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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 333-91093
CENTERPOINT ENERGY TRANSITION BOND COMPANY, LLC
(Exact name of registrant as specified in its charter)
DELAWARE 76-0624152
(State or other jurisdiction of incorporation (I.R.S. Employer Identification
or organization) Number)
1111 LOUISIANA, SUITE 4667 77002
HOUSTON, TEXAS (Zip Code)
(Address of principal executive offices)
(713) 207-8272
(Registrant's telephone number, including area code)
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND
(b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH THE REDUCED
DISCLOSURE FORMAT.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes __ No X
As of November 3, 2003, all outstanding membership interests in CenterPoint
Energy Transition Bond Company, LLC were held by CenterPoint Energy Houston
Electric, LLC.
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CENTERPOINT ENERGY TRANSITION BOND COMPANY, LLC
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.................................................................1
Statements of Income and Changes in Member's Equity
Three Months and Nine Months Ended September 30, 2002 and 2003 (unaudited).............1
Balance Sheets
December 31, 2002 and September 30, 2003 (unaudited)...................................2
Statements of Cash Flows
Nine Months Ended September 30, 2002 and 2003 (unaudited)..............................3
Notes to Unaudited Interim Financial Statements..........................................4
Item 2. Management's Narrative Analysis of Results of Operations of CenterPoint
Energy Transition Bond Company, LLC .................................................9
Item 4. Controls and Procedures.............................................................10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K....................................................11
i
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
From time to time we make statements concerning our expectations, beliefs,
plans, objectives, goals, strategies, future events or performance and
underlying assumptions and other statements that are not historical facts. These
statements are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Actual results may differ materially
from those expressed or implied by these statements. In some cases, you can
identify our forward-looking statements by the words "anticipate," "believe,"
"continue," "could," "estimate," "expect," "forecast," "goal," "intend," "may,"
"objective," "plan," "potential," "predict," "projection," "should," "will," or
other similar words.
We have based our forward-looking statements on our management's beliefs
and assumptions based on information available to our management at the time the
statements are made. We caution you that assumptions, beliefs, expectations,
intentions and projections about future events may and often do vary materially
from actual results. Therefore, we cannot assure you that actual results will
not differ materially from those expressed or implied by our forward-looking
statements.
The following list identifies some of the factors that could cause actual
results to differ from those expressed or implied by our forward-looking
statements:
- state and federal legislative and regulatory actions or
developments, including deregulation, re-regulation and
restructuring of the electric utility industry, changes in or
application of laws, orders or regulations applicable to our
business;
- non-payment of transition charges due to financial distress of
CenterPoint Energy Houston Electric, LLC's (CenterPoint Houston's)
customers, including its largest customer, Reliant Resources, Inc.;
- the accuracy of the servicer's estimates of market demand and prices
for energy;
- the accuracy of the servicer's estimates of industrial, commercial
and residential growth in CenterPoint Houston's service territory;
- changes in market demand and demographic patterns;
- weather variations and other natural phenomena affecting retail
electric customer energy usage;
- the operating performance of CenterPoint Houston's facilities and
third-party suppliers of electric energy in CenterPoint Houston's
service territory;
- the accuracy of the servicer's estimates of the payment patterns of
retail electric customers, including the rate of delinquencies and
any collections curves;
- legal and administrative proceedings and settlements;
- changes in tax laws;
- any lack of effectiveness of our disclosure controls and procedures;
- significant changes in critical accounting policies;
- acts of terrorism or war, including any direct or indirect effect on
our business resulting from terrorist attacks such as occurred on
September 11, 2001 or any similar incidents or responses to those
incidents;
- the reliability of the systems, procedures and other infrastructure
necessary to operate the retail electric business in CenterPoint
Houston's service territory, including the systems owned and
operated by the independent system operator of the Electric
Reliability Council of Texas, Inc.;
ii
- political, legal, regulatory and economic conditions and
developments in the United States; and
- other factors we discuss in this Form 10-Q and our other SEC
filings.
