CenterPoint Energy - Earnings Call - Q2 2016

Transcript

Speaker 0

Good morning and welcome to the CenterPoint Energy's Second Quarter twenty sixteen 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 David Morty, Director of Investor Relations. Mr.

Morty, you may begin.

Speaker 1

Thank you, Ashley. Good morning, everyone. Welcome to our second quarter twenty sixteen earnings conference call. Thank you for joining us today. Scott Prochaska, President and CEO Tracy Bridge, Executive Vice President and President of our Electric Division Joe Magoldrick, Executive Vice President and President of our Gas Division and Bill Rogers, Executive Vice President and CFO will discuss our second quarter twenty sixteen results and provide highlights on other key areas.

We also have with us other members of management who may assist in answering questions following the prepared remarks. In conjunction with the call today, we will be using slides which can be found under the Investors section on our website centerpointenergy.com. For a reconciliation of the non GAAP measures used in providing earnings guidance in today's call, please refer to our earnings press release and our slides, which along with our Form 10 Q have been posted on our website. Please note that we may announce material information using SEC filings, press releases, public conference calls, webcasts and posts to the Investors section of our website. In the future, we will continue to use these channels to communicate important information and encourage you to review the information on our website.

Today management is going to discuss certain topics that will contain projections and forward looking information that are based on management's beliefs, assumptions and information currently available to management. These forward looking statements are subject to risks and uncertainties. Actual results could differ materially based upon factors including weather variations, regulatory actions, economic conditions and growth, commodity prices, changes in our service territories and other risk factors noted in our SEC filings. We will also discuss our guidance for 2016. The guidance range considers utility operations performance to date and significant variables that may impact earnings such as weather, regulatory and judicial proceedings, throughput, commodity prices, effective tax rates and financing activities.

In providing this guidance, the company uses non GAAP measure of adjusted diluted earnings per share that does not include other potential impacts such as changes in accounting standards or unusual items, earnings or losses from the change in the value of zero premium exchangeable subordinated notes or ZEN securities and the related stocks or the timing effects of mark to market accounting in the company's Energy Service business. The guidance range also considers such factors as Enable's most recent public forecast and effective tax rate. The company does not include other potential impacts such as any changes in accounting standards or Enable Midstream's unusual items. Before Scott begins, I would like to mention that this call is being recorded. Information on how to access the replay can be found on our website.

And with that, I will turn the call over to Scott.

Speaker 2

Thank you, David, and good morning, ladies and gentlemen. Thank you for joining us today and thank you for your interest in CenterPoint Energy. We will begin on Slide four. This morning, we reported a second quarter twenty sixteen loss of $2,000,000 or $01 loss per diluted share compared with net income of $77,000,000 or $0.18 per diluted share in the same quarter of last year. Second quarter twenty sixteen earnings were impacted by several charges, which Bill will discuss in greater detail later in the call.

On a guidance basis, second quarter twenty sixteen adjusted earnings were $73,000,000 or $0.17 per diluted share compared with adjusted earnings of $84,000,000 or $0.19 per diluted share in the same quarter of last year. The fundamentals of our utility business segments remain strong. On a guidance basis, utility operations contributed $0.14 per diluted share in the 2016 compared to $0.13 per diluted share in the same quarter of last year, improving $01 despite milder than normal weather at our electric utility. We continue to see strong customer growth in both our electric and gas utilities. Combined, our utilities added over 90,000 metered customers during the last twelve months.

Capital expenditures remain strong as we invest to meet growth, safety and reliability needs within our service territories. Rate relief driven by capital investment continues to be an important contributor to earnings growth. To date, we have secured $45,000,000 in annualized distribution investment recovery at our electric utility and $18,000,000 in annualized revenue associated with recovery of capital investments at our Texas gas utilities. Further, we expect approvals in two gas rate cases in the third and fourth quarters. Joe and Tracy will provide additional regulatory updates for their business segments later in the call.

