Yahoo Finance CenterPoint Energy, Inc. (NYSE:CNP) Q1 2024 Earnings Call Transcript
CenterPoint Energy, Inc. (NYSE:CNP) Q1 2024 Earnings Call Transcript April 30, 2024
CenterPoint Energy, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning. And welcome to CenterPoint Energy First Quarter 2024 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. [Operator Instructions] I will now turn the call over to Jackie Richert, Senior Vice President of Corporate Planning, Investor Relations and Trustees. Ms. Richert, you may begin.
Jackie Richert: Good morning. And welcome to CenterPoint Energy’s first quarter 2024 earnings conference call. Jason Wells, our CEO; and Chris Foster, our CFO, will discuss the company’s first quarter 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. 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-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. 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 a reconciliation of the non-GAAP measures used in providing guidance, please refer to our news release and presentation on our website. We will use our website to announce material information. 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 call over to Jason.
Jason Wells: Thank you, Jackie, and good morning, everyone. As many of you likely saw from this morning’s earnings release, we are off to a strong start in 2024 despite the mild weather and the general trend of higher for longer interest rate environment our sector has experienced. This quarter is yet another illustration of why we believe we have one of the most tangible long-term growth plans in the industry, which we plan to consistently execute and thoughtfully enhance for the benefit of all of our stakeholders. On this morning’s call, I’d like to address three key areas of focus before handing the call over to Chris to discuss our financial results in more detail. First, I’ll briefly summarize the strong first quarter financial results I just alluded to.
Second, I’ll touch on the details of our most recent filing at Houston Electric related to our Resiliency investments, including the potential for incremental CapEx. And lastly, I’ll provide an update on where we stand with respect to our regulatory calendar, including an overview of our pending rate cases and an important update on the settlement of our Texas Gas rate case where we are hopeful for an eventual constructive outcome for our stakeholders. First, turning to our financial results for the first quarter, this morning we announced non-GAAP EPS of $0.55 for the first quarter, which represents over a third of our full year non-GAAP earnings guidance at the midpoint. As a reminder, our full year 2024 non-GAAP EPS guidance range of $1.61 to $1.63 represents 8% growth at the midpoint from our 2023 actual results of $1.50 per share and reflects our continued focus of delivering value for our each and every year.
Beyond 2024, we are reaffirming our guidance where we expect to grow non-GAAP EPS at the mid-to-high end of our 6% to 8% range annually through 2030, as well as targeting dividend per share growth in line with earnings per share growth over that same period of time. Chris will provide additional details regarding our financial results and earnings guidance shortly. Now I’ll turn to the recent announcement we made regarding Houston Electric’s Resiliency Plan filing. There’s been a tremendous amount of collaboration by the public and private sector to align our focus on grid resiliency across the State of Texas. I want to applaud the state for its continued support for providing additional tools to help improve resiliency of the electric grid, all of which serves to support the continued economic growth here in Texas.
This legislation is a recognition of investments needed to strengthen the resiliency of the grid for the increasing risk of disruptive extreme weather-related or security-related events, while at the same time accommodating load growth across Texas. Through these filings, we anticipate achieving a faster pace of investments to support higher levels of resiliency for our customers, while also utilizing a recovery mechanism that is expected to enable smoother and more efficient recovery of certain distribution-related costs for the benefit of our customers and our investors. Our focus on delivering a more resilient grid that serves approximately 2.8 million metered customers across the Greater Houston area has been underway for some time. The sequence of our work portfolio began with enhancing our electric transmission system and related substations, which comprise the backbone of our electric grid.
This work included upgrading our transmission structures to better withstand extreme winds, elevating our substations to mitigate flood risk and converting our older 69 kV transmission lines to a more robust 138 kV standard. We will continue this work on the backbone of our system and when the first three-year cycle proposed in this filing is complete in 2027, we believe we will have finished the vast majority of work associated with these programs. With that series of measures well underway, we’re now complementing these program elements by expanding our targeted investments to improve outcomes closer to the customer. Our work articulated in our Resiliency filing has 24 individual resiliency measures that are focused on advancing the overall resiliency of our system.
