Good morning, and welcome to CenterPoint Energy's Third Quarter 2020 Earnings Conference Call with Senior Management. [Operator Instructions]. I will now turn the call over to David Mordy, Director of Investor Relations. Mr. Mordy?

Thank you, and good morning, everyone. Welcome to our Third Quarter 2020 Earnings Conference Call. Dave Lesar, CEO; and Jason Wells, CFO, will discuss our third quarter 2020 results and provide highlights on our strategy. 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 various factors, including weather, regulatory actions, the economy and unemployment, commodity prices and the impact of COVID-19 pandemic and other risk factors noted in our SEC filings. We undertake no obligation to revise or update publicly any forward-looking statement for any reason. We will also discuss guidance for 2020 in 2 components. In providing this guidance, CenterPoint Energy uses a non-GAAP measure of adjusted diluted earnings per share. In summary, our guidance basis, Utility EPS range, includes net income from our utility segments as well as after tax corporate and other operating income. This guidance range considers operations performance to date and assumptions for certain significant variables that may impact earnings, as noted in our earnings release. The range reflects dilution and earnings as if the Series C preferred stock were issued as common stock and incorporates anticipated COVID-19 impacts. Finally, the guidance basis Utility EPS range assumes an allocation of corporate overhead based upon its relative earnings contribution. Our guidance basis Utility EPS excludes the Midstream Investments EPS range; results related to our recent divestitures and costs and impairment resulting from the sale of these businesses; certain expenses associated with the merger integration and business review and evaluation committee activities; severance costs; earnings or losses from the change in the value of ZENS and related securities; and changes in accounting standards. In addition to these exclusions, CenterPoint Energy's guidance does not consider unusual items, which could have a material impact on GAAP reported result for the applicable guidance period. We also provide guidance for Midstream Investments, which takes into account, among other things, the outlook provided by Enable on their earnings call. For further information on our guidance methodology and a reconciliation of the non-GAAP measures used in providing earnings guidance during today's call, please refer to our earnings news release and our slides, which can be found under the Investors section on our website. As a reminder, we may use our website to announce material information. Before Dave begins, I would like to mention that this call is being recorded. Information on how to access the replay can be found on our website. Dave?

Thank you, Dave, and good morning. Since we last talked 90 days ago, it has been a very busy time for both me and CenterPoint. These are exciting times for us. I am even more optimistic about where we can take this great company in the future than I was 90 days ago. I want to share with you why I'm so optimistic. Today, I will also bring you up-to-date on where we are on our BREC recommendations. But first, I want to discuss some of my general observations on the last 90 days. To start, we now have a newly energized leadership team made up of a great combination of experienced CenterPoint executives and external hires. Our management team is now more diverse and brings significantly higher level of utility experience to the table. The team is eager to embark on our new strategy where we can take advantage of industry-leading organic customer growth. We also have greater opportunities to invest more in growing our current rate base. We have all the right pieces to deliver what our investors and our customers want and expect from premium utilities. Throughout the many challenges CenterPoint has had during 2020, our employees have always stepped up. I especially want to thank our frontline crews for going into the field and providing reliable service to our millions of customers every single day. They have done an excellent job in helping the neighboring utilities get back up to speed after multiple storms. During the last quarter, we sent CenterPoint mutual assistant crews as far away as New York, Georgia and Florida, and of course, to Louisiana, where I spent some time with them as they worked in difficult conditions to restore power in hard hit Lake Charles. I am impressed with their dedication to…

Thank you, Dave, and my thanks to all of you on our call today. I'm delighted to be a part of CenterPoint as a Senior Adviser, although the title does make me feel a little older. From the day Dave and I met at my home in Michigan over a glass of wine -- well, that's not a surprise to most of you -- I was convinced that his leadership at CenterPoint would make a real difference. My first assignment from Dave was clear, help find a world-class CFO to partner with us. I, too, am thrilled that Jason agreed to join. Dave's vast experience as a CEO and his drive to excel, coupled with Jason's deep utility knowledge and skill, is a perfect stunning match. Dave's assembled a world-class leadership team and established a clear, will make it happen plan. CenterPoint is fortunate to operate in one of the few strong growth markets in the U.S. The team is unlocking powerful CenterPoint strengths. It's impressive. Just 2 of these strengths include points Dave just mentioned, implementing $3 billion of new investment and embracing continuous improvement to raise quality and reduce costs 1% to 2% every year. As we all know, growing revenues and shrinking costs provide valuable customer rate headroom, headroom to fund sector-leading CapEx growth, what a win-win for our customers and you, my old friends, our investors. I look forward to working with Dave and Jason, along with the management team, on this journey, laser-focused on delivering high-end EPS growth every year. We'll sweat the detail, so you don't have to. This commitment to a premier utility business model is not new to me. Anyone can do it. Only premier utility teams do. CenterPoint is positioned now to become one of those admired premium companies. Dave, thank you for allowing me to partner in a small way to deliver extraordinary performance for our customers and investors. I look forward to joining you and our great team at our Analyst Day on December 7. We'll share more insight into the emergence of CenterPoint, moving from legacy issues to consistent premium performance. Jason, it is a real pleasure to partner with you. So over to you.

