CenterPoint Energy Inc (CNP) 2017 Q2 法說會逐字稿

Good morning, and welcome to CenterPoint Energy's Second Quarter 2017 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, Natalia.

Good morning, everyone.

Welcome to our Second Quarter 2017 Earnings Conference Call.

Scott Prochazka, President and CEO; and Bill Rogers, Executive Vice President and CFO, will discuss our second quarter 2017 results and provide highlights on other key areas.

Also with us this morning are Tracy Bridge, Executive Vice President and President of our Electric division; Scott Doyle, Senior Vice President of Natural Gas Distribution; and Joe Vortherms, Senior Vice President of Energy Services.

Tracy, Scott and Joe 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.

They've been posted on our website as has our Form 10-Q.

Please note that we may announce material information using SEC filings, news releases, public conference calls, webcasts and posts 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 the information on our website.

Today, management will discuss certain topics containing projections, 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 variations, regulatory actions, economic growth -- economic conditions and growth, commodity prices, changes in our service territories and other risk factors noted in our SEC filings.

We will also discuss our guidance for 2017.

The guidance range considers utility operations performance to date and certain significant variables that may impact earnings, such as weather, regulatory and judicial proceedings, throughput, commodity prices, effective tax rate and financing activities.

In providing this guidance, the company uses a non-GAAP measure of adjusted diluted earnings per share that does not include other potential impacts such as changes in accounting standards or unusual items, earnings or losses from the change in the value of the Zero-Premium Exchangeable Subordinated Notes or ZENS securities and the related stocks or the timing effects of mark-to-market accounting in the company's energy services business.

The guidance range also considers such factors as Enable's most recent public forecasts and effective tax rates.

Before Scott 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.

And now I would like to turn the call over to Scott.

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 will begin on Slide 4. This morning, we reported second quarter 2017 net income of $135 million or $0.31 per diluted share compared to a net loss of $2 million or a loss of $0.01 per diluted share in the same quarter of last year.

On a guidance basis, second quarter 2017 adjusted earnings were $125 million or $0.29 per diluted share compared with adjusted earnings of $73 million or $0.17 per diluted share in the same quarter of last year.

This increase is a result of rate relief, customer growth, midstream investments performance and lower interest expense.

These improvements were partially offset by higher depreciation and amortization expense and the lower equity return.

Additionally, this quarter included positive impacts for the gas distribution business for the Texas Gulf rate order, which Bill will expand on later.

All of our business segments performed well this quarter.

Despite a mild winter, we are well ahead of same period last year.

Our business segments continue to implement their strategies which focus on safely addressing the growing needs of our customers while enhancing financial performance.

Houston Electric, highlighted on Slide 5, delivered in second quarter of 2017 core operating income of $144 million compared to $135 million in the same quarter of last year.

We continue to see strong growth in our electric service territory.

We added more than 46,000 residential metered customers since the second quarter of 2016 reflecting 2.2% growth.

We believe this level of growth will continue through this year and our 5-year plan period.

Additionally, total electric throughput across all customer classes is up 2.5% since the second quarter of 2016 suggesting ongoing strength in our commercial and industrial customer classes as well.

On May 23 in Sealy, Texas, on the West side of the Houston metropolitan area, was impacted by a rare microburst weather event.

This area experienced wind speeds of up to 100 miles an hour damaging nearly 250 distribution poles and 9 transmission structures.

Our crews worked around the clock over the following 2 days to safely restore power to the residents and commercial customers who are impacted by the storm.

I'm proud of the work our employees do to respond to events like this and to serve our communities.

In July, the Public Utility Commission approved Houston Electric's settlement agreement for an incremental annual increase of $42 million through the Distribution Cost Recovery Factor or DCRF.

Rates will go into effect on September 1. Further, with respect to DCRF, the Texas Legislature recently removed the 4 filing limit, which means Houston Electric will be eligible to file DCRF each year provided the business is earning below its authorized rate of return.

For a complete overview of Houston Electric's year-to-date regulatory developments, please see Slide 19.

