Carla Kneipp - Vice President of Investor Relations and Treasurer Scott M. Prochazka - Chief Executive Officer, President and Director Tracy B. Bridge - Executive Vice President and President of Electric Division Joseph B. McGoldrick - Executive Vice President and President of Gas Division Gary L.

Whitlock - Chief Financial Officer and Executive Vice President.

Danilo Juvane - BMO Capital Markets Canada Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division Matthew P. Tucker - KeyBanc Capital Markets Inc., Research Division.

Good morning, and welcome to CenterPoint Energy's Second Quarter 2014 Earnings Conference Call with Senior Management. [Operator Instructions] I will now turn the call over to Carla Kneipp, Vice President of Investor Relations.

Miss Kneipp?.

Thank you, Regina. Good morning, everyone. Welcome to our second quarter 2014 earnings conference call. Thank you for joining us today.

Scott Prochazka, President and CEO; Tracy Bridge, Executive Vice President and President of our Electric Division; Joe McGoldrick, Executive Vice President and President of our Gas Division; and Gary Whitlock, Executive Vice President and CFO, will discuss our second quarter 2014 results and provide highlights on the other key areas.

Although -- excuse me, also present are other members of management, who may assist in answering questions following the prepared remarks. Investors and others should note that we may announce material information using SEC filings, press releases, public conference calls, webcasts and posts on the Investor Relations section of our website.

In the future, we will continue to use these channels to distribute material information about the company and to communicate important information about the company, key personnel corporate initiatives, regulatory updates and other matters.

Information that we post on our website could be deemed material, therefore, we encourage investors, the media, our customers, business partners, and others interested in our company to review the information we post on our website.

I would also like to remind you that our earnings press release and Form 10-Q, as well as updated debt maturity and equity return amortization schedules, have been posted on our website, centerpointenergy.com, under the Investors section. These materials are for informational purposes, and will not be referred to during prepared remarks.

Also, any projections or forward-looking statements made during this call are subject to the cautionary statements on forward-looking information in the company's filing with the SEC. With the formation of Enable Midstream Partners, the way we present our financial results have changed.

As a result, we will refer to our equity investment in Enable as Midstream Investment, and to the remainder of our businesses as Utility Operations. Before Scott begins, I'd like to mention that a replay of this call will be available through Wednesday, August 13.

To access the replay, please call (855) 859-2056 or (404) 537-3406 and enter the conference ID number 65068077. You can also listen to an online replay on our website, and we will archive the call for at least 1 year. And with that, I will now turn the call over to Scott..

Thank you, Carla. Good morning, everyone, and thank you for joining us on CenterPoint Energy's second quarter 2014 earnings conference call. I would first like to thank those of you who joined us either in person or on the webcast for our June 30th Analyst and Investor Day.

At that event, we shared our optimism for the future based on growth in the organic investment opportunities in our utility service territories. We believe we are well-positioned to provide our customers and the communities we serve highly reliable and safe utility service.

Further, we believe our investment in Enable Midstream Partners creates additional shareholder value as they realize growth opportunities. For those not able to participate, let me reiterate a few key messages from the meeting. We introduced a $1.2 billion potential upside to our current 5-year estimated capital plan of $6.2 billion.

We shared that while our current plan is expected to generate annualized rate-based growth of 7% to 8% from 2014 to 2018, our potential upside capital investment could increase that annual growth rate to 9% to 10%.

Our current plan supports utility earnings compound annual growth of 4% to 6%, and a potential upside capital investment would allow us to more confidently target the upper end of that range.

We are currently reviewing our 5-year strategic plan and we'll formally update or revise capital investment schedule beginning or during our fourth quarter earnings call.

Also, at our Analyst Day meeting, Lynn Bourdon and Rod Sailor of Enable Midstream Partners discussed their company's value proposition and reviewed the key drivers that will support sustainable growth in their distributable cash.

Each of these elements contributes to our expectation of providing CenterPoint Energy shareholders a stable dividend with growth of 8% to 10% annually over the next 3 years. Our investment thesis is to provide reliable earnings growth with an industry-leading dividend growth rate. Turning to our second quarter 2014 performance.

