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.

Thank you, John, and good morning, everyone. I'm honored to serve as the Interim Executive Vice President and CFO of CenterPoint Energy, and I look forward to meeting many of you in the near future. Turning to slide 15, let me highlight some key accomplishments within utility operations during the first quarter. We deployed approximately $600 million of utility capital investment and achieved strong fundamental customer growth across both our electric and gas utilities. Additionally, to date, we have identified approximately 60% of our targeted 2020 O&M reductions. We remain steadfast in our focus on discipline O&M management to support long-term earnings growth and maintaining investment-grade credit metrics. On the regulatory front, we made various rate relief filings, including the Houston Electric Transmission and Texas Gas Jurisdiction's capital recovery mechanisms. Moving to slide 16. I would like to comment on the non-cash impairments recorded in continuing operations. In the first quarter of 2020, CenterPoint recorded an after-tax non-cash impairment charge of approximately $1.2 billion related to our investment in Enable and the company's share of impairment charges recorded by Enable for goodwill and long-lived assets, and $185 billion related to Indiana Electric. It is important to note that these impairments do not affect the company's liquidity, cash flow, or compliance with debt covenants. The impairment charge related to our investment in Enable recognizes the severity of the decline in the estimated fair value of our investment. The decline is primarily due to the economic conditions related in part to COVID-19 and the excess supply and depressed prices of natural gas and oil impacting the midstream industry, combined with Enable's announcement last month to reduce its quarterly distributions per common unit by 50%. With these non-cash charges, we have reduced our balance sheet investment in Enable Midstream from approximately $2.4 billion to $848 million. Now I'll provide some context regarding the non-cash impairment charge recorded at Indiana Electric of $185 million. Upon acquisition of this business in the veteran merger in February 2019, the carrying value of this business unit approximated fair value. Therefore, there was minimal cushion to absorb the significant decline in current market conditions as a result of the pandemic. We do not believe that this impairment is indicative of the long-term value of this which continues to deliver strong earnings with continued significant capital investment needs. I would now like to review the quarter-over-quarter utility operations and midstream investment guidance basis EPS drivers on slide 17. Excluding impairment charges, utility operations delivered 50 cents per diluted share, and midstream investments provided 10 cents per diluted share, for the first quarter of 2020, compared to 41 cents and 5 cents respectively in the first quarter of 2019. Utility operations delivered a solid performance this quarter, providing 9 cents of positive variance. Rate relief contributed 7 cents of positive variance, largely as a result of the capital recovery mechanisms in the Indiana electric and Texas gas jurisdiction along with the implementation of interim rates in Minnesota. Additionally, the first quarter of 2020 benefited approximately 5 cents from an additional month of earnings associated with the jurisdictions acquired through the merger in February 2019. O&M's savings provided 3 cents of favorability. Lastly, CenterPoint Energy's continued strong customer growth, primarily along the Texas coast and our Minnesota service territory, provided for two cents of positive variance. Partially offsetting these positive variances were higher depreciation and amortization and other tax expense, lower usage, and lower equity return, primarily due to the annual true-up of transition charges. The lower usage experienced across our natural gas distribution and Indiana electric service territory was partially driven by warmer-than-normal weather which accounted for approximately one cent of negative earnings variance versus normal. Overall, we were very pleased with the performance of our utilities. Turning to slide 18, we discuss our continued discipline in O&M management. Last year, our company made great strides through our diligence and keen focus on O&M management by achieving approximately $100 million of annualized year-over-year O&M savings through merger and other cost efficiencies. Further building on the momentum from 2019, early last month, CenterPoint announced that we are targeting approximately $40 million in incremental O&M savings for 2020 relative to full-year 2019 levels. We expect to achieve approximately half of the targeted incremental 2020 O&M savings from support level functions. We will continue to look for systematic opportunities to align work activities and organizational approaches in support of our utility-focused strategy. This comprehensive approach to O&M management will continue to support EPS growth and maintaining investment-grade credit metrics. On slide 19, as John previously detailed, the equity issuances announced today demonstrate CenterPoint's commitment to a strong balance sheet and further strengthening of our investment grade credit metrics and overall credit profile. Our rigorous capital allocation process and ongoing discipline O&M management further support this commitment. These equity issuances eliminate the anticipated equity needs through 2022, and we will target 14 to 14 and a half episode of debt over the long-term planning period. Turning to slide 20. we are reiterating our 2020 utility guidance basis EPS range of $1.10 to $1.20 and a 5% to 7% five-year EPS growth CAGR. The 2020 guidance range takes into consideration earnings dilution as a result of the higher share count from the announced equity transaction and the potential range of earnings impact of $0.05 to $0.08 per diluted share associated with the COVID-19 pandemic that John previously discussed. These items are expected to be offset by strong first quarter results, the benefits received from previously announced targeted O&M reductions, as well as tax benefits from the CARES Act. To the extent actual recovery deviates from these COVID-19 scenario assumptions, our projected full-year guidance range may change. In closing, the first quarter presented new challenges for not only our business, but the entire industry and global market. Our company was proactive in tackling the challenges presented by COVID-19. Leadership remains focused on our core value of the safety of our employees and the communities we serve, delivering reliable and affordable energy. CenterPoint Energy is poised to deliver 5% to 7% utility EPS growth through execution of our utility strategy and discipline O&M management while remaining firmly committed to our solid investment-grade credit policy. I'll now turn it back to David.

