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Text: Dave Lesar, our CEO; Jason Wells, our CFO; and Tom Webb, our Senior Adviser, will discuss the company's first 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 earnings guidance and our utility earnings growth target.
In providing this guidance, we use a non-GAAP measure of adjusted diluted earnings per share.
We previously referred to our earnings guidance as guidance basis EPS, and we'll now refer to it as non-GAAP earnings per share or utility EPS.
Similarly, we will refer to our 6% to 8% non-GAAP utility earnings per share target growth rate as utility earnings per share growth rate.
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.
We are observing a sense of normalcy starting to return here in Texas and in many of our other jurisdictions.
Just as important to me is that I look forward to an opportunity to meet you in person and tell you about the amazing things we have accomplished in less than a year and what our strategy entails moving forward.
I want to share with everyone our excitement about the progress CenterPoint is making and our continued belief in the utility assets that we operate.
We believe they are premium assets and want you to believe that too.
Today, we will provide an update on the continued disciplined execution of our strategy that we outlined during our Investor Day just five short months ago.
I hope you see that we are developing a track record of being consistent and accountable against the goals that we set.
As you know, I'd like to lead with headlines, and we have some worthy ones to cover this quarter.
First, we delivered very strong results for the first quarter of 2021, including $0.47 of utility EPS.
Because the higher natural gas prices are pass-through costs for our business, they did not impact this quarter's utility results.
In addition, our first quarter results are in line with recent historical trends in which the first quarter contributed close to 40% of the full year utility EPS.
We are, of course, reaffirming our full year utility earnings per share range for 2021 of $1.24 to $1.26 and our long-term 6% to 8% utility earnings per share annual growth target.
We are off to a great start for the year, so let's check the utility earnings box as being on track.
The second big headline is, of course, the announced agreement to sell our Arkansas and Oklahoma gas LDCs, which is anticipated to close by the end of the year, subject to regulatory approvals.
These are premium assets, and this was demonstrated by the level of interest we saw and, of course, in the price we got for them.
The landmark valuation was 2.5 times 2020 rate base.
This outcome was well beyond what even the most optimistic observers thought we would achieve.
We saw extraordinary interest from over 40 parties, 17 of which made bids, including strategics, infrastructure funds and PE firms.
There are a number of key takeaways from this great outcome.
First, it validates our strong and stated belief that our remaining gas LDCs are significantly undervalued, and investors should rethink their position as to the value of our remaining gas LDCs in our share price.
This also illustrates the strength, viability and value of the broader gas LDC industry.
The premium multiple these assets garnered in the marketplace shows that investors continue to see natural gas as an essential fuel that is efficient, valuable and affordable energy source.
This transaction demonstrates how we can efficiently finance our industry-leading rate base growth.
This is a perfect example of the efficient capital recycling strategy we committed to you on our Investor Day.
It's a simple model.
You sell at 2.5 times rate base and invest at 1 times rate base.
Naturally, this begs the question if we would consider more LDC sales in the future.
Currently, we're content with our utility portfolio mix.
But that being said, if we see another opportunity to recycle capital in a similarly attractive way, we would explore it as part of our broader strategy.
Our Investor Day plan highlighted that we had the opportunity to spend an additional $1 billion over our current $16 billion five-year capital plan.
At this price, the LDC transaction will provide us with $300 million of incremental proceeds on an after-tax basis compared to the five-year plan we showed you on our Analyst Day.
We will first look to deploy this $300 million in incremental proceeds into high-value utility capital spend opportunities that are part of those additional $1 billion in capital opportunities.
This incremental capital spending is likely to be spent in 2022 and begin to flow into earnings in 2023 and allow us to continue to provide reliable, essential services to our customers.
Therefore, this transaction will not impact our long-term growth plans or earnings trajectory.
On the contrary, we believe this will even more strongly support consistent 6% to 8% utility earnings annual growth rate in our industry-leading 10% rate-based CAGR targets.
We previously committed to you a 2Q sales announcement, and we delivered on that.
So let's also check that box as being done.
Turning now to the Enable transaction.
We anticipate the transaction between Enable and Energy Transfer to close in the second half of the year.
We remain absolutely focused on reducing and eliminating our midstream exposure through a disciplined approach.
And to reiterate what we said when we announced the news of a transaction back in February, completing this transaction also will not change our 6% to 8% utility earnings per share annual growth target or our 10% rate base CAGR.
So that box stays checked as we remain on track to reduce midstream exposure.
Turning to the impacts from the winter storm, Uri.
Last quarter, many of you questioned the incremental gas costs and the likelihood and timing of recovery.
We said that the storms impacts won't change the utility earnings per share target range and they will not.
We also said we believe we had a handle on the issue but needed some time to work through it with our regulators.
Let me give you an update on what progress we have made on that front.
