CenterPoint Energy, Inc. — Q1 2016 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2016; unaudited consolidated results compared with Q1 2015. CenterPoint is a utility holding company with electric transmission and distribution, natural gas distribution and energy services businesses, and a significant investment in Enable Midstream Partners. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 / prior date |
|---|---|---|
| Revenue | $1,984 | $2,433 |
| Operating income | $250 | $256 |
| Net income | $154 | $131 |
| Diluted EPS | $0.36 | $0.30 |
| Operating margin | 12.6% | 10.5% |
| Cash from operations | $634 | $666 |
| Capital expenditures | $332 | $341 |
| Cash and cash equivalents | $218 at March 31 | $264 at December 31, 2015 |
| Total current assets / current liabilities | $2,335 / $2,534 | $2,689 / $2,458 at December 31, 2015 |
| Long-term debt | $7,354 at March 31 | $7,866 at December 31, 2015 |
Operating margin is calculated as operating income divided by revenue. Net cash used in investing activities was $269 million, including $363 million received on Enable notes and $363 million invested in Enable preferred units. Net cash used in financing activities was $411 million. Dividends declared were $0.2575 per share, versus $0.2475 a year earlier.
Changes versus prior comparable period
- Revenue fell $449 million, or about 18%, largely alongside lower natural gas costs and lower Energy Services revenue. Operating income declined $6 million, while net income rose $23 million.
- Higher marketable-securities gains contributed $107 million to the year-over-year earnings increase; the indexed-debt-securities result worsened by $80 million. These market-sensitive items make reported net income more volatile than operating performance alone suggests.
- Natural Gas Distribution operating income increased $14 million, mainly from rate increases and customer growth, partly offset by milder weather and higher costs.
- Electric Transmission & Distribution operating income decreased $13 million, reflecting higher depreciation, operating costs and lower usage, partly offset by transmission revenue and customer growth.
- Energy Services operating income fell $7 million, primarily due to less favorable derivative mark-to-market results and reduced weather-related optimization opportunities.
- Enable equity earnings increased to $60 million from $52 million. Enable’s own net income attributable to it decreased to $86 million from $91 million.
Outlook, management commentary, risks and unusual items
- Management expected the 2016 effective tax rate to be approximately 36%; the Q1 rate was 36%, versus 37% in Q1 2015.
- For the remaining nine months of 2016, expected cash requirements included approximately $1.1 billion of capital expenditures, $325 million of maturing senior notes, $245 million of scheduled securitization-bond principal, the $98.2 million Continuum acquisition, dividends and interest. Management expected operating cash flow, Enable distributions, commercial paper and credit facilities to be sufficient, while noting financing markets may not be available on acceptable terms.
- On March 3, CenterPoint refinanced $2.1 billion of revolving facilities with $2.5 billion of five-year facilities. The company reported covenant compliance; its debt-to-capital ratio under the parent facility covenant was 54.2%, against a 65% limit.
- CenterPoint invested $363 million in Enable’s 10% Series A preferred units in February; Enable used proceeds to redeem notes owed to a CenterPoint subsidiary. CenterPoint held about 55.4% of Enable’s limited partner interests. Management judged the $2.6 billion equity-method investment not other-than-temporarily impaired despite Enable’s March 31 common-unit price of $8.56 versus CenterPoint’s stated carrying value of $11.03 per unit.
- After quarter-end, CES completed the acquisition of Continuum’s retail commercial and industrial businesses for $98.2 million. Houston Electric filed for a distribution-cost rate adjustment seeking a $36.4 million increase, and gas distribution divisions filed for aggregate annual revenue increases of $18.2 million; these requests were pending.
- Key exposures include weather, commodity prices, regulation and rate recovery, capital-project costs, credit ratings and collateral needs, litigation and environmental obligations, and Enable’s operating performance and distributions. Potential pipeline-safety rules could add costs. The filing identifies a $50 million CenterPoint guarantee of certain Enable obligations; a separate $1.1 billion CERC guarantee of Enable notes was automatically released on May 1, 2016.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. The filing stated there had been no material changes to the risk factors in the 2015 Form 10-K.
Most important facts for investors to verify
- Whether operating earnings and cash generation remain resilient after separating regulated-business performance from securities gains and losses.
- Enable’s distribution capacity, preferred-unit payments, financial performance and the recoverability of CenterPoint’s substantial investment, given the market-price gap cited in the filing.
- Final regulatory outcomes and timing for the requested electric and gas rate increases, including any effect on allowed returns and recovery of capital spending.
- Execution and funding of the planned 2016 capital program, debt maturities and acquisition, and continued covenant compliance and access to credit markets.
- Potential cash, collateral or earnings effects from credit-rating changes, ZENS securities and taxes, guarantees, litigation, environmental matters, and proposed pipeline regulations.