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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 (I.R.S. Employer Identification No.)
of incorporation or organization)
1111 LOUISIANA
HOUSTON, TEXAS 77002 (713) 207-1111
(Address and zip code of (Registrant's telephone number,
principal 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 November 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 SEPTEMBER 30, 2004
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements........................................................... 1
Statements of Consolidated Operations
Three Months and Nine Months Ended September 30, 2003 and 2004 (unaudited)..... 1
Consolidated Balance Sheets
December 31, 2003 and September 30, 2004 (unaudited)........................... 2
Statements of Consolidated Cash Flows
Nine Months Ended September 30, 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........................................................ 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................................. 22
Item 6. Exhibits....................................................................... 22
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,
and any legal proceeding relating thereto;
- 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.
Additional risk factors are described in other documents we file with the
Securities and Exchange Commission.
ii
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 OPERATIONS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2003 2004 2003 2004
----------- ----------- ----------- -----------
REVENUES .......................................... $ 653,438 $ 446,130 $ 1,582,613 $ 1,149,283
----------- ----------- ----------- -----------
EXPENSES:
Operation and maintenance ....................... 139,562 134,739 398,166 392,550
Depreciation and amortization ................... 69,779 73,819 202,628 208,719
Taxes other than income taxes ................... 61,396 59,667 158,883 157,874
----------- ----------- ----------- -----------
Total ....................................... 270,737 268,225 759,677 759,143
----------- ----------- ----------- -----------
OPERATING INCOME .................................. 382,701 177,905 822,936 390,140
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest and other finance charges .............. (80,587) (76,792) (243,446) (230,984)
Interest on transition bonds .................... (9,811) (9,495) (29,495) (28,716)
Other, net ...................................... 8,599 8,414 25,624 33,987
----------- ----------- ----------- -----------
Total ....................................... (81,799) (77,873) (247,317) (225,713)
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY LOSS.. 300,902 100,032 575,619 164,427
Income Tax Expense .............................. (106,930) (34,078) (202,089) (55,602)
----------- ----------- ----------- -----------
INCOME BEFORE EXTRAORDINARY LOSS .................. 193,972 65,954 373,530 108,825
Extraordinary Loss, net of tax .................. -- (893,618) -- (893,618)
----------- ----------- ----------- -----------
NET INCOME (LOSS) ................................. $ 193,972 $ (827,664) $ 373,530 $ (784,793)
=========== =========== =========== ===========
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, SEPTEMBER 30,
2003 2004
------------ -------------
CURRENT ASSETS:
Cash and cash equivalents ................................ $ 30,720 $ 3,766
Accounts and notes receivable, net ....................... 91,332 297,108
Accounts receivable -- affiliated companies, net ......... 3,897 --
Accrued unbilled revenues ................................ 71,507 92,350
Materials and supplies ................................... 56,008 49,701
Taxes receivable ......................................... 184,634 53,097
Prepaid expenses ......................................... 8,579 3,575
Other .................................................... 5,630 3,226
------------ -------------
Total current assets ................................... 452,307 502,823
------------ -------------
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment ............................ 6,084,665 6,195,372
Less accumulated depreciation and amortization ........... (2,040,382) (2,156,656)
------------ -------------
Property, plant and equipment, net ..................... 4,044,283 4,038,716
------------ -------------
OTHER ASSETS:
Other intangibles, net ................................... 39,010 38,529
Regulatory assets ........................................ 4,896,439 3,193,923
Accounts and notes receivable -- affiliated companies..... 814,513 814,513
Other .................................................... 79,770 93,393
------------ -------------
Total other assets ..................................... 5,829,732 4,140,358
------------ -------------
TOTAL ASSETS ......................................... $ 10,326,322 $ 8,681,897
============ =============
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 -- (CONTINUED)
(THOUSANDS OF DOLLARS)
(UNAUDITED)
LIABILITIES AND MEMBER'S EQUITY
DECEMBER 31, SEPTEMBER 30,
2003 2004
------------ -------------
CURRENT LIABILITIES:
Current portion of transition bond long-term debt..... $ 41,189 $ 46,806
Accounts payable ..................................... 35,771 39,181
Accounts payable -- affiliated companies, net ........ -- 21,612
Notes payable -- affiliated companies, net ........... 113,179 144,484
Taxes accrued ........................................ 82,650 70,143
Interest accrued ..................................... 64,769 35,882
Regulatory liabilities ............................... 185,812 217,419
Other ................................................ 62,085 73,963
