CenterPoint Energy, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless otherwise noted. 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. Unaudited interim statements reflect normal recurring adjustments.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $2,433 million | $3,163 million | Down 23% |
| Operating income | $256 million | $295 million | Down 13% |
| Net income | $131 million | $185 million | Down 29% |
| Diluted EPS | $0.30 | $0.43 | Down $0.13 |
| Operating margin | 10.5% | 9.3% | Up |
| Net margin | 5.4% | 5.9% | Down |
| Operating cash flow | $666 million | $380 million | Up $286 million |
| Capital expenditures | $341 million | $301 million | Up $40 million |
| Cash dividends paid | $106 million | $102 million | Up $4 million |
Lower revenue largely reflected reduced natural-gas costs and lower Energy Services sales amid lower commodity prices. Net income fell primarily because equity earnings from unconsolidated affiliates declined $39 million, operating income declined $39 million, and the gain on indexed debt securities was $19 million lower. Lower tax expense and smaller marketable-securities losses partly offset these effects. The effective tax rate was 37% in both periods.
Segment operating income was $96 million for Electric Transmission & Distribution ($105 million in 2014), $146 million for Natural Gas Distribution ($162 million), and $13 million for Energy Services ($26 million). Midstream equity earnings were $52 million, down from $91 million; Enable contributed $52 million versus $88 million. Milder weather reduced usage in both regulated businesses. Energy Services earnings also declined due to an $8 million year-over-year change in derivative mark-to-market results and fewer weather-related optimization opportunities.
Cash, debt, and liquidity
Operating cash flow increased chiefly due to income-tax refunds, fuel-cost recovery, gas-storage inventory and regulatory working-capital changes. Investing cash outflow was $337 million; financing cash outflow was $393 million. Cash decreased $64 million during the quarter to $234 million. Operating cash flow less capital expenditures was approximately $325 million.
At March 31, current assets were $2.691 billion and current liabilities were $3.187 billion, a working-capital deficit of $496 million. Balance-sheet long-term debt was $7.767 billion, with current debt classifications including $380 million of transition and restoration bonds, $154 million of indexed debt, and $271 million of other long-term debt due within a year. Short-term borrowings were zero. The filing separately reports $436 million of commercial paper and $10 million of letters of credit outstanding against $2.1 billion of revolving facilities; the companies were in compliance with facility covenants. Debt carrying amount and fair value are not directly comparable: the filing reports debt carrying amount of $8.418 billion and fair value of $9.275 billion in its financial-instruments disclosure.
For the remaining nine months of 2015, CenterPoint anticipated approximately $1.2 billion of capital expenditures, $234 million of scheduled transition and restoration bond principal payments, $269 million of maturing senior notes and pollution-control bonds, and approximately $43 million of pension contributions, in addition to dividends and interest. Management expected available credit facilities, commercial paper, debt issuance, operating cash flow, and Enable distributions to cover anticipated cash needs.
Material developments, outlook, and risks
- Enable investment valuation: Enable’s March 31 unit price was $16.40 versus CenterPoint’s $19.24 carrying value per unit, an aggregate market-price shortfall of approximately $665 million. CenterPoint concluded the decline was temporary and recorded no impairment, citing its ability and intent to hold to recovery, Enable’s investment-grade rating, and planned expansion projects.
- Rates and projects: CenterPoint Houston filed for a $16.7 million annual distribution-rate increase, proposed to take effect September 2015. It sought approval for the Brazos Valley Connection transmission project, estimated at $276–$383 million, with a regulatory decision expected in Q4 2015 and completion targeted by mid-2018. The Texas Coast gas business requested a $6.8 million annual rate increase; a decision was expected in Q4 2015.
- Enable distributions: Enable declared a $0.3125-per-unit distribution for Q1 2015. CenterPoint expected to receive approximately $73 million in Q2.
- Unusual items: Q1 included a $9 million non-cash pension settlement charge; management estimated about $1 million of additional settlement costs for the rest of 2015. CenterPoint declared a $0.2475-per-share quarterly dividend after quarter-end.
- Contingencies: CenterPoint disclosed guarantees of up to $100 million for certain Enable obligations and a $1.1 billion guarantee of collection on Enable senior notes, subject to automatic release on May 1, 2016. A gas-market manipulation case returned to district court after an April 21, 2015 Supreme Court decision; CenterPoint said it would continue defending the case and did not expect a material adverse effect. The filing also describes environmental matters, other proceedings, and potential collateral requirements.
- Key risks: Results and liquidity may be affected by weather, commodity prices, regulation and rate recovery, Enable’s performance and valuation, capital-market access and credit ratings, counterparty obligations, project execution, litigation, and natural disasters. Management reported no material change to the risk factors in its 2014 Form 10-K. No earnings guidance was provided.
Investor verification points
- Track Enable’s unit price, operating performance, distributions, and the basis for CenterPoint’s no-impairment conclusion.
- Check outcomes and timing for the pending rate filings and Brazos Valley Connection approval, cost, and construction schedule.
- Monitor whether planned capital spending, maturities, pension contributions, and dividends are funded as expected, and confirm liquidity and covenant headroom.
- Assess the effects of milder weather, lower commodity prices, and Enable earnings on segment results and cash generation.
- Review developments in the gas-market litigation, guarantee exposures, and any collateral demands tied to credit ratings or derivatives.