CenterPoint Energy, Inc. — Q1 2010 Form 10-Q
Reporting period: Three months ended March 31, 2010; comparisons are with Q1 2009 unless otherwise noted. CenterPoint is a utility holding company with electric transmission and distribution, natural gas distribution, pipelines, gas gathering and related businesses. The company notes that quarterly results are seasonal and are not necessarily indicative of full-year results.
Financial results and position
| Metric | Q1 2009 | Q1 2010 |
|---|---|---|
| Revenue | $2.766 billion | $3.023 billion |
| Operating income | $285 million | $357 million |
| Operating margin | 10.3% | 11.8% |
| Income before taxes | $115 million | $216 million |
| Net income | $67 million | $114 million |
| Diluted EPS | $0.19 | $0.29 |
| Dividends declared per share | $0.190 | $0.195 |
| Cash from operating activities | $433 million | $435 million |
| Capital expenditures | $260 million | $258 million |
- Revenue increased 9%; operating income rose 25% and net income rose 70%. Management attributed higher net income primarily to stronger segment operating income, a more favorable combined result from marketable securities and indexed debt securities, lower interest expense excluding transition-bond interest, and higher affiliate earnings. Higher income taxes partly offset these gains.
- The effective tax rate rose to 47% from 42%. A non-cash $21 million tax expense resulted from 2010 health-care legislation; the company recorded an $11 million regulatory asset for the portion it expects to recover through regulation.
- Cash and cash equivalents were $329 million at March 31, down $411 million from year-end; marketable securities were $338 million. Operating cash flow was nearly unchanged year over year. Investing used $303 million and financing used $543 million.
- Balance-sheet long-term debt was $8.410 billion, down from $9.119 billion at December 31, 2009; the filing’s debt fair-value note reports carrying amount of $9.459 billion, compared with $9.900 billion at year-end. The company repurchased $290 million of pollution-control bonds and CERC redeemed $45 million of convertible debentures during January. No borrowings were outstanding under the principal revolving facilities at quarter-end; debt covenants were met.
- Total assets were $19.351 billion and shareholders’ equity was $2.709 billion at March 31. Current liabilities exceeded current assets, which were $2.384 billion and $3.202 billion, respectively.
Material changes and business drivers
- Electric Transmission & Distribution operating income rose to $107 million from $70 million, reflecting higher usage, colder weather, customer growth, transmission revenues and advanced-metering revenues.
- Natural Gas Distribution operating income increased to $139 million from $118 million, mainly from higher margins, colder-weather usage and lower bad-debt expense.
- Competitive Natural Gas Sales and Services operating income improved to $15 million from $2 million, partly due to more favorable derivative mark-to-market results and a smaller gas-inventory write-down; lower pipeline basis and winter storage spreads were offsets.
- Interstate Pipelines operating income increased to $72 million from $69 million, while Field Services income declined to $23 million from $26 million as higher project costs and lower gas prices outweighed new-project margins.
Outlook, capital plans and risks
- No specific earnings or EPS guidance is provided. Management expects operating cash flows and credit facilities to cover anticipated cash needs for the remaining nine months of 2010. Expected requirements include approximately $1.2 billion of capital expenditures, $206 million of maturing long-term debt, $134 million of scheduled transition- and system-restoration-bond principal payments, dividends and interest.
- CenterPoint Houston planned to file a general rate case by June 30, 2010, with a final order anticipated in early 2011. The requested rate terms and amount had not been established in the filing.
- Field Services is developing gathering and treating capacity in the Haynesville and Bossier shale areas. The Magnolia project was estimated to cost up to $325 million for 700 MMcf/day, with about $260 million spent by March 31; a further 200 MMcf/day expansion was estimated at $50–$70 million. Separate Olympia facilities and construction were estimated at up to $400 million for 580 MMcf/day. These projects involve substantial capital commitments and execution risk.
- CenterPoint Houston finalized a $200 million Department of Energy grant for advanced metering and grid automation; the grant reimburses 50% of eligible costs. The company said the grant would accelerate advanced-meter deployment and support initial grid-automation deployment.
- A significant regulatory contingency remains in the Texas electric restructuring true-up proceedings. If the Texas Supreme Court does not modify the appellate decision, the company estimated a possible additional pre-tax loss of $180–$410 million plus interest. The related tax-normalization issue could also expose the company to material tax consequences; outcomes remain uncertain.
- Other risks include regulatory rate recovery, weather and commodity-price movements, major-project cost and schedule overruns, access to capital and credit-rating changes, collateral requirements, counterparty performance, and litigation. The company disclosed no material changes to the risk factors in its 2009 Form 10-K.
- Remaining legal and environmental matters include gas-market litigation and remediation obligations; the company generally stated it did not expect these matters to materially affect its financial condition, results or cash flows. CERC’s guarantees tied to former affiliate RRI obligations also remain a contingent exposure; RRI was not required to provide security at quarter-end.
Most important facts for investors to verify
- Progress and outcomes in the Texas true-up appeal and tax-normalization remand, including any resulting loss, refund or tax exposure.
- Whether the planned CenterPoint Houston rate filing produces timely and adequate cost recovery.
- Actual capital spending, completion timing, utilization and returns for Magnolia and Olympia gathering projects and the advanced-meter/grid program.
- Cash generation and liquidity against the remaining-2010 capital, debt-service and dividend requirements, including refinancing access and credit ratings.
- Whether earnings gains persist after considering weather, derivative mark-to-market effects, the higher tax rate and increased share count.