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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 1-3187
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC
(Exact name of registrant as specified in its charter)
TEXAS 22-3865106
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1111 LOUISIANA
HOUSTON, TEXAS 77002 (713) 207-1111
(Address and zip code of principal (Registrant's telephone number,
executive offices) including area code)
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC MEETS THE CONDITIONS SET FORTH IN
GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS
FORM 10-Q WITH THE REDUCED DISCLOSURE FORMAT.
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of August 1, 2004, all 1,000 common shares of CenterPoint Energy Houston
Electric, LLC were held by Utility Holding, LLC, a wholly owned subsidiary of
CenterPoint Energy, Inc.
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2004
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements ............................................... 1
Statements of Consolidated Income
Three Months and Six Months Ended June 30, 2003 and 2004 (unaudited)... 1
Consolidated Balance Sheets
December 31, 2003 and June 30, 2004 (unaudited) ....................... 2
Statements of Consolidated Cash Flows
Six Months Ended June 30, 2003 and 2004 (unaudited) ................... 4
Notes to Unaudited Consolidated Financial Statements ................... 5
Item 2. Management's Narrative Analysis of the Results of Operations ....... 12
Item 4. Controls and Procedures ............................................ 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .................................................. 20
Item 6. Exhibits and Reports on Form 8-K ................................... 20
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:
- the timing and outcome of the regulatory process related to the 1999
Texas Electric Choice Law leading to the determination and recovery
of the true-up components and the securitization of these amounts;
- state and federal legislative and regulatory actions or
developments, including deregulation, re-regulation and
restructuring of the electric utility industry, constraints placed
on our activities or business by the Public Utility Holding Company
Act of 1935, as amended (1935 Act), changes in or application of
laws or regulations applicable to other aspects of our business and
actions with respect to:
- allowed rates of return;
- rate structures;
- recovery of investments; and
- operation and construction of facilities;
- industrial, commercial and residential growth in our service
territory and changes in market demand and demographic patterns;
- changes in interest rates or rates of inflation;
- weather variations and other natural phenomena;
- commercial bank and financial market conditions, our access to
capital, the cost of such capital, receipt of certain approvals
under the 1935 Act, and the results of our financing and refinancing
efforts, including availability of funds in the debt capital
markets;
- actions by rating agencies;
- non-payment for our services due to financial distress of our
customers, including Reliant Energy, Inc. (formerly named Reliant
Resources, Inc.) (RRI);
- the outcome of the pending securities lawsuits against us, Reliant
Energy, Incorporated and RRI;
- the ability of RRI to satisfy its obligations to us including
indemnity obligations and obligations to pay the "price to beat"
clawback; and
- other factors we discuss in "Risk Factors" beginning on page 11 of
the CenterPoint Energy Houston Electric, LLC Annual Report on Form
10-K for the year ended December 31, 2003.
ii
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.
iii
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
STATEMENTS OF CONSOLIDATED INCOME
(THOUSANDS OF DOLLARS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2003 2004 2003 2004
--------- --------- --------- ---------
REVENUES ............................................... $ 481,772 $ 374,003 $ 929,175 $ 703,153
--------- --------- --------- ---------
EXPENSES:
Operation and maintenance ........................... 125,596 125,694 258,604 257,833
Depreciation and amortization ....................... 68,107 69,827 132,849 134,900
Taxes other than income taxes ....................... 53,435 51,162 97,487 98,207
--------- --------- --------- ---------
Total .......................................... 247,138 246,683 488,940 490,940
--------- --------- --------- ---------
OPERATING INCOME ....................................... 234,634 127,320 440,235 212,213
--------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Interest and other finance charges................... (80,477) (77,105) (162,859) (154,192)
Interest on transition bonds ........................ (9,836) (9,547) (19,684) (19,221)
Other, net .......................................... 8,517 18,670 17,025 25,595
--------- --------- --------- ---------
Total .......................................... (81,796) (67,982) (165,518) (147,818)
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES ............................ 152,838 59,338 274,717 64,395
Income Tax Expense .................................. (53,455) (19,772) (95,159) (21,524)
--------- --------- --------- ---------
NET INCOME ............................................. $ 99,383 $ 39,566 $ 179,558 $ 42,871
========= ========= ========= =========
See Notes to the Company's Interim Financial Statements
1
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
ASSETS
DECEMBER 31, JUNE 30,
2003 2004
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents ..................................................... $ 30,720 $ 27,070
Accounts and notes receivable, net ............................................ 91,332 112,544
Accounts receivable -- affiliated companies, net .............................. 3,897 168
Accrued unbilled revenues ..................................................... 71,507 85,916
Materials and supplies ........................................................ 56,008 51,507
Taxes receivable .............................................................. 184,634 47,495
Other ......................................................................... 14,209 7,695
------------ ------------
Total current assets ....................................................... 452,307 332,395
------------ ------------
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment ................................................. 6,084,665 6,148,939
Less accumulated depreciation and amortization ................................ (2,040,382) (2,116,164)
------------ ------------
Property, plant and equipment, net ......................................... 4,044,283 4,032,775
------------ ------------
OTHER ASSETS:
Other intangibles, net ........................................................ 39,010 38,690
Regulatory assets ............................................................. 4,896,439 4,925,257
Accounts and notes receivable -- affiliated companies.......................... 814,513 814,513
Other ......................................................................... 79,770 91,021
------------ ------------
Total other assets ......................................................... 5,829,732 5,869,481
------------ ------------
TOTAL ASSETS ............................................................ $ 10,326,322 $ 10,234,651
============ ============
See Notes to the Company's Interim Financial Statements
2
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS) -- (CONTINUED)
(UNAUDITED)
LIABILITIES AND MEMBER'S EQUITY
DECEMBER 31, JUNE 30,
2003 2004
----------- -----------
CURRENT LIABILITIES:
Current portion of transition bond long-term debt............................... $ 41,189 $ 43,099
Accounts payable ............................................................... 35,771 34,783
Notes payable -- affiliated companies, net ..................................... 113,179 170,967
Taxes accrued .................................................................. 82,650 42,370
Interest accrued ............................................................... 64,769 76,782
Regulatory liabilities ......................................................... 185,812 191,358
Other .......................................................................... 62,085 64,313
----------- -----------
Total current liabilities ................................................... 585,455 623,672
----------- -----------
OTHER LIABILITIES:
Accumulated deferred income taxes, net ......................................... 1,799,926 1,845,394
Unamortized investment tax credits ............................................. 55,845 52,359
Benefit obligations ............................................................ 83,236 90,088
Regulatory liabilities ......................................................... 923,038 810,773
Notes payable -- affiliated companies .......................................... 379,900 150,850
Accounts payable -- affiliated companies ....................................... 398,984 400,717
Other .......................................................................... 11,424 14,326
----------- -----------
Total other liabilities ..................................................... 3,652,353 3,364,507
----------- -----------
LONG-TERM DEBT:
Transition bonds ............................................................... 675,665 659,773
Other .......................................................................... 2,672,019 2,902,998
----------- -----------
Total long-term debt ........................................................ 3,347,684 3,562,771
----------- -----------
COMMITMENTS AND CONTINGENCIES (NOTES 1 AND 6)
MEMBER'S EQUITY:
Common stock ................................................................... 1 1
Paid-in capital ................................................................ 2,190,111 2,190,111
Retained earnings .............................................................. 550,718 493,589
----------- -----------
Total member's equity ....................................................... 2,740,830 2,683,701
----------- -----------