The three-year plan is expected to significantly improve customer outcomes from the most severe system events associated with extreme wind, flood, temperature changes and wildfires. Additionally, measures are being undertaken to bolster physical and cybersecurity. Examples of some of the solutions we’ll deploy include composite poles, trip-saver devices and intelligent grid switching automation technology. All of these are proven to help the system respond more favorably in extreme conditions, resulting in a reduced number of sustained interruptions that our customers experience. In fact, we’ve steadily deployed similar system automation in recent years, saving our customers over 300 million minutes of interruptions over the last five years.
With the investments included in our Resiliency Plan filing, we could more than triple that figure over the next few years. In aggregate, our filing includes a range of investments of approximately $2.2 billion to $2.7 billion over the three-year period of 2025 to 2027. The high end of our filing, if approved, would increase our total capital expenditures from $44.5 billion to $45 billion over our 10-year plan ending in 2030. Consistent with how we have historically incorporated incremental investment opportunities in our base plan, the $500 million of additional capital will be formally included in our capital investment plan when we believe we can efficiently execute, finance and recover these investments. We will also align our execution with the feedback and final resolution of the Resiliency Plan proceeding, which we anticipate will be towards the end of this year.
While we have factored the majority of this resiliency investment within our updated CapEx and financing plans discussed last quarter, Chris will describe thoughts on efficiently funding the incremental $500 million of capital investment opportunity, including pursuing various state and federal incentives. We are excited to work with the Commission and other stakeholders to get feedback on the plan we proposed and, most importantly, executing this work to create a more resilient electric grid for our customers. I now want to turn to an update on our broader regulatory calendar. I’ll cover these sequentially from the date filed, starting with a Texas Gas rate case where we have recently announced an all-party settlement. Although this settlement is still subject to Railroad Commission approval, we believe the settlement agreement reached with parties is a constructive outcome for our customers and all other stakeholders.
In its current form, pending approval, the case will result in an annual revenue requirement increase of approximately $5 million, which results in an average increase of well under one-tenth of 1% for our Houston-area residential customers. This very modest customer bill increase is a great illustration of the power of organic growth coupled with our continued focus on reducing O&M across our businesses. The Texas Gas rate case filing included nearly $500 million of new capital investments and an increase to its authorized cost of capital that I’ll briefly touch on in a moment, all while resulting in a very modest increase for our customers. Since the last rate case, we have invested a total of $1.4 billion in CapEx to continue to improve system safety and reliability for our customers.
These investments have translated to more than 1,800 miles of pipe replacement and more than 300,000 advanced meter upgrades, all helping to modernize our gas network. As I just mentioned, our $5 million settled revenue requirement proposal includes an increase to our authorized capital structure and return on equity. The proposed settlement includes an authorized equity ratio of approximately 61% and an authorized return on equity of 9.8% across our entire Texas Gas jurisdiction. In comparison, we are currently authorized on average for a 55.5% equity layer and a 9.64% return on equity across the four historic divisions. Increasing both our authorized equity ratio and our authorized return on equity is vital to the Texas Gas business, as well as our other regulated businesses, as we continue to compete for capital to make critical investments for our customers.
In addition to the minimal impact to our customer bills, the settlement combines our four historic Texas Gas jurisdictions into one jurisdiction for future capital recovery mechanisms, which will benefit all stakeholders through reduced administrative burden and the ability to spread future investments over a broader growing customer base. We appreciate the effort of various parties involved in the rate case to this point and expect Railroad Commission consideration of the settlement this summer. Moving to the filed Minnesota Gas rate case. As a reminder, we filed our rate case on November 1st of last year. They requested revenue increase of approximately $85 million and $52 million for 2024 and 2025, respectively. As discussed on the last call, the interim rates for 2024 were approved in mid-December and went into effect on January 1st of this year.
