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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO _________
COMMISSION FILE NUMBER 333-91093
CENTERPOINT ENERGY TRANSITION BOND COMPANY, LLC
(Exact name of registrant as specified in its charter)
DELAWARE 76-0624152
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1111 LOUISIANA, SUITE 4667
HOUSTON, TEXAS 77002 (713) 207-8272
(Address and zip code of principal executive (Registrant's telephone number,
offices) Including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I(1)(a) AND
(b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM 10-K 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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of each of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the member's equity held by non-affiliates of
the registrant as of June 30, 2004: None
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CENTERPOINT ENERGY TRANSITION BOND COMPANY, LLC
TABLE OF CONTENTS
PART I
Item 1. Business ........................................................ 1
Item 2. Properties ...................................................... 2
Item 3. Legal Proceedings ............................................... 2
Item 4. Submission of Matters to a Vote of Security Holders ............. 3
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities ............ 3
Item 6. Selected Financial Data ......................................... 3
Item 7. Management's Narrative Analysis of Results of Operations ........ 4
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ...... 5
Item 8. Financial Statements and Supplementary Data ..................... 6
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ..................................... 15
Item 9A. Controls and Procedures ......................................... 15
Item 9B. Other Information ............................................... 15
PART III
Item 10. Directors and Executive Officers of the Registrant .............. 15
Item 11. Executive Compensation .......................................... 15
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters .............................. 15
Item 13. Certain Relationships and Related Transactions .................. 15
Item 14. Principal Accountant Fees and Services .......................... 15
PART IV
Item 15. Exhibits and Financial Statement Schedules ...................... 16
i
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
From time to time we make statements concerning our expectations, beliefs,
plans, objectives, goals, strategies, future events or performance and
underlying assumptions and other statements that are not historical facts. These
statements are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Actual results may differ materially
from those expressed or implied by these statements. In some cases, you can
identify our forward-looking statements by the words "anticipate," "believe,"
"continue," "could," "estimate," "expect," "forecast," "goal," "intend," "may,"
"objective," "plan," "potential," "predict," "projection," "should," "will," or
other similar words.
We have based our forward-looking statements on our management's beliefs
and assumptions based on information available to our management at the time the
statements are made. We caution you that assumptions, beliefs, expectations,
intentions and projections about future events may and often do vary materially
from actual results. Therefore, we cannot assure you that actual results will
not differ materially from those expressed or implied by our forward-looking
statements.
The following list identifies some of the factors that could cause actual
results to differ from those expressed or implied by our forward-looking
statements:
- state and federal legislative and regulatory actions or developments,
including deregulation, re-regulation and restructuring of the
electric utility industry, changes in or application of laws or
regulations applicable to other aspects of our business;
- non-payment of transition charges due to financial distress of
CenterPoint Energy Houston Electric, LLC's (CenterPoint Houston's)
customers;
- the accuracy of the servicer's estimates of market demand and prices
for energy;
- the accuracy of the servicer's estimates of industrial, commercial and
residential growth in CenterPoint Houston's service territory;
- changes in market demand and demographic patterns;
- weather variations and other natural phenomena affecting retail
electric customer energy usage;
- the operating performance of CenterPoint Houston's facilities and
third-party suppliers of electric energy in CenterPoint Houston's
service territory;
- the accuracy of the servicer's estimates of the payment patterns of
retail electric customers, including the rate of delinquencies and any
collections curves;
- the reliability of the systems, procedures and other infrastructure
necessary to operate the retail electric business in CenterPoint
Houston's service territory, including the systems owned and operated
by the independent system operator in the Electric Reliability Council
of Texas, Inc.; and
- other factors we discuss in this Form 10-K and our other Securities
and Exchange Commission filings.
You should not place undue reliance on forward-looking statements. Each
forward-looking statement speaks only as of the date of the particular
statement, and we undertake no obligation to publicly update or revise any
forward-looking statements.
ii
PART I
ITEM 1. BUSINESS
GENERAL
We are a special purpose Delaware limited liability company whose sole
member is CenterPoint Energy Houston Electric, LLC (CenterPoint Houston). We
were organized on November 10, 1999, and amended and restated our limited
liability company agreement and certificate of formation on October 24, 2001.
Our principal purposes are:
a) purchasing the transition property, as described below, established by
a financing order from the Public Utility Commission of Texas (Texas
Utility Commission);
b) issuing, supporting and servicing one or more series of transition
bonds secured by transition property; and
c) engaging in only those other activities incidental thereto and
necessary, suitable or convenient thereto.
Our organizational documents require us to operate in a manner such that we
should not be consolidated in the bankruptcy estate of CenterPoint Houston in
the event that CenterPoint Houston becomes subject to such a proceeding.
We have no employees and have entered into a servicing agreement with
CenterPoint Houston (in this capacity, the Servicer). Pursuant to the servicing
agreement, the Servicer is responsible for servicing, managing, and receiving
transition charges from retail electric customers or retail electric providers
(Transition Charges). In addition, we have entered into an administration
agreement with CenterPoint Houston pursuant to which CenterPoint Houston
performs administrative and operational duties for us.
We purchased the transition property described below and issued Series
2001-1 Transition Bonds (the Transition Bonds) on October 24, 2001, with
expected principal repayments ranging from eleven months to twelve years and
final maturities of the four classes of Transition Bonds ranging from six years
to fourteen years. The specific interest rate and maturity of each class of
Transition Bonds is disclosed in Note 3 of the Notes to Financial Statements
included in Item 8 of this Form 10-K. The Transition Bonds were issued pursuant
to an indenture between us and Deutsche Bank Trust Company Americas (formerly
Bankers Trust Company), as trustee.
