Business context and reporting period
CenterPoint Energy, Inc. filed this unaudited combined Form 10-Q for the quarter and nine months ended September 30, 2018. The filing also includes separate results for Houston Electric and CenterPoint Energy Resources Corp. (CERC). CenterPoint operates electric transmission and distribution, natural gas distribution and energy services businesses, and holds an investment in Enable Midstream.
On September 4, CERC transferred its Enable investment to CenterPoint through an internal spin. CERC has no continuing involvement in that investment, and its Enable earnings are presented as discontinued operations. CenterPoint retained approximately 54% of Enable’s common units.
Financial performance and position
| CenterPoint Energy consolidated | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $2.212 billion | $2.098 billion | $7.553 billion | $6.976 billion |
| Operating income | $226 million | $297 million | $664 million | $828 million |
| Net income | $158 million | $169 million | $248 million | $496 million |
| Income available to common shareholders | $153 million | $169 million | $243 million | $496 million |
| Diluted EPS | $0.35 | $0.39 | $0.56 | $1.14 |
Q3 revenue increased about 5%, while operating income fell about 24%; nine-month revenue rose about 8%, while operating income declined about 20%. Operating margin, calculated from reported figures, was approximately 10.2% for Q3 versus 14.2% a year earlier, and 8.8% for the nine-month period versus 11.9%.
- Segment trends: Electric Transmission & Distribution operating income was $227 million in Q3 and $523 million year to date. Natural Gas Distribution earned $3 million in Q3 and $166 million year to date, down from $25 million and $235 million. Energy Services recorded operating losses of $9 million in Q3 and $20 million year to date, versus income of $7 million and $58 million.
- Cash flow: Nine-month operating cash flow was $1.679 billion, investing cash outflow was $674 million, and financing cash outflow was $970 million. Capital expenditures were $1.121 billion. Financing included $398 million distributed to ZENS noteholders and $790 million net proceeds from Series A preferred stock.
- Balance sheet and liquidity: At September 30, total assets were $22.228 billion and cash and cash equivalents were $293 million ($331 million including restricted cash). Marketable securities were $627 million. Reported long-term debt, including current maturities, was approximately $7.758 billion; the company also reported a $685 million indexed-debt derivative liability. CenterPoint had no short-term borrowings at quarter-end and was in compliance with debt covenants.
- Tax: CenterPoint’s effective tax rate was 24% for Q3 and 26% for the first nine months, compared with 37% and 36% in 2017. Management expected an approximately 24% full-year 2018 effective tax rate.
Material changes and unusual items
- CenterPoint’s nine-month common earnings fell $253 million year over year. The main unusual driver was a $316 million loss on indexed debt securities, including losses associated with the AT&T-Time Warner and Meredith-Time transactions. A $398 million payment to ZENS holders reduced the notes’ contingent principal.
- Operating results weakened, particularly in Natural Gas Distribution and Energy Services. Energy Services’ nine-month results included a $94 million adverse year-over-year swing from mark-to-market accounting on derivatives; the filing also cites weaker supply-optimization opportunities in Q3.
- Houston Electric’s nine-month net income rose to $296 million from $223 million, supported in part by lower taxes and higher transmission and distribution operating income. TCJA-related rate adjustments reduced customer revenue in both electric and gas utilities.
- CERC’s Q3 net income was $9 million versus $38 million; continuing operations reported a $35 million loss, partly offset by $44 million of discontinued-operations income. For nine months, CERC net income was $175 million versus $239 million.
- Following the quarter, CenterPoint completed merger-related financing: $950 million net from Series B preferred depositary shares, $1.844 billion net from common stock, and $1.5 billion of senior notes. The Series A preferred offering had generated $790 million net in August. The October 5 termination of the bridge facility increased CenterPoint’s revolving credit commitment from $1.7 billion to $3.3 billion.
Outlook, risks and contingencies
CenterPoint continued to expect to close its approximately $6 billion cash acquisition of Vectren in the first quarter of 2019, subject to remaining approvals and closing conditions. Vectren shareholders, the FTC and FCC had approved the transaction; FERC approval followed on October 5, 2018. The Indiana regulatory process remained pending. Specified termination circumstances could trigger a $210 million fee payable by CenterPoint or a $150 million fee payable by Vectren.
Management identified ongoing capital investment, rate recovery, weather, commodity prices, interest rates, credit ratings, counterparty and REP collections, regulatory decisions, and Enable’s performance and distributions as factors that could affect results and liquidity. The filing notes that lower credit ratings could increase collateral requirements; CERC could need as much as $185 million of collateral if ratings fell below certain thresholds. Enable pipeline rate outcomes under FERC’s tax-related actions remained uncertain.
Key contingencies include litigation arising from the 2017 Minnehaha Academy gas explosion, the Nevada gas-market case involving CES, and environmental remediation obligations. CERC recorded a $7 million liability for Minnesota manufactured-gas-plant monitoring and potential remediation; estimated possible remediation costs for relevant sites ranged from $4 million to $30 million. Management did not expect the disclosed matters to have a material adverse effect, while noting that outcomes are uncertain. The filing reported no material change in previously disclosed risk factors.
Most important facts for investors to verify
- Whether the Vectren merger received all remaining regulatory approvals and closed on the expected timetable, and how its financing affected leverage, ratings and share dilution.
- Whether weaker Natural Gas Distribution and Energy Services operating performance improved, including the realized-versus-mark-to-market contribution to Energy Services results.
- How much of the indexed-debt losses and ZENS cash obligations are nonrecurring, and the remaining ZENS exposure and related securities position.
- Whether regulatory proceedings permitted timely recovery of capital spending and addressed TCJA customer refunds and excess deferred taxes as expected.
- Whether operating cash flow, capital spending, liquidity facilities and debt covenants remained adequate as merger and infrastructure funding needs progressed.
- Developments in the Minnehaha Academy litigation, the Nevada case and the Vectren merger’s remaining approval conditions.