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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
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 1-13265
CENTERPOINT ENERGY RESOURCES CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0511406
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
1111 LOUISIANA
HOUSTON, TEXAS 77002 (713) 207-1111
(Address and zip code of principal executive offices) (Registrant's telephone number, including area code)
------------------------------
CENTERPOINT ENERGY RESOURCES CORP. 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 May 1, 2004, all 1,000 shares of CenterPoint Energy Resources Corp. common
stock were held by Utility Holding, LLC, a wholly owned subsidiary of
CenterPoint Energy, Inc.
CENTERPOINT ENERGY RESOURCES CORP.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2004
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements............................................................ 1
Statements of Consolidated Income
Three Months Ended March 31, 2003 and 2004 (unaudited)........................... 1
Consolidated Balance Sheets
December 31, 2003 and March 31, 2004 (unaudited)................................. 2
Statements of Consolidated Cash Flows
Three Months Ended March 31, 2003 and 2004 (unaudited)........................... 4
Notes to Unaudited Consolidated Financial Statements................................ 5
Item 2. Management's Narrative Analysis of the Results of Operations.................... 13
Item 4. Controls and Procedures......................................................... 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................... 19
Item 6. Exhibits and Reports on Form 8-K................................................ 19
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
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 are some of the factors that could cause actual results
to differ materially from those expressed or implied in forward-looking
statements:
- state and federal legislative and regulatory actions or
developments, constraints placed on our activities or business
by the Public Utility Holding Company Act of 1935, as amended
(1935 Act) and changes in or application of laws or
regulations applicable to other aspects of our business;
- timely rate increases, including recovery of costs;
- industrial, commercial and residential growth in our service
territory and changes in market demand and demographic
patterns;
- the timing and extent of changes in commodity prices,
particularly natural gas;
- changes in interest rates or rates of inflation;
- weather variations and other natural phenomena;
- the timing and extent of changes in the supply of natural gas;
- commercial bank and financial market conditions, our access to
capital, the costs of such capital, receipt of certain
approvals under the 1935 Act, and the results of our financing
and refinancing efforts, including availability of funds in
the debt capital markets;
- actions by rating agencies;
- inability of various counterparties to meet their obligations
to us;
- non-payment of our services due to financial distress of our
customers; and
- other factors we discuss in "Risk Factors" beginning on page 9
of the CenterPoint Energy Resources Corp. Annual Report on
Form 10-K for the year ended December 31, 2003.
Additional risk factors are described in other documents we file with
the Securities and Exchange Commission.
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 RESOURCES CORP. AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
STATEMENTS OF CONSOLIDATED INCOME
(THOUSANDS OF DOLLARS)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
----------------------------------
2003 2004
-------------- --------------
REVENUES............................................................... $ 2,094,020 $ 2,196,585
-------------- --------------
EXPENSES:
Natural gas.......................................................... 1,655,120 1,762,240
Operation and maintenance............................................ 177,666 181,845
Depreciation and amortization........................................ 43,910 46,526
Taxes other than income taxes........................................ 45,176 45,394
-------------- --------------
Total............................................................ 1,921,872 2,036,005
-------------- --------------
OPERATING INCOME....................................................... 172,148 160,580
-------------- --------------
OTHER INCOME (EXPENSE):
Interest and other finance charges................................... (35,826) (42,282)
Other, net........................................................... 1,060 2,612
-------------- --------------
Total............................................................ (34,766) (39,670)
-------------- --------------
INCOME BEFORE INCOME TAXES............................................. 137,382 120,910
Income Tax Expense.................................................. 49,210 46,719
-------------- --------------
NET INCOME............................................................. $ 88,172 $ 74,191
============== ==============
See Notes to the Company's Interim Financial Statements
1
CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
ASSETS
DECEMBER 31, MARCH 31,
2003 2004
-------------- --------------
CURRENT ASSETS:
Cash and cash equivalents................................................. $ 34,447 $ 184,800
Accounts and notes receivable, net........................................ 462,988 392,006
Accrued unbilled revenue.................................................. 323,844 175,911
Accounts and notes receivable - affiliated companies, net................. -- 157,941
Materials and supplies.................................................... 26,859 27,008
Natural gas inventory..................................................... 160,367 68,648
Non-trading derivative assets............................................. 45,897 48,993
Taxes receivable.......................................................... 32,023 --
Prepaid expenses.......................................................... 11,104 11,773
Other..................................................................... 71,597 44,760
-------------- --------------
Total current assets.................................................... 1,169,126 1,111,840
-------------- --------------
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment............................................. 4,086,750 4,126,166
Less accumulated depreciation............................................. (351,189) (378,241)
-------------- --------------
Property, plant and equipment, net...................................... 3,735,561 3,747,925
-------------- --------------
OTHER ASSETS:
Goodwill.................................................................. 1,740,510 1,740,510
Other intangibles, net.................................................... 20,101 19,696
Non-trading derivative assets............................................. 11,273 11,391
Accounts and notes receivable - affiliated companies, net................. 33,929 26,097
Other..................................................................... 142,162 144,609
-------------- --------------
Total other assets...................................................... 1,947,975 1,942,303
-------------- --------------
TOTAL ASSETS................................................................ $ 6,852,662 $ 6,802,068
============== ==============
See Notes to the Company's Interim Financial Statements
2
CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
(THOUSANDS OF DOLLARS)
(UNAUDITED)
LIABILITIES AND STOCKHOLDER'S EQUITY
DECEMBER 31, MARCH 31,
2003 2004
-------------- --------------
CURRENT LIABILITIES:
Short-term borrowings..................................................... $ 63,000 $ --
Accounts payable.......................................................... 528,394 468,490
Accounts and notes payable - affiliated companies, net.................... 23,351 --
Taxes accrued............................................................. 65,636 132,461
Interest accrued.......................................................... 58,505 52,795
Customer deposits......................................................... 58,372 59,730
Non-trading derivative liabilities........................................ 6,537 9,626
Accumulated deferred income taxes, net.................................... 8,856 20,371
Other..................................................................... 125,132 96,238
-------------- --------------
Total current liabilities........................................... 937,783 839,711
-------------- --------------
OTHER LIABILITIES:
Accumulated deferred income taxes, net.................................... 645,125 625,834
Non-trading derivative liabilities........................................ 3,330 1,676
Benefit obligations....................................................... 130,980 129,555
Other..................................................................... 571,005 561,714
-------------- --------------
Total other liabilities............................................... 1,350,440 1,318,779
-------------- --------------
LONG-TERM DEBT.............................................................. 2,370,974 2,370,515
-------------- --------------
COMMITMENTS AND CONTINGENCIES (NOTES 1 AND 9)
STOCKHOLDER'S EQUITY:
Common stock.............................................................. 1 1
Paid-in capital........................................................... 1,985,254 1,985,275
