CenterPoint Energy Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 27, 2023

There are 13 speakers on the call.

Operator

Good morning, and welcome to CenterPoint Energy's Second Quarter 2023 Earnings Conference Call with Senior Management. During the company's prepared remarks, all participants will be in a listen only mode. There will be a question and answer session after management's remarks. I will now turn the call over to Jackie Rickard, Vice President of Corporate Planning, Investor Relations and Treasurer. Mrs.

Operator

Rickert?

Speaker 1

Welcome to CenterPoint's earnings conference call. 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. These forward looking statements are subject to risks or uncertainties. Actual results could differ materially Based on various factors, as noted in our Form 10 Q, other SEC filings and our earnings materials, We undertake no obligation to revise or update publicly any forward looking statements. We will be discussing certain non GAAP measures on today's call.

Speaker 1

When providing guidance, we use the non GAAP EPS measure of diluted adjusted earnings per share on a consolidated basis referred to as non GAAP EPS. For information on our guidance methodology and reconciliation This call is being recorded. Information on how to access the replay can be found on our website. Now, I'd like to turn it over to Dave.

Speaker 2

Good morning and thank you to everyone joining us for our Q2 2023 earnings call. I'm excited to announce that this is our 13th consecutive quarter of meeting or exceeding expectations. Additionally, I am pleased to be joined on today's call by Chris Foster, the newest member of our management team. Chris has hit the ground running. I know most of you already knew what a high quality executive he is Since we have 3 speakers today instead of our usual 2, I will limit my time to providing the main headlines for the quarter And let Jason and Chris tell the story.

Speaker 2

Headline 1, another great quarter is in the books at CenterPoint As our entire team of nearly 9,000 employees continues to execute well on all fronts. Headline 2, overcoming headwinds, reaffirming 2023 guidance. We announced 2nd quarter non GAAP EPS of $0.28 per share overcoming the $0.08 per share headwinds from higher interest expense alone. Other headwinds came from inflationary pressures and generally milder weather throughout our service territories this quarter. Despite these headwinds, we are reaffirming our 2023 non GAAP EPS guidance target range of $1.48 to $1.50 per share.

Speaker 2

This represents an 8% growth over last year's actual amount. This follows non GAAP EPS earnings growth of 9% in both 20212022. Headline 3, reaffirming industry leading long term growth for 2024 and beyond. We continue to target 8% non GAAP EPS growth in 20.24 in the mid 2023 capital deployment is on track. We successfully deployed $1,200,000,000 of capital during the quarter, Bringing our year to date total to approximately $2,300,000,000 This is ahead of our anticipated plans for the year.

Speaker 2

Headline 5, increasing our 2023 capital spend by over 11%. Let me walk you through the new capital plan. Our prior 10 year capital plan was $43,000,000,000 with an incremental $3,000,000,000 of additional capital spend identified, but not yet included in our formal plan. Today, we are increasing our 2023 capital plan from $3,600,000,000 to $4,000,000,000 an increase of over 11%. We are now confident we can efficiently fund, execute and recover this $400,000,000 increase without any external equity issuance.

Speaker 2

With this, Our formal capital plan through 2,030 goes from $43,000,000,000 to $43,400,000,000 As to the remaining $2,600,000,000 of capital identified, but not yet included in our $43,400,000,000 We are now confident in our ability to identify opportunities well beyond this amount. As we have stated in the past, We will continue to add these incremental amounts to our capital plan when we are confident we can efficiently fund, Execute and recover them. As we always do, we will continue to identify and execute on constructive opportunities for all of our stakeholders. So to be clear, this is additional capital spending for 2023, not pulling future capital spending forward. These additional capital investments will support safety and resiliency For the benefit of customers in our Houston Electric business, while balancing the impact on their bills.

Speaker 2

Headline 6. O and M plan reductions remain on target. We continue on a path reducing O and M costs by 1% to 2% per year on average over the current 10 year plan. Headline 7, positive legislation outcomes from across our territories. There were a number of recent legislative outcomes in Texas and Indiana that should benefit our utility customers for years to come.

Speaker 2

To name just a few from Texas, we now have the ability to file for 2 DCRFs per year, The ability to recover prudent incentive compensation and the ability to file a comprehensive resiliency focused investment plan. Headline 8, Houston Growth Continues. People and companies continue to flock to Houston, partly because of its affordable and reliable energy. In 2022, the Houston area was the 2nd fastest going metro area In the U. S, and amazingly in 2022, over 1 third of Houston's region population growth was from residents moving to Houston from outside the United States.

Speaker 2

Headline 9, Targeting Houston Electric customer charges at or below the 2% historical rate of inflation. While continuing to heavily invest in the fundamentals of safety, resiliency and reliability, We will be aiming to keep Houston Electric customer charge increases at or below the 2% historical level of inflation over the longer term. This is a unique luxury among utilities. Headline 10. We plan to be out of operating coal generation by the end of 2027.

Speaker 2

Using renewables and lower carbon power generation should provide a more affordable alternative for our customers. I want to thank our incredibly dedicated employees in both Houston and Southwestern Indiana who worked tirelessly to repair our system that was struck by a series of major storms earlier this month. Also, I want to take a moment to thank the Texas and Indiana legislatures and all stakeholders that supported our constructive legislative outcomes. We are grateful that the resiliency and the reliability of the grid continues to be a top priority for all of our stakeholders. In summary, even in the midst of the economic and operational headwinds of higher interest rates, Inflationary pressures and unusual weather, we continue to deliver for both our customers and investors.