TOTAL LIABILITIES AND MEMBER'S EQUITY .................................... $10,326,322 $10,234,651
=========== ===========
See Notes to the Company's Interim Financial Statements
3
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
STATEMENTS OF CONSOLIDATED CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
2003 2004
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................................................ $ 179,558 $ 42,871
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization ........................................................... 132,849 134,900
Amortization of deferred financing costs ................................................ 14,144 15,553
Deferred income taxes ................................................................... 138,672 42,856
Investment tax credits .................................................................. (2,345) (3,486)
Changes in other assets and liabilities:
Accounts and notes receivable, net ................................................... (41,981) (35,621)
Accounts receivable/payable, affiliates .............................................. (16,857) 5,462
Inventory ............................................................................ 2,719 4,501
Accounts payable ..................................................................... (11,210) (988)
Taxes receivable ..................................................................... (32,733) 137,139
Interest and taxes accrued ........................................................... (32,138) (28,267)
Net regulatory assets and liabilities ................................................ (362,919) (159,783)
Other current assets ................................................................. 4,146 6,514
Other current liabilities ............................................................ 3,771 2,165
Other assets ......................................................................... (29,851) (8,164)
Other liabilities .................................................................... (11,490) 12,366
Other, net .............................................................................. 1,433 (210)
--------- ---------
Net cash provided by (used in) operating activities ................................ (64,232) 167,808
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures and other ............................................................ (105,588) (99,608)
--------- ---------
Net cash used in investing activities .............................................. (105,588) (99,608)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt .................................................. 958,500 229,050
Payments of long-term debt ................................................................ (518,649) (14,355)
Debt issuance costs ....................................................................... (26,705) (15,283)
Increase in short-term notes with affiliates, net ......................................... 142,344 57,788
Decrease in long-term notes payable, affiliates ........................................... (429,000) (229,050)
Dividend to parent ........................................................................ -- (100,000)
Other, net ................................................................................ 52 --
--------- ---------
Net cash provided by (used in) financing activities .................................. 126,542 (71,850)
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS .................................................... (43,278) (3,650)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ............................................. 70,866 30,720
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................................... $ 27,588 $ 27,070
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Payments:
Interest .................................................................................. $ 160,820 $ 156,537
Income taxes (refunds) .................................................................... -- (52,514)
See Notes to the Company's Interim Financial Statements
4
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) BACKGROUND AND BASIS OF PRESENTATION
General. Included in this Quarterly Report on Form 10-Q (Form 10-Q) of
CenterPoint Energy Houston Electric, LLC (CenterPoint Houston, together with its
subsidiaries, the Company), are the Company's consolidated interim financial
statements and notes (Interim Financial Statements) including its wholly owned
subsidiaries. The Interim Financial Statements are unaudited, omit certain
financial statement disclosures and should be read with the Annual Report on
Form 10-K of CenterPoint Houston for the year ended December 31, 2003
(CenterPoint Houston 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 (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 accounting principles generally accepted in the United States of
America (GAAP) requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
The 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,
(b) timing of maintenance and other expenditures and (c) acquisitions and
dispositions of assets and other interests. In addition, certain amounts from
the prior year have been reclassified to conform to the Company's presentation
of financial statements in the current year. These reclassifications do not
affect net income.
Note 2(e) (Regulatory Assets and Liabilities), Note 4 (Regulatory Matters)
and Note 9 (Commitments and Contingencies) to the consolidated annual financial
statements in the CenterPoint Houston Form 10-K relate to certain contingencies.
These notes, as updated herein, are incorporated herein by reference.
For information regarding certain legal and regulatory proceedings, see
Note 6 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
adoption of FIN 46-R had no effect on the Company's consolidated financial
statements.
5
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 7 to these Interim Financial Statements.
On May 19, 2004, the FASB issued a FASB Staff Position (FSP) addressing
the appropriate accounting and disclosure requirements for companies that
sponsor a postretirement health care plan that provides prescription drug
benefits. The new guidance from the FASB was deemed necessary as a result of the
2003 Medicare prescription law, which includes a federal subsidy for qualifying
companies. FSP FAS 106-2, "Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003 (FAS
106-2)," requires that the effects of the federal subsidy be considered an
actuarial gain and treated like similar gains and losses and requires certain
disclosures for employers that sponsor postretirement heath care plans that
provide prescription drug benefits. The FASB's related existing guidance, FSP
FAS 106-1, "Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003," will be
superseded upon the effective date of FAS 106-2. The effective date of the new
FSP is the first interim or annual period beginning after June 15, 2004, except
for certain nonpublic entities which have until fiscal years beginning after
December 15, 2004. The Company does not expect the adoption of FAS 106-2 to have
a material effect on its results of operations or financial condition.
(3) REGULATORY MATTERS
(a) 2004 True-Up Proceeding.
On March 31, 2004, the Company, Texas Genco, LP and Reliant Energy Retail
Services LLC, a former affiliate and current subsidiary of Reliant Energy, Inc.
(formerly named Reliant Resources, Inc.) (RRI), filed the final true-up
application required by the 1999 Texas Electric Choice Law (Texas electric
restructuring law) with the Public Utility Commission of Texas (Texas Utility
Commission). The Texas electric restructuring law authorizes public utilities to
recover in 2004 a true-up balance composed of stranded power plant costs, the
cost of environmental controls and certain other costs associated with
transition from a regulated to a competitive environment (2004 True-Up
Proceeding). The Company's requested true-up balance is $3.7 billion, excluding
interest. The Company has provided testimony and documentation to support the
$3.7 billion it seeks to recover in the 2004 True-Up Proceeding. Third parties
have challenged the amounts the Company has requested to recover, and
recommended partial or total disallowance of such amounts. The staff of the
Texas Utility Commission has recommended the disallowance of $1.8 billion and
all interest. To the extent recovery of any portion of the true-up balance is
denied or if the Company agrees to forego recovery of a portion of the request
under a settlement agreement, the Company would be unable to recover those
amounts in the future.
The Texas Utility Commission conducted hearings from June 21, 2004 through
July 7, 2004. The true-up proceeding will result in either additional charges
being assessed or credits being issued through the utility's non-bypassable
delivery charges. Non-bypassable delivery charges are those that must be paid by
essentially all customers and cannot, except in limited circumstances, be
avoided by switching to self-generation. The law also authorizes the Texas
Utility Commission to permit utilities to issue transition bonds based on the
securitization of revenues associated with the transition charges.
Following adoption of the true-up rule by the Texas Utility Commission in
2001, the Company appealed the provisions of the rule that permitted interest to
be recovered on stranded costs only from the date of the Texas Utility
Commission's final order in the 2004 True-Up Proceeding, instead of from January
1, 2002 as the Company contends is required by law. On June 18, 2004, the Texas
Supreme Court ruled that interest on stranded costs began to accrue as of
January 1, 2002 and remanded the rule to the Texas Utility Commission to review
the interaction between the Supreme Court's interest decision and the Texas
Utility Commission's capacity auction true-up rule and the extent to which the
capacity auction true-up results in the recovery of interest. The Texas Utility
Commission has established a procedural schedule for a hearing to be held on
this issue on September 8, 2004. The Company has not accrued interest income on
stranded costs in its consolidated financial statements.