Turning now to Slide 6. Natural gas distribution operating income in the second quarter of 2017 was $37 million compared to $20 million in the same quarter last year.

We continue to see solid customer growth of approximately 1% in this business with the addition of more than 32,000 customers since the second quarter of 2016.

On the regulatory front, the Railroad Commission approved the Texas Gulf rate case settlement in May.

The order includes an annual increase of $16.5 million.

Yesterday, in Minnesota, we filed a rate case proposing an annual increase of $56.5 million for growth and ongoing infrastructure replacement including our Minneapolis Belt Line project.

Interim rates are expected to go into effect on October 1. In Arkansas, we reached a unanimous settlement for $7.6 million on our first formula rate plan filing subject to approval by the Arkansas Public Service Commission.

For a complete overview of natural gas distributions year-to-date regulatory developments, please see Slides 20 and 21.

Before I move on to discuss our Energy Services business, I want to take this opportunity to thank local emergency officials and first responders for their response to yesterday's incident in Minneapolis.

We are cooperating with investigating authorities and are providing information and assistance to them as part of the investigation.

Our thoughts continue to be with those who have been impacted.

Once the authorities have completed their investigation and we are able to share additional information, we will do so.

Turning to Slide 7. Energy services operating income was $10 million in the second quarter of 2017 compared to $7 million in the same quarter last year, excluding a mark-to-market gain of $6 million and a loss of $7 million, respectively.

We benefited from increased customer count and throughput primarily related to the acquisition of Atmos Energy Marketing or AEM.

We continue to anticipate solid performance from energy services with projected operating income of $45 million to $55 million in 2017.

As anticipated, the AEM acquisition has been modestly accretive year-to-date.

Slide 8 shows some of the highlights from Enable's second quarter earnings call on August 1. Midstream investments contributed $0.09 per diluted share in the second quarter of 2017 compared to $0.03 per diluted share in the same period last year.

Enable performed well this quarter.

Daily volumes of gas gathered and processed were higher than the same quarter last year.

There has been a 38% increase in active rigs in the Enable footprint since April of this year.

They have secured over 50,000 new dedicated acres since January 1. We continue to believe Enable is well positioned for success.

Turning to Slide 9. We are reiterating our $1.25 to $1.33 EPS guidance for the year and continue to anticipate 2018 EPS growing at the upper end of our 4% to 6% range.

The status of our midstream investment's ownership review is covered on Slide 10.

Although we were hopeful of providing closure by this earnings call, the sale process remains ongoing.

Multiple parties are completing their due diligence and we will not comment on the status of those activities, nor can we represent that any of these parties will make a binding offer.

Given that the process remains ongoing, we issued another right of first offer to OGE in July per the terms of our partnership agreement.

We did, however, recently determine that we will no longer pursue a spin option.

We concluded that with a reasonable level of debt at SpinCo, we would not maintain the desired credit metrics for CenterPoint.

Finally, if we are unsuccessful with an outright sale of our Enable investment, we will look for opportunities to constructively sell our units in the public market as conditions allow.

Bill will provide additional detail later in the call regarding our considerations.

Let me conclude by reiterating how pleased I am with the performance of all 4 business segments this quarter.

These are strong results, and we are well on our way towards meeting our 2017 financial objectives.

I will now turn the call over to Bill.

Thank you, Scott.

I will provide a quarter-to-quarter operating income walk for our electric, T&D and natural gas distribution segments followed by EPS drivers for utility operations and then our consolidated business on a guidance basis.

Beginning on Slide 12.

Houston Electric performed well during the second quarter.

Rate relief translated into an $11 million favorable variance for the quarter.

2% customer growth translated into a $9 million positive variance.

Our electric T&D segment remained disciplined on O&M expenses this quarter with a focus to keep annual O&M growth under 2%.

Excluding certain expenses that have revenue offsets, O&M increased by only $4 million.

Depreciation and other taxes accounted for an unfavorable variance of $4 million.

