TOP CONTRIBUTORS

Paul Hedrick

CenterPoint Energy (CNP) is a domestic energy utility headquartered in Houston, Texas. As of December 2007, it delivered natural gas and electricity to over 5,000,000 customers.^[1] CenterPoint Energy was formed after industry giant Reliant Energy (RRI) spun off its electric retail sales as Reliant Resources and sold its electric generation assets in 2002. In October of that year, the remaining mostly regulated energy delivery company was renamed CenterPoint Energy.^[2] The company now serves metered customers primarily in Arkansas, Louisiana, Minnesota, Mississippi, Oklahoma and Texas and has assets valued at over $17 billion.^[3]

When CenterPoint was formed, the Texas energy market had just been subjected to the Texas Electric Choice Act, which dictated that generation and retail service prices by utilities must be subject to the laws of supply and demand instead of having fixed high rates.^[4] The company is currently in a large amount of debt because of this deregulation, and it's revenues are largely subject to changes in regulation and rules by utility commissions in Texas and the Midwest. CenterPoint's revenues are often affected by abnormal changes in weather, since electricity and natural gas usage depends largely on temperature. The company's revenues are also affected by its inability to refinance efficiently because of the breadth of CenterPoint's subsidiary functions and fluctuating natural gas prices, which make its services more expensive.

Business Financials

CenterPoint operates in five primary businesses: electric transmission and distribution, natural gas distribution, interstate pipelines, field services, and competitive natural gas sales and services.^[5] It is a public utility holding company that operates through two wholly owned subsidiaries: CenterPoint Houston and CenterPoint Energy Resources Corp. (CERC).^[6] CenterPoint Houston engages in the electric transmission and distribution and CERC controls the other four primary businesses. The income generated from electric transmission and distribution made up 47.2% of CenterPoint Energy's total operating income in 2007. Natural gas distribution and interstate pipelines comprised 18.2% and 20.0% of the total operating income, respectively.

Electric Transmission and Distribution

Between 2005 and 2007, operating revenues from electric transmission and distribution increased from $1,644 million to $1,837 million due to growth in number of customers (53,000 were added between December 2006 and 2007).^[8] The revenue increases were partially offset due to an October 2006 rate case settlement that cost the company $41 million.^[9] This, paired with high transmission costs ($25 million), meant that CenterPoint saw a $15 million decrease in operating income from 2006 to 2007, but there remained a total increase in income of $74 million from 2005 to 2007.^[10] When Hurricane Rita occurred in 2005, CenterPoint Houston's electric facilities did not sustain significant damage, but over 700,000 customers lost power. The revenue lost during the five day power restoration period was offset by the revenues generated because of warmer than normal weather in the third quarter of 2005.^[11]

Natural Gas Distribution

In 2006 CenterPoint saw it's operating income from natural gas distribution fall $51 million from 2005.^[13] This can be explained by a decrease in gas usage because of milder weather ($30 million) and a $21 million write off of purchased gas costs prior to July 2004. In 2007 operating income shot up $94 million from 2006, which can be explained by a return to normal weather in 2007 ($33 million), an addition of over 38,000 gas customers ($9 million) and changes in operating and maintenance efficiency.^[14]

Interstate Pipelines

2006 operating income increased from $165 million in 2005 to $181 million in 2006, which was due primarily to increase in demand for transportation and ancillary services as well as a decrease in the cost of litigation services.^[16] In the 2007 fiscal year CenterPoint saw a significant $56 million increase in operating income, which was driven primarily by the installation of a new 172-mile pipeline from Carthage, Texas, to Perryville, Louisiana ($42 million) and lower spending on project development costs ($6 million). Some of these increases were offset by lower sales in excess gas because of increased operating expenses.

