CenterPoint Energy, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. CenterPoint is a utility holding company with electric transmission and distribution, natural gas distribution, energy services, and an investment in Enable Midstream Partners. Quarterly results are affected by seasonality, weather, commodity prices, and spending timing.
Financial results
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $3.155 billion | $2.735 billion |
| Operating income | $251 million | $291 million |
| Net income | $165 million | $192 million |
| Diluted EPS | $0.38 | $0.44 |
| Operating cash flow | $484 million | $317 million |
| Capital expenditures | $362 million | $312 million |
- Operating margin was approximately 8.0%, down from approximately 10.6% a year earlier, reflecting lower operating income despite higher revenue.
- Cash and cash equivalents were $219 million at March 31; cash, cash equivalents and restricted cash totaled $257 million. Current assets were $3.049 billion and current liabilities $2.616 billion.
- Carrying amount of long-term debt was $8.670 billion. Revolving credit facilities totaled $2.9 billion, with $915 million of commercial paper outstanding at March 31; the company reported compliance with debt covenants.
- Quarter-end shareholders’ equity was $4.857 billion. CenterPoint received $83 million in Enable distributions during the quarter and reported $69 million of equity earnings from Enable.
Changes versus prior year
- Revenue rose $420 million, while operating income declined $40 million and net income fell $27 million. The effective tax rate declined to 22% from 36%, primarily because of the Tax Cuts and Jobs Act (TCJA); the lower tax expense partly offset weaker pre-tax results.
- Electric Transmission & Distribution operating income increased to $115 million from $86 million, supported by rate-related revenues, higher usage, and customer growth.
- Natural Gas Distribution operating income declined to $156 million from $168 million, despite higher throughput, amid increased operating costs and TCJA-related rate reductions.
- Energy Services swung to a $26 million operating loss from $35 million of income. Management attributed the $61 million decline primarily to an adverse $95 million year-over-year change in derivative mark-to-market impacts, partly offset by improved margins and volumes.
- Operating cash flow increased $167 million, primarily due to working-capital movements. Investing cash use was $331 million versus $372 million; financing cash use increased to $192 million from $36 million.
Outlook, developments and risks
- Vectren transaction: On April 21, 2018, CenterPoint agreed to acquire Vectren for approximately $6 billion in cash, subject to shareholder and regulatory approvals and other conditions. CenterPoint obtained a $5 billion, 364-day bridge facility commitment and expects a combination of debt, equity-linked and equity financing. The parties targeted closing in Q1 2019. Specified termination circumstances could trigger a $210 million fee payable by CenterPoint or a $150 million fee payable by Vectren.
- For the remaining nine months of 2018, management anticipated approximately $1.3 billion in capital expenditures, $50 million of maturing pollution-control bonds and $269 million of scheduled securitization-bond principal payments. Expected funding sources include operating cash flow, Enable distributions, commercial paper, credit facilities and long-term debt.
- After quarter-end, the board declared a regular quarterly dividend of $0.2775 per share, payable June 14, 2018. No dividend was declared for Q1 in the income statement; the filing does not explain the timing difference there.
- Houston Electric completed and energized the Brazos Valley Connection in March; final project costs were approximately $285 million, within the approved estimated range. Recovery remains subject to regulatory processes.
- TCJA-related tax savings are being addressed through regulatory proceedings and rate adjustments; timing and treatment vary by jurisdiction. A proposed FERC policy and rulemaking could adversely affect rates Enable may charge, but outcomes were uncertain.
- Credit agencies placed or revised certain ratings outlooks negatively following the Vectren announcement. Potential risks include financing costs and availability, collateral requirements, merger approvals and integration, weather and commodity volatility, regulatory recovery, and Enable’s operating performance and distributions.
- Contingencies include litigation related to a 2017 Minnesota gas explosion, environmental remediation, and gas-market litigation for which CenterPoint relies on indemnification from GenOn, then in bankruptcy proceedings. Management stated it did not expect these matters to have a material adverse effect, while noting outcomes remain uncertain.
- Unusual items included an $11 million ZENS-related loss tied to the Meredith acquisition of Time and a $43 million year-over-year decline in marketable-securities gains. The Energy Services segment’s derivative mark-to-market results were also a major source of earnings volatility.
Important facts for investors to verify
- Progress, approvals, financing terms, costs and expected benefits of the proposed Vectren acquisition, including implications for leverage and credit ratings.
- Whether Energy Services mark-to-market losses reverse or are offset by realized margins, and the segment’s underlying performance excluding timing effects.
- Regulatory decisions on TCJA rate reductions, excess deferred income taxes, project-cost recovery and proposed rate increases.
- Enable’s financial performance, distributions, and exposure to the FERC tax-allowance policy changes.
- Liquidity and refinancing needs, collateral exposure, and recovery of costs from major projects or weather events.