Retained earnings......................................................... 173,682 247,873
Accumulated other comprehensive income.................................... 34,528 39,914
-------------- --------------
Total stockholder's equity............................................ 2,193,465 2,273,063
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY............................... $ 6,852,662 $ 6,802,068
============== ==============
See Notes to the Company's Interim Financial Statements
3
CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
STATEMENTS OF CONSOLIDATED CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
---------------------------------
2003 2004
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................... $ 88,172 $ 74,191
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization.......................................... 43,910 46,526
Amortization of deferred financing costs............................... 408 2,814
Deferred income taxes.................................................. 23,598 (10,770)
Changes in other assets and liabilities:
Accounts and notes receivable, net................................... (251,918) 219,183
Accounts receivable/payable, affiliates.............................. (11,156) 1,626
Inventory............................................................ 72,791 91,570
Taxes receivable..................................................... 23,286 32,023
Accounts payable..................................................... 215,309 (59,904)
Fuel cost recovery................................................... 7,056 --
Interest and taxes accrued........................................... (14,519) 61,115
Net non-trading derivative assets and liabilities.................... (1,362) 6,487
Other current assets................................................. 29,864 26,168
Other current liabilities............................................ (22,831) (27,536)
Other assets......................................................... (4,489) (3,667)
Other liabilities.................................................... 18,061 (14,545)
Other, net............................................................. (7,037) (459)
-------------- --------------
Net cash provided by operating activities.......................... 209,143 444,822
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures..................................................... (50,732) (52,126)
Decrease (increase) in notes receivable from affiliates, net............. 926 (175,065)
Other, net............................................................... (2,424) (2,416)
-------------- --------------
Net cash used in investing activities.............................. (52,230) (229,607)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt............................................... (260,008) --
Proceeds from long-term debt............................................. 650,000 --
Debt issuance costs...................................................... (51,798) (1,862)
Decrease in short-term borrowings, net................................... (347,000) (63,000)
Decrease in notes with affiliates, net................................... (74,096) --
-------------- --------------
Net cash used in financing activities.............................. (82,902) (64,862)
-------------- --------------
NET INCREASE IN CASH AND CASH EQUIVALENTS................................... 74,011 150,353
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD........................ 9,237 34,447
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD.............................. $ 83,248 $ 184,800
============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Payments:
Interest................................................................. $ 54,930 $ 46,126
Income taxes............................................................. 793 14,968
See Notes to the Company's Interim Financial Statements
4
CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) BACKGROUND AND BASIS OF PRESENTATION
General. Included in this Quarterly Report on Form 10-Q (Form 10-Q) of
CenterPoint Energy Resources Corp. (CERC Corp., together with its subsidiaries,
the Company), are the Company's consolidated interim financial statements and
notes (Interim Financial Statements) including its wholly owned and majority
owned subsidiaries. The Interim Financial Statements are unaudited, omit certain
financial statement disclosures and should be read with the Annual Report on
Form 10-K of CERC Corp. for the year ended December 31, 2003 (CERC Corp. Form
10-K).
Background. The Company is an indirect wholly owned subsidiary of
CenterPoint Energy, Inc. (CenterPoint Energy), a public utility holding company
created on August 31, 2002, as part of a corporate restructuring of Reliant
Energy, Incorporated (Reliant Energy). 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 those of its
subsidiaries. The 1935 Act, among other things, limits the ability of
CenterPoint Energy and its regulated 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.
Basis of Presentation. The preparation of financial statements in
conformity with generally accepted accounting principles 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 Company's 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) seasonal fluctuations in demand for energy
and energy services, (b) changes in energy commodity prices, (c) timing of
maintenance and other expenditures and (d) acquisitions and dispositions of
businesses, 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.
Note 2(e)(Regulatory Assets and Liabilities), Note 3 (Regulatory
Matters), Note 5 (Derivative Instruments) and Note 9 (Commitments and
Contingencies) to the consolidated annual financial statements in the CERC Corp.
Form 10-K (CERC Corp. 10-K Notes) relate to certain contingencies. These notes,
as updated herein, are incorporated herein by reference.
For information regarding environmental matters and legal proceedings,
see Note 9 to the Interim Financial Statements.
(2) NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. (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. On December 24, 2003, the
FASB issued a revision to FIN 46 (FIN 46-R). For special-purpose entities
(SPE's) created before February 1, 2003, the Company applied the provisions of
FIN 46 or FIN 46-R as of December 31, 2003. The revised FIN 46-R is effective
for all other entities for financial periods ending after March 15, 2004. The
Company has a subsidiary trust that has Mandatorily Redeemable Preferred
Securities outstanding. The trust was determined to be a variable interest
entity under FIN 46-R and the Company also determined that it is
5
not the primary beneficiary of the trust. As of December 31, 2003, the Company
deconsolidated the trust and instead reports its junior subordinated debentures
due to the trust as long-term debt.
On December 23, 2003, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 132 (Revised 2003), "Employer's Disclosures about Pensions
and Other Postretirement Benefits" (SFAS No. 132(R)) which increases the
existing disclosure requirements by requiring more details about pension plan
assets, benefit obligations, cash flows, benefit costs and related information.
Companies are required to segregate plan assets by category, such as debt,
equity and real estate, and to provide certain expected rates of return and
other informational disclosures. SFAS No. 132(R) also requires companies to
disclose various elements of pension and postretirement benefit costs in
interim-period financial statements for quarters beginning after December 15,
2003. The Company has adopted the disclosure requirements of SFAS No. 132(R) in
Note 11(a) to these Interim Financial Statements.
In December 2003, Congress passed the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the Act) which will become effective
in 2006. The Act contains incentives for the Company, if it continues to provide
prescription drug benefits for its retirees, through the provision of a
non-taxable reimbursement to the Company of specified costs. The Company has
many different alternatives available under the Act, and, until clarifying
regulations are issued with respect to the Act, the Company is unable to
determine the financial impact the Act will have on the Company. On January 12,
2004, the FASB issued FASB Staff Position (FSP) FAS 106-1, "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003" (FAS 106-1). In accordance with FSP FAS 106-1,
the Company's postretirement benefits obligations and net periodic
postretirement benefit cost in the financial statements and accompanying notes
do not reflect the effects of the legislation. Specific authoritative guidance
on the accounting for the legislation is pending, and that guidance, when
issued, may require the Company to change previously reported information.
(3) REGULATORY MATTERS
(a) Rate Cases.
On January 6, 2004, new rates went into effect in the City of Houston
in accordance with a rate settlement between CenterPoint Energy Entex (Entex)
and the City. These settlement rates were subsequently filed with the 28
remaining cities in the Houston Division and with the Railroad Commission of
Texas (Texas Railroad Commission). The settlement rates went into effect in 12
of the 28 cities on February 1, 2004 and went into effect for ten additional
cities on May 1, 2004. The Texas Railroad Commission is expected to render a
decision associated with the unincorporated environs in the near future. Once
all remaining regulatory approvals are received, the annualized effect of this
multi-jurisdictional rate increase will be approximately $14 million.