Net income was $107 million, or $0.25 per diluted share, compared to a net loss of $100 million or a loss of $0.23 per diluted share for the same period in 2013. Excluding the 2 unusual items associated with the formation of Enable Midstream Partners, second quarter 2014 net income would have been $131 million or $0.30 per diluted share.

For the second quarter of 2014, Utility Operations contributed $0.14 per diluted share, and our Midstream Investments contributed $0.11.

On a guidance basis, second quarter 2014 earnings were $0.21 per diluted share as compared to $0.29 in the same period last year, which included a $0.07 per diluted share onetime tax benefit associated with the formation of Enable Midstream Partners.

Of the $0.21 per diluted share, Utility Operations contributed $0.10 and Midstream Investments contributed $0.11. Our second quarter performance once again illustrated the benefits of our diversified energy delivery portfolio. The effect of mild weather at Houston Electric was almost entirely offset by strong performance from gas operations.

Core operating income from utility operations was $156 million this quarter, compared to $159 million last year, excluding a $10 million of partnership formation expense in the second quarter of last year. In addition, we recognized $71 million of equity earnings from our investment in Enable Midstream.

As many of you know, Enable released their second quarter results and held their earnings conference call yesterday, so I will direct you to Enable's published documents for a detailed review of their results.

I would also like to remind you that Enable finalized its IPO and purchased essentially all of our remaining interest in the Southeast Supply Header during the quarter. As a result, our LP ownership interest in Enable is now 55.4%.

Through June, we invested nearly $630 million to serve our customers better and to accommodate the continued growth demands on our system. We remain on track to invest $1.4 billion of capital by year end. I am pleased with our company's performance so far this year.

We remain focused on operating safely, serving our growing customer base effectively and running the businesses efficiently. I will now turn the call over to Tracy, to review electric operations..

Thank you, Scott. Houston Electric had a solid second quarter, both operationally and financially, despite milder weather. Quarter operating income was $115 million, compared to $131 million in 2013. Higher earnings from customer growth were more than offset by the impact of milder weather, as well as higher O&M and depreciation expense.

Houston Electric's earnings continue to benefit from our growing customer base. Since this time last year, we added more than 48,000 metered customers which contributed approximately $7 million of operating income this quarter. We continue to expect 2% annual customer growth into the foreseeable future.

Electricity consumption in Houston continues to grow, and for the 12 months ended June 30, weather-normalized residential throughput was up slightly over 2% when compared to the previous 12 months. Over the past several years, our residential throughput increase had been consistent with our residential customer growth.

On a per customer basis, our usage has been more or less flat. As I mentioned, Houston Electric experienced mild weather this quarter. Compared to the same quarter last year, operating income was down $10 million due to weather-related usage. For the first half of this year, operating income is lower by $3 million when compared to normal weather.

Our O&M expense was higher compared to the second quarter of last year, primarily because of 2 items. First, transmission investment cost in Texas is recovered from all electric distribution service providers.

In the quarter, Houston Electric incurred approximately $46 million more of allocated transmission cost, which we refer to as TCOS expense, than in the same period last year. These costs are largely offset by the corresponding increase in transmission revenues.

Second, as we stated during the year end 2013 earnings call, we expected our operational expenses to be higher this year as we accelerate specific grid reliability and safety initiatives. As a result, non-key cost O&M was up $8 million or about 6% compared to the same period last year. Before I discuss our capital investment.

let me update you on our expectations for right-of-way revenue. Through the second quarter of 2014, we have recognized about $12 million of right-of-way revenue, of which $2 million was received this quarter. We currently estimate right-of-way revenue will be from $15 million to $20 million this year.

As we detailed during the recent Analyst Day meeting, Houston Electric has a significant capital plan in place to support customer growth, modernize our system and enhance reliability. Through the first half of the year, we invested $370 million, which keeps us on track to invest at least $780 million of capital by year end.

