CenterPoint Energy, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Unaudited consolidated financial statements; amounts below are in millions of dollars except per-share data. CenterPoint is a utility holding company with electric transmission and distribution, natural gas distribution and sales businesses, and an investment in a midstream partnership.
Key financial results
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $1,894 | $1,525 | $4,282 | $3,609 |
| Operating income | $223 | $302 | $555 | $640 |
| Income before taxes | $144 | $200 | $377 | $419 |
| Income tax expense | $244 | $74 | $330 | $146 |
| Net income (loss) | ($100) | $126 | $47 | $273 |
| Diluted EPS | ($0.23) | $0.29 | $0.11 | $0.64 |
For the six months, operating cash flow was $790, investing cash outflow was $625, and financing cash outflow was $314, versus $927, $657 outflow and $633 inflow, respectively, in 2012. Capital expenditures were $586 for the period. Cash and cash equivalents were $497 at June 30, down from $646 at year-end 2012.
At June 30, current assets were $2,480 and current liabilities $2,675. Long-term debt was $7,919; current debt included $648 of bond, indexed and other long-term debt maturities, plus $37 of short-term borrowings. The company also reported a $340 indexed-debt derivative liability. The filing reports $2.45 billion of revolving facilities, with $10 million of letters of credit outstanding and no facility loans or commercial paper outstanding at June 30.
Quarterly dividends declared were $0.2075 per share, up from $0.2025 a year earlier. The board subsequently declared another $0.2075 quarterly dividend, payable September 10, 2013.
Material changes and operating drivers
- Net income fell by $226 in both the quarter and first half. Management cited higher income tax expense, lower operating income and larger losses on indexed debt securities, partly offset by greater equity earnings, marketable-securities gains and lower interest expense.
- The unusually high 2013 effective tax rates—169% for Q2 and 88% for the first half, versus 37% and 35%—primarily reflected the midstream transaction. CenterPoint recorded a $225 deferred tax liability related to the book-tax basis difference in its investment and a $29 tax benefit from remeasuring state deferred taxes.
- Revenue rose, but operating income declined. Natural gas expense increased substantially, reflecting the nature of gas sales and cost pass-throughs; the filing does not provide a single consolidated margin measure.
- Electric Transmission & Distribution operating income fell to $165 in Q2 from $191, principally due to milder weather and lower usage. Natural Gas Distribution operating income rose to $25 from $9, primarily from colder weather, rate increases and customer growth.
- Competitive Natural Gas Sales and Services improved to $3 of Q2 operating income from a $4 loss, in part because of mark-to-market accounting. Comparisons for former Interstate Pipelines and Field Services are not like-for-like: substantially all those operations were contributed to the partnership on May 1.
Transaction, outlook and risks
- On May 1, CenterPoint, OGE Energy and ArcLight formed Enable Midstream Partners. CenterPoint retained approximately 58.3% of the limited partner interests and equal management rights with OGE. CenterPoint recorded a $4,285 equity-method investment; its share of partnership earnings was $33 for May and June. No gain or loss was recognized on the contributed assets.
- Management expected remaining-2013 cash needs to be met by cash on hand, credit facilities, commercial paper capacity, operating cash flow and partnership distributions. Key stated requirements for the second half included approximately $684 of capital expenditures, $228 of scheduled transition and restoration bond principal payments, approximately $50 of pension contributions, dividends and interest.
- No consolidated earnings guidance was provided in the supplied filing text. Management said partnership results were consistent with expectations, while noting lower NGL prices and weak seasonal and geographic price differentials; system integrity work and slightly lower demand affected transportation throughput.
- Key exposures include weather, commodity prices and differentials, rate recovery, regulation, project execution, customer and counterparty credit, interest rates, pension funding, and access to capital. The new partnership also faces supply and commodity risks, dependence on significant customers and third-party infrastructure, and regulatory uncertainty.
- CenterPoint guaranteed up to $100 of partnership obligations; CERC guarantees had a stated maximum of $157.2, although obligations covered in June and July totaled less than $1. The company also disclosed a guarantee tied to the partnership’s $1.05 billion term loan. A separate legacy gas-transportation guarantee had a maximum potential payout of about $66.
- Regulatory and contingency items include a Minnesota manufactured-gas-plant remediation liability of $13, with estimated possible costs of $6–$41; a Texas rate-adjustment appeal that could result in refunds; and a Minneapolis gas franchise expiring at the end of 2014, amid city consideration of a municipal utility. After quarter-end, MRT filed an uncontested rate-case settlement setting annual cost of service at $84 and anticipating customer refunds; FERC approval was expected later in 2013.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It cautioned that actual results may differ materially from forward-looking statements.
Important facts for investors to verify
- How much of the reported earnings decline is recurring versus the transaction-related tax charge and volatile indexed-debt and securities valuation effects.
- Enable Midstream’s finalized acquisition fair values, subsequent earnings and distributions, and any changes to CenterPoint’s guarantees or support obligations.
- Progress on cash generation, capital spending, debt maturities and liquidity, including the stated second-half funding assumptions.
- Outcomes and potential financial effects of the MRT settlement, Texas rate-adjustment litigation and Minneapolis franchise decision.
- Exposure to weather, commodity prices, major customers, counterparties and credit-rating changes, including potential collateral requirements.