------------ -------------
Total current liabilities .......................... 585,455 649,490
------------ -------------
OTHER LIABILITIES:
Accumulated deferred income taxes, net ............... 1,799,926 1,356,096
Unamortized investment tax credits ................... 55,845 50,617
Benefit obligations .................................. 83,236 90,998
Regulatory liabilities ............................... 923,038 673,078
Notes payable -- affiliated companies ................ 379,900 150,850
Accounts payable -- affiliated companies ............. 398,984 303,360
Other ................................................ 11,424 19,671
------------ -------------
Total other liabilities ............................ 3,652,353 2,644,670
------------ -------------
LONG-TERM DEBT:
Transition bonds ..................................... 675,665 628,893
Other ................................................ 2,672,019 2,902,807
------------ -------------
Total long-term debt ............................... 3,347,684 3,531,700
------------ -------------
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 (deficit) .......................... 550,718 (334,075)
------------ -------------
Total member's equity .............................. 2,740,830 1,856,037
------------ -------------
TOTAL LIABILITIES AND MEMBER'S EQUITY ............ $ 10,326,322 $ 8,681,897
============ =============
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)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2003 2004
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................... $ 373,530 $ (784,793)
Extraordinary loss, net of tax ...................................... -- 893,618
-------------- --------------
Income before extraordinary loss .................................... 373,530 108,825
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ..................................... 202,628 208,719
Amortization of deferred financing costs .......................... 23,884 23,354
Deferred income taxes ............................................. 253,181 84,279
Investment tax credits ............................................ (3,517) (5,228)
Changes in other assets and liabilities:
Accounts and notes receivable, net .............................. (26,535) (50,019)
Accounts receivable/payable, affiliates ......................... (11,543) 25,509
Inventory ....................................................... 3,151 6,307
Accounts payable ................................................ (14,677) 1,909
Taxes receivable ................................................ (31,139) 131,537
Interest and taxes accrued ...................................... (50,824) (41,394)
Net regulatory assets and liabilities ........................... (667,672) (253,772)
Other current assets ............................................ 2,991 7,408
Other current liabilities ....................................... 12,621 11,813
Other assets .................................................... (23,448) (17,073)
Other liabilities ............................................... (8,789) 20,568
Other, net ........................................................ 1,528 (119)
-------------- --------------
Net cash provided by operating activities ..................... 35,370 262,623
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures and other ...................................... (160,667) (163,790)
-------------- --------------
Net cash used in investing activities ......................... (160,667) (163,790)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt ............................ 1,257,762 229,050
Payments of long-term debt .......................................... (531,024) (41,808)
Debt issuance costs ................................................. (33,903) (15,291)
Increase in short-term notes with affiliates, net ................... 62,729 31,305
Decrease in long-term notes payable, affiliates ..................... (686,500) (229,050)
Dividend to parent .................................................. -- (100,000)
Other, net .......................................................... 60 7
-------------- --------------
Net cash provided by (used in) financing activities ........... 69,124 (125,787)
-------------- --------------
NET DECREASE IN CASH AND CASH EQUIVALENTS ............................. (56,173) (26,954)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ...................... 70,866 30,720
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............................ $ 14,693 $ 3,766
============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Payments:
Interest ............................................................ $ 286,905 $ 266,571
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, and 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 Operations 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) REGULATORY MATTERS
(a) 2004 True-Up Proceeding.
On March 31, 2004, the Company, Texas Genco, LP and Reliant Energy Retail
Services LLC, a 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 a true-up balance
composed of stranded power plant costs, the cost of environmental controls and
certain other costs associated with the 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 and net of the retail
clawback from RRI. The Company has provided testimony and documentation to
support the $3.7 billion it seeks to recover in the 2004 True-Up Proceeding. The
Company had recorded $3.3 billion of recoverable electric generation-related
regulatory assets.
5
The Texas Utility Commission conducted hearings on the Company's true-up
application and has held six public meetings between August and October 2004.
