Q4 2020 CenterPoint Energy Inc Earnings Call
[music].
Good morning, and welcome to Centerpoint Energy's fourth quarter, and full year, 'twenty and 'twenty earnings conference call with senior management.
And the company's prepared remarks, all participants will be in a listen only mode.
And there'll be a question and answer session after managements remarks.
Ask the question Press Star one on you touched on and keep that.
To withdraw your question press pound.
I will now turn the call over to Phil holder Senior Vice President of the strategic planning and Investor Relations Mr holder.
Good morning, everyone. Welcome to Centerpoint earnings Conference call, Dave was our our CEO, Jason Wells, our CFO and Tom Webb, our senior adviser, who will discuss the company's fourth quarter and full year 'twenty and 'twenty results.
Management will discuss certain topics that will contain projections and other forward looking information and statements that are based on management's beliefs assumptions and information currently available to management of these forward looking statements are subject to risks or uncertainties actual results could differ materially based upon various factors as noted in our form 10-K, other SEC filings and.
Our earnings materials, we undertake no obligation to revise or update publicly any forward looking statements. We will also discuss guidance basis utility EPS for 'twenty and 'twenty, one and providing guidance Centerpoint energy uses a non-GAAP measure of adjusted diluted earnings per share.
For information on our guidance methodology, and a reconciliation of non-GAAP measures used and providing guidance. Please refer to our earnings news release and presentation, both of 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 other than the financial results. We will also.
And to address the impact of the recent storm event and enables announced merger as a result, we may have less time for Q&A. If you have any questions that do not get answered please feel free to reach out to the IR team.
This call is being recorded information on how to access the replay can be found on our website now I'd like to turn the discussion over to Dave.
Thank you, Phil and I want to welcome you to our Centerpoint team and good morning to everyone.
During our Investor day. This past December we unveiled our strategy to take advantage of our organic growth and increased capital spending opportunities to deliver consistent earnings growth of.
Offer industry, leading rate base growth reduce costs to invest and the future.
Take our leading stance on E S G.
Minimize our exposure to the midstream.
We focus on core utility operations and most importantly continue to provide a resilient grid for our customers. We are excited to share our significant progress against those objectives with you today before we start I want to update you on the impacts of last week's devastating.
The winter storm event that struck Texas, and our broader service territories.
It was undoubtedly an extremely difficult week across our service territories, especially for Texans Wiener.
We know many of our customers faced very difficult conditions, and our hearts go out to those and our communities who have faced substantial hardship and loss.
I am really proud of how our employees worked in very harsh conditions to help customers, even as their own homes and families were without power or experiencing damage from busted pipes as you know I like to lead things off with headlines. So let me give you the storm headlines first and.
Foremost, our Centerpoint electric and gas systems worked as designed and proved to be very resilient. Despite the impact of ice and snow freezing temperatures and the fluctuating power loads provided to us by ERCOT during the week.
All of these factors are tough on equipment, but our system did its job and was able to be quickly re energized our decision to increase utilities earnings guidance is an expression of our confidence that the storm will not impact of 6% to 8% utility EPS annual growth rate and.
And our ability to ramp up our capital spending efforts and grow our rate base at a 10% compound annual growth rate and.
As you know in Texas, we are not a generator of electricity and are dependent on of power supply dispatch to us by the ERCOT system.
Once we finally received adequate power from third party generators to transmit and distribute across our service territory. The resiliency of our system proved itself and over 98% of our 2.6 million electric customers had electricity within about 12.
Ours.
I believe that's pretty amazing and I'm very proud of our employees that worked tirelessly our gas system was equally tested and proved resilient as the storm and cold weather simultaneously impacted our eight state gas footprint, including very cold temperatures and Minnesota.
And despite of constant search for gas supply, we kept our line pressures up and we're able to serve our customers throughout the system.
We saw on natural gas price spiking very high the water system and electric pricing getting very high and Texas in all of our gas jurisdictions. We are fortunate to have regulatory mechanisms already in place and additional tools now at our disposal to recover these costs.
And the timely manner and to mitigate impacts to our customers' bills.
As you well know our electric business transmit and distribute power.
And our markets the local retail electric providers or our EPS are responsible for purchasing and electricity and take on the inherent risk of power pricing customer billing and collecting.
If and IEP was to cease to operate.
You should know and be confident that the existing regulatory mechanisms allow for us to recover any cost exposure, we might have due to bad debt expense. These events. Once again point out the benefit we have of operating and states that have favorable and supportive regulatory.
Tori processes.
And importantly for our investors, we will not have to seek any incremental equity to handle our increased storm related liquidity needs.
As we have mentioned many times, we are fortunate to work and constructive regulatory jurisdictions and fully expect these costs to be recoverable in a timely manner and in many of our jurisdictions, where these costs are the largest we already have the ability to recover of some carrying costs we have.
We're in the process of working with all of our regulators on that from an overall financial standpoint, we expect to incur incremental spend in 'twenty and 'twenty one related to their February winter storm, including additional operational expenses and purchased gas costs. At this time, we expect the total amount.
Out of incremental gas purchase costs to be about $2.5 billion spread of course, all of our jurisdictions and Jason will speak in further detail about this but before anyone becomes concerned I want to remind everyone that we believe we have ample liquidity from our credit facilities.
<unk> given our recently announced committed short term financing that will help bridge, our near term working capital needs as well as strong capital markets access and strong and timely recovery mechanisms. Therefore to put your minds at ease while we don't expect direct the impact of.
The storm event on our guidance based utility EPS range, we will incur modest additional interest expense related to some of these excess costs until they can be recovered. We view this more as an addressable working capital management challenge, which we will manage our way through as we have ample.