TRANSITION PROPERTY
The transition property (Transition Property) that we purchased from
Reliant Energy, Incorporated (now CenterPoint Houston) includes the irrevocable
right to impose, collect and receive, through the Transition Charges payable by
retail electric customers within CenterPoint Houston's certificated service area
as it existed on May 1, 1999, an amount sufficient to recover the qualified
costs authorized in the financing order (Financing Order) issued by the Texas
Utility Commission, including the right to receive Transition Charges in amounts
and at times sufficient to pay principal and interest and to make other deposits
in connection with the Transition Bonds. All revenues and collections resulting
from Transition Charges are part of the Transition Property. CenterPoint
Houston's qualified costs authorized in the Financing Order approving the
issuance of the Transition Bonds include:
- certain of CenterPoint Houston's generation-related regulatory assets,
as determined in the Financing Order; and
- certain costs of issuing, supporting and servicing the Transition
Bonds.
We purchased the Transition Property from CenterPoint Houston with the
proceeds from the issuance of $748.9 million principal amount of Transition
Bonds. Prior to January 2002, the Servicer collected the Transition Charges
primarily from retail electric customers within CenterPoint Houston's service
territory on the Company's behalf. Beginning in January 2002, and in limited
circumstances earlier, retail electric customers in CenterPoint
1
Houston's service territory began to purchase electricity and related services
from retail electric providers, rather than from electric utilities. Certain of
these retail electric providers were affiliates of CenterPoint Houston through
September 30, 2002. Each retail electric provider includes the Transition
Charges in its bill to its retail electric customers but is not required to show
the Transition Charges as a separate line item or footnote. Each retail electric
provider, however, is required to provide annual written notice to its customers
that Transition Charges have been included in their bills. The retail electric
providers are obligated to remit payments of Transition Charges, less an
allowance for charge-offs of delinquent customer accounts, to the Servicer,
whether or not the Transition Charges are actually collected from retail
electric customers. The Servicer has only limited rights to collect the
Transition Charges directly from retail electric customers if a retail electric
provider does not remit such payments to the Servicer, but has certain rights
against the retail electric provider. Because the amount of Transition Charge
collections will largely depend on the amount of electricity consumed by
customers within CenterPoint Houston's service territory, the amount of
collections may vary substantially from year to year.
Credit enhancement for the Transition Bonds, which includes mandatory
periodic review and adjustment to the Transition Charges to be billed and
collected from the retail electric customers within CenterPoint Houston's
service territory and the allocation of those charges among the various classes
of customers, is intended to ensure that sufficient funds are available to make
payments of principal and interest on the Transition Bonds as scheduled. The
Servicer is required to make a filing with the Texas Utility Commission for an
adjustment at least annually to correct any significant undercollection or
overcollection of Transition Charges. In addition, if after application of
collections in accordance with the indenture, the actual principal balance of
Transition Bonds outstanding at the next payment date will be more than 5%
higher or lower than the expected principal balance on the expected amortization
schedule, interim true-up adjustments may be made, but not more frequently than
every six months. The amount of the adjustment will be determined by using a
formula established by the financing order approving the issuance of the
Transition Bonds. The adjustments will be made to correct any undercollections
or overcollections and are intended to provide that the Transition Charges
generate amounts sufficient to:
- make timely interest and principal payments on the Transition Bonds;
- pay fees and expenses of the trustee, our independent managers, the
administrator and the Servicer, and other fees, expenses, costs and
charges;
- reconcile the retail electric provider payments, net of expected
charge-offs for delinquent customer accounts; and
- fund the various subaccounts required by the Transition Bond Indenture
to their required levels.
CenterPoint Houston is required to true-up Transition Charges annually on
November 1st in compliance with the Financing Order adopted in Application of
Reliant Energy, Incorporated for Financing Order to Securitize Regulatory Assets
and Other Qualified Costs, Docket No. 21665. CenterPoint Houston's most recent
true-up filing to adjust Transition Charges was approved by the Texas Utility
Commission and became effective November 1, 2004. A link to that filing is
available at www.centerpointenergy.com/investors/bond/1,2776,106657,00.html. No
information on that or any other website is incorporated by reference into this
report. The adjusted Transition Charges are designed to collect $100.5 million
during the year ending October 31, 2005.
ITEM 2. PROPERTIES
We have no material physical properties. Our primary asset is the
Transition Property described above in Item 1 (Business - Transition Property).
ITEM 3. LEGAL PROCEEDINGS
None.
2
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted pursuant to Instruction I of Form 10-K.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Sale of Unregistered Securities. There is no established public trading
market for our equity securities. All of our equity is owned by CenterPoint
Houston. We were formed by CenterPoint Houston in November 1999. CenterPoint
Houston's acquisition of our membership interests at our formation was exempt
from registration under Section 4(2) of the Securities Act of 1933, as amended,
because no public offering was involved. We have made no other sales of
unregistered securities.
