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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 JUNE 30, 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 333-91093
CENTERPOINT ENERGY TRANSITION BOND COMPANY, LLC
(Exact name of registrant as specified in its charter)
DELAWARE 76-0624152
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1111 LOUISIANA, SUITE 4667 77002
HOUSTON, TEXAS (Zip Code)
(Address of principal executive offices)
(713) 207-8272
(Registrant's telephone number, including area code)
THE REGISTRANT 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 in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of August 8, 2003, all outstanding membership interests in CenterPoint Energy
Transition Bond Company, LLC were held by CenterPoint Energy Houston Electric,
LLC.
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CENTERPOINT ENERGY TRANSITION BOND COMPANY, LLC
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements........................................................1
Statements of Income and Changes in Member's Equity
Three Months and Six Months Ended June 30, 2002 and 2003 (unaudited)..........1
Balance Sheets
December 31, 2002 and June 30, 2003 (unaudited)...............................2
Statements of Cash Flows
Six Months Ended June 30, 2002 and 2003 (unaudited)...........................3
Notes to Unaudited Financial Statements.........................................4
Item 2. Management's Narrative Analysis of Results of Operations of CenterPoint
Energy Transition Bond Company, LLC.............................................9
Item 4. Controls and Procedures....................................................10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...........................................11
i
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
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. In some cases, you can
identify our forward-looking statements by the words "anticipate," "believe,"
"continue," "could," "estimate," "expect," "forecast," "goal," "intend," "may,"
"objective," "plan," "potential," "predict," "projection," "should," "will," 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 from those expressed or implied by our forward-looking
statements:
o state and federal legislative and regulatory actions or developments,
including deregulation, re-regulation and restructuring of the
electric utility industry, changes in or application of laws, orders
or regulations applicable to our business;
o non-payment of transition charges due to financial distress of
CenterPoint Energy Houston Electric, LLC's (CenterPoint Houston's)
customers, including its largest customer, Reliant Resources, Inc.;
o the accuracy of the servicer's estimates of market demand and prices
for energy;
o the accuracy of the servicer's estimates of industrial, commercial and
residential growth in CenterPoint Houston's service territory;
o changes in market demand and demographic patterns;
o weather variations and other natural phenomena affecting retail
electric customer energy usage;
o the operating performance of CenterPoint Houston's facilities and
third-party suppliers of electric energy in CenterPoint Houston's
service territory;
o the accuracy of the servicer's estimates of the payment patterns of
retail electric customers, including the rate of delinquencies and any
collections curves;
o legal and administrative proceedings and settlements;
o changes in tax laws;
o any lack of effectiveness of our disclosure controls and procedures;
o significant changes in critical accounting policies;
o 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;
o the reliability of the systems, procedures and other infrastructure
necessary to operate the retail electric business in CenterPoint
Houston's service territory, including the systems owned and operated
by the independent system operator of the Electric Reliability Council
of Texas, Inc.;
ii
o political, legal, regulatory and economic conditions and developments
in the United States; and
o other factors we discuss in this Form 10-Q and our other SEC filings.
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.
