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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 SEPTEMBER 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 1-3187
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC
(Exact name of registrant as specified in its charter)
TEXAS
(State or other jurisdiction of incorporation or organization)
22-3865106
(I.R.S. Employer Identification No.)
1111 LOUISIANA
HOUSTON, TEXAS
(Address of principal executive offices)
77002
(Zip Code)
(713) 207-1111
(Registrant's telephone number, 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 in Rule 12b-2 of the Exchange Act) Yes __ No X
As of November 3, 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 SEPTEMBER 30, 2003
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements...............................................1
Statements of Consolidated Income
Three and Nine Months Ended September 30, 2002 and 2003 (unaudited)...1
Consolidated Balance Sheets
December 31, 2002 and September 30, 2003 (unaudited)..................2
Statements of Consolidated Cash Flows
Nine Months Ended September 30, 2002 and 2003 (unaudited).............4
Notes to Unaudited Consolidated Interim Financial Statements............5
Item 2. Management's Narrative Analysis of the Results of Operations of
CenterPoint Energy Houston Electric, LLC and Subsidiaries..............20
Item 4. Controls and Procedures...........................................32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................33
Item 5. Other Information.................................................33
Item 6. Exhibits and Reports on Form 8-K..................................39
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. 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," "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.
Some of the factors that could cause actual results to differ from those
expressed or implied in forward-looking statements are described under "Risk
Factors" in Item 5 of Part II of this report.
You should not place undue reliance on forward-looking statements. Each
forward-looking statement speaks only as of the date of the particular
statement.
ii
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
STATEMENTS OF CONSOLIDATED INCOME
(THOUSANDS OF DOLLARS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- --------------------------
2002 2003 2002 2003
--------- --------- ----------- -----------
REVENUES .......................................................... $ 660,342 $ 653,438 $ 1,756,744 $ 1,582,613
--------- --------- ----------- -----------
EXPENSES:
Purchased power ............................................... -- -- 55,932 --
Operation and maintenance ..................................... 130,175 139,562 400,767 398,166
Depreciation and amortization ................................. 74,702 69,779 204,282 202,628
Taxes other than income taxes ................................. 56,419 61,396 168,340 158,883
--------- --------- ----------- -----------
Total .................................................. 261,296 270,737 829,321 759,677
--------- --------- ----------- -----------
OPERATING INCOME .................................................. 399,046 382,701 927,423 822,936
--------- --------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense and distribution on trust preferred securities (57,693) (90,398) (185,358) (272,941)
Other, net .................................................... 7,701 8,599 15,268 25,624
--------- --------- ----------- -----------
Total .................................................. (49,992) (81,799) (170,090) (247,317)
--------- --------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES ............. 349,054 300,902 757,333 575,619
Income Tax Expense ............................................ 120,854 106,930 258,994 202,089
--------- --------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS ................................. 228,200 193,972 498,339 373,530
Income from Discontinued Operations, net of tax ............... 134,839 -- 131,949 --
--------- --------- ----------- -----------
NET INCOME ........................................................ $ 363,039 $ 193,972 $ 630,288 $ 373,530
========= ========= =========== ===========
See Notes to the Company's Unaudited Consolidated Interim Financial Statements
1
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
ASSETS
DECEMBER 31, SEPTEMBER 30,
2002 2003
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents .................... $ 70,866 $ 14,693
Accounts and notes receivable, net ........... 99,304 113,423
Accrued unbilled revenues .................... 70,385 82,801
Materials and supplies ....................... 59,941 56,790
Taxes receivable ............................. 40,997 72,136
Other ........................................ 11,838 8,847
----------- -----------
Total current assets .................... 353,331 348,690
----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment ................ 5,959,843 6,053,158
Less accumulated depreciation and amortization (2,122,611) (2,238,237)
----------- -----------
Property, plant and equipment, net ...... 3,837,232 3,814,921
----------- -----------
OTHER ASSETS:
Other intangibles, net ....................... 39,912 39,429
Regulatory assets ............................ 3,970,007 4,743,310
Notes receivable -- affiliated companies ..... 814,513 814,513
Other ........................................ 66,049 84,005
----------- -----------
Total other assets ...................... 4,890,481 5,681,257
----------- -----------
TOTAL ASSETS ........................ $ 9,081,044 $ 9,844,868
=========== ===========
See Notes to the Company's Unaudited Consolidated Interim Financial Statements
2
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
CONSOLIDATED BALANCE SHEETS - (CONTINUED)
(THOUSANDS OF DOLLARS)
(UNAUDITED)
LIABILITIES AND MEMBER'S EQUITY
DECEMBER 31, SEPTEMBER 30,
2002 2003
---------- ----------
CURRENT LIABILITIES:
Current portion of long-term debt ............... $ 18,758 $ 41,228
Accounts payable ................................ 32,362 26,120
Accounts payable -- affiliated companies, net ... 43,662 32,118
Notes payable -- affiliated companies, net ...... 214,976 127,705
Taxes accrued ................................... 85,205 66,813
Interest accrued ................................ 78,355 30,923
Regulatory liabilities .......................... 168,173 180,932
Franchise fees accrued .......................... 33,837 44,338
Other ........................................... 23,894 26,014
---------- ----------
Total current liabilities .................. 699,222 576,191
---------- ----------
OTHER LIABILITIES:
Accumulated deferred income taxes, net .......... 1,419,301 1,667,252
Unamortized investment tax credits .............. 53,581 50,064
Benefit obligations ............................. 61,671 80,576
Regulatory liabilities .......................... 940,615 642,312
Notes payable -- affiliated companies ........... 916,400 379,900
Accounts payable -- affiliated companies ........ -- 395,516
Other ........................................... 24,987 13,101
---------- ----------
Total other liabilities .................... 3,416,555 3,228,721
---------- ----------
LONG-TERM DEBT ....................................... 2,641,281 3,347,078
---------- ----------
COMMITMENTS AND CONTINGENCIES (NOTES 1 AND 8)
MEMBER'S EQUITY:
Common stock .................................... 1 1
Paid-in capital ................................. 2,205,039 2,200,401
Retained earnings ............................... 118,946 492,476
---------- ----------
Total member's equity ...................... 2,323,986 2,692,878
---------- ----------
TOTAL LIABILITIES AND MEMBER'S EQUITY .. $9,081,044 $9,844,868
========== ==========
See Notes to the Company's Unaudited Consolidated Interim Financial Statements
3
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
STATEMENTS OF CONSOLIDATED CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2002 2003
--------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................................... $ 630,288 $ 373,530
Less: Income from discontinued operations .................................... (131,949) --
--------- -----------
Income from continuing operations ............................................ 498,339 373,530
Adjustments to reconcile income from continuing operations to net cash
provided by operating activities:
Depreciation and amortization ............................................ 204,282 202,628
Deferred income taxes .................................................... 272,066 253,181
Investment tax credits ................................................... (3,517) (3,517)
Changes in other assets and liabilities:
Accounts and notes receivable, net .................................... (356,085) (26,535)
Accounts receivable/payable, affiliates ............................... (21,259) (11,543)
Taxes receivable ...................................................... 52,755 (31,139)
Inventory ............................................................. 9,298 3,151
Accounts payable ...................................................... 39,940 (14,677)
Fuel cost recovery .................................................... 164,151 --
Interest and taxes accrued ............................................ (33,808) (50,824)
Net regulatory assets and liabilities ................................. (823,597) (664,421)
Other current assets .................................................. (1,169) 4,411
Other current liabilities ............................................. (105,696) 12,621
Other assets .......................................................... 89,882 (2,815)
Other liabilities ..................................................... 19,884 (8,789)
Other, net ............................................................... 5,021 1,528
--------- -----------
Net cash provided by operating activities ......................... 10,487 36,790
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ......................................................... (278,977) (160,667)
Decrease (increase) in restricted cash ....................................... 1,448 (1,420)
--------- -----------
Net cash used in investing activities ............................. (277,529) (162,087)
--------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt ..................................... -- 1,257,762
Increase in short-term borrowing, net ........................................ 223,220 --
Increase (decrease) in short-term notes with affiliates, net ................. (231,249) 62,729
Payments of long-term debt ................................................... (13,405) (531,024)
Decrease in long-term notes payable, affiliates .............................. -- (686,500)
Debt issuance costs .......................................................... -- (33,903)
Payment of common stock dividend ............................................. (222,538) --
Other, net ................................................................... (35) 60
--------- -----------
Net cash provided by (used in) financing activities ................... (244,007) 69,124
--------- -----------
NET CASH PROVIDED BY DISCONTINUED OPERATIONS ..................................... 513,894 --
--------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............................. 2,845 (56,173)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ................................. 3,428 70,866
--------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ....................................... $ 6,273 $ 14,693
========= ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Payments:
Interest ..................................................................... $ 98,995 $ 286,905
Income taxes ................................................................. -- --
See Notes to the Company's Unaudited Consolidated Interim Financial Statements
4
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(1) BACKGROUND AND BASIS OF PRESENTATION
Included in this Quarterly Report on 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
Company has filed a Current Report on Form 8-K dated May 15, 2003 (May 15, 2003
Form 8-K). The May 15, 2003 Form 8-K gives effect to certain reclassifications
that have been made to the Company's historical financial statements as
presented in the Annual Report on Form 10-K of CenterPoint Houston (CenterPoint
Houston Form 10-K) for the year ended December 31, 2002. The Interim Financial
Statements are unaudited, omit certain financial statement disclosures and
should be read with the May 15, 2003 Form 8-K, including the exhibits thereto,
and the Quarterly Reports on Form 10-Q of CenterPoint Houston for the quarter
ended March 31, 2003 and the quarter ended June 30, 2003.
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.
CenterPoint Energy is a registered public utility holding company under
the Public Utility Holding Company Act of 1935, as amended (the 1935 Act). The
1935 Act and related rules and regulations impose a number of restrictions on
the activities of CenterPoint Energy and its subsidiaries. The 1935 Act, among
other things, generally limits the ability of the holding company and its
subsidiaries to issue debt and equity securities without prior authorization,
5
restricts the source of dividend payments to current and retained earnings
without prior authorization, regulates sales and acquisitions of certain assets
and businesses and governs affiliate transactions. The United States Congress is
currently considering legislation that has a provision that would repeal the
1935 Act. The Company cannot predict at this time whether this legislation or
any variation thereof will be adopted or, if adopted, the effect of such law on
its business.
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.
The following notes to the consolidated annual financial statements included in
Exhibit 99.2 to the May 15, 2003 Form 8-K (CenterPoint Houston 8-K Notes) relate
to certain contingencies. These notes, as updated herein, are incorporated
herein by reference.
CenterPoint Houston 8-K Notes: Notes 3(e) (Regulatory Assets and
Liabilities), 4 (Regulatory Matters), 8(a) (Pension Plans) and 10
(Commitments and Contingencies).
For information regarding certain legal and regulatory proceedings, see
Note 8.
(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 Houston are Reliant Resources, Inc.'s (Reliant
Resources) unregulated operations previously reported in the Wholesale Energy,
European Energy and Retail Energy business segments of Reliant Energy. 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.
Total revenues included in discontinued operations for the three months
and nine months ended September 30, 2002 were $4.1 billion and $10.0 billion,
respectively. 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." Income from discontinued operations for the three and nine months
ended September 30, 2002 is reported net of income tax expense of $130 million
and $254 million, respectively.
(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 recognizes removal costs as a component of depreciation expense in
accordance with regulatory treatment. As of September 30, 2003, these removal
costs of $229 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 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 is required to be reclassified. No such reclassification was required in
the three months or nine months ended September 30, 2002. The Company has
reclassified the $25 million loss on debt extinguishment related to the fourth
quarter of 2002 from an extraordinary item to interest expense as presented in
its May 15, 2003 Form 8-K.
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 Emerging Issues Task Force (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. The Company adopted the provisions of SFAS No. 146 on January 1, 2003. The
adoption of SFAS No. 146 had no effect on the Company's consolidated financial
statements.