Thank you, Dave and Tom, and thank you to everyone for joining us for our third quarter earnings call. Before I cover the details of the quarter and share some thoughts on our approach to the business going forward, I want to express how excited I am to be part of the team here at CenterPoint. It was clear to me that the company was uniquely positioned to increase and maximize value for all of our stakeholders. The ingredients are all here, starting with premium utilities anchored by one of the fastest-growing cities in our country; an abundance of opportunities to deploy capital to improve our service; and a management team led by Dave, who is absolutely committed to delivering results. And after 6 weeks on the ground, I can tell you I'm even more optimistic today about our future than I was when I started. Now turning to Slide 4. I want to reemphasize some of the key themes Dave just laid out. First, we had strong financial performance across our utilities during the third quarter and on a year-to-date basis, which is giving us confidence to raise the low end of our 2020 guidance range. Second, we now have confidence in our annual rate base growth of 10% for the next 5 years. And finally, that rate base growth provides a solid foundation for earnings per share growth at the high end of our 5% to 7% long-term guidance range. For the quarter, our diluted earnings per share was $0.13. Our third quarter guidance basis Utility EPS was $0.29, as shown on Slide 5. Including Midstream Investments, we delivered $0.34 on a guidance basis, up modestly from analyst estimates. Year-to-date guidance basis Utility EPS stands at $0.95 versus a loss of $2.10 on a GAAP basis, primarily due…

Thanks, Jason. My final remarks will be short. They are really just the headlines I want you to take away from today. First, we are on the launch pad and about to unleash our strategy for accelerating our earnings results at CenterPoint. Next, we have industry-leading rate base growth opportunities, driven by $3 billion in incremental spend above our prior plans. In addition, we have more than $1 billion in capital to spend on top of those opportunities. We are aligned around maximizing the value of Enable. We can execute our plan with no block issuance of equity. We plan to sell 1 to 2 of our LDCs to help finance our capital spend. We are committed to better cost control. We're going to become a larger player in renewables. We will manage the business so you don't have to worry. And we plan to earn at the high end of our expected range of 5% to 7%. And without a doubt, I can't wait to show you how all this fits together on December 7.

Thank you, Dave. We will now take questions until 9:00 Eastern. As our prepared remarks covered both the quarter and the BREC updates, we have a bit less time for questions, so I'll ask you to limit yourself to one question. But rest assured, we will cover a lot more of your questions during the CEI conference and on December 7. Maria?

[Operator Instructions]. Our first question is from Anthony Crowdell of Mizuho.

Congrats on a great quarter. Also, Jason, best of luck at the new job. You are moving to a city that has a professional football team with more wins than -- or the same amount of wins as both of our New York teams, so good luck there. Just quickly, the CapEx raise is quite impressive. If you could give us some clarity on how much of that CapEx is maybe rider-eligible or any approvals required for it, and if anything requires a rate case? And then I have one follow-up.

Yes. Thanks for the comment. And yes, even our football team isn't all that great here either though, by the way. But I'll let Jason answer the question.

Yes. Thank you, Anthony. It's great to be here. And I would say, just shy of $2.5 billion of that incremental CapEx that we've described is rider-eligible. I think we are very fortunate to work in very constructive regulatory jurisdictions that provide for capital recovery on a timely basis. And so as I said, about $2.5 billion -- just shy of $2.5 billion of that is rider-eligible. Just a little bit more than $0.5 billion will be dependent upon additional approvals in Indiana related to our generation plan that I described in our prepared remarks.

Great. Just quickly, if you could bridge the gap between the really strong rate base growth of 10% and the 5% to 7% EPS CAGR. Is that just some additional parent interest expense? I was wondering if you can give clarity on that.