Turning to midstream investments, we have a number of highlights on Slide five. Midstream investments contributed $0.03 per diluted share in the 2016 compared to $06 per diluted share in the same quarter of last year. The contribution was reduced as a result of losses attributable to changes in the fair value of commodity derivatives and an increase in deferred taxes. As I mentioned earlier, Bill will provide additional details on these items. Enable's call highlighted the robustness of drilling activity in the SCOOP and STACK plays, which continue to be recognized as two of the top plays in the country.

Enable continues to focus on strengthening their balance sheet, lowering cost and improving capital efficiency. We believe they are well positioned to take advantage of market opportunities over the next few years. Turning to Slide six, given the year to date performance and outlook for both utility operations and midstream investments, we are reaffirming full year earnings guidance of $1.12 to $1.2 per diluted share. 2016 earnings growth drivers include utility customer growth, capital discipline, rate relief and operating and financing cost management. CenterPoint's core strategy remains to operate, maintain and invest in our current utility service territories, deploying capital to address needs for system growth, maintenance, reliability, safety and customer interactions.

In February, we announced that we would conduct two strategic reviews focused on possible incremental value creation for our long term shareholders. One review contemplated placing utility assets in a REIT structure with the assumption of executing a public offering of that REIT and redeploying those proceeds on behalf of our shareholders. We have completed our REIT evaluation based upon assumptions for qualified assets, revenue requirements determined through general regulatory proceedings and capital markets considerations. Key variables include the collection of federal income taxes within the revenue requirement and the timing of adjustments to lease payments related to capital investment by the REIT on behalf of the utility operating company. We have concluded that current uncertainties along with the complexity of the structure do not warrant pursuit of a REIT.

As always, we remain open to explore avenues for long term value creation for our current shareholders. The strategic review regarding our Enable ownership is ongoing and we remain committed to providing an update on this subject before the end of twenty sixteen. As I mentioned before, our utility fundamentals continue to be strong and on track. We remain committed to our vision to lead the nation in delivering energy, service and value. We are focused on consistent performance, including safe, reliable and efficient operations for our customers and long term value creation for our shareholders.

Tracy will now update you on Houston Electric.

Speaker 3

Thank you, Scott. I am pleased with Houston Electric's performance this quarter. As you will see on Slide eight, core operating income in the 2016 was $135,000,000 compared with $131,000,000 for the same period last year. The business benefited from rate relief, customer growth, higher equity return primarily related to true up proceeds and higher right of way revenues. These benefits were partially offset by higher depreciation and taxes, lower usage primarily due to milder weather and modestly higher O and M.

Similar to the first quarter of this year, higher depreciation was anticipated due to both the amount and type of capital invested. We continue to focus on keeping annual O and M growth under 2%, excluding certain expenses that have revenue offsets. Houston Electric added approximately 55,000 metered customers since the second quarter of last year. We continue to anticipate approximately 2% metered customer growth this year. As we've mentioned before, 2% customer growth equates to approximately 25,000,000 to $30,000,000 of incremental revenue annually.

Slide nine provides a regulatory update for Houston Electric. In April, we filed an application with the Texas Public Utility Commission for a DCRF interim rate adjustment. Our application requested the annualized revenue requirement be set at 49,400,000 In July 2016, a settlement was approved by the commission providing for an annualized revenue requirement of $45,000,000 effective 09/01/2016. As a reminder, the amount is reset with each filing, so it is not additive to the approved DCRF revenue requirement from the prior filing. Recently, Houston Electric was awarded the International Smart Grid Action Network Award of Excellence and the Global Smart Grid Federation Best Smart Grid Project.

Through our smart grid deployment, key technology partnerships, and the dedication of our employees, we have reduced outages by more than one hundred and thirty four million minutes, enabled restoration of more than 1,500,000 outage cases without a customer phone call, and saved millions of dollars in eliminated fees for more than 2,300,000 metered customers in our service area. I am pleased to report Houston Electric's performance is on track for the year. Although we experienced milder than normal weather in the second quarter, the third quarter to date has been warmer than normal. Further, the third quarter has historically been the most impactful quarter for Houston Electric. We will continue to focus on the safety, reliability and efficiency of our system to meet the growing needs of our service territory.

