying to – I think this year, we are – we closed some of the headroom related to – from the expected returns versus the allowed returns, so – particularly our natural gas businesses are doing a really good job. And just focusing on every dollar isn’t the same. So where do we deploy – make sure that we provide safety, reliable service, at the same time, being really smart about where to deploy the next incremental dollars. At CEHE, the – you know the timing of filing TCOS and DCRF, that in itself will continue to have a lag. For instance, the time you file TCOS versus the time we receive the revenues, there is a three-month delay. And DCRF is filing in April and getting rates in September. So the inherent regulatory lag will continue to be there. At the same time, I think the continued focus on O&M will give us some ability. I don’t think we could close completely the gap to the allowed ROE, but that definitely is a focus for us going forward.

Got it. All right. Fair enough guys. Thank you.

Thanks, Julien.

Our next question is from Insoo Kim and Goldman Sachs.

Thank you. Maybe starting with the CEHE rate case. I understand there’s a lot of moving parts that’ll go into the 2020 guidance that’ll be provided in February. But Scott, when you mentioned that – just when we’re trying to put some pieces together, your original guidance, which had the $182 million midpoint, had about, I guess, the $1 billion of spend that you weren’t getting the recovery and return on, and the PFD would result in $27 million of operating income decrease from the current rates. If I just take the rate base math of the $1 billion and then also the small difference in the operating income in the PFD, that would – I would calculate something like a $0.12, $0.13 difference. All else being equal, is that the way I should think about just how CEHE was included in the original guidance and what the PFD would imply?

Insoo, I think the math and the way you’re thinking is the right line of thinking. A couple of things, though. That doesn’t include the impacts associated with the reduction in FFO. That’s just the – kind of the earnings side. Xia talked earlier about a significant reduction in FFO could accelerate the needs for equity, for example, to maintain the current metrics. So it doesn’t include that nor does it include what I would consider management response because depending on the outcome, we would consider what actions we can take to help mitigate the negative effects of an outcome. But that’s why I said there’s a lot of moving parts here. And while we’re trying to provide clarity about what the PFD says, I just want to reiterate the process isn’t over, and the commissioners have not yet opined on this. And we are very hopeful that the commissioners will have a different view of what’s appropriate.

Insoo, I’ll just add quickly, in the original guidance, we also had expectations on Enable and the other nonutility businesses. And you’re aware about the development particularly related to the Enable. They guided to the lower end of this year, and they just issued their 2020 guidance. That was another component in the original guidance range.

Yes. I totally understand all the other moving parts. I just didn’t want to open up a little can of worms on all the moving pieces. Appreciate that. Maybe secondly, related to – sticking with CEHE. If the results of the PFD do hold with the associated disallowances, how does that impact your thoughts going forward on future capital spend at the utility? And what type of investments you may make or may not make, given the current rate case decision?

Well, I’d say, look, we still have an obligation to serve the customers in our service territory, and the needs of our customers ultimately are the ones that drive our thinking about capital. There is a little bit of discretionary capital from a timing perspective. But by and large, the capital we spend is needed to serve the needs of the community. So we would have to – for example, if there were disallowances upheld, we would have to get clarity on views around what is acceptable spend before we go down the path of making the spend. That’s one example of some management action that we need to take here. But the capital itself would be driven by – primarily by – it’s going to be driven by the needs of the community as opposed to the – necessarily the outcome of the proceeding.

Understood. Thank you very much.

Thank you.

[Operator Instructions] Our next question is from Chris Turnure and JPMorgan.

The only question that I had left for you guys was on kind of where you’re at right now with Houston Electric credit metrics, just kind of where they’re at, including outlooks. When you last got an update from the agencies? And if these have been part of the discussion at all with the interveners so far in Texas?

Our rating agencies are fully aware of where we are from the CEHE rate case standpoint. We keep the communication very transparent and open with them. I think they are, just like us, eager to find out what the final outcome will be from the PUC ruling. So one thing is that we are aware of the PFD recommendations. But the other thing, like Scott said a couple of times, we remain hopeful that the final outcome is more balanced and constructive outcome. So depending on the outcome, I think the rating agencies will communicate again with the rating agencies about where we are.

Chris, I would also add, I think the interveners are certainly very aware of the views of the rating agencies, about the condition that CEHE’s in relative to the rate proceeding as well as the commission and others is – the information and views around this have – and concerns, quite frankly, have been shared as part of the process.

Okay. Because certainly, some of your peers have had that as part of their discussions in recent rate case processes there around the authorized equity layer and other things.

Yes, it’s absolutely part of our discussion.

Okay. So it sounds like certainly part of the discussion, but also nothing has changed there in terms of the focus or lack of focus on that versus prior discussions for other rate cases in Houston.

Well, again, the only information we have so far is the judge’s view of PFD. That’s the only piece of information that’s come out about how to think about this. The commission has yet to weigh in on this particular issue. But we made it very clear, going into the rate case and throughout the periods in which we can respond to comments and provide our own comments, of the issues associated with this subject around credit metrics is caused by different factors. So everyone is very – all the key parties are very aware of this issue.

