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Text: Dave Lesar, our CEO; Jason Wells, our CFO; and Tom Webb, our Senior Adviser, will discuss the company's second quarter 2021 results.
Actual results could differ materially based upon various factors as noted in our Form 10-Q, other SEC filings and our earnings materials.
We will also discuss non-GAAP EPS, referred to as Utility EPS, earnings guidance and our utility earnings growth target.
In providing these financial performance metrics and guidance, we use a non-GAAP measure of adjusted diluted earnings per share.
As a reminder, we may use our website to announce material information.
Information on how to access the replay can be found on our website.
Now I'd like to turn the discussion over to Dave.
Now while we are always keen to discuss our great future, we are planning to discuss our exciting longer-term strategy updates at our Analyst Day, which will take place on September 23 here in Houston.
Though this is our second Analyst Day in less than 12 months, we feel that it is warranted as we are now well into our strategic transition and we want to use that forum to update our investors on our longer-term business plan, earnings capacity, financial metrics and the net zero emissions target that we will be sharing with you.
We are also excited for the opportunity to spend more time with you in our hometown here in Houston and to see you in person.
Let me quickly remind you of just how far we have come in the last year.
A year ago, CenterPoint was going through a strategic review at the direction of our Business Review and Evaluation Committee or BREC.
The goal of the review was to optimize shareholder value and address specific shareholder concerns.
Initially, in my role as Chairman of the BREC, and then later when I became CEO, it was crystal clear to me that while the company had a great asset base and talented employees, we have not unlocked all of our potential, and certainly had not taken full advantage of all of our inherent opportunities.
Before the BREC process, CenterPoint was targeting modest earnings per share growth and had reduced capital spending in our regulated businesses.
We had work to do to strengthen our regulatory relationships.
The company had previously announced a strategic review of Enable, but had not found an executable opportunity to actually reduce exposure to its midstream investments.
Our O&M expenses were historically growing, and we needed a stronger balance sheet.
We had minimal renewables opportunities on our radar screen, and we were in search of a permanent CFO.
So yes, the list of challenges was long.
I mentioned these not to revisit the adversities our investors and company we're experiencing, but to highlight for you the aggressive speed and approach used by our new team to attack and resolve the challenges and headwinds we faced.
Let me quickly recap our progress.
I substantially refreshed and diversified our Executive Committee, and we now have what I believe is a best-in-class management team.
We announced an updated five-year strategy that prioritizes investment in our regulated businesses and boosted our planned capital spending by about 25% to $16 billion.
We instituted a 10% utility rate base CAGR, well above our peer group average of 8%.
That rate base growth then supported an increased long-term utility earnings per share target growth rate of 6% to 8%, which is also above the consensus peer average of 6%.
To efficiently fund our growth, while repairing our balance sheet, we announced the sale of our Arkansas and Oklahoma gas LDCs at a landmark earnings multiple of 2.5 times rate base.
We were instrumental in the Enable and Energy Transfer merger which, once closed, will provide us a pathway to eliminate our exposure to midstream.
And we announced a commitment to a 1% to 2% annual reduction in O&M over the five years to keep our customer rate growth manageable.
We recently announced changes to our Board leadership to bring our governance structure in line with best practices and shareholder expectations, and we will be announcing a commitment to an industry-leading net zero carbon commitment at our Analyst Day.
So in my view, we certainly have walked the talk, and through timely and aggressive actions overcome many of the headwinds we faced.
Now it's time for CenterPoint to switch gears.
We are going to use the same aggressive approach and organizational speed to take advantage of the tailwinds we have today.
Our strong execution, coupled with a privilege to serve some of the fastest-growing regions in our country, have created the foundation for CenterPoint to trade as one of the premium utilities in the U.S. Believe me, we are just getting started.
Our six-month financial performance in 2021 has been strong.
Today, we are raising our 2021 Utility earnings per share guidance range to $1.25 to $1.27.
This 8% growth projection in '21 puts us at the high end of our 6% to 8% Utility earnings per share annual growth target.
And as a reminder, this increase in guidance is after the dilution impact of the 18% increase in our share count that we experienced in 2020.