Joe will now update you on the results for gas operations.

Speaker 2

Thank you, Tracy. Our natural gas operations, which includes both our gas distribution business and our non regulated energy services business, had a solid quarter. As you'll see on slide 11, operating income for our natural gas utilities was $20,000,000 compared to $19,000,000 for the same period in 2015. Operating income was higher primarily due to rate relief and continued customer growth. These increases were offset by higher depreciation and taxes as well as increased contractor services expense related to integrity services and increased credit and collection activities.

Customer growth remains strong on our natural gas utilities having added nearly 36,000 customers since the second quarter of twenty fifteen, almost identical to the growth in customers this time last year. This represents customer growth slightly in excess of 1%. Slides twelve and thirteen provide detail on twenty sixteen regulatory developments, including our rate cases in Minnesota and Arkansas. The Minnesota PUC issued an order authorizing a $27,500,000 rate increase based on an ROE of 9.49%. We have had interim rates in effect since last fall and will implement final rates later this year.

In the Arkansas case, a non unanimous settlement was reached for an annual revenue increase of $14,200,000 The settlement includes the use of a formula rate plan mechanism starting in 2017 to recover future capital investment and expenses. The recommended ROE in the Arkansas settlement is 9.5%. The settlement is pending commission approval and we expect a final order and new rates to be implemented in the third quarter. As Scott mentioned, we have also finalized four Texas Grip cases, which collectively increased revenues $18,000,000 on an annualized basis. Turning to Slide 14.

Operating income for our Energy Services business was $7,000,000 for the 2016 compared with $7,000,000 for the same period last year, excluding a mark to market loss of $7,000,000 and a gain of $2,000,000 respectively. Our integration efforts from our recent acquisition are anticipated to be completed within 2016. With more than 12,000 new metered customers, Energy Services now has more than 30,000 customers. Inclusive of integration and acquisition costs, this year we anticipate the Energy Services business will roughly match last year's financial performance of $38,000,000 in operating income, again excluding mark to market adjustments. For 2017, the first full year of combined operations, we now expect Energy Services to provide annual operating income excluding mark to market gains or losses in the range of $45,000,000 to $55,000,000 Overall, our natural gas operations performed well this quarter.

Excluding mark to market, year to date operating income is up $13,000,000 or 7% higher than 2015 despite lower weather related throughput at the utilities and acquisition and integration costs at Energy Services. We will continue to operate effectively and efficiently as we focus on growth, safety and the reliability of our system. I will now turn the call over to Bill who will cover financial performance and forecast.

Speaker 4

Thank you, Joe, and good morning to everyone. I will begin on Slide 16. We reported a second quarter twenty sixteen loss of $01 per diluted share. Earnings included a charge of $110,000,000 or $0.17 per diluted share associated with our Zen Securities. This charge is primarily due to the merger of Time Warner Cable and Charter Communications through a cash and stock sale and the related revaluation of associated assets and liabilities on our books.

Further details on the accounting at the merger date on May 18 are provided on page 17 of the slide deck as well as Note 11 in our second quarter Form 10 Q. In addition, the quarter also included a $01 mark to market charge in our Energy Services segment. Therefore, our earnings per share on a guidance basis was $0.17 versus earnings of $0.19 per share for the second quarter of twenty fifteen. Earnings per share increased $01 for our Utility Operations segment and decreased 0.3 for our Midstream investments. Midstream was impacted by losses attributable to changes in fair value of commodity derivatives.

As discussed on Enable's call and disclosed in their second quarter Form 10 Q, Enable uses derivatives to manage the partnership's commodity price risk. The accounting for these derivatives requires that the charges associated with the fair value of the instruments be recognized in current earnings. In addition, at the CenterPoint level, we recognize an increase in deferred tax expense related to recent Louisiana tax law changes and our Enable income from Louisiana. The sum of these two factors reduced the Midstream per share contribution to our earnings by approximately $03 Additionally, this is the first quarter that we recognized income from our investment in the Enable preferred as disclosed in footnote eight and within other income. Assuming Enable declares this dividend on a going forward basis, we expect to earn $0.03 per share in 2016 and $05 per share per year on future years.