Speaker 2

The Q2 of 2023 is just another example of our continued commitment to executing on what we believe Is the most tangible long term growth plan in the industry. I'll now let Jason and Chris take it from here.

Speaker 3

Thank you, Dave, and thank you to all of you for joining us this morning for our Q2 call. Before I get into my updates for the quarter, I want to echo Dave's gratitude to all of our employees who withstood this extreme weather to quickly restore service in our Greater Houston and Southwest Indiana Communities. I couldn't be prouder of our team's response and commitment to the communities we have the privilege to serve. Looking at the legislative summary on Slide 5. We are grateful for the customer focused outcomes resulting from these recent legislative sessions.

Speaker 3

We understand our state legislatures have numerous issues to consider and we are appreciative of the time that was spent on providing the electric and gas utility industries with additional tools to better serve our customers. In Texas, one of the top stated goals of the latest legislative session was to improve electric grade reliability, and we certainly believe we made good progress on that front with the enactment of a number of bills. There are 3 that I want to highlight in particular. First, Texas Transmission and Distribution Utilities now have the ability to file a resiliency plan for transmission and distribution related cost recovery. This comprehensive electric resiliency plan will allow the TDUs to work with the Public Utility Commission of Texas to outline a multi year investment plan to broadly harden our electric grid to better address the impacts of extreme weather.

Speaker 3

Additionally, Distribution investments under these new plans will be eligible for the deferral of certain carrying costs such as depreciation and interest expense, helping minimize the regulatory lag and recovery. This bill is a great illustration of how our legislators and other stakeholders desire for increased grid resiliency in light of the recent demands on the electric grid and providing the TDUs to do so. 2nd, we now have the ability to file for recovery of distribution related capital investments twice per year under the Distribution Capital Recovery Trackers or DCRF mechanism. This change now provides parity with the recovery of transmission investments where we already are able to make 2 filings a year. The ability to file 2 DCRFs a year will not only help to reduce regulatory lag on the recovery of our distribution investments, but will also help Keep incremental bill to increases smaller and smoother for our customers.

Speaker 3

Lastly, we will now be able to recover certain incentive compensation for the employees that serve our customers in the Houston Electric Service Territory. This will help us continue to attract top talent to better serve our customers. These bills, as well as other related bills that were enacted, were an overwhelmingly positive outcome for customers and for CenterPoint. And I want to also express appreciation to all stakeholders involved in achieving this. We will continue to work with stakeholders to achieve customer focused outcomes, While advancing the resiliency, reliability and safety of the grid, it helps power the economic success of the Greater Houston area.

Speaker 3

Outside of Texas, I want to thank the Indiana legislature for its time and attention in providing Indiana utilities for more opportunities to advocate for their customers. One such piece of legislation that I want to highlight in this regard is one that allows the utility the right of first refusal to building transmission lines that connect to a respective utility system. We believe this allows a utility to operate in the best interest of its customers, a win for those that we serve in Southwestern Indiana. In addition to a busy legislative calendar, we had a number of regulatory updates as shown on Slide 6. Starting with Minnesota Gas, we filed for the approval of 25 proposed projects under the Natural Gas Innovation Act or NGIA with an estimated cost of a little over $100,000,000 for the 1st 5 years of those projects.

Speaker 3

These projects include things like renewable natural gas These proposed projects are designed with a goal of helping to advance a cleaner energy future in Minnesota. We continue to be appreciative of the constructive environment in which allows us the opportunity to invest in projects that assist our customers to achieve their emission reduction targets. Now moving to Indiana Electric. We continue to make good progress related to our 2020 Integrated Resource Plan or IRP. During the quarter, we received several approvals from the Indiana Utility Regulatory Commission, including approval for our 200 Megawatt Wind Project and the re approval of 3 of our solar projects.

Speaker 3

Additionally, earlier this month, the gas pipeline that will serve the new Gas CT plant, which was approved last year, was fully authorized to proceed by the FERC. Related to our 2020 IRP, We now have received approval and in many instances, re approval for nearly all of the filings. These filings constitute over 1 gigawatt Renewable generation that we anticipate placing in service will begin contracting within the next few years and the 460 Megawatt Gas GT, which is expected to provide an additional generation source on days when the wind might not be blowing and the sun might not be shining. We also issued securitization bonds of approximately $340,000,000 related to the retirement of the AB Brown Coal facility. This was a very constructive transaction for our customers and has already started providing customer benefits in the form of a credit on their bills.

Speaker 3

With many of the individual projects related to our 2020 IRP underway, we can now turn our attention to the 2023 IRP we submitted in the 2nd quarter. This IRP addresses our proposed retirement of our 3rd and final coal facility and places us firmly on a path to fully exiting coal generation we operate By the end of 2027, while offering our customers a cleaner, more reliable, balanced portfolio of solar, wind and gas generation at a cost that is expected to be substantially less than maintaining our existing coal generation fleet. This new filing proposes converting our last coal plant to gas as well as adding 200 megawatts of wind and 200 megawatts of solar by 2,030. Its entirety, this IRP is anticipated to save customers nearly $80,000,000 compared to the continued use of coal over the next 20 years. This filing is a culmination of months of hard work and collaboration throughout our organization to arrive at what we believe is a thoughtful and customer centric approach to the generation transition in Southwest Indiana.

