10-QPeriod: Q3 FY2003

CENTERPOINT ENERGY INC Quarterly Report for Q3 Ended Sep 30, 2003

Filed November 12, 2003For Securities:CNP

Summary

CenterPoint Energy, Inc. (CNP) reported a net income of $181.7 million for the three months ended September 30, 2003, a significant improvement from a net loss of $4.12 billion in the same period of the previous year. This turnaround was driven by substantial increases in operating income from the Electric Generation segment, which saw higher capacity and energy revenues due to rising natural gas prices, and a positive contribution from the Other Operations segment. However, the company also experienced a notable increase in interest expense due to higher borrowing costs and increased debt levels. For the nine months ended September 30, 2003, net income was $413.4 million, compared to a net loss of $3.86 billion in the prior year's period. While the Electric Generation segment showed strong operating income growth, this was offset by a significant increase in interest expense and a reduction in operating income from the Electric Transmission & Distribution segment, largely due to lower ECOM (Excess Cost Over Market) revenue. Investors should closely monitor the upcoming 2004 True-Up Proceeding in Texas, which will determine the final recovery of stranded costs and regulatory assets.

Key Highlights

  • 1Significant year-over-year improvement in net income for both the three-month and nine-month periods, moving from substantial losses to positive net income.
  • 2Electric Generation segment reported a substantial increase in operating income, driven by higher capacity and energy revenues resulting from increased natural gas prices.
  • 3Interest expense increased significantly due to higher borrowing costs and increased debt levels, impacting overall profitability.
  • 4Electric Transmission & Distribution segment's operating income decreased, primarily due to a reduction in ECOM True-Up revenue, a non-cash item related to Texas's electricity restructuring.
  • 5The company adopted SFAS No. 143, 'Accounting for Asset Retirement Obligations,' which resulted in a cumulative effect of accounting change of $152 million.
  • 6Significant refinancing activities were undertaken in 2003 to manage debt and extend maturities, including issuing new debt and replacing existing credit facilities.
  • 7The company has substantial regulatory assets related to stranded costs and ECOM true-up, the recovery of which is contingent on the 2004 True-Up Proceeding in Texas.

Frequently Asked Questions

The primary driver for the improved net income was a significant increase in operating income from the Electric Generation segment, largely due to higher capacity and energy revenues resulting from increased natural gas prices. This was partially offset by increased interest expenses.

ECOM True-Up refers to the difference between actual market prices received for power sold in state-mandated auctions and earlier estimates of those market prices by the Texas Utility Commission. It generates non-cash operating income and is recorded as a regulatory asset. A reduction in ECOM True-Up revenue in the Electric Transmission & Distribution segment negatively impacted operating income compared to the previous year.

CenterPoint Energy engaged in significant debt refinancing in 2003, issuing new debt and replacing credit facilities to manage interest costs and extend maturities. As of September 30, 2003, the company had $11.1 billion in outstanding indebtedness. Key activities included issuing convertible senior notes, senior notes, and obtaining a new credit facility.

Key risks include the potential inability to recover the full value of stranded costs and regulatory assets in the upcoming 2004 True-Up Proceeding, concentration of receivables from a few retail electric providers, market volatility in the ERCOT wholesale power market, operational risks at generation facilities (including nuclear operations), competition, and reliance on adequate transmission capacity. The company's financial condition is also sensitive to interest rate fluctuations and credit rating changes.