As a reminder, second quarter has historically provided the least contribution to our annual earnings. For the first two quarters of this year, we have delivered $0.49 in guidance earnings per share consisting of $0.37 in utility earnings and $0.12 in midstream earnings. Given our performance year to date and ongoing strong utility fundamentals, as Scott mentioned earlier, we are reiterating EPS guidance of 1.12 to $1.2 dollars As shown on Slide 18, we are also reiterating our target of 4% to 6% EPS growth in each of 2017 and 2018. On Slide 19, we provide an overview of our anticipated financing plans, interest expense and effective tax rate. Year to date internally generated cash is strong, allowing us to fully fund capital expenditures and to pay dividends.

In the second quarter, our interest expense was lower on a period to period basis due to refinancing maturing debt at lower interest rates. During the quarter, we refinanced $300,000,000 of short term debt at Houston Electric with a five year maturity at a coupon of 1.85%. We expect to refinance another $300,000,000 of short term debt at Houston Electric in the second half of twenty sixteen. Therefore, for the full year 2016, we expect interest expense to be lower compared to 2015 with an EPS contribution of approximately $02 Interest expense saving opportunities should also present themselves in 2017 and 2018. We have $1,150,000,000 in maturities in those years and the weighted average coupon for this maturing debt is roughly 6.1%.

With respect to tax expense, as a result of deferred tax recognition for the midstream segment income, we expect our effective tax rate to be 37% this year. This is higher than our previously stated anticipated tax rate of 36%. In addition to our earnings release and our 10 Q filings for all of our registrants filed this morning, we would like to remind you of other press releases or filings of interest. First, our Board of Directors declared a $0.02 $5.07 $5 dividend per share on July 28, payable on September 9. Second, on July 21, we filed with the SEC an amendment to our Form 13D with respect to our ownership interest in Enable Midstream.

The required update to our February filing reflects that we sent OG and E a right of first offer or ROFO and that we will solicit authors from third parties to acquire our interest in Enable. As stated in our press release earlier this year and in our Form 13 DA, we continue to evaluate a number of strategic alternatives for our investment in the partnership including a sale, a spin off or maintain our ownership. As Scott stated, our intent is to provide an update on the review prior to the end of the year. And with that, I'll turn the call back over to David.

Speaker 1

Thank you, Bill. We will now open the call to questions. In the interest of time I will ask you to limit yourself to one question and a follow-up. Ashley?

Speaker 0

At this time we will begin taking Our first question comes from the line of Insoo Kim with RBC Capital Markets.

Speaker 5

Just regarding the Enable strategy, I know you can't comment much on that. But with the ROFO notice that you provide to OGE, if they do make an offer for your stake in Enable in those coming weeks, how does that impact, if any, your ability to still potentially pursue the spin off? Just wanted to make sure what depending on what they say on the stake and whether you have some offers outstanding with other third parties if that bounds you towards the sell option versus still having a spin off option?

Speaker 4

Vincent, good morning. It's Bill. The spin off and the consideration of the sale are two separate tracks. If OG and E were to make an offer to CenterPoint for CenterPoint stakes, then we are not obligated to accept that offer.

Speaker 5

Okay. So the two options are still open regardless of what they come back with?

Speaker 4

Correct.

Speaker 5

Understood. Okay. I know you guys can't comment much more on that, so I'll leave it there. But just moving to the electric utility, given customer growth has been above forecast for the past couple of quarters, How do you see the customer growth for the balance of the year and outlook for future years? I know you've mentioned 2% annual growth as a target, but it seems like it's been trending a little bit higher.

Speaker 2

Yes, this is Scott. We continue to see strong customer growth as you've obviously noted and we posted in our results. We see all signs pointing to that continuing. We continue to track the leading indicators about housing development, and that continues to be strong. I will say that one area that may provide a little softening would be multifamily homes.

That market is getting a little long here. But I think what that would do is that would probably tend to drive our growth rate from perhaps slightly above 2% down closer to 2%. Nothing that I would consider to be problematic. But that could be the downside piece of it. But other than that, we continue to see very strong local development.