First, in part by actively engaging, auditing and challenging our gas suppliers, we have reduced our incremental gas costs by over $300 million since our initial estimates, resulting in reduced customer incremental gas cost exposure of $2.2 billion.
We won't stop pursuing these actions, because we believe this is the right thing to do for our customers.
We are also beginning to seek the timely recovery of these costs through early adjustments to our normal cost recovery mechanisms.
We have started recovery in Arkansas and Louisiana, including some carrying costs.
Both Arkansas and Oklahoma have also passed legislation for securitization.
In Minnesota, we are pursuing recovery of storm-related costs, including some carrying costs due to the existing gas cost recovery mechanism over a two-year period.
And in Texas, a state-sponsored securitization bill on incremental gas cost has already passed through the house and is being considered by the Senate.
We believe there is good momentum behind this bill.
So while not completely behind us, we are getting closer to checking the incremental gas cost box.
We have said all along that we have strong regulatory relationships, and that belief is supported by our progress in working through this event.
On the electric side, the Texas PUC is undergoing a complete turnover, and we look forward to building our relationships with the new team.
There's also been some legislative progress around the proposal to increase grid resiliency in Texas.
In Texas, several proposed bills have been moving that are intended to protect systems and customers from a repeat of the electric disruption we saw in February.
We are very encouraged by the progress, and we see this as an opportunity for the system as a whole to find better ways to serve our community.
We remain on course for a $16 billion-plus capital spending program and industry-leading 10% compounded annual rate base growth target over the next five years.
For 2021, we are on track to spend the full $3.4 billion outlined on our Investor Day.
Similar to our earnings, there is a seasonality to our capital spend where we typically ramp up spending as the year progresses.
As stated previously, we have opportunities above our current $16 billion five-year plan and the $300 million in incremental proceeds from the ultimate sale of our Arkansas and Oklahoma LDC assets transaction will provide additional capacity for us to pursue some of these, if we so choose.
So let's check the capital spending box as being on track.
We have talked about our industry-leading organic customer growth rates.
Despite the impact of COVID, we again saw about 2% growth rates quarter-over-quarter, reinforcing the value of the fast-growing markets that we serve.
That organic growth plays a part in keeping our service costs reasonable for our customers.
In addition, we take a disciplined approach to reducing our O&M expenses to benefit our customers.
We are on track to reduce O&M by 2% to 3% in 2021.
However, given the incremental opportunity set we see to reinvest in our business, we may take the decision to reinvest some O&M savings back into our utility assets this year.
This is a great luxury to have.
So for 2021 on O&M, let's check that box as being on track.
Next up is our commitment to environmental stewardship.
We are well under way in developing and then announcing what we believe will be an industry-leading carbon strategy.
On that front, a critical constructive piece of news was recently received in Indiana, where we received a very positive Indiana Director's report for our IRP.
Though our Indiana IRP does not require approval, the directors report has provided us with the confidence that we are headed down the right renewable path with both regulators and our communities.
Since our last earnings call, we have reviewed our updated ESG plans with our Board and are preparing a rollout of our transition to net zero.
We should be in a place to disclose these exciting plans in the third quarter.
Since this is still a work in progress, we cannot check the box here, but I am very happy with the progress that we are making.
I've been looking forward to these calls every quarter, because we have so many exciting things to share with you as we execute our long-term strategy that we outlined on Investor Day.
I strongly believe that the strategy we laid out and the progress we have made so far more than demonstrates what a unique value proposition CenterPoint offers.
Just to echo Dave's sentiment, we're looking forward to seeing more of you in person in 2021.
To continue the theme of execution and delivery, I want to start by reviewing our quarterly results with you as well as provide some incremental details on a few events Dave highlighted.
Let me get started with our first quarter earnings.
On a GAAP basis, we reported $0.56 for the first quarter of 2021 compared to a loss of $2.44 for the first quarter of 2020.
Looking at slide four.
We reported $0.59 of non-GAAP earnings per share for the first quarter of 2021 compared to $0.60 for the first quarter of 2020.
Our utility earnings per share was $0.47 for the first quarter of 2021, while midstream investments contributed another $0.12 of EPS.
The notable drivers when comparing the quarters are strong customer growth across all of our jurisdictions and rate recovery, which makes up $0.05 of the favorable impact.
Our disciplined O&M management contributed another $0.03 of positive variance for the quarter.
The growth drivers were partially offset by the $0.09 from share dilution due to the large equity issuance back in May 2020 and $0.03 due to the nonrecurring CARES Act benefit we received last year.
Turning to slide five.
We are very pleased with the high level of interest we received for our Arkansas and Oklahoma gas LDCs as we've conveyed through the entire process.
As Dave said, there were interested parties across the spectrum, which drive a highly competitive auction process.
The successful outcome emphasizes the high-quality nature and supportive regulatory frameworks that are present in all of our businesses.