As we have previously disclosed, we expect equity return to be lower in 2017 relative to 2016.

Our decline this quarter relative to second quarter 2016 was $7 million.

In order to have a view of our growth in core operating income, we exclude the change in equity return.

Houston Electric's core operating income increased from $118 million to $134 million, a $16 million improvement on a period-to-period basis.

Investors can find our forecast for equity return income in the year-end slide deck posted on our Investor Relations website on February 28.

Turning to Slide 13.

Natural gas distribution also performed well for the quarter.

Other operating income for the second quarter was $37 million compared to $20 million for the same period last year.

The business benefited $6 million from rate relief, $1 million from customer growth and $8 million in favorable usage primarily due to the timing of the decoupling normalization adjustments.

In prior years, this normalization adjustment was recognized in the third or fourth quarter.

These benefits were partially offset by a $7 million increase in depreciation and amortization and other taxes.

Also included in the quarter are adjustments related to the Texas Gulf rate order.

We had a $16 million benefit due to the recording of a regulatory asset and a corresponding reduction in expense to recover prior period postretirement expenses.

These postretirement expenses will be recovered in future rates.

We also had a negative $6 million depreciation adjustment for vehicle fleet overhead that was expensed in O&M as a result of the depreciation study approved by the rate order.

In order to have a view of our core operating income, we removed these expense adjustments recorded with the Texas Gulf case order.

Therefore, we view the operating income as improving from $20 million to $27 million on a period-to-period basis.

The primary driver of this improvement was rate relief.

Our quarter-to-quarter EPS basis walk begins on Slide 14.

We start with $0.14 of utility operations EPS and had $0.05 of improvement from core operating income, excluding equity return.

As a reminder, the improvement in core operating income includes the adjustments to expense related to the Texas Gulf rate order.

Next, we had $0.02 of improvement from lower interest expense and a partial quarter increase in distribution income from the Enable preferred investment.

The decline in equity return resulted in a $0.01 decrease per share on a quarter-to-quarter basis.

In summary, utility operations guidance EPS increased from $0.14 to $0.20 on a quarter-to-quarter basis.

Our consolidated guidance EPS comparison is on Slide 15.

With the utility operations increase of $0.06 and the midstream investments' increase of $0.06, consolidated EPS improved from $0.17 in the second quarter of 2016 to $0.29 in the second quarter of 2017.

We continue to anticipate strong performance for the remainder of 2017 driven by utility customer growth, rate relief, energy services growth, interest expense savings and the improved performance of our midstream segment.

On Slide 16, we provide an overview of our anticipated financing plans and effective tax rate.

We continue to expect $1.5 billion in capital investment in 2017.

Cash generation and credit metrics remained consistent with year-end 2016 actuals.

Therefore, we are reducing anticipated net incremental borrowing needs in 2017 to between $200 million and $400 million, inclusive of the approximate $150 million funding for our purchase of AEM in the first quarter.

As previously discussed, we are not forecasting a need for equity in either 2017 for 2018.

With respect to tax expense, our second quarter 2017 effective tax rate was 36%, similar to the first quarter.

We continue to anticipate a full year 2017 tax rate of 36%.

In addition to our earnings release and 10-Q filings for all of our registrants filed this morning, we would like to remind you of other news releases or disclosures of interest.

First, our Board of Directors declared a dividend of $0.2675 per share on July 27 payable on September 8, 2017.

Second, as Enable stated on their call, we anticipate that the financial test required for conversion of all subordinated units will be satisfied by August 30.

Therefore, all subordinated units are expected to convert to common units on that date on a 1-for-1 basis.

With respect to our midstream ownership, as Scott shared in his comments, we have determined that we will no longer pursue a spin option and we continue discussions for a sale of our interest.

Let me provide some detail on our path if an outright sale of our Enable stake is not viable.

We continue to support Enable's investment, credit quality and distribution objectives.

We also support Enable's efforts to reduce commodity exposure primarily via contract design.

Additionally, we will consider selling units in the public markets.