iii
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CENTERPOINT ENERGY TRANSITION BOND COMPANY, LLC
STATEMENTS OF INCOME
AND CHANGES IN MEMBER'S EQUITY
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2002 2003 2002 2003
--------- --------- --------- ---------
(IN THOUSANDS)
REVENUES:
Transition charge revenue ........................... $ 17,106 $ 16,638 $ 33,304 $ 30,038
Investment income ................................... 37 60 68 164
--------- --------- --------- ---------
Total operating revenues .......................... 17,143 16,698 33,372 30,202
--------- --------- --------- ---------
EXPENSES:
Interest expense .................................... 9,630 9,430 19,247 18,865
Amortization of transition property ................. 6,926 6,732 12,954 10,297
Amortization of transition bond discount and
issuance costs .................................... 432 406 863 819
Administrative and general expenses ................. 155 130 308 221
--------- --------- --------- ---------
Total operating expenses .......................... 17,143 16,698 33,372 30,202
--------- --------- --------- ---------
NET INCOME............................................. -- -- -- --
MEMBER'S EQUITY AT BEGINNING OF PERIOD ................ 3,745 3,745 -- 3,745
CONTRIBUTED CAPITAL ................................... -- -- 3,745 --
--------- --------- --------- ---------
MEMBER'S EQUITY AT THE END OF THE PERIOD .............. $ 3,745 $ 3,745 $ 3,745 $ 3,745
========= ========= ========= =========
See Notes to the Company's Interim Financial Statements
1
CENTERPOINT ENERGY TRANSITION BOND COMPANY, LLC
BALANCE SHEETS
(UNAUDITED)
DECEMBER 31, JUNE 30,
2002 2003
------------ ----------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................................... $ 25,263 $ 26,088
Transition Charge receivable ............................................ 9,601 10,790
Restricted funds ........................................................ -- 1,577
Other current assets .................................................... 16 --
---------- ----------
Current Assets .................................................... 34,880 38,455
Intangible transition property .......................................... 706,220 695,923
Unamortized debt issuance costs ......................................... 8,409 7,615
Restricted funds ........................................................ 2,324 3,761
---------- ----------
Total Assets ...................................................... $ 751,833 $ 745,754
========== ==========
LIABILITIES AND MEMBER'S EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt ....................................... $ 18,723 $ 26,361
Accrued interest ........................................................ 11,223 11,106
Customer deposits ....................................................... 1,178 1,577
Fees payable to servicer ................................................ 159 140
---------- ----------
Current Liabilities ............................................... 31,283 39,184
Long-term debt:
Transition bonds, net of unamortized discount of $0.3 million and
$0.2 million, respectively .......................................... 716,805 702,825
---------- ----------
Total Liabilities ................................................. 748,088 742,009
---------- ----------
MEMBER'S EQUITY:
Contributed capital ..................................................... 3,745 3,745
Retained earnings ....................................................... -- --
---------- ----------
Total Member's Equity ............................................. 3,745 3,745
---------- ----------
Total Liabilities and Member's Equity ............................ $ 751,833 $ 745,754
========== ==========
See Notes to the Company's Interim Financial Statements
2
CENTERPOINT ENERGY TRANSITION BOND COMPANY, LLC
STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
----------------------
2002 2003
--------- ---------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .............................................................. $ -- $ --
Adjustments for non cash items:
Amortization of Transition Bond discount and issuance costs ........... 863 819
Amortization of Transition Property ................................... 12,954 10,297
Changes in other assets and liabilities:
Transition Charge receivable .......................................... (5,703) (1,189)
Other current assets .................................................. -- 16
Restricted funds ...................................................... -- (1,577)
Accrued interest ...................................................... 4,178 (117)
Customer deposits ..................................................... 840 399
Fees payable to servicer .............................................. 25 (20)
--------- ---------
Net cash provided by operating activities ......................... 13,157 8,628
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in restricted funds ................................. 2,961 (1,437)
--------- ---------
Net cash provided by (used in) investing activities ............... 2,961 (1,437)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt .............................................. -- (6,366)
--------- ---------
Net cash used in financing activities ............................. -- (6,366)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS ................................. 16,118 825
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ............................ 2,435 25,263
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD .................................. $ 18,553 $ 26,088
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Payments:
Interest .......................................................... $ 15,066 $ 18,982
See Notes to the Company's Interim Financial Statements
3
CENTERPOINT ENERGY TRANSITION BOND COMPANY, LLC
NOTES TO UNAUDITED FINANCIAL STATEMENTS
(1) BACKGROUND AND BASIS OF PRESENTATION
Effective August 31, 2002, Reliant Energy, Incorporated (Reliant Energy)
consummated a restructuring transaction 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), and (4)
distributed the capital stock of its operating subsidiaries 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. In connection
with the restructuring, Reliant Energy Transition Bond Company LLC was renamed
CenterPoint Energy Transition Bond Company, LLC (the Company).
The Company's interim financial statements are unaudited, omit certain
financial statement disclosures and should be read in conjunction with the
Company's Annual Report on Form 10-K for the year ended December 31, 2002.