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 was 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.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities, an Interpretation of Accounting Research Bulletin No. 51"
(FIN 46). FIN 46 requires certain variable interest entities to be consolidated
by the primary beneficiary of the entity if the equity investors in the entity
do not have the characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. On October 9, 2003, the FASB deferred the application of FIN
46 until the end of the first interim or annual period ending after December 15,
2003 for variable interest entities created
7
before February 1, 2003. The FASB is currently considering several amendments to
FIN 46, and the Company will analyze the impact, if any, these changes may have
on its consolidated financial statements upon ultimate implementation of FIN 46.
The Company does not expect the adoption of FIN 46 to have any effect on its
consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities" (SFAS No. 149). SFAS No. 149
has added additional criteria which were effective on July 1, 2002 for new,
acquired, or newly modified forward contracts. The adoption of SFAS No. 149 had
no effect on the Company's consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity" (SFAS
No. 150). SFAS No. 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. The adoption of SFAS No.
150 had no effect on the Company's consolidated financial statements.
(4) REGULATORY MATTERS
(a) Excess Cost Over Market (ECOM) True-Up.
The Company's 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 through
September 2003, Texas Genco conducted auctions, as required by the Public
Utility Commission of Texas (Texas Utility Commission) and by CenterPoint
Energy's master separation agreement with Reliant Resources.
The capacity auctions continue to be consummated at market-based prices
that are below the estimate of those prices made by the Texas Utility Commission
in the spring of 2001. The Texas electric restructuring law allows recovery, in
a "true-up" proceeding in 2004 (2004 True-Up Proceeding), of the difference
between the prices for power sold in state mandated auctions from January 1,
2002 through December 31, 2003 and earlier estimates of market power prices by
the Texas Utility Commission (ECOM True-Up). This calculation (the ECOM
Calculation) measures the difference between (1) an imputed margin that reflects
the actual market power prices received in the state mandated auctions, actual
fuel expense and generation, and (2) the margin included in the Texas Utility
Commission's estimates of power prices, fuel expense and generation in the ECOM
model developed by the Texas Utility Commission (the ECOM Margin). The resulting
difference is the ECOM True-Up amount.
The ECOM model from which the ECOM Margin is derived provides only annual
estimates of power prices, fuel expense and generation. Accordingly, the Company
must form its own quarterly allocation estimates during 2002-2003 for the
purpose of determining ECOM True-Up revenue.
Beginning January 1, 2002, the Company allocated the ECOM Margin in the
Company's ECOM Calculation based on annual estimated forecasts of power prices,
fuel expense and generation. In the second quarter of 2003, the Company began
using a cumulative methodology for allocating ECOM Margin. This methodology uses
revenue amounts based on the actual state mandated auction price results and
actual generation for historical periods, as well as forecasted amounts for the
balance of 2003, rather than forecasted amounts for the two-year period
allocated on an annual basis. Changes in estimates that affect the allocation of
ECOM Margin will have an effect on the amount of ECOM True-Up revenue recorded
in a specific period, but will not affect the total amount of ECOM True-Up
revenue recorded during the two-year period ending December 31, 2003. Beginning
in 2004, the ECOM Calculation will no longer apply.
In accordance with the Texas Utility Commission's rules regarding the ECOM
True-Up, for the three months ended September 30, 2002 and 2003, the Company
recorded approximately $240 million and $222 million, respectively, in non-cash
ECOM True-Up revenue. In accordance with the Texas Utility Commission's rules
regarding the ECOM True-Up, for the nine months ended September 30, 2002 and
2003, the Company recorded approximately $551 million and $455 million,
respectively, in non-cash ECOM True-Up revenue. ECOM True-Up revenue is recorded
as a regulatory asset and totaled $1.2 billion as of September 30, 2003. In
October 2003, a group of intervenors filed a petition asking the Texas Utility
Commission to open a rulemaking proceeding and reconsider certain aspects of its
ECOM rules.
8
On November 5, 2003, the Texas Utility Commission voted to deny the petition.
Despite the denial of the petition, the Company expects that issues could be
raised in the 2004 True-Up Proceeding regarding the Company's compliance with
the Texas Utility Commission's rules regarding ECOM True-Up, including whether
Texas Genco has auctioned all capacity it is required to auction in view of the
fact that some capacity has failed to sell in the state mandated auctions. The
Company believes Texas Genco has complied with the requirements under the
applicable rules, including re-offering the unsold capacity in subsequent
auctions. If events were to occur during the 2004 True-Up Proceeding that made
the recovery of the ECOM True-Up regulatory asset no longer probable, the
Company would write off the unrecoverable balance of such asset as a charge
against earnings. 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 8-K Notes, which are incorporated herein by reference.
(b) Regulatory Assets Contingency.
As of September 30, 2003, in contemplation of the 2004 True-Up Proceeding,
the Company has recorded, in addition to the ECOM amounts described above, a
regulatory asset of $2.5 billion representing the estimated future recovery of
previously incurred costs. This estimated recovery is based upon current
projections of the market value of the CenterPoint Energy's Texas generation
assets to be covered by the 2004 True-Up Proceeding calculations. This estimated
recovery 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 the Company's
investment in generation assets);
- $841 million of redirected depreciation; and
- $396 million related to the Texas Genco distribution.
Offsetting this regulatory asset is an $820 million regulatory liability
relating to an order issued by the Texas Utility Commission in 2001 to refund
amounts relating to prior mitigation of anticipated stranded costs. The Texas
Utility Commission ruled that those amounts should be refunded based on its
conclusion that those amounts would result in an over-mitigation of stranded
costs unless they were refunded. The Company began refunding those amounts
(excess mitigation credits) with January 2002 bills and is scheduled to continue
to refund those credits 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.
On June 26, 2003, the Company filed a petition with the Texas Utility
Commission seeking to cease refunding excess mitigation credits on the ground
that continuation of the refund in light of current projections of stranded
costs only increases the amount of stranded costs that the Company will seek to
recover in the 2004 True-Up Proceeding. The excess mitigation credits amount to
approximately $18 million per month. This proceeding is currently pending before
the Texas Utility Commission.
(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
9
items totaling $24 million were written off during the fourth quarter of 2002
and items totaling $203 million will be carried forward for resolution by the
Texas Utility Commission in late 2003 or early 2004. A hearing is scheduled to
begin on November 12, 2003.
(d) 2004 True-Up Proceeding.
Under the Texas electric restructuring law, the Texas Utility Commission is
required to conduct true-up proceedings for each investor-owned utility whose
generation assets were "unbundled" from its transmission and distribution assets
in order to quantify and reconcile the amount of stranded costs, ECOM True-Up,
unreconciled fuel costs, "price to beat" clawback component (See Note 8(b)) and
other regulatory assets associated with electric generation operations (true-up
components). On June 18, 2003, the Texas Utility Commission ruled that the
Company's filing for recovery of its true-up components will be made on March
31, 2004. The law requires a final order to be issued by the Texas Utility
Commission not more than 150 days after a proper filing is made by the regulated
utility, although, under its rules the Texas Utility Commission can extend the
150 day deadline for good cause.
Any delay in the final order date will result in a delay in the
securitization of the Company's stranded costs and the start of recovery of
certain carrying costs through non-bypassable charges to the Company's
customers. In addition, the March 31, 2004 filing date for the Company's
recovery of its true-up components means that the calculation of the market
value per share of the Texas Genco common stock for purposes of the Texas
Utility Commission's stranded cost determination might be more than the
purchase price per share calculated under the option held by Reliant Resources
to purchase CenterPoint Energy's 81% ownership interest in Texas Genco. Under
the option, the purchase price will be based on market prices during the 120
trading days ending on January 9, 2004, but under the filing schedule prescribed
by the Texas Utility Commission, the value of that ownership interest for the
stranded cost determination will be based on market prices during the 120
trading days ending on March 30, 2004. If Reliant Resources exercises its option
at a lower price than the market value used by the Texas Utility Commission, the
Company would be unable to recover the difference.
The Company will be required to establish and support the amounts it seeks
to recover in the 2004 True-Up Proceeding. Third parties will have the
opportunity and are expected to challenge the Company's calculation of these
costs. The Company and the anticipated intervenors in the 2004 True-Up
Proceeding have engaged in settlement discussions to determine if any or all of
the true-up components can be resolved outside a contested proceeding.
The Company expects that upon completion of the 2004 True-Up Proceeding,
it will seek to securitize its stranded costs, any regulatory assets not
previously securitized by the October 2001 issuance of transition bonds and, to
the extent permitted by the Texas Utility Commission, the balance of the other
true-up components. Before the Company can securitize these amounts, the Texas
Utility Commission must conduct a proceeding and issue a financing order
authorizing it to do so. Under the Texas electric restructuring law, the Company
is entitled to recover any portion of the true-up components not securitized by
transition bonds through a non-bypassable competition transition charge assessed
to its customers.
Following adoption of the True-Up rule by the Texas Utility Commission,
the Company appealed certain aspects of the rule, including the decision to
permit interest to be recovered on stranded costs only from the date of the
Texas Utility Commission's final order in the True-Up Proceeding, instead of
from January 1, 2002, as the Company had requested. That appeal remains pending
before the Texas Supreme Court, which has not agreed to hear the appeal but has
requested the parties to file briefs concerning the issues in the case.
10
(5) LONG-TERM DEBT AND SHORT-TERM BORROWINGS
DECEMBER 31, 2002 SEPTEMBER 30, 2003
----------------- ------------------
LONG-TERM CURRENT(1) LONG-TERM CURRENT(1)
--------- ---------- --------- ----------
(IN MILLIONS)
Long-term debt:
Mortgage bonds 5.60% to 9.15% due 2013 to 2033(2) .. $ 615 $ -- $ 1,365 $ --
Term loan, LIBOR plus 9.75%, due 2005(3) ........... 1,310 -- 1,310 --
Series 2001-1 Transition Bonds 3.84% to 5.63%
due 2002 to 2013(4) ............................. 717 19 676 41
Other .............................................. (1) -- (4) --
--------- --------- --------- ---------
Long-term debt to third parties .................... 2,641 19 3,347 41
Notes payable to affiliate 4.00% to 6.70%(5) ....... 916 167 380 17
Short-term borrowings from affiliates ................ -- 48 -- 111
--------- --------- --------- ---------
Total borrowings ................................ $ 3,557 $ 234 $ 3,727 $ 169
========= ========= ========= =========
- ----------
(1) Includes amounts due within one year of the date noted.
(2) Excludes $924 million of first mortgage bonds and general mortgage bonds
that the Company has issued as collateral for long-term debt of
CenterPoint Energy. Debt issued as collateral is excluded from the
financial statements because of the contingent nature of the obligation.
(3) Under the term loan, the London interbank offered rate (LIBOR) rate is
subject to a floor of 3%. This collateralized term loan is secured by the
Company's general mortgage bonds.
(4) 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
8-K Notes.
(5) Notes payable to affiliate at September 30, 2003, have the same principal
amounts and interest rates as pollution control bond obligations of
CenterPoint Energy that are secured by first mortgage bonds of the
Company.
Money Pool Borrowings
On September 30, 2003, the Company had borrowed approximately $111 million
from its affiliates, which had a weighted average interest rate of 6.37%. The
Company participates in a "money pool" through which it can borrow or invest on
a short-term basis. The Company is authorized to borrow up to a limit of $600
million from the money pool. 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 company systems under the 1935 Act and with the orders we
have received pursuant to 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 aggregate principal
amount of 10-year bonds with an interest rate of 5.7% and $312.3 million
aggregate principal amount of 30-year bonds with an interest rate of 6.95%.
Proceeds were used to redeem approximately $312.3 million aggregate principal
amount of the Company's first mortgage bonds and to repay $429 million of
intercompany notes payable to CenterPoint Energy. Proceeds from the note
repayment were ultimately used by CenterPoint Energy to repay $150 million
aggregate principal amount of medium-term notes maturing on April 21, 2003 and
to repay borrowings under its credit facility.
On May 23, 2003, the Company issued $200 million aggregate principal
amount of 20-year general mortgage bonds with an interest rate of 5.6%. Proceeds
were used to redeem, on July 1, 2003, $200 million aggregate principal amount of
the Company's 7.5% first mortgage bonds due 2023 at 103.51% of their principal
amount.
