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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
AMENDMENT NO. 2
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 1-31447
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CENTERPOINT ENERGY, INC.
(Exact name of registrant as specified in its charter)
TEXAS 74-0694415
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1111 LOUISIANA (713) 207-1111
HOUSTON, TEXAS 77002 (Registrant's telephone
(Address and zip code of number, including area code)
principal executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ------------------------
Common Stock, $0.01 par value and associated New York Stock Exchange
rights to purchase preferred stock Chicago Stock Exchange
HL&P Capital Trust II 8.257% Capital Securities, New York Stock Exchange
Series B
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of each of the registrants' knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Act). Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The aggregate market value of the voting stock held by non-affiliates of
CenterPoint Energy, Inc. (Company) was $3,521,933,742 as of June 30, 2004, using
the definition of beneficial ownership contained in Rule 13d-3 promulgated
pursuant to the Securities Exchange Act of 1934 and excluding shares held by
directors and executive officers. As of February 28, 2005, the Company had
308,501,031 shares of Common Stock outstanding. Excluded from the number of
shares of Common Stock outstanding are 166 shares held by the Company as
treasury stock.
Portions of the definitive proxy statement relating to the 2005 Annual
Meeting of Shareholders of the Company, which will be filed with the Securities
and Exchange Commission within 120 days of December 31, 2004, are incorporated
by reference in Item 10, Item 11, Item 12, Item 13 and Item 14 of Part III of
this Form 10-K.
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EXPLANATORY NOTE
CenterPoint Energy, Inc. (CenterPoint Energy or the Company) hereby amends
Items 6, 7, 8 and 9A of Part II and Item 15 of Part IV of its Annual Report on
Form 10-K for the year ended December 31, 2004 filed on March 16, 2005 (Form
10-K), as amended by Amendment No. 1 thereto on Form 10-K/A filed on August 29,
2005 (Amendment No. 1), to reflect the restatement of the Company's consolidated
financial statements as discussed in Note 17. Amendment No. 1 was filed solely
for the purpose of supplementing the Form 10-K by filing the opinion of the
Company's independent registered public accounting firm regarding the financial
statement schedules contained in Item 15 that was inadvertently omitted from the
Form 10-K. Contemporaneously with the filing of Amendment No. 2 to the Form 10-K
on this Form 10-K/A, CenterPoint Energy is filing amendments to its Quarterly
Reports on Forms 10-Q/A for each of the first three quarters of 2005.
For purposes of this Form 10-K/A, and in accordance with Rule 12b-15 under
the Securities Exchange Act of 1934, as amended, each item of the Form 10-K, as
amended by Amendment No. 1, that was affected by the restatement has been
amended to the extent affected and restated in its entirety. NO ATTEMPT HAS BEEN
MADE IN THIS FORM 10-K/A TO UPDATE OTHER DISCLOSURES AS PRESENTED IN THE FORM
10-K, AS AMENDED BY AMENDMENT NO. 1, EXCEPT AS REQUIRED TO REFLECT THE EFFECTS
OF THE RESTATEMENT. ACCORDINGLY, THIS FORM 10-K/A SHOULD BE READ IN CONJUNCTION
WITH THE COMPANY'S SEC FILINGS MADE SUBSEQUENT TO THE FILING OF THE FORM 10-K,
INCLUDING ANY AMENDMENTS OF THOSE FILINGS. IN ADDITION, THIS FORM 10-K/A
INCLUDES UPDATED CERTIFICATIONS FROM THE COMPANY'S CEO AND CFO AS EXHIBITS 31.1,
31.2, 32.1 AND 32.2.
i
TABLE OF CONTENTS
PAGE
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PART II
Item 6. Selected Financial Data......................................... 1
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 2
Item 8. Financial Statements and Supplementary Data..................... 25
Item 9A. Controls and Procedures......................................... 77
PART IV
Item 15. Exhibits and Financial Statement Schedules...................... 78
ii
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.
Some of the factors that could cause actual results to differ from those
expressed or implied by our forward-looking statements are described under "Risk
Factors" beginning on page 24 in Item 1 of our Annual Report on Form 10-K for
the year ended December 31, 2004 filed on March 16, 2005.
You should not place undue reliance on forward-looking statements. Each
forward-looking statement speaks only as of the date of the particular
statement, and we undertake no obligation to publicly update or revise any
forward-looking statements.
iii
PART II
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected financial data with respect to our
consolidated financial condition and consolidated results of operations and
should be read in conjunction with our consolidated financial statements and the
related notes in Item 8 of this report.
YEAR ENDED DECEMBER 31,
--------------------------------------------------
2000 2001(1) 2002 2003(2) 2004(3)(5)
------- ------- ------- ------- ----------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Revenues ........................................................ $ 6,949 $ 7,148 $ 6,438 $ 7,790 $ 7,999
------- ------- ------- ------- -------
Income from continuing operations before extraordinary loss and
cumulative effect of accounting change ....................... 52 357 482 409 205
Discontinued operations, net of tax ............................. 395 565 (4,402) 75 (133)
Extraordinary loss, net of tax .................................. -- -- -- -- (977)
Cumulative effect of accounting change, net of tax .............. -- 58 -- -- --
------- ------- ------- ------- -------
Net income (loss) attributable to common shareholders ........... $ 447 $ 980 $(3,920) $ 484 $ (905)
======= ======= ======= ======= =======
Basic earnings (loss) per common share:
Income from continuing operations before extraordinary loss
and cumulative effect of accounting change ................ $ 0.18 $ 1.23 $ 1.62 $ 1.35 $ 0.67
Discontinued operations, net of tax .......................... 1.39 1.95 (14.78) 0.24 (0.43)
Extraordinary loss, net of tax ............................... -- -- -- -- (3.18)
Cumulative effect of accounting change, net of tax ........... -- 0.20 -- -- --
------- ------- ------- ------- -------
Basic earnings (loss) per common share .......................... $ 1.57 $ 3.38 $(13.16) $ 1.59 $ (2.94)
======= ======= ======= ======= =======
Diluted earnings (loss) per common share:
Income from continuing operations before extraordinary loss
and cumulative effect of accounting change ................ $ 0.18 $ 1.22 $ 1.61 $ 1.24 $ 0.61
Discontinued operations, net of tax .......................... 1.38 1.93 (14.69) 0.22 (0.37)
Extraordinary loss, net of tax ............................... -- -- -- -- (2.72)
Cumulative effect of accounting change, net of tax ........... -- 0.20 -- -- --
------- ------- ------- ------- -------
Diluted earnings (loss) per common share ........................ $ 1.56 $ 3.35 $(13.08) $ 1.46 $ (2.48)
======= ======= ======= ======= =======
Cash dividends paid per common share ............................ $ 1.50 $ 1.50 $ 1.07 $ 0.40 $ 0.40
Dividend payout ratio from continuing operations ................ 833% 122% 66% 30% 60%
Return from continuing operations on average common equity ...... 1.0% 5.8% 11.8% 25.7% 14.4%
Ratio of earnings from continuing operations to fixed charges ... 1.39 1.99 2.03 1.81 1.43
At year-end:
Book value per common share .................................. $ 19.10 $ 22.77 $ 4.74 $ 5.77 $ 3.59
Market price per common share ................................ 43.31 26.52 8.01 9.69 11.30
Market price as a percent of book value ...................... 227% 116% 169% 168% 315%
Assets of discontinued operations ............................ $18,479 $16,840 $ 4,594 $ 4,244 $ 1,565
Total assets ................................................. 35,936 32,020 20,635 21,461 18,096
Short-term borrowings ........................................ 4,799 3,469 347 63 --
Long-term debt obligations, including current maturities ..... 4,989 4,712 9,996 10,939 9,029
Trust preferred securities(4) ................................ 705 706 706 -- --
Cumulative preferred stock ................................... 10 -- -- -- --
Capitalization:
Common stock equity ....................................... 49% 55% 12% 14% 11%
Trust preferred securities ................................ 6% 6% 6% -- --
Long-term debt, including current maturities .............. 45% 39% 82% 86% 89%
Capital expenditures, excluding discontinued operations ...... $ 653 $ 802 $ 566 $ 497 $ 530
- ----------
(1) 2001 net income includes the cumulative effect of an accounting change
resulting from the adoption of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ($58 million after-tax gain, or $0.20
earnings per basic and diluted share). For additional information related
to the cumulative effect of accounting change, please read Note 5 to our
consolidated financial statements.
(2) 2003 net income includes the cumulative effect of an accounting change
resulting from the adoption of SFAS No. 143, "Accounting for Asset
Retirement Obligations" ($80 million after-tax gain, or $0.26 and $0.24
earnings per basic and diluted share, respectively), which is included in
discontinued operations related to Texas Genco.
(3) 2004 net income includes an after-tax extraordinary loss of $977 million
($3.18 and $2.72 loss per basic and diluted share, respectively) based on
our analysis of the Texas Utility Commission's deliberations in the 2004
True-Up Proceeding. Additionally, we recorded a net after-tax loss of
approximately $133 million ($0.43 and $0.37 loss per basic and diluted
share, respectively) in 2004 related to our interest in Texas Genco. For
more information on these and other matters currently affecting us, please
see "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Executive Summary -- Significant Events in 2005."
1
(4) The subsidiary trusts that issued trust preferred securities have been
deconsolidated as a result of the adoption of FIN 46 "Consolidation of
Variable Interest Entities, an Interpretation of Accounting Research
Bulletin No. 51" (FIN 46) and the subordinated debentures issued to those
trusts are now reported as long-term debt effective December 31, 2003. For
additional information related to the adoption of FIN 46, please read Note
2(n) to our consolidated financial statements.
(5) As restated, see Note 17 to the consolidated financial statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in combination with
our consolidated financial statements included in Item 8 herein.
RESTATEMENT
The following management discussion and analysis gives effect to the
restatement discussed in Note 17 to our consolidated financial statements.
OVERVIEW
BACKGROUND
We are a public utility holding company, created on August 31, 2002 as part
of a corporate restructuring of Reliant Energy, Incorporated (Reliant Energy) in
compliance with requirements of the Texas Electric Choice Plan (Texas electric
restructuring law). We are the successor to Reliant Energy for financial
reporting purposes under the Securities Exchange Act of 1934. Our operating
subsidiaries own and operate electric transmission and distribution facilities,
natural gas distribution facilities, interstate pipelines and natural gas
gathering, processing and treating facilities. We are a registered holding
company under the Public Utility Holding Company Act of 1935, as amended (1935
Act). For information about the 1935 Act, please read " -- Liquidity and Capital
Resources -- Future Sources and Uses of Cash -- Certain Contractual and
Regulatory Limits on Ability to Issue Securities and Pay Dividends on Our Common
Stock." Our indirect wholly owned subsidiaries include:
- CenterPoint Energy Houston Electric, LLC (CenterPoint Houston), which
owns and operates our electric transmission and distribution business
in the Texas Gulf Coast area; and
- CenterPoint Energy Resources Corp. (CERC Corp., and together with its
subsidiaries, CERC), which owns and operates our local gas
distribution companies, interstate pipelines and gas gathering
systems, provides various ancillary services, and offers variable and
fixed price physical natural gas supplies to commercial and industrial
customers and natural gas distributors.
In July 2004, we announced our agreement to sell our majority owned
subsidiary, Texas Genco Holdings, Inc. (Texas Genco), to Texas Genco LLC
(formerly known as GC Power Acquisition LLC), an entity owned in equal parts by
affiliates of The Blackstone Group, Hellman & Friedman LLC, Kohlberg Kravis
Roberts & Co. L.P. and Texas Pacific Group. On December 15, 2004, Texas Genco
completed the sale of its fossil generation assets (coal, lignite and gas-fired
plants) to Texas Genco LLC for $2.813 billion in cash. Following the sale, Texas
Genco distributed $2.231 billion in cash to us. Texas Genco's principal
remaining asset is its ownership interest in a nuclear generating facility. The
final step of the transaction, the merger of Texas Genco with a subsidiary of
Texas Genco LLC in exchange for an additional cash payment of $700 million to
us, is expected to close during the first half of 2005, following receipt of
approval from the Nuclear Regulatory Commission (NRC).
At the time of Reliant Energy's corporate restructuring, it owned an 83%
interest in Reliant Resources, Inc., now known as Reliant Energy, Inc. (RRI). On
September 30, 2002, we distributed that interest to our shareholders (the RRI
Distribution).
BUSINESS SEGMENTS
In this section, we discuss our results from continuing operations on a
consolidated basis and individually for each of our business segments. We also
discuss our liquidity, capital resources and critical accounting policies.
CenterPoint Energy is first and foremost an energy delivery company and it is
our intention to remain focused on this segment of the energy business. The
results of our business operations are significantly impacted by weather,
customer growth, cost management, rate proceedings before regulatory agencies
and other actions of the various regulatory agencies to which we are subject.
Our transmission and distribution services remain subject to
2
rate regulation and are reported in the Electric Transmission & Distribution
business segment as are impacts of generation-related stranded costs and other
true-up balances recoverable by the regulated utility. Although our former
retail sales business is no longer conducted by us, retail customers remained
regulated customers of our former integrated electric utility, Reliant Energy
HL&P, through the date of their first meter reading in 2002. Sales of
electricity to retail customers in 2002 prior to this meter reading are
reflected in the Electric Transmission & Distribution business segment. Our
reportable business segments include:
Electric Transmission & Distribution
Our electric transmission and distribution operations provide electric
transmission and distribution services to retail electric providers serving
approximately 1.9 million metered customers in a 5,000-square-mile area of the
Texas Gulf coast that has a population of approximately 4.8 million people and
includes Houston.
On behalf of retail electric providers, CenterPoint Houston delivers
electricity from power plants to substations and from one substation to another
and to retail electric customers in locations throughout the control area
managed by the Electric Reliability Council of Texas, Inc. (ERCOT). ERCOT serves
as the regional reliability coordinating council for member electric power
systems in Texas. ERCOT membership is open to consumer groups, investor and
municipally owned electric utilities, rural electric cooperatives, independent
generators, power marketers and retail electric providers. The ERCOT market
represents approximately 85% of the demand for power in Texas and is one of the
nation's largest power markets. Transmission services are provided under tariffs
approved by the Public Utility Commission of Texas (the Texas Utility
Commission).
Operations include construction and maintenance of electric transmission
and distribution facilities, metering services, outage response services and
other call center operations. Distribution services are provided under tariffs
approved by the Texas Utility Commission.
Natural Gas Distribution
CERC owns and operates our natural gas distribution business, which engages
in intrastate natural gas sales to, and natural gas transportation for,
approximately 3 million residential, commercial and industrial customers in
Arkansas, Louisiana, Minnesota, Mississippi, Oklahoma and Texas. These
operations are regulated as natural gas utility operations. Its operations also
include non-rate regulated retail and wholesale gas sales to, and transportation
services for, commercial and industrial customers in the six states listed above
as well as several other Midwestern states.
Pipelines and Gathering
CERC's pipelines and gathering business operates two interstate natural gas
pipelines as well as gas gathering facilities and also provides pipeline
services. CERC's gathering operations are conducted by a wholly owned gas
gathering subsidiary, CenterPoint Energy Field Services, Inc. (CEFS). CEFS is a
natural gas gathering and processing business serving natural gas fields in the
Midcontinent basin of the United States that interconnect with CERC's pipelines,
as well as other interstate and intrastate pipelines. CEFS operates gathering
pipelines, which collect natural gas from approximately 200 separate systems
located in major producing fields in Arkansas, Louisiana, Oklahoma and Texas.
CEFS, through its Service Star operating division, provides remote data
monitoring and communications services to affiliates and third parties. The
Service Star operating division currently provides monitoring activities at over
6,000 locations across Alabama, Arkansas, Kansas, Oklahoma, Louisiana,
Mississippi, Missouri, New Mexico, Texas and Wyoming.
Other Operations
Our Other Operations business segment includes office buildings and other
real estate used in our business operations and other corporate operations which
support all of our business operations.
3
EXECUTIVE SUMMARY
RECENT EVENTS
2004 TRUE-UP PROCEEDING
Pursuant to the Texas Electric Choice Plan (the Texas electric
restructuring law), CenterPoint Houston is permitted to recover certain costs
associated with the transition to a competitive retail electric market in Texas.
The amount of costs recoverable was determined in a true-up proceeding before
the Texas Utility Commission. In March 2004, CenterPoint Houston filed the final
true-up application required by the Texas electric restructuring law with the
Texas Utility Commission. CenterPoint Houston's requested true-up balance was
$3.7 billion, excluding interest and net of the retail clawback from RRI. In
June, July and September 2004, the Texas Utility Commission conducted hearings
on and held public meetings addressing CenterPoint Houston's true-up
application. In December 2004, the Texas Utility Commission approved a final
order in CenterPoint Houston's true-up proceeding authorizing CenterPoint
Houston to recover $2.3 billion including interest through August 31, 2004,
subject to adjustments to reflect the benefit of certain deferred taxes and the
accrual of interest and payment of excess mitigation credits after August 31,
2004. Based on our analysis of the Texas Utility Commission's final order, we
recorded an after-tax charge to earnings in 2004 of $977 million to write-down
our electric generation-related regulatory assets to their realizable value,
which is reflected as an extraordinary loss in the Statements of Consolidated
Operations. Additionally, we have recorded other income of $226 million in the
fourth quarter of 2004 representing the return on our true-up balance for the
years 2002, 2003 and 2004 based on the Texas Utility Commission's final decision
on this matter. In January 2005, we appealed certain aspects of the final order
seeking to increase the true-up balance ultimately recovered by CenterPoint
Houston. Other parties have also appealed the order, seeking to reduce the
amount authorized for CenterPoint Houston's recovery. Although we believe we
have meritorious arguments and that the other parties' appeals are without
merit, no prediction can be made as to the ultimate outcome or timing of such
appeals.
In December 2004, CenterPoint Houston filed for approval of a financing
order to issue transition bonds to securitize its true-up balance, which will be
adjusted downward to reflect the benefit of certain deferred taxes previously
recovered through rates, and upward to reflect the accrual of interest and
payment of excess mitigation credits occurring after August 31, 2004. On March
9, 2005, the Texas Utility Commission issued its order allowing CenterPoint
Houston to securitize approximately $1.8 billion and requiring that the benefit
of certain deferred taxes be reflected as a reduction in the competition
transition charge. CenterPoint Houston also has filed an application for a
competition transition charge to recover any portion of its adjusted true-up
balance that it is not able to recover through the issuance of transition bonds.
Hearings in this proceeding are scheduled for April 2005.
The balance approved by the Texas Utility Commission in the 2004 True-Up
Proceeding includes $699 million in environmental expenditures incurred by Texas
Genco, of which approximately $50 million was not projected to be spent until
2005 and 2006. CenterPoint Houston has agreed to return to its customers any
funds not expended on environmental projects by December 31, 2006. The December
2004 final order in the 2004 True-Up Proceeding requires CenterPoint Houston to
demonstrate by January 31, 2007, that the $699 million was spent on
environmental projects or to refund its customers the unspent funds, along with
interest.
SALE OF TEXAS GENCO
Disposition. On December 14, 2004, Texas Genco merged with an indirect
wholly owned subsidiary of CenterPoint Energy. As a result of the merger, Texas
Genco became our indirect wholly owned subsidiary, and all of Texas Genco's
publicly held shares (other than 227 shares held by shareholders who validly
perfected their dissenter's rights under Texas law) were converted into the
right to receive $47 per share in cash without interest (the Merger
Consideration) less any applicable withholding taxes. In connection with the
merger, Texas Genco entered into a credit agreement (the Overnight Bridge Loan)
under which it borrowed approximately $716 million on December 14, 2004 to
finance the payment of the aggregate Merger Consideration payable as a result of
the merger. Texas Genco's shares ceased to be publicly traded as of the close of
trading on December 14, 2004. The merger was part of the first step of the sale
transaction announced in July 2004 in which Texas Genco LLC agreed to acquire
Texas Genco for approximately $3.65 billion in cash.
On December 15, 2004, Texas Genco completed the sale of its fossil
generation assets (coal, lignite and gas-fired plants) to Texas Genco LLC for
$2.813 billion in cash. Texas Genco used approximately $716 million of the cash
proceeds from the sale to repay the Overnight Bridge Loan and distributed $2.231
billion, consisting of the balance of the cash proceeds from the sale and cash
on hand, to us. We used the proceeds primarily to repay outstanding
indebtedness.
4
In connection with the sale of Texas Genco's fossil generation assets to
Texas Genco LLC, Texas Genco, LP, a subsidiary of Texas Genco (Genco LP), also
entered into a services agreement with Texas Genco LLC, under which Texas Genco
LLC has agreed to provide at cost energy dispatch and coordination services to
Genco LP, administer Genco LP's PUC-mandated capacity auctions and market Genco
LP's excess capacity and energy to third parties. For those services, Genco LP
will pay a monthly fee.
Following the sale of its fossil generation assets, Texas Genco's principal
remaining asset is its interest in the South Texas Project Electric Generating
Station, a nuclear generating facility (South Texas Project). Texas Genco
currently owns a 30.8% interest in the South Texas Project, that is subject to
increase pursuant to the right of first refusal described below, and currently
bears a corresponding 30.8% share of the capital and operating costs associated
with the project.
In connection with the sale of Texas Genco's fossil generation assets to
Texas Genco LLC, Genco LP entered into a power purchase and sale agreement with
a subsidiary of Texas Genco LLC, which we refer to as the back-to-back power
purchase agreement. Under this agreement, Genco LP has agreed to sell forward a
substantial portion of Genco LP's total share of the energy from the South Texas
Project through December 31, 2008. Genco LP has agreed to sell this energy on a
unit-contingent basis, meaning that Genco LP will be excused (subject to the
contingent payment for economic costs described below) from its obligations to
deliver this energy to the extent the energy is unavailable as a result of a
derating or forced outage at the South Texas Project or other specified causes.
During the period from the closing of the first step of the sale
transaction until the closing of the second step, the pricing for the energy
sold under the back-to-back power purchase agreement will be at the
weighted-average price achieved by Texas Genco LLC on its firm forward sales in
the South ERCOT zone, subject to payment by Genco LP to Texas Genco LLC, in the
event the second step does not close, of 50% of the economic cost (i.e.,
liquidated damages payable to third parties or cost of cover) incurred by Texas
Genco LLC during that period as a result of energy from the South Texas Project
being unavailable to meet the contract quantity. After any termination of the
transaction agreement, the pricing for this energy will be at 90% of such
weighted-average price, with no contingent payment for economic costs. The
transaction agreement may be terminated under various circumstances, including a
failure to close the second step of the sale transaction by April 30, 2005
(which date may be extended by either party for up to two consecutive 90-day
periods if NRC approval has not yet been obtained or is being contested and all
other closing conditions are capable of being satisfied).
The second step of the transaction, the merger of Texas Genco with a
subsidiary of Texas Genco LLC in exchange for an additional cash payment to us
of $700 million, is expected to close during the first half of 2005 following
receipt of approval from the NRC. Total cash proceeds to CenterPoint Energy from
both steps of the transaction are expected to be $2.931 billion.
We recorded an after-tax loss of approximately $214 million in 2004 related
to the sale of Texas Genco and an additional after-tax loss of $152 million
offsetting our interest in Texas Genco's 2004 earnings from July 1, 2004. Until
the sale of Texas Genco is complete, our interest in any future Texas Genco
earnings will be offset by an increase in the loss on the pending sale. The
consolidated financial statements included in this annual report on Form 10-K
present Texas Genco's operations as discontinued operations in accordance with
Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," (SFAS No. 144).
Right of First Refusal. In September 2004, Genco LP signed an agreement to
purchase a portion of AEP Texas Central Company's (AEP) 25.2% interest in the
South Texas Project for approximately $174 million. Once the purchase is
complete, Genco LP will own an additional 13.2% interest in the South Texas
Project for a total of 44%, or approximately 1,100 MW. This purchase agreement
was entered into pursuant to Genco LP's right of first refusal to purchase this
interest when AEP announced its agreement to sell this interest to a
third-party. In addition to AEP's ownership interest and Genco LP's current
30.8% ownership, the 2,500 MW nuclear plant is currently 28%-owned by City
Public Service of San Antonio (CPS) and 16%-owned by Austin Energy. CPS is
expected to purchase AEP's remaining 12% ownership interest under its right of
first refusal. The sale is subject to approval by the NRC. Texas Genco expects
to fund the purchase of its share of AEP's interest, including reimbursements of
draws under letters of credit, with existing cash balances that have been
provided to cash collateralize the letters of credit as described below and, if
necessary, cash expected to be generated through operations. If CPS were to
default and fail to purchase the 12% interest it has agreed to acquire, Texas
Genco would purchase AEP's entire 25.2% interest in the South Texas Project, in
which case Texas Genco would need approximately $158 million of additional cash.
We expect this transaction will be completed by the end of the second quarter of
2005.
In December 2004, prior to the consummation of the sale of Texas Genco's
coal, lignite and gas-fired generation assets to Texas Genco LLC, the $250
million revolving credit facility of Genco LP was terminated and the then
outstanding letters of credit
5
aggregating $182 million issued under the facility in favor of AEP relating to
the right of first refusal were cash collateralized at 105% of their face
amount. In February 2005, Genco LP also established a $75 million term loan
facility under which borrowings may be made for working capital purposes at
LIBOR plus 50 basis points. Two drawings aggregating $75 million may be made
under the facility which matures on the earlier of August 2005 or the closing of
the final step of the Texas Genco sale. An initial draw of $59 million was made
in February 2005. This facility is secured by a lien on Texas Genco's equity and
partnership interests in its subsidiaries and cash collateral accounts described
above.
SIGNIFICANT EVENTS IN 2005
Resolution of legal proceedings relating to the 2004 True-Up Proceeding,
recovery of amounts approved in the 2004 True-Up Proceeding and the sale of our
remaining interest in Texas Genco are the most significant events facing us in
2005. We expect to use the proceeds received from these events to further repay
a portion of our indebtedness and for other general corporate purposes. In
January 2005, we appealed certain aspects of the final order seeking to increase
the true-up balance ultimately recovered by CenterPoint Houston. Other parties
have also appealed the order, seeking to reduce the amount authorized for
CenterPoint Houston's recovery. Although we believe we have meritorious
arguments and that the other parties' appeals are without merit, no prediction
can be made as to the ultimate outcome or timing of such appeals.
We recorded an after-tax loss of approximately $214 million in 2004 related
to the sale of our interest in Texas Genco. See "Recent Events" above. We also
recorded an after-tax extraordinary loss of $977 million in 2004 related to the
2004 True-Up Proceeding as discussed above. Portions of these losses recorded in
periods prior to the fourth quarter of 2004 reduced our earnings below the level
required for us to continue paying our current quarterly dividends out of
current earnings as required under our Securities and Exchange Commission (SEC)
financing order. However, in May 2004, we received an order from the SEC under
the 1935 Act authorizing us to continue to pay our current quarterly dividend in
the second and third quarters of 2004 out of capital or unearned surplus in the
event we had such losses. We declared a dividend in the fourth quarter of 2004
out of current earnings. If our earnings for subsequent quarters are
insufficient to pay dividends from current earnings, additional authority would
be required from the SEC for payment of the quarterly dividend from capital or
unearned surplus, but there can be no assurance that the SEC would authorize
such payments. These losses would delay the timing of our achievement of a ratio
of common equity to total capitalization of 30% as generally required by the SEC
under the 1935 Act. Accordingly, we may issue equity and take other actions to
achieve a future equity capitalization of 30%.
In March 2005, we replaced our $750 million revolving credit facility with
a $1 billion five-year revolving credit facility. Borrowings may be made under
the facility at LIBOR plus 100 basis points based on current credit ratings. An
additional utilization fee of 12.5 basis points applies to borrowings any time
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.
In March 2005, CenterPoint Houston established a $200 million five-year
revolving credit facility. Borrowings may be made under the facility at LIBOR
plus 75 basis points based on CenterPoint Houston's current credit rating. An
additional utilization fee of 12.5 basis points applies to borrowings any time
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.
CenterPoint Houston also established a $1.31 billion credit facility in
March 2005. This facility is available to be utilized only to refinance
CenterPoint Houston'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. Net proceeds from the issuance of transition
bonds and certain new net indebtedness for borrowed money issued by CenterPoint
Houston in excess of $200 million must be used to repay borrowings under the new
facility. Based on CenterPoint Houston's current credit ratings, borrowings
under the facility can 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
CenterPoint Houston's general mortgage bonds in the same principal amount and
bearing the same interest rate as such drawings.
In March 2005, we filed a registration statement relating to an offer to
exchange our 3.75% convertible senior notes due 2023 for a new series of 3.75%
convertible senior notes due 2023. This registration statement has not yet been
declared effective by the SEC. We expect to conduct the exchange offer in
response to the guidance set forth in Emerging Issues Task Force Issue No. 04-8,
"The Effect of Contingently Convertible Instruments on Diluted Earnings Per
Share." Under that guidance, because the terms of the new notes provide for
settlement of the principal amount on conversion in cash rather than our common
stock, exchanging new notes for old
6
notes will allow us to exclude the portion of the conversion value of the new
notes attributable to their principal amount from our computation of diluted
earnings per share from continuing operations.
2004 HIGHLIGHTS
In addition to the extraordinary loss related to the 2004 True-Up
Proceeding and the loss related to the sale of Texas Genco as discussed above,
our operating performance for 2004 compared to 2003 were affected by:
- the termination of revenues related to Excess Cost Over Market (ECOM)
as of January 1, 2004 compared to ECOM revenues of $661 million
recorded in 2003;
- an increase in operating income of $135 million in our Electric
Transmission & Distribution business segment, excluding ECOM,
primarily due to the absence of an $87 million reserve recorded in
2003 related to the final fuel reconciliation, excluding interest, and
a $15 million reversal of this reserve in 2004;
- an increase in other income of $226 million related to the return on
our true-up balance as discussed above;
- rate increases of $15 million in 2004 in our Natural Gas Distribution
business segment;
- increased operating income of $22 million in our Pipelines and
Gathering business segment primarily from increased throughput,
favorable commodity prices and increased ancillary services; and
- continued customer growth, with the addition of over 92,000 metered
electric and gas customers.
CERTAIN FACTORS AFFECTING FUTURE EARNINGS
Our past earnings and results of operations are not necessarily indicative
of our future earnings and results of operations. The magnitude of our future
earnings and results of our operations will depend on or be affected by numerous
factors including:
- the timing and amount of our recovery of the true-up components;
- the timing and results of the monetization of our remaining interest
in Texas Genco;
- state and federal legislative and regulatory actions or developments,
including deregulation, re-regulation, constraints placed on our
activities or business by the 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;
- the timing and extent of changes in commodity prices, particularly
natural gas;
- changes in interest rates or rates of inflation;
- weather variations and other natural phenomena;
- the timing and extent of changes in the supply of natural gas;
7
- 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;
- inability of various counterparties to meet their obligations to us;
- non-payment for our services due to financial distress of our
customers, including RRI;
- the outcome of the pending securities lawsuits against us, Reliant
Energy and RRI;
- the ability of RRI to satisfy its obligations to us, including
indemnity obligations;
- our ability to control costs;
- the investment performance of our employee benefit plans;
- our internal restructuring or other restructuring options that may be
pursued;
- 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 discussed under "Risk Factors" in Item 1 of our Annual
Report on Form 10-K for the year ended December 31, 2004 filed on
March 16, 2005 (Centerpoint Energy Form 10-K).
CONSOLIDATED RESULTS OF OPERATIONS
All dollar amounts in the tables that follow are in millions, except for
per share amounts.
YEAR ENDED DECEMBER 31,
-------------------------
2002 2003 2004
------- ------ ------
Revenues ..................................................... $ 6,438 $7,790 $7,999
Operating Expenses ........................................... 4,998 6,435 7,135
------- ------ ------
Operating Income ............................................. 1,440 1,355 864
Gain (Loss) on Time Warner Investment ........................ (500) 106 31
Gain (Loss) on Indexed Debt Securities ....................... 480 (96) (20)
Interest and Other Finance Charges ........................... (712) (741) (777)
Return on True-Up Balance .................................... -- -- 226
Other Income (Expense), net .................................. 46 (10) 20
------- ------ ------
Income From Continuing Operations Before Income Taxes and
Extraordinary Loss ........................................ 754 614 344
Income Tax Expense ........................................... (272) (205) (139)
------- ------ ------
Income From Continuing Operations Before Extraordinary Loss .. 482 409 205
Discontinued Operations, net of tax .......................... (4,402) 75 (133)
------- ------ ------
Income (Loss) Before Extraordinary Loss ...................... (3,920) 484 72
Extraordinary Loss, net of tax ............................... -- -- (977)
------- ------ ------
Net Income (Loss) ......................................... $(3,920) $ 484 $ (905)
======= ====== ======
Basic Earnings Per Share:
Income From Continuing Operations Before Extraordinary Loss .. $ 1.62 $ 1.35 $ 0.67
Discontinued Operations, net of tax .......................... (14.78) 0.24 (0.43)
Extraordinary Loss, net of tax ............................... -- -- (3.18)
------- ------ ------
Net Income (Loss) ......................................... $(13.16) $ 1.59 $(2.94)
======= ====== ======
Diluted Earnings Per Share:
Income From Continuing Operations Before Extraordinary Loss .. $ 1.61 $ 1.24 $ 0.61
Discontinued Operations, net of tax .......................... (14.69) 0.22 (0.37)
Extraordinary Loss, net of tax ............................... -- -- (2.72)
------- ------ ------
Net Income (Loss) ......................................... $(13.08) $ 1.46 $(2.48)
======= ====== ======
8
2004 COMPARED TO 2003
Income from Continuing Operations. We reported income from continuing
operations before extraordinary loss of $205 million ($0.61 per diluted share)
for 2004 as compared to $409 million ($1.24 per diluted share) for 2003. The
decrease in income from continuing operations of $204 million was primarily due
to the termination of revenues in our Electric Transmission & Distribution
business segment related to ECOM as of January 1, 2004, which had contributed
$430 million of income in 2003, higher net transmission costs of $6 million
related to our Electric Transmission & Distribution business segment and
increased interest expense of $36 million related to continuing operations as
discussed below. These items were partially offset by the absence of an $87
million reserve recorded in 2003 by our Electric Transmission & Distribution
business segment related to the final fuel reconciliation, a $15 million
reversal of this reserve in 2004 and $226 million of other income related to a
return on the true-up balance of our Electric Transmission & Distribution
business segment. These items were a result of the Texas Utility Commission's
final orders in the fuel reconciliation and the 2004 True-Up Proceeding.
Additionally, income from continuing operations was favorably impacted by
increased operating income of $31 million related to customer growth in our
Electric Transmission & Distribution business segment, increased operating
income of $20 million in our Natural Gas Distribution business segment primarily
due to rate increases, increased operating income of $22 million in our
Pipelines and Gathering business segment primarily from increased throughput,
favorable commodity prices and increased ancillary services, and a gain of $10
million on the sale of land by our Electric Transmission & Distribution business
segment.
Net loss for 2004 included an after-tax extraordinary loss of $977 million
($2.72 per diluted share) from a write-down of regulatory assets based on our
analysis of the Texas Utility Commission's final order in the 2004 True-Up
Proceeding. Additionally, net loss for 2004 included a net after-tax loss from
discontinued operations of Texas Genco of $133 million ($0.37 per diluted
share).
Net income for 2003 includes the cumulative effect of an accounting change
resulting from the adoption of SFAS No. 143, "Accounting for Asset Retirement
Obligations" ($80 million after-tax gain, or $0.24 earnings per diluted share),
which is included in discontinued operations related to Texas Genco.
2003 COMPARED TO 2002
Income from Continuing Operations. We reported income from continuing
operations of $409 million ($1.24 per diluted share) for 2003 compared to $482
million ($1.61 per diluted share) for 2002. The decrease in income from
continuing operations for 2003 compared to 2002 of $73 million was primarily due
to a $69 million increase in expenses related to CenterPoint Houston's final
fuel reconciliation, a $36 million reduction in non-cash ECOM revenue and an
increase in interest expense of $29 million related to continuing operations due
to higher borrowing costs and increased debt levels as discussed below.
INTEREST EXPENSE AND OTHER FINANCE CHARGES
In 2002 and 2003, our $3.85 billion credit facility consisted of a revolver
and a term loan. This facility was amended in October 2003 to a $2.35 billion
credit facility, consisting of a revolver and a term loan. According to the
terms of the $3.85 billion credit facility, any net cash proceeds received from
the sale of Texas Genco were required to be applied to repay borrowings under
the credit facility. According to the terms of the $2.35 billion credit
facility, until such time as the facility had been reduced to $750 million, 100%
of any net cash proceeds received from the sale of Texas Genco were required to
be applied to repay borrowings under the credit facility and reduce the amount
available under the credit facility. In the fourth quarter of 2004, we reduced
borrowings under our credit facility by $1.574 billion and retired $375 million
of trust preferred securities. We expensed $15 million of unamortized loan costs
in the fourth quarter of 2004 that were associated with the credit facility. In
accordance with Emerging Issues Task Force Issue No. 87-24 "Allocation of
Interest to Discontinued Operations", we have reclassified interest to
discontinued operations of Texas Genco based on net proceeds to be received from
the sale of Texas Genco of $2.5 billion, and have applied the proceeds to the
amount of debt assumed to be paid down in each respective period according to
the terms of the respective credit facilities in effect for those periods. In
periods where only the term loan was assumed to be repaid, the actual interest
paid on the term loan was reclassified. In periods where a portion of the
revolver was assumed to be repaid, the percentage of that portion of the
revolver to the total outstanding balance was calculated, and that percentage
was applied to the actual interest paid in those periods to compute the amount
of interest reclassified.
Total interest expense incurred was $764 million, $942 million and $849
million in 2002, 2003 and 2004, respectively. We have reclassified $52 million,
$201 million and $72 million of interest expense in 2002, 2003 and 2004,
respectively, based upon actual interest expense incurred within our
discontinued operations and interest expense associated with debt that would
have been required to be repaid as a result of our disposition of Texas Genco.
9
RESULTS OF OPERATIONS BY BUSINESS SEGMENT
The following table presents operating income (in millions) for each of our
business segments for 2002, 2003 and 2004. Some amounts from the previous years
have been reclassified to conform to the 2004 presentation of the financial
statements. These reclassifications do not affect consolidated net income.
OPERATING INCOME (LOSS) BY BUSINESS SEGMENT
YEAR ENDED DECEMBER 31,
-----------------------
2002 2003 2004
------ ------ ----
(IN MILLIONS)
Electric Transmission & Distribution ...................... $1,096 $1,020 $494
Natural Gas Distribution .................................. 198 202 222
Pipelines and Gathering ................................... 153 158 180
Other Operations .......................................... (7) (25) (32)
------ ------ ----
Total Consolidated Operating Income .................... $1,440 $1,355 $864
====== ====== ====
ELECTRIC TRANSMISSION & DISTRIBUTION
The following tables provide summary data of our Electric Transmission &
Distribution business segment, CenterPoint Houston, for 2002, 2003 and 2004 (in
millions, except throughput data):
YEAR ENDED DECEMBER 31,
---------------------------
2002 2003 2004
------- ------- -------
Revenues:
Electric transmission and distribution revenues ...... $ 1,451 $ 1,400 $ 1,446
ECOM revenues(1) ..................................... 697 661 --
Transition bond revenues ............................. 74 63 75
------- ------- -------
Total operating revenues .......................... 2,222 2,124 1,521
------- ------- -------
Operating Expenses:
Operation and maintenance ............................ 641 635 539
Depreciation and amortization ........................ 238 246 248
Taxes other than income taxes ........................ 213 198 203
Transition bond expenses ............................. 34 25 37
------- ------- -------
Total operating expenses .......................... 1,126 1,104 1,027
------- ------- -------
Operating Income ........................................ $ 1,096 $ 1,020 $ 494
======= ======= =======
Actual gigawatt-hours (GWh) delivered:
Residential throughput (in GWh) ......................... 23,025 23,687 23,748
Total throughput (in GWh)(2) ............................ 69,585 70,815 73,632
- ----------
(1) In 2004, there were no non-cash ECOM revenues under the Texas electric
restructuring law.
(2) 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.
2004 Compared to 2003. Our Electric Transmission & Distribution business
segment reported operating income of $494 million for 2004, consisting of $456
million for the regulated electric transmission and distribution utility and $38
million for the transition bond company subsidiary of CenterPoint Houston that
issued $749 million principal amount of transition bonds in 2001. For 2003,
operating income totaled $1.0 billion, consisting of $321 million for the
regulated electric transmission and distribution utility, $38 million for the
transition bond company and $661 million of non-cash income associated with
ECOM. Operating income increased $31 million from continued customer growth and
a $10 million gain on a land sale, partially offset by milder weather and
decreased usage of $18 million and higher net transmission costs of $6 million.
Additionally, operating income in 2004 was favorably impacted by the absence of
$87 million reserve recorded in 2003 related to the final fuel reconciliation
and a $15 million reversal of this fuel reserve in 2004 as a result of the Texas
Utility Commission's final orders in the fuel reconciliation and the 2004
True-Up Proceeding.
2003 Compared to 2002. Our Electric Transmission & Distribution business
segment reported operating income of $1.0 billion for 2003 consisting of $321
million for the regulated electric transmission and distribution utility, $38
million for the transition bond
10
company and $661 million of non-cash income associated with ECOM. For 2002,
operating income totaled $1.1 billion, consisting of $359 million for the
regulated electric transmission and distribution utility, $40 million for the
transition bond company and $697 million of non-cash income associated with
ECOM. Increased revenues from customer growth ($40 million) were more than
offset by transition period revenues that only occurred in 2002 ($90 million)
and decreased industrial demand, resulting in an overall decrease in electric
revenues from the regulated electric transmission and distribution business of
$62 million. Additionally, non-cash ECOM revenue decreased $36 million as a
result of higher operating margins from sales of generation based on the
state-mandated capacity auctions. Operation and maintenance expenses decreased
in 2003 compared to 2002 primarily due to the absence of purchased power costs
that occurred in 2002 during the transition period to deregulation ($48
million), a decrease in labor costs as a result of work force reductions in 2002
($13 million), non-recurring contract services expense primarily related to
transition to deregulation in 2002 ($10 million) and lower bad debt expense
related to transition revenues in 2002 ($10 million). These decreases were
offset by an increase in expenses related to CenterPoint Houston's final fuel
reconciliation ($69 million) and an increase in benefits expense primarily due
to increased pension costs ($18 million). Taxes other than income taxes
decreased $15 million primarily due to the absence of gross receipts tax
associated with transition period revenue in the first quarter of 2002 ($9
million).
