Centerpoint Energy Inc Q1 FY2020 Earnings Call

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 listen-only mode. There will be a question-and-answer session after management's remarks. Operator Instructions: I will now turn the call over to David Mordy, Director of Investor Relations. Mr. Mordy?

Thank you, Joelle. Good morning, everyone. Welcome to our first quarter 2020 earnings conference call. John Somerhalder, Interim President and CEO; and Kristie 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 the 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 our natural gas distribution business segments as well as after-tax operating income from the corporate and other business segment. 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 in earnings as if the newly issued preferred stock were issued as common stock. In addition, guidance incorporates the COVID-19 scenario range of $0.05 to $0.08, which assumes reduced demand levels with April as the peak and reflects the 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 Enable 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 basis 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 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 a 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 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 delever CenterPoint's 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 1st, 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 a 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 appointments, 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 it 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 $0.50 per share, excluding impairments, compared with $0.41 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 Vectren 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 largest 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 in 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 began 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 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 $0.01 to $0.02 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 assumed a 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 full year COVID-19 impact to be in the range of $0.05 to $0.08 of utility EPS. To the extent actual recovery deviates from our COVID-19 scenario assumptions, our projected full year guidance range may change. Turning to slide 12, on April 9, 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 aligned 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 1. 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 earnings 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 Vectren 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 am very pleased to have Kristie Colvin discuss our financial results in greater detail. Kristie 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. Kristie?

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 reduction. We remain steadfast in our focus on disciplined 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 jurisdictions 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 million 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 macroeconomic 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 and the Vectren 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 utility, 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 $0.50 per diluted share and Midstream Investments provided $0.10 per diluted share for the first quarter of 2020 compared to $0.41 and $0.05, respectively, in the first quarter of 2019. Utility operations delivered a solid performance this quarter, providing $0.09 of positive variance. Rate relief contributed $0.07 of positive variance, largely as a result of the capital recovery mechanisms in the Indiana Electric and Texas Gas jurisdictions, along with the implementation of interim rates in Minnesota. Additionally, the first quarter of 2020 benefited approximately $0.05 from an additional month of earnings associated with the jurisdictions acquired through the merger in February 2019. O&M savings provided $0.03 of favorability. Lastly, CenterPoint Energy's continued strong customer growth, primarily along the Texas Coast and our Minnesota service territory, provided for $0.02 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 $0.01 of negative earnings variance versus normal. Overall, we were very pleased with the performance of our utilities. Turning to slide 18, we discussed our continued discipline in O&M management. Last year, our company made great strides through our diligent 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 disciplined O&M management further support this commitment. These equity issuances eliminate the anticipated equity needs through 2022, and we will target 14% to 14.5% FFO to 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 disciplined O&M management, while remaining firmly committed to our solid investment-grade credit policy. I'll now turn it back to David.

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

Thank you. At this time, we’ll begin to take your questions. Operator Instructions: Thank you. Our first question comes from Shar Pourreza with Guggenheim Partners. Your line is now open.

Hey, guys.

Good morning.

So just two questions here. First, starting sort of with that strategic level. You have, obviously, a review process that's in place now. Should 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 Day 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.

I'll start with the last question. Yes, that's correct. This is a situation where we have strong support for the business and the model we have now. We are going to review those businesses to see where we can optimize them. Our focus is clearly on our utility businesses. We believe all of our utility businesses have good regulatory compacts, and we will continue to look at how we can improve those going forward and the mechanisms for recovery. This will be a comprehensive review of all our businesses so that we can optimize them as a company moving forward.

