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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO________
COMMISSION FILE NUMBER 1-31447
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CENTERPOINT ENERGY, INC.
(Exact name of registrant as specified in its charter)
TEXAS 74-0694415
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
1111 LOUISIANA (713) 207-1111
HOUSTON, TEXAS 77002 (Registrant's telephone number, including area
(Address and zip code of principal executive code)
offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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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,
Series B New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [X] No [ ]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ]
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 $4,069,064,426 as of June 30, 2005, 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, 2006, the Company had
310,849,323 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.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement relating to the 2006 Annual
Meeting of Shareholders of the Company, which will be filed with the Securities
and Exchange Commission within 120 days of December 31, 2005, 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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TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................... 1
Item 1A. Risk Factors................................................ 21
Item 1B. Unresolved Staff Comments................................... 28
Item 2. Properties.................................................. 28
Item 3. Legal Proceedings........................................... 28
Item 4. Submission of Matters to a Vote of Security Holders......... 28
PART II
Item 5. Market for Registrants' Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities........... 29
Item 6. Selected Financial Data..................................... 30
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 32
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 56
Item 8. Financial Statements and Supplementary Data................. 59
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 117
Item 9A. Controls and Procedures..................................... 117
Item 9B. Other Information........................................... 120
PART III
Item 10. Directors and Executive Officers............................ 121
Item 11. Executive Compensation...................................... 121
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.................. 121
Item 13. Certain Relationships and Related Transactions.............. 121
Item 14. Principal Accountant Fees and Services...................... 121
PART IV
Item 15. Exhibits and Financial Statement Schedules.................. 122
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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" in Item 1A of this report.
You should not place undue reliance on forward-looking statements. Each
forward-looking statement speaks only as of the date of the particular
statement.
ii
PART I
ITEM 1. BUSINESS
OUR BUSINESS
OVERVIEW
We are a public utility holding company whose indirect wholly owned
subsidiaries include:
- CenterPoint Energy Houston Electric, LLC (CenterPoint Houston), which
provides 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; and
- CenterPoint Energy Resources Corp. (CERC Corp. and, together with its
subsidiaries, CERC), which owns gas distribution systems serving
approximately 3.1 million customers in Arkansas, Louisiana, Minnesota,
Mississippi, Oklahoma and Texas. Through wholly owned subsidiaries, CERC
also owns two interstate natural gas pipelines and gas gathering systems,
provides various ancillary services, and offers variable and fixed-price
physical natural gas supplies primarily to commercial and industrial
customers and electric and gas utilities.
Our reportable business segments are Electric Transmission & Distribution,
Natural Gas Distribution, Competitive Natural Gas Sales and Services, Pipelines
and Field Services (formerly Pipelines and Gathering), and Other Operations. The
operations of Texas Genco Holdings, Inc. (Texas Genco), formerly our majority
owned generating subsidiary, the sale of which was completed in April 2005, are
presented as discontinued operations.
We were a registered public utility holding company under the Public
Utility Holding Company Act of 1935, as amended (the 1935 Act). The 1935 Act and
related rules and regulations imposed a number of restrictions on our activities
and those of our subsidiaries. The Energy Policy Act of 2005 (Energy Act)
repealed the 1935 Act effective February 8, 2006, and since that date we and our
subsidiaries have no longer been subject to restrictions imposed under the 1935
Act. The Energy Act includes a new Public Utility Holding Company Act of 2005
(PUHCA 2005), which grants to the Federal Energy Regulatory Commission (FERC)
authority to require holding companies and their subsidiaries to maintain
certain books and records and make them available for review by the FERC and
state regulatory authorities in certain circumstances. On December 8, 2005, the
FERC issued rules implementing PUHCA 2005 that will require us to notify the
FERC of our status as a holding company and to maintain certain books and
records and make these available to the FERC. The FERC continues to consider
motions for rehearing or clarification of these rules.
Our principal executive offices are located at 1111 Louisiana, Houston,
Texas 77002 (telephone number: 713-207-1111).
We make available free of charge on our Internet website our annual report
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable
after we electronically file such reports with, or furnish them to, the
Securities and Exchange Commission (SEC). Additionally, we make available free
of charge on our Internet website:
- our Code of Ethics for our Chief Executive Officer and Senior Financial
Officers;
- our Ethics and Compliance Code;
- our Corporate Governance Guidelines; and
- the charters of our audit, compensation, finance and governance
committees.
Any shareholder who so requests may obtain a printed copy of any of these
documents from us. Changes in or waivers of our Code of Ethics for our Chief
Executive Officer and Senior Financial Officers and waivers of our Ethics and
Compliance Code for directors or executive officers will be posted on our
Internet website
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within five business days and maintained for at least 12 months or reported on
Item 5.05 of our Forms 8-K. Our website address is www.centerpointenergy.com.
Except to the extent explicitly stated herein, documents and information on our
website are not incorporated by reference herein.
ELECTRIC TRANSMISSION & DISTRIBUTION
Electric Transmission
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 taking power above 69 kilovolts (kV) in
locations throughout the control area managed by the Electric Reliability
Council of Texas, Inc. (ERCOT). CenterPoint Houston provides transmission
services under tariffs approved by the Public Utility Commission of Texas (Texas
Utility Commission).
Electric Distribution
In ERCOT, end users purchase their electricity directly from certificated
"retail electric providers." CenterPoint Houston delivers electricity for retail
electric providers in its certificated service area by carrying lower-voltage
power from the substation to the retail electric customer. Its distribution
network receives electricity from the transmission grid through power
distribution substations and delivers electricity to end users through
distribution feeders. CenterPoint Houston's operations include construction and
maintenance of electric transmission and distribution facilities, metering
services, outage response services and call center operations. CenterPoint
Houston provides distribution services under tariffs approved by the Texas
Utility Commission. Texas Utility Commission rules and market protocols govern
the commercial operations of distribution companies and other market
participants.
ERCOT Market Framework
CenterPoint Houston is a member of 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 includes much of the
State of Texas, other than a portion of the panhandle, a portion of the eastern
part of the state bordering Louisiana and the area in and around El Paso. The
ERCOT market represents approximately 85% of the demand for power in Texas and
is one of the nation's largest power markets. The ERCOT market includes an
aggregate net generating capacity of approximately 77,000 megawatts. There are
only limited direct current interconnections between the ERCOT market and other
power markets in the United States.
The ERCOT market operates under the reliability standards set by the North
American Electric Reliability Council. The Texas Utility Commission has primary
jurisdiction over the ERCOT market to ensure the adequacy and reliability of
electricity supply across the state's main interconnected power transmission
grid. The ERCOT independent system operator (ERCOT ISO) is responsible for
maintaining reliable operations of the bulk electric power supply system in the
ERCOT market. Its responsibilities include ensuring that electricity production
and delivery are accurately accounted for among the generation resources and
wholesale buyers and sellers. Unlike certain other regional power markets, the
ERCOT market is not a centrally dispatched power pool, and the ERCOT ISO does
not procure energy on behalf of its members other than to maintain the reliable
operations of the transmission system. Members who sell and purchase power are
responsible for contracting sales and purchases of power bilaterally. The ERCOT
ISO also serves as agent for procuring ancillary services for those members who
elect not to provide their own ancillary services.
CenterPoint Houston's electric transmission business, along with those of
other owners of transmission facilities in Texas, supports the operation of the
ERCOT ISO. The transmission business has planning, design, construction,
operation and maintenance responsibility for the portion of the transmission
grid and for the load-serving substations it owns, primarily within its
certificated area. We participate with the ERCOT ISO and other ERCOT utilities
to plan, design, obtain regulatory approval for and construct new transmission
lines
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necessary to increase bulk power transfer capability and to remove existing
constraints on the ERCOT transmission grid.
True-Up and Securitization
The Texas Electric Choice Plan (Texas electric restructuring law), which
became effective in September 1999, substantially amended the regulatory
structure governing electric utilities in order to allow retail competition for
electric customers beginning in January 2002. The Texas electric restructuring
law requires the Texas Utility Commission to conduct a "true-up" proceeding to
determine CenterPoint Houston's stranded costs and certain other costs resulting
from the transition to a competitive retail electric market and to provide for
its recovery of those costs. In March 2004, CenterPoint Houston filed its
true-up application with the Texas Utility Commission, requesting recovery of
$3.7 billion, excluding interest. In December 2004, the Texas Utility Commission
issued its final order (True-Up Order) allowing CenterPoint Houston to recover a
true-up balance of approximately $2.3 billion, which included interest through
August 31, 2004, and providing for adjustment of the amount to be recovered to
include interest on the balance until recovery, the principal portion of
additional excess mitigation credits returned to customers after August 31, 2004
and certain other matters. CenterPoint Houston and other parties filed appeals
of the True-Up Order to a district court in Travis County, Texas. In August
2005, the court issued its final judgment on the various appeals. In its
judgment, the court affirmed most aspects of the True-Up Order, but reversed two
of the Texas Utility Commission's rulings. The judgment would have the effect of
restoring approximately $650 million, plus interest, of the $1.7 billion the
Texas Utility Commission had disallowed from CenterPoint Houston's initial
request. First, the court reversed the Texas Utility Commission's decision to
prohibit CenterPoint Houston from recovering $180 million in credits through
August 2004 that CenterPoint Houston was ordered to provide to retail electric
providers as a result of an inaccurate stranded cost estimate made by the Texas
Utility Commission in 2000. Additional credits of approximately $30 million were
paid after August 2004. Second, the court reversed the Texas Utility
Commission's disallowance of $440 million in transition costs which are
recoverable under the Texas Utility Commission's regulations. CenterPoint
Houston and other parties appealed the district court decisions. Briefs have
been filed with the 3rd Court of Appeals in Austin but oral argument has not yet
been scheduled.
Among the issues raised in our appeal of the True-Up Order is the Texas
Utility Commission's reduction of our stranded cost recovery by approximately
$146 million for the present value of certain deferred tax benefits associated
with our former Texas Genco assets. Such reduction was considered in our
recording of an after-tax extraordinary loss of $977 million in the last half of
2004. We believe that the Texas Utility Commission based its order on proposed
regulations issued by the Internal Revenue Service (IRS) in March 2003 related
to those tax benefits. Those proposed regulations would have allowed utilities
which were deregulated before March 4, 2003 to make a retroactive election to
pass the benefits of Accumulated Deferred Investment Tax Credits (ADITC) and
Excess Deferred Federal Income Taxes (EDFIT) back to customers. However, in
December 2005, the IRS withdrew those proposed normalization regulations and
issued new proposed regulations that do not include the provision allowing a
retroactive election to pass the tax benefits back to customers. If the December
2005 proposed regulations become effective and if the Texas Utility Commission's
order on this issue is not reversed on appeal or the amount of the tax benefits
is not otherwise restored by the Texas Utility Commission, the IRS is likely to
consider that a "normalization violation" has occurred. If so, the IRS could
require us to pay an amount equal to CenterPoint Houston's unamortized ADITC
balance as of the date that the normalization violation was deemed to have
occurred. In addition, if a normalization violation is deemed to have occurred,
the IRS could also deny CenterPoint Houston the ability to elect accelerated
depreciation benefits. The Texas Utility Commission has not previously required
a company subject to its jurisdiction to take action that would result in a
normalization violation.
There are two ways for CenterPoint Houston to recover the true-up balance:
by issuing transition bonds to securitize the amounts due and/or by implementing
a competition transition charge (CTC). Pursuant to a financing order issued by
the Texas Utility Commission in March 2005 and affirmed in all respects in
August 2005 by the same Travis County District Court considering the appeal of
the True-Up Order, in December 2005 a subsidiary of CenterPoint Houston issued
$1.85 billion in transition bonds with interest rates ranging
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from 4.84 percent to 5.30 percent and final maturity dates ranging from February
2011 to August 2020. Through issuance of the transition bonds, CenterPoint
Houston recovered approximately $1.7 billion of the true-up balance determined
in the True-Up Order plus interest through the date on which the bonds were
issued.
In July 2005, CenterPoint Houston received an order from the Texas Utility
Commission allowing it to implement a CTC which will collect approximately $596
million over 14 years plus interest at an annual rate of 11.075 percent (CTC
Order). The CTC Order authorizes CenterPoint Houston to impose a charge on
retail electric providers to recover the portion of the true-up balance not
covered by the financing order. The CTC Order also allows CenterPoint Houston to
collect approximately $24 million of rate case expenses over three years through
a separate tariff rider (Rider RCE). CenterPoint Houston implemented the CTC and
Rider RCE effective September 13, 2005 and began recovering approximately $620
million. Certain parties appealed the CTC Order to the Travis County Court in
September 2005.
Under the True-Up Order, CenterPoint Houston is allowed to recover carrying
charges at 11.075 percent until the true-up balance is recovered. In January
2006, the Texas Utility Commission staff (Staff) proposed that the Texas Utility
Commission adopt new rules governing the carrying charges on unrecovered true-up
balances. If the Texas Utility Commission adopts the rule as the Staff proposed
it and the rule is deemed to apply to CenterPoint Houston, the rule would reduce
carrying costs on the unrecovered CTC balance prospectively from 11.075 percent
to the utility's cost of debt.
CenterPoint Houston Rate Case
The Texas Utility Commission requires each electric utility to file an
annual Earnings Report providing certain information to enable the Texas Utility
Commission to monitor the electric utilities' earnings and financial condition
within the state. In May 2005, CenterPoint Houston filed its Earnings Report for
the calendar year ended December 31, 2004. CenterPoint Houston's Earnings Report
shows that it earned less than its authorized rate of return on equity in 2004.
In October 2005, the Staff filed a memorandum summarizing its review of the
Earnings Reports filed by electric utilities. Based on its review, the Staff
concluded that continuation of CenterPoint Houston's rates could result in
excess retail transmission and distribution revenues of as much as $105 million
and excess wholesale transmission revenues of as much as $31 million annually
and recommended that the Texas Utility Commission initiate a review of the
reasonableness of existing rates. The Staff's analysis was based on a 9.60
percent cost of equity, which is 165 basis points lower than the approved return
on equity from CenterPoint Houston's last rate proceeding, the elimination of
interest on debt that matured in November 2005 and certain other adjustments to
CenterPoint Houston's reported information. Additionally, a hypothetical capital
structure of 60 percent debt and 40 percent equity was used which varies
materially from the actual capital structure of CenterPoint Houston as of
December 31, 2005 of approximately 50 percent debt and 50 percent equity.
In December 2005, the Texas Utility Commission considered the Staff report
and agreed to initiate a rate proceeding concerning the reasonableness of
CenterPoint Houston's existing rates for transmission and distribution service
and to require CenterPoint Houston to make a filing by April 15, 2006 to justify
or change those rates.
These and other significant matters currently affecting our financial
condition are further discussed in "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Executive
Summary -- Significant Events in 2005" in Item 7 of this report.
Customers
CenterPoint Houston serves nearly all of the Houston/Galveston metropolitan
area. CenterPoint Houston's customers consist of 66 retail electric providers,
which sell electricity in its certificated service area, and municipalities,
electric cooperatives and other distribution companies located outside
CenterPoint Houston's certificated service area. Each retail electric provider
is licensed by, and must meet creditworthiness
4
criteria established by, the Texas Utility Commission. Two of the retail
electric providers in our service area are subsidiaries of Reliant Energy, Inc
(RRI). Sales to subsidiaries of RRI represented approximately 78%, 71% and 62%
of CenterPoint Houston's transmission and distribution revenues in 2003, 2004
and 2005, respectively. CenterPoint Houston's billed receivables balance from
retail electric providers as of December 31, 2005 was $127 million.
Approximately 56% of this amount was owed by subsidiaries of RRI. CenterPoint
Houston does not have long-term contracts with any of its customers. It operates
on a continuous billing cycle, with meter readings being conducted and invoices
being distributed to retail electric providers each business day.
Distribution Automation
CenterPoint Houston, with assistance from IBM, has developed an Electric
Distribution Grid Automation Strategy that involves the implementation of an
"Intelligent Grid". An Intelligent Grid has the potential to provide us with on
demand data and information that should enable a significant improvement in grid
planning, operations and maintenance. This, in turn, should contribute to fewer
and shorter outages, better customer service, improved operations costs,
improved security and more effective use of the workforce. A limited system
deployment, with an expected capital cost of $11 million in 2006, has been
initiated and allows for a disciplined approach to proving the technology and
validating potential benefits prior to a full-scale implementation. The outcome
of this limited deployment will be a major factor in any decision to expand the
deployment in 2007 and beyond.
Competition
There are no other electric transmission and distribution utilities in
CenterPoint Houston's service area. In order for another provider of
transmission and distribution services to provide such services in CenterPoint
Houston's territory, it would be required to obtain a certificate of convenience
and necessity from the Texas Utility Commission and, depending on the location
of the facilities, may also be required to obtain franchises from one or more
municipalities. We know of no other party intending to enter this business in
CenterPoint Houston's service area at this time.
Seasonality
A significant portion of CenterPoint Houston's revenues is derived from
rates that it collects from each retail electric provider based on the amount of
electricity it distributes on behalf of such retail electric provider. Thus,
CenterPoint Houston's revenues and results of operations are subject to
seasonality, weather conditions and other changes in electricity usage, with
revenues being higher during the warmer months.
