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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO _______________.
-------------------
Commission file number 1-3187
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC
(Exact name of registrant as specified in its charter)
TEXAS 22-3865106
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1111 LOUISIANA
HOUSTON, TEXAS 77002 (713) 207-1111
(Address and zip code of (Registrant's telephone number,
principal executive offices) including area code)
-------------------
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC MEETS THE CONDITIONS SET FORTH IN
GENERAL INSTRUCTION H(1)(A) AND (B) OF FORM 10-Q AND IS THEREFORE FILING THIS
FORM 10-Q WITH THE REDUCED DISCLOSURE FORMAT.
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No| |
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act) Yes | | No |X|
As of May 2, 2003, all 1,000 common shares of CenterPoint Energy Houston
Electric, LLC were held by Utility Holding, LLC, a wholly owned subsidiary of
CenterPoint Energy, Inc.
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2003
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements................................................. 1
Statements of Consolidated Income
Three Months Ended March 31, 2002 and 2003 (unaudited)............... 1
Consolidated Balance Sheets
December 31, 2002 and March 31, 2003 (unaudited)..................... 2
Statements of Consolidated Cash Flows
Three Months Ended March 31, 2002 and 2003 (unaudited)............... 4
Notes to Unaudited Consolidated Financial Statements.................... 5
Item 2. Management's Narrative Analysis of the Results of Operations of
CenterPoint Energy Houston Electric, LLC and Subsidiaries............... 17
Item 4. Controls and Procedures.............................................. 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................... 27
Item 5. Other Information.................................................... 27
Item 6. Exhibits and Reports on Form 8-K..................................... 29
i
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
STATEMENTS OF CONSOLIDATED INCOME
(THOUSANDS OF DOLLARS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
----------------------
2002 2003
--------- ---------
REVENUES .............................................. $ 568,053 $ 447,403
--------- ---------
EXPENSES:
Purchased power .................................... 59,580 --
Operation and maintenance .......................... 141,105 133,008
Depreciation and amortization ...................... 63,339 64,742
Taxes other than income taxes ...................... 50,456 44,052
--------- ---------
Total .......................................... 314,480 241,802
--------- ---------
OPERATING INCOME ...................................... 253,573 205,601
--------- ---------
OTHER INCOME (EXPENSE):
Interest expense and distribution on trust preferred
securities ....................................... (60,097) (92,230)
Other, net ......................................... 5,392 8,508
--------- ---------
Total .......................................... (54,705) (83,722)
--------- ---------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES . 198,868 121,879
Income Tax Expense ................................. 67,143 41,704
--------- ---------
INCOME FROM CONTINUING OPERATIONS ..................... 131,725 80,175
Loss from Discontinued Operations, net of tax ...... (100,120) --
--------- ---------
NET INCOME ............................................ $ 31,605 $ 80,175
========= =========
See Notes to the Company's Interim Financial Statements
1
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
ASSETS
DECEMBER 31, MARCH 31,
2002 2003
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents .................... $ 70,866 $ 13,267
Accounts and notes receivable, net ........... 99,304 110,090
Accrued unbilled revenues .................... 70,385 61,376
Materials and supplies ....................... 59,941 58,033
Taxes receivable ............................. -- 63,953
Other ........................................ 11,839 11,120
----------- -----------
Total current assets ...................... 312,335 317,839
----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment ................ 5,959,843 5,980,213
Less accumulated depreciation and amortization (2,122,611) (2,155,584)
----------- -----------
Property, plant and equipment, net ........ 3,837,232 3,824,629
----------- -----------
OTHER ASSETS:
Other intangibles, net ....................... 39,912 39,751
Regulatory assets ............................ 3,970,007 4,527,749
Notes receivable-- affiliated companies ...... 814,513 814,513
Other ....................................... 66,049 71,085
----------- -----------
Total other assets ........................ 4,890,481 5,453,098
----------- -----------
TOTAL ASSETS ............................ $ 9,040,048 $ 9,595,566
=========== ===========
See Notes to the Company's Interim Financial Statements
2
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS) -- (CONTINUED)
(UNAUDITED)
LIABILITIES AND MEMBER'S EQUITY
DECEMBER 31, MARCH 31,
2002 2003
---------- ----------
CURRENT LIABILITIES:
Current portion of long-term debt .......... $ 18,758 $ 26,398
Accounts payable ........................... 32,362 22,470
Accounts payable-- affiliated companies, net 43,662 21,243
Notes payable-- affiliated companies, net .. 214,976 171,906
Taxes accrued .............................. 44,208 33,606
Interest accrued ........................... 78,355 60,769
Regulatory liabilities ..................... 168,173 171,742
Other ...................................... 57,513 46,071
---------- ----------
Total current liabilities ............... 658,007 554,205
---------- ----------
OTHER LIABILITIES:
Accumulated deferred income taxes, net ..... 1,419,301 1,494,101
Unamortized investment tax credits ......... 53,581 52,408
Benefit obligations ........................ 61,671 60,752
Regulatory liabilities ..................... 940,615 901,451
Notes payable-- affiliated companies ....... 916,400 637,400
Accounts payable-- affiliated companies .... -- 395,516
Other ...................................... 25,206 21,033
---------- ----------
Total other liabilities ................. 3,416,774 3,562,661
---------- ----------
LONG-TERM DEBT ................................ 2,641,281 3,074,539
---------- ----------
COMMITMENTS AND CONTINGENCIES (NOTES 1 AND 9)
MEMBER'S EQUITY:
Common stock ............................... 1 1
Paid-in capital ............................ 2,205,039 2,205,039
Retained earnings .......................... 118,946 199,121
---------- ----------
Total member's equity ................... 2,323,986 2,404,161
---------- ----------
TOTAL LIABILITIES AND MEMBER'S EQUITY . $9,040,048 $9,595,566
========== ==========
See Notes to the Company's Interim Financial Statements
3
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
STATEMENTS OF CONSOLIDATED CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
----------------------------
2002 2003
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income ....................................................................... $ 31,605 $ 80,175
Less: Loss from discontinued operations .......................................... (100,120) --
--------- ---------
Income from continuing operations ................................................ 131,725 80,175
Adjustments to reconcile income from continuing operations to net cash used in
operating activities:
Depreciation and amortization .................................................. 63,339 64,742
Deferred income taxes .......................................................... 83,127 74,267
Investment tax credits ......................................................... (1,172) (1,173)
Changes in other assets and liabilities:
Accounts and notes receivable, net ........................................... (269,676) (1,777)
Accounts receivable/payable, affiliates ...................................... (80,168) (22,418)
Inventory .................................................................... 4,549 1,908
Accounts payable ............................................................. 11,676 (9,892)
Fuel cost over recovery ...................................................... 138,819 --
Interest and taxes accrued ................................................... (58,599) (92,141)
Net regulatory assets and liabilities ........................................ (188,091) (201,816)
Other current assets ......................................................... (2,174) 718
Other current liabilities .................................................... (71,853) (11,442)
Other assets ................................................................. 87,845 12,200
Other liabilities ............................................................ (152,667) (4,559)
--------- ---------
Net cash used in operating activities ...................................... (303,320) (111,208)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net ........................................................ (67,796) (47,983)
--------- ---------
Net cash used in investing activities ...................................... (67,796) (47,983)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in cash related to securitization financing ............................. 2,958 --
Proceeds from issuance of long-term debt ......................................... -- 758,830
Increase in short-term borrowing, net ............................................ 236,178 --
Increase (decrease) in notes with affiliates, net ................................ (6,402) 106,930
Payments of long-term debt ....................................................... (283) (318,649)
Decrease in long-term notes payable with affiliates .............................. -- (429,000)
Debt issuance costs .............................................................. -- (17,296)
Payment of common stock dividend ................................................. (110,936) --
Other, net ....................................................................... -- 777
--------- ---------
Net cash provided by financing activities .................................... 121,515 101,592
--------- ---------
NET CASH PROVIDED BY DISCONTINUED OPERATIONS ........................................ 256,067 --
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................................ 6,466 (57,599)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .................................... 3,428 70,866
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .......................................... $ 9,894 $ 13,267
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Payments:
Interest ......................................................................... $ 24,853 $ 43,188
Income taxes ..................................................................... -- --
See Notes to the Company's Interim Financial Statements
4
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) BACKGROUND AND BASIS OF PRESENTATION
Included in this Quarterly Report on Form 10-Q (Form 10-Q) of CenterPoint
Energy Houston Electric, LLC (CenterPoint Houston, together with its
subsidiaries, the Company), are the Company's consolidated interim financial
statements and notes (Interim Financial Statements) including its wholly owned
subsidiaries. The Interim Financial Statements are unaudited, omit certain
financial statement disclosures and should be read with the Annual Report on
Form 10-K of CenterPoint Houston (CenterPoint Houston Form 10-K) for the year
ended December 31, 2002.
ORGANIZATIONAL STRUCTURE AND RESTRUCTURING
CenterPoint Houston is a regulated utility engaged in the transmission and
distribution of electric energy in a 5,000 square mile area located along the
Texas Gulf Coast, including the City of Houston. CenterPoint Houston is an
indirect wholly owned subsidiary of CenterPoint Energy, Inc. (CenterPoint
Energy), a public utility holding company.
The Company's business includes:
- Transmission. The Company's transmission business transports
electricity from power plants to substations and from one substation
to another in locations in the control area managed by the Electric
Reliability Council of Texas, Inc. (ERCOT).
- Distribution. The Company's electric distribution business
distributes electricity for retail electric providers in its
certificated service area by carrying power from the substation to
the retail electric customer.
The Company's business also includes the stranded costs and regulatory
asset recovery associated with the Company's historical generating operations.
The Company operates its business as a single segment. In addition to the
electric transmission and distribution business, the consolidated financial
statements include the operations of one financing subsidiary.
The Company's business does not include:
- the generation or sale of electricity;
- the procurement, supply or delivery of fuel for the generation of
electricity; or
- the marketing to or billing of retail electric customers.
Effective August 31, 2002, Reliant Energy, Incorporated (Reliant Energy)
consummated a restructuring transaction (Restructuring) in which it, among other
things, (1) conveyed its Texas electric generation assets to Texas Genco
Holdings, Inc. (Texas Genco), (2) became an indirect, wholly owned subsidiary of
a new utility holding company, CenterPoint Energy, (3) was converted into a
Texas limited liability company named CenterPoint Energy Houston Electric, LLC
and (4) distributed the capital stock of its operating subsidiaries, including
Texas Genco, to CenterPoint Energy. As part of the Restructuring, each share of
Reliant Energy common stock was converted into one share of CenterPoint Energy
common stock. The Company's operating subsidiaries which were distributed in
connection with the Restructuring and presented as discontinued operations
included $2.1 billion of indebtedness. An additional $1.9 billion of
indebtedness was assumed by CenterPoint Energy at the time of the Restructuring,
consisting of $1.6 billion of debt and $0.3 billion of trust preferred
securities that were reflected in continuing operations in the Company's
Consolidated Balance Sheet as of December 31, 2001. Additionally, at
Restructuring the Company issued a $1.6 billion note payable to CenterPoint
Energy. CenterPoint Energy assumed a $2.5 billion Senior A Credit Agreement,
dated as of July 13, 2001 among Houston Industries FinanceCo LP (a subsidiary of
Reliant Energy), Reliant Energy and the lender parties thereto, and a $1.8
billion Senior B Credit Agreement, dated as of July 13, 2001 among Houston
Industries FinanceCo LP, Reliant Energy and the lender
5
parties thereto.