The size, we will sweat the details. So you don't have to this is a perfect example of where that comes into play.
Finally, ive been asked by the mayor of Houston to head up the fund raising for families of Houstonian, who may need additional help to recover from the storm, especially around home repairs and basic needs.
Centerpoint was proud to provide the lead contribution to this fund and I look forward to working in my capacity as chair of the effort to build upon this contribution and I think the mayor for the trust and confidence. He has placed in me the company and our employees by asking us to lead this important.
And endeavor.
Now, let's move on to the results of our business.
This call is also an opportunity for us to demonstrate to you that we are in fact now executing on the key objectives that we outlined during our December 7th Investor Day.
I will review the underlying elements of our core plan and share with you, how we are making meaningful inroads and each functional area.
Let me start with the next set of headlines we are presenting to you today.
We delivered 29 cents per share for the fourth quarter and the dollars 40 per share for the year on the guidance basis, beating consensus and our previous guidance.
More importantly, even factoring in the disruptions to our operations last week, we are raising our 2021 guidance based utility EPS range to $1 24 to $1 26.
This will now be the new and higher baseline for our future, 6% to 8% guidance growth target. We are of course also maintaining our $16 billion plus capital spend program and 10% compound annual rate base growth or.
Our gas LDC sales process is on track and we are moving to minimize our midstream exposure.
So as you can see we have been very busy since our investor day.
Turning to enable let me tell you how excited I was about the announcement of the transaction between enable and energy transfer on February 17th.
We said the you on our Investor day, the we are absolutely focused on reducing and eventually eliminating our midstream exposure through a disciplined financial approach.
All done and in a thoughtful way with the objective to optimize the long term benefit to our shareholders.
We followed that approach and now have a transaction that we expect to achieve the following.
And accelerated path towards a fully regulated utility business model improvement and our business risk profile by having our midstream investment anchored to a larger more diversified entity.
Exchanging our interest into a more liquid security, which will facilitate and accelerated exit.
The increased autonomy through the dissolution of the enable partnership giving us flexibility to make decisions about our exit strategy.
And of course, it reduces risk to distributions, while we wind down our position.
As to our exit strategy, we intend to exit and and accelerated but highly managed and sophisticated way that will not disrupt the trading of energy transfer.
Jason will talk to you more about the transaction itself, but I wanted to say to you loud and clear. So there is no confusion or concern about it. This transaction will have zero impact on our broader strategic goals. In fact, we believe it supports our guidance and rate base growth targets and our.
Higher 'twenty 'twenty, one guidance based utility EPS range as I stated previously we will continue to expect no additional equity issuance in 'twenty and 'twenty one beyond the drip process. We described in our Investor day. The fact that we'll have to absorb increased corporate allocations.
And the cost associated with the debt currently allocated to enable as we reduce our midstream exposure or just headwinds to manage managing these enable related headwinds were anticipated and have been and our thinking all along.
We clearly will not back away from the financial goals, we have shared with you because of these headwinds we.
We sweat the details so you don't have to does that sound familiar.
It should be as it applies here too.
Since we last talked I am excited that we have added two high caliber of financial leaders to our team Stacy.
Stacy Peterson now leads our treasury financial planning and analysis efforts and fill holder from home and you heard earlier now leads our strategic planning and Investor Relations teams, our entire executive team is hard at work to deliver on our stated objectives, which begins with.
The industry, leading robust organic growth and continues with disciplined operations and financial management.
In addition to our industry, leading organic growth our management team is committed to making centerpoint utility industry leader and ESG and environmental stewardship.
During our Investor day, we elaborated on the beginnings of our carbon reduction strategy with our coal retirements, and Indiana as well as adding renewable and green hydrogen initiatives across our L. D C service territories.
The share our early thinking on Centerpoint role and a net zero economy.
First we are focused on reducing the carbon emissions from our electric generation fleet and Indiana work that is already well underway and supported by our filing for the C. P C and for the solar elements of our IR Pea plants earlier this week.
Secondly, we are focused on minimizing our emissions from our core operations by adopting electric vehicles for our fleet utilizing.
Utilizing state of the art technology to detect and eliminate methane emissions from leaks on our gas system and by embracing energy efficiency and the buildings we own.
Third we are focused on reducing the carbon intensity of the gas we supply our customers and continue to evaluate ways to expand our renewable natural gas and green hydrogen pilots.
Fourth we are focused on enabling carbon reduction of others, either through connecting new renewable energy sources to our grid and Texas, facilitating the adoption of electric vehicles or helping customers adopt higher efficiency standards.
We understand the importance of reducing our carbon footprint as evidenced by the adoption of our carbon policy last year.
Recognizing that there is still more work to do we plan to release and enhanced ESG plan later this year.
Want to thank you all for spending your time with Centerpoint today, and before I hand, it over to Jason Let me reiterate what it means to be invested and Centerpoint and why we are a uniquely attractive value proposition.
Number one we are moving toward a fully regulated business with fantastic utilities and highly attractive jurisdictions our.
Our utilities have the potential to deliver to you robust rate base and earnings growth relative to other opportunities that you have and the sector.
Two we are committed to keeping our service affordable for our customers by reducing the O&M expense and continuously improving our processes to create the necessary headroom to support our robust organic utility growth.
While remaining focused on our commitment to safety, Tom Webb who's expertise on that we have enjoyed over the past months will be joining of shortly and share what work we have done so far.
Number three we are focused on delivering consistently on our industry leading earnings growth. We don't want you to have surprises or elements you don't understand as you evaluate our business.