Restricted Payments. The indenture governing the Transition Bonds prohibits
us from making any distributions from the capital subaccount of the trust
established for the Transition Bonds to any owner of our beneficial interests
unless no default has occurred and is continuing thereunder and such
distributions would not cause the balance of such capital subaccount to decline
below 0.50% of the initial principal amount of Transition Bonds issued and
outstanding. We will not, except as contemplated by our organizational
documents, make any loan or advance credit to, or guarantee, endorse, or
otherwise become contingently liable in connection with the obligations, stocks
or dividends of, or own, purchase, repurchase or acquire (or agree contingently
to do so) any stock, obligations, assets or securities of, or any other interest
in, or make any capital contribution to, any other person. We will not directly
or indirectly make payments to or distributions from the collection account
except in accordance with the Transition Bond Indenture. As of December 31,
2004, we had not made any distributions to our sole member other than interest
earned on the capital subaccount paid in accordance with the Transition Bond
Indenture.
Bondholders. As of December 31, 2004, the sole record holder of the
Transition Bonds was Cede & Co., as nominee of The Depository Trust Company. The
Transition Bonds are not listed on any national securities exchange.
ITEM 6. SELECTED FINANCIAL DATA
Omitted pursuant to Instruction I of Form 10-K.
3
ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS
The following is an analysis of our consolidated results of operations in
an abbreviated format pursuant to Instruction I of Form 10-K. This analysis
should be read in combination with our financial statements included in Item 8
of this Form 10-K.
As discussed above under Item 1 (Business), we are a Delaware limited
liability company established in November 1999 for limited purposes. On October
24, 2001 we issued Transition Bonds and used the net proceeds to purchase the
Transition Property from CenterPoint Houston. As we are restricted by our
organizational documents from engaging in activities other than those described
in Item 1 (Business), income statement effects are limited primarily to income
generated from the Transition Charges, interest expense on the Transition Bonds,
amortization of the Transition Property, debt issuance expenses and the discount
on the Transition Bonds, Transition Property servicing and administration fees
and incidental investment interest income.
For the year ended December 31, 2004, revenue from Transition Charges was
$74.9 million and investment income was $0.3 million. Interest expense of $36.5
million related to interest on the Transition Bonds and amortization expense of
$1.5 million related to amortization of debt issuance expenses and the discount
on the Transition Bonds. Amortization of the Transition Property was net of
regulatory adjustments of $26.5 million in 2004 to defer amortization costs
until periods in which Transition Charge revenue is recognized. We recorded
administrative expenses of $2.2 million in 2004 primarily due to bad debt
expense associated with retail electric providers recorded in the second quarter
of 2004 in accordance with the financing order issued by the Public Utility
Commission of Texas (Texas Utility Commission) in May 2000 authorizing our
issuance of Transition Bonds.
For the year ended December 31, 2003, revenue from Transition Charges was
$63.5 million and investment income was $0.3 million. Interest expense of $37.6
million related to interest on the Transition Bonds and amortization expense of
$1.6 million related to amortization of debt issuance expenses and the discount
on the Transition Bonds. Amortization of the Transition Property was net of
regulatory adjustments of $37.5 million in 2003 to defer amortization costs
until periods in which Transition Charge revenue is recognized. We recorded
administrative expenses of $0.6 million in 2003.
For the year ended December 31, 2002, revenue from Transition Charges was
$74.1 million and investment income was $0.2 million. Interest expense of $38.4
million related to interest on the Transition Bonds and amortization expense of
$1.7 million related to amortization of debt issuance expenses and the discount
on the Transition Bonds. Amortization of the Transition Property was net of
regulatory adjustments of $28.0 million in 2002 to defer amortization costs
until periods in which Transition Charge revenue is recognized. We recorded
administrative expenses of $0.8 million in 2002.
We use collections of Transition Charges to make scheduled principal and
interest payments on the Transition Bonds. Transition Charges, together with
interest earned on collected Transition Charges, are expected to offset (1)
interest expense on the Transition Bonds, (2) amortization of the Transition
Property, debt issuance expenses and the discount on the Transition Bonds and
(3) the fees charged by CenterPoint Houston for servicing the Transition
Property and providing administrative services to us.
The Transition Charges are reviewed and adjusted at least annually by the
Texas Utility Commission to correct prospectively any overcollections or
undercollections during the preceding 12 months and to provide for the expected
recovery of amounts sufficient to timely provide all payment of debt service and
other required amounts and charges in connection with the Transition Bonds.
CenterPoint Houston is required to true-up Transition Charges annually on
November 1st in compliance with the Financing Order adopted in Application of
Reliant Energy, Incorporated for Financing Order to Securitize Regulatory Assets
and Other Qualified Costs, Docket No. 21665. CenterPoint Houston's most recent
true-up filing to adjust Transition Charges was approved by the Texas Utility
Commission and became effective November 1, 2004. The adjusted Transition
Charges are designed to collect $100.5 million during the year ending
October 31, 2005.
4
Holders of Transition Bonds may experience payment delays or incur losses
if our assets are not sufficient to pay interest or the scheduled principal of
the Transition Bonds. Funds for payments depend on the Transition Property and
the right to collect the transition charges over a period limited by Texas law
to 15 years. In addition, collections depend on the amount of electricity
consumed within CenterPoint Houston's service territory. At the time we made our
September 15, 2004 debt service payment, funds in the General Subaccount, the
Reserve Subaccount and the Overcollateralization Subaccount were insufficient to
cover the payment, and approximately $2.5 million was drawn from the Capital
Subaccount in connection with that payment. Milder than normal weather during
the summer of 2004 (and hence reduced electricity consumption) resulted in
Transition Charge collections being insufficient to fund that debt service
payment without a draw from the Capital Subaccount. After the September 15, 2004
payment, the aggregate balance in the Overcollateralization Subaccount and the
Capital Subaccount was $1.3 million, and the targeted aggregate balance for
these accounts was $4.7 million.
