Business context and reporting period
CenterPoint Energy, Inc. filed this unaudited combined Form 10-Q for the quarter and six months ended June 30, 2018. It covers CenterPoint Energy and two separately reporting subsidiaries: Houston Electric, an electric transmission and distribution utility, and CERC, whose businesses include natural gas distribution, energy services and an investment in Enable Midstream Partners.
Unless noted otherwise, amounts below are in millions of dollars. The filing’s income and cash-flow comparisons are year over year; balance-sheet comparisons are against December 31, 2017.
Key financial results
| CenterPoint Energy consolidated | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $2,186 | $2,143 | $5,341 | $4,878 |
| Operating income | $187 | $240 | $438 | $531 |
| Net income (loss) | $(75) | $135 | $90 | $327 |
| Diluted EPS | $(0.17) | $0.31 | $0.21 | $0.75 |
| Operating margin | 8.6% | 11.2% | 8.2% | 10.9% |
Q2 revenue rose about 2%, while six-month revenue rose about 9%. Operating income declined about 22% in Q2 and 18% for the six-month period. The Q2 net loss chiefly reflects a $254 million loss on indexed debt securities related to ZENS; the comparable six-month loss was $272 million. These fair-value losses substantially affected reported earnings.
Operating cash flow was $1,093 for the first six months, versus $677 in 2017. Capital expenditures were $697, compared with $649. Investing cash outflow was $267, while financing cash outflow was $756. Cash, cash equivalents and restricted cash ended the period at $366, versus $296 at year-end 2017.
At June 30, consolidated current assets were $2,701 and current liabilities $2,842. Long-term debt, net, was $7,760, down from $8,195 at year-end; the filing separately reports $446 of current securitization debt and $50 of other current debt. Short-term borrowings were zero. Debt figures should not be combined with the separately reported indexed-debt and ZENS-related balances without reviewing the filing’s classifications.
Material changes and business drivers
- Electric transmission and distribution: Operating income increased to $181 in Q2 from $171 and to $296 for six months from $257. Drivers included rate recovery, higher equity return, customer growth and usage; increases were partly offset by higher operating costs and lower customer revenues reflecting the Tax Cuts and Jobs Act (TCJA).
- Natural gas distribution: Operating income fell to $7 in Q2 from $42 and to $163 for six months from $210. The filing cites timing of weather-related regulatory accruals, higher labor and operating costs, and TCJA-related rate reductions, partly offset by rate increases and customer growth.
- Energy services: Operating income was $15 in Q2 versus $16; the six-month result was an $11 loss versus $51 income. Management attributed the year-to-date decline principally to a $93 adverse change in derivative mark-to-market results, partly offset by improved customer volumes and margins.
- Interest and taxes: Higher debt and Bridge Facility fees increased interest expense. The TCJA reduced the federal corporate income tax rate from 35% to 21%; CenterPoint Energy’s effective tax rate was 15% for Q2 and 27% for six months, compared with 36% in both 2017 periods.
- CenterPoint Energy declared a Q2 dividend of $0.2775 per share, compared with $0.2675 in Q2 2017.
Outlook, transactions, risks and contingencies
- Vectren acquisition: CenterPoint Energy agreed to acquire Vectren for approximately $6 billion in cash, or $72 per Vectren share. Management continued to expect closing in Q1 2019, subject to shareholder, regulatory and other approvals. Financing is expected to combine debt, equity-linked and equity issuances; Vectren debt will also be assumed. The merger agreement includes specified termination fees.
- Funding and capital needs: Estimated capital expenditures for the second half of 2018 were $972 for CenterPoint Energy, including $532 for Houston Electric and $407 for CERC. The filing says expected needs will be funded through operations, credit facilities, debt, commercial paper and Enable distributions, among other potential sources. A CenterPoint revolving facility increase from $1.7 billion to $3.3 billion is conditional on merger-related events. At June 30, aggregate facilities were $2.9 billion, with $565 million of commercial paper and $11 million of letters of credit utilized; the registrants reported compliance with financial covenants.
- Tax outlook: Management expected CenterPoint Energy’s 2018 annual effective tax rate to be approximately 23%. Tax savings and excess deferred income taxes are subject to regulatory treatment and may be returned to customers through rates.
- Projects and regulation: Houston Electric completed the Brazos Valley Connection project at a final cost of approximately $285 million and received interim cost recovery approval in July. The proposed Freeport transmission project’s estimated cost increased to as much as $630 million; approval and recovery remain subject to regulatory review.
- ZENS cash obligation: The AT&T/TW transaction generated $382 million payable to ZENS noteholders; CenterPoint Energy reported paying this amount in July 2018. The remaining contingent ZENS principal was $484 million at June 30. The associated securities and derivative valuation produced substantial reported earnings volatility.
- Risks and contingencies: Key exposures include the Vectren transaction and financing, Enable’s performance and distributions, regulatory rate recovery, commodity and weather variability, interest rates and credit ratings, REP customer collections, capital-market access, severe weather, litigation and environmental matters. The filing describes litigation related to the Minnehaha Academy gas explosion and a pending appeal in a gas-market case; management did not expect the disclosed matters to have a material adverse effect, while noting uncertainty where applicable. Recorded Minnesota manufactured-gas-plant liabilities were $7 million, with estimated possible remediation costs of $4 million to $30 million.
Important facts for investors to verify
- How much of the earnings decline is attributable to ZENS fair-value accounting versus recurring operating performance, and the resulting cash and tax consequences.
- Vectren merger approvals, timing, final financing mix, assumed debt and potential impact on leverage, ratings and shareholder dilution.
- Progress on utility rate cases and TCJA-related customer refunds or rate adjustments, including recovery of project and storm-restoration costs.
- Whether Energy Services’ mark-to-market volatility reverses or persists, and the implications of Enable’s operating performance and cash distributions.
- Liquidity and refinancing needs, capital spending execution, and the effect of credit-rating changes or collateral calls.