6
The Texas electric restructuring law requires a final order to be issued
by the Texas Utility Commission not more than 150 days after a proper filing is
made by the regulated utility, although under its rules the Texas Utility
Commission can extend the 150-day deadline for good cause. The Company expects a
decision from the Texas Utility Commission addressing issues other than interest
in late August 2004, and a decision addressing the interest issue after the
hearing scheduled for September 8, 2004. The Company and/or third parties may
appeal such decisions to a state court. Any such appeal may delay resolution and
any recovery of disputed amounts.
As of June 30, 2004, the Company has recorded net regulatory assets
totaling $3.4 billion. If events were to occur during the 2004 True-Up
Proceeding that made the recovery of these regulatory assets no longer probable,
the Company would write off the unrecoverable balance of such assets as a charge
against earnings.
(b) Final Fuel Reconciliation.
On March 4, 2004, an Administrative Law Judge (ALJ) issued a Proposal for
Decision (PFD) relating to the Company's final fuel reconciliation. The Company
reserved $117 million, including $30 million of interest, in the fourth quarter
of 2003 reflecting the ALJ's recommendation. On April 15, 2004, the Texas
Utility Commission affirmed the PFD's finding in part, reversed in part, and
remanded one issue back to the ALJ. On May 28, 2004, the Texas Utility
Commission approved a settlement of the remanded issue and issued a final order
which reduced the disallowance. As a result of the final order, the Company
reversed $23 million, including $8 million of interest, of the $117 million
reserve recorded in the fourth quarter of 2003. The results of the Texas Utility
Commission's final decision will be a component of the 2004 True-Up Proceeding.
The Company has appealed certain portions of the Texas Utility Commission's
final order involving a disallowance of approximately $67 million.
(4) LONG-TERM DEBT
In February 2004, $56 million aggregate principal amount of collateralized
5.6% pollution control bonds due 2027 and $44 million aggregate principal amount
of 4.25% collateralized insurance-backed pollution control bonds due 2017 were
issued on behalf of the Company. The pollution control bonds are collateralized
by general mortgage bonds of the Company with principal amounts, interest rates
and maturities that match the pollution control bonds. The proceeds were used to
extinguish two series of 6.7% collateralized pollution control bonds with an
aggregate principal amount of $100 million issued on behalf of CenterPoint
Energy. The Company's 6.7% first mortgage bonds which collateralized CenterPoint
Energy's payment obligations under the refunded pollution control bonds were
retired in connection with the extinguishment of the refunded pollution control
bonds. The Company's 6.7% notes payable to CenterPoint Energy were also
cancelled upon the extinguishment of the refunded pollution control bonds.
In March 2004, $45 million aggregate principal amount of 3.625%
collateralized insurance-backed pollution control bonds due 2012 and $84 million
aggregate principal amount of 4.25% collateralized insurance-backed pollution
control bonds due 2017 were issued on behalf of the Company. The pollution
control bonds are collateralized by general mortgage bonds of the Company with
principal amounts, interest rates and maturities that match the pollution
control bonds. The proceeds were used to extinguish two series of 6.375%
collateralized pollution control bonds with an aggregate principal amount of $45
million and one series of 5.6% collateralized pollution control bonds with an
aggregate principal amount of $84 million issued on behalf of CenterPoint
Energy. The Company's 6.375% and 5.6% first mortgage bonds which collateralized
CenterPoint Energy's payment obligations under the refunded pollution control
bonds were retired in connection with the extinguishment of the refunded
pollution control bonds. The Company's 6.375% and 5.6% notes payable to
CenterPoint Energy were also cancelled upon the extinguishment of the refunded
pollution control bonds.
7
(5) RELATED PARTY TRANSACTIONS AND MAJOR CUSTOMERS
The following table summarizes receivables from, or payables to,
CenterPoint Energy or its subsidiaries:
DECEMBER 31, JUNE 30,
2003 2004
------------ --------
(IN MILLIONS)
Accounts receivable from affiliates ............................... $ 50 $ 29
Accounts payable to affiliates .................................... (46) (29)
----- -----
Accounts receivable/(payable) -- affiliated companies, net ..... $ 4 $ --
===== =====
Notes payable -- affiliated companies (1) ......................... $(113) $(171)
===== =====
Long-term accounts and notes receivable -- affiliated
companies (2).................................................. $ 815 $ 815
===== =====
Long-term notes payable -- affiliated companies (3) ............... $(380) $(151)
===== =====
Long-term accounts payable -- affiliated companies (4) ............ $(399) $(401)
===== =====
- ----------
(1) This note represents money pool borrowings.
(2) Included in the $815 million notes receivable -- affiliated companies is a
$750 million note receivable from CenterPoint Energy payable on demand and
bearing interest at the prime rate that originated when the Company
converted its money fund investment at the time of the Restructuring.
Since August 31, 2002, the Company has been a participant in the
CenterPoint Energy money pool. The $750 million note receivable is
included in long-term notes receivable from affiliate in the Consolidated
Balance Sheets because the Company does not plan to demand repayment of
the note within the next twelve months.
(3) For more information on the long-term notes payable to affiliate, see Note
4.
(4) In 2003, CenterPoint Energy recorded a $399 million impairment related to
the partial distribution of its investment in Texas Genco Holdings, Inc.
(Texas Genco). Since this amount is expected to be recovered in the 2004
True-Up Proceeding, the Company has recorded a regulatory asset reflecting
its right to recover this amount and an associated payable to CenterPoint
Energy. For more information on the 2004 True-Up Proceeding, see Note 3.
The Company had net interest income (expense) related to affiliate
borrowings of $(4) million and $4 million for the three months ended June 30,
2003 and 2004, respectively. The Company had net interest income (expense)
related to affiliate borrowings of $(14) million and $6 million for the six
months ended June 30, 2003 and 2004, respectively.
The 1935 Act generally prohibits borrowings by CenterPoint Energy from its
subsidiaries, including the Company, either through the money pool or otherwise.
During the three months ended June 30, 2003 and 2004, revenues derived
from energy delivery charges provided by the Company to a subsidiary of RRI
totaled $225 million and $202 million, respectively. During the six months ended
June 30, 2003 and 2004, revenues derived from energy delivery charges provided
by the Company to a subsidiary of RRI totaled $437 million and $401 million,
respectively.
CenterPoint Energy provides some corporate services to the Company. The
costs of services have been charged directly to the Company using methods that
management believes are reasonable. These methods include negotiated usage
rates, dedicated asset assignment and proportionate corporate formulas based on
assets, operating expenses and employees. These charges are not necessarily
indicative of what would have been incurred had the Company not been an
affiliate. Amounts charged to the Company for these services were $25 million
for both the three months ended June 30, 2003 and 2004 and are included
primarily in operation and maintenance expenses. Amounts charged to the Company
for these services were $57 million and $49 million for the six months ended
June 30, 2003 and 2004, respectively, and are included primarily in operation
and maintenance expenses.
8
As of June 30, 2004, the Company has a guarantee issued to a third party
related to a performance obligation of Texas Genco for lignite mine reclamation
costs of up to $50 million. As of June 30, 2004, Texas Genco's recorded
liability for estimated lignite mine reclamation costs is $6 million.
In June 2004, the Company paid a dividend of $100 million to Utility
Holding, LLC.