Immediately following the March 15, 2005 debt service payment, the
aggregate balance in the Overcollateralization Subaccount and the Capital
Subaccount was at the targeted aggregate balance for these accounts of $4.8
million, and an additional $3.4 million was held in the Reserve Subaccount.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 2003 and 2004, we had outstanding fixed-rate debt
aggregating $717.1 million and $675.9 million in principal amount and having a
fair value of $753.5 million and $709.1 million, respectively. This fixed-rate
debt does not expose us to the risk of loss in earnings due to changes in market
interest rates. However, the fair value of this debt would increase by
approximately $10.1 million if interest rates were to decline by 10% from their
levels at December 31, 2004.
5
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CENTERPOINT ENERGY TRANSITION BOND COMPANY, LLC
STATEMENTS OF INCOME
AND CHANGES IN MEMBER'S EQUITY
YEAR ENDED DECEMBER 31,
---------------------------
2002 2003 2004
------- ------- -------
(IN THOUSANDS)
REVENUES:
Transition charge revenue ..................................... $74,086 $63,542 $74,929
Investment income.............................................. 213 262 270
------- ------- -------
Total operating revenues ................................... 74,299 63,804 75,199
------- ------- -------
EXPENSES:
Interest expense .............................................. 38,363 37,585 36,510
Amortization of transition property ........................... 33,477 24,016 35,034
Amortization of transition bond discount and issuance costs ... 1,706 1,612 1,457
Administrative and general expenses ........................... 753 591 2,198
------- ------- -------
Total operating expenses ................................... 74,299 63,804 75,199
------- ------- -------
NET INCOME ....................................................... -- -- --
MEMBER'S EQUITY AT BEGINNING OF PERIOD ........................... 3,745 3,745 3,745
CONTRIBUTED CAPITAL .............................................. -- -- --
------- ------- -------
MEMBER'S EQUITY AT THE END OF THE PERIOD ......................... $ 3,745 $ 3,745 $ 3,745
======= ======= =======
See Notes to the Company's Financial Statements
6
CENTERPOINT ENERGY TRANSITION BOND COMPANY, LLC
BALANCE SHEETS
DECEMBER 31,
-------------------
2003 2004
-------- --------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .......................................... $ 29,795 $ 23,244
Restricted funds ................................................... 5,630 3,474
Transition charge receivable ....................................... 9,128 12,983
-------- --------
Current Assets ............................................... 44,553 39,701
Intangible transition property ..................................... 682,204 647,170
Unamortized debt issuance costs .................................... 6,846 5,433
-------- --------
Total Assets ................................................. $733,603 $692,304
======== ========
LIABILITIES AND MEMBER'S EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt .................................. $ 41,189 $ 46,806
Accrued interest ................................................... 10,967 10,501
Customer deposits .................................................. 1,877 2,190
Fees payable to servicer ........................................... 160 159
-------- --------
Current Liabilities .......................................... 54,193 59,656
Long-term debt:
Transition bonds, net of unamortized discount of $0.2 million ... 675,665 628,903
-------- --------
Total Liabilities ............................................ 729,858 688,559
-------- --------
MEMBER'S EQUITY:
Contributed capital ................................................ 3,745 3,745
Retained earnings .................................................. -- --
-------- --------
Total Member's Equity ........................................ 3,745 3,745
-------- --------
Total Liabilities and Member's Equity ........................ $733,603 $692,304
======== ========
See Notes to the Company's Financial Statements
7
CENTERPOINT ENERGY TRANSITION BOND COMPANY, LLC
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
------------------------------
2002 2003 2004
-------- -------- --------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ....................................................... $ -- $ -- $ --
Adjustment for non-cash items:
Amortization of transition bond discount and issuance costs ... 1,706 1,612 1,457
Amortization of transition property ........................... 33,477 24,016 35,034
Changes in other assets and liabilities:
Transition charge receivable .................................. (5,874) 473 (3,855)
Restricted funds .............................................. 1,437 (3,306) 2,156
Other current assets .......................................... (16) 16 --
Accrued interest .............................................. 4,064 (256) (466)
Customer deposits ............................................. 1,100 699 313
Fees payable to servicer ...................................... 40 1 (1)
-------- -------- --------
Net cash provided by operating activities .................. 35,934 23,255 34,638
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt ....................................... (13,106) (18,723) (41,189)
-------- -------- --------
Net cash used in financing activities ...................... (13,106) (18,723) (41,189)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................ 22,828 4,532 (6,551)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ...................... 2,435 25,263 29,795
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD ............................ $ 25,263 $ 29,795 $ 23,244
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAYMENTS:
Interest ...................................................... $ 34,300 $ 37,841 $ 36,976
See Notes to the Company's Financial Statements
8
CENTERPOINT ENERGY TRANSITION BOND COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS
(1) BACKGROUND AND BASIS OF PRESENTATION
CenterPoint Energy Transition Bond Company, LLC (the Company) is a special
purpose Delaware limited liability company whose sole member is CenterPoint
Energy Houston Electric, LLC (CenterPoint Houston). CenterPoint Houston is a
regulated utility engaged in the transmission and distribution of electric
energy in a 5,000 square mile area located along the Texas Gulf Coast, including
the City of Houston.
