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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO _______________.
_____________________________
Commission file number 1-3187
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC
(Exact name of registrant as specified in its charter)
TEXAS 22-3865106
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1111 LOUISIANA
HOUSTON, TEXAS 77002 (713) 207-1111
(Address and zip code of (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 May 1, 2005, 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 MARCH 31, 2005
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements................................................................ 1
Statements of Consolidated Income
Three Months Ended March 31, 2004 and 2005 (unaudited)............................... 1
Consolidated Balance Sheets
December 31, 2004 and March 31, 2005 (unaudited)..................................... 2
Statements of Consolidated Cash Flows
Three Months Ended March 31, 2004 and 2005 (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............................................................. 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................... 23
Item 6. Exhibits............................................................................ 23
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 amount of our recovery of the true-up components;
- state and federal legislative and regulatory actions or
developments, including deregulation, re-regulation, 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 financing
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;
- our ability to control costs;
- the investment performance of CenterPoint Energy's employee benefit
plans;
- our internal restructuring or other restructuring options that may
be pursued;
ii
- our potential business strategies, including acquisitions or
dispositions of assets or businesses, which cannot be assured to be
completed or beneficial to us; and
- other factors we discuss in "Risk Factors" beginning on page 10 of
the CenterPoint Energy Houston Electric, LLC Annual Report on Form
10-K for the year ended December 31, 2004.
Additional risk factors are described in other documents we file with the
Securities and Exchange Commission.
You should not place undue reliance on forward-looking statements. Each
forward-looking statement speaks only as of the date of the particular
statement.
iii
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
STATEMENTS OF CONSOLIDATED INCOME
(THOUSANDS OF DOLLARS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
----------------------------
2004 2005
------------ ------------
REVENUES......................................................... $ 330,313 $ 344,994
------------ ------------
EXPENSES:
Operation and maintenance...................................... 133,280 139,307
Depreciation and amortization.................................. 65,073 75,446
Taxes other than income taxes.................................. 47,045 50,549
------------ ------------
Total...................................................... 245,398 265,302
------------ ------------
OPERATING INCOME................................................. 84,915 79,692
------------ ------------
OTHER INCOME (EXPENSE):
Interest and other finance charges............................. (77,087) (75,448)
Interest on transition bonds................................... (9,674) (9,220)
Return on true-up balance...................................... -- 34,082
Other, net..................................................... 6,903 10,795
------------ ------------
Total...................................................... (79,858) (39,791)
------------ ------------
INCOME BEFORE INCOME TAXES....................................... 5,057 39,901
Income Tax Expense............................................. (1,752) (11,773)
------------ ------------
NET INCOME ...................................................... $ 3,305 $ 28,128
============ ============
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, MARCH 31,
2004 2005
-------------- --------------
CURRENT ASSETS:
Cash and cash equivalents................................................ $ 24,928 $ 10,414
Accounts and notes receivable, net....................................... 124,452 115,628
Accounts and notes receivable -- affiliated companies, net............... 57,656 --
Accrued unbilled revenues................................................ 74,089 64,563
Materials and supplies................................................... 52,886 50,513
Taxes receivable......................................................... 62,078 126,647
Deferred tax asset....................................................... 78,656 78,656
Other.................................................................... 12,201 11,741
-------------- --------------
Total current assets................................................... 486,946 458,162
-------------- --------------
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment............................................ 6,245,302 6,279,183
Less accumulated depreciation and amortization........................... (2,203,846) (2,241,931)
-------------- --------------
Property, plant and equipment, net..................................... 4,041,456 4,037,252
-------------- --------------
OTHER ASSETS:
Other intangibles, net................................................... 38,349 38,189
Regulatory assets........................................................ 3,328,865 3,367,852
Notes receivable -- affiliated companies................................. 814,513 814,513
Other.................................................................... 72,624 57,865
-------------- --------------
Total other assets..................................................... 4,254,351 4,278,419
-------------- --------------
TOTAL ASSETS......................................................... $ 8,782,753 $ 8,773,833
============== ==============
See Notes to the Company's Interim Financial Statements
2
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS) -- (CONTINUED)
(UNAUDITED)
LIABILITIES AND MEMBER'S EQUITY
DECEMBER 31, MARCH 31,
2004 2005
-------------- --------------
CURRENT LIABILITIES:
Current portion of transition bond long-term debt....................... $ 46,806 $ 49,352
Current portion of other long-term debt................................. 1,310,106 1,310,107
Accounts payable........................................................ 40,852 26,313
Accounts and notes payable -- affiliated companies, net................. -- 74,377
Taxes accrued........................................................... 104,862 46,698
Interest accrued........................................................ 67,897 39,170
Regulatory liabilities.................................................. 224,732 224,732
Other................................................................... 57,706 55,912
-------------- --------------
Total current liabilities............................................. 1,852,961 1,826,661
-------------- --------------
OTHER LIABILITIES:
Accumulated deferred income taxes, net.................................. 1,377,199 1,390,821
Unamortized investment tax credits...................................... 48,874 47,131
Benefit obligations..................................................... 128,092 127,519
Regulatory liabilities.................................................. 648,305 601,028
Notes payable -- affiliated companies................................... 150,850 150,850
Accounts payable -- affiliated companies................................ 303,472 303,472
Other................................................................... 18,174 15,390
-------------- --------------
Total other liabilities............................................... 2,674,966 2,636,211
-------------- --------------
LONG-TERM DEBT:
Transition bonds........................................................ 628,903 610,453
Other................................................................... 1,592,429 1,647,153
-------------- --------------
Total long-term debt.................................................. 2,221,332 2,257,606
-------------- --------------
COMMITMENTS AND CONTINGENCIES (NOTES 1 AND 6)
MEMBER'S EQUITY:
Common stock............................................................ 1 1
Paid-in capital......................................................... 2,278,090 2,269,823
Retained deficit........................................................ (244,597) (216,469)
-------------- --------------
Total member's equity................................................. 2,033,494 2,053,355
-------------- --------------
TOTAL LIABILITIES AND MEMBER'S EQUITY............................... $ 8,782,753 $ 8,773,833
============== ==============
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)
THREE MONTHS ENDED MARCH 31,
---------------------------------
2004 2005
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................................. $ 3,305 $ 28,128
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization......................................... 65,073 75,446
Amortization of deferred financing costs.............................. 7,674 8,282
Deferred income taxes................................................. 20,666 11,997
Investment tax credits................................................ (1,743) (1,743)
Changes in other assets and liabilities:
Accounts and notes receivable, net.................................. (12,951) 18,350
Accounts receivable/payable, affiliates............................. 18,878 (14,298)
Inventory........................................................... 2,145 2,373
Accounts payable.................................................... (3,595) (14,539)
Taxes receivable.................................................... 99,110 (64,569)
Interest and taxes accrued.......................................... (82,087) (95,158)
Net regulatory assets and liabilities............................... (57,638) (88,007)
Other current assets................................................ 3,512 460
Other current liabilities........................................... (4,944) (1,794)
Other assets........................................................ (10,109) (7,213)
Other liabilities................................................... 8,411 (1,732)
Other, net............................................................ 2,136 73
-------------- --------------
Net cash provided by (used in) operating activities............... 57,843 (143,944)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures and other.......................................... (44,863) (53,484)
-------------- --------------
Net cash used in investing activities............................. (44,863) (53,484)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term revolving credit facility, net................................ -- 55,000
Proceeds from issuance of long-term debt................................ 229,050 --
Payments of long-term debt.............................................. (14,013) (16,252)
Increase (decrease) in short-term notes with affiliates, net............ (2,894) 146,331
Decrease in long-term notes payable, affiliates......................... (229,050) --
Debt issuance costs..................................................... (10,712) (2,177)
Other, net.............................................................. 7 12
-------------- --------------
Net cash provided by (used in) financing activities................. (27,612) 182,914
-------------- --------------
NET DECREASE IN CASH AND CASH EQUIVALENTS................................. (14,632) (14,514)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.......................... 30,720 24,928
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................................ $ 16,088 $ 10,414
============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Payments:
Interest................................................................ $ 108,789 $ 108,563
Income taxes (refunds).................................................. (13,810) 76,088
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 are the consolidated interim financial
statements and notes (Interim Financial Statements) of CenterPoint Energy
Houston Electric, LLC and its subsidiaries (collectively, CenterPoint Houston or
the Company). 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, 2004
(CenterPoint Houston Form 10-K).
