CenterPoint Energy Inc (CNP) 2015 Q3 法說會逐字稿

Good morning and welcome to CenterPoint Energy's third-quarter 2015 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 David Mordy, Director of Investor Relations.

Mr. Mordy?

Thank you Ginger.

Good morning everyone.

Welcome to our third-quarter 2015 earnings conference call.

Thank you for joining us today.

Scott Prochazka, President and CEO, Tracy Bridge, Executive Vice President and President of our Electric division, Joe McGoldrick, Executive Vice President and President of our Gas division, and Bill Rogers, Executive Vice President and CFO, will discuss our third-quarter 2015 results and provide highlights on other key areas.

We also have with us other members of management who may assist in answering questions following the prepared remarks.

In conjunction with the call today, we will be using slides which can be found under the Investors section on our website, CenterPointEnergy.com.

For a reconciliation of the earnings guidance provided in today's call, please refer to our earnings press release and our slides, which, along with our Form 10-Q, has been posted on our website.

Please note that we may announce material information using SEC filings, press releases, public conference calls, webcasts, and posts 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 is going to discuss certain topics that will contain projections and forward-looking information that are based on management's beliefs, assumptions and information currently available to management.

These forward-looking statements are subject to risks or uncertainties.

Actual results could differ materially based upon factors, including weather variations, regulatory actions, 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 2015.

The guidance range considers utility operations performance to date and certain significant variables that may impact earnings such as weather, regulatory and judicial proceedings, volumes, commodity prices, ancillary services, tax rates, interest rates, and financing activities.

In providing this guidance, the Company does not include other potential impacts such as changes in accounting standards, the value of ZENS securities and the related stocks or the timing effects of marked-to-market end inventory.

For Midstream Investments, the Company takes into account such factors as Enable's most recent public forecast, effective tax rates, the amortization of our basis difference in Enable, and other factors.

The Company does not include other potential impacts such as any changes in accounting standards, impairments, or Enable Midstream's unusual items.

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 with that, I will now 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.

Third-quarter 2015 adjusted earnings on a guidance basis were $146 million, or $0.34 per diluted share, compared with $128 million, or $0.30, in 2014.

On a guidance basis, as noted on Slide 4, utility operations contributed $0.24 per diluted share versus $0.19 in 2014.

Midstream Investments contributed $0.10 per diluted share compared to $0.11 in 2014.

On a GAAP basis, we reported a loss of $391 million, or a loss of $0.91 per diluted share.

The loss includes non-cash impairment charges related to Midstream Investments.

Bill will discuss these results in more detail later in the call.

Our business has performed well with particularly strong contribution from our utility operations.

Combined, our gas and electric utilities added more than 88,000 meters since the third quarter of 2014.

As you will hear from Tracy and Joe, we've had a busy year on the regulatory front and we are pleased with our progress.

We anticipate receiving approval this year for over $138 million in annualized utility rate relief, including interim rates.

Additionally, we continue to actively manage O&M expenses, which Tracy and Joe will also discuss later.

Turning to our Midstream Investments, last week, as you may have seen, that Enable Board of Directors named Rod Sailor as the new CEO effective January 1, 2016.

Rod is a seasoned industry professional and I am confident that his knowledge of and experience in the midstream industry will be invaluable as Enable continues to execute its growth strategy.

Enable recently announced a third-quarter distribution of $0.318 per unit, representing a year-to-date increase of about 3%.

We are pleased to see their fifth consecutive quarterly increase since the IPO, as they continue to navigate through this challenging commodity price environment.

Slide 5 includes highlights from Enable's recent earnings call.

They continue to see volume growth around many parts of their system.

In the Anadarko, 24 rigs are currently drilling wells scheduled to be connected to Enable's system.

Enable's Bear Den oil gathering system is now flowing close to its stated capacity.

Recent purchases of gas fields served by Enable in the Haynesville suggest the possibility for increased drilling in that region.