Properties
All of CenterPoint Houston's properties are located in Texas. CenterPoint
Houston's transmission system carries electricity from power plants to
substations and from one substation to another. These substations serve to
connect power plants, the high voltage transmission lines and the lower voltage
distribution lines. Unlike the transmission system, which carries high voltage
electricity over long distances, distribution lines carry lower voltage power
from the substation to the retail electric customers. The distribution system
consists primarily of distribution lines, transformers, secondary distribution
lines and service wires and meters. Most of CenterPoint Houston's transmission
and distribution lines have been constructed over lands of others pursuant to
easements or along public highways and streets as permitted by law.
All real and tangible properties of CenterPoint Houston, subject to certain
exclusions, are currently subject to:
- the lien of a Mortgage and Deed of Trust (the Mortgage) dated November 1,
1944, as supplemented; and
- the lien of a General Mortgage (the General Mortgage) dated October 10,
2002, as supplemented, which is junior to the lien of the Mortgage.
5
As of December 31, 2005, CenterPoint Houston had outstanding $2.0 billion
aggregate principal amount of general mortgage bonds under the General Mortgage,
including approximately $527 million held in trust to secure pollution control
bonds for which CenterPoint Energy is obligated and approximately $229 million
held in trust to secure pollution control bonds for which CenterPoint Houston is
obligated. Additionally, CenterPoint Houston had outstanding approximately $253
million aggregate principal amount of first mortgage bonds under the Mortgage,
including approximately $151 million held in trust to secure certain pollution
control bonds for which CenterPoint Energy is obligated. CenterPoint Houston may
issue additional general mortgage bonds on the basis of retired bonds, 70% of
property additions or cash deposited with the trustee. Approximately $2.0
billion of additional first mortgage bonds and general mortgage bonds could be
issued on the basis of retired bonds and 70% of property additions as of
December 31, 2005. However, CenterPoint Houston is contractually prohibited,
subject to certain exceptions, from issuing additional first mortgage bonds.
Electric Lines -- Overhead. As of December 31, 2005, CenterPoint Houston
owned 27,026 pole miles of overhead distribution lines and 3,621 circuit miles
of overhead transmission lines, including 451 circuit miles operated at 69,000
volts, 2,093 circuit miles operated at 138,000 volts and 1,077 circuit miles
operated at 345,000 volts.
Electric Lines -- Underground. As of December 31, 2005, CenterPoint
Houston owned 16,662 circuit miles of underground distribution lines and 18.8
circuit miles of underground transmission lines, including 4.5 circuit miles
operated at 69,000 volts and 14.3 circuit miles operated at 138,000 volts.
Substations. As of December 31, 2005, CenterPoint Houston owned 225 major
substation sites having total installed rated transformer capacity of 47,864
megavolt amperes.
Service Centers. CenterPoint Houston operates 16 regional service centers
located on a total of 311 acres of land. These service centers consist of office
buildings, warehouses and repair facilities that are used in the business of
transmitting and distributing electricity.
Franchises
CenterPoint Houston holds non-exclusive franchises from the incorporated
municipalities in its service territory. In exchange for payment of fees, these
franchises give CenterPoint Houston the right to use the streets and public
rights-of way of these municipalities to construct, operate and maintain its
transmission and distribution system and to use that system to conduct its
electric delivery business and for other purposes that the franchises permit.
The terms of the franchises, with various expiration dates, typically range from
5 to 50 years.
In June 2005, CenterPoint Houston accepted an ordinance granting it a new
30-year franchise to use the public rights-of-way to conduct its business in the
City of Houston (New Franchise Ordinance). The New Franchise Ordinance took
effect on July 1, 2005, and replaced the prior electricity franchise ordinance,
which had been in effect since 1957. The New Franchise Ordinance clarifies
certain operational obligations of CenterPoint Houston and the City of Houston
and provides for streamlined payment and audit procedures and a two-year statute
of limitations on claims for underpayment or overpayment under the ordinance.
Under the prior electricity franchise ordinance, CenterPoint Houston paid annual
franchise fees of $76.6 million to the City of Houston for the year ended
December 31, 2004. For the twelve-month period beginning July 1, 2005, the
annual franchise fee (Annual Franchise Fee) under the New Franchise Ordinance
will include a base amount of $88.1 million (Base Amount) and an additional
payment of $8.5 million (Additional Amount). The Base Amount and the Additional
Amount will be adjusted annually based on the increase, if any, in kWh delivered
by CenterPoint Houston within the City of Houston.
CenterPoint Houston began paying the new annual franchise fees on July 1,
2005. Pursuant to the New Franchise Ordinance, the Annual Franchise Fee will be
reduced prospectively to reflect any portion of the Annual Franchise Fee that is
not included in CenterPoint Houston's base rates in any subsequent rate case.
6
NATURAL GAS DISTRIBUTION
CERC's natural gas distribution business engages in regulated intrastate
natural gas sales to, and natural gas transportation for, residential,
commercial and industrial customers in Arkansas, Louisiana, Minnesota,
Mississippi, Oklahoma and Texas through two unincorporated divisions: Minnesota
Gas and Southern Gas Operations.
Minnesota Gas provides natural gas distribution services to approximately
780,000 customers in over 240 communities. The largest metropolitan area served
by Minnesota Gas is Minneapolis. In 2005, approximately 44% of Minnesota Gas'
total throughput was attributable to residential customers and approximately 56%
was attributable to commercial and industrial customers. Minnesota Gas also
provides unregulated services consisting of heating, ventilating and air
conditioning (HVAC) equipment and appliance repair, sales of HVAC, water heating
and hearth equipment and home security monitoring.
Southern Gas Operations provides natural gas distribution services to
approximately 2.3 million customers in Arkansas, Louisiana, Mississippi,
Oklahoma and Texas. The largest metropolitan areas served by Southern Gas
Operations are Houston, Texas; Little Rock, Arkansas; Shreveport, Louisiana;
Biloxi, Mississippi; and Lawton, Oklahoma. In 2005, approximately 42% of
Southern Gas Operations' total throughput was attributable to residential
customers and approximately 58% was attributable to commercial and industrial
customers.
The demand for intrastate natural gas sales to, and natural gas
transportation for, residential, commercial and industrial customers is
seasonal. In 2005, approximately 70% of the total throughput of CERC's local
distribution companies' business occurred in the first and fourth quarters.
These patterns reflect the higher demand for natural gas for heating purposes
during those periods.
Supply and Transportation. In 2005, Minnesota Gas purchased virtually all
of its natural gas supply pursuant to contracts with remaining terms varying
from a few months to four years. Minnesota Gas' major suppliers in 2005 included
BP Canada Energy Marketing Corp. (54% of supply volumes), Tenaska Marketing
Ventures (11%), ONEOK Energy Services Company, LP (7%) and ConocoPhillips
Company (5%). Numerous other suppliers provided the remaining 23% of Minnesota
Gas' natural gas supply requirements. Minnesota Gas transports its natural gas
supplies through various interstate pipelines under contracts with remaining
terms, including extensions, varying from one to sixteen years. We anticipate
that these gas supply and transportation contracts will be renewed prior to
their expiration.
In 2005, Southern Gas Operations purchased virtually all of its natural gas
supply pursuant to contracts with remaining terms varying from a few months to
five years. Southern Gas Operations' major suppliers in 2005 included Energy
Transfer Company (24% of supply volumes), Kinder Morgan Texas Pipeline
Corporation (18%), BP Energy Company (12%), Merrill Lynch Commodities (9%),
ONEOK Energy Services Company, LP (7%), and Coral Energy LLC (5%). Numerous
other suppliers provided the remaining 25% of Southern Gas Operations' natural
gas supply requirements. Southern Gas Operations transports its natural gas
supplies through various intrastate and interstate pipelines including
CenterPoint Energy's pipeline subsidiaries.
Generally, the regulations of the states in which CERC's natural gas
distribution business operates allow it to pass through changes in the costs of
natural gas to its customers under purchased gas adjustment provisions in its
tariffs. Depending upon the jurisdiction, the purchased gas adjustment factors
are updated periodically, ranging from monthly to semi-annually, using estimated
gas costs. The changes in the cost of gas billed to customers are subject to
review by the applicable regulatory bodies.
Minnesota Gas and Southern Gas Operations use various leased or owned
natural gas storage facilities to meet peak-day requirements and to manage the
daily changes in demand due to changes in weather. Minnesota Gas also
supplements contracted supplies and storage from time to time with stored
liquefied natural gas and propane-air plant production.
Minnesota Gas owns and operates an underground storage facility with a
capacity of 7.0 billion cubic feet (Bcf). It has a working capacity of 2.1 Bcf
available for use during a normal heating season and a maximum
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daily withdrawal rate of 50 million cubic feet (MMcf). It also owns nine
propane-air plants with a total capacity of 204 MMcf per day and on-site storage
facilities for 12 million gallons of propane (1.0 Bcf gas equivalent). Minnesota
Gas owns liquefied natural gas plant facilities with a 12 million-gallon
liquefied natural gas storage tank (1.0 Bcf gas equivalent) and a send-out
capability of 72 MMcf per day.
On an ongoing basis, CERC enters into contracts to provide sufficient
supplies and pipeline capacity to meet its customer requirements. However, it is
possible for limited service disruptions of interruptible customers' load to
occur from time to time due to weather conditions, transportation constraints
and other events. As a result of these factors, supplies of natural gas may
become unavailable from time to time, or prices may increase rapidly in response
to temporary supply constraints or other factors.
Assets
As of December 31, 2005, CERC owned approximately 66,000 linear miles of
gas distribution mains, varying in size from one-half inch to 24 inches in
diameter. Generally, in each of the cities, towns and rural areas served by
CERC, we own the underground gas mains and service lines, metering and
regulating equipment located on customers' premises and the district regulating
equipment necessary for pressure maintenance. With a few exceptions, the
measuring stations at which CERC receives gas are owned, operated and maintained
by others, and its distribution facilities begin at the outlet of the measuring
equipment. These facilities, including odorizing equipment, are usually located
on the land owned by suppliers.
Competition
CERC competes primarily with alternate energy sources such as electricity
and other fuel sources. In some areas, intrastate pipelines, other gas
distributors and marketers also compete directly for gas sales to end-users. In
addition, as a result of federal regulations affecting interstate pipelines,
natural gas marketers operating on these pipelines may be able to bypass CERC's
facilities and market and sell and/or transport natural gas directly to
commercial and industrial customers.
COMPETITIVE NATURAL GAS SALES AND SERVICES
CERC offers variable and fixed-priced physical natural gas supplies
primarily to commercial and industrial customers and electric and gas utilities
through a number of subsidiaries, primarily CenterPoint Energy Services, Inc.
(CES). We have reorganized the oversight of our Natural Gas Distribution
business segment and, as a result, beginning in the fourth quarter of 2005, we
have established a new reportable business segment, Competitive Natural Gas
Sales and Services. These operations were previously reported as part of the
Natural Gas Distribution business segment.
In 2005, CES marketed approximately 538 Bcf (including 27 Bcf to
affiliates) of natural gas, transportation and related energy services to nearly
7,000 customers which vary in size from small commercial to large utility
companies in the central and eastern regions of the United States. The business
has three operational functions: wholesale, retail and intrastate pipelines
further described below.
Wholesale Operations. CES offers a portfolio of physical delivery services
and financial products designed to meet wholesale customers' supply and price
risk management needs. These customers are served directly through interconnects
with various inter- and intra-state pipeline companies, and include gas
utilities, large industrial and electric generation customers.
Retail Operations. CES also offers a variety of natural gas management
services to smaller commercial and industrial customers, whose facilities are
located downstream of natural gas distribution utility city gate stations,
including load forecasting, supply acquisition, daily swing volume management,
invoice consolidation, storage asset management, firm and interruptible
transportation administration and forward price management. CES manages
transportation contracts and energy supply for retail customers in ten states.
Intrastate Pipeline Operations. Another wholly owned subsidiary of CERC
owns and operates approximately 210 miles of intrastate pipeline in Louisiana
and Texas. This subsidiary provides bundled and unbundled merchant and
transportation services to shippers and end-users.
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CES currently transports natural gas on over 30 pipelines throughout the
central and eastern United States. CES maintains a portfolio of natural gas
supply contracts and firm transportation agreements to meet the natural gas
requirements of its customers. CES aggregates supply from various producing
regions and offers contracts to buy natural gas with terms ranging from one
month to over five years. In addition, CES actively participates in the spot
natural gas markets in an effort to balance daily and monthly purchases and
sales obligations. Natural gas supply and transportation capabilities are
leveraged through contracts for ancillary services including physical storage
and other balancing arrangements.
As described above, CES offers its customers a variety of load following
services. In providing these services, CES uses its customers' purchase
commitments to forecast and arrange its own supply purchases and transportation
services to serve customers' natural gas requirements. As a result of the
variance between this forecast activity and the actual monthly activity, CES
will either have too much supply or too little supply relative to its customers'
purchase commitments. These supply imbalances arise each month as customers'
natural gas requirements are scheduled and corresponding natural gas supplies
are nominated by CES for delivery to those customers. CES' processes and risk
control environment are designed to measure and value all supply imbalances on a
real-time basis to ensure that CES' exposure to commodity price and volume risk
is kept to a minimum. The value assigned to these volumetric imbalances is
calculated daily and is known as the aggregate Value at Risk (VaR). In 2005,
CES' VaR averaged $0.5 million with a high of $3 million.
The CenterPoint Energy Risk Control policy, governed by the Risk Oversight
Committee, defines authorized and prohibited trading instruments and volumetric
trading limits. CES is a physical marketer of natural gas and uses a variety of
tools, including pipeline and storage capacity, financial instruments and
physical commodity purchase contracts to support its sales. The CES business
optimizes its use of these various tools to minimize its supply costs and does
not engage in proprietary or speculative commodity trading. The VaR limits
within which CES operates are consistent with its operational objective of
matching its aggregate sales obligations (including the swing associated with
load following services) with its supply portfolio in a manner that minimizes
its total cost of supply.
Competition
CES competes with regional and national wholesale and retail gas marketers
including the marketing divisions of natural gas producers and utilities. In
addition, CES competes with intrastate pipelines for customers and services in
its market areas.
PIPELINES AND FIELD SERVICES
CERC's pipelines and field services business operates two interstate
natural gas pipelines, as well as gas gathering and processing facilities and
also provides operating and technical services and remote data monitoring and
communication services. The rates charged by interstate pipelines for interstate
transportation and storage services are regulated by the FERC.
CERC owns and operates gas transmission lines primarily located in
Arkansas, Illinois, Louisiana, Missouri, Oklahoma and Texas. CERC's pipeline
operations are primarily conducted by two wholly owned interstate pipeline
subsidiaries which provide gas transportation and storage services primarily to
industrial customers and local distribution companies:
- CenterPoint Energy Gas Transmission Company (CEGT) is an interstate
pipeline that provides natural gas transportation, natural gas storage
and pipeline services to customers principally in Arkansas, Louisiana,
Oklahoma and Texas; and
- CenterPoint Energy-Mississippi River Transmission Corporation (MRT) is an
interstate pipeline that provides natural gas transportation, natural gas
storage and pipeline services to customers principally in Arkansas and
Missouri.
CERC's pipeline project management and facility operation services are
provided to affiliates and third parties through a wholly owned pipeline
services subsidiary, CenterPoint Energy Pipeline Services, Inc.
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CERC's field services operations are conducted by a wholly owned
subsidiary, CenterPoint Energy Field Services, Inc. (CEFS). CEFS provides
natural gas gathering and processing services for certain natural gas fields in
the Midcontinent basin of the United States that interconnect with CEGT's and
MRT'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, either directly, or through its 50% interest in the
Waskom Joint Venture, processes in excess of 240 MMcf per day of natural gas
along its gathering system. CEFS, through its ServiceStar operating division,
provides remote data monitoring and communications services to affiliates and
third parties. The ServiceStar operating division currently provides monitoring
activities at 9,100 locations across Alabama, Arkansas, Colorado, Illinois,
Kansas, Louisiana, Mississippi, Missouri, New Mexico, Oklahoma, Texas and
Wyoming.
In 2005, approximately 20% of our total operating revenue from pipelines
and field services was attributable to services provided to Southern Gas
Operations and approximately 7% was attributable to services provided to Laclede
Gas Company (Laclede), an unaffiliated distribution company that provides
natural gas utility service to the greater St. Louis metropolitan area in
Illinois and Missouri. Services to Southern Gas Operations and Laclede are
provided under several long-term firm storage and transportation agreements. The
agreement to provide services to Laclede expires in 2007. We expect that this
agreement will be renewed prior to its expiration. Agreements for firm
transportation, "no notice" transportation service and storage service in
Southern Gas Operations' major service areas (Arkansas, Louisiana and Oklahoma)
expire in 2012.
In October 2005, CEGT signed a firm transportation agreement with XTO
Energy to transport 600 MMcf per day of natural gas from Carthage, Texas to
CEGT's Perryville hub in Northeast Louisiana. To accommodate this transaction,
CEGT is in the process of filing applications for certificates with the FERC to
build a 172 mile, 42-inch diameter pipeline, and related compression facilities
at an estimated cost of $400 million. The final capacity of the pipeline will be
between 960 MMcf per day and 1.24 Bcf per day. CEGT expects to have firm
contracts for the full capacity of the pipeline prior to its expected in service
date in early 2007. During the four year period subsequent to the in service
date of the pipeline, XTO can request, and subject to mutual negotiations that
meet specific financial parameters, CEGT would construct a 67 mile extension
from CEGT's Perryville hub to an interconnect with Texas Eastern Gas
Transmission at Union Church, Mississippi.