Background. The Company owns and operates electric transmission and
distribution facilities. The Company is an indirect wholly owned subsidiary of
CenterPoint Energy, Inc. (CenterPoint Energy), a public utility holding company
created on August 31, 2002, as part of a corporate restructuring of Reliant
Energy, Incorporated (Reliant Energy) that implemented certain requirements of
the Texas Electric Choice Plan (Texas electric restructuring law).
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
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 affiliated service, sales and construction contracts.
Basis of Presentation. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America (GAAP) requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
The Company's Interim Financial Statements reflect all normal recurring
adjustments that are, in the opinion of management, necessary to present fairly
the financial position and results of operations for the respective periods.
Amounts reported in the Company's Statements of Consolidated Income are not
necessarily indicative of amounts expected for a full year period due to the
effects of, among other things, (a) fluctuations in demand for energy, (b)
timing of maintenance and other expenditures and (c) acquisitions and
dispositions of businesses, assets and other interests. In addition, certain
amounts from the prior year have been reclassified to conform to the Company's
presentation of financial statements in the current year. These
reclassifications do not affect net income.
Note 2(e) (Regulatory Assets and Liabilities), Note 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 and
environmental matters, see Note 6 to the Interim Financial Statements.
(2) NEW ACCOUNTING PRONOUNCEMENTS
In March 2005, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. (FIN) 47, "Accounting for Conditional Asset Retirement
Obligations" (FIN 47). FIN 47 clarifies that an entity must record a liability
for a "conditional" asset retirement obligation if the fair value of the
obligation can be reasonably estimated. FIN 47 is effective no later than the
end of fiscal years ending after December 15, 2005. The Company does not expect
the adoption of this standard to have a material effect on its financial
position, results of operations or cash flows.
5
(3) REGULATORY MATTERS
(a) Recovery of True-Up Balance.
During 2004, the Public Utility Commission of Texas (Texas Utility
Commission) issued its final determination of the stranded costs and other
amounts the Company will be entitled to recover from customers under the Texas
electric restructuring law (True-Up Order). In that True-Up Order, the Texas
Utility Commission authorized recovery of approximately $2.3 billion, including
interest through August 31, 2004, and provided for adjustment of the amount to
be recovered to reflect interest on the balance until recovery, the principal
portion of additional excess mitigation credits (EMCs) returned to customers
after August 31, 2004, and certain other matters. The Company had filed for
recovery of $3.7 billion, not including interest. Both the Company and other
parties filed appeals of the True-Up Order, and those appeals remain pending
before a state district court in Travis County, Texas. A hearing on the True-Up
Order appeal is scheduled for August 2005. In view of the Texas Utility
Commission's ruling that EMCs must continue, even after the determination of
stranded costs, the Company also filed with the Supreme Court of Texas (Texas
Supreme Court) a petition for a writ of mandamus, seeking a ruling that the EMCs
should terminate and that CenterPoint Houston should be allowed to recover fully
the EMCs previously issued. The Texas Supreme Court has discretion to grant or
reject the petition, and it has requested the parties to file briefs on issues
raised in the petition, but it is still unknown whether the court will grant the
relief requested or when it might complete its consideration of the petition.
As a result of a settlement reached in a separate proceeding involving
Reliant Energy, Inc.'s (RRI) Price-to Beat, EMCs were terminated as of April 29,
2005. Nevertheless, the Company will continue to pursue its writ of mandamus to
recover the portion of EMCs the Company is not permitted to recover under the
True-Up Order.
The Company expects to recover the amounts authorized in the True-Up Order
either through proceeds from the issuance of transition bonds under the Texas
electric restructuring law or through the imposition of a non-bypassable charge
called a Competition Transition Charge (CTC). On March 16, 2005, the Texas
Utility Commission issued its written financing order to the Company. The
financing order authorized the issuance of transition bonds under the terms of
the Texas electric restructuring law in the amount of approximately $1.8 billion
so that the Company could begin to recover its stranded costs and certain other
amounts authorized under the Texas electric restructuring law.
Several parties have filed appeals of the financing order with the
district court in Travis County, Texas. Those appeals include, among other
claims, assertions that transition bonds cannot be issued until after pending
appeals of the True-Up Order are finally resolved, that the amount of transition
bonds authorized was excessive based on the parties' views of the stranded costs
that the Texas Utility Commission should have authorized the Company to recover,
and that the Texas Utility Commission was in error in ordering that the effects
of certain accumulated deferred federal income taxes be reflected in a reduction
in the proposed CTC instead of as a reduction of the amount of transition bonds.
The Texas electric restructuring law provides for expedited appeals from a
financing order. Appeals were required to be filed with the district court in
Travis County, Texas, within 15 days of the issuance of a financing order by the
Texas Utility Commission, and any further appeals from a decision of the
district court must be made directly to the Texas Supreme Court, bypassing
review by the court of appeals. The Texas electric restructuring law also limits
appeals to whether the financing order conforms to the Texas Constitution and
law and is within the authority of the Texas Utility Commission. The Texas
Supreme Court has previously held that securitization is constitutional.
Expedited securitization appeals are based on the Texas Utility Commission
record and appellate briefs.
While it is not possible to predict with certainty the outcome of these
appeals of the financing order or the timing of their ultimate resolution, the
Company intends to vigorously oppose them and to seek expedited consideration of
them as directed by the statute. The Company intends to argue that the financing
order should be affirmed because plaintiffs' contentions do not satisfy the
statutory requirements for an appeal, and the financing order is within the
authority of the Texas Utility Commission.