We are very aware of capital markets limitations such as average daily volume.

Therefore, we would be patient and sell units opportunistically under the right capital markets conditions.

Any sales would be in accordance with the partnership agreement.

We have not established nor do we intend to communicate an objective on the target price, timing or amount of unit sales.

We are only communicating that we would look for the opportunity to reduce the size of our midstream investment should market conditions allow and in the event an outright sale is not viable.

Finally, on Slide 17.

We summarize year-to-date performance.

This strong year-to-date performance of $0.66 per share on a guidance basis sets us up well to achieve our full year 2017 financial objectives.

We will update our earnings guidance as appropriate, accounting for but not limited to, weather impacts on volume sales, the midstream segment's contribution to earnings including mark-to-market accounting, rate relief and changes in operating and maintenance expenses.

With that, I will now turn the call back over to David.

Thank you, Bill.

We will now open the call to questions.

(Operator Instructions) Natalia?

(Operator Instructions) And your first question comes from the line of Neel Mitra with Tudor, Pickering.

Regarding the Enable update, is the right way to look at the updates going forward is that the Enable portion of the business is something that you don't want to own longer term and you'll pursue ways to kind of lower that stake in your overall portfolio, but not to expect an absolute decision as to whether you're going to keep it or not?

I think, Neel, the way to think about this is, as we've expressed from the beginning, we would like to reduce our exposure to oil and gas sector, our investment in midstream.

So if we're not able to effect an outright sale, as Bill suggested, we would look for opportunities to lighten our ownership via public sale.

But we're also very much aware of the need to be cognizant of market conditions when we attempt to do that.

So I think that's maybe a long-winded answer, but I think the way you described it is perhaps accurate.

Okay.

And then just with the outright sale process, how do you look at the tax leakage associated with that?

Well, the viable sale processes that are there are ones that don't involve a cash transaction and therefore, would not involve an immediate tax liability.

Okay.

Okay.

Great.

And just really quickly, Houston Electric is doing very well for you.

I wanted to just try to think about rate base growth versus sales growth.

When you think about the capital spending that's involved there, is it mostly due to keeping up with the sales growth or are there reliability needs that need to be addressed as well and kind of rough percentage of what's driving the rate base growth, sales growth or just reliability and need for new equipment?

Yes.

Neel, there is a mix of investment for those categories you described.

I would estimate, I don't have the numbers in front of me, that the largest category is centered around growth investment.

Perhaps around 60% of our capital is growth oriented.

The remainder would be geared towards maintenance and reliability spend.

Your next question comes from the line of Insoo Kim with RBC Capital Markets.

Scott, just going back to the Enable options.

Per the partnership agreements of -- I understand the 5% limit which triggered the ROFO, but is there a limit to how many or what percentage you guys can sell either via an open market or an exchange in a given year?

This is Bill.

The 5% limit would be to a single owner.

There is not a limit with respect to what we might sell in the capital markets.

Having stated that, we are well aware of the practical limitations, I think, which center around the actual float and average daily trading volume of Enable.

Got it.

But in terms of the partnership agreement, there's no written language limiting any -- it would just be subject to the market conditions that you guys mentioned?

Yes.

Okay.

And then just maybe another technical question on if you were to do a noncash unit exchange with a third party for the sale of -- what happens to the current negative tax basis that you guys have in Enable?

Insoo, it's Bill again.

That negative tax basis stays and whenever we would sell those securities we would recognize the capital gain.

Okay.

Got it.

And then maybe turning to the CEHE.

With the legislative change in Texas, does that -- do you foresee the chance of you filing a rate case in the foreseeable future is like pretty low?

Well, in our last disclosed estimate of filings, we did not have a full-blown rate case in our -- in that plan.

The removal of the 4-time limit on DCRF would potentially allow us to defer a rate case even further.

Keep in mind that DCRF is only usable if our total ROE is below our authorized ROE.

Your next question is from the line of Shahriar Pourreza with Guggenheim Partners.