Speaker 3

Moving on to the regulatory calendar shown on Slide 7. As many of you know, we have a number of rate case filings on the horizon. I want to provide a brief update regarding the timing of those filings. Beginning with Texas Gas, we have slightly changed the expected timing of our filing. Previously, we had communicated that we would file this summer.

Speaker 3

However, we will delay this filing for a few months, likely filing in November of this year. We continue to anticipate filing for a relatively flat revenue requirement despite the delay and look forward to working with all stakeholders to reach a constructive outcome. Additionally, we will likely push the timing of our Houston Electric filing to Q1 of 2024, instead of the previously communicated Q4 of this year. We will continue to use our TCOS and DCRF mechanisms until that time. Similarly, we also anticipate filing a relatively flat revenue requirement supported by our O and M discipline and growth throughout our Texas service territory.

Speaker 3

With respect to the Minnesota and Indiana Electric filings, We remain on track with our previously communicated timelines of filing both cases towards the end of Q4 this year. Before I turn it over to Chris for the financial updates, I want to take a moment to touch on just how impressed I've been with the initiative and innovation of our leaders to reduce O and M, while at the same time incrementally and positively impacting our customers' experience. One such incremental example can be found in our gas business. Earlier this year, we completed a review focused on finding continuous improvement opportunities in our lead management activities. This review resulted in identifying several $1,000,000 in opportunities that will benefit customers in the future by reducing bill increases, but also freeing up crews to get to service calls faster.

Speaker 3

It is examples like this that continue to reinforce our confidence in Those are my updates for the quarter. I remain excited about our continued execution for the benefit of our customers and our investors. We continue to focus on making customer focused investments and working with stakeholders to support legislative and regulatory outcomes that benefit customers throughout our various service territories. Now with that, I'll turn it over to Chris for the financial updates.

Speaker 4

Thanks, Jason, Thanks to all of you for joining our 2023 second quarter call and my first earnings call as CFO of this great company. Although I only recently joined the CenterPoint team, I can certainly say that I've enjoyed meeting more of my coworkers, digging into the long term plan and representing the company to the investor community, While also getting my family settled here with me as a new set of Houston residents. And I'm really pleased to see the recent outcomes the team has achieved, Knowing we still have a number of long term opportunities, there's still very much in front of us. Today, I'll cover 3 areas of focus. First, our earnings progress then a financing update, including our Energy Systems Group transaction and further reduction of floating rate debt And finally, as Dave introduced, a positive revision to our capital plan.

Speaker 4

Now let's start with the financial results on Slide 8. As mentioned, we are reaffirming our full year 2023 guidance range of $1.48 to $1.50 of non GAAP earnings per share, which reflects 8% growth over full year 2022 non GAAP EPS of $1.38 when using the midpoint. On a GAAP EPS basis, we reported $0.17 for the Q2 of 2023. Our non GAAP EPS results for the Q1 removed the results of our now divested non regulated business Energy Systems Group. On a non GAAP basis, we reported $0.28 for the Q2 of 2023 compared to $0.31 in the Q2 of 2022.

Speaker 4

Combined with the Q1, we have now achieved 52% of our full year guidance at the midpoint. Growth in rate recovery contributed $0.07 largely driven by continued recoveries through our electric DCRF capital tracker filed last year and our electric transmission tracker or TCOS in our Houston electric territory, which went into rates last November. In addition, we continue to see strong organic growth in the Houston area, extending the long term trend of 1% to 2% average annual growth. O and M was flat for the 2nd quarter and $0.02 favorable year to date when compared to the first half of twenty twenty two as we continue to find ways to operate more efficiently to target O and M reduction by 1% to 2% per year on average, while remaining focused on meeting our customers' needs. These favorable drivers were offset by an $0.08 increase in interest expense.

Speaker 4

The continued rising interest rate expense on short term borrowings was the primary driver for this unfavorability when compared to the Q2 of last year. However, we continue to make progress in reducing our short term floating rate debt exposure, which I will discuss in more detail shortly. We believe our plan has sufficient conservatism built in to help us overcome these ongoing pressures. Weather and usage were $0.02 unfavorable when compared to the same quarter of 2022, primarily driven by a combination of sustained record breaking temperatures During Q2 of 2022, when compared year over year to the milder April and May weather in both our Houston and Indiana Electric territories this year. However, this trend did change in Houston in mid June.

Speaker 4

Next, we cover some financing and credit related topics on Slide 9. As of the end of the Q2, aligning with Moody's methodology, our FFO to debt was 13.9% as reported. We remain focused on the balance sheet as we target 14% to 15% through 2,030. Essentially, we are targeting around 150 basis Our non GAAP operating income statement was $1,000,000,000 and we will continue to explore opportunities to strengthen the balance sheet in this rising rate environment. Another area in which we've been executing well is in the reduction of our exposure to floating rate debt.

