CenterPoint Energy, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unaudited results are compared with the same periods in 2019. CenterPoint Energy is a utility holding company with electric and natural gas operations and a significant investment in Enable Midstream Partners.
Financial results and key metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $1.575bn | $1.658bn | $3.742bn | $3.887bn |
| Operating income | $235m | $229m | $452m | $440m |
| Income from continuing operations | $135m | $151m | $(918)m | $294m |
| Net income (loss) | $105m | $195m | $(1.094)bn | $364m |
| Income (loss) available to common shareholders | $59m | $165m | $(1.169)bn | $305m |
| Diluted EPS | $0.11 | $0.33 | $(2.27) | $0.61 |
| Cash from operating activities | Not separately presented quarterly | $1.181bn | $574m |
Q2 operating margin was approximately 14.9%, compared with 13.8% a year earlier; six-month operating margin was approximately 12.1%, compared with 11.3%. These are calculated as operating income divided by revenue. Q2 revenue declined about 5%, while operating income increased about 3%.
- Cash flow and investment: Six-month capital expenditures were $1.278bn, versus $1.169bn. Investing cash flow was $(143)m, versus $(7.149)bn in 2019, which included substantial acquisition spending. Financing cash flow was $(1.115)bn, versus $2.629bn provided in 2019. Operating cash flow less capital expenditures was approximately $(97)m for the first half.
- Balance sheet and liquidity: At June 30, cash and cash equivalents were $168m, and marketable securities were $753m. Total debt, including current maturities, was approximately $12.85bn, versus $15.09bn at December 31, 2019; debt fair value was $14.42bn. The company reported $5.1bn of revolving credit facilities, with no revolver loans outstanding at June 30; commercial paper outstanding was $780m. The registrants were in compliance with debt covenants.
- Other financial items: Total assets were $32.15bn and shareholders’ equity was $8.39bn. CenterPoint recorded $75m of Q2 gains on marketable securities and a $76m loss on indexed debt securities, both subject to market movements.
Material changes versus the prior comparable period
- For the first half, the $1.541bn non-cash impairment of the Enable investment was the principal driver of the reported loss. Enable-related equity results were a loss of $1.432bn, versus earnings of $136m in 2019. A separate $185m non-cash goodwill impairment was recorded in Indiana Electric Integrated.
- Q2 common-shareholder income fell $106m year over year, primarily due to lower discontinued-operations income, reduced Enable-related earnings, greater preferred-stock allocations, and lower Houston Electric earnings.
- Two businesses were sold and reported as discontinued operations: Infrastructure Services closed April 9 for $850m cash; Energy Services closed June 1 for approximately $286m cash. CenterPoint also recorded estimated sale-adjustment receivables of approximately $75m for Energy Services and a receivable for Infrastructure Services adjustments; final amounts may differ. The sales generated cash but also contributed impairment and disposal losses.
- Natural Gas Distribution earnings improved, supported by rate increases, customer growth and lower operating costs. Houston Electric earnings declined modestly for the first half; management cited COVID-related commercial and industrial usage reductions, rate-design changes, higher depreciation and taxes, partly offset by transmission revenue, customer growth and lower operating costs.
Outlook, management commentary, risks and contingencies
- COVID-19: Essential electric and gas services remained operational. Commercial and industrial usage declined, disconnection moratoria reduced certain fee revenues, and receivable aging and doubtful-account allowances increased. Management said the pandemic was expected to adversely affect future quarters but could not reliably estimate its full financial impact. Regulators allowed certain COVID-related costs, including bad debt, to be deferred for possible future recovery; recovery remains subject to regulatory review.
- Cost and capital plans: Management targeted approximately $300m less 2020 capital spending and approximately $40m lower 2020 O&M expense, subject to stated exclusions. The company continued to target approximately $13bn of total capital investment over five years. Estimated remaining-2020 capital expenditures were $1.051bn for CenterPoint Energy.
- Enable exposure: Enable cut its quarterly common-unit distribution by 50%, from $0.3305 to $0.16525. CenterPoint estimated this would reduce annual common-unit distributions by approximately $155m; further reductions were possible if commodity and economic conditions worsened. CenterPoint held approximately 53.7% of Enable’s common units. The investment’s carrying value was reduced to $848m after impairment; management reported no further impairment in Q2, but noted that additional declines in value could cause further charges.
- Capital actions and dividends: In May, CenterPoint raised net proceeds of $673m from common-stock issuance and $724m from Series C preferred-stock issuance. The common dividend was reduced from $0.29 to $0.15 per share quarterly, effective with the April declaration. Series C may convert into common shares; conversion of all issued shares at the initial price would represent approximately 47.4m shares.
- Regulation and projects: Houston Electric’s rate settlement produced an approximately $13m annual revenue requirement increase, a 9.4% ROE and a refund of $105m of unprotected excess deferred taxes plus carrying costs over roughly 30–36 months. The PUCT approved the settlement and rates took effect April 23. The Bailey-to-Jones Creek transmission project, estimated at approximately $483m, was expected to begin construction in early 2021 and finish before the end of 2021, subject to permitting and construction risks. Indiana Electric’s generation plan and environmental compliance investments remain relevant capital and regulatory matters.
- Risks and contingencies: Key risks include the duration and economic effects of COVID-19, customer non-payment and potential utility counterparty issues, Enable’s commodity and distribution outlook, interest-rate and capital-market access, regulatory cost recovery, weather and severe events, and environmental requirements. Indiana Electric recorded an approximately $72m asset-retirement obligation for ash-pond closures and anticipates an additional $60m–$80m of equipment purchases for the A.B. Brown closure project. The filing identifies ongoing litigation and environmental matters, including Minnehaha Academy claims and remediation obligations; management did not expect the described matters to have a material adverse effect. CERC retained estimated guarantee exposure of approximately $103m related to the sold Energy Services business, which management considered unlikely to result in a material payment.
Important facts for investors to verify
- How much of the Enable investment impairment and discontinued-operation losses are non-recurring, and whether further impairments or distribution cuts occur.
- Final sale-adjustment proceeds and any resulting gain or loss from the two divestitures, as well as the use of proceeds to reduce debt.
- Whether the planned capital and O&M reductions are achieved without compromising reliability, safety or regulated investment recovery.
- COVID-related receivable deterioration, regulatory deferrals and the timing and extent of actual recovery from customers.
- Debt maturities, commercial-paper access, credit ratings and any dilution or cash settlement associated with Series C preferred-stock conversion.
- Regulatory outcomes and costs for the transmission, generation and ash-pond projects, including the stated schedules and recovery assumptions.