Business Context and Reporting Period
This Form 8-K, filed on August 12, 2019, by CenterPoint Energy, Inc. (CNP), provides additional disclosure regarding the business, properties, and regulations of Vectren Corporation following its acquisition by CenterPoint Energy on February 1, 2019, for approximately $6 billion in cash. The report details the integration of Vectren's utility operations in Indiana and Ohio into CenterPoint Energy's segments, specifically Natural Gas Distribution and the newly formed Indiana Electric Integrated segment. The data presented covers the period from the merger date through June 30, 2019, with comparative data for the full year ended December 31, 2018.
Key Financial Metrics and Operational Data
Revenue and Throughput
- Natural Gas Distribution (Indiana & Ohio): Revenues for the five-month period (Feb 1 – June 30, 2019) were $351 million. For the full year 2018, revenues were $857.8 million. Total gas throughput was 153.4 million dekatherms (MMDth) for the six months ended June 30, 2019, compared to 268.0 MMDth for 2018.
- Indiana Electric: Revenues for the five-month period (Feb 1 – June 30, 2019) were $223 million. For the full year 2018, revenues were $582.5 million. Retail electricity sales totaled 2,254.0 GWh for the six months ended June 30, 2019.
- Infrastructure Services: Revenues for the five-month period (Feb 1 – June 30, 2019) were $472 million, compared to $966 million for the full year 2018.
- Energy Systems Group (ESG): Revenues for the five-month period (Feb 1 – June 30, 2019) were $116 million, compared to $291 million for the full year 2018. ESG backlog was $314 million as of June 30, 2019.
Costs and Margins
- Natural Gas Cost: Average cost of gas purchased for Indiana and Ohio operations was $3.53 per dekatherm for the six months ended June 30, 2019, down from $3.90 in 2018.
- Coal Cost: Average cost of coal purchased for Indiana Electric was $51.11 per ton for the six months ended June 30, 2019, compared to $52.75 in 2018.
- Authorized Return on Equity: Regulatory orders authorize a return on equity ranging from 10.15% to 10.40% for Indiana operations. A stipulation for the Ohio gas utility suggests a rate of return of 7.48%.
Debt and Liquidity
- OVEC Debt Obligation: Indiana Electric holds a 1.5% share in Ohio Valley Electric Corporation (OVEC). As of June 30, 2019, this share equates to a debt obligation between $20 million and $25 million. OVEC is rated one notch below investment grade by Moody's and S&P due to a shareholder bankruptcy, though Fitch maintains an investment-grade rating.
- Regulatory Assets: Significant regulatory assets exist for deferred costs, including $99.4 million for Indiana gas infrastructure plans and $97.6 million for Ohio gas deferrals as of December 31, 2018.
Material Changes and Operational Updates
- Customer Base Expansion: Post-merger, CenterPoint Energy serves approximately 1,034,100 natural gas customers in Indiana and Ohio and 147,100 electric customers in Indiana as of June 30, 2019.
- Generating Capacity: Indiana Electric's generating capacity decreased from 1,252 MW (Dec 31, 2018) to 1,232 MW (June 30, 2019) following the retirement of two 20 MW natural gas turbines in April 2019.
- Supply Mix: Indiana Electric generation in 2018 was 95% coal, 3% wind, and 1% natural gas. Wind resources provided 5% of total GWh sourced in the first six months of 2019.
- Regulatory Settlements: A non-unanimous stipulation was filed in January 2019 regarding the Ohio gas utility rate case, proposing a $22.7 million revenue increase (down from the requested $34 million) and extending infrastructure replacement programs through 2023.
Guidance, Risks, and Contingencies
Regulatory and Environmental Risks
- Ash Pond Closure (CCR Rule): Indiana Electric must cease disposal and close ash ponds at the Brown and Culley facilities by October 31, 2020. Estimated costs are $74 million in capital investments and $90 million in expenses over 14 years. The company expects to file for cost recovery under Indiana Senate Bill 251.
- Environmental Compliance (MATS): Indiana Electric has completed $70 million in investments for Mercury and Air Toxics Standards (MATS) compliance. Recovery of these costs was approved in April 2019.
- Legislative Changes: Ohio House Bill 6 (enacted July 2019) provides financial support to OVEC members. Indiana Senate Bills 251 and 560 allow for accelerated cost recovery of infrastructure investments outside of base rate cases.
Operational Risks
- Weather Sensitivity: Natural gas and electric sales are seasonal and weather-dependent, though decoupling and normal temperature adjustment mechanisms mitigate some risk in Indiana.
- OVEC Financial Health: Concerns regarding OVEC's liquidity and a shareholder bankruptcy could impact Indiana Electric's power supply and debt obligations, though the company expects to recover costs via fuel adjustment clauses.
Investor Verification Checklist
- Verify the final outcome of the Ohio gas utility rate case (VEDO) and the approved revenue increase versus the stipulated $22.7 million.
- Monitor the progress and cost estimates for the closure of the Brown and Culley ash ponds, including the timing of the IURC filing for cost recovery.
- Review the financial stability of Ohio Valley Electric Corporation (OVEC) and the potential impact of the Ohio House Bill 6 support on Indiana Electric's power costs.
- Confirm the integration progress of Vectren's non-utility businesses (Infrastructure Services and ESG) and their contribution to consolidated margins.
- Assess the impact of the Affordable Clean Energy (ACE) rule on future capital planning for coal-fired generation assets.