The Company is a special purpose Delaware limited liability company whose
sole member is CenterPoint Houston. 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.
In June 1999, the State of Texas enacted the Texas Electric Choice Plan
(Texas electric restructuring law). The Texas electric restructuring law
authorizes competition in the retail and generation markets for electricity
beginning in January 2002 and provides for recovery of stranded costs (i.e., the
excess of net regulatory book value of generation assets (as defined by the
Texas electric restructuring law) over the market value of those assets) and
generation-related regulatory assets (as defined by the Texas electric
restructuring law) through irrevocable non-bypassable transition charges
assessed on all retail electric customers within a utility's geographical
certificated service area as it existed on May 1, 1999 (Transition Charges). The
Texas electric restructuring law authorizes the Public Utility Commission of
Texas (Texas Utility Commission) to issue financing orders approving the
issuance of transition bonds to recover generation-related regulatory assets and
stranded costs. The Texas electric restructuring law and the financing order
permit an electric utility to transfer its rights and interests in the financing
order, including the right to collect Transition Charges pursuant to the Texas
electric restructuring law, to a special purpose entity formed by the electric
utility to issue debt securities secured by the right to receive revenues
arising from the Transition Charges. The electric utility's right to receive the
Transition Charges and its other rights and interests under the financing order
constitute Transition Property. The Texas Utility Commission issued a financing
order to CenterPoint Houston on May 31, 2000 (Financing Order) that authorized
CenterPoint Houston to cause the Company to issue transition bonds (Transition
Bonds) in an aggregate principal amount not to exceed $740 million plus up-front
qualified costs not to exceed $10.7 million in the aggregate.
The Company was organized in November 1999 under the laws of the State of
Delaware for the sole purpose of acquiring and holding the Transition Property
to be acquired from CenterPoint Houston. The Company had no operations until
October 2001.
On October 24, 2001, the Company issued $748.9 million of Transition Bonds
and used the net proceeds to purchase the Transition Property from CenterPoint
Houston and pay expenses of issuance. For additional information relating to the
Transition Bonds, see Note 3.
CenterPoint Energy is a registered public utility holding company under the
Public Utility Holding Company Act of 1935, as amended (1935 Act). The 1935 Act,
among other things, limits the ability of the holding company and its
subsidiaries to issue debt and equity securities without prior authorization,
restricts the source of dividend payments to funds from current and retained
earnings without prior authorization, regulates sales and acquisitions of
certain assets and businesses and governs affiliate transactions.
4
The Company is restricted by its organizational documents from engaging in
any activity not directly related to the specific purposes for which the Company
was created. The Company is a separate and distinct legal entity from
CenterPoint Houston, and the Company's organizational documents require it to
operate in a manner to avoid consolidation with the bankruptcy estate of
CenterPoint Houston in the event CenterPoint Houston becomes subject to such a
proceeding. CenterPoint Houston is not the owner of the Transition Property
described herein, and the assets of the Company are not available to pay
creditors of CenterPoint Houston or any of its affiliates.
(2) SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
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.
REGULATION AND REGULATORY ASSETS AND LIABILITIES. The Company's business
meets the criteria of Statement of Financial Accounting Standards (SFAS) No. 71,
"Accounting for the Effects of Certain Types of Regulation" (SFAS No. 71). This
accounting standard recognizes the cost-based ratemaking process which may
result in differences in the application of generally accepted accounting
principles between regulated and non-regulated businesses. The Company's purpose
is to purchase the Transition Property, issue one or more series of Transition
Bonds secured by the Transition Property and perform any activity incidental
thereto. The Transition Charges are designed to provide the necessary revenues
to make such payments. Continued applicability of SFAS No. 71 requires that
rates be designed to recover specific costs of providing regulated services and
products, and that it be reasonable to assume that the Transition Charges are
set at levels that will recover an entity's costs and can be charged to and
collected from customers. The Company believes it satisfies such requirements
and applies the provisions of SFAS No. 71 to its business.