NATURAL GAS DISTRIBUTION
The following table provides summary data of our Natural Gas Distribution
business segment for 2002, 2003 and 2004 (in millions, except throughput data):
YEAR ENDED DECEMBER 31,
------------------------
2002 2003 2004
------ ------ ------
Operating Revenues ......................................... $3,960 $5,435 $6,173
Operating Expenses:
Natural gas ............................................. 2,995 4,428 5,120
Operation and maintenance ............................... 539 560 566
Depreciation and amortization ........................... 126 136 143
Taxes other than income taxes ........................... 102 109 122
------ ------ ------
Total operating expenses ............................. 3,762 5,233 5,951
------ ------ ------
Operating Income ........................................... $ 198 $ 202 $ 222
====== ====== ======
Throughput (in billion cubic feet (Bcf)):
Residential ............................................. 175 183 175
Commercial and industrial ............................... 253 238 237
Non-rate regulated commercial and industrial ............ 471 511 579
Eliminations ............................................ (48) (96) (134)
------ ------ ------
Total Throughput ..................................... 851 836 857
====== ====== ======
2004 Compared to 2003. Our Natural Gas Distribution business segment
reported operating income of $222 million for 2004 as compared to $202 million
for 2003. Increases in operating income of $4 million from continued customer
growth with the addition of 45,000 customers since December 31, 2003, $15
million from rate increases, $11 million from the impact of the 2003 change in
estimate of margins earned on unbilled revenues implemented in 2003 and $9
million related to certain regulatory adjustments made to the amount of
recoverable gas costs in 2003 were partially offset by the $8 million impact of
milder weather. Operations and maintenance expense increased $6 million for 2004
as compared to 2003. Excluding an $8 million charge recorded in the first
quarter of 2004 for severance costs associated with staff reductions, which has
reduced costs in later periods, operation and maintenance expenses decreased by
$2 million.
2003 Compared to 2002. Our Natural Gas Distribution business segment's
operating income increased $4 million in 2003 compared to 2002 primarily due to
higher revenues from rate increases implemented late in 2002 ($33 million),
improved margins from our unregulated commercial and industrial sales ($6
million) and continued customer growth with the addition of over 38,000
customers since December 2002 ($6 million). These increases were partially
offset by decreased revenues as a result of a decrease in the estimate of
margins earned on unbilled revenues ($11 million). Additionally, operating
income was negatively impacted by higher employee benefit expenses primarily due
to increased pension costs ($13 million), certain costs being included in
operating expense subsequent to the amendment of a receivables facility in
November 2002 as compared to being included in interest expense in the prior
year ($7 million) and increased bad debt expense primarily due to higher gas
prices ($9 million).
11
PIPELINES AND GATHERING
The following table provides summary data of our Pipelines and Gathering
business segment for 2002, 2003 and 2004 (in millions, except throughput data):
YEAR ENDED DECEMBER 31,
------------------------
2002 2003 2004
------ ------ ------
Operating Revenues .................. $ 374 $ 407 $ 451
Operating Expenses:
Natural gas ...................... 32 61 46
Operation and maintenance ........ 130 129 164
Depreciation and amortization .... 41 40 44
Taxes other than income taxes .... 18 19 17
------ ------ ------
Total operating expenses ...... 221 249 271
------ ------ ------
Operating Income .................... $ 153 $ 158 $ 180
====== ====== ======
Throughput (Bcf):
Natural gas sales ................ 14 9 11
Transportation ................... 845 794 859
Gathering ........................ 287 292 321
Elimination(1) ................... (9) (4) (7)
------ ------ ------
Total Throughput .............. 1,137 1,091 1,184
====== ====== ======
- ----------
(1) Elimination of volumes both transported and sold.
2004 Compared to 2003. Our Pipelines and Gathering business segment's
operating income increased by $22 million in 2004 compared to 2003. Operating
margins (revenues less fuel costs) increased by $59 million primarily due to
favorable commodity pricing ($3 million), increased demand for certain
transportation services driven by commodity price volatility ($36 million) and
increased throughput and enhanced services related to our core gas gathering
operations ($11 million). The increase in operating margin was partially offset
by higher operation and maintenance expenses of $35 million primarily due to
compliance with pipeline integrity regulations ($4 million) and costs relating
to environmental matters ($9 million). Project work expenses included in
operation and maintenance expense increased ($11 million) resulting in a
corresponding increase in revenues billed for these services ($15 million).
2003 Compared to 2002. Our Pipelines and Gathering business segment's
operating income increased $5 million in 2003 compared to 2002. The increase was
primarily a result of increased margins (revenues less fuel costs) due to higher
commodity prices ($8 million), improved margins from new transportation
contracts to power plants ($7 million) and improved margins from enhanced
services in our gas gathering operations ($4 million), partially offset by
higher pension, employee benefit and other miscellaneous expenses ($14 million).
Project work expenses included in operation and maintenance expense decreased
($15 million) resulting in a corresponding decrease in revenues billed for these
services ($14 million).
OTHER OPERATIONS
The following table provides summary data for our Other Operations business
segment for 2002, 2003 and 2004 (in millions):
YEAR ENDED
DECEMBER 31,
------------------
2002 2003 2004
---- ---- ----
Operating Revenues......... $30 $ 28 $ 8
Operating Expenses......... 37 53 40
--- ---- ----
Operating Loss............. $(7) $(25) $(32)
=== ==== ====
2004 Compared to 2003. Our Other Operations business segment's operating
loss in 2004 compared to 2003 increased $7 million primarily due to a reduction
in rental income from RRI in 2004 as compared to 2003, partially offset by
changes in unallocated corporate costs in 2004 as compared to 2003.
2003 Compared to 2002. Our Other Operations business segment's operating
loss in 2003 compared to 2002 increased $18 million primarily due to changes in
unallocated corporate costs in 2002 as compared to 2003.
12
DISCONTINUED OPERATIONS
On September 30, 2002, we distributed all of the shares of RRI common stock
owned by us on a pro-rata basis to our shareholders. The consolidated financial
statements have been prepared to reflect the effect of the RRI Distribution as
described above on the CenterPoint Energy consolidated financial statements. The
consolidated financial statements present the RRI businesses (Wholesale Energy,
European Energy, Retail Energy and related corporate costs) as discontinued
operations in accordance with SFAS No. 144. We also recorded a $4.4 billion
non-cash loss on disposal of these discontinued operations in 2002. This loss
represents the excess of the carrying value of our net investment in RRI over
the market value of RRI common stock at the time of the RRI Distribution.
In February 2003, we sold our interest in Argener, a cogeneration facility
in Argentina, for $23 million. The carrying value of this investment was
approximately $11 million as of December 31, 2002. We recorded an after-tax gain
of $7 million from the sale of Argener in the first quarter of 2003. In April
2003, we sold our final remaining investment in Argentina, a 90 percent interest
in Empresa Distribuidora de Electricidad de Santiago del Estero S.A. We recorded
an after-tax loss of $3 million in the second quarter of 2003 related to our
Latin America operations. We have completed our strategy of exiting all of our
international investments. The consolidated financial statements present these
operations as discontinued operations in accordance with SFAS No. 144.
In November 2003, we sold CenterPoint Energy Management Services, Inc.
(CEMS), a business that provides district cooling services in the Houston
central business district and related complementary energy services to district
cooling customers and others. We recorded an after-tax loss of $1 million from
the sale of CEMS in the fourth quarter of 2003. We recorded an after-tax loss in
discontinued operations of $16 million ($25 million pre-tax) during the second
quarter of 2003 to record the impairment of the CEMS long-lived assets based on
the impending sale and to record one-time termination benefits. The consolidated
financial statements present these operations as discontinued operations in
accordance with SFAS No. 144.
In July 2004, we announced our agreement to sell our majority owned
subsidiary, Texas Genco, to Texas Genco LLC. On December 15, 2004, Texas Genco
completed the sale of its fossil generation assets (coal, lignite and gas-fired
plants) to Texas Genco LLC for $2.813 billion in cash. Following the sale, Texas
Genco distributed $2.231 billion in cash to us. Texas Genco's principal
remaining asset is its ownership interest in a nuclear generating facility. The
final step of the transaction, the merger of Texas Genco with a subsidiary of
Texas Genco LLC in exchange for an additional cash payment to us of $700
million, is expected to close during the first half of 2005, following receipt
of approval from the NRC. The Company recorded an after-tax loss of $214 million
in 2004 related to the sale of Texas Genco. In addition, as a result of this
transaction, any future earnings of Texas Genco will be offset by an increase in
the loss. The consolidated financial statements present these operations as
discontinued operations in accordance with SFAS No. 144.
LIQUIDITY AND CAPITAL RESOURCES
HISTORICAL CASH FLOWS
The net cash provided by/used in operating, investing and financing
activities for 2002, 2003 and 2004 is as follows (in millions):
YEAR ENDED DECEMBER 31,
-----------------------
2002 2003 2004
----- ----- -------
Cash provided by (used in):
Operating activities................. $ 335 $ 894 $ 736
Investing activities................. (772) (661) 1,466
Financing activities................. 723 (450) (2,124)
CASH PROVIDED BY OPERATING ACTIVITIES
Net cash provided by operating activities in 2004 decreased $158 million
compared to 2003 primarily due to increased pension contributions of $453
million and decreased income tax refunds of $74 million, partially offset by the
receipt of a $177 million retail clawback payment from RRI in the fourth quarter
of 2004, decreased accounts receivable attributable to a higher level of
accounts receivable being sold under CERC Corp.'s receivables facility ($81
million) and increased cash provided by Texas Genco's operations ($110 million).
Additionally, other changes in working capital items, primarily increased net
accounts receivable and accounts payable due to higher natural gas prices in
December 2004 as compared to December 2003 ($99 million), contributed to the
overall decrease in cash provided by operating activities. Cash provided by
operating activities will be negatively impacted in 2005 by the payment of taxes
associated with the sale of Texas Genco, the proceeds of which are reflected in
cash provided by investing activities in 2004 as discussed below.
13
Net cash provided by operating activities in 2003 increased $559 million
compared to 2002 primarily due to additional cash provided by Texas Genco's
operations of $365 million and higher income tax refunds received of $170
million, partially offset by higher interest paid related to outstanding
borrowings of $130 million.
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
Net cash provided by investing activities increased $2.1 billion in 2004 as
compared to 2003 primarily due to proceeds of $2.947 billion received from the
sale of Texas Genco's fossil generation assets in December 2004, offset by the
purchase of the minority interest in Texas Genco in December 2004 ($716 million)
and cash collateralization of letters of credit by Texas Genco related to its
anticipated purchase of an additional interest in the South Texas Project in the
first half of 2005 ($191 million).
Net cash used in investing activities decreased $111 million during 2003
compared to 2002 due primarily to decreased capital expenditures in our Electric
Transmission & Distribution business segment primarily resulting from process
improvements that included revised construction and design standards.
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
In 2004, debt payments exceeded net loan proceeds by $2.0 billion. Proceeds
received from the sale of Texas Genco's fossil generation assets in December
2004 and the retail clawback payment from RRI as discussed above were used to
retire a $915 million term loan, pay down $944 million in borrowings under our
revolving credit facility and retire $375 million of trust preferred securities.
As of December 31, 2004, we had borrowings of $239 million under our revolving
credit facility which were used to fund a portion of the $420 million pension
contribution made in December 2004.
In 2003, debt payments exceeded net loan proceeds by $338 million. In 2002,
net loan proceeds exceeded debt payments by $1.1 billion. Additionally, common
stock dividends paid by us in 2003 were $202 million less than in 2002. Since
the beginning of 2003, the terms of our credit facility limited the common stock
dividend to $0.10 per share per quarter. This dividend limitation was eliminated
in the new $1 billion credit facility entered into in March 2005.
FUTURE SOURCES AND USES OF CASH
Our liquidity and capital requirements are affected primarily by our
results of operations, capital expenditures, debt service requirements, tax
payments, working capital needs, various regulatory actions and appeals relating
to such regulatory actions. Our principal cash requirements during 2005,
excluding the requirements of Texas Genco, include the following:
- approximately $655 million of capital expenditures;
- an estimated $77 million in refunds by CenterPoint Houston of excess
mitigation credits (assuming they are terminated as of April 29,
2005);
- dividend payments on CenterPoint Energy common stock and debt service
payments;
- $1.8 billion of maturing long-term debt, including $47 million of
transition bonds; and
- income tax payments, including approximately $430 million in the first
quarter of 2005.
Significant cash inflows in 2005 are expected to include the following:
- cash proceeds of approximately $1.8 from the issuance of transition
bonds; and
- cash proceeds of $700 million from the sale of Texas Genco.
We expect that borrowings under our credit facilities and anticipated cash
flows from operations will be sufficient to meet our cash needs for 2005.
CenterPoint Houston's $1.31 billion term loan requires the proceeds from the
issuance of transition bonds to be used to reduce the term loan unless refused
by the lenders. CenterPoint Houston's $1.31 billion credit facility is expected
to be utilized if the $1.31 billion term loan matures prior to the issuance of
sufficient transition bonds. The credit facility requires that proceeds from
14
the issuance of transition bonds and certain new net indebtedness for borrowed
money issued by CenterPoint Houston in excess of $200 million be used to repay
borrowings under the credit 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 on Our Common Stock" below.
The following table sets forth our capital expenditures for 2004 and
estimates of our capital requirements for 2005 through 2009, excluding
expenditures related to discontinued operations (in millions):
2004 2005 2006 2007 2008 2009
---- ---- ---- ---- ---- ----
Electric Transmission & Distribution ... $235 $282 $295 $295 $271 $272
Natural Gas Distribution ............... 197 218 203 207 209 210
Pipelines and Gathering ................ 73 139 139 74 52 102
Other Operations ....................... 25 16 14 9 10 4
---- ---- ---- ---- ---- ----
Total ............................... $530 $655 $651 $585 $542 $588
==== ==== ==== ==== ==== ====
Capital expenditures related to discontinued operations totaled $74 million
in 2004.
The following table sets forth estimates of our contractual obligations to
make future payments for 2005 through 2009 and thereafter (in millions):
2010 AND
CONTRACTUAL OBLIGATIONS(1) TOTAL 2005 2006 2007 2008 2009 THEREAFTER
- -------------------------- ------- ------ ---- ---- ---- ---- ----------
Long-term debt, including current portion(2) ... $ 9,015 $1,831 $212 $ 66 $572 $80 $6,254
Capital leases ................................. 9 5 3 -- -- -- 1
Operating leases(3) ............................ 110 25 21 18 14 6 26
Non-trading derivative liabilities ............. 33 26 -- 4 2 1 --
Other commodity commitments(4) ................. 1,432 807 401 193 29 1 1
------- ------ ---- ---- ---- --- ------
Total contractual cash obligations .......... $10,599 $2,694 $637 $281 $617 $88 $6,282
======= ====== ==== ==== ==== === ======
- ----------
(1) Contributions to the pension plan are not required in 2005; however, we
expect to contribute approximately $29 million to our postretirement
benefits plan in 2005 to fund a portion of our obligations in accordance
with rate orders or to fund pay-as-you-go costs associated with the plan.
(2) The amounts reflected for long-term debt obligations in the table above do
not include interest and have been updated to reflect the new credit
facilities established on March 7, 2005.
(3) For a discussion of operating leases, please read Note 11(b) to our
consolidated financial statements.
(4) For a discussion of other commodity commitments, please read Note 11(a) to
our consolidated financial statements.
In October 2001, CenterPoint Houston was required by the Texas Utility
Commission to reverse the amount of redirected depreciation and accelerated
depreciation taken for regulatory purposes as allowed under the 1998 transition
plan and the Texas electric restructuring law. CenterPoint Houston recorded a
regulatory liability to reflect the prospective refund of the accelerated
depreciation and in January 2002 CenterPoint Houston began paying excess
mitigation credits, which were to be paid over a seven-year period. The annual
payment of excess mitigation credits is approximately $264 million. In January
2005, CenterPoint Houston filed a writ of mandamus petition with the Texas
Supreme Court asking that court to order the Texas Utility Commission to
terminate immediately the payment of all excess mitigation credits and to ensure
full recovery of all excess mitigation credits. Although we believe we have
meritorious arguments, a writ of mandamus is an extraordinary remedy and no
prediction can be made as to the ultimate outcome or timing of the mandamus
petition. If the Supreme Court denies our mandamus petition, we will continue to
pursue this issue through regular appellate mechanisms. On March 1, 2005, a
non-unanimous settlement was filed in Docket No. 30774, which involves the
adjustment of RRI's Price-to-Beat. Under the terms of that settlement, the
excess mitigation credits being paid by CenterPoint Houston would be terminated
as of April 29, 2005. The Texas Utility Commission approved the settlement on
March 9, 2005.
Off-Balance Sheet Arrangements. Other than operating leases, we have no
off-balance sheet arrangements. However, we do participate in a receivables
factoring arrangement. CERC Corp. has a bankruptcy remote subsidiary, which we
consolidate, which was
15
formed for the sole purpose of buying receivables created by CERC and selling
those receivables to an unrelated third-party. This transaction is accounted for
as a sale of receivables under the provisions of SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities",
and, as a result, the related receivables are excluded from the Consolidated
Balance Sheet. In January 2004, the $100 million receivables facility was
replaced with a $250 million receivables facility terminating in January 2005.
In January 2005, the facility was extended to January 2006 and temporarily
increased, for the period from January 2005 to June 2005, to $375 million. For
additional information regarding this transaction please read Note 2(i) to our
consolidated financial statements.
Credit Facilities. In March 2005, we replaced our $750 million revolving
credit facility with a $1 billion five-year revolving credit facility.
Borrowings may be made under the facility at LIBOR plus 100 basis points based
on current credit ratings. An additional utilization fee of 12.5 basis points
applies to borrowings any time 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. The facility contains covenants,
including a debt to earnings before interest, taxes, depreciation and
amortization (EBITDA) covenant and an EBITDA to interest covenant.
Borrowings under our credit facility are available upon customary terms and
conditions for facilities of this type, including a requirement that we
represent, except as described below, that no "material adverse change" has
occurred at the time of a new borrowing under this facility. A "material adverse
change" is defined as the occurrence of a material adverse change in our ability
to perform our obligations under the facility. The base line for any
determination of a relative material adverse change is our most recently audited
financial statements. At any time after the first time our credit ratings reach
at least BBB by Standard & Poor's Ratings Services, a division of The McGraw
Hill Companies (S&P), and Baa2 by Moody's Investors Service, Inc. (Moody's),
BBB+ by S&P and Baa3 by Moody's, or BBB-- by S&P and Baa1 by Moody's, or if the
drawing is to retire maturing commercial paper, we are not required to represent
as a condition to such drawing that no material adverse change has occurred or
that no litigation expected to have a material adverse effect has occurred.
Also in March 2005, CenterPoint Houston established a $200 million
five-year revolving credit facility. Borrowings may be made under the facility
at LIBOR plus 75 basis points based on CenterPoint Houston's current credit
rating. An additional utilization fee of 12.5 basis points applies to borrowings
any time 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.
CenterPoint Houston also established a $1.31 billion credit facility in
March 2005. This facility is available to be utilized only to refinance
CenterPoint Houston'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. Net proceeds from the issuance of transition
bonds and certain new net indebtedness for borrowed money issued by CenterPoint
Houston in excess of $200 million must be used to repay borrowings under the new
facility. Based on CenterPoint Houston's current credit ratings, borrowings
under the facility can 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
CenterPoint Houston's general mortgage bonds in the same principal amount and
bearing the same interest rate as such drawings.
CenterPoint Houston's $200 million and $1.31 billion credit facilities each
contain covenants, including a debt to total capitalization covenant of 68% and
an EBITDA to interest covenant. Borrowings under CenterPoint Houston's $200
million credit facility and its $1.31 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.
In February 2005, Genco LP also established a $75 million term loan
facility under which borrowings may be made for working capital purposes at
LIBOR plus 50 basis points. Two drawings aggregating $75 million may be made
under the facility which matures on the earlier of August 2005 or the closing of
the final step of the Texas Genco sale. An initial draw of $59 million was made
in February 2005. This facility is secured by a lien on Texas Genco's equity and
the partnership interests in its subsidiaries and cash collateral accounts set
up in connection with the sale of Texas Genco's coal, lignite and gas-fired
generation assets.
16
As of March 11, 2005, we had the following credit facilities (in millions):
AMOUNT UTILIZED AT
DATE EXECUTED COMPANY SIZE OF FACILITY MARCH 11, 2005 TERMINATION DATE
------------- ------- ---------------- ------------------ ----------------
March 23, 2004 CERC Corp. $ 250 $ -- March 23, 2007
March 7, 2005 CenterPoint Energy 1,000 235 March 7, 2010
March 7, 2005 CenterPoint Houston 200 30 March 7, 2010
March 7, 2005 CenterPoint Houston 1,310 -- (1)
February 3, 2005 Texas Genco 75 59 (2)
- ----------
(1) Revolver until November 2005 with two-year term-out of borrowed moneys.
(2) Earlier of August 2005 or the closing of the final step of the Texas Genco
sale.
Securities Registered with the SEC. At December 31, 2004, CenterPoint
Energy had a shelf registration statement covering senior debt securities,
preferred stock and common stock aggregating $1 billion and CERC Corp. had a
shelf registration statement covering $50 million principal amount of debt
securities.
Temporary Investments. On December 31, 2004, we had temporary external
investments of $144 million, of which $22 million were investments of Texas
Genco and are included in current assets of discontinued operations in the
Consolidated Balance Sheets.
Money Pools. We have two "money pools" through which our participating
subsidiaries 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. Following Texas Genco's certification by the FERC as an "exempt
wholesale generator" under the 1935 Act in October 2003, it could no longer
participate with our regulated subsidiaries in the same money pool. In October
2003, we established our second money pool in which Texas Genco and its
subsidiaries are currently the sole participants.
The net funding requirements of the money pool in which our regulated
subsidiaries participate are expected to be met with borrowings under
CenterPoint Energy's revolving credit facility.
Except in an emergency situation (in which case we could provide funding
pursuant to applicable SEC rules), we would be required to obtain approval from
the SEC to issue and sell securities for purposes of funding Texas Genco's
operations via the money pool established in October 2003. We do not currently
expect to fund the operations of Texas Genco via the money pool. A $75 million
credit facility, established in February 2005 at a subsidiary of Texas Genco, is
expected to be used to fund Texas Genco's operations.
The terms of both money pools 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 and those of
our subsidiaries on June 30, 2003 (June 2003 Financing Order). This order
expires in June 2005; however, we will seek appropriate approval for the money
pool prior to that date.
Impact on Liquidity of a Downgrade in Credit Ratings. As of March 1, 2005,
Moody's, S&P, and Fitch, Inc. (Fitch) had assigned the following credit ratings
to senior debt of CenterPoint Energy and certain subsidiaries:
MOODY'S S&P FITCH
------------------- ------------------- -------------------
COMPANY/INSTRUMENT RATING OUTLOOK(1) RATING OUTLOOK(2) RATING OUTLOOK(3)
- ------------------ ------ ---------- ------ ---------- ------ ----------
CenterPoint Energy Senior Unsecured Debt......................... Ba2 Negative BBB-- Negative BBB-- Stable
CenterPoint Houston Senior Secured Debt (First Mortgage Bonds)... Baa2 Negative BBB Negative BBB+ Stable
CERC Corp. Senior Debt........................................... Ba1 Stable BBB Negative BBB Stable
- ----------
(1) A "negative" outlook from Moody's reflects concerns over the next 12 to 18
months which will either lead to a review for a potential downgrade or a
return to a stable outlook. 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.
17
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 $1
billion credit facility, CenterPoint Houston's $200 million credit facility and
its $1.31 billion credit facility and CERC's $250 million revolving credit
facility. A decline in credit ratings would also increase the interest rate on
long-term debt to be issued in the capital markets and would negatively impact
our ability to complete capital market transactions. If we were unable to
maintain an investment-grade rating from at least one rating agency, as a
registered public utility holding company we would be required to obtain further
approval from the SEC for any additional capital markets transactions as more
fully described in "-- Certain Contractual and Regulatory Limits on Ability to
Issue Securities and Pay Dividends on Our Common Stock" below. Additionally, a
decline in credit ratings could increase cash collateral requirements and reduce
margins of our Natural Gas Distribution business segment.
As described above under "-- Credit Facilities," our revolving credit
facility contains a "material adverse change" clause that could impact our
ability to make new borrowings under this facility. CERC Corp.'s credit facility
also contains a "material adverse change" clause which relates to CERC Corp.'s
ability to perform its obligations under the credit agreement. Texas Genco's
term loan facility contains a "material adverse change" clause that could impact
the second borrowing under the facility. The clause relates to the business,
condition (financial or otherwise), operations, performance or properties of
Texas Genco. Borrowings under CenterPoint Houston's $200 million credit facility
and its $1.3 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.
In September 1999, we issued 2.0% Zero-Premium Exchangeable Subordinated
Notes due 2029 (ZENS) having an original principal amount of $1.0 billion. Each
ZENS note is exchangeable at the holder's option at any time for an amount of
cash equal to 95% of the market value of the reference shares of Time Warner
Inc. (TW Common) attributable to each ZENS note. If our creditworthiness were to
drop such that ZENS note holders thought our liquidity was adversely affected or
the market for the ZENS notes were to become illiquid, some ZENS noteholders
might decide to exchange their ZENS notes for cash. Funds for the payment of
cash upon exchange could be obtained from the sale of the shares of TW Common
that we own or from other sources. We own shares of TW Common equal to 100% of
the reference shares used to calculate our obligation to the holders of the ZENS
notes. ZENS note exchanges result in a cash outflow because deferred tax
liabilities related to the ZENS notes and TW Common shares become current tax
obligations when ZENS notes are exchanged and TW Common shares are sold.
CenterPoint Energy Gas Services, Inc. (CEGS), a wholly owned subsidiary of
CERC Corp., provides comprehensive natural gas sales and services to industrial
and commercial customers that are primarily located within or near the
territories served by our pipelines and natural gas distribution subsidiaries.
In order to hedge its exposure to natural gas prices, CEGS has agreements with
provisions standard for the industry that establish credit thresholds and
require a party to provide additional collateral on two business days' notice
when that party's rating or the rating of a credit support provider for that
party (CERC Corp. in this case) falls below those levels. As of December 31,
2004, the senior unsecured debt of CERC Corp. was rated BBB by S&P and Ba1 by
Moody's. We estimate that as of December 31, 2004, unsecured credit limits
extended to CEGS by counterparties could aggregate $100 million; however,
utilized credit capacity is significantly lower.
Cross Defaults. Under our revolving credit facility, a payment default on,
or a non-payment default that permits acceleration of, any indebtedness
exceeding $50 million by us or any of our significant subsidiaries will cause a
default. Pursuant to the indenture governing our senior notes, a payment default
by us, CERC Corp. or CenterPoint Houston 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 February
28, 2005, we 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 subsidiaries' 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:
- cash collateral requirements that could exist in connection with
certain contracts, including gas purchases, gas price hedging and gas
storage activities of our Natural Gas Distribution business segment,
particularly given gas price levels and volatility;
18
- acceleration of payment dates on certain gas supply contracts under
certain circumstances, as a result of increased gas prices and
concentration of suppliers;
- increased costs related to the acquisition of gas for storage;
- increases in interest expense in connection with debt refinancings;
- various regulatory actions;
- the ability of RRI and its subsidiaries to satisfy their obligations
as the principal customers of CenterPoint Houston and in respect of
RRI's indemnity obligations to us and our subsidiaries; and
- various of the risks identified under "Risk Factors" in Item 1 of the
CenterPoint Energy Form 10-K.
Certain Contractual and Regulatory Limits on Ability to Issue Securities
and Pay Dividends on Our Common Stock. Limitations imposed on us as a registered
public utility holding company under the 1935 Act affect our ability to issue
securities, pay dividends on our common stock or take other actions that affect
our capitalization.
The secured term loan and each of the credit facilities of CenterPoint
Houston limits CenterPoint Houston's debt, excluding transition bonds, as a
percentage of its total capitalization to 68%. CERC Corp.'s bank facility and
its receivables facility limit CERC's debt as a percentage of its total
capitalization to 60% and contain an EBITDA to interest covenant. Our $1 billion
credit facility contains a debt to EBITDA covenant and an EBITDA to interest
covenant. CenterPoint Houston's $1.31 billion and $200 million credit facilities
also contain EBITDA to interest covenants.
We are 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 activities and those of our subsidiaries other than Texas Genco. The 1935
Act, among other things, limits our ability and the ability of our regulated
subsidiaries to issue debt and equity securities without prior authorization,
restricts the source of dividend payments to current and retained earnings
without prior authorization, regulates sales and acquisitions of certain assets
and businesses and governs affiliated service, sales and construction contracts.
The June 2003 Financing Order is effective until June 30, 2005.
Additionally, we have received several subsequent orders which provide
additional financing authority. These orders establish limits on the amount of
external debt and equity securities that can be issued by us and our regulated
subsidiaries without additional authorization but generally permit us to
refinance our existing obligations and those of our regulated subsidiaries. Each
of us and our subsidiaries is in compliance with the authorized limits.
Discussed below are the incremental amounts of debt and equity that we are
authorized to issue after giving effect to our capital markets transactions in
2003 and 2004. The orders also permit utilization of undrawn credit facilities
at CenterPoint Energy and CERC. As of February 28, 2005:
- CenterPoint Energy is authorized to issue an additional aggregate $1.7
billion of debt securities and $875 million of preferred stock and
preferred securities;
- CenterPoint Houston is authorized to issue an additional aggregate
$273 million of debt and an aggregate $250 million of preferred stock
and preferred securities; and
- CERC is authorized to issue an additional $2 million of debt and an
additional aggregate $250 million of preferred stock and preferred
securities.
The SEC has reserved jurisdiction over, and must take further action to
permit, the issuance of $478 million of additional debt at CenterPoint Energy,
$430 million of additional debt at CERC and $250 million of additional debt at
CenterPoint Houston.
The orders require that if we or any of our regulated subsidiaries issue
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.
19
The 1935 Act limits the payment of dividends to payment from current and
retained earnings unless specific authorization is obtained to pay dividends
from other sources. The SEC has reserved jurisdiction over payment of $500
million of dividends from CenterPoint Energy's unearned surplus or capital.
Further authorization would be required to make those payments. As of December
31, 2004, we had an accumulated deficit on our Consolidated Balance Sheets. We
recorded an after-tax loss of approximately $214 million in 2004 related to the
sale of our remaining interest in Texas Genco. In addition, we recorded an
after-tax extraordinary loss of $977 million in 2004 related to the 2004 True-Up
Proceeding. Portions of these losses recorded in periods prior to the fourth
quarter of 2004 reduced our earnings below the level required for us to continue
paying our current quarterly dividends out of current earnings as required under
our SEC financing order. However, in May 2004, we received an order from the SEC
under the 1935 Act authorizing us to continue to pay our current quarterly
dividend in the second and third quarters of 2004 out of capital or unearned
surplus in the event we had such losses. We declared a dividend in the fourth
quarter of 2004 out of current earnings. If our earnings for subsequent quarters
are insufficient to pay dividends from current earnings, additional authority
would be required from the SEC for payment of the quarterly dividend from
capital or unearned surplus, but there can be no assurance that the SEC would
authorize such payments. These losses would delay the timing of our achievement
of a ratio of common equity to total capitalization of 30%, as generally
required by the SEC under the 1935 Act. Accordingly, we may issue equity and
take other actions to achieve a future equity capitalization of 30%. The June
2003 Financing Order also requires that CenterPoint Houston and CERC maintain a
ratio of common equity to total capitalization of 30%.
Other Factors Affecting the Upstreaming of Cash from Subsidiaries.
CenterPoint Houston's term loan, subject to certain exceptions, limits the
application of proceeds from capital markets transactions over $200 million by
CenterPoint Houston to repayment of debt existing in November 2002.
CenterPoint Houston will distribute recovery of the true-up components not
used to repay CenterPoint Houston's indebtedness to us through the payment of
dividends. CenterPoint Houston requires SEC action to approve any dividends in
excess of its current and retained earnings. To maintain CenterPoint Houston's
capital structure at the appropriate levels, we may reinvest funds in
CenterPoint Houston in the form of equity contributions or intercompany loans.
Under the orders described under "-- Certain Contractual and Regulatory Limits
on Ability to Issue Securities and Pay Dividends on Our Common Stock,"
CenterPoint Houston's member's equity as a percentage of total capitalization
generally must be at least 30%, although the SEC has permitted the percentage to
be below this level for other companies taking into account non-recourse
securitization debt as a component of capitalization.
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 our
consolidated financial statements. We believe the following accounting policies
involve the application of critical accounting estimates. Accordingly, these
accounting estimates have been reviewed and discussed with the audit committee
of the board of directors.
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. Our Electric Transmission & Distribution business continues 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
20
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 with respect to our Electric Transmission & Distribution business
segment relate to $1.9 billion of recoverable electric generation-related
regulatory assets as of December 31, 2004. These costs are recoverable under the
provisions of the Texas electric restructuring law. Based on our analysis of the
Texas Utility Commission's final order in the 2004 True-Up Proceeding, 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 is reflected as an extraordinary loss in the Statements
of Consolidated Operations.
IMPAIRMENT OF LONG-LIVED ASSETS AND INTANGIBLES
We review the carrying value of our long-lived assets, including goodwill
and identifiable intangibles, whenever events or changes in circumstances
indicate that such carrying values may not be recoverable, and annually for
goodwill as required by SFAS No. 142, "Goodwill and Other Intangible Assets." No
impairment of goodwill was indicated based on our analysis as of January 1,
2004. Unforeseen events and changes in circumstances and market conditions and
material differences in the value of long-lived assets and intangibles due to
changes in estimates of future cash flows, regulatory matters and operating
costs could negatively affect the fair value of our assets and result in an
impairment charge.
Fair value is the amount at which the asset could be bought or sold in a
current transaction between willing parties and may be estimated using a number
of techniques, including quoted market prices or valuations by third parties,
present value techniques based on estimates of cash flows, or multiples of
earnings or revenue performance measures. The fair value of the asset could be
different using different estimates and assumptions in these valuation
techniques.
We recorded an after-tax loss of approximately $214 million in 2004 related
to the sale of our remaining 81% interest in Texas Genco.
UNBILLED ENERGY REVENUES
Revenues related to the sale and/or delivery of electricity or natural gas
(energy) are generally recorded when energy is delivered to customers. However,
the determination of energy sales to individual customers is based on the
reading of their meters, which is performed on a systematic basis throughout the
month. At the end of each month, amounts of energy 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. Unbilled natural gas sales are
estimated based on estimated purchased gas volumes, estimated lost and
unaccounted for gas and tariffed rates in effect. As additional information
becomes available, or actual amounts are determinable, the recorded estimates
are revised. Consequently, operating results can be affected by revisions to
prior accounting estimates.
PENSION AND OTHER RETIREMENT PLANS
We sponsor pension and other retirement plans in various forms covering all
employees who meet eligibility requirements. We use several statistical and
other factors which attempt to anticipate future events in calculating the
expense and liability related to our plans. These factors include assumptions
about the discount rate, expected return on plan assets and rate of future
compensation increases as estimated by management, within certain guidelines. In
addition, our actuarial consultants use subjective factors such as withdrawal
and mortality rates to estimate these factors. The actuarial assumptions used
may differ materially from actual results due to changing market and economic
conditions, higher or lower withdrawal rates or longer or shorter life spans of
participants. These differences may result in a significant impact to the amount
of pension expense recorded. Please read "-- Other Significant Matters --
Pension Plans" for further discussion.
21
NEW ACCOUNTING PRONOUNCEMENTS
See Note 2(n) to the consolidated financial statements, incorporated herein
by reference, for a discussion of new accounting pronouncements that affect us.
OTHER SIGNIFICANT MATTERS
Pension Plan. As discussed in Note 9(b) to our consolidated financial
statements, we maintain a non-contributory pension plan covering substantially
all employees. Employer contributions are based on actuarial computations that
establish the minimum contribution required under the Employee Retirement Income
Security Act of 1974 (ERISA) and the maximum deductible contribution for income
tax purposes. At December 31, 2004, the projected benefit obligation exceeded
the market value of plan assets by $53 million; however, the market value of the
plan assets exceeded the accumulated benefit obligation by $22 million. Changes
in interest rates and the market values of the securities held by the plan
during 2005 could materially, positively or negatively, change our funded status
and affect the level of pension expense and required contributions in 2006 and
beyond.
In connection with the sale of our 81% interest in Texas Genco, a separate
pension plan was established for Texas Genco on September 1, 2004 and we
transferred a net pension liability of approximately $68 million to Texas Genco.
In October 2004, Texas Genco received an allocation of assets from our pension
plan pursuant to rules and regulations under ERISA.
During 2003 and 2004, we have not been required to make contributions to
our pension plan. We have made voluntary contributions of $23 million and $476
million in 2003 and 2004, respectively.
Under the terms of our pension plan, we reserve the right to change, modify
or terminate the plan. Our funding policy is to review amounts annually and
contribute an amount at least equal to the minimum contribution required under
ERISA and the Internal Revenue Code.
In accordance with SFAS No. 87, "Employers' Accounting for Pensions,"
changes in pension obligations and assets may not be immediately recognized as
pension costs in the income statement, but generally are recognized in future
years over the remaining average service period of plan participants. As such,
significant portions of pension costs recorded in any period may not reflect the
actual level of benefit payments provided to plan participants.
Pension costs were $35 million, $90 million and $80 million for 2002, 2003
and 2004, respectively. For 2002, a pension benefit of $4 million was recorded
related to RRI's participants. Pension benefit for RRI's participants is
reflected in the Statement of Consolidated Operations as discontinued
operations. In addition, included in the costs for 2002, 2003 and 2004 are $15
million, $17 million and $11 million, respectively, of expense related to Texas
Genco participants. Pension expense for Texas Genco participants is reflected in
the Statement of Consolidated Operations as discontinued operations.
Additionally, we maintain a non-qualified benefit restoration plan which
allows participants to retain the benefits to which they would have been
entitled under our non-contributory pension plan except for the federally
mandated limits on qualified plan benefits or on the level of compensation on
which qualified plan benefits may be calculated. The expense associated with
this non-qualified plan was $9 million, $8 million and $6 million in 2002, 2003
and 2004, respectively. Included in the cost for 2002 is $3 million of expense
related to RRI's participants, which is reflected in discontinued operations in
the Statements of Consolidated Operations.
The calculation of pension expense and related liabilities requires the use
of assumptions. Changes in these assumptions can result in different expense and
liability amounts, and future actual experience can differ from the assumptions.
Two of the most critical assumptions are the expected long-term rate of return
on plan assets and the assumed discount rate.
As of December 31, 2004, the expected long-term rate of return on plan
assets was 8.5%, a reduction from the 9.0% rate assumed as of December 31, 2003.
We believe that our actual asset allocation, on average, will approximate the
targeted allocation and the estimated return on net assets. We regularly review
our actual asset allocation and periodically rebalance plan assets as
appropriate.
As of December 31, 2004, the projected benefit obligation was calculated
assuming a discount rate of 5.75%, which is a 0.5% decline from the 6.25%
discount rate assumed in 2003. The discount rate was determined by reviewing
yields on high-quality bonds that receive one of the two highest ratings given
by a recognized rating agency and the expected duration of pension obligations
specific to the characteristics of our plan.
22
Pension expense for 2005, including the benefit restoration plan, is
estimated to be $37 million based on an expected return on plan assets of 8.5%
and a discount rate of 5.75% as of December 31, 2004. If the expected return
assumption were lowered by 0.5% (from 8.5% to 8.0%), 2005 pension expense would
increase by approximately $8 million.
Due to significant funding that occurred during 2004, pension plan assets
(excluding the unfunded benefit restoration plan) exceed the accumulated benefit
obligation, which enabled us to reverse a charge to comprehensive income of $350
million, net of tax. However, if the discount rate were lowered by 0.5% (from
5.75% to 5.25%), the assumption change would increase our projected benefit
obligation, accumulated benefit obligation and 2005 pension expense by
approximately $106 million, $100 million and $7 million, respectively. In
addition, the assumption change would have significant impacts on our
Consolidated Balance Sheet by changing the pension asset recorded as of December
31, 2004 of $610 million to a pension liability of $78 million, offset by a
charge to comprehensive income in 2004 of $447 million, net of tax.
For the benefit restoration plan, if the discount rate were lowered by 0.5%
(from 5.75% to 5.25%), the assumption change would increase our projected
benefit obligation, accumulated benefit obligation and 2005 pension expense by
approximately $4 million, $3 million, and less than $1 million, respectively. In
addition, the assumption change would result in a charge to comprehensive income
of approximately $2 million.
Future changes in plan asset returns, assumed discount rates and various
other factors related to the pension plan will impact our future pension expense
and liabilities. We cannot predict with certainty what these factors will be.
In October 2004, the American Jobs Creation Act (AJCA) was signed into law.
The AJCA made significant changes in the taxation of nonqualified deferred
compensation with new Code Section 409A. Non-compliance with Section 409A can
result in increased federal income taxes on nonqualified deferred compensation
for employees. We are currently analyzing the impact of Section 409A and related
guidance issued by the Treasury Department and the Internal Revenue Service, on
our non-qualified plans and agreements that provide for deferred compensation.
Such plans or agreements may require amendment or modification to comply with
the new law.
Quasi-Reorganization. On December 30, 2004, our Board of Directors adopted
a plan for an accounting reorganization of the company, to be effective as of
January 1, 2005. At the same time, the Manager of CenterPoint Houston adopted a
similar plan for CenterPoint Houston. These plans were adopted in order to
eliminate the accumulated deficit that exists at both companies.
The plan we adopted required: (1) a report to be presented to and reviewed
by our Board of Directors 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 Board of Directors on or before February 28, 2005 that the accounting
reorganization is inconsistent with our regulatory obligations. We are
continuing to work to complete the valuation analysis and the effects on our
financial statements of the accounting reorganization, and on February 23, 2005,
our Board of Directors extended until May 10, 2005 the time for making the
determination described in (3) of the preceding sentence.
An accounting reorganization, sometimes called a "quasi-reorganization,"
allows a company to extinguish an accumulated deficit. It involves restating a
company's assets and its liabilities to their fair values. The accumulated
deficit is then brought to zero through a reduction in the other capital
accounts, giving the company a "fresh start" with a zero balance in retained
earnings. As of December 31, 2004, we had an accumulated deficit of
approximately $1.7 billion. That deficit stemmed from the accounting effects of
(1) the distribution of our ownership interest in RRI to our shareholders in
September 2002, (2) the extraordinary loss recorded in connection with the Texas
Utility Commission's order related to the 2004 True-Up Proceeding and (3) the
loss on discontinued operations that was recorded in connection with our sale of
Texas Genco. In addition to eliminating the accumulated deficit and restating
assets and liabilities to fair value, if a quasi-reorganization were
implemented, we and CenterPoint Houston would be required to implement any
accounting standards that have been issued but not yet adopted.
We and CenterPoint Houston are seeking to eliminate the accumulated deficit
because restrictions contained in the 1935 Act require registered public utility
holding companies and their subsidiaries, like us and CenterPoint Houston, to
obtain express authorization from the SEC to pay dividends when current or
retained earnings are insufficient to do so. Eliminating the accumulated deficit
will permit current earnings not utilized to pay dividends to more quickly build
up a retained earnings balance. Under 1935 Act regulations, we could pay
dividends out of this balance during periods when current earnings may not be
adequate to do so.
