CenterPoint Energy, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also reports fourth-quarter results. CenterPoint is a utility holding company with regulated electric transmission and distribution and natural gas distribution businesses, competitive natural gas energy services, and an equity-method investment in Enable Midstream Partners.
Financial performance and liquidity
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $9.614 billion | $7.528 billion |
| Operating income | $1.072 billion | $959 million |
| Net income | $1.792 billion | $432 million |
| Diluted EPS | $4.13 | $1.00 |
| Operating cash flow | $1.421 billion | $1.931 billion |
| Capital expenditures | $1.494 billion | $1.406 billion |
| Cash and cash equivalents, year-end | $260 million | $341 million |
| Total debt, including securitization bonds and current maturities | $8.840 billion | $8.592 billion |
Revenue increased about 28% and operating income about 12%. Net income rose by $1.360 billion, but included a $1.113 billion deferred tax benefit from the Tax Cuts and Jobs Act (TCJA); the reported effective tax rate was negative 69%. Operating margin was approximately 11.1%, versus 12.7% in 2016. The filing does not provide a comparable adjusted net-income measure excluding the tax benefit.
Current assets were $3.395 billion and current liabilities $3.069 billion at year-end. Operating cash flow declined $510 million, mainly from less favorable working-capital movements. Cash generation was below capital expenditures; 2017 financing included debt issuance and repayments. The company reported $8.8 billion of consolidated indebtedness, including $1.9 billion of non-recourse securitization bonds. Cash dividends paid were $1.07 per share, versus $1.03 in 2016.
Fourth-quarter results
| Metric | Q4 2017 | Q4 2016 |
|---|---|---|
| Revenue | $2.638 billion | $2.081 billion |
| Operating income | $296 million | $243 million |
| Net income | $1.296 billion | $101 million |
| Diluted EPS | $2.99 | $0.23 |
Fourth-quarter 2017 net income included the TCJA deferred tax benefit, so the year-over-year earnings increase is not a straightforward indicator of recurring performance.
Material changes and business drivers
- Electric Transmission & Distribution: Segment operating income fell to $610 million from $628 million. Customer growth and rate increases were offset by lower usage, higher costs and lower Bond Companies income. Metered customers increased to 2.44 million.
- Natural Gas Distribution: Operating income rose to $328 million from $303 million, primarily on rate increases and customer growth. Throughput was nearly flat at 412 Bcf versus 411 Bcf, while total customers rose to 3.47 million.
- Energy Services: Operating income increased to $125 million from $20 million. The 2017 result included acquisition growth from AEM and favorable mark-to-market timing; a weather-driven year-end price spike produced an unusually high unrealized mark-to-market asset, expected to substantially reverse in Q1 2018 as prices normalize.
- Midstream Investments: Equity earnings from Enable were $265 million, up from $208 million. CenterPoint held 54.1% of Enable common units and 14.52 million Series A Preferred Units at year-end. No Enable investment impairment was recorded in 2017 or 2016; 2015 included substantial impairment charges.
- AEM acquisition: CES acquired AEM in January 2017 for a final purchase price of $147 million. The acquired business contributed approximately $1.3 billion of revenue and $74 million of operating income in 2017.
Outlook, risks and unusual items
- Management estimated 2018 capital expenditures of approximately $1.7 billion; the detailed plan totals $1.664 billion. Major planned investment is in electric and gas infrastructure. The company expected to fund needs with operating cash flow, credit facilities, commercial paper, debt issuance and Enable distributions.
- Management expected Houston-area customer growth to continue at roughly 2% in 2018, and anticipated relatively low energy commodity prices to continue or improve slightly. These are expectations, not guarantees.
- Hurricane Harvey caused damage to electric and gas distribution systems. Estimated restoration costs were about $120 million for Houston Electric and $25 million for NGD; management expected uninsured costs to be recovered through rates. A $64 million regulatory asset for Harvey restoration costs was recorded at year-end. Recovery and timing remain subject to regulatory processes.
- The TCJA reduced the federal corporate tax rate from 35% to 21%, prompting a $1.113 billion deferred tax benefit and a $1.3 billion net regulatory liability estimate for amounts expected to be returned to ratepayers. The ultimate customer treatment and timing were uncertain; regulatory proceedings and rate filings were ongoing.
- Key risks include regulatory lag or disallowance of costs, weather and severe storms, pipeline integrity and environmental compliance costs, cyber and physical security incidents, customer and counterparty credit exposure, interest-rate and commodity-price volatility, and reliance on Enable distributions and access to capital markets.
- CenterPoint’s Houston Electric receivables from REPs totaled $215 million at year-end; approximately 34% was owed by NRG affiliates and 12% by Vistra Energy affiliates. GenOn, an indemnifying party in legacy matters, was in Chapter 11 proceedings; its ability to satisfy obligations was uncertain.
- The filing describes litigation arising from the 2017 Minnehaha Academy gas explosion, including claims against CenterPoint and subsidiaries. The company reported insurance coverage for third-party bodily injury and property damage claims; outcomes remain uncertain.
The financial statements received an unqualified audit opinion, and management and the auditor concluded internal control over financial reporting was effective as of December 31, 2017.
Important facts for investors to verify
- How much of 2017 earnings growth is recurring after excluding the $1.113 billion TCJA benefit and volatile indexed-security and derivative effects.
- Whether the Energy Services mark-to-market gain substantially reverses as management expected in Q1 2018, and how AEM performs after integration.
- The eventual regulatory treatment, customer refunds and timing associated with TCJA deferred taxes and EDIT balances.
- Actual recovery of Hurricane Harvey costs, project spending and completion timing, including the Brazos Valley Connection and proposed Bailey-Jones Creek project.
- Debt maturities, borrowing capacity, collateral requirements and the sustainability of cash flows and distributions from Enable.
- Developments in the Minnehaha Academy litigation, legacy indemnity claims and other material legal or environmental contingencies.