Based on the Texas Utility Commission's deliberations at these public meetings,
the Company estimates it will recover $2.0 billion of its recorded electric
generation-related regulatory assets. The Texas Utility Commission acts only
through written orders and has not yet issued a written order on the true-up
application.
The Texas electric restructuring law specifies that a final order is to be
issued by the Texas Utility Commission 150 days after a proper filing is made by
the regulated utility, subject to an extension for good cause. The Company is
awaiting a decision and a written final order from the Texas Utility Commission.
It is possible that the Texas Utility Commission could modify the views
expressed in its public meetings prior to issuing its formal written decision.
However, based on its analysis of the Texas Utility Commission's deliberations,
the Company recorded an after-tax charge to earnings in the third quarter of
2004 of approximately $894 million, which is reflected as an extraordinary loss
in the Company's Statements of Consolidated Operations. Once a final order is
issued by the Texas Utility Commission, the extraordinary loss may be adjusted.
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 held a hearing on this issue
on September 8, 2004. While the Texas Utility Commission has discussed this
issue, it has not reached a conclusion as to the calculation. Therefore, the
Company has not accrued interest income on stranded costs in its consolidated
financial statements.
The true-up proceeding will result in additional charges being assessed to
customers 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.
The Company expects to seek rehearing of certain Texas Utility
Commission's rulings once they have been reduced to a final written order, and,
to the extent sufficient relief is not obtained through rehearing, to contest
certain of the Texas Utility Commission's rulings through appeals to Texas state
courts. The Company and CenterPoint Energy believe that significant aspects of
the preliminary deliberations made to date by the Texas Utility Commission are
contrary to both the statute by which the legislature restructured the electric
industry in Texas and the regulations and orders the Texas Utility Commission
has issued in implementing that statute. Although the Company and CenterPoint
Energy believe they have meritorious arguments, no prediction can be made as to
the ultimate outcome or timing of rehearings or appeals.
(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 plus interest
of $10 million.
(3) 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
6
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.
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 health 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. The
Company adopted FAS 106-2 prospectively in July 2004 with no material effect on
its results of operations or financial condition.
(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
Related Party Transactions. The following table summarizes receivables
from, or payables to, CenterPoint Energy or its subsidiaries:
DECEMBER 31, SEPTEMBER 30,
2003 2004
------------ -------------
(IN MILLIONS)
Accounts receivable from affiliates .................................. $ 50 $ 9
Accounts payable to affiliates ....................................... (46) (31)
--------- ---------
Accounts receivable/(payable) -- affiliated companies, net ........ $ 4 $ (22)
========= =========
Notes payable -- affiliated companies(1) ............................. $ (113) $ (144)
========= =========
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) $ (303)
========= =========
- -------------
(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. 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 was expected to be
recovered in the 2004 True-Up Proceeding, the Company originally
recorded a regulatory asset reflecting its right to recover this
amount and an associated payable to CenterPoint Energy. In the third
quarter of 2004, the payable to CenterPoint Energy and regulatory
assets were reduced by $96 million to reflect the transfer of a
liability from CenterPoint Energy which had been established in 1999
in connection with the passage of the Texas electric restructuring
law.
The Company recorded net interest income (expense) related to affiliate
borrowings of $(4) million and $5 million for the three months ended September
30, 2003 and 2004, respectively. The Company recorded net interest income
(expense) related to affiliate borrowings of $(18) million and $11 million for
the nine months ended September 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.
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 $27 million
and $26 million for the three months ended September 30, 2003 and 2004,
respectively, and are included primarily in operation and maintenance expenses.
Amounts charged to the Company for these services were $84 million and $75
million for the nine months ended September 30, 2003 and 2004, respectively, and
are included primarily in operation and maintenance expenses.
8
As of September 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 September 30, 2004, Texas Genco's
recorded liability for estimated lignite mine reclamation costs is $4 million.
In June 2004, the Company paid a dividend of $100 million to Utility
Holding, LLC.
Major Customer Transactions. During the three months ended September 30,
2003 and 2004, revenues derived from energy delivery charges provided by the
Company to a subsidiary of RRI totaled $290 million and $265 million,
respectively. During the nine months ended September 30, 2003 and 2004, revenues
derived from energy delivery charges provided by the Company to a subsidiary of
RRI totaled $727 million and $666 million, respectively.