23
In addition, we have undertaken an obligation under the 1935 Act to achieve
a minimum ratio of common equity to total capitalization of thirty percent,
which, depending on the results of the restatement of assets and liabilities
under the accounting reorganization, could be affected by, and will be taken
into consideration by the Board of Directors in evaluating the effects of, the
accounting reorganization. We will seek such authority as may be required under
the 1935 Act in connection with the quasi-reorganization.
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
CenterPoint Energy, Inc.
Houston, Texas
We have audited the accompanying consolidated balance sheets of CenterPoint
Energy, Inc. and subsidiaries (the "Company") as of December 31, 2003 and 2004,
and the related consolidated statements of operations, comprehensive income,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 2004. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of CenterPoint Energy, Inc. and
subsidiaries at December 31, 2003 and 2004, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2004 in conformity with accounting principles generally accepted in the
United States of America.
As discussed in Note 3 to the consolidated financial statements and
pursuant to a plan to sell this subsidiary, the Company has presented its
electric generating operations as discontinued operations in accordance with
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets."
As discussed in Note 17 to the consolidated financial statements, the
accompanying consolidated financial statements have been restated.
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of the
Company's internal control over financial reporting as of December 31, 2004,
based on the criteria established in Internal Control -- Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated March 15, 2005 (January 10, 2006 as to the effect of the
material weakness described in Management's Annual Report on Internal Control
Over Financial Reporting (as revised)) expressed an unqualified opinion on
management's assessment of the effectiveness of the Company's internal control
over financial reporting and an adverse opinion on the effectiveness of the
Company's internal control over financial reporting because of a material
weakness.
DELOITTE & TOUCHE LLP
Houston, Texas
March 15, 2005 (January 10, 2006 as to the effects of the restatement discussed
in Note 17 to the consolidated financial statements)
25
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
CenterPoint Energy, Inc.
Houston, Texas
We have audited management's assessment, included in the accompanying
Management's Annual Report on Internal Control Over Financial Reporting (as
revised), that CenterPoint Energy, Inc. and subsidiaries did not maintain
effective internal control over financial reporting as of December 31, 2004,
because of the effect of the material weakness identified in management's
assessment based on the criteria established in Internal Control -- Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. The Company's management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express an opinion on management's assessment and an opinion on the
effectiveness of the Company's internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.
A company's internal control over financial reporting is a process designed
by, or under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our report dated March 15, 2005, we expressed an unqualified opinion on
management's assessment that the Company maintained effective internal control
over financial reporting and an unqualified opinion on the effectiveness of
internal control over financial reporting. As described in the following
paragraph, the Company subsequently identified a material misstatement in its
2004 annual consolidated financial statements which caused such annual financial
statements to be restated. The misstatement was determined to be the result of a
material weakness as further discussed in the following paragraph. Accordingly,
management subsequently revised its assessment about the effectiveness of the
Company's internal control over financial reporting and our present opinion on
the effectiveness of the Company's internal control over financial reporting as
of December 31, 2004 expressed herein is different from that expressed in our
previous report.
A material weakness is a significant deficiency, or combination of
significant deficiencies, that results in more than a remote likelihood that a
material misstatement of the annual or interim financial statements will not be
prevented or detected. The following material weakness has been identified and
included in management's revised assessment: There were ineffective controls
over the process of eliminating certain interdivision purchases and sales of
natural gas within the Company's Natural Gas Distribution segment in the
consolidation process. This weakness resulted in a material error and the
restatement of the Company's consolidated balance sheet, as of December 31, 2004
and the statements of consolidated operations and of consolidated cash flows for
the year ended December 31, 2004. This material weakness was considered in
determining the nature, timing, and extent of audit tests applied in our
26
audit of the consolidated financial statements (as restated) and financial
statement schedules as of and for the year ended December 31, 2004 of the
Company and this report does not affect our reports on such restated financial
statements or the financial statement schedules.
In our opinion, management's revised assessment that the Company did not
maintain effective internal control over financial reporting as of December 31,
2004, is fairly stated, in all material respects, based on the criteria
established in Internal Control -- Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Also in our opinion,
because of the effect of the material weakness described above on the
achievement of the objectives of control criteria, the Company has not
maintained effective internal control over financial reporting as of December
31, 2004, based on the criteria established in Internal Control -- Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated financial
statements (as restated) and financial statement schedules as of and for the
year ended December 31, 2004 of the Company and our reports dated March 15, 2005
(January 10, 2006 as to the effects of the restatement discussed in Note 17 to
the consolidated financial statements) expressed an unqualified opinion on those
financial statements and financial statement schedules and included explanatory
paragraphs regarding i) the Company's presentation of its electric generating
operations as discontinued operations and ii) the restatement discussed in Note
17 to the consolidated financial statements.
DELOITTE & TOUCHE LLP
Houston, Texas
March 15, 2005 (January 10, 2006 as to the effect of the material weakness
described in Management's Annual Report on Internal Control Over Financial
Reporting, as revised)
27
MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING (AS REVISED)
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting. Internal control over financial
reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the
Securities Exchange Act of 1934 as a process designed by, or under the
supervision of, the company's principal executive and principal financial
officers and effected by the company's board of directors, management and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles and
includes those policies and procedures that:
- Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of the
assets of the company;
- Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and
- Provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the company's
assets that could have a material effect on the financial statements.
Management has designed its internal control over financial reporting to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America. Management's
assessment included review and testing of both the design effectiveness and
operating effectiveness of controls over all relevant assertions related to all
significant accounts and disclosures in the financial statements.
All internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation. Projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In the Company's 2004 annual report on Form 10-K, filed on March 16, 2005,
management of the Company included "Management's Annual Report on Internal
Control Over Financial Reporting", which expressed a conclusion by management
that as of December 31, 2004, the Company's internal control over financial
reporting was effective. As a result of the restatement of its financial
statements, management has concluded that a material weakness in internal
control over financial reporting existed as of December 31, 2004 and,
accordingly, has revised its assessment of the effectiveness of the Company's
internal control over financial reporting as of December 31, 2004.
A material weakness is a significant deficiency, or a combination of
significant deficiencies, that results in more than a remote likelihood that a
material misstatement of the annual or interim financial statements will not be
prevented or detected. Due to the circumstances described in Note 17 of the
Notes to the Company's Consolidated Financial Statements, management has
concluded that a material weakness in internal control over financial reporting
existed as of December 31, 2004 as defined under standards established by the
Public Company Accounting Oversight Board. Specifically, there were ineffective
controls over the process of eliminating certain interdivision purchases and
sales of natural gas within the Company's Natural Gas Distribution segment in
the consolidation process. This weakness resulted in a material error and the
restatement of the Company's Consolidated Balance Sheet as of December 31, 2004
and the Statements of Consolidated Operations and of Consolidated Cash Flows for
the year ended December 31, 2004.
In making this revised assessment, management, including our principal
executive officer and principal financial officer, used the criteria set forth
in Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on those criteria and
management's revised assessment, management concludes that, solely as a result
of the material weakness described above, the Company did not maintain effective
internal control over financial reporting as of December 31, 2004.
Deloitte & Touche LLP, the Company's independent registered public
accounting firm, has issued an attestation report on our revised assessment of
the effectiveness of our internal control over financial reporting as of
December 31, 2004 and such report is included herein.
28
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
YEAR ENDED DECEMBER 31,
-----------------------------------------
2004
(AS RESTATED -
2002 2003 SEE NOTE 17)
----------- ---------- --------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
REVENUES ..................................................... $ 6,437,505 $7,789,681 $7,999,461
----------- ---------- ----------
EXPENSES:
Natural gas ............................................... 2,953,871 4,297,914 5,013,484
Operation and maintenance ................................. 1,242,472 1,334,271 1,276,892
Depreciation and amortization ............................. 457,608 465,571 489,642
Taxes other than income taxes ............................. 343,811 336,512 355,648
----------- ---------- ----------
Total .................................................. 4,997,762 6,434,268 7,135,666
----------- ---------- ----------
OPERATING INCOME ............................................. 1,439,743 1,355,413 863,795
----------- ---------- ----------
OTHER INCOME (EXPENSE):
Gain (loss) on Time Warner investment ..................... (499,704) 105,820 31,592
Gain (loss) on indexed debt securities .................... 480,027 (96,473) (20,232)
Interest and other finance charges ........................ (711,812) (741,087) (777,300)
Return on true-up balance ................................. -- -- 226,324
Other, net ................................................ 45,955 (9,838) 19,842
----------- ---------- ----------
Total .................................................. (685,534) (741,578) (519,774)
----------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND
EXTRAORDINARY LOSS ........................................ 754,209 613,835 344,021
Income Tax Expense ........................................... (272,246) (205,064) (138,306)
----------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY LOSS .. 481,963 408,771 205,715
DISCONTINUED OPERATIONS:
Income from RRI, net of tax ............................... 99,465 -- --
Income (loss) from Other Operations, net of tax ........... 246 (2,674) --
Income (loss) from Texas Genco, net of tax ................ (113,136) 138,658 294,027
Minority interest on income from RRI ...................... (17,308) -- --
Minority interest on income from Texas Genco .............. -- (47,646) (61,394)
Loss on disposal of RRI ................................... (4,371,464) -- --
Loss on disposal of Other Operations, net of tax .......... -- (13,442) --
Loss on disposal of Texas Genco, net of tax ............... -- -- (365,716)
----------- ---------- ----------
Total .................................................. (4,402,197) 74,896 (133,083)
----------- ---------- ----------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS ...................... (3,920,234) 483,667 72,632
Extraordinary Loss, net of tax ............................... -- -- (977,336)
----------- ---------- ----------
NET INCOME (LOSS) ............................................ $(3,920,234) $ 483,667 $ (904,704)
=========== ========== ==========
BASIC EARNINGS PER SHARE:
Income from Continuing Operations ......................... $ 1.62 $ 1.35 $ 0.67
Discontinued Operations, net of tax ....................... (14.78) 0.24 (0.43)
Extraordinary Loss, net of tax ............................ -- -- (3.18)
----------- ---------- ----------
Net Income (Loss) ......................................... $ (13.16) $ 1.59 $ (2.94)
=========== ========== ==========
DILUTED EARNINGS PER SHARE:
Income from Continuing Operations ......................... $ 1.61 $ 1.24 $ 0.61
Discontinued Operations, net of tax ....................... (14.69) 0.22 (0.37)
Extraordinary Loss, net of tax ............................ -- -- (2.72)
----------- ---------- ----------
Net Income (Loss) ......................................... $ (13.08) $ 1.46 $ (2.48)
=========== ========== ==========
See Notes to the Company's Consolidated Financial Statements
29
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31,
----------------------------------
2002 2003 2004
----------- -------- ---------
(IN THOUSANDS OF DOLLARS)
Net income (loss) .................................................. $(3,920,234) $483,667 $(904,704)
----------- -------- ---------
Other comprehensive income (loss), net of tax:
Minimum pension liability adjustment (net of tax of $223,060,
$25,467 and $197,397) ........................................ (414,254) 47,296 366,594
Net deferred gain (loss) from cash flow hedges (net of tax of
$25,192, $15,405 and $30,740) ................................ (69,615) 21,973 59,104
Reclassification of deferred loss (gain) from cash flow hedges
realized in net income (net of tax of $13,539, $3,588 and
$3,478) ...................................................... 39,705 9,015 (7,140)
Reclassification of deferred gain from de-designation of cash
flow hedges to over/under recovery of gas cost (net of tax of
$36,766) ..................................................... -- -- (68,280)
Other comprehensive income (loss) from discontinued operations
(net of tax of $86,787, $366 and $1,924) ..................... 161,176 680 (3,573)
----------- -------- ---------
Other comprehensive income (loss) .................................. (282,988) 78,964 346,705
----------- -------- ---------
Comprehensive income (loss) ........................................ $(4,203,222) $562,631 $(557,999)
=========== ======== =========
See Notes to the Company's Consolidated Financial Statements
30
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
2004
DECEMBER 31, (AS RESTATED -
2003 SEE NOTE 17)
------------ --------------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................ $ 86,922 $ 164,645
Investment in Time Warner common stock ............... 389,302 420,882
Accounts receivable, net ............................. 566,260 674,355
Accrued unbilled revenues ............................ 395,351 576,252
Inventory ............................................ 243,235 253,686
Non-trading derivative assets ........................ 45,897 50,219
Taxes receivable ..................................... 228,746 --
Current assets of discontinued operations ............ 301,765 513,768
Prepaid expense and other current assets ............. 99,153 116,909
----------- -----------
Total current assets .............................. 2,356,631 2,770,716
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, NET ...................... 8,084,924 8,186,393
----------- -----------
OTHER ASSETS:
Goodwill, net ........................................ 1,740,510 1,740,510
Other intangibles, net ............................... 59,111 58,068
Regulatory assets .................................... 4,930,793 3,349,944
Non-trading derivative assets ........................ 11,273 17,682
Non-current assets of discontinued operations ........ 3,942,296 1,051,158
Other ................................................ 335,552 921,678
----------- -----------
Total other assets ................................ 11,019,535 7,139,040
----------- -----------
TOTAL ASSETS ................................... $21,461,090 $18,096,149
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings ................................ $ 63,135 $ --
Current portion of long-term debt .................... 160,792 1,835,988
Indexed debt securities derivative ................... 321,352 341,575
Accounts payable ..................................... 588,883 802,215
Taxes accrued ........................................ 154,916 609,025
Interest accrued ..................................... 164,521 151,365
Non-trading derivative liabilities ................... 8,036 26,323
Regulatory liabilities ............................... 186,239 225,158
Accumulated deferred income taxes, net ............... 280,836 260,958
Current liabilities of discontinued operations ....... 332,125 448,974
Other ................................................ 276,392 419,811
----------- -----------
Total current liabilities ......................... 2,537,227 5,121,392
----------- -----------
OTHER LIABILITIES:
Accumulated deferred income taxes, net ............... 2,231,066 2,415,143
Unamortized investment tax credits ................... 61,197 53,690
Non-trading derivative liabilities ................... 3,330 6,413
Benefit obligations .................................. 818,061 440,110
Regulatory liabilities ............................... 1,358,030 1,081,370
Non-current liabilities of discontinued operations ... 1,277,760 420,393
Other ................................................ 457,255 259,120
----------- -----------
Total other liabilities ........................... 6,206,699 4,676,239
----------- -----------
LONG-TERM DEBT .......................................... 10,777,934 7,193,016
----------- -----------
COMMITMENTS AND CONTINGENCIES (NOTE 11)
MINORITY INTEREST IN DISCONTINUED OPERATIONS ............ 178,673 --
----------- -----------
SHAREHOLDERS' EQUITY .................................... 1,760,557 1,105,502
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ........... $21,461,090 $18,096,149
=========== ===========
See Notes to the Company's Consolidated Financial Statements
31
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
YEAR ENDED DECEMBER 31,
---------------------------------------
(AS RESTATED - SEE NOTE 17)
---------------------------------------
2002 2003 2004
----------- ----------- -----------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................. $(3,920,234) $ 483,667 $ (904,704)
Discontinued operations, net of tax ............................... 4,402,197 (74,896) 133,083
Extraordinary loss, net of tax .................................... -- -- 977,336
----------- ----------- -----------
Income from continuing operations and cumulative
effect of accounting change .................................... 481,963 408,771 205,715
Adjustments to reconcile income from continuing operations to
net cash provided by operating activities:
Depreciation and amortization .................................. 457,608 465,571 489,642
Deferred income taxes .......................................... 346,777 508,749 264,914
Amortization of deferred financing costs ....................... 112,835 140,638 92,454
Investment tax credit .......................................... (5,225) (7,431) (7,507)
Unrealized loss (gain) on Time Warner investment ............... 499,704 (105,820) (31,592)
Unrealized loss (gain) on indexed debt securities .............. (480,027) 96,473 20,232
Changes in other assets and liabilities:
Accounts receivable and unbilled revenues, net .............. (217,965) (109,861) (201,963)
Inventory ................................................... 29,741 (47,587) (10,451)
Taxes receivable ............................................ (67,659) (161,087) 34,888
Accounts payable ............................................ 134,442 77,319 218,312
Fuel cost over (under) recovery/surcharge ................... 250,191 25,420 25,212
Interest and taxes accrued .................................. 72,620 37,381 81,190
Net regulatory assets and liabilities ....................... (1,062,130) (772,604) (519,830)
Clawback payment from RRI ................................... -- -- 176,600
Non-trading derivatives, net ................................ (144,478) 2,913 (40,464)
Pension contribution ........................................ -- (22,700) (476,000)
Other current assets ........................................ (38,130) (37,100) (17,772)
Other current liabilities ................................... (63,813) (23,638) (26,562)
Other assets ................................................ (87,721) 29,048 79,760
Other liabilities ........................................... 200,053 106,869 4,157
Other, net ..................................................... 36,434 38,547 20,047
----------- ----------- -----------
Net cash provided by operating activities of continuing
operations ............................................... 455,220 649,871 380,982
Net cash provided by (used in) operating activities of
discontinued operations .................................. (120,378) 244,538 354,846
----------- ----------- -----------
Net cash provided by operating activities ................... 334,842 894,409 735,828
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures .............................................. (823,792) (658,845) (603,756)
Proceeds from sale of Texas Genco, including cash retained ........ -- -- 2,947,000
Purchase of minority interest of Texas Genco ...................... -- -- (326,000)
Increase in restricted cash for purchase of minority interest of
Texas Genco .................................................... -- -- (390,000)
Funds held for purchase of additional interest in South Texas
Project ........................................................ -- -- (191,200)
Proceeds from sale of Time Warner investment ...................... 43,419 -- --
Other, net ........................................................ 8,864 (2,017) 29,478
----------- ----------- -----------
Net cash provided by (used in) investing activities ......... (771,509) (660,862) 1,465,522
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term borrowings, net ................. 668,386 (284,000) (63,000)
Long-term revolving credit facility, net .......................... -- (2,400,500) (1,205,500)
Proceeds from long-term debt ...................................... 1,320,723 3,796,529 229,050
Payments of long-term debt ........................................ (696,218) (1,210,548) (943,045)
Debt issuance costs ............................................... (196,830) (240,798) (15,228)
Payment of common stock dividends ................................. (324,682) (122,206) (122,881)
Payment of common stock dividends by subsidiary ................... -- (15,234) (15,234)
Proceeds from issuance of common stock, net ....................... 12,994 9,349 12,211
Redemption of indexed debt securities ............................. (45,085) -- --
Other, net ........................................................ (16,525) 17,079 --
----------- ----------- -----------
Net cash provided by (used in) financing activities ......... 722,763 (450,329) (2,123,627)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................. 286,096 (216,782) 77,723
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ....................... 17,608 303,704 86,922
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR ............................. $ 303,704 $ 86,922 $ 164,645
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Payments:
Interest ....................................................... $ 632,987 $ 762,613 $ 758,665
Income taxes (refunds) ......................................... (27,977) (197,915) (123,603)
See Notes to the Company's Consolidated Financial Statements
32
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
2002 2003 2004
--------------------- --------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------- ----------- ------- ----------- ------- -----------
(IN THOUSANDS OF DOLLARS AND SHARES)
PREFERENCE STOCK, NONE OUTSTANDING ........................ -- $ -- -- $ -- -- $ --
CUMULATIVE PREFERRED STOCK, $0.01 PAR VALUE; AUTHORIZED
20,000,000 SHARES, NONE OUTSTANDING .................... -- -- -- -- -- --
COMMON STOCK, $0.01 PAR VALUE; AUTHORIZED 1,000,000,000
SHARES
Balance, beginning of year ............................. 302,944 3,029 305,017 3,050 306,297 3,063
Issuances related to benefit and investment plans ...... 2,073 21 1,280 13 1,748 17
------- ----------- ------- ----------- ------- -----------
Balance, end of year ................................... 305,017 3,050 306,297 3,063 308,045 3,080
------- ----------- ------- ----------- ------- -----------
ADDITIONAL PAID-IN-CAPITAL
Balance, beginning of year ............................. -- 3,894,272 -- 3,046,043 -- 2,868,416
Issuances related to benefit and investment plans ...... -- 11,866 -- (31,364) -- 22,919
Loss on issuance of subsidiaries' stock ................ -- (12,835) -- -- -- --
Distribution of RRI .................................... -- (847,200) -- -- -- --
Distribution of Texas Genco ............................ -- -- -- (146,263) -- --
Other .................................................. -- (60) -- -- -- --
------- ----------- ------- ----------- ------- -----------
Balance, end of year ................................... -- 3,046,043 -- 2,868,416 -- 2,891,335
------- ----------- ------- ----------- ------- -----------
UNEARNED ESOP STOCK
Balance, beginning of year ............................. (7,070) (131,888) (4,916) (78,049) (912) (2,842)
Issuances related to benefit plan ...................... 2,154 53,839 4,004 75,207 912 2,842
------- ----------- ------- ----------- ------- -----------
Balance, end of year ................................... (4,916) (78,049) (912) (2,842) -- --
------- ----------- ------- ----------- ------- -----------
RETAINED EARNINGS (ACCUMULATED DEFICIT)
Balance, beginning of year ............................. 3,176,533 (1,062,083) (700,033)
Net income (loss) ...................................... (3,920,234) 483,667 (904,704)
Common stock dividends -- $1.07 per share in 2002 and
$0.40 per share in 2003 and 2004 .................... (318,382) (121,617) (122,834)
----------- ----------- -----------
Balance, end of year ................................... (1,062,083) (700,033) (1,727,571)
----------- ----------- -----------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance, end of year:
Minimum pension liability adjustment ................... (419,909) (372,613) (6,019)
Net deferred loss from cash flow hedges ................ (66,422) (35,434) (51,750)
Other comprehensive loss from discontinued operations .. (680) -- (3,573)
----------- ----------- -----------
Total accumulated other comprehensive loss,
end of year ......................................... (487,011) (408,047) (61,342)
----------- ----------- -----------
Total Shareholders' Equity .......................... $ 1,421,950 $ 1,760,557 $ 1,105,502
=========== =========== ===========
See Notes to the Company's Consolidated Financial Statements
33
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BACKGROUND AND BASIS OF PRESENTATION
(a) BACKGROUND
CenterPoint Energy, Inc. (CenterPoint Energy or the Company) is 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 1999 Texas Electric Choice Law (Texas electric
restructuring law) described below. In December 2000, Reliant Energy transferred
a significant portion of its unregulated businesses to Reliant Resources, Inc.,
now named Reliant Energy, Inc. (RRI), which, at the time, was a wholly owned
subsidiary of Reliant Energy.
On September 30, 2002, following RRI's initial public offering of
approximately 20% of its common stock in May 2001, CenterPoint Energy
distributed all of the shares of RRI common stock owned by CenterPoint Energy to
its common shareholders on a pro-rata basis (the RRI Distribution).
CenterPoint Energy is the successor to Reliant Energy for financial
reporting purposes under the Securities Exchange Act of 1934. The Company's
operating subsidiaries own and operate electric transmission and distribution
facilities, natural gas distribution facilities, interstate pipelines and
natural gas gathering, processing and treating facilities. 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 the Company and
those of its subsidiaries. The 1935 Act, among other things, limits the ability
of the Company and its regulated subsidiaries to issue debt and equity
securities without prior authorization, restricts the source of dividend
payments to current and retained earnings without prior authorization, regulates
sales and acquisitions of certain assets and businesses and governs affiliated
service, sales and construction contracts.
As of December 31, 2004, the Company's indirect wholly owned subsidiaries
included:
- CenterPoint Energy Houston Electric, LLC (CenterPoint Houston), which
engages in the electric transmission and distribution business in a
5,000-square mile area of the Texas Gulf Coast that includes Houston;
and
- CenterPoint Energy Resources Corp. (CERC Corp., and, together with its
subsidiaries, CERC), which owns gas distribution systems. The
operations of its local distribution companies are conducted through
three unincorporated divisions: Houston Gas, Minnesota Gas and
Southern Gas Operations. In 2004, the naming conventions of CERC's
three unincorporated divisions were changed in an effort to increase
brand recognition. CenterPoint Energy Arkla and the portion of
CenterPoint Energy Entex (Entex) located outside of the metropolitan
Houston area were renamed Southern Gas Operations. The metropolitan
Houston portion of Entex was renamed Houston Gas, and CenterPoint
Energy Minnegasco was renamed Minnesota Gas. Through wholly owned
subsidiaries, CERC owns two interstate natural gas pipelines and gas
gathering systems, provides various ancillary services, and offers
variable and fixed price physical natural gas supplies to commercial
and industrial customers and natural gas distributors.
In July 2004, the Company announced its agreement to sell its majority
owned subsidiary, Texas Genco Holdings, Inc. (Texas Genco), to Texas Genco LLC
(formerly known as GC Power Acquisition LLC), an entity owned in equal parts by
affiliates of The Blackstone Group, Hellman & Friedman LLC, Kohlberg Kravis
Roberts & Co. L.P. and Texas Pacific Group. On December 15, 2004, Texas Genco
completed the sale of its fossil generation assets (coal, lignite and gas-fired
plants) to Texas Genco LLC for $2.813 billion in cash. Following the sale, Texas
Genco distributed $2.231 billion in cash to the Company. Texas Genco's principal
remaining asset is its ownership interest in a nuclear generating facility. The
final step of the transaction, the merger of Texas Genco with a subsidiary of
Texas Genco LLC in exchange for an additional cash payment to the Company of
$700 million, is expected to close during the first half of 2005, following
receipt of approval from the Nuclear Regulatory Commission (NRC).
(b) BASIS OF PRESENTATION
The consolidated financial statements have been prepared to reflect the
effect of the RRI Distribution on the CenterPoint Energy financial statements.
The consolidated financial statements present the RRI businesses (Wholesale
Energy, European Energy, Retail
34
Energy and related corporate costs) as discontinued operations, in accordance
with Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" (SFAS No. 144).
In 2003, the Company sold all of its remaining Latin America operations.
The consolidated financial statements present these Latin America operations as
discontinued operations in accordance with SFAS No. 144.
In November 2003, the Company sold its district cooling services business
in the Houston central business district and related complementary energy
services to district cooling customers and others. The consolidated financial
statements present these operations as discontinued operations in accordance
with SFAS No. 144.
The Company recorded an after-tax loss of $214 million in 2004 related to
the sale of Texas Genco discussed in Note 3. In addition, as a result of this
transaction, any future earnings of Texas Genco will be offset by an increase in
the loss. The consolidated financial statements present these operations as
discontinued operations in accordance with SFAS No. 144.
The Company's reportable business segments include the following: Electric
Transmission & Distribution, Natural Gas Distribution, Pipelines and Gathering
and Other Operations. The electric transmission and distribution function
(CenterPoint Houston) is reported in the Electric Transmission & Distribution
business segment. Natural Gas Distribution consists of intrastate natural gas
sales to, and natural gas transportation and distribution for, residential,
commercial, industrial and institutional customers and non-rate regulated retail
gas marketing operations for commercial and industrial customers. Pipelines and
Gathering includes the interstate natural gas pipeline operations and the
natural gas gathering and pipeline services businesses. Other Operations
consists primarily of other corporate operations which support all of the
Company's business operations. The generation operations of CenterPoint Energy's
former integrated electric utility (Texas Genco) were previously reported in the
Electric Generation business segment, but have been reclassified as discontinued
operations in these financial statements as discussed above.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) RECLASSIFICATIONS AND USE OF ESTIMATES
In addition to the items discussed in Note 3, some amounts from the
previous years have been reclassified to conform to the 2004 presentation of
financial statements. These reclassifications do not affect net income.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
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.
(B) PRINCIPLES OF CONSOLIDATION
The accounts of CenterPoint Energy and its wholly owned and majority owned
subsidiaries are included in the consolidated financial statements. All
significant intercompany transactions and balances are eliminated in
consolidation. The Company uses the equity method of accounting for investments
in entities in which the Company has an ownership interest between 20% and 50%
and exercises significant influence. Other investments, excluding marketable
securities, are carried at cost.
(C) REVENUES
The Company records revenue for electricity delivery and natural gas sales
and services under the accrual method and these revenues are recognized upon
delivery to customers. Electricity deliveries not billed by month-end are
accrued based on daily supply volumes, applicable rates and analyses reflecting
significant historical trends and experience. Natural gas sales not billed by
month-end are accrued based upon estimated purchased gas volumes, estimated lost
and unaccounted for gas and currently effective tariff rates. The Pipelines and
Gathering business segment records revenues as transportation services are
provided.
(D) LONG-LIVED ASSETS AND INTANGIBLES
The Company records property, plant and equipment at historical cost. The
Company expenses repair and maintenance costs as incurred. Property, plant and
equipment includes the following:
35
DECEMBER 31,
ESTIMATED USEFUL -----------------
LIVES (YEARS) 2003 2004
---------------- ------- -------
(IN MILLIONS)
Electric transmission & distribution ......... 5-75 $ 6,085 $ 6,245
Natural gas distribution ..................... 5-50 2,316 2,494
Pipelines and gathering ...................... 5-75 1,722 1,767
Other property ............................... 3-40 446 457
------- -------
Total ..................................... 10,569 10,963
Accumulated depreciation and amortization .... (2,484) (2,777)
------- -------
Property, plant and equipment, net ..... $ 8,085 $ 8,186
======= =======
The components of the Company's other intangible assets consist of the
following:
DECEMBER 31, 2003 DECEMBER 31, 2004
----------------------- -----------------------
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
-------- ------------ -------- ------------
(IN MILLIONS)
Land Use Rights................... $55 $(12) $55 $(12)
Other............................. 20 (4) 21 (6)
--- ---- --- ----
Total.......................... $75 $(16) $76 $(18)
=== ==== === ====
The Company recognizes specifically identifiable intangibles, including
land use rights and permits, when specific rights and contracts are acquired.
The Company has no intangible assets with indefinite lives recorded as of
December 31, 2004 other than goodwill discussed below. The Company amortizes
other acquired intangibles on a straight-line basis over the lesser of their
contractual or estimated useful lives that range from 40 to 75 years for land
rights and 4 to 25 years for other intangibles.
Amortization expense for other intangibles for 2002, 2003 and 2004 was $2
million in each year. Estimated amortization expense for the five succeeding
fiscal years is as follows (in millions):
2005................... $ 2
2006................... 2
2007................... 3
2008................... 3
2009................... 3
---
Total............... $13
===
Goodwill by reportable business segment is as follows (in millions):
DECEMBER 31,
2003 AND 2004
-------------
Natural Gas Distribution..................... $1,085
Pipelines and Gathering...................... 601
Other Operations............................. 55
------
Total..................................... $1,741
======
The Company reviews the carrying value of goodwill annually and at such
times when events or changes in circumstances indicate that it may not be
recoverable. The Company completed its annual evaluation of goodwill for
impairment as of January 1, 2004 and no impairment was indicated.
The Company periodically evaluates long-lived assets, including property,
plant and equipment, and specifically identifiable intangibles, when events or
changes in circumstances indicate that the carrying value of these assets may
not be recoverable. The determination of whether an impairment has occurred is
based on an estimate of undiscounted cash flows attributable to the assets, as
compared to the carrying value of the assets.
As a result of the Company's decision to sell its interest in Texas Genco
in July 2004, the Company recorded an after-tax loss of approximately $253
million in the third quarter of 2004. In the fourth quarter of 2004, the Company
reduced the expected loss on the sale of its interest in Texas Genco by $39
million to $214 million. For further discussion, see Note 3.
36
(E) REGULATORY ASSETS AND LIABILITIES
The Company applies the accounting policies established in SFAS No. 71,
"Accounting for the Effects of Certain Types of Regulation" (SFAS No. 71), to
the accounts of the Electric Transmission & Distribution business segment and
the utility operations of the Natural Gas Distribution business segment and to
some of the accounts of the Pipelines and Gathering business segment.
The following is a list of regulatory assets/liabilities reflected on the
Company's Consolidated Balance Sheets as of December 31, 2003 and 2004:
DECEMBER 31,
---------------
2003 2004
------ ------
(IN MILLIONS)
Recoverable electric generation-related regulatory assets.............. $3,226 $1,946
Securitized regulatory asset........................................... 682 647
Unamortized loss on reacquired debt.................................... 80 80
Estimated removal costs................................................ (647) (677)
Other long-term regulatory assets/liabilities.......................... 46 47
------ ------
Total............................................................... $3,387 $2,043
====== ======
If events were to occur that would make the recovery of these assets and
liabilities no longer probable, the Company would be required to write-off or
write-down these regulatory assets and liabilities. During 2004, the Company
wrote-off net regulatory assets of $1.5 billion in response to the Texas Utility
Commission's order on CenterPoint Houston's final true-up application. For
further discussion of regulatory assets, see Note 4.
The Company's rate-regulated businesses recognize removal costs as a
component of depreciation expense in accordance with regulatory treatment. As of
December 31, 2003 and 2004, these removal costs of $647 million and $677
million, respectively, are classified as regulatory liabilities in the
Consolidated Balance Sheets. The Company has also identified other asset
retirement obligations that cannot be estimated because the assets associated
with the retirement obligations have an indeterminate life.
(F) DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation is computed using the straight-line method based on economic
lives or a regulatory-mandated recovery period. Other amortization expense
includes amortization of regulatory assets and other intangibles. See Notes 2(e)
and 4(a) for additional discussion of these items.
The following table presents depreciation and other amortization expense
for 2002, 2003 and 2004.
YEAR ENDED DECEMBER 31,
-----------------------
2002 2003 2004
---- ---- ----
(IN MILLIONS)
Depreciation expense....................................... $387 $403 $415
Other amortization expense................................. 71 63 75
---- ---- ----
Total depreciation and amortization expense............. $458 $466 $490
==== ==== ====
(G) CAPITALIZATION OF INTEREST AND ALLOWANCE FOR FUNDS USED DURING
CONSTRUCTION
Allowance for funds used during construction (AFUDC) represents the
approximate net composite interest cost of borrowed funds and a reasonable
return on the equity funds used for construction. Although AFUDC increases both
utility plant and earnings, it is realized in cash through depreciation
provisions included in rates for subsidiaries that apply SFAS No. 71. Interest
and AFUDC for subsidiaries that apply SFAS No. 71 are capitalized as a component
of projects under construction and will be amortized over the assets' estimated
useful lives. During 2002, 2003 and 2004, the Company capitalized interest and
AFUDC of $5 million, $4 million and $4 million, respectively.
(H) INCOME TAXES
The Company files a consolidated federal income tax return and follows a
policy of comprehensive interperiod income tax allocation. The Company uses the
liability method of accounting for deferred income taxes and measures deferred
income taxes for all
37
significant income tax temporary differences. Investment tax credits were
deferred and are being amortized over the estimated lives of the related
property. For additional information regarding income taxes, see Note 10.
(I) ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Accounts receivable are net of an allowance for doubtful accounts of $31
million and $30 million at December 31, 2003 and 2004, respectively. The
provision for doubtful accounts in the Company's Statements of Consolidated
Operations for 2002, 2003 and 2004 was $26 million, $24 million and $27 million,
respectively.
In connection with CERC's November 2002 amendment and extension of its $150
million receivables facility, CERC Corp. formed a bankruptcy remote subsidiary
for the sole purpose of buying receivables created by CERC and selling those
receivables to an unrelated third-party. This transaction was accounted for as a
sale of receivables under the provisions of SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
(SFAS No. 140) and, as a result, the related receivables are excluded from the
Consolidated Balance Sheets. The bankruptcy remote subsidiary purchases
receivables with cash and subordinated notes. In July 2003, the subordinated
notes owned by CERC were pledged to a gas supplier to secure obligations
incurred in connection with the purchase of gas by CERC. Effective June 25,
2003, CERC reduced the purchase limit under the receivables facility from $150
million to $100 million. As of December 31, 2003, CERC had utilized $100 million
of its receivables facility.
In the first quarter of 2004, CERC replaced the receivables facility with a
$250 million committed one-year receivables facility. The bankruptcy remote
subsidiary continues to buy CERC's receivables and sell them to an unrelated
third-party, which transactions are accounted for as a sale of receivables under
SFAS No. 140. As of December 31, 2004, CERC had utilized $181 million of its
receivables facility.
The average outstanding balances on the receivables facilities were $16
million, $100 million and $190 million in 2002, 2003 and 2004, respectively.
Sales of receivables were approximately $0.2 billion, $1.2 billion and $2.4
billion in 2002, 2003 and 2004, respectively.
(J) INVENTORY
Inventory consists principally of materials and supplies and natural gas.
Inventories used in the retail natural gas distribution operations are primarily
valued at the lower of average cost or market.
DECEMBER 31,
-------------
2003 2004
----- ----
(IN MILLIONS)
Materials and supplies.............. $ 83 $ 78
Natural gas......................... 160 176
---- ----
Total inventory.................. $243 $254
==== ====
(K) INVESTMENT IN OTHER DEBT AND EQUITY SECURITIES
In accordance with SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" (SFAS No. 115), the Company reports
"available-for-sale" securities at estimated fair value within other long-term
assets in the Company's Consolidated Balance Sheets and any unrealized gain or
loss, net of tax, as a separate component of shareholders' equity and
accumulated other comprehensive income. In accordance with SFAS No. 115, the
Company reports "trading" securities at estimated fair value in the Company's
Consolidated Balance Sheets, and any unrealized holding gains and losses are
recorded as other income (expense) in the Company's Statements of Consolidated
Operations.
As of December 31, 2003 and 2004, Texas Genco held debt and equity
securities in its nuclear decommissioning trust, which is reported at its fair
value of $189 million and $216 million, respectively, in the Company's
Consolidated Balance Sheets in non-current assets of discontinued operations.
Any unrealized losses or gains are accounted for as a non-current
asset/liability of discontinued operations as Texas Genco will not benefit from
any gains, and losses will be recovered through the rate-making process.
As of December 31, 2003 and 2004, the Company held an investment in Time
Warner Inc. common stock, which was classified as a "trading" security. For
information regarding this investment, see Note 6.
38
(L) ENVIRONMENTAL COSTS
The Company expenses or capitalizes environmental expenditures, as
appropriate, depending on their future economic benefit. The Company expenses
amounts that relate to an existing condition caused by past operations, and that
do not have future economic benefit. The Company records undiscounted
liabilities related to these future costs when environmental assessments and/or
remediation activities are probable and the costs can be reasonably estimated.
(M) STATEMENTS OF CONSOLIDATED CASH FLOWS
For purposes of reporting cash flows, the Company considers cash
equivalents to be short-term, highly liquid investments with maturities of three
months or less from the date of purchase. In connection with the issuance of
transition bonds in October 2001, the Company was required to establish
restricted cash accounts to collateralize the bonds that were issued in this
financing transaction. These restricted cash accounts are not available for
withdrawal until the maturity of the bonds. Cash and Cash Equivalents does not
include restricted cash. For additional information regarding the securitization
financing, see Note 4(a).
(N) NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. (FIN) 46 "Consolidation of Variable Interest Entities,
an Interpretation of Accounting Research No. 51" (FIN 46). FIN 46 requires
certain variable interest entities to be consolidated by the primary beneficiary
of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. On December 24, 2003, the
FASB issued a revision to FIN 46 (FIN 46-R). For special-purpose entities
(SPE's) created before February 1, 2003, the Company applied the provisions of
FIN 46 or FIN 46-R as of December 31, 2003. FIN 46-R is effective for all other
entities for financial periods ending after March 15, 2004. The Company has
subsidiary trusts that have Mandatorily Redeemable Preferred Securities
outstanding. The trusts were determined to be variable interest entities under
FIN 46-R and the Company also determined that it is not the primary beneficiary
of the trusts. As of December 31, 2003, the Company deconsolidated the trusts
and instead reports its junior subordinated debentures due to the trusts as
long-term debt. The Company also evaluated two purchase power contracts with
qualifying facilities as defined in the Public Utility Regulatory Policies Act
of 1978 related to its former Electric Generation business segment. The Company
concluded it was not required to consolidate the entities that own the
qualifying facilities.
On May 19, 2004, the FASB issued a FASB Staff Position (FSP) addressing the
appropriate accounting and disclosure requirements for companies that sponsor a
postretirement health care plan that provides prescription drug benefits. The
new guidance from the FASB was deemed necessary as a result of the 2003 Medicare
prescription law, which includes a federal subsidy for qualifying companies. FSP
106-2, "Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003" (FSP 106-2),
requires that the effects of the federal subsidy be considered an actuarial gain
and treated like similar gains and losses and requires certain disclosures for
employers that sponsor postretirement health care plans that provide
prescription drug benefits. The FASB's related existing guidance, FSP 106-1,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003," was superseded upon the
effective date of FSP 106-2. The Company adopted FSP 106-2 prospectively in July
2004 with no material effect on its results of operations, financial condition
or cash flows.
In its October 13, 2004 meeting, the FASB ratified the consensus reached by
the Emerging Issues Task Force (EITF) at its September 29-30, 2004 meeting on
EITF Issue No. 04-8, "Accounting Issues Related to Certain Features of
Contingently Convertible Debt and the Effect on Diluted Earnings Per Share"
(EITF 04-8), that requires certain contingently convertible debt instruments
with a market price trigger to be treated the same as traditional convertible
debt instruments for earnings per share (EPS) purposes. The contingently
convertible debt instruments are taken into consideration in the calculation of
diluted EPS using the "if-converted" method. The Company issued contingently
convertible debt instruments in 2003. The Company's $575 million contingently
convertible notes are included in the calculation of diluted earnings per share
pursuant to EITF 04-8. The Company's $255 million contingently convertible notes
are not included in the calculation of diluted earnings per share because the
terms of this debt instrument were modified prior to December 31, 2004 to
provide for only cash settlement of the principal amount upon conversion as
required by EITF 04-8. The Company adopted EITF 04-8 effective December 31,
2004. The impact on the Company's diluted EPS from continuing operations for the
years ended December 31, 2003 and 2004 was a decrease of $0.10 per share and
$0.05 per share, respectively.
39
On October 22, 2004, the American Jobs Creation Act (AJCA) was signed into
law. The AJCA makes several sweeping changes to U.S. taxpayers engaged in
cross-border or manufacturing businesses, and some of the provisions of the AJCA
have retroactive effective dates. The Company presently estimates that the
reduction in federal income tax related to relief for manufacturers of domestic
goods will inure to Texas Genco, which is reported as discontinued operations as
of December 31, 2004. Accordingly, this effect would be reflected on Texas
Genco's future financial statements when it will not be a part of the Company.
On December 21, 2004, the FASB issued FSP 109-1, "Application of FASB Statement
No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified
Production Activities Provided by the American Jobs Creation Act of 2004," that
provides accounting guidance on how companies should account for the effects of
the AJCA. In this FSP, the FASB concludes that the tax relief (special tax
deduction for domestic manufacturing) from this legislation should be accounted
for as a "special deduction" instead of a tax rate reduction. The guidance in
this FSP had no material effect on the Company's financial position as of
December 31, 2004.
