Good morning, and welcome to the CenterPoint Energy's Second Quarter 2021 Earnings Conference Call with Senior Management. [Operator Instructions]. I will now turn the call over to Phil Holder, Senior Vice President of Strategic Planning and Investor Relations. Mr. Holder?

Good morning, everyone. Welcome to CenterPoint's earnings conference call. Dave Lesar, our CEO; Jason Wells, our CFO; and Tom Webb, our Senior Adviser, will discuss the company's second quarter 2021 results. Management will discuss certain topics that will contain projections and other forward-looking information and statements that are based on management's beliefs, assumptions and information currently available to management. These forward-looking statements are subject to risks and uncertainties. Actual results could differ materially based upon various factors as noted in our Form 10-Q, other SEC filings and our earnings materials. We undertake no obligation to revise or update publicly any forward-looking statement. We will also discuss non-GAAP EPS, referred to as Utility EPS, earnings guidance and our utility earnings growth target. In providing these financial performance metrics and guidance, we use a non-GAAP measure of adjusted diluted earnings per share. For information on our guidance methodology and a reconciliation of the non-GAAP measures used in providing guidance, please refer to our earnings news release and presentation, both of which can be found under the Investors section on our website. As a reminder, we may use our website to announce material information. This call is being recorded. Information on how to access the replay can be found on our website. Now I'd like to turn the discussion over to Dave.

Thank you, Phil. Good morning, and thank you for joining our second quarter 2021 earnings call. This call marks my 1-year anniversary as CEO of CenterPoint, and I am excited to update everyone on our results this morning. We are now hitting the fast-paced organizational stride I want us to have, and the length of today's prepared remarks will be more in line with the template I want to follow going forward. Now while we are always keen to discuss our great future, we are planning to discuss our exciting longer-term strategy updates at our Analyst Day, which will take place on September 23 here in Houston. Though this is our second Analyst Day in less than 12 months, we feel that it is warranted as we are now well into our strategic transition and we want to use that forum to update our investors on our longer-term business plan, earnings capacity, financial metrics and the net zero emissions target that we will be sharing with you. We are also excited for the opportunity to spend more time with you in our hometown here in Houston and to see you in person. Let me quickly remind you of just how far we have come in the last year. A year ago, CenterPoint was going through a strategic review at the direction of our Business Review and Evaluation Committee or BREC. The goal of the review was to optimize shareholder value and address specific shareholder concerns. Initially, in my role as Chairman of the BREC, and then later when I became CEO, it was crystal clear to me that while the company had a great asset base and talented employees, we have not unlocked all of our potential, and certainly had not taken full advantage of all of our inherent opportunities.…

Thank you, Dave, and thank you to all of you for joining us this morning for our second quarter earnings call. While I don't quite have a full year with CenterPoint under my belt, I am just as energized as Dave by our recent execution and more importantly, about the path we are on to becoming a premium utility. Let me get started by discussing our earnings for the second quarter of 2021. On a GAAP EPS basis, we reported $0.37 for the second quarter of 2021 compared to $0.11 for the second quarter of 2020. Looking at Slide 4, we reported $0.36 of non-GAAP EPS for the second quarter of 2021 compared to $0.21 for the second quarter of 2020. Our Utility EPS was $0.28 for the second quarter of 2021, while Midstream investments contributed another $0.08. As Dave mentioned, there were a few onetime items for both quarters that made the comparison a bit noisy. This included favorable impacts for the second quarter of 2021, inclusive of $0.05 attributable to deferred state tax benefits. Of this $0.05 in total, $0.03 of the benefit was related to legislation in Louisiana that eliminated the NOL carryforward limitation period. This amount is included in our Utility EPS results. The remaining $0.02 of benefit was due to Oklahoma's revision of the corporate tax rate, which is a favorable driver in our midstream segment. Our 2020 Utility EPS included a negative $0.06 impact due to COVID. Beyond those onetime items, other notable drivers for the second quarter of 2021 include customer growth and rate recovery, which contributed about $0.04 of favorable impacts as well as miscellaneous revenue contributing another $0.02 of favorable impacts. These were partially offset by a negative $0.02 impact from the share dilution resulting from the May 2020 issuance and…