In a July 2002 order, the Securities and Exchange Commission (SEC) limited
the aggregate amount of our external borrowings to $3.55 billion. Our ability to
pay dividends is restricted by the SEC's requirement that common equity as a
percentage of total capitalization must be at least 30% after the payment of any
dividend. In addition, the order restricts our ability to pay dividends out of
capital accounts to the extent current or retained earnings are insufficient for
those dividends. Under these restrictions, we are permitted to pay dividends in
excess of our current or retained earnings in an amount up to $200 million.
BASIS OF PRESENTATION
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America (GAAP) requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
The Interim Financial Statements reflect all normal recurring adjustments
that are, in the opinion of management, necessary to present fairly the
financial position and results of operations for the respective periods. Amounts
reported in the Company's Statements of Consolidated Income are not necessarily
indicative of amounts expected for a full year period due to the effects of,
among other things, (a) fluctuations in demand for energy, (b) timing of
maintenance and other expenditures and (c) acquisitions and dispositions of
assets and other interests. In addition, certain amounts from the prior year
have been reclassified to conform to the Company's presentation of financial
statements in the current year. These reclassifications do not affect net
income.
Notes 4 (Regulatory Matters), 3(e) (Regulatory Assets and Liabilities),
8(a) (Pension Plans) and 10 (Commitments and Contingencies) to the consolidated
financial statements in the CenterPoint Houston Form 10-K (CenterPoint Houston
10-K Notes) relate to certain contingencies. These notes, as updated herein, are
incorporated herein by reference.
For information regarding certain legal and regulatory proceedings, see
Note 9.
(2) DISCONTINUED OPERATIONS
The Interim Financial Statements have been prepared to reflect the effect
of the Restructuring as described above as it relates to CenterPoint Houston and
have been prepared based upon Reliant Energy's historical consolidated financial
statements.
The Interim Financial Statements present the regulated and unregulated
operations of Reliant Energy that were distributed to CenterPoint Energy in the
restructuring as discontinued operations, in accordance with Statement of
Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (SFAS No. 144). Included in discontinued
operations of CenterPoint Energy Houston are Reliant Energy's unregulated
operations previously reported in the Wholesale Energy, European Energy and
Retail Energy business segments. Also included in discontinued operations are
the regulated businesses conveyed to CenterPoint Energy which have previously
been reported in the Natural Gas Distribution and Pipelines and Gathering
business segments as well as the Electric Generation business segment.
Accordingly, the Interim Financial Statements of CenterPoint Houston reflect
these operations as discontinued operations for the three months ended March 31,
2002.
Total revenues included in discontinued operations were $2.9 billion for
the three months ended March 31, 2002. Income from discontinued operations for
the three months ended March 31, 2002 is reported net of income tax expense of
$47 million. These amounts have been restated to reflect Reliant Resources'
adoption of Emerging Issues Task Force (EITF) Issue No. 02-3, "Issues Related to
Accounting for Contracts Involved in Energy Trading and Risk Management
Activities" during the third quarter of 2002, as reported in Reliant Resources'
Annual Report on Form 10-K/A, Amendment No. 1, filed with the SEC on April 30,
2003.
(3) NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2003, the Company adopted SFAS No. 143, "Accounting
for Asset Retirement Obligations"
6
(SFAS No. 143). SFAS No. 143 requires the fair value of an asset retirement
obligation to be recognized as a liability is incurred and capitalized as part
of the cost of the related tangible long-lived asset. Over time, the liability
is accreted to its present value each period, and the capitalized cost is
depreciated over the useful life of the related asset. Retirement obligations
associated with long-lived assets included within the scope of SFAS No. 143 are
those for which a legal obligation exists under enacted laws, statutes and
written or oral contracts, including obligations arising under the doctrine of
promissory estoppel.
The Company has not identified any asset retirement obligations; however,
the Company has previously recognized removal costs as a component of
depreciation expense in accordance with regulatory treatment. As of March 31,
2003, these previously recognized removal costs of $254 million do not represent
SFAS No. 143 asset retirement obligations, but rather embedded regulatory
liabilities.
In April 2002, the Financial Accounting Standards Board (FASB) issued SFAS
No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections" (SFAS No. 145). SFAS No. 145
eliminates the current requirement that gains and losses on debt extinguishment
must be classified as extraordinary items in the income statement. Instead, such
gains and losses will be classified as extraordinary items only if they are
deemed to be unusual and infrequent. SFAS No. 145 also requires that capital
leases that are modified so that the resulting lease agreement is classified as
an operating lease be accounted for as a sale-leaseback transaction. The changes
related to debt extinguishment are effective for fiscal years beginning after
May 15, 2002, and the changes related to lease accounting are effective for
transactions occurring after May 15, 2002. The Company has applied this guidance
as it relates to lease accounting and is applying the accounting provision
related to debt extinguishment. Upon adoption of SFAS No. 145, any gain or loss
on extinguishment of debt that was classified as an extraordinary item in prior
periods presented that does not meet the criteria in APB Opinion No. 30 for
classification as an extraordinary item in prior periods will be reclassified.
No such reclassification was required for the three-month period ended March 31,
2002. The Company has reclassified the $25 million loss on debt extinguishment
related to the fourth quarter of 2002 from extraordinary item to interest
expense.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (SFAS No. 146). SFAS No. 146
nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)" (EITF No. 94-3). The principal difference
between SFAS No. 146 and EITF No. 94-3 relates to the requirements for
recognition of a liability for costs associated with an exit or disposal
activity. SFAS No. 146 requires that a liability be recognized for a cost
associated with an exit or disposal activity when it is incurred. A liability is
incurred when a transaction or event occurs that leaves an entity little or no
discretion to avoid the future transfer or use of assets to settle the
liability. Under EITF No. 94-3, a liability for an exit cost was recognized at
the date of an entity's commitment to an exit plan. In addition, SFAS No. 146
also requires that a liability for a cost associated with an exit or disposal
activity be recognized at its fair value when it is incurred. SFAS No. 146 is
effective for exit or disposal activities that are initiated after December 31,
2002 with early application encouraged. The Company will apply the provisions of
SFAS No. 146 to all exit or disposal activities initiated after December 31,
2002.
In November 2002, the FASB issued FASB Interpretation No. (FIN) 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" (FIN 45). FIN 45 requires that a
liability be recorded in the guarantor's balance sheet upon issuance of certain
guarantees. In addition, FIN 45 requires disclosures about the guarantees that
an entity has issued. The provision for initial recognition and measurement of
the liability will be applied on a prospective basis to guarantees issued or
modified after December 31, 2002. The disclosure provisions of FIN 45 are
effective for financial statements of interim or annual periods ending after
December 15, 2002. The adoption of FIN 45 did not materially affect the
Company's consolidated financial statements.
(4) REGULATORY MATTERS
(a) Excess Cost Over Market (ECOM) True-Up.
Our affiliate, Texas Genco, sells, through auctions, entitlements to
substantially all of its installed electric generation capacity, excluding
reserves for planned and forced outages. From September 2001 to March 2003, it
conducted auctions, as required by the Public Utility Commission of Texas (Texas
Utility Commission) and by
7
CenterPoint Energy's Master Separation Agreement with Reliant Resources. Texas
Genco will conduct the final auction mandated by the Texas Utility Commission
for the purposes of the ECOM True-Up in July 2003.
The capacity auctions continue to be consummated at market-based prices
that are substantially below the estimate of those prices made by the Texas
Utility Commission in the spring of 2001. The Texas electric restructuring law
provides for the recovery in a "true-up" proceeding in 2004 (2004 True-Up
Proceeding) of any difference between market power prices and the earlier
estimates of those market prices by the Texas Utility Commission, using the
prices received in the auctions required by the Texas Utility Commission as the
measure of market prices (ECOM True-Up). For the three months ended March 31,
2002 and 2003, CenterPoint Energy recorded approximately $141 million and $132
million, respectively, in non-cash revenue related to the cost recovery of the
difference between the market power prices and the Texas Utility Commission's
earlier estimates. For additional information regarding the capacity auctions
and the related true-up proceeding, please read Notes 3(e) and 4(a) to the
CenterPoint Houston 10-K Notes, which are incorporated herein by reference.
(b) Regulatory Assets Contingency.
As of March 31, 2003, in contemplation of the 2004 True-Up Proceeding, the
Company has recorded a regulatory asset of $2.5 billion representing the
estimated future recovery of previously incurred stranded costs. This amount
includes $1.1 billion of previously recorded accelerated depreciation (an amount
equal to earnings above a stated overall annual rate of return on invested
capital that was used to recover CenterPoint Energy's investment in generation
assets) and redirected depreciation of $841 million, both reversed in 2001. In
addition, the Company has recorded a regulatory asset associated with
CenterPoint Energy's distribution of approximately 19% of the 80 million
outstanding shares of common stock of Texas Genco to their shareholders on
January 6, 2003 (Texas Genco distribution). As a result of the distribution of
Texas Genco common stock, CenterPoint Energy recorded an impairment change of
$396 million. That impairment was transferred to the Company as it represents
stranded costs recoverable through the 2004 True-Up Proceeding. Offsetting this
regulatory asset is a $932 million regulatory liability to refund the excess
mitigation to ratepayers. This estimated recovery is based upon current
projections of the market value of CenterPoint Energy's Texas generation assets
to be covered by the 2004 True-up Proceeding calculations. The regulatory
liability reflects a current refund obligation arising from prior mitigation of
stranded costs deemed excessive by the Texas Utility Commission. The Company
began refunding excess mitigation credits with the January 2002 bills. These
credits are to be refunded over a seven-year period. Because GAAP requires the
Company to estimate fair market values in advance of the final reconciliation,
the financial impacts of the Texas electric restructuring law with respect to
the final determination of stranded costs in the 2004 True-Up Proceeding are
subject to material changes. Factors affecting such changes may include
estimation risk, uncertainty of future energy and commodity prices and the
economic lives of the plants. If events were to occur that made the recovery of
some of the remaining generation related regulatory assets no longer probable,
the Company would write off the unrecoverable balance of such assets as a charge
against earnings.
(c) Fuel Reconciliation Contingency.
Texas Genco and the Company filed their joint application to reconcile
fuel revenues and expenses with the Texas Utility Commission on July 1, 2002.
This final fuel reconciliation filing covers reconcilable fuel revenue, fuel
expense and interest of approximately $8.5 billion incurred from August 1, 1997
through January 30, 2002. Also included in this amount is an under-recovery of
$94 million, which was the balance at July 31, 1997 as approved in the Company's
last fuel reconciliation. On March 3, 2003, a settlement agreement was filed
under which certain items totaling $24 million would be written off during the
fourth quarter of 2002 and items totaling $203 million would be carried forward
for resolution by the Texas Utility Commission in late 2003 or early 2004.
(5) INTANGIBLES
Amortization expense for the Company's specifically identifiable
intangible assets was immaterial and is expected to be immaterial for the next
five years.
8
(6) LONG-TERM DEBT AND SHORT-TERM BORROWINGS
DECEMBER 31, 2002 MARCH 31, 2003
----------------- --------------
LONG-TERM CURRENT(1) LONG-TERM CURRENT(1)
--------- ---------- --------- ----------
Long-term debt:
First mortgage bonds 5.70% to 9.15% due 2013 to
2033......................................................... $ 615 $ -- $ 1,065 $ --
Term loan, LIBOR plus 9.75%, due 2005(2)....................... 1,310 -- 1,310 --
Series 2001-1 Transition Bonds 3.84% to 5.63%
Due 2002 to 2013(3).......................................... 717 19 703 26
Other.......................................................... (1) -- (3) --
--------- ------- --------- -------
Long-term debt to third parties................................ 2,641 19 3,075 26
Notes payable to affiliate 4.90% to 6.70%(4)................... 916 167 637 17
--------- ------- --------- -------
Total borrowings............................................. $ 3,557 $ 186 $ 3,712 $ 43
========= ======= ========= =======
- ----------
(1) Includes amounts due within one year of the date noted.