(6) COMMITMENTS AND CONTINGENCIES
RRI Indemnified Litigation
The Company, CenterPoint Energy or their predecessor, Reliant Energy, and
certain of their former subsidiaries are named as defendants in several lawsuits
described below. Under a master separation agreement between Reliant Energy and
RRI, the Company, CenterPoint Energy and its other subsidiaries are entitled to
be indemnified by RRI for any losses, including attorneys' fees and other costs,
arising out of the lawsuits described below under Electricity and Gas Market
Manipulation Cases and Other Class Action Lawsuits. Pursuant to the
indemnification obligation, RRI is defending the Company, CenterPoint Energy and
its other subsidiaries to the extent named in these lawsuits. The ultimate
outcome of these matters cannot be predicted at this time.
Electricity and Gas Market Manipulation Cases. A large number of lawsuits
have been filed against numerous market participants and remain pending in both
federal and state courts in California and Nevada in connection with the
operation of the electricity and natural gas markets in California and certain
other western states in 2000-2001, a time of power shortages and significant
increases in prices. These lawsuits, many of which have been filed as class
actions, are based on a number of legal theories including violation of state
and federal antitrust laws, laws against unfair and unlawful business practices,
the federal Racketeer Influenced Corrupt Organization Act, false claims statutes
and similar theories and breaches of contracts to supply power to governmental
entities. Plaintiffs in these lawsuits, which include state officials and
governmental entities as well as private litigants, are seeking a variety of
forms of relief, including recovery of compensatory damages (in some cases in
excess of $1 billion), a trebling of compensatory damages and punitive damages,
injunctive relief, restitution, interest due, disgorgement, civil penalties and
fines, costs of suit, attorneys' fees and divestiture of assets. To date, some
of these complaints have been dismissed by the trial court and are on appeal,
but most of the lawsuits remain in early procedural stages. CenterPoint Energy's
former subsidiary, RRI, was a participant in the California markets, owning
generating plants in the state and participating in both electricity and natural
gas trading in that state and in western power markets generally. RRI, some of
its subsidiaries and in some cases, corporate officers of some of those
companies, have been named as defendants in these suits.
The Company, CenterPoint Energy or their predecessor, Reliant Energy, were
named in approximately 25 of these lawsuits, which were instituted between 2001
and 2004 and are pending in state courts in Los Angeles County and San Diego
County, in federal district courts in San Francisco, San Diego, Los Angeles and
Nevada and before the Ninth Circuit Court of Appeals. However, neither
CenterPoint Energy nor Reliant Energy was a participant in the electricity or
natural gas markets in California. The Company and Reliant Energy have been
dismissed from certain of the lawsuits, either voluntarily by the plaintiffs or
by order of the court and the Company believes it is not a proper defendant in
the remaining cases and will continue to seek dismissal from such remaining
cases. On July 6, 2004, the Ninth Circuit affirmed the Company's removal to
federal court of an electric case brought by the California Attorney General and
affirmed the court's dismissal of that case based upon the filed rate doctrine
and federal preemption.
Other Class Action Lawsuits. Fifteen class action lawsuits filed in May,
June and July 2002 on behalf of purchasers of securities of RRI and/or Reliant
Energy have been consolidated in federal district court in Houston. RRI and
certain of its former and current executive officers are named as defendants.
The consolidated complaint also names RRI, Reliant Energy, the underwriters of
the initial public offering of RRI common stock in May 2001 (RRI Offering) and
RRI's and Reliant Energy's independent auditors as defendants. The consolidated
amended complaint seeks monetary relief purportedly on behalf of purchasers of
common stock of Reliant Energy or RRI during certain time periods ranging from
February 2000 to May 2002, and purchasers of common stock that can be traced to
the RRI Offering. The plaintiffs allege, among other things, that the defendants
misrepresented their revenues and trading volumes by engaging in round-trip
trades and improperly accounted for certain structured transactions as cash-flow
hedges, which resulted in earnings from these transactions being accounted for
as future earnings rather than being accounted for as earnings in fiscal year
2001. In January 2004 the trial judge dismissed the plaintiffs' allegations that
the defendants had engaged in fraud, but claims based on alleged
misrepresentations in the registration statement issued in the RRI Offering
remain. In June 2004, the plaintiffs filed a motion for class certification,
which the defendants have asked the court to deny.
9
In February 2003, a lawsuit was filed by three individuals in federal
district court in Chicago against CenterPoint Energy and certain former and
current officers of RRI for alleged violations of federal securities laws. The
plaintiffs in this lawsuit allege that the defendants violated federal
securities laws by issuing false and misleading statements to the public, and
that the defendants made false and misleading statements as part of an alleged
scheme to artificially inflate trading volumes and revenues. In addition, the
plaintiffs assert claims of fraudulent and negligent misrepresentation and
violations of Illinois consumer law. In January 2004 the trial judge ordered
dismissal of plaintiffs' claims on the ground that they did not set forth a
claim. The plaintiffs filed an amended complaint in March 2004, which the
defendants are asking the court to dismiss.
In May 2002, three class action lawsuits were filed in federal district
court in Houston on behalf of participants in various employee benefits plans
sponsored by Reliant Energy. Two of the lawsuits have been dismissed without
prejudice. Reliant Energy and certain current and former members of its benefits
committee are the remaining defendants in the third lawsuit. That lawsuit
alleges that the defendants breached their fiduciary duties to various employee
benefits plans, directly or indirectly sponsored by Reliant Energy, in violation
of the Employee Retirement Income Security Act of 1974. The plaintiffs allege
that the defendants permitted the plans to purchase or hold securities issued by
Reliant Energy when it was imprudent to do so, including after the prices for
such securities became artificially inflated because of alleged securities fraud
engaged in by the defendants. The complaint seeks monetary damages for losses
suffered on behalf of the plans and a putative class of plan participants whose
accounts held Reliant Energy or RRI securities, as well as equitable relief in
the form of restitution. In July 2004, another class action suit was filed in
federal court on behalf of the Reliant Energy Savings Plan and a class
consisting of participants in that plan against Reliant Energy and the Reliant
Energy Benefits Committee. The allegations and the relief sought in the new suit
are substantially similar to those in the previously pending suit; however, the
new suit also alleges that Reliant Energy and its Benefits Committee breached
their fiduciary duties to the Savings Plan and its participants by investing
plan funds in Reliant Energy stock when Reliant Energy or its subsidiaries were
allegedly manipulating the California energy market.
In October 2002, a derivative action was filed in the federal district
court in Houston, against the directors and officers of CenterPoint Energy. The
complaint sets forth claims for breach of fiduciary duty, waste of corporate
assets, abuse of control and gross mismanagement. Specifically, the shareholder
plaintiff alleges that the defendants caused CenterPoint Energy to overstate its
revenues through so-called "round trip" transactions. The plaintiff also alleges
breach of fiduciary duty in connection with the spin-off of RRI and the RRI
Offering. The complaint seeks monetary damages on behalf of CenterPoint Energy
as well as equitable relief in the form of a constructive trust on the
compensation paid to the defendants. In March 2003, the court dismissed this
case on the grounds that the plaintiff did not make an adequate demand on
CenterPoint Energy before filing suit. Thereafter, the plaintiff sent another
demand asserting the same claims.
