CenterPoint Energy, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; unaudited. CenterPoint is a utility holding company with electric transmission and distribution, natural gas distribution and energy services businesses, plus an investment in Enable Midstream Partners.
Financial results and key metrics
Amounts below are in millions, except per-share data. Comparisons are with the corresponding 2016 period.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $2,098 | $1,889 | $6,976 | $5,447 |
| Operating income | $279 | $284 | $776 | $716 |
| Net income | $169 | $179 | $496 | $331 |
| Diluted EPS | $0.39 | $0.41 | $1.14 | $0.76 |
| Operating margin | 13.3% | 15.0% | 11.1% | 13.1% |
| Cash from operating activities | — | — | $1,031 | $1,455 |
| Capital expenditures | — | — | $994 | $1,047 |
- Revenue mix and growth: Nine-month revenue rose 28%, primarily reflecting higher Energy Services revenue following the January 2017 acquisition of Atmos Energy Marketing (AEM), as well as increased natural gas distribution revenue. Utility revenue was nearly flat year over year for the nine-month period.
- Segment operating income, nine months: Electric Transmission & Distribution was $489 (down from $498); Natural Gas Distribution was $220 (up from $202); and Energy Services was $58 (up from $11). Energy Services’ increase was primarily due to derivative mark-to-market timing gains and the AEM acquisition. Enable equity earnings increased to $199 from $164.
- Balance sheet at September 30: Cash and cash equivalents were $201; marketable securities were $1,057; total assets were $22,135; and shareholders’ equity was $3,618. Long-term debt was $7,531, with $982 of current maturities and current indexed debt; the filing’s debt table reports $8,513 of total long-term debt including current portions, excluding the separate indexed-debt balance.
- Liquidity: Revolving credit facilities totaled $2.9 billion, with $976 million of commercial paper and $10 million of letters of credit outstanding at September 30. The companies were in compliance with financial covenants. Cash declined by $140 million during the first nine months.
Material changes versus the prior period
- Q3 net income declined $10 million, mainly from a $40 million lower gain on marketable securities, lower operating income and Enable earnings; partially offset by a smaller ZENS indexed-debt loss and lower interest expense.
- Nine-month net income increased $165 million. Key contributors included a $199 million reduction in ZENS-related indexed-debt losses, $60 million higher operating income, $35 million higher Enable equity earnings and lower interest expense. These gains were partly offset by higher income tax expense and a smaller marketable-securities gain.
- Operating cash flow fell $424 million year over year, principally due to working-capital movements and lower cash flow from operations after adjusting for non-cash and non-operating items.
- CenterPoint acquired AEM for a final purchase price of $147 million, including $132 million net cash paid as reported in investing activities. The acquisition added $989 million of reported nine-month revenue and $28 million of operating income.
Outlook, risks and unusual items
- Hurricane Harvey: Houston Electric estimated electric-system restoration costs of $110–$120 million, with about $35 million covered by insurance. Natural Gas Distribution estimated costs of $25–$30 million, with about $17 million insured. Management deferred uninsured costs as regulatory assets based on expected recovery through rates and stated that the storm should not materially affect 2017 reported net income. Recovery and final costs remain subject to regulatory processes and insurance.
- Near-term cash needs: For the remaining three months of 2017, anticipated requirements included approximately $473 million of capital expenditures, $250 million of maturing senior notes, $64 million of scheduled securitization-bond principal payments, Harvey restoration costs, dividends and interest. Management expected available credit, commercial paper, operating cash flow and Enable distributions to meet anticipated needs.
- Guidance and distributions: Management expected a 2017 annual effective tax rate of approximately 36%. The board declared a $0.2675-per-share quarterly dividend payable December 8, 2017. Enable declared distributions for Q3, and CenterPoint expected to receive approximately $74 million on common units and $9 million on Series A Preferred Units in Q4.
- Investment and market risks: CenterPoint’s Enable investment and distributions are exposed to midstream market conditions and Enable’s operating performance. The company was evaluating alternatives for its Enable interest, had ruled out a spin-off, and could reduce common-unit ownership through market sales if a sale option proved unviable. Commodity prices, weather, interest rates, regulation, credit ratings and access to capital also affect results and liquidity.
- Debt and ZENS: The ZENS indexed-debt derivative liability was $776 million at quarter-end, with changes in fair value recorded in earnings. A cash exchange of all ZENS could trigger significant tax payments; the filing estimated deferred taxes of $472 million and capital-gains taxes of $331 million if the related securities were sold as of September 30.
- Contingencies: CenterPoint and affiliates face litigation related to the August 2017 Minnehaha Academy gas explosion; investigations were ongoing and insurance coverage was noted. GenOn’s Chapter 11 bankruptcy may affect its ability to meet indemnity obligations in older gas-market litigation. The filing also describes environmental and other proceedings, generally not expected by management to have a material adverse effect.
- Other: The company reported no material change in risk factors from its 2016 Form 10-K. Disclosure controls were considered effective, and no material change in internal control over financial reporting was reported.
Most important facts for investors to verify
- Whether Harvey restoration costs, insurance recoveries and regulatory approvals remain within management’s estimates and timing expectations.
- Whether operating cash flow recovers after the year-over-year decline and whether planned capital spending, debt maturities and dividends are funded as expected.
- How much of the nine-month earnings improvement reflects sustainable operations versus ZENS valuation changes, securities gains and derivative mark-to-market timing.
- Enable’s operating performance, distributions and any CenterPoint actions to sell or otherwise change its Enable ownership.
- Developments in rate proceedings, the Minnehaha Academy litigation and investigation, and GenOn’s ability to honor indemnity obligations.