Yes. Thank you for the question. We are focused on narrowing that delta over time. I think you hit on 1 of probably 2 of the larger drivers. First, let me kind of cover, while we -- while I highlighted some of the constructive regulatory mechanisms that we have to recover our capital investment timely, there is still a small lag in certain jurisdictions. So for example, in Houston, for Houston Electric, we were able to file for incremental recovery of our capital investment on the distribution side annually. On the transmission side, we're able to file twice a year, but that small little lag provide some of -- or causes some of that leakage. The second item that I'd point to is exactly what you highlighted. We do have some parent company debt that is kicking off some interest expense that's not recoverable from customers and contributing to that delta. We are focused, though, on addressing that -- the parent company debt as part of the comprehensive set of BREC recommendations. And so over time, we would see that delta beginning to narrow.

Great. And just lastly, I guess, for Dave, I appreciate the clarity on how you're going to fund the CapEx, mentioning selling 1 or 2 LDCs. Just curious right now, I think the LDC multiple has really contracted over the last 12 months. Do you see that recovering? Or do you view it as -- are you selling at a low? Just curious on that, and that's all I have.

No. I don't think we're selling at a low. When it becomes apparent which LDCs we're going to put in the market, I think you will recognize that there are not only a group of financial buyers that will look at them, but strategic buyers in those states that will be interested in them. So I'm not concerned at all that we're selling at a low.

I think it's also important, if I could add as well, sort of the difference of operating sort of big continent. There's been a lot of focus on the coasts around local ordinances banning natural gas and new building codes, but what we're seeing in a number of the states that we have the privilege to serve is that states have either passed or in the process of proposing legislation to ban those local ordinances. So we are fortunate to serve communities that prioritize the clean nature of natural gas. And I think that, that will be recognized by the universe of potential buyers.

Our next question comes from the line of Shar Pourreza of Guggenheim Partners.

Just one primary and then just a quick follow-up. Just getting a little bit more in the weeds on the $1 billion incremental spend, what's sort of the trigger point to put them in plan? How do you sort of plan to file for the incremental spend? And assuming you guys will be able to utilize your trackers, so a little bit more detail there, Dave, if it's okay? And then on the $3 billion increase, anything coming from your other states outside of Indiana and Texas? So anything being sourced in Oklahoma or Arkansas per se?

It sounds like you're trying to get us to tell what LDCs I'd have for sale. I'm not going to bite -- take the bait and bite it.

You're good, Dave. You're good. You're good.

I think to answer the first part of the question, the incremental $1 billion on top of the $3 billion that we talked about, it's a pretty heavy ramp-up in capital spend. And clearly, you need to want to make sure you're spending it efficiently. And it really is a matter of getting onboard the engineering resources, the construction management resources and things like that, that you need to be able to efficiently spend it. So as soon as I'm confident that resource is onboard, we'll take a look at pulling the trigger on that stuff.

Got it. And then just since you mentioned the LDC sales, just curious, and sorry, I have to ask, but where are you kind of in the process? Are you going to be in a position to announce a transaction on the 7th? Do you have buyers kind of already there? And then should we really be thinking about this as a sale versus maybe an asset swap with another counterpart?

No, I think the answer is no. We won't have a sale to announce on the 7th. We clearly will share with you which LDCs we have -- that we're going to be putting in the market, and then you can sort of extrapolate from there what the potential buyer universe will look like. But I think back to the sort of the prior question, to maximize the value on these things, you want to go through a very rational and direct sales process. And it's not something we have to hurry. We have the luxury of time here, and we might as well take it.

[Operator Instructions]. Our next question comes from the line of Steve Fleishman of Wolfe Research.

Had a little déjà vu listening to this call, if you know what I mean, Tom, in a good way. And -- but just my question is back to the one about the difference between the 10% rate base growth and the 7% high-end earnings growth. Are you incorporating in there things like some potential, the loss of earnings if you sell 1 or 2 LDCs? And then also the, I guess, potential for some need to reallocate parent debt if something ends up changing on Enable? Is that kind of embedded? And is that part of the difference there? Or would that be something incremental we need to kind of address?

No. I think, Steve, I'll let Jason sort of handle the back end of the question. But to be clear, we do not expect to take a step back in our earnings per share as we put these LDCs in the market. That's why, in my view, O&M cost control is so critical in this because it sort of would be crazy to take a big step back in your earnings per share to get the opportunity to set of goose your earnings going forward. So I think the plan we put in place is a pretty rational one. Next year's earnings will be driven off whatever this year's actual is, and we'll sort of control things from there. I'll look to Jason to sort of address the second part of the question, but I think he did hit on it earlier. The gap between the rate base growth and the earnings growth will close over time.