When we compare our Utility earnings per share growth to analysts' long-term consensus growth for our peers, we are now in the top decile.
And as you would expect, we are also reaffirming both our long-term 6% to 8% Utility earnings per share annual growth target and 10% rate base compound annual growth rate target.
This 10% rate base growth also exceeds the average 8% rate base growth of our peer group.
For the second quarter of 2021, we reported strong results, including $0.28 of Utility earnings per share compared to $0.18 for the second quarter of 2020.
The comparison to Q2 2020 is a bit noisy, and I believe essentially irrelevant as both quarters included a number of one-off items.
Q2 2020 results also reflected the impact of COVID on our business.
The bottom line for me is to focus on the reality that our Utility earnings per share is expected to grow 8% this year over last year, and then target 6% to 8% growth from there.
Our O&M continuous improvement programs have strengthened our results for the first six months of 2021.
We are already on track to save over $40 million in total O&M costs this year alone, while maintaining our focus on safety.
This is almost 3% of our annual O&M cost.
However, when compared to last year's second quarter, our O&M costs are actually up a bit.
Again, this is just more noise that I don't worry about as last year's second quarter O&M costs were artificially depressed by the impact of COVID and disconnect moratoriums.
We are still absolutely committed to our continuous improvement cost management efforts in our target of 1% to 2% annual reductions in O&M.
In fact, as a result of our excellent 2021 results to date, we were in the fortunate place to be able to already make a management decision and begin pulling recurring O&M work forward from 2022 into the last six months of this year and still be able to hit the 8% Utility earnings per share growth for this year.
This allows us the luxury of reducing near-term run rate O&M costs today, and immediately reinvesting them for the future long-term benefit of our customers and investors.
We continue to see industry-leading organic customer growth rates.
Despite COVID, our Houston service territory continues its 30-plus years of consistent growth.
Overall, we saw about 2% customer growth for electric and 1% for natural gas for the first six months of the year when compared to the prior year.
The growth is supported by the highest level of new home starts in Houston since 2005.
This continued and consistent growth reinforces the value of the fast-growing markets that we serve.
This organic growth plays a key role in keeping our service costs reasonable for our customers.
Moving to capital investments.
We have invested approximately $1.5 billion for the first six months of this year and are still on track to invest approximately $3.4 billion for the full year 2021.
More importantly, we now have better line of sight to additional capital investment opportunities beyond the five-year $16 billion investment plan we outlined on our Analyst Day.
New Texas legislation provides more tools to transmission and distribution utilities to improve the resiliency of the electric grid and helps minimize the risk of prolonged outages and allows us to put all of this into rate base.
Some of these laws include the ability to lease and put into rate base, backup battery storage capacity for resiliency and to assist with restoring power.
Next, the ability to lease and put into rate base emergency generation, which may include mobile generation capabilities.
The ability to immediately procure, store and put into rate base long lead time items related to restoring power, and the allowing of economic versus resiliency justifications for new transmission projects.
Based on initial analysis, these legislative changes provide support to increase our five-year capital investment plan by at least $500 million.
Now this is on top of the $1 billion in reserve capital investment opportunities we previously identified during our last Analyst Day, but were not incorporated into that plan.
Just as important, we will have the ability to efficiently fund $1.1 billion of these incremental opportunities.
This is primarily due to the incremental proceeds expected from the sale of our gas LDCs and the execution of tax mitigation strategies, which Jason will discuss shortly as well as additional debt, assuming a roughly 50-50 cap structure.
Even better, all of this is before the additional proceeds we anticipate from the sale of Energy Transfer units given the significant appreciation in value since the Enable and Energy Transfer merger was announced.
We are in the midst of quantifying what the whole new slate of organic opportunities will look like, and we'll be in a position to provide more detail at our Analyst Day in September.
However, just as a teaser, we are confident that we will be in a position to announce an increase to our previous five-year investment plan, fund that increase with no incremental equity and execute on projects that will continue to improve the resiliency and safety of our systems for the benefit of our customers, a very nice trifecta.