Net Income

CenterPoint reported $399 million in net income in the fiscal year of 2007, $33 million less than the income reported in the same quarter of 2006. It attributed this decrease to a $33 million increase in interest expenses due to higher borrowing levels, an increase in income tax expense, an an $8 million decrease in operating income from the electric transmission and distribution utility.^[18] However, the previous year CenterPoint saw a $80 million increase in net income due to decreases in interest expense, a decrease in income tax, and increases in operating revenues from the natural gas sales and services and interstate pipelines sectors.^[19]

Key Trends and Forces

Rate Regulation Delays Affect Profits

CenterPoint Houston's electric transmission and distribution rates are regulated mainly by the Texas Utility Commission (TUC). A utility is permitted a certain rate of return based on a set rate base. The rate base is set to prevent utilities, which are monopolies, from charging a higher than fair price. It is determined by the TUC after analyzing a test year and is based mainly on operating costs and capital expenditure. Because the analyses are made ahead of time for test years, they do not always match CenterPoint's actual expenses. CERC's rates for the other four services CenterPoint provides are also regulated by state municipalities and interstate pipelines by the FERC (Federal Regulation and Oversight of Energy).^[21] For example, in October 2006 a rate case settlement was implemented by the TUC that lowered the permitted rate of return on unrecovered balances from 11.06% to 8.06%, resulting in a $13 million loss.^[22] This same case implemented a rate freeze that will not allow CenterPoint to raise its rate base until 2010, so any expected revenue from a higher rate will not be earned at least until there are further proceedings.

Revenues are Seasonal

Both CenterPoint Houston's electric utility sector and CERC's natural gas sectors are strongly affected by weather in the Texas-Louisiana-Mississippi region where CenterPoint primarily operates. Typically, during the summer more air conditioning is used if the weather is uncharacteristically warm, which results in increased electricity usage. During the winter, colder weather will result in increased natural gas usage since it is typically used to power heaters.

In 2006, milder winter weather led to a $30 million decrease in operating income for CERC's natural gas sector. In the same year, a mild summer led to a $49 million decrease in operating income for CenterPoint Houston because of the decrease in demand for air conditioning services.^[23]

CenterPoint Houston Has Unrecovered True-Up Funds

In May 1999 a bill was passed in Texas called the Texas Electric Choice Act, which dictated that generation and retail services by utilities be subject to the competitive market---the bill was eneacted in 2002. Before the bill, utilities, which are monopolies, could charge a higher price than would be ideal for the public because so few companies offered similar service. Because it would be unfair for the company to be subject to such a drastic drop in its prices so quickly, "true-up" proceedings began three years after the bill was passed in an effort to compensate the electric utilites for revenues they would have earned with their previously higher prices^[24] In March 2004, CenterPoint Houston, CNP's electric utility filed with the TUC requesting the recovery of $3.7 billion. In December of that year, the TUC let the firm recover only $2.3 billion of their requested $3.7 billion. CenterPoint remained in the process of appealing as of December 2007 and looks to recover at least $146 million, but it stood that the company remains in debt and the Texas Utility Commission had yet to make a final decision on whether or not to allow more compensation.^[25]

Consolidated Finances Mean Limited Ability to Refinance

Because CenterPoint Energy is a consolidated holding company that operates in every major utility sector, its ability to refinance existing debt is limited. On a consolidated basis, CNP had $9.7 billion of outstanding indebtedness as of December 2007. The future financing for paying off this debt depends on factors affecting all five major business sectors, including CenterPoint Houston's True-Up proceedings results, general economic and capital market conditions, investor confidence in each market in which CNP operates, and provisions of relevant taxes and securities laws. One example of this uncertainty of refinance possibilities is the $229 million that CenterPoint Houston specifically owes to secure pollution control bonds, the repayment of which depends almost entirely on the results of True-Up proceedings.^[26]

Natural Gas Prices Significantly Affect CERC

CERC, CNP's subsidiary in charge of natural gas sales and distribution, is impacted by the price levels of natural gas. Prices have fluctuated and risen sharply since November 2007, when natural gas prices were below $8 mmbtu,^[27] and as of June 24, 2008, the price had risen to $13.20 mmbtu.^[28] When gas prices rise sharply, risk increases that the company will not be able to collect balances from customers, and when a sustained period of high prices is reached, downward pressure on demand for natural gas occurs, affecting CERC's total output.

