10-QPeriod: Q3 FY2006

CENTERPOINT ENERGY INC Quarterly Report for Q3 Ended Sep 30, 2006

Filed November 2, 2006For Securities:CNP

Summary

CenterPoint Energy, Inc. (CNP) reported improved financial performance for the nine months ended September 30, 2006, compared to the same period in 2005. Net income rose significantly to $365 million from $171 million, driven by a substantial decrease in interest expenses, a reduction in income tax reserves, and increased operating income across several key business segments, particularly Pipelines and Field Services and Electric Transmission & Distribution. The company also experienced a strong increase in operating cash flow, largely due to lower tax payments and improved fuel cost recovery. Key strategic developments include progress on major pipeline projects, such as the Carthage to Perryville pipeline, which is nearing completion and expansion. The company is also actively managing regulatory matters, including ongoing appeals related to true-up balances and rate cases, which have seen mixed but generally progressing outcomes. Despite some ongoing legal and environmental proceedings, the company expressed confidence that these would not have a material adverse effect on its financial condition. Overall, CNP demonstrated a more robust financial position and continued to invest in its infrastructure and growth initiatives.

Key Highlights

  • 1Net income for the first nine months of 2006 significantly increased to $365 million, up from $171 million in the prior year, driven by lower interest expenses and tax adjustments.
  • 2Operating income from continuing operations before taxes and extraordinary items for the nine months ended September 30, 2006, was $390 million, a substantial increase from $266 million in the same period of 2005.
  • 3The company's cash flow from operating activities for the nine months ended September 30, 2006, more than doubled to $728 million, compared to $275 million in 2005, mainly due to lower tax payments and improved fuel cost recovery.
  • 4Significant progress was made on the Carthage to Perryville pipeline project, with FERC certification obtained and construction underway, expected to be in service in Q1 2007 at an estimated cost of $455 million.
  • 5CenterPoint Houston's Electric Transmission & Distribution segment saw operating income increase to $480 million for the nine months ended September 30, 2006, up from $385 million in 2005, supported by customer growth and regulatory recovery mechanisms.
  • 6The company's financial position strengthened with a decrease in total long-term debt from $8,568 million at year-end 2005 to $7,905 million at September 30, 2006.
  • 7The company reached an agreement with the IRS regarding tax treatment of ZENS and ACES, resulting in a reduction of previously accrued tax and interest reserves by approximately $119 million in Q2 2006.

Frequently Asked Questions

The significant increase in net income was primarily driven by a substantial decrease in interest expenses (excluding transition bond interest) due to lower borrowing costs and levels, a considerable reduction in income tax expense resulting from a settlement with the IRS concerning ZENS and ACES which reduced previously accrued tax and interest reserves by approximately $119 million, and increased operating income from the Pipelines and Field Services and Electric Transmission & Distribution segments.

The company is making significant progress. The Carthage to Perryville pipeline project received FERC certification and has commenced construction, with an expected in-service date in the first quarter of 2007 at an estimated cost of $455 million. Additionally, a joint venture is proceeding with the Southeast Supply Header pipeline project, with an estimated total cost of $700 to $800 million and an expected in-service date of June 2008.

CenterPoint Houston is involved in ongoing appeals related to the true-up balance, with some rulings affirming aspects of the recovery but also facing reversals on others, leading to further appeals. For the Competitive Transition Charge (CTC), a district court reversed certain aspects of the Texas Utility Commission's order, which the company is also appealing. Rate cases for electric transmission and distribution services have led to a settlement agreement that reduces base rate revenues by approximately $58 million annually but provides a rate freeze until June 30, 2010. Natural gas distribution rate adjustments are being implemented across various jurisdictions with multi-year rate stability.

The company is involved in various legal, environmental, tax, and regulatory proceedings. While some involve substantial amounts, the company regularly analyzes these matters and provides for probable liabilities. Based on current information and experience, the company does not expect the ultimate disposition of these matters, individually or in aggregate, to have a material adverse effect on its financial condition, results of operations, or cash flows. Specific proceedings include market manipulation cases (where the company believes it is not a proper defendant), natural gas measurement lawsuits, and environmental remediation at manufactured gas plant sites.