The Texas Electric Choice Plan (Texas electric restructuring law), enacted
in 1999, authorized competition in the retail and generation markets for
electricity beginning in January 2002 and provides for recovery of stranded
costs (i.e., the excess of regulatory net book value of generation assets (as
defined in the Texas electric restructuring law) over the market value of those
assets) and generation-related regulatory assets (as set forth in the Texas
electric restructuring law) through irrevocable non-bypassable transition
charges assessed on all retail electric customers within a utility's
geographical certificated service area as it existed on May 1, 1999 (Transition
Charges). The Texas electric restructuring law authorizes the Public Utility
Commission of Texas (Texas Utility Commission) to issue financing orders
approving the issuance of transition bonds to recover generation-related
regulatory assets and stranded costs. The Texas electric restructuring law and
the financing order permit an electric utility to transfer its rights and
interests in the financing order, including the right to collect Transition
Charges pursuant to the Texas electric restructuring law, to a special purpose
entity formed by the electric utility to issue debt securities secured by the
right to receive revenues arising from the Transition Charges. The electric
utility's right to receive the Transition Charges and its other rights and
interests under the financing order constitute "Transition Property." The Texas
Utility Commission issued a financing order to CenterPoint Houston on May 31,
2000 (Financing Order) that authorized CenterPoint Houston to cause the Company
to issue transition bonds (Transition Bonds) in an aggregate principal amount
not to exceed $740 million plus up-front qualified costs not to exceed $10.7
million in the aggregate.
The Company was organized on November 10, 1999 under the laws of the State
of Delaware for the sole purpose of acquiring and holding the Transition
Property to be acquired from CenterPoint Houston. The Company had no operations
until October 24, 2001.
On October 24, 2001, the Company issued $748.9 million of Transition Bonds
and used the net proceeds to purchase the Transition Property from CenterPoint
Houston and pay expenses of issuance. For additional information relating to the
Transition Bonds, see Note 3.
CenterPoint Houston's parent company, CenterPoint Energy, Inc. (CenterPoint
Energy), is a registered public utility holding company under the Public Utility
Holding Company Act of 1935, as amended.
The Company is restricted by its organizational documents from engaging in
any activity not directly related to the specific purposes for which the Company
was created. The Company is a separate and distinct legal entity from
CenterPoint Houston, and the Company's organizational documents require it to
operate in a manner to avoid consolidation with the bankruptcy estate of
CenterPoint Houston in the event CenterPoint Houston becomes subject to such a
proceeding. CenterPoint Houston is not the owner of the Transition Property
described herein, and the assets of the Company are not available to pay
creditors of CenterPoint Houston or any of its affiliates.
9
(2) SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
REGULATION AND REGULATORY ASSETS AND LIABILITIES. The Company's business
meets the criteria of Statement of Financial Accounting Standards (SFAS) No. 71,
"Accounting for the Effects of Certain Types of Regulation" (SFAS No. 71). This
accounting standard recognizes the cost based rate making process which may
result in differences in the application of generally accepted accounting
principles between regulated and non-regulated businesses. The Company's purpose
is to purchase the Transition Property, issue one or more series of Transition
Bonds secured by the Transition Property and perform any activity incidental
thereto. The Transition Charges are designed to provide the necessary revenues
to make such payments. Continued applicability of SFAS No. 71 requires that
rates be designed to recover specific costs of providing regulated services and
products, and that it be reasonable to assume that the Transition Charges are
set at levels that will recover an entity's costs and can be charged to and
collected from customers. The Company believes it satisfies such requirements,
and applies the provisions of SFAS No. 71 to its business.
CASH AND CASH EQUIVALENTS/RESTRICTED FUNDS. For purposes of the Balance
Sheet and Statement of Cash Flows, the Company considers investments purchased
with a maturity of three months or less to be the equivalent of cash. The
trustee under the indenture pursuant to which the Transition Bonds were issued
(the Trustee) has established, as provided in the indenture, the following
subaccounts for the Transition Bonds:
- The General Subaccount is comprised of collections of Transition
Charges and interest earned from short term investments. These amounts
accumulate in the General Subaccount until they are transferred from
the General Subaccount on each Transition Bond payment date. The
General Subaccount had a balance of $23.2 million at December 31,
2004.
- The Reserve Subaccount is maintained for the purpose of holding any
Transition Charges and investment earnings (other than investment
earnings on amounts in the Capital Subaccount) not otherwise used on
the payment dates of the Transition Bonds for payment of principal,
interest, fees or expenses, or for funding the Capital Subaccount or
the Overcollateralization Subaccount. The Reserve Subaccount had a
balance of $4,110 at December 31, 2004.
- The Overcollateralization Subaccount has a target funding level of
approximately $3.7 million (0.5% of the initial principal amount of
the Transition Bonds), and funding is scheduled to occur ratably over
the life of the Transition Bonds. The Trustee may draw from this
subaccount if the General Subaccount and Reserve Subaccount are not
sufficient on any payment date to make scheduled payments on the
Transition Bonds and payments of certain fees and expenses. The
Overcollateralization Subaccount had a balance of $409 at December
31, 2004, with a scheduled level of $0.9 million.
