CENTERPOINT ENERGY INC quarterly report, Q1 FY2014

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CenterPoint Energy, Inc. — Q1 2014 Form 10-Q

Business context and reporting period. This unaudited filing covers the three months ended March 31, 2014, compared with the same 2013 period. CenterPoint operates electric transmission and distribution, natural gas distribution, and energy services businesses, and holds an equity-method investment in Enable Midstream Partners, LP (Enable). Results are seasonal and affected by weather and commodity prices.

Financial results and liquidity

  • Revenue: $3.163 billion, up 32% from $2.388 billion.
  • Operating income: $295 million, down from $332 million; operating margin was approximately 9.3%, versus 13.9% in Q1 2013.
  • Net income and EPS: Net income was $185 million versus $147 million; diluted EPS was $0.43 versus $0.34. The effective tax rate was 37% in both periods.
  • Cash flow: Operating cash flow was $380 million, down from $533 million. Capital expenditures were $301 million, compared with $271 million, leaving operating cash flow less capital expenditures of $79 million. Financing activities provided $107 million, versus $660 million used in the prior-year quarter.
  • Balance sheet: Cash was $379 million at March 31, versus $208 million at year-end 2013. Total assets were $22.264 billion; shareholders’ equity was $4.414 billion. Long-term debt was $8.056 billion, including $2.908 billion of transition and system restoration bonds; a further $362 million of those bonds was current. The company reported no short-term borrowings at quarter-end.
  • Liquidity: Revolving credit facilities totaled $2.1 billion, with $10 million of letters of credit and no loans outstanding at March 31. The company was in compliance with its financial covenants. Management expected available cash, credit facilities, commercial paper, operating cash flow, and Enable distributions to cover anticipated needs through the rest of 2014.
  • Dividends: $0.2375 per share was declared for Q1, versus $0.2075 a year earlier. The board declared the same $0.2375 quarterly dividend for payment in June 2014.

Material changes versus Q1 2013

  • Net income rose $38 million, despite operating income falling $37 million. Management attributed the net increase mainly to a $94 million improvement in indexed-debt-security gains, $86 million higher equity earnings from unconsolidated affiliates, and $19 million lower interest expense; these were partly offset by a $104 million deterioration in marketable-securities results, lower operating income, and higher income tax expense.
  • Enable contributed $88 million of equity earnings, compared with none in Q1 2013; CenterPoint’s retained SESH interest contributed $3 million. The company received $67 million of distributions from Enable during the quarter.
  • Q1 2014 operating income benefited from colder-than-normal weather in the electric and gas distribution businesses. Electric Transmission & Distribution operating income increased to $105 million from $84 million, and Natural Gas Distribution rose to $162 million from $139 million.
  • Energy Services operating income increased to $26 million from $7 million, helped by improved transportation-asset margins, higher throughput and price volatility. A $4 million derivative mark-to-market benefit compared with a $5 million charge in Q1 2013.
  • Prior-year Interstate Pipelines and Field Services operating income totaled $105 million; substantially all of those businesses were contributed to Enable in May 2013. Accordingly, segment comparisons are not directly comparable.
  • Operating cash flow declined primarily because of lower cash provided by fuel-cost recovery and working-capital movements. The $600 million bond issuance and lower long-term debt repayments were key contributors to the year-over-year change in financing cash flow.

Outlook, commentary, risks and unusual items

  • Capital needs: For the remaining nine months of 2014, CenterPoint expected approximately $1.1 billion of capital expenditures, $224 million of scheduled transition and restoration bond principal payments, approximately $93 million of additional pension contributions, and an $84 million pollution-control-bond redemption, as well as dividends and interest payments.
  • Enable IPO: Enable completed its IPO on April 16, 2014, after quarter-end, raising approximately $466 million net. CenterPoint’s limited-partner ownership fell from approximately 58.3% to 54.7%; CenterPoint and OGE continued to share control of Enable’s general partner. Enable expected a minimum quarterly distribution of $0.2875 per unit, subject to available cash and other conditions.
  • Regulatory matters: CenterPoint Houston sought a $13.6 million annual revenue increase through a transmission-cost filing. ERCOT endorsed a Houston-area transmission project estimated at approximately $600 million, but CenterPoint’s eventual construction and ownership share remained unresolved. Gas rate proceedings and infrastructure-recovery filings were also pending.
  • Contingencies and guarantees: CenterPoint disclosed up to $100 million of guarantees for certain Enable obligations, as well as CERC’s guarantee of collection on Enable’s $1.05 billion term loan, subordinated to CERC senior debt. No balance-sheet amounts were recorded for these guarantees. Other disclosed exposures include a maximum potential $55 million payout under legacy gas-transportation guarantees and environmental remediation liabilities, including $14 million recorded for Minnesota manufactured-gas-plant sites.
  • Credit and market risks: Risks include weather variability, commodity prices, regulatory cost recovery, interest and equity-market movements, counterparty credit, and access to financing. CenterPoint reported $184 million of billed receivables from retail electric providers; Energy Future Holdings and most of its subsidiaries filed for Chapter 11 in April 2014. A downgrade could also increase collateral needs; CERC could face up to $161 million of collateral demands under certain pipeline arrangements if ratings fell below applicable thresholds.
  • Unusual reported items: Q1 results included sizable mark-to-market changes in marketable securities and indexed debt securities. The ZENS indexed-debt derivative was a $412 million liability at March 31; the filing notes that these valuation changes affect reported earnings.

Important facts for investors to verify

  • Whether the net-income improvement persists after separating recurring operating performance from securities and indexed-debt fair-value movements.
  • How Enable’s post-IPO distributions, ownership dilution, and midstream performance affect CenterPoint’s cash flows and equity earnings.
  • The eventual approved revenue increases and CenterPoint Houston’s share, costs, and timing for the Houston transmission project.
  • Whether cash generation and financing capacity cover planned capital spending, debt service, pension contributions, and dividends.
  • Potential collection delays or losses related to retail electric provider receivables, including exposure to Energy Future Holdings affiliates.
  • Changes in guarantee, environmental, litigation, and collateral exposures; the filing states that management did not expect disclosed legal and environmental matters to have a material adverse effect, but outcomes remain uncertain.