CenterPoint Energy, Inc. — Q3 2013 Form 10-Q
Business context and period. Unaudited results cover the three and nine months ended September 30, 2013, compared with the same 2012 periods. CenterPoint operates electric transmission and distribution and natural gas distribution businesses, and sells natural gas competitively. On May 1, 2013, it contributed substantially all former interstate pipeline and field-services operations to Enable Midstream Partners, retaining an approximately 58.3% limited-partner interest accounted for under the equity method.
Financial performance
| Metric | Q3 2012 | Q3 2013 | 9M 2012 | 9M 2013 |
|---|---|---|---|---|
| Revenue | $1.705B | $1.640B | $5.314B | $5.922B |
| Operating income | $88M | $244M | $728M | $799M |
| Net income | $10M | $151M | $283M | $198M |
| Diluted EPS | $0.02 | $0.35 | $0.66 | $0.46 |
| Operating margin, approximate | 5.2% | 14.9% | 13.7% | 13.5% |
For the nine months, operating cash flow was $1.132B versus $1.379B; capital expenditures were $912M versus $818M. Investing activities used $926M and financing activities used $633M in 2013. Cash and cash equivalents were $219M at September 30, down from $646M at year-end 2012; marketable securities were $689M.
At September 30, long-term debt was $7.758B, with current portions of transition/system-restoration bonds, indexed debt and other long-term debt totaling $553M, plus $70M of short-term borrowings. Total current assets were $2.319B and current liabilities $2.595B. Revolving credit facilities totaled $2.1B, with no loans outstanding and $10M of letters of credit at September 30.
Material changes versus prior periods
- Q3 revenue fell 4%, while nine-month revenue rose 11%. Q3 operating income increased $156M; nine-month operating income increased $71M.
- Q3 net income increased $141M, reflecting higher operating income and Enable-related equity earnings, lower interest expense and tax expense, partly offset by the absence of the $136M Waskom step-acquisition gain recorded in 2012.
- Nine-month net income declined $85M. The comparison included a $136M Waskom gain in 2012 and a $225M tax expense in 2013 related to the book-tax basis difference from Enable’s formation. The 2012 period also included a $252M goodwill impairment charge.
- Enable contributed $77M of equity earnings in Q3 and $110M from May through September. CenterPoint received approximately $36M in distributions for May and June and expected approximately $70M for Q3.
- Segment reporting changed after Enable’s formation. Former interstate pipeline and field-services results are included only through April 2013; subsequent equity earnings are reported in Midstream Investments. Comparisons for those former segments are therefore not like-for-like.
Outlook, risks and unusual items
- Management gave no consolidated earnings guidance in the supplied filing text. It expected the remaining three months of 2013 to require approximately $345M of capital expenditures, $59M of scheduled bond principal payments, dividends, interest and the October redemption of approximately $59M of pollution-control bonds. Management expected available cash, operating cash flow, credit facilities and Enable distributions to cover anticipated needs.
- September amendments extended the three revolving credit facilities’ termination dates to September 2018 and reduced CERC’s facility to $600M. CenterPoint’s debt-to-capitalization covenant is generally 65%, with a temporary 70% threshold under specified major-disaster conditions.
- Key exposures include weather and commodity-price movements, regulatory rate recovery, access to capital and credit ratings, and counterparties’ ability to pay. CenterPoint Houston had $229M of billed REP receivables; approximately 41% was owed by NRG affiliates and 7% by Energy Future Holdings affiliates. The filing highlights Energy Future Holdings’ creditor discussions as a potential concern.
- A Texas rate-adjustment case could result in refunds if the company loses; approximately $16M had been billed under the challenged COSA mechanisms. Other notable proceedings include a Minneapolis gas-franchise renewal and an ongoing Minnesota rate case. The filing states that management did not expect the described litigation and environmental matters to have a material adverse effect, while noting outcomes are uncertain.
- CenterPoint guaranteed up to $100M of certain Enable obligations and provided a subordinated guarantee of Enable’s $1.05B term loan; separate CERC midstream guarantees had a maximum aggregate amount of $53.2M. A legacy GenOn-related guarantee had a maximum potential payout of approximately $62M, with no security required under the latest calculation.
- The indexed-debt derivative was a $382M liability at quarter-end and generated a $120M loss for the first nine months. The nine-month effective tax rate was 67%, substantially affected by Enable-related tax accounting. The annual goodwill impairment test in Q3 found no impairment.
Important facts for investors to verify
- Enable’s operating performance, distributions, planned IPO timing and the financial or liquidity impact of CenterPoint’s guarantees and retained investment.
- Whether REP receivables, particularly amounts due from NRG and Energy Future Holdings affiliates, are collected on time and whether exposure changes.
- Results of the Texas COSA appeal, Minneapolis franchise negotiations and Minnesota rate proceeding, including any effects on rates or refunds.
- Cash-flow generation, capital spending, debt maturities, compliance with credit covenants and continued access to financing.
- How much reported earnings depend on nonrecurring tax, derivative and other valuation items, and whether segment comparisons remain affected by the Enable transaction.