Speaker 4

In the Q1, we reduced floating rate debt by nearly $2,000,000,000 through the receipt of Winter Storm Uri proceeds and refinancing floating rate debt to fixed term issuances at the operating companies. We carried this momentum into the Q2 as we reduced floating rate debt by an additional $200,000,000 to approximately 14% of total debt outstanding. That's nearly a 50% year to date reduction relative to where we ended 2022. The primary drivers of this reduction For the receipt of the approximately $340,000,000 in securitization proceeds related to the retirement of A. B.

Speaker 4

Brown, the proceeds of the previously mentioned Energy Systems Group, along with the collection of elevated gas costs incurred in the latter part of 2022. As a reminder, We are carrying approximately $400,000,000 of debt at the parent, which was issued to fund our higher equity layer at Houston Electric and Texas Gas as we head into rate cases. And as we get to the other side of the rate cases, we will either begin recovering at this higher equity content or delever. From the moment I arrived here at CenterPoint, one of my primary areas of focus as we work through our industry leading growth plan is maintaining the strength of the balance sheet, especially in the current interest rate environment. I look forward to working with the team here not only to execute one of the most tangible long term growth plans in the industry, but also maintaining a strong balance sheet.

Speaker 4

Coming back to the divestiture of Energy Systems Group. We divested 1 of our few remaining non regulated businesses, Energy Systems Group or ESG and closed the transaction within Q2. ESG is an energy services business that implements efficiency solutions through infrastructure and other solutions. It was acquired in the Vectren acquisition in 2019 It was part of its non regulated portfolio. However, as we've sharpened our focus on our regulated utility businesses, it made sense to find a more natural owner for this business.

Speaker 4

As a result of this divestiture, today non regulated businesses account for less than 5% of our earnings. We're grateful to the employees for their tremendous work and believe they'll have further success under the new owners. We received after tax proceeds of $121,000,000 The combination of these proceeds as well as those received from the Indiana securitization will help to reduce near term floating rate debt exposure as well as provide incremental financing flexibility to help fund our capital plan, including the additional $400,000,000 capital investments we anticipate making this year. Let me now focus a bit on our CapEx enhancements on Slide 10. For the benefit of our customers and communities, We invested $1,200,000,000 this quarter and $2,300,000,000 year to date across our various service territories.

Speaker 4

This represents 64% of our beginning of the year target of $3,600,000,000 for 2023. We are updating our 2023 capital target from $3,600,000,000 to $4,000,000,000 This results in an increase to $43,400,000,000 for our 10 year capital plan target that goes through 2,030. This capital increase is a result of having greater visibility operationally to resource additional work and improvements to financing and recoveries. As it relates to the remainder of the balance of the $2,600,000,000 in incremental capital opportunities that we have not yet incorporated into the plan, as Dave said, We are now confident in our ability to identify opportunities well beyond this amount. We have communicated that we will include incremental amounts We have also stated that the previous $43,000,000,000 capital plan we set forth through 2,030 does not require external equity funding.

Speaker 4

The remainder of the incremental amounts Beyond today's increase will require some additional financing that is not currently contemplated or reflected in our plan. As we continue to evaluate when to fold in the remaining $2,600,000,000 and beyond, we will also target the optimal way to finance such investments. Our focus on delivering work affordably has not changed, and we will seek to continue to prudently deploy this capital, while being mindful of customer charges. We continue to target our customer charges at Houston Electric to be equal to or less than the historical inflation rate of 2%. We believe we are able to achieve this through Houston's tremendous organic growth, securitization charges rolling off the bill later next year and our plan to reduce O and M 1% to 2% per year on average.

Speaker 4

I'd like to reiterate the earlier point that while these incremental investments Undoubtedly added to the earnings power of the company. This management team will continue to be conservative as it relates to updates to earnings guidance. We are focused on delivering industry leading, sustainable earnings growth year over year through 2,030. As stated, looking beyond 2023 and from the reaffirmed 2023 non GAAP EPS guidance of $1.48 to 1 0.50 We continue to expect to grow non GAAP EPS 8% in 2024 and at the mid to high end of 6% to 8% annually, Thereafter through 2030. Those are my updates for the quarter.

Speaker 4

And before turning it back over to Dave, I want to say again how excited I am sitting in my new seat here at CenterPoint. I felt so welcomed by the excellent management team here. I believe that even with some of the headwinds our sector is facing, our tailwinds exceed the headwinds, And we have a tremendous amount of opportunity in front of us. I'll now turn the call back over to Dave.

Speaker 2

As you heard from us today, we now have 13 straight quarters of meeting or exceeding expectations. We are a pure play regulated premium utility and on a course to continue execution of our current plan

Speaker 1

Thank you, Dave. Operator, we'll now turn it back to Q and A.

Operator

At this time, we will begin taking questions. Thank you. Our first question comes from Jeremy Tonet with JPMorgan Securities. Your line is now open.

Speaker 5

Hi, good morning.

Speaker 3

Good morning, Jeremy. How are you? Good morning.

Speaker 6

Good. Thank you. Just diving in a little bit more on the CapEx increase here. With the $400,000,000 CapEx increase in Texas legislation benefit, How do these items position you on EPS basis relative to your current guidance? And can you walk us through the timing and magnitude of these benefits?

Speaker 6

And are there any hurdles to formalizing in the growth outlook here?