CASH AND CASH EQUIVALENTS/RESTRICTED FUNDS. For purposes of the Balance
Sheet and Statement of Cash Flows, the Company considers investments purchased
with a maturity of three months or less to be the equivalent of cash. The
trustee under the indenture pursuant to which the Transition Bonds were issued
(the Trustee) has established, as provided in the indenture, the following
subaccounts for the Transition Bonds:
o The General Subaccount is comprised of collections of Transition
Charges and interest earned from short term investments. These amounts
accumulate in the General Subaccount until they are transferred from
the General Subaccount on each Transition Bond payment date. The
General Subaccount had a balance of $17.1 million at June 30, 2003.
o The Reserve Subaccount is maintained for the purpose of holding any
Transition Charges and investment earnings (other than investment
earnings on amounts in the Capital Subaccount) not otherwise used on
the payment dates of the Transition Bonds for payment of principal,
interest, fees or expenses or for funding the Capital Subaccount or
the Overcollateralization Subaccount. The Reserve Subaccount had a
balance of $8.5 million at June 30, 2003.
o The Overcollateralization Subaccount has a target funding level of
approximately $3.7 million (0.5% of the initial principal amount of
the Transition Bonds), and funding is scheduled to occur ratably over
the life of the Transition Bonds. The Trustee may draw from this
subaccount if the General Subaccount and Reserve Subaccount are not
sufficient on any payment date to make scheduled payments on the
Transition Bonds and payments of certain fees and expenses. The
Overcollateralization Subaccount had a $0.5 million balance as of June
30, 2003, with a scheduled level of $0.5 million.
o The Capital Subaccount received a deposit of approximately $3.7
million (0.5% of the initial principal amount of the Transition Bonds)
on the date of issuance of the Transition Bonds. CenterPoint Houston
contributed this amount to the Company. If amounts available in the
General, Reserve and
5
Overcollateralization Subaccounts are not sufficient on any payment
date to make scheduled payments on the Transition Bonds and payments
of certain fees and expenses, the Trustee will draw on amounts in the
Capital Subaccount. As of June 30, 2003, the Capital Subaccount had a
balance of $3.8 million.
CUSTOMER DEPOSITS. The Trustee holds cash deposits, affiliate guarantees,
surety bonds and letters of credit provided by retail electric providers. Retail
electric providers are required to meet creditworthiness criteria established by
the Texas Utility Commission with respect to transition charges. Each retail
electric provider must (1) have a long-term, unsecured credit rating of not less
than BBB- and Baa3 (or the equivalent) from Standard & Poor's Ratings Services
(S&P) and Moody's Investors Service, Inc. (Moody's), respectively, or (2)
provide (a) a cash deposit of two months' maximum expected transition charge
collections, (b) an affiliate guarantee, surety bond or letter of credit
providing for payment of such amount of transition charge collections in the
event that the retail electric provider defaults in its payment obligations, or
(c) a combination of any of the foregoing. The provider of any affiliate
guarantee, surety bond or letter of credit must have and maintain long-term
unsecured credit ratings of not less than BBB- and Baa3 (or the equivalent) from
S&P and Moody's, respectively. As of June 30, 2003, retail electric providers
had satisfied the creditworthiness criteria through cash deposits, letters of
credit and affiliate guarantees aggregating approximately $1.6 million, $12.0
million and $1.7 million, respectively.
DEBT ISSUANCE COSTS. The costs associated with the issuance of the
Transition Bonds are capitalized and are being amortized over the life of the
Transition Bonds utilizing the effective interest method.
REVENUE. Beginning on October 25, 2001 and pursuant to the Financing Order,
CenterPoint Houston, as servicer of the Transition Charges (Servicer),
implemented the nonbypassable Transition Charge on behalf of the Company. The
Company records revenue for Transition Charges under the accrual method. These
revenues are generally recognized upon delivery of services by CenterPoint
Houston to retail electric providers.