Number four we have promised you that we will take steps to minimize our midstream exposure and are now on a clear path to deliver on that and.
I want to emphasize what a big step this is for us.
We are working towards a point, where midstream is no longer a topic of these calls.
And then we can all solely focused on what a great utility business we have.
Trust that we will continue to work on that.
Number five we are proactively working to strengthen our relationship with our regulators we are committed to doing right by our customers. So that our regulators can rest easy I have personally visited most of our regulators. During my short tenure as CEO and plan to engage with all of them on a regular.
For basis.
We are privileged to serve under some of the most constructive regulatory authorities and the country and we are working tirelessly to maintain those relationships.
Number six we are committed to balance sheet efficiency and high credit quality.
We will continue to work to recycle capital efficiently as we are doing with our gas LDC sales to further support our organic growth from our credit and financial perspective.
We are working to simplify our balance sheet and continue to improve our credit profile overtime, just recently S&P and Fitch his decision to remove centerpoint from negative watch confirmed that we are headed down the right path and we are not going to stop there.
And now I'm going to turn the call over to Jason. So he can talk to you about our financial results and provide more detail and what I have outlined I will be back at the end to share my closing comments and to answer your questions.
Jason.
Thank you, Dave and thank you to all of you for joining US this morning for our fourth quarter earnings call and.
And as Dave pointed out we shared many of those with you on our Investor day, and our team here is laser focused on delivering on them. Despite what is thrown our way the.
And the winter storm this past week challenge for the communities, we have the privilege to serve in extraordinary ways.
Our thoughts remain with our customers as they recover from the impact of the storm, but I want to add I too and proud of how our teams responded to the call for action the resiliency of our gas and electric systems during the storm and our ability of that continuing to deliver on our commitments to you our shareholders. During these extraordinary events, let me get started with our key takeaways from <unk>.
Today's call starting on slide three first we are pleased to report that for both the fourth quarter and the full year results for 2020, we beat both consensus and our most recent guidance given our ability to also pull forward. Some additional work into 2000 and 'twenty, we of the confidence and increasing our guidance basis utility EPS range for 2021 two.
And of $1 24 to $1 26.
This will be the basis for our consistent 6% to 8% guidance basis utility EPS growth year after year.
Like we've committed to your second we've recently shared that enable has entered into a merger agreement with energy transfer that would result in energy transfer acquiring and enable upon the closing of the transaction, including all of Centerpoint interest and in April.
And that's a big step towards Centerpoint has promised to minimize our midstream exposure and I'll talk more about this on a little bit.
Third we have shared our $16 billion, plus capex plan and our industry leading rate base compound annual growth rate target of 10% now that we are in 2021, we have already started to execute on that growth and remain confident and our ability to complete the work efficiently the sheer.
Fourth as Dave has touched on both he and I are taking a hard look at our ESG effort. We have multiple work streams underway in 2021 as it relates to transitioning our generation fleet and Indiana to be greener and cleaner beginning with the filing for the C. P C and for our solar generation component of our ERP. This week. We're also looking at.
Spanning our renewable natural gas and green hydrogen pilots to offset the carbon intensity of our gas system.
These things are already underway today.
We plan to do more and we plan to deliver on improved ESG focused strategy and the coming months.
Last but not least we will give you an update regarding our gas LDC sale process.
Looking back of 2000, and 'twenty, we had a strong financial performance across our utilities during the quarter and on a full year guidance basis. Despite many of the challenges 2020 presented.
It's the only goes to show how fortunate we are that we operate and such high growth constructive regulatory jurisdictions.
As shown on slide for for the quarter, our diluted earnings per share was 27 cents.
Guidance basis, EPS was <unk> 29 cents, a good margin above analyst estimates, we deliver 22 sense of guidance basis utility EPS for the quarter full year 2020 guidance basis utility EPS comes in and $1 17 per share. We ended the year with the dollar 40 of guidance basis consolidated EPS versus a loss of the dollar.
<unk> 79 per share on a GAAP basis, primarily due to the midstream related impairments recorded earlier in the year.
Looking at slide five you can see our primary drivers for the fourth quarter and year on results. The notable drivers our net customer growth and rate relief as well as disciplined O&M management. The unfavorable impact was largely driven by share dilution due to the large equity issuance back in May 2020, before we take a look at 2021 I want to cover our recent.
Announcement with respect to our investment and enable turning to slide six I want to emphasize that the announced merger between energy transfer and enable now puts us firmly on a path to deliver on our promise to minimize our exposure to midstream what's better is that through this transaction, we will reduce the risk of our future distributions and improve our business risk profile due to energy transfer.
Kale and desirable portfolio of long term take or pay contracts. Once we terminate our partnership agreement with the O Jeanie upon consummation of the transaction. We will also gain increased autonomy to exit our midstream investment with better economics and at a faster pace given the enhanced liquidity.
We want to be thoughtful on how best to maximize the value of our interest and energy transfer. So we're not providing a timeframe for exiting our exposure to midstream, but as Dave has mentioned, we will continue to use a disciplined approach and we will move at a pace of we believe our shareholders will appreciate.
Going forward, we are moving towards having almost 100% of our earnings come from our regulated businesses and we continue to feel confident and our ability to maintain our 6% to 8% guidance basis utility EPS growth target and the 10% rate base growth target and we've shared before now it's time to look forward to 2021, we continue.
And to see 2021 is a transition year as we move to a more fully regulated utility.
Accordingly, we will continue to provide guidance for and focus on our utility segment to provide clarity around the long term earnings power of the company. The main value drivers remain our impressive customer growth our enhanced capital investment plan and the hard work, we're putting into built around that O&M discipline.