6
The Company will not be able to issue transition bonds while the appeals
of the financing order are pending. Prior to the appeals, it had been expected
that approximately $1.8 billion in transition bonds could be issued by mid-2005
under the terms of the financing order. A hearing on the appeals is scheduled
for August 2005.
In January 2005, the Company filed an application with the Texas Utility
Commission for a CTC under which it would recover its adjusted true-up balance
that has not been securitized. Hearings were conducted in early April 2005 on
that application, with an order expected from the Texas Utility Commission in
late May 2005.
The Company recorded as a regulatory asset a return of $62 million on the
true-up balance for the first quarter of 2005 as allowed by the True-Up Order.
The Company, under the True-Up Order, will continue to accrue a return until the
true-up balance is recovered by the Company. The rate of return is based on the
Company's cost of capital, established in the Texas Utility Commission's final
order issued in October 2001, which is derived from the Company's cost to
finance assets (debt return) and an allowance for earnings on shareholders'
investment (equity return). Consequently, in accordance with SFAS No. 92,
"Regulated Enterprises -- Accounting for Phase-in Plans," the rate of return has
been bifurcated into a debt return component and an equity return component. The
debt return of $34 million is included in other income in the Company's
Statements of Consolidated Income. The debt return will continue to be
recognized as earned going forward. The equity return of $28 million has been
deferred and will be recognized in income as it is collected through rates in
the future. As of March 31, 2005, the Company has recognized a regulatory asset
of $260 million related to the debt return on its true-up balance and has
deferred an equity return of $176 million.
(b) Final Fuel Reconciliation.
The results of the Texas Utility Commission's final decision related to
the Company's final fuel reconciliation are a component of the True-Up Order.
The Company has appealed certain portions of the True-Up Order involving a
disallowance of approximately $67 million relating to the final fuel
reconciliation plus interest of $10 million. A hearing on this issue was held
before a district court in Travis County on April 22, 2005.
(4) LONG-TERM DEBT
In March 2005, the Company established a $200 million five-year revolving
credit facility. Borrowings may be made under the facility at the London
interbank offered rate (LIBOR) plus 75 basis points based on the Company's
current credit rating. An additional utilization fee of 12.5 basis points
applies to borrowings whenever more than 50% of the facility is utilized.
Changes in credit ratings would lower or raise the increment to LIBOR depending
on whether ratings improved or were lowered. As of March 31, 2005, borrowings of
$55 million were outstanding under the revolving credit facility.
The Company also established a $1.31 billion credit facility in March
2005. This facility is available to be utilized only to refinance the Company's
$1.31 billion term loan maturing in November 2005 in the event that proceeds
from the issuance of transition bonds are not sufficient to repay such term
loan. Drawings may be made under this credit facility until November 2005, at
which time any outstanding borrowings are converted to term loans maturing in
November 2007. Under this facility, (i) 100% of the net proceeds from the
issuance of transition bonds and (ii) the proceeds, in excess of $200 million,
from certain other new net indebtedness for borrowed money incurred by
the Company must be used to repay borrowings under the facility. Based
on the Company's current credit ratings, borrowings under the facility may be
made at LIBOR plus 75 basis points. Changes in credit ratings would lower or
raise the increment to LIBOR depending on whether ratings improved or were
lowered. Any drawings under this facility must be secured by the Company's
general mortgage bonds in the same principal amount and bearing the same
interest rate as such drawings.
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, MARCH 31,
2004 2005
------------ ---------
(IN MILLIONS)
Accounts receivable from affiliates....................................... $ 17 $ 26
Accounts payable to affiliates............................................ (32) (27)
Notes receivable/(payable) -- affiliated companies (1).................... 73 (73)
------------ ---------
Accounts and notes receivable/(payable) -- affiliated companies, net... $ 58 $ (74)
============ =========
Long-term notes receivable -- affiliated companies........................ $ 815 $ 815
============ =========
Long-term notes payable -- affiliated companies........................... $ (151) $ (151)
============ =========
Long-term accounts payable -- affiliated companies........................ $ (303) $ (303)
============ =========
- ------------
(1) This note represents money pool borrowings and investments.
For the three months ended March 31, 2004 and 2005, the Company had net
interest income related to affiliate borrowings of $2 million and $9 million,
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 margins, 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 $24
million and $26 million for the three months ended March 31, 2004 and 2005,
respectively, and are included primarily in operation and maintenance expenses.
Major Customers. During the three months ended March 31, 2004 and 2005,
revenues derived from energy delivery charges provided by the Company to a
subsidiary of RRI totaled $199 million and $183 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, CenterPoint Energy and its 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 CenterPoint Energy and its subsidiaries, including the Company, 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
8
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, several of the electricity complaints have been dismissed by the trial
court and are on appeal, and several of the dismissals have been affirmed by
appellate courts. Others remain in the early procedural stages. One of the gas
complaints has also been dismissed, but the time for appeal of that decision has
not yet passed. The other gas cases remain in the 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, former corporate
officers or employees of some of those companies have been named as defendants
in these suits.
CenterPoint Energy or its predecessor, Reliant Energy, has been named in
approximately 30 of these lawsuits, which were instituted between 2001 and 2004
and are pending in California state courts in Alameda County, Los Angeles
County, San Francisco County, San Mateo County and San Diego County, in Nevada
state court in Clark 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.
CenterPoint Energy and Reliant Energy have been dismissed from certain of the
lawsuits, either voluntarily by the plaintiffs or by order of the court and
CenterPoint Energy 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 CenterPoint Energy'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. On April 18, 2005, the
Supreme Court of the United States denied the Attorney General's petition for
certiorari in one of these cases. No petition for certiorari was filed in the
other case, and both of these cases are now finally resolved in favor of the
defendants.
Other Class Action Lawsuits. Fifteen class action lawsuits filed in May,
June and July 2002 on behalf of purchasers of securities of RRI and/or Reliant
Energy have been consolidated in federal district court in Houston. RRI and
certain of its former and current executive officers are named as defendants.
The consolidated complaint also names RRI, Reliant Energy, the underwriters of
the initial public offering of RRI's 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 court granted in February 2005. The defendants have
appealed the court's order certifying the class and have asked the trial court
to reconsider its ruling certifying the class. The case is currently scheduled
for trial in early 2006.
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 CenterPoint Energy. Two of the lawsuits have been dismissed without
prejudice. CenterPoint 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 CenterPoint 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 CenterPoint 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 CenterPoint Energy or RRI
securities, as well as restitution.
9
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 second 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.
Other Legal Matters
Texas Antitrust Actions. 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, Genco LP, RRI,
Reliant Energy 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 with the ERCOT market,
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. The Company is vigorously
contesting the appeal. The ultimate outcome of this matter cannot be predicted
at this time.