(2) LIBOR has a minimum rate of 3%. This collateralized term loan is secured
by the Company's general mortgage bonds.
(3) The Series 2001-1 Transition Bonds were issued by one of the Company's
subsidiaries, and are non-recourse to the Company. For further discussion
of the securitization financing, see Note 4(a) of the CenterPoint Houston
Form 10-K, which is incorporated herein by reference.
(4) Of the total $654 million notes payable to affiliate at March 31, 2003,
$397 million has the same principal amounts and interest rates as the
pollution control bond obligations of CenterPoint Energy that are secured
by first mortgage bonds of CenterPoint Houston.
Money Pool Borrowings
On March 31, 2003, the Company had borrowed approximately $155 million
from its affiliates, which had a weighted average interest rate of 6.25%. The
Company participates in a "money pool" through which it can borrow or invest on
a short-term basis. Funding needs are aggregated and external borrowing or
investing is based on the net cash position. The money pool's net funding
requirements are generally met with borrowings of CenterPoint Energy. The terms
of the money pool are in accordance with requirements applicable to registered
public utility holding companies under the 1935 Act.
Long-Term Debt
On March 18, 2003, the Company issued $762.3 million aggregate principal
amount of general mortgage bonds composed of $450 million principal amount of
10-year bonds with an interest rate of 5.7% and $312.3 million principal amount
of 30-year bonds with an interest rate of 6.95%. Proceeds were used to repay a
$150 million note payable to CenterPoint Energy that matured on April 21, 2003,
to redeem approximately $312 million aggregate principal amount of the Company's
first mortgage bonds and to repay $279 million of a $537 million intercompany
note payable to CenterPoint Energy.
9
The following table shows future maturity dates of long-term debt issued
by CenterPoint Houston and expected future maturity dates of the transition
bonds issued by CenterPoint Energy Transition Company, LLC, a subsidiary of the
Company (Bond Company) as of March 31, 2003. Amounts are expressed in thousands.
CENTERPOINT HOUSTON
---------------------------- TRANSITION
YEAR THIRD-PARTY AFFILIATE SUB-TOTAL BONDS TOTAL
---- ----------- --------- --------- ---------- -----------
2003........................... $ -- $ 16,600 $ 16,600 $ 12,357 $ 28,957
2004........................... -- -- -- 41,189 41,189
2005........................... 1,310,000 -- 1,310,000 46,806 1,356,806
2006........................... -- -- -- 54,295 54,295
2007........................... -- -- -- 59,912 59,912
2008........................... -- -- -- 65,529 65,529
2009........................... -- -- -- 73,018 73,018
2010........................... -- -- -- 80,506 80,506
2011........................... -- -- -- 87,995 87,995
2012........................... -- 45,570 45,570 99,229 144,799
2013........................... 450,000 -- 450,000 108,590 558,590
2015........................... -- 150,850 150,850 -- 150,850
2017........................... -- 127,385 127,385 -- 127,385
2021........................... 102,442 -- 102,442 -- 102,442
2023........................... 200,000 -- 200,000 -- 200,000
2027........................... -- 56,095 56,095 -- 56,095
2028........................... -- 257,500 257,500 -- 257,500
2033........................... 312,275 -- 312,275 -- 312,275
---------- ---------- ---------- -------- ----------
Total $2,374,717 $ 654,000 $3,028,717 $729,426 $3,758,143
========== ========== ========== ======== ==========
First mortgage bonds and general mortgage bonds in aggregate principal
amounts of $302 million and $762 million, respectively, have been issued
directly to third parties. External debt of $1.3 billion maturing in 2005 is
senior and secured by general mortgage bonds. The affiliate debt is senior and
unsecured.
Other than the affiliate note due 2028 set forth in the above table, the
amounts, maturities and interest rates of the intercompany debt payable to
CenterPoint Energy of $397 million effectively match the amounts, maturities and
interest rates of certain pollution control bond obligations of CenterPoint
Energy that are secured by the Company's first mortgage bonds in the same
amounts in the table below.
The following table shows the maturity dates of the $924 million of first
mortgage bonds and general mortgage bonds that the Company has issued as
collateral for long-term debt of CenterPoint Energy. These bonds are not
reflected on the financial statements of CenterPoint Houston because of the
contingent nature of the obligations. Amounts are expressed in thousands.
YEAR FIRST MORTGAGE BONDS GENERAL MORTGAGE BONDS TOTAL
---- -------------------- ---------------------- ------------
2003..................... $ 16,600 $ -- $ 16,600
2011..................... -- 19,200 19,200
2012..................... 45,570 -- 45,570
2015..................... 150,850 -- 150,850
2017..................... 127,385 -- 127,385
2018..................... -- 50,000 50,000
2019..................... -- 200,000 200,000
2020..................... -- 90,000 90,000
2026..................... -- 100,000 100,000
2027..................... 56,095 -- 56,095
2028..................... -- 68,000 68,000
-------- --------- -----------
Total $396,500 $ 527,200 $ 923,700
======== ========= ===========
10
The aggregate amount of additional general mortgage bonds and first
mortgage bonds that could be issued is approximately $600 million based on
estimates of the value of property encumbered by the general mortgage, the cost
of such property and the 70% bonding ratio contained in the general mortgage. As
a result of contractual limitations expiring in November 2005, the aggregate
amount of first mortgage bonds and general mortgage bonds cannot currently be
increased. As of March 31, 2003, outstanding first mortgage bonds and general
mortgage bonds aggregated approximately $3.3 billion as shown in the following
table. Amounts are expressed in thousands.
ISSUED AS ISSUED AS COLLATERAL
ISSUED DIRECTLY TO COLLATERAL FOR THE FOR CENTERPOINT
THIRD PARTIES COMPANY'S DEBT ENERGY'S DEBT TOTAL
------------------- ------------------ -------------------- -------------
First Mortgage Bonds $ 302,442 $ -- $ 396,500 $ 698,942
General Mortgage Bonds 762,275 1,310,000 527,200 2,599,475
------------- ---------- ----------- ------------
Total $ 1,064,717 $1,310,000 $ 923,700 $ 3,298,417
============= ========== =========== ============
The Bond Company has $729 million aggregate principal amount of
outstanding transition bonds. Classes of the transition bonds have final
maturity dates of September 15, 2007, September 15, 2009, September 15, 2011 and
September 15, 2015 and bear interest at rates of 3.84%, 4.76%, 5.16% and 5.63%,
respectively. The transition bonds are secured by "transition property," as
defined in the Texas electric restructuring law, which includes the irrevocable
right to recover, through non-bypassable transition charges payable by retail
electric customers, qualified costs provided in the Texas electric restructuring
law and a tariff issued by the Texas Utility Commission. The transition bonds
are reported as CenterPoint Houston's long-term debt, although the holders of
the transition bonds have no recourse to any of CenterPoint Houston's assets or
revenues, and CenterPoint Houston's creditors have no recourse to any assets or
revenues (including, without limitation, the transition charges) of the Bond
Company. CenterPoint Houston has no payment obligations with respect to the
transition bonds except to remit collections of transition charges as set forth
in a servicing agreement between CenterPoint Houston and the Bond Company and in
an intercreditor agreement among CenterPoint Houston, the Bond Company and other
parties.
Liens. The Company's assets are subject to liens securing approximately
$699 million of first mortgage bonds. Sinking or improvement fund and
replacement fund requirements on the first mortgage bonds may be satisfied by
certification of property additions. Sinking fund and replacement fund
requirements for 2001, 2002 and 2003 have been satisfied by certification of
property additions. The replacement fund requirement satisfied in 2003 was
approximately $354 million, and the sinking fund requirement satisfied in 2003
was approximately $8 million. The Company's assets are subject to liens securing
approximately $2.6 billion of general mortgage bonds, which are junior to the
liens of the first mortgage bonds.
(7) COMPREHENSIVE INCOME
The following table summarizes the components of total comprehensive
income:
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------
2002 2003
---- ---
(IN MILLIONS)
Net income ..................................................... $ 32 $80
---- ---
Other comprehensive income:
Other comprehensive income from discontinued operations ...... 174 --
Additional minimum non-qualified pension liability adjustment 1 --
---- ---
Other comprehensive income ..................................... 175 --
---- ---
Comprehensive income ........................................... $207 $80
==== ===
(8) RELATED PARTY TRANSACTIONS
From time to time, the Company has advanced money to, or borrowed money
from, CenterPoint Energy or its subsidiaries. As of December 31, 2002, the
Company had net short-term borrowings included in accounts payable-affiliated
companies of $44 million and $215 million included in notes payable-affiliated
companies. As of March 31, 2003, the Company had net short-term-borrowings of
$21 million in accounts payable-affiliated companies, which included accounts
payable of $45 million, partially offset by accounts receivable of $24 million.
The Company had net short-term borrowings of $172 million in notes payable-
affiliated companies as of March 31,
11
2003, which included net short-term notes payables of $155 million and $17
million current portion of long-term notes payable. The Company had a long-term
note receivable from affiliate of $815 million, as of December 31, 2002 and
March 31, 2003, as further discussed below. Long-term note payable to affiliate
was $1.1 billion as of December 31, 2002 and $654 million as of March 31, 2003.
For more information on the long-term note payable to affiliate see Note 6. The
Company had net interest expense related to affiliate borrowings of $30 million
and $18 million for the three months ended March 31, 2002 and March 31, 2003,
respectively. As of March 31, 2003, the Company had $396 million in long-term
accounts payable-affiliated companies, which related to the Texas Genco
distribution. For more information on the long-term accounts payable to
affiliate see Note 4(b).
Prior to August 31, 2002, the Company had $737 million invested in a money
fund through which the Company and certain of its affiliates could borrow and/or
invest on a short-term basis. At the time of the Restructuring, the Company
converted a money fund investment into a $750 million note receivable from
CenterPoint Energy payable on demand and bearing interest at the prime rate,
leaving $13 million borrowed from the money fund. Since August 31, 2002, the
Company has been a participant in the CenterPoint Energy money pool. The $750
million note receivable is included in long-term notes receivable from affiliate
in the Consolidated Balance Sheets because CenterPoint Energy does not plan to
repay the note within the next twelve months.
For the three months ended March 31, 2002, revenues, excluding transition
charges, derived from energy delivery charges provided by the Company to
subsidiaries of Reliant Resources, Inc. (Reliant Resources), a former affiliate,
totaled $117 million.
Although the former retail sales business is no longer conducted by the
Company, retail customers remained regulated customers of the Company through
the date of their first meter reading in January 2002. During this transition
period, the Company purchased $60 million of power from Texas Genco as of March
31, 2002.
CenterPoint Energy provides some corporate services to the Company. The
costs of services have been charged directly to the Company using methods that
management believes are reasonable. These methods include negotiated usage
rates, dedicated asset assignment and proportionate corporate formulas based on
assets, operating expenses and employees. These charges are not necessarily
indicative of what would have been incurred had the Company not been an
affiliate. Amounts charged to the Company for these services were $11 million
and $32 million for the three months ended March 31, 2002 and 2003,
respectively, and are included primarily in operation and maintenance expenses.
(9) LEGAL PROCEEDINGS
(a) Legal Matters
The Company's predecessor, Reliant Energy, and certain of its former
subsidiaries are named as defendants in several lawsuits described below. Under
a master separation agreement between Reliant Energy and Reliant Resources,
CenterPoint Energy and its subsidiaries, including the Company, are entitled to
be indemnified by Reliant Resources for any losses arising out of the lawsuits
described under "California Class Actions and Attorney General Cases,"
"Long-Term Contract Class Action," "Washington and Oregon Class Actions,"
"Bustamante Price Reporting Class Action," "Gas Trading Class Action" and
"Trading and Marketing Activities," including attorneys' fees and other costs.
