CenterPoint Energy, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Unaudited consolidated results. CenterPoint is a utility holding company with electric transmission and distribution, natural gas distribution and energy services businesses; it also held an approximately 55.4% limited-partner interest in Enable Midstream Partners, accounted for under the equity method.
Key financial metrics
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $1.807bn | $1.640bn | $6.854bn | $5.922bn |
| Operating income | $233m | $244m | $714m | $799m |
| Net income | $143m | $151m | $435m | $198m |
| Diluted EPS | $0.33 | $0.35 | $1.01 | $0.46 |
| Operating margin | 12.9% | 14.9% | 10.4% | 13.5% |
For the nine months, operating cash flow was $1.124bn, capital expenditures were $998m, and cash and cash equivalents rose to $230m from $208m at year-end 2013. Cash flow after capital expenditures was approximately $126m. Dividends paid were $306m; dividends declared were $0.2375 per share for Q3.
At September 30, total assets were $22.048bn and shareholders’ equity was $4.473bn. Reported long-term debt was $7.797bn, with additional current debt items and $80m of short-term borrowings. Current assets of $2.576bn were below current liabilities of $3.008bn. The filing reports $2.1bn of revolving credit facilities, extended to September 2019; the company and subsidiaries were in covenant compliance.
Changes versus comparable periods
- Q3 revenue increased 10%, while operating income fell $11m and net income fell $8m. Lower marketable-securities gains and lower operating income were the principal drags; a smaller indexed-debt securities loss and lower tax expense partly offset them.
- Nine-month net income rose $237m despite an $85m decline in operating income. Lower tax expense ($167m), higher equity earnings ($119m) and a smaller indexed-debt securities loss drove the increase. The 2013 comparison included a substantial tax charge associated with Enable’s formation.
- Comparability also reflects the May 2013 contribution of substantially all former interstate pipeline and field services operations to Enable. Those operations contributed income only through April 2013 in the 2013 nine-month segment figures; subsequent results are reflected mainly as equity earnings.
- Enable equity earnings were $236m for the first nine months of 2014, versus $110m for the five-month 2013 period reported after Enable’s formation. CenterPoint received $227m of Enable distributions during the 2014 nine-month period.
Outlook, management commentary, risks and unusual items
- No consolidated earnings guidance is provided in the supplied filing text. Management expected available cash, operating cash flows, borrowings and Enable distributions to meet anticipated cash needs for the remaining three months of 2014. Expected near-term uses included about $393m of capital expenditures and $60m of scheduled transition and system-restoration bond principal payments.
- Management identified utility infrastructure investment, reliability, safety and system expansion as primary capital needs. CenterPoint Houston’s share of the Brazos Valley Connection transmission project was estimated at $300m, with completion anticipated by mid-2018; an appeal by generators remained unresolved.
- Regulated-business results are exposed to weather, customer usage, cost recovery and regulatory decisions. Q3 electric results were affected by milder weather and higher labor and support costs; gas distribution reported an $8m operating loss versus $5m income a year earlier. Colder-than-normal weather supported nine-month gas results.
- Enable distributions depend on available cash and reserves. CenterPoint also disclosed exposure through a $1.1bn guarantee of collection on Enable senior notes, guarantees of up to $100m of Enable obligations, and a potential $46m maximum payout under legacy gas-transportation guarantees. The filing says the fair value of these guarantees was not material.
- Other disclosed uncertainties include potential collateral calls following credit downgrades, commodity-price and interest-rate movements, regulatory recovery of costs, litigation, environmental remediation and the ability of counterparties and retail electric providers to meet obligations. Management did not expect the cited legal and environmental matters to have a material adverse financial effect.
- Unusual accounting and market items include gains on marketable securities ($73m for nine months) and losses on indexed debt securities ($29m for nine months). The indexed-debt derivative liability was $483m at September 30. The company reported no goodwill impairment in its 2014 annual test.
Important facts for investors to verify
- How much of nine-month earnings growth reflects recurring operations versus tax effects, securities marks and the changed Enable reporting structure.
- Enable’s operating performance, distribution capacity and the implications of CenterPoint’s ownership, guarantees and receivables from Enable.
- Whether regulatory approvals and cost recovery support planned capital investment, especially the Brazos Valley Connection project and gas-rate proceedings.
- Debt maturities, current debt obligations, credit-facility covenant headroom and potential collateral needs under downgrade scenarios.
- The timing and final amount of Minnesota rate refunds, pending regulatory decisions, and any developments in litigation or environmental contingencies.