CenterPoint Energy's board of directors investigated that demand and
similar allegations made in a June 28, 2002 demand letter sent on behalf of a
CenterPoint Energy shareholder. The latter letter demanded that CenterPoint
Energy take several actions in response to alleged round-trip trades occurring
in 1999, 2000, and 2001. In June 2003, the Board determined that these proposed
actions would not be in the best interests of CenterPoint Energy.
The Company believes that none of the lawsuits described under "Other
Class Action Lawsuits" has merit because, among other reasons, the alleged
misstatements and omissions were not material and did not result in any damages
to the plaintiffs.
Other Legal Matters
Texas Antitrust Action. In July 2003, Texas Commercial Energy filed in
federal court in Corpus Christi, Texas a lawsuit against Reliant Energy, RRI,
Reliant Electric Solutions, LLC, several other RRI subsidiaries and a number of
other participants in the Electric Reliability Council of Texas (ERCOT) power
market. The plaintiff, a retail electricity provider in the Texas market served
by ERCOT, alleged that the defendants conspired to illegally fix and
artificially increase the price of electricity in violation of state and federal
antitrust laws and committed fraud and negligent misrepresentation. The lawsuit
sought damages in excess of $500 million, exemplary damages, treble damages,
interest, costs of suit and attorneys' fees. In February 2004, this complaint
was amended to add the Company and CenterPoint Energy, as successors to Reliant
Energy, and Texas Genco, LP as defendants. The plaintiff's principal allegations
had previously been investigated by the Texas Utility Commission and found to be
without merit. In June 2004, the federal court dismissed the plaintiff's claims
10
and in July 2004, the plaintiff filed a notice of appeal. CenterPoint Energy
intends to contest the appeal. The ultimate outcome of this matter cannot be
predicted at this time.
Municipal Franchise Fee Lawsuits. In February 1996, the cities of Wharton,
Galveston and Pasadena (Three Cities) filed suit, for themselves and a proposed
class of all similarly situated cities in Reliant Energy's electric service
area, against Reliant Energy and Houston Industries Finance, Inc. (formerly a
wholly owned subsidiary of the Company's predecessor, Reliant Energy) alleging
underpayment of municipal franchise fees. The plaintiffs claimed that they were
entitled to 4% of all receipts of any kind for business conducted within these
cities over the previous four decades. After a jury trial involving the Three
Cities claims (but not the class of cities), the trial court decertified the
class and entered a judgment for $1.7 million, including interest, plus an award
of $13.7 million in legal fees. Despite other jury findings for the plaintiffs,
the trial court's judgment was based on the jury's finding in favor of Reliant
Energy on the affirmative defense of laches, a defense similar to a statute of
limitations defense, due to the original claimant cities having unreasonably
delayed bringing their claims during the 43 years since the alleged wrongs
began. Following this ruling, 45 cities filed individual suits against Reliant
Energy in the District Court of Harris County.
On February 27, 2003, a state court of appeals in Houston rendered an
opinion reversing the judgment against CenterPoint Energy and rendering judgment
that the Three Cities take nothing by their claims. The court of appeals found
that the jury's finding of laches barred all of the Three Cities' claims and
that the Three Cities were not entitled to recovery of any attorneys' fees. The
Three Cities filed a petition for review at the Texas Supreme Court which
declined to hear the case. The Three Cities filed a motion for rehearing, which
was denied by the Supreme Court in April 2004. Now that the Three Cities case
has been favorably resolved, the Company intends to seek dismissal of the claims
of the other cities.
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.
(7) 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 JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2003 2004 2003 2004
---- ---- ---- ----
(IN MILLIONS)
Service cost ......................................... $ 1 $ 1 $ 1 $ 1
Interest cost ........................................ 3 4 6 8
Expected return on plan assets........................ (2) (3) (4) (5)
Net amortization ..................................... 1 3 3 5
--- --- --- ---
Net periodic cost ............................ $ 3 $ 5 $ 6 $ 9
=== === === ===
The Company expects to contribute $9 million to CenterPoint Energy's
postretirement benefits plan in 2004. As of June 30, 2004, $5 million has been
contributed.
11
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 Form 10-Q.
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 2 (Management's Discussion
and Analysis of Financial Condition and Results of Operations) and 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 results of
operations between the three and six months ended June 30, 2004 and the three
and six months ended June 30, 2003. Reference is made to "Management's Narrative
Analysis of Results of Operations" in Item 7 of our Annual Report on Form 10-K
for the year ended December 31, 2003 (CenterPoint Houston Form 10-K).
SIGNIFICANT EVENTS IN 2004
Resolution of our true-up proceeding (2004 True-Up Proceeding) is the most
significant event facing us in 2004. We expect to use the proceeds received from
the 2004 True-Up Proceeding to repay a portion of our indebtedness. The 2004
True-Up Proceeding could result in a charge against our earnings.
Our requested true-up balance is $3.7 billion, excluding interest. The
Public Utility Commission of Texas (Texas Utility Commission) conducted hearings
from June 21, 2004 through July 7, 2004 in connection with the 2004 True-Up
Proceeding. We have provided testimony and documentation to support the $3.7
billion we seek to recover in the 2004 True-Up Proceeding. Third parties have
challenged the amounts we have requested to recover, and recommended partial or
total disallowance of such amounts. The staff of the Texas Utility Commission
has recommended a disallowance of $1.8 billion and all interest. We expect a
decision from the Texas Utility Commission addressing issues other than interest
in late August 2004, and a decision addressing the interest issue after a
hearing scheduled for September 8, 2004. We and/or third parties may appeal such
decisions to a state court. Any such appeal may delay resolution and any
recovery of disputed amounts. An ultimate determination or a settlement at an
amount less than that recorded in our financial statements could lead to a
charge that would materially adversely affect our results of operations,
financial condition and cash flows.
We intend to seek authority from the Texas Utility Commission to
securitize all or a portion of the true-up balance as early as the fourth
quarter of 2004 through the issuance of transition bonds and to be in a position
to issue those bonds by early 2005. Appeals could delay the issuance of such
bonds. Any portion of the true-up balance not securitized by transition bonds
will be recovered through a non-bypassable competition transition charge. We
will distribute recovery of the true-up components not used to repay
indebtedness to CenterPoint Energy through either the payment of dividends or
the settlement of intercompany payables. To maintain our capital structure at
the appropriate levels, CenterPoint Energy may move funds back to us, either
through equity contributions or intercompany debt.
Following adoption of the true-up rule by the Texas Utility Commission in
2001, we appealed the provisions of the rule that permitted interest to be
recovered on stranded costs only from the date of the Texas Utility Commission's
final order in the 2004 True-Up Proceeding, instead of from January 1, 2002 as
we contend is required by law. On June 18, 2004, the Texas Supreme Court ruled
that interest on stranded costs began to accrue as of January 1, 2002 and
remanded the rule to the Texas Utility Commission to review the interaction
between the Supreme Court's interest decision and the Texas Utility Commission's
capacity auction true-up rule and the extent to which the capacity auction
true-up results in the recovery of interest. The Texas Utility Commission has
12
established a procedural schedule for a hearing to be held on this issue on
September 8, 2004. We have not accrued interest income on stranded costs in our
consolidated financial statements.