11
On September 2, 2003, the Company and the lender parties thereto amended
the $1.3 billion term loan to, among other things, allow the Company to issue an
additional $500 million of debt secured by its general mortgage bonds without
requiring that the net proceeds be applied to prepay the loans outstanding under
that term loan.
On September 9, 2003, the Company issued $300 million aggregate principal
amount of general mortgage bonds with an interest rate of 5.75% and a maturity
date of January 15, 2014. This issuance utilized $300 million of the Company's
additional debt capacity described in the preceding paragraph. Proceeds were
used to repay approximately $258 million of intercompany notes payable to
CenterPoint Energy and to repay approximately $40 million of money pool
borrowings. Proceeds in the amount of approximately $292 million from the note
and money pool repayments were ultimately used by CenterPoint Energy to repay a
portion of the term loan under its credit facility.
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 Bond Company, LLC, a subsidiary of
the Company (Bond Company) as of September 30, 2003. Amounts are expressed in
thousands.
CENTERPOINT HOUSTON
------------------- TRANSITION
YEAR THIRD-PARTY AFFILIATE SUB-TOTAL BONDS TOTAL
- ---- ----------- --------- --------- ---------- -----
2003 ... $ -- $ 16,600 $ 16,600 $ -- $ 16,600
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
2014 ... 300,000 -- 300,000 -- 300,000
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
2033 ... 312,275 -- 312,275 -- 312,275
---------- ---------- ---------- ---------- ----------
Total .. $2,674,717 $ 396,500 $3,071,217 $ 717,069 $3,788,286
========== ========== ========== ========== ==========
First mortgage bonds and general mortgage bonds in aggregate principal
amounts of $102 million and $1.3 billion, 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.
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.
12
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
=========== =========== ==========
The aggregate amount of additional general mortgage bonds and first
mortgage bonds that could be issued is approximately $400 million based on
estimates of the value of the Company's property encumbered by the general
mortgage, the cost of such property, the amount of retired bonds that could be
used as the basis for issuing new bonds and the 70% bonding ratio contained in
the general mortgage. However, contractual limitations on the Company and
CenterPoint Energy under debt instruments expiring in November 2005, limit the
incremental aggregate amount of first mortgage bonds and general mortgage bonds
that may be issued to $200 million.
As of September 30, 2003, outstanding first mortgage bonds and general
mortgage bonds aggregated approximately $3.6 billion as shown in the following
table. Amounts are expressed in thousands.
ISSUED AS ISSUED AS COLLATERAL
ISSUED DIRECTLY TO COLLATERAL FOR FOR CENTERPOINT
THIRD PARTIES THE COMPANY'S DEBT ENERGY'S DEBT TOTAL
------------- ------------------ ------------- -----
First Mortgage Bonds......... $ 102,442 $ -- $ 396,500 $ 498,942
General Mortgage Bonds....... 1,262,275 1,310,000 527,200 3,099,475
----------- ----------- ----------- -----------
Total $ 1,364,717 $ 1,310,000 $ 923,700 $ 3,598,417
=========== =========== =========== ===========
The Bond Company has $717 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. 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
$499 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 or improvement 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 or improvement fund requirement
satisfied in 2003 was approximately $8 million. The Company's assets are subject
to liens securing approximately $3.1 billion of general mortgage bonds, which
are junior to the liens of the first mortgage bonds.
13
(6) COMPREHENSIVE INCOME
The following table summarizes the components of total comprehensive
income:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2002 2003 2002 2003
---- ---- ---- ----
(IN MILLIONS)
Net income.............................................. $ 363 $ 194 $ 630 $ 374
--------- --------- --------- ---------
Other comprehensive income (loss):
Additional minimum non-qualified pension liability
adjustment.......................................... -- -- 1 --
Other comprehensive income (loss) from
discontinued operations............................. (18) -- 202 --
--------- --------- --------- ---------
Other comprehensive income (loss)....................... (18) -- 203 --
--------- --------- --------- ---------
Comprehensive income $ 345 $ 194 $ 833 $ 374
========= ========= ========= =========
(7) RELATED PARTY TRANSACTIONS
From time to time, the Company has receivables from, or payables to,
CenterPoint Energy or its subsidiaries. As of September 30, 2003, the Company
had net accounts payable-affiliated companies of $32 million, which included
accounts payable of $38 million, partially offset by accounts receivable of $6
million. Long-term note payable to affiliate was $1.1 billion as of December 31,
2002 and $397 million as of September 30, 2003. For more information on the
long-term note payable to affiliate see Note 5. The Company had net interest
expense related to affiliate borrowings of $14 million and $64 million for the
three months and nine months ended September 30, 2002, respectively and $4
million and $18 million for the three months and nine months ended September 30,
2003, respectively. As of September 30, 2003, the Company had $396 million in
long-term accounts payable-affiliated companies, which related to the Texas
Genco distribution. In the first quarter of 2003, CenterPoint Energy recorded a
$396 million impairment related to the partial distribution of its investment in
Texas Genco. Since this amount is expected to be recovered in the 2004 True-Up
Proceeding, the Company has recorded a regulatory asset reflecting its right to
recover this amount and an associated payable to CenterPoint Energy. For more
information on the 2004 True-Up Proceeding see Notes 4(b) and 4(d).
The 1935 Act generally prohibits borrowings by CenterPoint Energy from its
subsidiaries, including the Company, either through the money pool or otherwise.
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 and nine months ended September 30, 2002, revenues,
excluding transition charges, derived from energy delivery charges provided by
the Company to subsidiaries of Reliant Resources, a former affiliate, totaled
$298 million and $661 million, respectively.
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 $56 million of power from Texas Genco.
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 $24 million
and $82 million for the three
14
and nine months ended September 30, 2002, respectively, and $27 million and $84
million for the three and nine months ended September 30, 2003, respectively,
and are included primarily in operation and maintenance expenses.
(8) COMMITMENTS AND CONTINGENCIES
(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, the Company and each of their subsidiaries are entitled to
be indemnified by Reliant Resources for any losses, including attorneys' fees
and other costs, arising out of the lawsuits described under "California
Electricity and Gas Market Cases," "Western States Class Action," "Long-Term
Contract Class Action," "Gas Trading Cases," "Gas Futures Cases," "Trading and
Marketing Activities" and "Other Class Action Lawsuits." Pursuant to the
indemnification obligation, Reliant Resources is defending the Company and its
subsidiaries to the extent named in these lawsuits. The ultimate outcome of
these matters cannot be predicted at this time.
California Electricity and Gas Market Cases. Reliant Energy, Reliant
Resources, Reliant Energy Power Generation, Inc. (REPG) and several other
subsidiaries of Reliant Resources, as well as three former officers 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 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 stayed the remand order
pending the 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 (a wholesale energy marketing subsidiary of Reliant Resources)
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
purported to represent the same class of California ratepayers, asserted the
same claims as asserted in the other California class action cases, and in some
instances repeated as well the allegations in the Attorney General cases. All of
these cases were removed and consolidated in federal district court in San
Diego. The court dismissed the consolidated case on grounds that the claims were
barred by federal preemption of regulation of wholesale rates by the Federal
Energy Regulatory Commission (FERC) and the filed rate doctrine. The plaintiffs
have filed a notice of appeal.
In July 2003, the City of Los Angeles Attorney filed suit against
CenterPoint Energy, Reliant Energy, Reliant Resources, Reliant Energy Services
and one of Reliant Resources' employees in federal court in Los Angeles. The
lawsuit alleges that the defendants conspired to manipulate the price for
natural gas in breach of Reliant Energy Services' contract to supply the Los
Angeles Department of Water and Power (LADWP) with natural gas in violation of
federal and state antitrust laws, the federal Racketeer Influenced and Corrupt
Organization Act and the California False Claims Act. The lawsuit seeks treble
damages for the alleged overcharges for gas purchased by
15
LADWP of an estimated $218 million, interest, costs of suit and attorneys' fees.
The Company has filed a motion to dismiss the lawsuit for, among other things,
lack of personal jurisdiction, and the defendants have filed a notice seeking to
consolidate this case for pretrial purposes with the cases described under "Gas
Trading Cases."
Western States Class Action. In May 2003, a class action lawsuit was filed
against Reliant Resources, Reliant Energy and various market participants in
state court in San Diego County, California. The plaintiffs allege that Reliant
Resources and Reliant Energy engaged in unfair, unlawful and fraudulent business
practices and violations of the California antitrust laws by manipulating energy
markets in California and the West. The action is brought on behalf of all
persons and businesses residing in Oregon, Washington, Utah, Nevada, Idaho, New
Mexico, Arizona and Montana. The lawsuit seeks injunctive relief, treble
damages, restitution, costs of suit and attorney's fees. In May 2003, the case
was removed to federal court in San Diego. The plaintiffs have moved to remand
the case back to state court. The case has been transferred to the visiting
judge in San Diego before whom most of the other electricity cases have been
consolidated.
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.
Gas Trading Cases. CenterPoint Energy, Reliant Resources and Reliant
Energy have been named as defendants in two lawsuits filed 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. One lawsuit was filed in April 2003 in state court in Los Angeles
County, California, and the other was filed in May 2003 in state court in San
Diego County, California. The complaints are based on certain conclusions in a
report by the FERC staff even though the staff investigation found no evidence
that Reliant or Reliant's trader intended to manipulate gas prices and FERC has
concluded that the trading activity did not violate the Natural Gas Act or any
FERC regulation. The complaint seeks injunctive and declaratory relief,
compensatory and punitive damages, restitution, costs of suit and attorneys'
fees. The complaint alleges that there were "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. Reliant
Resources removed both cases to federal court and the plaintiffs in both cases
have moved to remand the cases back to state court. The plaintiffs in the San
Diego case have also filed a petition with the Federal Judicial Panel on
Multidistrict Litigation to transfer the case to federal court in Nevada. The
defendants have filed their own motion with the Panel to transfer the case to
the Northern District of California and requested that the case be heard by a
judge from the Southern District of New York. While Reliant Resources has not
yet filed an answer, the Company understands that Reliant Resources intends to
deny both the alleged violation of any laws and the participation in a
conspiracy with Enron. Neither CenterPoint Energy nor Reliant Energy was a party
in the proceedings in which the report was submitted. Only former subsidiaries
of the predecessor to the Company engaged in gas trading activities in
California; however, neither CenterPoint Energy nor any of its current
subsidiaries, including the Company, has ever engaged in gas trading in
California.
Gas Futures Cases. In August 2003, a class action lawsuit was filed
against CenterPoint Houston and Reliant Energy Services in federal court in New
York on behalf of purchasers of natural gas futures contracts on the New York
Mercantile Exchange (NYMEX). A second, similar class action with filed in the
same court in October 2003. The complaints allege that the defendants
manipulated the price of natural gas through their gas trading activities and
price reporting practices in violation of the Commodity Exchange Act during the
period January 1, 2000 through December 31, 2002. The plaintiffs seek damages
based on the effect of such alleged manipulation on the value of the gas futures
contracts they bought or sold. CenterPoint Houston has not yet been served in
the second action.
Other 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.
16
In June 2002, the Securities and Exchange Commission (SEC) advised Reliant
Resources and Reliant Energy that it had issued a formal order in connection
with its investigation of Reliant Resources' and Reliant Energy's financial
reporting, internal controls and related matters. The investigation was 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. 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.
Other Class Action Lawsuits. 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 initial public offering (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 fraudulent and negligent
misrepresentation and violations of Illinois consumer law.
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
17
form of a constructive trust on the compensation paid to the defendants. In
March, 2003, the court dismissed this case on the ground that the plaintiff did
not make an adequate demand on CenterPoint Energy before filing suit.
Thereafter, the plaintiff sent another demand asserting the same claims.
CenterPoint Energy's board of directors investigated that demand and
similar allegations made in a June 28, 2002 demand letter sent on behalf of a
CenterPoint Energy shareholder. The latter letter demanded that CenterPoint
Energy take several actions in response to alleged round-trip trades occurring
in 1999, 2000, and 2001. In June 2003, the Board determined that these proposed
actions would not be in the best interests of CenterPoint Energy.
The Company believes that none of the lawsuits described in "Other Class
Action 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.