You should not place undue reliance on forward-looking statements. Each
forward-looking statement speaks only as of the date of the particular
statement.
iii
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CENTERPOINT ENERGY TRANSITION BOND COMPANY, LLC
STATEMENTS OF INCOME
AND CHANGES IN MEMBER'S EQUITY
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2003 2002 2003
---- ---- ---- ----
(IN THOUSANDS)
REVENUES:
Transition charge revenue .................. $25,184 $18,106 $58,488 $48,144
Investment income .......................... 105 78 173 243
------- ------- ------- -------
Total operating revenues ................. 25,289 18,184 58,661 48,387
------- ------- ------- -------
EXPENSES:
Interest expense ........................... 9,609 9,409 28,855 28,274
Amortization of transition property ........ 14,981 8,209 27,936 18,507
Amortization of transition bond discount and
issuance costs ........................... 429 403 1,292 1,222
Administrative and general expenses ........ 270 163 578 384
------- ------- ------- -------
Total operating expenses ................. 25,289 18,184 58,661 48,387
------- ------- ------- -------
NET INCOME ................................... -- -- -- --
MEMBER'S EQUITY AT BEGINNING OF PERIOD ....... 3,745 3,745 3,745 3,745
CONTRIBUTED CAPITAL .......................... -- -- -- --
------- ------- ------- -------
MEMBER'S EQUITY AT THE END OF THE PERIOD ..... $ 3,745 $ 3,745 $ 3,745 $ 3,745
======= ======= ======= =======
See Notes to the Company's Unaudited Interim Financial Statements
1
CENTERPOINT ENERGY TRANSITION BOND COMPANY, LLC
BALANCE SHEETS
(UNAUDITED)
DECEMBER 31, SEPTEMBER 30,
2002 2003
---- ----
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .............................................. $ 25,263 $ 13,198
Transition charges receivable .......................................... 9,601 10,383
Restricted funds ....................................................... -- 1,689
Other current assets ................................................... 16 --
-------- --------
Current Assets ................................................... 34,880 25,270
Intangible transition property ......................................... 706,220 687,713
Unamortized debt issuance costs ........................................ 8,409 7,224
Restricted funds ....................................................... 2,324 3,744
-------- --------
Total Assets ..................................................... $751,833 $723,951
======== ========
LIABILITIES AND MEMBER'S EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt ...................................... $ 18,723 $ 41,189
Accrued interest ....................................................... 11,223 1,655
Customer deposits ...................................................... 1,178 1,689
Fees payable to servicer ............................................... 159 20
-------- --------
Current Liabilities .............................................. 31,283 44,553
Long-term debt:
Transition bonds, net of unamortized discount of $0.3 million and $0.2
million, respectively .............................................. 716,805 675,653
-------- --------
Total Liabilities ................................................ 748,088 720,206
-------- --------
MEMBER'S EQUITY:
Contributed capital .................................................... 3,745 3,745
Retained earnings ...................................................... -- --
-------- --------
Total Member's Equity ............................................ 3,745 3,745
-------- --------
Total Liabilities and Member's Equity ............................ $751,833 $723,951
======== ========
See Notes to the Company's Unaudited Interim Financial Statements
2
CENTERPOINT ENERGY TRANSITION BOND COMPANY, LLC
STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------
2002 2003
---- ----
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................................. $ -- $ --
Adjustments for non cash items:
Amortization of Transition Bond discount and issuance costs 1,292 1,222
Amortization of Transition Property ....................... 27,936 18,507
Changes in other assets and liabilities:
Transition charges receivable ............................ (10,635) (782)
Other current assets .................................... -- 16
Restricted funds ........................................ -- (1,689)
Accrued interest ........................................ (5,444) (9,568)
Customer deposits ....................................... 946 511
Fees payable to servicer ................................ (99) (139)
-------- --------
Net cash provided by operating activities ............. 13,996 8,078
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in restricted funds ..................... 1,448 (1,420)
-------- --------
Net cash provided by (used in) investing activities ... 1,448 (1,420)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt .................................. (13,106) (18,723)
-------- --------
Net cash used in financing activities ................. (13,106) (18,723)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .......... 2,338 (12,065)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................ 2,435 25,263
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD ...................... $ 4,773 $ 13,198
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Payments:
Interest .............................................. $ 34,300 $ 37,841
See Notes to the Company's Unaudited Interim Financial Statements
3
CENTERPOINT ENERGY TRANSITION BOND COMPANY, LLC
NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS
(1) BACKGROUND AND BASIS OF PRESENTATION
Effective August 31, 2002, Reliant Energy, Incorporated (Reliant Energy)
consummated a restructuring transaction in which it, among other things, (1)
conveyed its Texas electric generation assets to an affiliated company, Texas
Genco Holdings, Inc. (Texas Genco), (2) became an indirect, wholly owned
subsidiary of a new utility holding company, CenterPoint Energy, Inc.