The year-to-date combined performance of our utility operations as well as Midstream Investments along with anticipated fourth-quarter performance allows us to update our earnings guidance for the full year to be $1.05 to $1.10 per share.

Further, we are reaffirming our target earnings per share annualized growth rate of 4% to 6% through 2018.

As we have discussed in the past, we are investing in infrastructure and technology to better serve our customers.

I am proud to say that our efforts are being recognized.

In the most recent J.D. Power 2015 Gas Utility Residential Customer Satisfaction Study, our gas utilities ranked in the first quartile in their respective regions.

The study measures billing and payment, price, corporate citizenship, communications, customer service, and field service.

Before I close, I want to take a moment to congratulate our legal team here at CenterPoint.

They were recently recognized by Texas Lawyer as the 2015 Legal Department of the Year in the area of pro bono and community leadership work.

The legal team's contributions are often on their personal time and illustrate our values as well as our commitment to serve to the areas that we serve.

We remain committed to our vision to lead the nation in delivering energy, service and value.

We will continue to invest in our energy delivery systems to better serve our customers and to seek timely recovery of those investments.

Tracy will now update you on electric operations.

Thank you Scott.

Houston Electric had a strong quarter, in line with our expectations.

As you can see on Slide 7, core operating income was $219 million this quarter compared to $202 million for the same period last year.

The business benefited from higher usage primarily due to more favorable weather, higher transmission and distribution related rate relief, continued strong customer growth and lower operating expenses.

These benefits were partially offset by the absence of a one-time energy efficiency remand bonus received in the third quarter of 2014 and lower equity return related to true-up proceeds.

We continue to actively manage operating costs.

O&M expenses were down 0.3% for the first three quarters of 2015 versus the first three quarters of 2014, excluding certain expenses that have revenue offsets.

We remain committed to ongoing O&M expense discipline.

As you will see on Slide 8, we are successfully executing our regulatory strategy to recover invested capital in a timely manner.

We have received approval for over $50 million in annualized transmission and distribution related rate relief so far this year.

Transmission related cost recovery filings approved by the Commission in the first and third quarters this year resulted in $24 million and $14 million, respectively, in annual transmission revenues.

Also, an annual revenue increase of $13 million from our first distribution cost recovery factor filing went into effect in September.

We are seeking an additional $17 million from our most recent transmission cost of service filing and expect to receive approval during the fourth quarter.

The Houston economy remains resilient and strong.

Houston Electric added more than 53,000 metered customers since the third quarter of last year.

This represents a continued annual growth rate of more than 2%.

As we mentioned before, 2% customer growth equates to approximately $25 million to $30 million of incremental revenue annually.

On the employment front, healthcare and hospitality are making up for job losses in the energy sector with the Greater Houston Partnership forecasting 20,000 to 30,000 net new jobs in 2015.

Houston's housing market remains tight with inventory at 3.5 months supply compared to a more balanced inventory of six months.

Year-to-date through August, home and auto sales have maintained the pace set during a strong 2014.

On Slide 9, we've included a few statistics to further illustrate the size, strength and diversity of the Houston economy, which continues to perform well despite challenges associated with the energy sector.

We are pleased with Houston's growth prospects.

Houston Electric performed well this quarter and we are position to finish the year strong.

We will continue to focus on safety, reliability, efficiency and growth.

Joe will now update you on results for gas operations.

Thank you Tracy.

Our natural gas operations, which includes both our gas utilities and our nonregulated energy services business, had a strong quarter, both operationally and financially.

I mentioned during the second-quarter earnings call that we expected to improve our year-over-year operating income for the remainder of 2015.

I am pleased to tell you that improvement is occurring.

As you will see on Slide 11, natural gas utility's third-quarter operating income was $11 million compared to an operating loss of $8 million for the same period in 2014.

Operating income was higher due to several factors.

The business benefited from increased rate relief, customer growth, other revenue, and lower O&M expenses.

These increases were partially offset by higher tax and appreciation expense.

Further, the Minnesota Conservation Improvement Program incentive, or CIP, which historically has been received and recognized in the fourth quarter, was approved in the third quarter this year.