Texas Action. In July 2003, Texas Commercial Energy filed a lawsuit
against Reliant Energy, Reliant Resources, Reliant Electric Solutions, LLC,
several other Reliant Resources subsidiaries and several other participants in
the ERCOT power market in federal court in Corpus Christi, Texas. The plaintiff,
a retail electricity provider in the Texas market served by ERCOT, alleges that
the defendants conspired to illegally fix and artificially increase the price of
electricity in violation of state and federal antitrust laws and committed fraud
and negligent misrepresentation. The lawsuit seeks damages in excess of $500
million, exemplary damages, treble damages, interest, costs of suit and
attorneys' fees. The Company has not yet been served with the complaint.
Reliant Energy Municipal Franchise Fee Lawsuits. In February 1996, the
cities of Wharton, Galveston and Pasadena (Three Cities) 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
Three Cities have filed a petition for review at the Texas Supreme Court and
the court has requested briefs from the parties.
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 Proceedings. 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.
18
(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 2004 True-Up Proceeding provides for a
clawback of the "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 the Company for the
clawback component of the 2004 True-Up Proceeding. 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. As reported in Reliant Resources' Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 2003, filed with the SEC on
November 12, 2003, Reliant Resources expects that the clawback payment will be
in the range of $170 million to $180 million, with a most probable estimate of
$175 million.
19
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 our
Interim Financial Statements and notes contained in Item 1 of this report.
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 (we, us, 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.
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 and related rules and regulations impose a number of restrictions on the
activities of CenterPoint Energy and its subsidiaries other than Texas Genco,
which is an exempt wholesale generator under the 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 current and retained earnings without prior
authorization, regulates sales and acquisitions of certain assets and businesses
and governs affiliate transactions. CenterPoint Energy and its subsidiaries,
including us, received an order from the Securities and Exchange Commission
(SEC) relating to financing and other activities (June 2003 Financing Order),
which is effective until June 30, 2005.
On August 1, 2003, the SEC issued a supplemental order which allowed us to
issue additional external debt over the amount permitted in the June 2003
Financing Order. For more information regarding these orders, please read " -
Liquidity - Certain Contractual and Regulatory Limits on Ability to Issue
Securities."
The Interim Financial Statements have been prepared to reflect the effect
of the Restructuring as described above as it relates to us, and have been
prepared based upon Reliant Energy's historical consolidated financial
statements.
The Interim Financial Statements for the three months and nine months
ended September 30, 2002, 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).
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 our
results of operations between the three months and nine months ended September
30, 2003 and the three months and nine months ended September 30, 2002.
Reference is made to "Management's Narrative Analysis of Results of Operations"
in Exhibit 99.1 to our Current Report on Form 8-K dated May 15, 2003 (May 15,
2003 Form 8-K).
20
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 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 "Risk Factors" in Item
5 of Part II of this report and "Management's Narrative Analysis of Results of
Operations -- Certain Factors Affecting Future Earnings" in Exhibit 99.1 to the
May 15, 2003 Form 8-K, each of which is incorporated herein by reference. The
discontinuation of non-cash operating income associated with generation-related
regulatory assets, or Excess Cost Over Market (ECOM) is also expected to
negatively impact our earnings in 2004.
In the second quarter of 2003, we began to evaluate performance on an
operating income basis. Operating income is shown because it is the measure used
by the chief operating decision maker to evaluate performance and allocate
resources. Additionally, it is widely accepted measure of financial performance
prepared in accordance with accounting principles generally accepted in the
United States of America. Prior to the second quarter of 2003, we evaluated
performance on an earnings (loss) before interest expense, distribution on trust
preferred securities and income taxes (EBIT) basis. Historically, the difference
between EBIT and operating income has not been material.
The following table sets forth our consolidated results of operations for
the three months and nine months ended September 30, 2002 and 2003, followed by
a discussion of our consolidated results of operations.
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
2002 2003 2002 2003
---- ---- ---- ----
(IN MILLIONS)
Operating Revenues:
Electric revenues................................. $ 420 $ 432 $ 1,206 $ 1,128
ECOM true-up...................................... 240 222 551 455
---------- ---------- ---------- ----------
Total Operating Revenues......................... 660 654 1,757 1,583
---------- ---------- ---------- ----------
Operating Expenses:
Purchased power................................... -- -- 56 --
Operation and maintenance......................... 130 139 401 398
Depreciation and amortization..................... 75 70 204 203
Taxes other than income........................... 56 62 169 159
---------- ---------- ---------- ----------
Total Operating Expenses......................... 261 271 830 760
---------- ---------- ---------- ----------
Operating Income.................................... 399 383 927 823
Interest Expense and Distribution on Trust
Preferred Securities.............................. (58) (90) (185) (273)
Other Income, net................................... 8 8 15 26
---------- ---------- ---------- ----------
Income from Continuing Operations Before Income
Taxes............................................. 349 301 757 576
Income Tax Expense.................................. (121) (107) (259) (202)
---------- ---------- ---------- ----------
Income from Continuing Operations................... 228 194 498 374
Income from Discontinued Operations, net of tax..... 135 -- 132 --
---------- ---------- ---------- ----------
Net Income.......................................... $ 363 $ 194 $ 630 $ 374
========== ========== ========== ==========
Residential Throughput (in gigawatt-hours
(GWh)) (1)........................................ 7,966 8,134 18,735 19,183
- --------------
(1) Usage volumes (KWh) for commercial and industrial customers are excluded
from throughput because the majority of these customers are billed on a
peak demand (KW) basis and, as a result, revenues do not vary based on
consumption.
21
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2002
We reported operating income of $383 million for the three months ended
September 30, 2003, consisting of $161 million for the regulated electric
transmission and distribution utility and non-cash operating income of $222
million associated with ECOM, as described below. For the three months ended
September 30, 2002, operating income was $399 million, consisting of $159
million for the regulated electric transmission and distribution utility and
non-cash operating income of $240 million associated with ECOM.
Our business, excluding ECOM and transition related operating income,
continues to benefit from solid customer growth. Revenues increased from the
addition of over 50,000 metered customers since September 2002 ($13 million)
partially offset by milder weather ($4 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 from January 1, 2002
through December 31, 2003 and the Texas Utility Commission's earlier estimates
of those market prices. During 2002 and 2003, this difference, referred to as
ECOM, produced non-cash operating income and is recorded as a regulatory asset.
The reduction in ECOM True-Up revenue of $18 million from 2002 to 2003 is
primarily a result of higher capacity auction prices for Texas Genco for this
period in 2003 compared to the same period in 2002.
Operation and maintenance expense increased $9 million for the three
months ended September 30, 2003 as compared to the same period in 2002 primarily
due to higher pension and employee benefit expenses of $7 million.
Depreciation and amortization expense decreased $5 million for the three
months ended September 30, 2003 as compared to the same period in 2002 due to
decreased amortization of securitized assets ($7 million), partially offset by
increases in plant in service ($2 million). The amortization of securitized
assets is offset by revenue from non-bypassable transition charges payable by
retail electric customers.
Taxes other than income taxes increased $6 million for the three months
ended September 30, 2003 as compared to the same period in 2002 primarily due to
increased property tax ($2 million) and increased city franchise fees ($4
million).
Interest expense increased $32 million for the three months ended
September 30, 2003 as compared to the same period in 2002 due to higher
borrowing costs and increased debt levels and financing costs.
Our effective tax rate for the three months ended September 30, 2002 and
2003 was 34.6% and 35.5%, respectively.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2002
We reported operating income of $823 million for the nine months ended
September 30, 2003, consisting of $368 million for the regulated electric
transmission and distribution utility and non-cash operating income of $455
million associated with ECOM. For the nine months ended September 30, 2002,
operating income was $927 million, consisting of $376 million for the regulated
electric transmission and distribution utility and non-cash operating income of
$551 million associated with ECOM. 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 $56 million for the nine months ended September 30,
2002 relate to operation of the regulated utility during this transition period.
Increased revenues from customer growth ($33 million) and positive impacts
of weather ($1 million) were more than offset by transition period revenues in
2002 ($98 million) and decreased industrial demand.
The reduction in ECOM True-Up revenue of $96 million from 2002 to 2003
primarily resulted from higher capacity auction prices for Texas Genco for this
period in 2003 compared to the same period in 2002.
Operation and maintenance expense decreased $3 million for the nine months
ended September 30, 2003 as compared to the same period in 2002. The decrease
was primarily due to a reduction in bad debt expense related to the
22
2002 transition period revenues ($14 million), decreased transmission cost of
service ($5 million) and the termination of a factoring program ($3 million).
These decreases were partially offset by increased employee benefit expenses
primarily due to increased pension costs ($16 million) and increased insurance
expenses ($3 million).
Depreciation and amortization expense decreased $1 million for the nine
months ended September 30, 2003 as compared to the same period in 2002 primarily
due to decreased amortization of securitized assets ($9 million), partially
offset by increases in plant in service ($7 million). The amortization of
securitized assets is offset by revenue from non-bypassable transition charges
payable by retail electric customers
Taxes other than income taxes decreased $10 million for the nine months
ended September 30, 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 ($9 million) and decreased state franchise taxes ($6 million),
partially offset by increased city franchise fees ($3 million) and increased
property taxes ($3 million).
Interest expense increased $88 million for the nine months ended September
30, 2003 as compared to the same period in 2002 due to higher borrowing costs
and increased debt levels and financing costs.
Other income, net increased $11 million for the nine months ended
September 30, 2003, compared to the same period in 2002. The increase was
primarily due to higher interest income partially offset by decreased interest
income on under-recovery of fuel.
Our effective tax rate for the nine months ended September 30, 2002 and
2003 was 34.2% and 35.1%, 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 aggregate
principal amount of 10-year bonds with an interest rate of 5.7% and $312.3
million aggregate principal amount of 30-year bonds with an interest rate of
6.95%. Proceeds were used to redeem approximately $312.3 million aggregate
principal amount of our first mortgage bonds and to repay $429 million of
intercompany notes payable to CenterPoint Energy. Proceeds from the note
repayment were ultimately used by CenterPoint Energy to repay $150 million
aggregate principal amount of medium-term notes maturing on April 21, 2003 and
to repay borrowings under CenterPoint Energy's credit facility.
On May 23, 2003, we issued $200 million aggregate principal amount of
20-year general mortgage bonds with an interest rate of 5.6%. Proceeds were used
to redeem, on July 1, 2003, $200 million aggregate principal amount of our 7.5%
first mortgage bonds due 2023 at 103.51% of their principal amount.
On September 2, 2003, we and the lender parties thereto amended our $1.3
billion term loan to, among other things, allow us to issue an additional $500
million of debt secured by our general mortgage bonds without requiring that the
net proceeds be applied to prepay the loans outstanding under that term loan.
On September 9, 2003, we issued $300 million aggregate principal amount of
general mortgage bonds with an interest rate of 5.75% and a maturity date of
January 15, 2014. Proceeds were used to repay approximately $258 million of our
intercompany notes payable to CenterPoint Energy and to repay $40 million of our
money pool borrowings. Proceeds in the amount of $292 million from the note and
money pool repayments were ultimately used by CenterPoint Energy to repay a
portion of the term loan under its credit facility.
23
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 September 30, 2003. Amounts are expressed in
thousands.
CENTERPOINT HOUSTON
------------------- TRANSITION
YEAR THIRD-PARTY AFFILIATE SUB-TOTAL BONDS TOTAL
- ---- ----------- --------- --------- ----- -----
2003......... $ -- $ 16,600 $ 16,600 $ -- $ 16,600
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
2014......... 300,000 -- 300,000 -- 300,000
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
2033......... 312,275 -- 312,275 -- 312,275
---------- ---------- ---------- ---------- ----------
Total........ $2,674,717 $ 396,500 $3,071,217 $ 717,069 $3,788,286
========== ========== ========== ========== ==========
First mortgage bonds and general mortgage bonds in aggregate principal
amounts of $102 million and $1.3 billion, 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 $397 million aggregate principal amount
of affiliate notes, which represent borrowings from our parent.
