CENTERPOINT ENERGY INC (CNP)·Q2 2014 Earnings Summary

Executive Summary

• Consolidated Q2 2014 EPS was $0.25 on $1.88B revenue; utility operations were in line despite milder Houston weather, while Energy Services and Natural Gas Utilities offset with stronger performance .
• Management reaffirmed 2014 Utility Operations EPS guidance of $0.72–$0.76 and raised Midstream Investments to $0.42–$0.45; consolidated EPS (guidance basis) increased to $1.14–$1.21, a clear positive surprise and likely stock catalyst via higher full-year visibility .
• Equity earnings from Enable Midstream were $71M; the guidance raise was driven by Enable’s outlook, while utility O&M rose due to higher TCOS pass-through and grid reliability initiatives; weather reduced Houston Electric income by ~$10M .
• Customer growth remained robust (electric +48k YoY; gas +31k YoY), supporting multi-year capex and earnings growth; management reiterated a dividend growth objective of 8–10% CAGR over the next three years .

What Went Well and What Went Wrong

• What Went Well

  • Natural Gas Distribution operating income rose 20% YoY to $30M on rate changes, colder-than-normal weather, and customer growth; Energy Services operating income increased to $11M on improved margins and winter-driven basis volatility early in the quarter .
  • Enable Midstream equity income was $71M; CNP increased Midstream Investments guidance and consolidated guidance on the back of Enable’s outlook and capital plan .
  • Customer growth continued: Houston Electric added >48k metered customers YoY, contributing ~$7M of operating income in Q2; management expects ~2% annual customer growth in Houston .

• What Went Wrong

  • Houston Electric operating income declined to $115M (from $131M) as higher O&M and depreciation and milder weather more than offset growth; weather reduced operating income by about $10M in the quarter .
  • O&M increased, including ~$46M higher allocated transmission costs (largely offset in revenue) and ~$8M higher non-key O&M from accelerated reliability and safety initiatives, pressuring TDU margins .
  • Consolidated operating income fell to $186M from $223M YoY, reflecting the structural reporting change post-Enable and higher expenses; comparability to prior periods is limited by the midstream JV accounting change .

Financial Results

Notes: Net income margin computed from reported Net Income and Total Revenues (citations shown). Comparability vs prior year is affected by Enable Midstream JV accounting (operating income no longer includes midstream) .

Segment revenues (quarter):

Segment operating income (quarter):

Key KPIs:

Guidance Changes

Management reiterated that guidance excludes ZENS-related mark-to-market and certain timing effects; consolidated raise driven by Enable Midstream outlook .

Earnings Call Themes & Trends

Management Commentary

• “Our second quarter performance once again illustrated the benefits of our diversified energy delivery portfolio. The effect of mild weather at Houston Electric was almost entirely offset by strong performance from gas operations.” — Scott Prochazka, CEO .
• “We introduced a $1.2 billion potential upside to our current 5-year estimated capital plan of $6.2 billion…potential upside capital investment could increase [rate base growth] to 9% to 10%.” — Scott Prochazka .
• “Despite the impact of weather on this quarter, we reaffirmed our utility operations earnings guidance range of $0.72 to $0.76…[and] increased our midstream investment’s guidance range to $0.42 to $0.45.” — Gary Whitlock, CFO .
• “Houston Electric incurred approximately $46 million more of allocated transmission cost…largely offset by corresponding transmission revenues…non-key O&M was up $8 million…as we accelerate grid reliability and safety initiatives.” — Tracy Bridge (Electric) .
• “We added more than 48,000 metered customers…contributed approximately $7 million of operating income this quarter. We continue to expect 2% annual customer growth.” — Tracy Bridge .

Q&A Highlights

• Weather and O&M impacts: Management quantified ~$10M weather headwind and ~$8M O&M increase at Houston Electric for the quarter .
• Dividend growth and Enable: Despite raising consolidated guidance on Enable, dividend growth target remains 8–10% with aspiration to be toward the high end, reassessed annually .
• Strategic M&A: On Oncor, management reiterated organic investment is priority; M&A considered only if strategically and financially compelling to shareholders .
• Tax rate: 37% effective tax rate is reasonable for modeling absent changes in tax law .
• Capex financing: Will “thoughtfully use” debt capacity (debt-to-cap ~55.7% at quarter end) and feather in equity if accretive growth exceeds balance sheet capacity .

Estimates Context

• We attempted to retrieve S&P Global (Capital IQ) consensus for Q2 2014 EPS and revenue but could not due to provider rate limits; therefore, estimate comparisons are unavailable. As a result, we cannot quantify beats/misses vs consensus for this quarter (S&P Global consensus unavailable).
• Given the consolidated EPS guidance raise and Midstream guidance increase, Street models likely need to lift Midstream contribution and consolidated FY2014 EPS toward $1.14–$1.21, while Utility Operations guidance is unchanged, implying limited utility estimate revisions absent regulatory or weather changes .

Key Takeaways for Investors

• Quality in-line utility quarter masked by weather; strength in Gas Distribution and Energy Services plus Enable equity income delivered stable EPS of $0.25 despite Houston Electric headwinds .
• Guidance reset higher at consolidated level (and for Midstream) is the principal positive catalyst; dividend growth framework (8–10% CAGR) underscores improving cash flow visibility .
• Structural O&M uplift (TCOS pass-through, reliability initiatives) and depreciation are pressuring TDU near-term margins, but robust customer growth (~2%/yr) and capex plan support 5–6% normalized TDU operating income CAGR .
• Watch regulatory milestones (ERCOT Houston Import Project appeal) and continued rate case execution to sustain utility earnings trajectory .
• Enable Midstream remains a key swing factor; CNP’s raised Midstream guidance raises consolidated EPS visibility, but commodity and execution risks at Enable bear monitoring .
• Seasonal revenue/earnings volatility remains (Q1 stronger on gas usage; Q2 softer); focus on FY trajectory rather than quarterly noise .
• Balance sheet has capacity to fund current plan; incremental upside capex could be supported with a mix of debt and opportunistic equity to preserve credit metrics .

Sources:

• Q2 2014 8-K earnings press release and financials
• Q2 2014 earnings call transcript (prepared remarks and Q&A)
• Q1 2014 8-K press release and financials (trend context)
• Q4 2013 8-K press release and financials (trend context)