The following table shows the aggregate amount of Transition Charges
collected by the Company during each month from the date of issuance of the
Transition Bonds through June 30, 2003 (in thousands):
2001 2002 2003
---------- ---------- ----------
January $ -- $ 4,584 $ 4,902
February -- 3,997 4,693
March -- 4,297 4,698
April -- 5,144 4,986
May -- 3,678 4,236
June -- 5,805 5,378
July -- 5,892
August -- 7,091
September -- 7,195
October 2 8,799
November 414 6,119
December 1,937 5,390
In all material respects for each materially significant retail electric
provider, each such retail provider (i) has been billed in accordance with the
applicable Financing Order of the Texas Utility Commission, (ii) has made all
payments in compliance with the requirements outlined in the Financing Order,
and (iii) has satisfied the creditworthiness requirements of the Financing
Order. For a description of the creditworthiness requirements, see "Customer
Deposits" above.
AMORTIZATION. The Transition Property was recorded at acquired cost and is
being amortized over twelve years, the life of the Transition Bonds, based on
estimated revenue from Transition Charges, interest accruals and other expenses.
The Financing Order authorizing the imposition of the Transition Charges and the
issuance of the Transition Bonds limits the terms of the Transition Bonds to no
greater than 15 years. In accordance with SFAS No. 71, amortization is adjusted
for over/under collection of Transition Charges. Amortization of the Transition
Property included regulatory adjustments of $8.6 million and $20.5 million for
the three months and six months ended June 30, 2003, respectively, to defer
amortization costs until periods in which Transition Charge revenue is recorded.
The Transition Charges are reviewed and adjusted at least annually by the Texas
Utility Commission to
6
correct any overcollections or undercollections during the preceding 12 months
and to provide for the expected recovery of amounts sufficient to timely provide
all payment of debt service and other required amounts and charges in connection
with the Transition Bonds.
INCOME TAXES. The Company is organized as a single-member limited liability
company and will not be subject to United States federal income tax as an entity
separate from CenterPoint Energy. In addition, the Company has received a ruling
from the Comptroller of Public Accounts of the State of Texas to the effect that
(i) the Company's receipt of the Transition Property, (ii) the Company's receipt
of the Transition Charges and (iii) the Company's short-term earnings from
investment of the Transition Charges will be excluded from taxable capital and
taxable earned surplus for purposes of the Texas franchise tax. Accordingly,
there is no provision for income taxes or Texas franchise taxes.
(3) LONG-TERM DEBT
Interest payments on the Transition Bonds are due semi-annually beginning
March 15, 2002 and are paid from funds deposited daily with the Trustee by
CenterPoint Houston as Servicer of the Transition Property. Principal payments
on the Transition Bonds are due semi-annually.
The source of repayment for the Transition Bonds is the Transition Charges.
The Servicer collects this non-bypassable charge from retail providers of
electricity in CenterPoint Houston's service territory. The Servicer deposits
Transition Charge collections into a General Subaccount maintained by the
Trustee.
The following table shows scheduled and actual principal payments on the
Transition Bonds from the issuance date through June 30, 2003 (in thousands):
Class A-1 Class A-2 Class A-3 Class A-4
Scheduled Actual Scheduled Actual Scheduled Actual Scheduled Actual
--------- ------ --------- ------ --------- ------ --------- ------
March 15, 2002 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
September 15, 2002 13,106 13,106 -- -- -- -- -- --
March 15, 2003 6,366 6,366 -- -- -- -- -- --
(4) SIGNIFICANT AGREEMENTS AND RELATED PARTY TRANSACTIONS
Under a sale agreement between the Company and CenterPoint Houston dated
October 24, 2001, CenterPoint Houston sold the Transition Property to the
Company. Pursuant to a servicing agreement entered between the Company and
CenterPoint Houston concurrently with the issuance of the Transition Bonds,
CenterPoint Houston is the Servicer of the Transition Property. As the Servicer,
CenterPoint Houston manages and administers the Transition Property of the
Company and collects the Transition Charges on behalf of the Company. The
Company pays a fixed annual servicing fee to CenterPoint Houston for these
services. Pursuant to an administration agreement entered into between the
Company and CenterPoint Houston, CenterPoint Houston also provides
administrative services to the Company. The Company pays CenterPoint Houston a
fixed fee for performing these services, plus all reimbursable expenses. The
Company recorded administrative and servicing fees for the three and six months
ended June 30, 2002 of $0.09 million and $0.2 million, respectively. The Company
recorded administrative and servicing fees for the three and six months ended
June 30, 2003 of $0.09 million and $0.2 million, respectively.