In February 2005, Utility Choice Electric filed in federal court in
Houston, Texas a lawsuit against the Company, CenterPoint Energy, CenterPoint
Energy Gas Services, Inc., CenterPoint Energy Alternative Fuels, Inc., Genco LP
and a number of other participants in the ERCOT power market. The plaintiff, a
retail electricity provider with the ERCOT market, alleged that the defendants
conspired to illegally fix and artificially increase the price of electricity in
violation of state and federal antitrust laws, intentionally interfered with
prospective business relationships and contracts, and committed fraud and
negligent misrepresentation. The plaintiff's principal allegations had
previously been investigated by the Texas Utility Commission and found to be
without merit. The Company intends to vigorously defend the case. 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
10
case. Thus, the Three Cities' claims have been finally resolved in the Company's
favor, but the individual claims of the remaining 45 cities remain pending in
the same court.
Other Environmental Matters
Asbestos. A number of facilities owned by CenterPoint Energy contain
significant amounts of asbestos insulation and other asbestos-containing
materials. CenterPoint Energy or its subsidiaries have been named, along with
numerous others, as a defendant in lawsuits filed by a large number of
individuals who claim injury due to exposure to asbestos. Most claimants in such
litigation have been workers who participated in construction of various
industrial facilities, including power plants. Some of the claimants have worked
at locations owned by CenterPoint Energy, but most existing claims relate to
facilities previously owned by CenterPoint Energy but currently owned by Texas
Genco LLC. The Company anticipates that additional claims like those received
may be asserted in the future. Under the terms of the separation agreement
between CenterPoint Energy and Texas Genco Holdings, Inc. (Texas Genco),
ultimate financial responsibility for uninsured losses relating to these claims
has been assumed by Texas Genco, but under the terms of its agreement to sell
Texas Genco to Texas Genco LLC, CenterPoint Energy has agreed to continue to
defend such claims to the extent they are covered by insurance maintained by
CenterPoint Energy, subject to reimbursement of the costs of such defense from
Texas Genco LLC. Although their ultimate outcome cannot be predicted at this
time, the Company intends to continue vigorously contesting claims that it does
not consider to have merit and does not expect, based on its experience to date,
these matters, either individually or in the aggregate, to have a material
adverse effect on the Company's financial condition, results of operations or
cash flows.
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 does not expect the disposition of these matters to have a material
adverse effect on the Company's financial condition, results of operations or
cash flows.
Nuclear Decommissioning Trusts
The Company, as collection agent for the nuclear decommissioning
charge assessed on its transmission and distribution customers, contributed $2.9
million in 2004 to trusts established to fund Texas Genco's share of the
decommissioning costs for the South Texas Project, and expects to contribute
$2.9 million in 2005. There are various investment restrictions imposed upon
Texas Genco by the Texas Utility Commission and the Nuclear Regulatory
Commission (NRC) relating to Texas Genco's nuclear decommissioning trusts.
Pursuant to the provisions of both a separation agreement and the Texas Utility
Commission's final order, the Company and Texas Genco are presently jointly
administering the decommissioning funds through the Nuclear Decommissioning
Trust Investment Committee. Texas Genco and the Company have each appointed two
members to the Nuclear Decommissioning Trust Investment Committee which
establishes the investment policy of the trusts and oversees the investment of
the trusts' assets. As administrators of the decommissioning funds, the Company
and Texas Genco are jointly responsible for assuring that the funds are
prudently invested in a manner consistent with the rules of the Texas Utility
Commission. The Company and Texas Genco expect to file a request with the Texas
Utility Commission in 2005 to name Texas Genco as the sole fund administrator.
The securities held by the trusts for decommissioning costs had an estimated
fair value of $217 million as of March 31, 2005. In May 2004, an outside
consultant estimated Texas Genco's portion of decommissioning costs to be
approximately $456 million. While the funding levels currently exceed minimum
NRC requirements, no assurance can be given that the amounts held in trust will
be adequate to cover the actual decommissioning costs of the South Texas
Project. Such costs may vary because of changes in the assumed date of
decommissioning and changes in regulatory requirements, technology and costs of
labor, materials and equipment. Pursuant to the Texas electric restructuring
law, costs associated with nuclear decommissioning that were not recovered as of
January 1, 2002, will continue to be subject to cost-of-service rate regulation
and will be charged to transmission and distribution customers of the Company or
its successor.
11
(7) EMPLOYEE BENEFIT PLANS
The Company's employees participate in CenterPoint Energy's postretirement
benefit plan. The Company's net periodic cost includes the following components
relating to postretirement benefits:
THREE MONTHS ENDED
MARCH 31,
------------------
2004 2005
------- -------
(IN MILLIONS)
Interest cost...................................... $ 4 $ 4
Expected return on plan assets..................... (2) (3)
Net amortization................................... 2 2
------ ------
Net periodic cost............................... $ 4 $ 3
====== ======
The Company previously disclosed in its financial statements for the year
ended December 31, 2004, that it expected to contribute $10 million to its
postretirement benefits plan in 2005. As of March 31, 2005, $2 million has been
contributed.
On January 21, 2005, the Department of Health and Human Services' Centers
for Medicare and Medicaid Services (CMS) released final regulations governing
the Medicare prescription drug benefit and other key elements of the Medicare
Modernization Act (MNA) that will go into effect January 1, 2006. Under the
final regulations, it has been determined that a greater portion of benefits
offered under the Company's plans meets the definition of actuarial equivalence
and therefore qualifies for federal subsidies equal to 28% of allowable drug
costs. As a result, the Company has remeasured its obligations and costs to take
into account the new regulations.
(8) QUASI-REORGANIZATION
On December 30, 2004, the Manager of CenterPoint Houston adopted a plan
for an accounting reorganization of the Company, to be effective as of January
1, 2005. The plan was adopted in order to eliminate the accumulated retained
earnings deficit that exists at the Company.
The plan, as amended on February 23, 2005, required: (1) a report to be
presented to and reviewed by the Company's Manager on or before February 28,
2005 as to the completion of the valuation analysis of the accounting
reorganization and the effects of the accounting reorganization on the Company's
financial statements, (2) a determination that the accounting reorganization is
in accordance with accounting principles generally accepted in the United
States, and (3) that there be no determination by the Company's Manager on or
before May 10, 2005 that the accounting reorganization is inconsistent with the
Company's regulatory obligations.
On April 27, 2005, the Manager of CenterPoint Houston determined that an
accounting reorganization should not be implemented.
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 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), 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 months ended March 31, 2004 and the three months ended March 31, 2005.
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, 2004
(CenterPoint Houston Form 10-K).
