CenterPoint Energy, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Unaudited consolidated results. CenterPoint is a utility holding company with electric transmission and distribution, natural gas distribution, energy services, and an approximately 55.4% limited-partner interest in Enable Midstream Partners.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $1.574 billion | $1.532 billion | $3.558 billion | $3.965 billion |
| Operating income | $182 million | $186 million | $432 million | $442 million |
| Net income (loss) | $(2) million | $77 million | $152 million | $208 million |
| Diluted EPS | $(0.01) | $0.18 | $0.35 | $0.48 |
| Operating margin | 11.6% | 12.1% | 12.1% | 11.1% |
For the first half, operating cash flow was $1.058 billion, compared with $1.122 billion in 2015. Investing cash outflow was $467 million and financing cash outflow was $584 million. Capital expenditures were $682 million; operating cash flow less capital expenditures was approximately $376 million. Cash and cash equivalents were $271 million at June 30, versus $264 million at year-end 2015.
At June 30, total assets were $21.012 billion and shareholders’ equity was $3.397 billion. Long-term debt was $7.780 billion, including $2.059 billion of securitization bonds; current portions, indexed debt and short-term borrowings are additional balance-sheet obligations. Current assets of $2.272 billion slightly exceeded current liabilities of $2.241 billion. The company reported $2.5 billion in revolving credit facilities and was in compliance with financial covenants; its debt-to-capital ratio under the parent facility covenant was 55.5%, against a 65% limit.
Changes versus comparable periods
- Q2 revenue rose 3%, but net income fell by $79 million to a small loss. The main drivers were a smaller gain on marketable securities and higher ZENS-related indexed-debt losses, including a $117 million loss associated with the Charter/TWC merger; lower Enable equity earnings and slightly lower operating income also weighed on results.
- First-half revenue fell 10% and net income declined $56 million. Lower natural gas and energy-services revenue largely reflects commodity and sales-volume effects; natural gas expense also fell substantially. A $119 million year-over-year increase in ZENS-related losses was a major earnings headwind, partly offset by higher marketable-securities gains and lower interest and tax expense.
- First-half segment operating income increased at Natural Gas Distribution ($180 million versus $165 million), but declined at Electric Transmission & Distribution ($241 million versus $254 million) and Energy Services ($6 million versus $22 million). Energy Services results were affected by derivative mark-to-market charges and reduced weather-related optimization opportunities. Enable equity earnings were $91 million versus $95 million.
- The reported effective tax rate was 125% in Q2 versus 32% a year earlier, and 39% for the first half versus 36%. The increase reflects a Louisiana tax-law change that raised deferred tax liabilities, amplified by low quarterly pretax earnings.
Outlook, developments and risks
- Management expected approximately $695 million of capital expenditures in the second half of 2016 and $183 million of scheduled securitization-bond principal payments. It stated anticipated operating cash flows, Enable distributions, commercial paper and credit facilities should cover expected cash needs for the remainder of 2016. The expected full-year effective tax rate was approximately 37%.
- Houston Electric issued $300 million of 1.85% general mortgage bonds due 2021. CenterPoint refinanced its revolving facilities, increasing aggregate capacity from $2.1 billion to $2.5 billion, with facilities maturing in 2021. At June 30, commercial paper outstanding was $1.213 billion across the parent and CERC facilities.
- Houston Electric’s distribution-cost rate settlement was approved, providing annualized charges of $45 million effective September 2016 and, subject to future changes, $49 million effective September 2017. Texas gas divisions implemented rate increases; other rate matters remained pending or subject to reconsideration, including the Minnesota rate case.
- CenterPoint acquired Continuum’s retail energy-services business and natural-gas wholesale assets on April 1 for $98 million. The acquired operations contributed $108 million of revenue and less than $1 million of operating income in the first half.
- Enable declared second-quarter distributions expected to provide CenterPoint approximately $74 million on common and subordinated units and $9 million on preferred units in Q3 2016. CenterPoint had invested $363 million in Enable preferred units in February; Enable used the proceeds to redeem notes owed to a CenterPoint subsidiary.
- Key exposures include Enable’s operating performance and distributions, rate-case and regulatory outcomes, weather, commodity and interest-rate movements, access to financing, pipeline-safety rulemaking, and collateral demands following credit downgrades. CenterPoint guaranteed up to $50 million of certain Enable obligations and retained a separate gas-transportation guarantee with a maximum potential payout of approximately $20 million; the $1.1 billion guarantee of specified Enable senior notes was released May 1, 2016.
- The filing reported no material change in risk factors from the 2015 Form 10-K. Management said disclosure controls were effective and internal controls had no material change during the quarter. A Nevada gas-market case dismissal remained subject to appeal; management did not expect the disclosed legal and environmental matters to materially affect results. Minnesota manufactured-gas-plant liabilities were $7 million, with estimated possible remediation costs of $4 million to $30 million.
Important facts for investors to verify
- How much of the earnings decline reflects volatile ZENS and marketable-securities accounting versus recurring operating performance.
- Whether approved and pending rate adjustments are implemented as expected, including Minnesota reconsideration and other regulatory filings.
- Enable’s future cash distributions and performance, and the value and impairment risk of CenterPoint’s Enable investments.
- Liquidity and refinancing capacity after commercial-paper usage, planned capital spending, debt service and potential collateral requirements.
- Whether pipeline-safety proposals, severe weather, litigation or environmental obligations create costs beyond currently recorded amounts or management estimates.