We're preparing to commence the regulatory approval process and anticipate a close by the end of the year.
The integrated nature of the operations between these two jurisdictions will also accelerate the carve-out in integration process with the new owners as we work toward closing and will facilitate delivering on our commitment of reducing any remaining allocated O&M.
As shown on the slide, this transaction priced at $2.15 billion, inclusive of $425 million of incremental gas cost recovery.
The $1.725 billion in proceeds, after the natural gas cost recovery, represents a multiple of 2.5 times 2020 rate base and a multiple of 38 times 2020 earnings for those businesses.
This earnings multiple is based on the purchase price of $1.725 billion, reduced by approximately $340 million of implied regulatory debt compared to $36 million of 2020 full year earnings.
This transaction multiple, consistent with some of the highest multiples paid for gas LDCs, demonstrates that the market continues to see gas LDCs playing a pivotal role in our country's energy supply by providing affordable, efficient and lower carbon energy sources for our customers.
The net proceeds from this sale are estimated to be $1.3 billion after tax and closing costs as our Arkansas and Oklahoma assets have a relatively low tax basis of approximately $300 million.
While there's been a lot of focus on tax leakage, we were clear at our Investor Day that our five year plan assumed full tax on the gain on sale for these assets given the low tax basis.
Therefore, the headline is the competitive auction process will, at close, result in generating an additional $300 million in after-tax proceeds than what was assumed in the original five year plan.
To zero in on the use of the incremental $300 million of proceeds, we will prioritize funding an increase in our capital investment plan.
It is important to note this incremental capital will be deployed in 2022, and as a result, will likely impact 2023 earnings and beyond once the capital has been approved in rate base.
We will also evaluate using some of the excess proceeds to delay the start of our at-the-market equity program that was originally slated for 2022.
We're grateful I have these options.
I'd also like to reiterate that this disposition will not change our 2021 utility earnings guidance range.
It is also important to reiterate Dave's point that the premium multiple achieved through this transaction as well as the performance of the systems through the recent winter storms reinforces that there are many states that see natural gas as a viable low carbon fuel source and the market has been undervaluing these assets.
And as renewable fuels continue to advance, our systems will have the proven capabilities to adapt and evolve along with them.
Turning to slide six.
Dave discussed that we are still on pace to close the Enable and Energy Transfer merger in the second half of this year, and then we'll look to liquidate our midstream position in a disciplined but efficient manner.
As a reminder, we will have $385 million of energy transfer preferred units that we can liquidate at any time after the merger closes.
The $200 million of Energy Transfer common units we will receive in the merger will be registered through a process that will likely take two to three months after close.
We will have the flexibility to either dribble those units into the marketplace or sell through up to five block offerings.
As we've noted in the past, our negative tax bases at Enable will carry over to Energy Transfer units and will result in an effective 50% tax on the sale.
As previously discussed, we continue to explore tax mitigation strategies across the company to offset the burden that may come with a common unit sales and continue to have confidence we can reduce the tax leakage.
As a result, I'd like to reaffirm that the sale of the Energy Transfer units will not change our utility earnings per share growth target of 6% to 8% annually.
As Dave mentioned, we have actively worked with suppliers, which has, in part, helped to reduce the overall incremental gas costs from the winter storm to $2.2 billion, down from $2.5 billion we signaled last quarter.
In addition, CenterPoint regulators and legislators have all been working over the past few months to align on cost recovery methods that suit the needs of all of our stakeholders.
As laid out on slide seven, we have multiple mechanisms available to us for cost recovery.
two states have already initiated interim recovery.
Another two states have enacted a legislation enabling securitization, and Texas has a securitization bill pending.
Between the securitization, the sale of the gas LDCs and the interim rate recovery, we now expect between $1.6 billion and $1.7 billion of the total incremental gas costs to be recovered before the one year anniversary of the storm, assuming the Texas securitization bill is signed into law.
We are grateful for the diligence of our regulatory team and the constructive support of our commissions across our jurisdictions for getting us to this point.
Turning to our financing updates.
We closed our $1.7 billion CERC senior notes offering on March 2, which included $1 billion of floating rate notes and $700 million of fixed rate notes, both due in 2023.
The proceeds for the $1.7 billion issuance were used to pay for the incremental gas costs for the winter storm and the notes have an optional redemption date at any time on or after September two of this year, giving us full flexibility to pay down this debt consistent with our regulatory recoveries.
Recovery of the carrying costs and the majority of the impacted states such as Texas, Louisiana, Arkansas and Oklahoma will help offset the incremental interest cost from this debt issuance.
Our current liquidity remains strong at approximately $2.1 billion after the issuance of the senior notes proceeds and the payments made for the incremental gas costs.
Our long-term FFO to debt objective is between 14% and 14.5% and is consistent with the expectations of the rating agencies.