RECENT EVENTS
RECOVERY OF TRUE-UP BALANCE
During 2004, the Public Utility Commission of Texas (Texas Utility
Commission) issued its final determination (True-Up Order) of the stranded costs
and other amounts we will be entitled to recover from customers under the Texas
Electric Choice Plan (Texas electric restructuring law). In that True-Up Order,
the Texas Utility Commission authorized recovery of approximately $2.3 billion,
including interest through August 31, 2004, and provided for adjustment of the
amount to be recovered to reflect interest on the balance until recovery, the
principal portion of additional excess mitigation credits (EMCs) returned to
customers after August 31, 2004, and certain other matters. We had filed for
recovery of $3.7 billion, not including interest. Both we and other parties
filed appeals of the True-Up Order, and those appeals remain pending before a
state district court in Travis County, Texas. A hearing on the True-Up Order
appeal is scheduled for August 2005. In view of the Texas Utility Commission's
ruling that EMCs must continue, even after the determination of stranded costs,
we also filed with the Supreme Court of Texas (Texas Supreme Court) a petition
for a writ of mandamus, seeking a ruling that the EMCs should terminate and that
we should be allowed to recover fully the EMCs previously issued. The Texas
Supreme Court has discretion to grant or reject the petition, and it has
requested the parties to file briefs on issues raised in the petition, but it is
still unknown whether the court will grant the relief requested or when it might
complete its consideration of the petition.
As a result of a settlement reached in a separate proceeding involving
Reliant Energy, Inc.'s (RRI) Price-to Beat, EMCs were terminated as of April 29,
2005. Nevertheless, we will continue to pursue our writ of mandamus to recover
the portion of EMCs we are not permitted to recover under the True-Up Order.
We expect to recover the amounts authorized in the True-Up Order either
through proceeds from the issuance of transition bonds under the Texas electric
restructuring law or through the imposition of a non-bypassable charge called a
Competition Transition Charge (CTC). On March 16, 2005, the Texas Utility
Commission issued its written financing order to us. The financing order
authorized the issuance of transition bonds under the terms of the Texas
electric restructuring law in the amount of approximately $1.8 billion so that
we could begin to recover our stranded costs and certain other amounts
authorized under the Texas electric restructuring law.
Several parties have filed appeals of the financing order with the
district court in Travis County, Texas. Those appeals include, among other
claims, assertions that transition bonds cannot be issued until after pending
appeals of the True-Up Order are finally resolved, that the amount of transition
bonds authorized was excessive based on the parties' views of the stranded costs
that the Texas Utility Commission should have authorized us to recover, and that
the Texas Utility Commission was in error in ordering that the effects of
certain accumulated deferred federal
13
income taxes be reflected in a reduction in the proposed CTC instead of as a
reduction of the amount of transition bonds.
The Texas electric restructuring law provides for expedited appeals from a
financing order. Appeals were required to be filed with the district court in
Travis County, Texas, within 15 days of the issuance of a financing order by the
Texas Utility Commission, and any further appeals from a decision of the
district court must be made directly to the Texas Supreme Court, bypassing
review by the court of appeals. The Texas electric restructuring law also limits
appeals to whether the financing order conforms to the Texas Constitution and
law and is within the authority of the Texas Utility Commission. The Texas
Supreme Court has previously held that securitization is constitutional.
Expedited securitization appeals are based on the Texas Utility Commission
record and appellate briefs.
While it is not possible to predict with certainty the outcome of these
appeals of the financing order or the timing of their ultimate resolution, we
intend to vigorously oppose them and to seek expedited consideration of them as
directed by the statute. We intend to argue that the financing order should be
affirmed because plaintiffs' contentions do not satisfy the statutory
requirements for an appeal, and the financing order is within the authority of
the Texas Utility Commission.
We will not be able to issue transition bonds while the appeals of the
financing order are pending. Prior to the appeals, it had been expected that
approximately $1.8 billion in transition bonds could be issued by mid-2005 under
the terms of the financing order. A hearing on the appeals is scheduled for
August 2005.
In January 2005, we filed an application with the Texas Utility Commission
for a CTC under which we would recover our adjusted true-up balance that has not
been securitized. Hearings were conducted in early April 2005 on that
application, with an order expected from the Texas Utility Commission in late
May 2005.
We are entitled to accrue a return on the true-up balance until it is
fully recovered.
We may rely on our existing $1.31 billion senior secured backstop credit
facility to refinance our $1.31 billion term loan when it matures in November
2005. That credit facility was obtained specifically to address such a situation
and will effectively provide a two-year term loan at significantly lower
interest rates to refinance the existing loan on maturity.
14
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 ended March 31, 2004 and 2005, followed by a discussion of our
consolidated results of operations based on operating income. We have provided a
reconciliation of consolidated operating income to net income below.
THREE MONTHS ENDED MARCH 31,
----------------------------
2004 2005
-------- ---------
(IN MILLIONS)
Revenues:
Electric revenues............................ $ 315 $ 323
Transition bond revenues..................... 15 22
-------- --------
Total revenues.............................. 330 345
-------- --------
Expenses:
Operation and maintenance.................... 133 138
Depreciation and amortization................ 60 64
Taxes other than income taxes................ 47 50
Transition bond expenses..................... 5 13
-------- --------
Total expenses.............................. 245 265
-------- --------
Operating income............................... 85 80
Interest and other finance charges............. (87) (85)
Return on true-up balance...................... -- 34
Other income, net ............................. 7 11
-------- --------
Income before income taxes..................... 5 40
Income tax expense............................. (2) (12)
-------- --------
Net income .................................... $ 3 $ 28
======== ========
Actual gigawatt-hours (GWh) delivered:
Residential................................. 4,402 4,142
Total (1)................................... 15,520 15,826
- -------------------------
(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 MARCH 31, 2005 COMPARED TO THREE MONTHS ENDED MARCH 31, 2004
We reported operating income of $80 million for the three months ended
March 31, 2005, consisting of $71 million for the regulated electric
transmission and distribution utility and $9 million for the transition bond
company. For the three months ended March 31, 2004, operating income totaled $85
million, consisting of $75 million for the regulated electric transmission and
distribution utility and $10 million for the transition bond company. The
transition bond company's operating income represents the amount necessary to
pay interest on the transition bonds. Operating revenues increased $8 million
primarily from continued customer growth with the addition of 43,000 metered
customers since March 2004 and higher transmission cost recovery. Additionally,
operating expenses in 2005 increased primarily due to higher net transmission
costs of $5 million, higher property and state franchise taxes of $5 million and
increased depreciation and amortization of $4 million, partially offset by
reduced pension expense of $4 million. Additionally, the increase in other
income was primarily related to a $34 million return on our true-up balance
recorded in the first quarter of 2005 as a result of the True-Up Order.
15
CERTAIN FACTORS AFFECTING FUTURE EARNINGS
For information on other developments, factors and trends that may have an
impact on our future earnings, please read "Management's Narrative Analysis of
Results of Operations -- Certain Factors Affecting Future Earnings" in Item 7 of
Part II of the 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.
LIQUIDITY
Our liquidity and capital requirements are affected primarily by our
results of operations, capital expenditures, debt service requirements, working
capital needs, various regulatory actions and appeals relating to such
regulatory actions. Our principal cash requirements for the remainder of 2005
include the following:
- the maturity of our $1.31 billion term loan;
- approximately $227 million of capital expenditures;
- an estimated $10 million in refunds of excess mitigation credits
through April 29, 2005, the date of termination of the credits; and
- $31 million of maturing transition bonds.