Pursuant to the indemnification obligation, Reliant Resources is defending
CenterPoint Energy and its subsidiaries, including the Company, to the extent
named in these lawsuits. The ultimate outcome of these matters cannot be
predicted at this time.
California Class Actions and Attorney General Cases. Reliant Energy,
Reliant Resources, Reliant Energy Power Generation, Inc. (REPG) and several
other subsidiaries of Reliant Resources, as well as two former officers and one
present officer of some of these companies, have been named as defendants in
class action lawsuits and other lawsuits filed against a number of companies
that own generation plants in California and other sellers of electricity in
California markets. While the plaintiffs allege various violations by the
defendants of antitrust laws and state laws against unfair and unlawful business
practices, each of the lawsuits is grounded on the central allegation that the
defendants conspired to drive up the wholesale price of electricity. In addition
to injunctive relief, the plaintiffs in these lawsuits seek treble the amount of
damages alleged, restitution of alleged overpayments, disgorgement of alleged
unlawful profits for sales of electricity, costs of suit and attorneys' fees.
The first six of these suits originally were filed in state courts in San Diego,
San Francisco and Los Angeles Counties. The suits in San Diego and Los
12
Angeles Counties were consolidated and removed to the federal district court in
San Diego, but on December 13, 2002, that court remanded the suits to the state
courts. Prior to the remand, Reliant Energy was voluntarily dismissed from two
of the suits. Several parties, including the Reliant defendants, have appealed
the judge's remand decision. The United States court of appeals has entered a
briefing schedule that could result in oral arguments by the summer of 2003 and
stayed the remand order pending that appeal.
In March and April 2002, the California Attorney General filed three
complaints, two in state court in San Francisco and one in the federal district
court in San Francisco, against Reliant Energy, Reliant Resources, Reliant
Energy Services and other subsidiaries of Reliant Resources alleging, among
other matters, violations by the defendants of state laws against unfair and
unlawful business practices arising out of transactions in the markets for
ancillary services run by the California independent systems operator, charging
unjust and unreasonable prices for electricity, in violation of antitrust laws
in connection with the acquisition in 1998 of electric generating facilities
located in California. The complaints variously seek restitution and
disgorgement of alleged unlawful profits for sales of electricity, civil
penalties and fines, injunctive relief against unfair competition, divestment of
Reliant Resources' generation capacity and undefined equitable relief. Reliant
Resources removed the two state court cases to the federal district court in San
Francisco. In August 2002, the district court dismissed the two cases originally
filed in state court and also dismissed the damages claims asserted in the
antitrust case. The Attorney General has appealed the dismissal of these cases
to the court of appeals.
Following the filing of the Attorney General cases, seven additional class
action cases were filed in state courts in Northern California. Each of these
purports to represent the same class of California ratepayers, assert the same
claims as asserted in the other California class action cases, and in some
instances repeat as well the allegations in the Attorney General cases. All of
these cases have been removed to federal district court in San Diego. Reliant
Resources has not filed an answer in any of these cases.
In all of these cases pending before the federal and state courts in
California, the Reliant defendants have filed or intend to file motions to
dismiss on grounds that the claims are barred by federal preemption and the
filed rate doctrine.
Long-Term Contract Class Action. In October 2002, a class action was filed
in state court in Los Angeles against Reliant Energy and several subsidiaries of
Reliant Resources. The complaint in this case repeats the allegations asserted
in the California class actions as well as the Attorney General cases and also
alleges misconduct related to long-term contracts purportedly entered into by
the California Department of Water Resources. None of the Reliant entities,
however, has a long-term contract with the Department of Water Resources. This
case has been removed to federal district court in San Diego. The Reliant
defendants intend to file motions to dismiss on grounds that the claims are
barred by federal preemption and the filed rate doctrine.
Washington and Oregon Class Actions. In December 2002, a lawsuit was filed
in Circuit Court of the State of Oregon for the County of Multnomah on behalf of
a class of all Oregon purchasers of electricity and natural gas. Reliant Energy,
Reliant Resources and several Reliant Resources subsidiaries are named as
defendants, along with many other electricity generators and marketers. Like the
other lawsuits filed in California, the plaintiffs claim the defendants
manipulated wholesale power prices in violation of state and federal law. The
plaintiffs seek injunctive relief and payment of damages based on alleged
overcharges for electricity. Also in December 2002, a nearly identical lawsuit
on behalf of consumers in the State of Washington was filed in federal district
court in Seattle. Reliant Resources has removed the Oregon suit to federal
district court in Portland. It is anticipated that before answering the
lawsuits, the defendants will file motions to dismiss on the grounds that the
claims are barred by federal preemption and by the filed rate doctrine.
Bustamante Price Reporting Class Action. In November 2002, California
Lieutenant Governor Cruz Bustamante filed a lawsuit in state court in Los
Angeles on behalf of a class of purchasers of gas and power alleging violations
of state antitrust laws and state laws against unfair and unlawful business
practices based on an alleged conspiracy to report and publish false and
fraudulent natural gas prices with an intent to affect the market prices of
natural gas and electricity in California. Reliant Energy, Reliant Resources and
several Reliant Resources subsidiaries are named as defendants, along with other
market participants and publishers of some of the price indices. The complaint
seeks injunctive relief, compensatory and punitive damages, restitution of
alleged overpayment, disgorgement of all profits and funds acquired by the
alleged unlawful conduct, costs of suit and attorneys' fees. The Reliant
defendants intend to deny both their alleged violation of any laws and their
alleged participation in any conspiracy.
13
Gas Trading Class Action. CenterPoint Energy, Reliant Resources and
Reliant Energy have been named as defendants in a lawsuit filed in April 2003 in
state court in Los Angeles County, California on behalf of a class of purchasers
of natural gas alleging violations of state antitrust laws and state laws
against unfair and unlawful business practices based on an alleged conspiracy
with Enron Corp. to manipulate the California natural gas markets in 2000 and
2001. The complaint is based on certain conclusions in a report by the staff of
the Federal Energy Regulatory Commission (FERC) that has not been subject to
procedures designed to allow parties to either discover or test the basis for
the conclusions. The complaint seeks injunctive and declaratory relief,
compensatory and punitive damages, restitution, costs of suit and attorneys'
fees. The complaint alleges that there was "well over one billion dollars in
excess charges to California consumers during the 2000 through 2001 time
period." The plaintiffs are seeking a trebling of any damages award. While
Reliant Resources has not yet filed an answer, CenterPoint Energy understands
that Reliant Resources intends to deny both the alleged violation of any laws
and the participation in a conspiracy with Enron. Further, neither CenterPoint
Energy nor any of its current subsidiaries has ever engaged in gas trading in
California
Trading and Marketing Activities. Reliant Energy has been named as a party
in several lawsuits and regulatory proceedings relating to the trading and
marketing activities of its former subsidiary, Reliant Resources.
In June 2002, the SEC advised Reliant Resources and Reliant Energy that it
had issued a formal order in connection with its investigation of Reliant
Resources' financial reporting, internal controls and related matters. The
Company understands that the investigation is focused on Reliant Resources'
same-day commodity trading transactions involving purchases and sales with the
same counterparty for the same volume at substantially the same price and
certain structured transactions. These matters were previously the subject of an
informal inquiry by the SEC. Reliant Resources and CenterPoint Energy are
cooperating with the SEC staff. On May 12, 2003, the SEC advised Reliant
Resources and Reliant Energy that it had issued a formal order in connection
with this investigation. Reliant Energy, through the Company as its successor,
has entered into a settlement with the SEC that concludes this investigation.
Under the settlement, Reliant Resources and Reliant Energy consented to the
entry of an administrative cease-and-desist order with respect to future
violations of certain provisions of the Securities Act of 1933 and the
Securities Exchange Act of 1934, without admitting or denying the SEC's findings
that violations of these laws had occurred. The SEC did not assess monetary
penalties or fines against Reliant Energy, CenterPoint Energy or any of its
subsidiaries including the Company.
In connection with the Texas Utility Commission's industry-wide
investigation into potential manipulation of the ERCOT market on and after July
31, 2001, Reliant Energy and Reliant Resources have provided information to the
Texas Utility Commission concerning their scheduling and trading activities.
Fifteen class action lawsuits filed in May, June and July 2002 on behalf
of purchasers of securities of Reliant Resources and/or Reliant Energy have been
consolidated in federal district court in Houston. Reliant Resources and certain
of its former and current executive officers are named as defendants. Reliant
Energy is also named as a defendant in seven of the lawsuits. Two of the
lawsuits also name as defendants the underwriters of the May 2001 initial public
offering of approximately 20% of the common stock of Reliant Resources (Reliant
Resources Offering). One lawsuit names Reliant Resources' and Reliant Energy's
independent auditors as a defendant. The consolidated amended complaint seeks
monetary relief purportedly on behalf of three classes: (1) purchasers of
Reliant Energy common stock from February 3, 2000 to May 13, 2002; (2)
purchasers of Reliant Resources common stock on the open market from May 1, 2001
to May 13, 2002; and (3) purchasers of Reliant Resources common stock in the
Reliant Resources Offering or purchasers of shares that are traceable to the
Reliant Resources Offering. The plaintiffs allege, among other things, that the
defendants misrepresented their revenues and trading volumes by engaging in
round-trip trades and improperly accounted for certain structured transactions
as cash-flow hedges, which resulted in earnings from these transactions being
accounted for as future earnings rather than being accounted for as earnings in
fiscal year 2001.
In February 2003, a lawsuit was filed by three individuals in federal
district court in Chicago against CenterPoint Energy and certain former and
current officers of Reliant Resources for alleged violations of federal
securities laws. The plaintiffs in this lawsuit allege that the defendants
violated federal securities laws by issuing false and misleading statements to
the public, and that the defendants made false and misleading statements as part
of an alleged scheme to inflate artificially trading volumes and revenues. In
addition, the plaintiffs assert claims of
14
fraudulent and negligent misrepresentation and violations of Illinois consumer
law. The defendants expect to file a motion to transfer this lawsuit to the
federal district court in Houston and to consolidate this lawsuit with the
consolidated lawsuits described above.
The Company believes that none of these lawsuits has merit because, among
other reasons, the alleged misstatements and omissions were not material and did
not result in any damages to any of the plaintiffs.
In May 2002, three class action lawsuits were filed in federal district
court in Houston on behalf of participants in various employee benefits plans
sponsored by Reliant Energy. Reliant Energy and its directors are named as
defendants in all of the lawsuits. Two of the lawsuits have been dismissed
without prejudice. The remaining lawsuit alleges that the defendants breached
their fiduciary duties to various employee benefits plans, directly or
indirectly sponsored by Reliant Energy, in violation of the Employee Retirement
Income Security Act. The plaintiffs allege that the defendants permitted the
plans to purchase or hold securities issued by Reliant Energy when it was
imprudent to do so, including after the prices for such securities became
artificially inflated because of alleged securities fraud engaged in by the
defendants. The complaints seek monetary damages for losses suffered by a
putative class of plan participants whose accounts held Reliant Energy or
Reliant Resources securities, as well as equitable relief in the form of
restitution.
In October 2002, a derivative action was filed in the federal district
court in Houston, against the directors and officers of CenterPoint Energy. The
complaint sets forth claims for breach of fiduciary duty, waste of corporate
assets, abuse of control and gross mismanagement. Specifically, the shareholder
plaintiff alleges that the defendants caused CenterPoint Energy to overstate its
revenues through so-called "round trip" transactions. The plaintiff also alleges
breach of fiduciary duty in connection with the spin-off of Reliant Resources
and the Reliant Resources Offering. The complaint seeks monetary damages on
behalf of CenterPoint Energy as well as equitable relief in the form of a
constructive trust on the compensation paid to the defendants. On March 13,
2003, the court dismissed this case on the ground that the plaintiff did not
make an adequate demand on CenterPoint Energy before filing suit. On March 26,
2003, the plaintiff sent another demand asserting the same claims.