Thank you, Christy. 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.

Joelle. Thank you. At this time, we will begin taking questions. If you wish to ask a question, please press star 1. on your touch-tone keypad. To withdraw your question, press pound. The company requests that when asking a question, callers pick up their telephone handsets. Thank you. Our first question comes from Char Perez with Guggenheim Partners. Your line is now open.

Hey, guys.

Good morning. So just two questions here. Starting sort of with that strategic level, you have obviously review processes in place now, and as soon as we think about the range of outcomes that you're foreseeing with this, can we get a little bit of a sense of core versus non-core, stronger jurisdictions versus maybe those that require a bit more work from your perspective? And sort of with an analyst's base set, does this sort of imply that an outright sale of the company is not part of this kind of internal review process? I have a follow-up.

Yeah, I'll start with the last question. Yes, that's correct. This is a – we have strong support for the business and the model we have now, and so what we're going to do is review those businesses to see where we can optimize those. And clearly our focus is on, you know, our utility businesses, and we feel like, you know, all of our utility businesses have good regulatory compacts and we will always continue to look at how we improve those moving forward and the mechanisms for recovery. But this will be a comprehensive view of all of our businesses so that we can optimize those as a company moving forward.

Got it. And then just lastly, you know, you reiterated the utility guidance for 2020 and the 5% to 7% growth, which is, you know, very constructive. Can we get maybe a little bit more specific around the moving piece is maintaining these figures? There's a lot of moving pieces, you know, i.e., you called out COVID headwinds. Is that entirely kind of offset by corporate costs? What's implied with future cost cuts at the parent? What mitigates the dilution in the near term? So I'm just trying to get a bit of a sense on how all the drivers kind of net out, even as we think about beyond 2020. Thank you. Okay.

I'll start out. Is that you there? I'll start out with 2020 and then Christy can add to it and then talk a little bit about moving forward. I mean, we took several steps that we announced back at the beginning of April. Some of them were more driven by credit credit to make sure we have very solid credit metrics as we move through this year. And so reducing capital by 300 million helped us there. But we announced $40 million of O&M cuts as well, which we had good line of sight, as Christy said, about 60% of that. So, you know, the combination of a good first quarter, those O&M savings, and the CARES Act that has the tax benefit, and Christy can speak more to that, offset the impact of our expected range on COVID-19, as well as the dilution of as a result of the 1.4 of equity issuance. So those generally, that group generally nets out for 2020. And then as we move forward, we have the benefit of maintaining that $40 million of O&M savings, as well as the fact that we had anticipated raising about this amount of equity over the next three-year time period, maybe slightly more already. So that dilution from there, you know, is not as material as we move forward. And then we have the announced dividend, our dividend cut, which gives us additional retained earnings. So it's really the combination of all of those that allow us to reiterate 2020 guidance and also reiterate rate-based growth and EPS growth of 5% to 7%. Christy, would you like to add anything to that?

I think you covered it well.

Terrific. Thanks, guys, so much. Congrats on moving forward and congrats on the deal with Jeff and team. Congrats.

Thank you very much.

Thank you. Our next question comes from Kim with Goldman Sachs. Your line is now open.

Thank you. My first question is regarding just financing. With the $1.4 billion raise that you guys did, how do you think about the buffer that you have or maybe the potential leverage that you could pull in the hypothetical scenario that Enable needs to cut its distribution again?