We expect that borrowings under our credit facilities, anticipated cash
flows from operations and intercompany borrowings under the money pool described
below will be sufficient to meet our cash needs for 2005. Our $1.31 billion term
loan, maturing in November 2005, requires the proceeds from the issuance of
transition bonds to be used to reduce the term loan unless refused by the
lenders. Our $1.31 billion credit facility may be utilized to refinance the
$1.31 billion term loan at maturity. Under this facility, (i) 100% of the net
proceeds from the issuance of transition bonds and (ii) the proceeds, in excess
of $200 million, from certain other new net indebtedness for borrowed money
incurred by us must be used to repay borrowings under the facility.
The 1935 Act regulates our financing ability, as more fully described in
"-- Certain Contractual and Regulatory Limits on Ability to Issue Securities and
Pay Dividends" below.
Off-Balance Sheet Arrangements. Other than operating leases, we have no
off-balance sheet arrangements.
Credit Facilities. In March 2005, we established a $200 million five-year
revolving credit facility. Borrowings may be made under the facility at LIBOR
plus 75 basis points based on our current credit rating. An additional
utilization fee of 12.5 basis points applies to borrowings whenever more than
50% of the facility is utilized. Changes in credit ratings would lower or raise
the increment to LIBOR depending on whether ratings improved or were lowered.
We also established a $1.31 billion credit facility in March 2005. This
facility is available to be utilized only to refinance our $1.31 billion term
loan maturing in November 2005 in the event that proceeds from the issuance of
transition bonds are not sufficient to repay such term loan. Drawings may be
made under this credit facility until November 2005, at which time any
outstanding borrowings are converted to term loans maturing in November 2007.
Under this facility, (i) 100% of the net proceeds from the issuance of
transition bonds and (ii) the proceeds, in excess of $200 million, from certain
other new net indebtedness for borrowed money incurred by us must be used to
repay borrowings under the facility. Based on our current credit ratings,
borrowings under the facility may be made at LIBOR plus 75 basis points. Changes
in credit ratings would lower or raise the increment to LIBOR depending on
whether ratings improved or were lowered. Any drawings under this facility must
be secured by our general mortgage bonds in the same principal amount and
bearing the same interest rate as such drawings.
Our $200 million and $1.31 billion credit facilities each contain
covenants, including a debt (excluding transition bonds) to total capitalization
covenant of 68% and an earnings before interest, taxes, depreciation and
amortization (EBITDA) to interest covenant. Borrowings under our $200 million
credit facility and our $1.31
16
billion credit facility are available notwithstanding that a material adverse
change has occurred or litigation that could be expected to have a material
adverse effect has occurred, so long as other customary terms and conditions are
satisfied.
As of May 1, 2005, we had the following credit facilities (in millions):
AMOUNT UTILIZED AT
DATE EXECUTED SIZE OF FACILITY MAY 1, 2005 TERMINATION DATE
- ------------- ---------------- ------------------ ----------------
March 7, 2005 $ 200 $ -- March 7, 2010
March 7, 2005 1,310 -- (1)
- ---------------------
(1) Revolver until November 2005 with two-year term-out of borrowed moneys.
Long-term Debt. Our long-term debt consists of our obligations and the
obligations of our subsidiaries, including transition bonds issued by a wholly
owned subsidiary. 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 May 1, 2005. Amounts are
expressed in millions.
TRANSITION
YEAR THIRD-PARTY AFFILIATE SUB-TOTAL BONDS TOTAL
- --------------- ----------- --------- --------- ---------- -------
2005........... $ 1,310 $ -- $ 1,310 $ 31 $ 1,341
2006........... -- -- -- 54 54
2007........... -- -- -- 60 60
2008........... -- -- -- 66 66
2009........... -- -- -- 73 73
2010........... -- -- -- 80 80
2011........... -- -- -- 88 88
2012........... 46 -- 46 99 145
2013........... 450 -- 450 109 559
2014........... 300 -- 300 -- 300
2015........... -- 151 151 -- 151
2017........... 128 -- 128 -- 128
2021........... 102 -- 102 -- 102
2023........... 200 -- 200 -- 200
2027........... 56 -- 56 -- 56
2033........... 312 -- 312 -- 312
--------- ------ --------- ----- -------
Total.......... $ 2,904 $ 151 $ 3,055 $ 660 $ 3,715
========= ====== ========= ===== =======
As of May 1, 2005, outstanding first mortgage bonds and general mortgage
bonds aggregated approximately $3.6 billion as shown in the following table.
Amounts are expressed in millions.
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 $ -- $ 151 $ 253
General Mortgage Bonds........ 1,262 1,539 527 3,328
-------- -------- -------- --------
Total.............. $ 1,364 $ 1,539 $ 678 $ 3,581
======== ======== ======== ========
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 March 31, 2005 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 contained in the
$1.31 billion term loan maturing in November 2005 limit the incremental
aggregate amount of first mortgage bonds and general mortgage bonds that may be
issued to $200 million. Generally, first mortgage bonds and general mortgage
bonds can be issued to refinance outstanding first mortgage bonds or general
mortgage bonds in the same principal amount. Additionally, under our $1.31
billion credit facility, (i) 100% of the net proceeds from the issuance of
transition bonds and (ii) the proceeds, in excess of $200 million, from certain
other new net indebtedness for borrowed money incurred by us must be used to
repay borrowings under the facility.
17
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 millions.
FIRST MORTGAGE GENERAL MORTGAGE
YEAR BONDS BONDS TOTAL
- ------------- -------------- ---------------- -------
2011......... $ -- $ 19 $ 19
2015......... 151 -- 151
2018......... -- 50 50
2019......... -- 200 200
2020......... -- 90 90
2026......... -- 100 100
2028......... -- 68 68
------ ------ -------
Total.... $ 151 $ 527 $ 678
====== ====== =======
The Bond Company has $660 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 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.
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). This order expires in
June 2005; however, CenterPoint Energy and its subsidiaries, including us, are
seeking a new order providing appropriate approval for participation in the
money pool by the end of June 2005. Our money pool borrowing limit under
existing orders is $600 million. At March 31, 2005, we had borrowings from the
money pool of $73 million. The money pool may not provide sufficient funds to
meet our cash needs.
Impact on Liquidity of a Downgrade in Credit Ratings. As of May 1, 2005,
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 Stable BBB Negative BBB+ Stable
- ---------------
(1) A "stable" outlook from Moody's indicates that Moody's does not expect to
put the rating on review for an upgrade or downgrade within 18 months from
when the outlook was assigned or last affirmed.
(2) An S&P rating outlook assesses the potential direction of a long-term
credit rating over the intermediate to longer term.
(3) A "stable" outlook from Fitch encompasses a one-to-two year horizon as to
the likely ratings direction.
18
We cannot assure you that these ratings will remain in effect for any
given period of time or that one or more of these ratings will not be lowered or
withdrawn entirely by a rating agency. We note that these credit ratings are not
recommendations to buy, sell or hold our securities and may be revised or
withdrawn at any time by the rating agency. Each rating should be evaluated
independently of any other rating. Any future reduction or withdrawal of one or
more of our credit ratings could have a material adverse impact on our ability
to obtain short- and long-term financing, the cost of such financings and the
execution of our commercial strategies.