Thanks for the additional color on Enable.

Let me ask, get your refreshed thoughts here.

In a scenario where you are -- there's not an outright sale and you're divesting a small percentage on an annual basis, can you just remind us how you're thinking about other ways to potentially dilute your ownership in Enable?

Maybe looking at non-organic growth opportunities and tapping what seems to be an underutilized balance sheet, which I guess is a bit of a surprise for the rest of the sectors.

How are you sort of thinking about M&A and maybe potentially diluting Enable's exposure?

Well, certainly, our objective of having our midstream exposure on a percentage basis being lower could be accomplished through continued utility growth.

Our emphasis continues to be around organic growth for our utility.

When we invest organically, we know the returns that we will get on those investments.

It would be nice to find an opportunity or to be able to accelerate our utility growth.

But we have to compare the returns of other investments against the returns we can get investing in our organic growth opportunities.

Bill, did you want to add to that?

Sure.

Thanks, Scott.

Shahriar, I'll just remind investors that we did revise our 5-year CapEx higher in the 2016 Form 10-K.

And with the growth that we continue to see, I think that CapEx investment is biased to go higher yet.

The strength of our balance sheet and our credit metrics allows us to make those investments without having to consider common equity in the near term.

That's helpful.

Okay.

Got it.

So the organic opportunities far outweigh you having to look at the M&A market.

Your next question is from the line of Chris Turnure with JPMorgan.

To continue on the conversation regarding Enable.

Can you just kind of give us a little bit of background and remind us of the exact trigger of when you need to go to OGE with the right of first offer.

You've done this, I think, a couple times now.

You said you recently kind of refreshed that with them last month.

Sure.

I'll ask Bill to do that.

See, if we intend to have discussions with third parties to sell more than 5%, then under the partnership agreements, OGE has a right of first offer.

Given that we have been having discussions and continue to have those discussions, the time period lapsed and therefore we needed to provide OGE with another right of first offer.

Okay.

Then how did the time period lapse exactly?

Yes.

There is a time limit by which we would have to conclude the process and the close.

And that time limit is 120 days after we respond to OGE, should OGE give us an offer.

And OGE has 30 days to respond to our right of first offer notice and we have 30 days to respond to that.

Okay.

So as you've been going through the process over the past 1.5 years or so, now we can assume that that cycled through a couple of times and each time you've not been able to get it done, obviously, by the finish line there, okay.

And then switching gears to the energy services business.

It seems like since you closed the transaction with Atmos early this year, you're generally pleased with the results and you say that it kind of remains accretive.

Can you just speak in a little bit more detail to the kind of business market conditions there and the outlook going forward?

Yes.

I'm going to ask Joe to make a comment on this one.

He's sitting at the table here with us.

Yes.

It just gave us the opportunity to broaden our geographic scope which is, one, it lessens the overall impacts of economic conditions and weather conditions across the country; and two, the integration has been going well and it allows us to look for further organic optimization of the businesses as we combine them, so with Continuum, and with Atmos and legacy CES, it's put us in a good position to grow from an organic perspective just based off of the size we've accumulated with the acquisitions.

Okay.

And just the overall commodity and volume environment out there remains supportive and kind of in line with your expectations from 6 or 9 months ago?

It has.

With the gas prices and the gas availability out there, the market looks good.

Your next question is from the line of Kamal Patel with Wells Fargo.

A few questions on Enable.

Regarding the spin, I'm of the understanding that the risk profile of CenterPoint would have improved.

So I'm not understanding the inability to maintain desired credit metrics.

Could you kind of clarify that?

Go ahead.

Kamal, it's Bill.

Yes, you're correct in that the business risk profile would have improved without having the midstream investment as part of our business.

Having said that, we think there is real advantage to our credit metrics and we specifically look at FFO to debt.

And we did not think that we could put the amount of debt on SpinCo for it to have a sustainable credit quality as well as to meet our objectives of maintaining our credit metrics at CenterPoint.

Okay.