Now I will briefly touch on strategic initiatives, which we have announced over the recent months, including our gas LDC sale and our planned exit of our midstream investment.
We know that investors are highly focused on the ultimate completion of these initiatives, and we believe we will achieve our timing expectations.
We continue to make progress on the gas LDC sale and still anticipate closing by the end of the year.
We are working closely each day with Summit to secure regulatory approvals for the sale and to successfully transition that business.
Turning to the Enable transaction.
We still anticipate the transaction between Enable and Energy Transfer to close in the second half of the year.
We remain absolutely focused on reducing and then eliminating our midstream exposure through a disciplined approach.
Now to be clear, it would be very unlikely for either of these transactions to close prior to our September Analyst Day.
And finally, to reiterate what we said when we announced the news of these two transactions in our last quarterly call, completing these transactions will not change our industry-leading 6% to 8% Utility earnings per share growth target or 10% rate base compound annual growth rate target.
Finally, I want to highlight the Natural Gas Innovation Act that recently passed in Minnesota.
This is a landmark law that establishes a new state regulatory policy that creates additional opportunities for a natural gas utility to invest in innovative, clean energy resources and technologies, including renewable natural gas, green hydrogen and carbon capture and further demonstrates the forward-thinking mindset of the jurisdictions that we serve.
This is a successful outcome for all stakeholders as we work to collectively achieve lower greenhouse gas emission reduction goals.
With the approval from the Minnesota Public Utility Commission, a utility can invest up to 1.75% of our gross operating revenue in the state annually.
This opportunity increases up to 4% of gross operating revenues by 2033.
Under the new law, we expect to submit our first innovation plan to the PUC next year.
This law aligns with our steadfast commitment to environmental stewardship and more specifically, our carbon reduction goals.
Our customers are asking for ways in which we can deliver not only safe and reliable, but cleaner electricity and gas, and we are working to achieve that.
Across jurisdictions, we are collaborating to find ways to introduce more renewable fuels into our systems as we firm up our goal to achieve a net zero target.
We look forward to unveiling this in September during our Analyst Day.
For now, I'll just remind everyone how thrilled I am to be able to deliver these messages.
As I've said, this marks one year for me as CEO, and a lot has changed.
I look forward to the calls every quarter, so I can proudly share our team's accomplishments with you.
I strongly believe the strategy we have laid out and the progress we have made so far more than demonstrates what a unique value proposition CenterPoint offers.
While I don't quite have a full year with CenterPoint under my belt, I am just as energized as Dave by our recent execution and more importantly, about the path we are on to becoming a premium utility.
Let me get started by discussing our earnings for the second quarter of 2021.
On a GAAP earnings per share basis, we reported $0.37 for the second quarter of 2021 compared to $0.11 for the second quarter of 2020.
Looking at slide four, we reported $0.36 of non-GAAP earnings per share for the second quarter of 2021 compared to $0.21 for the second quarter of 2020.
Our Utility earnings per share was $0.28 for the second quarter of 2021, while Midstream investments contributed another $0.08.
As Dave mentioned, there were a few onetime items for both quarters that made the comparison a bit noisy.
This included favorable impacts for the second quarter of 2021, inclusive of $0.05 attributable to deferred state tax benefits.
Of this $0.05 in total, $0.03 of the benefit was related to legislation in Louisiana that eliminated the NOL carryforward limitation period.
This amount is included in our Utility earnings per share results.
The remaining $0.02 of benefit was due to Oklahoma's revision of the corporate tax rate, which is a favorable driver in our midstream segment.
Our 2020 Utility earnings per share included a negative $0.06 impact due to COVID.
Beyond those onetime items, other notable drivers for the second quarter of 2021 include customer growth and rate recovery, which contributed about $0.04 of favorable impacts as well as miscellaneous revenue contributing another $0.02 of favorable impacts.
These were partially offset by a negative $0.02 impact from the share dilution resulting from the May 2020 issuance and a negative $0.03 for unfavorable O&M variance.
So there's a lot of noise when comparing to second quarter of 2020 as that was the quarter that most impacted by COVID worldwide.