Yeah, I'll start out first on Enable. And that is, you know, for the reasons I talked about when I went through my presentation, we've looked at a number of scenarios, and they were downside scenarios, lower oil prices for longer. And when we made the decision to cut distribution by 50%, we felt very good that that was the right level. And even though we have seen, because of physical constraints, some shut-ins, we've seen some positives, too. So we still remain confident and Enable's ability to maintain that 50% distribution and pull their own levers related to O&M and capital. That's the starting point, but I'll let Christy speak to the other part of strengthening our balance sheet and how we look at that.

This transaction has strengthened our FFO to debt. As John mentioned, we are not currently anticipating a cut in the distribution from Enable.

Just in the scenario that maybe, you know, something like that does happen in a very worst-case scenario, are your conversations with Moody's, do you have a little bit more room on the ethical website to absorb some of that additional impact?

Yeah, I think we would have conversations about the increased level of regulated percentage in our earnings and our business with the rating agencies at that point.

Understood. And just one quick follow-up on the strategic review from a standalone standpoint, is the strategy ultimately equal still to try to trend towards that 90% utility earnings by 2024? Sure.

Well, that's the foundation we start on, and, you know, that's what we have seen really aligns with what we believe are shareholders' interests. So that's the starting point, but we will comprehensively, with that business review committee, evaluate the best options to further maximize shareholder value. So, yes, that's the starting point.

Got it. Thank you, and stay safe, everyone.

Thank you.

Thank you.

Our next question comes from Michael Weinstein with Credit Suisse. Your line is now open.

Hi, good morning. I just want to make it clear, you guys are in that SFO to debt target range for 2020? You're starting off in that range as you go forward?

With the equity issuance, we're a little higher. We're expecting to be a little higher than that in 2020. And then our long-term range is 14 to 14.5. Good.

And in terms of the COVID sensitivities, you know, it starts off with a pretty bad April, but you're expecting to get better over the summer and then beyond that. Do you have any kind of a ballpark scenario estimate of where, say, how much worse the $0.05 to $0.08 could get if, let's say, for instance, the April downturn of 15% to 20% at Houston Electric Commercial and 10% to 15% industrial reductions, if that continued at that level, you know, for the rest of the year, for instance, you know, how much worse would it get?

Yeah, I may give you some general ballpark, but, again, you know, Our experience, because of, you know, even though we had reduced industrial, we're not very sensitive because of the way the rates are designed on industrial. We're not very sensitive there. And the commercial downturn was in line with what we had expected. And we saw positive on the residential side, both in Houston and in Indiana. So, you know, what we saw in April was very much in line with what we had estimated. And then if you extrapolate that out for the conditions we talked about through August, you know, it results in that five to eight cents. But, you know, clearly you can extrapolate that out. We don't anticipate that it will impact us through the full year, but you can extrapolate out that one to two cents impact, you know, for more months. And that would be in line with what would happen should that scenario occur. Christy, you want to add to that?

That's one to two cents per month for additional months? Is that what you're looking at?

Yeah. Christy, do you see it differently than that?

No. Okay. And maybe just one last question. If you could just maybe comment on the status of the oil and gas industry and your service territory and what's going on there, what your assumptions are for oil and gas refining and drilling, you know, part of your customer base.

Clearly, Houston's economy is tied to the oil and gas business. The good news is less tied to that business over time. We've seen Houston do very well through downturns in the past. Robust growth of 2% plus customer count in good times. We've seen it still stay positive even through downturns. We still expect Very good market area there. But, yeah, we will monitor. We will monitor. It's too early to tell now. But we'll monitor what impact oil and gas downturn may have on our growth rate, you know, moving into next year and, you know, update you as we see more. At this point, you know, as we set today, we saw still good growth right up, you know, through the end of March on customer counts. We still see, you know, that we're connecting new developments and new areas. So at this point, we haven't seen that, but we will monitor it closely. Okay.

All right. Thank you very much. A lot of hard work getting done. Thank you very much. Thank you.

Thank you. Our next question comes from Steve Fleischman with Wolf Research LLC. Your line is now open.

Yeah. Hi. Good morning. Thank you. Hey, John. So just I'm curious if you had conversations on this already with the rating agencies, and did you get any sense that it would be possible that they might remove the negative outlook or any color there would be helpful?

Yeah, I'd comment first. Clearly this is positive, but, yeah, Christy can tell you about the actual conversations and where those could move.