Thank you, Jason, and thank you, Dave. I finally remember your visit to Kalamazoo a year ago, went over Dana's cooking in a bottle of nicely aged Bordeaux wine, I explained how I was busy and retired. You were persuasive. I was humbled to be asked and honored to help in a very small way on your extensive checklist. Top of your list was identifying and attracting one of the very best CFOs in the business. Check. Thank you, Jason. Thank you for taking the challenge. You already have made immediate critical improvements that will be lasting. CenterPoint has transformed in less than a year, selling noncore, nonutility businesses, think Enable securing more efficient financing, think LDC sales, driving clean energy, think coal closures, renewable growth and a lot more to come, and accelerating performance, think continuous improvement. We are witnessing the emergence of a premium utility with sustainable, predictable EPS growth every year. I trust you see it, feel it. We truly do sweat the details so you don't have to. You'll see bumps in the road, serious challenges like the winter storm that impacted many utilities. I bet you had doubts. But watch CenterPoint, this team promptly addresses challenges to protect our customers and deliver for you, our investors. With important capital investment to deliver needed improvements for our customers, our rate base growth target at 10% substantially outstrips the peer average at about 8%. Our resulting annual Utility EPS growth target of 6% to 8% is strong. We expect it to be at the high end of the range this year. And as Dave mentioned, that's top decile. Customer growth of 2% is just the level our peers would celebrate. Coupled with O&M reduction of 1% to 2% a year, this creates a lot of headroom for…

Thank you, Tom. As Jason said, you've been a valuable part of our team, and we're grateful for the time you have shared with us. This has been one exciting year for CenterPoint. I could not be more pleased by the momentum we have, what we've accomplished and the bright future that we see for ourselves. We have truly been sweating the details so you don't have to. And I believe our effort is evident in our consistent and more predictable earnings and rate base growth in our world-class operations in growing service territories. I hope you now have the trust that we will continue our commitment to deliver on our promises to you, our investors. I believe the best is yet to come.

Thank you, Dave. I'd also like to remind everyone to register for our upcoming Analyst Day on September 23 here in Houston. We will now take a few questions. Operator?

[Operator Instructions]. Our first question comes from James Thalacker with BMO Capital Markets.

So not trying to front run the upcoming Analyst Day too much, but as David touched on Slide 5, the $500 million of opportunities in Texas. I was just hoping to dig in a little bit more on the timing of these incremental investments, how you're looking at the regulatory treatment? And also where you see the best opportunities across the platforms, whether it be energy storage, generation, transmission? And again, I'll pile on a little bit more, but any additional thoughts on the scope of the growth beyond this initial view and when you'd be in a position to kind of talk a little bit more about this?

Yes. I mean certainly, We're not going to front run our Analyst Day. And we - and for one main reason is we're still trying to assess the - all the details in the bills, when they go effective and what is essentially a practical time when they can come into effect. I think another thing to focus on, a lot of people think that these were tools put in our tool kit basically to face a winter storm. In reality, what they really help us more for is hurricane season. And that's more likely that we'll have a hurricane before we'll have another year in terms of the territories that we serve. So I think it's a good set. As we said in the call, the initial view is at least another $500 million in capital. I'll maybe let Jason give a little color on what those - what - where that $500 may land and sort of what the timing might be.

Thanks, Dave. I would say we're obviously very appreciative of all the work the legislature went through to give us tools to reduce the risk of a widespread outage. In terms of timing, I would say about half of that $500 million will likely to be deployed over the next, call it, about 2 years with the remainder over the back half of the 5-year plan. We see the tools coming through in sort of a couple of different ways. Our system was designed to shed about 3 gigawatts of load in sort of widespread outage events. This past winter storm, we were asked to reduce about 5 gigawatts of load. And so what we see sort of as an immediate opportunity for us is the opportunity to own emergency generation for outages that are expected to be longer than 8 hours. We will be deploying mobile generation at the substation that within combination with a year-round demand management program will give us the flexibility to shed much more significant load for ERCOT, yet still provide power on a rolling basis for our customers. And that's some of the work that we will pursue aggressively. There were then some additional opportunities related to owning battery storage kind of as a grid level resource as well as a bill that introduced an economic dimension to citing new electric transmission lines. Those tools will help provide congestion relief and ensure even better reliability of our electric grid. But those programs will likely take a couple of years to site and build. And so I would think about half of the $500 million is coming in over the next couple of years with the remainder of the back half of the 5-year plan.

Your next question is from David Peters with Wolfe Research.