The Company also entered into an intercreditor agreement with CenterPoint
Houston and other parties related to the servicing of the Transition Bonds. In
addition, CenterPoint Houston has agreed to indemnify the Trustee on the
Company's behalf to the extent the indemnification provided for under the
Transition Bond indenture is not recoverable from the Company as a fixed
expense.
In order to obtain the desired ratings on the Transition Bonds, CenterPoint
Houston deposited $3.0 million in a specified reserve account for the benefit of
Deutsche Bank Trust Company Americas (formerly Bankers Trust Company), as
Trustee, as cash collateral for an indemnification obligation of CenterPoint
Houston arising in connection with the issuance of the Transition Bonds. All
funds remaining in the specified reserve account less any
7
amounts then due and owing to Deutsche Bank Trust Company Americas will be
released to CenterPoint Houston upon final payment of the Transition Bonds.
Certain debt issuance costs paid by CenterPoint Houston were reimbursed by
the Company upon issuance of the Transition Bonds.
Subsidiaries of Reliant Resources, Inc. (Reliant Resources), a former
affiliate of the Company, collect the majority of the Transition Charges from
retail electric customers. Reliant Resources has at all times been in compliance
with the creditworthiness criteria for retail electric providers as set forth in
the Financing Order. At June 30, 2003, subsidiaries of Reliant Resources had
letters of credit aggregating approximately $10.9 million on deposit with the
Trustee. As with any retail electric provider, the Servicer is expected to
direct the Trustee to seek recourse against such letters of credit or alternate
form of credit support as a remedy for any payment default that may occur.
8
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS OF CENTERPOINT
ENERGY TRANSITION BOND COMPANY, LLC
We meet the conditions specified in General Instruction H(1)(a) and (b) to
Form 10-Q and therefore are providing the following analysis of our results of
operations using the reduced disclosure format for wholly owned subsidiaries of
reporting companies. Accordingly, we have omitted from this report the
information called for by 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 and Use of Proceeds), Item 3 (Defaults Upon Senior
Securities) and Item 4 (Submission of Matters to a Vote of Security Holders).
This analysis should be read in combination with the Interim Financial
Statements included in Item 1 of this Form 10-Q.
We are a Delaware limited liability company established in November 1999
for limited purposes. On October 24, 2001 we issued Transition Bonds and used
the net proceeds to purchase the Transition Property from Reliant Energy. As we
are restricted by our organizational documents from engaging in activities other
than those described in Item 1 (Business) of our Annual Report on Form 10-K for
the year ended December 31, 2002, income statement effects were limited
primarily to income generated from the Transition Charges, interest expense on
the Transition Bonds, amortization of the Transition Property, debt issuance
expenses and the discount on the Transition Bonds, Transition Property servicing
and administration fees and incidental investment interest income.
For the three months ended June 30, 2003, revenue from Transition Charges
was $16.6 million and investment income was $0.06 million. Interest expense of
$9.4 million related to interest on the Transition Bonds and amortization
expense of $0.4 million related to amortization of debt issuance expenses and
the discount on the Transition Bonds. Amortization of the Transition Property of
$6.7 million included regulatory adjustments of $8.6 million for the three
months ended June 30, 2003 to defer amortization costs until periods in which
Transition Charge revenue is recorded. We recorded administrative expenses of
$0.1 million for the three months ended June 30, 2003.
For the six months ended June 30, 2003, revenue from Transition Charges was
$30.0 million and investment income was $0.2 million. Interest expense of $18.9
million relates to interest on the Transition Bonds and amortization expense of
$0.8 million relates to amortization of debt issuance expenses and the discount
on the Transition Bonds. Amortization of the Transition Property of $10.3
million includes regulatory adjustments of $20.5 million for the six months
ended June 30, 2003 to defer amortization costs until periods in which
Transition Charge revenue is recorded. We recorded administrative expenses of
$0.2 million for the six months ended June 30, 2003.