Customer growth remains strong in our natural gas utilities having added over 35,000 customers since the third quarter of 2014.

(technical difficulty) nearly 2% customer growth followed by Minnesota, which added more than 1%.

O&M expenses at our natural gas utilities were down 0.5% for the first three quarters of 2015 versus the first three quarters of last year, excluding certain expenses that have revenue offsets and excluding the Minnesota CIP incentive.

As with our electric business, we remain committed to ongoing O&M expense discipline.

Turning to Slides 12 through 14, we continue to execute on our multi-jurisdictional regulatory strategy.

Constructive annual rate mechanisms plus rate cases are allowing us to recover capital investments we've made to better serve our customer base.

The annualized rate relief approved so far this year is over $65 million, which includes $48 million of interim rates in Minnesota.

We expect a final decision on Minnesota rates in mid-2016.

Another milestone in our rate strategy was the implementation of a new three-year folded coupling pilot in Minnesota which is intended to normalize the impact of usage fluctuations, including weather.

As a result, we will not employ a weather hedge in Minnesota for the 2015/2016 winter.

Finally, next week, we will file our first rate case in eight years in Arkansas.

This case will be used to ensure recovery of the substantial infrastructure investments we are making that are not eligible for inclusion in current annual recovery mechanisms.

As part of the filings, we will also request approval of a formula rate plan as allowed by new legislation.

The formula rate plan will allow our rates to be prospectively adjusted based on a banded ROE approach in a projected test year.

We expect a final order of new base rates to be implemented in the third quarter of 2016.

On Slide 15, you'll see that operating income for our Energy Services business was $2 million for the third quarter of 2015 compared with an operating loss of $7 million for the same period of 2014, excluding mark-to-market gains of $5 million and $13 million respectively.

Sales volumes were down slightly but customer count grew nearly 1% year-over-year.

The increase in operating income was primarily related to commercial asset optimization in our Gulf Coast and Mid-Continent retail regions.

Additionally, there was a favorable impact to operations and maintenance expenses relating to one-time expenses incurred in the third quarter of 2014.

Energy Services is a profitable business segment that complements our gas distribution business and allows us to provide gas purchase options to CenterPoint customers across multiple states.

We've worked hard to focus on the commercial retail business within Energy Services while reducing fixed costs associated with long-term supply and transformation commitments.

Energy Services had another good quarter and is on a path to achieve another year of strong financial performance.

Overall, our natural gas operations performed well this quarter.

We will continue to operate effectively and efficiently as we focus on growth, safety, and the reliability of our system.

I will now turn the call over to Bill, who will cover our financial activities.

Thank you, Joe, and good morning to everyone.

Tracy and Joe have reviewed their respective operating incomes on a quarter-to-quarter basis.

I will provide a review of our earnings per share on a guidance basis and review utility operations for third quarter 2015 versus the baseline for the third quarter 2014.

Before I do that, let me comment on the impairment.

CenterPoint's third-quarter 2015 earnings filing reflects pretax impairment charges of $862 million related to our investment in Enable Midstream.

These impairments recognize the decline in the estimated fair value versus our balance sheet investment, which was $19.12 per unit as of June 30, 2015.

With these non-cash charges, we have reduced our balance sheet investment in Enable Midstream from $4.5 billion to $3.6 billion.

More information is provided on Page 17 of the slide deck.

Importantly, these impairments do not affect the Company's liquidity, cash flow, or compliance with debt covenants.

These impairments also do not change CenterPoint's earnings momentum or Enable's ability to participate in the development of North American energy infrastructure.

With that, I would like to discuss our financial performance for the third quarter.

On a guidance basis, our EPS was $0.34 in the third quarter of 2015 compared with $0.30 per share in 2014.

As a reminder, our EPS on a guidance basis excludes the impacts of unusual items such as mark-to-market adjustments at our Energy Services business, our ZENS securities and related reference shares, and Midstream Investments impairment charges.

