The following combined discussion and analysis should be read in combination
with the Interim Condensed Financial Statements contained in this Form 10-Q and
the Registrants' combined 2019 Form 10-K. When discussing CenterPoint Energy's
consolidated financial information, it includes the results of Houston Electric
and CERC, which, along with CenterPoint Energy, are collectively referred to as
the Registrants. Where appropriate, information relating to a specific
Registrant has been segregated and labeled as such. In this Form 10-Q, the terms
"our," "we" and "us" are used as abbreviated references to CenterPoint Energy,
Inc. together with its consolidated subsidiaries. No Registrant makes any
representations as to the information related solely to CenterPoint Energy or
the subsidiaries of CenterPoint Energy other than itself.
RECENT EVENTS
COVID-19 Impacts. On March 11, 2020, the World Health Organization declared the
current COVID-19 outbreak to be a global pandemic, and on March 13, 2020, the
United States declared a national emergency. In response to these declarations
and the rapid spread of COVID-19, federal, state and local governments have
imposed varying degrees of restrictions on business and social activities to
contain COVID-19, including quarantine and "stay-at-home" orders in our service
territories. CenterPoint Energy has experienced some resulting disruptions to
its business operations, as these restrictions have significantly impacted many
sectors of the economy with various businesses curtailing or ceasing normal
operations. For example, since mid-March, we have had to restrict access to our
administrative offices around the United States. However, we continue to be
productive through alternate work arrangements, leveraging a strong technology
platform to support our employees working remotely at home to perform their
duties or directly from their vehicles to serve our customers. Where we must
maintain a presence in the field, we have adjusted our operational protocols to
minimize exposure and risk to our field personnel, customers and the communities
we serve, including, among other things, modifying our work schedules and
reporting locations, delaying certain work types, such as maintenance and
capital projects, and adjusting project scope and scale to adhere to safety
protocols, while continuing to maintain the work activities necessary for safe
and reliable service to our customers with increased safety precautions.
Our first priority in our response to this crisis has been the health and safety
of our employees, our customers and other business counterparties. Because we
provide a critical service to our customers, it is paramount that we keep our
employees who operate our business safe and informed, and we have taken and are
updating precautions for that purpose. We have implemented preventative measures
and developed corporate and regional response plans to minimize unnecessary risk
of exposure and prevent infection, while supporting our customers' operations
under the circumstances. In addition, we have assessed and updated our existing
business continuity plans for each of our business units in the context of this
pandemic. We have a corporate response planning team who assesses risks to the
business, including for health, safety and environmental matters and personnel
issues, and addresses various impacts of the situation, as they have been
developing. We also have modified certain business practices (including those
related to employee travel, employee work locations and cancellation of physical
participation in meetings, events and conferences) to conform to government
restrictions and best practices encouraged by the Centers for Disease Control
and Prevention, the World Health Organization and other governmental and
regulatory authorities. We are continuing to address concerns to protect the
health and safety of our employees and those of our customers and other business
counterparties, and this includes changes to comply with health-related
guidelines as they are modified and supplemented. We are also working with our
suppliers to understand the potential impacts to our supply chain, including
identifying any negative impacts to material supplies, working to mitigate them
and pre-planning for longer-term emergency response protocols. This is a rapidly
evolving situation and could lead to extended disruption of economic activity in
our markets; we will continue to monitor developments affecting our workforce,
our customers and our suppliers and take additional precautions as we believe
are warranted.
An extended slowdown of economic growth, decreased demand for commodities and/or
material changes in governmental or regulatory policy in the United States could
result in lower growth and reduced demand for and usage of electricity and
natural gas in our service territories as customer facilities continue to close
or remain closed. The ability of our customers, contractors and suppliers to
meet their obligations to us, including payment obligations, could also be
negatively impacted under the current economic conditions. In our NGD service
territories and for Indiana Electric, we have informed customers that
disconnections for non-payment will be temporarily suspended. For Houston
Electric, we are following PUCT orders regarding disconnection practices related
to those customers impacted by COVID-19. To the extent these conditions in our
service territories persist, our bad debt expense from uncollectible accounts
could increase, negatively impacting our financial condition, results of
operations and cash flows. With respect to our regulatory proceedings, we could
experience significant delays in scheduling proceedings or hearings and in
obtaining orders from regulatory agencies. Any such delays could adversely
affect our future results of operations.
Due to current macroeconomic conditions and the decline in our common stock
price, we identified a triggering event to perform an interim goodwill
impairment test and recognized a non-cash goodwill impairment charge of $185
million in our Indiana Electric Integrated reporting unit for the three months
ended March 31, 2020. For further discussion of this impairment, see Note 10 to
the Interim Condensed Financial Statements.
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As of the date of this Form 10-Q, our efforts to respond to the challenges
presented by the conditions described above and minimize the impacts to our
business have yielded results. Our electric facilities and natural gas
distribution systems have remained operational and our customers have continued
to receive service. Although we continue to assess the COVID-19 situation, we
cannot estimate with any degree of certainty the full financial impact of the
COVID-19 pandemic on our business. Nor can we predict the effect that the
significant disruption and volatility currently being experienced in the markets
will have on our business, cash flows, liquidity, financial condition and
results of operations at this time. However, we expect the COVID-19 pandemic to
adversely impact us in future quarters due to the considerable uncertainty
regarding the extent to which COVID-19 will continue to spread and the extent
and duration of governmental and other measures implemented to try to slow the
spread of COVID-19, such as large-scale travel bans and restrictions, border
closures, quarantines, shelter-in-place orders and business and government
shutdowns. Restrictions of this nature have caused, and may continue to cause,
us, our suppliers and other business counterparties to experience operational
delays, closures or disruptions, among other things. The ultimate impacts to our
business, financial condition, results of operations, liquidity and cash flows
will depend on future developments, including, among others, the ultimate
duration and geographic spread of COVID-19, the consequences of governmental and
other measures designed to prevent the spread of COVID-19, the development of
effective treatments, actions taken by governmental authorities, customers,
suppliers and other third parties, workforce availability, and the timing and
extent to which normal economic and operating conditions resume. For additional
discussion regarding risks associated with the COVID-19 pandemic, see "Risk
Factors" in Item 1A of Part II of this Form 10-Q.