CONSOLIDATED RESULTS OF OPERATIONS
Our results of operations are affected by, among other things, seasonal
fluctuations and other changes in the demand for electricity, the actions of
various governmental authorities having jurisdiction over the rates we charge,
debt service costs, income tax expense, our ability to collect receivables from
retail electric providers and our ability to recover our stranded costs and
regulatory assets. For more information regarding factors that may affect the
future results of operations of our business, please read "Business -- Risk
Factors" in Item 1 of the CenterPoint Houston Form 10-K and "Management's
Narrative Analysis of Results of Operations -- Certain Factors Affecting Future
Earnings" in Item 7 of the CenterPoint Houston Form 10-K, each of which is
incorporated herein by reference.
The following table sets forth our consolidated results of operations for
the three months and six months ended June 30, 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 JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2003 2004 2003 2004
-------- -------- -------- --------
(IN MILLIONS)
Revenues:
Electric revenues .................. $ 364 $ 356 $ 666 $ 670
ECOM true-up ....................... 101 -- 233 --
Transition bond revenues ........... 17 18 30 33
-------- -------- -------- --------
Total revenues ................... 482 374 929 703
-------- -------- -------- --------
Expenses:
Operation and maintenance .......... 126 124 259 256
Depreciation and amortization ...... 61 63 123 123
Taxes other than income taxes ...... 53 51 97 98
Transition bond expenses ........... 7 9 10 14
-------- -------- -------- --------
Total expenses ................... 247 247 489 491
-------- -------- -------- --------
Operating Income ..................... 235 127 440 212
Interest and Other Finance Charges ... (90) (87) (183) (173)
Other Income, net .................... 8 19 18 25
-------- -------- -------- --------
Income Before Income Taxes ........... 153 59 275 64
Income Tax Expense ................... (54) (19) (95) (21)
-------- -------- -------- --------
Net Income ........................... $ 99 $ 40 $ 180 $ 43
======== ======== ======== ========
Actual gigawatt-hours (GWh) delivered:
Residential ........................ 6,490 5,801 11,049 10,203
Total (1) .......................... 19,086 18,545 33,874 34,065
- --------
(1) Usage volumes for commercial and industrial customers are included in
total GWh delivered; however, the majority of these customers are billed
on a peak demand (KW) basis and, as a result, revenues do not vary based
on consumption.
THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED JUNE 30, 2003
We reported operating income of $127 million for the three months ended
June 30, 2004, consisting of $118 million for the regulated electric
transmission and distribution utility and $9 million for the transition bond
company. For the three months ended June 30, 2003, operating income totaled $235
million, consisting of $124 million for the regulated electric transmission and
distribution utility, $10 million for the transition bond company and $101
million of non-cash income associated with Excess Cost Over Market (ECOM). ECOM
is recoverable under the 1999 Texas Electric Choice Law (Texas electric
restructuring law) and is included in our recently filed true-up application.
Beginning in 2004, there is no ECOM contribution to earnings. The transition
bond company's operating income represents the amount necessary to pay interest
on the transition bonds. The regulated electric transmission and distribution
utility continued to benefit from solid customer growth. Continued customer
growth
13
contributed $7 million in operating income from the addition of 51,000 metered
customers since June 2003. Additionally, operating income included $15 million
due to the reversal of a portion of an $87 million reserve, excluding interest,
related to the final fuel reconciliation recorded in the fourth quarter of 2003.
These amounts were more than offset by milder weather, which negatively impacted
the quarter by $14 million and higher net transmission costs of $5 million.
SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003
We reported operating income of $212 million for the six months ended June
30, 2004, consisting of $193 million for the regulated electric transmission and
distribution utility and $19 million for the transition bond company. For the
six months ended June 30, 2003, operating income totaled $440 million,
consisting of $187 million for the regulated electric transmission and
distribution utility, $20 million for the transition bond company and $233
million of non-cash income associated with ECOM. Continued customer growth
contributed $14 million in operating income. Additionally, operating income
included $15 million due to a reversal of a portion of an $87 million reserve,
excluding interest, related to the final fuel reconciliation recorded in the
fourth quarter of 2003. These amounts were substantially offset by milder
weather, which negatively impacted the first six months of 2004 by $19 million
and higher net transmission costs of $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 the factors listed under "Cautionary
Statement Regarding Forward-Looking Information" on page ii of this Form 10-Q,
"Management's Narrative Analysis of Results of Operations -- Certain Factors
Affecting Future Earnings" in Item 7 of Part II of the CenterPoint Houston Form
10-K and "Risk Factors" in Item 1 of Part I of the CenterPoint Houston Form
10-K, each of which is incorporated herein by reference. In addition to these
factors, the discontinuance of non-cash operating income associated with ECOM
will negatively impact our earnings in 2004 as compared to 2003.
LIQUIDITY
Off-Balance Sheet Arrangements. Other than operating leases, we have no
off-balance sheet arrangements.
Long-term Debt. Our long-term debt consists of our obligations and the
obligations of our subsidiaries, including transition bonds issued by an
indirect wholly owned subsidiary (transition bonds). The following table shows
future maturity dates of long-term debt issued by us to third parties and
affiliates and expected future maturity dates of transition bonds issued by our
subsidiary, CenterPoint Energy Transition Bond Company, LLC (Bond Company), as
of June 30, 2004. Amounts are expressed in thousands.
CENTERPOINT HOUSTON
--------------------------- TRANSITION
YEAR THIRD-PARTY AFFILIATE SUB-TOTAL BONDS TOTAL
- ------- ----------- --------- ---------- ---------- ----------
2004... $ -- $ -- $ -- $ 27,185 $ 27,185
2005... 1,310,000 -- 1,310,000 46,806 1,356,806
2006... -- -- -- 54,295 54,295
2007... -- -- -- 59,912 59,912
2008... -- -- -- 65,529 65,529
2009... -- -- -- 73,018 73,018
2010... -- -- -- 80,506 80,506
2011... -- -- -- 87,995 87,995
2012... 45,570 -- 45,570 99,229 144,799
2013... 450,000 -- 450,000 108,590 558,590
2014... 300,000 -- 300,000 -- 300,000
2015... -- 150,850 150,850 -- 150,850
2017... 127,385 -- 127,385 -- 127,385
2021... 102,442 -- 102,442 -- 102,442
2023... 200,000 -- 200,000 -- 200,000
2027... 56,095 -- 56,095 -- 56,095
2033... 312,275 -- 312,275 -- 312,275
---------- --------- ---------- ---------- ----------
Total $2,903,767 $ 150,850 $3,054,617 $ 703,065 $3,757,682
========== ========= ========== ========== ==========
14
First mortgage bonds and general mortgage bonds in aggregate principal
amounts of $102 million and $1.3 billion, respectively, have been issued
directly to third parties. External debt of $1.5 billion is senior and secured
by general mortgage bonds. The affiliate debt is senior and unsecured.
CenterPoint Energy's $2.3 billion credit facility provides that, until
such time as that facility has been reduced to $750 million, 100% of the net
cash proceeds from any securitizations relating to the recovery of stranded
costs, after making any payments required under our $1.3 billion term loan, and
the net cash proceeds from any sales of the common stock of Texas Genco
Holdings, Inc. (Texas Genco) owned by CenterPoint Energy or of material portions
of Texas Genco's assets, shall be applied to repay loans under the CenterPoint
Energy credit facility and reduce the credit facility. CenterPoint Energy's $2.3
billion credit facility contains no other restrictions with respect to our use
of proceeds from financing activities.