Yeah, I mean, we have had conversations with the rating agency. This should be considered positive. We have to get past the CESL before I think we would see any change from the agencies.

Okay. And when are you expecting that to close?

Second quarter.

And all is good on that?

Yes. Yeah. I mean, we're still working very closely with the buyer on transition, you know, putting the organization in place, what services we'll provide, employee, you know, issues. And as we talked about before, you know, the agreements works very well and gives both parties certainty about being able to close. So right now we feel very good about it.

Okay. And then I have one other follow-up question, just that – In this business valuation review, obviously, the one non-utility business left is Enable. And that Enable was reviewed by the company, you know, several years ago. And in the end, nothing really happened. Is there any reason to think that there might be more options or new options this time than three or four years ago?

I don't know at this point. You know, clearly we've reviewed it in great detail, looked at various options, and concluded the path forward that we took back then made the most sense. But the business review committee will review options related to this. So way too early to speculate, though, on whether other options could be identified or not.

Okay. Thank you.

Thank you. Our next question comes from with UBS. Your line is now open.

Good morning. So you talked a lot about the cost savings of $40 million. As you continue to review, what do you think could be the potential upside to this number across your footprint?

We're targeting $40 million of savings.

Yeah, and we feel very good about that number because, you know, as Christy mentioned, we have line of sight directly, things we'd already worked on earlier this year related to our corporate structure and support services and some ITIS-type costs that had been identified. Longer term, it really is a matter of looking at all types of things from how we use Contractors, and our contractors are very important to us, but, you know, what's the right approach there? Supply chain, savings, use of technologies, other technologies, work management systems. So we'll be digging into those issues in detail now that we've, you know, made the decisions and positioned the company now with flexibility, you know, and strong balance sheet moving forward. So it's too early to say. what the potential is. Right now, we're trying to ensure that we have certainty around the $40 million.

And you talked about the moving parts in 2020 utility EPS guidance. Could you maybe provide a little more detail on the per sure impact from the tax benefits from CARES Act?

Yes. In the first quarter, we had a $19 million tax benefit from the CARES Act. We also expect to have a future quarter benefit in around a $10 million range to earnings, also with favorable cash flows.

Perfect. Thank you, and stay safe.

Thank you. Thank you. Our next question comes from Julian DeMoon Smith with Bank of America. Your line is now open.

Hey, good morning, Steve. Congratulations on all the progress here. Thank you.

Thanks, Julian.

Absolutely. It's a pleasure. I wanted to follow up on the outlook through 2024 here. Can you comment specifically on expectations for earning your optimized returns? I know that, you know, obviously there's some gyrations in the current year related to COVID, but as you see achieving this 5 to 7, just specifically within that, kind of going back to where the first questioner started, what are your embedded earned returns? And how do you think about equity in that plan after 22 through 24? And then maybe implicit within this, just to make sure I'm scoring this appropriately, given that you have this equity issue in the first couple years, is the plan back half-weighted, just to kind of think about the equity being in front here either?

Yeah, actually, I'll start out with the equity piece. and then comment on the returns, some of those issues. But, you know, actually because of the dividend reduction down to, you know, targeting 50% to 55% on our regulated earnings, we have more retained earnings in those out years. So we issue an amount of equity through 2022 in the range of the $1.4 billion. which is pretty much in the range we had before, maybe slightly lower. But because of the retained earnings in the backside, the old forecast of 300 to 500 per year in that time period, actually there's lower pressure on that now. We believe it will be less in the out years and we'll get the benefit of of the things we've talked about, the O&M savings and the dividend cuts. So not back-end loaded at all. In fact, more modest needs in the back end of the plan, which really helps with the 5% to 7% growth when we're issuing less equity out in those time periods and have the $40 million of O&M savings. And what we're targeting is very much in line with our allowed returns. If we look at – Houston Electric, we target very close to the 9.4% return on equity with that cap structure and pretty similar in the other jurisdictions. Christy, add to that if I have anything that I missed on that.

I think you covered it well.

Okay. Turning to the strategic side of things just real quickly, perhaps clarifying your prior comments here. What is on the table with respect to the strategic review, just to ask it more explicitly and bluntly, if I may? You know, you commented on enable here. Just want to perhaps make sure we're fully encompassing and understanding what is contemplated, and how do you think about this, again, against the backdrop of having had process used in the past?

