CenterPoint Energy, Inc. — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010. CenterPoint is a utility holding company with electric transmission and distribution, natural gas distribution, pipeline, and gathering and processing operations. Financial amounts below are in millions except per-share data.
Financial results and liquidity
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $1,908 | $1,576 | $6,687 | $5,982 |
| Operating income | $327 | $287 | $947 | $825 |
| Net income | $123 | $114 | $318 | $267 |
| Diluted EPS | $0.29 | $0.31 | $0.78 | $0.74 |
| Operating margin | 17.1% | 18.2% | 14.2% | 13.8% |
- Quarterly net income increased $9 million, but diluted EPS declined as weighted-average diluted shares rose to 425 million from 372 million, primarily reflecting share issuance. Nine-month net income and diluted EPS both increased.
- Nine-month operating cash flow was $983 million, down from $1,437 million. Capital expenditures were $1,053 million versus $809 million, leaving operating cash flow less capital expenditures of negative $70 million. Investing cash use was $1,014 million; financing cash use was $610 million.
- Cash and equivalents were $99 million at September 30, compared with $740 million at year-end 2009. Current assets of $2,143 million were below current liabilities of $2,881 million.
- Long-term debt was $8,267 million, compared with $9,119 million at year-end; this excludes current debt and short-term borrowings. Short-term borrowings were $73 million. The company reported compliance with debt covenants and no borrowings under its revolving credit facilities at September 30.
- Quarterly dividends declared were $0.195 per share, compared with $0.19 a year earlier. The nine-month declared dividend was $0.585 per share.
Material changes and operating performance
- Nine-month operating income rose $122 million. Natural Gas Distribution improved by $40 million, Electric Transmission & Distribution by $27 million, Field Services by $22 million, and Interstate Pipelines by $13 million; Competitive Natural Gas Sales and Services improved from break-even to $16 million.
- Quarterly operating income increased $40 million. Field Services gained $17 million and Competitive Natural Gas Sales and Services swung to $7 million of income from an $8 million loss. Electric Transmission & Distribution income declined $6 million.
- Revenue growth partly reflected higher natural-gas costs and increased sales activity; revenue growth therefore exceeded operating-income growth. Quarterly operating margin was lower year over year.
- Cash flow declined mainly because of gas-storage inventory movements, higher tax payments and margin deposits, and lower cash provided by receivables/payables. Increased capital spending was primarily related to Field Services projects.
Outlook, management commentary, risks and unusual items
- No consolidated earnings guidance is provided in the supplied filing text. Management expected cash on hand, operating cash flow and credit facilities to meet anticipated cash needs for the remainder of 2010, including approximately $415 million of remaining-year capital expenditures, dividends and interest.
- CenterPoint Houston sought annual increases of $92 million in retail base rates and $18 million for wholesale transmission customers. Hearings concluded October 15, 2010; a decision was expected as early as late 2010. The filing also describes requests concerning advanced-metering costs and recovery of energy-efficiency costs.
- The Texas true-up appeal remained unresolved. If the appellate decision were not reversed or modified, the company anticipated a possible additional pre-tax loss of $180 million to $410 million, plus interest. A related tax-normalization outcome could also create material tax consequences.
- The IRS proposed disallowing a $603 million Hurricane Ike casualty-loss deduction; CenterPoint appealed and said it had considered the issue in its uncertain-tax-position accrual. Unrecognized tax benefits were $223 million at September 30; the company said the balance could decrease by as much as $203 million or increase by as much as $17 million over the following 12 months.
- Potential liquidity exposures include collateral demands tied to credit downgrades, commodity derivatives and pipeline contracts. CERC’s guarantees of certain RRI-related transportation obligations had an $86 million present value; required security was under discussion, and collateral could prove insufficient if RRI failed to perform.
- Major gathering-system expansions require further investment: Magnolia had up to $31 million remaining on its initial expansion and an estimated $60 million for further capacity; Olympia had up to $190 million remaining on its 600 MMcf/day project. Both systems’ planned capacity was expected in service in Q1 2011.
- Unusual comparability items included a $21 million 2010 tax expense from healthcare-law changes, while 2009 benefited from tax-examination settlements and related interest reductions. Q3 2010 competitive gas results included favorable derivative mark-to-market effects, partly offset by a $6 million inventory write-down.
- Subsequent events: on October 22, 2010, the Texas Supreme Court affirmed the CTC order, with no reported financial impact. The board declared a $0.195 dividend payable December 10, and Field Services completed a sale of non-strategic gathering assets with an approximately $20 million gain.
Key facts investors should verify
- Progress and outcome of the Texas true-up appeal, tax-normalization proceedings, and CenterPoint Houston rate case.
- Cash conversion and funding needs as capital spending continues, including completion costs and returns from Magnolia and Olympia.
- Effects of increased share count on per-share earnings and future capital needs.
- Resolution of the IRS Hurricane Ike deduction challenge and movement in uncertain tax benefits.
- Collateral and guarantee exposure, including counterparties’ ability to perform and any impact of credit-rating changes.
- Whether the stated seasonal, regulatory and weather-related factors materially affect full-year results; management cautions that interim results are not necessarily indicative of the full year.