CenterPoint Energy's board of directors is investigating that demand and
similar allegations made in a June 28, 2002 demand letter sent on behalf of a
CenterPoint Energy shareholder. The latter letter states that the shareholder
and other shareholders are considering filing a derivative suit on behalf of
CenterPoint Energy and demands that CenterPoint Energy take several actions in
response to alleged round-trip trades occurring in 1999, 2000, and 2001. The
Board is reviewing the demands made by the shareholders to determine if these
proposed actions are in the best interests of CenterPoint Energy.
Reliant Energy Municipal Franchise Fee Lawsuits. In February 1996, the
cities of Wharton, Galveston and Pasadena filed suit, for themselves and a
proposed class of all similarly situated cities in Reliant Energy's electric
service area, against Reliant Energy and Houston Industries Finance, Inc.
(formerly a wholly owned subsidiary of Reliant Energy) alleging underpayment of
municipal franchise fees. The plaintiffs claim that they are entitled to 4% of
all receipts of any kind for business conducted within these cities over the
previous four decades. A jury trial of the original claimant cities (but not the
class of cities) in the 269th Judicial District Court for Harris County, Texas,
ended in April 2000 (the Three Cities case). Although the jury found for Reliant
Energy on many issues, it found in favor of the original claimant cities on
three issues, and assessed a total of $4 million in actual and $30 million in
punitive damages. However, the jury also found in favor of Reliant Energy on the
affirmative defense of laches, a defense similar to a statute of limitations
defense, due to the original claimant cities having unreasonably delayed
bringing their claims during the 43 years since the alleged wrongs began. The
trial court in the Three Cities case granted most of Reliant Energy's motions to
disregard the jury's findings. The trial court's rulings reduced the judgment to
$1.7 million, including interest, plus an award of $13.7 million in legal fees.
In addition, the trial court granted Reliant Energy's motion to decertify the
class. Following this ruling, 45 cities filed individual suits against Reliant
Energy in the District Court of Harris County.
On February 27, 2003, the state court of appeals in Houston rendered an
opinion reversing the judgment against CenterPoint Energy and rendering judgment
that the Three Cities take nothing by their claims. The court of appeals found
that the jury's finding of laches barred all of the Three Cities' claims and
that the Three Cities were not entitled to recovery of any attorneys' fees. The
judgment of the court of appeals is subject to an appeal to the Texas Supreme
Court.
15
The extent to which issues in the Three Cities case may affect the claims
of the other cities served by Reliant Energy cannot be assessed until judgments
are final and no longer subject to appeal. However, the court of appeals' ruling
appears to be consistent with Texas Supreme Court opinions. The Company
estimates the range of possible outcomes for recovery by the plaintiffs in the
Three Cities case to be between $0 and $18 million inclusive of interest and
attorneys' fees.
Other Matters
The Company is involved in other legal, environmental, tax and regulatory
proceedings before various courts, regulatory commissions and governmental
agencies regarding matters arising in the ordinary course of business. Some of
these proceedings involve substantial amounts. The Company's management
regularly analyzes current information and, as necessary, provides accruals for
probable liabilities on the eventual disposition of these matters. The Company's
management believes that the disposition of these matters will not have a
material adverse effect on the Company's financial condition, results of
operations or cash flows.
(b) "Price to Beat" Clawback Component.
In connection with the implementation of the Texas electric restructuring
law, the Texas Utility Commission has set a "price to beat" that retail electric
providers affiliated or formerly affiliated with a former integrated utility
must charge residential and small commercial customers within their affiliated
electric utility's service area. The true-up provides for a clawback of "price
to beat" in excess of the market price of electricity if 40% of the "price to
beat" load is not served by a non-affiliated retail electric provider by January
1, 2004. Pursuant to the Texas electric restructuring law and the master
separation agreement between Reliant Energy and Reliant Resources, Reliant
Resources is obligated to pay CenterPoint Houston for the clawback component of
the true-up. The clawback may not exceed $150 times the number of customers
served by the affiliated retail electric provider in the transmission and
distribution utility's service territory, less the number of customers served by
the affiliated retail electric provider outside the transmission and
distribution utility's service territory, on January 1, 2004.
16
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS OF
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
The following narrative analysis should be read in combination with
CenterPoint Energy Houston Electric, LLC's Interim Financial Statements and
notes contained in this Form 10-Q.
Effective August 31, 2002, Reliant Energy, Incorporated (Reliant Energy)
consummated a restructuring transaction (the Restructuring) in which it, among
other things, (1) conveyed its Texas electric generation assets to an affiliated
company, Texas Genco Holdings, Inc. (Texas Genco), (2) became an indirect,
wholly owned subsidiary of a new utility holding company, CenterPoint Energy,
Inc. (CenterPoint Energy), (3) was converted into a Texas limited liability
company named CenterPoint Energy Houston Electric, LLC (CenterPoint Houston or
the Company), and (4) distributed the capital stock of its operating
subsidiaries, including Texas Genco, to CenterPoint Energy. As part of the
Restructuring, each share of Reliant Energy common stock was converted into one
share of CenterPoint Energy common stock. Pursuant to the provisions of certain
of its existing debt agreements applicable when the properties or assets of
Reliant Energy were transferred to another entity substantially as an entirety,
CenterPoint Energy expressly assumed certain debt and other obligations of
Reliant Energy, and Reliant Energy was released as the primary obligor on such
debt. For additional information on the Restructuring, see Note 1 to the Interim
Financial Statements.
We operate Reliant Energy's electric transmission and distribution
business, which continues to be subject to cost-of-service rate regulation and
is responsible for the delivery of electricity sold to retail customers through
retail electric providers in the 5,000 square mile service area of Houston,
Texas and surrounding metropolitan areas as well as the transmission of bulk
power into and out of the Houston area.
Contemporaneous with the Restructuring, CenterPoint Energy registered and
became subject, with its subsidiaries, to regulation as a registered holding
company system under the Public Utility Holding Company Act of 1935 (1935 Act).
The 1935 Act directs the SEC to regulate, among other things, transactions among
affiliates, sales or acquisitions of assets, issuance of securities,
distributions and permitted lines of business.
The Interim Financial Statements have been prepared to reflect the effect
of the Restructuring as described above as it relates to CenterPoint Houston,
and have been prepared based upon Reliant Energy's historical consolidated
financial statements.
The Interim Financial Statements present the former subsidiaries of
Reliant Energy that were distributed to CenterPoint Energy in the Restructuring
as discontinued operations, in accordance with Statement of Financial Accounting
Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" (SFAS No. 144). Accordingly, the Interim Financial Statements
of CenterPoint Houston reflect these operations as discontinued operations for
the three months ended March 31, 2002.
We meet the conditions specified in General Instruction H(1)(a) and (b) to
Form 10-Q and are therefore permitted to use the reduced disclosure format for
wholly owned subsidiaries of reporting companies. Accordingly, we have omitted
from this report the information called for by Item 2 (Management's Discussion
and Analysis of Financial Condition and Results of Operations), Item 3
(Quantitative and Qualitative Disclosures About Market Risk) of Part I and the
following Part II items of Form 10-Q: Item 2 (Changes in Securities), Item 3
(Defaults Upon Senior Securities) and Item 4 (Submission of Matters to a Vote of
Security Holders). The following discussion explains material changes in
CenterPoint Houston's our results of operations between the three months ended
March 31, 2003 and the three months ended March 31, 2002. Reference is made to
"Management's Narrative Analysis of Results of Operations" in Item 7 of our
Annual Report on Form 10-K for the year ended December 31, 2002 (CenterPoint
Houston Form 10-K).
CONSOLIDATED RESULTS OF OPERATIONS
Our results of operations are affected by, among other things, seasonal
fluctuations and other changes in the demand for electricity, the actions of
various governmental authorities having jurisdiction over the rates we charge,
debt service costs, income tax expense, our ability to collect receivables from
retail electric providers and our ability
17
to recover our stranded costs and regulatory assets. For more information
regarding factors that may affect the future results of operations of our
business, please read "Business -- Risk Factors" in Item 1 of the CenterPoint
Houston Form 10-K and "Management's Narrative Analysis of Results of Operations
- -- Certain Factors Affecting Future Earnings" in Item 7 of the CenterPoint
Houston Form 10-K, each of which is incorporated herein by reference.
The following table sets forth our consolidated results of operations for
the three months ended March 31, 2002 and 2003, followed by a discussion of our
consolidated results of operations based on earnings from continuing operations
before interest expense, distribution on trust preferred securities and income
taxes (EBIT). EBIT, as defined, is shown because it is a financial measure we
use to evaluate the performance of our business segments and we believe it is a
measure of financial performance that may be used as a means to analyze and
compare companies on the basis of operating performance. We expect that some
analysts and investors will want to review EBIT when evaluating our company.
EBIT is not defined under accounting principles generally accepted in the United
States of America (GAAP), should not be considered in isolation or as a
substitute for a measure of performance prepared in accordance with GAAP and is
not indicative of operating income from operations as determined under GAAP.
Additionally, our computation of EBIT may not be comparable to other similarly
titled measures computed by other companies, because all companies do not
calculate it in the same fashion. We consider operating income to be a
comparable measure under GAAP. We believe the difference between operating
income and EBIT on both a consolidated and business segment basis is not
material. We have provided a reconciliation of consolidated operating income to
EBIT and EBIT to net income below.
THREE MONTHS ENDED MARCH 31,
----------------------------
2002 2003
-------- --------
(IN MILLIONS)
Operating Revenues:
Electric revenues ........................................... $ 427 $ 316
ECOM true-up ................................................ 141 132
-------- --------
Total Operating Revenues ................................... 568 448
-------- --------
Operating Expenses:
Purchased power ............................................. 60 --
Operation and maintenance ................................... 141 133
Depreciation and amortization ............................... 63 65
Taxes other than income ..................................... 50 44
-------- --------
Total Operating Expenses ................................... 314 242
-------- --------
Operating Income .............................................. 254 206
Other Income, net ............................................. 5 8
-------- --------
Earnings Before Interest and Taxes ............................ 259 214
Interest Expense and Distribution on Trust Preferred Securities (60) (92)
-------- --------
Income from Continuing Operations Before Income Taxes ......... 199 122
Income Tax Expense ............................................ (67) (42)
-------- --------
Income from Continuing Operations ............................. 132 80
Loss from Discontinued Operations, net of tax ................. (100) --
-------- --------
Net Income .................................................... $ 32 $ 80
======== ========
Throughput Data (GWh(1)):
Residential ................................................ 4,473 4,558
Commercial ................................................. 3,975 4,008
Industrial ................................................. 6,338 6,186
Other ...................................................... 42 36
-------- --------
Total Throughput ........................................... 14,828 14,788
======== ========
- ----------
(1) Gigawatt hours
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002
We reported EBIT of $214 million for the three months ended March 31,
2003, consisting of $82 million for the regulated electric transmission &
distribution utility and non-cash EBIT of $132 million associated with
generation-related regulatory assets, or Excess Cost Over Market (ECOM), as
described below. For the three months ended
18
March 31, 2002, EBIT was $259 million, consisting of $104 million for the
regulated electric transmission & distribution utility, non-cash EBIT of $141
million associated with ECOM, and $14 million related to the transition to the
deregulated electric market. Although our former retail sales business is no
longer conducted by us, retail customers remained regulated customers of the
regulated utility through the date of their first meter reading in 2002. The
purchased power costs of $60 million for the three months ended March 31, 2002
relate to operation of the regulated utility during this transition period.