In December 2004, the FASB issued SFAS No. 123 (Revised 2004), "Share-Based
Payment" (SFAS No. 123). SFAS No. 123 requires that the compensation costs
relating to share-based payment transactions be recognized in financial
statements. That cost will be measured based on the fair value of the equity or
liability instruments issued at the grant date. The Company will be required to
adopt SFAS No. 123 in the third quarter of 2005 using the modified prospective
method as defined in the statement. The Company does not anticipate that the
adoption of SFAS No. 123 will have a material impact on its results of
operations, financial condition or cash flows.
(O) STOCK-BASED INCENTIVE COMPENSATION
In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation"
(SFAS No. 123), and SFAS No. 148, "Accounting for Stock-Based Compensation
Transition and Disclosure -- an Amendment of SFAS No. 123," the Company applies
the guidance contained in APB Opinion No. 25 and discloses the required
pro-forma effect on net income of the fair value based method of accounting for
stock compensation. The weighted average fair values at date of grant for
CenterPoint Energy options granted during 2002, 2003 and 2004 were $1.40, $1.66
and $1.86, respectively. The fair values were estimated using the Black-Scholes
option valuation model with the following assumptions:
2002 2003 2004
------ ------ ------
Expected life in years ............ 5 5 5
Interest rate ..................... 2.83% 2.62% 3.02%
Volatility ........................ 48.95% 52.60% 27.23%
Expected common stock dividend .... $ 0.64 $ 0.40 $ 0.40
Pro-forma information for 2002, 2003 and 2004 is provided to take into
account the amortization of stock-based compensation to expense on a
straight-line basis over the vesting period. Had compensation costs been
determined as prescribed by SFAS No. 123, the Company's net income and earnings
per share would have been as follows:
2002 2003 2004
------- ----- ------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Net income (loss) as reported ................................ $(3,920) $ 484 $ (905)
Add: Total stock-based employee compensation expense as
recorded, net of related tax effects ...................... 1 6 5
Less: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects ................................ (10) (16) (9)
------- ----- ------
Pro-forma net income (loss) .................................. $(3,929) $ 474 $ (909)
======= ===== ======
Basic Earnings (Loss) Per Share:
As reported ............................................... $(13.16) $1.59 $(2.94)
Pro-forma ................................................. $(13.19) $1.58 $(2.95)
Diluted Earnings (Loss) Per Share:
As reported ............................................... $(13.08) $1.46 $(2.48)
Pro-forma ................................................. $(13.11) $1.45 $(2.49)
See Note 9 for further discussion of stock-based incentive compensation.
(P) PENSION AND OTHER POSTEMPLOYMENT BENEFIT PLANS
The Company sponsors pension and other retirement plans in various forms
covering all employees who meet eligibility requirements. The Company uses
several statistical and other factors which attempt to anticipate future events
in calculating the
40
expense and liability related to its plans. These factors include assumptions
about the discount rate, expected return on plan assets and rate of future
compensation increases as estimated by management, within certain guidelines. In
addition, the Company's actuarial consultants use subjective factors such as
withdrawal and mortality rates to estimate these factors. The actuarial
assumptions used may differ materially from actual results due to changing
market and economic conditions, higher or lower withdrawal rates or longer or
shorter life spans of participants. These differences may result in a
significant impact to the amount of pension expense recorded. For further
discussion, see Note 9.
(3) DISCONTINUED OPERATIONS AND QUASI-REORGANIZATION
RRI. On September 30, 2002, CenterPoint Energy distributed to its
shareholders its 83% ownership interest in RRI by means of a tax-free spin-off
in the form of a dividend. Holders of CenterPoint Energy common stock on the
record date received 0.788603 shares of RRI common stock for each share of
CenterPoint Energy stock that they owned on the record date. The RRI
Distribution was recorded in the third quarter of 2002.
As a result of the RRI Distribution, CenterPoint Energy recorded a non-cash
loss on disposal of discontinued operations of $4.4 billion in 2002. This loss
represents the excess of the carrying value of CenterPoint Energy's net
investment in RRI over the market value of RRI's common stock at the time of the
RRI Distribution. The consolidated financial statements reflect the
reclassifications necessary to present RRI as discontinued operations for all
periods presented in accordance with SFAS No. 144.
RRI's revenues included in discontinued operations for the nine months
ended September 30, 2002 were $9.5 billion as reported in RRI's Annual Report on
Form 10-K/A, Amendment No. 1, filed with the Securities and Exchange Commission
(SEC) on May 1, 2003. These amounts have been restated to reflect RRI's adoption
of EITF Issue No. 02-3, "Issues Related to Accounting for Contracts Involved in
Energy Trading and Risk Management Activities." Income from these discontinued
operations for the nine months ended September 30, 2002 is reported net of
income tax expense of $284 million.
Latin America. In February 2003, the Company sold its interest in Argener,
a cogeneration facility in Argentina, for $23 million. The carrying value of
this investment was approximately $11 million as of December 31, 2002. The
Company recorded an after-tax gain of $7 million from the sale of Argener in the
first quarter of 2003. In April 2003, the Company sold its final remaining
investment in Argentina, a 90 percent interest in Empresa Distribuidora de
Electricidad de Santiago del Estero S.A. The Company recorded an after-tax loss
of $3 million in the second quarter of 2003 related to its Latin America
operations. The consolidated financial statements reflect the reclassifications
necessary to present these operations as discontinued operations for all periods
presented in accordance with SFAS No. 144.
Revenues related to the Company's Latin America operations included in
discontinued operations for the years ended December 31, 2002 and 2003 were $15
million and $2 million, respectively. Income from these discontinued operations
for each of the years ended December 31, 2002 and 2003 is reported net of income
tax expense of $2 million.
CenterPoint Energy Management Services, Inc. As discussed in Note 1, in
November 2003, the Company completed the sale of a component of its Other
Operations business segment, CenterPoint Energy Management Services, Inc.
(CEMS), that provides district cooling services in the Houston central business
district and related complementary energy services to district cooling customers
and others. The Company recorded an after-tax loss of $1 million from the sale
of CEMS in the fourth quarter of 2003. The Company recorded an after-tax loss in
discontinued operations of $16 million ($25 million pre-tax) during the second
quarter of 2003 to record the impairment of the long-lived asset based on the
impending sale and to record one-time employee termination benefits. The
consolidated financial statements reflect the reclassifications necessary to
present these CEMS operations as discontinued operations for all periods
presented in accordance with SFAS No. 144.
Revenues related to CEMS included in discontinued operations for the years
ended December 31, 2002 and 2003 were $9 million and $10 million, respectively.
Income from these discontinued operations for the years ended December 31, 2002
and 2003 is reported net of income tax benefit of $1 million and $2 million,
respectively.
Texas Genco. As discussed in Note 1, in July 2004, the Company announced
its agreement to sell Texas Genco to Texas Genco LLC. On December 15, 2004,
Texas Genco completed the sale of its fossil generation assets (coal, lignite
and gas-fired plants) to Texas Genco LLC for $2.813 billion in cash. Texas
Genco's principal remaining asset is its ownership interest in the South Texas
Project Electric Generating Station, a nuclear generating facility (South Texas
Project). The final step of the transaction, the merger of Texas Genco with a
subsidiary of Texas Genco LLC in exchange for an additional cash payment to the
Company of $700 million, is expected to close during the first half of 2005,
following receipt of approval from the NRC. The Company recorded an after-tax
loss
41
of $214 million in 2004 related to the sale of Texas Genco. In addition, as a
result of this transaction, any future earnings of Texas Genco will be offset by
an increase in the loss. The consolidated financial statements present these
operations as discontinued operations for all periods presented in accordance
with SFAS No. 144.
The following table summarizes the components of the income (loss) from
discontinued operations of Texas Genco for each of the years ended December
2002, 2003 and 2004:
YEAR ENDED DECEMBER 31,
-----------------------
2002 2003 2004
----- ----- -----
(IN MILLIONS)
Texas Genco net income (loss) as reported .................... $ (93) $ 250 $ (99)
Texas Genco loss on sale of fossil assets, net of tax(1) ..... -- -- 426
----- ----- -----
Texas Genco net income (loss) as adjusted for loss on sale of
fossil assets ............................................. (93) 250 327
General corporate overhead reclassification, net of tax(2) ... 18 18 13
Interest expense reclassification, net of tax(3) ............. (38) (129) (46)
----- ----- -----
Income (loss) from discontinued operations of Texas Genco, net
of tax .................................................... (113) 139 294
Minority interest in discontinued operations of Texas Genco .. -- (48) (61)
----- ----- -----
Income (loss) from discontinued operations of Texas Genco, net
of tax and minority interest .............................. (113) 91 233
----- ----- -----
Loss on sale of Texas Genco, net of tax ...................... -- -- (214)
Loss offsetting Texas Genco's 2004 earnings, net of tax ...... -- -- (152)
----- ----- -----
Loss on disposal of Texas Genco, net of tax .................. -- -- (366)
----- ----- -----
Total Discontinued Operations of Texas Genco .............. $(113) $ 91 $(133)
===== ===== =====
- ----------
(1) In 2004, Texas Genco recorded an after-tax loss of $426 million related to
the sale of its coal, lignite and gas-fired generation plants which
occurred in the first step of the transaction pursuant to which Texas Genco
is being sold. This loss was reversed by CenterPoint Energy to reflect its
estimated loss on the sale of Texas Genco.
(2) General corporate overhead previously allocated to Texas Genco from
CenterPoint Energy, which will not be eliminated by the sale of Texas
Genco, was excluded from income from discontinued operations and is
reflected as general corporate overhead of CenterPoint Energy in income
from continuing operations in accordance with SFAS No. 144.
(3) Interest expense was reclassified to discontinued operations of Texas Genco
related to the applicable amounts of CenterPoint Energy's term loan and
revolving credit facility debt that would have been assumed to be paid off
with any proceeds from the sale of Texas Genco during those respective
periods in accordance with SFAS No. 144.
Revenues related to Texas Genco included in discontinued operations for the
years ended December 31, 2002, 2003 and 2004 were $1.5 billion, $2.0 billion and
$2.1 billion, respectively. Income from these discontinued operations for the
years ended December 31, 2002, 2003 and 2004 is reported net of income tax
(expense) benefit of $63 million, $(71) million and $(166) million,
respectively.
42
Summarized balance sheet information as of December 31, 2003 and 2004
related to discontinued operations of Texas Genco is as follows:
DECEMBER 31, DECEMBER 31,
2003 2004
------------ ------------
(IN MILLIONS)
CURRENT ASSETS:
Cash and cash equivalents ....................... $ 45 $ 43
Restricted cash ................................. -- 390
Accounts receivable, principally trade .......... 82 28
Other current assets ............................ 175 53
------ ------
Total current assets ......................... 302 514
------ ------
NON-CURRENT ASSETS:
Funds held for purchase of additional interest
in South Texas Project ....................... -- 191
Other non-current assets ........................ 3,942 860
------ ------
Total non-current assets ..................... 3,942 1,051
------ ------
TOTAL ASSETS ................................. 4,244 1,565
------ ------
CURRENT LIABILITIES:
Accounts payable, principally trade ............. 109 17
Payable to minority shareholders ................ -- 390
Other current liabilities ....................... 223 42
------ ------
Total current liabilities .................... 332 449
------ ------
OTHER LONG-TERM LIABILITIES(1) ..................... 1,278 420
------ ------
TOTAL LIABILITIES ............................ 1,610 869
MINORITY INTEREST .................................. 179 --
------ ------
NET ASSETS OF DISCONTINUED OPERATIONS .............. $2,455 $ 696
====== ======
- ----------
(1) Deferred taxes of $758 million recorded as of December 31, 2003 were
reversed upon the completion of the first step of the sale of Texas Genco.
Taxes payable resulting from the sale will be paid by the Company, and are
included in current liabilities as of December 31, 2004.
On December 15, 2004, Texas Genco completed the sale of its fossil
generation assets (coal, lignite and gas-fired plants) to Texas Genco LLC for
$2.813 billion in cash. Texas Genco used approximately $716 million of the cash
proceeds from the sale to repay an overnight bridge loan that Texas Genco had
entered into in order to finance the repurchase of Texas Genco's common stock
held by minority shareholders prior to the first step of the Texas Genco sale.
Texas Genco distributed the balance of the cash proceeds from the sale ($2.097
billion) and cash on hand ($134 million), for a total of $2.231 billion, to the
Company. Included in current assets of discontinued operations is $390 million
of restricted cash designated to buy back the remaining shares of Texas Genco's
common stock which have not yet been tendered by Texas Genco's former minority
shareholders.
Texas Genco owns a 30.8% interest in the South Texas Project, which
consists of two 1,250 MW nuclear generating units and bears a corresponding
30.8% share of capital and operating costs associated with the project. The
South Texas Project is owned as a tenancy in common among Texas Genco and three
other co-owners, with each owner retaining its undivided ownership interest in
the two generating units and the electrical output from those units. Texas Genco
is severally liable, but not jointly liable, for the expenses and liabilities of
the South Texas Project. Texas Genco and the three other co-owners organized the
STP Nuclear Operating Company (STPNOC) to operate and maintain the South Texas
Project. STPNOC is managed by a board of directors comprised of one director
appointed by each of the four co-owners, along with the chief executive officer
of STPNOC. Texas Genco's share of direct expenses of the South Texas Project is
included in discontinued operations in the Statements of Consolidated
Operations. As of December 31, 2003 and 2004, Texas Genco's total utility plant
for the South Texas Project was $431 million and $436 million, respectively (net
of $2.2 billion and $2.3 billion accumulated depreciation, respectively, which
includes an impairment loss recorded in 1999 of $745 million). As of December
31, 2003 and 2004, Texas Genco's investment in nuclear fuel was $40 million (net
of $316 million amortization) and $34 million (net of $334 million
amortization), respectively. These assets are included in non-current assets of
discontinued operations in the Consolidated Balance Sheets.
In September 2004, a subsidiary of Texas Genco, Texas Genco, LP (Genco LP),
signed an agreement to purchase a portion of AEP Texas Central Company's (AEP)
25.2% interest in the South Texas Project for approximately $174 million. Once
the purchase is complete, Genco LP will own an additional 13.2% interest in the
South Texas Project for a total of 44%, or approximately 1,100 MW. This purchase
agreement was entered into pursuant to Genco LP's right of first refusal to
purchase this interest when AEP announced its agreement to sell this interest to
a third-party. In addition to AEP's ownership interest and Genco LP's current
30.8% ownership, the 2,500 MW nuclear plant is currently 28%-owned by City
Public Service of San Antonio (CPS) and 16%-owned by Austin Energy.
43
CPS is expected to purchase AEP's remaining 12% ownership interest under its
right of first refusal. The sale is subject to approval by the NRC. Texas Genco
expects to fund the purchase of its share of AEP's interest, including
reimbursements of draws under letters of credit, with existing cash balances
that have been provided to cash collateralize the letters of credit as described
below and, if necessary, cash expected to be generated through operations. If
CPS were to fail to purchase the 12% interest it has agreed to acquire, Texas
Genco would purchase AEP's entire 25.2% interest in the South Texas Project, in
which case Texas Genco would need approximately $158 million of additional cash.
The Company expects this transaction will be completed by the end of the second
quarter of 2005.
In December 2004, prior to the consummation of the sale of Texas Genco's
coal, lignite and gas-fired generation assets to Texas Genco LLC, the $250
million revolving credit facility of Genco LP was terminated and the then
outstanding letters of credit aggregating $182 million issued under the facility
in favor of AEP relating to the right of first refusal were cash collateralized
at 105% of their face amount. In February 2005, Genco LP also established a $75
million term loan facility under which borrowings may be made for working
capital purposes at LIBOR plus 50 basis points. Two drawings aggregating $75
million may be made under the facility which matures on the earlier of August
2005 or the closing of the final step of the Texas Genco sale. An initial draw
of $59 million was made in February 2005. This facility is secured by a lien on
Texas Genco's equity and partnership interests in its subsidiaries and cash
collateral accounts described above.
Quasi-Reorganization. On December 30, 2004, the Board of Directors of the
Company adopted a plan for an accounting reorganization of the Company, to be
effective as of January 1, 2005. At the same time, the Manager of CenterPoint
Houston adopted a similar plan for CenterPoint Houston. These plans were adopted
in order to eliminate the accumulated deficit that exists at both companies.
The plan adopted by the Company required: (1) a report to be presented to
and reviewed by the Company's Board of Directors 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 Board of Directors on or
before February 28, 2005 that the accounting reorganization is inconsistent with
the Company's regulatory obligations. The Company is continuing to work to
complete the valuation analysis and the effects on the Company's financial
statements of the accounting reorganization, and on February 23, 2005, the
Company's Board of Directors extended until May 10, 2005 the time for making the
determination described in (3) of the preceding sentence.
An accounting reorganization, sometimes called a "quasi-reorganization,"
allows a company to extinguish an accumulated deficit. It involves restating a
company's assets and its liabilities to their fair values. The accumulated
deficit is then brought to zero through a reduction in the other capital
accounts, giving the company a "fresh start" with a zero balance in retained
earnings. As of December 31, 2004, the Company had an accumulated deficit of
approximately $1.7 billion. That deficit stemmed from the accounting effects of
(1) the Company's distribution of its ownership interest in RRI to its
shareholders in September 2002, (2) the extraordinary loss recorded in
connection with the Texas Utility Commission's order related to the 2004 True-Up
Proceeding (defined below) and (3) the loss on discontinued operations that was
recorded in connection with the Company's sale of Texas Genco. In addition to
eliminating the accumulated deficit and restating assets and liabilities to fair
value, if a quasi-reorganization were implemented, the Company and CenterPoint
Houston would be required to implement any accounting standards that have been
issued but not yet adopted.
The Company and CenterPoint Houston are seeking to eliminate the
accumulated deficit balance because restrictions contained in the 1935 Act
require registered public utility holding companies and their subsidiaries, like
the Company and CenterPoint Houston, to obtain express authorization from the
SEC to pay dividends when current or retained earnings are insufficient to do
so. Eliminating the accumulated deficit will permit current earnings not
utilized to pay dividends to more quickly build up a retained earnings balance.
Under 1935 Act regulations, the Company could pay dividends out of this balance
during periods when current earnings may not be adequate to do so.
In addition, the Company has undertaken an obligation under the 1935 Act to
achieve a minimum ratio of common equity to total capitalization of thirty
percent, which, depending on the results of the restatement of assets and
liabilities under the accounting reorganization, could be affected by, and will
be taken into consideration by the Board of Directors in evaluating the effects
of, the accounting reorganization. The Company will seek such authority as may
be required under the 1935 Act in connection with the quasi-reorganization.
44
(4) REGULATORY MATTERS
(A) 2004 TRUE-UP PROCEEDING
In March 2004, CenterPoint Houston filed the final true-up application
required by the Texas electric restructuring law with the Public Utility
Commission of Texas (Texas Utility Commission) (2004 True-Up Proceeding).
CenterPoint Houston's requested true-up balance was $3.7 billion, excluding
interest and net of the retail clawback from RRI described below. In June, July
and September 2004, the Texas Utility Commission conducted hearings on, and held
public meetings addressing, CenterPoint Houston's true-up application. In
December 2004, the Texas Utility Commission approved a final order in
CenterPoint Houston's true-up proceeding (2004 Final Order) authorizing
CenterPoint Houston to recover $2.3 billion including interest through August
31, 2004, subject to adjustments to reflect the benefit of certain deferred
taxes and the accrual of interest and payment of excess mitigation credits after
August 31, 2004. As a result of the 2004 Final Order, the Company wrote-off net
regulatory assets of $1.5 billion and recorded a related income tax benefit of
$526 million, resulting in an after-tax charge of $977 million, which is
reflected as an extraordinary loss in the Company's Statements of Consolidated
Operations. The Company recorded an expected loss of $894 million in the third
quarter of 2004 and increased this amount by $83 million in the fourth quarter
of 2004 based on the Company's assessment of the amounts ultimately recoverable.
In January 2005, CenterPoint Houston appealed certain aspects of the final order
seeking to increase the true-up balance ultimately recovered by CenterPoint
Houston. Other parties have also appealed the order, seeking to reduce the
amount authorized for CenterPoint Houston's recovery. Although CenterPoint
Houston believes it has meritorious arguments and that the other parties'
appeals are without merit, no prediction can be made as to the ultimate outcome
or timing of such appeals.
The Company has recorded as a regulatory asset a return of $374 million on
the true-up balance for the period from January 1, 2002 through December 31,
2004 as allowed by the Texas Utility Commission's 2004 Final Order. The Company,
under the 2004 Final Order, will continue to accrue a return until the true-up
balance is recovered by the Company, either from rate payers or through a
securitization offering as discussed below. The rate of return is based on
CenterPoint Houston's cost of capital, established in the Texas Utility
Commission's final order issued in October 2001 (2001 Final Order), which is
derived from CenterPoint Houston's cost to finance assets and an allowance for
earnings on shareholders' investment. Accordingly, in accordance with SFAS No.
92, "Regulated Enterprises -- Accounting for Phase-in Plans." the rate of return
has been bifurcated into components representing a return of costs to finance
assets and an allowance for earnings on shareholders' investment. The component
representing a return of costs to finance assets of $226 million has been
recognized in the fourth quarter of 2004 and is included in other income in the
Company's Statements of Consolidated Operations. The component representing a
return of costs to finance assets will continue to be recognized as earned going
forward. The component representing an allowance for earnings on shareholders'
investment of $148 million has been deferred and will be recognized as it is
collected through rates in the future.
In November 2004, RRI paid $177 million to the Company, representing the
"retail clawback" determined by the Texas Utility Commission in the 2004 True-Up
Proceeding. The Texas electric restructuring law requires the Texas Utility
Commission to determine the retail clawback if the formerly integrated utility's
affiliated retail electric provider retained more than 40 percent of its
residential price-to-beat customers within the utility's service area as of
January 1, 2004 (offset by new customers added outside the service territory).
That retail clawback is a credit against the stranded costs the utility is
entitled to recover and was reflected in the $2.3 billion recovery authorized.
Under the terms of a master separation agreement between RRI and the Company,
RRI agreed to pay the Company the amount of the retail clawback determined by
the Texas Utility Commission. The payment was used by the Company to reduce
outstanding indebtedness.
The Texas electric restructuring law provides for the use of special
purpose entities to issue transition bonds for the economic value of
generation-related regulatory assets and stranded costs. These transition bonds
will be amortized over a period not to exceed 15 years through non-bypassable
transition charges. In October 2001, a special purpose subsidiary of CenterPoint
Houston issued $749 million of transition bonds to securitize certain
generation-related regulatory assets. These transition bonds have a final
maturity date of September 15, 2015 and are non-recourse to the Company and its
subsidiaries other than to the special purpose issuer. Payments on the
transition bonds are made solely out of funds from non-bypassable transition
charges.
In December 2004, CenterPoint Houston filed for approval of a financing
order to issue transition bonds to securitize its true-up balance. On March 9,
2005, the Texas Utility Commission issued a financing order allowing CenterPoint
Houston to securitize approximately $1.8 billion and requiring that the benefit
of certain deferred taxes be reflected as a reduction in the competition
transition charge. The Company anticipates that a new special purpose subsidiary
of CenterPoint Houston will issue bonds in one or more series through an
underwritten offering. Depending on market conditions and the impact of possible
appeals of the financing order, among other factors, the Company anticipates
completing such an offering in 2005.
45
In January 2005, CenterPoint Houston filed an application for a competition
transition charge to recover its true-up balance. CenterPoint Houston will
adjust the amount sought through that charge to the extent that it is able to
securitize any of such amount. Under the Texas Utility Commission's rules, the
unrecovered true-up balance to be recovered through the competition transition
charge earns a return until fully recovered.
In the 2001 Final Order, the Texas Utility Commission established the
transmission and distribution rates that became effective in January 2002. Based
on its 2001 revision of the 1998 stranded cost estimates, the Texas Utility
Commission determined that CenterPoint Houston had over-mitigated its stranded
costs by redirecting transmission and distribution depreciation and by
accelerating depreciation of generation assets as provided under its 1998
transition plan and the Texas electric restructuring law. In the 2001 Final
Order, CenterPoint Houston was required to reverse the amount of redirected
depreciation and accelerated depreciation taken for regulatory purposes as
allowed under the 1998 transition plan and the Texas electric restructuring law.
In accordance with the 2001 Final Order, CenterPoint Houston recorded a
regulatory liability to reflect the prospective refund of the accelerated
depreciation, and in January 2002 CenterPoint Houston began paying excess
mitigation credits, which were to be paid over a seven-year period with interest
at 7 1/2% per annum. The annual payment of excess mitigation credits is
approximately $264 million. In its December 2004 final order in the 2004 True-Up
Proceeding, the Texas Utility Commission found that CenterPoint Houston did, in
fact, have stranded costs (as originally estimated in 1998). Despite this
ruling, the Texas Utility Commission denied CenterPoint Houston recovery of
approximately $180 million of the interest portion of the excess mitigation
credits already paid by CenterPoint Houston and refused to terminate future
excess mitigation credits. In January 2005, CenterPoint Houston filed a writ of
mandamus petition with the Texas Supreme Court asking that court to order the
Texas Utility Commission to terminate immediately the payment of all excess
mitigation credits and to ensure full recovery of all excess mitigation credits.
Although CenterPoint Houston believes it has meritorious arguments, a writ of
mandamus is an extraordinary remedy and no prediction can be made as to the
ultimate outcome or timing of the mandamus petition. If the Supreme Court denies
CenterPoint Houston's mandamus petition, it will continue to pursue this issue
through regular appellate mechanisms. On March 1, 2005, a non-unanimous
settlement was filed in Docket No. 30774, which involves the adjustment of RRI's
Price-to-Beat. Under the terms of that settlement, the excess mitigation credits
being paid by CenterPoint Houston would be terminated as of April 29, 2005. The
Texas Utility Commission approved the settlement on March 9, 2005.
(B) FINAL FUEL RECONCILIATION
On March 4, 2004, an Administrative Law Judge (ALJ) issued a Proposal for
Decision (PFD) relating to CenterPoint Houston's final fuel reconciliation.
CenterPoint Houston reserved $117 million, including $30 million of interest, in
the fourth quarter of 2003 reflecting the ALJ's recommendation. On April 15,
2004, the Texas Utility Commission affirmed the PFD's finding in part, reversed
in part, and remanded one issue back to the ALJ. On May 28, 2004, the Texas
Utility Commission approved a settlement of the remanded issue and issued a
final order which reduced the disallowance. As a result of the final order, the
Company reversed $23 million, including $8 million of interest, of the $117
million reserve recorded in the fourth quarter of 2003. The results of the Texas
Utility Commission's final decision are a component of the 2004 True-Up
Proceeding. The Company has appealed certain portions of the Texas Utility
Commission's final order involving a disallowance of approximately $67 million
relating to the final fuel reconciliation plus interest of $10 million. Briefs
on this issue were filed on January 5, 2005, and a hearing on this issue is
scheduled for April 22, 2005.
(C) RATE CASES
In 2004, the City of Houston, 28 other cities and the Railroad Commission
of Texas (Railroad Commission) approved a settlement that increased Houston Gas'
base rate and service charge revenues by approximately $14 million annually.
In February 2004, the Louisiana Public Service Commission (LPSC) approved a
settlement that increased Southern Gas Operations' base rate and service charge
revenues in its South Louisiana Division by approximately $2 million annually.
In July 2004, Minnesota Gas filed an application for a general rate
increase of $22 million with the Minnesota Public Utilities Commission (MPUC).
Minnesota Gas and the Minnesota Department of Commerce have agreed to a
settlement of all issues, including an annualized increase in the amount of $9
million, subject to approval by the MPUC. A final decision on this rate relief
request is expected from the MPUC in the second quarter of 2005. Interim rates
of $17 million on an annualized basis became effective on October 1, 2004,
subject to refund.
In July 2004, the LPSC approved a settlement that increased Southern Gas
Operations' base rate and service charge revenues in its North Louisiana
Division by approximately $7 million annually.
46
In October 2004, Southern Gas Operations filed an application for a general
rate increase of approximately $3 million with the Railroad Commission for rate
relief in the unincorporated areas of its Beaumont, East Texas and South Texas
Divisions. The Railroad Commission staff has begun its review of the request,
and a decision is anticipated in April 2005.
In November 2004, Southern Gas Operations filed an application for a
general rate increase of approximately $34 million with the Arkansas Public
Service Commission (APSC). The APSC staff has begun its review of the request,
and a decision is anticipated in the second half of 2005.
In December 2004, the Oklahoma Corporation Commission approved a settlement
that increased Southern Gas Operations' base rate and service charge revenues by
approximately $3 million annually.
(D) CITY OF TYLER, TEXAS DISPUTE
In July 2002, the City of Tyler, Texas, asserted that Southern Gas
Operations had overcharged residential and small commercial customers in that
city for gas costs under supply agreements in effect since 1992. That dispute
has been referred to the Railroad Commission by agreement of the parties for a
determination of whether Southern Gas Operations has properly charged and
collected for gas service to its residential and commercial customers in its
Tyler distribution system in accordance with lawful filed tariffs during the
period beginning November 1, 1992, and ending October 31, 2002. In December
2004, the Railroad Commission conducted a hearing on the matter and is expected
to issue a ruling in March or April of 2005. In a parallel action now in the
Court of Appeals in Austin, Southern Gas Operations is challenging the scope of
the Railroad Commission's inquiry which goes beyond the issue of whether
Southern Gas Operations had properly followed its tariffs to include a review of
Southern Gas Operations' historical gas purchases. The Company believes such a
review is not permitted by law and is beyond what the parties requested in the
joint petition that initiated the proceeding at the Railroad Commission. The
Company believes that all costs for Southern Gas Operations' Tyler distribution
system have been properly included and recovered from customers pursuant to
Southern Gas Operations' filed tariffs.
(5) DERIVATIVE INSTRUMENTS
The Company is exposed to various market risks. These risks arise from
transactions entered into in the normal course of business. The Company utilizes
derivative financial instruments such as physical forward contracts, swaps and
options (Energy Derivatives) to mitigate the impact of changes in its natural
gas businesses on its operating results and cash flows.
(A) NON-TRADING ACTIVITIES
Cash Flow Hedges. To reduce the risk from market fluctuations associated
with purchased gas costs, the Company enters into energy derivatives in order to
hedge certain expected purchases and sales of natural gas (non-trading energy
derivatives). The Company applies hedge accounting for its non-trading energy
derivatives utilized in non-trading activities only if there is a high
correlation between price movements in the derivative and the item designated as
being hedged. The Company analyzes its physical transaction portfolio to
determine its net exposure by delivery location and delivery period. Because the
Company's physical transactions with similar delivery locations and periods are
highly correlated and share similar risk exposures, the Company facilitates
hedging for customers by aggregating physical transactions and subsequently
entering into non-trading energy derivatives to mitigate exposures created by
the physical positions.
During 2004, hedge ineffectiveness of $0.4 million was recognized in
earnings from derivatives that are designated and qualify as Cash Flow Hedges,
and in 2003 and 2002, no hedge ineffectiveness was recognized. No component of
the derivative instruments' gain or loss was excluded from the assessment of
effectiveness. If it becomes probable that an anticipated transaction will not
occur, the Company realizes in net income the deferred gains and losses
recognized in accumulated other comprehensive loss. Once the anticipated
transaction occurs, the accumulated deferred gain or loss recognized in
accumulated other comprehensive loss is reclassified and included in the
Company's Statements of Consolidated Operations under the caption "Natural Gas."
Cash flows resulting from these transactions in non-trading energy derivatives
are included in the Statements of Consolidated Cash Flows in the same category
as the item being hedged. As of December 31, 2004, the Company expects $5
million in accumulated other comprehensive income to be reclassified into net
income during the next twelve months.
47
The maximum length of time the Company is hedging its exposure to the
variability in future cash flows for forecasted transactions on existing
financial instruments is primarily two years with a limited amount of exposure
up to five years. The Company's policy is not to exceed five years in hedging
its exposure.
Other Derivative Financial Instruments. The Company also has natural gas
contracts which are derivatives which are not hedged. Load following services
that the Company offers its natural gas customers create an inherent tendency to
be either long or short natural gas supplies relative to customer purchase
commitments. The Company measures and values all of its volumetric imbalances on
a real time basis to minimize its exposure to commodity price and volume risk.
The aggregate Value at Risk (VaR) associated with these operations is calculated
daily and averaged $0.2 million with a high of $1 million during 2004. The
Company does not engage in proprietary or speculative commodity trading.
Unhedged positions are accounted for by adjusting the carrying amount of the
contracts to market and recognizing any gain or loss in operating income, net.
During 2004, the Company recognized net gains related to unhedged positions
amounting to $7 million and as of December 31, 2004 had recorded short-term risk
management assets and liabilities of $4 million and $5 million, respectively,
included in other current assets and other current liabilities, respectively.
Interest Rate Swaps. As of December 31, 2003, the Company had an
outstanding interest rate swap with a notional amount of $250 million to fix the
interest rate applicable to floating-rate short-term debt. This swap, which
expired in January 2004, did not qualify as a cash flow hedge under SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No.
133), and was marked to market in the Company's Consolidated Balance Sheets with
changes in market value reflected in interest expense in the Statements of
Consolidated Operations.
During 2002, the Company settled forward-starting interest rate swaps
having an aggregate notional amount of $1.5 billion at a cost of $156 million,
which was recorded in other comprehensive income and is being amortized into
interest expense over the life of the designated fixed-rate debt. Amortization
of amounts deferred in accumulated other comprehensive income for 2003 and 2004
was $12 million and $25 million, respectively. As of December 31, 2004, the
Company expects $31 million in accumulated other comprehensive income to be
reclassified into net income during the next twelve months.
Embedded Derivative. The Company's $575 million of convertible senior
notes, issued May 19, 2003, and $255 million of convertible senior notes, issued
December 17, 2003 (see Note 8), contain contingent interest provisions. The
contingent interest component is an embedded derivative as defined by SFAS No.
133, and accordingly, must be split from the host instrument and recorded at
fair value on the balance sheet. The value of the contingent interest components
was not material at issuance or at December 31, 2004.
(B) CREDIT RISKS
In addition to the risk associated with price movements, credit risk is
also inherent in the Company's non-trading derivative activities. Credit risk
relates to the risk of loss resulting from non-performance of contractual
obligations by a counterparty. The following table shows the composition of the
non-trading derivative assets of the Company as of December 31, 2003 and 2004
(in millions):
DECEMBER 31, 2003 DECEMBER 31, 2004
------------------- ----------------------
INVESTMENT INVESTMENT
GRADE(1)(2) TOTAL GRADE(1)(2) TOTAL(3)
----------- ----- ----------- --------
Energy marketers ........ $24 $35 $10 $17
Financial institutions .. 21 21 50 50
Other ................... -- 1 1 1
--- --- --- ---
Total ................ $45 $57 $61 $68
=== === === ===
- ----------
(1) "Investment grade" is primarily determined using publicly available credit
ratings along with the consideration of credit support (such as parent
company guarantees) and collateral, which encompass cash and standby
letters of credit.
(2) For unrated counterparties, the Company performs financial statement
analysis, considering contractual rights and restrictions and collateral,
to create a synthetic credit rating.
(3) The $17 million non-trading derivative asset includes a $6 million asset
due to trades with Reliant Energy Services, Inc. (Reliant Energy Services),
an affiliate until the date of the RRI Distribution. As of December 31,
2004, Reliant Energy Services did not have an investment grade rating.
48
(C) GENERAL POLICY
The Company has established a Risk Oversight Committee composed of
corporate and business segment officers that oversees all commodity price and
credit risk activities, including the Company's trading, marketing, risk
management services and hedging activities. The committee's duties are to
establish the Company's commodity risk policies, allocate risk capital within
limits established by the Company's board of directors, approve trading of new
products and commodities, monitor risk positions and ensure compliance with the
Company's risk management policies and procedures and trading limits established
by the Company's board of directors.
The Company's policies prohibit the use of leveraged financial instruments.
A leveraged financial instrument, for this purpose, is a transaction involving a
derivative whose financial impact will be based on an amount other than the
notional amount or volume of the instrument.
(6) INDEXED DEBT SECURITIES (ZENS) AND TIME WARNER SECURITIES
(A) ORIGINAL INVESTMENT IN TIME WARNER SECURITIES
In 1995, the Company sold a cable television subsidiary to Time Warner Inc.
(TW) and received TW convertible preferred stock (TW Preferred) as partial
consideration. On July 6, 1999, the Company converted its 11 million shares of
TW Preferred into 45.8 million shares of Time Warner common stock (TW Common).
The Company currently owns 21.6 million shares of TW Common. Unrealized gains
and losses resulting from changes in the market value of the TW Common are
recorded in the Company's Statements of Consolidated Operations.
(B) ZENS
In September 1999, the Company issued its 2.0% Zero-Premium Exchangeable
Subordinated Notes due 2029 (ZENS) having an original principal amount of $1.0
billion. ZENS are exchangeable for cash equal to the market value of a specified
number of shares of TW common. The Company pays interest on the ZENS at an
annual rate of 2% plus the amount of any quarterly cash dividends paid in
respect of the shares of TW Common attributable to the ZENS. The principal
amount of ZENS is subject to being increased to the extent that the annual yield
from interest and cash dividends on the reference shares of TW Common is less
than 2.309%. At December 31, 2004, ZENS having an original principal amount of
$840 million and a contingent principal amount of $851 million were outstanding
and were exchangeable, at the option of the holders, for cash equal to 95% of
the market value of 21.6 million shares of TW Common deemed to be attributable
to the ZENS. At December 31, 2004, the market value of such shares was
approximately $421 million, which would provide an exchange amount of $476 for
each $1,000 original principal amount of ZENS. At maturity, the holders of the
ZENS will receive in cash the higher of the original principal amount of the
ZENS (subject to adjustment as discussed above) or an amount based on the
then-current market value of TW Common, or other securities distributed with
respect to TW Common.
In 2002, holders of approximately 16% of the 17.2 million ZENS originally
issued exercised their right to exchange their ZENS for cash, resulting in
aggregate cash payments by CenterPoint Energy of approximately $45 million.
Exchanges of ZENS subsequent to 2002 aggregate less than one percent of ZENS
originally issued.
A subsidiary of the Company owns shares of TW Common and elected to
liquidate a portion of such holdings to facilitate the Company's making the cash
payments for the ZENS exchanged in 2002 through 2004. In connection with the
exchanges, the Company received net proceeds of approximately $43 million from
the liquidation of approximately 4.1 million shares of TW Common at an average
price of $10.56 per share. The Company now holds 21.6 million shares of TW
Common which are classified as trading securities under SFAS No. 115 and are
expected to be held to facilitate the Company's ability to meet its obligation
under the ZENS.
Upon adoption of SFAS No. 133 effective January 1, 2001, the ZENS
obligation was bifurcated into a debt component and a derivative component (the
holder's option to receive the appreciated value of TW Common at maturity). The
derivative component was valued at fair value and determined the initial
carrying value assigned to the debt component ($121 million) as the difference
between the original principal amount of the ZENS ($1 billion) and the fair
value of the derivative component at issuance ($879 million). Effective January
1, 2001 the debt component was recorded at its accreted amount of $122 million
and the derivative component was recorded at its fair value of $788 million, as
a current liability. Subsequently, the debt component accretes through interest
charges at 17.5% annually up to the minimum amount payable upon maturity of the
ZENS in 2029 (approximately $915
49
million) which reflects exchanges and adjustments to maintain a 2.309% annual
yield, as discussed above. Changes in the fair value of the derivative component
are recorded in the Company's Statements of Consolidated Operations. During
2002, 2003 and 2004, the Company recorded a loss of $500 million, a gain of $106
million and a gain of $31 million, respectively, on the Company's investment in
TW Common. During 2002, 2003 and 2004, the Company recorded a gain of $480
million, a loss of $96 million and a loss of $20 million, respectively,
associated with the fair value of the derivative component of the ZENS
obligation. Changes in the fair value of the TW Common held by the Company are
expected to substantially offset changes in the fair value of the derivative
component of the ZENS.
The following table sets forth summarized financial information regarding
the Company's investment in TW securities and the Company's ZENS obligation (in
millions):
DEBT DERIVATIVE
TW COMPONENT COMPONENT
INVESTMENT OF ZENS OF ZENS
---------- --------- ----------
Balance at December 31, 2001 ......... $ 827 $123 $ 730
Accretion of debt component of ZENS .. -- 1 --
Gain on indexed debt securities ...... -- -- (480)
Loss on TW Common .................... (500) -- --
Liquidation of TW Common ............. (43) -- --
Liquidation of ZENS, net of gain ..... -- (20) (25)
----- ---- -----
Balance at December 31, 2002 ......... 284 104 225
Accretion of debt component of ZENS .. -- 1 --
Loss on indexed debt securities ...... -- -- 96
Gain on TW Common .................... 106 -- --
----- ---- -----
Balance at December 31, 2003 ......... 390 105 321
Accretion of debt component of ZENS .. -- 2 --
Loss on indexed debt securities ...... -- -- 20
Gain on TW Common .................... 31 -- --
----- ---- -----
Balance at December 31, 2004 ......... $ 421 $107 $ 341
===== ==== =====
(7) EQUITY
(A) CAPITAL STOCK
At December 31, 2004, CenterPoint Energy has 1,020,000,000 authorized
shares of capital stock, composed of 1,000,000,000 shares of $0.01 par value
common stock and 20,000,000 shares of $0.01 par value preferred stock.
The Company's sale of its interest in Texas Genco described in Notes 1 and
3 resulted in an after-tax loss of approximately $214 million in 2004. In
addition, the Company recorded an after-tax extraordinary loss of $977 million
in 2004 related to the 2004 True-Up Proceeding. Portions of these losses
recorded in periods prior to the fourth quarter of 2004 reduced the Company's
earnings below the level required for the Company to continue paying its current
quarterly dividends out of current earnings as required under the Company's SEC
financing order. However, in May 2004, the Company received an order from the
SEC under the 1935 Act authorizing it to continue to pay its current quarterly
dividend in the second and third quarters of 2004 out of capital or unearned
surplus in the event the Company had such losses. The Company declared a
dividend in the fourth quarter out of current earnings. If the Company's
earnings for subsequent quarters are insufficient to pay dividends from current
earnings, additional authority would be required from the SEC for payment of the
quarterly dividend from capital or unearned surplus, but there can be no
assurance that the SEC would authorize such payments.
(B) SHAREHOLDER RIGHTS PLAN
The Company has a Shareholder Rights Plan that states that each share of
its common stock includes one associated preference stock purchase right (Right)
which entitles the registered holder to purchase from the Company a unit
consisting of one-thousandth of a share of Series A Preference Stock. The
Rights, which expire on December 11, 2011, are exercisable upon some events
involving the acquisition of 20% or more of the Company's outstanding common
stock. Upon the occurrence of such an event, each Right entitles the holder to
receive common stock with a current market price equal to two times the exercise
price of the Right. At anytime prior to becoming exercisable, the Company may
repurchase the Rights at a price of $0.005 per Right. There are 700,000 shares
of Series A Preference Stock reserved for issuance upon exercise of the Rights.