- The Capital Subaccount received a deposit of approximately $3.7
million (0.5% of the initial principal amount of the Transition Bonds)
on the date of issuance of the Transition Bonds. CenterPoint Houston
contributed this amount to the Company. If amounts available in the
General, Reserve and Overcollateralization Subaccounts are not
sufficient on any payment date to make scheduled payments on the
Transition Bonds and payments of certain fees and expenses, the
Trustee will draw on amounts in the Capital Subaccount. Approximately
$2.5 million was drawn from the Capital Subaccount in connection with
the September 15, 2004 interest payment. As of December 31, 2004, the
Capital Subaccount had a balance of $1.3 million and is classified as
Restricted Funds in the Balance Sheets.
10
- As of December 31, 2004, cash deposits provided by retail electric
providers totaled $2.2 million and are classified as Restricted Cash
in the Balance Sheets.
DEBT ISSUANCE COSTS. The costs associated with the issuance of the
Transition Bonds are capitalized and are being amortized over the life of the
Transition Bonds utilizing the effective interest method.
TRANSITION CHARGES. Beginning on October 25, 2001 and pursuant to the
Financing Order, CenterPoint Houston, as Servicer, implemented the
non-bypassable Transition Charge on behalf of the Company. The Company records
revenue for Transition Charges under the accrual method. These revenues are
generally recognized upon delivery of services by CenterPoint Houston to retail
electric providers.
The following table shows the aggregate amount of Transition Charges
collected by the Company during each month from the date of issuance of the
Transition Bonds through December 31, 2004 (in thousands):
2001 2002 2003 2004
------ ------ ------ ------
January $ -- $4,584 $4,902 $4,652
February -- 3,997 4,693 4,554
March -- 4,297 4,698 5,798
April -- 5,144 4,986 4,808
May -- 3,678 4,236 3,754
June -- 5,805 5,378 6,258
July -- 5,892 6,195 6,039
August -- 7,091 5,948 6,668
September -- 7,195 6,359 7,217
October 2 8,799 6,403 6,137
November 414 6,119 4,667 7,055
December 1,937 5,390 5,516 6,528
In all material respects, each significant retail electric provider (i) has
been billed in accordance with the applicable Financing Order of the Texas
Utility Commission, (ii) has made all payments in compliance with the
requirements outlined in the Financing Order, and (iii) has satisfied the
creditworthiness requirements of the Financing Order.
AMORTIZATION. The Transition Property was recorded at acquired cost and is
being amortized over twelve years, the life of the Transition Bonds, based on
estimated revenue from Transition Charges, interest accruals and other expenses.
The Financing Order authorizing the imposition of the Transition Charges and the
issuance of the Transition Bonds, limits the terms of the Transition Bonds to no
greater than 15 years. In accordance with SFAS No. 71, amortization is adjusted
for over/under collection of Transition Charges. Amortization of the Transition
Property was net of regulatory adjustments of $28.0 million, $37.5 million and
$26.5 million in 2002, 2003 and 2004, respectively to defer amortization costs
until periods in which Transition Charge revenue is recognized. The Transition
Charges are reviewed and adjusted at least annually by the Texas Utility
Commission to correct any overcollections or undercollections during the
preceding 12 months and to provide for the expected recovery of amounts
sufficient to timely provide all payment of debt service and other required
amounts and charges in connection with the Transition Bonds.
INCOME TAXES. The Company is organized as a single member limited liability
company and will not be subject to United States federal income tax as an entity
separate from CenterPoint Energy. In addition, the Company has received a ruling
from the Comptroller of Public Accounts of the State of Texas to the effect that
(i) the Company's receipt of the Transition Property, (ii) the Company's receipt
of the Transition Charges and (iii) the Company's short-term earnings from
investment of the Transition Charges will be excluded from taxable capital and
taxable earned surplus for purposes of the Texas franchise tax. Accordingly,
there is no provision for income or Texas franchise taxes.
11
(3) LONG-TERM DEBT
On October 24, 2001, the Company issued $748.9 million aggregate principal
amount of its Series 2001-1 Transition Bonds pursuant to the Financing Order.
Net proceeds to the Company from the issuance after payment of all allowed costs
of issuance payable from bond proceeds were $738.2 million. The Company paid
CenterPoint Houston $738.2 million for all of CenterPoint Houston's interest in
the Transition Property.
The Transition Bonds are secured primarily by the Transition Property,
which includes the irrevocable right to recover, through non-bypassable
Transition Charges payable by certain retail electric customers, the qualified
costs of CenterPoint Houston authorized by the Financing Order. The holders of
the Transition Bonds have no recourse to any assets or revenues of CenterPoint
Houston, and the creditors of CenterPoint Houston have no recourse to any assets
or revenues (including, without limitation, the Transition Charges) of the
Company. CenterPoint Houston has no payment obligations with respect to the
Transition Bonds except to remit collections of Transition Charges as set forth
in a servicing agreement between CenterPoint Houston and the Company and in an
intercreditor agreement among CenterPoint Houston, the Company and other
parties.
The source of repayment for the Transition Bonds is the Transition Charges.
The servicer collects these non-bypassable charges from retail electric
providers in CenterPoint Houston's service territory. The servicer deposits
Transition Charge collections into the General Subaccount maintained by the
Trustee.