Got it. And then, just lastly you reiterated the utility guidance for 2020 and the 5% to 7% growth, which is very constructive. Can we get maybe a little bit more specific around the moving pieces? Maintaining these figures, there's a lot of moving pieces, 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 with 2020, and then Kristie can add to it and then talk a little bit about moving forward. We took several steps that we announced back at the beginning of April, some of them more driven by credit to make sure we have very solid credit metrics as we move through this year. 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 to, as Kristie said, about 60% of that. So the combination of a good first quarter, those O&M savings and the CARES Act tax benefit, Kristie can speak more to that, offset the impact of our expected range on COVID-19 as well as the dilution as a result of the $1.4 billion of equity issuance. So those generally net 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 is not as material as we move forward. And then, we have the announced dividend reduction, 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 base growth and EPS growth of 5% to 7%. Kristie, 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 Insoo Kim with Goldman Sachs. Your line is now open.

Thank you. My first question is regarding 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?

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

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

Just in the scenario that may be 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 FFO to debt side to absorb some of that additional impact?

Yes. 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 stand-alone CenterPoint standpoint, is the strategy, all being equal, still to try to trend towards that 90% utility earnings by 2024?

Well, that's the foundation we start on. And that's what we have seen really aligns with what we believe are our 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.

Hi, Mike.

I just want to make it clear. You are in that FFO 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%.

Got it. And in terms of the COVID sensitivities, you had — it starts off with a pretty bad April, but you expect things to get better over the summer and then beyond that. Do you have any kind of a ballpark estimate of worsening? How much worse the $0.05 to $0.08 could get? Let's say, for instance, the April downturn of 15% to 20% as you saw in the commercial and 10% to 15% industrial reductions. If that continued at that level for the rest of the year, for instance, how much worse would it get?

I'll give you some general ballpark. Our experience is that even though we had reduced industrial, we're not very sensitive because of the way the rates are designed on industrial. The commercial downturn was in line with what we had expected, and we saw positive on the residential side, both in Houston and Indiana. So what we saw in April was very much in line with what we had estimated. If you extrapolate that out for the conditions we talked about through August, it results in that $0.05 to $0.08. But clearly, you can extrapolate that out. We don't anticipate that it will impact us through the full year, but you can extrapolate that $0.01 to $0.02 impact for more months, and that would be in line with what would happen should that scenario occur. Kristie, you want to add on that?

Okay. $0.01 to $0.02 per month for additional months? Is that how you're looking at?

Yes. Kristie, 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 in your service territory, and what's going on there? What your assumptions are for oil and gas refining and drilling part of your customer base?

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

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

Thank you.

Thank you. Our next question comes from Steve Fleishman with Wolfe Research, LLC. Your line is now open.

Hi. Good morning.

Hey, Steve.

John, I'm curious, have 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? Any color there would be helpful.

This is positive. Kristie can tell you about the actual conversations and where those could move.

We have had conversations with the rating agencies. This should be considered positive. We have to get past the CES sale 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.

Yes. We're working very closely with the buyer on transition, putting the organization in place, what services we'll provide, employee issues. The agreement works well and gives both parties certainty about being able to close. So we feel very good about it.

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

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

Okay. Thank you.

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

Good morning. 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.

We feel very good about that number because as Kristie mentioned, we have line of sight directly to things we'd already worked on earlier this year related to our corporate structure and support services and some IT-IS 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, supply chain savings, use of technologies, work management systems. We'll be digging into those issues in detail now that we've made the decisions and positioned the company with flexibility and strong balance sheet moving forward. So it's too early to say what the potential upside 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 share impact from the tax benefits from the CARES Act?

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 the range of around $10 million to earnings, also with favorable cash flows.

Perfect. Thank you and stay safe.

Thank you.

Thank you. Our next question comes from Julien Dumoulin-Smith with Bank of America. Your line is now open.

Hey, good morning and congratulations on all the progress here.

Thank you.

I wanted to follow up on the outlook through '24. Can you comment specifically about expectations for earning your optimized returns? I know that obviously there's some gyrations in the current year related to COVID. But as you see achieving this 5% to 7%, specifically within that, 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, given that you have this equity issuance in the first couple of years, is the plan back half-weighted? Just to kind of think about the equity being a factor?