(b) Other Regulatory Proceedings.
City of Tyler, Texas Dispute. In July 2002, the City of Tyler, Texas,
asserted that Entex had overcharged residential and small commercial customers
in that city for excessive gas costs under supply agreements in effect since
1992. That dispute has been referred to the Texas Railroad Commission by
agreement of the parties for a determination of whether Entex has properly and
lawfully charged and collected for gas service to its residential and commercial
customers in its Tyler distribution system for the period beginning November 1,
1992, and ending October 31, 2002. The Company believes that all costs for
Entex's Tyler distribution system have been properly included and recovered from
customers pursuant to Entex's filed tariffs.
(4) DERIVATIVE INSTRUMENTS
The Company is exposed to various market risks. These risks arise from
transactions entered into in the normal course of business. The Company utilizes
derivative financial instruments such as physical forward contracts, swaps and
options to mitigate the impact of changes in cash flows of its natural gas
businesses on its operating results and cash flows.
Cash Flow Hedges. During the three months ended March 31, 2004, there
was no hedge ineffectiveness recognized in earnings from derivatives that
qualify for and are designated as cash flow hedges. No component of the
derivative instruments' gain or loss was excluded from the assessment of
effectiveness. As of March 31, 2004,
6
the Company expects $54 million in accumulated other comprehensive income to be
reclassified into net income during the next twelve months.
For additional information regarding the Company's use of derivatives,
see Note 5 to the CERC Corp. 10-K Notes, which is incorporated herein by
reference.
(5) GOODWILL AND INTANGIBLES
Goodwill as of December 31, 2003 and March 31, 2004 by reportable
business segment is as follows (in millions):
Natural Gas Distribution....... $ 1,085
Pipelines and Gathering........ 601
Other Operations............... 55
------------
Total........................ $ 1,741
============
The Company completed its annual evaluation of goodwill for impairment
as of January 1, 2004 and no impairment was indicated.
The components of the Company's other intangible assets consist of the
following:
DECEMBER 31, 2003 MARCH 31, 2004
-------------------------- ---------------------------
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
----------- ------------ ----------- ------------
(IN MILLIONS)
Land use rights.......................... $ 7 $ (3) $ 7 $ (3)
Other.................................... 20 (4) 20 (4)
----------- ---------- ----------- ----------
Total.................................... $ 27 $ (7) $ 27 $ (7)
=========== ========== =========== ==========
The Company recognizes specifically identifiable intangibles when
specific rights and contracts are acquired. The Company has no intangible assets
with indefinite lives recorded as of March 31, 2004. The Company amortizes other
acquired intangibles on a straight-line basis over the lesser of their
contractual or estimated useful lives that range from 47 to 75 years for land
use rights and 4 to 25 years for other intangibles.
Amortization expense for other intangibles for the three months ended
March 31, 2003 and 2004 was $0.3 million and $0.4 million, respectively.
Estimated amortization expense for the remainder of 2004 is approximately $1.5
million and is approximately $0.5 million per year for the five succeeding
fiscal years.
(6) LONG-TERM DEBT AND RECEIVABLES FACILITY
(a) Long-Term Debt.
Credit Facilities. As of March 31, 2004, the Company had a revolving
credit facility that provided for an aggregate of $250 million in committed
credit. The revolving credit facility terminates on March 23, 2007. Fully-drawn
rates for borrowings under this facility, including the facility fee, are London
interbank offered rate (LIBOR) plus 150 basis points based on current credit
ratings and the applicable pricing grid. As of March 31, 2004, such credit
facility was not utilized.
Junior Subordinated Debentures (Trust Preferred Securities). In June
1996, a Delaware statutory business trust created by CERC Corp. (CERC Trust)
issued $173 million aggregate amount of convertible preferred securities to the
public. CERC Trust used the proceeds of the offering to purchase convertible
junior subordinated debentures issued by CERC Corp. having an interest rate and
maturity date that correspond to the distribution rate and mandatory redemption
date of the convertible preferred securities. The convertible junior
subordinated debentures represent CERC Trust's sole asset and its entire
operations. CERC Corp. considers its obligation under the Amended and Restated
Declaration of Trust, Indenture and Guaranty Agreement relating to the
convertible preferred securities, taken together, to constitute a full and
unconditional guarantee by CERC Corp. of CERC Trust's obligations with respect
to the convertible preferred securities. As discussed in Note 2, upon the
Company's
7
adoption of FIN 46, the junior subordinated debentures discussed above are
included in long-term debt as of December 31, 2003 and March 31, 2004.
The convertible preferred securities are mandatorily redeemable upon
the repayment of the convertible junior subordinated debentures at their stated
maturity or earlier redemption. Effective January 7, 2003, the convertible
preferred securities are convertible at the option of the holder into $33.62 of
cash and 2.34 shares of CenterPoint Energy common stock for each $50 of
liquidation value. As of December 31, 2003 and March 31, 2004, $0.4 million
liquidation amount of convertible preferred securities were outstanding. The
securities, and their underlying convertible junior subordinated debentures,
bear interest at 6.25% and mature in June 2026. Subject to some limitations,
CERC Corp. has the option of deferring payments of interest on the convertible
junior subordinated debentures. During any deferral or event of default, CERC
Corp. may not pay dividends on its common stock to CenterPoint Energy. As of
March 31, 2004, no interest payments on the convertible junior subordinated
debentures had been deferred.
(b) Receivables Facility.
On January 21, 2004, the Company replaced its $100 million receivables
facility with a $250 million receivables facility. The $250 million receivables
facility terminates on January 19, 2005. As of March 31, 2004, the Company had
fully utilized its receivables facility.
(7) COMPREHENSIVE INCOME
The following table summarizes the components of total comprehensive
income:
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------
2003 2004
-------- --------
(IN MILLIONS)
Net income......................................................................... $ 88 $ 74
-------- --------
Other comprehensive income:
Net deferred gain (loss) from cash flow hedges................................... (1) 8
Reclassification of deferred loss (gain) from cash flow hedges realized in net
income......................................................................... 1 (3)
-------- --------
Other comprehensive income......................................................... -- 5
-------- --------
Comprehensive income............................................................... $ 88 $ 79
======== ========
8
(8) RELATED PARTY TRANSACTIONS
The following table summarizes receivables from, or payables to,
CenterPoint Energy or its subsidiaries:
DECEMBER 31, MARCH 31,
2003 2004
------------ ----------
(IN MILLIONS)
Accounts receivable from affiliates......................................... $ 6 $ 11
Accounts payable to affiliates.............................................. (29) (36)
--------- ----------
Accounts payable -- affiliated companies, net............................. (23) (25)
--------- ----------
Note receivable from affiliates(1).......................................... -- 183
--------- ----------
Accounts and notes receivable/(payable) -- affiliated companies, net... $ (23) $ 158
========= ==========
Long-term accounts receivable from affiliates............................... $ -- $ 64
Long-term accounts payable to affiliates.................................... -- (43)
--------- ----------
Long-term accounts receivable -- affiliated companies, net................ -- $ 21
--------- ----------
Long-term notes receivable from affiliates.................................. 67 $ 5
Long-term notes payable to affiliates....................................... (33) --
--------- ----------
Long-term notes receivable -- affiliated companies, net................... 34 $ 5
--------- ----------
Long-term accounts and notes receivable -- affiliated companies, net... $ 34 $ 26
========= ==========
- ----------
(1) This represents money pool investments.