Our 5-year capital plan is approximately $3.7 billion, and we also have an additional $750 million to $800 million of potential upside capital investment during that timeframe. Regarding the Houston Import Project, our appeal of ERCOT's SESH decision to split responsibility for the project is now before the Texas Public Utility Commission.

We believe that as owners of the end points of the project, we are entitled by ERCOT protocols to own the entire project. The commission has scheduled a hearing on August 21, and we are hopeful for a third quarter decision.

We expect Houston Electric to grow a normalized operating income at a compound annual rate of 5% to 6% over the next 5 years, with a possibility of 6% to 7% compound annual growth when taking into account our potential upside capital investment.

As we stated during our analyst a presentation, these growth projections are somewhat back-end loaded in our 5-year plan. We are well-positioned to continue our strong performance. We are focused on effectively serving our growing customer base, modernizing our system, and operating reliably and safely.

I'll now turn the call over to Joe, who will review the gas operations businesses..

Thank you, Tracy. As a reminder, our gas operations business includes both our natural gas utilities and our Energy Services business. Second quarter 2014 operating income for gas operations was $41 million, $13 million more than last year. Of this, $30 million was from our natural gas utilities, and $11 million was from Energy Services.

Last year, operating income in the second quarter was $28 million, with $25 million from the natural gas utilities and $3 million from Energy Services. Our natural gas utilities had a good quarter, benefiting from an improved rate and continued customer growth.

Rate increases improved our operating income approximately $10 million, compared to the second quarter of 2013, driven by a PUC decision on our Minnesota rate case and several Texas GRID filings. Weather and usage, net of our weather hedge and the weather normalization adjustments riders, contributed approximately $3 million.

Weather in the quarter was colder than normal, but not as cold as the second quarter of 2013. However, we exceeded our winter hedge cap from the first quarter this year, so we were able to fully benefit from the colder-than-normal weather in the second quarter.

We remain very pleased with customer growth we continue to see across our footprint, adding approximately 31,000 customers since the second quarter of 2013. This 1% customer growth is heavily influenced by our Metropolitan areas of Minneapolis and Houston.

After excluding pass-through expenses, which have offsetting revenues, operational O&M is up about $6 million in the second quarter compared to last year. The majority of our increase is due to additional contract labor utilized in our leak detection and pipeline inspection efforts.

In my Analyst Day presentation, I shared that we're working hard to ensure our operational O&M does not exceed a 3% compound annual growth rate over the 5-year planning period. Despite increasing pipeline integrity requirements, we remain committed to that objective.

Our capital program will continue to focus on customer growth, technology, consistency and system safety, and reliability investments. Through June, we have invested $230 million of capital, and expect to invest at least $520 million by year end.

Going forward, as we shared during the Analyst Day, our current $2.2 billion 5-year capital plan has an additional $300 million to $400 million of potential upside. As Scott mentioned, we'll update these numbers during our fourth quarter earnings call.

In the quarter, we closed on the purchase of the building in Minneapolis, which will serve as our permanent Minnesota headquarters. Also, we continued to deploy automated meter-reading technology across our footprint, and now have almost 2.7 million installations, systemwide.

We remain on track to convert all 3.4 million of our meters by year end 2015, positioning us as an industry leader in automated meter technology.

Based on our current capital plan, we expect our natural gas utilities to growth operating income at a compound annual rate 4% to 5% over the next 5 years, the possibility of 5% to 6% when taking into account our potential capital upside. Finally, Energy Services had another strong quarter, with $8 million more in operating income last year.

Favorable transportation optimization provided a margin uplift, and expense control continues to prove beneficial for the business. Our Energy Services group will continue to provide valuable, nonutility services, and position CenterPoint Energy gas operations as a premier provider of one-stop natural gas solutions for our customers.

We are well-positioned to further our proven track record of performance. I also believe we have the proper operating model to continue building an industry-leading Gas Distribution Energy Services business.

We are focused on the early adoption of technology to improve the customer experience, and our infrastructure investments support the growth and event on our systems and we remain committed to operating an efficient, safe, and reliable system.