Enable Quarterly Distributions. The price of, and global demand for, natural
gas, NGLs and crude oil have declined significantly as a result of the ongoing
spread and economic effects of the COVID-19 pandemic and the significant
governmental measures being implemented to control the spread of COVID-19. In
addition, the recent dispute over crude oil production levels between Russia and
members of the Organization of the Petroleum Exporting Countries led by Saudi
Arabia have exacerbated the sharp decline in the price of NGLs and crude oil.
Despite the subsequent agreement in April 2020 by a coalition of nations
including Russia and Saudi Arabia to reduce production of crude oil, the price
of NGLs and crude oil have remained significantly depressed and, in the case of
crude oil, have at times reached a negative price. Further, financial market
declines and volatility, together with deteriorating credit, liquidity concerns,
decreasing production, and increasing inventories, are conditions that are
associated with a general economic downturn. Producers have announced and begun
to implement plans to reduce production and decrease the drilling and completion
of wells in response to these conditions, which include reductions in the
exploration, development and production activity across Enable's areas of
operation. As a result, the effects of the COVID-19 pandemic and the decline in
demand and price for natural gas, NGLs and crude oil have begun and may continue
to negatively impact the demand for midstream services. In response to the
impacts of these developments on its business, on April 1, 2020, Enable
announced a reduction in its quarterly distributions per common unit from
$0.3305 distributed for the fourth quarter 2019 to $0.16525, representing a 50%
reduction. For further information, see "-Liquidity and Capital Resources-Future
Sources and Uses of Cash" below.
CenterPoint Energy Financial Measures. On April 1, 2020, in response to the
current business environment and to strengthen its financial position and adjust
for the reduction in cash flow related to the reduction in Enable quarterly
common unit distributions, CenterPoint Energy announced targeted reductions in
(i) its quarterly common stock dividend to $0.1500 per share; (ii) 2020
operation and maintenance expenses, excluding certain merger costs, utility
costs to achieve savings, severance and amounts with revenue offsets; and (iii)
2020 capital spending. For further information, see "-Liquidity and Capital
Resources-Future Sources and Uses of Cash" below.
Enable Investment Impairment. CenterPoint Energy recognized a loss of $1,475
million on its investment in Enable for the three months ended March 31, 2020.
This loss included an impairment charge on its investment in Enable of $1,541
million. For further discussion, see Note 9 to the Interim Condensed Financial
Statements.
CenterPoint Energy Leadership Transition. On February 19, 2020, the Board of
Directors appointed John W. Somerhalder II to the position of Interim President
and Chief Executive Officer. On April 1, 2020, the Board of Directors appointed
Kristie L. Colvin to the position of Interim Executive Vice President and Chief
Financial Officer in addition to her position as Chief Accounting Officer. In
conjunction with their respective appointments, Mr. Somerhalder and Ms. Colvin
also have been appointed to serve on the Board of Directors of Enable GP.
Business Divestitures. On February 3, 2020, CenterPoint Energy, through its
subsidiary VUSI, entered into the Securities Purchase Agreement to sell the
Infrastructure Services Disposal Group. The transaction closed on April 9, 2020.
On February 24, 2020, CenterPoint Energy, through its subsidiary CERC Corp.,
entered into the Equity Purchase Agreement to sell the Energy Services Disposal
Group. The transaction is expected to close in the second quarter of 2020. For
further information, see Note 3 to the Interim Condensed Financial Statements.
Regulatory Proceedings. On April 5, 2019, and subsequently adjusted in errata
filings in May and June 2019, Houston Electric filed its base rate application
with the PUCT and the cities in its service area to change its rates. A
settlement has been reached and a final order from the PUCT was received on
March 9, 2020 and were implemented on April 23, 2020. For details related to
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our pending and completed regulatory proceedings and orders related to the TCJA
to date in 2020, see "-Liquidity and Capital Resources -Regulatory Matters"
below.
Private Placements. On May 6, 2020, CenterPoint Energy entered into agreements
for the private placements of its Series C Preferred Stock and its Common Stock.
For more information about the private placements, see Note 19 to the Interim
Condensed Financial Statements.
New Directors and Board of Directors Committee. On May 6, 2020, at the
recommendation of the Governance Committee, the Board of Directors appointed
David J. Lesar and Barry T. Smitherman to the Board of Directors effective
immediately. Messrs. Lesar and Smitherman have been elected to serve as
directors of CenterPoint Energy until the expiration of their respective terms
on the date of its annual meeting of shareholders in 2021 and until their
successors are elected and qualified. Messrs. Lesar and Smitherman are expected
to stand for election as directors at the annual meeting of shareholders in
2021. Messrs. Lesar and Smitherman will serve on the Board of Directors' newly
established Business Review and Evaluation Committee, which will assist the
Board in evaluating and optimizing the various businesses, assets and ownership
interests currently held by CenterPoint Energy.
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