CenterPoint Energy, Inc (Holding Co)

Good morning and welcome to CenterPoint Energy's third quarter 2020 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. To ask a question, press star 1 on your touchtone phone. To withdraw your question, press the pound key. I will now turn the call over to David Morty, Director of Investor Relations. Mr. Morty?

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

Thank you, Dave, and good morning. Since we last talked 90 days ago, it has been a very busy time for both me and CenterPoint. These are exciting times for us. I am even more optimistic about where we can take this great company in the future than I was 90 days ago. I want to share with you why I'm so optimistic. Today, I will also bring you up to date on where we are on our BREC recommendations. But first I want to discuss some of my general observations on the last 90 days. To start, we now have a newly energized leadership team made up of a great combination of experienced center point executives and external hires. Our management team is now more diverse and brings significantly higher level of utility experience to the table. The team is eager to embark on our new strategy where we can take advantage of industry-leading organic customer growth. We also have greater opportunities to invest more in growing our current rate base. We have all the right pieces to deliver what our investors and our customers want and expect from premium utilities. Throughout the many challenges CenterPoint has had during 2020, our employees have always stepped up. I especially want to thank our frontline crews for going into the field and providing reliable service to our millions of customers every single day. They have done an excellent job in helping the neighboring utilities get back up to speed after multiple storms. During the last quarter, we sent CenterPoint mutual assistant crews as far away as New York, Georgia, and Florida, and of course to Louisiana, where I spent some time with them as they worked in difficult conditions to restore power in hard hit Lake Charles. I am impressed with their dedication to both customers and to maintaining a safe working environment, and I am very proud of them. Our performance this quarter puts us right where we want to be in terms of delivering within our newly increased 2020 utility guidance range, which we highlighted in our press release this morning. Our focus going forward will be on consistently providing improved utility-driven earnings, and you're going to hear a lot about that today and how we're going to execute and make that happen. In this quarter, I also focused on enhancing our management team. We had several new additions to an already strong performing management team. I am thrilled to have Jason Wells on our team. Jason is well known to you, and brings a sharp intellect, deep industry knowledge, and a firm commitment to success. Jason has really hit the ground running and has been heavily involved with me in finalizing the BRAC recommendations and our new strategy. I also brought Tom Webb on board as Senior Advisor to CenterPoint. Not only is Tom helping us accelerate our implementation of proven utility value drivers but he is also critical in identifying Jason as our new CFO. With his vast experience in the industry, he has also been instrumental in helping us set CenterPoint on a path to focus on and execute a continuous improvement program, not only as a day-to-day mindset, but also as an ongoing discipline. In addition, we brought in Greg Knight to join the team. Greg joined us from National Grid and he has a proven history of driving excellent customer service. Our company also needs to learn to deal better with adversity. I strongly believe a first-rate management team deals with whatever challenges it confronts and effectively manages through them. No matter if it's COVID, the weather, or any other challenge, our organization must learn to confront and overcome any headwinds. In the future, whatever impact these items may have on our business, we will work our way through them like any good management team would and deliver consistent results. And our team has truly embraced that mentality. Now let's move on to the update I suspect you were most eager to hear about. As you know, we concluded the business review and evaluation committee work in October and provided recommendations to the entire CenterPoint board. We had a requirement to hold an analyst day by the end of Q1 2021, but I did not believe it was fair to shareholders to have you wait until then to hear the outcome of this effort. Therefore, I have accelerated the timing of our investor day to December 7th. just a few short weeks from now. We, of course, are clearly eager to introduce our new strategy to you. And while our investor day will be full of details on our strategy, I believe it is only right to share with you some of our conclusions this morning. First, increasing capital investment. The most positive and striking outcome from the Breck review is that we are absolutely flush with incremental capital spending opportunities way, way beyond our prior stated plans. Apart from safety, our number one goal is of course to grow our premium regulated utilities and maximize the advantage of this growth for customers and shareholders. So organic growth opportunities are a great place to start this conversation. One of the most exciting advantages we have at CenterPoint are the organic growth opportunities in our core regulated markets. Consistent organic growth is a luxury most utilities simply do not have. On a rolling 12-month basis, our organic customer growth across our electric utilities was 2.4%. including 33 years of consecutive growth in our Houston territory. This growth highlights what an unappreciated crown jewel we have in both our regulated electric and gas utilities in the Houston area. As you will see, Houston Electric will be one of our main earnings drivers going forward. And even when you include all of our gas distribution utilities, our total company organic growth was over 2%. Now that's pretty amazing, given the diversity of states where we currently operate in. And as you know, organic growth drives incremental demand, which drives the need for significant incremental rate-based investment and helps to keep customer rates lower. During the BREC process, we did a complete, ground-up review of capital investment opportunities available to CenterPoint. I took the approach that we should look at all available capital investment opportunities without considering balance sheet constraints. Using this ground-up approach allowed us to determine how much we could increase capital spending on both our base regulated business and these great organic growth opportunities. We found increased capital investment opportunities were driven not only by these organic growth opportunities, but the continuing need to harden our grid, take advantage of renewable opportunities, and provide safe, reliable, and greener energy for our customers. The upshot is we will be able to increase our 21 to 25 capital investment plan by $3 billion to $16 billion. This $3 billion increase spend is now expected to deliver rate-based growth of approximately 10% per year. This 10% rate-based growth will put us at or near the top of the entire utility industry. Think for a second or two about what $3 billion more in capital spending and a 10% annual rate-based growth will do for us. Well, I'll let you do the math for now. But it will, of course, provide impressive future earnings growth power, and we believe will push us towards the top end of our 5% to 7% guidance basis utility EPS growth. And that's not all. During the same 21 to 25 timeframe, we've identified an additional $1 billion plus of capital spending opportunities on top of that incremental $3 billion that we can use to even further increase our spend. We will begin to look at spending this additional $1 billion once I am confident we have built up our internal resources to efficiently spend it. So at this point, these additional $1 billion in capital spending opportunities are not even included in our stated 10% rate-based growth plan. Second, we're going to add renewables to our portfolio. It is critical that we take advantage of current opportunities to provide renewable energy for our customers. This includes aggressively pushing to build renewable generation outlined within our Indiana IRP, where we now plan on investing $950 million in both wind and solar generation that we will own as a company. This will have the added benefit of providing tax credits to CenterPoint, something that we have not had in the past. We will also be advancing RNG and hydrogen renewables in Minnesota. We are also exploring building new transmission interconnects with renewable generation in other parts of Texas. But more importantly for us in the near term are the renewable generation investment opportunities that are now being built in our Texas service territory. Jason will have more on these great opportunities in a few minutes. And we will share even more details on these exciting additional renewable opportunities with you at our investor day. Third, enhancing balance sheet optionality. I would like to share some of our conclusions on how we will finance the $3 billion plus in additional capital spending opportunities. First, and to eliminate any initial anxiety you may have, I want to immediately emphasize that our plan does not require any block issuance of new equity, nor require a reduction to our current earnings per share. To prime the pump on achieving this plan, we plan to sell one or two of our natural gas LDC utilities. Now, all of our gas LDCs are good assets in constructive regulatory environments, and we hate to sell any of them. But a hard capital allocation decision needed to be made, and I made it. The LDC assets we plan to sell are well positioned in the states they operate in and should be attractive to a wide range of buyers. These LDC sales will have the additional benefit of more heavily weighting our portfolio towards growing our regulated electrical utilities. I will not comment on which LDCs we plan to sell today, but we will share more details with you during our upcoming Investor Day. We also value and understand the importance of our ongoing engagement with the rating agencies, an area where both Jason and Tom not only have significant experience, but excel. In summary, we expect to finance this increased capital spend with enhanced internal cash flow, restructuring our debt profile, LDC asset sales, a more efficient operating structure, and a small amount of routine equity via such things as reinstituting our drip, which Jason will discuss in more detail. Fourth, Operations and maintenance cost discipline. Over my 20-year career as a CEO, I have worked in very competitive industries. Therefore, cost discipline has always been important to me. This year at CenterPoint, the cost discipline we have implemented has been vital to maintaining our profit guidance as we work through our many challenges. We are now quickly transforming this current year cost discipline mindset into a culture of continuous cost improvement. This is an area where Tom Webb has been invaluable in helping me to accelerate my thinking about how to get more value for less cost year after year. Now that's very doable at CenterPoint. And after having been here only a few months, I believe that Tom fully agrees. So going forward, we plan to deliver a 1% to 2% in O&M reductions every year. And once again, think about what that will do for our earnings profile, as this effort will benefit not only our customers, but our investors. The most critical part of delivering on these reductions is instituting that can-do culture across the entire organization. and I can tell you we will institute that cultural change at center point. Fifth, enable. As you can appreciate, I will only comment on enable within our prepared remarks, and we will not be addressing additional questions. We continue to evaluate enable options. To do this effectively, we believed it was important to regain strong alignment with OG&E regarding our Enable interests. Investors may have noticed OG&E's appointment of Luke Corbett to the Enable board, as well as recent commentary from OG&E that CenterPoint and OG&E are now well aligned in our desire to maximize the value of Enable. Luke has tremendous depth in midstream experience and joins CenterPoint's two Enable representatives, Al Walker and Bob Gwynn. Luke knows Al and Bob well, and we believe these three will help enable determine the best way to maximize stakeholder value. Six, regulatory relationships. I have now personally met with all of our eight states regulators, except for Minnesota, where we have an open rate case. Now, there's been a perception among investors that we do not have good regulatory relationships at CenterPointe. Nothing could be further from the truth. We operate in business-friendly states and have very strong relationships with our regulators. We enjoy rate mechanisms that greatly reduce regulatory lag, allowing us to efficiently recover on any investments we make. I would also like to point out that despite the commonly held negative view, our results in the Houston electric rate case earlier this year were in line or actually better than that received by peer utilities in Texas. Now, don't get me wrong. I'm not making excuses for the fact that we misread both the depth of our Texas regulatory relationships and the shifting regulatory realities in Texas. That is a fact. I do know that right now the relationship with the Texas Public Utility Commission is getting better as we have staffed up resources and I spend more time in Austin. Above all, Texas remains an excellent state for regulated investment, as do our other premium utilities within the central United States. It's also important to note that we are earning at or near our allowable returns in almost all of our jurisdictions. Now let me wrap up by saying that I will not be satisfied until we are recognized as a premium utility, one with high organic and rate-based growth and a management team that is focused on delivering consistent quarter-over-quarter results, increasing stakeholder value, and getting the most out of our assets and people. I look forward to seeing everyone on December 7th and on giving investors the chance to see our new management team in action. With that, in a few minutes, I will turn the call over to Jason Wells. Jason will provide additional details on results and delve further into our strategy and upcoming plans. But before we do that, Tom Webb would like to say a few words. So, like a blast from the past, here is Tom Webb.