Business context and reporting period
CenterPoint Energy, Inc. is a utility holding company with electric transmission and distribution, natural gas distribution and energy services operations, plus an approximately 55.4% limited-partner interest in Enable Midstream Partners. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2015; comparisons are with the same 2014 periods. Dollar amounts below are in millions unless noted.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $1,630 | $1,807 | $5,595 | $6,854 |
| Operating income | $265 | $233 | $707 | $714 |
| Net income (loss) | $(391) | $143 | $(183) | $435 |
| Diluted EPS | $(0.91) | $0.33 | $(0.43) | $1.01 |
| Operating margin, approximately | 16.3% | 12.9% | 12.6% | 10.4% |
Cash flow: Nine-month operating cash flow was $1,518, compared with $1,124 in 2014. Investing activities used $1,024, including $1,131 of capital expenditures; financing activities used $565. Cash and cash equivalents were $227 at September 30, 2015, versus $298 at December 31, 2014.
Balance sheet and liquidity: Total assets were $21,778, down from $23,200 at year-end 2014. Current assets were $2,400 and current liabilities $3,191. Long-term debt was $7,662, with $938 of current indexed debt and current portions of long-term debt, and $49 of short-term borrowings. The company reported compliance with its credit-facility financial covenants. Its three revolving credit facilities totaled $2.1 billion; commercial paper outstanding at September 30 was $834 across CenterPoint Energy and CERC Corp.
Dividends: Dividends declared were $0.2475 per share for Q3 and $0.7425 for the nine-month period. The board subsequently declared another $0.2475 per share, payable December 10, 2015.
Material changes versus comparable periods
- Net results swung to a loss chiefly because equity in unconsolidated affiliates declined by $873 in Q3 and $940 for the nine months. The Q3 Enable-related equity loss was $794 and included $862 of impairment charges: CenterPoint’s $250 write-down of its Enable investment and its $612 share of Enable’s goodwill and long-lived-asset impairments.
- CenterPoint reduced its Enable investment carrying value to $3.6 billion. Management cited sustained weakness in Enable’s unit price and depressed oil and gas market conditions; the valuation used significant unobservable assumptions.
- Q3 revenue fell $177 year over year and nine-month revenue fell $1,259, reflecting lower natural gas-related revenues and commodity costs. Operating income rose $32 in Q3 but decreased $7 for the nine months.
- Marketable-securities losses were $134 in Q3 and $72 for the nine months, versus gains of $31 and $73, respectively, in 2014. These were partly offset by gains on indexed debt securities of $129 in Q3 and $62 year to date.
- Segment operating income for the nine months increased in Electric Transmission & Distribution to $498 from $482, while Natural Gas Distribution decreased to $176 from $184 and Energy Services to $29 from $43. Energy Services’ lower year-to-date mark-to-market benefit was a key factor in its decline.
Outlook, management commentary, risks and contingencies
- Management expected approximately $408 of capital expenditures for the remaining three months of 2015 and stated that cash from operations, credit facilities, commercial paper and Enable distributions should cover anticipated near-term cash needs.
- Management estimated a 2015 annual effective tax rate of approximately 45%. The nine-month effective tax rate was 41%, compared with 36% in 2014; the filing attributes the increase primarily to the Enable impairment’s tax effects.
- Regulatory developments included approved annual revenue increases of $13.7 for electric transmission and $13.0 for electric distribution, plus a $4.9 annual increase in the Texas Coast natural gas rate settlement. Minnesota regulators approved a $47.8 interim natural-gas revenue increase effective October 2, subject to refund; a final decision was expected in 2016.
- The Brazos Valley transmission project remained subject to regulatory approval. The ALJs recommended a route with estimated total cost of approximately $325; CenterPoint’s estimated capital-cost range was $276–$383, with completion expected by mid-2018 if approved.
- Key risks include Enable’s operating performance, distributions and valuation; commodity prices and pipeline-market conditions; regulatory recovery and project execution; weather; access to capital and credit ratings; collateral requirements; and counterparty performance. Texas gas distribution and electric operations lack the weather-normalization mechanisms present in several other jurisdictions.
- Guarantees include up to $50 of Enable obligations under a Shell agreement and a subordinated guarantee of collection on $1.1 billion of Enable senior notes, scheduled for automatic release on May 1, 2016. A separate GenOn-related guarantee had a maximum potential payout of approximately $31. The filing states that the fair value of these guarantees was not material.
- The company disclosed a pending gas-market manipulation case and environmental and other proceedings, but did not expect the described matters to have a material adverse effect. It reported no material changes to the risk factors in its 2014 Form 10-K. Disclosure controls were considered effective.
Important facts for investors to verify
- Enable impairment assumptions, Enable’s ongoing results and distributions, and CenterPoint’s exposure through its investment, notes receivable and guarantees.
- Whether regulated rate increases and the Brazos Valley project receive final approvals, and whether project costs and timing remain within estimates.
- Near-term liquidity, commercial-paper usage, refinancing needs and compliance with debt covenants, particularly under adverse credit-rating or market conditions.
- Whether operating cash flow and planned capital spending support the dividend and infrastructure investment without materially increasing borrowing.
- How the 2015 tax-rate estimate, weather exposure, commodity-related results and pending legal or environmental matters develop.