For utility operations, we have provided two waterfall charts to help illustrate our normalized operational performance quarter-over-quarter.

In summary, as is detailed on Slide 18 and in the appendix, the adjustments lowered third-quarter 2014 EPS $0.01 from $0.19 to $0.18.

These adjustments are consistent with the baseline adjustments we highlighted in our 2014 year-end call.

A second chart on Slide 19 provides a quarter-to-quarter comparison for utility operations from third-quarter 2014 baseline to third quarter 2015 on a guidance basis.

We are pleased with the $0.06 per share entries from $0.18 to $0.24 on a quarter-to-quarter basis.

As Tracy and Joe discussed, their combined core operating income on a guidance basis improved $45 million to $232 million in the quarter.

With respect to our cost of capital and financing activity, our interest expense was flat on a period-to-period basis.

Borrowings have increased approximately $100 million since year-end.

For the year, we expect interest expense to be slightly lower compared to 2014, despite a projected increase of approximately $300 million in net borrowings.

On Slide 20, we provide more details on our financing plan.

Our last below the line item is the provision for income tax expense.

Excluding the impact of the impairment, the tax rate for 2015 is expected to be 35%.

Further, we expect a 36% rate in 2016.

The $0.24 contribution from utility operations and the $0.10 from our Midstream Investments resulted in a strong quarter-to-quarter performance of $0.34 versus $0.30 per share.

Given these results, as Scott mentioned earlier, we are revising our earnings guidance from our original range of $1.00 to $1.10 to the high end of the range of $1.05 to $1.10.

We reiterate targeting a 4% to 6% earnings growth per annum through 2018 and anticipate EPS contributions from utility operations and Midstream Investments of 70% to 75% and 25% to 30% respectively.

On our fourth-quarter call, as in prior years, we intend to provide EPS guidance for 2016 and an update on our utility's five-year capital investment plans.

Finally, I would like to remind you of the $0.2475 per share quarterly dividend declared by our Board of Directors on October 21.

As we reviewed in great detail on our second-quarter call, we intend for dividend growth to be aligned with and to follow earnings growth.

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

Thank you Bill.

We will now open the call to questions.

In the interest of time, I will ask you to limit yourself to one question and a follow-up.

Ginger?

(Operator Instructions).

Neel Mitra, Tudor Pickering.

Good morning.

I had a question regarding the dividend policy that you laid out in the last quarter.

Enable lowered their distribution guidance yesterday, and I was curious as to how that would affect your dividend policy going forward.

Are you still targeting 4% to 6%, or is it more consistent with just what the earnings are on the consolidated entity?

We are still targeting -- let me make two comments.

First is the dividends are going to follow our earnings growth.

And even with the change that Enable has made to their forecast, we are still reiterating our projected, our targeted earnings growth of 4% to 6% over the next three years, and the dividend will follow that growth in earnings.

Okay, great.

So it doesn't necessarily have to be 4% to 6%, but you are reiterating 4% to 6%, so the dividend should follow that.

Is that how I should interpret it?

I think what we are saying is we are reiterating the 4% to 6% growth in earnings and that we are reconfirming the statement we made last quarter that dividends would follow the growth in earnings.

And of course, as you know, the dividend, actual change in dividend, is a subject that has to be addressed by the board.

Right.

Great.

And the second question, could you just comment generally on the Houston economy?

Obviously, you have seen strong load growth year-to-date.

Do you think that's tailing off, or it's going to continue through 2016?

I don't know if there's any signs of weak oil prices, weak energy prices impacting your load growth.

I think the economy is holding up very well.

As you've seen in our data, we obviously track our meter additions.

They continue to be very strong.

Another kind of leading indicator we look at is something Tracy mentioned, and that is the inventory of housing.

If the economy were slowing and impacting the rate of construction, our residential construction, you may tend to see an increase of inventory or a slowdown in the number of meters that we are connecting.

So far, we haven't seen that.

So we continue to see a very robust economy overall.

And as Tracy mentioned, several sectors are taking up for some of the downturn that we have seen in the energy space.

