CenterPoint Energy, Inc. (CNP) Q1 2013 Earnings Report, Transcript and Summary

Good morning, and welcome to CenterPoint Energy's First Quarter 2013 Earnings Conference Call with senior management. [Operator Instructions] I will now turn the call over to Carla Kneipp, Vice President of Investor Relations. Ms. Kneipp?

Thank you very much, Sarah. Good morning, everyone. Welcome to our first quarter 2013 earnings conference call. Thank you for joining us today. David McClanahan, President and CEO; Scott Prochazka, Executive Vice President and Chief Operating Officer; and Gary Whitlock, Executive Vice President and CFO, will discuss our first quarter 2013 results and provide highlights on other key activities. We also have other members of management who may assist in answering questions following the prepared remarks. Our earnings press release and Form 10-Q are posted on our website, centerpointenergy.com, under the Investors section. I remind you that any projections or forward-looking statements made during this call are subject to the cautionary statements on forward-looking information in the company's filings with the SEC. Before David begins, I would like to mention that a replay of this call will be available on CenterPoint Energy's Investor website and will be archived for at least 1 year. And with that, I will now turn the call over to David.

Thank you, Carla, and good morning, ladies and gentlemen. Thank you for joining us today, and thank you for your interest in CenterPoint Energy. This morning, we reported first quarter 2013 net income of $147 million or $0.34 per diluted share, the same as reported in the first quarter of last year. Operating income for the first quarter of 2013 was $332 million compared to $338 million last year. Overall, it was a good quarter for our balanced business portfolio. Our Regulated Natural Gas Distribution unit benefited from a return to more normal winter weather, continued strong service territories and timely rate recovery mechanisms. Our Field Services unit continues to benefit from its contracting strategy and earnings from recent acquisitions. Our Competitive Natural Gas Sales and Services unit also performed well. The improved results of these units largely offset anticipated declines in our electric utility and Interstate Pipelines. I am pleased to report that we closed yesterday on our midstream partnership, which, as you may recall, combines our Interstate Pipelines and Field Services units with Enogex, OGE's midstream business. We believe the combination of our 2 midstream businesses will provide accelerated value creation through greater scale, geographic reach, diversification and expanded service capabilities. We believe we can grow faster and capture more midstream opportunities as a combined entity than we could have alone. We are eager to transform our 2 organizations into 1 business and to now begin to capture commercial and operating synergies and jointly pursue the significant opportunities we seek for this partnership. We are conducting a thorough evaluation of both internal and external candidates for our key leadership positions, and that process is well underway. We have formed a program management office comprised of functional and business leaders from both CenterPoint Energy and Enogex to develop and implement comprehensive long-term integration plans. These efforts can accelerate now that the partnership has been formed. While our leadership team is being assembled and our integration activities progress, day-to-day operations of the partnership will be conducted by existing management. Our plans for an initial public offering in the form of a public master limited partnership are on track, and we hope to complete these efforts within the next 6 to 12 months. Under SEC regulations, we are limited in what we can say about the financial and strategic details of the partnership until an S-1 registration statement for the IPO is filed with the SEC. However, there are some questions we can address at this time. A number of you have asked about our intentions with regard to ongoing ownership in the MLP. We fully intend to maintain ownership in the midstream partnership. A diverse and balanced business mix remains important to CenterPoint, and participating in the ongoing development of the U.S. natural gas and liquids infrastructure is consistent with our energy delivery strategy. We have also been asked about CenterPoint's dividend policy going forward. We know our dividend is an important component of the total return expected by our shareholders. We believe the additional cash flow generated by the partnership will provide flexibility as we evaluate future dividend levels and capital allocation decisions. We also continue to receive questions about the accounting for the partnership. First, CenterPoint does not expect to record a step up of book basis in connection with the partnership's formation. And second, we expect to record our portion of the midstream partnership's earning using the equity method of accounting. Let me conclude by reiterating how excited we are about this partnership. We believe the partnership will create long-term value and significant cash flows for CenterPoint. Going forward, we expect that CenterPoint will not be valued on an earnings basis alone. Instead, we anticipate our regulated operations as well as our GP ownership will be valued on an earnings multiple basis, while our LP interest in the midstream partnership will be valued consistent with the public valuation of the partnership following its IPO. We believe this will provide a more transparent valuation for CenterPoint as a whole. I'll now ask Scott to update you on the business performance of each unit for the first quarter of 2013.