I'll start with the equity piece, and then comment on returns. Because of the dividend reduction, targeting 50% to 55% payout on our regulated earnings, we have more retained earnings in those out years. We issued an amount of equity in the past forecast through 2022 in the range of about $1.4 billion, which is similar to what we had before, maybe slightly lower. But because of the retained earnings in the backside, the old forecast of $300 million to $500 million per year in that time period is now lower. We believe it will be less in the out years, and we'll get the benefit of the things we've talked about: the O&M savings and the dividend reduction. So it's not back-end loaded; in fact there's more modest needs in the back end of the plan, which 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 capital structure and pretty similar in the other jurisdictions. Kristie, did I miss anything?

I think you covered it well.

And then turning to the strategic side, what is on the table with respect to the strategic review, just to ask it more explicitly? You commented on Enable. I want to make sure we're fully understanding what is contemplated and how you think about this against the backdrop of having had these processes in the past.

In the past, many of the processes were led by management. What we have now is a group including two new directors and existing directors that will be looking at this at the Board level. It will be comprehensive. We'll look at our businesses in total to make sure that we move forward in the most optimized way. So it's similar in some ways, but it has the changes I just mentioned. We're encouraged by that and think it's the right time to further optimize our business.

Should we expect management updates and appointments prior to the conclusion of the process?

The plan right now is the committee will function under its charter through October. A normal time to communicate would be at an Investor Day early in 2021. But if something should be communicated before that, we would do that. 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. Should anything occur that changes that, we would make it public as appropriate.

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

Should anything occur that we need to update publicly, we would do that. The base plan is the timeframe I outlined.

Got it. Excellent. Thank you all very much. Best of luck.

Thanks, Julien.

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

Good morning. Two quick questions. First, any update on the CEO search, any timing on when the Board selects someone?

The committee has been rigorous and has a search firm in place. They've identified and interviewed a number of candidates. We're on the back side of that search process. Until the absolute right person is picked and timing on transition is confirmed, it's not done. But I feel good that we've made a lot of progress and are on the backside of getting that taken care of.

Great. And the $40 million of additional O&M cuts identified in 2020 — are they more at the parent company or at operating utility companies?

More than half of the identified savings are at the company level, support services and some IT and similar costs. There will also be items each business unit develops. A good percentage are at the corporate level.

They'll be across the board, but over half we've identified in support-level activities.

Great. Thanks and stay healthy.

Thank you, you too.

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

Good morning. I wanted to follow-up on the business review process. With the new investors and this investment, should we think the business review is now a wider range of potential options, and that almost anything could be on the table to enhance shareholder value? Or are certain things off the table?

The business review committee will look at business plans across all of our businesses and think through everything from regulatory strategies to how businesses fit together. It's a normal part of running a company, but it brings a fresh set of eyes with new director experience. It's a very powerful process and they'll make recommendations to the Board during the timeframe we discussed.

But if there was the potential for a sale of the company, is that off the table? In other words, would you consider anything that enhances shareholder value, or are there things you feel aren't part of your game plan?

The starting point is truly looking at how our businesses are operating and optimizing those, making the right business decisions in total around our utility assets. That's the focus. Every company considers other options, but this committee is designed to review the go-forward plan for our utilities and how to optimize and configure them correctly moving forward.

Okay. And on Indiana Electric, the write-down: was that goodwill? Could you elaborate further on the impact at the utility in terms of regulatory rate making and equity or utility-level impacts?

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

Awesome. Thanks so much.

Thank you.

Our next question comes from Jeremy Tonet with JPMorgan. Your line is now open.

Good morning. Building on some points, with regards to the FFO to debt trajectory, if something moves against you like another Enable distribution cut, what levers do you have left to pull? Could that include more CapEx deferrals or other levers?

One of the things we would do is continue to work with the rating agencies and highlight the increased regulated percentage in our earnings, should that occur. We've taken positive steps already, but under adverse circumstances we would look at alternatives such as reducing capital, further optimizing O&M, and other steps to maintain a strong balance sheet. Kristie, anything to add?