(CenterPoint Energy), (3) was converted into a Texas limited liability company
named CenterPoint Energy Houston Electric, LLC (CenterPoint Houston), and (4)
distributed the capital stock of its operating subsidiaries to CenterPoint
Energy. As part of the restructuring, each share of Reliant Energy common stock
was converted into one share of CenterPoint Energy common stock. In connection
with the restructuring, Reliant Energy Transition Bond Company LLC was renamed
CenterPoint Energy Transition Bond Company, LLC (the Company).
The Company's interim financial statements are unaudited, omit certain
financial statement disclosures and should be read in conjunction with the
Company's Annual Report on Form 10-K for the year ended December 31, 2002.
The Company is a special purpose Delaware limited liability company whose
sole member is CenterPoint Houston. CenterPoint Houston is a regulated utility
engaged in the transmission and distribution of electric energy in a 5,000
square mile area located along the Texas Gulf Coast, including the City of
Houston.
The Texas Electric Choice Plan (Texas electric restructuring law), enacted
in 1999, authorized competition in the retail and generation markets for
electricity beginning in January 2002 and provides for recovery of stranded
costs (i.e., the excess of net regulatory book value of generation assets (as
defined by the Texas electric restructuring law) over the market value of those
assets) and generation-related regulatory assets (as defined by the Texas
electric restructuring law) through irrevocable non-bypassable transition
charges assessed on all retail electric customers within a utility's
geographical certificated service area as it existed on May 1, 1999 (Transition
Charges). The Texas electric restructuring law authorizes the Public Utility
Commission of Texas (Texas Utility Commission) to issue financing orders
approving the issuance of transition bonds to recover generation-related
regulatory assets and stranded costs. The Texas electric restructuring law and
the financing order permit an electric utility to transfer its rights and
interests in the financing order, including the right to collect Transition
Charges pursuant to the Texas electric restructuring law, to a special purpose
entity formed by the electric utility to issue debt securities secured by the
right to receive revenues arising from the Transition Charges. The electric
utility's right to receive the Transition Charges and its other rights and
interests under the financing order constitute Transition Property. The Texas
Utility Commission issued a financing order to CenterPoint Houston on May 31,
2000 (Financing Order) that authorized CenterPoint Houston to cause the Company
to issue transition bonds (Transition Bonds) in an aggregate principal amount
not to exceed $740 million plus up-front qualified costs not to exceed $10.7
million in the aggregate.
The Company was organized in November 1999 under the laws of the State of
Delaware for the sole purpose of acquiring and holding the Transition Property
to be acquired from CenterPoint Houston. The Company had no operations until
October 2001.
On October 24, 2001, the Company issued $748.9 million of Transition Bonds
and used the net proceeds to purchase the Transition Property from CenterPoint
Houston and pay expenses of issuance. For additional information relating to the
Transition Bonds, see Note 3.
CenterPoint Energy is a registered public utility holding company under
the Public Utility Holding Company Act of 1935, as amended (1935 Act). The 1935
Act, among other things, generally limits the ability of the holding company and
its subsidiaries to issue debt and equity securities without prior
authorization, restricts the source of dividend payments to funds from current
and retained earnings without prior authorization, regulates sales and
acquisitions of certain assets and businesses and governs affiliate
transactions.
4
The Company is restricted by its organizational documents from engaging in
any activity not directly related to the specific purposes for which the Company
was created. The Company is a separate and distinct legal entity from
CenterPoint Houston, and the Company's organizational documents require it to
operate in a manner to avoid consolidation with the bankruptcy estate of
CenterPoint Houston in the event CenterPoint Houston becomes subject to such a
proceeding. CenterPoint Houston is not the owner of the Transition Property
described herein, and the assets of the Company are not available to pay
creditors of CenterPoint Houston or any of its affiliates.
(2) SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
REGULATION AND REGULATORY ASSETS AND LIABILITIES. The Company's business
meets the criteria of Statement of Financial Accounting Standards (SFAS) No. 71,
"Accounting for the Effects of Certain Types of Regulation" (SFAS No. 71). This
accounting standard recognizes the cost-based ratemaking process which may
result in differences in the application of generally accepted accounting
principles between regulated and non-regulated businesses. The Company's purpose
is to purchase the Transition Property, issue one or more series of Transition
Bonds secured by the Transition Property and perform any activity incidental
thereto. The Transition Charges are designed to provide the necessary revenues
to make such payments. Continued applicability of SFAS No. 71 requires that
rates be designed to recover specific costs of providing regulated services and
products, and that it be reasonable to assume that the Transition Charges are
set at levels that will recover an entity's costs and can be charged to and
collected from customers. The Company believes it satisfies such requirements
and applies the provisions of SFAS No. 71 to its business.