So the CapEx plan, you maintained the $16 billion for the 5 years, but clearly, you're pointing to that moving higher. And I think you said there's no equity needed for that $1.5 billion. But could you maybe just talk more about the sources of funding for that? Specifically, I think you kind of talked on the tax efficiencies, but even to the extent that you see kind of more upside above that $1.5 billion, is it still fair that we shouldn't expect any additional equity?

I mean that's a question that's right in Jason's wheelhouse. So I'll let him answer it.

Thanks, Dave. I think that's a fair assumption. As you pointed out, we outlined back in December a 5-year capital investment plan of $16 billion. At that time, we acknowledged that we held back about $1 billion of what I would consider to be sort of routine capital investment spend. We really wanted to make sure that we could efficiently grow into the increased level of CapEx as well as funded efficiently, and we're gaining that level of confidence. And then as I just mentioned, we just discussed, we see the opportunity for at least $500 million of incremental capital investment related to the recently passed legislation here in Texas. And so the combination of those factors allow us to at least increase our 5-year CapEx plan up to about $17.5 billion. And back to the central part of your question around funding it. We've had a couple of strong tailwinds that give us the ability to fund it without any incremental equity. First, as we announced on the first quarter call, we have about $300 million in incremental proceeds above our original plan from the sale of our gas LDCs. And as we talked about on today's call in our prepared remarks, we're seeing at least $250 million in after-tax cash benefits from the implementation of the tax repairs method change that we will put in place. Think about that as providing $550 million of equity-related financing. And so we can effectively double that with debt that authorized under our regulated capital structure. And so it gives us at least $1.1 billion to fund that capital investment increase. And these figures are all before we take into consideration any of the significant unit appreciation from Energy Transfer. So in short, we have significant capital investment opportunities above that $16 billion plan that we outlined in December. And we have confidence we'll be able to fund that without any incremental equity as we move forward.

And then maybe this is something for the Analyst Day, but just the 6% to 8% going forward given - I think you said a lot of this one start contributing until '23. Should we maybe think of it as like a step-up at that point or just a bias towards the top end through '25?

We're focused on this year on delivering on the high end of the 6% to 8% Utility EPS range that we had outlined. We'll reserve further comments on long-term growth for the Analyst Day later this year. But I think you highlighted an important element. As we spend this incremental capital likely beginning here towards the end of '21 to '22, It really will not drive earnings until 2023. And so think about this as a long-term tailwind for the company, and we look forward to sharing more at our upcoming Analyst Day.

Your next question comes from the line of Shar Purreza with Guggenheim.

It's actually Constantine here for Shar. Congrats on the strong quarter, and congratulations to Tom on a job well done. Just in regard to the CapEx plan, kind of bridging the new disclosures and maybe elaborating on the $1.5 billion of incremental opportunity that you're now presenting. Do you feel that there is more work to be done beyond the current IRP in Indiana? And is that number inclusive at all of any upsides in Minnesota? And kind of do you anticipate that this would be reflected at the Analyst Day?

I'll let Jason handle that. He's on a role handling capital questions today.

Constantine, can you repeat the question around Minnesota?

Is the $1.5 billion in upside at all inclusive of the new legislation in Minnesota, like the RNG and/or any reliability enhancements?

Yes. The natural Gas Innovation Act up in Minnesota. So no, the $1.5 billion figure that we've been discussing is prior to any incremental capital related to that new Innovation Gas Act up in Minnesota. I would say the - we do have incremental upside related to Indiana in the coal transition plan as a potential. Right now, we've outlined as part of a $16 billion capital investment plan, the costs associated with the closure and transition of 2 of our 3 coal facilities in Indiana. We will be looking at that third coal facility as part of the upcoming integrated resource plan that we will file in 2022 in Indiana. To the extent that, that filing changes sort of timing around the closure of that third and final plant in - coal plant in Indiana, that potentially could provide a further tailwind to the capital investment opportunity up there. So overall, we still have - as we tried to indicate, I think, additional tailwinds be what could be about a $17.5 billion 5-year capital investment plan. This would come from increased opportunities as we continue to work with stakeholders around the Texas legislation, as we pointed out here, the opportunities around the Natural Gas Innovation Act in Minnesota as well as further work on the coal transition plan.

Sounds great. Momentum is good. Can we shift to O&M and kind of maybe some updated thoughts on cost savings? The targets are staying the same, but are you finding it easier to reach those targets at this point? And what sort of visibility do you have for '22? And just as a quick follow-up to that kind of post Enable sale, what trajectory do you see for the remaining parent costs?

