Business context and reporting period
CenterPoint Energy, Inc. (CNP) filed this combined Form 10-K for the fiscal year ended December 31, 2018, covering CNP, CenterPoint Energy Houston Electric, LLC and CenterPoint Energy Resources Corp. At year-end, its core businesses were regulated electric transmission and distribution in the Houston area, natural gas distribution in six states, competitive natural gas services, and an investment in Enable Midstream Partners. Vectren was not included in 2018 results; CNP completed its approximately $6 billion cash acquisition on February 1, 2019.
Financial performance and position
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $10.589 billion | $9.614 billion |
| Operating income | $831 million | $1.136 billion |
| Net income | $368 million | $1.792 billion |
| Income available to common shareholders | $333 million | $1.792 billion |
| Diluted EPS | $0.74 | $4.13 |
| Cash from operating activities | $2.136 billion | $1.417 billion |
| Capital expenditures | $1.720 billion | $1.494 billion |
| Year-end total assets | $27.009 billion | $22.736 billion |
Operating margin was approximately 7.8%, down from 11.8%. Year-end cash and cash equivalents were $4.231 billion, including $3.9 billion of temporary investments raised for the Vectren transaction; this is not a recurring operating cash balance. CNP reported approximately $9.2 billion of consolidated debt, including $1.4 billion of non-recourse securitization bonds. Long-term debt represented 53% of capitalization, or 49% excluding securitization bonds. The filing reports $4.5 billion of aggregate revolving credit facilities at December 31, 2018; the registrants were in compliance with debt covenants.
In fourth-quarter 2018, CNP revenue was $3.036 billion, operating income $167 million, income available to common shareholders $90 million and diluted EPS $0.18. Fourth-quarter 2017 included a large tax-reform benefit, making the year-over-year earnings comparison unusually difficult.
Material changes versus the prior comparable period
- Revenue rose about 10%, while operating income fell about 27% and common income fell about 81%. The 2017 results included a $1.113 billion tax benefit from the Tax Cuts and Jobs Act (TCJA); 2018 earnings also reflected lower operating income, ZENS-related losses and higher interest expense.
- Energy Services swung to a $47 million operating loss from $126 million of income, principally due to a $189 million unfavorable year-over-year change in derivative mark-to-market accounting. Management said the 2017 weather-driven mark-to-market gain substantially reversed as gas prices normalized in early 2018.
- Natural Gas Distribution operating income declined to $266 million from $348 million, while Electric Transmission & Distribution operating income declined to $623 million from $636 million. Customer counts and throughput increased in both businesses, but tax-related rate reductions, higher operating costs and depreciation weighed on results.
- Enable equity earnings increased to $307 million from $265 million. CERC transferred its Enable investment to CNP in September 2018; the transfer was treated as a common-control transaction, with no gain or loss, and Enable-related results were presented as discontinued operations at CERC.
- CNP raised equity in 2018, issuing common stock for $1.844 billion net and preferred stock for $1.740 billion net, primarily to help fund the Vectren acquisition. The common share count increased to approximately 501 million at year-end from 431 million.
Outlook, management commentary, risks and unusual items
- CNP forecasts 2019 capital expenditures of $2.432 billion, including Vectren estimates; Houston Electric and CERC estimates are $979 million and $714 million, respectively. CNP expected to fund cash needs through operations, debt and commercial paper, credit facilities and Enable distributions, with possible Enable unit sales; availability and terms of financing are not assured.
- Management expected Houston-area residential meter growth to increase to 2% in 2019, from approximately 1.6% in 2018. Houston Electric was required to file a comprehensive rate case by April 30, 2019; the filing’s terms and outcome were not yet established.
- The merger adds scale and regulated investment opportunities, according to management, but creates integration, execution and financing risks. After the transaction, Moody’s downgraded CNP’s senior unsecured rating to Baa2 and S&P lowered it to BBB; both outlooks were stable. These downgrades may raise financing costs.
- Key risks include regulatory lag and incomplete cost recovery; weather and severe storms; natural-gas price, supply and transportation exposure; REP counterparty concentration (Houston Electric’s $207 million of billed REP receivables included 34% owed by NRG affiliates and 12% by Vistra affiliates); pipeline safety and environmental compliance costs; cyber and operational disruptions; and possible impairment of goodwill or Enable investments.
- Contingencies include litigation arising from the 2017 Minnehaha Academy gas explosion, a gas-market manipulation case subject to settlement approvals, and environmental remediation. CNP and CERC disclosed a $7 million liability for Minnesota manufactured-gas-plant monitoring and possible remediation costs estimated at $5 million to $32 million. Management did not expect these matters to materially affect results, but outcomes remain uncertain.
- Other notable items: CNP recorded $46 million of merger transaction and integration costs in 2018; a $232 million loss on indexed debt securities was driven in part by corporate transactions involving Time Warner and TW; and the 2017 tax benefit materially distorts comparisons. CNP reported no goodwill impairment in its 2018 annual test. The auditor issued an unqualified opinion, and CNP reported effective internal control over financial reporting.
The filing does not provide clear quantified consolidated earnings guidance for 2019.
Most important facts for investors to verify
- Post-merger debt, liquidity, credit ratings and financing costs, including the use of temporary cash balances and commercial paper.
- Vectren integration progress, realized synergies, acquisition accounting and actual capital spending versus the 2019 plan.
- The outcome and rate impact of Houston Electric’s 2019 rate case, and regulators’ treatment of TCJA tax savings and excess deferred income taxes.
- Whether Energy Services mark-to-market volatility normalizes and the segment returns to profitability.
- Enable distributions, CNP’s ownership strategy and the effect of Enable’s operating performance and leverage on CNP cash flows.
- Developments in the Minnehaha Academy and other legal matters, pipeline-safety requirements, environmental liabilities and Houston Electric REP receivable collections.