Speaker 5

Got it. Thank you very much.

Speaker 6

Yep.

Speaker 0

Our next question is from Ali Agha with SunTrust.

Speaker 2

Morning. Morning, Ali.

Speaker 6

Good morning. Scott, your first question, as you are continuing to look at strategically what to do with Enable, can you tell us what are some of the big milestones? Or what is it that you're looking at in terms of reaching a final conclusion for that? And related to that, if the sale option were to be exercised by you, have you been able to resolve the tax issue or would that still be the same as you've talked about in the past?

Speaker 2

Ali, I'll provide a little bit of comment on this. I'll let Bill comment the tax piece of it. But our options are essentially the same as we've communicated in the past, and that is to look at a sale or a spin. The timing is such that, as we've indicated, we're just continuing to step through the process. Providing the ROFO notice to OGE was one step in the process.

And so we're just going to continue marching down that path with the expectations that we'll be able to provide an update to you all by, certainly by the end of the year. Bill, would you like to comment on the tax question?

Speaker 4

Certainly. Good morning, Ali. The tax consideration is still there. As we've discussed, we have negative basis in our investment in Enable Midstream. And therefore, sale for cash would result in a significant taxable gain.

Speaker 6

Okay. And the sale option I guess that reminded me, you mentioned that sale for stock would still be an option within that sale option?

Speaker 4

Yes. So there's potential to defer an eventual recognition of the gain through a sale for stock or some other currency. We would likely get there if we went on that structure through a reorganization under the tax code.

Speaker 6

Okay. And last question, Scott, there's a lot of consolidation going on on the regulated utility front both in the gas and electric side. Just wanted to get a sense of what your current view is as you're looking at the landscape around you and other opportunities that you guys could potentially capitalize on.

Speaker 2

Elliot, I certainly observed the same thing you are, and that is that there have been a number of consolidations. The strategy that we have is still very much centered around the investment we can make in our utilities and our current service territory. So our focus continues to be around the 1,300,000,000.0 plus we're spending on our own utilities and growing those utilities to meet the needs of our customers and grow our earnings along with that.

Speaker 6

Thank you. Yes.

Speaker 0

And your next question comes from the line of Michael Lapides with Goldman Sachs.

Speaker 7

Hey guys, I think Dave is going to hate me because I have a couple of them for you. One is simple. In your multiyear, your EPS growth rate guidance for 2017 and 2018, do you assume Enable earnings contribution grows, shrinks or stays flat in that period? I'm trying to just kind of think about the puts and takes between utility regulated utility earnings growth versus kind of consolidated EPS growth.

Speaker 2

Michael, as you know, Enable has not put out any information beyond this current year. That said, we have looked at a number of possible growth rates that could come from Enable and we've tested that against our capabilities at the utility. And combined under a number of different scenarios, we feel comfortable that we can achieve that 4% to 6% rate.

Speaker 7

Got it. So even if Enable were to decline in 'seventeen and 'eighteen, you're still pretty comfortable getting the 4% to 6% consolidated growth rate?

Speaker 2

Yes. We've looked at like I said, Michael, we've looked at a number of scenarios and one of them would be one where the growth rates have not returned for that segment as they had been in the past.

Speaker 7

Got it. One question on the Houston business, the CEHE business. I want to make sure I understand the DCRF. The $45,000,000 what is the incremental amount that's going into rates in September?

Speaker 3

Michael, this is Tracy. We don't think about it as an incremental amount because every year the revenue requirement is determined on a stand alone basis. You might recall that a year ago we implemented a rate increase of $16,000,000 and now we're going to be implementing a rate increase of $45,000,000 But the two are not related because we calculate the revenue requirement independently every year. So if you're modeling it, just put in $45,000,000 on an annualized basis starting 09/01/2016.

Speaker 7

Yeah. But I gotta know what's in your current numbers. Right? Because otherwise we could be overstating, we could be completely misstating. So I'm just trying to make the bridge here.