For the three months ended March 31, 2003 and 2004, the Company had net
interest income (expense) related to affiliate borrowings of $(0.1) million and
$1.6 million, respectively.
The 1935 Act generally prohibits borrowings by CenterPoint Energy from
its subsidiaries, including the Company, either through the money pool or
otherwise.
For the three months ended March 31, 2003 and 2004, sales and services
provided by the Company to CenterPoint Energy and its subsidiaries totaled $5
million and $7 million, respectively.
CenterPoint Energy provides some corporate services to the Company. The
costs of services have been directly charged 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 $31 million
and $27 million for the three months ended March 31, 2003 and 2004,
respectively, and are included primarily in operation and maintenance expenses.
(9) COMMITMENTS AND CONTINGENCIES
(a) Legal Matters.
Natural Gas Measurement Lawsuits. CERC Corp. and certain of its
subsidiaries are defendants in a suit filed in 1997 under the Federal False
Claims Act alleging mismeasurement of natural gas produced from federal and
Indian lands. The suit seeks undisclosed damages, along with statutory
penalties, interest, costs, and fees. The complaint is part of a larger series
of complaints filed against 77 natural gas pipelines and their subsidiaries and
affiliates. An earlier single action making substantially similar allegations
against the pipelines was dismissed by the federal district court for the
District of Columbia on grounds of improper joinder and lack of jurisdiction. As
a result, the various individual complaints were filed in numerous courts
throughout the country. This case has been consolidated, together with the other
similar False Claims Act cases, in the federal district court in Cheyenne,
Wyoming.
9
In addition, CERC Corp. and certain of its subsidiaries are defendants
in two mismeasurement lawsuits against approximately 245 pipeline companies and
their affiliates pending in state court in Stevens County, Kansas. In one case
(originally filed in May 1999 and amended four times), the plaintiffs purport to
represent a class of royalty owners who allege that the defendants have engaged
in systematic mismeasurement of the volume of natural gas for more than 25
years. The plaintiffs amended their petition in this suit in July 2003 in
response to an order from the judge denying certification of the plaintiffs'
alleged class. In the amendment the plaintiffs dismissed their claims against
certain defendants (including two CERC subsidiaries), limited the scope of the
class of plaintiffs they purport to represent and eliminated previously asserted
claims based on mismeasurement of the Btu content of the gas. The same
plaintiffs then filed a second lawsuit, again as representatives of a class of
royalty owners, in which they assert their claims that the defendants have
engaged in systematic mismeasurement of the Btu content of natural gas for more
than 25 years. In both lawsuits, the plaintiffs seek compensatory damages, along
with statutory penalties, treble damages, interest, costs and fees. The Company
believes that there has been no systematic mismeasurement of gas and that the
suits are without merit. The Company does not expect that their ultimate outcome
would have a material impact on the Company's financial condition or results of
operations.
Gas Cost Recovery Litigation. In October 2002, a suit was filed in
state district court in Wharton County, Texas against CenterPoint Energy, the
Company, Entex Gas Marketing Company, and others alleging fraud, violations of
the Texas Deceptive Trade Practices Act, violations of the Texas Utilities Code,
civil conspiracy and violations of the Texas Free Enterprise and Antitrust Act.
The plaintiffs seek class certification, but no class has been certified. The
plaintiffs allege that defendants inflated the prices charged to certain
consumers of natural gas. In February 2003, a similar suit was filed against the
Company in state court in Caddo Parish, Louisiana purportedly on behalf of a
class of residential or business customers in Louisiana who allegedly have been
overcharged for gas or gas service provided by the Company. In February 2004,
another suit was filed against the Company in Calcasieu Parish, Louisiana,
seeking to recover alleged overcharges for gas or gas services allegedly
provided by Entex without advance approval by the Louisiana Public Service
Commission. The plaintiffs in these cases seek injunctive and declaratory
relief, restitution for the alleged overcharges, exemplary damages or trebling
of actual damages and civil penalties. In these cases, CenterPoint Energy, the
Company and Entex Gas Marketing Company deny that they have overcharged any of
their customers for natural gas and believe that the amounts recovered for
purchased gas have been in accordance with what is permitted by state regulatory
authorities. The Company does not anticipate that the outcome of these matters
will have a material impact on the Company's financial condition or results of
operations.
(b) Environmental Matters.
Hydrocarbon Contamination. CERC Corp. and certain of its subsidiaries
are among the defendants in lawsuits filed beginning in August 2001 in Caddo
Parish and Bossier Parish, Louisiana. The suits allege that, at some unspecified
date prior to 1985, the defendants allowed or caused hydrocarbon or chemical
contamination of the Wilcox Aquifer, which lies beneath property owned or leased
by certain of the defendants and which is the sole or primary drinking water
aquifer in the area. The primary source of the contamination is alleged by the
plaintiffs to be a gas processing facility in Haughton, Bossier Parish,
Louisiana known as the "Sligo Facility," which was formerly operated by a
predecessor in interest of CERC Corp. This facility was purportedly used for
gathering natural gas from surrounding wells, separating gasoline and
hydrocarbons from the natural gas for marketing, and transmission of natural gas
for distribution.
Beginning about 1985, the predecessors of certain CERC Corp. defendants
engaged in a voluntary remediation of any subsurface contamination of the
groundwater below the property they owned or leased. This work has been done in
conjunction with and under the direction of the Louisiana Department of
Environmental Quality. The plaintiffs seek monetary damages for alleged damage
to the aquifer underlying their property, unspecified alleged personal injuries,
alleged fear of cancer, alleged property damage or diminution of value of their
property, and, in addition, seek damages for trespass, punitive, and exemplary
damages. The quantity of monetary damages sought is unspecified. The Company is
unable to estimate the monetary damages, if any, that the plaintiffs may be
awarded in these matters.
Manufactured Gas Plant Sites. The Company and its predecessors operated
manufactured gas plants (MGP) in the past. In Minnesota, remediation has been
completed on two sites, other than ongoing monitoring and water treatment. There
are five remaining sites in the Company's Minnesota service territory, two of
which it believes were neither owned nor operated by the Company, and for which
it believes it has no liability.