Speaker 3

Yes. Let me give you maybe a 50,000

Speaker 7

foot How we see the sort of recent legislative outcomes and then Jason can go into more of the details. But clearly, Point 1 would be, it was a very successful legislative session that is going to clearly benefit our customers and our other stakeholders and of I think it's important though to understand that these laws will basically get layered in Over different time frames and Jason can add a little color on that. But I think the real point is the one that Chris sort of ended his comments This is just really another tailwind for CenterPoint going forward. So we really like the outcome. We think it's going to be great But Jason, maybe you can give a little more color in and around the timing and potential impact.

Speaker 3

Thanks, Dave, and thanks for the question, Jeremy. Clearly, this incremental capital we've flowed into the plan, the successful legislative session just continue to further strengthen what we believe is up already, Industry's most tangible long term growth plan. Maybe to more specifically answer some of your questions, the bills that I highlighted in my prepared remarks take us take a significant step in terms of reducing regulatory lag and helping us earn closer to our allowed return when using Our year end rate base, the benefit of the 2 DCRFs per year will somewhat be a function of the capital spend, But that benefit, when you couple it with a recovery of incentive comp, should be roughly $0.05 to $0.07 per year. And the earnings benefit for the resiliency bill will obviously be shaped through the rulemaking proceeding and our eventual filing. But I think a good rule of thumb is that, should have at least $0.01 benefit for every $300,000,000 of CapEx eligible for that resiliency definition.

Speaker 3

And so in terms of kind of when we should feel the impact and timing of those benefits, As we mentioned in the prepared remarks, we will likely file a second DCRF this year. So that will, on a full year basis, begin impacting earnings in 2024. The remainder of the earnings benefits from these recent legislation will likely follow our rate case. So think about those sort of flowing into our plan more in 2025 and beyond. And so at the end of the day, this continues to be yet kind of another tailwind that just further strengthens an already great plan.

Speaker 6

Got it. That's great to hear there. And maybe just looking at the regulatory calendar more broadly here, Some of the rate case timing has shifted and just wonder if you could speak more to the regulatory calendar over the next 18 months and really How you see these cases setting up the business for the period thereafter?

Speaker 3

Yes. Thanks, Jeremy. It's Going to be a busy period of rate case regulatory activity. Let me just quickly run through those. As we talked about in We've shifted the timing of our Texas gas rate case to likely November this year.

Speaker 3

Right about that same time, we will be filing our Minnesota rate case And Indiana Electric rate case as well. And then we'll likely follow that with the Houston Electric rate case Probably sometime late Q1 next year. And so obviously, there's a number of rate cases that we'll have in front of us. I want to continue to reemphasize, though, Given the great work the company has done managing O and M, I anticipate particularly in the Texas Gas and the Houston Electric rate case Filing a relatively flat revenue requirement increase, which I think will be a constructive signal for resolution of those cases. On the Minnesota Gas case, that's a case we file every 2 years.

Speaker 3

It really just sort of reflects the Capital that we intend to spend to modernize our gas system up in Minnesota. And then Indiana Electric, much of the capital that We'll be subject to that case. It's already been reviewed as part of some of our regular ongoing files with respect to our grid Modernization program as well as our generation transition plan. So while it's a very busy upcoming regulatory calendar, We continue to feel like we're putting our best foot forward for our customers and our shareholders.

Speaker 6

Got it. That's very helpful. Thanks. And last one if I could here. With the recent Indian IRP filing, just wondering how has stakeholder engagement trended into Formal launch here, is there any notable early highlights on this front?

Speaker 3

I'm really proud of the team's efforts With respect to engaging our stakeholders up in Southwestern Indiana, I think that there was a lot of good feedback on the depth of the conversations, on the alternatives that were considered. And so I feel like we're putting a Plan that has probably the opportunity for the broadest possible support going forward to Close that coal, third and final coal facility. Again, I just want to reemphasize, the plan we're putting forward is the Leased cost option to continue to serve our customers up in Southwestern Indiana with a reliable and cleaner energy Supply mix, I think that will come through as we work our way not only through the IRP, but then ultimately the filings for each of these projects.

Speaker 6

Very helpful. I'll leave it there. Thank you.

Operator

Thank you. Our next question is from Anthony Crodell with Mizuho.

Speaker 8

Hey, good morning. If I could hit up Dave and maybe a follow-up with Chris. Dave, I just won a tough loss last night against the crosstown rival there. Quarter was better than a game. But Just I guess on Jeremy's question, but moving it more towards 2023, just the headwinds and tailwinds that you're seeing For just 2023, I mean you're coming in first half of the year at I guess like $0.58 leaning above the midpoint of where guidance would be just first half of the year.

Speaker 8

What are the tailwinds that get you maybe slightly above or just maybe address what are the tailwinds or headwinds for the remainder of 2023?

Speaker 7

Yes. How about let me let Chris answer his first question as a CenterPoint CFO on that one because he's the one Whoever day has to track the headwinds and the tailwinds, but I would just say as I think a number of us have reiterated, We believe that the tailwinds are greater than the headwinds on us right now, but I'll let Chris tell you why.

Speaker 9

Yes. Thanks, Dave. And Anthony, thanks for the question. And as you heard me in the prepared remarks, we are beyond the halfway point here, we are beyond Halfway through our EPS guidance and there's a couple of different things I want to point out for you. First is just emphasizing that as you look at the back half of the year, We've got another roughly $220,000,000 in additional revenues from the 2022 distribution investments and our assumption around the mobile generation filing.