CASH AND CASH EQUIVALENTS/RESTRICTED FUNDS. For purposes of the Balance
Sheet and Statement of Cash Flows, the Company considers investments purchased
with a maturity of three months or less to be the equivalent of cash. The
trustee under the indenture pursuant to which the Transition Bonds were issued
(the Trustee) has established, as provided in the indenture, the following
subaccounts for the Transition Bonds:
- The General Subaccount is comprised of collections of Transition
Charges and interest earned from short term investments. These
amounts accumulate in the General Subaccount until they are
transferred from the General Subaccount on each Transition Bond
payment date. The General Subaccount had a balance of $3.5 million
at September 30, 2003.
- The Reserve Subaccount is maintained for the purpose of holding any
Transition Charges and investment earnings (other than investment
earnings on amounts in the Capital Subaccount) not otherwise used on
the payment dates of the Transition Bonds for payment of principal,
interest, fees or expenses or for funding the Capital Subaccount or
the Overcollateralization Subaccount. The Reserve Subaccount had a
balance of $9.0 million at September 30, 2003.
- The Overcollateralization Subaccount has a target funding level of
approximately $3.7 million (0.5% of the initial principal amount of
the Transition Bonds), and funding is scheduled to occur ratably
over the life of the Transition Bonds. The Trustee may draw from
this subaccount if the General Subaccount and Reserve Subaccount are
not sufficient on any payment date to make scheduled payments on the
Transition Bonds and payments of certain fees and expenses. The
Overcollateralization Subaccount had a $0.6 million balance as of
September 30, 2003, with a scheduled level of $0.6 million.
- The Capital Subaccount received a deposit of approximately $3.7
million (0.5% of the initial principal amount of the Transition
Bonds) on the date of issuance of the Transition Bonds. CenterPoint
Houston contributed this amount to the Company. If amounts available
in the General, Reserve and Overcollateralization Subaccounts are
not sufficient on any payment date to make scheduled payments on the
Transition Bonds and payments of certain fees and expenses, the
Trustee will draw on amounts in the Capital Subaccount. As of
September 30, 2003, the Capital Subaccount had a balance of $3.7
million.
5
CUSTOMER DEPOSITS. The Trustee holds cash deposits, affiliate guarantees,
surety bonds and letters of credit provided by retail electric providers. Retail
electric providers are required to meet creditworthiness criteria established by
the Texas Utility Commission with respect to transition charges. Each retail
electric provider must (1) have a long-term, unsecured credit rating of not less
than BBB- and Baa3 (or the equivalent) from Standard & Poor's Ratings Services
(S&P) and Moody's Investors Service, Inc. (Moody's), respectively, or (2)
provide (a) a cash deposit of two months' maximum expected transition charge
collections, (b) an affiliate guarantee, surety bond or letter of credit
providing for payment of such amount of transition charge collections in the
event that the retail electric provider defaults in its payment obligations, or
(c) a combination of any of the foregoing. The provider of any affiliate
guarantee, surety bond or letter of credit must have and maintain long-term
unsecured credit ratings of not less than BBB- and Baa3 (or the equivalent) from
S&P and Moody's, respectively. As of September 30, 2003, retail electric
providers had satisfied the creditworthiness criteria through cash deposits,
letters of credit and affiliate guarantees aggregating approximately $1.7
million, $11.9 million and $1.6 million, respectively.
DEBT ISSUANCE COSTS. The costs associated with the issuance of the
Transition Bonds are capitalized and are being amortized over the life of the
Transition Bonds utilizing the effective interest method.
REVENUE. Beginning on October 25, 2001 and pursuant to the Financing
Order, CenterPoint Houston, as servicer of the Transition Charges (Servicer),
implemented the nonbypassable Transition Charges on behalf of the Company. The
Company records revenue for Transition Charges under the accrual method. These
revenues are generally recognized upon delivery of services by CenterPoint
Houston to retail electric providers.