Our business, excluding ECOM and transition related-EBIT, continues to
benefit from solid customer growth. Reduced revenues from industrial customers
($9 million) and higher employee benefit and insurance costs ($8 million) more
than offset increased revenues from the addition of over 50,000 metered
customers since March 2002 ($8 million).
Under the Texas electric restructuring law, a regulated utility may
recover, in its 2004 stranded cost true-up proceeding, any difference between
market prices received through the state mandated auctions and the Texas Utility
Commission's earlier estimates of those market prices. During 2002 and 2003,
this difference, referred to as ECOM, produces non-cash EBIT and is recorded as
a regulatory asset. The reduction in ECOM of $9 million from 2002 to 2003
resulted from an increase in capacity auction prices at Texas Genco.
In the electric transmission & distribution business, throughput remained
level during the three months ended March 31, 2003 as compared to the same
period in 2002.
Operation and maintenance expense decreased $8 million for the three
months ended March 31, 2003 as compared to the same period in 2002. The decrease
was primarily due to a reduction in bad debt expense of $17 million related to
the reduction in transition period (bundled) revenues ($14 million) and the
termination of a factoring program ($3 million). This decrease in bad debt
expense was partially offset by increased employee benefit expenses primarily
due to increased pension costs ($5 million) and increased insurance expenses ($3
million).
Depreciation and amortization expense increased $2 million for the three
months ended March 31, 2003 as compared to the same period in 2002 primarily due
to increases in plant in service ($4 million) partially offset by decreased
amortization on securitized assets ($2 million).
Taxes other than income taxes decreased $6 million for the three months
ended March 31, 2003 as compared to the same period in 2002 primarily due to
gross receipts tax associated with transition period revenue in the first
quarter of 2002.
Other income, net increased $3 million for the three months ended March
31, 2003, compared to the same period in 2002. The increase was primarily due to
interest income partially offset by decreased interest on under recovery of
fuel.
CenterPoint Houston's effective tax rate for the three months ended March
31, 2002 and 2003 was 33.8% and 34.2%, respectively.
LIQUIDITY
Long-Term Debt.
On March 18, 2003, we issued $762.3 million aggregate principal amount of
general mortgage bonds composed of $450 million principal amount of 10-year
bonds with an interest rate of 5.7% and $312.3 million principal amount of
30-year bonds with an interest rate of 6.95%. Proceeds were used to repay a $150
million note payable to CenterPoint Energy that matured on April 21, 2003, to
redeem approximately $312.3 million aggregate principal amount of the Company's
first mortgage bonds and to repay $279 million of a $537 million intercompany
note payable to CenterPoint Energy. Proceeds from the note repayment were
ultimately used to repay borrowings under CenterPoint Energy's $3.85 billion
credit facility, which is discussed below, and to permanently reduce the term
loan component of the credit facility by $50 million.
19
The following table shows future maturity dates of long-term debt issued
by us to third parties and affiliates and expected future maturity dates of
transition bonds issued by our subsidiary, CenterPoint Energy Transition Bond
Company, LLC (Bond Company), as of March 31, 2003. Amounts are expressed in
thousands.
CENTERPOINT HOUSTON
----------------------------- TRANSITION
YEAR THIRD-PARTY AFFILIATE SUB-TOTAL BONDS TOTAL
---- ----------- --------- --------- ----- -----
2003........................... $ -- $ 16,600 $ 16,600 $12,357 $ 28,957
2004........................... -- -- -- 41,189 41,189
2005........................... $1,310,000 -- 1,310,000 46,806 1,356,806
2006........................... -- -- -- 54,295 54,295
2007........................... -- -- -- 59,912 59,912
2008........................... -- -- -- 65,529 65,529
2009........................... -- -- -- 73,018 73,018
2010........................... -- -- -- 80,506 80,506
2011........................... -- -- -- 87,995 87,995
2012........................... -- 45,570 45,570 99,229 144,799
2013........................... 450,000 -- 450,000 108,590 558,590
2015........................... -- 150,850 150,850 -- 150,850
2017........................... -- 127,385 127,385 -- 127,385
2021........................... 102,442 -- 102,442 -- 102,442
2023........................... 200,000 -- 200,000 -- 200,000
2027........................... -- 56,095 56,095 -- 56,095
2028........................... -- 257,500 257,500 -- 257,500
2033........................... 312,275 312,275 -- 312,275
---------- --------- ---------- -------- ----------
Total $2,374,717 $ 654,000 $3,028,717 $729,426 $3,758,143
========== ========= ========== ======== ==========
First mortgage bonds and general mortgage bonds in aggregate principal
amounts of $302 million and $762 million, respectively, have been issued
directly to third parties. External debt of $1.3 billion maturing in 2005 is
senior and secured by general mortgage bonds. The affiliate debt is senior and
unsecured.
We have outstanding approximately $654 million aggregate principal amount
of affiliate notes, which represent borrowings from our parent.
On February 28, 2003, CenterPoint Energy amended its existing $3.85
billion bank facility. The amendment provides that proceeds from capital stock
or indebtedness issued or incurred by us must be applied (subject to a $200
million basket for CenterPoint Energy Resources Corp. (CERC) and its
subsidiaries and another $250 million basket for borrowings by us and
CenterPoint Energy's other subsidiaries and other limited exceptions) to repay
bank loans and reduce the bank facility. Cash proceeds from issuances of
indebtedness to refinance indebtedness existing on October 10, 2002 are not
subject to this limitation.
We have outstanding approximately $699 million aggregate principal amount
of first mortgage bonds and approximately $2.6 billion aggregate principal
amount of general mortgage bonds, of which approximately $924 million combined
aggregate principal amount of first mortgage bonds and general mortgage bonds
collateralizes debt of CenterPoint Energy. The lien of the general mortgage
indenture is junior to that of the Mortgage, pursuant to which the first
mortgage bonds are issued. The aggregate amount of additional general mortgage
bonds and first mortgage bonds that could be issued is approximately $600
million based on estimates of the value of property encumbered by the general
mortgage, the cost of such property and the 70% bonding ratio contained in the
general mortgage. As a result of contractual limitations expiring in November
2005, the aggregate amount of first mortgage bonds and general mortgage bonds
cannot currently be increased.
20
The following table shows the maturity dates of the $924 million of first
mortgage bonds and general mortgage bonds that we have issued as collateral for
long-term debt of CenterPoint Energy. These bonds are not reflected on the
financial statements of CenterPoint Houston because of the contingent nature of
the obligations. Amounts are expressed in thousands.
YEAR FIRST MORTGAGE BONDS GENERAL MORTGAGE BONDS TOTAL
---- -------------------- ---------------------- -----
2003..................... $ 16,600 $ -- $ 16,600
2011..................... -- 19,200 19,200
2012..................... 45,570 -- 45,570
2015..................... 150,850 -- 150,850
2017..................... 127,385 -- 127,385
2018..................... -- 50,000 50,000
2019..................... -- 200,000 200,000
2020..................... -- 90,000 90,000
2026..................... -- 100,000 100,000
2027..................... 56,095 -- 56,095
2028..................... -- 68,000 68,000
--------- ---------- ---------
Total $ 396,500 $ 527,200 $ 923,700
========= ========== =========
As of March 31, 2003, outstanding first mortgage bonds and general
mortgage bonds aggregated approximately $3.3 billion as shown in the following
table. Amounts are expressed in thousands.
ISSUED AS ISSUED AS COLLATERAL
ISSUED DIRECTLY TO COLLATERAL FOR THE FOR CENTERPOINT
THIRD PARTIES COMPANY'S DEBT ENERGY'S DEBT TOTAL
------------- -------------- ------------- -----
First Mortgage Bonds $ 302,442 $ -- $396,500 $ 698,942
General Mortgage Bonds 762,275 1,310,000 527,200 2,599,475
---------- ---------- -------- ----------
Total $1,064,717 $1,310,000 $923,700 $3,298,417
========== ========== ======== ==========
The Bond Company has $729 million aggregate principal amount of
outstanding transition bonds that were issued in 2001 in accordance with the
Texas electric restructuring law. Classes of the transition bonds have final
maturity dates of September 15, 2007, September 15, 2009, September 15, 2011 and
September 15, 2015 and bear interest at rates of 3.84%, 4.76%, 5.16% and 5.63%,
respectively. The transition bonds are secured by "transition property," as
defined in the Texas electric restructuring law, which includes the irrevocable
right to recover, through non-bypassable transition charges payable by retail
electric customers, qualified costs provided in the Texas electric restructuring
law and a tariff issued by the Texas Utility Commission. The transition bonds
are reported as our long-term debt, although the holders of the transition bonds
have no recourse to any of our assets or revenues, and our creditors have no
recourse to any assets or revenues (including, without limitation, the
transition charges) of the transition bond company. We have no payment
obligations with respect to the transition bonds except to remit collections of
transition charges as set forth in a servicing agreement between us and the Bond
Company and in an intercreditor agreement among us, the Bond Company and other
parties.
Bank Facilities. As of March 31, 2003, we had no bank facilities available
to meet our short-term liquidity needs.
In February 2003, we obtained a $75 million revolving credit facility that
terminated on March 21, 2003, following our March 2003 issuance of general
mortgage bonds, which is discussed above. No borrowings were made under this
facility.
Money Pool. We participate in a "money pool" through which we and certain
of our affiliates can borrow or invest on a short-term basis. Funding needs are
aggregated and external borrowing or investing is based on the net cash
position. The money pool's net funding requirements are generally met by
borrowings of CenterPoint Energy. The terms of the money pool are in accordance
with requirements applicable to registered public utility holding companies
under the 1935 Act. At March 31, 2003, we had borrowings of $155 million from
the money pool. The money pool may not provide sufficient funds to meet our cash
needs.
Capital Requirements. We anticipate capital expenditures of up to $1.5
billion in the years 2003 through 2007,
21
including $48 million expended during the three months ended March 31, 2003. We
anticipate capital expenditures to be approximately $210 million and $300
million in for the remainder of 2003 and 2004, respectively.
Contractual Obligations. Excluding long-term debt discussed above, our
contractual obligations to make future payments consist of operating leases of
$5 million each in the years 2003 through 2005 and $6 million each in the years
2006 and 2007. For a discussion of operating leases, please read Note 10(a) to
the CenterPoint Houston 10-K.
Refunds to Our Customers. An order issued by the Texas Utility Commission
on October 3, 2001 established the transmission and distribution rates that
became effective in January 2002. The Texas Utility Commission determined that
we had overmitigated our stranded costs by redirecting transmission and
distribution depreciation and by accelerating depreciation of generation assets
(an amount equal to earnings above a stated overall rate of return on rate base
that was used to recover our investment in generation assets) as provided under
the 1998 transition plan and the Texas electric restructuring law. In this final
order, we are required to reverse the amount of redirected depreciation and
accelerated depreciation taken for regulatory purposes as allowed under the
transition plan and the Texas electric restructuring law. Per the October 3,
2001 order, we recorded a regulatory liability to reflect the prospective refund
of the accelerated depreciation. We began refunding excess mitigation credits
with the January 2002 unbundled bills, to be refunded over a seven- year period.
The annual refund of excess earnings is approximately $237 million. Under the
Texas electric restructuring law, a final settlement of these stranded costs
will occur in 2004.
Cash Requirements in 2003. Our liquidity and capital requirements are
affected primarily by our results of operations, capital expenditures, debt
service requirements, and working capital needs. Our principal cash requirements
during the last nine months of 2003 include the following:
- approximately $210 million of capital expenditures;
- an estimated $185 million which we are obligated to return to
customers as a result of the Texas Utility Commission's finding of
over-mitigation of stranded costs;
- dividend payments to CenterPoint Energy; and
- $17 million of maturing long-term debt to affiliate.
