CenterPoint Energy, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The combined filing covers CenterPoint Energy, Inc. and its subsidiaries, including Houston Electric and CERC. The company is a regulated energy-delivery business with natural gas distribution, electric utilities, competitive energy services, pipeline construction services, and an investment in Enable Midstream Partners. Vectren was acquired on February 1, 2019, for approximately $6.0 billion; 2019 results include its operations from that date.
Key financial results and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $12.301 billion | $10.589 billion |
| Operating income | $1.226 billion | $831 million |
| Net income | $791 million | $368 million |
| Income available to common shareholders | $674 million | $333 million |
| Diluted EPS | $1.33 | $0.74 |
| Cash from operating activities | $1.638 billion | $2.136 billion |
| Capital expenditures | $2.587 billion | $1.720 billion |
| Cash and cash equivalents at year-end | $241 million | $4.231 billion |
- Revenue increased about 16% and operating income about 48%; the comparisons are materially affected by the Vectren acquisition and are not fully like-for-like.
- Operating cash flow declined $498 million, primarily reflecting working-capital movements. Investing cash outflow was $8.421 billion, including $5.991 billion for acquisitions; financing provided $2.776 billion.
- Consolidated debt was approximately $15.1 billion, including $977 million of securitization bonds. Year-end shareholders’ equity was $8.359 billion. The debt increase chiefly reflects merger financing and debt assumed with Vectren.
- CenterPoint reported $241 million of year-end cash; revolving facilities totaled $5.1 billion, with $2.278 billion of commercial paper outstanding at December 31. Credit facilities were reported in compliance with their covenants.
- Common dividends paid were $1.15 per share in 2019, versus $1.11 in 2018. The annual report reports an 86% dividend payout ratio for 2019.
Material changes and segment performance
- Vectren integration: Added Indiana electric operations and utility gas operations in Indiana and Ohio, as well as Infrastructure Services and ESG. Acquired businesses contributed $190 million of net income from the merger date through year-end. CenterPoint recorded $102 million of merger-related severance and $83 million of integration costs.
- Houston Electric: Segment operating income was $624 million, broadly flat with $623 million in 2018. Customer growth and higher transmission revenues were offset by lower usage, costs, and tax-related revenue reductions.
- Natural Gas Distribution: CenterPoint’s segment operating income rose to $408 million from $266 million, reflecting the acquired Indiana and Ohio utilities, customer growth, weather and usage, and rate changes. CERC’s standalone gas-distribution operating income increased to $316 million from $266 million.
- Energy Services: Operating income was $32 million versus a $47 million loss in 2018. Results included a $48 million goodwill impairment and a $149 million favorable year-over-year change in derivative mark-to-market effects.
- Enable investment: Equity earnings fell to $229 million from $307 million, including CenterPoint’s $46 million share of Enable’s $86 million goodwill impairment. CenterPoint received $339 million of distributions from Enable in 2019.
- Fourth quarter: CenterPoint reported revenue of $3.230 billion, operating income of $302 million, income available to common shareholders of $128 million, and diluted EPS of $0.25. In fourth-quarter 2018, these were $3.036 billion, $167 million, $90 million, and $0.18, respectively.
Outlook, commentary, risks and unusual items
- Management’s plans emphasize regulated infrastructure investment. Estimated 2020 capital expenditures were $2.630 billion; expected capital needs were to be funded through operating cash flow, debt and commercial paper, credit facilities, and Enable distributions. The company expected proceeds from the proposed sales of Infrastructure Services and Energy Services to be used to repay debt.
- Houston Electric’s rate-case settlement was approved by the PUCT on February 14, 2020, after year-end. It provides an approximately $13 million annual revenue requirement increase, a 9.4% ROE, and a 42.5% equity/57.5% debt capital structure. It also requires refunds of $105 million of unprotected EDIT plus carrying costs over approximately 30–36 months, and Houston Electric agreed not to file a DCRF in 2020.
- After year-end, CenterPoint agreed to sell Infrastructure Services for approximately $850 million and CES, representing substantially all Energy Services, for approximately $400 million, each subject to customary adjustments and closing conditions. Both transactions were expected to close in the second quarter of 2020. The company anticipated additional 2020 impairment and transaction costs of approximately $85 million for Infrastructure Services and $80 million for Energy Services; actual amounts could differ.
- CenterPoint recorded a $48 million Energy Services goodwill impairment in 2019. The Enable investment’s market price was below its carrying value at year-end; management considered the decline temporary, but a sustained decline could trigger impairment.
- Key risks include regulatory cost recovery and rate-case outcomes; merger integration; leverage, refinancing and credit-rating changes; weather and severe storms; pipeline and electric-system safety; environmental compliance and coal-ash pond closure; commodity, derivative and counterparty exposure; and the ability of Enable to sustain distributions. Houston Electric also has concentrated receivables from retail electric providers.
- Executive leadership changed after year-end: the CEO resigned on February 19, 2020, and John W. Somerhalder II was serving as interim CEO when the report was filed. The report identifies credit-rating actions, including a February 2020 Fitch downgrade of Houston Electric’s secured debt to A with a negative outlook.
Most important facts for investors to verify
- Whether the two announced divestitures closed on expected terms, and the final sale proceeds, debt reduction, and related impairment or transaction charges.
- Whether operating cash flow, working capital, and liquidity support the planned capital program and debt maturities, particularly following the decline in year-end cash.
- How the Houston Electric settlement, EDIT refunds, and ring-fencing requirements affect earnings, cash flows, and the parent company’s access to subsidiary cash.
- Whether Enable’s distributions and market value recover, and whether the investment requires an impairment charge.
- Whether coal-ash closure costs, environmental requirements, regulatory proceedings, and credit-rating developments create additional costs or collateral needs.
- The filing reports unqualified financial-statement audit opinions and effective internal control over financial reporting for CenterPoint Energy; separately assess the substantial acquisition-related changes and the critical audit matters involving Vectren valuation, goodwill, and rate regulation.