The Commission will consider interim rates for 2025 toward the end of this year depending on how far along we are in the case. At this stage, we anticipate hearings to occur in the middle of December this year. Ahead of those hearings, we intend to engage parties to the case in settlement discussions. As you may recall, we have settled our previous three rate cases in our Minnesota Gas jurisdiction. Now turning to the Indiana Electric rate case, which we filed in December of last year with a requested revenue requirement of $119 million. As we’ve discussed previously, much of this revenue requirement increase is associated with our investments in connection with our electric generation transition plan as we move away from coal to more efficient and cost-effective fuel types such as renewables and natural gas.
We have slightly delayed the start of the hearings in this case to determine if a settlement is possible with parties. Absent a settlement, we would expect a final decision in this case in the fourth quarter of this year. And finally, I’ll touch on our largest jurisdiction, Houston Electric. As many of you saw, we have filed our rate case last month with a requested revenue requirement increase of 2.6%, which is approximately $60 million. This revenue requirement increase results in a relatively nominal residential customer charge increase of about $1.25 per month or less than 1%. This revenue requirement increase is premised on the filing seeking an authorized equity ratio of approximately 45% and an authorized return on equity of 10.4%.
As a reminder, we’ve been funding the Houston Electric business with a 45% equity ratio, as we believe this is the minimum amount of equity with which this business should be capitalized, even though we are currently authorized at 42.5%. The modest revenue requirement request truly exemplifies the strong advantage we have here at CenterPoint, as it’s driven by; one, our relentless focus on reducing O&M 1% to 2% per year on average; two, prior securitization charges rolling off the bill in October of this year; and three, the nearly unparalleled growth that Houston Electric and surrounding areas experience each and every year. To put these combined factors into perspective, since our last rate case in 2019, Houston Electric’s rate base has nearly doubled, while the average residential charges were nearly the same amount at the beginning of 2024 as they were all the way back in 2014.
As a management team, we are acutely aware of the advantage we have to serve a growing economy like Houston, but we also understand the tremendous responsibility that accompanies it. We are tasked with serving and supporting the dynamic growth of Houston’s vibrant and diverse population. One recent tangible example of Houston’s continued expansion can be seen from the nearly $6 billion in Department of Energy grants awarded a little over a month ago. Nearly one-third of these grants were awarded for projects in the greater Houston area. If completed, we believe these projects associated with these grants could contribute well over 500 megawatts alone in new load in the Houston Electric service territory and this is just one of many examples of the explosive load growth potential in this region.
We look forward to working with our stakeholders as we continue to support this incredible growth story here in Houston. Before moving on, I want to briefly mention that we have one other rate case that we will be filing in 2024 related to our Ohio Gas business. We anticipate filing this rate case in August of this year and will provide more details as we get closer to the filing. We look forward to continuing to work with all of our stakeholders to reach constructive resolutions to all of our rate cases. We believe we are well positioned in all of our filings as we’ve made prudent investments on behalf of our customers and have made concerted efforts to reduce controllable O&M for the benefit of the communities we serve. Those are all of my updates for now.
With a strong start here in 2024, we have laid the foundation to once again meet or exceed expectations for the benefit of all of our stakeholders. I’m proud of the early milestones already achieved in 2024 and look forward to being able to provide progress on our cases and how the Resiliency Plan filing and other opportunities may influence incremental investments in the future. I am confident in our path forward and our ability to continue as we reaffirm our commitment to our proven strategy into our non-GAAP EPS guidance target range of 8% in 2024 and at the mid-to-high end of our 6% to 8% non-GAAP EPS guidance target range annually from 2025 through 2030. And as we’ve mentioned in recent quarters, we’ll be prepared to update a new 10-year plan through an Analyst Day following the conclusion of our rate cases next year.
With that, I’ll hand it over to Chris for his financial updates.
Chris Foster: Thanks, Jason. Today, I’d like to cover three areas of focus. First, the details of our strong first quarter financial results. Second, I’ll touch on our capital deployment progress this quarter and the potential for incremental capital related to Houston Electric’s system Resiliency Plan filing. And finally, I’ll provide an update on where we stand with respect to our current financing plan and credit metrics. Let’s start with the financial results shown on Slide 6. As Jason highlighted earlier, the first quarter of 2024 was yet another strong quarter of financial performance here at CenterPoint. On a GAAP EPS basis, we reported $0.55 for the first quarter of 2024. On a non-GAAP basis, we also reported $0.55 for the first quarter of 2024, compared to $0.50 in the first quarter of 2023.
