CenterPoint Energy, Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing also reports fourth-quarter results. CenterPoint is a regulated electric transmission and distribution and natural gas distribution holding company, with energy services operations and a 55.4% limited-partner interest in Enable Midstream Partners, accounted for as an equity-method investment.
Financial performance
| Metric | 2014 | 2013 |
|---|---|---|
| Revenue | $9.226 billion | $8.106 billion |
| Operating income | $935 million | $1.010 billion |
| Net income | $611 million | $311 million |
| Diluted EPS | $1.42 | $0.72 |
| Cash from operating activities | $1.397 billion | $1.613 billion |
| Capital expenditures | $1.402 billion | $1.272 billion |
| Cash dividends declared per share | $0.95 | $0.83 |
Fourth quarter: Revenue was $2.372 billion, operating income $221 million, net income $176 million and diluted EPS $0.41, compared with $2.184 billion, $211 million, $113 million and $0.26, respectively, in fourth-quarter 2013.
Balance sheet and debt: Total assets were $23.2 billion and shareholders’ equity was $4.548 billion at year-end. Consolidated debt was approximately $8.9 billion, including $3.0 billion of transition and system-restoration bonds; $1.1 billion of principal was due through 2017, excluding approximately $1.2 billion of transition and restoration bond repayments supported by dedicated charges. Cash and cash equivalents were $298 million, of which $290 million was held by bond subsidiaries for servicing their bonds. The company had $2.1 billion of revolving credit facilities; year-end commercial paper outstanding was $532 million, with $10 million of letters of credit.
Operating cash flow declined $216 million year over year, while capital spending exceeded operating cash flow by about $5 million. Management expected 2015 capital expenditures of approximately $1.522 billion. The company reported $3.5 billion of regulatory assets and $1.2 billion of regulatory liabilities.
Changes versus prior period and business drivers
- Net income rose $300 million, despite operating income falling $75 million. The increase primarily reflected $196 million lower income tax expense, $120 million higher equity earnings from unconsolidated affiliates and a $107 million smaller loss on indexed debt securities; lower marketable-securities gains partly offset these items.
- The effective tax rate fell to 31.0% from 60.2%. The 2013 rate included a $196 million net tax charge associated with Enable’s formation. The 2014 rate benefited from a $29 million tax benefit following a tax-basis review and a $13 million reversal of previously accrued taxes.
- Electric Transmission & Distribution operating income decreased to $595 million from $607 million, reflecting higher operating costs partly offset by customer growth and rate-related benefits. Natural Gas Distribution income increased to $287 million from $263 million, mainly from colder weather, rate increases and customer growth.
- Energy Services operating income increased to $52 million from $13 million, aided by derivative mark-to-market results, weather-related asset optimization and higher throughput. Enable equity earnings were $303 million versus $173 million; the 2013 amount covered only the eight months following its formation, limiting comparability.
- Most former Interstate Pipelines and Field Services operations were contributed to Enable in May 2013; those segments reported no 2014 operating results. Enable completed its IPO in April 2014. CenterPoint received no IPO proceeds, and its ownership interest rose from approximately 54.7% to 55.4% after contributing a 24.95% SESH interest for Enable units.
Outlook, risks and notable items
- Management forecast 2015 capital expenditures of approximately $1.522 billion, pension contributions of about $66 million, scheduled transition and system-restoration bond principal payments of $372 million, and $269 million of maturing senior notes and pollution-control bonds. Expected funding sources included operations, borrowings, commercial paper, debt issuance, a tax refund and Enable distributions. No CenterPoint earnings or EPS guidance is provided in the filing.
- Enable declared a fourth-quarter 2014 distribution of $0.30875 per unit; CenterPoint expected to receive approximately $72 million in the first quarter of 2015. Enable’s 2015 expansion capital spending estimate was $600–$800 million, with up to a further $300 million of potential projects under evaluation.
- Key risks include rate-case outcomes and cost recovery; weather and energy usage; concentrated electric receivables from retail electric providers; lower commodity prices and reduced producer drilling affecting Enable; Enable distribution and refinancing capacity; regulatory, environmental and pipeline-integrity costs; severe weather and limited insurance for electric lines; cyber and physical security; pension funding; and possible collateral calls following credit downgrades.
- CenterPoint guaranteed up to $100 million of certain Enable obligations and provided a guarantee of collection for $1.1 billion of Enable senior notes, subject to automatic release on May 1, 2016. A separate CERC guarantee for gas-transportation demand charges had a maximum potential payout of approximately $42 million; no security was required from GenOn under the latest annual calculation.
- CenterPoint recorded a $6 million pension curtailment loss as substantially all employees seconded to Enable transferred to Enable effective January 1, 2015. The filing reports a $7 million liability for Minnesota manufactured-gas-plant remediation, with estimated possible costs of $5–$29 million. Management did not expect the disclosed litigation and environmental matters to materially adversely affect financial condition, results or cash flows.
- The 2014 financial statements received an unqualified audit opinion, and the auditor also gave an unqualified opinion on internal control over financial reporting.
Important facts for investors to verify
- Whether operating cash flow can support the company’s large planned capital program, dividends, debt service and pension contributions.
- Debt maturities, covenant headroom, credit ratings and the availability and cost of refinancing; distinguish bond debt backed by dedicated customer charges from other debt.
- Whether the 2014 earnings improvement is repeatable, given the tax benefits, market-sensitive ZENS and securities results, and non-comparable Enable contribution and equity earnings.
- Enable’s cash generation, distributions, commodity exposure, capital needs and debt guarantees, particularly in light of weaker commodity prices and potential reductions in producer activity.
- Regulatory recovery and timing for CenterPoint’s investments, including the pending transmission cost-of-service matter and the planned Brazos Valley project.