For the three months ended June 30, 2002, revenue from Transition Charges
was $17.1 million and investment income was $0.04 million. Interest expense of
$9.6 million relates to interest on the Transition Bonds and amortization
expense of $0.4 million relates to amortization of debt issuance expenses and
the discount on the Transition Bonds. Amortization of the Transition Property of
$6.9 million includes regulatory adjustments of $8.5 million for the three
months ended June 30, 2002 to defer amortization costs until periods in which
Transition Charge revenue is recorded. The Company recorded administrative
expenses of $0.2 million, including bad debt expense of $0.06 million, and
servicing fees of $0.09 million for the three months ended June 30, 2002.
For the six months ended June 30, 2002, revenue from Transition Charges was
$33.3 million and investment income was $0.07 million. Interest expense of $19.2
million relates to interest on the Transition Bonds and amortization expense of
$0.9 million relates to amortization of debt issuance expenses and the discount
on the Transition Bonds. Amortization of the Transition Property of $13.0
million includes regulatory adjustments of $17.8 million for the six months
ended June 30, 2002 to defer amortization costs until periods in which
Transition Charge revenue is recorded. The Company recorded administrative
expenses of $0.3 million, including bad debt expense of $0.1 million, and
servicing fees of $0.2 million for the six months ended June 30, 2002.
We use collections of Transition Charges to make scheduled principal and
interest payments on the Transition Bonds. Transition Charges, together with
interest earned on collected Transition Charges, are expected to offset (1)
interest expense on the Transition Bonds, (2) amortization of the Transition
Property, debt issuance expenses and the discount on the Transition Bonds and
(3) the fees charged by CenterPoint Houston for servicing the Transition
Property and providing administrative services to us. From the October 2001
issuance date of the Transition Bonds
9
to the March 15, 2003 semi-annual debt service payment date, the aggregate
amount of collected Transition Charges and interest thereon was $82.4 million,
and the aggregate amount expected to have been collected was $74.0 million. As a
result of the overcollections, $8.4 million has been deposited into the Reserve
Subaccount.
The Transition Charges are reviewed and adjusted at least annually by the
Public Utility Commission of Texas (Texas Utility Commission) to correct any
overcollections or undercollections during the preceding 12 months and to
provide for the expected recovery of amounts sufficient to timely provide all
payment of debt service and other required amounts and charges in connection
with the Transition Bonds.
CenterPoint Houston filed on August 1, 2003 with the Texas Utility
Commission, in Docket No. 28252, the Transition Charges to be effective November
1, 2003. CenterPoint Houston is required to true-up Transition Charges annually
on November 1st in compliance with the Financing Order adopted in Application of
Reliant Energy, Incorporated for Financing Order to Securitize Regulatory Assets
and Other Qualified Costs, Docket No. 21665. The adjusted Transition Charges are
designed to collect $70,409,224 during the year ended October 31, 2004. This
amount reflects a reduction of $11,443,707 due to an expected over-recovery.
This over-recovery results from growth in billings in the residential and small
commercial sectors, which exceed the previous forecasts for the fifteen-month
period ended October 31, 2003. The $11,443,707 over-recovery reduces the
revenues that are otherwise required by 14 % for the upcoming collection period
ended October 31, 2004.
As of June 30, 2003, one of the retail electric providers with which we do
business was in default and currently is in bankruptcy. That retail electric
provider's deposit with the Trustee is more than sufficient to satisfy its
outstanding Transition Charge balance.
Holders of Transition Bonds may experience payment delays or incur losses
if our assets are not sufficient to pay interest or the scheduled principal of
the Transition Bonds. Funds for payments are dependent upon the Transition
Property and the right to collect the Transition Charges over a period limited
by Texas law to 15 years.
In addition, collections of Transition Charges are dependent on the amount
of electricity consumed within CenterPoint Houston's service territory.
ITEM 4. CONTROLS AND PROCEDURES
In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an
evaluation, under the supervision and with the participation of management,
including our principal executive officer and principal financial officer, of
the effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report. Based on that evaluation, our principal executive
officer and principal financial officer concluded that our disclosure controls
and procedures were effective as of June 30, 2003 to provide assurance that
information required to be disclosed in our reports filed or submitted under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms.