And with those three things we believe our plan can weather the ups and downs as we've illustrated with our 2020 results.
In fact, our O&M discipline, and 2020 allowed us to accelerate some incremental work on our gas and electric systems, which allows us to increase our guidance basis utility EPS range to $1 24 to $1 26, as you can see on slide seven.
Due to the fact that enable has suspended initiating earnings guidance as well as the announced transaction between enable and energy transfer we are not in a position to provide guidance for the midstream segment at this time.
As a reminder for the midstream segment, we will continue to record our share of enables earnings as well as the basis difference accretion earn.
Earnings from the enable preferred distributions net of the associated amount of debt interest on the midstream note and and allocation of corporate overhead based on midstream and relative earnings contribution until the transaction closes the.
The transaction will be accounted for as a gain on sale of our investment and enable and our investment and energy transfer will be recorded at fair value, resulting in a net gain on the sale.
Upon closing of the enabled transaction with energy transfer of our investment and energy transfer of common units will be accounted for at fair value going forward.
Once we achieve more clarity following the transaction close we will establish guidance for the midstream segment based on the distributions from our energy transfer investments and the debt and corporate allocations previously described as a component of our midstream investment we will exclude mark to market gains or losses recorded for the energy transfer investments similar to the way that we treat our zens investments today.
To give you a sense of what we're looking at on a GAAP versus guidance basis for 2021, EPS I want to highlight some of the big adjustments related to the execution of our strategic plan. This year first upon consummation of the transaction between enable and energy transfer and we anticipate recording a large one time gain net of transaction costs on the exchange of.
Of our enable common units for energy transfer common units as we recognize the investment at fair value eliminating the basis differential we previously recorded.
Second we anticipate recording a large one time gain on the sale of our gas LDC businesses again. This gain will include the costs of the transaction.
Finally in January 2021, we recorded a $26 million loss on the early redemption of $250 million of 3.85% senior notes maturing in 2024 the redemption.
And is consistent with our liability management goals.
These are big steps, we're taking and this transition year to reposition centerpoint is a premium regulated utility.
We will also continue to exclude from her guidance basis results mark to market gains or losses on science and energy transfer securities as well as cost to achieve the integration of Vectren Biff.
Before I go through our financing plan for the year I want to briefly touch upon the impacts of the recent winter storm on our financials and light Dave I want to express my personal sympathy for those affected.
When we think about liquidity and credit metrics near term we have to address the recent and 2021 February storm event that affected customers and many jurisdictions, especially here in Texas.
There is no denying that the tightening and the natural gas market led to a surge and gas prices for our gas ldcs during those few days let.
Let me be clear, though we believe these costs to be fully recoverable for centerpoint.
Turning to slide eight at this time, there is about $2 $5 billion of total incremental gas purchasing costs that we incurred last week, but this is pretty well spread across our various service territories, except for perhaps our hardest hit Texas territory.
We are already and touch with regulators and are working on a path towards timely recovery of these costs, but also understanding that we need to be sensitive to the burdens of our customers are incurring during these difficult times.
Recently, the Texas Railroad Commission issued an order, allowing utilities to record any extraordinary expenses related to the winter storm event as a regulatory asset and confirming that we may seek future recovery of these extraordinary costs.
Following that order, we're already in conversations to explore recovery options for the Texas Railroad Commission and regulators and other impacted jurisdictions.
We are confident and our actions as we fulfill our duty to serve and our strong regulatory relationships will be highlighted here.
From a balance sheet and liquidity perspective.
We just received an additional $1 $7 billion of short term financing commitments. This along with our strong balance sheet provides a sufficient level of liquidity to support and anticipated increase and our near term working capital needs due to the February storm event, we expect cost recovery began and the third quarter of 2021 fall.
Knowing the normal recovery timelines and only a very modest impact of interest expense as a number of our jurisdictions provide for recovery of the financing costs associated with Unrecoverable balances.
Moving on to our financing plan on slide nine.
We remain disciplined on the balance sheet and and addressing our near term maturities earlier. This month and we completed a refinancing of our revolving credit facilities and extended the maturity to February of 2024 and.
In addition, we have some near term 2021 maturities at CE.
And at the parent that we will actively address over the coming months.
Our liquidity remains strong with liquidity of $2 1 billion as of February of 'twenty and before our recently received commitments on and additional short term financing of $1 7 billion.
We continue to engage with our rating agencies and discuss the key credit enhancing actions taken in 2000, and 'twenty and our progress on strategic initiatives such as our recent announcement with our enable investment.
With the announcement of the pending merger between enable and energy transfer Fitch and S&P of acknowledged our improved business risk profile by revising centerpoint credit outlook from negative to stable Fitch also upgraded the rating that shirt from triple B plus to a minus.
As it relates to equity we've already shared with you our plan and we plan on sticking to it the only a small drip program here in 2021 and introduction of a modest annual ATM program and 2022, no large block equity as needed.
Before I conclude let me provide a brief update regarding the potential sale of our two gas LDC businesses, and Arkansas and Oklahoma.
We continue to be very pleased with a robust level of interest. We have received and are even more confident that this is an efficient way for us to recycle capital and invest and our growth accretive utility businesses.
We expect to have a transition to announce and early second quarter of this year and complete the transaction by the end of the year.
We don't anticipate that the recent winter storm related events will impact our sales process, the regulatory mechanisms and Arkansas and Oklahoma are strong and if anything this event should further highlight the value of these utilities.
These are the updates, Dave and I believe and the importance of the regular cadence we have with you and we will continue to share our progress.
We have a lot more to show you as we move through 2021, and I have every confidence and our team here at Centerpoint that we will deliver on all of our promises.