I look through that noise, and I think you should, too.
The bottom line is we expect to grow our Utility earnings per share 8% this year and target 6% to 8% thereafter.
And that's what we should all focus on.
As Dave mentioned, O&M is a bit noisy this quarter as well.
The key takeaway is we are delivering on our planned efficiencies of over $40 million in cost reductions for the year, and are now beginning to accelerate O&M work from 2022.
This will help improve reliability of our service for our customers while sustaining growth for our shareholders.
With two quarters of financial results behind us, we have good line of sight to our full year 2021 earnings per share outperformance.
Our disciplined execution and tailwinds led us to raise our Utility earnings per share guidance range to $1.25 to $1.27 per share for the full year, which is at the high end of our 6% to 8% annual Utility earnings per share growth target.
Beyond 2021, I want to reiterate, we are focused on growing Utility earnings per share at 6% to 8% each and every year.
And we look forward to discussing incremental drivers over a longer-term horizon during our September Analyst Day.
Moving to a discussion of future capital opportunities as shown on page five.
We are currently developing our full analysis of additional capital opportunities resulting from bill signed into effect in Texas during the last legislative session.
There will be some shorter-dated opportunities that develop such as the ability to procure long lead time items or to lease a portion of battery storage or backup generation across our footprint, and then some longer-dated projects such as transmission opportunities through economic justification.
Based on our first look, we have confidence that new Texas legislation will support at least $500 million of incremental capital investment opportunities over just our current five-year plan.
This number will likely increase as we work with stakeholders to refine the implementation of this new legislation and develop the longer-dated plan to incorporate some of these opportunities.
We are confident the new tools we have been providing will help create a more resilient electric grid and help reduce the risk of prolonged outages.
Regarding the previously identified incremental $1 billion, we may be able to deploy above our 2020 Analyst Day plan of $16 billion.
This incremental capital spending is likely to be allocated toward recurring system improvements to accelerate the improvement in resiliency, reliability and safety of our services.
We will provide a more comprehensive update on this additional capital spend in our upcoming Analyst Day, but it is important to highlight any incremental capital we include in this plan won't begin contributing to earnings until 2023 at the earliest, as we will begin recovering incremental spend the year following the investment.
As far as the funding sources for these incremental capital opportunities, we continue to take advantage of a number of tailwinds that will allow us to incorporate additional capital spend.
As we reported last quarter, and Dave reinforced, we will receive an incremental $300 million of proceeds above our original plan once the gas LDC sale closes.
Additionally, we have continued to refine the estimate of the incremental benefit for the method we use to determine the amount of repairs expense that can be deducted for tax purposes.
While we are still refining this study, we have confidence that the benefit will generate at least $1 billion in incremental tax deductions, resulting in at least $250 million in additional cash to us and likely more.
This enhanced method for determining repairs expense is an efficient way for us to fund these capital investment opportunities, which improve the resiliency and safety of our systems for the benefits of our customers.
The combination of these improved sources of funding, coupled with debt, that will be authorized under our regulatory capital structure, supports incremental investments of at least $1.1 billion.
And importantly, this amount is before we consider any additional proceeds due to the unit appreciation of Energy Transfer.
Moving to the financing updates.
We closed our $1.7 billion debt issuance in May, which was comprised of $700 million of three-year floating rate notes, $500 million of five-year fixed rate notes at 1.45% and $500 million of 10-year fixed rate notes at 2.65%.
The proceeds was to refinance $1.2 billion of near-term maturities at the parent as well as to pay down commercial paper.
Based on our current financing plans, we have no further issuance needs for 2021.
Our current liquidity remains strong at $2.2 billion, including available borrowings under our short-term credit facilities and unrestricted cash.
Our long-term FFO to debt objective is between 14% and 15%, aligning with the Moody's methodology and is consistent with the expectations of the rating agencies.
We continue to actively engage with them and they have informed us that they are comfortable with the outlook and thresholds we've indicated.
Based on our current financing plans, we will not issue any incremental equity through an aftermarket equity program in 2022, as previously discussed, and are evaluating if or when we would initiate it beyond that.
