CENTERPOINT ENERGY INC quarterly report, Q2 FY2017

Business context and reporting period

CenterPoint Energy, Inc. is a utility holding company with electric transmission and distribution, natural gas distribution, energy services and an investment in Enable Midstream Partners. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2017; comparisons are with the corresponding 2016 periods. Results include the January 3, 2017 acquisition of Atmos Energy Marketing (AEM).

Financial performance and position

Revenue growth reflected substantially higher non-utility sales, including AEM, while associated natural-gas costs also rose. Energy Services revenue was $931m in Q2 versus $397m and segment operating income was $16m versus nil; for the half-year, revenue was $2.127bn versus $836m and operating income was $51m versus $6m. Management attributed much of the segment’s profit improvement to derivative mark-to-market timing, as well as AEM-related throughput and customers. Enable equity earnings increased to $59m in Q2 from $31m and to $131m for six months from $91m.

Q2 net income improved by $137m year over year, principally because the ZENS indexed-debt-related loss was $117m lower, operating income rose $41m and Enable equity earnings rose $28m. The six-month improvement of $175m was also significantly affected by a $163m year-over-year reduction in ZENS-related losses. These comparisons include volatile securities and derivative accounting effects and should not be read as wholly recurring operating growth.

For the first six months, operating cash flow was $680m, down from $1.061bn, while capital expenditures were $649m versus $682m. Operating cash flow less capital expenditures was approximately $31m (versus $379m); this is a simple derived measure, not a company-defined cash-flow metric. Investing cash outflow was $635m and financing cash outflow was $138m. Cash and cash equivalents were $248m at June 30, 2017, compared with $341m at December 31, 2016. Current assets of $2.865bn were below current liabilities of $3.038bn. Marketable securities were $1.020bn, including securities held in connection with the ZENS obligation.

Long-term debt, net, was $7.587bn, including $1.638bn of securitization bonds; the balance sheet also reports current maturities and indexed debt separately. The filing’s debt fair-value disclosure gives a $8.559bn carrying amount and $9.051bn fair value. Revolving facilities totaled $2.9bn at June 30, with $1.688bn of commercial paper and $10m of letters of credit outstanding; the companies reported covenant compliance. Common dividends declared were $0.2675 per share for Q2, up from $0.2575.

Material changes versus the prior comparable period

• Consolidated revenue rose 36% in Q2 and 37% for six months, largely reflecting the Energy Services business and AEM acquisition; revenue growth was accompanied by higher natural-gas expense.
• Operating income increased 23% in Q2 and 15% for six months. Natural Gas Distribution operating income rose to $37m from $20m in Q2 and to $201m from $180m for six months, with rate actions, customer growth and certain regulatory or tax items contributing.
• Electric Transmission & Distribution operating income was $164m versus $158m in Q2 and $242m versus $241m for six months. Customer growth and capital-related rate increases were partly offset by costs and transition-charge true-ups.
• Operating cash flow declined $381m year over year, primarily due to working-capital movements and lower cash flow after adjustments for non-cash and non-operating items.
• CenterPoint acquired AEM for a final purchase price of $147m. AEM contributed approximately $319m of Q2 revenue and $8m of Q2 operating income, and approximately $678m of six-month revenue and $25m of six-month operating income.

Outlook, management commentary, risks and contingencies

Management expects a 2017 annual effective tax rate of approximately 36%; the filing provides no consolidated earnings-per-share guidance. For the second half of 2017, anticipated cash requirements include approximately $831m of capital expenditures, $250m of maturing senior notes, $193m of scheduled securitization-bond principal payments, dividends and interest. Management expects operating cash flow, Enable distributions, commercial paper, credit facilities and anticipated bond offerings to meet expected needs, while noting financing may not be available on acceptable terms.

The Brazos Valley Connection transmission project was under construction and on schedule, with estimated capital costs of $270m–$310m and expected energization by June 2018. Houston Electric proposed a separate approximately $250m Freeport-area transmission project; ERCOT’s decision was anticipated in Q4 2017. Regulatory proceedings include rate increases and cost-recovery mechanisms, as well as a Houston Electric settlement that included a proposed $28.7m AMS surcharge refund for which a reserve had been recorded.

Important risks include weather variability, commodity-price and derivative mark-to-market volatility, regulatory approval and recovery of capital costs, construction delays or overruns, interest rates and access to financing, and potential collateral requirements following credit downgrades. CenterPoint’s investment in Enable is material: a reduction in Enable distributions could affect liquidity, and the company continued to evaluate reducing its Enable ownership over time after deciding not to pursue a spin-off. GenOn’s June 2017 Chapter 11 filing could impair its ability to meet indemnity obligations related to litigation; plaintiffs had appealed the dismissal of CES from a gas-market case, which CenterPoint said it would continue to defend. The company reported a $7m liability for Minnesota manufactured-gas-plant monitoring and possible remediation, with estimated possible costs of $4m–$30m. Management did not expect the disclosed legal and environmental matters to have a material adverse effect. No material changes to the risk factors in the 2016 Form 10-K were reported.

Most important facts for investors to verify

• How much of earnings growth is recurring operating performance versus ZENS valuation changes, energy-derivative mark-to-market timing, acquisition effects and regulatory or tax items.
• Whether operating cash flow rebounds from the first-half working-capital drag and is sufficient alongside planned capital spending, debt service and dividends.
• Actual capital costs, timing and regulatory recovery for the Brazos Valley Connection, Freeport proposal and other planned infrastructure investment.
• Enable’s operating performance, distributions and any change in CenterPoint’s ownership strategy.
• Developments in GenOn’s bankruptcy and related indemnity exposure, the appealed gas-market litigation, and environmental remediation estimates.
• Credit ratings, commercial-paper access, collateral requirements and the company’s ability to fund its expected second-half 2017 needs on acceptable terms.