Let me handle sort of the 50,000-foot view of that, and I'll let Jason come in and sort of fill the blanks in. I mean our commitment is to a 1% to 2% reduction every year, and we have every intention of living up to that commitment. I think as we try to provide some color on the call here this morning is we have the luxury - we're running ahead of the 1% to 2% this year. I'm thinking the 1% to 2% is averaging over the 5-year horizon that we're talking about. We're actually ahead of that, which gives us the ability to pull forward '22 into '21. And so we are taking run rate O&M out. And I view it as then just turning around and immediately investing it in sort of opportunities to save in the longer run. So I think we're dead on track on O&M. We've learned a lot from Tom about going from sort of O&M reductions to the thought of continuous improvement, which is just grinding out a more efficient operation quarter after quarter. And clearly, as we start to think about '22, I mean, we're halfway through '21. So we're having a lot of dialogue right now about what '22 looks like, where we're going to spend our money, where we're going to get savings. And clearly, that is in high focus for us right now. I don't know, Jason, do you want to add anything else or I think I've covered it.

I'll spend a minute on providing a couple of examples that we're really proud about. We've talked about some big opportunities, things like - we're finally integrating the legacy Vectren companies onto our SAP platform. We went live with that integration this summer. And so as we tackle big events like that, that allows us to reduce significant costs. But importantly, what we're seeing is the real beginning of adoption of a continuous improvement mindset. On previous calls, we've highlighted our focus on reducing truck rolls in the field. And we had some success in the second quarter this year in our electric business by bundling some of our major underground work, bundling both the capital and the expense work we executed at the same time. And so we saw not only the benefit of reducing truck rolls, but also reducing a lot of the support cost behind the scenes. And so we are very pleased with the continuous improved at mindset that is building giving us confidence in '22. I know you also asked about sort of post Enable parent. We see some opportunity for parent costs coming down as we use the proceeds from the sale of the - what will be the Energy Transfer units to delever at the parent level as well as the reset of the preferred dividends on our Series A preferred stock in 2023. So we do see an opportunity over the next few years as well to see sort of those parent company costs also come down and help further support an overall reduction in our cost structure.

I think that's the reason that we keep emphasizing that post the sale of the LDCs and post the elimination of the midstream, we are absolutely confident around our 6% to 8% growth. We don't want to leave the impression that losing that earnings stream means that we are going to back off of that 6% to 8% growth.

Your next question is from the line of Julien Dumoulin-Smith with Bank of America.

It's actually Kody Clark on for Julien. So first, can you give a little bit more color on the gas cost recovery process in Minnesota? I know there was a hearing on the matter yesterday, but just wondering what the latest feedback is from parties and when are you expecting a resolution there?

Jason, you want to take that one?

Yes, happy to. Let me first start sort of overall with kind of where we expect to be with gas recovery. I think the punchline is, we expect to recover about 80% of those incremental gas costs by the 1-year anniversary of the store. That's really going to be largely driven by the issuance of the securitization here in Texas, the reimbursement for the incremental gas costs in Arkansas and Oklahoma as part of the sale of Summit as well as the recovery that has begun or will be beginning here shortly in the remaining states. Back to Minnesota. Later today, the commission there, will likely vote on a proposal to begin recovering costs over 27 months. We've been working with stakeholders there. We understand that it is a significant amount of money for our customers, and we appreciate the commission and others work to try to find a balance between timely recovery of those costs as well as helping mitigate the bill impact for our customers up there. And I think the proposal that will be heard strives to strike that appropriate balance, and we're obviously very appreciative of the work. We are also looking forward to working with regulators in each of our states going forward to see what tools we should put in place to help mitigate this risk going forward. But a lot of work has been done, and we expect to hear more later today as the - in Minnesota as the commission considers our proposal for cost recovery.

Got it. Okay. And then utility results have been strong year-to-date. So I'm kind of wondering how you're thinking about the drivers in the balance of the year. What are the factors that would put you towards the top or the bottom end of the range? And you talked about them a little bit already, but if you could just give a little bit more detail, that would be helpful.