Chris, to your point, the recommendations from the ALJ didn’t take that into consideration.

Okay. Helpful color. Thank you guys.

Our next question is from Charles Fishman and Morningstar Research.

Scott, on Slide 8, you seem to imply a decision might not be reached next week. But it seems like everything is queued up for the commission to make that decision. Is there something they’re still waiting on? Or what is your – why might they not make a decision next week?

Well, it could be a number of things. It could be that they – there’s a number of issues that we’re asking them to opine on. There’s a full agenda, for example, at the meeting on the 14th. There are just a number of things going on. And while we would perhaps like them to work through every one of our issues and debate and make a decision, it may be, from a timing standpoint, that they don’t get through everything, and it just gets pushed to the following meeting. They’re not obligated to kind of make a decision at this upcoming meeting. So that’s why we think it’s possible they could begin dialogue and push it to another meeting. It is also possible they could get to an end point, but nothing other than just the number of issues to be debated and the size of the agenda that will make us think it would be pushed.

Sounds like administrative then more than any technical thing.

Yes. That’s the way to think of it

And then a second question. On Slide 24, I – first nine months on the operating earnings or guidance basis earnings, $0.29 from the utilities – positive from the utilities acquired in the merger, $0.14 from the Energy Services business. If my math is right, that’s $0.43 and yet $0.48 negative from the merger financing. Is that being unfair to say this transaction looks pretty dilutive for the first nine months? Or should some of that $0.07 O&M management be credited towards the merger?

Yes. Some of the O&M management should be credited towards the merger. I think the merger financing itself is around $0.48. If you add the pickup from the acquired jurisdictions, Indiana Electric year-to-date added $0.16, legacy Vectren gas added $0.13, the Infrastructure Services added $0.14, and then some of the O&M management should be credited to the variance. You should compare those moving parts to the merger financing.

Okay. So at this point, at least through the first nine months, if I take some credit for the O&M management, the transaction is roughly breakeven.

Yes. That’s a good way to think about it.

Okay. That’s all I had. Thank you.

Our next question is from Ashar Khan and Verition.

Good morning. Good earnings. Can I just ask that you said you will be providing the CAGR for the utility business based on the forecast for this year 2019? And if we can assume we are at the upper end, how much would utility earnings come out to be in that scenario? I wanted to start off with the base and just wanted to get a good idea. So under your current guidance for 2019, what would the utility guidance be?

It’s – roughly 75% of the – of our earnings is expected to be from the utilities. Keep in mind, there are several moving parts in there. We had some favorable weather in there, and we also had favorable income tax items that might not necessarily repeat itself. But roughly, the way to think about it is the utility is 75% of the earnings expectations. And that’s based on today’s CEHE regulatory construct. So the outcome…

Okay. So if I take 75% of $1.70, it’s $1.27. And how much would you say is weather and the tax items? Could you just quantify those year-to-date, how much would those be?

Yes. Yes, happy to. So year-to-date, weather, roughly $0.03 positive, a little over $0.03.

Okay.

And the favorable tax item for this year alone is roughly $0.05.

Okay. So we are running approximately $1.20 base this year normalized for taxes and weather as – it’s for the utility. Would that be a fair number?

Yes, close to.

Okay. Thank you so much.

Our last question is from Anthony Crowdell and Mizuho.

Hey. Good morning. Hopefully an easy question. What’s the process on the motion for rehearing in Houston, like the time frame? And how long – like I guess the clarity on the motion for hearing?

Jason, do you want to come down here and answer this for me?

Sure.

I’m going to bring our regulatory expert down here to make sure he doesn’t have to correct me on the timing.

Good morning. It’s Jason Ryan. So the process for rehearing is that a couple of weeks after the order issued by the commission, motions for rehearing are due. And then the commission has up to 100 days from the date of their order to rule on motions for rehearing or they’re just overruled by the passage of time.

Do you have any like historical preference in Texas of maybe when orders have been changed through rehearing? Is that something you guys have or can disclose?

So motions for rehearing are granted and denied depending on the issues that they raise. Sometimes the motions for rehearing are granted to correct a purely administrative item versus changing a substantive ruling sometimes there are changes at the substantive rulings.

Does – on Slide 8, you stated that the you stated the new rates going into effect 45 days after the PUCT order becomes final. If you file for a motion for rehearing, when is that final date? When the motion for rehearing is either granted or denied, is that the final date?

Yes.

Got it. That’s all my questions. Thank you.

And at this time there are no further questions. I will now turn it back over to David Mordy for any closing remarks at this time.

Thank you everyone for your interest in CenterPoint Energy. We look forward to seeing many of you at the Edison Electric Institute Conference shortly. We will now conclude our third quarter 2019 earnings call. Have a great day.

This concludes CenterPoint Energy’s third quarter 2019 earnings conference call. Thank you for your participation. You may now disconnect.