Now, both Dave and I touch on our commitment to reducing O&M expense, while maintaining our focus on safety.
As many of you know this is an area about which Tom Webb is very passionate and which he is certainly an expert Tom has been working very closely with our continuous improvement team. So let me turn this over to Tom. So he can share with you. The work that we have done I'll be back with you at the end of the call and look forward to answering your questions.
Tom.
Thank you Jason.
And thank you to all of our coworkers, who rose to the occasion to help our customers last week.
Please let me share and example of what operational excellence can do.
As shown on the right of Slide 10, 2020 provided an early example of our commitment to our customers.
Our guidance basis utility EPS outlook was challenged by.
The COVID-19 well.
Weather conditions unanticipated share dilution and more it's all shown in red.
With the no excuses commitment in the second half management embarked on actions to right the ship meet our guidance.
However, coupled with better than anticipated economic recovery and good cost reduction performance.
We were going to surpass our EPS guidance.
This permitted us to put more resources to work back for customers our reason for being.
Not many companies do this we.
We sweat the details to maximize resources for our customers and for you our investors.
This management team together with empowered talented employees are executing on a tremendous opportunity to make substantial capital investment for customers and my opinion. It will result, and one of the highest rate base growth clips and the industry.
And with top tier organic growth and sector, leading cost reductions a good portion of this investment will be funded for our customers.
But do you believe our cost reductions are net reductions are real.
I do.
Take a look at slide 11 in December we showed you. This slide highlighting our five year plan, including O&M cost reductions of 1% to 2% a year of $110 million over the next five years.
We've added the column to show 2021, compared with 2020.
It's highlighted in Green and we plan of fast start with O&M costs down $44 million or about 3%.
Some of this is already on cruise control for example, what we call. The attrition is simply anticipated turnover of about 150 people.
Tire mints with one for one replacements with savings of about $25000 each for $4 million and total.
And this assumes that everyone will be replaced.
How 'bout enhanced capitalization merely replacing O&M expenses with smart capital investment, where it's appropriate this reduces cost to our customers moving from immediate expensing to capital recovery over time, there's no magic here.
And further because we were ahead of plan in 2020, we maximized resources for our customers pulling work ahead from 2021 into 2020.
New magic here either.
And importantly, our continuous improvement work is ramping up during 2021.
Even in this ramp up year, we expect savings of about $15 million.
Please don't misunderstand or underestimate the value of continuous improvement.
It provides the basics the building blocks of the safe reliable affordable clean and resilient systems.
It's a process driven rather than people dependent.
I suspect however, you're thinking if we can reduce costs by 3% and 2021 why can't we do it every year, especially since we had the big savings ahead as we seek to convert from coal to gas to renewables and a couple of years.
Hmm.
Clearly theres a lot of work to do the team here is capable the team here is committed to no excuses performance, we're committed to continuous improvement process improvement that accelerates safety reliability quality delivery and waste elimination and morale.
Process changes simplify how we do our work.
The cost fallout.
They fallout how we.
We eliminate human struggle.
I'm honored to be a very small part of this world class approach to delivering for customers and investors.
Now on that note for a wrap up.
Back to one of the most extraordinary Ceos and our business Dave.
Thanks, Tom.
And I want to conclude the prepared remarks by discussing what I referred to as our 'twenty 'twenty One report card.
These are critical elements that we are focused on to transform centerpoint into an industry leader.
Delivering to use sustainable and predictable earnings growth.
Converting our industry, leading customer growth and O&M discipline into outsized rate base and capex growth, while maintaining our commitment to safety.
Enhancing our ESG strategy and becoming a key enabler for a net zero economy and places we operate.
Strengthening our balance sheet and credit profile.
Focusing on utility operations and improving the customer experience executing our capital recycling strategy.
And finally, delivering and economically viable path to minimize the impact of our midstream exposure and then eventually eliminate it.
And this is the new centerpoint consistent and predictable earnings growth World class operations and service territories, and a commitment to delivering on our promises to our shareholders.
Thank you, Dave we will now take questions until nine am eastern and questions not answered please reach out to the IR team and we would be happy to schedule. The time with you to discuss any follow ups you may have.
Thank you at this time, we will begin taking questions. If you wish to ask the question. Please press star one again that the star one on your touched on and keep at.
Do we draw the question Brett.
The company requested for when asking a question of colors pick up the telephone handsets.
Our first question is from Shar <unk> from Guggenheim Partners. Your line is open.
Hey, good morning, guys.
Good morning.
Just two quick top of share.
First it sounds like you guys have a really good handle on the storms.
Is it kind of relates to policy decisions and Austin are there sort of any potential opportunities for centerpoint and should you think about the plan as presented this morning, and just remind US is there sort of any impact of centerpoint and ERCOT large retailers of generators run into sort of financial difficulties.
Yeah, well I appreciate it let me take the maybe the first part of your question Jason can take the second part as you can imagine there's a lot of dialogue going.
And often even as we speak here the legislature is in the session. So everyone in the political sphere is in Austin and at this point in time, but I guess as I look back at it from Centerpoint.
Centerpoint and standpoint, obviously, our number one goal is to serve our customers to the best way. We can if you think about last week clearly for us more control over some of our assets and our grid wed have been of positive. So we're thinking about looking at opportunities.
<unk>, which we course would have to get through the legislature of things like getting batteries and fuel cells and the like actually into our rate base. So we could provide sort of more in territory stability to the grid if anything like this ever happen again, so as I said, the gamut of things being discussed and <unk>.
Austin right now is is pretty wide I think everybody is looking for the right solution for the state of Texas. So this doesn't happen again and it will be part of that dialogue.