10
At March 31, 2004, the Company had accrued $19 million for remediation
of certain Minnesota sites. At March 31, 2004, the estimated range of possible
remediation costs for these sites was $8 million to $44 million based on
remediation continuing for 30 to 50 years. The cost estimates are based on
studies of a site or industry average costs for remediation of sites of similar
size. The actual remediation costs will be dependent upon the number of sites to
be remediated, the participation of other potentially responsible parties (PRP),
if any, and the remediation methods used. The Company has utilized an
environmental expense tracker mechanism in its rates in Minnesota to recover
estimated costs in excess of insurance recovery. The Company has collected or
accrued $12 million as of March 31, 2004 to be used for environmental
remediation.
The Company has received notices from the United States Environmental
Protection Agency and others regarding its status as a PRP for other sites. The
Company has been named as a defendant in lawsuits under which contribution is
sought for the cost to remediate former MGP sites based on the previous
ownership of such sites by former affiliates of the Company or its divisions.
The Company is investigating details regarding these sites and the range of
environmental expenditures for potential remediation. Based on current
information, the Company has not been able to quantify a range of potential
environmental expenditures for such sites.
Mercury Contamination. The Company's pipeline and distribution
operations have in the past employed elemental mercury in measuring and
regulating equipment. It is possible that small amounts of mercury may have been
spilled in the course of normal maintenance and replacement operations and that
these spills may have contaminated the immediate area with elemental mercury.
This type of contamination has been found by the Company at some sites in the
past, and the Company has conducted remediation at these sites. It is possible
that other contaminated sites may exist and that remediation costs may be
incurred for these sites. Although the total amount of these costs cannot be
known at this time, based on experience by the Company and that of others in the
natural gas industry to date and on the current regulations regarding
remediation of these sites, the Company believes that the costs of any
remediation of these sites will not be material to the Company's financial
condition, results of operations or cash flows.
Other Environmental. From time to time the Company has received notices
from regulatory authorities or others regarding its status as a PRP in
connection with sites found to require remediation due to the presence of
environmental contaminants. In addition, the Company has been named as a
defendant in litigation related to such sites. The Company anticipates that
additional claims like those received may be asserted in the future and intends
to continue vigorously contesting claims that it does not consider to have
merit. Although their ultimate outcome cannot be predicted at this time, the
Company does not believe, based on its experience to date, that these matters,
either individually or in the aggregate, will have a material adverse effect on
the Company's financial condition, results of operations or cash flows.
(c) 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.
(10) REPORTABLE BUSINESS SEGMENTS
Because CERC Corp. is an indirect wholly owned subsidiary of
CenterPoint Energy, the Company's determination of reportable segments considers
the strategic operating units under which CenterPoint Energy manages sales,
allocates resources and assesses performance of various products and services to
wholesale or retail customers in differing regulatory environments.
The Company has identified the following reportable business segments:
Natural Gas Distribution, Pipelines and Gathering, and Other Operations. For
descriptions of the reportable business segments, see Note 12 to the CERC Corp.
10-K Notes, which is incorporated herein by reference.
11
The following table summarizes financial data for the Company's
reportable business segments:
AS OF
DECEMBER 31,
FOR THE THREE MONTHS ENDED MARCH 31, 2003 2003
------------------------------------------------- ------------
REVENUES FROM NET
THIRD PARTIES AND INTERSEGMENT OPERATING
AFFILIATES REVENUES INCOME TOTAL ASSETS
----------------- ------------ ----------- ------------
(IN MILLIONS)
Natural Gas Distribution............. $ 2,028 $ 17 $ 129 $ 4,661
Pipelines and Gathering.............. 61 48 43 2,519
Other Operations..................... -- 2 -- 388
Sales to Affiliates.................. 5 -- -- --
Eliminations......................... -- (67) -- (715)
------------ ----------- ----------- -----------
Consolidated......................... $ 2,094 $ -- $ 172 $ 6,853
============ =========== =========== ===========
AS OF
MARCH 31,
FOR THE THREE MONTHS ENDED MARCH 31, 2004 2004
------------------------------------------------- ------------
REVENUES FROM NET
THIRD PARTIES AND INTERSEGMENT OPERATING
AFFILIATES REVENUES INCOME TOTAL ASSETS
----------------- ------------ ----------- ------------
(IN MILLIONS)
Natural Gas Distribution............. $ 2,124 $ 7 $ 117 $ 4,691
Pipelines and Gathering.............. 65 37 45 2,481
Other Operations..................... -- 3 (2) 539
Sales to Affiliates.................. 7 -- -- --
Eliminations......................... -- (47) -- (909)
------------ ----------- ----------- -----------
Consolidated......................... $ 2,196 $ -- $ 160 $ 6,802
============ =========== =========== ===========
(11) EMPLOYEE BENEFIT PLANS AND SEVERANCE COSTS
(a) Employee Benefit Plans.
The Company's employees participate in CenterPoint Energy's
postretirement benefit plan.
The Company's net periodic cost includes the following components
relating to postretirement benefits:
THREE MONTHS ENDED
MARCH 31,
---------------------------
2003 2004
----------- ------------
(IN MILLIONS)
Service cost..................................... $ -- $ --
Interest cost.................................... 2 2
Expected return on plan assets................... -- --
Net amortization................................. 1 1
Other ........................................... -- 1
----------- ------------
Net periodic cost.......................... $ 3 $ 4
=========== ============
The Company previously disclosed in its financial statements for the
year ended December 31, 2003, that it expected to contribute $15 million to its
postretirement benefits plan in 2004. As of March 31, 2004, $3 million has been
contributed.
(b) Severance Costs.
The Company recorded an $8 million charge for severance costs
associated with staff reductions in its Natural Gas Distribution business
segment during the three months ended March 31, 2004.
12
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS
The following narrative analysis should be read in combination with our
Interim Financial Statements contained in Item 1 of this report.
We are an indirect wholly owned subsidiary of CenterPoint Energy, Inc.
(CenterPoint Energy), a public utility holding company created on August 31,
2002, as part of a corporate restructuring of Reliant Energy, Incorporated
(Reliant Energy). CenterPoint Energy is a registered public utility holding
company under the Public Utility Holding Company Act of 1935, as amended (1935
Act). For information about the 1935 Act, please read " -- Liquidity -- Certain
Contractual and Regulatory Limits on Ability to Issue Securities and Pay
Dividends."
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 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, Use of Proceeds and Issuer
Purchases of Equity 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 revenue and expense items between
the three months ended March 31, 2003 and the three months ended March 31, 2004.
Reference is made to "Management's Narrative Analysis of the Results of
Operations" in Item 7 of the Annual Report on Form 10-K of CERC Corp. for the
year ended December 31, 2003 (CERC Corp. Form 10-K).