Yeah. I mean, in the past, you know, a lot of the processes – that went on were effective and they were more led by the management team. What we have now is a, you know, a group including two new directors, two existing directors or three if you count me, the five of us will be looking at this. So, it'll be a board level with that new set of experiences involved in a board level. And it will be comprehensive. We'll look at, you know, our businesses in total to make sure that we move forward in the most optimized way. So it's similar in some ways, but, you know, it has the changes I just talked about. So we're very encouraged by that. We think it's the right time to further optimize our business.

Yeah, are we supposed to, just in terms of the plan, just to clarify this, Should we expect management updates and appointments prior to the conclusion of the process?

You know, the plan right now is clearly the committee, I think, will function under its charter through October. And so a normal time that we may talk about that would be in an investor day early in 2021. That would be the base plan. But obviously, if there's something that should be communicated before that, we would do that. But the normal schedule is what I first laid out.

Right. So no updates to management in the interim either?

Oh, well, you know, should anything occur that we need to update you all on and make public, we would do that. But the base plan is to take that amount of time and then be prepared to announce changes and direction certainly at the conclusion of that process. But should anything happen that changes that, we would obviously make public as appropriate.

Got it. Excellent. Thank you all very much. Best of luck. Talk to you soon. Thanks, Julian.

Thank you. Our next question comes from Anthony Crowdell with Mizuho. Your line is now open.

Good morning. Hopefully one question, one follow-up. I think a little off of Julian's question, I'm more on the CEO search. Any update on the CEO search on timing of when we may find out when the board selects someone?

Yeah, I mean, the very good news is the committee's been working for a time – well, pretty much since we stood that committee up, and they've been – very, very rigorous around that. We have a search firm in place. They've identified a large number of candidates. They've conducted interviews with a number of candidates. And so, you know, we're now more on the backside of that search process. But, you know, until it's the absolute right person is picked and we can make sure, you know, what the timing is on, you know, a transition period You know, it's not done until it's done, but I feel good that a lot of good work has been done, and we're on the back side of getting that taken care of.

Great. And then lastly, just more fine-tuning, the $40 million of additional O&M cuts to companies identified in 2020, and I think you've answered this. Maybe I missed it. Are they more at the parent company, or are they more at the operating utility company?

I'll start out, but, yeah. you know, more than half of it that's been identified is more at the, you know, the company level, more support services, and some of those things as we look at, you know, the new mix and more utility focused, some of those, you know, just fit with how we looked at the support services moving forward. But there will be some, some that each of our business units will develop as well. So there will be some, but a good percentage of them are at the corporate level. Christy, add to that for me, please.

No, I think that's right. They'll be across the board, but again, over half we've identified are support level activities.

Great. Thanks for taking my questions and stay healthy.

Thank you. You too.

Thank you. Our next question comes from Paul Patterson with Glenrock Associates. Your line is now open.

Hey, good morning. Can you hear me? Good morning. Yeah, good morning. So I just wanted to sort of follow up on the business review process. I mean, last time on the fourth quarter, it sounded like you guys weren't really looking at necessarily that wide a range of potential business combinations or what have you. With the new investors, with this investment or what have you, should we think that perhaps the business review is now perhaps a wider range of potential options that almost anything could be on the table to enhance shareholder value?

Well, the way I look at it is... the business review committee will really look at the business plans across, you know, all of our business and think through everything from appropriate regulatory strategies and think through best ways to optimize and how businesses fit together. So, I mean, that's something, you know, you do on a normal basis anyway. So it brings a fresh set of eyes with good experience with our new directors involved. to the process. So, you know, I think it's in line with what a company normally would do, but with really good expertise, you know, with the opportunities we have now to really take a fresh look at it. So, it is different. It's a very powerful process I think we can follow and that they'll make recommendations to the board for the board to act on in the time period we talked about. So... So we think it's a good thing to do moving forward.

Sure. But I guess what I'm sort of wondering is, you know, if there was the potential for a sale of the company or what have you, is that off the table, I guess, is what I'm saying? I mean, in other words, would you guys be willing to look at anything that, you know, depending on obviously what it is and obviously what the standalone plan is and what your outlook is, should we think of it as pretty much, Anything is on the table, potentially, as long as you guys see it in shareholder value, or are there certain things that you feel, hey, that just isn't in our game plan, so to speak?