Jason do you want to handle the second part of the question sure. Thanks, Dave and good morning Shar.
And I really think that there is.
Low risk of that of any.
The financial impact associated with any financial challenges with the generators or retail energy providers.
And the state law here in Texas is very clear that we have the right to recover any delinquent accounts for retail energy providers as the regulatory asset.
We also have and do collect from the retail energy providers on a daily basis, and so have a good handle on that.
Those that are continue to perform with respect to their obligations and maybe the final point that I would highlight is that to the extent that any of the large generators of retail energy providers experienced financial challenge.
And will likely be a reorganization of that and one of the first areas of focus on the first day motions of any.
The reorganization would be the continuity of business that will allow the retail energy providers to continue to pay the associated T&D charges and so in short and see this as a really low risk issue for for the company.
Got it and then just lastly on the midstream exit and the can you just remind US you know Dave on sort of the various exit options, you're thinking of that as ies exercising your demand rights. The most viable path versus the slow of triple or piggy backing and I know the exit is going to be obviously satisfactory to utility investors, which clearly highlights of.
More rapid exit, but you're still kind of sticking with that minimizing language versus an outright midstream.
Are you simply alluding to holding on to that preferred and the near term or is it something else. Thank you.
I think the question and I'll, let Jason Jason and clarify it but the.
For you can ask if you have the minimized and so I think what we've done with this transaction and it's allowed us to sort of minimize our exposure and now and when the transaction closes we will pivot very quickly to exit.
And believe me, it's top of mind in terms of the discussions we're having every day, but I'll, let Jason and elaborate a bit.
Thanks, sure I am not going to be.
The specific in terms of timelines as as.
<unk> and our prepared remarks, but let me sort of talk about quickly the tools that we have available with respect to the series J preferred there are no.
Registration rates.
Needed for that security and so upon transaction close we have full flexibility to to sell of that security. There is an active secondary market and we have.
A tax basis that approximates fair of base value of that security. So we have full flexibility.
On to exit that security on transaction close there will be a short delay upon the close of the transaction for the common units registered.
But I think you've highlighted the two tools that we will look at there is ample liquidity.
And the volumes of energy transfer of units and so we will likely utilize some form of the durable.
And Opportunistically, where it makes sense, we will exercise of our demand rates for potentially a larger block, but just to close and reemphasize what Dave articulated it is our commitment to exit.
Those are the midstream and we're going to do so on a matter that we think.
And thank our shareholders happy.
Terrific guys congrats on the.
On the execution I appreciate it thank you.
Our next question comes from the line of <unk> Kim from Goldman Sachs. Your line is now open.
Thank you my first question on spec to the Texas weather event.
The first I just wanted to confirm on your comments that the guidance for 'twenty 'twenty. One does include whatever drag is associated with the financing of.
The cover the cost immediately and then just related to that.
And we think about your thoughts on the recovery and the recovery period over the various index various jurisdictions.
And does your analysis show a.
I guess, Pat that achieve the right balance between the potential impact of the customer bills and your ability to continue and make the investments that to hit the growth rate.
Yes, let me answer the first one and I'll, let Jason answer the second one it seems like we have of routine work and here but.
The absolutely the the guidance we have out there does include the drag of the storm as I said in my prepared remarks, yes, there'll be some extra interest pressure on there, but I view that as a headwind. The managed we have a very talented financial team here at Centerpoint and.
And we've got some buttons to push and levers to pull and we're going to do that and we are already are doing that and so we will have zero impact on the guidance that we've given.
Let me also amplify David.
Dave's remarks on that point several of the jurisdictions that we operate and allow us to recover of the carrying costs of that does help sort of minimize the.
Any drag from the the incremental debt.
But I think you've touched upon and issue that obviously, we are working with regulators policymakers on and that's balancing the financial health of the utilities with the impact of collecting and Thats on customer bills. I think we've seen some very strong signals come out of the various jurisdictions, we have the <unk>.
Of which to operate and as I highlighted the Texas Railroad Commission made it clear of that these are recoverable costs and so I think what.
We are all doing and I use that term sort of broadly because this is not of centerpoint issue, but.
Our gas LDC.
The issue is we're working to find and strike that right balance of short term recovery of these costs, while not unnecessarily burdening the impact of customer bills more work needs to be done hearings are underway. This week, but I am confident we will strike that right balance here.
Understood.
My only other question is.
And for 'twenty, and 'twenty, one guidance and the assumptions that are embedded and it seems like.
There is nothing major related to any COVID-19 related items is that correct.
That's correct.
Particularly.
Towards the end of last year.
Our responsibility to manage the ups and downs the headwinds of tailwind for this business.
The Covid remains a small headwind.
But we have every confidence that we have the tools to manage through it and.
One of the other things that I would just continue to emphasize as I think we are also fortunate.
And to serve and communities of high growth and so we continue to see residential growth that offsets some of the reduction and.
Electricity consumption from the.
The commercial segment of our business and so in short we have full.
Full confidence of our ability to manage whatever remaining COVID-19 headwind exists.
Got it thank you so much.
Our next question and that's from Julien Dumoulin Smith from Bank of America. Your line is now open.
Hey, congratulations team.
So perhaps just just to stick with the cost question and cost allocation question coming out of.
Enabled transition here can you speak a little bit to how you're thinking about that evolution here a little bit more specifically just the cadence of addressing and minimizing that element. When you think about presumably reallocating those costs back to the utility of our time.
Sure Good morning Julien.
I think given the negative tax basis that we have and our current enabling units that will.
Transfer over and the energy transfer of units I think.
Fair to characterize about 50%.