Speaker 9

And so those are either just updated or we anticipate those will be recovered later this year. So those are good tailwinds because really they're just weighted toward the back half of the year. Weather has been more of a mixed bag for us, definitely been trending nicely of late and the impact of the milder winter we had across our jurisdiction Q1 has been a bit offset from the hotter summer thus far, which has specifically been the case here in Houston. And as Houston remains hot, The weather impacts we're seeing are kind of normalizing some of what we're seeing for the balance of the year. And I should say we're generally conservative When we're incorporating weather impacts into our plan in the first place, it's no surprise on the headwind side They're really interest rate driven.

Speaker 9

As you can imagine, we've been actively working those since last year. And so we continue to assume high rates as we go through the remainder of the year. And we're taking active steps you've probably seen to move and improve our position. One of those is The move to fund ZECO on a standalone basis and there we were reducing its reliance on roughly $450,000,000 of intercompany debt from the parent, Right. So that allows us to take advantage of the relative lower cost of debt, thanks to its higher rating.

Speaker 9

So We collectively put these together. We like where we are at this stage of the year.

Speaker 8

And then just a follow-up on Slide 9, You kind of addressed it on the prepared remarks on the, I guess, credit ratings. We see a decline from 4Q 2022, 15.4% to 13.9%, I think maybe that trends back to 14% to 15%. But just what's the thought between The potential for maybe upgrade to Baa1 versus a fatter cushion at a Baa2 rating?

Speaker 9

Sure. So let me just start with the 39 that we're talking about this morning is in line with our plan. And so we had consistently anticipated This quarter really was going to be the trough for a couple of reasons. First is on the debt side, we've got an incremental of roughly $1,000,000,000 of debt in line, this Directly in line with feeding our capital plans and we were front loading excuse me, we were front loading funding at the start of the year. Then as you look at the cash flow side, as we previously mentioned, the annual revenue requirement increases of roughly $430,000,000 this year So over $200,000,000 of that is going to become effective from September onwards towards the back end of the year.

Speaker 9

So if you combine these with higher weather receipts, We see it being additive to the balance of the year's operating cash flows. On the as you also have to say on the qualitative side, As we're making progress on some of these legislative and then regulatory implementation outcomes, we do see some benefit there over time as we're spending time at the rating agencies.

Speaker 3

Great. Thank you so much.

Operator

Thank you. Our next This question is from Shahriar Pourreza with Guggenheim Partners.

Speaker 5

Hey guys, good morning. Good morning, Shahriar. Good morning. Good morning. I guess, Dave, just first off, can you just touch a little bit on what You met in your prepared remarks, and I'm going to paraphrase a little bit here that you now see opportunities well above the $2,600,000,000 CapEx that remains outside of plan.

Speaker 5

I guess, can you define kind of what you mean by well above and the source of the opportunities? So what states are you seeing those? And Do you anticipate some of that $400,000,000 increase in 2023 to be recurring CapEx in the later years as we're thinking about kind of the run rate?

Speaker 7

Yes, it's a good question. Let me have Jason answer that one.

Speaker 3

Yes. Thanks, Shar, for the question. We've indicated since In our very first Analyst Day, we think that there are a significant number of capital investments we can make that are in our customers' interest. And Dave's expression of capital investments beyond the $2,600,000,000 that we've kind of identified but not yet incorporated in the plan continue to It really kind of runs the gamut across our gas and electric business. We'll start first with sort of resiliency.

Speaker 3

We incorporated a significant uplift around particularly enhancing grid resiliency here at Houston Electric last year, But I think that there's a potential for more to be done there. I think when we look at the electric transmission side, I think here in the state of Texas, I think all stakeholders will support the fact that there is more transmission needed to help We've aided congestion and helped support the continued economic growth in the Greater Houston area. So there's a potential for electric transmission upside. I think there are also opportunities on the gas side, particularly kind of given the continued growth of our gas systems, Potentially incremental gas transmission related projects as we kind of enhance capacity to serve kind of our growing market. So those are just a handful of the opportunities.

Speaker 3

I think for us, there is an Abundance of opportunities at CapEx. Our focus will continue to be, as we've emphasized, evaluating whether or not we can Efficiently executed for our customers, that we can efficiently finance it for our shareholders and that we can efficiently recover it in rates. And I think we've, as a management team, earned a track record of holding capital into the plan as soon as we See line of sight on all three of those dimensions. Case in point today, we're increasing our annual guidance here for 2023 by 11 As it relates to what $400,000,000 increase could do going forward, I do think it puts us in a position to more Consistently executed this higher level of capital moving forward. We're just continuing to evaluate Our ability to finance it efficiently and recover it timely, particularly given the fact that we're entering a pretty heavy rate case period where during that We don't have access to some of these capital trackers that we've been discussing.

Speaker 3

Okay.

Speaker 5

So, Jason, lastly, and You bring up a good point. I'm getting a lot of questions this morning on the efficient financing angle of it, right? And obviously, you guys still mentioned no equity in plan. You guys are kind of at the lower end of that target range as we're thinking about credit metrics. I guess, what do you mean by efficient financing?

