For U.S. regulated utility CenterPoint Energy Inc. (CPE), 2021 has been a year of many changes. In February, CPE and its subsidiaries felt the full brunt of the extreme weather in the wake of the winter storm, which caused utilities across the central U.S. to incur extraordinary fuel and purchased power costs. At the same time, CPE announced its intention to sell its natural gas distribution operations in Arkansas and Oklahoma. It is also in the middle of a transaction where its investment in midstream entity Enable Midstream Partners L.P. (Enable) will be merged into Energy Transfer L.P. (ET). And most recently, during its analyst day, CPE announced an increased five-year capital plan and presented a new 10-year plan specifically targeting its environmental, social, and governance (ESG) goals.

Here, we answer questions about CPE's involvement in the ET sale and ultimate exit from midstream, the impact from Winter Storm Uri, the company's updated capital plan, and its revised clean energy transition plan, and discuss any potential impacts to our ratings on the company. Our base case assumes CPE's financial measures will remain at the lower end of the financial risk profile category.

Frequently Asked Questions

What drove S&P Global Ratings' rating action and outlook revision on CPE and its subsidiaries in mid-February 2021?

In mid-February, Enable and ET announced their plan to merge. We expect the sale of Enable will lead to a modest improvement in the CPE's consolidated business risk profile, given management's strategy to focus on its low-risk regulated utility operations over the longer term. At the same time, CPE subsidiary CenterPoint Energy Resources Corp. (CERC) is selling its natural gas distribution operating divisions in Arkansas and Oklahoma.

Our base-case assumption is that CPE will use proceeds from the transactions to, in part, repay debt. Given our expectation of stronger, more predictable financial measures over the next several years combined with a modest strengthening of the business risk profile we affirmed our issuer credit rating (ICR) on CPE and its subsidiaries, including CERC, CenterPoint Energy Houston Electric LLC (CEHE), Vectren Utility Holdings Inc. (VUHI), Southern Indiana Gas and Electric Co. (SIGECO), and Indiana Gas Co. Inc. (IGC). We also revised our assessment of CPE's consolidated financial risk profile to significant from aggressive to better align with our expectation of financial measures, including funds from operations (FFO) to debt of about 13% through 2024.

See "CenterPoint Energy Inc. Outlook Revised To Stable From Negative; Ratings Affirmed," Feb. 22, 2021, for more details on the rating actions.

Why did S&P Global Ratings revise the rating outlooks on CPE and its subsidiaries to stable from negative?

The outlook revision reflects our expectation of consistent financial measures, albeit with minimal financial cushion. We expect CPE to maintain its business risk profile in line with our assessment of a significant financial risk profile after the reduction in midstream operations.

How much could CPE obtain upon sale of its ownership interest in Enable?

After completing the Enable/ET merger, which will likely close by year-end 2021, we expect CPE to receive approximately 6.5% ownership of ET common units for the current 53.7% of Enable common units. CPE will also exchange $363 million of Enable series A non-cumulative preferred shares for about $385 million of ET series G perpetual preferred units.

During its September 2021 analyst day, the company announced that it will sell by year-end 2021, through a contingent forward sale, 50 million ET common units (25% of CPE's expected ET common units). Along with selling these common units, CPE plans to sell the ET preferred shares, thereby monetizing about 40% of the ET equity investment by the end of 2021. In our base-case scenario, we assume the proceeds from these sales will help fund the company's rising capital spending, thereby supporting credit measures. We base our business risk profile assessment on regulated utility operations only since we have already reflected the sales of non-utility operations.

How did the February winter storm affect CPE and its subsidiaries?

CPE's utility subsidiaries incurred about $2.1 billion in incremental natural gas costs during the winter storm events. At the time, the Texas Railroad Commission (RRC) authorized the state's local distribution companies (LDCs) to accrue the incremental expenses as a regulatory asset for future rate recovery. As of June 30, 2021, CPE and CERC recorded current regulatory assets of $325 million (inclusive of CERC expenses) and $222 million, respectively, and non-current regulatory assets of $1.77 billion (inclusive of CERC expenses) and $1.76 billion, respectively.

Also during the winter storm, the Public Utility Commission of Texas (PUCT) prohibited disconnections by any retail electric providers (REPs) from nonpayment by customers. As of June 30, 2021, CEHE recorded a regulatory asset of $8 million for bad debt expenses resulting from defaults on payments by REPs, and a regulatory asset of $12 million to defer operations and maintenances costs from the storm.

How does CPE plan to recover the incremental costs incurred during the winter storm?

