CenterPoint Energy, Inc. — Q3 2016 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2016. CenterPoint is a utility holding company with electric transmission and distribution, natural gas distribution, energy services, and an approximately 55.4% limited-partner interest in Enable Midstream Partners.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $1.889 billion | $1.630 billion | $5.447 billion | $5.595 billion |
| Operating income | $284 million | $265 million | $716 million | $707 million |
| Net income (loss) | $179 million | $(391) million | $331 million | $(183) million |
| Diluted EPS | $0.41 | $(0.91) | $0.76 | $(0.43) |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $1.452 billion | $1.518 billion |
| Capital expenditures | Not stated for quarter | Not stated for quarter | $1.047 billion | $1.131 billion |
Q3 revenue increased about 16%, while nine-month revenue declined about 3%. Operating income improved modestly in both comparisons. The net-income swing chiefly reflects 2015 impairment losses associated with Enable: CenterPoint recorded $73 million of equity earnings from Enable in Q3 2016 versus an $794 million equity loss in Q3 2015, and $164 million versus a $699 million loss for the nine-month periods. Marketable-security gains and ZENS-related losses also drove substantial period-to-period earnings volatility.
By segment, Q3 operating income was $257 million in Electric Transmission & Distribution, $22 million in Natural Gas Distribution, and $5 million in Energy Services. Nine-month Natural Gas Distribution operating income rose to $202 million from $176 million; Energy Services declined to $11 million from $29 million, primarily because of derivative mark-to-market results.
Margins: The filing does not provide a consolidated margin measure. Natural Gas Distribution reported operating income of $22 million on $377 million revenue in Q3 and $202 million on $1.693 billion revenue for the nine-month period.
Balance sheet, liquidity and financing
- At September 30, 2016, cash and cash equivalents were $270 million, current assets $2.529 billion and current liabilities $2.398 billion.
- Long-term debt was $7.736 billion, including $1.931 billion of securitization bonds and $5.805 billion of other long-term debt. Current liabilities also included $250 million of current maturities of other long-term debt, $410 million of current securitization bonds and $112 million of indexed debt. An additional $562 million indexed-debt derivative liability is separately presented.
- CenterPoint refinanced its revolving credit facilities to total $2.5 billion, with maturities in 2021. At September 30, commercial paper utilization was $998 million, with $13 million of letters of credit; all three borrowers were within their financial covenants. CenterPoint’s covenant debt-to-capital ratio was 55.5% against a 65% limit.
- For the first nine months, operating cash flow was $1.452 billion; investing activities used $739 million and financing activities used $707 million. Cash increased $6 million to $270 million.
- Common dividends declared were $0.2575 per share for Q3, up from $0.2475 a year earlier.
Material changes and unusual items
- The April 2016 acquisition of Continuum’s retail energy services business and natural gas wholesale assets closed for $102 million. It contributed approximately $170 million of Q3 revenue and $270 million for the nine-month period; reported operating income attributable to the acquisition was approximately $2 million for each period.
- CenterPoint invested $363 million in Enable Series A Preferred Units, replacing notes receivable of the same amount. It received $13 million of preferred-unit distributions through September 30, in addition to $223 million of distributions on Enable common and subordinated units.
- The Charter/TWC merger resulted in a $178 million payment to ZENS noteholders and a $117 million loss on indexed debt securities. The ZENS derivative liability was $562 million at quarter-end; fair-value movements can materially affect reported earnings.
- Property, plant and equipment, net, increased to $12.083 billion from $11.537 billion at year-end 2015. Total assets were essentially unchanged at $21.286 billion.
Outlook, risks and contingencies
- Management expected a 2016 annual effective tax rate of approximately 37%. No consolidated earnings or revenue guidance is provided in the supplied filing text.
- For the remaining three months of 2016, expected cash requirements included about $334 million of capital expenditures, $63 million of scheduled securitization-bond principal payments, dividends and interest. Management expected operating cash flow, credit facilities, commercial paper and Enable distributions to meet anticipated needs.
- Houston Electric’s Brazos Valley Connection was proceeding toward construction in January 2017 and completion by mid-2018. The initial estimated capital-cost range was $270–$310 million; actual costs may exceed it, including because of land, material and construction costs.
- Regulatory rate actions included approved electric distribution and transmission adjustments and natural-gas rate increases. The Minnesota $24.6 million decoupling adjustment was subject to review and approval; the Minnesota rate-case refund and final rates were expected in December 2016.
- Key risks include rate recovery and regulatory changes, severe weather and natural disasters, project cost overruns, commodity and interest-rate movements, access to capital, counterparty credit, and Enable’s operating performance and distributions. Proposed PHMSA pipeline rules could increase costs for CenterPoint and Enable.
- Contingencies include a $7 million recorded liability for Minnesota manufactured-gas-plant monitoring and remediation, with estimated possible costs of $4–$29 million. Management did not expect disclosed legal and environmental matters to have a material adverse effect. The $1.1 billion CERC guarantee of certain Enable notes was automatically released in May 2016; a separate CenterPoint guarantee of up to $50 million for Enable obligations remained.
- After quarter-end, CenterPoint announced an agreement to acquire Atmos Energy Marketing for approximately $120 million, including estimated working capital; closing was expected in early 2017, subject to approvals.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. The filing reported no material changes to the risk factors in the 2015 Form 10-K.
Investor verification priorities
- Separate recurring utility and operating performance from the large Enable impairment comparison and market-sensitive securities and ZENS gains or losses.
- Verify Enable’s distribution sustainability, CenterPoint’s equity-method exposure, and the performance and terms of the $363 million preferred-unit investment.
- Track debt maturities, commercial-paper usage, covenant headroom, and availability and cost of refinancing.
- Monitor execution, cost estimates and regulatory recovery for the Brazos Valley project, as well as the timing and final approval of pending rate adjustments.
- Confirm closing conditions, final purchase price and integration outcomes for the proposed Atmos Energy Marketing acquisition.