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CE

CENTERPOINT ENERGY INC (CNP)·Q3 2014 Earnings Summary

Executive Summary

  • Q3 2014 delivered net income of $143M ($0.33 EPS) versus $151M ($0.35) YoY; on a guidance basis EPS was $0.30, with Utility Operations $0.19 and Midstream Investments $0.11, as milder weather and higher O&M offset customer growth and right‑of‑way revenues .
  • Guidance reaffirmed: Utility Operations $0.72–$0.76, Midstream Investments $0.42–$0.45, Consolidated $1.14–$1.21; dividend of $0.2375 per share declared Oct 21, payable Dec 10 .
  • Electric T&D core OI of $202M vs $207M YoY; higher TCOS transmission expenses (offset by revenues) and normal weather muted growth; gas distribution posted an $8M operating loss vs $5M OI YoY; Energy Services OI rose to $6M on $13M mark‑to‑market gains .
  • Management highlighted strong customer growth (>85k added LTM) and robust capital execution ($987M YTD; tracking to $1.4B FY), with upside from the Houston Import Project ($300M not in plan) and midstream distributions ($70M received in Q3) as catalysts .

What Went Well and What Went Wrong

  • What Went Well

    • Strong customer growth and right‑of‑way revenues partially offset weather impacts; Houston Electric added >50k metered customers YoY and expects 2% annual growth driving $25–$30M incremental revenue per year (“we expect this 2% annual customer growth to continue...”) .
    • Energy Services continued to perform, with $6M operating income and $13M mark‑to‑market gains in Q3; YTD OI $43M vs $12M in 2013, benefiting from prior winter volatility and basis/storage spreads .
    • Capital deployment remained robust: $358M Q3 capex ($203M Electric; $148M Gas); YTD $987M; tracking ~$1.4B by year‑end, supporting future rate base growth and utility earnings CAGR targets .

  • What Went Wrong

    • Weather headwind: Electric operating income down ~$11M YoY due to return to normal weather; diluted EPS down YoY to $0.33 from $0.35 .
    • Higher O&M: Electric O&M up primarily due to ~$47M transmission expense with offsetting revenue, plus a $6M claims reserve adjustment; excluding these, O&M up $10M on reliability and safety initiatives .
    • Natural Gas Distribution posted an $8M operating loss (vs $5M OI YoY) as higher O&M, depreciation, and taxes outweighed revenue improvements; rate relief increases were less than prior year .

Financial Results

MetricQ3 2013Q1 2014Q2 2014Q3 2014
Total Revenue ($USD Millions)$1,640 $3,163 $1,884 $1,807
Operating Income ($USD Millions)$244 $295 $186 $233
Net Income ($USD Millions)$151 $185 $107 $143
Diluted EPS ($)$0.35 $0.43 $0.25 $0.33
Operating Income Margin (%)14.9% (calc from )9.3% (calc from )9.9% (calc from )12.9% (calc from )
Guidance-basis EPS ($)—$0.40 $0.21 $0.30

Segment Operating Income and Revenue

SegmentQ1 2014 OI ($M)Q2 2014 OI ($M)Q3 2014 OI ($M)Q3 2014 Revenue ($M)
Electric Transmission & Distribution (Total)$105 $145 $232 $839
- TDU (Core)$75 $115 $202 $660
- Securitization Bonds$30 $30 $30 $179
Natural Gas Distribution$162 $30 $(8) $382
Energy Services$26 $11 $6 $604
Other Operations$2 $0 $3 $4

Key Performance Indicators (KPIs)

KPIQ3 2013Q3 2014
Electric Cooling Degree Days (% of 10-year avg)104% 99%
Electric Total MWh Delivered24,409,786 24,801,549
Electric Metered Customers (Total, end of period)2,234,041 2,284,202
Natural Gas Total Customers (end of period)3,288,288 3,324,422
Natural Gas Throughput (BCF, Total)61 58
Energy Services Throughput (BCF)134 140
Enable Cash Distributions to CNP (Q3)—$70

Non-GAAP Adjustments (Guidance Basis)

ItemQ3 2014 Net Impact ($M)EPS Impact ($)
Mark-to-market gain (CES)$(8) $(0.02)
ZENS-related marketable securities$(21) $(0.04)
Indexed debt securities$14 $0.03
Utility Ops earnings (guidance basis)$79 $0.19
Midstream Investments (guidance basis)$49 $0.11
Consolidated (guidance basis)$128 $0.30

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Utility Operations EPS GuidanceFY 2014$0.72–$0.76 (Q2 release) $0.72–$0.76 (Q3 release) Maintained
Midstream Investments EPS GuidanceFY 2014$0.42–$0.45 (Q2 release) $0.42–$0.45 (Q3 release) Maintained (raised in Q2 from Q1’s $0.38–$0.43 )
Consolidated EPS GuidanceFY 2014$1.14–$1.21 (Q2 release) $1.14–$1.21 (Q3 release) Maintained (raised in Q2 from Q1’s $1.10–$1.19 )
Effective Tax Rate (Consolidated)FY 201437% (Q2 commentary) 37% (Q3 call) Maintained
Avg Diluted Share Count (assumption)FY 2014~431M (Q2) ~431M (Q3) Maintained
Dividend (most recent declared)Quarterly$0.2375 (declared Jul 24) $0.2375 (declared Oct 21; payable Dec 10) Maintained

