CenterPoint Energy Inc (CNP) 2011 Q4 法說會逐字稿

Good morning and welcome to CenterPoint Energy's fourth-quarter and full-year 2011 earnings conference call with senior management.

During the Company's prepared remarks all participants will be in a listen-only mode.

There will be a question-and-answer session after management's remarks.

(Operator Instructions).

I will now turn the call over to Marianne Paulsen, Director of Investor Relations.

Good morning, everyone.

This is Marianne Paulsen, Director of Investor Relations for CenterPoint Energy.

I would like to welcome you to our fourth-quarter and full-year 2011 earnings conference call.

Thank you for joining us today.

David McClanahan, President and CEO, and Gary Whitlock, Executive Vice President and Chief Financial Officer, will discuss our fourth-quarter and full-year 2011 results and will also provide highlights on other key activities.

In addition to David and Gary, we have other members of management with us who may assist in answering questions following their prepared remarks.

Our earnings press release and Form 10-K, filed earlier today, are posted on our website, which is www.CenterPointEnergy.com, under the Investors section.

This quarter we have created supplemental materials which are also posted under the Investors section of our website.

These materials are for informational purposes and we will not be referring to them during prepared remarks.

I remind you that any projections or forward-looking statements made during this call are subject to the cautionary statements on forward-looking information in the Company's filings with the SEC.

Before David begins, I would like to mention that a replay of this call will be available until 6 PM Central Time through Wednesday, March 7, 2012.

To access the replay please call 1-855-859-2056 or 404-537-3406 and enter the conference ID number (technical difficulty) 1632104.

You can also listen to an online replay of the call through the website that I just mentioned.

We will archive the call on CenterPoint Energy's website for at least one year.

And with that, I will now turn the call over to David.

Good morning, ladies and gentlemen.

Thank you for joining us today and thank you for your interest in CenterPoint Energy.

2011 was a very good year for the Company.

Four of our five business units had strong years, both operationally and financially.

We resolved the long-standing issues associated with our 2004 true-up proceedings and last month recovered almost $1.7 billion of additional true-up costs through the issuance of securitization bonds.

We are pleased this matter is finally behind us and we can now focus our full attention on the future.

This morning we reported full-year earnings of $1.36 billion or $3.17 per diluted share.

Excluding the impacts of the true-up proceeding, net income would have been $546 million or $1.27 per diluted share compared to $442 million or $1.07 per diluted share in 2010.

So this was an outstanding year, either way you look at it.

Our fourth-quarter results were also solid.

Net income was $117 million or $0.27 per diluted share compared to $124 million or $0.29 per diluted share for the fourth quarter of 2010.

Fourth-quarter earnings for 2011 on the same basis as we provide earnings guidance would have been $0.26 per diluted share.

This was above our expectations, due principally to a lower effective tax rate associated with state income taxes.

Our press release and 10-K provide the details around our financial results this past year, so I won't repeat the specifics.

I will, however, summarize the performance of each unit and describe their prospects for 2012 and beyond.

Houston Electric had its best year financially.

Core operating income was $496 million compared to $427 million in 2010.

Fourth-quarter income was $62 million, up $6 million from 2010.

Last summer's record heat was the biggest driver of Houston Electric's increased income.

In addition, we saw strong growth in Houston with over 45,000 new customers added last year.

Our gas LDCs also had a good year.

Operating income for the full year was $226 million or about $5 million below the record level of 2010.

Fourth-quarter income was $73 million compared to $86 million in 2010.

While margin growth was modest last year, we were successful in our expense management efforts.

As a result, on an overall basis, we earned at or near our authorized rate of return for the second consecutive year.

Our interstate pipelines achieved operating income of $248 million last year, down from the $270 million in 2010.

Income in the fourth quarter was $52 million compared to $63 million in the previous year.

The decline in earnings for the full year and fourth quarter were almost completely attributable to the expiration of a backhaul contract on our Carthage to Perryville line.

Our Field Services unit had a very strong year as a result of the investments we've made to gather and treat gas in several of developing shale plays.

Full year operating income was $189 million compared to $151 million the previous year.

Fourth-quarter earnings were $53 million compared to $57 million in the fourth quarter of 2010.

It is worth noting that operating income for 2010 reflected a gain of $21 million from the sale of some nonstrategic assets.

Excluding that one-time gain, last year's fourth-quarter earnings were up over 45% from 2010.

Our competitive gas sales and services business continued to struggle in 2011.

Full year earnings were $6 million compared to $16 million in 2010.