Debt service payments on the Transition Bonds are due semi-annually and are
paid from funds deposited daily with the Trustee for the Transition Bonds by
CenterPoint Houston as Servicer of the Transition Property. Scheduled final
payment dates, final maturity dates and interest rates for the Transition Bonds
at December 31, 2004, are as follows:
Scheduled Scheduled Interest
Class Final Payment Date Final Maturity Date Rate Amount
- ----- ------------------ ------------------- -------- -------------
(in millions)
A-1 September 15, 2005 September 15, 2007 3.84% $ 42.0
A-2 September 15, 2007 September 15, 2009 4.76% 118.0
A-3 September 15, 2009 September 15, 2011 5.16% 130.0
A-4 September 15, 2013 September 15, 2015 5.63% 385.9
------
675.9
Less: Current Maturities (scheduled payments).............. (46.8)
Less: Unamortized Discount................................. (0.2)
------
Total Long-Term Debt, net.................................. $628.9
======
The following table shows scheduled and actual principal payments on the
Transition Bonds from the issuance date through December 31, 2004 (in
thousands):
Class A-1 Class A-2 Class A-3 Class A-4
------------------- ------------------ ------------------ -----------------
Scheduled Actual Scheduled Actual Scheduled Actual Scheduled Actual
--------- ------- --------- ------ --------- ------ --------- ------
March 15, 2002 $ -- $ -- $-- $-- $-- $-- $-- $--
September 15, 2002 13,106 13,106 -- -- -- -- -- --
March 15, 2003 6,366 6,366 -- -- -- -- -- --
September 15, 2003 12,357 12,357 -- -- -- -- -- --
March 15, 2004 14,004 14,004 -- -- -- -- -- --
September 15, 2004 27,185 27,185 -- -- -- -- -- --
12
Scheduled principal payments through 2008 for the Transition Bonds
outstanding at December 31, 2004 are as follows: 2005 - $46.8 million, 2006 -
$54.3 million, 2007 - $59.9 million, 2008 - $65.5 million and 2009 - $73.0
million.
The estimated fair value of the Transition Bonds at December 31, 2004 was
$709.1 million.
(4) SIGNIFICANT AGREEMENTS AND RELATED PARTY TRANSACTIONS
Under a sale agreement between the Company and CenterPoint Houston dated
October 24, 2001, CenterPoint Houston sold the Transition Property to the
Company. Pursuant to a servicing agreement entered into between the Company and
CenterPoint Houston concurrently with the issuance of the Transition Bonds,
CenterPoint Houston is the Servicer of the Transition Property. As the Servicer,
CenterPoint Houston manages and administers the Transition Property of the
Company and collects the Transition Charges on behalf of the Company. The
Company pays a fixed annual servicing fee to CenterPoint Houston for these
services. Pursuant to an administration agreement entered into between the
Company and CenterPoint Houston, CenterPoint Houston also provides
administrative services to the Company. The Company pays CenterPoint Houston a
fixed fee for performing these services, plus all reimbursable expenses. The
Company recorded administrative and servicing fees of $0.5 million in each of
the years 2002, 2003 and 2004.
The Company also entered into an intercreditor agreement with CenterPoint
Houston and other parties related to the servicing of the Transition Bonds. In
addition, CenterPoint Houston has agreed to indemnify the Trustee under the
Transition Bond Indenture on the Company's behalf to the extent such
indemnification is not recoverable from the Company as a fixed expense.
Certain debt issuance costs paid by CenterPoint Houston were reimbursed by
the Company upon issuance of the Transition Bonds.
In order to obtain the desired ratings on the Transition Bonds, CenterPoint
Houston deposited $3 million in a specified reserve account for the benefit of
Deutsche Bank Trust Company Americas (formerly Bankers Trust Company), as
Trustee, as cash collateral for an indemnification obligation of CenterPoint
Houston arising in connection with the issuance of the Transition Bonds. All
funds remaining in the specified reserve account less any amounts then due and
owing to Deutsche Bank Trust Company Americas will be released to CenterPoint
Houston upon final payment of the Transition Bonds.
Subsidiaries of Reliant Energy, Inc. (formerly named Reliant Resources,
Inc.) (RRI), a former affiliate of the Company, collect the majority of the
transition charges from retail electric customers. The subsidiaries of RRI have
at all times been in compliance with the creditworthiness criteria for retail
electric providers as set forth in the financing order of the Texas Utility
Commission. At December 31, 2004, subsidiaries of RRI had letters of credit
aggregating approximately $8.6 million on deposit with the Trustee. As with any
retail electric provider, the servicer is expected to direct the Trustee to seek
recourse against such letters of credit or alternate form of credit support as a
remedy for any payment default that may occur.
13
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Member of
CenterPoint Energy Transition Bond Company, LLC
Houston, Texas
We have audited the accompanying balance sheets of CenterPoint Energy Transition
Bond Company, LLC (the Company) as of December 31, 2004 and 2003, and the
related statements of income and changes in member's equity and cash flows for
each of the three years in the period ended December 31, 2004. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CenterPoint Energy Transition
Bond Company, LLC at December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2004, in conformity with accounting principles generally accepted
in the United States of America.
DELOITTE & TOUCHE LLP
Houston, Texas
March 29, 2005
14
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. 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 December 31, 2004 to provide assurance that
information required to be disclosed in our reports filed or submitted under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms.
There has been no change in our internal controls over financial reporting
that occurred during the three months ended December 31, 2004 that has
materially affected, or is reasonably likely to materially affect, our internal
controls over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Omitted pursuant to Instruction I of Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Omitted pursuant to Instruction I of Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Omitted pursuant to Instruction I of Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Omitted pursuant to Instruction I of Form 10-K.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2003 2004
------------ ------------
Audit fees .............................. $21,000 $21,000
Audit-related fees (1) .................. 20,000 20,000
------- -------
Total audit and audit-related fees ... 41,000 41,000
Tax fees ................................ -- --
All other fees .......................... -- --
------- -------
Total fees ........................... $41,000 $41,000
======= =======
- ----------
(1) Agreed upon procedures related to securitization financing.