Speaker 3

So the revenue for 2016 for DCRF would be $16,200,000 and the revenue for 2017 would be $53,800,000

Speaker 7

Got it. So that makes sense. And then the agreement to go from $45,000,000 to 49,000,000 So does that just imply, and I'm being very simplistic here, a $4,000,000 step up? I assume that's what that is, but I'm just making sure I'm understanding that correctly.

Speaker 3

That's what it implies, yes.

Speaker 2

So Michael, that would be a $4,000,000 step up assuming we did not make another DCRF filing next year.

Speaker 7

Oh, so this doesn't preclude you from making another DCRF next year?

Speaker 2

Yes, that's correct. Right. We can make another filing next year and then we would go through a whole new determination and then there would be a new number that would be in place of the 45 that's there today.

Speaker 7

I appreciate that. Thank you, Scott. Much, much, much more clear there. Much appreciated.

Speaker 0

And your next question comes from the line of Steve Fleishman with Wolfe Research.

Speaker 8

Guys. Good morning Steve. Just a clarification on disclosure maybe. When OGE responds within their thirty days on the ROFO, either way, would that be something you're going to disclose what their response is?

Speaker 4

Steve will look at the required disclosure at that time. And that, of course, would depend upon their response.

Speaker 8

Okay. So it's possible they could, you know, not make an offer. We just wouldn't know.

Speaker 4

That's correct.

Speaker 5

Okay.

Speaker 8

And then my understanding is, just to be clear, once they've responded either way, you then have one hundred and twenty days to basically transact and after which the process starts again. Is that right?

Speaker 4

Yes. Just to put some more clarity on that, Steve, they have thirty days to respond to the ROFO. If they did not respond, then we would move forward with a solicitation of offers although we're not precluded from doing that at this time. If they did respond, then we would have thirty days to respond to their offer. And then subsequent to that, we would have the one hundred and twenty days.

Speaker 8

Okay. That's great. And then just on the mark to market hit on the that you took on the Enable hedges, do you expect that that will come back to you by the end of the year?

Speaker 4

Steve, again, it's Bill. If nothing happened other than the forward curve staying the same at June 30 and they didn't enter into any more hedges as it played out much but not all of that would come back '16 with the balance in 2017. But should gas prices go higher under mark to market accounting that could impact what Enable records or should it go lower or go the other way. So it very much depends upon where gas prices are at each quarterly statement period.

Speaker 8

Okay, got it. Thank you.

Speaker 0

And your next question comes from the line of Neil Mitra with Tudor Pickering.

Speaker 9

Can you guys hear me?

Speaker 2

Yes. Good morning, Neil.

Speaker 9

I had another question around Enable and the possible tax leakage from a sale. If OGE were to make an offer that you would accept, would the same tax consequences arise as if it were a third party buyer? Would you still be on the hook for the negative tax basis or is there something different about OG and E being a buyer?

Speaker 4

Neil, it's Bill. Good morning. There's no difference between OG and E and any other buyer with respect to tax consequences.

Speaker 9

Okay, great. And I noticed in the presentation that you noted that you wouldn't need equity for 2016 and 2017. But I wanted to just understand under what scenario you could possibly need equity 2018 and beyond. Would it be that you found additional growth projects that would kind of put you at the top or above the 6% growth rate at the utilities? Or is it something else?

Or do you feel that you don't need any equity at all until the end of the decade or farther?

Speaker 4

Neal, here's how do we get to our thinking on equity. We take a look at our credit metrics, principally FFO to debt. And we're currently at approximately 20%. We want to maintain that because we like our credit ratings. Admittedly we think we have some debt capacity within that.

But if that were to erode then we would consider equity. And that could erode from any number of factors including, as you said, a higher rate of capital investment.

Speaker 9

Okay. And with the Enable stake, if that were to decline, that be something that would cause you to issue equity or do you view that as a separate entity that's self funding?

Speaker 4

Enable in 2015 was under 20% of our cash flow in the way we think about our internally generated cash flow. So it's significant but we'd have to take a look at what the credit metrics would be for us and what that might imply for equity at that time.

Speaker 9

Okay. Got it. Thank you very much.