Regarding the potential sale opportunities, if you go down the path of selling via the public markets, would you go back to a potential block sale?

Or would you just remain on the public market sale?

We will not be commenting as to how we might do that.

But there are various either programs or as you suggested, block sale opportunities.

I think it very much depends upon the capital market considerations.

And I know I've said it twice, but I'll say it again, we do recognize practical limitations that exist today as a result of average daily trading volume and float.

Okay.

And one last one.

Back when you had the cable business you used the ZENS structure to offload the position in the cable business.

Is that something that could be devaluated for your Enable LP interest?

I don't think that would practically work with units.

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

First question, Scott, I just want to understand the sort of strategic thinking behind the sale for shares because it seems to me that all you're doing is essentially adding another layer in your ultimate goal of exiting that exposure.

Is that fair?

I mean, essentially, what you may get is a more liquid share ownership that you could sell more easily.

Or I'm just trying to understand what the sale for shares would accomplish given where you want to go?

So Ali, our objective with this transaction was to have more visibility into the earnings associated with midstream investments as well as the option to have more liquidity to change our ownership.

So your point is exactly right.

The transition to another security, in part, would be to provide optionality for us to lighten our investment in midstream over time.

Okay.

And so presumably that potential buyer is understanding of that fact that there may be some pressure on their shares if they do give you shares for that ownership exchange?

Yes.

Okay.

And also to clarify, Scott, the -- and I think you said that, just to clarify, as far as selling the Enable units in the market is concerned, there is no official limit with the partnership agreement.

I mean, theoretically, you could sell all of it in one go if you wanted to.

I understand the capital markets issue, but there is no other limit to how much you can sell at any given time?

That is correct for just straight capital markets transactions.

Right.

And then second question.

Bill, for you, if I look at what you've reported so far through the first half and I look at the guidance range you have for the year, even at the high end of the guidance range, it essentially is telling us that second half results will be flat with second half '16.

Is there any rationale or any reason why that would be the case?

Well, we never said it was flat with '16.

But what I've said in the prepared remarks, Ali, was that we will update earnings guidance as appropriate.

Hope you'll appreciate we are in the middle of our big quarter for Houston Electric.

So volume sales related to weather do matter to our earnings and we do recognize that oil and gas forward prices change, and that could change the mark-to-market accounting that is at the Enable level.

Okay.

But there's no structure, there was no onetime gain or anything in the last year's second half that would make up for a tougher comparison?

That's correct.

Your next question comes from the line of Steve Fleishman with Wolfe.

I'm just curious that, obviously, beginning of the year you moved the date of this call giving more time for this process, and then we have this happen again.

And you could, I guess, in theory just say, hey, we're just going to go status quo and obviously any time somebody could make an offer to do something else.

So maybe just give some color like why kind of continue with this process as is instead of just saying, hey, let's just go status quo and if something happens strategically then it happens?

Well, Steve, the reality is that we are still in discussions with parties.

Admittedly, there were some parties that came into the conversation a little bit later in the process, and that may be the driver for this not being concluded.

But we are working towards a conclusion of the discussions that we are having.

So while we didn't get closure by this call, and I'm hesitant to provide another date for target, hopefully, it will be in the near future when this is closed out.

Okay.

Got it.

That's helpful.

And then secondly, just in terms of thinking about the credit -- credit thought process if you applied it to any type of sale for stock.

You would -- it really wouldn't -- in theory, it wouldn't really change your credit situation much because you'd still be effectively getting the Enable distributions through to CenterPoint from whatever entity you've invested in and so you wouldn't have any of the credit issues that you would have had with spin at a high level.

Is that correct?

That's correct, Steve.

Your next question is from the line of Charles Fishman with Morningstar.

Just one question I had left.

In thinking about this idea of the sale of units for some type of like-kind exchange so you can time your tax liability, have a little more control over that.

Is some of that due to the uncertainty with respect to tax reform?

No.

I would say it's not.

When we started this process we were talking about this option and that was before any discussion of tax reform.