Our pipelines and field services business operations may be affected by
changes in the demand for natural gas, the available supply and relative price
of natural gas in the Midcontinent and Gulf Coast natural gas supply regions and
general economic conditions.
Assets
We own and operate approximately 8,200 miles of gas transmission lines
primarily located in Missouri, Illinois, Arkansas, Louisiana, Oklahoma and
Texas. We also own and operate six natural gas storage fields with a combined
daily deliverability of approximately 1.2 Bcf per day and a combined working gas
capacity of approximately 59.0 Bcf. We also own a 10% interest in Gulf South
Pipeline Company, LP's Bistineau storage facility. This facility has a total
working gas capacity of 85.7 Bcf and approximately 1.1 Bcf per day of
deliverability. Storage capacity in the Bistineau facility is 8 Bcf of working
gas with 100 MMcf per day of deliverability. Most storage operations are in
north Louisiana and Oklahoma. We also own and operate approximately 4,000 miles
of gathering pipelines that collect, treat and process natural gas from
approximately 200 separate systems located in major producing fields in
Arkansas, Louisiana, Oklahoma and Texas.
Competition
Our pipelines and field services business competes with other interstate
and intrastate pipelines and gathering companies in the transportation and
storage of natural gas. The principal elements of competition among pipelines
are rates, terms of service, and flexibility and reliability of service. Our
pipelines and field services business competes indirectly with other forms of
energy available to our customers, including
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electricity, coal and fuel oils. The primary competitive factor is price.
Changes in the availability of energy and pipeline capacity, the level of
business activity, conservation and governmental regulations, the capability to
convert to alternative fuels, and other factors, including weather, affect the
demand for natural gas in areas we serve and the level of competition for
transportation and storage services. In addition, competition for our gathering
operations is impacted by commodity pricing levels because of their influence on
the level of drilling activity. Both pipeline services and ServiceStar compete
with other similar service companies based on market pricing. The principal
elements of competition are rates, terms of service and reliability of services.
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.
DISCONTINUED OPERATIONS
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, whose principal remaining asset was its ownership interest in a nuclear
generating facility, distributed $2.231 billion in cash to us. 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, was completed
on April 13, 2005.
We recorded an after-tax gain (loss) of $91 million, $(133) million and
$(3) million for the years ended December 31, 2003, 2004 and 2005, respectively,
related to the operations of Texas Genco. The consolidated financial statements
report these operations for all periods presented as discontinued operations in
accordance with Statement of Financial Accounting Standards (SFAS) No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets."
FINANCIAL INFORMATION ABOUT SEGMENTS
For financial information about our segments, see Note 14 to our
consolidated financial statements, which note is incorporated herein by
reference.
REGULATION
We are subject to regulation by various federal, state and local
governmental agencies, including the regulations described below.
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
As a registered public utility holding company under the 1935 Act, we and
our subsidiaries were subject to a comprehensive regulatory scheme imposed by
the SEC. Although the SEC did not regulate rates and charges under the 1935 Act,
it did regulate the structure, financing, lines of business and internal
transactions of public utility holding companies and their system companies.
The Energy Act repealed the 1935 Act effective February 8, 2006, and since
that date, we and our subsidiaries have no longer been subject to restrictions
imposed under the 1935 Act. The Energy Act includes PUHCA 2005, which grants to
the FERC authority to require holding companies and their subsidiaries to
maintain certain books and records and make them available for review by the
FERC and state regulatory authorities in certain circumstances. On December 8,
2005, the FERC issued rules implementing PUHCA 2005 that will require us to
notify the FERC of our status as a holding company and to maintain certain books
and records and make these available to the FERC. The FERC continues to consider
motions for rehearing or clarification of these rules.
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FEDERAL ENERGY REGULATORY COMMISSION
The FERC has jurisdiction under the Natural Gas Act and the Natural Gas
Policy Act of 1978, as amended, to regulate the transportation of natural gas in
interstate commerce and natural gas sales for resale in intrastate commerce that
are not first sales. The FERC regulates, among other things, the construction of
pipeline and related facilities used in the transportation and storage of
natural gas in interstate commerce, including the extension, expansion or
abandonment of these facilities. The rates charged by interstate pipelines for
interstate transportation and storage services are also regulated by the FERC.
The Energy Act expanded the FERC's authority to prohibit market manipulation in
connection with FERC-regulated transactions and gave the FERC additional
authority to impose civil penalties for statutory violations and violations of
the FERC's rules or orders and also expanded criminal penalties for such
violations.
Our natural gas pipeline subsidiaries may periodically file applications
with the FERC for changes in their generally available maximum rates and charges
designed to allow them to recover their costs of providing service to customers
(to the extent allowed by prevailing market conditions), including a reasonable
rate of return. These rates are normally allowed to become effective after a
suspension period and, in some cases, are subject to refund under applicable law
until such time as the FERC issues an order on the allowable level of rates.
CenterPoint Houston is not a "public utility" under the Federal Power Act
and therefore is not generally regulated by the FERC, although certain of its
transactions are subject to limited FERC jurisdiction. The Energy Act provides
the FERC the authority to establish mandatory and enforceable service
reliability standards for the electric industry. CenterPoint Energy is subject
to these standards.
STATE AND LOCAL REGULATION
Electric Transmission & Distribution. CenterPoint Houston conducts its
operations pursuant to a certificate of convenience and necessity issued by the
Texas Utility Commission that covers its present service area and facilities. In
addition, CenterPoint Houston holds non-exclusive franchises from the
incorporated municipalities in its service territory. In exchange for payment of
fees, these franchises give CenterPoint Houston the right to use the streets and
public rights-of-way of these municipalities to construct, operate and maintain
its transmission and distribution system and to use that system to conduct its
electric delivery business and for other purposes that the franchises permit.
The terms of the franchises, with various expiration dates, typically range from
5 to 50 years. As discussed above under "Our Business -- Electric Transmission &
Distribution -- Franchises," a new franchise ordinance for the City of Houston
franchise was granted in June 2005 with a term of 30 years. There are a total of
37 cities whose franchises will expire in 2007 and 2008. CenterPoint Houston
expects to be able to renew these expiring franchises.
All retail electric providers in CenterPoint Houston's service area pay the
same rates and other charges for the same transmission and distribution
services.
CenterPoint Houston's distribution rates charged to retail electric
providers for residential customers are based on amounts of energy delivered,
whereas distribution rates for a majority of commercial and industrial customers
are based on peak demand. Transmission rates charged to other distribution
companies are based on amounts of energy transmitted under "postage stamp" rates
that do not vary with the distance the energy is being transmitted. All
distribution companies in ERCOT pay CenterPoint Houston the same rates and other
charges for transmission services. The transmission and distribution rates for
CenterPoint Houston have been in effect since electric competition began. This
regulated delivery charge includes the transmission and distribution rate (which
includes municipal franchise fees), a system benefit fund fee imposed by the
Texas electric restructuring law, a nuclear decommissioning charge associated
with decommissioning the South Texas nuclear generating facility (South Texas
Project), transition charges associated with securitization of regulatory assets
and securitization of stranded costs, a competition transition charge for
collection of the true-up balance not securitized and a rate case expense
charge.
As discussed above under "Electric Transmission & Distribution --
CenterPoint Houston Rate Case," in December 2005, the Texas Utility Commission
agreed to initiate a rate proceeding concerning the reasonable-
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ness of CenterPoint Houston's existing rates for transmission and distribution
service and to require CenterPoint Houston to make a filing by April 15, 2006 to
justify or change those rates.
Natural Gas Distribution. In almost all communities in which CERC provides
natural gas distribution services, it operates under franchises, certificates or
licenses obtained from state and local authorities. The original terms of the
franchises, with various expiration dates, typically range from 10 to 30 years,
though franchises in Arkansas are perpetual. None of CERC's material franchises
expire in the near term. CERC expects to be able to renew expiring franchises.
In most cases, franchises to provide natural gas utility services are not
exclusive.
Substantially all of CERC's retail natural gas sales by its local
distribution divisions are subject to traditional cost-of-service regulation at
rates regulated by the relevant state public utility commissions and, in Texas,
by the Railroad Commission of Texas (Railroad Commission) and certain
municipalities CERC serves.
SOUTHERN GAS OPERATIONS
In November 2004, Southern Gas Operations filed an application for a $34
million base rate increase, which was subsequently adjusted downward to $28
million, with the Arkansas Public Service Commission (APSC). In September 2005,
an $11 million rate reduction (which included a $10 million reduction relating
to depreciation rates) ordered by the APSC went into effect. The reduced
depreciation rates were implemented effective October 2005. This base rate
reduction and corresponding reduction in depreciation expense represent an
annualized operating income reduction of $1 million.
In April 2005, the Railroad Commission established new gas tariffs that
increased Southern Gas Operations' base rate and service revenues by a combined
$2 million in the unincorporated environs of its Beaumont/East Texas and South
Texas Divisions. In June and August 2005, Southern Gas Operations filed requests
to implement these same rates within 169 incorporated cities located in the two
divisions. The proposed rates were approved or became effective by operation of
law in 164 of these cities. Five municipalities denied the rate change requests
within their respective jurisdictions. Southern Gas Operations has appealed the
actions of these five cities to the Railroad Commission. In February 2006,
Southern Gas Operations notified the Railroad Commission that it had reached a
settlement with four of the five cities. If approved, the settlement will affect
rates in a total of 60 cities in the South Texas Division. In addition, 19
cities where rates have already gone into effect have challenged the
jurisdictional and statutory basis for implementation of the new rates within
their respective jurisdictions. Southern Gas Operations has petitioned the
Railroad Commission for an order declaring that the new rates have been properly
established within these 19 cities. If the settlement is approved and assuming
all other rate change proposals become effective, revenues from Southern Gas
Operations' base rates and miscellaneous service charges would increase by an
additional $17 million annually. Currently, approximately $15 million of this
expected annual increase is in effect in the incorporated areas of Southern Gas
Operations' Beaumont/East Texas and South Texas Divisions.
In October 2005, Southern Gas Operations filed requests with the Louisiana
Public Service Commission (LPSC) for approximately $2 million in base rate
increases for its South Louisiana service territory and approximately $2 million
in base rate reductions for its North Louisiana service territory in accordance
with the Rate Stabilization Plans in its tariffs. These base rate changes became
effective on January 2, 2006 in accordance with the tariffs and are subject to
review and possible adjustment by the staff of the LPSC. Southern Gas Operations
is unable to predict when the LPSC staff may conclude its review or what
adjustments, if any, the staff may recommend.
In December 2005, Southern Gas Operations filed a request with the
Mississippi Public Service Commission (MPSC) for approximately $1 million in
miscellaneous service charges (e.g., charges to connect service, charges for
returned checks, etc.) in its Mississippi service territory. This request was
approved in the first quarter of 2006.
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In addition, in January and February 2006, Southern Gas Operations filed
requests with the MPSC for approximately $3 million in base rate increases in
its Mississippi service territory in accordance with the Automatic Rate
Adjustment Mechanism provisions in its tariffs and an additional $2 million in
surcharges to recover system restoration expenses incurred following hurricane
Katrina. Both requests are being reviewed by the MPSC staff with a decision
expected in the first quarter of 2006.
MINNESOTA GAS
In June 2005, the Minnesota Public Utilities Commission (MPUC) approved a
settlement which increased Minnesota Gas' base rates by approximately $9 million
annually. An interim rate increase of approximately $17 million had been
implemented in October 2004. Substantially all of the excess amounts collected
in interim rates over those approved in the final settlement were refunded to
customers in the third quarter of 2005.
In November 2005, Minnesota Gas filed a request with the MPUC to increase
annual rates by approximately $41 million. In December 2005, the MPUC approved
an interim rate increase of approximately $35 million that was implemented
January 1, 2006. Any excess of amounts collected under the interim rates over
the amounts approved in final rates is subject to refund to customers. A
decision by the MPUC is expected in the third quarter of 2006.
In December 2004, the MPUC opened an investigation to determine whether
Minnesota Gas' practices regarding restoring natural gas service during the
period between October 15 and April 15 (Cold Weather Period) are in compliance
with the MPUC's Cold Weather Rule (CWR), which governs disconnection and
reconnection of customers during the Cold Weather Period. The Minnesota Office
of the Attorney General (OAG) issued its report alleging Minnesota Gas has
violated the CWR and recommended a $5 million penalty. Minnesota Gas and the OAG
have reached an agreement on procedures to be followed for the current Cold
Weather Period which began on October 15, 2005. In addition, in June 2005, CERC
was named in a suit filed in the United States District Court, District of
Minnesota on behalf of a purported class of customers who allege that Minnesota
Gas' conduct under the CWR was in violation of the law. Minnesota Gas is in
settlement discussions regarding both the OAG's action and the action on behalf
of the purported class.
DEPARTMENT OF TRANSPORTATION
In December 2002, Congress enacted the Pipeline Safety Improvement Act of
2002 (the Act). This legislation applies to our interstate pipelines as well as
our intrastate pipelines and local distribution companies. The legislation
imposes several requirements related to ensuring pipeline safety and integrity.
It requires pipeline and distribution companies to assess the integrity of their
pipeline transmission facilities in areas of high population concentration or
High Consequence Areas (HCA). The legislation further requires companies to
perform remediation activities, in accordance with the requirements of the
legislation, over a 10-year period.
Final regulations implementing the Act became effective on February 14,
2004 and provided guidance on, among other things, the areas that should be
classified as HCA.
Our interstate and intrastate pipelines and our natural gas distribution
companies anticipate that compliance with these regulations will require
increases in both capital and operating cost. The level of expenditures required
to comply with these regulations will be dependent on several factors, including
the age of the facility, the pressures at which the facility operates and the
number of facilities deemed to be located in areas designated as HCA. Based on
our interpretation of the rules and preliminary technical reviews, we believe
compliance will require average annual expenditures of approximately $15 to $20
million during the initial 10-year period.
ENVIRONMENTAL MATTERS
Our operations are subject to stringent and complex laws and regulations
pertaining to health, safety and the environment. As an owner or operator of
natural gas pipelines, gas gathering and processing systems, and
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electric transmission and distribution systems we must comply with these laws
and regulations at the federal, state and local levels. These laws and
regulations can restrict or impact our business activities in many ways, such
as:
- restricting the way we can handle or dispose of our wastes;
- limiting or prohibiting construction activities in sensitive areas such
as wetlands, coastal regions, or areas inhabited by endangered species;
- requiring remedial action to mitigate pollution conditions caused by our
operations, or attributable to former operations; and
- enjoining the operations of facilities deemed in non-compliance with
permits issued pursuant to such environmental laws and regulations.
In order to comply with these requirements, we may need to spend
substantial amounts and devote other resources from time to time to:
- construct or acquire new equipment;
- acquire permits for facility operations;
- modify or replace existing and proposed equipment; and
- clean up or decommission waste disposal areas, fuel storage and
management facilities and other locations and facilities.
Failure to comply with these laws and regulations may trigger a variety of
administrative, civil and criminal enforcement measures, including the
assessment of monetary penalties, the imposition of remedial actions, and the
issuance of orders enjoining future operations. Certain environmental statutes
impose strict, joint and several liability for costs required to clean up and
restore sites where hazardous substances have been disposed or otherwise
released. Moreover, it is not uncommon for neighboring landowners and other
third parties to file claims for personal injury and property damage allegedly
caused by the release of hazardous substances or other waste products into the
environment.
The trend in environmental regulation is to place more restrictions and
limitations on activities that may affect the environment, and thus there can be
no assurance as to the amount or timing of future expenditures for environmental
compliance or remediation, and actual future expenditures may be different from
the amounts we currently anticipate. We try to anticipate future regulatory
requirements that might be imposed and plan accordingly to remain in compliance
with changing environmental laws and regulations and to minimize the costs of
such compliance.
Based on current regulatory requirements and interpretations, we do not
believe that compliance with federal, state or local environmental laws and
regulations will have a material adverse effect on our business, financial
position or results of operations. In addition, we believe that the various
environmental remediation activities in which we are presently engaged will not
materially interrupt or diminish our operational ability. We cannot assure you,
however, that future events, such as changes in existing laws, the promulgation
of new laws, or the development or discovery of new facts or conditions will not
cause us to incur significant costs. The following is a discussion of all
material environmental and safety laws and regulations that relate to our
operations. We believe that we are in substantial compliance with all of these
environmental laws and regulations.
AIR EMISSIONS
Our operations are subject to the federal Clean Air Act and comparable
state laws and regulations. These laws and regulations regulate emissions of air
pollutants from various industrial sources, including our processing plants and
compressor stations, and also impose various monitoring and reporting
requirements. Such laws and regulations may require that we obtain pre-approval
for the construction or modification of certain projects or facilities expected
to produce air emissions or result in the increase of existing air emissions,
15
obtain and strictly comply with air permits containing various emissions and
operational limitations, or utilize specific emission control technologies to
limit emissions. Our failure to comply with these requirements could subject us
to monetary penalties, injunctions, conditions or restrictions on operations,
and potentially criminal enforcement actions. We may be required to incur
certain capital expenditures in the future for air pollution control equipment
in connection with obtaining and maintaining operating permits and approvals for
air emissions. We believe, however, that our operations will not be materially
adversely affected by such requirements, and the requirements are not expected
to be any more burdensome to us than to any other similarly situated companies.