CONSOLIDATED RESULTS OF OPERATIONS
Our results of operations are affected by seasonal fluctuations in the
demand for natural gas and price movements of energy commodities. Our results of
operations are also affected by, among other things, the actions of various
federal, state and municipal governmental authorities having jurisdiction over
rates we charge, competition in our various business operations, debt service
costs and income tax expense. For more information regarding factors that may
affect the future results of operations of our business, please read "Business
- -- Risk Factors" in Item 1 of the CERC Corp. Form 10-K and "Management's
Narrative Analysis of the Results of Operations -- Certain Factors Affecting
Future Earnings" in Item 7 of the CERC Corp. Form 10-K, which are incorporated
herein by reference.
The following table sets forth our consolidated results of operations
for the three months ended March 31, 2003 and 2004, followed by a discussion of
our consolidated results of operations based on operating income. We have
provided a reconciliation of consolidated operating income to net income below.
THREE MONTHS ENDED MARCH 31,
------------------------------
2003 2004
------------ ------------
Revenues............................................................... $ 2,094 $ 2,196
------------ ------------
Expenses:
Natural gas......................................................... 1,655 1,762
Operation and maintenance........................................... 178 182
Depreciation and amortization....................................... 44 47
Taxes other than income taxes....................................... 45 45
------------ ------------
Total Expenses............................................... 1,922 2,036
------------ ------------
Operating Income....................................................... 172 160
Interest and Other Finance Charges..................................... (36) (42)
Other Income, net...................................................... 1 3
------------ ------------
Income Before Income Taxes............................................. 137 121
Income Tax Expense..................................................... (49) (47)
------------ ------------
Net Income........................................................... $ 88 $ 74
============ ============
THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THREE MONTHS ENDED MARCH 31, 2003
We reported operating income of $160 million for the three months ended
March 31, 2004 as compared to $172 million for the same period in 2003.
Continued customer growth, with the addition of over 38,000 customers in our
Natural Gas Distribution business segment since March 2003, higher revenues of
$3 million from rate increases,
13
higher utilization of storage services, higher interruptible transportation
margins, increased throughput and enhanced services related to our gas gathering
operations and lower natural gas prices were more than offset by the impact of
milder weather of $10 million and reduced contributions from our competitive
commercial and industrial sales business. Operation and maintenance expense
increased $4 million for the three months ended March 31, 2004 compared to the
same period in 2003 primarily due to an $8 million charge for severance costs
associated with staff reductions in our Natural Gas Distribution business
segment, which will reduce costs in future periods. Excluding this charge,
operation and maintenance expenses decreased by $4 million.
CERTAIN FACTORS AFFECTING FUTURE EARNINGS
For information on other developments, factors and trends that may have
an impact on our future earnings, please read "Management's Narrative Analysis
of Results of Operations -- Certain Factors Affecting Future Earnings" in Item 7
of Part II of the CERC Corp. Form 10-K and "Risk Factors" in Item 1 of Part I of
the CERC Corp. Form 10-K, each of which is incorporated herein by reference.
LIQUIDITY
Off-Balance Sheet Arrangements. Other than operating leases, we have no
off-balance sheet arrangements. However, we do participate in a receivables
factoring arrangement. On January 21, 2004, we replaced our $100 million
receivables facility with a $250 million receivables facility. The $250 million
receivables facility terminates on January 19, 2005. As of March 31, 2004, we
had fully utilized our receivables facility.
Long-Term Debt. As of March 31, 2004, we had the following revolving
credit facility:
SIZE OF AMOUNT
FACILITY AT OUTSTANDING AT
MARCH 31, MARCH 31,
DATE EXECUTED COMPANY 2004 2004 TERMINATION DATE
- ------------- ---------- ----------- -------------- ----------------
(IN MILLIONS)
March 23, 2004 CERC Corp. $ 250 $ -- March 23, 2007
On March 23, 2004, we replaced our $200 million revolving credit
facility with a $250 million revolving credit facility that terminates on March
23, 2007. Fully-drawn rates for borrowings under this facility, including the
facility fee, are London interbank offered rate (LIBOR) plus 150 basis points
based on current credit ratings and the applicable pricing grid.
As of March 31, 2004, we had $160 million in external temporary
investments.
At March 31, 2004, we had a shelf registration statement covering $50
million principal amount of debt securities.
Cash Requirements in 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 remaining cash
requirements during 2004 include approximately $256 million of capital
expenditures.
We expect that revolving credit borrowings, anticipated cash flows from
operations, the liquidation of our temporary investments and borrowings from
affiliates will be sufficient to meet our cash needs for 2004.
Impact on Liquidity of a Downgrade in Credit Ratings. As of May 1,
2004, 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 unsecured debt:
MOODY'S S&P FITCH
- ---------------------- --------------------- ---------------------
RATING OUTLOOK(1) RATING OUTLOOK(2) RATING OUTLOOK(3)
- ------ ---------- ------ ---------- ------ ----------
Ba1 Stable BBB Negative BBB Negative
- ----------
(1) A "stable" outlook from Moody's indicates that Moody's does
not expect to put the rating on review for an upgrade or
downgrade within 18 months from when the outlook was assigned
or last affirmed.
14
(2) An S&P rating outlook assesses the potential direction of a
long-term credit rating over the intermediate to longer term.
(3) A "negative" outlook from Fitch encompasses a one-to-two year
horizon as to the likely ratings direction.
On April 30, 2004, Moody's announced that it had changed our outlook to
stable from negative. Moody's explained in its announcement that the action was
to reflect the mitigation of concerns that underlay its negative outlook
including our establishment of a steady operating track record as a subsidiary
of CenterPoint Energy, our establishment of adequate stand-alone liquidity, our
progress made in addressing certain regulatory issues and greater comfort with
the ringfencing protections provided to us by the 1935 Act.
We cannot assure you that these ratings will remain in effect for any
given period of time or that one or more of these ratings will not be lowered or
withdrawn entirely by a rating agency. We note that these credit ratings are not
recommendations to buy, sell or hold our securities and may be revised or
withdrawn at any time by the rating agency. Each rating should be evaluated
independently of any other rating. Any future reduction or withdrawal of one or
more of our credit ratings could have a material adverse impact on our ability
to obtain short- and long-term financing, the cost of such financings, the
willingness of suppliers to extend credit lines to us on an unsecured basis and
the execution of our commercial strategies.
A decline in credit ratings would increase borrowing costs under our
$250 million revolving credit facility. 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
as more fully described in " -- Certain Contractual and Regulatory Limits on
Ability to Issue Securities and Pay Dividends" below. Additionally, a decline in
credit ratings could increase cash collateral requirements that could exist in
connection with certain contracts relating to gas purchases, gas price hedging
and gas storage activities of our Natural Gas Distribution business segment.