Thank you, David, and good morning to everyone. Starting with Houston Electric. Core operating income was $49 million in the first quarter of 2013 compared to $70 million the prior year. While revenue from customer growth remained strong from the addition of over 44,000 customers, other factors, particularly the timing of right-of-way revenues, caused a decline in our year-over-year performance. We also experienced slightly higher operating expenses, depreciation and other taxes. Some of these impacts are timing-related and are expected to reverse over the balance of the year. The Houston area remains a leader in job creation, with metropolitan job growth outpacing the nation as a whole. We continued to enjoy a steady commercial growth and strong housing starts. As a result, we have forecasted a customer growth rate of approximately 2% annually. I am particularly pleased with the first quarter performance of our Natural Gas Distribution unit. Operating income was $139 million compared to $121 million the prior year. This unit benefited from a return to more normal weather, timely rate recovery from existing mechanisms, effective bad debt management and continued customer growth with the addition of more than 29,000 customers. Our Interstate Pipelines achieved income from operations, including equity income from SESH, our joint venture with Spectra, of $57 million in the first quarter of 2013, down from $66 million last year. Factors driving this decline include reduced ancillary services and lower off-system transportation revenues. Compressed basis contributed to a reduction in pricing and volumes on some contract renewals. Operating income increased by approximately $5 million in the first quarter of 2013 compared to the fourth quarter of 2012. This increase is driven by the seasonality in demand charges associated with our natural gas distribution customer contracts. Equity income from SESH was $5 million for the first quarter of 2013 compared to $6 million the previous year, down slightly due to unplanned pipeline maintenance. As you may recall, in August of 2012, we filed to adjust rates for our MRT pipeline. The FERC staff and other participants in the docket have filed initial testimony. In the absence of a settlement, the FERC procedural schedule contemplates a hearing in the third quarter of this year with a decision expected by year end. Our field services unit had a solid quarter. Income from operations was $53 million this quarter as compared to $50 million last year, which included $3 million of equity earnings from the Waskom joint venture. This improvement was driven by earnings from acquisitions made in 2012, throughput commitments and higher natural gas pricing on the sale of retained gas. These benefits were partially offset by reduced gathering volumes and lower liquids pricing. Our total natural gas gathering volumes averaged about 2.1 billion cubic feet per day in the first quarter of 2013 as compared to 2.6 Bcf per day in the first quarter of last year and 2.2 Bcf per day last quarter. Given lower volumes, we continue to see the benefit of our contracting strategy of throughput commitments and guaranteed returns. Last month, we signed a 15-year agreement to provide gas and oil gathering services in the Bakken shale region for XTO, a subsidiary of Exxon Mobil. This project, which is included in our midstream partnership, is expected to cost between $100 million and $125 million. With the benefit of annual and term volume commitments, we expect to generate returns in line with our target midstream hurdle rate. Today, trucks are the primary source of transportation for gathered project -- products in this region. Gathering infrastructure will give customers a safer and more efficient and reliable way to move their products to centralized transportation hubs. Survey, permit and right-of-way work have been substantially completed by our team, and we are preparing to begin construction in early summer. We are excited about this opportunity for our midstream partnership as we move into an underdeveloped area outside our current footprint with a top producer with whom we have a great, long-standing relationship. We believe our past performance as a safe, on-budget and on-time service provider helps to differentiate us from our competition and positions us to expand in this and other emerging crude oil and liquids rich shale plays. Our final segment is our Competitive Natural Gas Sales and Services business. Operating income for the first quarter of 2013 was $7 million compared to $1 million last year. After adjusting for a $4 million mark-to-market change, the results improved by $10 million over the first quarter of 2012. This business is benefiting from improved margins. In summary, I am pleased with the overall first quarter results and excited about what lies ahead. We will work diligently to ensure our businesses perform as expected as we continue to look for investment opportunities. I will now turn the call over to Gary.

Thank you, Scott, and good morning to everyone. Let me first update you on the status of financing of the midstream partnership. We are very pleased to say that working with our partners at OGE, we have arranged 2 very successful credit facilities. At closing, the partnership entered into a $1.4 billion revolving credit facility and a 3-year $1.05 billion term loan. The revolver will be available to meet the ongoing liquidity needs of the partnership, and the term loan was used to repay intercompany loans to SERC. We expect the partnership to have investment-grade credit ratings, and the initial drawn and undrawn costs are at attractive rates. Turning to other financing activities at CenterPoint. We paid off 2 series of outstanding debt at maturity thus far this year. First, Houston Electric repaid, on March 15, $450 million of debt carrying an interest rate of 5.7%, resulting in interest expense savings of approximately $25 million annually. Second, in anticipation of our midstream partnership, on April 1, we repaid $365 million of 7 7/8% SERC notes, resulting in interest expense savings of approximately $29 million annually. SERC will utilize the payment it has received from the midstream partnership to achieve an appropriate capital structure to support our portfolio of natural gas distribution and competitive gas sales and services businesses. Now I'd like to discuss our earnings guidance for 2013. This morning, in our earnings release, we announced revised earnings guidance in the range of $1.17 to $1.25 per diluted share. This guidance range takes into consideration the closing of our midstream partnership on May 1, the performance to date of our businesses, as well as an estimate of our portion of the partnership's earnings for the balance of 2013. The actual earnings of the partnership will be dependent on a number of variables, the most significant being commodity prices, volume throughput and the net synergies realized as the partnership's operations are integrated. We expect the impact of the midstream partnership on CenterPoint's EPS to be accretive by 2015, if not earlier. In addition to the impact of our midstream partnership earnings, we continue to provide earnings guidance in the form of a range to reflect the number of other economic and operational variables such as weather, regulatory proceedings, effective tax rates and financing activities. As the year progresses, we will keep you updated on our earnings expectations. Finally, I would like to remind you of the $0.2075 per share quarterly dividend declared by our Board of Directors on April 25. We believe our dividend actions continue to demonstrate a strong commitment to our shareholders and the confidence of management and the Board of Directors in our ability to deliver sustainable earnings and cash flow. Thank you for your continued interest in CenterPoint Energy, and I will now turn the call back over to Carla.

