CenterPoint Energy, Inc (Holding Co)

Good morning and welcome to CenterPoint Energy's first quarter 2020 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. To ask a question, press star 1 on your touchtone keypad. To withdraw your question, press pound. I will now turn the call over to David Morty, Director of Investor Relations. Mr. Morty?

Thank you, Joelle. Good morning, everyone. Welcome to our first quarter 2020 earnings conference call. John Sommerhalder, interim president and CEO, and Christy Colvin, interim executive vice president and CFO, will discuss our first quarter 2020 results and provide highlights on other key areas. Also with us this morning are several other members of management who will be available during the Q&A portion of our call. In conjunction with our call, we will be using slides, which can be found under the Investors section on our website, centerpointenergy.com. Please note that we may announce material information using SEC filings, news releases, public conference calls, webcasts, and posts to the Investors section of our website. Today, management will 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 or uncertainties. Actual results could differ materially based upon factors including weather, regulatory actions, the economy and unemployment, commodity prices, the impact of COVID-19 pandemic, and other risk factors noted in our SEC filings. We will also discuss guidance for 2020. To provide greater transparency on utility earnings, 2020 guidance will be presented in two components, a guidance-basis utility EPS range and a midstream investments EPS expected range. Please refer to slide 26 in the appendix for further detail. Utility EPS guidance range includes net income from Houston Electric, Indiana Electric, and natural gas distribution business segments, as well as after-tax operating income from the corporate and other business segments. The 2020 utility EPS guidance range considers operations performance to date and assumptions for certain significant variables that may impact earnings, such as customer growth, approximately 2% for electric operations and 1% for natural gas distribution, and usage including normal weather, throughput, recovery of capital invested through rate cases and other rate filings, effective tax rates, financing activities and related interest rates, regulatory and judicial proceedings, anticipated cost savings as a result of the merger, and reflects dilution and earnings as if the newly issued preferred stock were issued as common stock. In addition, guidance incorporates a COVID-19 scenario range of 5 to 8 cents, which assumes reduced demand levels with April at the peak, and reflects anticipated deferral and recovery of incremental expenses, including bad debt. The COVID-19 scenario also assumes a gradual reopening of the economy in our service territories, leading to diminishing levels of demand reduction, which would continue through August. To the extent actual recovery deviates from these COVID-19 scenario assumptions, the 2020 utility EPS guidance range may not be met, and our projected full-year guidance range may change. The utility EPS guidance range also assumes an allocation of corporate overhead based upon its relative earnings contribution. Corporate overhead consists of interest expense, preferred stock dividend requirements, income on enabled preferred units, and other items directly attributable to the parent along with associated income taxes. Utility EPS guidance excludes midstream investments EPS range, results related to infrastructure services and energy services, and anticipated costs and impairment resulting from the sale of these businesses, certain integration and transaction-related fees and expenses associated with the merger, severance costs, earnings or losses from the change in the value of ZENs and related securities, and changes in accounting standards. In providing this guidance, CenterPoint Energy uses a non-GAAP measure of adjusted diluted earnings per share that does not consider the items noted above and other potential impacts, including unusual items, which could have a material impact on GAAP-reported results for the applicable guidance period. In providing the 2020 EPS expected range for midstream investments, the company assumes a 53.7% limited partner ownership interest in Enable and includes the amortization of our base differential in Enable and assumes an allocation of Centerpoint Energy corporate overhead based upon midstream investments' relative earnings contribution. The midstream investments' EPS expected range reflects dilution and earnings as if the Centerpoint Energy newly issued preferred stock were issued as common stock. The company also takes into account such factors as Enable's most recent public outlook for 2020 dated May 6, 2020, and effective tax rates. The company does not include other potential impacts, such as any changes in accounting standards, impairments, or Enable's unusual items. For reconciliation of the non-GAAP measures used in providing earnings guidance in today's call, please refer to our earnings news release and our slides on our website. Before John 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. I'd now like to turn the call over to John.