Okay, great.

Thank you very much.

Ali Agha, SunTrust.

Thank you.

Good morning.

I apologize, I jumped on late on the call.

But coming back first off to this point about dividend growth and earnings growth being both in the 4% to 6% range, so mathematically, just to understand that, if Enable is talking about 3% growth in their distributions at least for the next two years, are you implying that you are willing to increase the payout ratio (technical difficulty)?

Because otherwise how do you maintain 4% to 6% if a lot of cash coming in for dividend is only growing at 3%?

It's Bill.

I'll answer that question.

Again, as Scott said and we made in our comments, so what we are stating is our targeting EPS growth at CenterPoint at 4% to 6% a year and that dividends would follow that.

So I think you're correct in asking the question what does it mean if Enable's earnings and/or distributions slow.

What we are saying implicitly in that is we expect greater growth at the utilities to make up for the balance in order to achieve that 4% to 6%.

We continue and are modeling to say that the utility's actual payout in terms of the cash support to dividend is 60% to 70% of their earnings.

Okay.

And then secondly, obviously Enable updated their outlook through 2017.

It's come down.

There is still a fair amount of uncertainty around 2017 as well.

They have a fully open position.

I just wanted to come back to an issue of what does it need for CenterPoint to see in terms of deciding for CenterPoint shareholders what needs to happen with regards to your exposure to the Enable story?

The downside or the open position, which I would also argue has upside, in 2017 is incorporated to our thinking in the 4% to 6% per year EPS range.

Okay.

But more strategically, Bill or Scott, what are the sort of milestones you're going to be looking at to determine how this is working out for CenterPoint shareholders longer-term?

We continue to believe that the fundamentals are still very strong for Enable to participate in a growing buildout of infrastructure in this space.

And right now, we are clearly in this low commodity price environment with uncertainty.

They are not contribute at the level that it was originally designed, but we remain confident that, as the market firms up, that the improvement that we will see at Enable will represent upside to the 4% to 6% growth target that we have provided.

Okay.

Last question.

Scott, in today's environment and particularly given the tougher exposure that you have with n the M&P space, what is your appetite in terms of potentially additional M&A opportunities on the regulator space?

I think, as we've shared in the past, we have a strategy in place that does not require us to participate in M&A.

We have great investment opportunities at our utilities organically where we are growing with returns that are near our allowed return.

Recent transactions in the space have suggested returns that are below that.

And any opportunity that one may consider would have to be weighed against the quality of the investments you have internally.

So we don't see a need to participate in M&A.

We see it potentially as opportunistic, but our focus is on growing and operating our utilities.

Thank you.

David Fishman, Goldman Sachs.

Thanks for taking my question.

This is kind of a continuation of that, sorry.

I was hoping you could provide a little more color around I guess, between the different segments, how we get to the 4% to 6%, so with the Texas T&D, the gas utilities and for the Midstream.

I think we touched a little bit about the Midstream already.

So pretty much how they all -- how you look at each segment individually to get to the 4% to 6% range.

Certainly David.

This is Bill.

We talked about Enable and their rate relative to the 4% to 6%.

Combined our electric and gas business, we expect to be delivering greater than 4% to 6%, and the next couple of years, it really does depend upon which year in terms of which of those businesses will have earnings momentum.

But if you were to take a look at the regulatory filings, which Joe and Tracy provided to you, it would certainly suggest that, on balance, there would be more earnings per share momentum in the gas business in the very near term relative to the electric business and that that might shift as we begin to look at 2017 and beyond.

Okay.

So for the gas utilities, we should expect it to be a little faster in the near term relative to the electric there?

In the 16-year -- again, I encourage you to take a look at the regulatory detail we provide in the slide deck.

Okay, thank you.

(Operator Instructions).

Thank you, everyone, for your interest in CenterPoint Energy.

We will now conclude our third-quarter 2015 earnings conference call.

Have a nice day.

This concludes CenterPoint Energy's third-quarter 2015 earnings conference call.

Thank you for your participation.