Fourth-quarter earnings were $3 million compared to no operating income in the previous year.

For the past few years this unit has been burdened with economic pipeline capacity contracts.

However, we were able to accelerate our termination of some of those contracts last year and most of the remaining uneconomic contracts will expire over the next 12 months.

Now let me turn to the future and give you some insight into each business unit's prospects.

Year in, year out Houston Electric has been able to earn its regulated rate of return since we formed CenterPoint Energy in 2002.

I expect it will again perform well this year.

It has a solid and growing service territory.

The Houston metropolitan area was the first area in the nation to replace the jobs lost during the economic downturn and more than 80,000 jobs are expected to be created this year.

We estimate that customer growth will equal or exceed the growth we experienced last year, which should add approximately $25 million in base revenues.

However, Houston Electric is unlikely to equal its 2011 financial performance, which, as I indicated earlier, was driven by record heat.

This unusual weather added approximately $60 million to base revenues last year.

In addition, the negative impact of the rates implemented in September of last year will be experienced for the full year in 2012.

We expect this to be approximately -- estimate this to be approximately $35 million.

Over the longer term, Houston Electric should experience significant rate-based growth.

Annual capital expenditures are forecast to average between $500 million and $550 million over the next five years, resulting in annual rate-based growth of over 4%.

Because of the recently approved distribution cost recovery factor, together with the long-standing transmission of cost recovery mechanisms, we don't anticipate the need for a major Houston Electric rate case for the next several years.

We anticipate rate-based growth at our gas LDCs as well.

Over the next five years, capital expenditures are expected to exceed $350 million a year compared to an historical run rate of about $200 million a year.

These increased expenditures are primarily related to new pipeline integrity and safety requirements, and will result in an annual rate-based growth of over 6%.

Although we have rate adjustment mechanisms in most jurisdictions, we will likely need to file a number of rate cases over the next 12 to 18 months.

While the current low natural gas prices are positive for both Houston Electric and our gas LDCs, they can negatively affect our Midstream business.

This is particularly true for our Field Services units.

As we have indicated in the past, we retain over 1.5% of all gas we gather.

While the majority of our revenue stream is fee-based, we do earn revenues from the sale of this retained gas.

We estimate that each $1 change in natural gas prices would have about a $20 million impact on operating income this year.

In addition, as gas prices have fallen, rig activity in dry gas basins has also declined.

This is most significant in our traditional gathering area, where we have seen some gathering volumes decline over 10% since 2010.

Increasing gathering volumes in the shale plays, however, have more than offset this decline.

Overall gathering volumes increased almost 30% last year, and by year end we were gathering about 2.6 billion cubic feet per day.

We expect total gathering volumes under our current [contacts] will increase about 15% to 20% this year.

Low natural gas prices and compressed basis differentials are also expected to impact our interstate pipelines.

It is unlikely any significant new pipelines will be needed in the near-term in our current Midcontinent footprint, and there will be increased competition for new and existing customers.

In addition, the expiration of a backhaul agreement last year will reduce operating income by approximately $10 million this year.

However, we believe there are continuing opportunities to serve customers on or near our pipelines, particularly power generation customers.

Over the last few years, our energy services business has suffered like many others in the industry.

As I indicated earlier, the principal drag on earnings has been related to uneconomic pipeline capacity agreements.

We have taken action to reduce our exposure to such agreements by an estimated $15 million this year.

Our retail business continues to do well.

And we expect 2012 will be a year of significant improvement for this business.

Of course, we also expect to realize earnings benefits from the $1.7 billion of additional true-up costs we recovered last month.

Earlier this year, we called or tendered for our $375 million of debt at the parent company.

Gary will provide the details and earnings impacts from this debt reduction in a few minutes.

As we indicated in our third-quarter earnings call, we expect to invest the remaining proceeds in our existing businesses and to acquire similar assets.

While we are not in a position to make any announcements today, I feel confident we will be successful in deploying a portion of these proceeds to expand our present businesses, and we are currently evaluating several possibilities, particularly in the Field Services sector.

As I indicated earlier, we will also be required to make significant new capital investments in our existing regulated businesses to satisfy both growth and regulatory requirements.

I would like to remind you of the $0.2025 per share quarterly dividend declared by our Board of Directors on January 19.

This marks the seventh consecutive year that we have raised our dividend.

We believe our dividend actions continue to demonstrate a strong commitment to our shareholders and the confidence the Board of Directors has in our ability to deliver sustainable earnings and cash flow.

