CenterPoint Energy, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; unaudited. CenterPoint is a utility holding company with electric transmission and distribution, natural gas distribution, pipeline, gathering and related businesses.
Financial performance and liquidity
| Metric | Q1 2011 | Q1 2012 |
|---|---|---|
| Revenue | $2.587 billion | $2.084 billion |
| Operating income | $364 million | $338 million |
| Net income | $148 million | $147 million |
| Diluted EPS | $0.35 | $0.34 |
| Operating cash flow | $627 million | $424 million |
| Capital expenditures | $333 million | $264 million |
- Operating margin was approximately 16.2% versus 14.1%; net income was nearly flat despite lower revenue and operating income.
- Cash and cash equivalents were $1.096 billion at March 31, up from $220 million at year-end. Investing activities used $292 million and financing activities provided $744 million.
- Long-term debt was $9.005 billion, with $1.009 billion of current debt portions and $9 million of short-term borrowings. The company issued $1.695 billion of transition bonds in January; these are repaid through customer charges and secured by transition property, not the general credit of CenterPoint.
- Revolving credit facilities totaled $2.45 billion; utilization at March 31 consisted of $17 million in letters of credit, with no loans or commercial paper outstanding.
- Quarterly dividend declared was $0.2025 per share, versus $0.1975 a year earlier.
Changes and management commentary
- Revenue declined about 19%, primarily reflecting lower natural gas costs and lower gas throughput. Operating income fell $26 million; management attributed the $1 million net-income decline mainly to lower operating income and a larger indexed-debt securities loss, partly offset by lower tax expense and higher marketable-securities gains.
- Natural Gas Distribution operating income decreased $21 million, mainly due to warmer winter weather and lower throughput. Competitive Natural Gas Sales and Services income declined from $10 million to $1 million, including a $4 million inventory write-down and compressed margins.
- Interstate Pipelines income fell from $76 million to $60 million, including effects of an expired backhaul contract and higher operating costs. Field Services improved from $36 million to $47 million on higher gathering volumes and contracted commitments. Electric Transmission and Distribution improved from $101 million to $107 million.
- Operating cash flow was down $203 million year over year, reflecting lower tax refunds and fuel-cost recovery, among other working-capital changes. Financing cash flow benefited from debt issuance.
- The effective tax rate declined to 33% from 37%, principally due to a $10 million reduction in uncertain tax liabilities following an IRS settlement for tax years 2006 and 2007.
Outlook, risks and contingencies
- Management expected cash on hand and anticipated operating cash flows to meet cash needs for the remaining nine months of 2012. Planned requirements included about $1.0 billion of capital expenditures, $219 million of scheduled transition and system restoration bond principal, and approximately $122 million of pension contributions.
- Management expects infrastructure investment focused on reliability, safety and system expansion. No specific earnings guidance is provided in the filing.
- Key sensitivities include regulatory and rate-recovery outcomes, weather, natural gas prices and supply, customer demand, construction execution, interest rates, access to capital, credit ratings, counterparties and customer collections, pension performance, and severe weather or other disruptions.
- Potential exposures include an $86 million maximum undiscounted guarantee for certain gas transportation demand charges through 2018; GenOn had provided $28 million of collateral. Minnesota manufactured-gas-site remediation accruals were $13 million, with estimated possible costs of $6 million to $41 million. Management stated it did not expect the described litigation and environmental matters to have a material adverse effect.
- Credit-rating declines could increase financing costs or collateral needs. CERC estimated it might need to provide up to $172 million of collateral under pipeline contracts if ratings fell below applicable thresholds. A hypothetical ZENS exchange on March 31 could have triggered approximately $411 million of deferred taxes payable in 2012.
- The company reported no material changes to the risk factors in its 2011 Form 10-K. Disclosure controls were considered effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether warmer-weather effects and weak competitive-gas margins persist, and how segment earnings respond to weather normalization and customer growth.
- Progress and regulatory recovery of planned capital investment, rate cases and infrastructure program costs.
- Debt maturities, transition-bond servicing, available liquidity and covenant compliance; assess the effect of financing and debt classification on leverage.
- Actual 2012 capital spending, pension contributions and operating cash generation against management’s expectations.
- Developments in tax examinations, regulatory proceedings, environmental remediation and the GenOn-backed guarantee exposure.