In October 2003, CenterPoint Energy refinanced its bank facility with a
$2.35 billion credit facility. The new credit facility contains fewer
restrictions on our use of proceeds from financing activities. The new facility
provides that until such time as that facility has been reduced to $750 million,
100% of the net cash proceeds from any securitizations relating to the recovery
of stranded costs, after making any payments required under our $1.3 billion
term loan, and the net cash proceeds of any sales of the common stock of Texas
Genco owned by CenterPoint Energy or of material portions of Texas Genco's
assets shall be applied to repay loans under the CenterPoint Energy credit
facility and reduce that facility. CenterPoint Energy's $2.35 billion credit
facility contains no other restrictions with respect to our use of proceeds from
financing activities.
We have outstanding approximately $499 million aggregate principal amount
of first mortgage bonds and approximately $3.1 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 incremental general mortgage
bonds and first mortgage bonds that could be issued is approximately $400
million based on estimates of the value of our property encumbered by the
general mortgage, the cost of such property, the amount of retired bonds that
could be used as the basis for issuing new bonds and the 70% bonding ratio
contained in the general mortgage. However, contractual limitations on us and
CenterPoint Energy expiring in November 2005 limit the incremental aggregate
amount of first mortgage bonds and general mortgage bonds that may be issued to
$200 million. Generally, first mortgage bonds and general mortgage bonds can be
issued to refinance outstanding first mortgage bonds or general mortgage bonds
in the same principal amount.
24
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 September 30, 2003, outstanding first mortgage bonds and general
mortgage bonds aggregated approximately $3.6 billion as shown in the following
table. Amounts are expressed in thousands.
ISSUED AS ISSUED AS
ISSUED COLLATERAL COLLATERAL FOR
DIRECTLY TO FOR THE CENTERPOINT
THIRD PARTIES COMPANY'S DEBT ENERGY'S DEBT TOTAL
------------- -------------- ------------- -----
First Mortgage Bonds........ $ 102,442 $ -- $396,500 $ 498,942
General Mortgage Bonds...... 1,262,275 1,310,000 527,200 3,099,475
---------- ---------- -------- ----------
Total.............. $1,364,717 $1,310,000 $923,700 $3,598,417
========== ========== ======== ==========
The Texas electric restructuring law allows the former integrated utility
to recover its stranded costs in order to recover its generation investment in a
"true-up" proceeding to be held in 2004 (2004 True-Up Proceeding). We will be
required to establish and support the amounts of these costs in order to recover
them. Third parties will have the opportunity and are expected to challenge our
calculation of these costs. Following the unbundling of the integrated utility
into its components, we remain a regulated transmission and distribution utility
through which stranded investment is recovered. Since we do not own the
once-regulated generating assets, we are obligated to distribute recovery of
stranded investment to CenterPoint Energy, the ultimate owner of these
generation assets.
In the first quarter of 2003 CenterPoint Energy recorded a $396 million
impairment related to the partial distribution of its investment in Texas Genco.
Since this amount is expected to be recovered in the 2004 True-Up Proceeding, we
have recorded a regulatory asset, reflecting our right to recover this amount,
and an associated payable to CenterPoint Energy. Any additional impairment or
loss that CenterPoint Energy incurs on its Texas Genco investment that we expect
to recover as stranded investment will be recorded in the same manner.
The Bond Company has $717 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. 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 September 30, 2003, we had no bank facilities
available to meet our short-term liquidity needs.
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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. Under the June
2003 Financing Order, we can borrow up to a limit of $600 million from the money
pool. 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 of the 1935 Act and the June 2003 Financing
Order. At September 30, 2003, we had borrowings of $111 million from the money
pool. The money pool may not provide sufficient funds to meet our cash needs.
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
(in amounts 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 were 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. In accordance with the
October 3, 2001 order, we recorded a regulatory liability to reflect the
prospective refund of the accelerated depreciation and in January 2002 we began
refunding excess mitigation credits, which are to be refunded over a seven-year
period. The annual refund of excess mitigation credits is approximately $237
million. Under the Texas electric restructuring law, a final determination of
these stranded costs will occur in the 2004 True-Up Proceeding. We are currently
seeking authority from the Texas Utility Commission to terminate these refunds
based on preliminary estimates of what that final determination will be. This
case is still pending before the Texas Utility Commission.
Cash Requirements in 2003 and 2004. 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 three months of 2003 and during 2004 include the following:
- approximately $375 million of capital expenditures, of which $75
million relates to the fourth quarter of 2003;
- an estimated $291 million in refunds of excess mitigation credits
described above, of which approximately $53 million relates to the
fourth quarter of 2003;
- dividend payments to CenterPoint Energy; and
- $16.6 million of maturing long-term debt to affiliate.
We expect that our anticipated cash flows from operations, money pool
borrowings and, to the extent permitted by our external debt agreements and
CenterPoint Energy's bank facility, proceeds from possible debt offerings, will
be sufficient to meet our cash needs for the remainder of 2003 and 2004.
Currently, our term loan limits the application of proceeds from capital markets
transactions over $200 million to the refinancing of debt existing in November
2002. CenterPoint Energy's bank facility provides that until such time as that
facility has been reduced to $750 million, 100% of the net cash proceeds from
any securitizations relating to the recovery of stranded costs, after making any
payments required under our $1.3 billion term loan, and the net cash proceeds of
any sales of the common stock of Texas Genco owned by CenterPoint Energy or of
material portions of Texas Genco's assets shall be applied to repay loans under
the CenterPoint Energy credit facility and reduce that facility. Limits on our
ability to issue secured debt, as described in this report, may adversely affect
our ability to issue debt securities. In addition, our future indebtedness may
include terms that are more restrictive or burdensome than those of our current
indebtedness. Such terms may negatively impact our ability to operate our
business or may restrict the payment of dividends to our parent.
The amount of any debt security or any security having equity
characteristics, whether registered or unregistered, or whether debt is secured
or unsecured, is expected to be affected by:
- general economic and capital market conditions;
26
- credit availability from financial institutions and other lenders;
- investor confidence in us and the market in which we operate;
- maintenance of acceptable credit ratings;
- market expectations regarding our future earnings and probable cash
flows;
- market perceptions of our ability to access capital markets on
reasonable terms;
- our exposure to Reliant Resources in connection with its
indemnification obligations arising in connection with its
separation from us;
- provisions of relevant tax and securities laws; and
- our ability to obtain approval of specific financing transactions
under the 1935 Act.
Sales of securities are expected to be used to refinance existing debt. We
may access the bank and capital markets to refinance debt that is not scheduled
to mature in the next twelve months.
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 be made out of funds
from non-bypassable charges assessed to retail electric providers required to
take delivery service from us. The holders of the new securitization bonds would
have recourse to the assets and revenues of the issuer of the new securitization
bonds, and our other creditors would not have recourse to any assets or revenues
of that issuer. The proceeds from the issuance of securitization bonds remaining
after repayment of our $1.3 billion collateralized term loan due in 2005, if
repayment is required by the lenders, are required to be utilized first to
reduce CenterPoint Energy's credit facility. Funds for such payment by
CenterPoint Energy may be provided by our payment of a dividend or by settlement
of intercompany payables.
Impact on Liquidity of a Downgrade in Credit Ratings. As of October 7,
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 Negative BBB Stable BBB+ Stable
General Mortgage Bonds....... Baa2 Negative BBB Stable BBB Stable
Debt secured by General
Mortgage Bonds............. Baa2 Negative BBB Stable BBB Stable
- ----------
(1) A "negative" outlook from Moody's reflects concerns over the next 12 to 18
months which will either lead to a review for a potential downgrade or a
return to stable outlook.
(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 that the rating is not likely to
change 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
27
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 on debt for borrowed money and certain other
specified types of obligations by us exceeding $50 million will cause a default
under our $1.3 billion loan maturing in 2005. A payment default on, or a
non-payment default that permits acceleration of, any of our indebtedness
exceeding $50 million will caused a default under CenterPoint Energy's $2.35
billion credit facility entered into on October 7, 2003. A payment default by us
in respect of, or an acceleration of, borrowed money and certain other specified
types of obligations, in the aggregate principal amount of $50 million will
cause a default on CenterPoint Energy's 3.75% senior convertible notes due 2023,
its 5.875% senior notes due 2008, its 6.85% senior notes due 2015 and its 7.25%
senior notes due 2010.
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, including those under the 1935 Act; 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.
Certain Contractual and Regulatory Limits on Ability to Issue Securities.
Factors affecting our ability to issue securities or take other actions to
adjust our capitalization include:
- covenants in our borrowing agreements; and
- limitations imposed on us under the 1935 Act.
Our collateralized term loan limits our debt, excluding transition bonds,
as a percentage of our total capitalization to 68%.
Our parent is a registered public utility holding company under the 1935
Act. The 1935 Act and related rules and regulations impose a number of
restrictions on our activities. The 1935 Act, among other things, limits our
ability to issue debt and equity securities without prior authorization,
restricts the source of dividend payments to current and retained earnings
without prior authorization, regulates sales and acquisitions of certain assets
and businesses and governs affiliate transactions.
We received an order from the SEC relating to our financing activities on
June 30, 2003 (June 2003 Financing Order), which is effective until June 30,
2005. On August 1, 2003, the SEC issued a supplemental order (August 2003
Financing Order, together with the June 2003 Financing Order, the Orders) which,
after giving effect to our issuance of $300 million principal amount of general
mortgage bonds in September 2003, allows us to issue an additional $200 million
of incremental external debt. We have requested the authority to issue an
incremental $300 million of external debt not previously authorized by the
Orders. This request is pending at the SEC.
The Orders establish limits on the amount of external debt and equity
securities that can be issued by us and our subsidiaries without additional
authorization. We are in compliance with the authorized limits. After reflecting
our September 2003 issuance of $300 million aggregate principal amount of
general mortgage bonds, the Orders permit the following additional financing
activities:
- refinancings of existing external debt;
- the issuance of an aggregate $200 million of external debt; and
- the issuance of an aggregate $250 million of preferred stock and
preferred securities.
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The June 2003 Financing Order requires that if we issue any securities
that are rated by a nationally recognized statistical rating organization
(NRSRO), the security to be issued must obtain an investment grade rating from
at least one NRSRO and, as a condition to such issuance, all outstanding rated
securities of the issuer and of CenterPoint Energy must be rated investment
grade by at least one NRSRO. The June 2003 Financing Order also contains certain
requirements for interest rates, maturities, issuance expenses and use of
proceeds. Under the June 2003 Financing Order, our common equity as a percentage
of total capitalization must be at least 30%.
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, including the credit
facility of our parent, to use cash received from certain asset
sales and certain securities offerings to pay down debt.
Pension Plan. As discussed in Note 8(a) of the notes to the consolidated
financial statements included in Exhibit 99.2 to the May 15, 2003 Form 8-K
(CenterPoint Houston 8-K Notes), 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 and nine
months ended September 30, 2003 was $7 million and $20 million, respectively.
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 continue to 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
29
assets reflected in our Consolidated Balance Sheets aggregated $4.0 billion and
$4.7 billion as of December 31, 2002 and September 30, 2003, respectively.
Additionally, regulatory liabilities reflected in our Consolidated Balance
Sheets aggregated $1.1 billion and $823 million as of December 31, 2002 and
September 30, 2003, respectively. 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 $1.2 billion of
ECOM true-up. The stranded costs include $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 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.
The Texas electric restructuring law allows recovery of the difference
between the prices for power sold in state mandated auctions and earlier
estimates of market power prices by the Texas Utility Commission. This
calculation (the ECOM Calculation) compares (1) an imputed margin that reflects
the difference between actual market power prices received in the state mandated
auctions, actual fuel expense and generation, and (2) the margin resulting from
the Texas Utility Commission's estimates of power prices, fuel expense and
generation in the ECOM model developed by the Texas Utility Commission (the ECOM
Margin). The difference between those two amounts is the ECOM True-Up amount,
which is the non-cash revenue related to the cost recovery.
The ECOM model from which the ECOM Margin is derived provides only annual
estimates of power prices, fuel expense and generation. Accordingly, we must
form our own quarterly allocation estimates during 2002-2003 for the purpose of
determining ECOM True-Up revenue.
