CenterPoint Energy, Inc. — Q2 2009 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2009; comparative periods ended June 30, 2008. Amounts are in millions of dollars except per-share data. CenterPoint is a utility holding company with electric transmission and distribution, natural gas distribution, pipeline, gathering and competitive gas businesses.
Financial performance
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Revenue | $1,640 | $2,670 | $4,406 | $6,033 |
| Operating income | $253 | $297 | $538 | $633 |
| Net income | $86 | $101 | $153 | $223 |
| Diluted EPS | $0.24 | $0.30 | $0.44 | $0.66 |
| Operating margin | 15.4% | 11.1% | 12.2% | 10.5% |
Revenue fell sharply, principally reflecting lower natural gas commodity prices and reduced competitive gas sales revenue; operating income and net income also declined. Management attributed the six-month net income decrease primarily to $95 million lower operating income, $28 million higher interest expense (excluding transition-bond interest), and $12 million lower equity earnings, partly offset by lower taxes and $14 million of Hurricane Ike-related interest income. Reported operating margin rose because revenue, particularly commodity-related revenue, fell faster than operating income.
Cash flow, balance sheet and liquidity
- Six-month operating cash flow was $1,056, up from $868 in 2008; investing cash outflow was $504 versus $700, including $504 of capital expenditures versus $419. Financing cash outflow was $568 versus $147. Cash ended at $151, compared with $167 at year-end 2008.
- At June 30, total assets were $18,717 and shareholders’ equity was $2,237. Current assets of $1,928 were below current liabilities of $2,094; cash was $151.
- Long-term debt was $9,631; adding current debt and short-term borrowings brings reported debt to approximately $10.05 billion, down from approximately $10.67 billion at December 31, 2008. Debt balances exclude derivative liabilities.
- Credit-facility borrowings totaled $509 at June 30, down from $1,441 at year-end. CenterPoint and its principal subsidiaries reported covenant compliance. Management expected operating cash flow and credit facilities to cover anticipated cash needs for the remainder of 2009.
- For the remaining six months of 2009, expected principal cash requirements included approximately $636 of capital expenditures and $104 of maturing transition bonds, in addition to dividends and interest.
Material changes and operating trends
- Electric Transmission & Distribution operating income was $162 for Q2 and $232 for six months, compared with $164 and $255. Customer growth and higher transmission revenue were offset by milder-weather-related declines in use, increased transmission costs, pension costs and advanced-metering expenses.
- Natural Gas Distribution operating income was $2 for Q2 and $120 for six months, compared with $4 and $125. Rate and other margin gains were substantially offset by higher pension and operating expenses.
- Competitive Natural Gas Sales and Services reported operating income of $6 for Q2 and $8 for six months, improving from a Q2 loss of $5 and six-month income of $1, partly due to less adverse derivative mark-to-market effects. It recorded a $6 inventory write-down in the first half.
- Interstate Pipelines operating income declined to $61 for Q2 and $130 for six months, from $101 and $172, reflecting lower commodity-linked ancillary-service margins and the absence of a prior-year $18 gain on storage-project sales, partly offset by new transportation business.
- Field Services operating income fell to $23 for Q2 and $49 for six months, from $32 and $77, mainly due to lower commodity prices and prior-year one-time gains.
Outlook, risks and unusual items
- Hurricane Ike recovery: By June 30, CenterPoint Houston had recorded $442 of regulatory assets and $163 of related property, plant and equipment for restoration costs. A July 31, 2009 settlement provided for recovery of $663 of costs plus subsequent carrying costs, subject to Texas regulator approval. Approximately $643, plus issuance costs, could be eligible for recovery through system-restoration bonds; the regulator’s final action and bond amount remained pending. The company expected to seek recovery of approximately $20 of transmission costs separately.
- True-up litigation: The Texas Supreme Court agreed to review disputed electric restructuring true-up issues, with argument scheduled for October 2009. If the appellate decision stands, CenterPoint estimated a possible additional pre-tax loss of $170–$385 plus interest. The related tax-normalization issue could also create tax and depreciation consequences; the ultimate outcomes were uncertain.
- Regulatory rate proceedings included a July 2009 Houston-area gas-rate request seeking $25.4 of annual revenue increases and a Minnesota request seeking $59.8; decisions were expected in 2010. A Mississippi request seeking $6.2 of annual revenue was filed in July 2009.
- Other exposures include commodity and weather variability, collateral requirements, counterparty/customer credit risk, rating downgrades, litigation and environmental contingencies. A 10% commodity-price decline would raise the reported net fair-value liability on non-trading energy derivatives by $40, though the filing expected the underlying physical hedges to substantially offset this exposure. A credit-rating trigger on certain derivatives could require $89 of additional collateral.
- CenterPoint issued 13.8 million shares in Q2 for $145 gross proceeds under its equity distribution program and issued another 0.5 million shares for $5 on July 1, increasing share count and diluting per-share results. The board declared a $0.19-per-share dividend payable September 10, 2009.
- The filing reported effective disclosure controls and no material change in internal control over financial reporting. Management stated that there had been no material change in risk factors from the 2008 Form 10-K. No specific full-year earnings guidance was provided.
Key investor verification points
- Confirm Texas regulator approval, final recoverable Ike costs, deferred-tax treatment, and timing and terms of any restoration-bond issuance.
- Track the Texas Supreme Court true-up appeal and tax-normalization proceedings, including potential loss and tax effects.
- Assess whether lower commodity prices, milder weather, pension costs and pipeline ancillary-service margins persist, and distinguish recurring results from prior-year gains and current-period mark-to-market items.
- Review refinancing needs, available facility capacity, covenant headroom, credit ratings and potential collateral calls, particularly given current liabilities exceeding current assets.
- Monitor further equity issuance and the impact of dilution on EPS and dividend coverage.