I think that covered it pretty well.

Thanks. And a follow-up on COVID-19 deferrals: when do you expect to have clarity on deferrals for the remainder of your jurisdictions?

We have a large number and good line of sight. Most jurisdictions look to be addressing these issues in the near future. I'll turn it over to Jason for specifics.

Good morning. The Oklahoma Commission voted to approve an accounting order earlier this morning. The Minnesota Commission is discussing this topic as we speak. We've been working with industry colleagues and regulators in Indiana and expect to file an application seeking an accounting order either late this week or early next. That would take care of all of our jurisdictions, given that most of them have already acted.

Got it. That's helpful. Thanks.

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

Good morning. In the current guidance, 2020 guidance, utility contribution is 88% and Midstream 12%. You anticipated utility earnings contribution increasing to nearly 100% over the next few years. That implies your preference was to divest Enable. Am I reading more into that than I should? Or is there something else I don't understand?

When we looked at Enable's 50% distribution cut, it was based on expectations of very little drilling activity this year and into next. We took that proactive step to protect Enable's liquidity as they head into lower earnings. Naturally, as those earnings decline under that scenario, the earnings contribution for midstream goes down. On top of that, we're continuing to invest heavily in our regulated business, so you have the regulated contribution increasing while midstream declines. That naturally results in a 95-plus percent regulated earnings mix. Kristie, do you want to add?

There will be basis accretion as a result of these impairments, but we still expect the utility to grow to approximately 95% of the contribution.

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

Thanks, Charles.

Thank you. Our next question comes from Ashar Khan with Verition. Your line is now open.

Hi, good morning and congratulations. I wanted to ask about the CEO search timing — quicker is better — do you have any specific date by which we can expect an announcement?

We feel positive that the process has moved. We have good identified candidates, but until it's finalized and transition timing is worked out, I can't commit to an exact time. I feel good we've made a lot of progress and it can happen in a reasonably short period.

Thanks. One accounting question: the tax benefits you mentioned, are they only for this year? You mentioned $19 million and another $10 million — do they go away?

Yes. They go away after this year.

You also mentioned amortization benefit, how much is that, does that continue?

The amortization, referring to the basis accretion, is expected to increase the usual $47 million a year to about $100 million annually. Because it is not effective from the beginning of the year, this year it would be about $85 million in total versus the usual $47 million. It will continue for approximately 28 years. That primarily impacts the midstream or unregulated earnings.

Understood. Thank you so much.

Thank you.

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

Thanks guys. I apologize if I missed it in the filings, but have you disclosed the terms of the convertibles? And in your presentation for 2020 and the 5% to 7% growth, are you assuming the preferred as issued in the share count?

Between the 8-K and what we've posted on our website, those terms and conditions have been disclosed and filed. There is a mandatory conversion in 12 months.

After the calculation of guidance, we will treat the preferred as if it were common in the dilution calculation.

Okay. So the 5% to 7% then reflects that dilution through the forecast period?

Yes.

That's correct.

Okay, great. Thank you very much.

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

Good morning. Thank you. I wanted to be clear on equity needs. Total equity needs through 2022 are not necessarily different from what you had previously. You had $300 million to $500 million in both 2021 and 2022 previously. Is the idea that the bulk of that will now be met with the issuance you announced today so this is more a timing shift? Or do the O&M savings and dividend cut essentially take care of that?

In 2023 and 2024 we still will have some equity needs, but based on our current plan, they are expected to be lower than the previous $300 million to $500 million per year estimate. With the dividend cuts, it is lower than previously anticipated in those years.

We issued $1.4 billion today. Our prior plan was to issue $800 million in 2020 and between $300 million and $500 million in 2021 and 2022. At the midpoint for 2021 and 2022, that would have been $1.6 billion versus the $1.4 billion we're doing today. So we satisfied our needs upfront for these three years.

Got it. And have you vetted today's plan with the rating agencies?

Yes. We have been in contact with the rating agencies regarding 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.