CenterPoint Energy's CEO Discusses Q3 2011 Results - Earnings Call Transcript

CenterPoint Energy (CNP)

Q3 2011 Earnings Call

November 02, 2011 11:30 am ET

Executives

Marianne Paulsen - Director of Investor Relations

David M. McClanahan - Chief Executive Officer, President and Director

Gary L. Whitlock - Chief Financial Officer and Executive Vice President

Analysts

James Krapfel - Morningstar Inc., Research Division

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

Lauren Duke - Deutsche Bank AG, Research Division

Carl L. Kirst - BMO Capital Markets U.S.

Andrew Weisel - Macquarie Research

Unknown Analyst -

Yves Siegel - Crédit Suisse AG, Research Division

Faisel Khan - Citigroup Inc, Research Division

Presentation

Operator

Good morning, and welcome to CenterPoint Energy's Third Quarter 2011 Earnings Conference Call with senior management. [Operator Instructions] I will now turn the call over to Marianne Paulsen, Director of Investor Relations. Ms. Paulsen?

Marianne Paulsen

Thank you very much, Thea[ph]. Good morning, everyone. This is Marianne Paulsen, Director of Investor Relations for CenterPoint Energy. I'd like to welcome you to our third quarter 2011 earnings conference call. Thank you for joining us today. David McClanahan, President and CEO; And Gary Whitlock, Executive Vice President and Chief Financial Officer, will discuss our third quarter 2011 results and will also provide highlights on other key activities.

In addition to Mr. McClanahan and Mr. Whitlock, we have other members of management with us who may assist in answering questions following their prepared remarks. Our earnings press release and Form 10-Q filed earlier today are posted on our website, which is www.centerpointenergy.com, under the Investors section.

I remind you that any projections or forward-looking statements made during this call are subject to the cautionary statements on forward-looking information in the company's filings with the SEC. Before Mr. McClanahan begins, I would like to mention that a replay of this call will be available until 6:00 p.m. Central Time through Wednesday, November 9, 2011.

To access the replay, please call 1 (855) 859-2056 or (404) 537-3406 and enter the conference ID number 14698131. You can also listen to an online replay of the call through the website that I just mentioned. We will archive the call on CenterPoint Energy's website for at least 1 year. And with that, I will now turn the call over to David McClanahan.

David M. McClanahan

Thank you, Marianne. Good morning, ladies and gentlemen. Thank you for joining us today and thank you for your interest in CenterPoint Energy.

This past quarter was a very good one for the company. We had a strong quarter from an earnings standpoint, and after 7 years, we resolved the long-standing issues associated with our true-up proceeding.

Our press release and 10-Q provided details around our business unit's financial performance this past quarter, so I won't repeat the specifics. But let me summarize the performance of each business unit and talk a little bit about their prospects.

Houston Electric had an outstanding quarter, and it's having a really good year. This past summer was the hottest summer on record for Texas. This drove the largest part of Houston Electric's earnings gains. I was really pleased at how well our systems performed when faced with a stressed that the extreme heat placed on it. We've also taken the opportunity to invest more in system hardening and reliability, which benefits not only this year, but the years ahead as well. The future looks bright for this unit. While we can't count on repeating the weather-driven earnings we experienced this year, we can count on a solid and growing service territory. We have added more than 35,000 customers since this time last year, and believe we'll see a continuation of that pace of growth next year.

Very few areas around the country are experiencing this type of economic activity and growth. Capital expenditures should approximate between $500 million and $600 million annually, as we build infrastructure to serve new loads and automate the grid. The primary earnings headwind this unit faces comes from the rate changes implemented this past September. This will have a negative operating income impact of approximately $35 million next year when the effect of the change in depreciation rates is also taken into account.

Our gas distribution unit is having another outstanding year attributable primarily to our business model and expense control. Annual rate adjustments in a number of our jurisdictions continue to help us recover increased investments, as well as reductions in gas usage without the necessity of a major rate proceeding. This significantly reduces the amount of regulatory lag we would typically experience. Like most of the industry, we are very focused on pipeline safety and integrity. As a result, we are planning to accelerate the replacement of some aging infrastructure and increase our system improvement expenditures. We expect rate base will grow at a much faster pace, as overall capital expenditures are likely to increase to between $300 million and $400 million annually compared to a historical level of about $200 million.

Our midstream businesses are also doing well. As expected, our field services unit, demonstrated from infrastructure investments we've made into Haynesville and Fayetteville shale areas. Our gathering volume increased by almost 5% over the previous quarter, and averaged over 2.2 billion cubic feet per day. About 1 billion cubic feet per day was gathered out of the Haynesville shale.

Gathering volumes from our traditional basins were down about 2% from the previous quarter, in line with our expectations.

Next year, we expect the volumes out of Haynesville will reach 1.5 billion cubic feet per day by the second quarter. We expect volumes out of the Fayetteville and Woodford to increase as well. While a number of producers are shifting their emphasis from leaner shale plays to more liquid-rich plays, our principal customers have maintained a consistent level of drilling in these shales.

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