(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 CenterPoint 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,
several of which dismissals have been affirmed by the appellate courts, 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, have
been named in approximately 25 of these lawsuits, which were instituted between
2001 and 2004 and are pending in state courts in Alameda County, Los Angeles
County and San Diego County, in federal district courts in San Francisco, San
Diego, Los Angeles, Fresno, Sacramento and Nevada and before the Ninth Circuit
Court of Appeals. However, the Company, CenterPoint Energy and Reliant Energy
were not participants 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 and on October 12,
2004, the Ninth Circuit affirmed the Company's removal to federal district court
of two electric cases brought by the California Attorney General and affirmed
the federal court's dismissal of these cases 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
9
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.
In February 2003, a lawsuit was filed by three individuals in federal
district court in Chicago against CenterPoint Energy and certain former 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 asked the court to
dismiss. On August 18, 2004, the court granted the defendants' motion to dismiss
with prejudice.
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. On October 14, 2004, the
plaintiff voluntarily dismissed the newly filed lawsuit.
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 set forth claims for breach of fiduciary duty, waste of corporate
assets, abuse of control and gross mismanagement. Specifically, the shareholder
plaintiff alleged that the defendants caused CenterPoint Energy to overstate its
revenues through so-called "round trip" transactions. The plaintiff also alleged
breach of fiduciary duty in connection with the spin-off of RRI and the RRI
Offering. The complaint sought 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. 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. 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.
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.
10
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, the
Company and CenterPoint Energy, as successors to Reliant Energy, Texas Genco,
LP, 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. 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 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 in state district court in
Harris County, Texas 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 entered a judgment on the Three
Cities' breach of contract claims for $1.7 million, including interest, plus an
award of $13.7 million in legal fees. It also decertified the class. 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 the Company and rendering judgment that
the Three Cities take nothing by their claims. The court of appeals held that
all of the Three Cities' claims were barred by the jury's finding of laches, a
defense similar to the statute of limitations, due to the Three Cities' having
unreasonably delayed bringing their claims during the more than 30 years since
the alleged wrongs began. The court also held that the Three Cities were not
entitled to recover any attorneys' fees. The Three Cities filed a petition for
review to the Texas Supreme Court, which declined to hear the case. Thus, the
Three Cities' claims have been finally resolved in the Company's favor, but the
individual claims of the 45 other cities remain pending in the same court.
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
benefits plan.
The Company's net periodic cost includes the following components relating
to postretirement benefits:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2003 2004 2003 2004
------------ ------------ ------------ ------------
(IN MILLIONS)
Service cost..................................... $ -- $ -- $ 1 $ 1
Interest cost.................................... 3 4 9 12
Expected return on plan assets................... (1) (2) (5) (7)
Net amortization................................. 1 1 4 6
------------ ------------ ------------ ------------
Net periodic cost.......................... $ 3 $ 3 $ 9 $ 12
============ ============ ============ ============
11
The Company expects to contribute $9 million to CenterPoint Energy's
postretirement benefits plan in 2004. As of September 30, 2004, $7 million has
been contributed.
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 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 (Unregistered Sales of Equity
Securities and Use of Proceeds), 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 nine months ended September 30, 2004 and the three and nine months
ended September 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).
UPDATE OF 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. We recorded
an after-tax extraordinary loss of $894 million in the third quarter of 2004
related to the 2004 True-Up Proceeding as discussed below.
Our requested true-up balance is $3.7 billion, excluding interest and net
of the retail clawback from Reliant Energy, Inc. (formerly Reliant Resources,
Inc.) (RRI). We have provided testimony and documentation to support the $3.7
billion we seek to recover in the 2004 True-Up Proceeding. We had recorded $3.3
billion of recoverable electric generation-related regulatory assets. The Public
Utility Commission of Texas (Texas Utility Commission) conducted hearings on our
true-up application and has held six public meetings between August and October
2004. Based on the Texas Utility Commission's deliberations at these public
meetings, we estimate that we will recover approximately $2.0 billion of our
recorded electric generation-related regulatory assets. Based on our analysis of
the Texas Utility Commission's deliberations, we recorded an after-tax charge to
earnings in the third quarter of 2004 of approximately $894 million to
write-down our electric generation-related regulatory assets to their realizable
value, which is reflected as an extraordinary loss in the Statements of
Consolidated Operations. The ultimate amount of such charge will depend upon the
final action of the Texas Utility Commission. The Texas Utility Commission acts
only through written orders and has not yet issued a written order on the
true-up application. Once a final order is issued by the Texas Utility
Commission, the extraordinary loss may be adjusted.