With these first quarter results, we have now earned over a third of our full year 2024 non-GAAP earnings guidance at the midpoint. Diving into more detail of the earnings drivers for the quarter, growth in rate recovery contributed $0.09, which is primarily driven by the ongoing recovery from various interim mechanisms for which customer rates were updated last year. In addition to those capital recovery mechanisms, interim rates in our Minnesota Gas business went into effect on January 1st of this year. These rates reflect a revenue requirement increase of approximately $69 million, which, when combined with our requested 2025 revenue increase, represent an approximately 5% average bill increase over the next two years. In addition, we continue to see strong organic growth in Houston area extending the long-term trend of 1% to 2% average annual customer growth, which continues to benefit both customers and investors.
A great illustration of this continued growth can be found in the impressive job creation we’ve observed in Houston over the last year. According to the U.S. Department of Labor, the Houston Metro area added the second most jobs in the entire U.S. from February of last year to February 2024. Weather and usage were $0.02 favorable when compared to the same quarter of 2023. And despite the mild weather, the $0.02 favorable variance was largely driven by more favorable weather when compared to an extremely mild Q1 of 2023. Partially offsetting the favorable items from rate recovery and usage for increases in O&M and interest expense. O&M was $0.02 unfavorable for the first quarter. This unfavorable variance was driven by additional work pulled forward in the first quarter of this year, as well as storm response recovery efforts.
However, we remain on track to achieve our target of reducing O&M 1% to 2% per year on average through 2030. Interest expense was $0.04 unfavorable, primarily driven by the new debt issuances since the first quarter of last year at a higher relative cost of debt. However, the impact of this increase was partially offset by the redemption of all outstanding shares of the Series A Preferred for $800 million last September, which eliminated the approximately $12 million quarterly dividend. I’ll discuss our long-term financing plan and balance sheet in greater detail later. Next, I’ll touch on our capital execution thus far in 2024 and the state of our 10-year capital plan target, which you can see here on Slide 7. In short, we are right on.
The first quarter of 2024 represented yet another quarter of solid capital investment execution as we invested $800 billion for the benefit of our customers and communities. This represents a little over 20% of our 2024 capital expenditure target of $3.7 billion. Our approach to incorporating customer-driven capital has resulted in a capital investment plan of $44.5 billion and potentially more, which represents an increase of over 10% since our 2021 Analyst Day. This increased capital plan is expected to drive a nearly 10% rate-based CAGR through 2030, which supports strong earnings growth through the remainder of the decade. We continue to estimate our growth in customer delivery charges at Houston Electric to be equal to or less than the historical inflation rate of 2% through 2030 with this capital investment profile.
We have confidence in our ability to achieve this given the size of Houston Electric’s customer base and the underlying tremendous organic growth, securitization charges that are rolling off the bill later this year and our plan to reduce O&M, as I referenced. In addition to enhancing the customer experience through our capital investments, we remain focused on affordability both from an O&M and ongoing targeted capital perspective. A great illustration as to why we are confident that we can continue to prudently invest while keeping customer charges modest can be found by looking at our utility delivery charge increases over the last 10 years. Since 2014, Houston Electric’s average monthly delivery charges have stayed essentially flat.
That’s a truly remarkable outcome for our customers. And as Jason mentioned, our capital has potential for further incremental revisions driven by our resiliency filing in Texas. The System Resiliency Plan filing could drive incremental customer-driven opportunities of up to $500 million at the high-end range of our proposed investment. And I want to reiterate that over the past couple years, we have been increasing our capital investment plan through 2030 as we identify incremental investment opportunities that we believe we can efficiently execute, finance and recover. Let’s spend a moment on the potential for funding the incremental resiliency investment opportunities of approximately $500 million, which Jason mentioned. We are applying for various federal dollars through multiple avenues and have already applied for $100 million of grant applications through the Department of Energy Grid Resilience and Innovation Partnerships funding opportunity, and that was submitted a little over a week ago.