As of June 30, 2004, outstanding first mortgage bonds and general mortgage
bonds aggregated approximately $3.6 billion as shown in the following table.
Amounts are expressed in thousands.
ISSUED AS ISSUED AS COLLATERAL
ISSUED DIRECTLY COLLATERAL FOR THE FOR CENTERPOINT
TO THIRD PARTIES COMPANY'S DEBT ENERGY'S DEBT TOTAL
------------------ ------------------ -------------------- ----------
First Mortgage Bonds $ 102,442 $ -- $ 150,850 $ 253,292
General Mortgage Bonds 1,262,275 1,539,050 527,200 3,328,525
---------- ---------- ---------- ----------
Total $1,364,717 $1,539,050 $ 678,050 $3,581,817
========== ========== ========== ==========
The lien of the general mortgage indenture is junior to that of the
mortgage, pursuant to which the first mortgage bonds are issued. The aggregate
amount of incremental general mortgage bonds and first mortgage bonds that could
be issued as of June 30, 2004 is approximately $300 million based on estimates
of the value of our property encumbered by the general mortgage, the cost of
such property, the amount of retired bonds that could be used as the basis for
issuing new bonds and the 70% bonding ratio contained in the general mortgage.
However, contractual limitations on us and CenterPoint Energy expiring in
November 2005 limit the incremental aggregate amount of first mortgage bonds and
general mortgage bonds that may be issued to $200 million. Generally, first
mortgage bonds and general mortgage bonds can be issued to refinance outstanding
first mortgage bonds or general mortgage bonds in the same principal amount.
The following table shows the maturity dates of the $678 million of first
mortgage bonds and general mortgage bonds that we have issued as collateral for
long-term debt of CenterPoint Energy. These bonds are not reflected in the
financial statements of CenterPoint Houston because of the contingent nature of
the obligations. Amounts are expressed in thousands.
FIRST MORTGAGE GENERAL MORTGAGE
YEAR BONDS BONDS TOTAL
- ------- -------- -------- --------
2011 $ -- $ 19,200 $ 19,200
2015 150,850 -- 150,850
2018 -- 50,000 50,000
2019 -- 200,000 200,000
2020 -- 90,000 90,000
2026 -- 100,000 100,000
2028 -- 68,000 68,000
-------- -------- --------
Total $150,850 $527,200 $678,050
======== ======== ========
The Bond Company has $703 million aggregate principal amount of
outstanding transition bonds that were issued in 2001 in accordance with the
Texas electric restructuring law. The transition bonds are secured by
"transition property," as defined in the Texas electric restructuring law, which
includes the irrevocable right to recover, through non-bypassable transition
charges payable by retail electric customers, qualified costs provided in the
Texas electric restructuring law. The transition bonds are reported as our
long-term debt, although the holders of the transition bonds have no recourse to
any of our assets or revenues, and our creditors have no recourse to any assets
or revenues (including, without limitation, the transition charges) of the
transition bond company. We have no payment obligations with respect to the
transition bonds except to remit collections of transition charges as set forth
in a servicing agreement between us and the Bond Company and in an intercreditor
agreement among us, the Bond Company and other parties.
15
Bank Facilities. As of June 30, 2004, we had no bank facilities available
to meet our short-term liquidity needs.
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 cash requirements
during the second half of 2004 include the following:
- approximately $188 million of capital expenditures;
- an estimated $130 million in refunds of excess mitigation credits
through December 31, 2004; and
- $27 million of maturing transition bonds.
We expect that anticipated cash flows from operations and intercompany
borrowings will be sufficient to meet our cash needs for 2004.
We will distribute recovery of the true-up components not used to repay
our indebtedness to CenterPoint Energy through either the payment of dividends
or the settlement of intercompany payables. To maintain our capital structure at
the appropriate levels, CenterPoint Energy may move funds back to us, either
through equity contributions or intercompany debt. Under the orders described
under " -- Certain Contractual and Regulatory Limits on Ability to Issue
Securities and Pay Dividends," our member's equity as a percentage of total
capitalization must be at least 30%, although the Securities and Exchange
Commission (SEC) has permitted the percentage to be below this level for other
companies taking into account non-recourse securitization debt as a component of
capitalization. Our liquidity and capital requirements will be affected by the
amount and timing of receipt of the true-up proceeds, including the effects of
any appeal from the true-up proceeding and whether or not transition bonds are
issued.
Impact on Liquidity of a Downgrade in Credit Ratings. As of June 30, 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 debt.
MOODY'S S&P FITCH
------------------------ ------------------------ -------------------------
COMPANY/INSTRUMENT RATING OUTLOOK(1) RATING OUTLOOK (2) RATING OUTLOOK (3)
- ---------------------------------- ----- ---------- ------ ----------- ------ -----------
CenterPoint Houston Senior Secured
Debt (First Mortgage Bonds)...... Baa2 Negative BBB Negative BBB+ Negative
- ----------
(1) A "negative" outlook from Moody's reflects concerns over the next 12 to 18
months which will either lead to a review for a potential downgrade or a
return to a stable outlook.
(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.
We cannot assure you that these ratings will remain in effect for any
given period of time or that one or more of these ratings will not be lowered or
withdrawn entirely by a rating agency. We note that these credit ratings are not
recommendations to buy, sell or hold our securities and may be revised or
withdrawn at any time by the rating agency. Each rating should be evaluated
independently of any other rating. Any future reduction or withdrawal of one or
more of our credit ratings could have a material adverse impact on our ability
to obtain short- and long-term financing, the cost of such financings and the
execution of our business strategies.
Cross Defaults. The terms of our debt instruments generally provide that a
default on obligations by CenterPoint Energy does not cause a default under our
debt instruments. A payment default on debt for borrowed money and certain other
specified types of obligations by us exceeding $50 million will cause a default
under our $1.3 billion loan maturing in 2005. A payment default on, or a
non-payment default that permits acceleration of, any of our indebtedness
exceeding $50 million will caused a default under CenterPoint Energy's $2.3
billion credit facility entered into on October 7, 2003. A payment default by us
in respect of, or an acceleration of, borrowed money and
16
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 CenterPoint Houston Form 10-K (CenterPoint Houston
10-K Notes), which is incorporated herein by reference, we participate in
CenterPoint Energy's qualified non-contributory pension plan covering
substantially all employees. Pension expense for 2004 is estimated to be $23
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 and liabilities. 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:
- various regulatory actions; and
- the ability of Reliant Energy, Inc. (formerly named Reliant
Resources, Inc.) (RRI) and its subsidiaries to satisfy their
obligations as our principal customer and in respect of RRI's
indemnity obligations to us.
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 relating to our financing
activities on June 30, 2003 (June 2003 Financing Order). Our money pool
borrowing limit under such financing order is $600 million. At June 30, 2004, we
had borrowings from the money pool of $171 million. 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 to take other actions to adjust our
capitalization include:
- covenants and other provisions in our borrowing agreements; and
- limitations imposed on us under the 1935 Act.
Our collateralized term loan limits our debt, excluding transition bonds,
as a percentage of total capitalization to 68%.
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. As of June 30, 2004, we are authorized to issue an
additional aggregate $47 million of debt and an aggregate $250 million of
preferred stock and preferred securities.