The starting point is truly looking at how our businesses are operating, how they function, optimizing those, making the right business decisions in total around the base of this great set of utility assets. So that's the starting point. That's the focus. You know, every company has got to consider, you know, the other options that you've talked about. That's not where we're starting with this committee. This committee is designed to review the go-forward plan as a great set of utility assets and how to optimize those and configure those correctly moving forward.

Okay, great. And then just finally on Indiana Electric, the write-down, I wasn't completely clear when you said the fair value. Is that got anything to do with fair value accounting with respect to the rate base or anything? Could you just elaborate a little bit further on what the impact is actually at the utility in terms of if there is one in terms of either equity or what have you at the utility level in terms of regulatory rate making and what have you?

Yes, that was goodwill and it should not impact the regulated utility.

Okay, awesome. Thanks so much.

Thank you. Thank you. Our next question comes from Jeremy Tonnet with JP Morgan. Your line is now open.

Good morning. Just wanted to kind of build on some of the points that you touched on here. With regards to the FFO to debt trajectory, just wanted to see if something by chance moves against you here, like enable a dividend cut or something like that. Just wanted to see what levers you have left to pull at this point. Could that include kind of like more capex deferrals or just any thoughts you have there would be helpful?

Yeah, I'll start out. I mean, one of the things we would do, especially with the strength of our balance sheet now heading into that, A couple things we do is work, continue to work with the rating agencies, you know, and talk through the fact that our regulated versus unregulated mix would be enhanced if, you know, should that, you know, should that occur. Again, we feel good about the NABLES distributions, but that would be where we'd start. But clearly, we've taken some very positive steps, we believe, already. But clearly, under those circumstances, we would look at other alternatives. And the type that you mentioned would be things that would be evaluated, whether that's, you know, a little less capital or continuing to see if we can optimize O&M. We'd look at those as other possible ways to make sure we kept the best balance sheet moving forward. Christy, add to that, please.

I think that covered it pretty well.

Got it. Thanks for that. And just a follow-up question with regards to COVID-19 here. Just when do you expect to have clarity on COVID deferrals for the remainder of your jurisdiction?

Christine, I mean, my understanding is we have a large number. we have good line of sight are already taken care of. My understanding is most of our jurisdictions look to be addressing those issues in the near future. Does someone have a better time estimate on that?

Yeah, I was going to let Jason cover that. Sure.

Hey, this is Jason Ryan. Good morning. So the Oklahoma Commission voted to approve an accounting order earlier this morning. The Minnesota Commission is discussing That topic, I believe, as we sit here right now, so I don't have an update on where they're headed, but they are looking at that. And we've been working with our industry colleagues and regulators in Indiana on this topic and expect to file an application seeking an accounting order either late this week or early next. So that would take care of all of our jurisdictions given that most of them have already acted.

Got it. That's helpful. That's it for me. Thanks.

Thank you.

Thank you. Our next question comes from Charles Bishamon with Morningstar. Your line is now open.

Good morning. In the current guidance, 2020 guidance, utility contribution 88%, midstream 12%. Yeah, John, in the April 1 news release, you indicated that you anticipated utility earnings contribution increasing, you know, nearly 100% over the next few years. That would imply to me that, you know, your preference and realize you got this, the review board now, but your preference at that time was to probably either divest completely or partially enable Am I reading more into that quote than I should, or is there something else going on that I don't understand?

Yeah. I mean, effectively what happened is when we looked at the enabled distribution cut of 50%, it was based on the fact that we expected very little drilling activity to occur during this year and heading into next year in this lower for longer period we're in. And so the results are we took that proactive step on distribution cuts to really protect the liquidity of an enable as they head into lower earnings, you know, in the next year and even moving a little further than that. So just naturally, as those earnings go to where we expect under this, you know, no, significant drilling in some of those basins for the time period I talked about, that takes the earnings contribution from midstream down just naturally there. And then on top of that, we're continuing to invest heavily in our regulated business. So you have the positive of the regulated coming up and then just that normal trajectory that we anticipated when we cut distributions to 50% that will result in 95% plus percent, I think, regulated earnings mix. Now, Christy, there may be a little bit more on that related to the impairment and how that impacts that. Is that correct?

I mean, there will be basis accretion as a result of these impairments, but we do still expect that the utility will grow to the 95% of the contribution.

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

Thank you. Our next question comes from Mishar Khan with Viridian. Your line is now open.

Hi, good morning and congratulations. I think the board did a terrific job and congratulations. I wanted to mention a little bit, but it would really help because the last thing left in this whole picture is the new CEO. Can you be a little bit more, what time frame? Of course, quicker the better, but do you have any specific dates by which we can hear that announcement? No.