I'll now turn the call over to Gary, who will provide an update on financial activities and earnings guidance..

Utility Operations and Midstream Investment. We have assumed a consolidated effective tax rate of 37% and an average share count of 431 million shares. Despite the impact of weather on this quarter, we reaffirmed our utility operations earnings guidance range of $0.72 to $0.76 per diluted share.

The utility operations guidance range considers significant variables that may impact earnings such as weather, regulatory and judicial proceedings, throughput, commodity prices, effective tax rates and financing activities.

However, the company does not include in its earnings expectations the impact of any changes in accounting standards, any impact to earnings from the change in the value of the stocks and the related securities or the timing of the value of the Time Warner stocks and the related [indiscernible] securities or the timing effect of mark-to-market accounting.

Additionally, we increased our midstream investment's guidance range to $0.42 to $0.45. This Midstream Investment's guidance range takes into account Enable's most recent public forecast, effective tax rate, the accretion of our basis difference in Enable and other factors. As the year progresses, we will keep you updated on our earnings expectations.

As recently announced, our objective is to grow our dividend at a compound annual growth rate of 8% to 10% over the next 3 years, which differentiates us within our industry.

Our dividend policy of targeting an annual payout ratio of 60% to 70% of sustainable earnings from our Utility Operations, and 90% to 100% of the net after-tax cash distributions we received from Enable, clearly supports our commitment to achieving the stated dividend growth rate objective.

Finally, I'd like to remind you of the $0.2375 per share quarterly dividend declared by our Board of Directors on July 24th. We believe our dividend actions continue to demonstrate a our strong commitment to our shareholders, and the confidence that management and the Board of Directors in our ability to deliver sustainable earnings and cash flow.

Now let me thank you for your continued interest in CenterPoint energy, and I will now turn the call back over to Carla..

Thank you, Gary. In asking your questions, I'd like to remind you that Enable-related financial and Operational performance questions should be directed to Enable Management. We will now open the call to questions, and in the interest of time, I ask you to limit yourself to one question and a follow-up.

Regina?.

[Operator Instructions] Our first question will come from the line of Carl Kirst with BMO Capital..

This is actually Danilo filling in for Carl. A couple of quick follow-up questions.

With respect to CE, what was the weather impact, again, for the quarter?.

Tracy, you want to take that one?.

I will take that one. I'm looking for the number right here. Yes, it's about $10 million for the quarter..

And can you repeat again what the O&M impact was, as well?.

About $8 million..

Got you. Okay. I guess most of my other questions have been hit. One quick follow-up, though, for Gary.

Now that you sort of are increasing guidance because of Enable, is it fair to say that the dividend growth will sort of change towards that high end of that 8% to 10% range?.

Well, I wouldn't say that. I think, at this point, what you're seeing, I think, we are implementing what we've said we -- we really want to look at Enable. As you know, they announced earnings yesterday, they laid out their EBITDA range. And -- which, I think reflects, by the way, what we laid out at the Analyst Day, 8% to 10%.

And I think, at this point, we know that's the range. Certainly, our objective -- their objective is to be as profitable as possible, increase their distributions as much as possible. But at this point, I'd say stay with 8% to 10%. And as I said before, our objective is to be at the high end of that, of course, and then we'll look at it each year.

I think that's an important thing. Each year, we'll look at what that looks like, and as I said at the Analyst Day, we want to update our -- update you guys on where we see that compounded growth rate. But no change in the range at this point..

We will -- I'll just add onto that. We will continue to evaluate the implications of their forecast as it change, as it may impact our growth rate. But at this point, as Gary said, the growth rate is still 8% to 10%..

Got you. And I guess, a final one before I leave. Any sort of updates on your interest in the Oncor assets? There've been a lot of parties, obviously, interested in it.

Do you guys sort of still are looking at that? Or how should we think about that?.

I think we've mentioned several times. First of all, our top priority is organic investment, right? We're going to focus on that and making sure that Enable is properly governed and they're doing what they need to. But as we've said before, we have an interest in M&A if it meets our strategic criteria. You've asked specifically about Oncor.