We expect to fund cash requirements with cash from operations,
liquidations of short-term investments, short-term borrowings and to the extent
permitted by our bank facility, proceeds from debt offerings. We believe that
our current liquidity, along with anticipated cash flows from operations and
proceeds from possible debt issuances will be sufficient to meet our cash needs.
However, disruptions in our ability to access the capital markets on a timely
basis could adversely affect our liquidity. Limits on our ability to issue
secured debt, as described in this report, may adversely affect our ability to
issue debt securities. In addition, the cost of our recent secured debt
issuances has been very high. A similar cost with regard to additional issuances
could significantly impact our debt service.
Prior to the Restructuring, Reliant Energy obtained an order from the SEC
that granted us certain authority with respect to financing, dividends and other
matters. The financing authority granted by that order will expire on June 30,
2003, and CenterPoint Energy must obtain a further order from the SEC under the
1935 Act in order for it and its subsidiaries, including us, to engage in
financing activities subsequent to that date.
The amount of any debt issuance, whether registered or unregistered, or
whether debt is secured or unsecured, is expected to be affected by the market's
perception of our creditworthiness, market conditions and factors affecting our
industry. Proceeds from the issuance of debt are expected to be used to
refinance existing debt, to finance capital expenditures and to permit the
payment of dividends.
Principal Factors Affecting Cash Requirements in 2004 and 2005. We expect
to issue securitization bonds in 2004 or 2005 to monetize and recover the
balance of stranded costs relating to previously owned electric generation
assets and other qualified costs as determined in the 2004 true-up proceeding.
The issuance will be done pursuant to a financing order to be issued by the
Texas Utility Commission. As with the debt of our existing transition bond
company, payments on these new securitization bonds would also be made out of
funds from non-bypassable charges assessed to retail electric customers required
to take delivery service from us. The holders of the
22
securitization bonds would not have recourse to any of our assets or revenues,
and our creditors would not have recourse to any assets or revenues of the
entity issuing the securitization bonds. All or a portion of the proceeds from
the issuance of securitization bonds remaining after repayment of our $1.3
billion collateralized term loan are expected to be utilized to retire affiliate
debt and pay a dividend to our parent.
Impact on Liquidity of a Downgrade in Credit Ratings. As of May 1, 2003,
Moody's Investors Service, Inc. (Moody's), Standard & Poor's Ratings Services, a
division of The McGraw Hill Companies (S&P) and Fitch, Inc. (Fitch) had assigned
the following credit ratings to our senior secured debt:
MOODY'S S&P FITCH
--------------------- -------------------- -------------------
SECURITY RATING OUTLOOK(1) RATING OUTLOOK(2) RATING OUTLOOK(3)
-------------------------- ------ ---------- ------ ---------- ------ ----------
First Mortgage Bonds...... Baa2 Stable BBB Stable BBB+ Stable
General Mortgage Bonds.... Baa2 Stable BBB Stable BBB Stable
Debt secured by General
Mortgage Bonds.......... Baa2 Stable BBB Stable BBB Stable
- ----------
(1) A "stable" outlook from Moody's indicates that Moody's does not expect to
put the rating on review for an upgrade or downgrade within 18 months from
when the outlook was assigned or last affirmed.
(2) A "stable" outlook from S&P indicates that the rating is not likely to
change over the intermediate to longer term.
(3) A "stable" outlook from Fitch indicates the direction a rating is likely
to move over a one-to two-year period.
We cannot assure you that these ratings will remain in effect for any
given period of time or that one or more of these ratings will not be lowered or
withdrawn entirely by a rating agency. We note that these credit ratings are not
recommendations to buy, sell or hold our securities and may be revised or
withdrawn at any time by the rating agency. Each rating should be evaluated
independently of any other rating. Any future reduction or withdrawal of one or
more of our credit ratings could have a material adverse impact on our ability
to obtain short- and long-term financing, the cost of such financings and the
execution of our commercial strategies. A decline in credit ratings would also
increase the interest rate on long-term debt to be issued in the capital markets
and would negatively impact our ability to complete capital market transactions.
Cross Defaults. The terms of our debt instruments generally provide that a
default on obligations by CenterPoint Energy does not cause a default under our
debt instruments. A payment default by us exceeding $50 million will cause a
default under our $1.3 billion loan maturing in 2005.
Other Factors that Could Affect Cash Requirements. In addition to the
above factors, our liquidity and capital resources could be affected by:
- various regulatory actions; and
- the ability of Reliant Resources and its subsidiaries to satisfy
their obligations to us as a principal customer and in respect of
its indemnity obligation to us.
Capitalization. Factors affecting our capitalization include:
- covenants in our borrowing agreements; and
- limitations imposed on us because our parent company is a registered
public utility holding company.
In connection with our parent company's registration as a public utility
holding company under the 1935 Act, the SEC has limited the aggregate amount of
our external borrowings to $3.55 billion. Our ability to pay dividends is
restricted by the SEC's requirement that common equity as a percentage of total
capitalization must be at least 30% after the payment of any dividend. In
addition, the order restricts our ability to pay dividends out of capital
accounts to the extent current or retained earnings are insufficient for those
dividends. Under these restrictions, we are permitted to pay dividends in excess
of the respective current or retained earnings in an amount up to $200 million.
23
Relationship to CenterPoint Energy. We are a wholly owned subsidiary of
CenterPoint Energy. As a result of this relationship, the financial condition
and liquidity of our parent company could affect our access to capital, our
credit standing and our financial condition.
Asset Sales. Factors affecting our ability to sell assets (including
assets of our subsidiaries) or to satisfy our cash requirements include the
following:
- the 1935 Act may require us to obtain prior approval of certain
assets sales; and
- obligations under existing credit facilities to use certain cash
received from asset sales and securities offerings to pay down debt.
Pension Plan. As discussed in Note 8(a) in the CenterPoint Houston 10-K,
which is incorporated herein by reference, we participate in CenterPoint
Energy's qualified non-contributory pension plan covering substantially all
employees. Pension expense for 2003 is estimated to be $26 million based on an
expected return on plan assets of 9.0% and a discount rate of 6.75% as of
December 31, 2002. Pension expense for the three months ended March 31, 2003 was
$6 million. Future changes in plan asset returns, assumed discount rates and
various other factors related to the pension will impact our future pension
expense. We cannot predict with certainty what these factors will be in the
future.
CRITICAL ACCOUNTING POLICIES
A critical accounting policy is one that is both important to the
presentation of our financial condition and results of operations and requires
management to make difficult, subjective or complex accounting estimates. An
accounting estimate is an approximation made by management of a financial
statement element, item or account in the financial statements. Accounting
estimates in our historical consolidated financial statements measure the
effects of past business transactions or events, or the present status of an
asset or liability. The accounting estimates described below require us to make
assumptions about matters that are highly uncertain at the time the estimate is
made. Additionally, different estimates that we could have used or changes in an
accounting estimate that are reasonably likely to occur could have a material
impact on the presentation of our financial condition or results of operations.
The circumstances that make these judgments difficult, subjective and/or complex
have to do with the need to make estimates about the effect of matters that are
inherently uncertain. Estimates and assumptions about future events and their
effects cannot be predicted with certainty. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances, the results of which form the basis for making
judgments. These estimates may change as new events occur, as more experience is
acquired, as additional information is obtained and as our operating environment
changes. We believe the following accounting policies involve the application of
critical accounting estimates.
ACCOUNTING FOR RATE REGULATION
SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation"
(SFAS No. 71), provides that rate-regulated entities account for and report
assets and liabilities consistent with the recovery of those incurred costs in
rates if the rates established are designed to recover the costs of providing
the regulated service and if the competitive environment makes it probable that
such rates can be charged and collected. We apply SFAS No. 71, which results in
our accounting for the regulatory effects of recovery of "stranded costs" and
other "regulatory assets" resulting from the unbundling of the transmission and
distribution business from our electric generation operations in our
consolidated financial statements. Certain expenses and revenues subject to
utility regulation or rate determination normally reflected in income are
deferred on the balance sheet and are recognized in income as the related
amounts are included in service rates and recovered from or refunded to
customers. Regulatory assets reflected in our Consolidated Balance Sheets
aggregated $4.0 billion and $4.5 billion as of December 31, 2002 and March 31,
2003, respectively. Additionally, regulatory liabilities reflected in our
Consolidated Balance Sheets aggregated $1.1 billion at both December 31, 2002
and March 31, 2003. Significant accounting estimates embedded within the
application of SFAS No. 71 relate to $2.5 billion of recoverable electric
generation plant mitigation assets (stranded costs) and $829 million of ECOM
true-up. The stranded costs are comprised of $1.1 billion of previously recorded
accelerated depreciation and $841 million of previously redirected depreciation
as well as $396 million associated with CenterPoint Energy's distribution of
approximately 19% of the 80 million outstanding shares of common stock of Texas
Genco to their shareholders on January 6, 2003. These stranded costs are
recoverable under the provisions of the Texas electric restructuring law. The
ultimate
24
amount of stranded cost recovery is subject to a final determination, which will
occur in 2004 and is contingent upon the market value of Texas Genco. Any
significant changes in our accounting estimate of stranded costs as a result of
current market conditions or changes in the regulatory recovery mechanism
currently in place could result in a material write-down of all or a portion of
these regulatory assets. Regulatory assets related to ECOM true-up represent the
regulatory assets associated with costs incurred as a result of mandated
capacity auctions conducted beginning in 2002 by Texas Genco being consummated
at market-based prices that have been substantially below the estimate of those
prices made by the Texas Utility Commission in the spring of 2001. Any
significant changes in our estimate of our regulatory asset associated with ECOM
true-up could have a significant effect on our financial condition and results
of operations. Additionally, any significant changes in our estimated stranded
costs or ECOM true-up recovery could significantly affect our liquidity
subsequent to the final true-up proceedings conducted by the Texas Utility
Commission which are expected to conclude in late 2004.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets recorded in our Consolidated Balance Sheets primarily
consist of property, plant and equipment (PP&E). Net PP&E comprises $3.8 billion
or 42% of our total assets as of March 31, 2003. We make judgments and estimates
in conjunction with the carrying value of these assets, including amounts to be
capitalized, depreciation and amortization methods and useful lives. We evaluate
our PP&E for impairment whenever indicators of impairment exist. During 2003, no
such indicators of impairment existed. Accounting standards require that if the
sum of the undiscounted expected future cash flows from a company's asset is
less than the carrying value of the asset, an asset impairment must be
recognized in the financial statements. The amount of impairment recognized is
calculated by subtracting the fair value of the asset from the carrying value of
the asset.
UNBILLED REVENUES
Revenues related to the sale and/or delivery of electricity are generally
recorded when electricity is delivered to customers. However, the determination
of deliveries to individual customers is based on the reading of their meters,
which is performed on a systematic basis throughout the month. At the end of
each month, amounts of electricity delivered to customers since the date of the
last meter reading are estimated and the corresponding unbilled revenue is
estimated. Unbilled electric delivery revenue is estimated each month based on
daily supply volumes, applicable rates and analyses reflecting significant
historical trends and experience. Accrued unbilled revenues recorded in the
Consolidated Balance Sheets as of December 31, 2002 and March 31, 2003 were $70
million and $61 million, respectively.
NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2003, we adopted SFAS No. 143, "Accounting for Asset
Retirement Obligations" (SFAS No. 143). SFAS No. 143 requires the fair value of
an asset retirement obligation to be recognized as a liability is incurred and
capitalized as part of the cost of the related tangible long-lived asset. Over
time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related asset.
Retirement obligations associated with long-lived assets included within the
scope of SFAS No. 143 are those for which a legal obligation exists under
enacted laws, statutes and written or oral contracts, including obligations
arising under the doctrine of promissory estoppel.
We have not identified any asset retirement obligations; however, we have
previously recognized removal costs as a component of depreciation expense in
accordance with regulatory treatment. As of March 31, 2003, these previously
recognized removal costs of $254 million do not represent SFAS No. 143 asset
retirement obligations, but rather embedded regulatory liabilities.
