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CenterPoint will sell gas utilities to fund $3B electric-focused capex increase

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CenterPoint will sell gas utilities to fund $3B electric-focused capex increase

CenterPoint Energy Inc.'s long-anticipated business transformation plan will include increasing its five-year capital spending plan, selling off gas utilities and owning renewable power projects.

Amid an ongoing strategic review, company executives presented a six-point outline Nov. 5 that they plan to flesh out at their Dec. 7 investor day event. The core of the plan is a $3 billion increase to CenterPoint's 2021-2025 capital spending, bringing total investment over the period to $16 billion as the company pursues organic growth opportunities in its electric business in Indiana and Texas.

The company expects the increased spending to drive rate base growth of 10% per year and push utility EPS growth to the top end of its 5%-7% range. CenterPoint has also identified another $1 billion of spending beyond the incremental $3 billion increase and will consider spending the additional capex once it shores up internal resources to ensure it deploys the capital efficiently.

"The most positive and striking outcome from the [business review and evaluation committee] review is that we are absolutely flush with incremental capital spending opportunities, way, way beyond our prior stated plans," CenterPoint President and CEO David Lesar said on the company's earnings conference call.

To fund the spending, CenterPoint plans to sell one or two of its gas utilities from its eight-state footprint. The divestments will allow the company to avoid a block issuance of new equity, which would dilute the value of outstanding shares, and have the added benefit of weighting CenterPoint's portfolio toward its growing regulated electric utilities, according to Lesar.

"Now all of our gas LDCs are good assets in constructive regulatory environments, and we hate to sell any of them," he said. "But a hard capital allocation decision needed to be made, and I made it."

New investments in CenterPoint's Houston and Indiana electric businesses account for two-thirds of the incremental $3 billion in capex, CenterPoint Executive Vice President and CFO Jason Wells said.

The company plans to increase capex by $1 billion to a total of $6 billion in Houston to support customer growth, improve reliability and resiliency, and harden transmission systems. Wells said the growing amount of solar generation around Houston also requires additional grid investments.

"On a rolling 12-month basis, our organic customer growth across our electric utilities was 2.4%, including 33 years of consecutive growth in our Houston territory. This growth highlights what an unappreciated crown jewel we have in both our regulated electric and gas utilities in the Houston area," Lesar said.

The new plan also includes $1.3 billion of planned capex for Indiana power generation, including $950 million in wind and solar power projects that CenterPoint will own. The investments will allow CenterPoint to take advantage of renewable tax credits for the first time, Lesar said.

CenterPoint also plans to advance renewable natural gas and hydrogen projects in its Minnesota gas distribution business. It is planning $1 billion in additional capex through 2025, primarily on system modernization and pipeline replacement.

Beyond selling gas utilities, CenterPoint expects to meet remaining financing needs for the increased capex by enhancing internal cash flow, restructuring its debt profile, achieving a more efficient operating structure and raising a small amount of routine equity.

CenterPoint plans to reduce operations and maintenance costs by 1% to 2% per year. The cost reduction plan includes adopting advanced technologies such as drones, automation and machine learning.

Lesar said the company continues to evaluate its stake in Enable Midstream Partners. He declined to comment on a potential divestment from the midstream business except to say CenterPoint has worked to regain alignment with OGE Energy Corp., which owns 25.49% of the partnership's common units.

Lesar also said he is working to improve CenterPoint's relationship with its regulators, particularly in Texas.

CenterPoint had reported third-quarter consolidated earnings on a guidance basis of $200 million, down from $236 million a year ago. EPS of 34 cents was down from 47 cents in the year-ago period and beat analysts' estimates for 30 cents. The company updated its 2020 guidance basis utility EPS range, increasing the low end of the range by 2 cents to between $1.12 and $1.20.