CenterPoint Energy, Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; comparative figures are for Q1 2010. CenterPoint is a utility holding company with electric transmission and distribution, natural gas distribution, pipelines, and gas gathering and services businesses. Financial amounts below are in millions unless stated otherwise.
Financial performance
- Revenue: $2,587, down 14% from $3,023. Lower natural gas revenues and costs largely reflect commodity-related pass-throughs; lower revenue does not by itself indicate weaker underlying margins.
- Operating income: $364, up from $357. Operating margin was approximately 14.1%, versus 11.8% in Q1 2010.
- Net income and EPS: Net income was $148, versus $114; diluted EPS was $0.35, versus $0.29. Management attributed the $34 increase mainly to $15 lower income tax expense, $7 higher operating income, $6 lower interest expense, and a $4 smaller indexed-debt loss, partly offset by a $6 lower marketable-securities gain.
- Cash flow: Operating cash flow was $627, versus $435; capital expenditures were $333, versus $258. Operating cash flow less capital expenditures was $294, versus $177. The cash-flow improvement included $152 more in tax refunds and $103 less cash used for margin deposits, partly offset by $113 less cash from fuel-cost recovery.
- Liquidity: Cash and equivalents were $95 at March 31, down from $199 at year-end. Current assets were $2,014 and current liabilities $2,201 (current ratio approximately 0.91). Management expected operating cash flows, commercial paper and credit facilities to cover anticipated needs for the rest of 2011.
- Debt: Long-term debt was $8,732; current portions of transition and restoration bonds and indexed debt were $294 and $127, respectively. Short-term borrowings were zero. CERC refinanced $550 of 7.75% notes with new 4.50% and 5.85% notes and exchanged $397 of 7.875% notes due 2013 for 4.50% notes plus cash. The companies reported compliance with debt covenants.
- Dividend: Q1 dividends declared were $0.1975 per share, up from $0.1950. A $0.1975 dividend was subsequently declared for payment June 10, 2011.
Segment results and changes
- Electric transmission and distribution: Operating income fell to $101 from $107. Customer growth and higher transmission and advanced-metering revenues were offset by higher operating costs. Total throughput rose to 16,768 GWh from 16,436 GWh.
- Natural gas distribution: Operating income increased to $142 from $139, primarily due to lower bad-debt expense. Throughput decreased to 178 Bcf from 183 Bcf; warmer-weather effects were partly mitigated by hedges and rate mechanisms.
- Competitive natural gas sales and services: Operating income declined to $10 from $15, reflecting less favorable derivative valuation and weaker pipeline-basis and winter-storage spreads.
- Interstate pipelines: Operating income increased to $76 from $72, with throughput rising to 461 Bcf from 438 Bcf.
- Field services: Operating income rose to $36 from $23, mainly as Magnolia and Olympia gathering systems contributed higher margins. Gathering throughput increased to 183 Bcf from 128 Bcf.
Outlook, material matters and risks
- Texas true-up proceeding: A March 18, 2011 Texas Supreme Court ruling reversed some prior regulatory decisions and remanded issues for further proceedings. CenterPoint estimated that asset-sale valuation could reduce stranded costs by about $252, less selling costs, while reversals concerning capacity-auction costs and depreciation could add approximately $440 and $378, respectively, plus interest, to amounts eligible for recovery. The company expected to seek recovery of about $1.85 billion, including interest through September 30, 2011, if the ruling became final. Rehearing requests and regulatory proceedings leave the amount and timing uncertain; interest on the unsecuritized balance was expected to accrue at about 8% if bonds were not issued by September 30.
- Tax-normalization exposure: The remand includes treatment of approximately $146 of deferred tax benefits. If the unfavorable treatment is not changed, the IRS could require payment related to unamortized investment tax credits and could restrict accelerated depreciation, potentially materially affecting results, financial condition and cash flows. The company had not finalized its evaluation of new bonus-depreciation guidance and estimated tax net operating losses for 2010 and 2011.
- Electric rate case: A draft Texas order approved April 29 provided for an estimated $14.7 annual increase in delivery charges and a $12.3 annual decrease in wholesale transmission charges. Revised rates were not expected before Q3 2011; CenterPoint estimated the decision would reduce normalized annual operating income by about $30 versus 2010. The final order remained subject to revision and appeal.
- Capital needs and projects: Expected capital expenditures for the remaining nine months of 2011 were approximately $1.1 billion, alongside $143 of scheduled transition and restoration bond principal payments. Magnolia’s 200-MMcf/day expansion entered service in February; Olympia required up to $65 of additional spending to complete remaining work. Further optional expansions could require substantial additional capital.
- Other exposures: Risks include regulatory and litigation outcomes, weather and commodity-price movements, project execution, counterparty performance, credit ratings and collateral needs. Potential additional collateral under pipeline arrangements was estimated at up to $182 if credit ratings fell below specified levels. The company cited a maximum potential guarantee payout of about $109 for certain gas-transportation demand charges through 2018, supported by GenOn collateral that could prove insufficient.
- Unusual items: The 2010 comparative period included a non-cash $21 tax charge from healthcare legislation, contributing to the lower 2011 effective tax rate (37%, versus 47%). Q1 2011 also included $32 of DOE grant cash received.
Important facts for investors to verify
- Developments in Texas Supreme Court rehearing and remand proceedings, the final true-up recovery amount, securitization timing, and the related tax-normalization issue.
- Whether the final electric rate-case order and implementation match the draft terms and the estimated $30 annual operating-income reduction.
- Execution and funding of the remaining 2011 capital program, including gathering-system commitments and planned DOE-funded metering work.
- Cash-flow sustainability after the unusually large tax refunds and working-capital effects in Q1; available liquidity and any collateral demands.
- Refinancing and debt-exchange effects, credit ratings, and the company’s capacity to meet scheduled debt service and dividends.