Let me conclude by expressing my gratitude to our employees, through whose hard work we achieved not only an outstanding 2011 but excellent operating and financial performance since our inception in 2002.

As many of you know, we faced some significant challenges in our early years.

But I think we are stronger today because of our success in overcoming them, and I'm convinced our future is even brighter.

We have terrific employees, well-positioned assets and business units and a balanced and diversified portfolio which can excel under a variety of market conditions.

Thank you again for your interest in the Company.

I will now turn the call over to Gary.

Thank you, David, and good morning to everyone.

Today I would like to discuss a few items with you.

First, since the formation of our Company in October of 2002, we have significantly improved our balance sheet.

As you know, subsequent to the favorable resolution of the true-up case last year, the rating agencies have taken positive actions to upgrade the long-term ratings of the debt of CenterPoint Energy, [CE and CERC].

Each company now has a solid investment grade credit ratings and the ratings outlook for each company is either stable or positive.

In addition, our businesses generated solid cash flows and, when combined with the benefits of bonus depreciation, essentially funded our capital program and dividend in 2011.

We ended 2011 with net debt of approximately $6.7 billion and a debt to total capitalization ratio of 61.2%.

In January of this year we closed on the sale of approximately $1.7 billion in transition [bonds] with an effective annual weighted average interest rate of approximately 2.5%.

We were very pleased with this offering, which resulted in one of the lowest rates of any utility securitization.

The Company received proceeds of approximately $1.7 billion from the offering.

Our solid balance sheet, cash on hand, internally generated cash and other liquidity provide the Company with the financial flexibility to effectively execute our business plan.

I know you are all interested in how we are currently using the cash we received from the sale of the transition bond.

First, we used a portion of the cash to pay off outstanding commercial paper.

In addition, as we continue to evaluate a number of opportunities to invest the cash and long-term accretive projects, we made the decision to reapply our tax-exempt debt at the parent company, having an aggregate principal amount of $375 million, with a weighted average interest rate of 5.4%, as this clearly enhances earnings and cash flow relative to the alternative of maintaining cash and money market funds, earning approximately 20 basis points.

The result will be a reduction in interest expense in 2012 of approximately $18 million or $0.03 per diluted share.

This action supports our long-standing objective of deleveraging the parent company.

As David pointed out, we have a significant capital plan for 2012.

We estimated our 2012 capital expenditures to be approximately $1.3 billion, an increase of approximately $100 million from 2011.

About 86% or a little more than $1.1 billion of CapEx will be spent by our regulated businesses this year compared to 78% in 2011.

Let me give you a breakdown by business.

In our electric business, we expect to spend $575 million, an increase of $37 million or 7% from 2011.

CapEx will be used primarily to support our investments in infrastructure to serve new loads and enhance reliability.

We expect to spend $354 million in our natural gas distribution business, reflecting a 20% increase or $59 million from 2011.

This increased level of spending will be used primarily for infrastructure related to pipeline safety and integrity.

Our pipeline capital budget is $181 million, which is significantly more than our 2011 spend of $98 million.

This increase will be used primarily for routine maintenance, major line replacements related to pipeline safety and integrity, as well as spending associated with meeting anticipated new regulatory requirements.

With the completion of our Magnolia and Olympia systems, our 2012 capital budget for Field Services is $139 million.

However, this estimate does not include any new capital which may be required if we were to add significant new opportunities.

To the extent we need financing in connection with future growth opportunities, we expect we can finance them at attractive interest rates at the operating Company level.

However, we are often asked about our financing strategy for our Midstream business, especially whether or not we are considering the formation of an MLP.

We continue to think the formation of an MLP can be an efficient structure to finance significant new growth and thus remains a viable option for our Company as we evaluate various Midstream projects.

Now let me turn to my final topic, our 2012 earnings guidance.

This morning in our earnings release, we announced 2012 earnings guidance in the range of $1.08 to $1.20 per diluted share.

This is somewhat broader range -- this somewhat broader guidance range takes into consideration a number of economic and operational variables that may impact our actual earnings performance.

Although the strength of the US economy in general and the Texas economy in particular can have a significant impact to earnings, the most important variables are commodity prices, volume throughput, weather, regulatory proceedings and our effective tax rate.

We have developed our guidance range by using combinations of these variables.

We have also taken into account the benefit of the $375 million debt reduction at the parent and we are using an average share count of approximately 430 million shares.

In addition, we have not assumed any additional use of the remaining true-up proceeds in developing this range.

As the year progresses we will keep you updated on our earnings expectations.