The SEC has reserved jurisdiction over, and must take further action to
permit, the issuance of $250 million of additional debt by us.
17
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. We expect to pay dividends out of current earnings. The June
2003 Financing Order requires that we 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
CenterPoint Houston 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.
ACCOUNTING FOR RATE REGULATION
Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for
the Effects of Certain Types of Regulation" (SFAS No. 71), provides that
rate-regulated entities account for and report assets and liabilities consistent
with the recovery of those incurred costs in rates if the rates established are
designed to recover the costs of providing the regulated service and if the
competitive environment makes it probable that such rates can be charged and
collected. We apply SFAS No. 71, which results in our accounting for the
regulatory effects of recovery of stranded costs and other regulatory assets
resulting from the unbundling of the transmission and distribution business from
our electric generation operations in our consolidated financial statements.
Certain expenses and revenues subject to utility regulation or rate
determination normally reflected in income are deferred on the balance sheet and
are recognized in income as the related amounts are included in service rates
and recovered from or refunded to customers. Significant accounting estimates
embedded within the application of SFAS No. 71 relate to $3.4 billion of
recoverable electric generation-related regulatory assets as of June 30, 2004.
These costs are recoverable under the provisions of the Texas electric
restructuring law. The ultimate amount of cost recovery is subject to a final
determination, which will occur in 2004. An adverse determination could result
in a material write-down of these regulatory assets.
IMPAIRMENT OF LONG-LIVED ASSETS AND INTANGIBLES
We review the carrying value of our long-lived assets, including
identifiable intangibles, whenever events or changes in circumstances indicate
that such carrying values may not be recoverable. Unforeseen events and changes
18
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 electricity are generally
recorded when electricity is delivered to customers. However, the determination
of energy 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 electricity delivered to customers since the date of the
last meter reading are estimated and the corresponding unbilled revenue is
estimated. Unbilled electric delivery revenue is estimated each month based on
daily supply volumes, applicable rates and analyses reflecting significant
historical trends and experience. 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 June 30, 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 June 30, 2004 that has materially
affected, or is reasonably likely to materially affect, our internal controls
over financial reporting.
19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For a description of certain legal and regulatory proceedings affecting
us, please review Notes 3 and 6 to our Interim Financial Statements, "Business -
Regulation" and " - Environmental Matters" in Item 1 of the CenterPoint Houston
Form 10-K, Item 3 of the CenterPoint Houston Form 10-K and Notes 4 and 9(b) to
the CenterPoint Houston 10-K Notes, each of which is incorporated herein by
reference.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibits not incorporated by reference to a prior filing are designated by
a cross (+); all exhibits not so designated are incorporated by reference
to a prior filing of CenterPoint Energy Houston Electric, LLC or
CenterPoint Energy, Inc. as indicated.
Report or Registration SEC File or
Exhibit Number Description Statement Registration Number Exhibit References
- -------------- ------------------------ ----------------------- ------------------- ------------------
3.1 Articles of Organization CenterPoint Houston's 1-3187 3(b)
of CenterPoint Energy Form 8-K dated August
Houston Electric, LLC 31, 2002 filed with the
SEC on September 3,
2002
3.2 Limited Liability CenterPoint Houston's 1-3187 3(c)
Company Regulations Form 8-K dated August
of CenterPoint Energy 31, 2002 filed with the
Houston Electric, LLC SEC on September 3,
2002
10.1.1 $1,310,000,000 Credit CenterPoint Energy's 1-31447 4(g)(1)
Agreement dated as of Form 10-K for the year
November 12, 2002, ended December 31,
among CenterPoint 2002
Houston and the banks
named therein
10.1.2 First Amendment to CenterPoint Energy's 1-31447 10.7
Exhibit 10.1.1, dated as Form 10-Q for the
of September 3, 2003 quarter ended
September 30, 2003
10.1.3 Pledge Agreement, CenterPoint Energy's 1-31447 4(g)(2)
dated as of Form 10-K for the year
November 12, 2002 ended December 31,
executed in connection 2002
with Exhibit 10.1.1
+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
20
Report or Registration SEC File or
Exhibit Number Description Statement Registration Number Exhibit References
- ------------- ------------------------ ----------------------- ---------------------- ------------------
+99.1 Items incorporated by
reference from the
CenterPoint Houston
Form 10-K. Item 1
"Business--
Regulation," "--
Environmental
Matters," "--Risk
Factors," Item 3 "Legal
Proceedings" and Item
7 "Management's
Narrative Analysis of
Results of Operations
-- Certain Factors
Affecting Future
Earnings" and Notes
2(e) (Regulatory Assets
and Liabilities), 4
(Regulatory Matters),
7(a) (Pension Plans)
and 9 (Commitments
and Contingencies).
(b) Reports on Form 8-K.
On April 1, 2004, we filed a Current Report on Form 8-K dated April 1,
2004 to report that CenterPoint Houston, Texas Genco LP and Reliant Energy
Retail Services LLC filed the final true-up application required by the 1999
Texas Electric Choice Law with the Texas Utility Commission. A slide showing the
components of the true-up balance for CenterPoint Energy was furnished under
Item 9 of that form.
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.
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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 HOUSTON ELECTRIC, LLC
By: /s/ James S. Brian
----------------------------------------------
James S. Brian
Senior Vice President and Chief Accounting Officer
Date: August 6, 2004
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EXHIBIT INDEX
Exhibits not incorporated by reference to a prior filing are designated by a
cross (+); all exhibits not so designated are incorporated by reference to a
prior filing of CenterPoint Energy Houston Electric, LLC or CenterPoint Energy,
Inc. as indicated.
Report or Registration SEC File or
Exhibit Number Description Statement Registration Number Exhibit References
- -------------- ------------------------ ----------------------- ------------------- ------------------
3.1 Articles of Organization CenterPoint Houston's 1-3187 3(b)
of CenterPoint Energy Form 8-K dated August
Houston Electric, LLC 31, 2002 filed with the
SEC on September 3,
2002
3.2 Limited Liability CenterPoint Houston's 1-3187 3(c)
Company Regulations Form 8-K dated August
of CenterPoint Energy 31, 2002 filed with the
Houston Electric, LLC SEC on September 3,
2002
10.1.1 $1,310,000,000 Credit CenterPoint Energy's 1-31447 4(g)(1)
Agreement dated as of Form 10-K for the year
November 12, 2002, ended December 31,
among CenterPoint 2002
Houston and the banks
named therein
10.1.2 First Amendment to CenterPoint Energy's 1-31447 10.7
Exhibit 10.1.1, dated as Form 10-Q for the
of September 3, 2003 quarter ended
September 30, 2003
10.1.3 Pledge Agreement, CenterPoint Energy's 1-31447 4(g)(2)
dated as of Form 10-K for the year
November 12, 2002 ended December 31,
executed in connection 2002
with Exhibit 10.1.1
+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
CenterPoint Houston
Form 10-K. Item 1
"Business--
Regulation," "--
Environmental
Matters," "--Risk
Factors," Item 3 "Legal
Proceedings" and Item
7 "Management's
Narrative Analysis of
Results of Operations
-- Certain Factors
Affecting Future
Earnings" and Notes
2(e) (Regulatory Assets
and Liabilities), 4
(Regulatory Matters),
7(a) (Pension Plans)
and 9 (Commitments
and Contingencies).