It is possible if tax reform were to occur that there could be some benefit from it.

(Operator Instructions) And your next question is from the line of Paul Patterson with Glenrock Associates.

Just to sort of follow-up on Ali Agha's question and some of the others in terms of this like-kind exchange.

Is the only purpose for taxes or is there any other benefit that you would get from accounting or what have you in having a lower percentage of ownership in a larger entity than you have with Enable?

Paul, it's Bill.

We currently account for our Enable investment as equity accounting under really the real estate accounting rules.

So if we were to exchange those units for units or C corp common of some other entity, at this time, we don't see a change in the accounting and we would not expect to recognize any tax liability.

The exchange would defer the tax liability until the time in which we sold either units or C corp common and that the exchange for the units would be under a plan of reorganization.

Okay.

And then with respect to -- I mean, just with respect to the expansion of the tax liability, is this a big driver in this?

Is that -- I mean, as opposed to potentially filling your Enable's ownership for cash.

Is that what you're talking -- is that one of the big drivers this year that you guys are considering?

Is that the big portion of the consideration here?

Well, we do have to think through that and that we have significant negative basis.

So it -- in order for us to meet our objectives, as Scott has outlined, we would need a very high sales price to first recognize that capital gains liability and then drive the rest through to get back to our earnings per share.

Okay.

So with that in consideration, when we're talking about capital markets opportunities and what have you, the idea of a secondary offering, of selling security holders or what have you, it would seem that because of that management of the tax liability issue, you would be probably divesting.

If you were doing it through the capital markets, your preference would be to not do a block sale or not do a large sale, it would seem to be that you would be, for lack of a better word, dribbling it out over a considerable period of time as you would with the like-kind exchange.

Is that the right way to sort of think about the likely outcome of -- I'm not trying to preclude you from any potential disposition, but does that make more -- is that sort of the way we should think about it just in general?

I think with respect to sale in the public markets, the capital market's considerations are much more of a limiting factor than paying capital gains tax as we liquidate.

Even like -- but what about the idea of a secondary offering, for instance?

Like in other words, an underwritten kind of offering or something of that sort of nature?

I was thinking in those terms, do you follow me?

Yes, obviously, if you're just selling in the open market, like you've been saying there would be some restrictions there just because of the flow and what have you.

But just I'm thinking in terms of the block sale or something of that sort of nature or marketed effort that would certainly preclude as well, would it not, because of the tax considerations?

Well, it would.

But just, practically, we own over 54% of the LP units of Enable, so we have to think through how much any one block sale would be relative to that ownership.

Your next question is from the line of Andy Levi with Avon Capital Advisors.

How long has the -- just your sale process has been going on for Enable?

We announced it about 18 months ago.

But from a practical standpoint, it began a little less than a year ago.

We had some challenges right after we announced with the commodity markets and basically caused a delayed start, if you will.

But I'd say it's been active since a little under a year.

And this is, again, I'm not talking about the strategic review.

I'm just talking about the actual sales process, straight sales process for Enable, which is kind of where we're at right now.

It's been about a year?

Yes, it has.

Okay.

And I'm just curious, I mean, obviously, you mentioned, obviously, the energy markets as well.

And obviously, there's been a number of times where OGE has been offered the right of first offer or whatever it's called, ROFO, but the point being is why is it taking so long?

Is it because it's a minority -- not a minority stake but obviously that there's another owner of Enable?

Is that the problem?

Or can you give us any color of why the process is taking so long?

Admittedly, it's taking longer than we had expected.

I think I'll begin with it took some time to get confidence in a forecast over multiple years that we could represent to potential buyers.

Then you just have to think back to the state of the E&P industry in the midstream segment for the first half of last year.

And then you're right, this has an added layer to it in that any potential purchaser wants to get comfortable with their partner.

So then move to the like-kind exchange, I would assume that may be a similar issue.

In a like-kind exchange, how does it work just logistically with OGE?

I mean, obviously, I guess they could participate in that like-kind exchange, tell me if I'm right or wrong, but also as far as their first look at it, a better way to put that -- it.