There has been no change in our internal controls over financial reporting
that occurred during the three months ended June 30, 2003 that has materially
affected, or is reasonably likely to materially affect, our internal controls
over financial reporting.
10
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The following exhibits are filed herewith:
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 Transition Bond
Company, LLC.
SEC FILE
OR
EXHIBIT REGISTRATION EXHIBIT
NUMBER DESCRIPTION REPORT OR REGISTRATION STATEMENT NUMBER REFERENCE
------- ----------------------------------- -------------------------------- ------------ ---------
4.1 Amended and Restated Limited Form 8-K dated October 23, 2001 333-91093 4.3
Liability Company Agreement of
Reliant Energy Transition Bond
Company LLC
4.2 Amended and Restated Certificate Form 8-K dated October 23, 2001 333-91093 4.7
of Formation of Reliant Energy
Transition Bond Company LLC
+4.3 Certificate of Amendment to the
Certificate of Formation of Reliant
Energy Transition Bond Company, LLC
+10.1 Semiannual Servicer's Certificate,
dated as of March 14, 2003, as to the
transition bond balances, the
balances of the collection account
and its sub-accounts, and setting
forth transfers and payments to be
made on the March 17, 2003 payment
date.
+10.2 Servicer's Annual Calculation Date
Statement, dated as of the August 1,
2003 true-up filing with the Texas
Utility Commission, as to the
transition bond balances, the
balances of the collection account
and its sub-accounts, and certain
projections of those balances.
+10.3 Application of CenterPoint Energy
Houston Electric, LLC on behalf of
CenterPoint Energy Transition Bond
Company, LLC for a Standard True-Up
of Transition Charges dated August 1,
2003
+31.1 Section 302 Certification of Gary L.
Whitlock
+31.2 Section 302 Certification of Marc
Kilbride
+32.1 Section 906 Certification of Gary L.
Whitlock
+32.2 Section 906 Certification of Marc
Kilbride
(b) Reports on Form 8-K.
None.
11
SIGNATURES
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 TRANSITION BOND COMPANY, LLC
By: /s/ James S. Brian
-------------------------------------
James S. Brian
Senior Vice President and
Chief Accounting Officer
Date: August 13, 2003
12
INDEX TO EXHIBITS
SEC FILE
OR
EXHIBIT REGISTRATION EXHIBIT
NUMBER DESCRIPTION REPORT OR REGISTRATION STATEMENT NUMBER REFERENCE
------- ----------------------------------- -------------------------------- ------------ ---------
4.1 Amended and Restated Limited Form 8-K dated October 23, 2001 333-91093 4.3
Liability Company Agreement of
Reliant Energy Transition Bond
Company LLC
4.2 Amended and Restated Certificate Form 8-K dated October 23, 2001 333-91093 4.7
of Formation of Reliant Energy
Transition Bond Company LLC
+4.3 Certificate of Amendment to the
Certificate of Formation of Reliant
Energy Transition Bond Company, LLC
+10.1 Semiannual Servicer's Certificate,
dated as of March 14, 2003, as to the
transition bond balances, the
balances of the collection account
and its sub-accounts, and setting
forth transfers and payments to be
made on the March 17, 2003 payment
date.
+10.2 Servicer's Annual Calculation Date
Statement, dated as of the August 1,
2003 true-up filing with the Texas
Utility Commission, as to the
transition bond balances, the
balances of the collection account
and its sub-accounts, and certain
projections of those balances.
+10.3 Application of CenterPoint Energy
Houston Electric, LLC on behalf of
CenterPoint Energy Transition Bond
Company, LLC for a Standard True-Up
of Transition Charges dated August 1,
2003
+31.1 Section 302 Certification of Gary L.
Whitlock
+31.2 Section 302 Certification of Marc
Kilbride
+32.1 Section 906 Certification of Gary L.
Whitlock
+32.2 Section 906 Certification of Marc
Kilbride