Our revolving credit facility contains a "material adverse change"
clause that could impact our ability to make new borrowings under this facility.
The "material adverse change" clause in our revolving credit facility relates to
any material adverse change in the business, condition, operations, performance
or properties of the borrower or the borrower and its subsidiaries taken as a
whole.
CenterPoint Energy Gas Services, Inc. (CEGS), a wholly owned subsidiary
of CERC Corp., provides comprehensive natural gas sales and services to
industrial and commercial customers, which are primarily located within or near
the territories served by our pipelines and natural gas distribution
subsidiaries. In order to hedge its exposure to natural gas prices, CEGS has
agreements with provisions standard for the industry that establish credit
thresholds and require a party to provide additional collateral on two business
days' notice when that party's rating or the rating of a credit support provider
for that party (CERC Corp. in this case) falls below those levels. As of
December 31, 2003, the senior unsecured debt of CERC Corp. was rated BBB by S&P
and Ba1 by Moody's. We estimate that as of March 31, 2004, unsecured credit
limits related to hedge instruments extended to CEGS by counterparties could
aggregate $82 million; however, utilized credit capacity is significantly lower.
Cross Defaults. Our debentures and borrowings generally provide that a
default on obligations by CenterPoint Energy does not cause a default under our
debentures, revolving credit facility or receivables facility. Under our
revolving credit facility, a payment default on, or a non-payment default that
permits acceleration of, any indebtedness exceeding $35 million by us or any of
our significant subsidiaries will cause a default. 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 $922 million aggregate principal amount of our senior notes.
A payment default on, or a non-payment default that permits acceleration of, any
indebtedness at CERC Corp. exceeding $50 million will cause a default under
CenterPoint Energy's $2.3 billion credit facility entered into in October 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 senior debt of CenterPoint Energy
aggregating $1.4 billion.
Pension Plan. As discussed in Note 7(a) to the consolidated annual
financial statements in the CERC Corp. Form 10-K (CERC Corp. 10-K Notes), which
is incorporated herein by reference, we participate in CenterPoint Energy's
qualified non-contributory pension plan
15
covering substantially all employees. Pension expense for 2004 is estimated to
be $31 million based on an expected return on plan assets of 9.0% and a discount
rate of 6.25% as of December 31, 2003. 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.
Other Factors that Could Affect Cash Requirements. In addition to the
above factors, our liquidity and capital resources could be affected by:
- cash collateral requirements that could exist in connection
with certain contracts, including gas purchases, gas price
hedging and gas storage activities of our Natural Gas
Distribution business segment, particularly given gas price
levels and volatility;
- acceleration of payment dates on certain gas supply contracts
under certain circumstances, as a result of increased gas
prices and concentration of suppliers;
- increased costs related to the acquisition of gas for storage;
and
- various regulatory actions.
Money Pool. We participate in a "money pool" through which we and
certain of our affiliates can borrow or invest on a short-term basis. Funding
needs are aggregated and external borrowing or investing is based on the net
cash position. The money pool's net funding requirements are generally met by
borrowings of CenterPoint Energy. The terms of the money pool are in accordance
with requirements applicable to registered public utility holding companies
under the 1935 Act and under an order from the SEC dated June 30, 2003 (June
2003 Financing Order) relating to our financing activities. Our money pool
borrowing limit under such financing order is $600 million. At March 31, 2004,
we had $183 million invested in the money pool. The money pool may not provide
sufficient funds to meet our cash needs.
Certain Contractual and Regulatory Limits on Ability to Issue
Securities and Pay Dividends. Factors affecting our ability to issue securities,
pay dividends on our common stock or take other actions to adjust our
capitalization include:
- covenants and other provisions in our credit facility and
receivables facility; and
- limitations imposed on us under the 1935 Act.
Our bank facility and our receivables facility limit our debt as a
percentage of our total capitalization to 60% and contain an earnings before
interest, taxes, depreciation and amortization (EBITDA) to interest covenant. We
are in compliance with such covenants.
Our parent, CenterPoint Energy, 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 parent's activities and those of its
subsidiaries, including us. The 1935 Act, among other things, limits our
parent's ability and the ability of its regulated subsidiaries, including us, 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 June 2003 Financing Order is effective until June 30, 2005.
Additionally, CenterPoint Energy has received several subsequent orders which
provide additional financing authority. These orders establish limits on the
amount of external debt and equity securities that can be issued by CenterPoint
Energy and its regulated subsidiaries, including us, without additional
authorization but generally permit CenterPoint Energy and its subsidiaries,
including us, to refinance our existing obligations. We are in compliance with
the authorized limits. The orders also permit our utilization of undrawn credit
facilities. As of April 30, 2004, we are authorized to issue an additional $2
million of debt and an additional aggregate $250 million of preferred stock and
preferred securities after giving effect to our capital market transactions in
2003 and the first four months of 2004.
The SEC has reserved jurisdiction over, and must take further action to
permit, the issuance of $430 million of additional debt by us.
16
The orders require that if CenterPoint Energy or any of its regulated
subsidiaries, including us, 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
orders also contain certain requirements for interest rates, maturities,
issuance expenses and use of proceeds.
The 1935 Act limits the payment of dividends to payment from current
and retained earnings unless specific authorization is obtained to pay dividends
from other sources. The June 2003 Financing Order requires us to maintain a
ratio of common equity to total capitalization of at least 30%.
Relationship with CenterPoint Energy. We are an indirect 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.
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. Our significant accounting policies are discussed in Note 2 to the CERC
Corp. 10-K Notes. We believe the following accounting policies involve the
application of critical accounting estimates. Accordingly, these accounting
estimates have been reviewed and discussed with the audit committee of the board
of directors of CenterPoint Energy.
IMPAIRMENT OF LONG-LIVED ASSETS AND INTANGIBLES
We review the carrying value of our long-lived assets, including
goodwill and identifiable intangibles, whenever events or changes in
circumstances indicate that such carrying values may not be recoverable, and
annually for goodwill as required by Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets." No impairment of goodwill was
indicated based on our analysis as of January 1, 2004. Unforeseen events and
changes in circumstances and market conditions and material differences in the
value of long-lived assets and intangibles due to changes in estimates of future
cash flows, regulatory matters and operating costs could negatively affect the
fair value of our assets and result in an impairment charge.
Fair value is the amount at which the asset could be bought or sold in
a current transaction between willing parties and may be estimated using a
number of techniques, including quoted market prices or valuations by third
parties, present value techniques based on estimates of cash flows, or multiples
of earnings or revenue performance measures. The fair value of the asset could
be different using different estimates and assumptions in these valuation
techniques.