A decline in credit ratings would increase borrowing costs under our $200
million credit facility and our $1.31 billion credit facility. A decline in
credit ratings would also increase the interest rate on long-term debt to be
issued in the capital markets and would negatively impact our ability to
complete capital market transactions.
Borrowings under our $200 million credit facility and our $1.31 billion
facility are available notwithstanding that a material adverse change has
occurred or litigation that could be expected to have a material adverse effect
has occurred.
Cross Defaults. Under CenterPoint Energy's revolving credit facility, a
payment default by us on, or a non-payment default by us that permits
acceleration of, any indebtedness exceeding $50 million will cause a default.
Pursuant to the indenture governing CenterPoint Energy's senior notes, 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. As of May 1, 2005, CenterPoint Energy had issued
five series of senior notes aggregating $1.4 billion in principal amount under
this indenture. A default by CenterPoint Energy would not trigger a default
under our debt instruments or bank credit facilities.
Other Factors that Could Affect Cash Requirements. In addition to the
above factors, our liquidity and capital resources could be affected by:
- increases in interest expense in connection with debt refinancings
and borrowings under credit facilities;
- various regulatory actions;
- the ability of RRI and its subsidiaries to satisfy their obligations
as our principal customer and in respect of RRI's indemnity
obligations to us; and
- various of the risks identified in "Risk Factors" in Item 1 of the
CenterPoint Houston Form 10-K.
Certain Contractual and Regulatory Limits on Ability to Issue Securities
and Pay Dividends. Limitations imposed on us under the 1935 Act affect our
ability to issue securities, pay dividends on our common stock or take other
actions that affect our capitalization.
Our secured term loan and each of our credit facilities limit our debt,
excluding transition bonds, as a percentage of our total capitalization to 68%.
Our $1.31 billion and $200 million credit facilities also contain EBITDA to
interest covenants.
Our parent, CenterPoint Energy, is a registered public utility holding
company under the 1935 Act. The 1935 Act and related rules and regulations
impose a number of restrictions on our parent's activities and those of its
subsidiaries, including us. The 1935 Act, among other things, limits our
parent's ability and the ability of its regulated subsidiaries, including us, to
issue debt and equity securities without prior authorization, restricts the
source of dividend payments to current and retained earnings without prior
authorization, regulates sales and acquisitions of certain assets and businesses
and governs affiliated service, sales and construction contracts.
The June 2003 Financing Order and the several subsequent orders we have
received that provide additional financing authority are effective until June
30, 2005. 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 regulated subsidiaries, including us, to
refinance our existing obligations. We are in compliance with the authorized
limits. As of April 30, 2005, we are authorized to issue an additional aggregate
$89 million of debt and an aggregate $250 million of preferred stock and
19
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.
CenterPoint Energy and certain of its subsidiaries, including us, have an
application currently pending with the SEC for a new financing order which would
govern financing by CenterPoint Energy and its subsidiaries after the expiration
of the June 2003 Financing Order. We anticipate that the new order will be
issued at or before the expiration of the existing order.
The 1935 Act limits the payment of dividends to payment from current and
retained earnings unless specific authorization is obtained to pay dividends
from other sources. We expect to pay dividends out of current earnings. The June
2003 Financing Order requires that we maintain a ratio of common equity to total
capitalization of at least 30%, 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. At March 31, 2005, our
ratio (excluding transition bonds) was 41%.
Other Factors Affecting the Upstreaming of Cash to Parent. Our term loan,
subject to certain exceptions, limits the application of proceeds, in excess of
$200 million, from capital markets transactions and ceratin other borrowing
transactions, by us to repayment of debt existing as of November 2002.
Additionally, under our $1.31 billion credit facility, (i) 100% of the net
proceeds from the issuance of transition bonds and (ii) the proceeds, in excess
of $200 million, from certain other new net indebtedness for borrowed money
incurred by us must be used to repay borrowings under the facility.
We plan to distribute recovery of the true-up components not used to repay
our indebtedness to CenterPoint Energy through the payment of dividends. We
require SEC action to approve any dividends in excess of our current and
retained earnings. To maintain our capital structure at the appropriate levels,
CenterPoint Energy may reinvest funds in us in the form of equity contributions
or intercompany loans.
Relationship with CenterPoint Energy. We are an indirect wholly owned
subsidiary of CenterPoint Energy. As a result of this relationship, the
financial condition and liquidity of our parent company could affect our access
to capital, our credit standing and our financial condition.
CRITICAL ACCOUNTING POLICIES
A critical accounting policy is one that is both important to the
presentation of our financial condition and results of operations and requires
management to make difficult, subjective or complex accounting estimates. An
accounting estimate is an approximation made by management of a financial
statement element, item or account in the financial statements. Accounting
estimates in our historical consolidated financial statements measure the
effects of past business transactions or events, or the present status of an
asset or liability. The accounting estimates described below require us to make
assumptions about matters that are highly uncertain at the time the estimate is
made. Additionally, different estimates that we could have used or changes in an
accounting estimate that are reasonably likely to occur could have a material
impact on the presentation of our financial condition or results of operations.
The circumstances that make these judgments difficult, subjective and/or complex
have to do with the need to make estimates about the effect of matters that are
inherently uncertain. Estimates and assumptions about future events and their
effects cannot be predicted with certainty. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances, the results of which form the basis for making
judgments. These estimates may change as new events occur, as more experience is
acquired, as additional information is obtained and as our operating environment
changes. Our significant accounting policies are discussed in Note 2 to the
consolidated financial statements in the CenterPoint Houston 10-K (CenterPoint
Houston 10-K Notes). We believe the following accounting policies involve the
application of critical accounting estimates.
20
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
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. Application of SFAS No. 71 to the
electric generation portion of our business was discontinued as of June 30,
1999. We continue to 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 $2.1 billion of
recoverable electric generation-related regulatory assets as of March 31, 2005.
These costs are recoverable under the provisions of the Texas electric
restructuring law. Based on our analysis of the True-Up Order, we recorded an
after-tax charge to earnings in 2004 of approximately $977 million to write-down
our electric generation-related regulatory assets to their realizable value,
which was reflected as an extraordinary loss.
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 ENERGY 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 electricity delivery revenue is estimated each month
based on daily supply volumes, applicable rates and analyses reflecting
significant historical trends and experience. As additional information becomes
available, or actual amounts are determinable, the recorded estimates are
revised. Consequently, operating results can be affected by revisions to prior
accounting estimates.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 2 to the Interim Financial Statements, incorporated herein by
reference, for a discussion of new accounting pronouncements that affect us.
OTHER SIGNIFICANT MATTERS
Quasi-Reorganization. On December 30, 2004, the Manager of CenterPoint
Houston adopted a plan for an accounting reorganization of the company, to be
effective as of January 1, 2005. The plan was adopted in order to eliminate the
accumulated retained earnings deficit that exists at our company.