50
(8) LONG-TERM DEBT AND SHORT-TERM BORROWINGS
DECEMBER 31, 2003 DECEMBER 31, 2004
---------------------- ----------------------
LONG-TERM CURRENT(1) LONG-TERM CURRENT(1)
--------- ---------- --------- ----------
(IN MILLIONS)
Short-term borrowings:
Revolving credit facility ............................................... $ 63 $ --
---- ------
Long-term debt:
CenterPoint Energy:
ZENS(2) ................................................................. $ -- 105 $ -- 107
Senior notes 5.875% to 7.25% due 2008 to 2015 ........................... 600 -- 600 --
Convertible senior notes 2.875% to 3.75% due 2023 to 2024 ............... 830 -- 830 --
Pollution control bonds 5.60% to 6.70% due 2012 to 2027(3) .............. 380 -- 151 --
Pollution control bonds 4.70% to 8.00% due 2011 to 2030(4) .............. 1,046 -- 1,046 --
Loans due 2006(5) ....................................................... 1,450 10 239 --
Junior subordinated debentures payable to affiliate 8.257% due 2037(6) .. 747 -- 103 --
CenterPoint Houston:
First mortgage bonds 9.15% due 2021 ..................................... 102 -- 102 --
Series 2001-1 Transition Bonds 3.84% to 5.63% due 2005 to 2013 .......... 676 41 629 47
Term loan, LIBOR plus 9.75%, due 2005(7) ................................ 1,310 -- -- 1,310
General mortgage bonds 5.60% to 6.95% due 2013 to 2033 .................. 1,262 -- 1,262 --
Pollution control bonds 3.625% to 5.60% due 2012 to 2027(8) ............. -- -- 229 --
CERC Corp.:
Convertible subordinated debentures 6.00% due 2012 ...................... 74 -- 69 6
Senior notes 5.95% to 8.90% due 2005 to 2014 ............................ 2,251 -- 1,923 325
Junior subordinated debentures payable to affiliate 6.25% due 2026(6) ... 6 -- 6 --
Other ...................................................................... 46 5 5 41
Unamortized discount and premium(9) ........................................ (2) -- (1) --
------- ---- ------ ------
Total long-term debt ................................................. 10,778 161 7,193 1,836
------- ---- ------ ------
Total borrowings ..................................................... $10,778 $224 $7,193 $1,836
======= ==== ====== ======
- ----------
(1) Includes amounts due or exchangeable within one year of the date noted.
(2) Upon adoption of SFAS No. 133 effective January 1, 2001, the Company's ZENS
obligation was bifurcated into a debt component and an embedded derivative
component. For additional information regarding ZENS, see Note 6(b). As
ZENS are exchangeable for cash at any time at the option of the holders,
these notes are classified as a current portion of long-term debt.
(3) These series of debt are secured by first mortgage bonds of CenterPoint
Houston.
(4) $527 million of these series of debt is secured by general mortgage bonds
of CenterPoint Houston.
(5) Classified as long-term debt because of the termination dates of the
facilities under which the funds were borrowed.
(6) The junior subordinated debentures were issued to subsidiary trusts in
connection with the issuance by those trusts of preferred securities. The
trust preferred securities were deconsolidated effective December 31, 2003
pursuant to the adoption of FIN 46. This resulted in the junior
subordinated debentures held by the trusts being reported as long-term
debt. For further discussion, see Note 2(n).
(7) London inter-bank offered rate (LIBOR) has a minimum rate of 3% under the
terms of this debt. This term loan is secured by general mortgage bonds of
CenterPoint Houston.
(8) These series of debt are secured by general mortgage bonds of CenterPoint
Houston.
(9) Debt acquired in business acquisitions is adjusted to fair market value as
of the acquisition date. Included in long-term debt is additional
unamortized premium related to fair value adjustments of long-term debt of
$6 million and $5 million at December 31, 2003 and 2004, respectively,
which is being amortized over the respective remaining term of the related
long-term debt.
51
(A) SHORT-TERM BORROWINGS
Credit Facilities. As of December 31, 2003, CERC Corp. had a revolving
credit facility that provided for an aggregate of $200 million in committed
credit. As of December 31, 2003, $63 million was borrowed under the CERC Corp.
revolving credit. This facility terminated in March 2004. The weighted average
interest rate on short-term borrowings at December 31, 2003 was 5.0%, excluding
facility fees and other fees paid in connection with the arrangement of the bank
facilities.
(B) LONG-TERM DEBT
As of December 31, 2004, CERC Corp. had a revolving credit facility that
provided for an aggregate of $250 million in committed credit. The revolving
credit facility terminates on March 23, 2007. Fully-drawn rates for borrowings
under this facility, including the facility fee, are LIBOR plus 150 basis points
based on current credit ratings and the applicable pricing grid. As of December
31, 2004, such credit facility was not utilized.
In February 2004, $56 million aggregate principal amount of collateralized
5.6% pollution control bonds due 2027 and $44 million aggregate principal amount
of 4.25% collateralized insurance-backed pollution control bonds due 2017 were
issued on behalf of CenterPoint Houston. The pollution control bonds are
collateralized by general mortgage bonds of CenterPoint Houston with principal
amounts, interest rates and maturities that match the pollution control bonds.
The proceeds were used to extinguish two series of 6.7% collateralized pollution
control bonds with an aggregate principal amount of $100 million issued on
behalf of CenterPoint Energy. CenterPoint Houston's 6.7% first mortgage bonds
which collateralized CenterPoint Energy's payment obligations under the refunded
pollution control bonds were retired in connection with the extinguishment of
the refunded pollution control bonds. CenterPoint Houston's 6.7% notes payable
to CenterPoint Energy were also cancelled upon the extinguishment of the
refunded pollution control bonds.
In March 2004, $45 million aggregate principal amount of 3.625%
collateralized insurance-backed pollution control bonds due 2012 and $84 million
aggregate principal amount of 4.25% collateralized insurance-backed pollution
control bonds due 2017 were issued on behalf of CenterPoint Houston. The
pollution control bonds are collateralized by general mortgage bonds of
CenterPoint Houston with principal amounts, interest rates and maturities that
match the pollution control bonds. The proceeds were used to extinguish two
series of 6.375% collateralized pollution control bonds with an aggregate
principal amount of $45 million and one series of 5.6% collateralized pollution
control bonds with an aggregate principal amount of $84 million issued on behalf
of CenterPoint Energy. CenterPoint Houston's 6.375% and 5.6% first mortgage
bonds which collateralized CenterPoint Energy's payment obligations under the
refunded pollution control bonds were retired in connection with the
extinguishment of the refunded pollution control bonds. CenterPoint Houston's
6.375% and 5.6% notes payable to CenterPoint Energy were also cancelled upon the
extinguishment of the refunded pollution control bonds.
On December 15, 2004, the Company permanently reduced its three-year credit
facility to $750 million from $2.34 billion. The credit facility was composed of
a $1.425 billion revolving credit facility (LIBOR plus 300 basis points), which
has been permanently reduced to $750 million, and a $915 million term loan
(LIBOR plus 350 basis points), which was repaid and retired on December 15,
2004. As a result of the term loan repayment and the permanent reduction of the
revolving credit facility, the Company expensed $15 million of unamortized loan
costs in the fourth quarter of 2004 that were associated with these facilities.
In March 2005, the Company replaced its $750 million revolving credit
facility with a $1 billion five-year revolving credit facility. Borrowings may
be made under the facility at LIBOR plus 100 basis points based on current
credit ratings. An additional utilization fee of 12.5 basis points applies to
borrowings any time 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.
In March 2005, CenterPoint Houston established a $200 million five-year
revolving credit facility. Borrowings may be made under the facility at LIBOR
plus 75 basis points based on CenterPoint Houston's current credit rating. An
additional utilization fee of 12.5 basis points applies to borrowings any time
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.
CenterPoint Houston also established a $1.31 billion credit facility in
March 2005. This facility is available to be utilized only to refinance
CenterPoint Houston'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. Net proceeds from the issuance of transition
bonds and certain new net indebtedness for borrowed money issued by CenterPoint
Houston in excess of $200 million must
52
be used to repay borrowings under the new facility. Based on CenterPoint
Houston's current credit ratings, borrowings under the facility can 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 CenterPoint Houston's general
mortgage bonds in the same principal amount and bearing the same interest rate
as such drawings.
Convertible Debt. On May 19, 2003, the Company issued $575 million
aggregate principal amount of convertible senior notes due May 15, 2023 with an
interest rate of 3.75%. Holders may convert each of their notes into shares of
CenterPoint Energy common stock, initially at a conversion rate of 86.3558
shares of common stock per $1,000 principal amount of notes at any time prior to
maturity, under the following circumstances: (1) if the last reported sale price
of CenterPoint Energy common stock for at least 20 trading days during the
period of 30 consecutive trading days ending on the last trading day of the
previous calendar quarter is greater than or equal to 120% or, following May 15,
2008, 110% of the conversion price per share of CenterPoint Energy common stock
on such last trading day, (2) if the notes have been called for redemption, (3)
during any period in which the credit ratings assigned to the notes by both
Moody's Investors Service, Inc. (Moody's) and Standard & Poor's Ratings Services
(S&P), a division of The McGraw-Hill Companies, are lower than Ba2 and BB,
respectively, or the notes are no longer rated by at least one of these ratings
services or their successors, or (4) upon the occurrence of specified corporate
transactions, including the distribution to all holders of CenterPoint Energy
common stock of certain rights entitling them to purchase shares of CenterPoint
Energy common stock at less than the last reported sale price of a share of
CenterPoint Energy common stock on the trading day prior to the declaration date
of the distribution or the distribution to all holders of CenterPoint Energy
common stock of the Company's assets, debt securities or certain rights to
purchase the Company's securities, which distribution has a per share value
exceeding 15% of the last reported sale price of a share of CenterPoint Energy
common stock on the trading day immediately preceding the declaration date for
such distribution. The convertible senior notes also have a contingent interest
feature requiring contingent interest to be paid to holders of notes commencing
on or after May 15, 2008, in the event that the average trading price of a note
for the applicable five trading day period equals or exceeds 120% of the
principal amount of the note as of the day immediately preceding the first day
of the applicable six-month interest period. For any six-month period,
contingent interest will be equal to 0.25% of the average trading price of the
note for the applicable five-trading-day period.
In March 2005, the Company filed a registration statement relating to an
offer to exchange its 3.75% convertible senior notes due 2023 for a new series
of 3.75% convertible senior notes due 2023. This registration statement has not
yet been declared effective by the SEC. The Company expects to conduct the
exchange offer in response to the guidance set forth in EITF 04-8. Under that
guidance, because settlement of the principal portion of new notes will be made
in cash rather than stock, exchanging new notes for old notes will allow the
Company to exclude the portion of the conversion value of the new notes
attributable to their principal amount from its computation of diluted earnings
per share from continuing operations. See Note 2(n) for further discussion of
the Company's adoption of EITF 04-8 and the impact on diluted earnings per share
related to these securities.
On December 17, 2003, the Company issued $255 million aggregate principal
amount of convertible senior notes due January 15, 2024 with an interest rate of
2.875%. Holders may convert each of their notes into shares of CenterPoint
Energy common stock, initially at a conversion rate of 78.064 shares of common
stock per $1,000 principal amount of notes at any time prior to maturity, under
the following circumstances: (1) if the last reported sale price of CenterPoint
Energy common stock for at least 20 trading days during the period of 30
consecutive trading days ending on the last trading day of the previous calendar
quarter is greater than or equal to 120% of the conversion price per share of
CenterPoint Energy common stock on such last trading day, (2) if the notes have
been called for redemption, (3) during any period in which the credit ratings
assigned to the notes by both Moody's and S&P are lower than Ba2 and BB,
respectively, or the notes are no longer rated by at least one of these ratings
services or their successors, or (4) upon the occurrence of specified corporate
transactions, including the distribution to all holders of CenterPoint Energy
common stock of certain rights entitling them to purchase shares of CenterPoint
Energy common stock at less than the last reported sale price of a share of
CenterPoint Energy common stock on the trading day prior to the declaration date
of the distribution or the distribution to all holders of CenterPoint Energy
common stock of the Company's assets, debt securities or certain rights to
purchase the Company's securities, which distribution has a per share value
exceeding 15% of the last reported sale price of a share of CenterPoint Energy
common stock on the trading day immediately preceding the declaration date for
such distribution. Under the original terms of these convertible senior notes,
CenterPoint Energy could elect to satisfy part or all of its conversion
obligation by delivering cash in lieu of shares of CenterPoint Energy. On
December 13, 2004, the Company entered into a supplemental indenture with
respect to these convertible senior notes in order to eliminate its right to
settle the conversion of the notes solely in shares of its common stock. The
convertible senior notes also have a contingent interest feature requiring
contingent interest to be paid to holders of notes commencing on or after
January 15, 2007, in the event that the average trading price of a note for the
applicable five-trading-day period equals or exceeds 120% of the principal
amount of the note as of the day immediately preceding the first day of the
applicable six-month interest period. For any six-month period, contingent
interest will be equal to 0.25% of the average trading price of the note for the
applicable five-trading-day period.
53
Proceeds from the issuance of the convertible senior notes were used to
redeem, in January 2004, $250 million liquidation amount of the 8.125% trust
preferred securities issued by HL&P Capital Trust I. Pending such use, the net
proceeds were used to repay a portion of the outstanding borrowings under the
Company's revolving credit facility. See Note 2(n) for further discussion of the
Company's adoption of EITF 04-8 and the impact on diluted earnings per share
related to these securities.
Junior Subordinated Debentures (Trust Preferred Securities). In February
1997, two Delaware statutory business trusts created by CenterPoint Energy (HL&P
Capital Trust I and HL&P Capital Trust II) issued to the public (a) $250 million
aggregate amount of preferred securities and (b) $100 million aggregate amount
of capital securities, respectively. In February 1999, a Delaware statutory
business trust created by CenterPoint Energy (REI Trust I) issued $375 million
aggregate amount of preferred securities to the public. Each of the trusts used
the proceeds of the offerings to purchase junior subordinated debentures issued
by CenterPoint Energy having interest rates and maturity dates that correspond
to the distribution rates and the mandatory redemption dates for each series of
preferred securities or capital securities. As discussed in Note 2(n), upon the
Company's adoption of FIN 46, the amount of outstanding junior subordinated
debentures discussed above was included in long-term debt as of December 31,
2003 and 2004.
The preferred securities issued by HL&P Capital Trust I having an aggregate
liquidation amount of $250 million were redeemed at 100% of their aggregate
liquidation amount in January 2004. The preferred securities issued by REI Trust
I having an aggregate liquidation amount of $375 million were redeemed at 100%
of their aggregate liquidation amount in December 2004.
The junior subordinated debentures are the trusts' sole assets and their
entire operations. CenterPoint Energy considers its obligations under the
Amended and Restated Declaration of Trust, Indenture, Guaranty Agreement and,
where applicable, Agreement as to Expenses and Liabilities, relating to each
series of preferred securities or capital securities, taken together, to
constitute a full and unconditional guarantee by CenterPoint Energy of each
trust's obligations related to the respective series of preferred securities or
capital securities.
The preferred securities and capital securities are mandatorily redeemable
upon the repayment of the related series of junior subordinated debentures at
their stated maturity or earlier redemption. Subject to some limitations,
CenterPoint Energy has the option of deferring payments of interest on the
junior subordinated debentures. During any deferral or event of default,
CenterPoint Energy may not pay dividends on its capital stock. As of December
31, 2004, no interest payments on the junior subordinated debentures had been
deferred.
The outstanding aggregate liquidation amount, distribution rate and
mandatory redemption date of each series of the preferred securities or capital
securities of the trusts described above and the identity and similar terms of
each related series of junior subordinated debentures are as follows:
AGGREGATE LIQUIDATION
AMOUNTS AS OF DISTRIBUTION MANDATORY
--------------------------- RATE/ REDEMPTION
DECEMBER 31, DECEMBER 31, INTEREST DATE/
TRUST 2003 2004 RATE MATURITY DATE JUNIOR SUBORDINATED DEBENTURES
- ----- ------------ ------------ ------------ ------------- ------------------------------
(IN MILLIONS)
REI Trust I............. $375 $ -- 7.20% March 2048 7.20% Junior Subordinated Debentures
HL&P Capital Trust I.... $250 $ -- 8.125% March 2046 8.125% Junior Subordinated Deferrable
Interest Debentures Series A
HL&P Capital Trust II... $100 $100 8.257% February 2037 8.257% Junior Subordinated Deferrable
Interest Debentures Series B
In June 1996, a Delaware statutory business trust created by CERC Corp.
(CERC Trust) issued $173 million aggregate amount of convertible preferred
securities to the public. CERC Trust used the proceeds of the offering to
purchase convertible junior subordinated debentures issued by CERC Corp. having
an interest rate and maturity date that correspond to the distribution rate and
mandatory redemption date of the convertible preferred securities. The
convertible junior subordinated debentures represent CERC Trust's sole asset and
its entire operations. CERC Corp. considers its obligation under the Amended and
Restated Declaration of Trust, Indenture and Guaranty Agreement relating to the
convertible preferred securities, taken together, to constitute a full and
unconditional guarantee by CERC Corp. of CERC Trust's obligations with respect
to the convertible preferred securities. As discussed in Note 2(n), upon the
Company's adoption of FIN 46, the amount of outstanding junior subordinated
debentures discussed above was included in long-term debt as of December 31,
2003 and 2004.
54
The convertible preferred securities are mandatorily redeemable upon the
repayment of the convertible junior subordinated debentures at their stated
maturity or earlier redemption. Effective January 7, 2003, the convertible
preferred securities are convertible at the option of the holder into $33.62 of
cash and 2.34 shares of CenterPoint Energy common stock for each $50 of
liquidation value. As of December 31, 2003 and 2004, the liquidation amount of
convertible preferred securities outstanding was $0.4 and $0.3 million,
respectively. The securities, and their underlying convertible junior
subordinated debentures, bear interest at 6.25% and mature in June 2026. Subject
to some limitations, CERC Corp. has the option of deferring payments of interest
on the convertible junior subordinated debentures. During any deferral or event
of default, CERC Corp. may not pay dividends on its common stock to CenterPoint
Energy. As of December 31, 2004, no interest payments on the convertible junior
subordinated debentures had been deferred.
Maturities. The Company's maturities of long-term debt, capital leases and
sinking fund requirements, excluding the ZENS obligation, are $1.7 billion in
2005, $215 million in 2006, $66 million in 2007, $572 million in 2008 and $80
million in 2009. The 2005 amount is net of the portion of a sinking fund payment
that will be satisfied with debt that had been acquired and retired as of
December 31, 2004.
Liens. As of December 31, 2004, CenterPoint Houston's assets were subject
to liens securing approximately $253 million of first mortgage bonds. Sinking or
improvement fund and replacement fund requirements on the first mortgage bonds
may be satisfied by certification of property additions. Sinking fund and
replacement fund requirements for 2002, 2003 and 2004 have been satisfied by
certification of property additions. The replacement fund requirement to be
satisfied in 2005 is approximately $147 million, and the sinking fund
requirement to be satisfied in 2005 is approximately $3 million. The Company
expects CenterPoint Houston to meet these 2005 obligations by certification of
property additions. At December 31, 2004, CenterPoint Houston's assets were also
subject to liens securing approximately $3.3 billion of general mortgage bonds
which are junior to the liens of the first mortgage bonds.
(C) RECEIVABLES FACILITY
On January 21, 2004, CERC replaced its $100 million receivables facility
with a $250 million receivables facility. As of December 31, 2004, CERC had $181
million outstanding under its receivables facility. In January 2005, the
facility was extended to January 2006 and temporarily increased, for the period
from January 2005 to June 2005, to $375 million to provide additional liquidity
to CERC during the peak heating season of 2005, in view of recent levels of, and
volatility in, gas prices.
(9) STOCK-BASED INCENTIVE COMPENSATION PLANS AND EMPLOYEE BENEFIT PLANS
(A) INCENTIVE COMPENSATION PLANS
The Company has long-term incentive compensation plans (LICPs) that provide
for the issuance of stock-based incentives, including performance-based shares,
performance-based units, restricted shares and stock options to directors,
officers and key employees. A maximum of approximately 37 million shares of
CenterPoint Energy common stock may be issued under these plans.
Performance-based shares, performance-based units and restricted shares are
granted to employees without cost to the participants. The performance shares
and units vest three years after the grant date based upon the performance of
the Company over a three-year cycle, except as discussed below. The restricted
shares vest at various times ranging from one-year to the end of a three-year
period. Upon vesting, the shares are issued to the plan participants.
During 2002, 2003 and 2004, the Company recorded compensation expense of $2
million, $9 million and $8 million, respectively, related to performance-based
shares, performance-based units and restricted share grants. Included in these
amounts is a compensation benefit of $1 million recorded in 2002 related to
RRI's participants. Amounts for RRI's and Texas Genco's participants are
reflected in discontinued operations in the Statements of Consolidated
Operations.
55
The following table summarizes the Company's performance-based units,
performance-based shares and restricted share grant activity for the years 2002
through 2004:
NUMBER OF NUMBER OF NUMBER OF
PERFORMANCE-BASED PERFORMANCE-BASED RESTRICTED
UNITS SHARES SHARES
----------------- ----------------- ----------
Outstanding at December 31, 2001 ................. 83,670 626,090 208,562
Granted ....................................... -- 451,050 --
Canceled ...................................... (5,625) (176,258) (41,892)
Released to participants ...................... (120) (447,060) (78,768)
------- ---------- ---------
Outstanding at December 31, 2002 ................. 77,925 453,822 87,902
Granted ....................................... -- 840,920 583,613
Shares converted at Texas Genco Distribution .. -- 25,746 23,219
Canceled ...................................... (29,515) (43,386) (14,240)
Released to participants ...................... (1,441) (7,042) (113,056)
------- ---------- ---------
Outstanding at December 31, 2003 ................. 46,969 1,270,060 567,438
Granted ....................................... 38,200 -- 255,800
Canceled ...................................... (39) (88,905) (40,128)
Released to participants ...................... (47,930) (12,642) (14,363)
------- ---------- ---------
Outstanding at December 31, 2004 ................. 37,200 1,168,513 768,747
======= ========== =========
Weighted average fair value granted for 2002 ..... $ 12.00 $ --
========== =========
Weighted average fair value granted for 2003 ..... $ 5.70 $ 5.83
========== =========
Weighted average fair value granted for 2004 ..... $ -- $ 10.95
========== =========
The maximum value associated with the performance-based units granted in
2004 was $150 per unit.
Effective with the RRI Distribution which occurred on September 30, 2002,
the Company's compensation committee authorized the conversion of outstanding
CenterPoint Energy performance-based shares for the performance cycle ending
December 31, 2002 to a number of restricted shares of CenterPoint Energy's
common stock equal to the number of performance-based shares that would have
vested if the performance objectives for the performance cycle were achieved at
the maximum level for substantially all shares. These restricted shares vested
if the participant holding the shares remained employed with the Company or with
RRI and its subsidiaries through December 31, 2002. On the date of the RRI
Distribution, holders of these restricted shares received shares of RRI common
stock in the same manner as other holders of CenterPoint Energy common stock,
but these shares of common stock were subject to the same vesting schedule, as
well as to the terms and conditions of the plan under which the original
performance shares were granted. Thus, following the RRI Distribution, employees
who held performance-based shares under the LICP for the performance cycle
ending December 31, 2002 held restricted shares of CenterPoint Energy common
stock and restricted shares of RRI common stock, which vested following
continuous employment through December 31, 2002.
Effective with the RRI Distribution, the Company converted all outstanding
CenterPoint Energy stock options granted prior to the initial public offering of
RRI common stock in May 2001 (RRI Offering) to a combination of adjusted
CenterPoint Energy stock options and RRI stock options. For the converted stock
options, the sum of the intrinsic value of the CenterPoint Energy stock options
immediately prior to the record date of the RRI Distribution equaled the sum of
the intrinsic values of the adjusted CenterPoint Energy stock options and the
RRI stock options granted immediately after the record date of the RRI
Distribution. As such, RRI employees who do not work for the Company hold stock
options of the Company. Both the number and the exercise price of all
outstanding CenterPoint Energy stock options that were granted on or after the
RRI Offering and prior to the RRI Distribution were adjusted to maintain the
total intrinsic value of the grants.
During January 2003, due to the Texas Genco Distribution, the Company
granted additional CenterPoint Energy shares to participants with
performance-based and restricted shares that had not yet vested as of the record
date of December 20, 2002. These additional shares are subject to the same
vesting schedule and the terms and conditions of the plan under which the
original shares were granted. Also in connection with this distribution, both
the number and the exercise price of all outstanding CenterPoint Energy stock
options were adjusted to maintain the total intrinsic value of the stock option
grants.
Under the Company's plans, stock options generally become exercisable in
one-third increments on each of the first through third anniversaries of the
grant date. The exercise price is the average of the high and low sales price of
the common stock on the New York Stock Exchange on the grant date. The Company
applies APB Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
Opinion No. 25), and related interpretations in accounting for its stock option
plans. Accordingly, no compensation expense has been recognized for these fixed
stock options.
56
The following table summarizes stock option activity related to the Company
for the years 2002 through 2004:
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
---------- ----------------
Outstanding at December 31, 2001 .................... 9,828,471 $28.34
Options granted .................................. 3,115,399 7.12
Options converted at RRI Distribution ............ 742,636 29.01
Options exercised ................................ (71,273) 20.59
Options canceled ................................. (1,155,351) 16.11
----------
Outstanding at December 31, 2002 .................... 12,459,882 18.26
Options granted .................................. 2,217,546 5.69
Options converted at Texas Genco Distribution .... 751,867 17.21
Options exercised ................................ (80,750) 6.44
Options canceled ................................. (275,408) 16.40
----------
Outstanding at December 31, 2003 .................... 15,073,137 15.59
Options granted .................................. 2,028,000 10.92
Options exercised ................................ (580,624) 6.16
Options canceled ................................. (361,418) 11.99
----------
Outstanding at December 31, 2004 .................... 16,159,095 $15.42
========== ======
Options exercisable at December 31, 2002 ............ 6,854,910 $19.78
========== ======
Options exercisable at December 31, 2003 ............ 10,285,689 $18.09
========== ======
Options exercisable at December 31, 2004 ............ 12,076,730 $17.82
========== ======
Exercise prices for CenterPoint Energy stock options outstanding held by
Company employees ranged from $4.78 to $32.26. The following tables provide
information with respect to outstanding CenterPoint Energy stock options held by
the Company's employees on December 31, 2004:
REMAINING AVERAGE
OPTIONS AVERAGE CONTRACTUAL LIFE
OUTSTANDING EXERCISE PRICE (YEARS)
----------- -------------- -----------------
Ranges of Exercise Prices:
$4.78-$10.00............................ 4,212,025 $ 6.10 7.2
$10.01-$15.00........................... 5,737,414 12.93 5.1
$15.01-$20.00........................... 3,079,571 18.06 2.2
$20.01-$30.00........................... 708,162 22.99 3.5
$30.01-$32.26........................... 2,421,923 31.96 5.4
----------
Total................................ 16,159,095 15.42 5.1
==========
The following table provides information with respect to CenterPoint Energy
stock options exercisable at December 31, 2004:
OPTIONS AVERAGE
EXERCISABLE EXERCISE PRICE
----------- --------------
Ranges of Exercise Prices:
$4.78-$10.00............................ 2,070,960 $ 6.23
$10.01-$15.00........................... 3,796,114 13.96
$15.01-$20.00........................... 3,079,571 18.06
$20.01-$30.00........................... 708,162 22.99
$30.01-$32.26........................... 2,421,923 31.96
----------
Total................................ 12,076,730 17.82
==========
See Note 2(o) for disclosure of the pro-forma effect on net income of the
fair value based method of accounting for stock compensation.
(B) PENSION AND POSTRETIREMENT BENEFITS
The Company maintains a non-contributory qualified defined benefit plan
covering substantially all employees, with benefits determined using a cash
balance formula. Under the cash balance formula, participants accumulate a
retirement benefit based upon 4% of eligible earnings and accrued interest.
Prior to 1999, the pension plan accrued benefits based on years of service,
final average pay and covered compensation. As a result, certain employees
participating in the plan as of December 31, 1998 are eligible to receive the
57
greater of the accrued benefit calculated under the prior plan through 2008 or
the cash balance formula. Participants are 100% vested in their benefit after
completing five years of service.
The Company provides certain healthcare and life insurance benefits for
retired employees on a contributory and non-contributory basis. Employees become
eligible for these benefits if they have met certain age and service
requirements at retirement, as defined in the plans. Under plan amendments,
effective in early 1999, healthcare benefits for future retirees were changed to
limit employer contributions for medical coverage.
Such benefit costs are accrued over the active service period of employees.
The net unrecognized transition obligation, resulting from the implementation of
accrual accounting, is being amortized over approximately 20 years.
The Company's net periodic cost includes the following components relating
to pension and postretirement benefits:
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
2002 2003 2004
------------------------- ------------------------- -------------------------
PENSION POSTRETIREMENT PENSION POSTRETIREMENT PENSION POSTRETIREMENT
BENEFITS BENEFITS BENEFITS BENEFITS BENEFITS BENEFITS
-------- -------------- -------- -------------- -------- --------------
(IN MILLIONS)
Service cost ............................ $ 32 $ 5 $ 37 $ 4 $ 40 $ 4
Interest cost ........................... 104 32 102 31 102 31
Expected return on plan assets .......... (126) (13) (92) (11) (103) (13)
Net amortization ........................ 16 13 43 13 37 13
Curtailment ............................. -- -- -- -- -- 17
Benefit enhancement ..................... 9 3 -- -- 4 2
Settlement .............................. -- (18) -- -- -- --
----- ---- ---- ---- ----- ----
Net periodic cost ....................... $ 35 $ 22 $ 90 $ 37 $ 80 $ 54
===== ==== ==== ==== ===== ====
Above amounts reflect the following
net periodic cost (benefit) related to
discontinued operations .............. $ 11 $ (9) $ 17 $ 4 $ 11 $ 20
===== ==== ==== ==== ===== ====
The Company used the following assumptions to determine net periodic cost
relating to pension and postretirement benefits:
DECEMBER 31,
---------------------------------------------------------------------------------
2002 2003 2004
------------------------- ------------------------- -------------------------
PENSION POSTRETIREMENT PENSION POSTRETIREMENT PENSION POSTRETIREMENT
BENEFITS BENEFITS BENEFITS BENEFITS BENEFITS BENEFITS
-------- -------------- -------- -------------- -------- --------------
Discount rate .............................. 7.25% 7.25% 6.75% 6.75% 6.25% 6.25%
Expected return on plan assets ............. 9.5% 9.5% 9.0% 9.0% 9.0% 8.5%
Rate of increase in compensation levels .... 4.1% -- 4.1% -- 4.1% --
In determining net periodic benefits cost, the Company uses fair value, as
of the beginning of the year, as its basis for determining expected return on
plan assets.
58
The following table displays the change in the benefit obligation, the fair
value of plan assets and the amounts included in the Company's Consolidated
Balance Sheets as of December 31, 2003 and 2004 for the Company's pension and
postretirement benefit plans:
DECEMBER 31,
-----------------------------------------------------
2003 2004
------------------------- -------------------------
PENSION POSTRETIREMENT PENSION POSTRETIREMENT
BENEFITS BENEFITS BENEFITS BENEFITS
-------- -------------- -------- --------------
(IN MILLIONS)
CHANGE IN BENEFIT OBLIGATION
Benefit obligation, beginning of year ................. $1,550 $ 479 $1,692 $ 518
Service cost .......................................... 37 4 40 4
Interest cost ......................................... 102 31 102 31
Participant contributions ............................. -- 8 -- 6
Benefits paid ......................................... (142) (43) (124) (42)
Plan amendments ....................................... 4 (5) -- (20)
Divestitures .......................................... -- -- (165) --
Actuarial loss ........................................ 141 44 161 36
Curtailment, benefit enhancement and settlement ....... -- -- 4 2
------ ----- ------ -----
Benefit obligation, end of year ....................... $1,692 $ 518 $1,710 $ 535
====== ===== ====== =====
CHANGE IN PLAN ASSETS
Plan assets, beginning of year ........................ $1,054 $ 131 $1,194 $ 150
Employer contributions ................................ 23 34 476 27
Participant contributions ............................. -- 8 -- 6
Benefits paid ......................................... (142) (43) (124) (42)
Divestitures .......................................... -- -- (40) --
Actual investment return .............................. 259 20 151 15
------ ----- ------ -----
Plan assets, end of year .............................. $1,194 $ 150 $1,657 $ 156
====== ===== ====== =====
RECONCILIATION OF FUNDED STATUS
Funded status ......................................... $ (498) $(368) $ (53) $(379)
Unrecognized actuarial loss ........................... 733 63 714 96
Unrecognized prior service cost ....................... (71) 49 (51) 14
Unrecognized transition (asset) obligation ............ -- 79 -- 65
------ ----- ------ -----
Net amount recognized ................................. $ 164 $(177) $ 610 $(204)
====== ===== ====== =====
AMOUNTS RECOGNIZED IN BALANCE SHEETS
Benefit obligations ................................... $ (395) $(177) $ 610 $(204)
Accumulated other comprehensive income ................ 559 -- -- --
------ ----- ------ -----
Prepaid (accrued) benefit cost ........................ $ 164 $(177) $ 610 $(204)
====== ===== ====== =====
ACTUARIAL ASSUMPTIONS
Discount rate ......................................... 6.25% 6.25% 5.75% 5.75%
Expected return on plan assets ........................ 9.0% 8.5% 8.5% 8.0%
Rate of increase in compensation levels ............... 4.1% -- 4.6% --
Healthcare cost trend rate assumed for the next year .. -- 10.50% -- 9.75%
Rate to which the cost trend rate is assumed to decline
(the ultimate trend rate) .......................... -- 5.5% -- 5.5%
Year that the rate reaches the ultimate trend rate .... -- 2011 -- 2011
DECEMBER 31,
-----------------------------------------------------------------------------
2003 2004
------------------------------------- -------------------------------------
PENSION POSTRETIREMENT PENSION POSTRETIREMENT
BENEFITS BENEFITS BENEFITS BENEFITS
----------------- ----------------- ----------------- -----------------
(IN MILLIONS)
ADDITIONAL INFORMATION
Accumulated benefit obligation............... $1,589 $518 $1,635 $535
Change in minimum liability included in other
comprehensive income...................... (64) -- (559) --
Measurement date used to determine plan
obligations and assets.................... December 31, 2003 December 31, 2003 December 31, 2004 December 31, 2004
59
Assumed healthcare cost trend rates have a significant effect on the
reported amounts for the Company's postretirement benefit plans. A 1% change in
the assumed healthcare cost trend rate would have the following effects:
1% 1%
INCREASE DECREASE
-------- --------
(IN MILLIONS)
Effect on total of service and interest cost ..... $ 2 $ 2
Effect on the postretirement benefit obligation .. 39 33
The following table displays the weighted-average asset allocations as of
December 31, 2003 and 2004 for the Company's pension and postretirement benefit
plans:
DECEMBER 31,
-----------------------------------------------------
2003 2004
------------------------- -------------------------
PENSION POSTRETIREMENT PENSION POSTRETIREMENT
BENEFITS BENEFITS BENEFITS BENEFITS
-------- -------------- -------- --------------
Domestic equity securities ....... 60% 41% 57% 34%
International equity securities .. 15 9 15 11
Debt securities .................. 22 48 26 54
Real estate ...................... 3 -- 2 --
Cash ............................. -- 2 -- 1
--- --- --- ---
Total ......................... 100% 100% 100% 100%
=== === === ===
In managing the investments associated with the benefit plans, the
Company's objective is to preserve and enhance the value of plan assets while
maintaining an acceptable level of volatility. These objectives are expected to
be achieved through an investment strategy that manages liquidity requirements
while maintaining a long-term horizon in making investment decisions and
efficient and effective management of plan assets.
As part of the investment strategy discussed above, the Company has adopted
and maintains the following weighted average allocation targets for its benefit
plans:
PENSION POSTRETIREMENT
BENEFITS BENEFITS
-------- --------------
Domestic equity securities ....... 45-55% 28-38%
International equity securities .. 7-13% 5-15%
Debt securities .................. 20-30% 52-62%
Real estate ...................... 0-5% --
Cash ............................. 0-2% 0-2%
The expected rate of return assumption was developed by reviewing the
targeted asset allocations and historical index performance of the applicable
asset classes over a 15-year period, adjusted for investment fees and
diversification effects.
Equity securities for the pension plan include CenterPoint Energy common
stock in the amounts of $44 million (3.7% of total pension plan assets) as of
December 31, 2003. The pension plan did not include any holdings of CenterPoint
Energy common stock as of December 31, 2004.
Although funding for the Company's pension and postretirement plans was not
required during 2004, the Company contributed $56 million to its pension plan in
September 2004 and $420 million in December 2004, which effectively brought the
Company's pension plan assets and accumulated benefit obligation into balance
and increased shareholders' equity by $350 million as a result of the
elimination of the related minimum benefit liability. Additionally, the Company
contributed $27 million to its postretirement benefits plan in 2004.
Contributions to the pension plan are not required in 2005; however, the
Company expects to make a contribution. The Company expects to contribute
approximately $29 million to its postretirement benefits plan in 2005.
60
The following benefit payments are expected to be paid by the pension and
postretirement benefit plans:
PENSION POSTRETIREMENT
BENEFITS BENEFITS
-------- --------------
(IN MILLIONS)
2005 ............................................... $108 $ 38
2006 ............................................... 112 40
2007 ............................................... 114 42
2008 ............................................... 118 44
2009 ............................................... 120 46
2010-2014 .......................................... 627 240
In connection with the Company's sale of its 81% interest in Texas Genco as
discussed in Note 3, a separate pension plan was established for Texas Genco on
September 1, 2004 and the Company transferred a net pension liability of
approximately $68 million to Texas Genco. In October 2004, Texas Genco received
an allocation of assets from the Company's pension plan pursuant to rules and
regulations under the Employee Retirement Income Security Act of 1974.
In addition to the non-contributory pension plans discussed above, the
Company maintains a non-qualified benefit restoration plan which allows
participants to retain the benefits to which they would have been entitled under
the Company's non-contributory pension plan except for the federally mandated
limits on qualified plan benefits or on the level of compensation on which
qualified plan benefits may be calculated. The expense associated with this
non-qualified plan was $9 million, $8 million and $6 million in 2002, 2003 and
2004, respectively. Included in the net benefit cost in 2002 is $3 million of
expense related to RRI's participants, which is reflected in discontinued
operations in the Statements of Consolidated Operations. The accrued benefit
liability for the non-qualified pension plan was $75 million and $69 million at
December 31, 2003 and 2004, respectively. In addition, these accrued benefit
liabilities include the recognition of minimum liability adjustments of $15
million as of December 31, 2003 and $10 million as of December 31, 2004, which
are reported as a component of other comprehensive income, net of income tax
effects.
The following table displays the Company's plans that have or have had
accumulated benefit obligations in excess of plan assets:
DECEMBER 31,
---------------------------------------------------------------------------------
2003 2004
--------------------------------------- ---------------------------------------
PENSION RESTORATION POSTRETIREMENT PENSION RESTORATION POSTRETIREMENT
BENEFITS BENEFITS BENEFITS BENEFITS BENEFITS BENEFITS
-------- ----------- -------------- -------- ----------- --------------
(IN MILLIONS)
Accumulated benefit obligation ..... $1,589 $75 $518 $1,635 $69 $535
Projected benefit obligation ....... 1,692 77 518 1,710 81 535
Plan assets ........................ 1,194 -- 150 1,657 -- 156
(C) SAVINGS PLAN
The Company has a qualified employee savings plan that includes a cash or
deferred arrangement under Section 401(k) of the Internal Revenue Code of 1986,
as amended (the Code), and an employee stock ownership plan (ESOP) under Section
4975(e)(7) of the Code. Under the plan, participating employees may contribute a
portion of their compensation, on a pre-tax or after-tax basis, generally up to
a maximum of 16% of compensation. The Company matches 75% of the first 6% of
each employee's compensation contributed. The Company may contribute an
additional discretionary match of up to 50% of the first 6% of each employee's
compensation contributed. These matching contributions are fully vested at all
times.
Participating employees may elect to invest all or a portion of their
contributions to the plan in CenterPoint Energy common stock, to have dividends
reinvested in additional shares or to receive dividend payments in cash on any
investment in CenterPoint Energy common stock, and to transfer all or part of
their investment in CenterPoint Energy common stock to other investment options
offered by the plan.
During the first quarter 2004, the Company repaid the balance on the ESOP
loan. As a result, the Company's matching requirements during 2004 were
satisfied, in part, through the allocation of the remaining 911,847 ESOP shares
held by the plan and by cash contributions.
As a result of the ESOP, the savings plan has significant holdings of
CenterPoint Energy common stock. As of December 31, 2004, an aggregate of
27,565,537 shares of CenterPoint Energy's common stock were held by the savings
plan, which represented
61
26% of its investments. Given the concentration of the investments in
CenterPoint Energy's common stock, the savings plan and its participants have
market risk related to this investment.
The Company's savings plan benefit expense was $47 million, $38 million and
$40 million in 2002, 2003 and 2004, respectively. Included in these amounts is
$6 million of savings plan benefit expense for 2002 related to RRI's
participants, and $9 million, $7 million and $6 million of savings plan benefit
expense for 2002, 2003 and 2004, respectively, related to Texas Genco
participants. Amounts for RRI's and Texas Genco's participants are reflected as
discontinued operations in the Statements of Consolidated Operations.
(D) POSTEMPLOYMENT BENEFITS
Net postemployment benefit costs for former or inactive employees, their
beneficiaries and covered dependents, after employment but before retirement
(primarily healthcare and life insurance benefits for participants in the
long-term disability plan) were $12 million, $10 million and $8 million in 2002,
2003 and 2004, respectively. Included in these amounts are $1 million for each
of the years 2002, 2003, and 2004 related to Texas Genco participants, which is
reflected in discontinued operations in the Statements of Consolidated
Operations.
The Company's postemployment obligation is presented as a liability in the
Consolidated Balance Sheets under the caption "Benefit Obligations."
(E) OTHER NON-QUALIFIED PLANS
The Company has non-qualified deferred compensation plans that provide
benefits payable to directors, officers and certain key employees or their
designated beneficiaries at specified future dates, upon termination, retirement
or death. Benefit payments are made from the general assets of the Company.
During 2002, 2003 and 2004, the Company recorded benefit expense relating to
these programs of $11 million, $13 million and $9 million, respectively.