WATER DISCHARGES
Our operations are subject to the Federal Water Pollution Control Act of
1972, as amended, also known as the Clean Water Act, and analogous state laws
and regulations. These laws and regulations impose detailed requirements and
strict controls regarding the discharge of pollutants into waters of the United
States. The unpermitted discharge of pollutants, including discharges resulting
from a spill or leak incident, is prohibited. The Clean Water Act and
regulations implemented thereunder also prohibit discharges of dredged and fill
material in wetlands and other waters of the United States unless authorized by
an appropriately issued permit. Any unpermitted release of petroleum or other
pollutants from our pipelines or facilities could result in fines or penalties
as well as significant remedial obligations.
HAZARDOUS WASTE
Our operations generate wastes, including some hazardous wastes, that are
subject to the federal Resource Conservation and Recovery Act (RCRA), and
comparable state laws, which impose detailed requirements for the handling,
storage, treatment and disposal of hazardous and solid waste. RCRA currently
exempts many natural gas gathering and field processing wastes from
classification as hazardous waste. Specifically, RCRA excludes from the
definition of hazardous waste waters produced and other wastes associated with
the exploration, development, or production of crude oil and natural gas.
However, these oil and gas exploration and production wastes are still regulated
under state law and the less stringent non-hazardous waste requirements of RCRA.
Moreover, ordinary industrial wastes such as paint wastes, waste solvents,
laboratory wastes, and waste compressor oils may be regulated as hazardous
waste. The transportation of natural gas in pipelines may also generate some
hazardous wastes that are subject to RCRA or comparable state law requirements.
LIABILITY FOR REMEDIATION
The Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended (CERCLA), also known as "Superfund," and comparable state laws
impose liability, without regard to fault or the legality of the original
conduct, on certain classes of persons responsible for the release of hazardous
substances into the environment. Such classes of persons include the current and
past owners or operators of sites where a hazardous substance was released, and
companies that disposed or arranged for disposal of hazardous substances at
offsite locations such as landfills. Although petroleum, as well as natural gas,
is excluded from CERCLA's definition of a "hazardous substance," in the course
of our ordinary operations we generate wastes that may fall within the
definition of a "hazardous substance." CERCLA authorizes the United States
Environmental Protection Agency (EPA) and, in some cases, third parties to take
actions in response to threats to the public health or the environment and to
seek to recover from the responsible classes of persons the costs they incur.
Under CERCLA, we could be subject to joint and several liability for the costs
of cleaning up and restoring sites where hazardous substances have been
released, for damages to natural resources, and for the costs of certain health
studies.
LIABILITY FOR PREEXISTING CONDITIONS
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
16
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 liquid 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. In the pending litigation, 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. We do not expect the ultimate cost
associated with resolving this matter to have a material impact on our financial
condition, results of operations or cash flows or that of 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, 2005, CERC had accrued $14 million for remediation of these
Minnesota sites. At December 31, 2005, the estimated range of possible
remediation costs for these sites was $4 million to $35 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, 2005, CERC has collected $13
million from insurance companies and ratepayers to be used for future
environmental remediation.
In addition to the Minnesota sites, the EPA and other regulators have
investigated MGP sites that were owned or operated by CERC or may have been
owned or operated by one of its former affiliates. CERC has been named as a
defendant in two lawsuits under which contribution is sought by private parties
for the cost to remediate former MGP sites based on the previous ownership of
such sites by former affiliates of CERC or its divisions. CERC has also been
identified as a PRP by the State of Maine for a site that is the subject of one
of the lawsuits. In March 2005, the court considering the other suit for
contribution granted CERC's motion to dismiss on the grounds that CERC was not
an "operator" of the site as had been alleged. The plaintiff in that case has
filed an appeal of the court's dismissal of CERC. We are 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 CERCLA and applicable state statutes, and is
vigorously contesting those suits and its designation as a PRP.
Mercury Contamination. Our pipeline and natural gas 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. We
have found this type of contamination at some sites in the past, and we have
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
our experience and that of others in the natural gas industry to date and on the
current regulations regarding remediation of these sites, we believe that the
costs of any remediation of these sites will not be material to our financial
condition, results of operations or cash flows.
Other Environmental. From time to time, we have received notices from
regulatory authorities or others regarding our status as a PRP in connection
with sites found to require remediation due to the presence of environmental
contaminants. Although their ultimate outcome cannot be predicted at this time,
we do not
17
believe, based on our experience to date, that these matters, either
individually or in the aggregate, will have a material adverse effect on our
financial condition, results of operations or cash flows.
Asbestos. Some of our facilities contain or have contained asbestos
insulation and other asbestos-containing materials. We or our 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 we own, but most existing claims relate to facilities
previously owned by our subsidiaries but currently owned by Texas Genco LLC. We
anticipate that additional claims like those received may be asserted in the
future. Under the terms of the separation agreement between us and Texas Genco,
ultimate financial responsibility for uninsured losses from these claims
relating to facilities transferred to Texas Genco has been assumed by Texas
Genco, but under the terms of our agreement to sell Texas Genco to Texas Genco
LLC, we have agreed to continue to defend such claims to the extent they are
covered by insurance we maintain, subject to reimbursement of the costs of such
defense from Texas Genco LLC. Although their ultimate outcome cannot be
predicted at this time, we intend to continue vigorously contesting claims that
we do not consider to have merit and do not expect, based on our experience to
date, these matters, either individually or in the aggregate, to have a material
adverse effect on our financial condition, results of operations or cash flows.
REGULATORY MATTERS RELATING TO DISCONTINUED OPERATIONS
Texas Genco and the other owners of the South Texas Project are required by
NRC regulations to estimate from time to time the amounts required to
decommission that nuclear generating facility and are required to maintain funds
to satisfy that obligation when the plant ultimately is decommissioned. Although
CenterPoint Houston no longer owns an interest in the South Texas Project,
CenterPoint Houston currently collects through a separate nuclear
decommissioning charge amounts calculated to provide sufficient funds at the
time of decommissioning to discharge these obligations. Funds collected are
deposited into nuclear decommissioning trusts. The beneficial ownership of the
nuclear decommissioning trusts is held by a subsidiary of Texas Genco LLC as a
licensee of the facility. While current funding levels exceed NRC minimum
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 waste burial. In the event that funds from the trust are inadequate to
decommission the facilities, CenterPoint Houston will be required by the
transaction agreement with Texas Genco LLC to collect through rates or other
authorized charges all additional amounts required to fund Texas Genco LLC's
obligations relating to the decommissioning of the South Texas Project.
EMPLOYEES
As of December 31, 2005, we had 9,001 full-time employees. The following
table sets forth the number of our employees by business segment:
NUMBER REPRESENTED
BY UNIONS OR
OTHER COLLECTIVE
BUSINESS SEGMENT NUMBER BARGAINING GROUPS
- ---------------- ------ ------------------
Electric Transmission & Distribution....................... 2,931 1,225
Natural Gas Distribution................................... 4,387 1,493
Competitive Natural Gas Sales and Services................. 98 --
Pipelines and Field Services............................... 717 --
Other Operations........................................... 868 --
----- -----
Total.................................................... 9,001 2,718
===== =====
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As of December 31, 2005, approximately 30% of the Company's employees are
subject to collective bargaining agreements. Two of these agreements, covering
approximately 19% of the Company's employees will expire in 2006. Minnesota Gas
has 466 bargaining unit employees who are covered by a collective bargaining
unit agreement with the United Association of Journeymen and Apprentices of
Plumbing and Pipe Fitting Industry of the United States and Canada Local 340
that expires in April 2006. CenterPoint Houston has 1,225 bargaining unit
employees who are covered by a collective bargaining unit agreement with the
International Brotherhood of Electrical Workers Local 66, that expires in May
2006. We have a good relationship with these bargaining units and expect to
renegotiate new agreements in 2006.
EXECUTIVE OFFICERS
(AS OF FEBRUARY 28, 2006)
NAME AGE TITLE
- ---- --- -----
David M. McClanahan....................... 56 President and Chief Executive Officer and Director
Scott E. Rozzell.......................... 56 Executive Vice President, General Counsel and
Corporate Secretary
Gary L. Whitlock.......................... 56 Executive Vice President and Chief Financial
Officer
James S. Brian............................ 58 Senior Vice President and Chief Accounting Officer
Byron R. Kelley........................... 58 Senior Vice President and Group President --
CenterPoint Energy Pipelines and Field Services
Thomas R. Standish........................ 56 Senior Vice President and Group
President -- Regulated Operations
DAVID M. MCCLANAHAN has been President and Chief Executive Officer and a
director of CenterPoint Energy since September 2002. He served as Vice Chairman
of Reliant Energy, Incorporated (Reliant Energy) from October 2000 to September
2002 and as President and Chief Operating Office of Reliant Energy's Delivery
Group from April 1999 to September 2002. He has served in various executive
capacities with CenterPoint Energy since 1986. He previously served as Chairman
of the Board of Directors of ERCOT and Chairman of the Board of the University
of St. Thomas in Houston. He currently serves on the boards of the Edison
Electric Institute and the American Gas Association.
SCOTT E. ROZZELL has served as Executive Vice President, General Counsel
and Corporate Secretary of CenterPoint Energy since September 2002. He served as
Executive Vice President and General Counsel of the Delivery Group of Reliant
Energy from March 2001 to September 2002. Before joining CenterPoint Energy in
2001, Mr. Rozzell was a senior partner in the law firm of Baker Botts L.L.P. He
currently serves as Chair of the Association of Electric Companies of Texas.
GARY L. WHITLOCK has served as Executive Vice President and Chief Financial
Officer of CenterPoint Energy since September 2002. He served as Executive Vice
President and Chief Financial Officer of the Delivery Group of Reliant Energy
from July 2001 to September 2002. Mr. Whitlock served as the Vice President,
Finance and Chief Financial Officer of Dow AgroSciences, a subsidiary of The Dow
Chemical Company, from 1998 to 2001.
JAMES S. BRIAN has served as Senior Vice President and Chief Accounting
Officer of CenterPoint Energy since August 2002. He served as Senior Vice
President, Finance and Administration of the Delivery Group of Reliant Energy
from 1999 to August 2002. Mr. Brian has served in various executive capacities
with CenterPoint Energy since 1983.
BYRON R. KELLEY has served as Senior Vice President and Group
President -- CenterPoint Energy Pipelines and Field Services since June 2004,
having previously served as President and Chief Operating Officer of CenterPoint
Energy Pipelines and Field Services from May 2003 to June 2004. Prior to joining
CenterPoint Energy he served as President of El Paso International, a subsidiary
of El Paso Corporation, from January 2001 to August 2002. He currently serves on
the Board of Directors of the Interstate Natural Gas Association of America.
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THOMAS R. STANDISH has served as Senior Vice President and Group
President-Regulated Operations of CenterPoint Energy since August 2005, having
previously served as Senior Vice President and Group President and Chief
Operating Officer of CenterPoint Houston from June 2004 to August 2005 and as
President and Chief Operating Officer of CenterPoint Houston from August 2002 to
June 2004. He served as President and Chief Operating Officer for both
electricity and natural gas for Reliant Energy's Houston area from 1999 to
August 2002. Mr. Standish has served in various executive capacities with
CenterPoint Energy since 1993. He currently serves on the Board of Directors of
ERCOT.
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ITEM 1A. RISK FACTORS
We are a holding company that conducts all of our business operations
through subsidiaries, primarily CenterPoint Houston and CERC. The following
summarizes the principal risk factors associated with the businesses conducted
by each of these subsidiaries:
RISK FACTORS AFFECTING OUR ELECTRIC TRANSMISSION & DISTRIBUTION BUSINESS
CENTERPOINT HOUSTON MAY NOT BE SUCCESSFUL IN ULTIMATELY RECOVERING THE FULL
VALUE OF ITS TRUE-UP COMPONENTS, WHICH COULD RESULT IN THE ELIMINATION OF
CERTAIN TAX BENEFITS AND COULD HAVE AN ADVERSE IMPACT ON CENTERPOINT HOUSTON'S
RESULTS OF OPERATIONS, FINANCIAL CONDITION AND CASH FLOWS.
In March 2004, CenterPoint Houston filed its true-up application with the
Texas Utility Commission, requesting recovery of $3.7 billion, excluding
interest. In December 2004, the Texas Utility Commission issued its final order
(True-Up Order) allowing CenterPoint Houston to recover a true-up balance of
approximately $2.3 billion, which included interest through August 31, 2004, and
providing for adjustment of the amount to be recovered to include interest on
the balance until recovery, the principal portion of additional excess
mitigation credits returned to customers after August 31, 2004 and certain other
matters. CenterPoint Houston and other parties filed appeals of the True-Up
Order to a district court in Travis County, Texas. In August 2005, the court
issued its final judgment on the various appeals. In its judgment, the court
affirmed most aspects of the True-Up Order, but reversed two of the Texas
Utility Commission's rulings. The judgment would have the effect of restoring
approximately $650 million, plus interest, of the $1.7 billion the Texas Utility
Commission had disallowed from CenterPoint Houston's initial request. First, the
court reversed the Texas Utility Commission's decision to prohibit CenterPoint
Houston from recovering $180 million in credits through August 2004 that
CenterPoint Houston was ordered to provide to retail electric providers as a
result of an inaccurate stranded cost estimate made by the Texas Utility
Commission in 2000. Additional credits of approximately $30 million were paid
after August 2004. Second, the court reversed the Texas Utility Commission's
disallowance of $440 million in transition costs which are recoverable under the
Texas Utility Commission's regulations. CenterPoint Houston and other parties
appealed the district court decisions. Briefs have been filed with the 3rd Court
of Appeals in Austin but oral argument has not yet been scheduled. No prediction
can be made as to the ultimate outcome or timing of such appeals. Additionally,
if the amount of the true-up balance is reduced on appeal to below the amount
recovered through the issuance of transition bonds and under the CTC, while the
amount of transition bonds outstanding would not be reduced, CenterPoint Houston
would be required to refund the over recovery to its customers.
Among the issues raised in our appeal of the True-Up Order is the Texas
Utility Commission's reduction of our stranded cost recovery by approximately
$146 million for the present value of certain deferred tax benefits associated
with our former Texas Genco assets. Such reduction was considered in our
recording of an after-tax extraordinary loss of $977 million in the last half of
2004. We believe that the Texas Utility Commission based its order on proposed
regulations issued by the IRS in March 2003 related to those tax benefits. Those
proposed regulations would have allowed utilities which were deregulated before
March 4, 2003 to make a retroactive election to pass the benefits of ADITC and
EDFIT back to customers. However, in December 2005, the IRS withdrew those
proposed normalization regulations and issued new proposed regulations that do
not include the provision allowing a retroactive election to pass the tax
benefits back to customers. If the December 2005 proposed regulations become
effective and if the Texas Utility Commission's order on this issue is not
reversed on appeal or the amount of the tax benefits is not otherwise restored
by the Texas Utility Commission, the IRS is likely to consider that a
"normalization violation" has occurred. If so, the IRS could require us to pay
an amount equal to CenterPoint Houston's unamortized ADITC balance as of the
date that the normalization violation was deemed to have occurred. In addition,
if a normalization violation is deemed to have occurred, the IRS could also deny
CenterPoint Houston the ability to elect accelerated depreciation benefits. If a
normalization violation should ultimately be found to exist, it could have an
adverse impact on our results of operations, financial condition and cash flows.
The Texas Utility Commission has not previously required a company subject to
its jurisdiction to take action that would result in a normalization violation.
21
CENTERPOINT HOUSTON'S RECEIVABLES ARE CONCENTRATED IN A SMALL NUMBER OF RETAIL
ELECTRIC PROVIDERS, AND ANY DELAY OR DEFAULT IN PAYMENT COULD ADVERSELY AFFECT
CENTERPOINT HOUSTON'S CASH FLOWS, FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
CenterPoint Houston's receivables from the distribution of electricity are
collected from retail electric providers that supply the electricity CenterPoint
Houston distributes to their customers. Currently, CenterPoint Houston does
business with 66 retail electric providers. Adverse economic conditions,
structural problems in the market served by the Electric Reliability Council of
Texas, Inc. (ERCOT) or financial difficulties of one or more retail electric
providers could impair the ability of these retail providers to pay for
CenterPoint Houston's services or could cause them to delay such payments.
CenterPoint Houston depends on these retail electric providers to remit payments
on a timely basis. Applicable regulatory provisions require that customers be
shifted to a provider of last resort if a retail electric provider cannot make
timely payments. RRI, through its subsidiaries, is CenterPoint Houston's largest
customer. Approximately 56% of CenterPoint Houston's $127 million in billed
receivables from retail electric providers at December 31, 2005 was owed by
subsidiaries of RRI. Any delay or default in payment could adversely affect
CenterPoint Houston's cash flows, financial condition and results of operations.
RATE REGULATION OF CENTERPOINT HOUSTON'S BUSINESS MAY DELAY OR DENY
CENTERPOINT HOUSTON'S ABILITY TO EARN A REASONABLE RETURN AND FULLY RECOVER
ITS COSTS.
CenterPoint Houston's rates are regulated by certain municipalities and the
Texas Utility Commission based on an analysis of its invested capital and its
expenses in a test year. Thus, the rates that CenterPoint Houston is allowed to
charge may not match its expenses at any given time. The regulatory process by
which rates are determined may not always result in rates that will produce full
recovery of CenterPoint Houston's costs and enable CenterPoint Houston to earn a
reasonable return on its invested capital.