Speaker 0

And your next question comes from the line of Jeremy Tonet with JPMorgan.

Speaker 10

Just wanted to follow-up on the Enable situation. And if you were to sell your stake there and receive stock against that and then you were to subsequently distribute that stock, would that introduce tax leakage as well or would that be a way to mitigate that?

Speaker 4

Good morning, Jeremy. I'm going to restate what you posited and then if I don't get that right correct me. But you're assuming we would sell for stock and would not have a taxable recognition at that time and then we would spend whatever we received out to shareholders, is that correct?

Speaker 10

Yes, spin it out to shareholders, that's right.

Speaker 4

Right. So we have not contemplated that strategy. I think that that would have some combination of the tax effects that you would either have in a sale for stock and a spin.

Speaker 10

Okay, thanks. And just with the whole strategic review process here, I'm just wondering if you could help us into your thought process. You know, the commodities have softened a little bit recently, it seems like the cycle has turned a bit. So I'm just wondering how that enters into the calculus of your decisions here with the cycle getting better.

Speaker 2

Well, certainly is nice to see the commodities turning around as they have. But we went into this evaluation geared at looking for alternatives to reduce the volatility associated with this earnings stream. So we're continuing our process. We're going to continue through even as commodities are improving because we want to see if there's a way to reduce that volatility in a way that could create value for our shareholders.

Speaker 10

Great, thanks. And then one just quick one. Correct me if I'm wrong, but I think there was a slug of the energy resources debt, $325,000,000 that matured in May. I was just wondering what happened to that, if that was refinanced or if we should take any meaning from that?

Speaker 4

You're correct. Dollars $325,000,000 did mature in May. We met that maturity with cash flow generated at CERT and short term borrowings. As I said on our remarks in this call, we were cash flow positive for the first six months of the year, including investments on CapEx on behalf of our customers and including dividends paid to our shareholders.

Speaker 10

That's helpful. Thank you very much.

Speaker 0

Your next question comes from the line of Brian Russo with Ladenburg Thalmann.

Speaker 11

Just to clarify, is OGE required to respond with a yes or a no? Or can they just not respond and that's just an implied no?

Speaker 4

Brian, good morning, it's Bill. The latter is correct. They can stay silent.

Speaker 11

Got it. Okay. And then also to clarify, the decision not to pursue the REIT structure for the Texas assets, does that conclude all strategic alternative reviews? Or are there other options that you're looking at?

Speaker 2

Brian, that concludes our strategic review of the concept of a REIT for utility assets. But our other review underway is the consideration around our naval ownership. And as we've said, that's still ongoing.

Speaker 11

Okay. But there's no ongoing review of your gas LDCs?

Speaker 2

That's correct.

Speaker 5

Okay. Thank you.

Speaker 0

Your next question comes from the line of Nick Raza with Citi.

Speaker 12

Thanks guys. Really couple of just housekeeping items. In terms of the marketing business or energy services business that you acquired, when you acquired it you said that combined with your existing operations and the acquisition you'd generate anywhere from 40,000,000 to $50,000,000 in operating income. That number seems to be a little higher now. Can you just talk about that real quick?

Speaker 2

Phil, you want to take that one? Sure. Good morning, Nick. This is Joe. Yes, that's correct.

We have increased that guidance for our Energy Services business given the integration of the business and some improved performance at our CES base business. So we are now comfortable that we will be in the $45,000,000 to $55,000,000 range in the first full year, which is 2017.

Speaker 12

Okay. And then I guess one of the aspects that you mentioned that would help you meet your EPS guidance in the outer years is O and M or operating cost reductions or not as much growth. But if I look at your O and M expenses, they seem to have been growing by about 5%. Can you just talk about what's driving that and how you guys view that?

Speaker 2

Yes. So the 5% that you see on the charts includes some items that have revenue offsets. So if you back that out and you consider some timing aspects of spend on a quarter to quarter basis, we're still confident we can manage this expense in that around 2% to 3% range.

Speaker 12

Okay. That's all I had. Thank you, guys.

Speaker 6

Yes.