Thank you, David, and good morning, ladies and gentlemen. We will start with slide four. Let me begin by thanking our employees in the field. Our linemen, service technicians, and other field employees are essential personnel vital to supporting the communities we serve. During these unprecedented times, we are extremely proud of the tremendous effort our employees are making every day to continue providing safe and reliable electricity and natural gas to our customers. Thank you all for representing CenterPoint well and living up to our brand promise of being always there. This morning, our company announced strong first quarter results along with several other key announcements highlighted on slide five. Over the past year, CenterPoint Energy's portfolio transformation has shown the company's strategic commitment to increasing its focus on the regulated utility sector. This portfolio transformation is better aligned with our investors' risk return objectives and has earned the support of several highly credible investors. As a result, today the company announced a $1.4 billion transaction, which was compromised of $700 billion. comprised of 725 million of shares of mandatory convertible preferred stock and $675 million of shares of common stock as detailed on slide six. This transaction in combination with the cash proceeds received from the recent sale of Miller Pipeline and Minnesota Limited for our infrastructure services business and the pending sale of CenterPoint Energy Services will be used to deliver CenterPoints balance sheet, further strengthening its investment grade credit metrics and overall credit profile. As a result of this action, and the measures we announced on April 1, we anticipate that the company will not raise additional equity capital through 2022. These equity issuances highlight the substantial value proposition of CenterPoint as our premier regulated utility with high growth opportunity. The company's robust five-year $13 billion capital investment program, combined with a strong regulatory strategy and keen O&M discipline, are anticipated to drive 5% to 7% utility earnings compounded annual growth over the planning horizon. all while keeping customers' rates low. CenterPoint is uniquely positioned to operate from a place of heightened strength and flexibility while remaining focused on providing safe, reliable, and affordable services to its customers and executing on the wide range of long-term opportunities across its utility businesses. Additionally, turning to slide seven, the company has also appointed two new outside directors to serve on the company's board. bringing the total number of directors on the board to 10. These directors come to the board with exemplary leadership experience, unique backgrounds, and well-matched skill sets tailored for the needs and opportunities ahead for CenterPoint. In addition to the new director appointment, the board has formed a new advisory business review and evaluation committee of the board. The new committee will assist the board in evaluating strategic business actions and alternatives related to CenterPoint's portfolio of businesses, assets and other ownership interests to further enhance the company's financial strength, positioning and value proposition. I would now like to provide an update on the COVID-19 pandemic. Turning to slide eight, safety is our top priority and we have implemented social distancing protocol, rotational shifts and alternative work facilities in order to enhance the safety of our customers, employees and contractors. The Centerpoint Energy Foundation has also created a $1.5 million relief fund to assist nonprofit organizations within our service territories with the effects of the pandemic. The COVID-19 pandemic has impacted almost every facet of our customers lives, and we believe is more important than ever to support the communities that we serve. We continue to deliver the same reliable service our customers rightfully expect from us. Since the start of the pandemic, we have not experienced material interruptions in our supply chain. Our safety precautions allow us to continue moving forward with planned capital projects, and we continue to anticipate filing an integrated resource plan in Indiana in the second quarter. Moving to slide nine. we delivered first quarter guidance basis utility EPS of 50 cents per share, excluding impairments compared with 41 cents for the first quarter of 2019. Rate relief, customer growth, O&M savings and favorable tax impacts associated with the CARES Act, as well as having a full quarter for the legacy veteran utilities were the primary contributors to the improvement. For full year 2020, we are reiterating our utility guidance basis EPS range, projected to deliver $1.10 to $1.20 in adjusted earnings. We are projecting that earnings dilution from a higher share count attributable to the equity issuance we announced this morning, and the negative earnings impact from COVID-19 will be offset by the previously announced O&M reductions, as well as the tax benefit from the CARES Act. Turning to slide 10, regulators have been broadly supportive of the recovery of increased bad debt and other incremental COVID-19 pandemic related expenses. Nearly 70% of our jurisdictions have a form of pandemic mechanism in place. In our larger service territory, the Public Utility Commission of Texas approved a mechanism to assist the retail electric providers with increased bad debt expense, as well as to cover pandemic related expenses, Houston Electric will encounter. As a reminder, approximately 70 retail electric providers make up the customer base of Houston Electric. We will continue working with the regulators and all of the states we serve to ensure customers impacted by the pandemic are supported. During the first quarter, we experienced very minimal demand impacts associated with COVID-19 as the stay-at-home restrictions begin to take effect across the communities we serve towards the end of March. On slide 11, we have provided an early estimated demand impact for April and the anticipated impact on our full-year guidance assumption. As a result of stay-at-home practices, we estimate a modest decline in April demand for our commercial and small industrial electric customers, partially offset by increased residential usage due to folks staying in and working from home. Natural gas distribution, commercial and industrial demand reduction was influenced primarily by restaurant, retail and manufacturing closures. In total, we estimate that reduced demand impacted utility EPS by about one to two cents in April. Overall, based on past experience, we believe our rates have become less sensitive to demand shock as a result of rate design efforts in recent years. I will note that the Houston electric sensitivities incorporate the new rates that went into effect in April. For the purpose of our full year 2020 guidance, The range assumes April to be the peak of reduced demand levels and reflects anticipated deferral and recovery of incremental expenses, including bad debt. As states are beginning to loosen stay-at-home restrictions, we assume the gradual reopening of the economy in our service territories, leading to diminished levels of demand reduction, which would continue through August in our guidance. Under this scenario, we project the four-year COVID-19 impact to be in the range of five to eight cents of utility EPS. To the extent actual recovery deviates from our COVID-19 scenario assumptions, our projected four-year guidance range may change. Turning to slide 12, on April 9th, we completed the sale of our infrastructure services business. providing approximately 670 million of cash to pay down debt, net of taxes. Completing this sale, along with the pending energy services sale, improves our business risk profile, strengthens our credit quality, and reduces our earnings volatility. Above all, it is in line with our strategy to increase the contributions of earnings from utilities. These divestitures highlight our commitment to focusing squarely on high organic growth utilities. Turning to slide 13, many shareholders have asked about Enable's overall health, especially given the distribution cut that was announced on April 1st. We are confident in Enable's ability to weather the current downturn for a number of reasons. First and foremost, Enable has a strong balance sheet and a healthy coverage ratio. Second, approximately one-third of Enable's business is associated with transportation and storage, which we anticipate will provide earning stability during the current commodity downturn. Third, dry gas drilling and completions in Haynesville remain in line with expectations as oil wells and associated gas and other shale plays are being shut in. Finally, Enable has both O&M and capital levers they can utilize to help maintain cash flow if volumes drop lower than currently anticipated. Let me close by summarizing our investor value proposition as shown on slide 14. Following our successful veteran merger integration and portfolio transformation, CenterPoint is committed to delivering increased shareholder value in the coming years. Our $13 billion capital investment program, combined with a strong regulatory strategy and O&M discipline, are anticipated to drive 5% to 7% utility EPS growth over the planning horizon. Additionally, we are firmly committed to maintaining solid investment-grade credit quality. We believe this framework positions CenterPoint for long-term success and provides a compelling opportunity for shareholders. I'm very pleased to have Christy Colvin discuss our financial results in greater detail. Christy has been integral to the success of our finance organization for over 30 years, and has outstanding knowledge of every facet of our business. Over the past month, she has more than risen to the challenge of leading our finance organization. And I am eager to have her interact more with the investment community in the months ahead. Christy.