That's within the ROFO.

So if we're offering our interest for sale, OGE has a right of first offer.

But in the like-kind exchange as well?

Correct.

Okay.

And that's just based on a cash price, I guess?

Well, that's based on the fact they have a right of first offer...

No, no, no, I understand that.

But I'm saying as far as like-kind exchange, obviously, you would be offered shares in another company in exchange for your shares of Enable, but that would be based on, I guess, a price, right?

Obviously, so that's how OGE would determine whether they are kind of in the game or not, put in a better way?

Well, under the right of first offer, they make the offer first if they elect to do that.

Okay.

Okay.

So they -- okay, I guess, I didn't realize that.

I thought they were able to review what the offers were, but I guess that's not the case.

No.

They have first offer rights.

Right.

Okay.

But that's something I had in my head that they were part of the process beyond that first offer right.

Okay, so basically on the like-kind exchange we'll find out about that fairly soon, is that fair?

Yes.

We hope to move this to conclusion here pretty quick, yes.

Your next question is from the line of Insoo Kim with RBC Capital Markets.

Sorry for the follow-up.

Just one follow-up on the Enable -- I know the spin is essentially off the table.

But was that decision for that, you say it was credit metrics, but did the math that you worked through in terms of potentially paying down the debt and maybe re-equatizing [circ] of the equity offerings, did that not make sense to you guys as in terms of accretion or whatnot?

And then the other part is, are you able to tell us whether you received the private letter ruling from the IRS that it would or it would not be a largely tax-free spin?

I'm not in a position to comment on the latter.

We're not in the position to talk about private letter rulings publicly.

But with respect to the way we looked at it, Insoo, it was the consolidated credit metrics of CenterPoint after a spin and the amount of debt that we can reasonably place on SpinCo, so that SpinCo would have reasonable access to the debt capital markets.

Your next question is from the line of Paul Patterson with Glenrock Associates.

Just a quick follow-up.

So assuming that you guys do a like-kind exchange and there is no liquidity issue, or very little if one, what would then be in terms of the disposition of those assets would you think because, at that point, assuming there's no liquidity issue, it's just a question of tax liability management it would seem to me.

How should we think then of the disposal of the new securities that you would own?

And would those be accounted for in operating earnings, potentially?

Well, I'll start and maybe Bill can add to the latter part of the question.

Thinking through that option, that far down is reaching way far ahead in terms of what may happen if the first assumption were to occur.

We maintain our objective of trying to reduce the volatility of the investment proportion that we have in our midstream space.

So the timing for disposition, there are many factors that would go into that.

One is the variability of the earnings stream that we now have and as you know, capital market's considerations.

But there are many factors that would go into it and we have not, at all, described what our objectives would be relative to that investment.

Your next question is from the line of Kamal Patel with Wells Fargo.

Sorry, one quick follow-up.

Regarding the GP interest in Enable, would you hold on to it until you sold down or got out of your LP position down to a reasonable level?

Or it's more of a smaller stake per se?

Our expectation is that the GP would go with the sale.

Your next question is from the line of Neel Mitra with Tudor, Pickering.

Just another question on the like-for-kind exchange.

If you were to exchange units with somebody else, would that ultimately actually reduce the tax liability or just manage your ability to basically pay that out over time when you sell the units?

That would not change our tax liability.

Okay.

So you'll just be able to manage it over time?

That's correct.

Your next question is from the line of Andy Levi with Avon Capital Advisors.

I think I'm all set.

Our last question is from the line of Andy Gupta with HITE.

Just a clarification.

In the sale option, is the only option you're considering taking units of shares or what if it's a cash offer?

Cash offer would work, but it has to be at the right price to meet the other obligations.

This concludes our second quarter 2017 earnings call.

Thank you, everyone, for your interest in CenterPoint Energy, and have a wonderful day.

This concludes CenterPoint Energy's Second Quarter 2017 Earnings Conference Call.

Thank you for your participation.