To fund immediate cash impact of these incremental expenses, CERC, at the time, issued $1.7 billion in incremental senior notes (see chart detailing the storm's impact on CPE's operations).

Table 1

Long-term recovery for the winter storm costs varies between regulatory jurisdictions. In states that do not have securitization in place, CPE expects to recover the extraordinary costs within a one- to five-year period with and without carrying charges. For material balances, if cost recovery is not within one year or through securitization, the state commission has authorized rate recovery of carrying charges along with incurred costs.

How are the Arkansas and Oklahoma divisions' sales structured?

CPE announced in late April 2021 that Summit Utilities Inc., an owner and operator of natural gas distribution and transmission pipeline systems, would purchase CERC's Arkansas and Oklahoma natural gas local distribution operating divisions. The assets include approximately 17,000 miles of main pipelines serving more than 500,000 customers. We expect the sale to be completed by year-end 2021.

The expected gross purchase price of the two gas LDCs is approximately $2.15 billion, including $425 million of incremental gas costs incurred in Winter Storm Uri. We expect CPE to use the net sales proceeds and the reimbursement for the remaining incremental gas costs to fund capital spending and repay debt at CPE and CERC. CPE plans to have elevated capital spending within its regulated operations for the next five years, and the sale of the two gas LDCs would help fund the increased spending. Although there will be an EBITDA loss after the sale of the operating utilities, incremental EBITDA growth is expected in later years.

We expect for the sale of the two gas LDCs to close by the end of 2021. Post-sale, CPE's utility mix would be 40% natural gas and 60% electric.

What does CPE's decarbonization strategy entail?

CPE's decarbonization strategy targets Scope 1, 2, and 3 emissions. Scope 1 emissions are direct emissions from company-owned and controlled resources, Scope 2 emissions are indirect emissions from the generation of purchased power, and Scope 3 emissions are all indirect emissions not already included in Scope 2 emissions. Examples of Scope 3 emissions include the production and transportation of fuels such as coal or natural gas used in generation of electricity.

Specifically, CPE plans to reduce Scope 1 and 2 emissions by approximately 5.2 million metric tons (MM MT) to net-zero by 2035 and reduce Scope 3 emissions 20%-30% by 2035 across all of its operating utilities.

With the company's electric generation housed under subsidiary SIGECO, in mid-June 2020, CPE revealed plans to retire SIGECO's 490-megawatt (MW) AB Brown coal facility and unit 2 of its 90-MW FB Culley coal facility in 2023, while also exiting its 150-MW stake in the Warrick coal facility in 2023. The company plans to replace this capacity with at least 1,000 MW of renewables in addition to the construction of two natural gas combustion turbines. As per its mid-June 2021 predetermination filing in Indiana, SIGECO is seeking pre-approval of a 460-MW gas turbine facility that the utility anticipates costing $323 million. We believe the plan demonstrates the company's commitment to its decarbonization goals, while also satisfying state regulators' recent request to consider more renewables as part of its long-term integrated resource plan (IRP). We believe pre-approval of the plan will reduce regulatory risk related to disallowance. The recent approval of legislation permitting the use of securitization financing to recover costs associated with retired generation assets further enables the company to implement its plan in a credit supportive manner.

Table 2

To address methane leaks across its natural gas distribution network in Ohio and Indiana, CPE expects to remove all cast iron pipes in both states by 2023 and replace all unprotected steel mains by 2032.

How does CPE's capital plan affect the company's financial measures?

CPE plans to invest over $18 billion within the next five years as per its latest capital plan. This includes spending to improve system maintenance and reliability, to accommodate customer growth, and to deploy sustainable technologies.

Most of this spending will occur within its regulated business segments, which is line with CPE's goal to be a fully regulated business. Additionally, the increase in capital expenditures by $900 million more in 2021 compared to 2020 will help overcome the loss of the Arkansas and Oklahoma LDC divisions without affecting CPE's utility earnings growth target. CPE's elevated capital plan will require a balanced mix of debt and equity funding, in addition to periodic rate increases, to maintain current financial measures, including adjusted FFO to debt of about 13% through 2023.

Table 3

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How will CPE fund its elevated capital plans?

The company does not expect to need any external equity issuance to fund its revised capital plan. In fact, CPE eliminated a previously announced $300 million at-the-market equity program and does not expect to issue equity through 2030. Instead, CPE plans to utilize the approximately $2.15 billion gross proceeds from the sale of its Arkansas and Oklahoma LDCs, the approximately $1.1 billion securitization proceeds, plus any proceeds from the ultimate sale of its ET common and preferred units, to repay debt and apply towards its higher capital spending. Additionally, we expect annual dividend increases of 8% in line with the company's expectations.