The following table shows the aggregate amount of Transition Charges
collected by the Company during each month from the date of issuance of the
Transition Bonds through September 30, 2003 (in thousands):
2001 2002 2003
---- ---- ----
January $ -- $4,584 $4,902
February -- 3,997 4,693
March -- 4,297 4,698
April -- 5,144 4,986
May -- 3,678 4,236
June -- 5,805 5,378
July -- 5,892 6,195
August -- 7,091 5,948
September -- 7,195 6,359
October 2 8,799
November 414 6,119
December 1,937 5,390
In all material respects for each materially significant retail electric
provider, each such retail provider (i) has been billed in accordance with the
applicable Financing Order of the Texas Utility Commission, (ii) has made all
payments in compliance with the requirements outlined in the Financing Order,
and (iii) has satisfied the creditworthiness requirements of the Financing
Order. For a description of the creditworthiness requirements, see "Customer
Deposits" above.
AMORTIZATION. The Transition Property was recorded at acquired cost and is
being amortized over twelve years, the life of the Transition Bonds, based on
estimated revenue from Transition Charges, interest accruals and other expenses.
The Financing Order authorizing the imposition of the Transition Charges and the
issuance of the Transition Bonds limits the terms of the Transition Bonds to no
greater than 15 years. In accordance with SFAS No. 71, amortization is adjusted
for over/under collection of Transition Charges. Amortization of the Transition
Property included regulatory adjustments of $0.4 million and $18.2 million for
the three months and nine months ended September 30, 2002, respectively, and
$7.2 million and $27.6 million for the three months and nine months ended
September 30, 2003, respectively, to defer amortization costs until periods in
which Transition Charge revenue is recorded. The Transition Charges are reviewed
and adjusted at least annually by the Texas Utility Commission to correct any
overcollections or undercollections during the preceding 12 months and to
provide for the expected recovery of amounts sufficient to timely provide all
payment of debt service and other required amounts and charges in connection
with the Transition Bonds.
6
INCOME TAXES. The Company is organized as a single-member limited
liability company and will not be subject to United States federal income tax as
an entity separate from CenterPoint Energy. In addition, the Company has
received a ruling from the Comptroller of Public Accounts of the State of Texas
to the effect that (i) the Company's receipt of the Transition Property, (ii)
the Company's receipt of the Transition Charges and (iii) the Company's
short-term earnings from investment of the Transition Charges will be excluded
from taxable capital and taxable earned surplus for purposes of the Texas
franchise tax. Accordingly, there is no provision for income taxes or Texas
franchise taxes.
(3) LONG-TERM DEBT
Interest payments on the Transition Bonds are due semi-annually beginning
March 15, 2002 and are paid from funds deposited daily with the Trustee by
CenterPoint Houston as Servicer of the Transition Property. Principal payments
on the Transition Bonds are due semi-annually.
The source of repayment for the Transition Bonds is the Transition
Charges. The Servicer collects this non-bypassable charge from retail providers
of electricity in CenterPoint Houston's service territory. The Servicer deposits
Transition Charge collections into a General Subaccount maintained by the
Trustee.
The following table shows scheduled and actual principal payments on the
Transition Bonds from the issuance date through September 30, 2003 (in
thousands):
Class A-1 Class A-2 Class A-3 Class A-4
--------- --------- --------- ---------
Scheduled Actual Scheduled Actual Scheduled Actual Scheduled Actual
--------- ------ --------- ------ --------- ------ --------- ------
March 15, 2002 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
September 15, 2002 13,106 13,106 -- -- -- -- -- --
March 15, 2003 6,366 6,366 -- -- -- -- -- --
September 15, 2003 12,357 12,357 -- -- -- -- -- --
(4) SIGNIFICANT AGREEMENTS AND RELATED PARTY TRANSACTIONS
Under a sale agreement between the Company and CenterPoint Houston dated
October 24, 2001, CenterPoint Houston sold the Transition Property to the
Company. Pursuant to a servicing agreement entered between the Company and
CenterPoint Houston concurrently with the issuance of the Transition Bonds,
CenterPoint Houston is the Servicer of the Transition Property. As the Servicer,
CenterPoint Houston manages and administers the Transition Property of the
Company and collects the Transition Charges on behalf of the Company. The
Company pays a fixed annual servicing fee to CenterPoint Houston for these
services. Pursuant to an administration agreement entered into between the
Company and CenterPoint Houston, CenterPoint Houston also provides
administrative services to the Company. The Company pays CenterPoint Houston a
fixed fee for performing these services, plus all reimbursable expenses. The
Company recorded administrative and servicing fees for the three and nine months
ended September 30, 2002 of $0.1 million and $0.4 million, respectively. The
Company recorded administrative and servicing fees for the three and nine months
ended September 30, 2003 of $0.1 million and $0.4 million, respectively.