You know, I think we feel positive about the fact the process has moved to this point. We have very good identified candidates. But, you know, as you know, until you finalize something, and when you're looking for someone that's got, you know, a really strong track record on utility operations, these type businesses, understands that business, focus on strong balance sheet. You know, we want to make sure we take the time to absolutely get the right person. But I feel very good about the individuals that are being talked to now. And so I think it can happen in a reasonably short time period. But until all those issues are worked out, sorry, I can't more specifically commit to an exact time. But like I said, I feel good about that we've made really good progress to this point and that it can happen in a reasonably short time period moving forward.

Okay, thank you. And if I may just ask you one question on the accounting side. The tax benefits that you mentioned, are they only for this year? I guess you mentioned $19 million and another $10 million. Do they go away or do they carry on into next year?

Yes, they go away.

They go away. And then you also mentioned that we get some amortization benefit. How much is that and does that keep on going?

Amortization referring to the basis accretion, or?

Yes, correct.

Yes, that would keep on going.

That would keep, and how much is that in itself?

It's estimated to bring the $47 million a year up to $100 million annually.

And starting this year?

I think this year, because it's starting in, not in the beginning of the year, it would be about 85 million in total. Our year is usually 47 million.

So previously you had thought of 47 when you gave the initial guidance and now it is 87. 85, yes. 85, so that is an increase of that. And that is going to be around 100. And how long is that going to last?

It's almost 28 or so years.

Okay.

And that primarily impacts the midstream or unregulated earnings.

I understand. I understand, but I just wanted to make sure I have the counting right. Thank you. Thank you so much. Thank you.

Thank you. Our next question comes from James Straliker with BMO Capital Markets. Your line is now open.

Oh, thanks, guys. Can you hear me? Yes.

Yes, James.

I apologize if I missed it somewhere in the AK, but I was just wondering if you disclosed what the terms of the convertibles were. I'm just trying to understand, are you, in your presentation for 2020 and the 5% to 7% growth rate, are you assuming sort of as issued in the share count?

Yeah, I think, yes, between the 8K and what we've posted on our website, I think those terms and conditions have been disclosed and now have been filed. So I think that's in there. But Christy, would you take the other part of that question?

Yes. As to the calculation of guidance, we will treat the preferred as if it was common in the dilution calculation.

Okay. And so the 5% to 7% then would reflect that dilution through the forecast period?

Yes. That's correct. And they do, you know, there is a mandatory convert on those, what, 12 months out?

Right. Okay. Great. Thank you very, very much.

Thank you.

Thank you. Our last question is from Antoine Armand with Bank of America. Your line is now open.

Hey, good morning. Thank you so much for taking my question. I just wanted to be Hey, how are you? Just wanted to be clear on equity needs. So total equity needs through 2022 are not necessarily different from what you had previously. And you had the three to 500 million in both 21 and 22. As you have mentioned, Is the idea that the bulk of that will now be met with new whole-code debt insurance, so more of a timing shift, or is it the O&M savings, the dividend cut, that essentially take care of that?

Yeah. If the question – in 23 and 24, we still will have some equity needs, but I would – based upon, you know, what we're looking at now, anticipated plan – would estimate it to be lower than the $300 million to $500 million range we estimated before. And Christy, can you give more information on that?

I mean, that's correct. As you said, with the dividend cuts we did, it is lower than anticipated in those years.

And to be clear, are you going to – so since today's announcement – take care of equity needs through 22, the 21 and 22 that you were going to issue, is that going to be met with the new whole credit issuance?

Well, we issued 1.4 today, and our plan was to issue $800 million in 2020 and between $300 and $500 million in 21 and 22. So at the midpoint of 21 and 22, that would have been 1.6 billion versus the 1.4 billion we're doing. So we satisfied our needs up front for these three years.

Got it. And lastly, to be abundantly clear, have you vetted today's plan with the rating agencies?

Yes, we have been in contact with the rating agencies with regards to this plan, and we expect – them to consider it favorable.

Okay, perfect. Thank you so much. Thank you.

I do not believe we have any more questions. Thank you everyone for your interest in CenterPoint Energy. We will now conclude our first quarter 2020 earnings call. Have a great day.

This concludes CenterPoint Energy's first quarter 2020 earnings conference call. Thank you for your participation.