DISRUPTIONS AT POWER GENERATION FACILITIES OWNED BY THIRD PARTIES COULD
INTERRUPT CENTERPOINT HOUSTON'S SALES OF TRANSMISSION AND DISTRIBUTION
SERVICES.
CenterPoint Houston transmits and distributes to customers of retail
electric providers electric power that the retail electric providers obtain from
power generation facilities owned by third parties. CenterPoint Houston does not
own or operate any power generation facilities. If power generation is disrupted
or if power generation capacity is inadequate, CenterPoint Houston's sales of
transmission and distribution services may be diminished or interrupted, and its
results of operations, financial condition and cash flows may be adversely
affected.
CENTERPOINT HOUSTON'S REVENUES AND RESULTS OF OPERATIONS ARE SEASONAL.
A significant portion of CenterPoint Houston's revenues is derived from
rates that it collects from each retail electric provider based on the amount of
electricity it distributes on behalf of such retail electric provider. Thus,
CenterPoint Houston's revenues and results of operations are subject to
seasonality, weather conditions and other changes in electricity usage, with
revenues being higher during the warmer months.
RISK FACTORS AFFECTING OUR NATURAL GAS DISTRIBUTION, COMPETITIVE NATURAL GAS
SALES AND SERVICES AND PIPELINES AND FIELD SERVICES BUSINESSES
RATE REGULATION OF CERC'S BUSINESS MAY DELAY OR DENY CERC'S ABILITY TO EARN A
REASONABLE RETURN AND FULLY RECOVER ITS COSTS.
CERC's rates for its local distribution companies are regulated by certain
municipalities and state commissions, and for its interstate pipelines by the
FERC, based on an analysis of its invested capital and its expenses in a test
year. Thus, the rates that CERC is allowed to charge may not match its expenses
at any given time. The regulatory process in which rates are determined may not
always result in rates that will produce full recovery of CERC's costs and
enable CERC to earn a reasonable return on its invested capital.
22
CERC'S BUSINESSES MUST COMPETE WITH ALTERNATIVE ENERGY SOURCES, WHICH COULD
LEAD TO LESS NATURAL GAS BEING MARKETED, AND ITS PIPELINES AND FIELD SERVICES
BUSINESSES MUST COMPETE DIRECTLY WITH OTHERS IN THE TRANSPORTATION, STORAGE,
GATHERING, TREATING AND PROCESSING OF NATURAL GAS, WHICH COULD LEAD TO LOWER
PRICES, EITHER OF WHICH COULD HAVE AN ADVERSE IMPACT ON CERC'S RESULTS OF
OPERATIONS, FINANCIAL CONDITION AND CASH FLOWS.
CERC competes primarily with alternate energy sources such as electricity
and other fuel sources. In some areas, intrastate pipelines, other natural gas
distributors and marketers also compete directly with CERC for natural gas sales
to end-users. In addition, as a result of federal regulatory changes affecting
interstate pipelines, natural gas marketers operating on these pipelines may be
able to bypass CERC's facilities and market, sell and/or transport natural gas
directly to commercial and industrial customers. Any reduction in the amount of
natural gas marketed, sold or transported by CERC as a result of competition may
have an adverse impact on CERC's results of operations, financial condition and
cash flows.
CERC's two interstate pipelines and its gathering systems compete with
other interstate and intrastate pipelines and gathering systems in the
transportation and storage of natural gas. The principal elements of competition
are rates, terms of service, and flexibility and reliability of service. They
also compete indirectly with other forms of energy, including electricity, coal
and fuel oils. The primary competitive factor is price. The actions of CERC's
competitors could lead to lower prices, which may have an adverse impact on
CERC's results of operations, financial condition and cash flows.
CERC'S NATURAL GAS DISTRIBUTION AND COMPETITIVE NATURAL GAS SALES AND SERVICES
BUSINESSES ARE SUBJECT TO FLUCTUATIONS IN NATURAL GAS PRICING LEVELS, WHICH
COULD AFFECT THE ABILITY OF CERC'S SUPPLIERS AND CUSTOMERS TO MEET THEIR
OBLIGATIONS OR OTHERWISE ADVERSELY AFFECT CERC'S LIQUIDITY.
CERC is subject to risk associated with increases in the price of natural
gas, which has been the trend in recent years. Increases in natural gas prices
might affect CERC's ability to collect balances due from its customers and, on
the regulated side, could create the potential for uncollectible accounts
expense to exceed the recoverable levels built into CERC's tariff rates. In
addition, a sustained period of high natural gas prices could apply downward
demand pressure on natural gas consumption in the areas in which CERC operates
and increase the risk that CERC's suppliers or customers fail or are unable to
meet their obligations. Additionally, increasing gas prices could create the
need for CERC to provide collateral in order to purchase gas.
IF CERC WERE TO FAIL TO EXTEND A CONTRACT WITH ONE OF ITS SIGNIFICANT PIPELINE
CUSTOMERS, THERE COULD BE AN ADVERSE IMPACT ON ITS OPERATIONS.
CERC's contract with Laclede Gas Company, one of its pipeline's customers,
is currently scheduled to expire in 2007. To the extent the pipeline is unable
to extend this contract or the contract is renegotiated at rates substantially
less than the rates provided in the current contract, there could be an adverse
effect on CERC's results of operations, financial condition and cash flows.
A DECLINE IN CERC'S CREDIT RATING COULD RESULT IN CERC'S HAVING TO PROVIDE
COLLATERAL IN ORDER TO PURCHASE GAS.
If CERC's credit rating were to decline, it might be required to post cash
collateral in order to purchase natural gas. If a credit rating downgrade and
the resultant cash collateral requirement were to occur at a time when CERC was
experiencing significant working capital requirements or otherwise lacked
liquidity, CERC might be unable to obtain the necessary natural gas to meet its
obligations to customers, and its results of operations, financial condition and
cash flows would be adversely affected.
CERC'S PIPELINES' AND FIELD SERVICES' BUSINESS REVENUES AND RESULTS OF
OPERATIONS ARE SUBJECT TO FLUCTUATIONS IN THE SUPPLY OF GAS.
CERC's pipelines and field services business largely relies on gas sourced
in the various supply basins located in the Midcontinent region of the United
States. To the extent the availability of this supply is
23
substantially reduced, it could have an adverse effect on CERC's results of
operations, financial condition and cash flows.
CERC'S REVENUES AND RESULTS OF OPERATIONS ARE SEASONAL.
A substantial portion of CERC's revenues is derived from natural gas sales
and transportation. Thus, CERC's revenues and results of operations are subject
to seasonality, weather conditions and other changes in natural gas usage, with
revenues being higher during the winter months.
RISK FACTORS ASSOCIATED WITH OUR CONSOLIDATED FINANCIAL CONDITION
IF WE ARE UNABLE TO ARRANGE FUTURE FINANCINGS ON ACCEPTABLE TERMS, OUR ABILITY
TO REFINANCE EXISTING INDEBTEDNESS COULD BE LIMITED.
As of December 31, 2005, we had $8.9 billion of outstanding indebtedness on
a consolidated basis, which includes $2.5 billion of non-recourse transition
bonds. As of December 31, 2005, approximately $665 million principal amount of
this debt must be paid through 2008. This amount excludes principal repayments
of approximately $379 million on transition bonds, for which a dedicated revenue
stream exists. In addition, we have $830 million of outstanding convertible
notes on which holders could exercise their "put" rights during this period. Our
future financing activities may depend, at least in part, on:
- the timing and amount of our recovery of the true-up components,
including, in particular, the results of appeals to the courts of
determinations on rulings obtained to date;
- general economic and capital market conditions;
- credit availability from financial institutions and other lenders;
- investor confidence in us and the market in which we operate;
- maintenance of acceptable credit ratings;
- market expectations regarding our future earnings and probable cash
flows;
- market perceptions of our ability to access capital markets on reasonable
terms;
- our exposure to RRI in connection with its indemnification obligations
arising in connection with its separation from us; and
- provisions of relevant tax and securities laws.
As of December 31, 2005, CenterPoint Houston had outstanding $2.0 billion
aggregate principal amount of general mortgage bonds under the General Mortgage,
including approximately $527 million held in trust to secure pollution control
bonds for which CenterPoint Energy is obligated and approximately $229 million
held in trust to secure pollution control bonds for which CenterPoint Houston is
obligated. Additionally, CenterPoint Houston had outstanding approximately $253
million aggregate principal amount of first mortgage bonds under the Mortgage,
including approximately $151 million held in trust to secure certain pollution
control bonds for which CenterPoint Energy is obligated. CenterPoint Houston may
issue additional general mortgage bonds on the basis of retired bonds, 70% of
property additions or cash deposited with the trustee. Approximately $2.0
billion of additional first mortgage bonds and general mortgage bonds could be
issued on the basis of retired bonds and 70% of property additions as of
December 31, 2005. However, CenterPoint Houston is contractually prohibited,
subject to certain exceptions, from issuing additional first mortgage bonds.
Our current credit ratings are discussed in "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources -- Future Sources and Uses of Cash -- Impact on Liquidity of a
Downgrade in Credit Ratings" in Item 7 of this report. These credit ratings may
not remain in effect for any given period of time and one or more of these
ratings may 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. Each rating should be evaluated independently of any other rating.
Any future reduction
24
or withdrawal of one or more of our credit ratings could have a material adverse
impact on our ability to access capital on acceptable terms.
AS A HOLDING COMPANY WITH NO OPERATIONS OF OUR OWN, WE WILL DEPEND ON
DISTRIBUTIONS FROM OUR SUBSIDIARIES TO MEET OUR PAYMENT OBLIGATIONS, AND
PROVISIONS OF APPLICABLE LAW OR CONTRACTUAL RESTRICTIONS COULD LIMIT THE
AMOUNT OF THOSE DISTRIBUTIONS.
We derive all our operating income from, and hold all our assets through,
our subsidiaries. As a result, we will depend on distributions from our
subsidiaries in order to meet our payment obligations. In general, these
subsidiaries are separate and distinct legal entities and have no obligation to
provide us with funds for our payment obligations, whether by dividends,
distributions, loans or otherwise. In addition, provisions of applicable law,
such as those limiting the legal sources of dividends, limit their ability to
make payments or other distributions to us, and they could agree to contractual
restrictions on their ability to make distributions.
Our right to receive any assets of any subsidiary, and therefore the right
of our creditors to participate in those assets, will be effectively
subordinated to the claims of that subsidiary's creditors, including trade
creditors. In addition, even if we were a creditor of any subsidiary, our rights
as a creditor would be subordinated to any security interest in the assets of
that subsidiary and any indebtedness of the subsidiary senior to that held by
us.
THE USE OF DERIVATIVE CONTRACTS BY US AND OUR SUBSIDIARIES IN THE NORMAL
COURSE OF BUSINESS COULD RESULT IN FINANCIAL LOSSES THAT NEGATIVELY IMPACT OUR
RESULTS OF OPERATIONS AND THOSE OF OUR SUBSIDIARIES.
We and our subsidiaries use derivative instruments, such as swaps, options,
futures and forwards, to manage our commodity and financial market risks. We and
our subsidiaries could recognize financial losses as a result of volatility in
the market values of these contracts, or should a counterparty fail to perform.
In the absence of actively quoted market prices and pricing information from
external sources, the valuation of these financial instruments can involve
management's judgment or use of estimates. As a result, changes in the
underlying assumptions or use of alternative valuation methods could affect the
reported fair value of these contracts.
RISKS COMMON TO OUR BUSINESSES AND OTHER RISKS
WE ARE SUBJECT TO OPERATIONAL AND FINANCIAL RISKS AND LIABILITIES ARISING FROM
ENVIRONMENTAL LAWS AND REGULATIONS.
Our operations are subject to stringent and complex laws and regulations
pertaining to health, safety and the environment. As an owner or operator of
natural gas pipelines and distribution systems, gas gathering and processing
systems, and electric transmission and distribution systems we must comply with
these laws and regulations at the federal, state and local levels. These laws
and regulations can restrict or impact our business activities in many ways,
such as:
- restricting the way we can handle or dispose of our wastes;
- limiting or prohibiting construction activities in sensitive areas such
as wetlands, coastal regions, or areas inhabited by endangered species;
- requiring remedial action to mitigate pollution conditions caused by our
operations, or attributable to former operations; and
- enjoining the operations of facilities deemed in non-compliance with
permits issued pursuant to such environmental laws and regulations.
In order to comply with these requirements, we may need to spend
substantial amounts and devote other resources from time to time to:
- construct or acquire new equipment;
- acquire permits for facility operations;
25
- modify or replace existing and proposed equipment; and
- clean up or decommission waste disposal areas, fuel storage and
management facilities and other locations and facilities.
Failure to comply with these laws and regulations may trigger a variety of
administrative, civil and criminal enforcement measures, including the
assessment of monetary penalties, the imposition of remedial actions, and the
issuance of orders enjoining future operations. Certain environmental statutes
impose strict, joint and several liability for costs required to clean up and
restore sites where hazardous substances have been disposed or otherwise
released. Moreover, it is not uncommon for neighboring landowners and other
third parties to file claims for personal injury and property damage allegedly
caused by the release of hazardous substances or other waste products into the
environment.
OUR INSURANCE COVERAGE MAY NOT BE SUFFICIENT. INSUFFICIENT INSURANCE COVERAGE
AND INCREASED INSURANCE COSTS COULD ADVERSELY IMPACT OUR RESULTS OF
OPERATIONS, FINANCIAL CONDITION AND CASH FLOWS.
We currently have general liability and property insurance in place to
cover certain of our facilities in amounts that we consider appropriate. Such
policies are subject to certain limits and deductibles and do not include
business interruption coverage. Insurance coverage may not be available in the
future at current costs or on commercially reasonable terms, and the insurance
proceeds received for any loss of, or any damage to, any of our facilities may
not be sufficient to restore the loss or damage without negative impact on our
results of operations, financial condition and cash flows.
In common with other companies in its line of business that serve coastal
regions, CenterPoint Houston does not have insurance covering its transmission
and distribution system because CenterPoint Houston believes it to be cost
prohibitive. If CenterPoint Houston were to sustain any loss of, or damage to,
its transmission and distribution properties, it may not be able to recover such
loss or damage through a change in its regulated rates, and any such recovery
may not be timely granted. Therefore, CenterPoint Houston may not be able to
restore any loss of, or damage to, any of its transmission and distribution
properties without negative impact on its results of operations, financial
condition and cash flows.
WE, CENTERPOINT HOUSTON AND CERC COULD INCUR LIABILITIES ASSOCIATED WITH
BUSINESSES AND ASSETS THAT WE HAVE TRANSFERRED TO OTHERS.
Under some circumstances, we and CenterPoint Houston could incur
liabilities associated with assets and businesses we and CenterPoint Houston no
longer own. These assets and businesses were previously owned by Reliant Energy,
a predecessor of CenterPoint Houston, directly or through subsidiaries and
include:
- those transferred to RRI or its subsidiaries in connection with the
organization and capitalization of RRI prior to its initial public
offering in 2001; and
- those transferred to Texas Genco in connection with its organization and
capitalization.
In connection with the organization and capitalization of RRI, RRI and its
subsidiaries assumed liabilities associated with various assets and businesses
Reliant Energy transferred to them. RRI also agreed to indemnify, and cause the
applicable transferee subsidiaries to indemnify, us and our subsidiaries,
including CenterPoint Houston and CERC, with respect to liabilities associated
with the transferred assets and businesses. The indemnity provisions were
intended to place sole financial responsibility on RRI and its subsidiaries for
all liabilities associated with the current and historical businesses and
operations of RRI, regardless of the time those liabilities arose. If RRI is
unable to satisfy a liability that has been so assumed in circumstances in which
Reliant Energy has not been released from the liability in connection with the
transfer, we, CenterPoint Houston or CERC could be responsible for satisfying
the liability.
Prior to CenterPoint Energy's distribution of its ownership in RRI to its
shareholders, CERC had guaranteed certain contractual obligations of what became
RRI's trading subsidiary. Under the terms of the separation agreement between
the companies, RRI agreed to extinguish all such guarantee obligations prior to
separation, but when separation occurred in September 2002, RRI had been unable
to extinguish all
26
obligations. To secure CenterPoint Energy and CERC against obligations under the
remaining guarantees, RRI agreed to provide cash or letters of credit for the
benefit of CERC and CenterPoint Energy, and undertook to use commercially
reasonable efforts to extinguish the remaining guarantees. Our current exposure
under the remaining guarantees relates to CERC's guarantee of the payment by RRI
of demand charges related to transportation contracts with one counterparty. The
demand charges are approximately $53 million per year in 2006 through 2015, $49
million in 2016, $38 million in 2017 and $13 million in 2018. As a result of
changes in market conditions, CenterPoint Energy's potential exposure under that
guarantee currently exceeds the security provided by RRI. CenterPoint Energy has
requested RRI to increase the amount of its existing letters of credit or, in
the alternative, to obtain a release of CERC's obligations under the guarantee,
and CenterPoint Energy and RRI are pursuing alternatives. RRI continues to meet
its obligations under the transportation contracts.
RRI's unsecured debt ratings are currently below investment grade. If RRI
were unable to meet its obligations, it would need to consider, among various
options, restructuring under the bankruptcy laws, in which event RRI might not
honor its indemnification obligations and claims by RRI's creditors might be
made against us as its former owner.
