CenterPoint Energy, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012; unaudited consolidated results. CenterPoint is a utility holding company with electric transmission and distribution, natural gas distribution, pipelines, gathering and related businesses. Unless stated otherwise, financial amounts below are in millions of dollars.
Financial results
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $1,525 | $1,837 | $3,609 | $4,424 |
| Operating income | $302 | $303 | $640 | $667 |
| Net income | $126 | $119 | $273 | $267 |
| Diluted EPS | $0.29 | $0.28 | $0.64 | $0.62 |
| Operating margin | 19.8% | 16.5% | 17.7% | 15.1% |
Revenue fell 17% in the quarter and 18% year to date, while operating income was nearly flat in Q2 and down 4% for the six months. Lower natural gas prices and related lower gas costs reduced reported revenue; the resulting higher operating-margin percentages should be read in that context. Net income increased modestly, supported by investment gains, affiliate indemnification income and, for the six-month period, lower income tax expense. The six-month effective tax rate was 35%, versus 37% in 2011, including a favorable $10 million IRS Appeals settlement adjustment.
Cash flow and liquidity: Six-month operating cash flow was $927, down from $1,137; investing cash use was $657 versus $572; financing provided $633 versus cash use of $574. Cash rose to $1,123 at June 30 from $220 at year-end, partly reflecting debt issuance. Capital expenditures were $524 in the first half. Management expected cash on hand and operating cash flows to cover anticipated needs for the remaining six months of 2012, including approximately $708 of capital expenditures, $275 for the July acquisition, $219 of scheduled transition-bond principal payments and approximately $78 of pension contributions.
At June 30, current assets were $2,955 and current liabilities $3,206. Long-term debt was $8,583; current portions of long-term debt were $1,388, indexed debt $134, and short-term borrowings $30. The company reported $9.8 billion of fixed-rate debt excluding indexed debt, at carrying amount. Revolving credit facilities totaled $2.45 billion; utilization was limited to letters of credit ($10 million) at June 30, with no commercial paper outstanding. Declared dividends were $0.2025 per share for Q2, up from $0.1975.
Material changes and operating trends
- Electric transmission and distribution: Segment operating income rose to $191 from $185 for Q2 and to $298 from $286 year to date. Customer growth, equity-return recovery and miscellaneous revenues helped; the prior rate-case impact and milder weather partly offset gains.
- Natural gas distribution: Operating income declined to $9 from $13 in Q2 and to $130 from $155 year to date. Management attributed the decline principally to warmer weather and lower throughput, partly offset by rate increases, customer additions and lower bad-debt expense.
- Competitive natural gas sales and services: The segment reported a Q2 operating loss of $4 and a six-month loss of $3, versus income of $3 and $13, respectively, in 2011. Mark-to-market derivative charges, compressed margins and a $4 inventory write-down affected results.
- Interstate pipelines: Operating income declined to $52 from $60 in Q2 and to $112 from $136 year to date, primarily following expiration of a backhaul contract and reduced related compressor efficiency.
- Field services: Operating income increased to $51 from $39 in Q2 and to $98 from $75 year to date, driven by gathering throughput growth and contracted volume commitments, partly offset by lower commodity prices.
Outlook, transactions and risks
- No quantitative earnings guidance is provided. Management cited seasonality, weather, commodity prices, rate recovery, capital needs and financing access as factors affecting future results.
- In January, a subsidiary issued $1.695 billion of transition bonds, with maturities from 2018 to 2025 and rates from 0.9012% to 3.0282%; repayment is through customer charges. The issuance recovered a comparable true-up balance.
- CenterPoint acquired the Amoruso gathering system for approximately $89 million in May and entered a 15-year gathering agreement. On July 31, it acquired the remaining 50% of Waskom and other gathering assets for approximately $275 million, recording a pre-tax gain of approximately $130 million from remeasuring its existing Waskom interest.
- CenterPoint Houston called for redemption of $800 million of 2014 bonds in August 2012. The expected premiums were approximately $71 million; the company expected to issue $800 million of long-term debt, subject to market conditions, to fund part of the redemption.
- Regulatory matters include appeals of the 2010 electric rate case, pending or approved gas-rate mechanisms, and a Houston inquiry into gas utility rates. Rate recovery and regulatory outcomes remain material business considerations.
- Management said there were no material changes to the risk factors in the 2011 Form 10-K. Risks include weather, regulatory and environmental developments, commodity and supply conditions, capital-market access, counterparty/customer credit, litigation, outages and natural disasters. Management did not expect the described litigation and environmental matters to have a material adverse effect.
- A CERC guarantee related to former affiliate GenOn transportation obligations had a maximum potential payout of approximately $82 million; GenOn had posted $28 million of collateral, which could be insufficient if GenOn failed to perform. Derivative credit downgrades could also require additional collateral.
Important facts for investors to verify
- Whether the revenue decline reflects mainly lower commodity prices and pass-through gas costs, and how underlying segment margins and earnings are trending.
- Progress and economics of the Waskom and other gathering-asset acquisition, including realization of the reported $130 million gain and subsequent operating contribution.
- Completion, financing cost and premium for the planned $800 million bond redemption/refinancing.
- Cash generation, capital spending and debt maturities, alongside ongoing transition-bond charges and liquidity needs.
- Outcomes of the rate proceedings and regulatory inquiries, and the adequacy of collateral supporting GenOn-related guarantees and other counterparty exposures.