Now I would like to turn the call back to Marianne.

Thank you, Gary, and with that we will now open the call to questions.

In the interest of time I would ask you to please limit yourselves to one question and a follow-up.

Thea, would you please give the instructions on how to ask a question?

(Operator Instructions).

David Frank with Catapult.

Gary, you mentioned there at the end some of the factors that drive earnings within the range you've given for 2012 include commodity prices and Midstream volumes.

Can you give us a sense of how much of the range is dictated by commodities?

And could you give us a sense of maybe the range in gas prices that you have embedded in that range?

David, let me take a shot at that.

We tested against a series of -- a range of natural gas prices anywhere from $2.50 at the low end up to a little less than $4 at the high end.

Obviously, gas prices have been coming down since we started putting together our plans last fall on and our current thinking is that the gas prices are going to be hovering at the low end of that range.

But we clearly looked at those and tested those, and we also looked at natural gas liquids prices as well.

We are not as sensitive, but we have some processing on both our pipes and our Field Services business, and we tested liquidity or liquids prices as well.

Great, great.

And David, you made a comment that you are interested -- it sounded like you are interested in making complementary asset acquisitions in the Midstream area.

Can we infer that corporate acquisition or M&A is, then off the table?

I don't think you should draw that conclusion, David.

I think clearly there's -- some asset acquisitions are perhaps easier to do and there's more opportunities there.

But we continue to look on all fronts.

So I don't want you to draw that, but I will say that the most active opportunities we are looking at are in this Field Services sector.

Carl Kirst with BMO Capital.

Actually, maybe just leveraging off of David's question there, and I just wanted to be clear when you were just sort of answering that as well as the opportunities that you are seeing in Field Services and Midstream -- are you talking about actual Field Services Midstream M&A, or are you talking more about the organic like the Mississippi line proposal or, I guess, is it a combination?

It really is a combination.

We have opportunities on all fronts.

We have a number of proposals out to producers, but we are also looking at some assets that we might purchase outright from either existing gatherers or producers.

That's helpful.

And just in Field Services, can you help us, give a breakdown between sort of the in the fourth quarter, which looked like it was very good throughput in Midstream, what was traditional, what were shale and if you had any color for maybe how that has changed here in the first quarter, if it has changed?

Yes, let me give you a December kind of look for a minute.

Or maybe fourth quarter, but we were gathering in total about 2.6 billion at the end of last year.

I would say, out of our traditional basins, that's more like [750 to 775], something of that nature.

We've seen that the traditional basins declined in the fourth quarter more than it did at any other time during the year.

As you might recall, the first three quarters were pretty flat but we saw a decline in the fourth quarter.

I'm not sure that is going to be sustainable, but there's not a lot of rig activity in those dry gas basins at these gas prices.

So year to year in our traditional basins we saw about a 10%, maybe a little bit more drop in traditional basins gathering.

Of course, offsetting all that is the Haynesville gathering we are doing in Magnolia and Olympia.

Fayetteville gathering continues to increase.

We've got some wet gas in our traditional basins, and that is kind of helping us, too, because there is some drilling in these basins where there's wet gas.

So it turns out we had an excellent year from a gathering standpoint, ending at 2.6 billion a day, which was up, I don't know, 25%, 30% from 2010.

You have to attribute that to all of this -- I mean, substantially to shale plays and the new investments we made.

Sure, and I appreciate that.

And then with respect to the first quarter, and I guess maybe just to narrow the question, have you seen any rollover or declines in the Haynesville, I guess, specifically?

I think the way we would answer that is it appears to us that the producers are maintaining their production levels from what we saw at the end of last year.

They've got enough rig activity to continue to do that.

And I think that's kind of our expectation for a while, until we see exactly where natural gas prices or they see where natural gas prices are going to go.

But our producers are telling us they are going to try to maintain their volumes, but they are not talking about any substantial increase in volumes at this stage.

No, fair enough, very much appreciate that.

And maybe last question, if I could, just because on the marketing you had alluded to 2012 maybe being a significant improvement; and I didn't know if maybe you could parse that into what your expectations are between retail and wholesale.

We have been saying for some time that if you just take our retail business alone, we think it ought to produce $30 million to $35 million worth of operating income.

But because of some on uneconomic contracts, we haven't been able to achieve that.

These contracts are starting to roll off.

Certainly, we can see $15 million worth of improvement in 2012 around those contracts rolling off versus what we incurred in 2011.

And who knows what's going to happen with some of the other ones?

