CenterPoint Energy, Inc. — Q3 2011 Form 10-Q
Business context and reporting period. CenterPoint Energy is a utility holding company with electric transmission and distribution, natural gas distribution, interstate pipeline, gas gathering and processing, and competitive gas sales businesses. This unaudited report covers the quarter and nine months ended September 30, 2011; balance-sheet comparisons are with December 31, 2010. Amounts below are in millions except per-share data.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $1,881 | $1,908 | $6,305 | $6,687 |
| Operating income | $357 | $327 | $1,024 | $947 |
| Income before extraordinary item | $386 | $123 | $653 | $318 |
| Net income | $973 | $123 | $1,240 | $318 |
| Diluted EPS | $2.27 | $0.29 | $2.89 | $0.78 |
| Operating cash flow | — | — | $1,449 | $983 |
| Capital expenditures | — | — | $960 | $1,053 |
- Q3 net income included a $587 after-tax extraordinary gain and $352 of pretax return on the true-up balance. Excluding the extraordinary item, Q3 income was $386, or $0.90 basic EPS and $0.90 diluted EPS.
- Cash and cash equivalents were $103 at September 30, versus $199 at year-end 2010. Current assets were $1,982 and current liabilities $2,319. Long-term debt was $8,497; short-term borrowings were $84.
- Quarterly dividends declared were $0.1975 per share. The effective tax rate was 35% for Q3 and 36% for the first nine months, compared with 38% and 41%, respectively, in 2010.
Material changes versus the prior comparable period
- Nine-month revenue declined about 6%, while operating income increased about 8%. Net income growth chiefly reflects the true-up resolution and return, rather than solely recurring operating performance.
- Electric Transmission & Distribution operating income rose to $530 for nine months from $477, supported by usage, customer growth and transmission-related revenue. Field Services increased to $136 from $94, driven by gathering volumes and contracted commitments.
- Interstate Pipelines operating income declined to $196 from $207, including effects of an expiring backhaul contract and a restructured affiliate agreement. Competitive Natural Gas Sales and Services fell to $3 from $16 for nine months and recorded a Q3 operating loss of $10, affected by weaker basis spreads and derivative valuation.
- Operating cash flow increased by $466, with higher tax refunds a major contributor. Investing cash use decreased, while financing cash use increased; the company issued $550 of long-term debt and repaid $909 of long-term debt during the nine-month period.
Outlook, commentary, risks and unusual items
- The Texas Utility Commission approved a $1.695 billion additional recoverable true-up balance, with no further interest accruing, and authorized securitization through transition bonds. The financing order was issued October 27, after quarter-end, and was appealable. Management expected proceeds, less issuance costs, in Q4 2011 or Q1 2012; timing depended on appeals and market conditions.
- The related Q3 accounts include a $921 pretax extraordinary gain ($587 after tax) and $352 pretax other income from the appealed balance; a further $405 pretax equity return is to be recognized over the life of the transition bonds. Investors should note the order and financing developments occurred after September 30.
- Management expected approximately $500 of capital expenditures in the remaining three months of 2011 and said anticipated operating cash flows, commercial paper and credit facilities should meet expected near-term cash needs. No quantified full-year earnings guidance is provided in the filing.
- The 2010 CenterPoint Houston rate case resulted in revised rates effective September 1, 2011. It provides an estimated annual $14.7 increase in delivery charges and $12.3 decrease in wholesale transmission charges; management expects normalized annual operating income to be reduced by approximately $30.
- Key exposures include rate and regulatory outcomes, weather, commodity prices and basis spreads, capital-project execution, interest rates and access to capital, counterparties and customer credit, litigation, environmental remediation, and potential collateral needs. CERC’s guarantee exposure under certain gas transportation contracts had a maximum potential payout of approximately $100 through 2018; additional security from GenOn was requested for December 2011.
- The company reported no material change in disclosed risk factors and stated disclosure controls were effective. It reported a $13 accrual for Minnesota manufactured-gas-plant remediation, with estimated possible costs of $6–$41.
Important facts for investors to verify
- Whether the true-up and transition-bond orders withstand appeals, and when securitization proceeds are received.
- How much reported earnings growth is recurring after excluding the extraordinary true-up gain and return on the balance.
- Whether the rate-case impact, including the projected $30 annual operating-income reduction, is reflected in subsequent results.
- Cash-flow sustainability after the effect of tax refunds, planned capital spending, debt service and dividends.
- Developments in pipeline contract economics, gas-market spreads, counterparty credit and collateral requirements.