Speaker 0

Your next question comes from the line of Charles Fishman with Morningstar.

Speaker 13

Hey Bill, just based on your comments, the effective tax rate, that 37% was really just a one time thing and just assuming business as usual with respect to Enable going forward from a modeling standpoint, still 35%, 36% would be a long term rate?

Speaker 4

Yes, I would advise using 36% for our provision. It's just going to be 37% this year due to the change in Louisiana law.

Speaker 13

Okay. And then the second question was for Tracy. Right of way revenues, remind me or I mean, I know they're going down, are we still talking 5,000,000 to $10,000,000 total this year? I forgot what you've said in the past.

Speaker 3

Good morning, Charles. We're projecting 10,000,000 to $20,000,000 of right of way in miscellaneous revenue this year.

Speaker 13

10,000,000 to 20,000,000 which is still an elevated level over normalized, correct?

Speaker 3

Well, depends on what you mean by normalized. Certainly ten years ago and beyond that it would be much lower. But we've had some pretty strong miscellaneous revenues in the last few years as you recall.

Speaker 13

Right. Okay, that's all I had. Thank you.

Speaker 3

Thank you.

Speaker 0

And your next question comes from the line of with Avila Research.

Speaker 14

I guess it's still good morning in the East Coast. The ZENS issue, is there does it make sense to buy back given the low current interest rate environment?

Speaker 4

Lassane, good morning. It's Bill. Good morning. This remains a very low cost source of capital for us. If we were to think about buying back the bet, we would have recognition from a tax perspective associated with the capital gain that we've otherwise deferred.

Speaker 14

I see. I understand. Okay, next question I guess is for, well, I guess it's for anybody who wants to answer But the hot weather in that area tends to get super hot and I understand it's approaching 100 degree weather. So maybe Tracy is the best person to answer this question. Are you guys having any issues with infrastructure overheating or melting down or having any kind of equipment problems even with trucks or anything like that?

Speaker 3

Good morning. We're not. The system's holding up very well. Unlike some parts of the country, we're accustomed to this humidity, and so the system's holding up fine. Thank you for asking.

Speaker 14

Excellent. I guess this question goes back to Bill, my last question. Is there any way you can engineer a like kind exchange for Enable? I mean essentially to avoid the big tax bill now.

Speaker 2

Right.

Speaker 4

There are ways to continue to defer recognition of taxes if we sold for stock or units of another entity. But it would not be through a lifetime exchange. It would be through a reorganization within the tax code.

Speaker 14

Okay. So you couldn't take cash for Enable and then say buy pipeline or buy gas utility somewhere and transfer your basis over that way?

Speaker 4

We do not see a path in that direction.

Speaker 14

I understand. Thank you for your help.

Speaker 0

And we do have a follow-up question from the line of Michael Lapides with Goldman Sachs.

Speaker 7

Cash taxes, I know you've talked about the effective tax rate but how long do you expect not to be a cash taxpayer for?

Speaker 4

Michael, it's Bill. We will be a cash taxpayer. It's just that it's at a very low rate. We expect to be a cash taxpayer this year as measured by cash income taxes paid divided by accrual income before taxes and that number will be in the high single digits.

Speaker 7

And then for how long, like how big is your effective whether it's an NOL or a like balance whether generated via bonus DNA or something else, how long do you expect to be a very low cash taxpayer for?

Speaker 4

It will gradually creep up to 35% over the planning horizon in terms of cash tax rate. That of course will be impacted by the level of capital investment and depreciation rates amongst all the other factors that go through our tax return.

Speaker 7

So kind of getting closer to a normal gap in cash tax rate by the next two to three years or kind of longer term than that?

Speaker 4

Longer than that, Michael. At the end of our five year planning horizon.

Speaker 7

Got it. Thank you, Bill. Much appreciated.

Speaker 1

Thank you, everyone, for your interest in CenterPoint Energy. We will now conclude our second quarter twenty sixteen earnings call. Have a nice day.

Speaker 0

And this concludes CenterPoint Energy's second quarter twenty sixteen earnings conference call. Thank you for your participation.