Reliant Energy and RRI are named as defendants in a number of lawsuits
arising out of power sales in California and other West Coast markets and
financial reporting matters. Although these matters relate to the business and
operations of RRI, claims against Reliant Energy have been made on grounds that
include the effect of RRI's financial results on Reliant Energy's historical
financial statements and liability of Reliant Energy as a controlling
shareholder of RRI. We or CenterPoint Houston could incur liability if claims in
one or more of these lawsuits were successfully asserted against us or
CenterPoint Houston and indemnification from RRI were determined to be
unavailable or if RRI were unable to satisfy indemnification obligations owed
with respect to those claims.
In connection with the organization and capitalization of Texas Genco,
Texas Genco assumed liabilities associated with the electric generation assets
Reliant Energy transferred to it. Texas Genco also agreed to indemnify, and
cause the applicable transferee subsidiaries to indemnify, us and our
subsidiaries, including CenterPoint Houston, with respect to liabilities
associated with the transferred assets and businesses. In many cases the
liabilities assumed were obligations of CenterPoint Houston and CenterPoint
Houston was not released by third parties from these liabilities. The indemnity
provisions were intended generally to place sole financial responsibility on
Texas Genco and its subsidiaries for all liabilities associated with the current
and historical businesses and operations of Texas Genco, regardless of the time
those liabilities arose. In connection with the sale of Texas Genco's fossil
generation assets (coal, lignite and gas-fired plants) to Texas Genco LLC, the
separation agreement we entered into with Texas Genco in connection with the
organization and capitalization of Texas Genco was amended to provide that all
of Texas Genco's rights and obligations under the separation agreement relating
to its fossil generation assets, including Texas Genco's obligation to indemnify
us with respect to liabilities associated with the fossil generation assets and
related business, were assigned to and assumed by Texas Genco LLC. In addition,
under the amended separation agreement, Texas Genco is no longer liable for, and
CenterPoint Energy has assumed and agreed to indemnify Texas Genco LLC against,
liabilities that Texas Genco originally assumed in connection with its
organization to the extent, and only to the extent, that such liabilities are
covered by certain insurance policies or other similar agreements held by
CenterPoint Energy. If Texas Genco or Texas Genco LLC were unable to satisfy a
liability that had been so assumed or indemnified against, and provided Reliant
Energy had not been released from the liability in connection with the transfer,
CenterPoint Houston could be responsible for satisfying the liability.
We or our 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 we own, but most
existing claims relate to facilities previously owned by our subsidiaries but
currently owned by Texas Genco LLC. We anticipate that additional claims like
those received may be asserted in the future. Under the terms of the separation
agreement between us and Texas Genco, ultimate financial responsibility for
uninsured losses from claims relating to facilities transferred
27
to Texas Genco has been assumed by Texas Genco, but under the terms of our
agreement to sell Texas Genco to Texas Genco LLC, we have agreed to continue to
defend such claims to the extent they are covered by insurance we maintain,
subject to reimbursement of the costs of such defense from Texas Genco LLC.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
CHARACTER OF OWNERSHIP
We own or lease our principal properties in fee, including our corporate
office space and various real property. Most of our electric lines and gas mains
are located, pursuant to easements and other rights, on public roads or on land
owned by others.
ELECTRIC TRANSMISSION & DISTRIBUTION
For information regarding the properties of our Electric Transmission &
Distribution business segment, please read "Our Business -- Electric
Transmission & Distribution -- Properties" in Item 1 of this report, which
information is incorporated herein by reference.
NATURAL GAS DISTRIBUTION
For information regarding the properties of our Natural Gas Distribution
business segment, please read "Our Business -- Natural Gas
Distribution -- Assets" in Item 1 of this report, which information is
incorporated herein by reference.
PIPELINES AND FIELD SERVICES
For information regarding the properties of our Pipelines and Field
Services business segment, please read "Our Business -- Pipelines and Field
Services -- Assets" in Item 1 of this report, which information is incorporated
herein by reference.
OTHER OPERATIONS
For information regarding the properties of our Other Operations business
segment, please read "Our Business -- Other Operations" in Item 1 of this
report, which information is incorporated herein by reference.
ITEM 3. LEGAL PROCEEDINGS
For a discussion of material legal and regulatory proceedings affecting us,
please read "Regulation" and "Environmental Matters" in Item 1 of this report
and Notes 4 and 10(d) to our consolidated financial statements, which
information is incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to the vote of our security holders during
the fourth quarter of 2005.
28
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
As of February 28, 2006, our common stock was held of record by
approximately 54,679 shareholders. Our common stock is listed on the New York
and Chicago Stock Exchanges and is traded under the symbol "CNP."
The following table sets forth the high and low closing prices of the
common stock of CenterPoint Energy on the New York Stock Exchange composite tape
during the periods indicated, as reported by Bloomberg, and the cash dividends
declared in these periods. Cash dividends paid aggregated $0.40 per share in
both 2004 and 2005.
MARKET PRICE DIVIDEND
--------------- DECLARED
HIGH LOW PER SHARE
------ ------ ---------
2004
First Quarter............................................. $0.10
January 2............................................... $ 9.72
March 31................................................ $11.43
Second Quarter............................................ $0.10
April 2................................................. $11.88
May 11.................................................. $10.25
Third Quarter............................................. $0.10
July 20................................................. $12.21
September 24............................................ $10.02
Fourth Quarter............................................ $0.10
October 25.............................................. $10.41
December 15............................................. $11.34
2005(1)
First Quarter............................................. $0.20
January 11.............................................. $10.65
March 8................................................. $12.61
Second Quarter............................................ $0.07
April 20................................................ $11.68
June 30................................................. $13.21
Third Quarter............................................. $0.07
August 8................................................ $13.04
September 16............................................ $15.13
Fourth Quarter............................................ $0.06
October 3............................................... $14.82
October 21.............................................. $12.65
- ---------------
(1) During 2005, we paid irregular quarterly dividends based on earnings in each
specific quarter in order to comply with requirements under the Public
Utility Holding Company Act of 1935, as amended (1935 Act). The 1935 Act,
with its requirements associated with dividends, has been repealed effective
as of February 8, 2006.
The closing market price of our common stock on December 31, 2005 was
$12.85 per share.
29
The amount of future cash dividends will be subject to determination based
upon our results of operations and financial condition, our future business
prospects, any applicable contractual restrictions and other factors that our
board of directors considers relevant and will be declared at the discretion of
the board of directors.
On January 26, 2006, we announced a regular quarterly cash dividend of
$0.15 per share, payable on March 10, 2006 to shareholders of record on February
16, 2006.
Repurchases of Equity Securities
During the quarter ended December 31, 2005, none of our equity securities
registered pursuant to Section 12 of the Securities Exchange Act of 1934 were
purchased by or on behalf of us or any of our "affiliated purchasers," as
defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934.
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,
-----------------------------------------------
2001(1) 2002 2003(2) 2004(3) 2005(4)
------- ------- ------- ------- -------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Revenues........................................ $ 7,148 $ 6,438 $ 7,790 $ 7,999 $ 9,722
------- ------- ------- ------- -------
Income from continuing operations before
extraordinary item and cumulative effect of
accounting change............................. 357 482 409 205 225
Discontinued operations, net of tax............. 565 (4,402) 75 (133) (3)
Extraordinary item, net of tax.................. -- -- -- (977) 30
Cumulative effect of accounting change, net of
tax........................................... 58 -- -- -- --
------- ------- ------- ------- -------
Net income (loss)............................... $ 980 $(3,920) $ 484 $ (905) $ 252
======= ======= ======= ======= =======
Basic earnings (loss) per common share:
Income from continuing operations before
extraordinary item and cumulative effect of
accounting change.......................... $ 1.23 $ 1.62 $ 1.35 $ 0.67 $ 0.72
Discontinued operations, net of tax........... 1.95 (14.78) 0.24 (0.43) (0.01)
Extraordinary item, net of tax................ -- -- -- (3.18) 0.10
Cumulative effect of accounting change, net of
tax........................................ 0.20 -- -- -- --
------- ------- ------- ------- -------
Basic earnings (loss) per common share.......... $ 3.38 $(13.16) $ 1.59 $ (2.94) $ 0.81
======= ======= ======= ======= =======
Diluted earnings (loss) per common share:
Income from continuing operations before
extraordinary item and cumulative effect of
accounting change.......................... $ 1.22 $ 1.61 $ 1.24 $ 0.61 $ 0.67
Discontinued operations, net of tax........... 1.93 (14.69) 0.22 (0.37) (0.01)
Extraordinary item, net of tax................ -- -- -- (2.72) 0.09
Cumulative effect of accounting change, net of
tax........................................ 0.20 -- -- -- --
------- ------- ------- ------- -------
Diluted earnings (loss) per common share........ $ 3.35 $(13.08) $ 1.46 $ (2.48) $ 0.75
======= ======= ======= ======= =======
30
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2001(1) 2002 2003(2) 2004(3) 2005(4)
------- ------- ------- ------- -------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Cash dividends paid per common share............ $ 1.50 $ 1.07 $ 0.40 $ 0.40 $ 0.40
Dividend payout ratio from continuing
operations.................................... 122% 66% 30% 60% 56%
Return from continuing operations on average
common equity................................. 5.8% 11.8% 25.7% 14.4% 18.7%
Ratio of earnings from continuing operations to
fixed charges................................. 1.99 2.03 1.81 1.43 1.51
At year-end:
Book value per common share................... $ 22.77 $ 4.74 $ 5.77 $ 3.59 $ 4.18
Market price per common share................. 26.52 8.01 9.69 11.30 12.85
Market price as a percent of book value....... 116% 169% 168% 315% 307%
Assets of discontinued operations............. $16,840 $ 4,594 $ 4,244 $ 1,565 $ --
Total assets.................................. 32,020 20,635 21,461 18,096 17,116
Short-term borrowings......................... 3,469 347 63 -- --
Transition bonds, including current portion... 749 736 717 676 2,480
Other long-term debt, including current
portion.................................... 3,963 9,260 10,222 8,353 6,427
Trust preferred securities(5)................. 706 706 -- -- --
Capitalization:
Common stock equity........................ 55% 12% 14% 11% 13%
Trust preferred securities................. 6% 6% -- -- --
Long-term debt, including current
portion.................................. 39% 82% 86% 89% 87%
Capital expenditures, excluding discontinued
operations................................. $ 802 $ 566 $ 497 $ 530 $ 719
- ---------------
(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).
(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 order 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.
(4) 2005 net income includes an after-tax extraordinary gain of $30 million
($0.10 and $0.09 per basic and diluted share, respectively) recorded in the
first quarter reflecting an adjustment to the extraordinary loss recorded in
the last half of 2004 to write down generation-related regulatory assets as
a result of the final orders issued by the Texas Utility Commission.
(5) 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 were reported as long-term debt effective December 31, 2003.
31
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.
OVERVIEW
BACKGROUND
We are a public utility holding company whose indirect wholly owned
subsidiaries include:
- CenterPoint Energy Houston Electric, LLC (CenterPoint Houston), which
provides 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; and
- CenterPoint Energy Resources Corp. (CERC Corp. and, together with its
subsidiaries, CERC), which owns gas distribution systems serving
approximately 3.1 million customers in Arkansas, Louisiana, Minnesota,
Mississippi, Oklahoma and Texas. Through wholly owned subsidiaries, CERC
also owns two interstate natural gas pipelines and gas gathering systems,
provides various ancillary services, and offers variable and fixed-price
physical natural gas supplies primarily to commercial and industrial
customers and electric and gas utilities.
We were a registered public utility holding company under the Public
Utility Holding Company Act of 1935, as amended (the 1935 Act). The 1935 Act and
related rules and regulations imposed a number of restrictions on our activities
and those of our subsidiaries. The Energy Policy Act of 2005 (Energy Act)
repealed the 1935 Act effective February 8, 2006, and since that date we and our
subsidiaries have no longer been subject to restrictions imposed under the 1935
Act. The Energy Act includes a new Public Utility Holding Company Act of 2005
(PUHCA 2005), which grants to the Federal Energy Regulatory Commission (FERC)
authority to require holding companies and their subsidiaries to maintain
certain books and records and make them available for review by the FERC and
state regulatory authorities in certain circumstances. On December 8, 2005, the
FERC issued rules implementing PUHCA 2005 that will require us to notify the
FERC of our status as a holding company and to maintain certain books and
records and make these available to the FERC. The FERC continues to consider
motions for rehearing or clarification of these rules.
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 are subject to 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 electric utility. Our natural gas distribution
services are also subject to rate regulation and are reported in the Natural Gas
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.
32
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 (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 regulated natural gas distribution business,
which engages in intrastate natural gas sales to, and natural gas transportation
for, approximately 3.1 million residential, commercial and industrial customers
in Arkansas, Louisiana, Minnesota, Mississippi, Oklahoma and Texas.
Competitive Natural Gas Sales and Services
CERC's operations also include non-rate regulated natural gas sales and
services provided primarily to commercial and industrial customers and electric
and gas utilities throughout the central and eastern United States. We have
reorganized the oversight of our Natural Gas Distribution business segment and,
as a result, beginning in the fourth quarter of 2005, we have established a new
reportable business segment, Competitive Natural Gas Sales and Services. These
operations were previously reported as part of the Natural Gas Distribution
business segment. We have reclassified all prior period segment information to
conform to this new presentation.
Pipelines and Field Services
CERC's pipelines and field services business owns and operates
approximately 8,200 miles of gas transmission lines primarily located in
Arkansas, Illinois, Louisiana, Missouri, Oklahoma and Texas. CERC's pipelines
and field services business also owns and operates six natural gas storage
fields with a combined daily deliverability of approximately 1.2 Bcf per day and
a combined working gas capacity of approximately 59.0 Bcf. Most storage
operations are in north Louisiana and Oklahoma. CERC's pipelines and field
services business also owns and operates approximately 4,000 miles of gathering
pipelines that collect, treat and process natural gas from approximately 200
separate systems located in major producing fields in Arkansas, Louisiana,
Oklahoma and Texas.
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.
33
EXECUTIVE SUMMARY
SIGNIFICANT EVENTS IN 2005
RECOVERY OF TRUE-UP BALANCE/SECURITIZATION FINANCING
The Texas Electric Choice Plan (Texas electric restructuring law), which
became effective in September 1999, substantially amended the regulatory
structure governing electric utilities in order to allow retail competition for
electric customers beginning in January 2002. The Texas electric restructuring
law requires the Texas Utility Commission to conduct a "true-up" proceeding to
determine CenterPoint Houston's stranded costs and certain other costs resulting
from the transition to a competitive retail electric market and to provide for
its recovery of those costs. In March 2004, CenterPoint Houston filed its
true-up application with the Texas Utility Commission, requesting recovery of
$3.7 billion, excluding interest. In December 2004, the Texas Utility Commission
issued its final order (True-Up Order) allowing CenterPoint Houston to recover a
true-up balance of approximately $2.3 billion, which included interest through
August 31, 2004, and providing for adjustment of the amount to be recovered to
include interest on the balance until recovery, the principal portion of
additional excess mitigation credits returned to customers after August 31, 2004
and certain other matters. CenterPoint Houston and other parties filed appeals
of the True-Up Order to a district court in Travis County, Texas. In August
2005, the court issued its final judgment on the various appeals. In its
judgment, the court affirmed most aspects of the True-Up Order, but reversed two
of the Texas Utility Commission's rulings. The judgment would have the effect of
restoring approximately $650 million, plus interest, of the $1.7 billion the
Texas Utility Commission had disallowed from CenterPoint Houston's initial
request. First, the court reversed the Texas Utility Commission's decision to
prohibit CenterPoint Houston from recovering $180 million in credits through
August 2004 that CenterPoint Houston was ordered to provide to retail electric
providers as a result of an inaccurate stranded cost estimate made by the Texas
Utility Commission in 2000. Additional credits of approximately $30 million were
paid after August 2004. Second, the court reversed the Texas Utility
Commission's disallowance of $440 million in transition costs which are
recoverable under the Texas Utility Commission's regulations. CenterPoint
Houston and other parties appealed the district court decisions. Briefs have
been filed with the 3rd Court of Appeals in Austin but oral argument has not yet
been scheduled.
There are two ways for CenterPoint Houston to recover the true-up balance:
by issuing transition bonds to securitize the amounts due and/or by implementing
a competition transition charge (CTC). Pursuant to a financing order issued by
the Texas Utility Commission in March 2005 and affirmed in all respects in
August 2005 by the same Travis County District Court considering the appeal of
the True-Up Order, in December 2005 a subsidiary of CenterPoint Houston issued
$1.85 billion in transition bonds with interest rates ranging from 4.84 percent
to 5.30 percent and final maturity dates ranging from February 2011 to August
2020. Through issuance of the transition bonds, CenterPoint Houston recovered
approximately $1.7 billion of the true-up balance determined in the True-Up
Order plus interest through the date on which the bonds were issued.
In July 2005, CenterPoint Houston received an order from the Texas Utility
Commission allowing it to implement a CTC which will collect approximately $596
million over 14 years plus interest at an annual rate of 11.075 percent (CTC
Order). The CTC Order authorizes CenterPoint Houston to impose a charge on
retail electric providers to recover the portion of the true-up balance not
covered by the financing order. The CTC Order also allows CenterPoint Houston to
collect approximately $24 million of rate case expenses over three years through
a separate tariff rider (Rider RCE). CenterPoint Houston implemented the CTC and
Rider RCE effective September 13, 2005 and began recovering approximately $620
million. During the period from September 13, 2005, the date of implementation
of the CTC Order, through December 31, 2005, CenterPoint Houston recognized
approximately $21 million in CTC operating income. Certain parties appealed the
CTC Order to the Travis County Court in September 2005.