In April 2002, the Financial Accounting Standards Board (FASB) issued SFAS
No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections" (SFAS No. 145). SFAS No. 145
eliminates the current requirement that gains and losses on debt extinguishment
must be classified as extraordinary items in the income statement. Instead, such
gains and losses will be classified as extraordinary items only if they are
deemed to be unusual and infrequent. SFAS No. 145 also requires that capital
leases that are modified so that the resulting lease agreement is classified as
an operating lease be accounted for as a sale-leaseback transaction. The changes
related to debt extinguishment are effective for fiscal years beginning after
May 15, 2002, and the changes related to lease accounting are effective for
transactions occurring after May 15, 2002. We have
25
applied this guidance prospectively as it relates to lease accounting and will
apply the accounting provision related to debt extinguishment. Upon adoption of
SFAS No. 145, any gain or loss on extinguishment of debt that was classified as
an extraordinary item in prior periods presented that does not meet the criteria
in APB Opinion No. 30 for classification as an extraordinary item in prior
periods will be reclassified. No such reclassification was required for the
three-month period ended March 31, 2002. We have reclassified the $25 million
loss on debt extinguishment related to the fourth quarter of 2002 from
extraordinary item to interest expense.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (SFAS No. 146). SFAS No. 146
nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)" (EITF No. 94-3). The principal difference
between SFAS No. 146 and EITF No. 94-3 relates to the requirements for
recognition of a liability for costs associated with an exit or disposal
activity. SFAS No. 146 requires that a liability be recognized for a cost
associated with an exit or disposal activity when it is incurred. A liability is
incurred when a transaction or event occurs that leaves an entity little or no
discretion to avoid the future transfer or use of assets to settle the
liability. Under EITF No. 94-3, a liability for an exit cost was recognized at
the date of an entity's commitment to an exit plan. In addition, SFAS No. 146
also requires that a liability for a cost associated with an exit or disposal
activity be recognized at its fair value when it is incurred. SFAS No. 146 is
effective for exit or disposal activities that are initiated after December 31,
2002 with early application encouraged. We will apply the provisions of SFAS No.
146 to all exit or disposal activities initiated after December 31, 2002.
In November 2002, the FASB issued FASB Interpretation No. (FIN) 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" (FIN 45). FIN 45 requires that a
liability be recorded in the guarantor's balance sheet upon issuance of certain
guarantees. In addition, FIN 45 requires disclosures about the guarantees that
an entity has issued. The provision for initial recognition and measurement of
the liability will be applied on a prospective basis to guarantees issued or
modified after December 31, 2002. The disclosure provisions of FIN 45 are
effective for financial statements of interim or annual periods ending after
December 15, 2002. The adoption of FIN 45 did not materially affect our
consolidated financial statements.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. Based
on that evaluation, the Chief Executive Officer and the Chief Financial Officer
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information relating to us (including our consolidated
subsidiaries) required to be included in our periodic SEC filings. Subsequent to
the date of their evaluation, there were no significant changes in our internal
controls or in other factors that could significantly affect the internal
controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.
26
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
For a description of certain legal and regulatory proceedings affecting
us, please review Note 9 to our Interim Financial Statements, Item 3 of the
CenterPoint Houston Form 10-K and Note 10(b) to the CenterPoint Houston 10-K
Notes, all of which are incorporated herein by reference.
ITEM 5. OTHER INFORMATION.
Forward-Looking Statements. From time to time, we make statements
concerning our expectations, beliefs, plans, objectives, goals, strategies,
future events or performance and underlying assumptions and other statements
that are not historical facts. These statements are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Actual results may differ materially from those expressed or implied by these
statements. You can generally identify the forward-looking statements by the
words "anticipate," "believe," "continue," "could," "estimate," "expect,"
"forecast," "goal," "intend," "may," "objective," "plan," "potential,"
"predict," "projection," "should," or other similar words.
We have based our forward-looking statements on our management's beliefs
and assumptions based on information available to our management at the time the
statements are made. We caution you that assumptions, beliefs, expectations,
intentions and projections about future events may and often do vary materially
from actual results. Therefore, we cannot assure you that actual results will
not differ materially from those expressed or implied by our forward-looking
statements.
The following list identifies some of the factors that could cause actual
results to differ materially from those expressed or implied in forward-looking
statements:
- state and federal legislative and regulatory actions or developments,
including deregulation, re-regulation and restructuring of the electric
utility industry, constraints placed on our activities or business by
the Public Utility Holding Company Act of 1935, changes in or
application of laws or regulations applicable to other aspects of our
business and actions with respect to:
- approval of stranded costs;
- allowed rates of return;
- rate structures;
- recovery of investments; and
- operation and construction of facilities;
- non-payment for our services due to financial distress of our
customers, including our largest customer, Reliant Resources;
- the successful and timely completion of our capital projects;
- industrial, commercial and residential growth in our service
territory and changes in market demand and demographic patterns;
- changes in business strategy or development plans;
- changes in interest rates or rates of inflation;
- unanticipated changes in operating expenses and capital expenditures;
- weather variations and other natural phenomena, which can affect the
demand for power over our transmission and distribution system;
- commercial bank and financial market conditions, our access to capital,
the cost of such capital, receipt of certain approvals under the 1935
Act, and the results of our financing
27
and refinancing efforts, including availability of funds in the debt
capital markets;
- actions by rating agencies;
- legal and administrative proceedings and settlements;
- changes in tax laws;
- inability of various counterparties to meet their obligations with
respect to our financial instruments;
- any lack of effectiveness of our disclosure controls and procedures;
- changes in technology;
- significant changes in our relationship with our employees,
including the availability of qualified personnel and the potential
adverse effects if labor disputes or grievances were to occur;
- significant changes in accounting policies;
- acts of terrorism or war, including any direct or indirect effect on
our business resulting from terrorist attacks such as occurred on
September 11, 2001 or any similar incidents or responses to those
incidents;
- the availability and price of insurance;
- the outcome of the pending securities lawsuits against Reliant
Energy and Reliant Resources;
- the outcome of the SEC investigation relating to the treatment in
our consolidated financial statements of certain activities of
Reliant Resources;
- the ability of Reliant Resources to satisfy its indemnity
obligations to us;
- the reliability of the systems, procedures and other infrastructure
necessary to operate the retail electric business in our service
territory, including the systems owned and operated by the
independent system operator of the market served by the independent
system operator in the market served by the Electric Reliability
Council of Texas, Inc.;
- political, legal, regulatory and economic conditions and
developments in the United States; and
- other factors we discuss in the CenterPoint Houston Form 10-K,
including those outlined in Item 1 under "Risk Factors."
You should not place undue reliance on forward-looking statements. Each
forward-looking statement speaks only as of the date of the particular
statement, and we undertake no obligation to publicly update or revise any
forward-looking statements.
28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibits not incorporated by reference to a prior filing are designated by
a cross (+); all exhibits not so designated are incorporated by reference
to a prior filing of CenterPoint Energy Houston Electric, LLC or
CenterPoint Energy, Inc. as indicated.
Report or Registration SEC File or
Exhibit Number Description Statement Registration Number Exhibit References
- -------------------------- ---------------------- --------------------- --------------------- -------------------
3.1 Articles of Conversion Form 8-K dated August 1-3187 3(a)
of REI 31, 2002 filed with
the SEC on September
3, 2002
3.2 Articles of Form 8-K dated August 1-3187 3(b)
Organization of 31, 2002 filed with
CenterPoint Energy the SEC on September
Houston Electric, LLC 3, 2002
3.3 Limited Liability Form 8-K dated August 1-3187 3(c)
Company Regulations of 31, 2002 filed with
CenterPoint Energy the SEC on September
Houston Electric, LLC 3, 2002
4.1 Tenth Supplemental CenterPoint 1-31447 4.1
Indenture to Exhibit Houston's
4(e)(1), dated as of Form 8-K dated March
March 18, 2003 13, 2003
4.2 Officer's Certificate CenterPoint Houston's 1-31447 4.2
dated March 18, 2003 Form 8-K dated March
setting forth the 13, 2003
form, terms and
provisions of the
Tenth Series and
Eleventh Series of
general mortgage bonds
+99.1 Section 906
Certification of David
M. McClanahan
+99.2 Section 906
Certification of Gary
L. Whitlock
+99.3 Items incorporated by
reference from the
CenterPoint Houston
Form 10-K. Item 1
"Business--Risk
Factors," Item 3
"Legal Proceedings"
and Item 7
"Management's
Narrative Analysis of
Results of Operations
--Certain Factors
Affecting Future
Earnings" and Notes 3(e)
(Regulatory Assets and
Liabilities), 4
(Regulatory Matters),
8(a) (Pension Plans)
and 10 (Commitments
and Contingencies).
29
(b) Reports on Form 8-K.
On March 27, 2003, we filed a Current Report on Form 8-K dated March 13, 2003,
announcing the pricing and closing of $762.275 million of general mortgage bonds
in a private placement with institutions pursuant to Rule 144A under the
Securities Act of 1933, as amended.
30
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC
By: /s/ James S. Brian
-------------------------
James S. Brian
Senior Vice President and
Chief Accounting Officer
Date: May 14, 2003
31
CERTIFICATIONS
I, David M. McClanahan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CenterPoint
Energy Houston Electric, LLC;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 14, 2003
By /s/ David M. McClanahan
------------------------------------------------
David M. McClanahan
Chairman and Principal Executive Officer
32
I, Gary L. Whitlock, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CenterPoint
Energy Houston Electric, LLC;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 14, 2003
By /s/ Gary L. Whitlock
---------------------------------------------------------
Gary L. Whitlock
Executive Vice President and Chief Financial Officer
33
EXHIBIT INDEX
Exhibits not incorporated by reference to a prior filing are designated by
a cross (+); all exhibits not so designated are incorporated by reference
to a prior filing of CenterPoint Energy Houston Electric, LLC or
CenterPoint Energy, Inc. as indicated.
Report or Registration SEC File or
Exhibit Number Description Statement Registration Number Exhibit References
- -------------------------- ---------------------- --------------------- --------------------- -------------------
3.1 Articles of Conversion Form 8-K dated August 1-3187 3(a)
of REI 31, 2002 filed with
the SEC on September
3, 2002
3.2 Articles of Form 8-K dated August 1-3187 3(b)
Organization of 31, 2002 filed with
CenterPoint Energy the SEC on September
Houston Electric, LLC 3, 2002
3.3 Limited Liability Form 8-K dated August 1-3187 3(c)
Company Regulations of 31, 2002 filed with
CenterPoint Energy the SEC on September
Houston Electric, LLC 3, 2002
4.1 Tenth Supplemental CenterPoint Houston's 1-31447 4.1
Indenture to Exhibit Form 8-K dated March
4(e)(1), dated as of 13, 2003
March 18, 2003
4.2 Officer's Certificate CenterPoint Houston's 1-31447 4.2
dated March 18, 2003 Form 8-K dated March
setting forth the 13, 2003
form, terms and
provisions of the
Tenth Series and
Eleventh Series of
general mortgage bonds
+99.1 Section 906
Certification of David
M. McClanahan
+99.2 Section 906
Certification of Gary
L. Whitlock
+99.3 Items incorporated by
reference from the
CenterPoint Houston
Form 10-K. Item 1
"Business--Risk
Factors," Item 3
"Legal Proceedings"
and Item 7
"Management's
Narrative Analysis of
Results of Operations
--Certain Factors
Affecting Future
Earnings" and Notes 3(e)
(Regulatory Assets and
Liabilities), 4
(Regulatory Matters),
8(a) (Pension Plans)
and 10 (Commitments
and Contingencies).