Speaker 5

Is there any kind of balance sheet repair embedded in the current plan internal or external? And where does sort of incremental regulated asset sales kind of fit in the mix there? Thank you very much. Thank you. So regulated asset sales kind of fit in the mix there?

Speaker 5

Thank you very much, guys.

Speaker 3

Yes. Let me just be very direct. There's no balance sheet I do think that this focus kind of on our set of credit metrics is, I don't know. I'll say respectfully a bit misplaced. I would rather continue to maintain a healthy cushion between our actual metrics and our downgrade threshold.

Speaker 3

That remains our commitment, targeting as we've previously discussed around 150 basis points. Some of peer companies that are often cited for having better credit metrics, while they may have a higher targeted Set of credit metrics, they also have a higher downgrade threshold as they have less cushion. What we're focused on is retaining this healthy cushion We're running the company and our downgrade threshold. So our focus has been on delevering this year. Chris highlighted a number of different opportunities where we've also turned out variable rate debt as we're in a period of transition this year with a number of strategic transactions.

Speaker 3

We'll continue to look at opportunities to do that. And again, I just want to emphasize what Chris said about Our credit metrics at the end of the second quarter. The end of the second quarter is the period of time just the way our capital recovery mechanisms work where we have Sort of the tightest set of credit metrics. Our the revenues we get from our capital trackers are definitely back end loaded. And so you will undoubtedly see an improvement in those metrics as we start to collect On the capital that we deployed in 2022 here in the back half of twenty twenty three.

Speaker 5

Got it. Okay, perfect. Thank you guys. Appreciate it. Mr.

Speaker 5

Foster, Congrats on your first CenterPoint earnings call. Thanks guys.

Speaker 9

Appreciate it, Shar. Thanks.

Operator

Thank you. Our next question is from Julien Dumoulin Smith of Bank of America.

Speaker 10

Hey, good morning team. Thank you very much for the time. Hope you guys are doing well. So I just wanted to follow-up here on the last set of questions, Charles, just talking about the if you want to call it the new norm here, I wanted to clarify a little bit, as you think about this elevated level of spending, More likely post the next rate case, right, given the recovery dynamics in 'twenty four, I just want to clarify in setting expectations following the last comments. And then to that end, how do you think about the associated financing considerations or opportunities in 2025 when post this rate case, If you could address that a little bit, how do you think about balancing both sides of that equation here into 2025?

Speaker 10

Yes. I got a follow-up.

Speaker 7

Yes. That's a great question for Chris to answer.

Speaker 9

Sure. Julian, You're right in terms of the thinking about the rate case timeframe. If you just step back and look at it, the kind of Last case among the ones that Jason referenced earlier would be the Houston Electric case. So we'd be filing that anticipating Q1 Of 2024 anticipate somewhere around a year to get it resolved. So that timing would put us somewhere in Q1 of 2025 Where we'd be on the other side of really the critical mass of all these cases that are in front of us.

Speaker 9

And so that put us probably at that stage to be in a position to give everybody a more robust update With respect to really the plan through 2,030 and with the potential for extending earnings guidance targets really beyond that as we'll have greater visibility at that stage. In terms of financing, I have to say, I mean, Jason mentioned our emphasis really on maintaining the cushion as it relates to FFO to debt. You should also just keep in mind that we're consistently looking at really the debt stack that we have present state and efficiently financing that, but also we are also evaluating opportunities Like the DOE loan program as well, right, at this stage looking to pulling up other opportunities to create financing that is actually cheaper for our customers. So, a lot of opportunity there in front of us.

Speaker 11

Excellent. Thanks for clarifying that.

Speaker 10

And then coming back to this resiliency filing, I mean, It would seem like a lot of your capital that is non growth would potentially be eligible for this resiliency filing. Can you talk a little bit about the extent of that Eligibility here as you think about it and also how that resiliency filing could filter into A, your any potential further CapEx revisions And B, into the rate case itself? I know they might be somewhat in parallel here, if you will.

Speaker 3

Yes. Thanks for the question, Julian. Ultimately, this is going to be defined by the rulemaking proceeding that's going to be in front of the commission now. Those rules should be established by the end of 23 and then ultimately our filing. But let me just kind of try to put some high level thoughts around this.

Speaker 3

I think clearly, some of the investments related Great, hardening our grid, right, potential underground in the distribution lines, shorter spans, composite poles, etcetera. That all fits sort of squarely in the definition of resiliency. I think there's also Clearly work that can be incorporated through Veg Management. I think what we need to work with the commission on is maybe some other aspects, including kind of IT related spending It helped from an analytical standpoint and or reduce concern around kind of IT kind of resource availability And so I think conservatively, you could probably say there's at least $500,000,000 to $1,000,000,000 a Year of capital at CE that could qualify for that Resiliency definition, ultimately, again, it's going to be shaped by the rulemaking proceeding in our filing, but probably somewhere in that zip code. I think what's important and I think you highlighted it, Julian, the way the mechanisms work here in Texas, The company is eligible for recovering or effectively keeping the growth And revenues associated with customer count increases.