15
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this report:
1. Financial Statements.
Statements of Income and Changes in Member's Equity
Balance Sheets
Statements of Cash Flows
Notes to Financial Statements
Report of Independent Registered Public Accounting Firm
2. Financial Statement Schedules.
None.
3. Exhibits.
See the Index to Exhibits which appears following the
signature page to this report.
16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of
Houston, the State of Texas, on the 31st day of March, 2005.
CENTERPOINT ENERGY TRANSITION BOND
COMPANY, LLC
(Registrant)
By: /s/ Marc Kilbride
------------------------------------
Marc Kilbride
Manager
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 31, 2005.
SIGNATURE TITLE
--------- -----
/s/ Gary L. Whitlock President and Manager
- ------------------------------------- (Principal Executive Officer)
(Gary L. Whitlock)
/s/ Marc Kilbride Vice President, Treasurer and Manager
- ------------------------------------- (Principal Financial Officer)
(Marc Kilbride)
/s/ James S. Brian Manager
- ------------------------------------- (Principal Accounting Officer)
(James S. Brian)
/s/ Bernard J. Angelo Manager
- -------------------------------------
(Bernard J. Angelo)
/s/ Andrew L. Stidd Manager
- -------------------------------------
(Andrew L. Stidd)
17
CENTERPOINT ENERGY TRANSITION BOND COMPANY, LLC
EXHIBITS TO THE ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 2004
INDEX TO EXHIBITS
Exhibits not incorporated by reference to a prior filing are designated by
a cross (+); all exhibits not so designated are incorporated herein by reference
to a prior filing as indicated.
Report or
Registration SEC File or
Exhibit Number Description Statement Registration Number Exhibit References
- -------------- ---------------------- ------------------- ------------------- ------------------
4.1 Limited Liability Registration 333-91093 4.1
Company Agreement of Statement on Form
Reliant Energy S-3 filed with the
Transition Bond SEC on November 17,
Company LLC as amended 1999
and restated
4.2 Certificate of Registration 333-91093 4.2
Formation of Reliant Statement on Form
Energy Transition Bond S-3 filed with the
Company LLC SEC on November 17,
1999
4.3 Form of Amended and Current Report on 333-91093 4.7
Restated Certificate Form 8-K filed with
of Formation of the SEC on October
Reliant Energy 23, 2001
Transition Bond
Company LLC
4.4 Form of Amended and Current Report on 333-91093 4.3
Restated Limited Form 8-K filed with
Liability Company the SEC on October
Agreement 23, 2001
4.5 Form of Indenture Current Report on 333-91093 4.4
Form 8-K filed with
the SEC on October
23, 2001
4.6 Form of Supplemental Current Report on 333-91093 4.5
Indenture Form 8-K filed with
the SEC on October
23, 2001
4.7 Form of the Transition Current Report on 333-91093 4.6
Bonds (included in Form 8-K filed with
Exhibit 4.5) the SEC on October
23, 2001
10.1 Form of Sale Agreement Current Report on 333-91093 10.1
Form 8-K filed with
the SEC on October
23, 2001
10.2 Form of Servicing Current Report on 333-91093 10.2
Agreement Form 8-K filed with
the SEC on October
23, 2001
10.3 Form of Administration Current Report on 333-91093 10.3
Agreement Form 8-K filed with
the SEC on October
23, 2001
10.4 Form of Intercreditor Current Report on 333-91093 10.4
Agreement Form 8-K filed with
the SEC on October
23, 2001
10.5 Semiannual Servicer's Form 10-Q for the 333-91093 10.1
Certificate, dated as quarterly period
of March 12, 2004, as ended March 31, 2004
to the transition
bond balances, the
balances of the
collection account
and its sub-accounts,
and setting forth
transfers and payments
to be made on the
March 15, 2004 payment
date.
10.6 Semiannual Servicer's Form 10-Q for the 333-91093 10.1
Certificate, dated as quarterly period
of September 14, 2004, ended September 30,
as to the transition 2004
bond balances, the
balances of the
collection account and
18
Report or
Registration SEC File or
Exhibit Number Description Statement Registration Number Exhibit References
- -------------- ---------------------- ------------------- ------------------- ------------------
its sub-accounts,
and setting forth
transfers and payments
to be made on the
September 15, 2004
payment date (as
modified).
+31.1 Section 302
Certification of Gary
L. Whitlock
+31.2 Section 302
Certification of Marc
Kilbride
+32.1 Section 906
Certification of Gary
L. Whitlock
+32.2 Section 906
Certification of Marc
Kilbride
99.1 Financing Order Amendment No. 3 to 333-91093 99.1
the Company's
Registration
Statement on Form
S-3 filed with the
SEC on September 7,
2001
99.2 Internal Revenue Amendment No. 2 to 333-91093 99.2
Service Private Letter the Company's
Ruling relating to the Registration
transition bonds Statement on Form
S-3 filed with the
SEC on August 30,
2001
99.3 State of Texas Amendment No. 2 to 333-91093 99.3
Comptroller of Public the Company's
Accounts rulings Registration
relating to the Statement on Form
transition bonds S-3 filed with the
SEC on August 30,
2001
19