Yes, Steve. Obviously, I won't recover what I provided earlier. I will say though that as we were looking at this plan and evaluating our confidence in achieving the high end of our stated long-term growth range, we did incorporate things like, obviously, the scenarios around Enable. I'm reticent to go any deeper today. Obviously, we'll provide more of an update on our Analyst Day there, but the confidence we have in achieving the high end of that earnings growth range does incorporate our considerations around Enable. It does incorporate smaller things like the loss of the equity return on the securitization bonds at Houston Electric. And so sort of coming back at the central theme that we shared as part of the prepared remarks, it's our job as the management team to address any of the headwinds that we see in our business. And as we've shared with you our confidence in achieving the high end of the range, we've taken into consideration some of those smaller moving parts.

Our next question comes from the line of Julien Dumoulin-Smith of Bank of America.

Let me just make this -- absolutely. If I can pick it up off of Steve's question a little bit further, just can you clearly define to us just what the base EPS is for this 5% to 7% just to make sure we're all on the same page? And then separately, as you think about the trajectory here, you've got some earlier dilution if you think about '20 and '21. As you think about pushing this CAGR forward in subsequent years, how do you narrow that gap between the 10% and the 5% to 7%? Does that make sense?

Yes. And those are perfectly teed up questions for Jason because he and I have talked about this about 100 times since he's been onboard.

Thanks, Julien, for the questions. In terms of the growth from here forward, it really is on the utility guidance basis range of $1.12 to $1.20 per share. Given where we are in the year, I think it's likely that we end the year right at or slightly above the midpoint of that revised guidance range. And so I'd use that as the factor to grow earnings on a 7% basis going forward. In terms of confidence in the ability to deliver the 7% range, we still continue -- as I've indicated a couple of times, have confidence of our ability to address some of that drag. Part of our plans coming out of the BREC is to restructure the balance sheet. We have been issuing parent company debt to fund operating company debt needs. We will address that over time, reduce some of the leakage from that excess interest expense, as I said. And taking advantage of those opportunities will help us grow to that -- and deliver that 7% EPS growth range.

Got it. And the top end there assumes earning your ROEs across all the utilities?

We are targeting we earn at or slightly below all of our operating company ROEs. There is -- as I've indicated a couple of times, there is a small delay in capital recovery. These are very constructive mechanisms that allow us to layer in that incremental expense, but there is some time delay with that. And so as a result, there are periodically small differences in our allowed return. But I think it's important to know that we sort of operate the business on a portfolio basis and across all the utilities are -- assuming that we earn the allowed return on equity sort of across the enterprise over that time period.

Got it. Okay. Actual '20 for the starting point for 7?

Right.

Our next question comes from the line of Insoo Kim of Goldman Sachs.

Congratulations, Jason, on the appointment. Just a question on Enable, on the timing of that. I know the process is ongoing, but by December 7, they're -- if it's not December 7, is there any broad range of time line where we could get an update on what that strategic review would entail for Enable?

Insoo, I appreciate the question. I know it's top of mind for our investors. We aren't going to comment in any further detail on today's call with respect to Enable. What I will just reiterate is some of the comments that Dave shared in his prepared remarks that we are pleased with the alignment with OGE. We are focused on addressing Enable, but for purposes of today's call, we're not going to go into any greater level of detail with respect to the timing of that transaction.

Got it. And whether something happens or doesn't happen or some combination, your Utility EPS growth rate, that should remain unchanged as a result of any of those actions?

That's correct.

Our next question comes from the line of Michael Weinstein of Crédit Suisse.

Good to see you again, Tom. What regulatory strategy are you guys planning to achieve -- planning to help achieve close to 7% EPS growth, considering 1% to 2% annual O&M decreases? Do you plan multiyear rate plans across jurisdictions? How are you going to keep customer bills in that below inflation zone?

From a rate case standpoint, this is really taking advantage of the constructive mechanisms in these states. We are focused on delivering results that are consistent with our allowed return as long as we stay and earn that -- our allowed return. We have the opportunity to fold in this incremental capital on an annual, semiannual basis, as I've alluded to. And so the incremental depreciation that will come from this will help sort of offset a little bit of the O&M reduction so that we stay at and earn the allowed returns and have the opportunity to continue to deploy this incremental capital and take advantage of these constructive regulatory mechanisms. And so from a procedural standpoint, this is sort of squarely in line with how our regulators have set up these systems. Sort of more broadly as it relates to customer rates, we're very attuned to impact of the cost of our service for our customers and our communities we have the privilege to serve. I think all in, we're looking at growing our rates in line with inflation. There might be periodic deviations from that, but over time, we see the opportunity to grow our rates in each of the states, generally in line with inflation. That's really driven by those factors that I discussed, the fact that we've got growth in the majority of the states we serve, that we have O&M discipline around our cost structure. And so that helps balance that incremental capital investment that we shared with you this morning.