Certainly, very strong results driven by a few things. Obviously, the continued growth that we see in our business, the rebound in the economy sort of post COVID and some onetime tax changes that we've highlighted on today's call. What I would say, though, is some of those onetime events will enable us to fully accommodate the cost of the recent governance changes that we announced for the Board here at CenterPoint, which will likely mostly be incurred during the third quarter this year. And so as we look at sort of the balance of the year, I think there are a couple of things that would drive us or continue to improve our profile and that's really continued growth in the markets we serve as well as continued O&M discipline. As we've tried to highlight here and we've tried to highlight on previous calls, our focus is on consistently growing our utility earnings at the top of the peer group. And when we have the ability to pull forward incremental work for the benefit of our customers, we'll do so. And we highlighted today that we've already made decisions to pull forward about $20 million of spend from '22. That's allowing our electric business in part to execute more vegetation management work, which helps with the reliability and for the benefit of our customers. And so as we see incremental progress, we will evaluate whether or not to continue to pull forward work and put us even in a stronger profile to year after year earn what we believe is EPS growth rate at the top of the industry.

Okay. That's helpful. And then lastly, just one clarifying question if I can sneak it in. Is the $1 billion in tax optimization that you mentioned just for Energy Transfer units? Or does that include some optimization for the LDC sales?

What I would consider it as more optimization of our tax position for our ongoing utility operations. It's largely driven by the adoption of method change for how we account for repairs expense for tax purposes. It's a pretty standard deduction in the industry. It's a temporary deduction. It effectively allows us to expense upfront, what otherwise, would be a capital addition on our system. We will claim that method change essentially starting back after bonus depreciation was phased out. So back to about 2018. And the real benefit here is obviously, it gives us this onetime cash tax benefit. But going forward, it's really a very efficient way for us to fund the incremental capital investment for the benefit of our customers. Because it is a temporary difference, it will reduce rate base modestly in the form of increased deferred tax liability. And so it gives us what I consider to be cash to address sort of on a onetime basis some of the tax gains that you pointed out, gas LDC sales as well as the sale of Energy Transfer units. But more importantly, it gives us a really efficient way to fund incremental capital investment for our customers going forward.

Our last question will come from Insoo Kim with Goldman Sachs.

My first question is on that additional CapEx that you're talking about, the $1.5 billion, definitely pretty impressive. And whenever we talk about the upside to CapEx, one of the questions that come up is customer bill impact. And I think definitely through this 1% to 2% O&M and decreased plan that you've laid out, it definitely helps with that somewhat, as it moderates the balance of the customer bill impact. How does this incremental CapEx, how do you plan to deal with the potential increases in bill and are there some other moving parts of the sites, just cost management efforts that could help on that effort?

I think it's a good question, and it's something that we debate internally all the time because at the end of the day, we exist to serve our customers at a good rate. But I think you put your finger on one of them, the continuous improvement program and focus there, passing some of that along to our customers. But I think the thing that we have that most other utilities don't that people forget in the equation is our organic growth. So by continuing to grow, for instance, our Houston Electric business 2% sort of quarter-over-quarter, year after year, you're spreading essentially that fixed cost across a wider base, which also helps in terms of the impact on customer billing. So we're cognizant of the sort of responsibility we have. And I think the combination of continuous improvement, organic growth, and just bringing new technology and more resiliency and hardening of the grid, which sort of pace benefits over time is the key to doing that. But we're confident that we can pass muster with the PUC here in Texas and our other jurisdictions with respect to the CapEx that we're going to spend.

Got it. That makes sense. My last question is on that natural gas inhibition in Minnesota, just for my purposes, to clarify, is that basically allowing these investments full rate base treatment in that utility? I know I think currently, there's like a feed-in tariff type of system in place. So I just wanted to clarify there. And picking backing off of that, are there any similar proposals or initiatives at some of your other jurisdictions that would also allow for a certain rate base treatment of RNG type of investments?

Yes. We'll work with the Minnesota Commission, obviously, on the implementation of the Innovation Act. But the way that we read it is it would provide incremental rate base opportunity for our utility there to help invest in the decarbonization of the gas that we provide our customers up there. And so we do see this as a potential additional driver of incremental CapEx in the future. And sort of more broadly, yes, we are working with our other jurisdictions in a focused effort to help reduce the carbon intensity of the gas we supply to our customers across our footprint. And obviously, that we've got a green hydrogen pilot that will come online here in Minnesota at the end of the year. It gives us a great opportunity to begin to kind of understand that technology, how our system responds to green hydrogen, and we're looking to take those learnings and see if we can expand it across the broader part of our gas system as well as working on renewable gas - renewable natural gas opportunities. And so I think Minnesota is taking a leadership position with respect to helping reduce carbon intensity of the gas we provide our customers, and we're looking to take that beyond the work we're doing there.

Again, thank you, everyone, for joining us today and for your interest in CenterPoint.

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