CenterPoint Energy, Inc. — Q3 2009 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2009; comparisons are with the corresponding 2008 periods unless stated otherwise. CenterPoint is a utility holding company whose subsidiaries operate electric transmission and distribution, natural gas distribution, pipelines, and gas gathering and related businesses. Amounts below are in millions of dollars, except per-share data.
Financial performance and position
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Revenue | $1,576 | $2,515 | $5,982 | $8,548 |
| Operating income | $287 | $337 | $825 | $970 |
| Net income | $114 | $136 | $267 | $359 |
| Diluted EPS | $0.31 | $0.39 | $0.74 | $1.05 |
| Operating cash flow | Not separately presented for the quarter | $1,437 | $724 |
- Q3 revenue declined 37%, operating income 15%, and net income 16%. For the nine months, revenue fell 30%, operating income 15%, and net income 26%.
- The nine-month effective tax rate was 33%, versus 37% in 2008; Q3 rates were 25% and 36%, respectively. Settlement of federal tax examinations for 2004–2005 reduced uncertain-tax-position liabilities by about $42 million and accrued interest by about $9 million.
- Cash and cash equivalents were $61 at September 30, 2009, down from $167 at December 31, 2008. Current assets were $1,995 and current liabilities $2,312.
- Consolidated debt was reported as approximately $9.4 billion, including $2.4 billion of non-recourse transition bonds. Long-term debt on the balance sheet was $8,827; short-term borrowings were $40. The company reported compliance with debt covenants.
- Nine-month capital expenditures were $809, up from $632. Financing cash flow was a use of $961, versus a source of $222 in 2008. The company paid $202 in common dividends, versus $183.
Material changes and segment performance
- Management attributed the nine-month net-income decline primarily to a $145 decrease in operating income, a $38 decrease in equity earnings from unconsolidated affiliates, and a $38 increase in interest expense excluding transition-bond interest. Lower taxes and gains on marketable securities and indexed debt securities partly offset the declines.
- Electric Transmission & Distribution operating income was $450 for nine months, compared with $457. Higher transmission revenues, rate increases, advanced-metering revenues, and customer growth were largely offset by higher transmission, operating, benefit, and advanced-metering costs.
- Natural Gas Distribution operating income was $105, down from $119. Rate and margin improvements were outweighed by increased pension, labor, benefits, and customer-support costs. Nine-month gas throughput declined to 265 Bcf from 288 Bcf.
- Competitive Natural Gas Sales and Services reported no operating income for the nine months, versus $36 in 2008; Q3 was an $8 loss versus $35 income. Management cited unfavorable derivative mark-to-market results, lower margins, reduced volumes, and narrower locational spreads. Reported revenue in this segment fell sharply, in part reflecting lower commodity prices and business mix.
- Interstate Pipelines operating income declined to $194 from $227, including lower equity earnings from SESH and higher operating costs; new pipeline agreements and power-generation contracts supported results. Field Services operating income fell to $72 from $121, principally due to lower commodity prices and the absence of prior-year gains, partly offset by growth in shale-related projects.
- Q3 and nine-month reported operating-income-to-revenue ratios were approximately 18% and 14% in 2009, versus 13% and 11% in 2008. These ratios are affected by commodity-price-driven revenue changes and segment mix.
Outlook, risks, and unusual items
- Hurricane Ike recovery: Texas regulators approved recovery of $663 in storm-related costs: $643 eligible for securitization and $20 recoverable through existing transmission mechanisms. The company expected to issue restoration bonds in Q4 2009. A customer tax credit tied to deferred taxes was expected to reduce operating income by about $24 in 2010. Storm restoration costs were recorded as regulatory assets and had not reduced operating income through September 30.
- True-up litigation: The Texas Supreme Court granted review and heard argument in October 2009. If the appellate decision is not reversed or modified, CenterPoint estimated a possible additional pre-tax loss of $170–$385, plus interest. The related tax-normalization issue could also lead to repayment of tax benefits and have a material adverse effect; outcomes remain uncertain.
- Investment and funding: A gathering and treating expansion with EnCana and Shell was estimated to cost up to $325 to reach 700 MMcf/day; an optional further expansion could cost up to an additional $300. Management expected remaining 2009 cash needs to be met by operating cash flow and credit facilities, and anticipated a $137 tax refund in Q4. It estimated approximately $383 of capital expenditures for the remaining three months of 2009.
- Financing and equity: The company raised about $280 from a September stock offering and $148 through a continuous offering during the nine months, contributing to share-count growth. CenterPoint Houston issued $500 of 7.00% bonds due 2014. The board declared a $0.19-per-share quarterly dividend payable in December 2009.
- Other notable items: SESH’s decision to discontinue regulated-operations accounting resulted in non-cash charges to CenterPoint’s equity earnings. The company reported derivative fair-value liabilities and collateral exposure; a one-notch downgrade could require additional collateral under some contracts. A DOE grant award of $200 for advanced metering and intelligent-grid projects was contingent on successful negotiation.
- Key risks: Regulatory rate recovery and court outcomes; weather and natural disasters; commodity prices and supply; customer and counterparty credit, including dependence on a large retail electric provider; access to capital and credit ratings; construction costs; derivative collateral requirements; and environmental, legal, and guarantee exposures. The filing gives no formal full-year earnings guidance.
Investor verification priorities
- Track the Texas Supreme Court and regulatory decisions on the true-up and tax-normalization proceedings, including any resulting loss or tax exposure.
- Confirm the timing, terms, and proceeds of the Hurricane Ike securitization, and monitor the associated customer credit and 2010 earnings impact.
- Assess whether operating cash flow remains sustainable after working-capital movements, and review debt maturities, liquidity, covenant headroom, and credit ratings.
- Evaluate whether the EnCana/Shell project meets construction, cost, throughput, and customer-commitment expectations.
- Separate recurring operating performance from commodity-driven derivative marks, tax-settlement benefits, securities gains, and other non-recurring or non-cash items; also account for dilution from share issuance.