CenterPoint Energy, Inc. — Q2 2015 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and six months ended June 30, 2015, compared with the same 2014 periods. CenterPoint operates electric transmission and distribution and natural gas distribution businesses, provides energy services, and holds an approximately 55.4% limited-partner interest in Enable Midstream Partners, LP (Enable). Unless otherwise noted, financial amounts below are in millions of dollars.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $1,532 | $1,884 | $3,965 | $5,047 |
| Operating income | $186 | $186 | $442 | $481 |
| Net income | $77 | $107 | $208 | $292 |
| Diluted EPS | $0.18 | $0.25 | $0.48 | $0.68 |
| Dividends declared per share | $0.2475 | $0.2375 | $0.4950 | $0.4750 |
- Six-month operating cash flow was $1,122, versus $712 in 2014; investing cash outflow was $671, including $712 of capital expenditures, and financing cash outflow was $504. Cash ended the period at $245, down $53 from year-end.
- At June 30, cash and cash equivalents were $245 and current marketable securities were $960. Current assets were $2,509 and current liabilities $3,125.
- Long-term debt was $7,614. Including reported current debt and short-term borrowings, debt was approximately $8,565; this excludes the separately reported $583 indexed-debt derivative liability. Total debt at December 31, 2014, on the same basis, was approximately $8,857.
- The six-month effective tax rate was 36%, versus 37%; management expected a 2015 annual effective tax rate of approximately 35%. The six-month earnings-to-fixed-charges ratio was 2.53, compared with 2.90.
Changes versus the prior comparable periods
- Q2 net income fell $30 and six-month net income fell $84. Management attributed the Q2 decline mainly to a $41 larger loss on indexed debt securities and $28 lower equity earnings from affiliates. For the six-month decline, key factors were $67 lower affiliate earnings, a $60 larger indexed-securities loss, and $39 lower operating income.
- Consolidated operating income was flat in Q2 but fell $39 for the first half. Electric transmission and distribution operating income improved, while natural gas distribution and Energy Services income declined.
- Revenue fell substantially, especially in Energy Services and natural gas distribution, alongside lower natural-gas revenue and costs. Energy Services Q2 revenue was $408 versus $676; its six-month operating income was $22 versus $37, reflecting weaker derivative mark-to-market results and less weather-related optimization.
- Enable equity earnings were $43 in Q2 versus $69 and $95 for the first half versus $157. Enable’s reported operating revenue and net income also declined year over year.
- Operating cash flow rose $410 year over year, primarily from higher income-tax refunds, fuel-cost recovery, and gas-storage inventory cash flows. Capital expenditures increased $87.
Outlook, management commentary, risks and unusual items
- Management expected remaining-2015 capital expenditures of approximately $832, scheduled transition and system restoration bond principal payments of $173, and pension contributions of approximately $41. It expected credit facilities, commercial paper, operating cash flow, and Enable distributions to cover anticipated cash needs through year-end.
- CenterPoint Houston’s Brazos Valley Connection project remained subject to regulatory approval; estimated cost was $276–$383, with completion expected by mid-2018. The filing also describes pending or recently settled rate proceedings, including approved Texas distribution-rate increases and a proposed Minnesota rate increase.
- Enable’s market unit price was below CenterPoint’s carrying value: $15.98 per unit at June 30 versus a $19.12 carrying value. CenterPoint concluded the decline was temporary and recorded no impairment, but warned a sustained low or further declining price could lead to a future impairment charge. Enable distributions are an important expected cash source; approximately $74 was expected in Q3 2015.
- Unusual items included a $9 non-cash pension settlement charge for the first half, with further settlement charges possible; and ZENS-related losses, including a $67 indexed-debt-securities loss for the first half. The AOL share transaction resulted in a $32 payment to ZENS holders in July and reduced contingent principal.
- Key exposures include weather, commodity prices, regulation and rate recovery, project cost or schedule overruns, market and credit conditions, and Enable performance. Guarantees include up to $100 for certain Enable obligations and a $1.1 billion guarantee of collection on Enable senior notes, scheduled for automatic release May 1, 2016. The filing reports no material changes to the 2014 Form 10-K risk factors.
- A gas-market manipulation case returned to district court after a U.S. Supreme Court decision; the company said it did not expect a material adverse effect. It also reported a $7 million recorded liability for certain Minnesota manufactured-gas-plant remediation, with estimated possible costs of $4–$28 million.
- Disclosure controls were assessed as effective, and management reported no material change in internal controls over financial reporting during the quarter. No specific full-year earnings guidance was provided in the filing text.
Important facts for investors to verify
- Whether lower Enable earnings and its unit-price discount to carrying value persist, and whether CenterPoint records an impairment.
- Whether regulated rate increases and the Brazos Valley Connection receive approvals on the expected timetable and at expected economics.
- Whether projected cash flows and Enable distributions are sufficient alongside capital spending, debt service, dividends, and pension funding.
- How indexed ZENS liabilities, securities values, and any resulting cash or tax requirements change following corporate actions affecting reference shares.
- Whether contingent guarantees, credit-rating or collateral exposures, and disclosed legal and environmental matters change materially.