Earnings Call Themes & Trends

TopicPrevious Mentions (Q1 2014)Previous Mentions (Q2 2014)Current Period (Q3 2014)Trend
Customer growth (Houston Electric)+45k YoY; 2% growth; right-of-way revenues $10M YTD +48k YoY; 2% growth; weather-normalized throughput flat per customer +50k YoY; 2% annual growth expected; ~$25–$30M incremental revenue/yr Steady/positive
Weather impactCold winter boosted Q1 results; hedges capped in MN/TX Electric OI down ~$10M due to milder weather Electric OI down ~$11M YoY; Gas no discernible delta; continued hedging Normalizing headwind
O&M and TCOS transmission costsHigher O&M; property taxes TCOS expense +$46M (offsetting revenue); O&M +$8M Transmission expenses $47M (offsetting revenue); claims reserve +$6M; O&M +$10M ex items Elevated but planned
Energy Services performanceStrong Q1 on basis volatility; OI $26M; mark-to-market +$4M OI $11M; mark-to-market +$6M OI $6M; mark-to-market +$13M; VAR avg < $400k Above recent years; moderating from Q1
Technology/AMR deploymentTargeting conversion of 3.4M meters by YE2015 ~2.7M installations; on track YE2015 Expect full conversion by YE2015; reduces O&M and improves service On track
Regulatory/legal (Houston Import Project)ERCOT endorsed project; appeal to PUCT; seeking full ownership PUCT hearing scheduled Aug 21; decision hoped in Q3 PUCT denied appeal to split decision; CNP planning its portion; estimating ~$300M capex; decision on necessity expected mid‑Dec Advancing with partial scope
Macro/MLP linkageEnable IPO complete; ownership strategy Midstream guidance raised; Enable CapEx/EBITDA outlook MLP sector oil‑price volatility pressured Enable/CNP valuation; management expects volatility to subside with education Near‑term headwind

Management Commentary

  • “Net income was $143 million or $0.33 per diluted share… On a guidance basis, third quarter 2014 earnings were $0.30 per diluted share of which Utility Operations contributed $0.19 and Midstream Investments $0.11.” — Scott Prochazka .
  • “We’ve added more than 85,000 customers in the last 12 months… We remain on track to invest approximately $1.4 billion in infrastructure by year‑end.” — Scott Prochazka .
  • “We expect this 2% annual customer growth to continue… providing $25 million to $30 million of incremental revenue each year.” — Tracy Bridge .
  • “We recorded $6 million of operating income in the third quarter which included a $13 million mark‑to‑market gain… VAR average for 2014 is below $400,000.” — Joe McGoldrick .
  • “We reaffirmed our 2014 consolidated earnings estimate of $1.14 to $1.21… and our dividend growth objective of 8% to 10% over the next three years.” — Gary Whitlock .

Q&A Highlights

  • Weather and hedging: Electric YoY weather headwind ~$11M; Minnesota decoupling pilot starts July 2015; financial weather hedges continue this winter .
  • CapEx upside: Management confident upside opportunities (ex‑Houston Import Project) are “doable”; updates expected on Q4 call .
  • Energy Services sustainability: Business viewed as $15–$25M OI per year baseline; will be opportunistic in volatility (e.g., polar vortex) .
  • Tax rate: Quarterly rate below guidance; full‑year assumption remains ~37% .
  • MLP valuation volatility: Management attributes recent stock pressure to overreaction to oil prices; expects reduced volatility as market digests Enable’s commodity exposure .
  • Strategic M&A: Oncor seen as “industrial logic”; will only pursue if in shareholders’ interest .

Estimates Context

  • Attempts to retrieve S&P Global consensus EPS and revenue for Q3 2014 were unsuccessful due to an API limit at the time; therefore, beat/miss versus Wall Street consensus cannot be determined from S&P Global in this report [GetEstimates error]. Where applicable, comparisons are anchored to reported GAAP and company guidance reconciliations .

Key Takeaways for Investors

  • Utility fundamentals resilient: Customer growth and right‑of‑way revenues underpin Electric T&D even as weather normalizes; watch O&M trajectory tied to grid initiatives and TCOS passthrough dynamics .
  • Energy Services upside remains tactical: Mark‑to‑market uplift and favorable spreads boosted 2014 YTD; baseline OI target implies potential mean reversion absent volatility; position size risk remains controlled (VAR < $400k) .
  • Capital plan supports earnings and dividend CAGR: ~$1.4B 2014 capex tracking; Houston Import Project adds ~$300M upside; guidance maintained, dividend steady at $0.2375, reinforcing the 8%–10% dividend growth target .
  • Midstream linkage is a sentiment swing factor: Enable distributions ($70M Q3) support cash flow, but oil‑price‑driven MLP volatility can pressure valuation; management expects stabilization with improved market understanding .
  • Near‑term trading: Reaffirmed guidance and capital execution are supportive; headlines around PUCT decision timing (mid‑Dec) and year‑end CapEx updates can act as catalysts; watch weather and mark‑to‑market dynamics into winter .
  • Medium‑term thesis: Rate base growth (7%–8% CAGR, upside 9%–10%) across electric and gas, AMR O&M savings and constructive regulatory frameworks (e.g., Minnesota decoupling pilot) sustain utility earnings CAGR targets .
  • Monitor regulatory and M&A developments: Houston Import Project scope/cost recovery, decoupling pilots, and any Oncor process outcomes could reshape growth optionality and capital needs .