We continue to actively engage with them, and they are comfortable with the outlook and thresholds we've indicated.
I'd like to reiterate, we have no large equity issuance needs over our current planning horizon and can now reevaluate the need for our ATM program in 2022, depending on how we utilize the expected proceeds from our LDC asset sale.
I hope it's becoming clear that our story is streamlining nicely as we prove to you, our investors, that we're delivering on our plan as outlined.
We are reducing our exposure to nonutility businesses, realigning our balance sheet to reduce our reliance between intercompany borrowings and parent debt and committing to efficiently fund our industry-leading rate base growth.
These are the updates for the quarter.
Both Dave and I are excited about the direction CenterPoint is taking, and we cannot wait to share more good news with you as we continue to execute on our plan throughout 2021 and beyond.
Over to you, Tom.
Five months after our strategy-revealing Investor Day, CenterPoint, as you just heard, is well under way executing its strategy.
It's dispensing with volatile noncore nonutility businesses, think Enable; implementing efficient financing, think gas LDC sales; introducing clean energy, think coal closures, renewable additions and much more; and improving performance, think continuous improvement, a whole new culture.
Dave and Jason already have highlighted details about each of these as strategic changes are nearing completion, our premium utility operation is humming.
I hope you see it.
I hope you feel it.
We really sweat the details, so you don't have to.
We have superior rate base growth, delivering needed capital investment.
Our growth rate target of 10% outstrips the peer average of about 7%.
Our resulting utility earnings per share growth target at 6% to 8% every year is well above the peer average of 5%.
And our customer growth at 2% is something we would celebrate at my old company, with top quartile customer satisfaction, we still seek to hold down customer price increases, reducing our O&M cost by 1% to 2% every year.
Coupled with customer growth, this creates a lot of headroom for the needed capital investment.
Five months ago, we showed you our five year plan to reduce costs 1% to 2% each year.
We added the detail for 2021 during our last call.
And here, you can see our progress in the first quarter.
We plan for a fast start with 2021, down 2% to 3%, with results in the first quarter faster yet.
Please keep in mind, some of this is timing.
We still expect to reduce costs by about 2% to 3% for the year.
As you know, one of our tools is our continuous improvement initiative.
We improve our processes from the ground up to 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 and higher every day.
Each day, I observe more who are proud to wear the colors.
Continuous improvement takes time to ramp up.
It's a powerful process.
It shifts dependence from heroic individual work to better processes that can be repeated.
As we succeeded eliminating human struggle, the cost will fall out.
My favorite chart is on the right.
We take on the headwinds.
We take advantage of the tailwinds.
We deliver our earnings per share commitment consistently every year.
We really do sweat the details, so you don't have to.
As I have experienced elsewhere, this management team may do so well on cost reductions that it can pull ahead work from next year, reinvesting savings to benefit our customers sooner.
We did this last year.
We maximize resources for customers and deliver our commitment to you, our investors.
No more, no less, a win-win.
Dave, Jason and this superb leadership team know the secret sauce.
They are working for both our customers and our investors, no or's here.
Back to you, Dave.
I want to reemphasize what we consider critical elements as we transform CenterPoint into a premium utility we believe it can be.
We will continue to deliver sustainable, predictable and consistent 6% to 8% earnings growth year after year.
With our industry-leading organic customer growth and our disciplined O&M management, we believe we can generate robust capex and 10% rate base growth while continuing our focus on safety.
We also look forward to unveiling our enhanced ESG strategy that will put us as an industry leader for a net-zero economy.
We will continue to keep our eyes on maintaining and enhancing our balance sheet and credit profile.
We have executed on our capital recycling strategy through our announced gas LDC sale at 2.5 times rate base and investing at 1 times rate base, and we will continue to explore opportunities to do more of this.
We remain absolutely committed to delivering an economically viable path to minimize the impact of our midstream exposure and eventually eliminate it.
And finally, as we work to move toward a fully regulated business model, we continue to stay focused on our utility operations and improving the experience for our customers.
I hope you will join us on this path of transitioning CenterPoint into a premium utility.
While myself, our team and our employees are only 10 months into this new journey, I could not be more pleased by the momentum we have, what we've accomplished and the bright future we see for CenterPoint.
What you see is the new CenterPoint, where you can expect consistent and predictable earnings and rate base growth, world-class operations and growing service territories and a commitment to delivering on our promises to you, our investors.
We sweat the details, so you don't have to.
We will now take questions until 9:00 a.m. Operator?

user
centerpoint energy - qtrly earnings per share $0.56.
q1 non-gaap earnings per share $0.59.
q1 earnings per share $0.56.
reaffirming 2021 utility earnings per share guidance range of $1.24 - $1.26 and reiterating 6% - 8% utility earnings per share annual growth rate target.
on path to deliver 10% compound annual rate base growth through $16 billion 5-year capital plan.

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