These funds, if approved, would primarily assist in providing a lower cost of borrowing for our resiliency initiatives around distribution circuit rebuilds and substation resiliency innovation. In addition, we will also seek other efficient funding opportunities through federal and state matching programs, such as the DOE Loan Guarantee Program. CenterPoint has three separate loan applications working through the process in various stages for over $2 billion in aggregate. While these are loan dollars, not grant dollars, the relative cost savings versus traditional debt can be substantial, around 100 basis points, representing meaningful savings for customers. As Jason alluded to, we are actively pursuing these avenues of funding as we believe these are incredibly valuable initiatives for customers.
To the extent that we are not successful, our consistent growth capital investment rule of thumb holds, which is funding in line with our consolidated capital structure. Finally, to highlight the balance sheet and credit strength, as of the end of the first quarter, our calculated FFO-to-debt is 14.6%, based on our calculation aligning with Moody’s methodology, as shown on Slide 20. On a full year 2024 basis, we still anticipate delivering on the 100 basis points to 150 basis points cushion we continue to emphasize when applying Moody’s methodology. As you can see on the slide, we’ve also included S&P’s calculation on the slide this quarter and will continue to do so going forward. As the computations illustrate, we’ve adjusted our calculations for one-time items, mainly driven by Winter Storm Uri.
We have had two years of one-time items related to the over $1 billion of extraordinary gas costs associated with that storm. We don’t believe that this debt, nor the eventual receipt of the proceeds and associated taxes, were indicative of the fundamental credit health of the company and adjusted accordingly. For comparative purposes, you can see on the slides that we put our calculated 14% in the middle of the 18.5% FFO-to-debt that Moody’s derived and the 11.2% calculation that S&P derived. To be clear, we see no need to our current financing plans we shared with our rating agencies earlier this year to improve the outlook from S&P on our credit metrics. In addition, we’ve made good progress against the modest $250 million at the market or ATM equity program year-to-date.
We have completed approximately 75% of our equity sales through today, leaving only around an expected $60 million of equity remaining to be issued this year. As a reminder, we continue to have slightly elevated parent debt to total debt as we are continuing to carry over $400 million of debt at the parent to support what we believe is the proper capitalization of the CEHE and CERC operating companies through rate cases. We plan to continue to carry that through the CEHE rate case, supporting its approximately 45% equity layer today. On the solid footing of a strong first quarter, we continue to reaffirm our non-GAAP EPS target of 8% this year and the mid-to-high end of 6% to 8% annually thereafter through 2030. This growth is supported by differentiating factors that we enjoy, including consistent customer organic growth, which has averaged 2% per year over the last 30 years in the Houston area, Texas’ pro-business environment, which continues to attract new investment, especially in the Gulf Coast region, and lastly, our relentless focus on O&M discipline.
We believe these factors will allow us to sustainably grow for years to come. The last thing I want to mention is that we are making good progress related to the sale of our Louisiana and Mississippi Gas LDCs. We, along with a buyer, have now made all required regulatory filings, including filings with the Louisiana and Mississippi Public Service Commission and we look forward to working constructively with the Commission to facilitate the approval proceedings. We still anticipate closing the sale late first quarter 2025 and it is anticipated to result in after-tax cash proceeds of approximately $1 billion, which equates to an earnings multiple of nearly 32 times 2023 earnings. This would be a terrific outcome for all stakeholders. With that, I’ll now turn the call back over to Jason.
Jason Wells: Thank you, Chris. I look forward to continuing not only to execute on what I believe to be one of the most tangible long-term growth plans in the industry, but also enhancing it for the benefit of all of our stakeholders in both the near- and long-term.
Jackie Richert: Thank you, Jason. Operator, we’re now ready for Q&A.
Operator: Thank you. [Operator Instructions] Thank you. And the first question will come from Shar Pourreza with Guggenheim Partners. Your line is open.
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