Under the True-Up Order, CenterPoint Houston is allowed to recover carrying
charges at 11.075 percent until the true-up balance is recovered. In January
2006, the Texas Utility Commission staff (Staff) proposed that the Texas Utility
Commission adopt new rules governing the carrying charges on unrecovered true-up
34
balances. If the Texas Utility Commission adopts the rule as the Staff proposed
it and the rule is deemed to apply to CenterPoint Houston, the rule would reduce
carrying costs on the unrecovered CTC balance prospectively from 11.075 percent
to the utility's cost of debt.
CENTERPOINT HOUSTON RATE CASE
The Texas Utility Commission requires each electric utility to file an
annual Earnings Report providing certain information to enable the Texas Utility
Commission to monitor the electric utilities' earnings and financial condition
within the state. In May 2005, CenterPoint Houston filed its Earnings Report for
the calendar year ended December 31, 2004. CenterPoint Houston's Earnings Report
shows that it earned less than its authorized rate of return on equity in 2004.
In October 2005, the Staff filed a memorandum summarizing its review of the
Earnings Reports filed by electric utilities. Based on its review, the Staff
concluded that continuation of CenterPoint Houston's rates could result in
excess retail transmission and distribution revenues of as much as $105 million
and excess wholesale transmission revenues of as much as $31 million annually
and recommended that the Texas Utility Commission initiate a review of the
reasonableness of existing rates. The Staff's analysis was based on a 9.60
percent cost of equity, which is 165 basis points lower than the approved return
on equity from CenterPoint Houston's last rate proceeding, the elimination of
interest on debt that matured in November 2005 and certain other adjustments to
CenterPoint Houston's reported information. Additionally, a hypothetical capital
structure of 60 percent debt and 40 percent equity was used which varies
materially from the actual capital structure of CenterPoint Houston as of
December 31, 2005 of approximately 50 percent debt and 50 percent equity.
In December 2005, the Texas Utility Commission considered the Staff report
and agreed to initiate a rate proceeding concerning the reasonableness of
CenterPoint Houston's existing rates for transmission and distribution service
and to require CenterPoint Houston to make a filing by April 15, 2006 to justify
or change those rates.
CITY OF HOUSTON FRANCHISE
In June 2005, CenterPoint Houston accepted an ordinance granting it a new
30-year franchise to use the public rights-of-way to conduct its business in the
City of Houston (New Franchise Ordinance). The New Franchise Ordinance took
effect on July 1, 2005, and replaced the prior electricity franchise ordinance,
which had been in effect since 1957. The New Franchise Ordinance clarifies
certain operational obligations of CenterPoint Houston and the City of Houston
and provides for streamlined payment and audit procedures and a two-year statute
of limitations on claims for underpayment or overpayment under the ordinance.
Under the prior electricity franchise ordinance, CenterPoint Houston paid annual
franchise fees of $76.6 million to the City of Houston for the year ended
December 31, 2004. For the twelve-month period beginning July 1, 2005, the
annual franchise fee (Annual Franchise Fee) under the New Franchise Ordinance
will include a base amount of $88.1 million (Base Amount) and an additional
payment of $8.5 million (Additional Amount). The Base Amount and the Additional
Amount will be adjusted annually based on the increase, if any, in kWh delivered
by CenterPoint Houston within the City of Houston.
CenterPoint Houston began paying the new annual franchise fees on July 1,
2005. Pursuant to the New Franchise Ordinance, the Annual Franchise Fee will be
reduced prospectively to reflect any portion of the Annual Franchise Fee that is
not included in CenterPoint Houston's base rates in any subsequent rate case.
DEBT FINANCING TRANSACTIONS
During the fourth quarter of 2005, CenterPoint Houston retired at maturity
its $1.31 billion term loan, which bore interest at the London inter-bank offer
rate (LIBOR) plus 975 basis points, subject to a minimum LIBOR rate of 3
percent. CenterPoint Houston used its $1.31 billion credit facility bearing
interest at LIBOR plus 75 basis points to retire the term loan. Borrowings under
the credit facility were subsequently repaid with a portion of the proceeds of
the $1.85 billion transition bonds referred to above.
35
In August 2005, we accepted for exchange approximately $572 million
aggregate principal amount of our 3.75% convertible senior notes due 2023 (Old
Notes) for an equal amount of our new 3.75% convertible senior notes due 2023
(New Notes). Old Notes of approximately $3 million remain outstanding. We
commenced the exchange offer in response to the guidance set forth in Emerging
Issues Task Force (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). Under that guidance, because settlement of the principal
portion of the New Notes will be made in cash rather than stock, the exchange of
New Notes for Old 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.
SALE OF TEXAS GENCO
In July 2004, we announced our agreement to sell our majority-owned
generating subsidiary, Texas Genco Holdings, Inc. (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, whose principal
remaining asset was its ownership interest in a nuclear generating facility,
distributed $2.231 billion in cash to us. 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, was completed on April 13, 2005.
The operations of Texas Genco, formerly presented as our Electric Generation
business segment, are presented as discontinued operations.
2005 HIGHLIGHTS
Our operating performance for 2005 compared to 2004 was affected by:
- increased operating income of $55 million in our Pipelines and Field
Services business segment primarily from increased demand for
transportation resulting from basis differentials across the system and
higher demand for ancillary services and increased throughput and demand
for services related to our core gas gathering operations;
- increased operating income of $16 million in our Competitive Natural Gas
Sales and Services business segment primarily from higher sales to
utilities and favorable basis differentials over the pipeline capacity
that we control;
- a decreased operating loss of $14 million in our Other Operations
business segment primarily from increased overhead allocated in 2005;
- continued customer growth, with the addition of 105,000 metered electric
and gas customers;
- a decrease in interest expense of $67 million; and
- a decrease in the return on the true-up balance of $105 million in 2005,
partially offset by an increase in operating income of $21 million
related to the return on the true-up balance being recovered through the
CTC. This decrease is primarily due to the recording of the return on the
true-up balance for 2002 through 2004 in the fourth quarter of 2004.
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,
including, in particular, the results of appeals to the courts of
determinations on rulings obtained to date;
36
- state and federal legislative and regulatory actions or developments,
including deregulation, re-regulation, 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;
- timely and appropriate rate actions and increases, allowing recovery of
costs and a reasonable return on investment;
- 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;
- commercial bank and financial market conditions, our access to capital,
the cost of such capital, and the results of our financing and
refinancing efforts, including availability of funds in the debt capital
markets;
- actions by rating agencies;
- effectiveness of our risk management activities;
- inability of various counterparties to meet their obligations to us;
- non-payment for our services due to financial distress of our customers,
including Reliant Energy, Inc. (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 potential business strategies, including acquisitions or dispositions
of assets or businesses, which we cannot assure will provide the
anticipated benefits to us; and
- other factors we discuss under "Risk Factors" in Item 1A of this report.
37
CONSOLIDATED RESULTS OF OPERATIONS
All dollar amounts in the tables that follow are in millions, except for
per share amounts.
YEAR ENDED DECEMBER 31,
------------------------
2003 2004 2005
------ ------ ------
Revenues.................................................... $7,790 $7,999 $9,722
Expenses.................................................... 6,435 7,135 8,783
------ ------ ------
Operating Income............................................ 1,355 864 939
Gain (Loss) on Time Warner Investment....................... 106 31 (44)
Gain (Loss) on Indexed Debt Securities...................... (96) (20) 49
Interest and Other Finance Charges.......................... (741) (777) (710)
Return on True-Up Balance................................... -- 226 121
Other Income (Expense), net................................. (10) 20 23
------ ------ ------
Income From Continuing Operations Before Income Taxes and
Extraordinary Item........................................ 614 344 378
Income Tax Expense.......................................... 205 139 153
------ ------ ------
Income From Continuing Operations Before Extraordinary
Item...................................................... 409 205 225
Discontinued Operations, net of tax......................... 75 (133) (3)
------ ------ ------
Income Before Extraordinary Item............................ 484 72 222
Extraordinary Item, net of tax.............................. -- (977) 30
------ ------ ------
Net Income (Loss)......................................... $ 484 $ (905) $ 252
====== ====== ======
Basic Earnings (Loss) Per Share:
Income From Continuing Operations Before Extraordinary
Item...................................................... $ 1.35 $ 0.67 $ 0.72
Discontinued Operations, net of tax......................... 0.24 (0.43) (0.01)
Extraordinary Item, net of tax.............................. -- (3.18) 0.10
------ ------ ------
Net Income (Loss)......................................... $ 1.59 $(2.94) $ 0.81
====== ====== ======
Diluted Earnings (Loss) Per Share:
Income From Continuing Operations Before Extraordinary
Item...................................................... $ 1.24 $ 0.61 $ 0.67
Discontinued Operations, net of tax......................... 0.22 (0.37) (0.01)
Extraordinary Item, net of tax.............................. -- (2.72) 0.09
------ ------ ------
Net Income (Loss)......................................... $ 1.46 $(2.48) $ 0.75
====== ====== ======
2005 COMPARED TO 2004
Income from Continuing Operations. We reported income from continuing
operations before extraordinary item of $225 million ($0.67 per diluted share)
for 2005 as compared to $205 million ($0.61 per diluted share) for 2004. The
increase in income from continuing operations of $20 million was primarily due
to increased operating income of $55 million in our Pipelines and Field Services
business segment resulting from increased demand for transportation resulting
from basis differentials across the system and higher demand for ancillary
services as well as increased throughput and demand for services related to our
core gas gathering operations, increased operating income of $16 million in our
Competitive Natural Gas Sales and Services business segment primarily due to
higher sales to utilities and favorable basis differentials over the pipeline
capacity that we control, a decrease in the operating loss of $14 million in our
Other Operations business segment resulting from increased overhead allocated in
2005 and a $67 million decrease in interest expense due to lower borrowing
levels and lower borrowing costs reflecting the replacement of certain of our
credit facilities. The above increases were partially offset by a decrease of
$105 million in the return on the true-up
38
balance of our Electric Transmission & Distribution business segment as a result
of the True-Up Order, partially offset by an increase in operating income of $21
million related to the return on the true-up balance being recovered through the
CTC, and decreased operating income of $29 million in our Electric Transmission
& Distribution business segment, excluding the CTC operating income discussed
above, primarily from increased franchise fees paid to the City of Houston,
increased depreciation expense and higher operation and maintenance expenses,
including higher transmission costs, the absence of a $15 million partial
reversal of a reserve related to the final fuel reconciliation recorded in the
second quarter of 2004 and the absence of an $11 million gain from a land sale
recorded in 2004, partially offset by increased usage mainly due to weather,
continued customer growth and higher transmission cost recovery. Additionally,
income tax expense increased $14 million in 2005 as compared to 2004.
Net income for 2005 included an after-tax extraordinary gain of $30 million
($0.09 per diluted share) recorded in the second quarter reflecting an
adjustment to the after-tax extraordinary loss of $977 million recorded in the
last half of 2004 to write down generation-related regulatory assets as a result
of the final orders issued by the Texas Utility Commission.
Income Tax Expense. In 2005, our effective tax rate was 40.6%. The most
significant items affecting our effective tax rate in 2005 were an addition to
the tax reserve of approximately $42 million relating to the contention of the
Internal Revenue Service (IRS) that the current deductions for original issue
discount (OID) on our 2.0% Zero-Premium Exchangeable Subordinated Notes due 2029
(ZENS) be capitalized, potentially converting what would be ordinary deductions
into capital losses at the time the ZENS are settled, partially offset by
favorable tax audit adjustments of $10 million. Future changes to the reserve
will depend upon a number of variables, including the market price of TW Common,
the amount of ZENS OID, which increases quarterly, our assessment of available
capital gains and the ultimate outcome of the dispute with the IRS.
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 the 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 final
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 $21 million in our
Natural Gas Distribution business segment primarily due to rate increases,
increased operating income of $22 million in our Pipelines and Field Services
business segment primarily from increased throughput, favorable commodity prices
and increased ancillary services, and a gain of $11 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 included 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.
39
INTEREST EXPENSE AND OTHER FINANCE CHARGES
In 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 EITF Issue No. 87-24 "Allocation of Interest to Discontinued
Operations", we have reclassified interest to discontinued operations of Texas
Genco based on net proceeds 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 $942 million, $849 million and $711
million in 2003, 2004 and 2005, respectively. We have reclassified $201 million,
$72 million and $1 million of interest expense in 2003, 2004 and 2005,
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.
RESULTS OF OPERATIONS BY BUSINESS SEGMENT
Revenues by segment include intersegment sales, which are eliminated in
consolidation.
The following table presents operating income (in millions) for each of our
business segments for 2003, 2004 and 2005. Some amounts from the previous years
have been reclassified to conform to the 2005 presentation of the financial
statements. These reclassifications do not affect consolidated operating income.
OPERATING INCOME (LOSS) BY BUSINESS SEGMENT
YEAR ENDED DECEMBER 31,
-----------------------
2003 2004 2005
------- ----- -----
(IN MILLIONS)
Electric Transmission & Distribution........................ $1,020 $494 $487
Natural Gas Distribution.................................... 157 178 175
Competitive Natural Gas Sales and Services.................. 45 44 60
Pipelines and Field Services................................ 158 180 235
Other Operations............................................ (25) (32) (18)
------ ---- ----
Total Consolidated Operating Income....................... $1,355 $864 $939
====== ==== ====
40
ELECTRIC TRANSMISSION & DISTRIBUTION
The following tables provide summary data of our Electric Transmission &
Distribution business segment, CenterPoint Houston, for 2003, 2004 and 2005 (in
millions, except throughput and customer data):
YEAR ENDED DECEMBER 31,
---------------------------------
2003 2004 2005
--------- --------- ---------
Revenues:
Electric transmission and distribution utility(1)......... $ 2,061 $ 1,446 $ 1,538
Transition bond companies................................. 63 75 106
--------- --------- ---------
Total revenues......................................... 2,124 1,521 1,644
--------- --------- ---------
Expenses:
Operation and maintenance................................. 635 539 618
Depreciation and amortization............................. 246 248 258
Taxes other than income taxes............................. 198 203 214
Transition bond companies................................. 25 37 67
--------- --------- ---------
Total expenses......................................... 1,104 1,027 1,157
--------- --------- ---------
Operating Income -- Electric transmission and distribution
utility................................................... 982 456 448
Operating Income -- Transition bond companies(2)............ 38 38 39
--------- --------- ---------
Total segment operating income......................... $ 1,020 $ 494 $ 487
========= ========= =========
Throughput (in gigawatt-hours (GWh)):
Residential............................................ 23,687 23,748 24,924
Total.................................................. 70,815 73,632 74,189
Average number of metered customers:
Residential............................................ 1,594,177 1,639,488 1,683,100
Total.................................................. 1,815,142 1,862,853 1,912,346
- ---------------
(1) In 2003, revenues include $661 million of non-cash ECOM revenues in
accordance with the Texas electric restructuring law. In 2004 and 2005,
there were no ECOM revenues.
(2) Represents the amount necessary to pay interest on the transition bonds.
2005 Compared to 2004. Our Electric Transmission & Distribution business
segment reported operating income of $487 million for 2005, consisting of $448
million for the regulated electric transmission and distribution utility and $39
million for the transition bond company subsidiaries of CenterPoint Houston that
issued $749 million and $1.851 billion principal amount of transition bonds in
2001 and 2005, respectively. For 2004, operating income totaled $494 million,
consisting of $456 million for the regulated electric transmission and
distribution utility and $38 million for the transition bond company. Operating
revenues increased primarily due to increased usage resulting from warmer
weather ($13 million), continued customer growth ($33 million) with the addition
of 61,000 metered customers since December 2004, recovery of our 2004 true-up
balance not covered by the transition bond financing order ($21 million) and
higher transmission cost recovery ($13 million). The increase in operating
revenues was more than offset by higher transmission costs ($24 million), the
absence of a gain from a land sale recorded in 2004 ($11 million), the absence
of a $15 million partial reversal of a reserve related to the final fuel
reconciliation recorded in 2004, increased employee-related expenses ($20
million) and higher tree trimming expense ($6 million), partially offset by a
decrease in pension expense ($14 million). Depreciation and amortization expense
increased ($10 million) primarily as a result of higher plant balances. Taxes
other than income taxes increased ($11 million) primarily due to higher
franchise fees paid to the City of Houston.
In September 2005, CenterPoint Houston's service area in Texas was
adversely affected by Hurricane Rita. Although damage to CenterPoint Houston's
electric facilities was limited, over 700,000 customers lost
41
power at the height of the storm. Power was restored to over a half million
customers within 36 hours and all power was restored in less than five days. The
Electric Transmission & Distribution business segment's revenues lost as a
result of the storm were more than offset by warmer than normal weather during
the third quarter. CenterPoint Houston has deferred $28 million of restoration
costs for recovery in a future rate case and has capitalized an additional $8
million of costs as property, plant and equipment.
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. 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 $11 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 partial reversal of
this fuel reserve in 2004 as a result of the Texas Utility Commission's final
orders in the final fuel reconciliation.