The Company also entered into an intercreditor agreement with CenterPoint
Houston and other parties related to the servicing of the Transition Bonds. In
addition, CenterPoint Houston has agreed to indemnify the Trustee on the
Company's behalf to the extent the indemnification provided for under the
Transition Bond indenture is not recoverable from the Company as a fixed
expense.
In order to obtain the desired ratings on the Transition Bonds,
CenterPoint Houston deposited $3.0 million in a specified reserve account for
the benefit of Deutsche Bank Trust Company Americas (formerly Bankers Trust
Company), as Trustee, as cash collateral for an indemnification obligation of
CenterPoint Houston arising in connection with the issuance of the Transition
Bonds. All funds remaining in the specified reserve account less any amounts
then due and owing to Deutsche Bank Trust Company Americas will be released to
CenterPoint Houston upon final payment of the Transition Bonds.
7
Certain debt issuance costs paid by CenterPoint Houston were reimbursed by
the Company upon issuance of the Transition Bonds.
Subsidiaries of Reliant Resources, Inc. (Reliant Resources), a former
affiliate of the Company, collect the majority of the Transition Charges from
retail electric customers. Subsidiaries of Reliant Resources have at all times
been in compliance with the creditworthiness criteria for retail electric
providers as set forth in the Financing Order. At September 30, 2003,
subsidiaries of Reliant Resources had letters of credit aggregating
approximately $10.9 million on deposit with the Trustee. As with any retail
electric provider, the Servicer is expected to direct the Trustee to seek
recourse against such letters of credit or alternate form of credit support as a
remedy for any payment default that may occur.
8
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS OF CENTERPOINT
ENERGY TRANSITION BOND COMPANY, LLC
We meet the conditions specified in General Instruction H(1)(a) and (b) to
Form 10-Q and therefore are providing the following analysis of our results of
operations using the reduced disclosure format for wholly owned subsidiaries of
reporting companies. Accordingly, we have omitted from this report the
information called for by Item 3 (Quantitative and Qualitative Disclosures About
Market Risk) of Part I and the following Part II items of Form 10-Q: Item 2
(Changes in Securities and Use of Proceeds), Item 3 (Defaults Upon Senior
Securities) and Item 4 (Submission of Matters to a Vote of Security Holders).
This analysis should be read in combination with the Interim Financial
Statements included in Item 1 of this Form 10-Q.
We are a Delaware limited liability company established in November 1999
for limited purposes. On October 24, 2001 we issued Transition Bonds and used
the net proceeds to purchase the Transition Property from Reliant Energy. As we
are restricted by our organizational documents from engaging in activities other
than those described in Item 1 (Business) of our Annual Report on Form 10-K for
the year ended December 31, 2002, income statement effects were limited
primarily to income generated from the Transition Charges, interest expense on
the Transition Bonds, amortization of the Transition Property, debt issuance
expenses and the discount on the Transition Bonds, Transition Property servicing
and administration fees and incidental investment interest income.
For the three months ended September 30, 2003, revenue from Transition
Charges was $18.1 million and investment income was $0.08 million. Interest
expense of $9.4 million related to interest on the Transition Bonds and
amortization expense of $0.4 million related to amortization of debt issuance
expenses and the discount on the Transition Bonds. Amortization of the
Transition Property of $8.2 million included regulatory adjustments of $7.2
million for the three months ended September 30, 2003 to defer amortization
costs until periods in which Transition Charge revenue is recorded. We recorded
administrative expenses of $0.2 million for the three months ended September 30,
2003.
For the nine months ended September 30, 2003, revenue from Transition
Charges was $48.1 million and investment income was $0.2 million. Interest
expense of $28.3 million relates to interest on the Transition Bonds and
amortization expense of $1.2 million relates to amortization of debt issuance
expenses and the discount on the Transition Bonds. Amortization of the
Transition Property of $18.5 million includes regulatory adjustments of $27.6
million for the nine months ended September 30, 2003 to defer amortization costs
until periods in which Transition Charge revenue is recorded. We recorded
administrative expenses of $0.4 million for the nine months ended September 30,
2003.
For the three months ended September 30, 2002, revenue from Transition
Charges was $25.2 million and investment income was $0.1 million. Interest
expense of $9.6 million relates to interest on the Transition Bonds and
amortization expense of $0.4 million relates to amortization of debt issuance
expenses and the discount on the Transition Bonds. Amortization of the
Transition Property of $15.0 million includes regulatory adjustments of $0.4
million for the three months ended September 30, 2002 to defer amortization
costs until periods in which Transition Charge revenue is recorded. The Company
recorded administrative expenses of $0.3 million for the three months ended
September 30, 2002.