We expect to seek rehearing of certain Texas Utility Commission's rulings
once they have been reduced to a final written order, and, to the extent
sufficient relief is not obtained through rehearing, to contest certain of the
Texas Utility Commission's rulings through appeals to Texas state courts. We and
CenterPoint Energy believe that significant aspects of the preliminary
deliberations made to date by the Texas Utility Commission are contrary to both
the statute by which the legislature restructured the electric industry in Texas
and the regulations and orders the Texas Utility Commission has issued in
implementing that statute. Although we and CenterPoint Energy believe we have
meritorious arguments, no prediction can be made as to the ultimate outcome or
timing of rehearings or appeals.
After the issuance of the order in the 2004 True-Up Proceeding, we will
seek authority from the Texas Utility Commission to securitize all or a portion
of the true-up balance through the issuance of transition bonds and expect to be
in a position to issue those bonds in the first half of 2005. Appeals of the
true-up or securitization orders 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
13
components not used to repay our indebtedness to CenterPoint Energy or our
external debt through either the payment of dividends or the settlement of
intercompany payables. The Securities and Exchange Commission (SEC) must take
action to permit the issuance of any transition bonds and approve any dividends
by us in excess of our current and retained earnings. To maintain our capital
structure at the appropriate levels, CenterPoint Energy may reinvest funds in
our company in the form of equity contributions or intercompany loans.
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 held a
hearing on this issue on September 8, 2004. While the Texas Utility Commission
has discussed this issue, it has not reached a conclusion as to the calculation.
Therefore, 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 nine months ended September 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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
2003 2004 2003 2004
------------ ----------- ------------ ------------
(IN MILLIONS)
Revenues:
Electric revenues .................. $ 414 $ 425 $ 1,080 $ 1,095
ECOM true-up ....................... 222 -- 455 --
Transition bond revenues ........... 18 21 48 54
-------- -------- -------- --------
Total revenues .................... 654 446 1,583 1,149
-------- -------- -------- --------
Expenses:
Operation and maintenance .......... 139 134 398 390
Depreciation and amortization ...... 62 63 184 186
Taxes other than income taxes ...... 62 59 159 158
Transition bond expenses ........... 8 12 19 25
-------- -------- -------- --------
Total expenses .................... 271 268 760 759
-------- -------- -------- --------
Operating Income ..................... 383 178 823 390
Interest and Other Finance Charges ... (90) (86) (273) (260)
Other Income, net .................... 8 8 26 34
-------- -------- -------- --------
Income Before Income Taxes ........... 301 100 576 164
Income Tax Expense ................... (107) (34) (202) (55)
Extraordinary Loss, net of tax ....... -- (894) -- (894)
-------- -------- -------- --------
Net Income (Loss) .................... $ 194 $ (828) $ 374 $ (785)
======== ======== ======== ========
Actual gigawatt-hours (GWh) delivered:
Residential ........................ 8,134 8,512 19,183 18,714
Total (1) .......................... 20,896 22,568 54,770 56,634
14
- --------------
(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 SEPTEMBER 30, 2004 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2003
We reported operating income of $178 million for the three months ended
September 30, 2004, consisting of $169 million for the regulated electric
transmission and distribution utility and $9 million for the transition bond
company. For the three months ended September 30, 2003, operating income totaled
$383 million, consisting of $151 million for the regulated electric transmission
and distribution utility, $10 million for the transition bond company and $222
million of non-cash income associated with Excess Cost Over Market (ECOM). The
amount of non-cash income associated with ECOM was included in our 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 transmission and
distribution utility continued to benefit from solid customer growth, which
contributed $9 million in operating income from the addition of nearly 51,000
metered customers since September 2003. Additionally, we recorded an $11 million
gain on the sale of land in the third quarter. These amounts were offset by
higher net transmission costs ($2 million) and environmental remediation costs
($4 million).
