Business Context and Reporting Period
Company: CenterPoint Energy, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Business Overview: A public utility holding company operating electric transmission and distribution facilities (CenterPoint Houston), natural gas distribution systems in six states, interstate pipelines, and natural gas gathering/processing facilities.
Key Financial Metrics
| Metric (in millions, except per share) | Q1 2009 | Q1 2008 |
|---|---|---|
| Revenues | $2,766 | $3,363 |
| Operating Income | $285 | $336 |
| Net Income | $67 | $122 |
| Diluted EPS | $0.19 | $0.36 |
| Operating Cash Flow | $433 | $567 |
| Total Assets | $18,810 | $19,676 |
| Total Long-Term Debt | $9,875 | $10,181 |
| Cash and Equivalents | $65 | $167 |
Material Changes vs. Prior Period
- Revenue Decline: Consolidated revenues decreased by $597 million (17.8%) primarily due to lower natural gas commodity prices and reduced customer usage driven by milder weather.
- Net Income Drop: Net income fell $55 million (45.1%) to $67 million. Key drivers included a $51 million decrease in operating income, a $28 million reduction in gains on indexed debt securities, and a $13 million increase in interest expense.
- Segment Performance:
- Electric Transmission & Distribution: Operating income decreased $21 million due to lower utility operating income, offset slightly by transition bond income.
- Field Services: Operating income dropped $19 million, largely due to the absence of one-time gains ($17 million total) recognized in Q1 2008 from a customer settlement and asset sale.
- Competitive Natural Gas Sales: Operating income declined $4 million due to a $6 million write-down of gas inventory to market value.
- Cash Flow: Operating cash flow decreased $134 million, impacted by increased margin deposits and lower net income, partially offset by a reduction in natural gas inventory.
Outlook, Risks, and Management Commentary
- Hurricane Ike Recovery: CenterPoint Houston is seeking regulatory approval to recover approximately $678 million in storm restoration costs. In April 2009, the Texas Legislature enacted legislation authorizing the issuance of system restoration bonds to recover these costs. Management expects to incur an additional $12 million in restoration costs.
- Regulatory Litigation (True-Up): The Texas Supreme Court is reviewing the "True-Up" balance appeal. If the lower court's decision is not reversed, the Company anticipates recording an additional pre-tax loss ranging from $170 million to $385 million.
- Debt Financing: In January 2009, CenterPoint Houston issued $500 million in general mortgage bonds at 7.00% interest to fund capital expenditures and storm restoration costs. The Company remains in compliance with all debt covenants.
- Dividend: On April 23, 2009, the Board declared a quarterly cash dividend of $0.19 per share.
- Risk Factors: Significant risks include the resolution of regulatory true-up appeals, potential credit rating downgrades increasing collateral requirements, and the financial stability of Reliant Energy, Inc. (RRI), a major customer and indemnitor.
Investor Verification Checklist
- Hurricane Ike Cost Recovery: Verify the status of the Texas Utility Commission's ruling on the $678 million restoration cost application and the issuance of system restoration bonds.
- True-Up Litigation: Monitor the Texas Supreme Court's decision on the True-Up appeal, which could result in a material charge of up to $385 million.
- Commodity Hedging: Review the impact of natural gas price volatility on the Competitive Natural Gas Sales segment and the associated mark-to-market losses.
- Debt Covenants: Confirm continued compliance with debt-to-EBITDA and debt-to-capitalization covenants, particularly given the temporary modifications related to Hurricane Ike.
- Customer Credit Risk: Assess the financial health of Reliant Energy, Inc. (RRI) regarding its ability to meet payment obligations and indemnity requirements.