CenterPoint Energy, Inc. — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010; comparisons are with the corresponding 2009 periods. CenterPoint is a utility holding company whose operations include electric transmission and distribution, natural gas distribution, pipelines, and gas gathering and services. Amounts below are in millions of dollars except per-share data.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Revenue | $1,756 | $1,640 | $4,779 | $4,406 |
| Operating income | $263 | $253 | $620 | $538 |
| Net income | $81 | $86 | $195 | $153 |
| Diluted EPS | $0.20 | $0.24 | $0.49 | $0.44 |
| Operating margin | 15.0% | 15.4% | 13.0% | 12.2% |
Cash flow, six months: Operating cash flow was $818, down from $1,056. Capital expenditures were $727, versus $504; cash used in investing was $719. Cash used in financing was $256, versus $568. Cash and equivalents were $583 at June 30, down $157 from year-end 2009. Operating cash flow less capital expenditures was $91.
Balance sheet and liquidity: Total assets were $19,521 and shareholders’ equity was $3,061 at June 30. The filing reports $9.6 billion of consolidated indebtedness, including $2.9 billion of non-recourse transition and system restoration bonds. Current assets were $2,352 versus current liabilities of $3,032. Credit facilities totaled approximately $2.36 billion; the company reported covenant compliance and no revolving-credit borrowings at June 30. Long-term debt carrying amount was $9,453, with fair value of $10,296.
Other metrics: The company issued 25.3 million shares in June for approximately $315 million of net proceeds. The quarterly dividend declared was $0.195 per share. The six-month ratio of earnings to fixed charges was 2.05, compared with 1.70 in 2009.
Material changes and drivers
- Q2 revenue rose about 7%, but net income fell $5 and diluted EPS declined from $0.24 to $0.20. Higher operating income and lower interest expense were outweighed mainly by lower Hurricane Ike restoration-cost interest income, lower affiliate earnings, and higher tax expense. The larger share count also affected per-share results.
- Six-month revenue increased about 8% and net income increased $42. Operating income rose $82, led by Natural Gas Distribution, Electric Transmission and Distribution, and Field Services. Higher taxes, including a $21 non-cash charge related to 2010 health-care legislation, partly offset the gains.
- Six-month operating cash flow declined $238, primarily reflecting less cash from gas storage inventory and higher tax payments. Capital spending increased $223, mainly for Field Services projects.
- Segment results were mixed in Q2: Electric Transmission and Distribution operating income was $158 versus $162; Natural Gas Distribution was $10 versus $2; Competitive Natural Gas Sales and Services recorded a $6 loss versus $6 income; Interstate Pipelines earned $67 versus $61; and Field Services earned $31 versus $23.
Outlook, risks and contingencies
- No consolidated earnings guidance is provided in the supplied filing text. Management expected available cash, credit facilities, and operating cash flows to cover anticipated needs for the rest of 2010. Remaining-2010 cash requirements included approximately $760 of capital expenditures, $200 of maturing long-term debt, $134 of scheduled transition and system-restoration bond principal, dividends, and interest.
- CenterPoint Houston filed a Texas rate application in June seeking support for at least $76 of annual retail base-rate increases and $18 of wholesale transmission increases. Management said a decision could come as early as late 2010. The filing seeks an 11.25% return on equity; the result is uncertain.
- The Texas electric true-up appeals remain a significant contingency. If the appellate outcome is not favorable, the company estimated an additional pre-tax loss of $180–$410, plus subsequent interest. The related tax-normalization issue could also lead to tax payments or loss of accelerated depreciation benefits; the ultimate outcome is uncertain.
- The IRS proposed disallowing a $603 Hurricane Ike casualty-loss deduction in its examination of 2006–2007 returns. CenterPoint appealed and stated it had considered the proposal in its uncertain-tax-position accruals.
- Large gathering-system projects carry execution and capital risks. Magnolia’s original 700 MMcf/day scope was estimated to cost up to $325, with $286 spent by June 30; an elected expansion to 900 MMcf/day was estimated at $60. Olympia’s 600 MMcf/day build-out was estimated at up to $400, with $141 spent. Further expansions are optional and could require substantial additional capital.
- Other risks include weather and commodity-price volatility, rate-recovery and regulatory outcomes, construction costs and delays, natural disasters and limited insurance for CenterPoint Houston’s transmission and distribution system, concentrated receivables from retail electric providers, credit-rating and collateral requirements, and the ability of RRI Energy to meet indemnity and guaranty obligations.
- Management reported effective disclosure controls as of June 30, 2010 and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Track the Texas Supreme Court true-up decision and the related tax-normalization proceedings, including the potential $180–$410 pre-tax exposure and possible tax consequences.
- Check the outcome and timing of CenterPoint Houston’s rate case and the treatment of advanced-metering costs and DOE grant funding.
- Assess the IRS casualty-loss dispute and changes in unrecognized tax benefits; the filing reports $196 of unrecognized tax benefits at June 30.
- Monitor cash generation against the planned second-half capital program, debt maturities, and scheduled bond repayments, along with any additional financing or share issuance.
- Review construction progress, final costs, and customer volume commitments for Magnolia and Olympia, and whether counterparties elect further expansions.
- Evaluate debt and liquidity with the distinction between recourse debt and non-recourse transition bonds, and monitor rating, collateral, and major retail-provider exposures.