Net loss for the three months ended September 30, 2004 included an
after-tax extraordinary loss of $894 million from a write-down of regulatory
assets based on our analysis of the Texas Utility Commission's deliberations on
the 2004 True-Up Proceeding.
NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2003
We reported operating income of $390 million for the nine months ended
September 30, 2004, consisting of $361 million for the regulated electric
transmission and distribution utility and $29 million for the transition bond
company. For the nine months ended September 30, 2003, operating income totaled
$823 million, consisting of $339 million for the regulated electric transmission
and distribution utility, $29 million for the transition bond company and $455
million of non-cash income associated with ECOM. Milder weather and decreased
usage negatively impacted the first nine months of 2004 by $25 million in
addition to higher net transmission costs of $6 million. These amounts were more
than offset by increased operating income from continued customer growth of $23
million and a gain of $11 million on the sale of land in the third quarter.
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.
Net loss for the nine months ended September 30, 2004 included an
after-tax extraordinary loss of $894 million from a write-down of regulatory
assets based on our analysis of the Texas Utility Commission's deliberations on
the 2004 True-Up Proceeding.
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. The actual terms of the
order issued by the Texas Utility Commission in the 2004 True-Up Proceeding will
affect our results for the fourth quarter of 2004 to the extent materially
different from that assumed when we recorded the charge to earnings in the third
quarter for the assumed terms of the order. 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.
15
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 September 30, 2004. Amounts are expressed in thousands.
CENTERPOINT HOUSTON
-------------------------- TRANSITION
YEAR THIRD-PARTY AFFILIATE SUB-TOTAL BONDS TOTAL
---- ------------- ----------- ------------ ------------ ------------
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 $ 675,880 $ 3,730,497
============= =========== ============ ============ ============
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 September 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 September 30, 2004 is approximately $500 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
16
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 $676 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.
Bank Facilities. As of September 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 fourth quarter of 2004 include the following:
- approximately $76 million of capital expenditures; and
- an estimated $56 million in refunds of excess mitigation credits
through December 31, 2004.
We expect that anticipated cash flows from operations and intercompany
borrowings will be sufficient to meet our cash needs for 2004. We also
anticipate receiving payment of the retail clawback of approximately $177
million from RRI.
We will distribute to CenterPoint Energy recovery of the true-up
components not used to repay our indebtedness to CenterPoint Energy or our
external debt through either the payment of dividends or the settlement of
intercompany payables. The SEC must take action to permit the issuance of any
transition bonds and approve any dividends by us in excess of our current and
retained earnings. To maintain our capital structure at the appropriate levels,
CenterPoint Energy may reinvest funds in our company, in the form of equity
contributions or intercompany loans. 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 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.
17
Impact on Liquidity of a Downgrade in Credit Ratings. As of September 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. In the near term, our ratings may be
affected by the results of the 2004 True-Up Proceeding. 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 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
18
September 30, 2004, we had borrowings from the money pool of $144 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 September 30, 2004, we are authorized to issue an
additional aggregate $73 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.
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. As of September 30, 2004, we had a retained deficit on our
Consolidated Balance Sheets as a result of an after-tax extraordinary loss of
$894 million recorded in the third quarter of 2004 related to the 2004 True-Up
Proceeding. We expect to pay dividends out of current earnings or obtain SEC
approval for any dividends in excess of our current and retained earnings. The
June 2003 Financing Order requires that we maintain a ratio of common equity to
total capitalization of at least 30%.
On October 27, 2004, CenterPoint Energy's board of directors authorized us
to undertake such accounting and legal review, valuation studies and other
analyses as may be deemed necessary in order to prepare an accounting
reorganization (quasi-reorganization) for presentation to CenterPoint Energy's
board. Such quasi-reorganization, if approved, may be effective as of
December 31, 2004.
A quasi-reorganization is an accounting procedure that eliminates an
accumulated deficit in retained earnings and permits the company to proceed on
much the same basis as if it had been legally reorganized. A
quasi-reorganization involves restating a company's assets and its liabilities
to their fair values. The balance in the retained earnings account is then
closed through a reduction in paid-in-capital accounts, giving the company a
"fresh start" with a zero balance in retained earnings.