Beginning January 1, 2002, we allocated the ECOM Margin in our ECOM
Calculation based on annual estimated forecasts of power prices, fuel expense
and generation. In the second quarter of 2003, we began using a cumulative
methodology for allocating ECOM Margin. This methodology uses revenue amounts
based on the actual state mandated auction price results and actual generation
for historical periods, as well as forecasted amounts for the balance of 2003,
rather than forecasted amounts for the two-year period allocated on an annual
basis. Changes in estimates that affect the allocation of ECOM Margin will have
an affect on the total amount of ECOM True-Up revenue recorded in a specific
period, but will not affect the total amount of ECOM True-Up revenue recorded
during the two-year period ending December 31, 2003.
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 39% of our total assets as of September 30, 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 September 30, 2003 were
$70 million and $83 million, respectively.
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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
recognize removal costs as a component of depreciation expense in accordance
with regulatory treatment. As of September 30, 2003, these removal costs of $229
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 applied this guidance
prospectively as it relates to lease accounting and 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 is required to be reclassified. No such reclassification was required in
the three months and nine months ended September 30, 2002. We have reclassified
the $25 million loss on debt extinguishment related to the fourth quarter of
2002 from an extraordinary item to interest expense as presented in our May 15,
2003 Form 8-K.
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. We adopted the provisions of SFAS No. 146 on January 1, 2003. The adoption
of SFAS No. 146 had no effect on our consolidated financial statements.
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.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities, an Interpretation of Accounting Research Bulletin No. 51"
(FIN 46). FIN 46 requires certain variable interest entities to be consolidated
by the primary beneficiary of the entity if the equity investors in the entity
do not have the characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its activities without
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additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. On October 9, 2003, the FASB deferred the application of FIN
46 until the end of the first interim or annual period ending after December 15,
2003 for variable interest entities created before February 1, 2003. The FASB is
currently considering several amendments to FIN 46, and we will analyze the
impact, if any, these changes may have on our consolidated financial statements
upon ultimate implementation of FIN 46. We do not expect the adoption of FIN 46
to have any effect on our consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities" (SFAS No. 149). SFAS No. 149
has added additional criteria which were effective on July 1, 2003 for new,
acquired, or newly modified forward contracts. The adoption of SFAS No. 149 had
no effect on our consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity" (SFAS
No. 150). SFAS No. 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. SFAS No. 150 is
effective for financial instruments entered into or modified after May 31, 2003
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. It is to be implemented by reporting the
cumulative effect of a change in an accounting principle with no restatement of
prior period information permitted. The adoption of SFAS No. 150 had no effect
on our consolidated financial statements.
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 September 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 September 30, 2003 that has
materially affected, or is reasonably likely to materially affect, our internal
controls over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
For a description of certain legal and regulatory proceedings affecting
us, please review Note 8 to our Interim Financial Statements, "Legal
Proceedings" in Item 3 of the CenterPoint Houston Form 10-K and Note 10(b) to
the CenterPoint Houston 8-K Notes, each of which is incorporated herein by
reference.
ITEM 5. OTHER INFORMATION.
RISK FACTORS
PRINCIPAL RISK FACTORS ASSOCIATED WITH OUR BUSINESS
WE MAY NOT BE SUCCESSFUL IN RECOVERING THE FULL VALUE OF OUR STRANDED COSTS,
REGULATORY ASSETS RELATED TO GENERATION AND OTHER TRUE-UP COMPONENTS.
Pursuant to the Texas electric restructuring law and rules promulgated
thereunder by the Texas Utility Commission, we are entitled to recover our
stranded costs (the excess of regulatory net book value of generation assets, as
defined by the Texas electric restructuring law, over the market value of those
assets) and our regulatory assets related to generation. We expect to make a
filing on March 31, 2004 in a true-up proceeding (2004 True-Up Proceeding)
provided for by the Texas electric restructuring law. The purpose of this
proceeding will be to quantify and reconcile the following costs or true-up
components:
- the amount of stranded costs;
- regulatory assets that were not previously recovered through the
issuance of transition bonds by a subsidiary;
- differences in the prices achieved in the state-mandated auctions of
Texas Genco's generation capacity and Texas Utility Commission
estimates;
- fuel over- or under-recovery; and
- the "price to beat" clawback.
We will be required to establish and support the amounts of these costs in order
to recover them. Third parties will have the opportunity and are expected to
challenge our calculation of these costs. We expect these costs to be
substantial. To the extent recovery of a portion of these costs is denied or if
we agree to forego recovery of a portion of the request under a settlement
agreement, we would be unable to recover these costs in the future.
Additionally, in October 2003, a group of intervenors filed a petition asking
the Texas Utility Commission to open a rulemaking proceeding and reconsider
certain aspects of its ECOM rules. On November 5, 2003, the Texas Utility
Commission voted to deny the petition. Despite the denial of the petition, we
expect that issues could be raised in the 2004 True-Up Proceeding regarding our
compliance with the Texas Utility Commission's rules regarding ECOM True-Up,
including whether Texas Genco has auctioned all capacity it is required to
auction in view of the fact that some capacity has failed to sell in the state
mandated auctions. We believe Texas Genco has complied with the requirements
under the applicable rules, including re-offering the unsold capacity in
subsequent auctions. If events were to occur during the 2004 True-Up Proceeding
that made the recovery of the ECOM True-Up regulatory asset no longer probable,
we would write off the unrecoverable balance of such asset as a charge against
earnings. Our $1.3 billion collateralized term loan that matures in November
2005 is expected to be repaid or refinanced with the proceeds from the issuance
of securitization bonds to recover our stranded costs and the balance of our
regulatory assets. If we do not receive the proceeds on or before the maturity
date, our ability to repay or refinance this term loan will be adversely
affected.
The Texas Utility Commission's ruling that the 2004 True-Up Proceeding
filing will be made on March 31, 2004 means that the calculation of the market
value of a share of the Texas Genco common stock for purposes of the Texas
Utility Commission's stranded cost determination might be more than the
purchase price calculated
33
under the option held by Reliant Resources to purchase CenterPoint Energy's 81%
ownership interest in Texas Genco. The purchase price under the option will be
based on market prices during the 120 trading days ending on January 9, 2004,
but under the filing schedule prescribed by the Texas Utility Commission, the
value of that ownership interest for the stranded cost determination will be
based on market prices during the 120 trading days ending on March 30, 2004. If
Reliant Resources exercises its option at a lower price than the market value
used by the Texas Utility Commission, we would be unable to recover the
difference.
OUR RECEIVABLES ARE CONCENTRATED IN A SMALL NUMBER OF RETAIL ELECTRIC PROVIDERS.
Our receivables from the distribution of electricity are collected from
retail electric providers that supply the electricity we distribute to their
customers. Currently, we do business with approximately 31 retail electric
providers. Adverse economic conditions, structural problems in the new ERCOT
market or financial difficulties of one or more retail electric providers could
impair the ability of these retail providers to pay for our services or could
cause them to delay such payments. We depend on these retail electric providers
to remit payments timely to us. Any delay or default in payment could adversely
affect our cash flows, financial condition and results of operations.
Approximately 76% of our $114 million in receivables from retail electric
providers at September 30, 2003 was owed by subsidiaries of Reliant Resources.
Our financial condition may be adversely affected if Reliant Resources is unable
to meet these obligations. Reliant Resources, through its subsidiaries, is our
largest customer. Pursuant to the Texas electric restructuring law, Reliant
Resources may be obligated to make a large "price to beat" clawback payment to
us in 2004. We expect the clawback, if any, to be applied against any stranded
cost recovery to which we are entitled or, if no stranded costs are recoverable,
to be refunded to retail electric providers.
RATE REGULATION OF OUR BUSINESS MAY DELAY OR DENY OUR FULL RECOVERY OF OUR
COSTS.
Our rates are regulated by certain municipalities and the Texas Utility
Commission based on an analysis of our invested capital and expenses incurred in
a test year. Thus, the rates that we are allowed to charge may not match our
expenses at any given time. While rate regulation in Texas is premised on
providing a reasonable opportunity to recover reasonable and necessary operating
expenses and to earn a reasonable return on our invested capital, there can be
no assurance that the Texas Utility Commission will judge all of our costs to be
reasonable or necessary or that the regulatory process in which rates are
determined will always result in rates that will produce full recovery of our
costs.
DISRUPTIONS AT POWER GENERATION FACILITIES OWNED BY THIRD PARTIES COULD
INTERRUPT OUR SALES OF TRANSMISSION AND DISTRIBUTION SERVICES.
We depend on power generation facilities owned by third parties to provide
retail electric providers with electric power which we transmit and distribute
to our customers. We do not own or operate any power generation facilities. If
power generation is disrupted or if power generation capacity is inadequate, our
services may be interrupted, and our results of operations, financial condition
and cash flows may be adversely affected.
OUR REVENUES AND RESULTS OF OPERATIONS ARE SEASONAL.
A portion of our revenues is derived from rates that we collect from each
retail electric provider based on the amount of electricity we distribute on
behalf of each retail electric provider. Thus, our revenues and results of
operations are subject to seasonality, weather conditions and other changes in
electricity usage, with revenues being higher during the warmer months.
RISK FACTORS ASSOCIATED WITH OUR FINANCIAL CONDITION
IF WE ARE UNABLE TO ARRANGE FUTURE FINANCINGS ON ACCEPTABLE TERMS, OUR ABILITY
TO FUND FUTURE CAPITAL EXPENDITURES AND REFINANCE EXISTING INDEBTEDNESS COULD BE
LIMITED.
As of September 30, 2003, we had $3.8 billion of outstanding indebtedness.
Approximately $1.3 billion principal amount of this debt must be paid through
2005, excluding principal repayments of approximately $88 million on transition
bonds. In addition, the capital constraints and other factors currently
impacting our business may require our future indebtedness to include terms that
are more restrictive or burdensome than those of our current indebtedness. These
terms may negatively impact our ability to operate our business or adversely
affect our
34
financial condition and results of operations. The success of our future
financing efforts may depend, at least in part, on:
- general economic and capital market conditions;
- credit availability from financial institutions and other lenders;
- investor confidence in us and the market in which we operate;
- maintenance of acceptable credit ratings by us and by CenterPoint
Energy;
- market expectations regarding our future earnings and probable cash
flows;
- market perceptions of our ability to access capital markets on
reasonable terms;
- our exposure to Reliant Resources as our customer and in connection
with Reliant Resources' indemnification obligations arising in
connection with its separation from CenterPoint Energy;
- provisions of relevant tax and securities laws; and
- our ability to obtain approval of specific financing transactions
under the 1935 Act.
As of September 30, 2003, we had $3.1 billion principal amount of general
mortgage bonds outstanding. We may issue additional general mortgage bonds on
the basis of retired bonds, 70% of property additions or cash deposited with the
trustee. Although approximately $400 million of additional general mortgage
bonds could be issued on the basis of property additions and retired bonds as of
September 30, 2003, we have agreed under the $1.3 billion collateralized term
loan maturing in 2005 to not issue, subject to certain exceptions, more than
$200 million of incremental secured or unsecured debt. In addition, we are
contractually prohibited, subject to certain exceptions, from issuing additional
first mortgage bonds.
Our current credit ratings are discussed in "Management's Narrative
Analysis of Results of Operations of CenterPoint Energy Houston Electric, LLC
and Subsidiaries -- Liquidity -- Impact on Liquidity of a Downgrade in Credit
Ratings" in Item 2 of Part I of this report. We cannot assure you that these
credit 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. 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 access capital on
acceptable terms.
AN INCREASE IN SHORT-TERM INTEREST RATES COULD ADVERSELY AFFECT OUR CASH FLOWS.
As of September 30, 2003, we had $1.4 billion of outstanding floating-rate
debt owed to third parties. Because of capital constraints impacting our
business at the time $1.3 billion of this floating-rate debt was entered into,
the interest rate spreads on such debt are substantially above our historical
borrowing rates. In addition, any floating-rate debt issued by us in the future
could be at interest rates substantially above our historical borrowing rates.
While we may seek to use interest rate swaps in order to hedge portions of our
floating-rate debt, we may not be successful in obtaining hedges on acceptable
terms. Any increase in short-term interest rates would result in higher interest
costs and could adversely affect our results of operations, financial condition
and cash flows.
THE FINANCIAL CONDITION AND LIQUIDITY OF OUR PARENT COMPANY COULD AFFECT OUR
ACCESS TO CAPITAL, OUR CREDIT STANDING AND OUR FINANCIAL CONDITION.