As we've said in the past, we take our commitment to be good stewards of your investment very seriously and realize our obligation to optimize stakeholder value.
I am energized with our execution over the last year, and I am confident we are positioning CenterPoint to be a premium utility moving forward.
Those are the updates for the quarter.
As mentioned, we'll be hosting an Analyst Day here in Houston on September 23.
We look forward to the opportunity to engage and introduce you to the depth of the CenterPoint team then.
This will be Tom's last call with us, as Tom's work here at CenterPoint is winding down.
I want to extend our sincerest appreciation to Tom for his counsel and support over the past year.
I have, and I know we all have benefited greatly from his time here.
I finally remember your visit to Kalamazoo a year ago, went over Dana's cooking in a bottle of nicely aged Bordeaux wine, I explained how I was busy and retired.
I was humbled to be asked and honored to help in a very small way on your extensive checklist.
Top of your list was identifying and attracting one of the very best CFOs in the business.
You already have made immediate critical improvements that will be lasting.
CenterPoint has transformed in less than a year, selling noncore, nonutility businesses, think Enable securing more efficient financing, think LDC sales, driving clean energy, think coal closures, renewable growth and a lot more to come, and accelerating performance, think continuous improvement.
We are witnessing the emergence of a premium utility with sustainable, predictable earnings per share growth every year.
I trust you see it, feel it.
We truly do sweat the details so you don't have to.
You'll see bumps in the road, serious challenges like the winter storm that impacted many utilities.
I bet you had doubts.
But watch CenterPoint, this team promptly addresses challenges to protect our customers and deliver for you, our investors.
With important capital investment to deliver needed improvements for our customers, our rate base growth target at 10% substantially outstrips the peer average at about 8%.
Our resulting annual Utility earnings per share growth target of 6% to 8% is strong.
We expect it to be at the high end of the range this year.
And as Dave mentioned, that's top decile.
Customer growth of 2% is just the level our peers would celebrate.
Coupled with O&M reduction of 1% to 2% a year, this creates a lot of headroom for needed capital investment.
Our five-year plan includes 1% to 2% cost reduction every year.
Our plan for this year is for a fast start, down more than $40 million or 3%.
And with a fast start, we already are pulling work ahead from 2022.
The cost reductions, favorable tax changes, lower financing cost, economic recovery and more allow us to reinvest $20 million for our customers now and possibly more later.
This performance reflects good business decisions and continuous improvement.
It comes from management commitment, experienced teams and ground-up process improvements that enhance safety every day; quality, doing things right the first time; delivery, doing things on time; cost, we see; and eliminate waste and morale higher every day.
This continuous improvement process is powerful.
It's just dependence from heroic individual work to better processes that are repeatable; as we eliminate human struggle, the cost fall out.
And one of my favorite charts is on the right.
As Dave often observes, we take on the headwinds, we take advantage of the tailwinds.
We deliver our earnings per share commitment consistently every year.
We deploy surplus resources to our customers.
It is all about our customers and our investors.
We did this last year.
We're doing it again now.
No ors, just ands here.
It's fun to be part of a premium winning utility.
CenterPoint is a great company with wonderful people and a huge investment opportunity.
As Jason said, you've been a valuable part of our team, and we're grateful for the time you have shared with us.
This has been one exciting year for CenterPoint.
I could not be more pleased by the momentum we have, what we've accomplished and the bright future that we see for ourselves.
We have truly been sweating the details so you don't have to.
And I believe our effort is evident in our consistent and more predictable earnings and rate base growth in our world-class operations in growing service territories.
I hope you now have the trust that we will continue our commitment to deliver on our promises to you, our investors.
I believe the best is yet to come.
I'd also like to remind everyone to register for our upcoming Analyst Day on September 23 here in Houston.
We will now take a few questions.

user
centerpoint energy q2 earnings per share $0.37.
q2 earnings per share $0.37.
qtrly adjusted earnings per share $0.36.
raising 2021 utility earnings per share guidance range to $1.25 - $1.27.
on path to deliver 10% compound annual rate base growth over 5 years.

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