Included in "Benefit Obligations" in the accompanying Consolidated Balance
Sheets at December 31, 2003 and 2004 was $127 million and $121 million,
respectively, relating to deferred compensation plans. Included in "Non-Current
Liabilities of Discontinued Operations in the accompanying Consolidated Balance
Sheets at December 31, 2003 and 2004 was $4 million and $3 million,
respectively, relating to deferred compensation plans for Texas Genco
participants.
(F) CHANGE OF CONTROL AGREEMENTS AND OTHER EMPLOYEE MATTERS
In December 2003, the Company entered into agreements with certain of its
executive officers that generally provide, to the extent applicable, in the case
of a change of control of the Company and termination of employment, for
severance benefits of up to three times annual base salary plus bonus and other
benefits. By their terms, these agreements will expire December 31, 2006.
As of December 31, 2004, approximately 31% of the Company's employees are
subject to collective bargaining agreements. Four of these agreements, covering
approximately 9% of the Company's employees, have expired or will expire in
2005.
62
(10) INCOME TAXES
The Company's current and deferred components of income tax expense
(benefit) were as follows:
YEAR ENDED DECEMBER 31,
-----------------------
2002 2003 2004
---- ----- -----
(IN MILLIONS)
Current:
Federal ........................ $(78) $(301) $(130)
State .......................... 9 5 11
---- ----- -----
Total current ............... (69) (296) (119)
---- ----- -----
Deferred:
Federal ........................ 330 487 264
State .......................... 11 14 (6)
---- ----- -----
Total deferred .............. 341 501 258
---- ----- -----
Income tax expense ................ $272 $ 205 $ 139
==== ===== =====
A reconciliation of the federal statutory income tax rate to the effective
income tax rate is as follows:
YEAR ENDED DECEMBER 31,
-----------------------
2002 2003 2004
----- ----- -----
(IN MILLIONS)
Income from continuing operations before income taxes and extraordinary loss .......... $ 754 $ 614 $ 344
Federal statutory rate ................................................................ 35% 35% 35%
----- ----- -----
Income taxes at statutory rate ........................................................ 264 215 120
----- ----- -----
Net addition (reduction) in taxes resulting from:
State income taxes, net of valuation allowances and federal income tax benefit ..... 13 12 3
Capital loss benefit ............................................................... (72) -- --
Amortization of investment tax credit .............................................. (5) (8) (8)
Excess deferred taxes .............................................................. (3) (4) (4)
Valuation allowance, capital loss .................................................. 72 -- --
Deferred tax asset write-off ....................................................... -- -- 19
Increase in tax reserve ............................................................ -- -- 7
Other, net ......................................................................... 3 (10) 2
----- ----- -----
Total ........................................................................... 8 (10) 19
----- ----- -----
Income tax expense .................................................................... $ 272 $ 205 $ 139
===== ===== =====
Effective rate ........................................................................ 36.1% 33.4% 40.4%
63
Following are the Company's tax effects of temporary differences between
the carrying amounts of assets and liabilities in the financial statements and
their respective tax bases:
DECEMBER 31,
---------------
2003 2004
------ ------
(IN MILLIONS)
Deferred tax assets:
Current:
Allowance for doubtful accounts ................ $ 9 $ 13
Regulatory liabilities ......................... 65 79
Non-trading derivative assets, net ............. 20 28
------ ------
Total current deferred tax assets ........... 94 120
------ ------
Non-current:
Employee benefits .............................. 288 --
Disallowed plant cost, net ..................... 18 --
Operating loss carryforwards ................... 141 30
Contingent liabilities associated with
discontinuance of SFAS No. 71 ............... 74 --
Foreign exchange gains ......................... 16 16
Deferred gas costs ............................. -- 69
Other .......................................... 119 82
Valuation allowance ............................ (73) (20)
------ ------
Total non-current deferred tax assets ....... 583 177
------ ------
Total deferred tax assets, net .............. 677 297
------ ------
Deferred tax liabilities:
Current:
Unrealized gain on indexed debt securities ..... 284 287
Unrealized gain on Time Warner investments ..... 91 94
------ ------
Total current deferred tax liabilities ...... 375 381
------ ------
Non-current:
Depreciation ................................... 1,717 1,709
Regulatory assets, net ......................... 1,016 748
Employee benefits .............................. -- 38
Other .......................................... 81 97
------ ------
Total non-current deferred tax liabilities .. 2,814 2,592
------ ------
Total deferred tax liabilities .............. 3,189 2,973
------ ------
Accumulated deferred income taxes, net ... $2,512 $2,676
====== ======
CenterPoint Energy's consolidated federal income tax returns have been
audited and settled through the 1996 tax year. The 1997 through 2003
consolidated federal income tax returns are currently under audit.
Tax Attribute Carryforwards. At December 31, 2004, the Company has $327 of
state net operating loss carryforwards. The losses are available to offset
future state taxable income through the year 2023. Substantially all of the
state loss carryforwards will expire between 2012 and 2020. A valuation
allowance has been established against approximately 33% of the state net
operating loss carryforwards.
The valuation allowance reflects a net decrease of $10 million and $53
million in 2003 and 2004, respectively. These net changes resulted from a
reassessment of the Company's future ability to use federal and state capital
loss carryforwards and state tax net operating loss carryforwards.
Tax Refunds. In 2003 and 2004, the Company received refunds from the
Internal Revenue Service (IRS) of $203 million and $163 million, respectively,
related to federal tax net operating losses and capital losses generated in 2002
and 2003. Of the 2002 amount, $8 million related to refunds generated from the
carryback of the federal capital loss.
Tax Contingencies. With the conclusion of the federal income tax audit for
the years 1997 through 2000, the Company adjusted its prior years' federal
income tax reserve, along with certain previously recorded deferred tax assets,
resulting in net additional tax expense in the fourth quarter of 2004 of $26
million. In addition, as of December 31, 2004, $42 million of federal tax
reserve has been reclassified to current tax liability.
64
In the 1997 through 2000 audit, the IRS disallowed all deductions for
original issue discount (OID) relating to the Company's ZENS and 7% Automatic
Common Exchange Securities (ACES). It is the contention of the IRS that (1)
those instruments, in combination with the Company's long position in TW Common,
constitute a straddle under Section 1092 and 246 of the Code and (2) the
indebtedness underlying those instruments was incurred to carry the TW Common.
If the IRS prevails on both of these positions, all OID (including interest
actually paid) on the ZENS and ACES would not be currently deductible, but would
instead be added to the Company's basis in the TW Common it holds. The
capitalization of OID to the TW Common basis would have the effect of
recharacterizing ordinary interest deductions to capital losses or reduced
capital gains.
The Company's ability to realize the tax benefit of future capital losses,
if any, from the sale of the 21.6 million shares of TW Common currently held
will depend on the timing of those sales, the value of TW Common stock when
sold, and the extent of any other capital gains and losses.
Although the Company is protesting the contention of the IRS, the Company
has established a tax reserve for this issue of $79 million. The Company has
also reserved for other significant tax items including issues relating to
acquisitions, capital cost recovery and certain positions taken with respect to
state tax filings. The total amount reserved for the other items is
approximately $31 million.
(11) COMMITMENTS AND CONTINGENCIES
(A) FUEL COMMITMENTS
Fuel commitments, excluding Texas Genco, include natural gas contracts
related to the Company's natural gas distribution operations, which have various
quantity requirements and durations that are not classified as non-trading
derivatives assets and liabilities in the Company's Consolidated Balance Sheets
as of December 31, 2004 as these contracts meet the SFAS No. 133 exception to be
classified as "normal purchases contracts" or do not meet the definition of a
derivative. Minimum payment obligations for natural gas supply contracts are
approximately $807 million in 2005, $401 million in 2006, $193 million in 2007,
$29 million in 2008 and $1 million in 2009.
(B) LEASE COMMITMENTS
The following table sets forth information concerning the Company's
obligations, excluding Texas Genco, under non-cancelable long-term operating
leases at December 31, 2004, which primarily consist of rental agreements for
building space, data processing equipment and vehicles (in millions):
2005 ............. $ 25
2006 ............. 21
2007 ............. 18
2008 ............. 14
2009 ............. 6
2010 and beyond .. 26
----
Total ......... $110
====
Total lease expense for all operating leases was $36 million, $35 million
and $32 million during 2002, 2003 and 2004, respectively.
(C) LEGAL, ENVIRONMENTAL AND OTHER REGULATORY MATTERS
Legal Matters
RRI Indemnified Litigation
The Company, CenterPoint Houston 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 the Company and
RRI, the Company 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 the Company and its subsidiaries to the extent named in these
lawsuits. The ultimate outcome of these matters cannot be predicted at this
time.
65
Electricity and Gas Market Manipulation Cases. A large number of lawsuits
have been filed against numerous market participants and remain pending in both
federal and state courts in California and Nevada in connection with the
operation of the electricity and natural gas markets in California and certain
other western states in 2000-2001, a time of power shortages and significant
increases in prices. These lawsuits, many of which have been filed as class
actions, are based on a number of legal theories, including violation of state
and federal antitrust laws, laws against unfair and unlawful business practices,
the federal Racketeer Influenced Corrupt Organization Act, false claims statutes
and similar theories and breaches of contracts to supply power to governmental
entities. Plaintiffs in these lawsuits, which include state officials and
governmental entities as well as private litigants, are seeking a variety of
forms of relief, including recovery of compensatory damages (in some cases in
excess of $1 billion), a trebling of compensatory damages and punitive damages,
injunctive relief, restitution, interest due, disgorgement, civil penalties and
fines, costs of suit, attorneys' fees and divestiture of assets. To date, some
of these complaints have been dismissed by the trial court and are on appeal,
several of which dismissals have been affirmed by the appellate courts, but most
of the lawsuits remain in early procedural stages. The Company's former
subsidiary, RRI, was a participant in the California markets, owning generating
plants in the state and participating in both electricity and natural gas
trading in that state and in western power markets generally. RRI, some of its
subsidiaries and, in some cases, corporate officers of some of those companies
have been named as defendants in these suits.
The Company or its predecessor, Reliant Energy, have 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 Houston and Reliant Energy
were not participants in the electricity or natural gas markets in California.
The Company and Reliant Energy have been dismissed from certain of the lawsuits,
either voluntarily by the plaintiffs or by order of the court and the Company
believes it is not a proper defendant in the remaining cases and will continue
to seek dismissal from such remaining cases. On July 6, 2004 and on October 12,
2004, the Ninth Circuit affirmed the Company's removal to federal district court
of two electric cases brought by the California Attorney General and affirmed
the federal court's dismissal of these cases based upon the filed rate doctrine
and federal preemption.
Other Class Action Lawsuits. Fifteen class action lawsuits filed in May,
June and July 2002 on behalf of purchasers of securities of RRI and/or Reliant
Energy have been consolidated in federal district court in Houston. RRI and
certain of its former and current executive officers are named as defendants.
The consolidated complaint 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.
In February 2003, a lawsuit was filed by three individuals in federal
district court in Chicago against CenterPoint Energy and certain former officers
of RRI for alleged violations of federal securities laws. The plaintiffs in this
lawsuit allege that the defendants violated federal securities laws by issuing
false and misleading statements to the public, and that the defendants made
false and misleading statements as part of an alleged scheme to artificially
inflate trading volumes and revenues. In addition, the plaintiffs assert claims
of fraudulent and negligent misrepresentation and violations of Illinois
consumer law. In January 2004 the trial judge ordered dismissal of plaintiffs'
claims on the ground that they did not set forth a claim. The plaintiffs filed
an amended complaint in March 2004, which the defendants asked the court to
dismiss. On August 18, 2004, the court granted the defendants' motion to dismiss
with prejudice.
In May 2002, three class action lawsuits were filed in federal district
court in Houston on behalf of participants in various employee benefits plans
sponsored by Reliant Energy. Two of the lawsuits have been dismissed without
prejudice. Reliant Energy and certain current and former members of its benefits
committee are the remaining defendants in the third lawsuit. That lawsuit
alleges that the defendants breached their fiduciary duties to various employee
benefits plans, directly or indirectly sponsored by Reliant Energy, in violation
of the Employee Retirement Income Security Act of 1974. The plaintiffs allege
that the defendants permitted the plans to purchase or hold securities issued by
Reliant Energy when it was imprudent to do so, including after the prices for
such
66
securities became artificially inflated because of alleged securities fraud
engaged in by the defendants. The complaint seeks monetary damages for losses
suffered on behalf of the plans and a putative class of plan participants whose
accounts held Reliant Energy or RRI securities, as well as restitution. In July
2004, another class action suit was filed in federal court on behalf of the
Reliant Energy Savings Plan and a class consisting of participants in that plan
against Reliant Energy and the Reliant Energy Benefits Committee. The
allegations and the relief sought in the new suit are substantially similar to
those in the previously pending suit; however, the new suit also alleges that
Reliant Energy and its Benefits Committee breached their fiduciary duties to the
Savings Plan and its participants by investing plan funds in Reliant Energy
stock when Reliant Energy or its subsidiaries were allegedly manipulating the
California energy market. On October 14, 2004, the plaintiff voluntarily
dismissed the newly filed lawsuit.
In October 2002, a derivative action was filed in the federal district
court in Houston against the directors and officers of the Company. 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 the Company 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 the Company as well
as equitable relief in the form of a constructive trust on the compensation paid
to the defendants. The Company's board of directors investigated that demand and
similar allegations made in a June 28, 2002 demand letter sent on behalf of a
Company shareholder. The second letter demanded that the Company 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 the Company. In March 2003, the court dismissed this
case on the grounds that the plaintiff did not make an adequate demand on the
Company 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 Houston, 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 Houston, 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
67
delayed bringing their claims during the more than 30 years since the alleged
wrongs began. The court also held that the Three Cities were not entitled to
recover any attorneys' fees. The Three Cities filed a petition for review to the
Texas Supreme Court, which declined to hear the case. Thus, the Three Cities'
claims have been finally resolved in the Company's favor, but the individual
claims of the 45 cities remain pending in the same court.
Natural Gas Measurement Lawsuits. CERC Corp. and certain of its
subsidiaries are defendants in a suit filed in 1997 under the Federal False
Claims Act alleging mismeasurement of natural gas produced from federal and
Indian lands. The suit seeks undisclosed damages, along with statutory
penalties, interest, costs, and fees. The complaint is part of a larger series
of complaints filed against 77 natural gas pipelines and their subsidiaries and
affiliates. An earlier single action making substantially similar allegations
against the pipelines was dismissed by the federal district court for the
District of Columbia on grounds of improper joinder and lack of jurisdiction. As
a result, the various individual complaints were filed in numerous courts
throughout the country. This case has been consolidated, together with the other
similar False Claims Act cases, in the federal district court in Cheyenne,
Wyoming.
In addition, CERC Corp. and certain of its subsidiaries are defendants in
two mismeasurement lawsuits brought against approximately 245 pipeline companies
and their affiliates pending in state court in Stevens County, Kansas. In one
case (originally filed in May 1999 and amended four times), the plaintiffs
purport to represent a class of royalty owners who allege that the defendants
have engaged in systematic mismeasurement of the volume of natural gas for more
than 25 years. The plaintiffs amended their petition in this suit in July 2003
in response to an order from the judge denying certification of the plaintiffs'
alleged class. In the amendment the plaintiffs dismissed their claims against
certain defendants (including two CERC subsidiaries), limited the scope of the
class of plaintiffs they purport to represent and eliminated previously asserted
claims based on mismeasurement of the Btu content of the gas. The same
plaintiffs then filed a second lawsuit, again as representatives of a class of
royalty owners, in which they assert their claims that the defendants have
engaged in systematic mismeasurement of the Btu content of natural gas for more
than 25 years. In both lawsuits, the plaintiffs seek compensatory damages, along
with statutory penalties, treble damages, interest, costs and fees. CERC and its
subsidiaries believe that there has been no systematic mismeasurement of gas and
that the suits are without merit. CERC does not expect that the ultimate outcome
will have a material impact on the financial condition or results of operations
of either the Company or CERC.
Gas Cost Recovery Litigation. In October 2002, a suit was filed in state
district court in Wharton County, Texas against the Company, CERC, Entex Gas
Marketing Company, and certain non-affiliated companies alleging fraud,
violations of the Texas Deceptive Trade Practices Act, violations of the Texas
Utilities Code, civil conspiracy and violations of the Texas Free Enterprise and
Antitrust Act with respect to rates charged to certain consumers of natural gas
in the State of Texas. Subsequently the plaintiffs added as defendants
CenterPoint Energy Marketing Inc., CenterPoint Energy Gas Transmission Company,
United Gas, Inc., Louisiana Unit Gas Transmission Company, CenterPoint Energy
Pipeline Services, Inc., and CenterPoint Energy Trading and Transportation
Group, Inc. The plaintiffs allege that defendants inflated the prices charged to
certain consumers of natural gas. In February 2003, a similar suit was filed in
state court in Caddo Parish, Louisiana against CERC with respect to rates
charged to a purported class of certain consumers of natural gas and gas service
in the State of Louisiana. In February 2004, another suit was filed in state
court in Calcasieu Parish, Louisiana against CERC seeking to recover alleged
overcharges for gas or gas services allegedly provided by Southern Gas
Operations to a purported class of certain consumers of natural gas and gas
service without advance approval by the LPSC. In October 2004, a similar case
was filed in district court in Miller County, Arkansas against the Company,
CERC, Entex Gas Marketing Company, CenterPoint Energy Gas Transmission Company,
CenterPoint Energy Field Services, CenterPoint Energy Pipeline Services, Inc.,
Mississippi River Transmission Corp. and other non-affiliated companies alleging
fraud, unjust enrichment and civil conspiracy with respect to rates charged to
certain consumers of natural gas in at least the states of Arkansas, Louisiana,
Mississippi, Oklahoma and Texas. At the time of the filing of each of the Caddo
and Calcasieu Parish cases, the plaintiffs in those cases filed petitions with
the LPSC relating to the same alleged rate overcharges. The Caddo and Calcasieu
Parish cases have been stayed pending the resolution of the respective
proceedings by the LPSC. The plaintiffs in the Miller County case seek class
certification, but the proposed class has not been certified. In November 2004,
the Miller County case was removed to federal district court in Texarkana,
Arkansas. In February 2005, the Wharton County case was removed to federal
district court in Houston, Texas, and in March 2005, the plaintiffs in the
Wharton County case moved to dismiss the case and agreed not to refile the
claims asserted unless the Miller County case is not certified as a class action
or is later decertified. The range of relief sought by the plaintiffs in these
cases includes injunctive and declaratory relief, restitution for the alleged
overcharges, exemplary damages or trebling of actual damages, civil penalties
and attorney's fees. In these cases, the Company, CERC and their affiliates deny
that they have overcharged any of their customers for natural gas and believe
that the amounts recovered for purchased gas have been in accordance with what
is permitted by state regulatory authorities. The Company and CERC do not
anticipate that the outcome of these matters will have a material impact on the
financial condition or results of operations of either the Company or CERC.
68
Texas Genco Shareholder Litigation. On July 23, 2004, two plaintiffs, both
Texas Genco shareholders, filed virtually identical lawsuits in Harris County,
Texas district court. These suits, purportedly brought on behalf of holders of
Texas Genco common stock, name Texas Genco and each of that company's directors
as defendants. Both plaintiffs allege, among other things, self-dealing and
breach of fiduciary duty by the defendants in entering into the July 2004
agreement to sell Texas Genco. As part of their allegations of self- dealing,
both plaintiffs claim that the board of directors of Texas Genco is controlled
by CenterPoint Energy, that the defendants improperly concealed results of Texas
Genco's results of operations for the second quarter of 2004 until after the
transaction agreement was announced and that, in order to aid CenterPoint
Energy, the Texas Genco board only searched for acquirers who would offer
all-cash consideration. Plaintiffs seek to enjoin the transaction or,
alternatively, rescind the transaction and/or recover damages in the event that
the transaction is consummated. In August 2004, the cases were consolidated in
state district court in Harris County, Texas. Although the defendants continue
to deny liability, in February 2005, all parties entered into a Memorandum of
Understanding to settle the lawsuit based upon supplemental disclosures made by
Texas Genco and the extension of the deadline for the exercise of shareholder
dissenters' rights. The settlement is subject to the parties' preparation of a
stipulation of settlement and court approval of the settlement.
ENVIRONMENTAL MATTERS
Hydrocarbon Contamination. CERC Corp. and certain of its subsidiaries are
among the defendants in lawsuits filed beginning in August 2001 in Caddo Parish
and Bossier Parish, Louisiana. The suits allege that, at some unspecified date
prior to 1985, the defendants allowed or caused hydrocarbon or chemical
contamination of the Wilcox Aquifer, which lies beneath property owned or leased
by certain of the defendants and which is the sole or primary drinking water
aquifer in the area. The primary source of the contamination is alleged by the
plaintiffs to be a gas processing facility in Haughton, Bossier Parish,
Louisiana known as the "Sligo Facility," which was formerly operated by a
predecessor in interest of CERC Corp. This facility was purportedly used for
gathering natural gas from surrounding wells, separating gasoline and
hydrocarbons from the natural gas for marketing, and transmission of natural gas
for distribution.
Beginning about 1985, the predecessors of certain CERC Corp. defendants
engaged in a voluntary remediation of any subsurface contamination of the
groundwater below the property they owned or leased. This work has been done in
conjunction with and under the direction of the Louisiana Department of
Environmental Quality. The plaintiffs seek monetary damages for alleged damage
to the aquifer underlying their property, unspecified alleged personal injuries,
alleged fear of cancer, alleged property damage or diminution of value of their
property, and, in addition, seek damages for trespass, punitive, and exemplary
damages. The Company believes the ultimate cost associated with resolving this
matter will not have a material impact on the financial condition or results of
operations of either the Company or CERC.
Manufactured Gas Plant Sites. CERC and its predecessors operated
manufactured gas plants (MGP) in the past. In Minnesota, CERC has completed
remediation on two sites, other than ongoing monitoring and water treatment.
There are five remaining sites in CERC's Minnesota service territory. CERC
believes that it has no liability with respect to two of these sites.
At December 31, 2004, CERC had accrued $18 million for remediation of
certain Minnesota sites. At December 31, 2004, the estimated range of possible
remediation costs for these sites was $7 million to $42 million based on
remediation continuing for 30 to 50 years. The cost estimates are based on
studies of a site or industry average costs for remediation of sites of similar
size. The actual remediation costs will be dependent upon the number of sites to
be remediated, the participation of other potentially responsible parties (PRP),
if any, and the remediation methods used. CERC has utilized an environmental
expense tracker mechanism in its rates in Minnesota to recover estimated costs
in excess of insurance recovery. As of December 31, 2004, CERC has collected or
accrued $13 million from insurance companies and ratepayers to be used for
future environmental remediation.
In addition to the Minnesota sites, the United States Environmental
Protection Agency and other regulators have investigated MGP sites that were
owned or operated by CERC or may have been owned by one of its former
affiliates. CERC has not been named by these agencies as a PRP for any of those
sites. CERC has been named as a defendant in lawsuits under which contribution
is sought for the cost to remediate former MGP sites based on the previous
ownership of such sites by former affiliates of CERC or its divisions. The
Company is investigating details regarding these sites and the range of
environmental expenditures for potential remediation. However, CERC believes it
is not liable as a former owner or operator of those sites under the
Comprehensive Environmental, Response, Compensation and Liability Act of 1980,
as amended, and applicable state statutes, and is vigorously contesting those
suits.
Mercury Contamination. The Company's pipeline and distribution operations
have in the past employed elemental mercury in measuring and regulating
equipment. It is possible that small amounts of mercury may have been spilled in
the course of normal maintenance and replacement operations and that these
spills may have contaminated the immediate area with elemental mercury.
69
This type of contamination has been found by the Company at some sites in the
past, and the Company has conducted remediation at these sites. It is possible
that other contaminated sites may exist and that remediation costs may be
incurred for these sites. Although the total amount of these costs cannot be
known at this time, based on experience by the Company and that of others in the
natural gas industry to date and on the current regulations regarding
remediation of these sites, the Company believes that the costs of any
remediation of these sites will not be material to the Company's financial
condition, results of operations or cash flows.
Asbestos. A number of facilities owned by the Company contain significant
amounts of asbestos insulation and other asbestos-containing materials. The
Company 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 the
Company, but most existing claims relate to facilities previously owned by the
Company 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 the Company and 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, the Company has agreed to continue to defend such claims to
the extent they are covered by insurance maintained by the Company, 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 believe, based on its experience to date, that these matters,
either individually or in the aggregate, will have a material adverse effect on
the Company's financial condition, results of operations or cash flows.
Other Environmental. From time to time the Company has received notices
from regulatory authorities or others regarding its status as a PRP in
connection with sites found to require remediation due to the presence of
environmental contaminants. In addition, the Company has been named from time to
time as a defendant in litigation related to such sites. Although the ultimate
outcome of such matters cannot be predicted at this time, the Company does not
believe, based on its experience to date, that these matters, either
individually or in the aggregate, will have a material adverse effect on the
Company's financial condition, results of operations or cash flows.
OTHER PROCEEDINGS
The Company is involved in other legal, environmental, tax and regulatory
proceedings before various courts, regulatory commissions and governmental
agencies regarding matters arising in the ordinary course of business. Some of
these proceedings involve substantial amounts. The Company's management
regularly analyzes current information and, as necessary, provides accruals for
probable liabilities on the eventual disposition of these matters. The Company's
management believes that the disposition of these matters will not have a
material adverse effect on the Company's financial condition, results of
operations or cash flows.
TEXAS GENCO MATTERS
Nuclear Insurance. Texas Genco and the other owners of the South Texas
Project maintain nuclear property and nuclear liability insurance coverage as
required by law and periodically review available limits and coverage for
additional protection. The owners of the South Texas Project currently maintain
$2.75 billion in property damage insurance coverage, which is above the legally
required minimum, but is less than the total amount of insurance currently
available for such losses.
Under the Price Anderson Act, the maximum liability to the public of owners
of nuclear power plants was $10.8 billion as of December 31, 2004. Owners are
required under the Price Anderson Act to insure their liability for nuclear
incidents and protective evacuations. Texas Genco and the other owners currently
maintain the required nuclear liability insurance and participate in the
industry retrospective rating plan under which the owners of the South Texas
Project are subject to maximum retrospective assessments in the aggregate per
incident of up to $100.6 million per reactor. The owners are jointly and
severally liable at a rate not to exceed $10 million per reactor per year per
incident.
There can be no assurance that all potential losses or liabilities
associated with the South Texas Project will be insurable, or that the amount of
insurance will be sufficient to cover them. Any substantial losses not covered
by insurance would have a material effect on Texas Genco's financial condition,
results of operations and cash flows.
Nuclear Decommissioning. CenterPoint Houston, 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
70
restrictions imposed upon Texas Genco by the Texas Utility Commission and the
NRC relating to Texas Genco's nuclear decommissioning trusts. Texas Genco and
CenterPoint Houston 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. The
securities held by the trusts for decommissioning costs had an estimated fair
value of $216 million as of December 31, 2004, of which approximately 36% were
fixed-rate debt securities and the remaining 64% were equity securities. 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 CenterPoint
Houston or its successor.
(12) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of cash and cash equivalents, investments in debt and
equity securities classified as "available-for-sale" and "trading" in accordance
with SFAS No. 115, and short-term borrowings are estimated to be approximately
equivalent to carrying amounts and have been excluded from the table below. The
fair values of non-trading derivative assets and liabilities are equivalent to
their carrying amounts in the Consolidated Balance Sheets at December 31, 2003
and 2004 and have been determined using quoted market prices for the same or
similar instruments when available or other estimation techniques (see Note 5).
Therefore, these financial instruments are stated at fair value and are excluded
from the table below.
DECEMBER 31, 2003 DECEMBER 31, 2004
------------------ -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- ------
(IN MILLIONS)
Financial liabilities:
Long-term debt (excluding capital leases) .. $10,820 $11,325 $8,913 $9,601
71
(13) EARNINGS PER SHARE
The following table reconciles numerators and denominators of the Company's
basic and diluted earnings per share (EPS) calculations:
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------
2002 2003 2004
------------ ------------ ------------
(IN MILLIONS, EXCEPT PER SHARE AND SHARE
AMOUNTS)
Basic EPS calculation:
Income from continuing operations before extraordinary loss ......... $ 482 $ 409 $ 205
Income (loss) from discontinued operations, net of tax .............. (4,402) 75 (133)
Extraordinary loss, net of tax ...................................... -- -- (977)
------------ ------------ ------------
Net income (loss) ................................................... $ (3,920) $ 484 $ (905)
============ ============ ============
Weighted average shares outstanding .................................... 297,997,000 303,867,000 307,185,000
Basic EPS:
Income from continuing operations before extraordinary loss ......... $ 1.62 $ 1.35 $ 0.67
Income (loss) from discontinued operations, net of tax .............. (14.78) 0.24 (0.43)
Extraordinary loss, net of tax ...................................... -- -- (3.18)
------------ ------------ ------------
Net income (loss) ................................................... $ (13.16) $ 1.59 $ (2.94)
============ ============ ============
Diluted EPS calculation:
Net income (loss) ................................................... $ (3,920) $ 484 $ (905)
Plus: Income impact of assumed conversions:
Interest on 3 1/4% contingently convertible senior notes ......... -- 9 14
Interest on 6 1/4% convertible trust preferred securities ........ -- -- --
------------ ------------ ------------
Total earnings effect assuming dilution ............................. $ (3,920) $ 493 $ (891)
============ ============ ============
Weighted average shares outstanding .................................... 297,997,000 303,867,000 307,185,000
Plus: Incremental shares from assumed conversions(1) Stock options .. 846,000 851,000 1,203,000
Restricted stock ................................................. 784,000 1,484,000 1,447,000
3 1/4% convertible senior notes .................................. -- 30,745,000 49,655,000
6 1/4% convertible trust preferred securities .................... 17,000 18,000 16,000
------------ ------------ ------------
Weighted average shares assuming dilution ........................... 299,644,000 336,965,000 359,506,000
============ ============ ============
Diluted EPS:
Income from continuing operations before extraordinary loss ......... $ 1.61 $ 1.24 $ 0.61
Income (loss) from discontinued operations, net of tax .............. (14.69) 0.22 (0.37)
Extraordinary loss, net of tax ...................................... -- -- (2.72)
------------ ------------ ------------
Net income (loss) ................................................... $ (13.08) $ 1.46 $ (2.48)
============ ============ ============
- ----------
(1) Options to purchase 9,709,272, 10,106,673 and 11,892,508 shares were
outstanding for the years ended December 31, 2002, 2003 and 2004,
respectively, but were not included in the computation of diluted EPS
because the options' exercise price was greater than the average market
price of the common shares for the respective years.
The Company's $575 million contingently convertible notes are included in
the calculation of diluted earnings per share pursuant to EITF 04-8. The
Company's $255 million contingently convertible notes are not included in the
calculation of diluted earnings per share because the terms of this debt
instrument were modified prior to December 31, 2004 to provide for only cash
settlement of the principal amount upon conversion as required by EITF 04-8.
Diluted earnings per share for 2003 has been restated for the adoption of EITF
04-8 effective December 31, 2004. See Note 2(n) for further discussion of the
Company's adoption of EITF 04-8.
(14) UNAUDITED QUARTERLY INFORMATION
As discussed in Note 17, the unaudited quarterly financial data for the
interim periods ended March 31, 2004, June 30, 2004, September 30, 2004 and
December 31, 2004 have been restated from amounts previously reported.
The consolidated financial statements have been prepared to reflect the
effect of the RRI Distribution, the sale of the Company's remaining Latin
America operations, the sale of CEMS and the sale of Texas Genco as described in
Note 3. Accordingly, the consolidated financial statements present the RRI and
Texas Genco businesses and the Company's Latin America and CEMS operations as
discontinued operations, in accordance with SFAS No. 144.
72
Summarized quarterly financial data for the years ended December 31, 2003 and
2004 is as follows:
YEAR ENDED DECEMBER 31, 2003
---------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Revenues ................................. $2,548 $1,517 $1,608 $2,117
Operating income ......................... 369 290 418 278
Income from continuing operations ........ 122 93 147 47
Discontinued operations, net of tax ...... 47 (30) 35 23
------ ------ ------ ------
Net income ............................... $ 169 $ 63 $ 182 $ 70
====== ====== ====== ======
Basic earnings per share:(1)
Income from continuing operations ..... $ 0.40 $ 0.31 $ 0.48 $ 0.15
Discontinued operations, net of tax ... 0.16 (0.10) 0.12 0.08
------ ------ ------ ------
Net income ............................ $ 0.56 $ 0.21 $ 0.60 $ 0.23
====== ====== ====== ======
Diluted earnings per share:(1)
Income from continuing operations ..... $ 0.40 $ 0.29 $ 0.42 $ 0.14
Discontinued operations, net of tax ... 0.16 (0.09) 0.10 0.07
------ ------ ------ ------
Net income ............................ $ 0.56 $ 0.20 $ 0.52 $ 0.21
====== ====== ====== ======
YEAR ENDED DECEMBER 31, 2004
---------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Revenues ...................................... $2,402 $1,593 $ 1,567 $2,437
Operating income .............................. 240 186 207 231
Income (loss) from continuing operations ...... 29 (3) 17 162
Discontinued operations, net of tax ........... 45 60 (259) 21
Extraordinary loss, net of tax ................ -- -- (894) (83)
------ ------ ------- ------
Net income (loss) ............................. $ 74 $ 57 $(1,136) $ 100
====== ====== ======= ======
Basic earnings (loss) per share:(1)
Income (loss) from continuing operations ... $ 0.09 $(0.01) $ 0.05 $ 0.53
Discontinued operations, net of tax ........ 0.15 0.20 (0.84) 0.07
Extraordinary loss, net of tax ............. -- -- (2.90) (0.27)
------ ------ ------- ------
Net income (loss) .......................... $ 0.24 $ 0.19 $ (3.69) $ 0.33
====== ====== ======= ======
Diluted earnings (loss) per share:(1)
Income (loss) from continuing operations ... $ 0.09 $(0.01) $ 0.05 $ 0.46
Discontinued operations, net of tax ........ 0.13 0.20 (0.83) 0.06
Extraordinary loss, net of tax ............. -- -- (2.88) (0.23)
------ ------ ------- ------
Net income (loss) .......................... $ 0.22 $ 0.19 $ (3.66) $ 0.29
====== ====== ======= ======
- ----------
(1) Quarterly earnings per common share are based on the weighted average
number of shares outstanding during the quarter, and the sum of the
quarters may not equal annual earnings per common share. The Company's $575
million contingently convertible notes are not included in the calculation
of diluted earnings per share during the first three quarters of 2004 as
they were anti-dilutive due to lower income from continuing operations in
these periods. However, the $575 million contingently convertible notes are
included in the calculation of diluted earnings per share for the fourth
quarter of 2004 and the year ended December 31, 2004 as they are dilutive.
(15) REPORTABLE BUSINESS SEGMENTS
The Company's determination of reportable business segments considers the
strategic operating units under which the Company manages sales, allocates
resources and assesses performance of various products and services to wholesale
or retail customers in differing regulatory environments. The accounting
policies of the business segments are the same as those described in the summary
of significant accounting policies except that some executive benefit costs have
not been allocated to business segments.
The Company's reportable business segments include the following: Electric
Transmission & Distribution, Natural Gas Distribution, Pipelines and Gathering
and Other Operations. The electric transmission and distribution function
(CenterPoint Houston) is reported in the Electric Transmission & Distribution
business segment. Natural Gas Distribution consists of intrastate natural gas
sales to, and natural gas transportation and distribution for, residential,
commercial, industrial and institutional customers and non-rate
73
regulated retail gas marketing operations for commercial and industrial
customers. Pipelines and Gathering includes the interstate natural gas pipeline
operations and the natural gas gathering and pipeline services businesses. Other
Operations consists primarily of other corporate operations which support all of
the Company's business operations. Reportable business segments presented herein
do not include the operations of RRI which are presented as discontinued
operations within these consolidated financial statements. The Company's Latin
America operations and its energy management services business, which were
previously reported in the Other Operations business segment, are presented as
discontinued operations within these consolidated financial statements.
Additionally, the Company's generation operations, which were previously
reported in the Electric Generation business segment, are presented as
discontinued operations within these consolidated financial statements.
Long-lived assets include net property, plant and equipment, net goodwill
and other intangibles and equity investments in unconsolidated subsidiaries. The
Company accounts for intersegment sales as if the sales were to third parties,
that is, at current market prices.
Financial data for business segments and products and services are as
follows:
ELECTRIC NATURAL PIPELINES
TRANSMISSION & GAS AND OTHER DISCONTINUED RECONCILING
DISTRIBUTION DISTRIBUTION GATHERING OPERATIONS OPERATIONS ELIMINATIONS CONSOLIDATED
-------------- ------------ --------- ---------- ------------ ------------ ------------
(IN MILLIONS)
AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 2002:
Revenues from external
customers(1) ..................... $ 2,222(2) $3,953(3) $ 255(4) $ 8 $ -- $ -- $ 6,438
Intersegment revenues ............... -- 7 119 22 -- (148) --
Depreciation and amortization ....... 271 126 41 20 -- -- 458
Operating income (loss) ............. 1,096 198 153 (7) -- -- 1,440
Total assets ........................ 9,321 4,428 2,500 1,345 4,594 (1,553) 20,635
Expenditures for long-lived assets .. 261 196 70 39 258 -- 824
AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 2003:
Revenues from external
customers(1) ..................... $ 2,124(2) $5,406(3) $ 244(4) $ 16 $ -- $ -- $ 7,790
Intersegment revenues ............... -- 29 163 12 -- (204) --
Depreciation and amortization ....... 270 136 40 20 -- -- 466
Operating income (loss) ............. 1,020 202 158 (25) -- -- 1,355
Total assets ........................ 10,387 4,661 2,519 1,746 4,244 (2,096) 21,461
Expenditures for long-lived assets .. 218 199 66 14 162 -- 659
AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 2004:
Revenues from external customers .... $ 1,521(2) $6,170(3) $ 306(4) $ 2 $ -- $ -- $ 7,999
Intersegment revenues ............... -- 3 145 5 -- (153) --
Depreciation and amortization ....... 284 143 44 19 -- -- 490
Operating income (loss) ............. 494 222 180 (32) -- -- 864
Total assets ........................ 8,783 4,732 2,637 2,794(5) 1,565 (2,415) 18,096
Expenditures for long-lived assets .. 235 197 73 25 74 -- 604
- ----------
(1) Revenues from external customers for the Electric Transmission &
Distribution business segment include ECOM revenues of $697 million and
$661 million for 2002 and 2003, respectively.
(2) Sales to subsidiaries of RRI in 2002, 2003 and 2004 represented
approximately $820 million, $948 million and $882 million, respectively, of
CenterPoint Houston's transmission and distribution revenues. RRI has been
presented as discontinued operations in these consolidated financial
statements.
(3) Sales to Texas Genco in 2002, 2003 and 2004 represented approximately $26
million, $28 million and $20 million, respectively, of the Natural Gas
Distribution business segment's revenues from external customers. Texas
Genco has been presented as discontinued operations in these consolidated
financial statements.
(4) Sales to Texas Genco in 2002, 2003 and 2004 represented approximately $2
million, $3 million and $2 million, respectively, of the Pipelines and
Gathering business segment's revenues from external customers. Texas Genco
has been presented as discontinued operations in these consolidated
financial statements.
74
(5) Included in total assets of Other Operations as of December 31, 2004 is a
pension asset of $610 million. See Note 9 for further discussion.
YEAR ENDED DECEMBER 31,
------------------------
2002 2003 2004
------ ------ ------
(IN MILLIONS)
Revenues by Products and Services:
Electric delivery sales........... $1,525 $1,463 $1,521
ECOM revenue...................... 697 661 --
Retail gas sales.................. 3,858 5,311 6,072
Gas transport..................... 255 244 306
Energy products and services...... 103 111 100
------ ------ ------
Total ......................... $6,438 $7,790 $7,999
====== ====== ======
(16) SUBSEQUENT EVENT
On January 26, 2005, the Company's board of directors declared a dividend
of $0.10 per share of common stock payable on March 10, 2005 to shareholders of
record as of the close of business on February 16, 2005. On March 3, 2005, the
Company's board of directors declared a dividend of $0.10 per share of common
stock payable on March 31, 2005 to shareholders of record as of the close of
business on March 16, 2005. This additional first quarter dividend was declared
in lieu of the regular second quarter dividend to address technical restrictions
that might limit the Company's ability to pay a regular dividend during the
second quarter of 2005. Due to the limitations imposed under the 1935 Act, the
Company may declare and pay dividends only from earnings in the specific quarter
in which the dividend is paid, absent specific authorization from the Securities
and Exchange Commission. As a result of the seasonal nature of the Company's
utility businesses, the second quarter historically provides the smallest
contribution to the Company's annual earnings, while the first quarter generally
provides a significant contribution to the Company's annual earnings.
(17) RESTATEMENT
Subsequent to the issuance of the Company's consolidated financial
statements for the year ended December 31, 2004, CenterPoint Energy determined
that, during 2004, certain transactions involving purchases and sales of natural
gas among divisions within its Natural Gas Distribution segment were not
properly eliminated in the consolidated financial statements. Consequently,
revenues and natural gas expenses during 2004 were each overstated by
approximately $511 million. As a result, the accompanying 2004 consolidated
financial statements have been restated from the amounts previously reported to
reflect the elimination of interdivision purchases and sales of natural gas.
There was no effect on the Company's previously reported operating income, net
income, earnings per share or net cash flows for 2004 for this item.
The Company also determined that it should not have presented the cash
flows associated with discontinued operations as a single line item in its 2002,
2003 and 2004 Statements of Consolidated Cash Flows. As a result, the
accompanying Statements of Consolidated Cash Flows have been restated from the
amounts previously reported to reflect the cash flows of discontinued operations
within the respective categories of operating, investing and financing
activities. This restatement did not affect the Company's total net change in
cash and cash equivalents.
