CenterPoint Energy, Inc. — Q3 2019 Form 10-Q
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2019, compared with the same 2018 periods. CenterPoint completed its approximately $6.0 billion cash acquisition of Vectren on February 1, 2019; the acquired businesses are included from that date, making several year-over-year comparisons non-comparable. The filing also includes separate financial statements for Houston Electric and CERC.
Key financial metrics
| Metric ($ millions, except per-share amounts) | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | 2,742 | 2,212 | 9,071 | 7,553 |
| Operating income | 392 | 226 | 924 | 664 |
| Net income | 270 | 158 | 634 | 248 |
| Income available to common shareholders | 241 | 153 | 546 | 243 |
| Diluted EPS | $0.47 | $0.35 | $1.08 | $0.56 |
| Operating margin, calculated | 14.3% | 10.2% | 10.2% | 8.8% |
For the nine months, operating cash flow was $1.086 billion, down from $1.679 billion. Capital expenditures were $1.822 billion and acquisition spending, net of cash acquired, was $5.991 billion. Cash and cash equivalents were $259 million at quarter-end; cash, cash equivalents and restricted cash totaled $297 million.
Long-term debt, including current maturities, had a carrying amount of $14.861 billion at September 30, versus $9.140 billion at year-end 2018. The company reported $5.1 billion of revolving credit facilities and was in compliance with debt covenants. Commercial paper and letters of credit utilized $1.978 billion of facilities at September 30. Preferred-stock dividends increased substantially year over year, partly reflecting the post-merger capital structure.
Material changes and management commentary
- Revenue increased 24% in Q3 and 20% for the nine-month period, primarily reflecting Vectren and changes in business mix. Consolidated results also include significant non-utility derivative revenue.
- Common earnings rose to $241 million in Q3 and $546 million for the nine months. Management attributed the improvement mainly to higher operating income and gains on marketable securities; nine-month comparisons also benefited from lower ZENS-related losses than in 2018. Higher interest expense and preferred dividends partly offset the gains.
- Operating income increased across several segments, including Natural Gas Distribution and Energy Services. Energy Services’ nine-month improvement included a $118 million favorable year-over-year change from derivative mark-to-market accounting; management noted weaker natural-gas optimization margins compared with unusually favorable first-quarter 2018 conditions.
- Houston Electric’s nine-month operating income was broadly flat at $522 million versus $523 million, as customer growth, rate increases and lower operating costs were offset by lower Bond Company income, TCJA-related revenue reductions and other costs.
- Vectren’s preliminary purchase accounting included $4.306 billion of goodwill. The valuation and allocation remained subject to revision, and the company expected to complete the measurement period by December 31, 2019. Merger-related severance, integration and transaction costs affected expenses.
Outlook, risks and unusual items
- No consolidated earnings guidance is stated in the supplied filing text. For the remaining three months of 2019, estimated capital expenditures were $704 million for CenterPoint, $307 million for Houston Electric and $221 million for CERC. Management expected cash needs to be met with operating cash flow, borrowing, commercial paper and, for CenterPoint, Enable distributions.
- Houston Electric’s pending PUCT base-rate case is a major uncertainty. The company sought approximately $194 million in annual revenue increases, excluding EDIT refunds. Administrative law judges recommended an increase of about $2.6 million. If adopted, the recommendation could result in an approximately $120 million pre-tax write-off, refunds of previously recovered capital, and a separate determination regarding up to $158 million of EDIT on securitized assets. The PUCT had not issued a final order, and the company said the outcome was uncertain.
- Management identifies rate recovery, regulation, weather, commodity prices, acquisition integration, construction costs, credit ratings, access to capital, counterparty performance, litigation and environmental compliance as risks. A one-notch rating downgrade was estimated to have an immaterial effect on revolving-credit borrowing costs, but downgrades could impair market access, increase financing costs or require additional collateral.
- Indiana Electric recorded an approximately $75 million asset-retirement obligation for closure of ash ponds. Closure timing, environmental rules, recovery in rates and possible extensions to continue pond use remain relevant uncertainties; additional equipment purchases of $60–$80 million were anticipated for the A.B. Brown closure project.
- The annual goodwill impairment test found no impairment, but Infrastructure Services and ESG fair values exceeded carrying values by only 6% and 8%, respectively; management noted elevated impairment sensitivity if operations decline or market rates rise.
Important facts for investors to verify
- Final PUCT disposition of Houston Electric’s rate case, including rate base disallowances, refund obligations, EDIT treatment and any ring-fencing requirements.
- Final Vectren purchase-price allocation and any changes to goodwill, acquired assets, liabilities or tax estimates.
- Whether operating cash generation can support the elevated capital program, acquisition-related debt and dividends without materially increasing leverage.
- How much Energy Services’ reported earnings depend on derivative mark-to-market movements versus realized operating margins and cash flows.
- Progress, recoverability and final costs for Indiana ash-pond closures, and impairment headroom in Infrastructure Services and ESG.