For the nine months ended September 30, 2002, revenue from Transition
Charges was $58.5 million and investment income was $0.2 million. Interest
expense of $28.9 million relates to interest on the Transition Bonds and
amortization expense of $1.3 million relates to amortization of debt issuance
expenses and the discount on the Transition Bonds. Amortization of the
Transition Property of $27.9 million includes regulatory adjustments of $18.2
million for the nine months ended September 30, 2002 to defer amortization costs
until periods in which Transition Charge revenue is recorded. The Company
recorded administrative expenses of $0.6 million for the nine months ended
September 30, 2002.
We use collections of Transition Charges to make scheduled principal and
interest payments on the Transition Bonds. Transition Charges, together with
interest earned on collected Transition Charges, are expected to offset (1)
interest expense on the Transition Bonds, (2) amortization of the Transition
Property, debt issuance expenses and the discount on the Transition Bonds and
(3) the fees charged by CenterPoint Houston for servicing the Transition
Property and providing administrative services to us. From the October 2001
issuance date of the Transition Bonds
9
to the September 15, 2003 semi-annual debt service payment date, the aggregate
amount of collected Transition Charges and interest thereon was $114.6 million,
and the aggregate amount expected to have been collected was $105.6 million. As
a result of the overcollections, $9.0 million has been deposited into the
Reserve Subaccount.
The Transition Charges are reviewed and adjusted at least annually by the
Public Utility Commission of Texas (Texas Utility Commission) to correct any
overcollections or undercollections during the preceding 12 months and to
provide for the expected recovery of amounts sufficient to timely provide all
payment of debt service and other required amounts and charges in connection
with the Transition Bonds.
CenterPoint Houston filed on August 1, 2003 with the Texas Utility
Commission the Transition Charges that became effective November 1, 2003.
CenterPoint Houston is required to true-up Transition Charges annually on
November 1st in compliance with the Financing Order adopted in Application of
Reliant Energy, Incorporated for Financing Order to Securitize Regulatory Assets
and Other Qualified Costs, Docket No. 21665. The adjusted Transition Charges are
designed to collect $70.4 million during the year ended October 31, 2004. This
amount reflects a reduction of $11.4 million from the prior year's Transition
Charges due to an expected over-recovery during the twelve-month period ended
October 31, 2003. This over-recovery results from growth in billings in the
residential and small commercial sectors which exceeded the previous forecasts
for the twelve-month period ended October 31, 2003. The $11.4 million
over-recovery reduces the revenues that are otherwise required by 14% for the
upcoming collection period ended October 31, 2004.
In June 2003, the Texas Utility Commission ruled that one particular
customer was not required to pay Transition Charges based on an exemption in the
Public Utility Regulatory Act for customers generating their own qualifying
electricity on-site. The Office of the Public Utility Counsel has appealed that
ruling. The Texas Utility Commission's order and the appeal thereof are not
expected to impact the recovery of Transition Charges during the twelve-month
period beginning November 1, 2003 for which the Texas Utility Commission already
has approved CenterPoint Houston's Transition Charge rates.
As of September 30, 2003, one retail electric provider had filed for
bankruptcy but continues to operate. Prior to the bankruptcy filing, made in
March 2003, this retail electric provider deposited funds with the Trustee for
the Transition Bonds (Trustee) to secure payment of its Transition Charges to
us. Although this deposit will not cover all of the Transition Charges owed to
us for the period prior to the bankruptcy filing, we believe that it will cover
a substantial portion thereof. This deposit has not yet been applied by the
Trustee. The Servicer is seeking recovery in the bankruptcy proceeding of all
amounts owed to us by the retail electric provider for periods prior to the
bankruptcy filing. The Servicer has entered into an arrangement with the retail
electric provider under which the retail electric provider has provided a
Transition Charge deposit in connection with its post-bankruptcy operations,
which deposit is held by the Trustee. The retail electric provider is current in
all of its Transition Charge payments for the period since the bankruptcy
filing. In the course of evaluating the Servicer's actions relating to this
retail electric provider payments and its bankruptcy, we have identified certain
instances in which the Servicer may not have complied fully with the Service
Agreement; the Servicer may have failed to act promptly to apply (or to seek
Bankruptcy Court permission to apply) the pre-bankruptcy deposit to the unpaid
Transition Charges and failed to obtain prior consent from the Trustee and the
majority of the bondholders and to notify the rating agencies before entering
into the alternative arrangement that allowed the retail electric provider to
post an additional deposit to continue providing service. This noncompliance has
not affected our ability to pay interest and principal on the bonds and, in
addition, amounts in the Capital Account are more than sufficient to cover the
amount of the Transition Charges owed to us by this retail electric provider for
the period prior to the filing of its bankruptcy petition in the event that we
do not recover such amounts in the bankruptcy proceeding. We expect to
ultimately recover in the bankruptcy proceeding amounts owed to us by this
retail electric provider. We will continue to work with the bankruptcy trustee
and the Trustee to recover and apply all amounts owing to us.