75
A summary of the significant effects of the restatements is as follows:
YEAR ENDED DECEMBER 31, 2004
------------------------------------
AS RESTATED AS PREVIOUSLY REPORTED
----------- ----------------------
(IN MILLIONS)
STATEMENTS OF CONSOLIDATED OPERATIONS:
Revenues........................... $7,999 $8,510
Expenses: Natural gas.............. 5,013 5,524
Total expenses..................... 7,135 7,646
AS OF DECEMBER 31, 2004
------------------------------------
AS RESTATED AS PREVIOUSLY REPORTED
----------- ----------------------
(IN MILLIONS)
CONSOLIDATED BALANCE SHEETS:
Accounts receivable, net..................... $ 674 $ 742
Total current assets......................... 2,771 2,837
Total assets................................. 18,096 18,162
Accounts payable............................. 802 868
Total current liabilities.................... 5,121 5,187
Total liabilities and shareholders' equity... 18,096 18,162
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
2002 2003 2004
------------------------ ------------------------ ------------------------
AS AS PREVIOUSLY AS AS PREVIOUSLY AS AS PREVIOUSLY
RESTATED REPORTED RESTATED REPORTED RESTATED REPORTED
-------- ------------- -------- ------------- -------- -------------
(IN MILLIONS)
STATEMENTS OF CONSOLIDATED CASH FLOWS:
Operating activities:
Net cash provided by (used in) operating
activities of discontinued operations....... $(120) $ -- $ 245 $ -- $ 355 $ --
Net cash provided by operating activities...... 335 455 894 650 736 381
Investing activities:
Funds held for purchase of additional interest
in South Texas Project...................... -- -- -- -- (191) --
Capital expenditures........................... (824) (566) (659) (496) (604) (530)
Net cash provided by (used in) investing
activities.................................. (772) (513) (661) (504) 1,466 1,709
Financing activities:
Payment of common stock dividends by
subsidiary.................................. -- -- (15) -- (15) --
Net cash provided by (used in) financing
activities.................................. 723 723 (450) (434) (2,124) (2,107)
Net cash provided by (used in) discontinued
operations.................................. -- (379) -- 72 -- 95
76
ITEM 9A. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
In accordance with Exchange Act Rules 13a-15 and 15d-15, we have
re-evaluated, under the supervision and with the participation of management,
including our principal executive officer and principal financial officer, the
effectiveness of our disclosure controls and procedures (as such term is defined
in Rule 13(a)-15(e) under the Securities Exchange Act of 1934, as amended) 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,
solely because of the material weakness described below, our disclosure controls
and procedures were not effective as of December 31, 2004. This conclusion is
different than the conclusion disclosed in the original filing of our Annual
Report on Form 10-K for the fiscal year ended December 31, 2004 in which
management concluded that our disclosure controls and procedures were effective.
As a result of the material weakness described below, which was identified
subsequent to the original filing of our Annual Report on Form 10-K for the
fiscal year ended December 31, 2004, management has re-evaluated the
effectiveness of our disclosure controls and procedures.
We determined that, during 2004, certain transactions involving purchases
and sales of natural gas among divisions within our Natural Gas Distribution
segment were not properly eliminated in the consolidated financial statements.
Consequently, revenues and natural gas expenses during 2004 were each overstated
by approximately $511 million and management concluded that a restatement of the
2004 consolidated financial statements was necessary to correct this error.
Subsequent to the period covered by this report, in connection with the
discovery of the error described above and the conclusion that we had a material
weakness in our internal control over financial reporting related to ineffective
controls over the process of eliminating certain interdivision purchases and
sales of natural gas within our Natural Gas Distribution segment in the
consolidation process, we improved procedures related to the recording and
reporting of purchases and sales of natural gas, including increased review and
approval controls by senior financial personnel over the personnel that will
prepare the accruals and enhanced analysis of the recorded activity, including
ensuring that intercompany activity is properly eliminated in consolidation.
"Management's Annual Report on Internal Control over Financial Reporting
(as revised)" appears on page 28 of this Annual Report on Form 10-K/A. There has
been no change in our internal control over financial reporting that occurred
during the three months ended December 31, 2004 that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting. However, subsequent to the date of filing our original Annual Report
on Form 10-K for the fiscal year ended December 31, 2004, we took the remedial
action described above.
77
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this Annual Report on
Form 10-K/A:
(1) Financial Statements.
The following consolidated financial statements are included at the
indicated pages in this Annual Report on Form 10-K/A and incorporated in
this Item 15(a) by reference:
Statements of Consolidated Operations for the Three Years Ended
December 31, 2004 (as restated)................................. 29
Statements of Consolidated Comprehensive Income for the Three Years
Ended December 31, 2004......................................... 30
Consolidated Balance Sheets at December 31, 2004 and 2003
(as restated)................................................... 31
Statements of Consolidated Cash Flows for the Three Years Ended
December 31, 2004 (as restated)................................. 32
Statements of Consolidated Shareholders' Equity for the Three Years
Ended December 31, 2004......................................... 33
Notes to Consolidated Financial Statements......................... 34
Report of Independent Registered Public Accounting Firm............ 25
(2) Financial Statement Schedules for the Three Years Ended December
31, 2004.
Report of Independent Registered Public Accounting Firm............ 79
I -- Condensed Financial Information of CenterPoint Energy, Inc.
(Parent Company)................................................ 80
II -- Qualifying Valuation Accounts................................ 86
The following schedules are omitted because of the absence of the
conditions under which they are required or because the required information is
included in the financial statements:
III, IV and V.
(3) Exhibits.
See Index of Exhibits beginning on page 88.
78
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
CenterPoint Energy, Inc. and Subsidiaries:
We have audited the consolidated financial statements of CenterPoint Energy,
Inc. and subsidiaries (the Company) as of December 31, 2004 and 2003, and for
each of the three years in the period ended December 31, 2004, and have issued
our report dated March 15, 2005, January 10, 2006, as to the effects of the
restatement discussed in Note 17 (which report expresses an unqualified opinion
and includes explanatory paragraphs relating to the Company's presentation of
its electric generating operations as discontinued operations and the
restatement discussed in Note 17 to the consolidated financial statements), and
management's assessment of the effectiveness of the Company's internal control
over financial reporting as of December 31, 2004, and have issued our report
dated March 15, 2005, January 10, 2006 as to the effects of the material
weakness described in management's report (which report expresses an adverse
opinion on the effectiveness of internal control over financial reporting); such
reports are included elsewhere in this Form 10-K/A. Our audits also included the
consolidated financial statement schedules the Company listed in the index at
Item 15 (a)(2). These consolidated financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, such consolidated financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly, in all material respects,
the information set forth therein.
DELOITTE & TOUCHE LLP
Houston, Texas
March 15, 2005
79
CENTERPOINT ENERGY, INC.
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF
CENTERPOINT ENERGY, INC. (PARENT COMPANY)
STATEMENTS OF OPERATIONS
FOR THE PERIOD
SEPTEMBER 1, 2002 FOR THE YEAR FOR THE YEAR
THROUGH ENDED ENDED
DECEMBER 31, 2002 DECEMBER 31, 2003 DECEMBER 31, 2004
----------------- ----------------- -----------------
(IN THOUSANDS)
Equity Income (Losses) of Subsidiaries .. $ (4,907) $ 850,394 $ 707,047
Interest Income from Subsidiaries ....... 29,878 63,266 21,568
Loss on Disposal of Subsidiary .......... (4,371,464) -- (365,716)
Loss on Indexed Debt Securities ......... (7,964) (96,473) (20,232)
Operation and Maintenance Expenses ...... (5,793) (12,944) (21,042)
Depreciation and Amortization ........... (5,978) (14,029) (311)
Taxes Other than Income ................. (6,024) (5,091) (186)
Interest Expense to Subsidiaries ........ (31,198) (93,100) (79,590)
Interest Expense ........................ (188,027) (393,717) (303,493)
Income Tax Benefit ...................... 64,916 185,361 134,587
Extraordinary Loss, net of tax .......... -- -- (977,336)
----------- --------- ---------
Net Income (Loss) ....................... $(4,526,561) $ 483,667 $(904,704)
=========== ========= =========
See CenterPoint Energy, Inc. and Subsidiaries Notes to Consolidated
Financial Statements in Part II, Item 8
80
CENTERPOINT ENERGY, INC.
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF
CENTERPOINT ENERGY, INC. (PARENT COMPANY)
BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
2003 2004
------------ ------------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ......................... $ 21,617 $ --
Notes receivable -- affiliated companies .......... 201,887 125,680
Accounts receivable -- affiliated companies ....... 89,835 29,855
Other assets ...................................... 13,675 2,141
---------- -----------
Total current assets ........................... 327,014 157,676
---------- -----------
PROPERTY, PLANT AND EQUIPMENT, NET ................... 111,533 5,567
---------- -----------
OTHER ASSETS:
Investment in subsidiaries ........................ 8,655,214 6,031,696
Notes receivable -- affiliated companies .......... 443,090 321,288
Accumulated deferred tax asset .................... 213,858 --
Other assets ...................................... 125,115 675,360
---------- -----------
Total other assets ............................. 9,437,277 7,028,344
---------- -----------
TOTAL ASSETS ................................ $9,875,824 $ 7,191,587
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable -- affiliated companies ............. $ 6,018 $ 126,790
Current portion of long-term debt ................. 119,564 107,065
Indexed debt securities derivative ................ 321,352 341,575
Accounts payable:
Affiliated companies ........................... 79,647 36,773
Other .......................................... 13,362 5,267
Taxes accrued ..................................... 594,476 810,699
Interest accrued .................................. 41,246 25,660
Other ............................................. 32,277 15,171
---------- -----------
Total current liabilities ...................... 1,207,942 1,469,000
---------- -----------
OTHER LIABILITIES:
Accumulated deferred tax liabilities .............. -- 432,918
Benefit obligations ............................... 603,845 54,260
Notes payable -- affiliated companies ............. 1,677,720 1,167,089
Other ............................................. 314,366 97,536
---------- -----------
Total non-current liabilities .................. 2,595,931 1,751,803
---------- -----------
LONG-TERM DEBT ....................................... 4,311,394 2,865,282
---------- -----------
SHAREHOLDERS' EQUITY:
Common stock ...................................... 3,063 3,080
Additional paid-in capital ........................ 2,868,416 2,891,335
Accumulated deficit ............................... (700,033) (1,727,571)
Unearned ESOP stock ............................... (2,842) --
Accumulated other comprehensive loss .............. (408,047) (61,342)
---------- -----------
Total shareholders' equity ..................... 1,760,557 1,105,502
---------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .. $9,875,824 $ 7,191,587
========== ===========
See CenterPoint Energy, Inc. and Subsidiaries Notes to Consolidated
Financial Statements in Part II, Item 8
81
CENTERPOINT ENERGY, INC.
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF
CENTERPOINT ENERGY, INC. (PARENT COMPANY)
STATEMENTS OF CASH FLOWS
FOR THE PERIOD
SEPTEMBER 1, 2002
THROUGH FOR THE YEAR FOR THE YEAR
DECEMBER 31, ENDED ENDED
2002 DECEMBER 31, 2003 DECEMBER 31, 2004
----------------- ----------------- -----------------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income (loss) .................................. $(4,526,561) $ 483,667 $ (904,704)
Loss on disposal of subsidiary ..................... 4,371,464 -- 365,716
Extraordinary loss, net of tax ..................... -- -- 977,336
----------- ----------- -----------
Adjusted income (loss) ............................. (155,097) 483,667 438,348
Non-cash items included in net income (loss):
Equity losses (income) of subsidiaries .......... 4,907 (850,394) (707,047)
Deferred income tax expense (benefit) ........... (52,117) 65,778 155,405
Depreciation and amortization ................... 5,978 14,029 311
Amortization of debt issuance costs ............. 32,649 112,046 70,428
Loss on indexed debt securities ................. 7,964 96,473 20,232
Changes in working capital:
Accounts receivable to affiliates, net ....... 39,540 89,076 (6,253)
Accounts payable ............................. (1,302) 4,493 (1,025)
Other current assets ......................... (6,571) (3,478) (5,111)
Other current liabilities .................... (101,273) (42,631) (290,434)
Common stock dividends received from subsidiaries .. 57,645 121,695 177,264
Pension contribution ............................... -- (22,700) (476,000)
Other .............................................. (12,681) 95,447 52,836
----------- ----------- -----------
Net cash provided by (used in) operating activities ... (180,358) 163,501 (571,046)
----------- ----------- -----------
INVESTING ACTIVITIES:
Proceeds from sale of Texas Genco .................. -- -- 2,231,000
Investment in subsidiaries ......................... (181,654) 32,832 19,090
Short-term notes receivable from affiliates ........ (178,127) 290,359 76,207
Long-term notes receivable from affiliates ......... 1,067,280 540,973 191,954
Capital expenditures, net .......................... (4,274) (6,596) (5,802)
----------- ----------- -----------
Net cash provided by investing activities ............. 703,225 857,568 2,512,449
----------- ----------- -----------
FINANCING ACTIVITIES:
Changes in short-term borrowings ................... (21,000) -- --
Payments on long-term debt ......................... (168,558) (6,727,055) (2,093,880)
Proceeds from long-term debt ....................... -- 5,778,242 --
Debt issuance costs ................................ (87,798) (117,641) (730)
Common stock dividends paid ........................ (48,672) (122,249) (122,881)
Short-term notes payable to affiliates ............. 25,177 (31,274) 120,772
Long-term notes payable to affiliates .............. 495 (1,986) 133,699
----------- ----------- -----------
Net cash used in financing activities ................. (300,356) (1,221,963) (1,963,020)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .. 222,511 (200,894) (21,617)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ...... -- 222,511 21,617
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............ $ 222,511 $ 21,617 $ --
=========== =========== ===========
See CenterPoint Energy, Inc. and Subsidiaries Notes
to Consolidated Financial Statements in Part II, Item 8
82
CENTERPOINT ENERGY, INC.
SCHEDULE I -- NOTES TO CONDENSED FINANCIAL INFORMATION (PARENT COMPANY)
(1) The condensed parent company financial statements and notes should be
read in conjunction with the consolidated financial statements and notes of
CenterPoint Energy, Inc. (CenterPoint Energy or the Company) appearing in the
Annual Report on Form 10-K/A. CenterPoint Energy, Inc. is a public utility
holding company that became the parent of Reliant Energy, Incorporated (Reliant
Energy) and its subsidiaries on August 31, 2002 as part of a corporate
restructuring of Reliant Energy (the Restructuring). CenterPoint Energy is a
registered public utility holding company under the 1935 Act. Prior to the
Restructuring, Reliant Energy was a public utility holding company that was
exempt from registration under the 1935 Act. After the Restructuring, an
exemption was no longer available for the corporate structure that the Texas
Utility Commission required CenterPoint Energy to adopt under the Texas electric
restructuring law. CenterPoint Energy did not conduct any activities other than
those incident to its formation until September 1, 2002. Accordingly, statements
of operations and cash flows would not provide meaningful information and have
been omitted for periods prior to September 1, 2002.
(2) As a registered public utility holding company, the Company and its
subsidiaries except Texas Genco Holdings, Inc. (Texas Genco) are subject to a
comprehensive regulatory scheme imposed by the Securities and Exchange
Commission (SEC) in order to protect customers, investors and the public
interest. Although the SEC does not regulate rates and charges under the 1935
Act, it does regulate the structure, financing, lines of business and internal
transactions of public utility holding companies and their system companies. In
order to obtain financing, acquire additional public utility assets or stock, or
engage in other significant transactions, CenterPoint Energy is required to
obtain approval from the SEC under the 1935 Act.
The Company received an order from the SEC under the 1935 Act on June 30,
2003 and supplemental orders thereafter relating to its financing activities and
those of its regulated subsidiaries, as well as other matters. The orders are
effective until June 30, 2005. As of December 31, 2004, the orders generally
permitted the Company and its regulated subsidiaries to issue securities to
refinance indebtedness outstanding at June 30, 2003, and authorized the Company
and its regulated subsidiaries to issue certain incremental external debt
securities and common and preferred stock through June 30, 2005, without prior
authorization from the SEC. Further, the SEC has reserved jurisdiction over the
issuance by the Company and its regulated subsidiaries of certain amounts of
incremental external debt securities, so that the Company is required to obtain
SEC approval prior to issuing those incremental amounts.
The orders require that if the Company or any of its regulated subsidiaries
issues any security that is 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 the Company 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. Under the orders, the Company's common equity as a percentage of total
capitalization must be at least 30%. The SEC has acknowledged that prior to the
monetization of Texas Genco and the securitization of the true-up components,
the Company's common equity as a percentage of total capitalization is expected
to remain less than 30%. In addition, after the securitization, the Company's
common equity as a percentage of total capitalization, including securitized
debt, is expected to be less than 30%, which the SEC has permitted for other
companies.
Effective January 1, 2004, CenterPoint Energy established a service company
in order to comply with the 1935 Act. As a result, certain assets and
liabilities of the parent company were transferred to the service company,
primarily property, plant and equipment, pension and other postemployment
benefit assets and obligations and related deferred taxes. These transfers have
been excluded from the Statement of Cash Flows for the year ended December 31,
2004 as they represent non-cash transactions.
(3) On September 30, 2002, the Company distributed to its shareholders 240
million shares of Reliant Energy, Inc. (formerly Reliant Resources, Inc.) (RRI)
common stock, which represented the Company's approximately 83% ownership
interest in RRI, by means of a tax-free spin-off in the form of a dividend.
Holders of CenterPoint Energy common stock on the record date received 0.788603
shares of RRI common stock for each share of CenterPoint Energy stock that they
owned on the record date. The total value of the RRI Distribution, after the
impairment charge discussed below, was $847 million.
As a result of the spin-off of Reliant Resources, the Company recorded a
non-cash loss on disposal of discontinued operations of $4.4 billion in 2002.
This loss represented the excess of the carrying value of the Company's net
investment in RRI over the market value of RRI's common stock.
83
(4) The Company distributed approximately 19% of the 80 million outstanding
shares of common stock of Texas Genco to its shareholders on January 6, 2003. As
a result of the distribution of Texas Genco common stock, the Company recorded a
pre-tax impairment charge of $399 million, which was reflected as a regulatory
asset in the Consolidated Balance Sheet as of December 31, 2003. This impairment
charge represents the excess of the carrying value of the Company's net
investment in Texas Genco over the market value of Texas Genco's common stock.
In July 2004, the Company announced its agreement to sell its majority
owned subsidiary, Texas Genco, to Texas Genco LLC (formerly known as GC Power
Acquisition LLC), an entity owned in equal parts by affiliates of The Blackstone
Group, Hellman & Friedman LLC, Kohlberg Kravis Roberts & Co. L.P. and Texas
Pacific Group. On December 15, 2004, Texas Genco completed the sale of its
fossil generation assets (coal, lignite and gas-fired plants) to Texas Genco LLC
for $2.813 billion in cash. Following the sale, Texas Genco distributed $2.231
billion in cash to the Company. Texas Genco's principal remaining asset is its
ownership interest in a nuclear generating facility. The final step of the
transaction, the merger of Texas Genco with a subsidiary of Texas Genco LLC in
exchange for an additional cash payment to the Company of $700 million, is
expected to close during the first half of 2005, following receipt of approval
from the Nuclear Regulatory Commission. The Company recorded an after tax loss
of $366 million in 2004 related to the sale of Texas Genco.
(5) On December 15, 2004, the Company permanently reduced its three-year
credit facility to $750 million from $2.34 billion. The credit facility was
composed of a $1.425 billion revolving credit facility (London interbank offered
rate (LIBOR) plus 300 basis points), which has been permanently reduced to $750
million, and a $915 million term loan (LIBOR) plus 350 basis points), which was
repaid and retired on December 15, 2004. As a result of the term loan repayment
and the permanent reduction of the revolving credit facility, the Company
expensed $15 million of unamortized loan costs in the fourth quarter of 2004
that were associated with these facilities.
In March 2005, the Company replaced its $750 million revolving credit
facility with a $1 billion five-year revolving credit facility. Borrowings may
be made under the facility at LIBOR plus 100 basis points based on current
credit ratings. An additional utilization fee of 12.5 basis points applies to
borrowings any time 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.
On May 19, 2003, the Company issued $575 million aggregate principal amount
of convertible senior notes due May 15, 2023 with an interest rate of 3.75%.
Holders may convert each of their notes into shares of CenterPoint Energy common
stock, initially at a conversion rate of 86.3558 shares of common stock per
$1,000 principal amount of notes at any time prior to maturity, under the
following circumstances: (1) if the last reported sale price of CenterPoint
Energy common stock for at least 20 trading days during the period of 30
consecutive trading days ending on the last trading day of the previous calendar
quarter is greater than or equal to 120% or, following May 15, 2008, 110% of the
conversion price per share of CenterPoint Energy common stock on such last
trading day, (2) if the notes have been called for redemption, (3) during any
period in which the credit ratings assigned to the notes by both Moody's
Investors Service, Inc. (Moody's) and Standard & Poor's Ratings Services (S&P),
a division of The McGraw-Hill Companies, are lower than Ba2 and BB,
respectively, or the notes are no longer rated by at least one of these ratings
services or their successors, or (4) upon the occurrence of specified corporate
transactions, including the distribution to all holders of CenterPoint Energy
common stock of certain rights entitling them to purchase shares of CenterPoint
Energy common stock at less than the last reported sale price of a share of
CenterPoint Energy common stock on the trading day prior to the declaration date
of the distribution or the distribution to all holders of CenterPoint Energy
common stock of the Company's assets, debt securities or certain rights to
purchase the Company's securities, which distribution has a per share value
exceeding 15% of the last reported sale price of a share of CenterPoint Energy
common stock on the trading day immediately preceding the declaration date for
such distribution. The convertible senior notes also have a contingent interest
feature requiring contingent interest to be paid to holders of notes commencing
on or after May 15, 2008, in the event that the average trading price of a note
for the applicable five trading day period equals or exceeds 120% of the
principal amount of the note as of the day immediately preceding the first day
of the applicable six-month interest period. For any six-month period,
contingent interest will be equal to 0.25% of the average trading price of the
note for the applicable five-trading-day period.
In March 2005, the Company filed a registration statement relating to an
offer to exchange its 3.75% convertible senior notes due 2023 for a new series
of 3.75% convertible senior notes due 2023. This registration statement has not
yet been declared effective by the SEC. The Company expects to conduct the
exchange offer in response to the guidance set forth in Emerging Issues Task
Force No. 04-8, "Accounting Issues Related to Certain Features of Contingently
Convertible Debt and the Effect on Diluted Earnings Per Share". Under that
guidance, because settlement of the principal portion of new notes will be made
in cash rather than stock, exchanging new notes for old notes will allow the
Company to exclude the portion of the conversion value of the new notes
attributable to their principal amount from its computation of diluted earnings
per share from continuing operations.
On December 17, 2003, the Company issued $255 million aggregate principal
amount of convertible senior notes due January 15, 2024 with an interest rate of
2.875%. Holders may convert each of their notes into shares of CenterPoint
Energy common stock,
84
initially at a conversion rate of 78.064 shares of common stock per $1,000
principal amount of notes at any time prior to maturity, under the following
circumstances: (1) if the last reported sale price of CenterPoint Energy common
stock for at least 20 trading days during the period of 30 consecutive trading
days ending on the last trading day of the previous calendar quarter is greater
than or equal to 120% of the conversion price per share of CenterPoint Energy
common stock on such last trading day, (2) if the notes have been called for
redemption, (3) during any period in which the credit ratings assigned to the
notes by both Moody's and S&P are lower than Ba2 and BB, respectively, or the
notes are no longer rated by at least one of these ratings services or their
successors, or (4) upon the occurrence of specified corporate transactions,
including the distribution to all holders of CenterPoint Energy common stock of
certain rights entitling them to purchase shares of CenterPoint Energy common
stock at less than the last reported sale price of a share of CenterPoint Energy
common stock on the trading day prior to the declaration date of the
distribution or the distribution to all holders of CenterPoint Energy common
stock of the Company's assets, debt securities or certain rights to purchase the
Company's securities, which distribution has a per share value exceeding 15% of
the last reported sale price of a share of CenterPoint Energy common stock on
the trading day immediately preceding the declaration date for such
distribution. Under the original terms of these convertible senior notes,
CenterPoint Energy could elect to satisfy part or all of its conversion
obligation by delivering cash in lieu of shares of CenterPoint Energy. On
December 13, 2004, the Company entered into a supplemental indenture with
respect to these convertible senior notes in order to eliminate its right to
settle the conversion of the notes solely in shares of its common stock. The
convertible senior notes also have a contingent interest feature requiring
contingent interest to be paid to holders of notes commencing on or after
January 15, 2007, in the event that the average trading price of a note for the
applicable five-trading-day period equals or exceeds 120% of the principal
amount of the note as of the day immediately preceding the first day of the
applicable six-month interest period. For any six-month period, contingent
interest will be equal to 0.25% of the average trading price of the note for the
applicable five-trading-day period.
(6) On December 30, 2004, the Board of Directors of the Company adopted a
plan for an accounting reorganization of the Company, to be effective as of
January 1, 2005. This plan was adopted in order to eliminate the accumulated
deficit that exists.
The plan adopted by the Company required: (1) a report to be presented to
and reviewed by the Company's Board of Directors 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 Board of Directors on or
before February 28, 2005 that the accounting reorganization is inconsistent with
the Company's regulatory obligations. The Company is continuing to work to
complete the valuation analysis and the effects on the Company's financial
statements of the accounting reorganization, and on February 23, 2005, the
Company's Board of Directors extended until May 10, 2005 the time for making the
determination described in (3) of the preceding sentence.
An accounting reorganization, sometimes called a "quasi-reorganization,"
allows a company to extinguish an accumulated deficit. It involves restating a
company's assets and its liabilities to their fair values. The accumulated
deficit is then brought to zero through a reduction in the other capital
accounts, giving the company a "fresh start" with a zero balance in retained
earnings. As of December 31, 2004, the Company had an accumulated deficit of
approximately $1.7 billion. That deficit stemmed from the accounting effects of
(1) the Company's distribution of its ownership interest in RRI to its
shareholders in September 2002, (2) the extraordinary loss recorded in
connection with the Texas Utility Commission's order related to the 2004 True-Up
Proceeding (defined below) and (3) the loss on discontinued operations that was
recorded in connection with the Company's sale of Texas Genco. Those events
stemmed from the Company's response to the Texas electric restructuring law. In
addition to eliminating the accumulated deficit and restating assets and
liabilities to fair value, if a quasi-reorganization were implemented, the
Company and CenterPoint Houston would be required to implement any accounting
standards that have been issued but not yet adopted.
The Company is seeking to eliminate the accumulated deficit because
restrictions contained in the 1935 Act require registered public utility holding
companies, like the Company, to obtain express authorization from the SEC to pay
dividends when current or retained earnings are insufficient to do so.
Eliminating the accumulated deficit will permit current earnings not utilized to
pay dividends to more quickly build up a retained earnings balance. Under 1935
Act regulations, the Company could pay dividends out of this balance during
periods when current earnings may not be adequate to do so.
In addition, the Company has undertaken an obligation under the 1935 Act to
achieve a minimum ratio of common equity to total capitalization of thirty
percent, which, depending on the results of the restatement of assets and
liabilities under the accounting reorganization, could be affected by, and will
be taken into consideration by the Board of Directors in evaluating the effects
of, the accounting reorganization. The Company will seek such authority as may
be required under the 1935 Act in connection with the quasi-reorganization.
85
CENTERPOINT ENERGY, INC.
SCHEDULE II -- QUALIFYING VALUATION ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 2004
COLUMN C
-----------------------
COLUMN A COLUMN B ADDITIONS COLUMN D COLUMN E
- -------- ---------- ----------------------- ----------- ----------
BALANCE AT CHARGED TO DEDUCTIONS BALANCE AT
BEGINNING CHARGED OTHER FROM END OF
DESCRIPTION OF PERIOD TO INCOME ACCOUNTS(1) RESERVES(2) PERIOD
- ----------- ---------- --------- ----------- ----------- ----------
(IN THOUSANDS)
Year Ended December 31, 2004:
Accumulated provisions:
Uncollectible accounts receivable ......... $30,800 $ 26,829 $ -- $27,591 $30,038
Deferred tax asset valuation allowance .... 73,248 (67,421) 14,114 -- 19,941
Year Ended December 31, 2003:
Accumulated provisions:
Uncollectible accounts receivable ......... $24,294 $ 24,037 $ -- $17,531 $30,800
Deferred tax asset valuation allowance .... 82,929 (9,681) -- -- 73,248
Year Ended December 31, 2002:
Accumulated provisions:
Uncollectible accounts receivable ......... $46,047 $ 25,883 $ -- $47,636 $24,294
Deferred tax asset valuation allowance .... 15,439 67,490 -- -- 82,929
- ----------
(1) Charges to other accounts represent changes in presentation to reflect
state tax attributes net of federal tax benefit as well as to reflect
amounts that were netted against related attribute balances in prior years.
(2) Deductions from reserves represent losses or expenses for which the
respective reserves were created. In the case of the uncollectible accounts
reserve, such deductions are net of recoveries of amounts previously
written off.
86
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Houston, the State of Texas, on the 10th day of January, 2006.
CENTERPOINT ENERGY, INC.
(Registrant)
By: /s/ DAVID M. MCCLANAHAN
------------------------------------
David M. McClanahan,
President and Chief Executive Officer
87
CENTERPOINT ENERGY, INC.
EXHIBITS TO THE ANNUAL REPORT ON FORM 10-K/A
FOR FISCAL YEAR ENDED DECEMBER 31, 2004
INDEX OF EXHIBITS
Exhibits included with this report are designated by a cross (+);
exhibits previously filed with our Annual Report on Form 10-K for the fiscal
year ended December 31, 2004 as filed on March 16, 2005 are designated by two
crosses (++); all exhibits not so designated are incorporated herein by
reference to a prior filing as indicated. Exhibits designated by an asterisk (*)
are management contracts or compensatory plans or arrangements required to be
filed as exhibits to this Form 10-K/A by Item 601(b)(10)(iii) of Regulation S-K.
CenterPoint Energy has not filed the exhibits and schedules to Exhibit 2(b).
CenterPoint Energy hereby agrees to furnish supplementally a copy of any
schedule omitted from Exhibit 2(b) to the SEC upon request.
SEC FILE OR
EXHIBIT REGISTRATION EXHIBIT
NUMBER DESCRIPTION REPORT OR REGISTRATION STATEMENT NUMBER REFERENCE
------- ----------- -------------------------------- ------------ ---------
2(a) -- Agreement and Plan of Merger, dated as CenterPoint Energy's Form 10-K for the 1-31447 2
of October 19, 2001, by and among year ended December 31, 2001
Reliant Energy, Incorporated ("Reliant
Energy"), CenterPoint Energy, Inc.
("CenterPoint Energy") and Reliant
Energy MergerCo, Inc.
2(b) -- Transaction Agreement dated July 21, CenterPoint Energy's Form 8-K dated 1-31447 10.1
2004 among CenterPoint Energy, Utility July 21, 2004
Holding, LLC, NN Houston Sub, Inc.,
Texas Genco Holdings, Inc. ("Texas
Genco"), HPC Merger Sub, Inc. and GC
Power Acquisition LLC
3(a)(1) -- Amended and Restated Articles of CenterPoint Energy's Registration 3-69502 3.1
Incorporation of CenterPoint Energy Statement on Form S-4
3(a)(2) -- Articles of Amendment to Amended and CenterPoint Energy's Form 10-K for the 1-31447 3.1.1
Restated Articles of Incorporation of year ended December 31, 2001
CenterPoint Energy
3(b) -- Amended and Restated Bylaws of CenterPoint Energy's Form 10-K for the 1-31447 3.2
CenterPoint Energy year ended December 31, 2001
3(c) -- Statement of Resolution Establishing CenterPoint Energy's Form 10-K for the 1-31447 3.3
Series of Shares designated Series A year ended December 31, 2001
Preferred Stock of CenterPoint Energy
4(a) -- Form of CenterPoint Energy Stock CenterPoint Energy's Registration 3-69502 4.1
Certificate Statement on Form S-4
4(b) -- Rights Agreement dated January 1, 2002, CenterPoint Energy's Form 10-K for the 1-31447 4.2
between CenterPoint Energy and JPMorgan year ended December 31, 2001
Chase Bank, as Rights Agent
4(c) -- Contribution and Registration Agreement CenterPoint Energy's Form 10-K for the 1-31447 4.3
dated December 18, 2001 among Reliant year ended December 31, 2001
Energy, CenterPoint Energy and the
Northern Trust Company, trustee under
the Reliant Energy, Incorporated Master
Retirement Trust
4(d)(1) -- Mortgage and Deed of Trust, dated HL&P's Form S-7 filed on August 25, 2-59748 2(b)
November 1, 1944 between Houston 1977
Lighting and Power Company ("HL&P") and
Chase Bank of Texas, National
Association (formerly, South Texas
Commercial National Bank of Houston), as
Trustee, as amended and supplemented by
20 Supplemental Indentures thereto
4(d)(2) -- Twenty-First through Fiftieth HL&P's Form 10-K for the year ended 1-3187 4(a)(2)
Supplemental Indentures to Exhibit December 31, 1989
4(d)(1)
4(d)(3) -- Fifty-First Supplemental Indenture to HL&P's Form 10-Q for the quarter ended 1-3187 4(a)
Exhibit
88
SEC FILE OR
EXHIBIT REGISTRATION
NUMBER DESCRIPTION REPORT OR REGISTRATION STATEMENT NUMBER EXHIBIT REFERENCE
------- ----------- -------------------------------- ------------ -----------------
4(d)(1) dated as of March 25, 1991 June 30, 1991
4(d)(4) -- Fifty-Second through Fifty-Fifth HL&P's Form 10-Q for the quarter ended 1-3187 4
Supplemental Indentures to Exhibit March 31, 1992
4(d)(1) each dated as of March 1, 1992
4(d)(5) -- Fifty-Sixth and Fifty-Seventh HL&P's Form 10-Q for the quarter ended 1-3187 4
Supplemental Indentures to Exhibit September 30, 1992
4(d)(1) each dated as of October 1, 1992
4(d)(6) -- Fifty-Eighth and Fifty-Ninth HL&P's Form 10-Q for the quarter ended 1-3187 4
Supplemental Indentures to Exhibit March 31, 1993
4(d)(1) each dated as of March 1, 1993
4(d)(7) -- Sixtieth Supplemental Indenture to HL&P's Form 10-Q for the quarter ended 1-3187 4
Exhibit 4(d)(1) dated as of July 1, 1993 June 30, 1993
4(d)(8) -- Sixty-First through Sixty-Third HL&P's Form 10-K for the year ended 1-3187 4(a)(8)
Supplemental Indentures to Exhibit December 31, 1993
4(d)(1) each dated as of December 1,
1993
4(d)(9) -- Sixty-Fourth and Sixty-Fifth HL&P's Form 10-K for the year ended 1-3187 4(a)(9)
Supplemental Indentures to Exhibit December 31, 1995
4(d)(1) each dated as of July 1, 1995
4(e)(1) -- General Mortgage Indenture, dated as of CenterPoint Houston's Form 10-Q for 1-3187 4(j)(1)
October 10, 2002, between CenterPoint the quarter ended September 30, 2002
Energy Houston Electric, LLC and
JPMorgan Chase Bank, as Trustee
4(e)(2) -- First Supplemental Indenture to Exhibit CenterPoint Houston's Form 10-Q for 1-3187 4(j)(2)
4(e)(1), dated as of October 10, 2002 the quarter ended September 30, 2002
4(e)(3) -- Second Supplemental Indenture to Exhibit CenterPoint Houston's Form 10-Q for 1-3187 4(j)(3)
4(e)(1), dated as of October 10, 2002 the quarter ended September 30, 2002
4(e)(4) -- Third Supplemental Indenture to Exhibit CenterPoint Houston's Form 10-Q for 1-3187 4(j)(4)
4(e)(1), dated as of October 10, 2002 the quarter ended September 30, 2002
4(e)(5) -- Fourth Supplemental Indenture to Exhibit CenterPoint Houston's Form 10-Q for 1-3187 4(j)(5)
4(e)(1), dated as of October 10, 2002 the quarter ended September 30, 2002
4(e)(6) -- Fifth Supplemental Indenture to Exhibit CenterPoint Houston's Form 10-Q for 1-3187 4(j)(6)
4(e)(1), dated as of October 10, 2002 the quarter ended September 30, 2002
4(e)(7) -- Sixth Supplemental Indenture to Exhibit CenterPoint Houston's Form 10-Q for 1-3187 4(j)(7)
4(e)(1), dated as of October 10, 2002 the quarter ended September 30, 2002
4(e)(8) -- Seventh Supplemental Indenture to CenterPoint Houston's Form 10-Q for 1-3187 4(j)(8)
Exhibit 4(e)(1), dated as of October 10, the quarter ended September 30, 2002
2002
4(e)(9) -- Eighth Supplemental Indenture to Exhibit CenterPoint Houston's Form 10-Q for 1-3187 4(j)(9)
4(e)(1), dated as of October 10, 2002 the quarter ended September 30, 2002
4(e)(10) -- Officer's Certificates dated October 10, CenterPoint Energy's Form 10-K for the 1-31447 4(e)(10)
2002 setting forth the form, terms and year ended December 31, 2003
provisions of the First through Eighth
Series of General Mortgage Bonds
4(e)(11) -- Ninth Supplemental Indenture to Exhibit CenterPoint Energy's Form 10-K for the 1-31447 4(e)(10)
4(e)(1), dated as of November 12, 2002 year ended December 31, 2002
4(e)(12) -- Officer's Certificate dated November 12, CenterPoint Energy's Form 10-K for the 1-31447 4(e)(12)
2002 setting forth the form, terms and year ended December 31, 2003
provisions of the Ninth Series of
General Mortgage Bonds
4(e)(13) -- Tenth Supplemental Indenture to Exhibit CenterPoint Energy's Form 8-K dated 1-31447 4.1
4(e)(1), dated as of March 18, 2003 March 13, 2003
4(e)(14) -- Officer's Certificate dated March 18, CenterPoint Energy's Form 8-K dated 1-31447 4.2
2003 setting forth the form, terms and March 13, 2003
provisions of the Tenth Series and
Eleventh Series of General Mortgage Bonds
89
SEC FILE OR
EXHIBIT REGISTRATION EXHIBIT
NUMBER DESCRIPTION REPORT OR REGISTRATION STATEMENT NUMBER REFERENCE
------- ----------- -------------------------------- ------------ ---------
4(e)(15) -- Eleventh Supplemental Indenture to Exhibit CenterPoint Energy's Form 8-K dated 1-31447 4.1
4(e)(1), dated as of May 23, 2003 May 16, 2003
4(e)(16) -- Officer's Certificate dated May 23, 2003 CenterPoint Energy's Form 8-K dated 1-31447 4.2
setting forth the form, terms and May 16, 2003
provisions of the Twelfth Series of
General Mortgage Bonds
4(e)(17) -- Twelfth Supplemental Indenture to Exhibit CenterPoint Energy's Form 8-K dated 1-31447 4.2
4(e)(1), dated as of September 9, 2003 September 9, 2003
4(e)(18) -- Officer's Certificate dated September 9, CenterPoint Energy's Form 8-K dated 1-31447 4.3
2003 setting forth the form, terms and September 9, 2003
provisions of the Thirteenth Series of
General Mortgage Bonds
4(f)(1) -- Indenture, dated as of February 1, 1998, RERC Corp.'s Form 8-K dated February 1-13265 4.1
between Reliant Energy Resources Corp. 5, 1998
("RERC Corp.") and Chase Bank of Texas,
National Association, as Trustee
4(f)(2) -- Supplemental Indenture No. 1 to Exhibit RERC Corp.'s Form 8-K dated November 1-13265 4.2
4(f)(1), dated as of February 1, 1998, 9, 1998
providing for the issuance of RERC Corp.'s
6 1/2% Debentures due February 1, 2008
4(f)(3) -- Supplemental Indenture No. 2 to Exhibit RERC Corp.'s Form 8-K dated November 1-13265 4.1
4(f)(1), dated as of November 1, 1998, 9, 1998
providing for the issuance of RERC Corp.'s
6 3/8% Term Enhanced ReMarketable
Securities
4(f)(4) -- Supplemental Indenture No. 3 to Exhibit RERC Corp.'s Registration Statement 333-49162 4.2
4(f)(1), dated as of July 1, 2000, on Form S-4
providing for the issuance of RERC Corp.'s
8.125% Notes due 2005
4(f)(5) -- Supplemental Indenture No. 4 to Exhibit RERC Corp.'s Form 8-K dated February 1-13265 4.1
4(f)(1), dated as of February 15, 2001, 21, 2001
providing for the issuance of RERC Corp.'s
7.75% Notes due 2011
4(f)(6) -- Supplemental Indenture No. 5 to Exhibit CenterPoint Energy's Form 8-K dated 1-31447 4.1
4(f)(1), dated as of March 25, 2003, March 18, 2003
providing for the issuance of CenterPoint
Energy Resources Corp.'s ("CERC Corp.'s")
7.875% Senior Notes due 2013
4(f)(7) -- Supplemental Indenture No. 6 to Exhibit CenterPoint Energy's Form 8-K dated 1-31447 4.2
4(f)(1), dated as of April 1, 2003, April 7, 2003
providing for the issuance of CERC Corp.'s
7.875% Senior Notes due 2013
4(f)(8) -- Supplemental Indenture No. 7 to Exhibit CenterPoint Energy's Form 8-K dated 1-31447 4.2
4(f)(1), dated as of November 3, 2003, October 29, 2003
providing for the issuance of CERC Corp.'s
5.95% Senior Notes due 2014
4(g)(1) -- Indenture, dated as of May 19, 2003, CenterPoint Energy's Form 8-K dated 1-31447 4.1
between CenterPoint Energy and JPMorgan May 19, 2003
Chase Bank, as Trustee
4(g)(2) -- Supplemental Indenture No. 1 to Exhibit CenterPoint Energy's Form 8-K dated 1-31447 4.2
4(g)(1), dated as of May 19, 2003, May 19, May 19, 2003
providing for the issuance of CenterPoint
Energy's 3.75% Convertible Senior Notes
due 2023
4(g)(3) -- Supplemental Indenture No. 2 to Exhibit CenterPoint Energy's Form 8-K dated 1-31447 4.3
4(g)(1), dated as of May 27, 2003, May 19, May 19, 2003
providing for the issuance of CenterPoint
Energy's
90
SEC FILE OR
EXHIBIT REGISTRATION EXHIBIT
NUMBER DESCRIPTION REPORT OR REGISTRATION STATEMENT NUMBER REFERENCE
------- ----------- -------------------------------- ------------ ---------
5.875% Senior Notes due 2008 and 6.85%
Senior Notes due 2015
4(g)(4) -- Supplemental Indenture No. 3 to Exhibit CenterPoint Energy's Form 8-K dated 1-31447 4.2
4(g)(1), dated as of September 9, 2003, September 9, 2003
providing for the issuance of CenterPoint
Energy's 7.25% Senior Notes due 2010
4(g)(5) -- Supplemental Indenture No. 4 to Exhibit CenterPoint Energy's Form 8-K dated 1-31447 4.2
4(g)(1), dated as of December 17, 2003, December 10, 2003
providing for the issuance of CenterPoint
Energy's 2.875% Convertible Senior Notes
due 2024
4(g)(6) -- Supplemental Indenture No. 5 to Exhibit CenterPoint Energy's Form 8-K dated 1-31447 4.1
4(g)(1), dated as of December 13, 2004, as December 9, 2004
supplemented by Exhibit 4(g)(5), relating
to the issuance of CenterPoint Energy's
2.875% Convertible Senior Notes due 2024
4(h) -- Supplemental Indenture No. 2 dated as of CenterPoint Energy's Form 8-K12B 1-31447 4(e)
August 31, 2002, among CenterPoint Energy, dated August 31, 2002
Reliant Energy and JPMorgan Chase Bank
(supplementing the Subordinated Indenture
dated as of September 1, 1999 under which
Reliant Energy's 2% Zero-Premium
Exchangeable Subordinated Notes Due 2029
were issued)
4(i) -- Supplemental Indenture No. 3 dated as of CenterPoint Energy's Form 8-K12B 1-31447 4(g)
August 31, 2002 among CenterPoint Energy, dated August 31, 2002
REI and The Bank of New York
(supplementing the Junior Subordinated
Indenture dated as of February 1, 1997
under which REI's Junior Subordinated
Debentures related to 8.257% capital
securities issued by HL&P Capital Trust II
were issued)
4(j) -- Third Supplemental Indenture dated as of CenterPoint Energy's Form 8-K12B 1-31447 4(h)
August 31, 2002 among CenterPoint Energy, dated August 31, 2002
Reliant Energy, RERC and The Bank of New
York (supplementing the Indenture dated as
of June 15, 1996 under which RERC's 6.25%
Convertible Junior Subordinated Debentures
were issued)
4(k) -- Second Supplemental Indenture dated as of CenterPoint Energy's Form 8-K12B 1-31447 4(i)
August 31, 2002 among CenterPoint Energy, dated August 31, 2002
Reliant Energy, RERC and JPMorgan Chase
Bank (supplementing the Indenture dated as
of March 1, 1987 under which RERC's 6%
Convertible Subordinated Debentures due
2012 were issued)
4(l) -- Assignment and Assumption Agreement for CenterPoint Energy's Form 8-K12B 1-31447 4(j)
the Guarantee Agreements dated as of dated August 31, 2002
August 31, 2002 between CenterPoint Energy
and Reliant Energy (relating to the
Guarantee Agreement dated as of February
4, 1997 between Reliant Energy and The
Bank of New York providing for the
guaranty of certain amounts relating to
the 8.257% capital securities issued by
HL&P Capital Trust II)
4(m) -- Assignment and Assumption Agreement for CenterPoint Energy's Form 8-K12B 1-31447 4(l)
the Expense and Liability Agreements and dated August 31, 2002
the Trust Agreements dated as of August
31, 2002 between CenterPoint Energy and
Reliant Energy (relating to (i) the
Agreement as to Expenses and Liabilities
dated as of February 4, 1997 between
Reliant Energy and HL&P Capital Trust II
and (ii) HL&P Capital
91
SEC FILE OR
EXHIBIT REGISTRATION EXHIBIT
NUMBER DESCRIPTION REPORT OR REGISTRATION STATEMENT NUMBER REFERENCE
- ------- ----------- -------------------------------- ------------ ---------
Trust II's Amended and Restated Trust
Agreement dated February 4, 1997
4(n)(1) -- $1,310,000,000 Credit Agreement, dated CenterPoint Energy's Form 10-K 1-31447 4(g)(1)
as of November 12, 2002, among for the year ended December 31,
CenterPoint Houston and the banks named 2002
therein
4(n)(2) -- First Amendment to Exhibit 4(n)(1), CenterPoint Energy's Form 10-Q 1-31447 10.7
dated as of September 3, 2003 for the quarter ended September
30, 2003
4(n)(3) -- Pledge Agreement, dated as of November CenterPoint Energy's Form 10-K 1-31447 4(g)(2)
12, 2002 executed in connection with for the year ended December 31,
Exhibit 4(n)(1) 2002
4(o) -- $1,000,000,000 Credit Agreement dated as CenterPoint Energy's Form 8-K 1-31447 4.1
of March 7, 2005 among CenterPoint dated March 7, 2005
Energy and the banks named therein
++4(p)(1) -- $75,000,000 revolving credit facility
dated as of February 3, 2005 among Texas
Genco Holdings, Inc., Texas Genco GP,
LLC, Texas Genco LP, LLC, Texas Genco,
LP and the banks named therein
++4(p)(2) -- Pledge Agreement, dated as of February
3, 2005, executed in connection with
Exhibit 4(p)(1)
4(q) -- $250,000,000 Credit Agreement dated as CenterPoint Energy's Form 8-K 1-31447 4.1
of March 23, 2004 among CERC and the dated March 31, 2004
initial lenders named therein
4(r) -- $200,000,000 Credit Agreement dated as CenterPoint Energy's Form 8-K 1-31447 4.2
of March 7, 2005 among CenterPoint dated March 7, 2005
Houston and the banks named therein
4(s) -- $1,310,000,000 Credit Agreement dated as CenterPoint Energy's Form 8-K 1-31447 4.3
of March 7, 2005 among CenterPoint dated March 7, 2005
Houston and the banks named therein
92
Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, CenterPoint Energy
has not filed as exhibits to this Form 10-K/A certain long-term debt
instruments, including indentures, under which the total amount of securities
authorized does not exceed 10% of the total assets of CenterPoint Energy and its
subsidiaries on a consolidated basis. CenterPoint Energy hereby agrees to
furnish a copy of any such instrument to the SEC upon request.
