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 business shutdowns and closures, travel
restrictions, quarantines, curfews, shelter in place and "stay-at-home" orders
in our service territories. State and local authorities have also implemented
multi-step policies with the goal of re-opening various sectors of the economy
such as retail establishments, health and personal care businesses, and
restaurants, among others. However, despite extensive planning and mitigation
efforts by the states in our service territories, COVID-19 cases continued to
increase, requiring governing authorities to continuously reassess re-opening
plans for their jurisdictions. For example, the governor of the state of Texas
issued orders in April 2020 to allow businesses to re-open at varying levels of
capacity in May and June 2020. To address the June 2020 spike in COVID-19 cases,
including in Houston, such reopening activities were temporarily paused or
scaled back, and also included closing certain establishments. Similarly, the
governor of the state of Indiana announced that the state would delay entering
the final phase of its re-opening plan. We have experienced some resulting
disruptions to our 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. When an employee tests positive for COVID-19, we
investigate appropriately and take action to identify and notify potentially
exposed individuals, coordinate testing and clean work locations, among other
precautionary measures. If our employees feel sick or are awaiting COVID-19 test
results, they do not report to their respective work locations in an effort to
protect the health and safety of other employees. 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 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 continuing to work 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. Since March 2020,
we have not experienced significant disruptions or challenges with respect to
our supply chain from the COVID-19 pandemic as a result of the aforementioned
efforts with our core vendors and suppliers. This is a continuously evolving
situation and could lead to further 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 has
resulted in, and could continue to result in, lower growth, including customer
growth,
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and reduced demand for and usage of electricity and natural gas in our service
territories as customer facilities continue to close or remain closed. While
residential electric usage has increased as individuals continue to stay at home
or work remotely, our business has experienced reduced demand and usage among
our electric and natural gas commercial and industrial customers as well as a
decrease in revenues from disconnections and reconnections due to the disconnect
moratorium across our service territories due to COVID-19. Certain aspects of
Houston Electric's rate design could mitigate the negative impact of reduced
demand among commercial and industrial users. The ability of our customers,
contractors and suppliers to meet their obligations to us, including payment
obligations, has also been negatively impacted under the current economic
conditions. For Houston Electric, we are following PUCT orders regarding
disconnection practices related to those customers impacted by COVID-19.
Although one of Houston Electric's REPs filed for bankruptcy in April 2020 due
to COVID-19, Houston Electric has not experienced significant impacts with
respect to its customers meeting their payment obligations since March 2020. In
our NGD service territories and for Indiana Electric, we have informed customers
that disconnections for non-payment have been temporarily suspended and in
certain service territories continue to be temporarily suspended. Consequently,
as a result of the disconnect moratorium across our NGD service territories and
other payment deferrals or arrangements, days outstanding on receivables and
uncollectible accounts have increased, resulting in an increase to allowance for
doubtful accounts. To the extent these conditions in our service territories
persist, our bad debt expense from uncollectible accounts could continue to
increase, negatively impacting our financial condition, results of operations
and cash flows. Our NGD service territories and Indiana Electric have either (1)
received authority from their public utility commissions to defer bad debt
expense associated with COVID-19 as a regulatory asset or (2) exercised existing
authority to recover bad debt expense through an existing tracking mechanism.
Additionally, while we have not experienced delays to date due to COVID-19 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 macroeconomic conditions and the decline in our Common Stock price, we
identified a triggering event to perform an interim goodwill impairment test as
of March 31, 2020 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. CenterPoint Energy and CERC did not
identify triggering events in the three months ended June 30, 2020, and goodwill
impairment tests were not required or performed as of June 30, 2020.
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 been successful. 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 and evolving factors, including, among
others, the ultimate duration, scope and 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 in part 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 depressed relative to pre-pandemic levels.
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 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. To the extent
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such economic conditions persist or further deteriorate, quarterly distributions
on Enable's common units may be subject to further reductions. 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 $1,432
million on its investment in Enable for the six months ended June 30, 2020. This
loss included an impairment charge on its investment in Enable of $1,541 million
during the three months ended March 31, 2020. For further discussion, see Note 9
to the Interim Condensed Financial Statements.
CenterPoint Energy Leadership Transition. On June 30, 2020, the Board of
Directors appointed David J. Lesar to the position of President and Chief
Executive Officer, effective July 1, 2020. 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.
Board of Directors Appointments and Formation of Business Review and Evaluation
Committee. On May 6, 2020, the Board of Directors appointed David J. Lesar and
Barry T. Smitherman to the Board of Directors effective immediately, and, on
June 30, 2020, the Board of Directors appointed Earl M. Cummings to the Board of
Directors, effective July 1, 2020, to replace John W. Somerhalder II, who also
resigned from his position as Interim President and Chief Executive Officer,
effective June 30, 2020. On May 6, 2020, the Board of Directors established a
Business Review and Evaluation Committee, which will assist the Board of
Directors in evaluating and optimizing the various businesses, assets and
ownership interests currently held by CenterPoint Energy.
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 closed on June 1, 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 was reached and a final order from the PUCT was received on March 9,
2020. New rates were implemented on April 23, 2020. For details related to our
pending and completed regulatory proceedings and orders related to the TCJA to
date in 2020, see "-Liquidity and Capital Resources -Regulatory Matters" below.
Equity Transactions. 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.
Debt Transactions. In June 2020, Houston Electric issued $300 million aggregate
principal amount of general mortgage bonds. For more information, see Note 12 to
the Interim Condensed Financial Statements.
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