Speaker 3

And so about half of our capital at CE relates to connecting new customers. So if you think about that supports a higher level of revenues. There's really very limited regulatory lag On that growth related capital, where we've historically seen our regulatory lag is on our resiliency related investments Having to kind of wait for the capital trackers to come in, by being able to defer the carrying costs Those investments, depreciation, interest, etcetera, between the time we put that capital into service And before we start to recover it in rates, we're all but effectively beginning to eliminate regulatory lag at CE. And so I just want to underscore Just how important this bill was to continuing to improve our ability to earn at our allowed return at And so hopefully that kind of starts to begin to shape a little bit of that resiliency filing, but more to come as the PUCT Works through the rulemaking and we ultimately file Q1 next year.

Speaker 11

Got it.

Speaker 10

All right, guys. Thank you very much. Good luck. Speak soon. Okay.

Operator

Thank you. Our next question is from David Arcaro with Morgan Stanley. Your line is now open.

Speaker 3

Hey, good morning.

Speaker 12

Thanks so much for taking my questions.

Speaker 3

Good morning, Dave. Good morning.

Speaker 12

Good morning. Let's see, we've seen some indications of gas utilities on the market in In terms of M and A potential, I was just wondering your latest thoughts on the mix of businesses, balance sheet and how that could weave into funding needs over time?

Speaker 3

Yes. Thanks, David, for the question. We love our business mix. We strategically, as part of kind of the Reset several years ago that we have a slight bias towards sort of the growth in the electric business here in Houston. But our split of roughly, call it, 60% electric, 40% gas

Speaker 5

is,

Speaker 3

I think, a very good split. That being said, As it kind of gets back to sort of your broader question, as we've indicated on previous responses to questions here, we don't have a need for equity to fund our plan. We Have a need for asset sales. We continue though to receive significant amount of inbound interest on all of our assets. Obviously, there's a number of processes sort of underway across the country.

Speaker 3

I think it continues to reflect that there's a high demand for at least high quality Utility related assets. And so we don't have any need to sell any of our assets. We're happy with our profile, but we'll always continue to Have an eye towards optimizing our plan for the benefit of our customers and our shareholders.

Speaker 7

Yes, I guess this is Dave. I guess the way I think about it, I You should think about it is, we are in such a great position right now with the assets we have. We can just sit back and play offense. We don't have to play defense at this point in time, which really gives us an opportunity to be very opportunistic with our business as we go forward. So I think that to me is the bottom line is we really have preserved almost all our optionality On any direction we want to go.

Speaker 7

And as Jason said, the inbound inquiries we get on essentially every piece of our business We really like where we are, but we really don't have to do anything other than execute, I think, which is the greatest plan that's out there in the utility space.

Speaker 12

Okay. Thank you. That's helpful. And then I was wondering if you could just give thoughts on the Indiana Electric rate case coming up later this year in terms of that filing. I was just Wondering if you'd expect there to be big items or revenue requirement, specifics or would this be a fairly standard kind of growth driven Rate case that you'd expect to file?

Speaker 3

Yes. Thanks, David. I appreciate the question. I mean, I think largely, it will be a rate case Where we have signaled and actually previewed with the commission stakeholders many of the elements. I think there are a number of constructive mechanisms up in Indiana.

Speaker 3

For instance, our grid related investments in our transmission distribution system. We make a separate filing in advance. We then execute upon it and report. And So this will be sort of a true off of the execution of a plan that we've already filed and reviewed several times with the commission. Similarly, on the generation transition plan, not only have we filed an IRP, but then we filed for the individual project So much of the kind of element of that case will already be previewed between the with all That being said, rates continue to be a focus in Southwestern Indiana, and I would anticipate that will be part of The conversation there as we file the case.

Speaker 12

Okay, great. Makes sense. Thanks so much.

Speaker 1

Operator, given the proximity to the end of the hour, I think we have time for one more.

Operator

Our last question comes from Durgesh Chopra with Evercore ISI.

Speaker 11

Hey guys, thanks for squeezing me in here. Just one question for me. You obviously have a lot of good earnings here. You mentioned no equity for the plan, dollars 43,000,000,000 You mentioned that you may need Some equity as we go beyond that. Just any sort of color you can provide on timing?

Speaker 11

Historically, like Q3 last year, you provided big CapEx update. Just any color on timing when we could see the big CapEx update and potentially a new financing plan? Is it After you go through the rate cases, any color would be appreciated there. Thank you.

Speaker 9

Hi, Durgesh. Thanks for the question. In short, yes, we've got a really important set of Casey, it's right here in front of us. Jason mentioned how well we're positioned going into them, given the affordability profile for our customers, So that really is going to be where the short term emphasis is. So I really would kind of direct you toward the back end that I referenced where we're going to be in a really good position at that stage with the clarity provided through all those cases, to be able to revisit some of those targets and give you a better feel for how we'll finance them.

Speaker 9

But I have to say, as you heard this morning, it's really we're going to consistently look at this as we go, right. As we find opportunities to efficiently execute to fund them and recover The revenues, we're going to consistently see if there's opportunity to pull in some of the capital as referenced earlier. So hopefully that helps give you some color.

Speaker 11

It does. Thanks, Chris, and congrats on your first CenterPoint earnings call. Thanks, guys.

Speaker 5

Thank you.

Speaker 1

Great. Operator, with that, I think that's going to conclude our call here for the Q2 of 2023. Thanks, everyone, for dialing in.

Operator

This concludes CenterPoint Energy's 2nd quarter earnings conference call. Thank you for participating.

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Earnings Conference Call
CenterPoint Energy Q2 2023
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