SEC FILE OR
EXHIBIT REGISTRATION EXHIBIT
NUMBER DESCRIPTION REPORT OR REGISTRATION STATEMENT NUMBER REFERENCE
- ------- ----------- -------------------------------- ------------ ---------
*10(a)(1) -- Executive Benefit Plan of Houston HI's Form 10-Q for the quarter 1-7629 10(a)(1),
Industries Incorporated ("HI") and First ended March 31, 1987 10(a)(2),
and Second Amendments thereto effective and
as of June 1, 1982, July 1, 1984, and 10(a)(3)
May 7, 1986, respectively
*10(a)(2) -- Third Amendment dated September 17, 1999 Reliant Energy's Form 10-K for 1-3187 10(a)(2)
to Exhibit 10(a)(1) the year ended December 31, 2000
*10(a)(3) -- CenterPoint Energy Executive Benefits CenterPoint Energy's Form 10-Q 1-31447 10.4
Plan, as amended and restated effective for the quarter ended
June 18, 2003 September 30, 2003
*10(b)(1) -- Executive Incentive Compensation Plan of HI's Form 10-K for the year 1-7629 10(b)
HI effective as of January 1, 1982 ended December 31, 1991
*10(b)(2) -- First Amendment to Exhibit 10(b)(1) HI's Form 10-Q for the quarter 1-7629 10(a)
effective as of March 30, 1992 ended March 31, 1992
*10(b)(3) -- Second Amendment to Exhibit 10(b)(1) HI's Form 10-K for the year 1-7629 10(b)
effective as of November 4, 1992 ended December 31, 1992
*10(b)(4) -- Third Amendment to Exhibit 10(b)(1) HI's Form 10-K for the year 1-7629 10(b)(4)
effective as of September 7, 1994 ended December 31, 1994
*10(b)(5) -- Fourth Amendment to Exhibit 10(b)(1) HI's Form 10-K for the year 1-3187 10(b)(5)
effective as of August 6, 1997 ended December 31, 1997
*10(c)(1) -- Executive Incentive Compensation Plan of HI's Form 10-Q for the quarter 1-7629 10(b)(1)
HI effective as of January 1, 1985 ended March 31, 1987
*10(c)(2) -- First Amendment to Exhibit 10(c)(1) HI's Form 10-K for the year 1-7629 10(b)(3)
effective as of January 1, 1985 ended December 31, 1988
*10(c)(3) -- Second Amendment to Exhibit 10(c)(1) HI's Form 10-K for the year 1-7629 10(c)(3)
effective as of January 1, 1985 ended December 31, 1991
*10(c)(4) -- Third Amendment to Exhibit 10(c)(1) HI's Form 10-Q for the quarter 1-7629 10(b)
effective as of March 30, 1992 ended March 31, 1992
*10(c)(5) -- Fourth Amendment to Exhibit 10(c)(1) HI's Form 10-K for the year 1-7629 10(c)(5)
effective as of November 4, 1992 ended December 31, 1992
*10(c)(6) -- Fifth Amendment to Exhibit 10(c)(1) HI's Form 10-K for the year 1-7629 10(c)(6)
effective as of September 7, 1994 ended December 31, 1994
*10(c)(7) -- Sixth Amendment to Exhibit 10(c)(1) HI's Form 10-K for the year 1-3187 10(c)(7)
effective as of August 6, 1997 ended December 31, 1997
*10(d) -- Executive Incentive Compensation Plan of HI's Form 10-Q for the quarter 1-7629 10(b)(2)
HL&P effective as of January 1, 1985 ended March 31, 1987
*10(e)(1) -- Executive Incentive Compensation Plan of HI's Form 10-Q for the quarter 1-7629 10(b)
HI as amended and restated on January 1, ended June 30, 1989
1989
*10(e)(2) -- First Amendment to Exhibit 10(e)(1) HI's Form 10-K for the year 1-7629 10(e)(2)
effective as of January 1, 1989 ended December 31, 1991
*10(e)(3) -- Second Amendment to Exhibit 10(e)(1) HI's Form 10-Q for the quarter 1-7629 10(c)
effective as of March 30, 1992 ended March 31, 1992
93
SEC FILE OR
EXHIBIT REGISTRATION EXHIBIT
NUMBER DESCRIPTION REPORT OR REGISTRATION STATEMENT NUMBER REFERENCE
- ---------- ----------- -------------------------------- ------------ ---------
*10(e)(4) -- Third Amendment to Exhibit 10(e)(1) HI's Form 10-K for the year ended 1-7629 10(c)(4)
effective as of November 4, 1992 December 31, 1992
*10(e)(5) -- Fourth Amendment to Exhibit HI's Form 10-K for the year ended 1-7629 10(e)(5)
10(e)(1) effective as of September December 31, 1994
7, 1994
*10(f)(1) -- Executive Incentive Compensation HI's Form 10-K for the year ended 1-7629 10(b)
Plan of HI as amended and restated December 31, 1990
on January 1, 1991
*10(f)(2) -- First Amendment to Exhibit 10(f)(1) HI's Form 10-K for the year ended 1-7629 10(f)(2)
effective as of January 1, 1991 December 31, 1991
*10(f)(3) -- Second Amendment to Exhibit HI's Form 10-Q for the quarter ended 1-7629 10(d)
10(f)(1) effective as of March 30, March 31, 1992
1992
*10(f)(4) -- Third Amendment to Exhibit 10(f)(1) HI's Form 10-K for the year ended 1-7629 10(f)(4)
effective as of November 4, 1992 December 31, 1992
*10(f)(5) -- Fourth Amendment to Exhibit HI's Form 10-K for the year ended 1-7629 10(f)(5)
10(f)(1) effective as of January 1, December 31, 1992
1993
*10(f)(6) -- Fifth Amendment to Exhibit 10(f)(1) HI's Form 10-K for the year ended 1-7629 10(f)(6)
effective in part, January 1, 1995, December 31, 1994
and in part, September 7, 1994
*10(f)(7) -- Sixth Amendment to Exhibit 10(f)(1) HI's Form 10-Q for the quarter ended 1-7629 10(a)
effective as of August 1, 1995 June 30, 1995
*10(f)(8) -- Seventh Amendment to Exhibit HI's Form 10-Q for the quarter ended 1-7629 10(a)
10(f)(1) effective as of January 1, June 30, 1996
1996
*10(f)(9) -- Eighth Amendment to Exhibit HI's Form 10-Q for the quarter ended 1-7629 10(a)
10(f)(1) effective as of January 1, June 30, 1997
1997
*10(f)(10) -- Ninth Amendment to Exhibit 10(f)(1) HI's Form 10-K for the year ended 1-3187 10(f)(10)
effective in part, January 1, 1997, December 31, 1997
and in part, January 1, 1998
*10(g) -- Benefit Restoration Plan of HI HI's Form 10-Q for the quarter ended 1-7629 10(c)
effective as of June 1, 1985 March 31, 1987
*10(h) -- Benefit Restoration Plan of HI as HI's Form 10-K for the year ended 1-7629 10(g)(2)
amended and restated effective as December 31, 1991
of January 1, 1988
*10(i)(1) -- Benefit Restoration Plan of HI, as HI's Form 10-K for the year ended 1-7629 10(g)(3)
amended and restated effective as December 31, 1991
of July 1, 1991
*10(i)(2) -- First Amendment to Exhibit 10(i)(1) HI's Form 10-K for the year ended 1-3187 10(i)(2)
effective in part, August 6, 1997, December 31, 1997
in part, September 3, 1997, and in
part, October 1, 1997
*10(j)(1) -- Deferred Compensation Plan of HI HI's Form 10-Q for the quarter ended 1-7629 10(d)
effective as of September 1, 1985 March 31, 1987
*10(j)(2) -- First Amendment to Exhibit 10(j)(1) HI's Form 10-K for the year ended 1-7629 10(d)(2)
effective as of September 1, 1985 December 31, 1990
*10(j)(3) -- Second Amendment to Exhibit HI's Form 10-Q for the quarter ended 1-7629 10(e)
10(j)(1) effective as of March 30, March 31, 1992
1992
*10(j)(4) -- Third Amendment to Exhibit 10(j)(1) HI's Form 10-K for the year ended 1-7629 10(h)(4)
effective as of June 2, 1993 December 31, 1993
*10(j)(5) -- Fourth Amendment to Exhibit HI's Form 10-K for the year ended 1-7629 10(h)(5)
10(j)(1) effective as of September December 31, 1994
7, 1994
94
SEC FILE OR
EXHIBIT REGISTRATION EXHIBIT
NUMBER DESCRIPTION REPORT OR REGISTRATION STATEMENT NUMBER REFERENCE
- ---------- ----------- -------------------------------- ------------ ---------
*10(j)(6) -- Fifth Amendment to Exhibit 10(j)(1) HI's Form 10-Q for the quarter ended 1-7629 10(d)
effective as of August 1, 1995 June 30, 1995
*10(j)(7) -- Sixth Amendment to Exhibit 10(j)(1) HI's Form 10-Q for the quarter ended 1-7629 10(b)
effective as of December 1, 1995 June 30, 1995
*10(j)(8) -- Seventh Amendment to Exhibit HI's Form 10-Q for the quarter ended 1-7629 10(b)
10(j)(1) effective as of January 1, June 30, 1997
1997
*10(j)(9) -- Eighth Amendment to Exhibit HI's Form 10-K for the year ended 1-3187 10(j)(9)
10(j)(1) effective as of October 1, December 31, 1997
1997
*10(j)(10) -- Ninth Amendment to Exhibit 10(j)(1) HI's Form 10-K for the year ended 1-3187 10(j)(10)
effective as of September 3, 1997 December 31, 1997
*10(j)(11) -- Tenth Amendment to Exhibit 10(j)(1) CenterPoint Energy's Form 10-K for the 1-31447 10(j)(11)
effective as of January 1, 2001 year ended December 31, 2002
*10(j)(12) -- Eleventh Amendment to Exhibit CenterPoint Energy's Form 10-K for the 1-31447 10(j)(12)
10(j)(1) effective as of August 31, year ended December 31, 2002
2002
*10(j)(13) -- CenterPoint Energy 1985 Deferred CenterPoint Energy's Form 10-Q for the 1-31447 10.1
Compensation Plan, as amended and quarter ended September 30, 2003
restated effective January 1, 2003
*10(k)(1) -- Deferred Compensation Plan of HI HI's Form 10-Q for the quarter ended 1-7629 10(a)
effective as of January 1, 1989 June 30, 1989
*10(k)(2) -- First Amendment to Exhibit 10(k)(1) HI's Form 10-K for the year ended 1-7629 10(e)(3)
effective as of January 1, 1989 December 31, 1989
*10(k)(3) -- Second Amendment to Exhibit HI's Form 10-Q for the quarter ended 1-7629 10(f)
10(k)(1) effective as of March 30, March 31, 1992
1992
*10(k)(4) -- Third Amendment to Exhibit 10(k)(1) HI's Form 10-K for the year ended 1-7629 10(i)(4)
effective as of June 2, 1993 December 31, 1993
*10(k)(5) -- Fourth Amendment to Exhibit HI's Form 10-K for the year ended 1-7629 10(i)(5)
10(k)(1) effective as of September December 31, 1994
7, 1994
*10(k)(6) -- Fifth Amendment to Exhibit 10(k)(1) HI's Form 10-Q for the quarter ended 1-7629 10(c)
effective as of August 1, 1995 June 30, 1995
*10(k)(7) -- Sixth Amendment to Exhibit 10(k)(1) HI's Form 10-Q for the quarter ended 1-7629 10(c)
effective December 1, 1995 June 30, 1995
*10(k)(8) -- Seventh Amendment to Exhibit HI's Form 10-Q for the quarter ended 1-7629 10(c)
10(k)(1) effective as of January 1, June 30, 1997
1997
*10(k)(9) -- Eighth Amendment to Exhibit HI's Form 10-K for the year ended 1-3187 10(k)(9)
10(k)(1) effective in part October December 31, 1997
1, 1997 and in part January 1, 1998
*10(k)(10) -- Ninth Amendment to Exhibit 10(k)(1) HI's Form 10-K for the year ended 1-3187 10(k)(10)
effective as of September 3, 1997 December 31, 1997
*10(k)(11) -- Tenth Amendment to Exhibit 10(k)(1) CenterPoint Energy's Form 10-K for the 1-31447 10(k)(11)
effective as of January 1, 2001 year ended December 31, 2002
*10(k)(12) -- Eleventh Amendment to Exhibit CenterPoint Energy's Form 10-K for the 1-31447 10(k)(12)
10(k)(1) effective as of August 31, year ended December 31, 2002
2002
*10(l)(1) -- Deferred Compensation Plan of HI HI's Form 10-K for the year ended 1-7629 10(d)(3)
effective as of January 1, 1991 December 31, 1990
*10(l)(2) -- First Amendment to Exhibit 10(l)(1) HI's Form 10-K for the year ended 1-7629 10(j)(2)
effective as of January 1, 1991 December 31, 1991
*10(l)(3) -- Second Amendment to Exhibit HI's Form 10-Q for the quarter ended 1-7629 10(g)
10(l)(1) effective as of March 30, March 31, 1992
1992
95
SEC FILE OR
EXHIBIT REGISTRATION EXHIBIT
NUMBER DESCRIPTION REPORT OR REGISTRATION STATEMENT NUMBER REFERENCE
------- ----------- -------------------------------- ------------ ---------
*10(l)(4) -- Third Amendment to Exhibit 10(l)(1) effective HI's Form 10-K for the year 1-7629 10(j)(4)
as of June 2, 1993 ended December 31, 1993
*10(l)(5) -- Fourth Amendment to Exhibit 10(l)(1) effective HI's Form 10-K for the year 1-7629 10(j)(5)
as of December 1, 1993 ended December 31, 1993
*10(l)(6) -- Fifth Amendment to Exhibit 10(l)(1) effective HI's Form 10-K for the year 1-7629 10(j)(6)
as of September 7, 1994 ended December 31, 1994
*10(l)(7) -- Sixth Amendment to Exhibit 10(l)(1) effective HI's Form 10-Q for the quarter 1-7629 10(b)
as of August 1, 1995 ended June 30, 1995
*10(l)(8) -- Seventh Amendment to Exhibit 10(l)(1) HI's Form 10-Q for the quarter 1-7629 10(d)
effective as of December 1, 1995 ended June 30, 1996
*10(l)(9) -- Eighth Amendment to Exhibit 10(l)(1) effective HI's Form 10-Q for the quarter 1-7629 10(d)
as of January 1, 1997 ended June 30, 1997
*10(l)(10) -- Ninth Amendment to Exhibit 10(l)(1) effective HI's Form 10-K for the year 1-3187 10(l)(10)
in part August 6, 1997, in part October 1, ended December 31, 1997
1997, and in part January 1, 1998
*10(l)(11) -- Tenth Amendment to Exhibit 10(l)(1) effective HI's Form 10-K for the year 1-3187 10(i)(11)
as of September 3, 1997 ended December 31, 1997
*10(l)(12) -- Eleventh Amendment to Exhibit 10(l)(1) CenterPoint Energy's Form 10-K 1-31447 10(l)(12)
effective as of January 1, 2001 for the year ended December 31,
2002
*10(l)(13) -- Twelfth Amendment to Exhibit 10(l)(1) CenterPoint Energy's Form 10-K 1-31447 10(l)(13)
effective as of August 31, 2002 for the year ended December 31,
2002
*10(m)(1) -- Long-Term Incentive Compensation Plan of HI HI's Form 10-Q for the quarter 1-7629 10(c)
effective as of January 1, 1989 ended June 30, 1989
*10(m)(2) -- First Amendment to Exhibit 10(m)(1) effective HI's Form 10-K for the year 1-7629 10(f)(2)
as of January 1, 1990 ended December 31, 1989
*10(m)(3) -- Second Amendment to Exhibit 10(m)(1) effective HI's Form 10-K for the year 1-7629 10(k)(3)
as of December 22, 1992 ended December 31, 1992
*10(m)(4) -- Third Amendment to Exhibit 10(m)(1) effective HI's Form 10-K for the year 1-3187 10(m)(4)
as of August 6, 1997 ended December 31, 1997
*10(m)(5) -- Fourth Amendment to Exhibit 10(m)(1) effective Reliant Energy's Form 10-Q for 1-3187 10.4
as of January 1, 2001 the quarter ended June 30, 2002
*10(n)(1) -- Form of stock option agreement for HI's Form 10-Q for the quarter 1-7629 10(h)
non-qualified stock options granted under ended March 31, 1992
Exhibit 10(m)(1)
*10(n)(2) -- Forms of restricted stock agreement for HI's Form 10-Q for the quarter 1-7629 10(i)
restricted stock granted under Exhibit 10(m)(1) ended March 31, 1992
*10(o)(1) -- 1994 Long-Term Incentive Compensation Plan of HI's Form 10-K for the year 1-7629 10(n)(1)
HI effective as of January 1, 1994 ended December 31, 1993
*10(o)(2) -- Form of stock option agreement for HI's Form 10-K for the year 1-7629 10(n)(2)
non-qualified stock options granted under ended December 31, 1993
Exhibit 10(o)(1)
*10(o)(3) -- First Amendment to Exhibit 10(o)(1) effective HI's Form 10-Q for the quarter 1-7629 10(e)
as of May 9, 1997 ended June 30, 1997
*10(o)(4) -- Second Amendment to Exhibit 10(o)(1) effective HI's Form 10-K for the year 1-3187 10(p)(4)
as of August 6, 1997 ended December 31, 1997
96
SEC FILE OR
EXHIBIT REGISTRATION EXHIBIT
NUMBER DESCRIPTION REPORT OR REGISTRATION STATEMENT NUMBER REFERENCE
------- ----------- -------------------------------- ------------ ---------
*10(o)(5) -- Third Amendment to Exhibit 10(o)(1) effective HI's Form 10-K for the year 1-3187 10(p)(5)
as of January 1, 1998 ended December 31, 1998
*10(o)(6) -- Reliant Energy 1994 Long- Term Incentive Reliant Energy's Form 10-Q for 1-3187 10.6
Compensation Plan, as amended and restated the quarter ended June 30, 2002
effective January 1, 2001
*10(o)(7) -- First Amendment to Exhibit 10(o)(6), effective CenterPoint Energy's Form 10-K 1-31447 10(p)(7)
December 1, 2003 for the year ended December 31,
2003
*10(o)(8) -- Form of Non-Qualified Stock Option Award CenterPoint Energy's Form 8-K 1-31447 10.6
Notice under Exhibit 10(o)(6) dated January 25, 2005
*10(p)(1) -- Savings Restoration Plan of HI effective as of HI's Form 10-K for the year 1-7629 10(f)
January 1, 1991 ended December 31, 1990
*10(p)(2) -- First Amendment to Exhibit 10(p)(1) effective HI's Form 10-K for the year 1-7629 10(l)(2)
as of January 1, 1992 ended December 31, 1991
*10(p)(3) -- Second Amendment to Exhibit 10(p)(1) effective HI's Form 10-K for the year 1-3187 10(q)(3)
in part, August 6, 1997, and in part, October ended December 31, 1997
1, 1997
*10(q)(1) -- Director Benefits Plan effective as of January HI's Form 10-K for the year 1-7629 10(m)
1, 1992 ended December 31, 1991
*10(q)(2) -- First Amendment to Exhibit 10(q)(1) effective HI's Form 10-K for the year 1-7629 10(m)(1)
as of August 6, 1997 ended December 31, 1998
*10(q)(3) -- CenterPoint Energy Outside Director Benefits CenterPoint Energy's Form 10-Q 1-31447 10.6
Plan, as amended and restated effective June for the quarter ended September
18, 2003 30, 2003
*10(q)(4) -- First Amendment to Exhibit 10(q)(3) effective CenterPoint Energy's Form 10-Q 1-31447 10.6
as of January 1, 2004 for the quarter ended June 30,
2004
*10(r)(1) -- Executive Life Insurance Plan of HI effective HI's Form 10-K for the year 1-7629 10(q)
as of January 1, 1994 ended December 31, 1993
*10(r)(2) -- First Amendment to Exhibit 10(r)(1) effective HI's Form 10-Q for the quarter 1-7629 10
as of January 1, 1994 ended June 30, 1995
*10(r)(3) -- Second Amendment to Exhibit 10(r)(1) effective HI's Form 10-K for the year 1-3187 10(s)(3)
as of August 6, 1997 ended December 31, 1997
*10(r)(4) -- CenterPoint Energy Executive Life Insurance CenterPoint Energy's Form 10-Q 1-31447 10.5
Plan, as amended and restated effective June for the quarter ended September
18, 2003 30, 2003
*10(s) -- Employment and Supplemental Benefits Agreement HI's Form 10-Q for the quarter 1-7629 10(f)
between HL&P and Hugh Rice Kelly ended March 31, 1987
*10(t)(1) -- Reliant Energy Savings Plan, as amended and Reliant Energy's Form 10-K for 1-3187 10(cc)(1)
restated effective April 1, 1999 the year ended December 31, 1999
*10(t)(2) -- First Amendment to Exhibit 10(t)(1) effective Reliant Energy's Form 10-Q for 1-3187 10.9
January 1, 1999 the quarter ended June 30, 2002
*10(t)(3) -- Second Amendment to Exhibit 10(t)(1) effective Reliant Energy's Form 10-Q for 1-3187 10.10
January 1, 1997 the quarter ended June 30, 2002
*10(t)(4) -- Third Amendment to Exhibit 10(t)(1) effective Reliant Energy's Form 10-Q for 1-3187 10.11
January 1, 2001 the quarter ended June 30, 2002
*10(t)(5) -- Fourth Amendment to Exhibit 10(t)(1) effective Reliant Energy's Form 10-Q for 1-3187 10.12
May 6, 2002 the quarter ended June 30, 2002
97
SEC FILE OR
EXHIBIT REGISTRATION EXHIBIT
NUMBER DESCRIPTION REPORT OR REGISTRATION STATEMENT NUMBER REFERENCE
------- ----------- -------------------------------- ------------ ---------
*10(t)(6) -- Fifth Amendment to Exhibit 10(t)(1) effective CenterPoint Energy's Form 10-K 1-31447 10(u)(6)
January 1, 2002 and as renamed effective for the year ended December 31,
October 2, 2002 2002
++*10(t)(7) -- Sixth Amendment to Exhibit 10(t)(1) effective
January 1, 2005
*10(t)(8) -- Reliant Energy Savings Trust between Reliant CenterPoint Energy's Form 10-K 1-31447 10(u)(7)
Energy and The Northern Trust Company, as for the year ended December 31,
Trustee, as amended and restated effective 2002
April 1, 1999
*10(t)(9) -- First Amendment to Exhibit 10(t)(8) effective CenterPoint Energy's Form 10-K 1-31447 10(u)(8)
September 30, 2002 for the year ended December 31,
2002
*10(t)(10) -- Second Amendment to Exhibit 10(t)(8) CenterPoint Energy's Form 10-K 1-31447 10(u)(9)
effective January 6, 2003 for the year ended December 31,
2003
*10(t)(11) -- Reliant Energy Retirement Plan, as amended CenterPoint Energy's Form 10-K 1-31447 10(u)(10)
and restated effective January 1, 1999 for the year ended December 31,
2002
*10(t)(12) -- First Amendment to Exhibit 10(t)(11) CenterPoint Energy's Form 10-K 1-31447 10(u)(11)
effective as of January 1, 1995 for the year ended December 31,
2002
*10(t)(13) -- Second Amendment to Exhibit 10(t)(11) CenterPoint Energy's Form 10-K 1-31447 10(u)(12)
effective as of January 1, 1995 for the year ended December 31,
2002
*10(t)(14) -- Third Amendment to Exhibit 10(t)(11) CenterPoint Energy's Form 10-K 1-31447 10(u)(13)
effective as of January 1, 2001 for the year ended December 31,
2002
*10(t)(15) -- Fourth Amendment to Exhibit 10(t)(11) CenterPoint Energy's Form 10-K 1-31447 10(u)(14)
effective as of January 1, 2001 for the year ended December 31,
2002
*10(t)(16) -- Fifth Amendment to Exhibit 10(t)(11) CenterPoint Energy's Form 10-K 1-31447 10(u)(15)
effective as of November 15, 2002, and as for the year ended December 31,
renamed effective October 2, 2002 2002
*10(t)(17) -- Sixth Amendment to Exhibit 10(t)(11) CenterPoint Energy's Form 10-K 1-31447 10(u)(16)
effective as of January 1, 2002 for the year ended December 31,
2002
*10(t)(18) -- Seventh Amendment to Exhibit 10(t)(11) CenterPoint Energy's Form 10-K 1-31447 10(u)(18)
effective December 1, 2003 for the year ended December 31,
2003
*10(t)(19) -- Eighth Amendment to Exhibit 10(t)(11) CenterPoint Energy's Form 10-Q 1-31447 10.7
effective as of January 1, 2004 for the quarter ended June 30,
2004
++*10(t)(20) -- Ninth Amendment to Exhibit 10(t)(11)
effective as of October 27, 2004
++*10(t)(21) -- Tenth Amendment to Exhibit 10(t)(11)
effective as of January 1, 2005
*10(t)(22) -- Reliant Energy, Incorporated Master Reliant Energy's Form 10-K for 1-3187 10(u)(3)
Retirement Trust (as amended and restated the year ended December 31, 1999
effective January 1, 1999 and renamed
effective May 5, 1999)
10(t)(23) -- Contribution and Registration Agreement dated Reliant Energy's Form 10-K for 1-3187 10(u)(4)
December 18, 2001 among Reliant Energy, the year ended December 31, 2001
CenterPoint Energy and the Northern Trust
Company, trustee under the Reliant Energy,
Incorporated Master Retirement Trust
98
SEC FILE OR
EXHIBIT REGISTRATION EXHIBIT
NUMBER DESCRIPTION REPORT OR REGISTRATION STATEMENT NUMBER REFERENCE
------- ----------- -------------------------------- ------------ ---------
10(u)(1) -- Stockholder's Agreement dated as of July 6, Schedule 13-D dated July 6, 1995 5-19351 2
1995 between Houston Industries Incorporated
and Time Warner Inc.
10(u)(2) -- Amendment to Exhibit 10(u)(1) dated November HI's Form 10-K for the year 1-7629 10(x)(4)
18, 1996 ended December 31, 1996
*10(v)(1) -- Houston Industries Incorporated Executive HI's Form 10-K for the year 1-7629 10(7)
Deferred Compensation Trust effective as of ended December 31, 1995
December 19, 1995
*10(v)(2) -- First Amendment to Exhibit 10(v)(1) effective HI's Form 10-Q for the quarter 1-3187 10
as of August 6, 1997 ended June 30, 1998
*10(w) -- Letter Agreement dated December 9, 2004 CenterPoint Energy's Form 8-K 1-31447 10.1
between CenterPoint Energy and Milton Carroll dated December 9, 2004
*10(x)(1) -- Reliant Energy, Incorporated and Subsidiaries Reliant Energy's Form 10-K for 1-3187 10(y)
Common Stock Participation Plan for the year ended December 31, 2000
Designated New Employees and Non-Officer
Employees effective as of March 4, 1998
*10(x)(2) -- Reliant Energy, Incorporated and Subsidiaries CenterPoint Energy's Form 10-K 1-31447 10(y)(2)
Common Stock Participation Plan for for the year ended December 31,
Designated New Employees and Non-Officer 2002
Employees, as amended and restated effective
January 1, 2001
*10(y) -- Reliant Energy, Incorporated Annual Incentive Reliant Energy's Definitive 1-3187 Exhibit A
Compensation Plan, as amended and restated Proxy Statement for 2000 Annual
effective January 1, 1999 Meeting of Shareholders
*10(z)(1) -- Long-Term Incentive Plan of Reliant Energy, Reliant Energy's Registration 333-60260 4.6
Incorporated effective as of January 1, 2001 Statement on Form S-8 dated May
4, 2001
*10(z)(2) -- First Amendment to Exhibit 10(z)(1) effective Reliant Energy's Registration 333-60260 4.7
as of January 1, 2001 Statement on Form S-8 dated May
4, 2001
*10(z)(3) -- Second Amendment to Exhibit 10(z)(1) CenterPoint Energy's Form 10-K 1-31447 10(aa)(3)
effective November 5, 2003 for the year ended December 31,
2003
*10(z)(4) -- Long-Term Incentive Plan of CenterPoint CenterPoint Energy's Form 10-Q 1-31447 10.5
Energy, Inc. (amended and restated effective for the quarter ended June 30,
as of May 1, 2004) 2004
*10(z)(5) -- Form of Non-Qualified Stock Option Award CenterPoint Energy's Form 8-K 1-31447 10.1
Agreement under Exhibit 10(z)(4) dated January 25, 2005
*10(z)(6) -- Form of Restricted Stock Award Agreement CenterPoint Energy's Form 8-K 1-31447 10.2
under Exhibit 10(z)(4) dated January 25, 2005
*10(z)(7) -- Form of Performance Share Award under Exhibit CenterPoint Energy's Form 8-K 1-31447 10.3
10(z)(4) dated January 25, 2005
*10(z)(8) -- Form of Performance Unit Award under Exhibit CenterPoint Energy's Form 8-K 1-31447 10.4
10(z)(4) dated January 25, 2005
*10(z)(9) -- Form of Restricted Stock Award Agreement CenterPoint Energy's Form 8-K 1-31447 10.2
(With Performance Vesting Requirement) dated February 21, 2005
under Exhibit 10(z)(4)
*10(z)(10) -- Summary of Performance Objectives for Awards CenterPoint Energy's Form 8-K 1-31447 10.5
under Exhibit 10(z)(4) dated January 25, 2005
99
SEC FILE OR
EXHIBIT REGISTRATION EXHIBIT
NUMBER DESCRIPTION REPORT OR REGISTRATION STATEMENT NUMBER REFERENCE
------- ----------- -------------------------------- ------------ ---------
10(aa)(1) -- Master Separation Agreement Reliant Energy's Form 10-Q for 1-3187 10.1
entered into as of December the quarter ended March 31, 2001
31, 2000 between Reliant
Energy, Incorporated and
Reliant Resources, Inc.
10(aa)(2) -- First Amendment to Exhibit CenterPoint Energy's Form 10-K 1-31447 10(bb)(5)
10(aa)(1) effective as of for the year ended December 31,
February 1, 2003 2002
10(aa)(3) -- Employee Matters Agreement, Reliant Energy's Form 10-Q for 1-3187 10.5
entered into as of December the quarter ended March 31, 2001
31, 2000, between Reliant
Energy, Incorporated and
Reliant Resources, Inc.
10(aa)(4) -- Retail Agreement, entered into Reliant Energy's Form 10-Q for 1-3187 10.6
as of December 31, 2000, the quarter ended March 31, 2001
between Reliant Energy,
Incorporated and Reliant
Resources, Inc.
10(aa)(5) -- Tax Allocation Agreement, Reliant Energy's Form 10-Q for 1-3187 10.8
entered into as of December the quarter ended March 31, 2001
31, 2000, between Reliant
Energy, Incorporated and
Reliant Resources, Inc.
10(bb)(1) -- Separation Agreement entered CenterPoint Energy's Form 10-K 1-31447 10(cc)(1)
into as of August 31, 2002 for the year ended December 31,
between CenterPoint Energy and 2002
Texas Genco
10(bb)(2) -- Transition Services Agreement, CenterPoint Energy's Form 10-K 1-31447 10(cc)(2)
dated as of August 31, 2002, for the year ended December 31,
between CenterPoint Energy and 2002
Texas Genco
10(bb)(3) -- Tax Allocation Agreement, CenterPoint Energy's Form 10-K 1-31447 10(cc)(3)
dated as of August 31, 2002, for the year ended December 31,
between CenterPoint Energy and 2002
Texas Genco
10(bb)(4) -- Assignment and Assumption Texas Genco's Registration 1-31449 10.11
Agreement for the Technical Statement on Form 10
Services Agreement entered
into as of August 31, 2002, by
and between CenterPoint Energy
and Texas Genco, LP
*10(cc) -- Retention Agreement effective Reliant Energy's Form 10-K for 1-3187 10(jj)
October 15, 2001 between the year ended December 31, 2001
Reliant Energy and David G.
Tees
*10(dd) -- Retention Agreement effective Reliant Energy's Form 10-K for 1-3187 10(kk)
October 15, 2001 between the year ended December 31, 2001
Reliant Energy and Michael A.
Reed
*10(ee)(1) -- Non-Qualified Executive CenterPoint Energy's Form 10-K 1-31447 10(ff)(1)
Disability Income Plan of for the year ended December 31,
Arkla, Inc. effective as of 2002
August 1, 1983
*10(ee)(2) -- Executive Disability Income CenterPoint Energy's Form 10-K 1-31447 10(ff)(2)
Agreement effective July 1, for the year ended December 31,
1984 between Arkla, Inc. and 2002
T. Milton Honea
*10(ff) -- Non-Qualified Unfunded CenterPoint Energy's Form 10-K 1-31447 10(gg)
Executive Supplemental Income for the year ended December 31,
Retirement Plan of Arkla, Inc. 2002
effective as of August 1, 1983
*10(gg)(1) -- Deferred Compensation Plan for CenterPoint Energy's Form 10-K 1-31447 10(hh)(1)
Directors of Arkla, Inc. for the year ended December 31,
effective as of November 10, 2002
1988
*10(gg)(2) -- First Amendment to Exhibit CenterPoint Energy's Form 10-K 1-31447 10(hh)(2)
10(hh)(1) effective as of for the year ended December 31,
August 6, 1997 2002
100
SEC FILE OR
EXHIBIT REGISTRATION EXHIBIT
NUMBER DESCRIPTION REPORT OR REGISTRATION STATEMENT NUMBER REFERENCE
------- ----------- -------------------------------- ------------ ---------
10(hh) -- Pledge Agreement dated as of CenterPoint Energy's Form 10-Q 1-31447 10.1
May 28, 2003 by Utility for the quarter ended June 30,
Holding, LLC in favor of JP 2003
Morgan Chase Bank, as
administrative agent
*10(ii) -- CenterPoint Energy Deferred CenterPoint Energy's Form 10-Q 1-31447 10.2
Compensation Plan, as amended for the quarter ended June 30,
and restated effective January 2003
1, 2003
*10(jj)(1) -- CenterPoint Energy Short Term CenterPoint Energy's Form 10-Q 1-31447 10.3
Incentive Plan, as amended and for the quarter ended September
restated effective January 1, 30, 2003
2003
*10(jj)(2) -- Summary of 2005 goals for CenterPoint Energy's Form 8-K 1-31447 10.1
Exhibit 10(jj)(1) dated February 21, 2005
*10(kk) -- CenterPoint Energy Stock Plan CenterPoint Energy's Form 10-K 1-31447 10(ll)
for Outside Directors, as for the year ended December 31,
amended and restated effective 2003
May 7, 2003
++10(ll) -- Summary of non-employee
director compensation
++10(mm) -- Summary of named executive
officer compensation
++12 -- Computation of Ratios of
Earnings to Fixed Charges
++21 -- Subsidiaries of CenterPoint
Energy
+23 -- Consent of Deloitte & Touche
LLP
+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
101
Exhibit 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos.
333-120306, 333-116246, 333-114543, 333-114440 and 333-110348 on Form S-3;
Registration Statement Nos. 333-115976 and 333-105773 on Form S-8;
Post-Effective Amendment No. 1 to Registration Statement No. 333-33303-99 on
Form S-3; Post Effective Amendment No. 1 to Registration Statement Nos.
333-32413-99, 333-49333-99, 333-38188-99, 333-60260-99, 333-98271-99 and
333-101202 on Form S-8; and Post-Effective Amendment No. 5 to Registration
Statement No. 333-11329-99 on Form S-8 of our reports relating to i) the
consolidated financial statements of CenterPoint Energy, Inc. and subsidiaries
dated March 15, 2005, January 10, 2006, as to the effects of the restatement
discussed in Note 17 to the consolidated financial statements (which report
expresses an unqualified opinion and includes explanatory paragraphs relating to
the Company's presentation of its electric generating operations as discontinued
operations and the restatement discussed in Note 17 to the consolidated
financial statements), ii) the consolidated financial statement schedules dated
March 15, 2005, and iii) management's report on the effectiveness of internal
control over financial reporting dated March 15, 2005, January 10, 2006 as to
the effects of the material weakness described in Management's Annual Report on
Internal Control over Financial Reporting as revised (which report expresses an
adverse opinion on the effectiveness of internal control over financial
reporting), appearing in this Amendment No. 2 to the Annual Report on Form
10-K/A of CenterPoint Energy, Inc. for the year ended December 31, 2004.
DELOITTE & TOUCHE LLP
Houston, Texas
January 10, 2006
EXHIBIT 31.1
CERTIFICATIONS
I, David M. McClanahan, certify that:
1. I have reviewed this amended Annual Report on Form 10-K/A of CenterPoint
Energy, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal control
over financial reporting.
Date: January 10, 2006
/s/ David M. McClanahan
----------------------------------------
David M. McClanahan
President and Chief Executive Officer
EXHIBIT 31.2
CERTIFICATIONS
I, Gary L. Whitlock, certify that:
1. I have reviewed this amended Annual Report on Form 10-K/A of CenterPoint
Energy, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal control
over financial reporting.
Date: January 10, 2006
/s/ Gary L. Whitlock
----------------------------------------
Gary L. Whitlock
Executive Vice President and
Chief Financial Officer
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the amended Annual Report of CenterPoint Energy, Inc.
(the "Company") on Form 10-K/A for the year ended December 31, 2004 (the
"Report"), as filed with the Securities and Exchange Commission on the date
hereof, I, David M. McClanahan, Chief Executive Officer, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that, to the best of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Date: January 10, 2006 /s/ David M. McClanahan
----------------------------------------
David M. McClanahan
President and Chief Executive Officer
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the amended Annual Report of CenterPoint Energy, Inc.
(the "Company") on Form 10-K/A for the year ended December 31, 2004 (the
"Report"), as filed with the Securities and Exchange Commission on the date
hereof, I, Gary L. Whitlock, Chief Financial Officer, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that, to the best of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: January 10, 2006 /s/ Gary L. Whitlock
----------------------------------------
Gary L. Whitlock
Executive Vice President and
Chief Financial Officer