UNBILLED REVENUES
Revenues related to the sale and/or delivery of natural gas are
generally recorded when natural gas is delivered to customers. However, the
determination of sales 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 natural gas
17
delivered to customers since the date of the last meter reading are estimated
and the corresponding unbilled revenue is estimated. Unbilled natural gas sales
are estimated based on estimated purchased gas volumes, estimated lost and
unaccounted for gas and tariffed rates in effect. As additional information
becomes available, or actual amounts are determinable, the recorded estimates
are revised. Consequently, operating results can be affected by revisions to
prior accounting estimates.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 2 to the Interim Financial Statements for a discussion of new
accounting pronouncements that affect us.
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 March 31, 2004 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 March 31, 2004 that has
materially affected, or is reasonably likely to materially affect, our internal
controls over financial reporting.
18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For a description of certain legal and regulatory proceedings affecting
us, please review Notes 3 and 9 to our Interim Financial Statements, "Business
- -- Regulation" and " -- Environmental Matters" in Item 1 of the CERC Corp. Form
10-K, Item 3 of the CERC Corp. Form 10-K and Notes 3, 9(c) and (d) to the CERC
Corp. 10-K Notes, each of which is incorporated herein by reference.
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 as indicated.
REPORT OR SEC FILE OR
EXHIBIT REGISTRATION REGISTRATION EXHIBIT
NUMBER DESCRIPTION STATEMENT NUMBER REFERENCE
- ------- ----------------------------------------- ---------------------------- ------------- ---------
3.1.1 - Certificate of Incorporation of Form 10-K for the year ended 1-13265 3(a)(1)
RERC Corp. December 31, 1997
3.1.2 - Certificate of Merger merging Form 10-K for the year ended 1-13265 3(a)(2)
former NorAm Energy Corp. with and December 31, 1997
into HI Merger, Inc. dated August
6, 1997
3.1.3 - Certificate of Amendment changing Form 10-K for the year ended 1-13265 3(a)(3)
the name to Reliant Energy Resources December 31, 1998
Corp.
3.1.4 - Certificate of Amendment changing Form 10-Q for the quarter ended 1-13265 3(a)(4)
the name to CenterPoint Energy June 30, 2003
Resources Corp.
3.2 - Bylaws of RERC Corp. Form 10-K for the year ended 1-13265 3(b)
December 31, 1997
10.1 - $250,000,000 Credit Agreement, Form 8-K dated March 31, 2004 1-13265 4.1
dated as of March 23, 2004, among
CERC Corp., as Borrower, and the
Initial Lenders named therein, as
Initial Lenders
+31.1 - Rule 13a-14(a)/15d-14(a)
Certification of David M. McClanahan
+31.2 - Rule 13a-14(a)/15d-14(a)
Certification of Gary L. Whitlock
+32.1 - Section 1350 Certification of David
M. McClanahan
+32.2 - Section 1350 Certification of Gary
L. Whitlock
19
REPORT OR SEC FILE OR
EXHIBIT REGISTRATION REGISTRATION EXHIBIT
NUMBER DESCRIPTION STATEMENT NUMBER REFERENCE
- ------- ----------------------------------------- ---------------------------- ------------- ---------
+99.1 - Items incorporated by reference
from the CERC Corp. Form 10-K.
Item 1 "Business -- Regulation,"
"-- Environmental Matters," and
"-- Risk Factors," Item 3 "Legal
Proceedings" and Item 7
"Management's Narrative Analysis of
the Results of Operations --
Certain Factors Affecting
Future Earnings" and Notes
2(e) (Regulatory Assets and
Liabilities), 3 (Regulatory
Matters), 5 (Derivative
Instruments), 7(a) (Pension
Plans), 9 (Commitments and
Contingencies) and 12 (Reportable
Segments).
(b) Reports on Form 8-K.
On March 3, 2004, we filed a Current Report on Form 8-K dated March 3,
2004 to furnish under Item 9 of that form a slide presentation we expect will be
presented to various members of the financial and investment community from time
to time.
On April 1, 2004, we filed a Current Report on Form 8-K dated March 31,
2004 to report that we had entered into a new three-year, $250 million credit
agreement with a group of lenders.
On April 1, 2004, we filed a Current Report on Form 8-K dated April 1,
2004 to furnish under Item 9 of that form a slide presentation we expect will be
presented to various members of the financial and investment community from time
to time.
20
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 RESOURCES CORP.
By: /s/ James S. Brian
----------------------------------------
James S. Brian
Senior Vice President and Chief Accounting Officer
Date: May 7, 2004
21
INDEX TO EXHIBITS
Exhibits not incorporated by reference to a prior filing are designated
by a cross (+); all exhibits not so designated are incorporated by reference to
a prior filing as indicated.
REPORT OR SEC FILE OR
EXHIBIT REGISTRATION REGISTRATION EXHIBIT
NUMBER DESCRIPTION STATEMENT NUMBER REFERENCE
- ------- ----------------------------------------- ---------------------------- ------------- ---------
3.1.1 - Certificate of Incorporation of Form 10-K for the year ended 1-13265 3(a)(1)
RERC Corp. December 31, 1997
3.1.2 - Certificate of Merger merging Form 10-K for the year ended 1-13265 3(a)(2)
former NorAm Energy Corp. with and December 31, 1997
into HI Merger, Inc. dated August
6, 1997
3.1.3 - Certificate of Amendment changing Form 10-K for the year ended 1-13265 3(a)(3)
the name to Reliant Energy Resources December 31, 1998
Corp.
3.1.4 - Certificate of Amendment changing Form 10-Q for the quarter ended 1-13265 3(a)(4)
the name to CenterPoint Energy June 30, 2003
Resources Corp.
3.2 - Bylaws of RERC Corp. Form 10-K for the year ended 1-13265 3(b)
December 31, 1997
10.1 - $250,000,000 Credit Agreement, Form 8-K dated March 31, 2004 1-13265 4.1
dated as of March 23, 2004, among
CERC Corp., as Borrower, and the
Initial Lenders named therein, as
Initial Lenders
+31.1 - Rule 13a-14(a)/15d-14(a)
Certification of David M. McClanahan
+31.2 - Rule 13a-14(a)/15d-14(a)
Certification of Gary L. Whitlock
+32.1 - Section 1350 Certification of David
M. McClanahan
+32.2 - Section 1350 Certification of Gary
L. Whitlock
+99.1 - Items incorporated by reference
from the CERC Corp. Form 10-K.
Item 1 "Business -- Regulation,"
"-- Environmental Matters," and
"-- Risk Factors," Item 3 "Legal
Proceedings" and Item 7
"Management's Narrative Analysis of
the Results of Operations --
Certain Factors Affecting Future
Earnings" and Notes 2(e)
(Regulatory Assets and
Liabilities), 3 (Regulatory
Matters), 5 (Derivative
Instruments), 7(a) (Pension
Plans, 9 (Commitments and
Contingencies) and 12 (Reportable
Segments).
22