Our next question comes from the line of Durgesh Chopra of Evercore ISI.

Just if you can -- to the extent you can, the comment on 1 to 2 gas LDCs, is that predominantly -- should that -- should we think about it predominantly driven by sort of you trying to bridge the financing gap in the plan? Or is it that you've identified 2 gas LDCs which are nonstrategic and don't fit into your long term portfolio, and that's how you're going about it? Appreciate any color you could share there.

Yes. It's really the former. I mean we like all our gas businesses, as Jason has said a number of times. They're in constructive markets. Our gas businesses make good returns. And they're certainly an integral part of our portfolio, but it was really taking the approach that I aligned in the -- in my prepared comments, which is how much can we spend in what we really want to focus on for the future, which is our regulated business in our bigger states with a bias toward electric, and how much can we spend on those and where can we go find the capital to make those required investments. So it was really threading the needle. I almost think about it as a backward integration of an equation. How much can we spend? And therefore, what do we need to go find in terms of cash flow? And where do we find it? And that's going to drive and has driven the conclusion as to which LDCs we're going to sell.

Durgesh, if I -- some of Dave's thoughts on sort of the capital allocation standpoint. We believe we should be trading as a premium utility given industry-leading growth we have line of sight to, given the constructive jurisdictions we have the privilege to serve. We recognize that's the case. That isn't the case today, but we plan to get there over time as we deliver on the strategy that we've outlined today. But recognizing we're not there today, and to Dave's point in terms of priming the pump on this capital investment plan, we see the opportunity to sell 1 to 2 gas LDCs at well north of 1.5x rate base -- to reinvest those proceeds at 1x rate base without losing any earnings power of the company. That gives us time then to grow into that modest amount of equity that we've outlined on today's call, that we will issue on a highly efficient basis to keep our balance sheet strong and minimize any overhang from a fear of a dilutive equity block in the future. And so we -- it really is, as Dave has said, it's sort of priming the pump in a very capital-efficient way to grow our regulated utility businesses.

Yes. I guess I would just sort of add one more editorial comment in that when we went through the process of looking at how much capital we could spend here and it became very apparent very quickly that there was a lot more upside here, especially in and around our core regulated businesses, it was like, okay, you're going to be crazy not to spend that money, but you'd also be crazy not to -- or to fund it with equity because your shareholders, at the end of the day, don't benefit from that. So it was sort of an easy extrapolation then to say you got to sell something that you have to be able to fund that. That's a tough -- it wasn't an easy decision. It's tough to decide which one to do, but that's what you pay us for. And we made that decision. We'll share it with you on our Analyst Day. But I think the upshot is it's going to be a great outcome not only for CenterPoint, but our customers and, more importantly, our shareholders.

Our next question comes from the line of Jeremy Tonet of JPMorgan.

Just want to turn to Slide 7 here and dig in a little bit more. Can you provide more of a breakdown on the components of your $3 billion CapEx increase here? And kind of what's the timing and cadence of generation investments here? And are there any other large projects in your plan we should be thinking about?

We're going to be sharing a lot more detail around this CapEx plan at the Analyst Day, but let me kind of just give you a little bit of color today. I think outside of the generation plan in Indiana, the CapEx plan that we're highlighting here is really made up of a series of smaller sort of routine project. I think a classic example of that is targeting sort of the low voltage transmission lines in and around the Houston area, our 69kV lines. It's about a 10-year placement plan that provides us sort of certainty for ongoing kind of capital investment. And so I would say, again, outside of the generation plant in Indiana, these are a series of routine and sort of repetitive programs. We will definitely be sharing a lot more detail with you at the upcoming Analyst Day.

Great. Well, thank you, everyone, for your interest in CenterPoint Energy. I know we didn't get to all of the questions today, but I want to encourage everyone to reach out to us. We're here to help you understand our strategy and the potential of what we've laid out today. Have a great day.

This concludes CenterPoint Energy's Third Quarter 2020 Earnings Conference Call. Thank you for your participation. You may now disconnect.