CenterPoint Energy, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited. Amounts are in U.S. dollars, generally millions except per-share data. CenterPoint is a utility holding company with electric transmission and distribution, natural gas distribution, pipeline, gathering and related businesses.
Financial performance and position
| Metric | Q1 2012 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $2,084 | $2,388 | Up $304 (about 15%) |
| Operating income | $338 | $332 | Down $6 |
| Net income | $147 | $147 | Unchanged |
| Diluted EPS | $0.34 | $0.34 | Unchanged |
| Operating cash flow | $424 | $533 | Up $109 |
| Capital expenditures | $264 | $271 | Up $7 |
Operating margin was approximately 13.9%, compared with 16.2% in Q1 2012, reflecting revenue growth that did not translate into higher operating income. Net income was supported by increased marketable-securities gains and lower interest expense, offset by higher taxes, a larger loss on indexed debt securities, lower operating income and reduced affiliate earnings. The effective tax rate rose to 37% from 33%; the prior-year rate benefited from an $11 million tax-liability reduction following an IRS settlement.
At March 31, cash and cash equivalents were $245 million, down from $646 million at year-end; marketable securities were $614 million. Current assets were $2.36 billion and current liabilities $3.13 billion. Long-term debt was $8.13 billion, with $1.08 billion of current debt portions and no short-term borrowings. The filing reports debt fair value of $10.15 billion against carrying value of $9.07 billion. Shareholders’ equity was $4.37 billion. Dividends declared were $0.2075 per share, versus $0.2025 in Q1 2012.
Operating cash flow increased chiefly from stronger fuel-cost recovery and lower interest paid, partly offset by less favorable receivables/payables cash flows. Investing used $274 million; financing used $660 million, primarily reflecting long-term debt repayments and the absence of the prior-year debt issuance proceeds.
Material changes and segment results
- Natural Gas Distribution: Operating income rose to $139 million from $121 million, primarily due to a return to more normal weather, with customer growth and rate increases also contributing. Throughput increased from 136 to 166 Bcf.
- Electric Transmission & Distribution: Operating income declined to $84 million from $107 million. The regulated utility component fell to $49 million from $70 million, mainly due to lower right-of-way revenue and higher operating and depreciation costs.
- Competitive Natural Gas Sales and Services: Operating income improved to $7 million from $1 million, reflecting customer and margin gains and lower fixed costs, partly offset by derivative mark-to-market charges.
- Interstate Pipelines: Operating income declined to $52 million from $60 million, as reduced geographic price differentials, lower off-system transportation revenue and weaker ancillary services weighed on results.
- Field Services: Operating income increased to $53 million from $47 million, supported by acquisitions and contract timing, partly offset by lower volumes and liquids pricing.
On May 1, 2013, after quarter-end, CenterPoint, OGE Energy and ArcLight closed the Midstream Partnership formation. CenterPoint contributed midstream businesses and held approximately 58.3% of limited-partner interests; OGE held 28.5% and ArcLight 13.2%. CenterPoint and OGE share control. The partnership borrowed $1.05 billion and repaid approximately $1.05 billion of intercompany debt owed to CERC. CenterPoint also disclosed a new Bakken crude-gathering agreement, with construction estimated to cost up to $125 million.
Outlook, risks and contingencies
Management expected remaining-2013 cash needs to include approximately $1.4 billion of capital expenditures, $286 million of transition and system-restoration bond principal payments, approximately $77 million of pension contributions, and dividends and interest. CERC’s approximately $365 million debt maturity was retired in April. Management expected the partnership debt repayment, credit facilities, commercial paper and operating cash flows to cover anticipated needs; it cautioned that future capital-market or credit availability is not assured. No specific earnings guidance is provided in the filing.
Key risks include regulatory and rate-recovery outcomes, weather, commodity prices and regional gas supply, project execution and costs, interest rates and access to capital, counterparties and customer credit, litigation, and the partnership’s performance and integration. CenterPoint Houston had $172 million of billed REP receivables at March 31; approximately 37% was owed by NRG affiliates and 10% by Energy Future Holdings affiliates. Energy Future Holdings had disclosed discussions with creditors about possible restructuring.
Other items to monitor include the Midstream Partnership guarantees (up to $100 million from CenterPoint and a maximum aggregate $157.2 million under CERC guarantees, with efforts to replace or release them), CERC’s potential $70 million maximum exposure under legacy transportation guarantees, and the pending FERC rate case for MRT. CERC recorded a $13 million liability for Minnesota manufactured-gas-plant remediation; estimated possible costs ranged from $6 million to $41 million. Management did not expect the described litigation and environmental matters to have a material adverse effect. The filing states disclosure controls were effective and there was no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the Midstream Partnership delivers the expected operating results and whether CenterPoint’s guarantees are replaced or released as planned.
- REP receivable collection and credit developments, particularly exposures to NRG and Energy Future Holdings affiliates.
- Progress on the MRT FERC rate case, including the requested cost recovery and regulatory compliance surcharge.
- Execution of the 2013 capital program, debt maturities and bond payments, and continued access to committed liquidity.
- Drivers of the lower electric and interstate-pipeline operating income, and sensitivity of reported earnings to marketable securities and indexed debt securities.