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
19
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 $2.0 billion of
recoverable electric generation-related regulatory assets as of September 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 is expected to occur in 2004. Based on our analysis of the
Texas Utility Commission's deliberations, we recorded an after-tax charge to
earnings in the third quarter of 2004 of approximately $894 million to
write-down our electric generation-related regulatory assets to their realizable
value, which is reflected as an extraordinary loss in the Statements of
Consolidated Operations. The ultimate amount of such charge will depend upon the
final action of the Texas Utility Commission.
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
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 delivery of electricity are generally recorded
when electricity is delivered to customers. However, the determination of
electricity deliveries to individual customers is based on the reading of their
meters, which is performed on a systematic basis throughout the month. At the
end of each month, amounts of electricity delivered to customers since the date
of the last meter reading are estimated and the corresponding unbilled revenue
is estimated. Unbilled electric delivery revenue is estimated each month based
on daily supply volumes, applicable rates and analyses reflecting significant
historical trends and experience. 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.
20
NEW ACCOUNTING PRONOUNCEMENTS
See Note 3 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 September 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 SEC's rules and forms.
There has been no change in our internal controls over financial reporting
that occurred during the three months ended September 30, 2004 that has
materially affected, or is reasonably likely to materially affect, our internal
controls over financial reporting.
21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For a description of certain legal and regulatory proceedings affecting
us, please review Notes 2 and 6 to our Interim Financial Statements, "Business
- -- Regulation" and " -- Environmental Matters" in Item 1 of the CenterPoint
Houston Form 10-K, "Legal Proceedings" in 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
Exhibits not incorporated by reference to a prior filing are designated by
a cross (+); all exhibits not so designated are incorporated by reference to a
prior filing of CenterPoint Energy Houston Electric, LLC or CenterPoint Energy,
Inc. as indicated.
Report or Registration SEC File or
Exhibit Number Description Statement Registration Number Exhibit References
- -------------- ------------------- ---------------------- ------------------- ------------------
3.1 Articles of CenterPoint 1-3187 3(b)
Organization of Houston's Form 8-K
CenterPoint Energy dated August 31,
Houston Electric, 2002 filed with
LLC the SEC on
September 3, 2002
3.2 Limited Liability CenterPoint 1-3187 3(c)
Company Regulations Houston's Form 8-K
of CenterPoint dated August 31,
Energy Houston 2002 filed with
Electric, LLC the SEC on
September 3, 2002
4.1.1 $1,310,000,000 CenterPoint 1-31447 4(g)(1)
Credit Agreement Energy's Form 10-K
dated as of for the year ended
November 12, 2002, December 31, 2002
among CenterPoint
Houston and the
banks named therein
4.1.2 First Amendment to CenterPoint 1-31447 10.7
Exhibit 4.1.1, Energy's Form 10-Q
dated as of for the quarter
September 3, 2003 ended September
30, 2003
4.1.3 Pledge Agreement, CenterPoint 1-31447 4(g)(2)
dated as of Energy's Form 10-K
November 12, 2002 for the year ended
executed in December 31, 2002
connection with
Exhibit 4.1.1
+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
22
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).
23
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: November 9, 2004
24
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 CenterPoint 1-3187 3(b)
Organization of Houston's Form 8-K
CenterPoint Energy dated August 31,
Houston Electric, 2002 filed with
LLC the SEC on
September 3, 2002
3.2 Limited Liability CenterPoint 1-3187 3(c)
Company Regulations Houston's Form 8-K
of CenterPoint dated August 31,
Energy Houston 2002 filed with
Electric, LLC the SEC on
September 3, 2002
4.1.1 $1,310,000,000 CenterPoint 1-31447 4(g)(1)
Credit Agreement Energy's Form 10-K
dated as of for the year ended
November 12, 2002, December 31, 2002
among CenterPoint
Houston and the
banks named therein
4.1.2 First Amendment to CenterPoint 1-31447 10.7
Exhibit 4.1.1, Energy's Form 10-Q
dated as of for the quarter
September 3, 2003 ended September
30, 2003
4.1.3 Pledge Agreement, CenterPoint 1-31447 4(g)(2)
dated as of Energy's Form 10-K
November 12, 2002 for the year ended
executed in December 31, 2002
connection with
Exhibit 4.1.1
+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
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).