10-QPeriod: Q2 FY2004

CENTERPOINT ENERGY INC Quarterly Report for Q2 Ended Jun 30, 2004

Filed August 6, 2004For Securities:CNP

Summary

CenterPoint Energy, Inc. (CNP) reported its financial results for the second quarter and the first six months of 2004. The company faced challenges including the termination of Excess Cost Over Market (ECOM) revenues, milder weather impacting operating income, and increased transmission costs. However, these were partially offset by improved operating income from Texas Genco, customer growth, and reduced interest expense. A significant development is the pending sale of the company's 81% interest in Texas Genco for approximately $3.65 billion, expected to close in two steps through late 2004 and early 2005, which will result in an estimated after-tax loss of $250 million in Q3 2004. Another critical event is the ongoing regulatory process for the 2004 True-Up Proceeding in Texas, where CenterPoint Houston is seeking to recover $3.7 billion in stranded costs. A decision is anticipated in late August 2004, with potential appeals and a subsequent ruling on interest accrual in September 2004. The outcome of this proceeding could significantly impact earnings and financial condition. The company also announced its intention to exercise its right of first refusal to purchase an additional interest in the South Texas Project nuclear plant for approximately $175 million.

Key Highlights

  • 1Net income for the three months ended June 30, 2004, was $58 million, a decrease from $63 million in the same period of 2003, largely due to the termination of ECOM revenues.
  • 2The company is selling its 81% interest in Texas Genco for approximately $3.65 billion, with an expected after-tax loss of $250 million in Q3 2004, and anticipates using the net proceeds of approximately $2.5 billion to pay down debt.
  • 3The Texas 2004 True-Up Proceeding remains a key focus, with CenterPoint Houston seeking recovery of $3.7 billion in stranded costs; a decision is expected in late August 2004, with potential for appeals.
  • 4Diluted earnings per share from continuing operations were $0.19 for Q2 2004, down from $0.27 in Q2 2003.
  • 5Total assets decreased slightly from $21.38 billion at December 31, 2003, to $21.15 billion at June 30, 2004.
  • 6Cash provided by operating activities significantly increased to $690 million for the six months ended June 30, 2004, up from $242 million in the prior year, largely due to improved cash flow from Texas Genco and working capital changes.
  • 7CenterPoint Energy exercised its right of first refusal to purchase an additional 13.2% interest in the South Texas Project for an estimated $175 million.

Frequently Asked Questions

The sale of CenterPoint Energy's 81% interest in Texas Genco is expected to result in an after-tax loss of approximately $250 million in the third quarter of 2004. The company expects to receive total cash proceeds of approximately $2.9 billion, which it intends to use to pay down outstanding debt.

CenterPoint Houston is seeking to recover $3.7 billion in stranded costs through the 2004 True-Up Proceeding. A decision from the Texas Utility Commission is anticipated in late August 2004, with further proceedings on interest accrual in September. An adverse outcome or significant disallowance could lead to a material write-down of regulatory assets and adversely affect earnings, financial condition, and cash flows.

The anticipated loss from the Texas Genco sale and potential charges from the True-Up Proceeding could reduce earnings below the level required to pay dividends from current earnings. However, the SEC has authorized the company to continue paying its current quarterly dividend in Q2 and Q3 2004 from capital or unearned surplus if earnings are insufficient. Future dividend payments may require additional SEC authorization if earnings remain insufficient.

The company's liquidity and capital requirements will be influenced by the sale of Texas Genco, the proceeds from the True-Up Proceeding, capital expenditures, debt service, and regulatory actions. The company expects current cash flows and revolving credit borrowings to be sufficient for its needs in the second half of 2004. The company's credit ratings are under review with negative outlooks from multiple agencies, which could increase borrowing costs.