Our ratings and credit may be impacted by CenterPoint Energy's credit
standing. CenterPoint Energy and its subsidiaries other than us have
approximately $2.6 billion principal amount of debt required to be paid through
2006. Included in the approximately $2.6 billion is $140 million principal
amount of notes that were retired in November 2003. On October 7, 2003, Moody's
Investors Services, Inc. placed CenterPoint Energy's senior unsecured credit
rating on review for downgrade, reflecting concerns that may lead to a
downgrade. We cannot assure you that CenterPoint Energy and its other
subsidiaries will be able to pay or refinance these amounts. If
35
CenterPoint Energy were to experience a deterioration in its credit standing or
liquidity difficulties, our access to credit and our ratings could be adversely
affected and the repayment of a note receivable from CenterPoint Energy in the
amount of $815 million as of September 30, 2003 could be adversely affected.
WE ARE A WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY. CENTERPOINT ENERGY CAN
EXERCISE SUBSTANTIAL CONTROL OVER OUR BUSINESS AND OPERATIONS AND COULD DO SO IN
A MANNER THAT IS ADVERSE TO OUR INTERESTS.
We are managed by officers and employees of CenterPoint Energy. Our
management will make determinations with respect to the following:
- decisions on our financings and our capital raising activities;
- mergers or other business combinations; and
- our acquisition or disposition of assets.
There are no contractual restrictions on our ability to pay dividends to
CenterPoint Energy. Our management could decide to increase our dividends to
CenterPoint Energy to support its cash needs. This could adversely affect our
liquidity. Under the 1935 Act, 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.
OTHER RISKS
WE COULD INCUR LIABILITIES ASSOCIATED WITH BUSINESSES AND ASSETS WE HAVE
TRANSFERRED TO OTHERS.
Under some circumstances, we could incur liabilities associated with
assets and businesses we no longer own. These assets and businesses were
previously owned by Reliant Energy directly or through subsidiaries and include:
- those transferred to Reliant Resources or its subsidiaries in
connection with the organization and capitalization of Reliant
Resources prior to its initial public offering in 2001;
- those transferred to Texas Genco in connection with its organization
and capitalization; and
- those transferred to CenterPoint Energy in connection with the
Restructuring.
In connection with the organization and capitalization of Reliant
Resources, Reliant Resources and its subsidiaries assumed liabilities associated
with various assets and businesses Reliant Energy transferred to them. Reliant
Resources also agreed to indemnify, and cause the applicable transferee
subsidiaries to indemnify, CenterPoint Energy and its subsidiaries, including
us, with respect to liabilities associated with the transferred assets and
businesses. The indemnity provisions were intended to place sole financial
responsibility on Reliant Resources and its subsidiaries for all liabilities
associated with the current and historical businesses and operations of Reliant
Resources, regardless of the time those liabilities arose. If Reliant Resources
is unable to satisfy a liability that has been so assumed in circumstances in
which Reliant Energy has not been released from the liability in connection with
the transfer, we could be responsible for satisfying the liability.
Reliant Resources reported in its Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2003 that as of September 30, 2003 it had
$7.5 billion of total debt and its unsecured debt ratings are currently below
investment grade. If Reliant Resources is unable to meet its obligations, it
would need to consider, among various options, restructuring under the
bankruptcy laws, in which event Reliant Resources might not honor its
indemnification obligations and claims by Reliant Resources' creditors might be
made against us as its former owner.
Reliant Energy and Reliant Resources are named as defendants in a number
of lawsuits arising out of power sales in California and other West Coast
markets and financial reporting matters. Although these matters relate to the
business and operations of Reliant Resources, claims against Reliant Energy have
been made on grounds that include the effect of Reliant Resources' financial
results on Reliant Energy's historical financial statements and liability of
Reliant Energy as a controlling shareholder of Reliant Resources. We could incur
liability if claims in one or more of these lawsuits were successfully asserted
against us and indemnification from Reliant Resources
36
were determined to be unavailable or if Reliant Resources were unable to satisfy
indemnification obligations owed to us with respect to those claims.
In connection with the organization and capitalization of Texas Genco,
Texas Genco assumed liabilities associated with the electric generation assets
Reliant Energy transferred to it. Texas Genco also agreed to indemnify, and
cause the applicable transferee subsidiaries to indemnify, CenterPoint Energy
and its subsidiaries, including us, with respect to liabilities associated with
the transferred assets and businesses. In many cases the liabilities assumed
were held by us and we were not released by third parties from these
liabilities. The indemnity provisions were intended generally to place sole
financial responsibility on Texas Genco and its subsidiaries for all liabilities
associated with the current and historical businesses and operations of Texas
Genco, regardless of the time those liabilities arose. If Texas Genco were
unable to satisfy a liability that had been so assumed or indemnified against,
and provided Reliant Energy had not been released from the liability in
connection with the transfer, we could be responsible for satisfying the
liability.
IF THE ERCOT MARKET DOES NOT FUNCTION IN THE MANNER CONTEMPLATED BY THE TEXAS
ELECTRIC RESTRUCTURING LAW, OUR BUSINESS, PROSPECTS, RESULTS OF OPERATIONS,
FINANCIAL CONDITION AND CASH FLOWS COULD BE ADVERSELY IMPACTED.
The competitive electric market in Texas became fully operational in
January 2002, and none of the Texas Utility Commission, ERCOT, other market
participants or us has any significant operating history under the market
framework created by the Texas electric restructuring law. The initiatives under
the Texas electric restructuring law have had a significant impact on the nature
of the electric power industry in Texas and the manner in which participants in
the ERCOT market conduct their business. These changes are ongoing, and we
cannot predict the future development of the ERCOT market or the ultimate effect
that this changing regulatory environment will have on our business.
Some restructured markets in other states have experienced supply problems
and extreme price volatility. If the ERCOT market does not function as intended
by the Texas electric restructuring law, our results of operations, financial
condition and cash flows could be adversely affected. In addition, any market
failures could lead to revisions or reinterpretations of the Texas electric
restructuring law, the adoption of new laws and regulations applicable to us or
our facilities and other future changes in laws and regulations that may have a
detrimental effect on our business.
WE, AS A SUBSIDIARY OF CENTERPOINT ENERGY, A HOLDING COMPANY, ARE SUBJECT TO
REGULATION UNDER THE 1935 ACT. THE 1935 ACT AND RELATED RULES AND REGULATIONS
IMPOSE A NUMBER OF RESTRICTIONS ON OUR ACTIVITIES.
CenterPoint Energy and its subsidiaries, including us, but excluding Texas
Genco, are subject to regulation by the SEC under the 1935 Act. The 1935 Act,
among other things, limits the ability of a holding company and its subsidiaries
to issue debt and equity securities without prior authorization, restricts the
source of dividend payments to current and retained earnings without prior
authorization, regulates sales and acquisitions of certain assets and businesses
and governs affiliate transactions.
The Orders relating to financing activities are effective until June 30,
2005. CenterPoint Energy and we must seek a new order before this expiration
date. Although authorized levels of financing, together with current levels of
liquidity, are believed to be adequate during the period the order is effective,
unforeseen events could result in capital needs in excess of authorized amounts,
necessitating further authorization from the SEC. Approval of filings under the
1935 Act can take extended periods.
The United States Congress is currently considering legislation that has a
provision that would repeal the 1935 Act. We cannot predict at this time whether
this legislation or any variation thereof will be adopted or, if adopted, the
effect of any such law on our business.
WE DO NOT MAINTAIN INSURANCE COVERAGE ON OUR TRANSMISSION AND DISTRIBUTION
SYSTEM. INSUFFICIENT INSURANCE COVERAGE AND INCREASED INSURANCE COSTS COULD
ADVERSELY IMPACT OUR RESULTS OF OPERATIONS, FINANCIAL CONDITION AND CASH FLOWS.
In common with other companies in our line of business that serve coastal
regions, we do not have insurance covering our transmission and distribution
system because we believe it to be cost prohibitive. If we were to sustain
37
any loss of or damage to our transmission and distribution properties, we would
be entitled to seek to recover such loss or damage through a change in our
regulated rates, although there is no assurance that we would ultimately obtain
any such rate recovery or that any such rate recovery would be timely granted.
Therefore, we cannot assure you that we will be able to restore any loss of or
damage to any of our transmission and distribution properties without negative
impact on our results of operations, financial condition and cash flows.
TECHNOLOGICAL CHANGE MAY MAKE ALTERNATIVE ENERGY SOURCES MORE ATTRACTIVE AND MAY
ADVERSELY AFFECT OUR REVENUES AND RESULTS OF OPERATIONS.
The continuous process of technological development may result in the
introduction to retail customers of economically attractive alternatives to
purchasing electricity through our distribution facilities. Manufacturers of
self-generation facilities continue to develop smaller-scale,
more-fuel-efficient generating units that can be cost-effective options for some
retail customers with smaller electric energy requirements. Any reduction in the
amount of electric energy we distribute as a result of these technologies may
have an adverse impact on our results of operations, financial condition and
cash flows in the future.
OUR REVENUES AND RESULTS OF OPERATIONS ARE SUBJECT TO RISKS THAT ARE BEYOND OUR
CONTROL, INCLUDING BUT NOT LIMITED TO FUTURE TERRORIST ATTACKS OR RELATED ACTS
OF WAR.
The cost of repairing damage to our facilities due to storms, natural
disasters, wars, terrorist acts and other catastrophic events in excess of
reserves established for such repairs, may adversely impact our results of
operations, financial condition and cash flows. The occurrence or risk of
occurrence of future terrorist activity may impact our results of operations,
financial condition and cash flows in unpredictable ways. These actions could
also result in adverse changes in the insurance markets and disruptions of power
and fuel markets. In addition, our transmission and distribution facilities
could be directly or indirectly harmed by future terrorist activity. The
occurrence or risk of occurrence of future terrorist attacks or related acts of
war could also adversely affect the United States' economy. A lower level of
economic activity could result in a decline in energy consumption, which could
adversely affect our revenues and margins and limit our future growth prospects.
Also, these risks could cause instability in the financial markets and adversely
affect our ability to access capital.
38
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 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 CenterPoint 1-3187 3(a)
Conversion of REI Houston's Form 8-K
dated August 31,
2002 filed with the
SEC on September 3,
2002
3.2 -- Articles of CenterPoint 1-3187 3(b)
Organization of Houston's Form 8-K
CenterPoint dated August 31,
Energy Houston 2002 filed with the
Electric, LLC SEC on September 3,
2002
3.3 -- Limited Form 8-K dated 1-3187 3(c)
Liability August 31, 2002
Company filed with the SEC
Regulations of on September 3, 2002
CenterPoint
Energy Houston
Electric, LLC
4.1.1 -- General Mortgage CenterPoint 1-3187 4(j)(1)
Indenture, dated Houston's Form 10-Q
as of October for the quarter
10, 2002, ended September 30,
between 2002
CenterPoint
Houston and
JPMorgan Chase
Bank, as Trustee
4.1.2 -- First CenterPoint 1-3187 4(j)(2)
Supplemental Houston's Form 10-Q
Indenture to for the quarter
Exhibit 4.1.1, ended September 30,
dated as of 2002
October 10, 2002
4.1.3 -- Second CenterPoint 1-3187 4(j)(3)
Supplemental Houston's Form 10-Q
Indenture to for the quarter
Exhibit 4.1.1, ended September 30,
dated as of 2002
October 10, 2002
4.1.4 -- Third CenterPoint 1-3187 4(j)(4)
Supplemental Houston's Form 10-Q
Indenture to for the quarter
Exhibit 4.1.1, ended September 30,
dated as of 2002
October 10, 2002
4.1.5 -- Fourth CenterPoint 1-3187 4(j)(5)
Supplemental Houston's Form 10-Q
Indenture to for the quarter
Exhibit 4.1.1, ended September 30,
dated as of 2002
October 10, 2002
4.1.6 -- Fifth CenterPoint 1-3187 4(j)(6)
Supplemental Houston's Form 10-Q
Indenture to for the quarter
Exhibit 4.1.1, ended September 30,
dated as of 2002
October 10, 2002
4.1.7 -- Sixth CenterPoint 1-3187 4(j)(7)
Supplemental Houston's Form 10-Q
Indenture to for the quarter
Exhibit 4.1.1, ended September 30,
dated as of 2002
October 10, 2002
39
4.1.8 -- Seventh CenterPoint 1-3187 4(j)(8)
Supplemental Houston's Form 10-Q
Indenture to for the quarter
Exhibit 4.1.1, ended September 30,
dated as of 2002
October 10, 2002
4.1.9 -- Eighth CenterPoint 1-3187 4(j)(9)
Supplemental Houston's Form 10-Q
Indenture to for the quarter
Exhibit 4.1.1, ended September 30,
dated as of 2002
October 10, 2002
4.1.10 -- Ninth CenterPoint Energy's 1-31447 4(e)(10)
Supplemental Form 10-K for the
Indenture to year ended December
Exhibit 4.1.1, 31, 2002
dated as of
November 12, 2002
4.1.11 -- Tenth CenterPoint 1-3187 4.1
Supplemental Houston's Form 8-K
Indenture to dated March 13, 2003
Exhibit 4.1.1,
dated as of
March 18, 2003
4.1.12 -- Officer's CenterPoint 1-3187 4.2
Certificate Houston's Form 8-K
dated March 18, dated March 13, 2003
2003 setting
forth the form,
terms and
provisions of
the Tenth Series
and Eleventh
Series of
general mortgage
bonds
4.1.13 -- Registration CenterPoint Energy's 1-31447 4.2.2
Rights Form 10-Q for the
Agreement, dated quarter ended
as of March 18, September 30, 2003
2003, among
CenterPoint
Houston and the
representatives
of the initial
purchasers named
therein relating
to Tenth Series
and Eleventh
Series of
general mortgage
bonds.