I think, in the past, we've commented that from a strategic standpoint, there's good industrial logic for it. But as this process unfolds, as we look at this, we're only going to do something if it makes sense, it meets our strategic criteria and it creates value for our current shareholders..

Our next question will come from the line of Ali Agha with SunTrust..

Scott, you guys have raised your '14 guidance based on Enable's numbers being put out there. As you know, they put out both '14 and '15 numbers.

Are their '15 numbers higher than what you had assumed in your outlook as well?.

Well we, as you know -- this is Gary. Good morning, Ali. We've not provided '15 guidance. I think, directionally, we're frankly very pleased with what they laid out.

I think you can see they're investing a significant amount of capital, and I think that they're very clear to the market in letting you guys know the amount of capital that they're going to execute on. But in terms of 2015, we're not providing guidance at this point.

But certainly, our expectations is that they would increase their EBITDA growth and distributable cash flow in 2015, and we expect them to continue beyond that. So I'm going to call it in line with our expectations, but in terms of specific guidance, we'll give that first quarter of next year..

Okay. And my second question, I guess, Gary, for you, as well. Kind of 2 parts.

One is that's just a logistic point, the 37% tax rate, is that fair for modeling purposes to assume that to be consistent in future years as well?.

I think it is. It's subject to, I would say, some type of change in the tax rates. But, yes, I think you could use it for now. I mean, I think that's a fair rate to use, yes..

Okay.

And just the real question I wanted to ask you is if that growth CapEx does come to fruition in your regular businesses, can you remind us, would that cause you to think about raising equity to meet your CapEx plans if you do spend that extra amount as well?.

Well, in terms of the -- let me maybe back up and review our financing plan, is to thoughtfully use our debt capacity, and that's what we're doing. We ended the year with debt to total cap of about 53.5%. If you look at the end of the quarter, it's about 55.7%.

So we have quite a bit of runway in front of us to thoughtfully use our debt capacity, to the extent that Joe and Tracy are able to execute on accretive growth capital above and beyond that. Frankly, we'd be delighted to get feather in some equity to support that.

But we'll, first of all, thoughtfully use our debt capacity that we work diligently to have the flexibility to use over these past few years. Hope that's helpful..

Our next question will come from the line of Matt Tucker with KeyBanc Capital Markets..

First question on the stronger guidance for Enable.

Can you just talk a little bit more specifically about what's driving your -- the stronger view versus what you were assuming previously? And has it been more the performance to date or the second half outlook?.

I'll take this. Matt, I think it's really -- again, obviously, you can look at their release in terms of the details, but I think this is what we've expected, and it's really around, as they have -- are able to drive more transparency around their outlook. Certainly, commodity prices were moving in their favor to some extent.

I think that's weakened some. And as I said, we really need to follow what they laid out, but as you can see, they laid out yesterday I think a really strong CapEx plan and growth in their EBITDA. So we'll follow them. And I think it's pretty well in line with what we expected.

And again, as they became public, we understood where they were going to be on SESH, in our ownership and those things, to be able to just fine-tune, if you will, their guidance at this point..

And then I, I guess, had a similar question on the reaffirmed Utility Operations guidance.

Are there any moving pieces in terms of the stronger, weaker assumptions there for the 3 segments included in that?.

I'd say -- on the Utility side, we see -- certainly, we see some growth. There's some strength in the growth space, very strong. We had the weather downturn, as you noted, in the actuals for the quarter, which has kind of negatively impacted that.

But overall, we're still very confident with what we see in our ability to deliver on that range, given our ability to constructively manage O&M and take advantage of the growth that we see happening in the area..

Regina, we don't have anybody else in the queue, correct?.

None at this time..

Okay. With that, we will now end the call. Thank you very much for participating today. We appreciate your support, and have a nice day..

This concludes CenterPoint Energy's Second Quarter 2014 Earnings Conference Call. Thank you for your participation..