CENTERPOINT ENERGY INC quarterly report, Q2 FY2019

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CenterPoint Energy, Inc. — Q2 2019 Form 10-Q

Business context and reporting period

Unaudited results cover the three and six months ended June 30, 2019. CenterPoint Energy is a utility holding company with electric and natural gas utilities, energy services, infrastructure services, and an investment in Enable Midstream. On February 1, 2019, it acquired Vectren for approximately $6.0 billion in cash. Accordingly, 2019 results include Vectren only from the acquisition date; year-over-year comparisons are not fully comparable.

Key financial results

  • Q2 revenue: $2.798 billion, up from $2.186 billion in Q2 2018. Operating income: $287 million versus $187 million. Net income: $195 million versus a $75 million loss; income available to common shareholders was $165 million, or $0.33 diluted EPS, versus a $75 million loss, or $(0.17) per share.
  • First-half revenue: $6.329 billion versus $5.341 billion. Operating income: $532 million versus $438 million. Net income: $364 million versus $90 million; income available to common shareholders was $305 million, or $0.61 diluted EPS, versus $90 million, or $0.21 per share.
  • Cash flow, first half: Operating cash flow was $574 million, down from $1.093 billion. Capital expenditures were $1.169 billion; acquisition spending, net of cash acquired, was $5.987 billion. Investing activities used $7.149 billion and financing activities provided $2.629 billion.
  • Cash and liquidity: Cash and cash equivalents were $271 million at June 30, versus $4.231 billion at year-end; cash, cash equivalents and restricted cash totaled $332 million. Current assets were $3.326 billion and current liabilities $2.996 billion. The company had $5.1 billion of revolving credit facilities and was in compliance with debt covenants.
  • Debt: Long-term debt was $14.121 billion, compared with $8.682 billion at year-end; the filing reports $14.587 billion of long-term debt including current maturities. Commercial paper outstanding was $2.607 billion, with an additional $135 million of revolving-facility loans reported at June 30.
  • Margins and earnings quality: Operating income rose, but reported earnings also reflected volatile securities marks: Q2 included a $64 million gain on marketable securities and a $68 million loss on indexed debt securities. The comparable 2018 quarter had a $22 million securities gain and a $254 million indexed-debt loss.

Material changes versus the prior period

  • The Vectren acquisition expanded the business and added Indiana electric, infrastructure services, and additional natural gas operations. Preliminary purchase accounting included $4.306 billion of goodwill; the final allocation remained incomplete.
  • Q2 common earnings improved substantially, primarily due to the smaller indexed-debt securities loss, higher operating income, increased marketable-securities gains, and higher Enable equity earnings. Higher interest expense and preferred dividends partly offset these items.
  • First-half operating income increased, with contributions from natural gas distribution, energy services, and the acquired operations. Energy Services’ first-half operating income was $62 million versus an $11 million loss, driven largely by mark-to-market accounting; management also cited fewer gas-margin optimization opportunities than in 2018.
  • Houston Electric’s first-half net income declined to $127 million from $153 million. Management cited lower usage under more normal weather, lower equity returns following transition-charge true-ups, higher expenses, and lower TCJA-related revenue, partly offset by transmission revenue, customer growth, and rate increases.
  • First-half operating cash flow fell, including working-capital effects. The company’s cash balance also reflects substantial acquisition spending and related financing activity.

Outlook, risks and unusual items

  • Outlook and funding: No consolidated earnings or revenue guidance is stated in the provided filing text. For the remaining six months of 2019, estimated capital expenditures were $1.370 billion for CenterPoint Energy, including $546 million for Houston Electric and $449 million for CERC. Management expected cash needs to be funded through operating cash flow, borrowings, commercial paper, debt issuance and Enable distributions; financing may not be available on acceptable terms.
  • Regulation: Houston Electric’s pending base-rate case sought approximately $149 million of retail rate increases, including a proposed rider, plus approximately $5 million for wholesale transmission service. A final order was expected in Q4 2019. Rate-case outcomes and timely cost recovery remain important uncertainties.
  • Environmental and capital exposure: Indiana Electric recorded an approximately $90 million asset-retirement obligation for coal-ash pond closure and anticipated a further $60–$80 million of equipment purchases for the A.B. Brown closure project. Closure timing, regulatory requirements, cost recovery and insurance proceeds remain uncertain.
  • Acquisition-related items: First-half expenses included $61 million of severance and $37 million of accelerated share-award costs; integration costs were $48 million. Purchase-price allocation and acquired asset valuations remained preliminary.
  • Other risks: The filing highlights exposure to weather, commodity and interest-rate movements, Enable distributions and performance, regulatory decisions, credit-rating changes, counterparty and REP collections, litigation, environmental rules, and access to capital. Some Vectren-related utility ratings carried negative Moody’s outlooks as of July 26, 2019.
  • Contingencies: The filing discusses litigation and environmental matters, including the Minnehaha Academy incident and legacy manufactured-gas-plant remediation. Management did not expect these matters to have a material adverse effect, while acknowledging that outcomes are uncertain.

Most important facts for investors to verify

  • How the final Vectren purchase-price allocation, goodwill and integration costs compare with current preliminary amounts.
  • The outcome and timing of Houston Electric’s rate case, and the recoverability of planned capital investment and environmental costs.
  • Whether operating cash flow and available financing support the company’s capital program, debt service and commercial-paper refinancing needs.
  • The extent to which earnings depend on marketable-securities and indexed-debt marks, Energy Services mark-to-market results, and Enable distributions.
  • Whether acquired-business results, customer growth and cost savings develop as expected, and whether credit ratings or collateral requirements change.