4.1.14 -- Eleventh CenterPoint 1-3187 4.1
Supplemental Houston's Form 8-K
Indenture to dated May 16, 2003
Exhibit 4.1.1,
dated as of May
23, 2003
4.1.15 -- Officer's CenterPoint 1-3187 4.2
Certificate Houston's Form 8-K
dated May 23, dated May 16, 2003
2003 setting
forth the form,
terms and
provisions of
the Twelfth
Series of
general mortgage
bonds
4.1.16 -- Registration CenterPoint Energy's 1-31447 4.2.4
Rights Form 10-Q for the
Agreement, dated quarter ended June
as of May 23, 30, 2003
2003, among
CenterPoint
Houston and the
representatives
of the initial
purchasers named
therein relating
to Twelfth
Series of
general mortgage
bonds
40
4.1.17 -- Twelfth CenterPoint 1-3187 4.2
Supplemental Houston's Form 8-K
Indenture to dated September 9,
Exhibit 4.3.1, 2003
dated as of
September 9, 2003
4.1.18 -- Officer's CenterPoint 1-3187 4.3
Certificate Houston's Form 8-K
dated September dated September 9,
9, 2003 setting 2003
forth the form,
terms and
provisions of
the Thirteenth
Series of
general mortgage
bonds
4.1.19 -- Registration Amendment No. 1 to 33-108766 4.2.6
Rights CenterPoint
Agreement, dated Houston's
as of September registration
9, 2003, among statement on Form
CenterPoint S-4, filed September
Houston and the 30. 2003
representatives
of the initial
purchasers named
therein relating
to the
Thirteenth
Series of
general mortgage
bonds
10.1 -- First Amendment, CenterPoint Energy's 1-31447 10.7
dated as of Form 10-Q for the
September 2, quarter ended
2003 to the September 30, 2003
$1,310,000,000
Credit
Agreement, dated
as of November
12, 2002 among
CenterPoint
Houston and the
lenders named
therein
+12.1 -- Computation of
Ratios of Earnings
to Fixed Charges
+31.1 -- Section 302
Certification of
David M.
McClanahan
+31.2 -- Section 302
Certification of
Gary L. Whitlock
+32.1 -- Section 906
Certification of
David M.
McClanahan
+32.2 -- Section 906
Certification of
Gary L. Whitlock
+99.1 -- Items
incorporated by
reference from
the CenterPoint
Houston Form
10-K: Item 3
"Legal
Proceedings."
41
+99.2 -- Items
incorporated by
reference from
CenterPoint
Houston's
Current Report
on Form 8-K
dated May 15,
2003. Exhibit
99.1,
"Management's
Narrative
Analysis of
Results of
Operations --
Certain Factors
Affecting Future
Earnings," and
the following
Notes from
Exhibit 99.2:
Notes 3(e)
(Regulatory
Assets and
Liabilities), 4
(Regulatory
Matters), 8(a)
(Pension Plans)
and 10
(Commitments and
Contingencies).
(b) Reports on Form 8-K.
On September 3, 2003, we filed a Current Report on Form 8-K dated
September 3, 2003 to report that we had amended our $1.3 billion collateralized
term loan maturing in 2005 to permit our issuance of an additional $500 million
of secured debt and to summarize the risks that would exist if Reliant
Resources, Inc. does not exercise its option to purchase the common stock of
Texas Genco Holdings, Inc. owned by CenterPoint Energy. We also furnished
information under Item 9 of the Form 8-K regarding CenterPoint Energy's
discussions related to the refinancing of its bank facility.
On September 10, 2003, we filed a Current Report on Form 8-K dated
September 9, 2003 to report the pricing and closing of $300 million of general
mortgage bonds in a private placement with institutions pursuant to Rule 144A
under the Securities Act of 1933, as amended. The bonds bear interest at a rate
of 5.75% and will be due January 15, 2014.
42
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: November 12, 2003
43
INDEX TO 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 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 CenterPoint 1-3187 3(a)
Conversion of REI Houston's Form 8-K
dated August 31,
2002 filed with the
SEC on September 3,
2002
3.2 -- Articles of CenterPoint 1-3187 3(b)
Organization of Houston's Form 8-K
CenterPoint dated August 31,
Energy Houston 2002 filed with the
Electric, LLC SEC on September 3,
2002
3.3 -- Limited Form 8-K dated 1-3187 3(c)
Liability August 31, 2002
Company filed with the SEC
Regulations of on September 3, 2002
CenterPoint
Energy Houston
Electric, LLC
4.1.1 -- General Mortgage CenterPoint 1-3187 4(j)(1)
Indenture, dated Houston's Form 10-Q
as of October for the quarter
10, 2002, ended September 30,
between 2002
CenterPoint
Houston and
JPMorgan Chase
Bank, as Trustee
4.1.2 -- First CenterPoint 1-3187 4(j)(2)
Supplemental Houston's Form 10-Q
Indenture to for the quarter
Exhibit 4.1.1, ended September 30,
dated as of 2002
October 10, 2002
4.1.3 -- Second CenterPoint 1-3187 4(j)(3)
Supplemental Houston's Form 10-Q
Indenture to for the quarter
Exhibit 4.1.1, ended September 30,
dated as of 2002
October 10, 2002
4.1.4 -- Third CenterPoint 1-3187 4(j)(4)
Supplemental Houston's Form 10-Q
Indenture to for the quarter
Exhibit 4.1.1, ended September 30,
dated as of 2002
October 10, 2002
4.1.5 -- Fourth CenterPoint 1-3187 4(j)(5)
Supplemental Houston's Form 10-Q
Indenture to for the quarter
Exhibit 4.1.1, ended September 30,
dated as of 2002
October 10, 2002
4.1.6 -- Fifth CenterPoint 1-3187 4(j)(6)
Supplemental Houston's Form 10-Q
Indenture to for the quarter
Exhibit 4.1.1, ended September 30,
dated as of 2002
October 10, 2002
4.1.7 -- Sixth CenterPoint 1-3187 4(j)(7)
Supplemental Houston's Form 10-Q
Indenture to for the quarter
Exhibit 4.1.1, ended September 30,
dated as of 2002
October 10, 2002
4.1.8 -- Seventh CenterPoint 1-3187 4(j)(8)
Supplemental Houston's Form 10-Q
Indenture to for the quarter
Exhibit 4.1.1, ended September 30,
dated as of 2002
October 10, 2002
4.1.9 -- Eighth CenterPoint 1-3187 4(j)(9)
Supplemental Houston's Form 10-Q
Indenture to for the quarter
Exhibit 4.1.1, ended September 30,
dated as of 2002
October 10, 2002
4.1.10 -- Ninth CenterPoint Energy's 1-31447 4(e)(10)
Supplemental Form 10-K for the
Indenture to year ended December
Exhibit 4.1.1, 31, 2002
dated as of
November 12, 2002
4.1.11 -- Tenth CenterPoint 1-3187 4.1
Supplemental Houston's Form 8-K
Indenture to dated March 13, 2003
Exhibit 4.1.1,
dated as of
March 18, 2003
4.1.12 -- Officer's CenterPoint 1-3187 4.2
Certificate Houston's Form 8-K
dated March 18, dated March 13, 2003
2003 setting
forth the form,
terms and
provisions of
the Tenth Series
and Eleventh
Series of
general mortgage
bonds
4.1.13 -- Registration CenterPoint Energy's 1-31447 4.2.2
Rights Form 10-Q for the
Agreement, dated quarter ended
as of March 18, September 30, 2003
2003, among
CenterPoint
Houston and the
representatives
of the initial
purchasers named
therein relating
to Tenth Series
and Eleventh
Series of
general mortgage
bonds.
4.1.14 -- Eleventh CenterPoint 1-3187 4.1
Supplemental Houston's Form 8-K
Indenture to dated May 16, 2003
Exhibit 4.1.1,
dated as of May
23, 2003
4.1.15 -- Officer's CenterPoint 1-3187 4.2
Certificate Houston's Form 8-K
dated May 23, dated May 16, 2003
2003 setting
forth the form,
terms and
provisions of
the Twelfth
Series of
general mortgage
bonds
4.1.16 -- Registration CenterPoint Energy's 1-31447 4.2.4
Rights Form 10-Q for the
Agreement, dated quarter ended June
as of May 23, 30, 2003
2003, among
CenterPoint
Houston and the
representatives
of the initial
purchasers named
therein relating
to Twelfth
Series of
general mortgage
bonds
4.1.17 -- Twelfth CenterPoint 1-3187 4.2
Supplemental Houston's Form 8-K
Indenture to dated September 9,
Exhibit 4.3.1, 2003
dated as of
September 9, 2003
4.1.18 -- Officer's CenterPoint 1-3187 4.3
Certificate Houston's Form 8-K
dated September dated September 9,
9, 2003 setting 2003
forth the form,
terms and
provisions of
the Thirteenth
Series of
general mortgage
bonds
4.1.19 -- Registration Amendment No. 1 to 33-108766 4.2.6
Rights CenterPoint
Agreement, dated Houston's
as of September registration
9, 2003, among statement on Form
CenterPoint S-4, filed September
Houston and the 30. 2003
representatives
of the initial
purchasers named
therein relating
to the
Thirteenth
Series of
general mortgage
bonds
10.1 -- First Amendment, CenterPoint Energy's 1-31447 10.7
dated as of Form 10-Q for the
September 2, quarter ended
2003 to the September 30, 2003
$1,310,000,000
Credit
Agreement, dated
as of November
12, 2002 among
CenterPoint
Houston and the
lenders named
therein
+12.1 -- Computation of
Ratios of Earnings
to Fixed Charges
+31.1 -- Section 302
Certification of
David M.
McClanahan
+31.2 -- Section 302
Certification of
Gary L. Whitlock
+32.1 -- Section 906
Certification of
David M.
McClanahan
+32.2 -- Section 906
Certification of
Gary L. Whitlock
+99.1 -- Items
incorporated by
reference from
the CenterPoint
Houston Form
10-K: Item 3
"Legal
Proceedings."
+99.2 -- Items
incorporated by
reference from
CenterPoint
Houston's
Current Report
on Form 8-K
dated May 15,
2003. Exhibit
99.1,
"Management's
Narrative
Analysis of
Results of
Operations --
Certain Factors
Affecting Future
Earnings," and
the following
Notes from
Exhibit 99.2:
Notes 3(e)
(Regulatory
Assets and
Liabilities), 4
(Regulatory
Matters), 8(a)
(Pension Plans)
and 10
(Commitments and
Contingencies).