21
The plan, as amended on February 23, 2005, required: (1) a report to be
presented to and reviewed by our Manager on or before February 28, 2005 as to
the completion of the valuation analysis of the accounting reorganization and
the effects of the accounting reorganization on our financial statements, (2) a
determination that the accounting reorganization is in accordance with
accounting principles generally accepted in the United States, and (3) that
there be no determination by our Manager on or before May 10, 2005 that the
accounting reorganization is inconsistent with our regulatory obligations.
On April 27, 2005, the Manager of CenterPoint Houston determined that an
accounting reorganization should not be implemented.
ITEM 4. CONTROLS AND PROCEDURES
In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an
evaluation, under the supervision and with the participation of management,
including our principal executive officer and principal financial officer, of
the effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report. Based on that evaluation, our principal executive
officer and principal financial officer concluded that our disclosure controls
and procedures were effective as of March 31, 2005 to provide assurance that
information required to be disclosed in our reports filed or submitted under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms.
There has been no change in our internal controls over financial reporting
that occurred during the three months ended March 31, 2005 that has materially
affected, or is reasonably likely to materially affect, our internal controls
over financial reporting.
22
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For a description of certain legal and regulatory proceedings affecting
us, please review Notes 3 and 6 to our Interim Financial Statements, "Business
- -- Regulation" and " -- Environmental Matters" in Item 1 of the CenterPoint
Houston Form 10-K, Item 3 of the CenterPoint Houston Form 10-K and Notes 4 and
9(b) to the CenterPoint Houston 10-K Notes, each of which is incorporated herein
by reference.
ITEM 6. EXHIBITS
The following exhibits are filed herewith:
Exhibits not incorporated by reference to a prior filing are designated by
a cross (+); all exhibits not so designated are incorporated by reference to a
prior filing of CenterPoint Energy Houston Electric, LLC or CenterPoint Energy,
Inc. as indicated.
Exhibit Report or Registration SEC File or
Number Description Statement Registration Number Exhibit References
- ------- ------------------------------------- -------------------------------------- ------------------- ------------------
3.1 Articles of Organization of CenterPoint Houston's Form 8-K dated 1-3187 3(b)
CenterPoint Energy Houston Electric, August 31, 2002 filed with the SEC on
LLC September 3, 2002
3.2 Limited Liability Company Regulations CenterPoint Houston's Form 8-K dated 1-3187 3(c)
of CenterPoint Energy Houston August 31, 2002 filed with the SEC on
Electric, LLC September 3, 2002
4.1.1 $1,310,000,000 Credit Agreement dated CenterPoint Energy's Form 10-K for the 1-31447 4(g)(1)
as of November 12, 2002, among year ended December 31, 2002
CenterPoint Houston and the banks
named therein
4.1.2 First Amendment to Exhibit 4.1.1, CenterPoint Energy's Form 10-Q for the 1-31447 10.7
dated as of September 3, 2003 quarter ended September 30, 2003
4.1.3 Pledge Agreement, dated as of CenterPoint Energy's Form 10-K for the 1-31447 4(g)(2)
November 12, 2002 executed in year ended December 31, 2002
connection with Exhibit 4.1.1
4.2 $200,000,000 Credit Agreement dated CenterPoint Houston's Form 8-K dated 1-3187 4.2
as of March 7, 2005 among CenterPoint March 7, 2005
Houston and the banks named therein
4.3 $1,310,000,000 Credit Agreement dated CenterPoint Houston's Form 8-K dated 1-3187 4.3
as of March 7, 2005 among CenterPoint March 7, 2005
Houston and the banks named therein
+31.1 Rule 13a-14(a)/15d-14(a)
Certification of David M. McClanahan
23
Report or Registration SEC File or
Exhibit Number Description Statement Registration Number Exhibit References
- -------------- ------------------------------------ ----------------------- ------------------- ------------------
+31.2 Rule 13a-14(a)/15d-14(a)
Certification of
Gary L. Whitlock
+32.1 Section 1350 Certification of
David M. McClanahan
+32.2 Section 1350 Certification of
Gary L. Whitlock
+99.1 Items incorporated by reference
from the CenterPoint Houston
Form 10-K. Item 1 "Business --
Regulation," " -- Environmental
Matters," " -- Risk Factors,"
Item 3 "Legal Proceedings" and
Item 7 "Management's Narrative
Analysis of Results of Operations
-- Certain Factors Affecting
Future Earnings" and Notes 2(e)
(Regulatory Assets and Liabilities),
4 (Regulatory Matters) and
9 (Commitments and Contingencies).
24
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: May 11, 2005
25
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.
Exhibit Report or Registration SEC File or
Number Description Statement Registration Number Exhibit References
- ------- ------------------------------------- -------------------------------------- ------------------- ------------------
3.1 Articles of Organization of CenterPoint Houston's Form 8-K dated 1-3187 3(b)
CenterPoint Energy Houston Electric, August 31, 2002 filed with the SEC on
LLC September 3, 2002
3.2 Limited Liability Company Regulations CenterPoint Houston's Form 8-K dated 1-3187 3(c)
of CenterPoint Energy Houston August 31, 2002 filed with the SEC on
Electric, LLC September 3, 2002
4.1.1 $1,310,000,000 Credit Agreement dated CenterPoint Energy's Form 10-K for the 1-31447 4(g)(1)
as of November 12, 2002, among year ended December 31, 2002
CenterPoint Houston and the banks
named therein
4.1.2 First Amendment to Exhibit 4.1.1, CenterPoint Energy's Form 10-Q for the 1-31447 10.7
dated as of September 3, 2003 quarter ended September 30, 2003
4.1.3 Pledge Agreement, dated as of CenterPoint Energy's Form 10-K for the 1-31447 4(g)(2)
November 12, 2002 executed in year ended December 31, 2002
connection with Exhibit 4.1.1
4.2 $200,000,000 Credit Agreement dated Form 8-K dated March 7, 2005 1-31447 4.2
as of March 7, 2005 among CenterPoint
Houston and the banks named therein
4.3 $1,310,000,000 Credit Agreement dated Form 8-K dated March 7, 2005 1-31447 4.3
as of March 7, 2005 among CenterPoint
Houston and the banks named therein
+31.1 Rule 13a-14(a)/15d-14(a)
Certification of David M. McClanahan
+31.2 Rule 13a-14(a)/15d-14(a)
Certification of Gary L. Whitlock
+32.1 Section 1350 Certification of
David M. McClanahan
+32.2 Section 1350 Certification of
Gary L. Whitlock
+99.1 Items incorporated by reference from
the CenterPoint Houston Form 10-K.
Item 1 "Business -- Regulation," "
-- Environmental Matters," " --
Risk Factors," Item 3 "Legal
Proceedings" and Item 7 "Management's
Narrative Analysis of Results of
Operations -- Certain Factors Affecting
Future Earnings" and Notes 2(e)
(Regulatory Assets and Liabilities),
4 (Regulatory Matters) and 9
(Commitments and Contingencies).