Maybe things will improve a little bit.

So we see an improvement.

Do we think we will get it all revealed in 2012?

No, it will probably be 2013 before all these contracts have rolled off and we can start really focusing everybody on our retail business and what it will produce.

But we still feel good about the retail business; but, as you know, these basins collapsed and storage spreads have gone down, and where we were making a fair amount of money three or four years ago we are losing money today.

Ali Agha with SunTrust.

I wanted to come back to the 2012 guidance, David or Gary, for that matter.

If I heard you correctly, for Houston Electric you are assuming a down year, given the trends you mentioned.

But can you give us a sense of the other segments?

I think pipelines had some headwinds you mentioned.

Field services has headwinds as well.

Should we assume them to be flat to down as well, just given those trends?

And also the tax rate, Gary, you alluded to, can you remind us what effective tax rate we should assume?

On the tax rate, maybe let me describe it like this.

If you have a normal blend of our federal rate and our state rate, you should -- state tax rates, you should have about 37.5%.

This year we came in at about 34.4%, and it was really kind of two issues.

It was the lower state blended tax rate in terms of the allocation of those sort of apportionment factors for the income.

And then we had the resolution of the normalization issues.

So we picked up some benefit this year.

Going forward I gave you a range of 34.5% to 37.5%.

And the reason for that is, again, I think we have to look at the proportionate factors and see how that plays out in terms of this state tax blended rate.

And then we continue to look at a number of tax reserves that we have related to various outstanding issues with IRS.

So I would like to give you a midpoint of that, but I'm going to say we do have a range of 34.5% to 37.5% in our tax rate.

Of course, like any company we are working diligently to have that as low as possible.

But I think we have to stay with the range on that at the moment.

And as to your other questions, first just on Houston Electric, because of the hot weather in 2011 it's going to be hard to repeat that.

I will tell you that current weather forecasts are suggesting it's going to be hot and dry again.

So it's not out of the question, but our model suggests we've got almost $60 million from normal weather in 2011.

So we'll just have to wait and see what happens there.

Our growth in customers should add at least $25 million.

We've got transmission revenues of another $10 million that should benefit 2012.

And we saw some customer excellent usage growth in 2011.

We are not sure whether that was real usage or whether it was weather.

It was so hot, it's hard to distinguish that.

So there could be a little upside there as well.

And then we have the full year of the rate case, which might offset some of the things I'd talk about.

So we think we are going to have a good year.

We think we can earn our regulator rate of return next year.

But unless we get this hot weather we probably won't set the same kind of records we did in 2011.

I would also say pipelines, it does have a little bit of headwind there because we have that -- the tail end of that backhaul agreement that we didn't feel in the first four or five months of last year, we are going to feel it this year.

And we estimate that's about a $10 million impact.

As I'm sure you know, there's lots of pipes in the Midcontinent area that are going to be competing with us as contracts roll off.

And we tend to believe that that could put a little pressure on rates.

But having said that, each year we have been able to overcome a lot of these things.

So I'm not ready to say that pipeline is not going to have a good year.

But they have a little headwind in front of them, that's for sure.

Field Services -- it really depends on gas prices.

I think that they should have a good year, whether -- it's not going to be the 30% or 40% increase we saw in 2011.

One other question, if I could -- on the use of proceeds in the past I think you also alluded to the fact that after Field Services there may be interested in electric utility acquisitions.

Just from your comments today, should we infer that you're not seeing any good opportunities in that area and the focus is really Field Services?

And to the extent that's the case, just conceptually what kind of return are you targeting or we should be thinking about in terms of thinking about the earnings potential that cash would give CenterPoint?

First, I think David answered that first question.

I think we don't see a lot of properties on the market.

There are some, I think, gas LDCs that may be coming on the market and we will clearly take a look and see if we have any interest there.

But on the Field Services side we look at a range from the low teens to the midteens on unleveraged basis.

And it really depends on the contract terms and how much -- if we get through put guarantees or guaranteed rate of returns.

If we do, it will be on the lower end of that.

If we don't, it would be 14%, 15%, probably.

On a pretax or after-tax?

That's after-tax, unlevered.

Faisel Khan with Citigroup.

David, on the pipeline segment I'm trying to figure out what the opportunity is on the power generation side.

So we've seen, I guess, the headwind from backhaul contracts and restructuring contracts.

But what kind of opportunity do you guys have in your territory to sign up more power generators to firm capacity?

I think, Greg, you might want to weigh in on this as well.

But what we see is we have 20 or 30

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