Holders of Transition Bonds may experience payment delays or incur losses
if our assets are not sufficient to pay interest or the scheduled principal of
the Transition Bonds. Funds for payments are dependent upon the Transition
Property and the right to collect the Transition Charges over a period limited
by Texas law to 15 years.
In addition, collections of Transition Charges are dependent on the amount
of electricity consumed within CenterPoint Houston's service territory.
ITEM 4. CONTROLS AND PROCEDURES
In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an
evaluation, under the supervision and with the participation of management,
including our principal executive officer and principal financial officer, of
the effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report. Based on that evaluation, our principal executive
officer and principal financial officer concluded that our disclosure controls
and procedures were effective as of 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.
10
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The following exhibits are filed herewith:
Exhibits not incorporated by reference to a prior filing are
designated by a cross (+); all exhibits not so designated are
incorporated by reference to a prior filing of CenterPoint Energy
Transition Bond Company, LLC.
SEC FILE
OR
EXHIBIT REGISTRATION EXHIBIT
NUMBER DESCRIPTION REPORT OR REGISTRATION STATEMENT NUMBER REFERENCE
------ ----------- -------------------------------- ------ ---------
4.1 -- Amended and Restated Limited Form 8-K dated October 23, 2001 333-91093 4.3
Liability Company Agreement of
Reliant Energy Transition Bond
Company LLC
4.2 -- Amended and Restated Certificate of Form 8-K dated October 23, 2001 333-91093 4.7
Formation of Reliant Energy
Transition Bond Company LLC
4.3 -- Certificate of Amendment to the Form 10-Q dated June 30, 2003 333-91093 4.3
Certificate of Formation of Reliant
Energy Transition Bond Company, LLC
+10.1 -- Semiannual Servicer's Certificate,
dated as of September 12, 2003, as
to the transition bond balances, the
balances of the collection account
and its sub-accounts, and setting
forth transfers and payments to be
made on the September 15, 2003
payment date.
+31.1 -- Section 302 Certification of Gary L.
Whitlock
+31.2 -- Section 302 Certification of Marc
Kilbride
+32.1 -- Section 906 Certification of Gary L.
Whitlock
+32.2 -- Section 906 Certification of Marc
Kilbride
(b) Reports on Form 8-K.
None.
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CENTERPOINT ENERGY TRANSITION BOND COMPANY, LLC
By: /s/ James S. Brian
----------------------------------------------
James S. Brian
Senior Vice President and Chief Accounting
Officer
Date: November 14, 2003
12
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
Transition Bond Company, LLC.
SEC FILE
OR
EXHIBIT REGISTRATION EXHIBIT
NUMBER DESCRIPTION REPORT OR REGISTRATION STATEMENT NUMBER REFERENCE
------ ----------- -------------------------------- ------ ---------
4.1 -- Amended and Restated Limited Form 8-K dated October 23, 2001 333-91093 4.3
Liability Company Agreement of
Reliant Energy Transition Bond
Company LLC
4.2 -- Amended and Restated Certificate of Form 8-K dated October 23, 2001 333-91093 4.7
Formation of Reliant Energy
Transition Bond Company LLC
4.3 -- Certificate of Amendment to the Form 10-Q dated June 30, 2003 333-91093 4.3
Certificate of Formation of Reliant
Energy Transition Bond Company, LLC
+10.1 -- Semiannual Servicer's Certificate,
dated as of September 12, 2003, as
to the transition bond balances, the
balances of the collection account
and its sub-accounts, and setting
forth transfers and payments to be
made on the September 15, 2003
payment date.
+31.1 -- Section 302 Certification of Gary L.
Whitlock
+31.2 -- Section 302 Certification of Marc
Kilbride
+32.1 -- Section 906 Certification of Gary L.
Whitlock
+32.2 -- Section 906 Certification of Marc
Kilbride