Of the proceeds that we would receive upon district.
Sale of of those common units would result in.
Sure.
Or will be paid and taxes and so as you think about sort of both the tax bill as well as the allocated debt that we have to.
To the to the midstream segment.
Our timing our.
Exit from midstream sort of that as Dave pointed out we are not impacting our utility segment.
That 50% sort of rule of thumb for the tax component of of the enable sales is what I would consider to be a status quo rule of thumb, we are working on various tax strategies.
To help improve that position.
In addition, whatever remaining.
And that that that exists after disposition of those units pay down of the associated tax bill pay down of the associated debt. We believe we have.
Sufficient O&M levers to offset which is why we are fully confident that as we exit midstream will be able to do so on a matter that has no impact on our stated 6% to 8% utility growth rate.
Got it okay, so fully offset on a go forward basis.
Yes.
Okay, great. Thank you for that.
Can you elaborate at least preliminarily on how youre thinking of Weatherization options coming out of the deep freeze here.
Clearly some of your earlier comments on the call suggested.
The the bulk of improvement and seem to be more on operations, but curious as as you perform your task being a wires utility and the gas. So we see how do you think about winter of <unk> opportunities that might emerge there in the form of Capex and actual investments here.
And obviously.
Yeah, Let me, let me take that one on first I think.
There has been a lot of dialogue across the state about.
A lot of the reason the generation of went down is because it was not properly winterized and that includes both the set of wind and solar and gas generators, but in fact at one point the the big nuclear plant FTP also went down.
And one point last week.
As you know the state sort of electric grid is constructed for set of peak summer of air conditioning.
Time, and therefore this concept of winter rising your equipment winterize, the and the generators.
It's going to be difficult to do because obviously by and closing them and.
And insulating them and winterized and now it means you just put more stress on it during the summer when it is really hard. So I think there are ways to do it and companies theyre going to have to find ways to do it because I suspect thats one of the things thats going to come out of.
Austin from a regulatory standpoint, but specifically to your question.
And we actually have winterized, our equipment or it really protected it from both the hot and cold weather, but there are some incremental opportunities for us to do certain things really more is the resiliency and hardening our system standpoint, I wouldn't think of it as winter rising it is more or less.
And hardening and making the system more resilient and of course, we will be able to get that into rate base.
And I would view it as sort of a slight potential increment to our capital spend.
Okay got it doesn't doesn't Johnson material.
Excellent. Thank you very much I appreciate it.
And.
Okay.
Our next question is from Steve Fleishman from Wolfe Research. Your line is now open.
Thank you.
Okay.
Jason Tom.
The is it possible and you could break out the $2 5 billion by states.
Sure I'll give you the three top states kind of in Texas, we have about $1 5 billion.
Of incremental costs.
And Minnesota about a half of 1 billion and.
And in Arkansas, We've got about $350 million, and then and the rest of spread fairly evenly across the other jurisdictions.
Okay, and then when you talk about the regulatory mechanisms for timely recovery could that potentially include securitization of some of these costs.
I think it's really kind of early to get ahead of the regulatory process, but securitization has been discussed.
And so whether it's the securitization following the current recovery timelines are about 12 months and some of the jurisdictions.
And particularly those three that I mentioned.
Our year to recover maybe too much for customer bills and may extend the timeline of 18 months or so and so there are a number of tools being discussed securitization is just one of those at this point.
Okay.
And then I guess, maybe a question for Dave So just.
For the lame in person and it might be hard to kind of.
The separate centerpoint of the utility versus the generators, our ERCOT or other so I'm, just and it's encouraging to see that the mayor major of the head of this.
Fund raising campaign, but just could you give a sense of just the the political leadership and <unk>.
Others kind of no.
How you fit into the system here and.
And how.
How much political heat are you getting.
Or are they kind of get that this.
No I would say generally I think everybody gets and understand the roles that the generators the <unk>.
T&D companies and the retailers basically play within Texas.
And we were very aggressive and our communication last week of putting out sometimes.
And always one and sometimes the two press releases every day trying to inform people about what the state of play was clearly statewide there was a lot of frustration as you can imagine there is finger pointing and going on but I would say that we did a pretty good.
Job getting out in front of the story and really essentially what we what we told our customers is listen when we get electricity. We will begin to restore our system is resilient, which had proved to be we got power back into the homes of our customers of very very quickly.
After we got it and.
The reality is is that this was a.
And this was asset of our system wide failure.
From the state as well Ben.
And so as I said earlier, there will be something that comes out of Austin on this but I think people have done.
Good job understanding our role and it that doesn't mean that ultimately some fingers don't get pointed here and there we will just have to address those as they come at us.
Okay, and then finally just and.
And I know in the past you and the other utilities of have.
We have proposed adding batteries on the utility grid and.
I'm not sure of that would've helped here or not but just is that something that could come up as the.
Potential thing and the legislative session.
Yes, I think right now almost everything thats being considered up there, but I think our our pitch would be.
And in an event like this.
And having your own generation, which we don't want to do.
Yeah, we were at the Mercy of ERCOT.
But I do think that around the edges and for sort of incremental ability to react to short term things like this batteries fuel cells and those kinds of things would have been helpful. And I think that if you look at things that we would like potentially the C and any.
Legislative changes that would be of dialog, we would wholeheartedly get into the middle of.
Okay. Thank you.
Our next question is from James the locker from BMO capital markets. Your line is now open. Please proceed.
You may be on mute.
James Slacker your line is open.
Okay, Thanks, and one of them, we'd be one more on and we'll wrap up.
Thank you. Our last question is from Sophie Karp from Keybanc capital markets.
Hi, Good morning, Thank you for taking my question.