Thank you, Gary. Please note, since we plan to pursue an IPO of our midstream partnership, we are restricted by SEC regulations in the details that we can discuss. [Operator Instructions]. Sarah?

[Operator Instructions] Our first question is from Ali Agha with SunTrust.

I wanted to be clear, the $0.05 reduction in guidance for this year, is that primarily almost due to the near-term dilution from the MLP formation? Is that the way we should think about it? Is the $0.05 essentially coming from there?

I think that is the right way to think about it, yes, Ali.

Okay. And then, should we think, I mean, given Gary's remarks, that we should see a kind of a similar impact, perhaps in '14, before the accretion comes into play in '15? Is that the profile that roughly we should think about?

I think you're going to -- this dilution will decline next year, and then it'll be accretive in 2015 based on our assumptions today. We have some things, and hopefully, we'll be able to win some additional business that will actually change that profile and make it a lot quicker than the base case we're looking at. But it's going to -- the dilutive effect is going to be less next year, and then it will be -- we believe it'll be accretive in 2015.

Yes, and my second question. David, previously you had highlighted, I think, about $500 million of excess cash at CenterPoint. I just wanted to get a sense of what that number would be right now. And given this MLP formation, I'm assuming that cash is now available for CenterPoint to use for different areas than just building out its midstream operation. So I'm just wondering what your priority would be for that excess cash now?

You want me to take that?

Yes, Gary wants it.

Yes, I'll take that, Ali. Look, as I said in my comments, as you know, we have paid down some debt, so we have used essentially all of the cash that we had, although we were in an invested position at the end of March. So we have used that cash. And then this year, as we formed -- until we do the IPO, we may have some additional cash that we inject into the joint venture, depending on the timing of the CapEx there and the IPO. So I want you to think of the cash as, effectively, that we've had, historically over the last couple of years or 18 months or so, we've applied that cash, mainly to invest in some debt paydown.

Your next question comes from the line of Matt Tucker with Keybanc Capital Markets.

Just a clarification on the timeframe you gave for the IPO. I heard 6 to 12 months. Was that for a completion of the IPO process? And if so, do you have an expected time frame for the S-1 filing?

Yes, it is for a completion. We are working hard at that as we speak. We're going to try to get the S-1 on file later on this year. I -- we'd like to shoot for the September timeframe or late summer. And it takes time to get all this stuff through the SEC and review, and then make sure the markets are right as well. But we're going to do that as quickly as we can to make sure we get the right value for it as well.

Great. And then on the electric side, you called out some expenses that you expect to kind of reverse as the year progresses. Can you elaborate a little bit on that?

Scott?

Yes. Matt, this is Scott. I'll take that one. The delta we saw in performance quarter-over-quarter was driven by a couple of major things, one of which was the timing of the right-of-way. That was almost half of that delta, and the cause of that is, last year, in the first quarter, about half of the right-of-way revenue we received in the year came in the first quarter, whereas this year, the right-of-way revenue is going to be skewed more towards the middle to the back end, so the quarter-over-quarter comparison was different by about half of that delta you saw. And on the other side of it, we saw some expenses that are going to be -- are going to reverse as we go through the year. Some of it has to do with the fact that we've spent a little bit less capital than we had planned in this first quarter, and as we spend more capital to make up our full budget, we'll make up some of that expense delta.

Your next question comes from the line of Charles Fishman with Morningstar.

Lower gathering volumes for Field Services. I would have thought with the uptick in natural gas prices, maybe we would have seen an increase in that. Could you give a little more color on that?

I'll ask Greg Harper to address that.

Yes. With the increase in gas prices that we saw kind of going into the quarter, we are seeing the rigs move back into our drier gas plays, Haynesville in particular. So we think we'll start seeing the uptick from those rigs coming in the second and third quarter, for sure.

