CenterPoint Energy, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Amounts are in millions of dollars, except per-share data. The unaudited statements cover a regulated electric transmission and distribution business, natural gas distribution, interstate pipelines, and non-regulated gas sales and field services.
Financial performance and position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $1,837 | $1,756 | $4,424 | $4,779 |
| Operating income | $303 | $263 | $667 | $620 |
| Net income | $119 | $81 | $267 | $195 |
| Diluted EPS | $0.28 | $0.20 | $0.62 | $0.49 |
| Operating margin | 16.5% | 15.0% | 15.1% | 13.0% |
| Dividends declared per share | $0.1975 | $0.195 | $0.395 | $0.39 |
For the first six months, operating cash flow was $1,137, investing cash outflow was $572, and financing cash outflow was $574. Capital expenditures were $633; operating cash flow less capital expenditures was $504. Cash and cash equivalents were $190 at June 30, versus $199 at year-end 2010; marketable securities were $417. Current assets of $2,042 were below current liabilities of $2,361.
Long-term debt declined to $8,510 from $9,001 at year-end 2010; short-term borrowings were $109. CERC issued $550 of new notes to refinance $550 of 7.75% notes due in February and exchanged $397 of 7.875% notes due 2013 for new notes and cash. The company reported compliance with debt covenants.
Changes versus comparable periods
- Q2 revenue rose 5%, operating income rose 15%, and net income increased $38. Higher operating income, marketable-securities gains, and lower interest expense drove the earnings improvement; lower indexed-debt gains and higher tax expense partly offset it.
- First-half revenue fell 7%, while operating income rose 8% and net income increased $72. Lower natural-gas costs contributed to the revenue decline; higher operating income, securities gains, and lower interest expense supported earnings.
- Electric transmission and distribution operating income increased to $185 in Q2 and $286 for the half, supported by usage, transmission revenues, customer growth, and advanced-metering-system revenues.
- Field Services operating income increased to $39 in Q2 and $75 for the half, reflecting new projects and gathering activity, including Magnolia and Olympia expansions. Interstate Pipelines income declined to $60 in Q2 and $136 for the half; an expiring backhaul contract was a headwind.
- First-half operating cash flow increased $319 year over year, principally due to higher tax refunds and net income, partly offset by less favorable working-capital and fuel-cost-recovery movements.
Outlook, risks, and notable items
- True-up proceeding: Following a Texas Supreme Court remand, CenterPoint Houston expects to seek recovery of approximately $1.88 billion, including interest through October 31, 2011, and plans to seek securitization. The court reinstated potential recovery of about $440 in capacity-auction amounts and $378 related to depreciation, plus interest; it also required a generating-asset valuation approach the company estimates could reduce stranded costs by about $252, less selling costs, plus buyer-assumed debt. The final recoverable amount and timing remain uncertain. Interest on the approved balance was expected to accrue at about 8% until bond issuance.
- Tax-normalization exposure: The remand includes a $146 deferred-tax issue. If not resolved, the IRS could require payment of unamortized investment tax credits and restrict accelerated depreciation, potentially materially affecting results, financial condition, and cash flows.
- Rate case: The Texas regulator’s rehearing order provided a $14.7 annual increase in delivery charges and a $12.3 annual decrease in wholesale transmission charges, but CenterPoint Houston anticipates normalized annual operating income will be reduced by about $30. Revised rates were expected in Q3 2011; appeals remained possible.
- Cash needs: For the remainder of 2011, expected requirements included approximately $825 of capital expenditures, $143 of scheduled transition and restoration bond principal payments, and $70 of pension contributions, plus dividends and interest. Management expected operating cash flow, commercial paper, and credit facilities to meet anticipated needs, while noting market access was not assured. It expected to replace three credit facilities expiring in 2012 with similar-capacity five-year facilities.
- Projects and commitments: The Olympia gathering expansion had incurred about $375, with up to $50 more expected to complete current milestones. Potential customer-elected future expansions could require up to $200 for Olympia and $240 for Magnolia. CenterPoint Houston’s advanced-metering and grid projects received $167 of a $200 DOE grant through June 30.
- Other risks: Customer and counterparty credit, ratings-related collateral demands, commodity and weather exposure, regulatory outcomes, litigation, environmental remediation, and pension obligations remain relevant. A one-notch downgrade could increase financing costs and trigger collateral needs; estimated pipeline collateral exposure for CERC was up to $179. The company disclosed a $105 maximum potential payout under certain GenOn-related gas transportation guarantees, with $7 of collateral posted by GenOn.
- No full-year earnings guidance was provided in the supplied filing text. Management cautioned that results are seasonal and that actual outcomes may differ from forward-looking statements. The board declared a $0.1975 quarterly dividend payable September 9, 2011.
Key facts investors should verify
- How the Texas regulator resolves the true-up remand, including the tax-normalization issue, allowed balance, interest, and timing and terms of securitization.
- Whether the rate-case order’s estimated $30 annual operating-income reduction is offset by other rate or operating developments.
- Execution, remaining cost, and contracted volumes for the Magnolia and Olympia projects, including any additional expansion elections.
- Liquidity and refinancing progress, including replacement of expiring credit facilities, planned capital spending, and the ability to access commercial-paper and debt markets.
- Exposure to tax audits and unrecognized tax benefits, customer concentration and credit risk, collateral requirements, and contingent guarantees.