Competition

As a utility, CenterPoint Energy naturally has little competition. Utilities are usually monopolies with price regulated by state or federal commissions. They occur naturally because of huge initial capital expenditure costs, such as those required to set up power lines and stations. There are no other electric transmission and distribution utilities in CenterPoint Houston’s service area.^[29] CERC's natural gas distribution sector competes primarily with alternate energy sources such as electricity and other fuel sources, and the natural gas sales sector competes with regional and national wholesale and retail gas marketers including the marketing divisions of natural gas producers and utilities.^[30] Interstate pipelines are in competition with similar pipelines and the the field services division competes with other companies in the natural gas gathering, treating, and processing business.

• Ameren (AEE) is a public utility holding company that operates electric generation, transmission and distribution businesses and natural gas transmission and distribution businesses in Missouri and Illinois.^[31] It provides energy services to approximately 2.4 million electric customers and one million natural gas customers.^[32]

• NiSource, Inc (NI) is an energy holding company that provides natural gas, electricity and other products and services to approximately 3.8 million customers located within a corridor that runs from the Gulf Coast through the Midwest to New England. It serves natural gas to approximately 3.3 million customers in nine states and electricity to 457,000 customers in northern Indiana.^[33]

• SCANA (SCG) is an energy-based holding company that is involved in the generation and sale of electricity, as well as in the purchase, sale and transportation of natural gas to wholesale and retail customers in South Carolina, North Carolina, and Georgia.^[34] It provides electric service to 639,300 customers and sells natural gas to 457,000 customers.^[35]

• Wisconsin Energy (WEC) is an energy holding company whose subsidiary, Wisconsin Electric, had 1,132,500 electric customers as of December 2007 and operated primarily in Wisconsin and the upper peninsula of Michigan.^[36]

References

1. ↑ CNP Website - About Us
2. ↑ CNP Website - Company History
3. ↑ CNP Website - Company History
4. ↑ AEP.com True-up Proceedings
5. ↑ CNP Website - Company Overview
6. ↑ CNP's 2007 10-k p.35
7. ↑ CNP's 2007 10-k p.43
8. ↑ CNP's 2007 10-k p.44
9. ↑ CNP's 10-k p.44
10. ↑ CNP's 10-k p.44
11. ↑ CNP's 10-k p.44
12. ↑ CNP's 2007 10-k p.41
13. ↑ CNP's 2007 10-k p.45
14. ↑ CNP's 2007 10-k p.45
15. ↑ CNP's 2007 10-k p.46
16. ↑ CNP's 2007 10-k p.47
17. ↑ CNP's 2007 10-k p.47
18. ↑ CNP's 2007 10-k p.41
19. ↑ CNP's 2007 10-k p.42
20. ↑ CNP's 2007 10-k p.41
21. ↑ CNP's 2007 10-k p.24
22. ↑ CNP's 2007 10-k p.44
23. ↑ CNP's 2007 10-k p.44
24. ↑ AEP.com True-up Proceedings
25. ↑ CNP's 2007 10-k p.22
26. ↑ CNP's 2007 10-k p.26
27. ↑ NYMEX Crude Oil Spot and Natural Gas Spot Prices
28. ↑ CNN Oil and Gas Prices
29. ↑ CNP's 2007 10-k p.7
30. ↑ CNP's 2007 10-k p.8
31. ↑ AEE's 2007 10-k p.5
32. ↑ Ameren Website's Company Fact Sheet
33. ↑ NI's 2007 10-k p.6-7
34. ↑ SCANA Website Company Profile
35. ↑ SCG's 2007 10-k Part I Item I
36. ↑ WEC's 2007 10-k p.10-11