Okay. And then on -- just one more quick one on the right-of-way. I understand the timing issue. But in the fourth quarter, you indicated that the right-of-way revenues would be well above historical. That's still the case, correct?

Yes, that is the case. We expect that the right-of-way revenues will be kind of well above that fairly low historical number, closer to what we experienced last year in terms of overall magnitude for the year.

Your next question comes from the line of Steven Fleishman with Wolfe Research.

Just first, could you give us a sense on the likely timing of the new management team at the MLP entity? Is this something over the next couple of weeks? Is it going to take a few months?

Well, Steve, we're -- as I said in my direct remarks, we're working hard at that. We actually -- this thing closed a little bit faster than we thought. We had kind of targeted, early on, an early June close rather than May. But once everything cleared, we were anxious to get it closed. So I would say, we're shooting as quickly as possible, certainly within the next 30 to 60 days.

Okay. And then on -- maybe, David, you could give us a little color, strategically, for the rest of CenterPoint outside the MLP? What are you going to be thinking about in terms of strategic focus? You have more cash coming in, et cetera. Could you just give a little color there?

Two comments there, Steven. First, as you know, we're very fortunate to have terrific service territories for our existing businesses. Our organic growth is robust. Our Houston Electric, we should see rate base growth there of 5%. And our gas LDCs will -- that will approach 7% over the next 5 years. So we're going to have good, healthy growth in our existing businesses. We are also looking to say, can we increase that regulated footprint? We would love to do that. We continue to analyze that and see what makes sense, and we'll continue to do that, and as you know, and it's hard to do a regulated M&A deal, but that's -- but they're not impossible, and we continue to work hard to see if anything might make sense that can create value for our shareholders.

Your next question comes from the line of Jeremy Anot (sic) [Tonet] with JPMorgan. Jeremy Tonet - JP Morgan Chase & Co, Research Division: This is Jeremy Tonet. I was just curious, with gas above $4, if you could comment more -- maybe more specifically on the Haynesville, if you're seeing any improvements in driller activity there? And also, it seems like basis differentials might be starting to improve a bit. Do you see any benefits to your Interstate Pipeline system?

Yes, this is Greg. As I mentioned on a previous answer, the Haynesville, and as we talked about in the first quarter -- the first quarter during the year-end call, Encana has announced, along with Shell, that they're moving up to 5 rigs back into the Haynesville. We've already seen 1 rig move over, so that makes a total of 3 drillings, so we expect 5 by the end of year, if not more, if gas prices keep going up. So again, they just need to bring those wells on through the next quarter and third quarter. As far as basis differentials, we're not seeing the big spreads -- we're not seeing big spreads. Going from negative $0.01 to $0.02 is not going to drive a lot of movement yet. We need to get $0.20, $0.30 to see, I think, good improvement.

[Operator Instructions] Our next question is from Eli Kraicer with Millennium.

It's Steve Gambuzza. Just on the tax rate, I believe that you'd -- on your fourth quarter call, you had guided for a 30% -- 37% effective tax rate for 2013. I believe you came in a bit below that in the first quarter, and I was just curious what the update for the transaction, if there was any change in that tax rate.

Steve, this is Gary. No, there's not -- we would expect a 37% tax rate, still stay around that. A little movement between quarter, but stay with 37%.

Your next question comes from the line of Sarah Akers with Wells Fargo.

You mentioned the potential for additional midstream opportunities. Can you provide an update on RFPs, either specific opportunities or more generally on the landscape, if it's heating up at all or if RFPs continue to be pushed out?

Sure. This is Greg, again. I'll talk pipelines first. And I think we mentioned on the last call that we were preparing to place our bid into the Florida Power & Light RFP that they're having for a big major new pipeline into Florida. We did do that. So they're -- I think they mentioned on their earnings call that they'll be evaluating those and, hopefully, have a second round by August. We're in discussions with them on our proposal, as I'm sure others are. But we feel good about what we've put together. On the field services side, as we mentioned on the Bakken information and Scott actually addressed in his comments, we see Bakken as -- this is not just a one-off investment. We see a lot of investment opportunity in the Bakken. We're one of the first independent gatherers of crude up in the Bakken, and we'd like to obviously leverage off that footprint. And we think there are potential other smaller systems that producers have been putting together. Now they're up for sale or will be. Mississippi Lime, in connection with the partnership, we know our partner, OGE and Enogex, are in some RFPs right around the Mississippi lime footprint, and we'll be excited to kind of start participating with them in that, with providing some exit capacity on our interstate pipes, so we see that as a great opportunity for us first coming together. Same thing with maybe in the Woodford area as well. And then we're also -- there will still be some other Mississippi Lime RFPs coming out in the more northern area of the Mississippi Lime, we think, in mid-summer.

This concludes CenterPoint Energy's First Quarter 2013 Earnings Conference Call. Thank you for your participation.