No other questions about Texas and other pressure on issues have been answered I just wanted to ask you about kind of organization on morale it.
It seems like you guys are very focused on the O&M reductions and the perhaps you're asking a lot of the staple of within their organizations to do things differently.
And I was just kind of wondering if you could comment on the overall morale within the organization and how much of a buy and is the air from employees on all levels and.
And how you're handling this thank you.
Yes.
Obviously this is a biased view and a personal view, but I think morale is really really great and the center point right now and I think if you you got to look back over what this organization has gone through and the last 12 months and it's been on.
<unk> change and the <unk>.
<unk> CEO within the year, Jason is the third CFO within the year, we had issues around dividend, we had the activist investor on US we had COVID-19, we had a hurricane that skirted.
Last summer and.
I would say that I think people are really bought into the new centerpoint and certainly in my engagement with and I think I can speak more broadly for our executive team. There are people are motivated they like what's happening they did not like what happened early last year and so I think they see a.
Really happening and company.
A management team that is taking the organization and the right way they're excited about it they understand that everybody has a part to play and I think the other thing is is.
Our focus on O&M isn't always a focus on people reduction as Thomas said, it's the focus on doing things better and it's getting your vendors to participate with you and doing things more efficiently buying things cheaper and that kind of thing. So I think at the end of the day morale is really really good.
Good here and I expect that to even get better.
Thank you.
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Good morning, and welcome to Centerpoint Energy's fourth quarter, and full year, 'twenty and 'twenty earnings conference call with senior management during the Companys prepared remarks, all participants will be in a listen only mode.
And there'll be a question and answer session after managements remarks.
Ask the question Press Star one on your touch on key pad.
And so we do all of your question press the pound.
And now I'll turn the call over to Phil holder Senior Vice President of the strategic planning and Investor Relations Mr holder.
Good morning, everyone. Welcome to Centerpoint earnings Conference call, Dave was our our CEO, Jason Wells of our CFO and Tom Webb, our senior adviser will discuss the company's fourth quarter and full year of 2020 results.
Management will discuss certain topics that will contain projections and other forward looking information and statements that are based on management's beliefs assumptions and information currently available to management of these forward looking statements are subject to risks or uncertainties actual results could differ materially and based upon various factors as noted in our form 10-K, other SEC filings and.
Our earnings materials, we undertake no obligation to revise or update publicly any forward looking statements. We will also discuss guidance basis utility EPS for 2021, and providing guidance Centerpoint energy uses a non-GAAP measure of adjusted diluted earnings per share.
For information on our guidance methodology, and a reconciliation of non-GAAP measures used and providing guidance. Please refer to our earnings news release and presentation, both of 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 other than the financial results. We will also for.
And to address the impact of the recent storm event and enables announced the merger as a result, we may have less time for Q&A. If you have any questions that do not get answered please feel free to reach out to the IR team on.
This call is being recorded information on how to access the replay can be found on our website now I'd like to turn the discussion over to Dave.
Thank you, Phil and I want to welcome you to our Centerpoint team and good morning to everyone.
During our Investor day. This past December we unveiled our strategy to take advantage of our organic growth and increased capital spending opportunities to deliver consistent earnings growth off of our industry leading rate base growth.
Reduce costs to invest and the future take.
Take our leading stance on ESG.
And minimize our exposure to the midstream.
We focus on core utility operations and most importantly continue to provide a resilient grid for our customers. We are excited to share our significant progress against those objectives with you today before we start I want to update you on the impacts of last week's devastating.
Winter storm of at that struck Texas, and our broader service territories.
It was undoubtedly an extremely difficult week across our service territories, especially for taxes.
We know many of our customers faced very difficult conditions, and our hearts go out to those and our communities who have faced substantial hardship and loss I am really proud of how our employees worked and very harsh conditions to help customers, even as their own homes and families were without power.
Or experiencing damage from busted pipes as you know I like to lead things off with headlines. So let me give you the storm headlines first and foremost our centerpoint electric and gas systems worked as designed and proved to be very resilient, despite the impact of ice and snow.
The freezing temperatures and the fluctuating power loads provided to us by ERCOT during the week.
All of these factors are tough on equipment, but our system did its job and was able to be quickly re energized our decision to increase the utility's earnings guidance is an expression of our confidence that the storm will not impact of 6% to 8% utility EPS annual growth rate and.
And our ability to ramp up our capital spending our efforts and grow our rate base at a 10% compound annual growth rate and.
As you know in Texas, we are not a generator of electricity and are dependent on a power supply dispatched to us by the ERCOT system.
Once we finally received adequate power from third party generators to transmit and distribute across our service territory. The resiliency of our system proved itself and over 98% of our 2.6 million electric customers had electricity within about 12.
Ours.
I believe that's pretty amazing and I'm very proud of our employees that worked tirelessly our gas system was equally tested and proved resilient as the storm and cold weather and simultaneously impacted our eight state gas footprint, including very cold temperatures and Minnesota.
And despite of constant search for gas supply, we kept our line pressures up and are able to serve our customers throughout the system.
We saw on natural gas price spiking very high throughout our system and electric pricing and getting very high and Texas and all of our gas jurisdictions. We are fortunate to have regulatory mechanisms already in place and additional tools now at our disposal to recover these costs.
And the timely manner and to mitigate impacts to our customers' bills.
As you well know our electric business transmit and distribute power.
And our markets the local retail electric providers or our EPS are responsible for purchasing and electricity and take on the inherent risk of power pricing customer billing and collecting.
And our a pea was to cease to operate.
You should know and be confident that the existing regulatory mechanisms allow for us to recover.