NATURAL GAS DISTRIBUTION
The following table provides summary data of our Natural Gas Distribution
business segment for 2003, 2004 and 2005 (in millions, except throughput and
customer data):
YEAR ENDED DECEMBER 31,
---------------------------------
2003 2004 2005
--------- --------- ---------
Revenues............................................ $ 3,389 $ 3,579 $ 3,846
--------- --------- ---------
Expenses:
Natural gas....................................... 2,450 2,596 2,841
Operation and maintenance......................... 540 544 551
Depreciation and amortization..................... 135 141 152
Taxes other than income taxes..................... 107 120 127
--------- --------- ---------
Total expenses................................. 3,232 3,401 3,671
--------- --------- ---------
Operating Income.................................... $ 157 $ 178 $ 175
========= ========= =========
Throughput (in billion cubic feet (Bcf)):
Residential....................................... 183 175 160
Commercial and industrial......................... 238 237 215
--------- --------- ---------
Total Throughput............................... 421 412 375
========= ========= =========
Average number of customers:
Residential.................................... 2,755,200 2,798,210 2,838,357
Commercial and industrial...................... 245,081 246,068 246,372
--------- --------- ---------
Total.......................................... 3,000,281 3,044,278 3,084,729
========= ========= =========
2005 Compared to 2004. Our Natural Gas Distribution business segment
reported operating income of $175 million for 2005 as compared to $178 million
for 2004. Increases in operating margins (revenues less natural gas costs) from
rate increases ($19 million) and margin from gas exchanges ($7 million) were
partially offset by the impact of milder weather and decreased throughput net of
continued customer growth with the addition of approximately 44,000 customers
since December 2004 ($13 million). Operation and maintenance expense increased
$7 million. Excluding an $8 million charge recorded in 2004 for severance costs
associated with staff reductions, operation and maintenance expenses increased
by $15 million primarily due to increased litigation reserves ($11 million) and
increased bad debt expense ($9 million), partially offset by the capitalization
of previously incurred restructuring expenses as allowed by a regulatory order
from the
42
Railroad Commission of Texas ($5 million). Additionally, operating income was
unfavorably impacted by increased depreciation expense primarily due to higher
plant balances ($11 million).
During the third quarter of 2005, our east Texas, Louisiana and Mississippi
natural gas service areas were affected by Hurricanes Katrina and Rita. Damage
to our facilities was limited, but approximately 10,000 homes and businesses
were damaged to such an extent that they will not be taking service for the
foreseeable future. The impact on the Natural Gas Distribution business
segment's operating income was not material.
2004 Compared to 2003. Our Natural Gas Distribution business segment
reported operating income of $178 million for 2004 as compared to $157 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 $4 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
$4 million.
COMPETITIVE NATURAL GAS SALES AND SERVICES
The following table provides summary data of our Competitive Natural Gas
Sales and Services business segment for 2003, 2004 and 2005 (in millions, except
throughput and customer data):
YEAR ENDED DECEMBER 31,
------------------------
2003 2004 2005
------ ------ ------
Revenues................................................... $2,232 $2,848 $4,129
------ ------ ------
Expenses:
Natural gas.............................................. 2,164 2,778 4,033
Operation and maintenance................................ 20 22 30
Depreciation and amortization............................ 1 2 2
Taxes other than income taxes............................ 2 2 4
------ ------ ------
Total expenses........................................ 2,187 2,804 4,069
------ ------ ------
Operating Income........................................... $ 45 $ 44 $ 60
====== ====== ======
Throughput (in Bcf):
Wholesale -- third parties............................... 195 228 304
Wholesale -- affiliates.................................. 21 35 27
Retail................................................... 140 141 156
Pipeline................................................. 80 76 51
------ ------ ------
Total Throughput...................................... 436 480 538
====== ====== ======
Average number of customers:
Wholesale................................................ 73 97 138
Retail................................................... 5,242 5,976 6,328
Pipeline................................................. 188 172 142
------ ------ ------
Total................................................. 5,503 6,245 6,608
====== ====== ======
2005 Compared to 2004. Our Competitive Natural Gas Sales and Services
business segment reported operating income of $60 million for 2005 as compared
to $44 million for 2004. The increase in operating income of $16 million was
primarily due to increased operating margins (revenues less natural gas costs)
related to higher sales to utilities and favorable basis differentials over the
pipeline capacity that we control
43
($32 million) less the impact of certain derivative transactions ($6 million),
partially offset by higher payroll and benefit related expenses ($4 million) and
increased bad debt expense ($3 million).
2004 Compared to 2003. Our Competitive Natural Gas Sales and Services
business segment reported operating income of $44 million for 2004 as compared
to $45 million for 2003. The decrease in operating income was primarily due to
increased payroll and benefit-related expenses ($3 million), increased factoring
expenses ($1 million) and increased franchise taxes ($1 million), partially
offset by increased operating margins related to increased volatility and growth
($2 million) and a decrease in bad debt expense ($2 million).
PIPELINES AND FIELD SERVICES
The following table provides summary data of our Pipelines and Field
Services business segment for 2003, 2004 and 2005 (in millions, except
throughput data):
YEAR ENDED DECEMBER 31,
------------------------
2003 2004 2005
------ ------ ------
Revenues................................................... $ 407 $ 451 $ 493
------ ------ ------
Expenses:
Natural gas.............................................. 61 46 30
Operation and maintenance................................ 129 164 164
Depreciation and amortization............................ 40 44 45
Taxes other than income taxes............................ 19 17 19
------ ------ ------
Total expenses........................................ 249 271 258
------ ------ ------
Operating Income........................................... $ 158 $ 180 $ 235
====== ====== ======
Throughput (in Bcf):
Natural gas sales........................................ 9 11 6
Transportation........................................... 794 859 914
Gathering................................................ 292 321 353
Elimination(1)........................................... (4) (7) (4)
------ ------ ------
Total Throughput...................................... 1,091 1,184 1,269
====== ====== ======
- ---------------
(1) Elimination of volumes both transported and sold.
2005 Compared to 2004. Our Pipelines and Field Services business segment
reported operating income of $235 million for 2005 compared to $180 million for
2004. Operating income for the pipeline business for 2005 was $165 million
compared to $129 million in 2004. The field services business recorded operating
income of $70 million for 2005 compared to $51 million in 2004. Operating
margins (revenues less natural gas costs) increased by $58 million primarily due
to increased demand for transportation resulting from basis differentials across
the system and higher demand for ancillary services ($43 million), increased
throughput and demand for services related to our core gas gathering operations
($29 million), partially offset by reductions in project-related revenues ($11
million). Additionally, operation and maintenance expenses remained flat
primarily due to a reduction in project-related expenses ($9 million), offset by
increases in materials and supplies and contracts and services ($8 million).
2004 Compared to 2003. Our Pipelines and Field Services 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
44
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).
Additionally, included in other income in 2003, 2004 and 2005 is equity
income of $-0-, $2 million and $6 million, respectively, related to a joint
venture owned by our field services business.
OTHER OPERATIONS
The following table provides summary data for our Other Operations business
segment for 2003, 2004 and 2005 (in millions):
YEAR ENDED DECEMBER 31,
------------------------
2003 2004 2005
------ ------ ------
Revenues.................................................... $ 28 $ 8 $ 19
Expenses.................................................... 53 40 37
---- ---- ----
Operating Loss.............................................. $(25) $(32) $(18)
==== ==== ====
2005 Compared to 2004. Our Other Operations business segment's operating
loss in 2005 compared to 2004 decreased $14 million primarily due to increased
overhead allocated in 2005.
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 Reliant Energy, Inc. (RRI) in 2004 as compared to 2003,
partially offset by changes in unallocated corporate costs in 2004 as compared
to 2003.
DISCONTINUED OPERATIONS
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.
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 employee termination benefits.
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, whose principal remaining asset was its ownership interest in a nuclear
generating facility, distributed $2.231 billion in cash to us. 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, was completed
on April 13, 2005. We recorded an after-tax gain (loss) of $91 million, $(133)
million and $(3) million for the years ended December 31, 2003, 2004 and 2005,
respectively, related to the operations of Texas Genco.
The consolidated financial statements report the businesses described above
as discontinued operations for all periods presented in accordance with
Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS No. 144).
For further information regarding discontinued operations, please read Note
3 to our consolidated financial statements.
45
LIQUIDITY AND CAPITAL RESOURCES
HISTORICAL CASH FLOW
The net cash provided by/used in operating, investing and financing
activities for 2003, 2004 and 2005 is as follows (in millions):
YEAR ENDED DECEMBER 31,
-----------------------
2003 2004 2005
----- ------- -----
Cash provided by (used in):
Operating activities..................................... $ 894 $ 736 $ 63
Investing activities..................................... (661) 1,466 17
Financing activities..................................... (450) (2,124) (171)
CASH PROVIDED BY OPERATING ACTIVITIES
Net cash provided by operating activities in 2005 decreased $673 million
compared to 2004 primarily due to increased tax payments of $475 million, the
majority of which related to the tax payment in the second quarter of 2005
associated with the sale of Texas Genco, decreased cash provided by Texas Genco
of $393 million, increased net accounts receivable/payable ($151 million),
increased gas storage inventory ($105 million) and increased fuel under-recovery
($154 million), primarily due to higher gas prices in 2005 as compared to 2004.
These decreases were partially offset by decreases in net regulatory
assets/liabilities ($328 million), primarily due to the termination of excess
mitigation credits effective April 29, 2005, and decreased pension contributions
of $401 million in 2005 as compared to 2004.
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 (USED IN) INVESTING ACTIVITIES
Net cash provided by investing activities decreased $1.4 billion in 2005 as
compared to 2004 primarily due to proceeds of $700 million received from the
sale of our remaining interest in Texas Genco in April 2005 compared to proceeds
of $2.947 billion received in 2004 from the sale of Texas Genco's fossil
generation assets and increased capital expenditures of $89 million, partially
offset by the purchase of the minority interest in Texas Genco in 2004 of $716
million and cash collateralization of letters of credit by Texas Genco in 2004
related to its anticipated purchase of an additional interest in the South Texas
Project in the first half of 2005 of $191 million.
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).
CASH USED IN FINANCING ACTIVITIES
In 2005, debt payments exceeded net loan proceeds by $66 million. Proceeds
from the December 2005 issuance of $1.85 billion in transition bonds were used
to repay borrowings under our credit facility and CenterPoint Houston's $1.3
billion term loan.
46
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.
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 for 2006 include the
following:
- approximately $1 billion of capital expenditures, including the
construction of a new pipeline by our Pipelines and Field Services
business segment ($343 million) and transmission project by our Electric
Transmission & Distribution business segment ($60 million);
- dividend payments on CenterPoint Energy common stock and debt service
payments; and
- long-term debt payments of $224 million, including $73 million of
transition bonds.
We expect that borrowings under our credit facilities and anticipated cash
flows from operations will be sufficient to meet our cash needs for the next
twelve months. Cash needs may also be met by issuing securities in the capital
markets.
The following table sets forth our capital expenditures for 2005 excluding
capital expenditures of $9 million related to discontinued operations, and
estimates of our capital requirements for 2006 through 2010 (in millions):
2005 2006 2007 2008 2009 2010
---- ------ ---- ---- ---- ----
Electric Transmission & Distribution............. $281 $ 336 $361 $333 $304 $301
Natural Gas Distribution......................... 249 191 253 264 251 218
Competitive Natural Gas Sales and Services....... 12 10 2 1 1 1
Pipelines and Field Services..................... 156 467 257 118 110 65
Other Operations................................. 21 20 28 19 11 9
---- ------ ---- ---- ---- ----
Total.......................................... $719 $1,024 $901 $735 $677 $594
==== ====== ==== ==== ==== ====
The following table sets forth estimates of our contractual obligations,
including payments due by period (in millions):
2011 AND
CONTRACTUAL OBLIGATIONS TOTAL 2006 2007-2008 2009-2010 THEREAFTER
- ----------------------- ------- ------ --------- --------- ----------
Transition bond debt, including current
portion(1)................................. $ 2,480 $ 73 $ 306 $ 365 $ 1,736
Other long-term debt, including current
portion.................................... 6,423 263 513 216 5,431
Interest payments -- transition bond
debt(1)(2)................................. 960 92 239 207 422
Interest payments -- other long-term
debt(2).................................... 4,861 408 774 724 2,955
Capital leases............................... 4 3 -- -- 1
Operating leases(3).......................... 85 20 32 11 22
Benefit obligations(4)....................... -- -- -- -- --
Purchase obligations(5)...................... 109 109 -- -- --
Non-trading derivative liabilities........... 78 43 20 12 3
Other commodity commitments(6)............... 1,316 858 428 7 23
------- ------ ------ ------ -------
Total contractual cash obligations......... $16,316 $1,869 $2,312 $1,542 $10,593
======= ====== ====== ====== =======
47
- ---------------
(1) Transition charges are adjusted at least annually to cover debt service on
transition bonds.
(2) We calculated estimated interest payments for long-term debt as follows: for
fixed-rate debt and term debt, we calculated interest based on the
applicable rates and payment dates; for variable-rate debt and/or non-term
debt, we used interest rates in place as of December 31, 2005; we typically
expect to settle such interest payments with cash flows from operations and
short-term borrowings.
(3) For a discussion of operating leases, please read Note 10(b) to our
consolidated financial statements.
(4) Contributions to the pension plan are not required in 2006; however, we
expect to contribute approximately $26 million to our postretirement
benefits plan in 2006 to fund a portion of our obligations in accordance
with rate orders or to fund pay-as-you-go costs associated with the plan.
(5) Represents capital commitments for material in connection with the
construction of a new pipeline by our Pipelines and Field Services business
segment. This project has been included in the table of capital expenditures
presented above.
(6) For a discussion of other commodity commitments, please read Note 10(a) to
our consolidated financial statements.
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 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 2006, the $250 million
facility, which temporarily increased to $375 million for the period from
January 2006 to June 2006, was extended to January 2007. As of December 31,
2005, CERC had $141 million of advances under its receivables facility.
Prior to CenterPoint Energy's distribution of its ownership in RRI to its
shareholders, CERC had guaranteed certain contractual obligations of what became
RRI's trading subsidiary. Under the terms of the separation agreement between
the companies, RRI agreed to extinguish all such guarantee obligations prior to
separation, but when separation occurred in September 2002, RRI had been unable
to extinguish all obligations. To secure CenterPoint Energy and CERC against
obligations under the remaining guarantees, RRI agreed to provide cash or
letters of credit for the benefit of CERC and CenterPoint Energy, and undertook
to use commercially reasonable efforts to extinguish the remaining guarantees.
Our current exposure under the remaining guarantees relates to CERC's guarantee
of the payment by RRI of demand charges related to transportation contracts with
one counterparty. The demand charges are approximately $53 million per year in
2006 through 2015, $49 million in 2016, $38 million in 2017 and $13 million in
2018. As a result of changes in market conditions, CenterPoint Energy's
potential exposure under that guarantee currently exceeds the security provided
by RRI. CenterPoint Energy has requested RRI to increase the amount of its
existing letters of credit or, in the alternative, to obtain a release of CERC's
obligations under the guarantee, and CenterPoint Energy and RRI are pursuing
alternatives. RRI continues to meet its obligations under the transportation
contracts.
Credit Facilities. In June 2005, CERC Corp. replaced its $250 million
three-year revolving credit facility with a $400 million five-year revolving
credit facility. Borrowings under this facility may be made at LIBOR plus 55
basis points, including the facility fee, based on current credit ratings. An
additional utilization fee of 10 basis points applies to borrowings whenever
more than 50% of the facility is utilized. Changes in credit ratings could lower
or raise the increment to LIBOR depending on whether ratings improved or were
lowered. CERC Corp.'s $400 million credit facility contains covenants, including
a total debt to capitalization covenant of 65% and an earnings before interest,
taxes, depreciation and amortization (EBITDA) to interest covenant. Borrowings
under CERC Corp.'s $400 million 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.
48
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 87.5 basis points based on current credit ratings. An
additional utilization fee of 12.5 basis points applies to borrowings whenever
more than 50% of the facility is utilized. Changes in credit ratings could lower
or raise the increment to LIBOR depending on whether ratings improved or were
lowered. The facility contains covenants, including a debt to 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 but excludes any litigation
related to the True-Up Order. 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
ratings. An additional utilization fee of 12.5 basis points applies to
borrowings whenever more than 50% of the facility is utilized. Changes in credit
ratings could lower or raise the increment to LIBOR depending on whether ratings
improved or were lowered. CenterPoint Houston's $200 million credit facility
contains covenants, including a debt (excluding transition bonds) to total
capitalization covenant of 68% and an EBITDA to interest covenant. Borrowings
under CenterPoint Houston's $200 million 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.
We, CenterPoint Houston and CERC Corp. are currently in compliance with the
various business and financial covenants contained in the respective credit
facilities.
As of February 28, 2006, we had the following credit facilities (in
millions):
AMOUNT UTILIZED AT
DATE EXECUTED COMPANY SIZE OF FACILITY FEBRUARY 28, 2006 TERMINATION DATE
- ------------- ------- ---------------- ------------------ ----------------
March 7, 2005 CenterPoint Energy $1,000 $96(1) March 7, 2010
March 7, 2005 CenterPoint Houston 200 4(2) March 7, 2010
June 30, 2005 CERC Corp. 400 -- June 30, 2010
- ---------------
(1) Includes $28 million of outstanding letters of credit and $68 million of
commercial paper backstopped by the credit facility.
(2) Represents $4 million of outstanding letters of credit.
The $1 billion CenterPoint Energy credit facility backstops a $1 billion
commercial paper program under which CenterPoint Energy began issuing commercial
paper in June 2005. As of December 31, 2005, $3 million of commercial paper was
outstanding. The commercial paper is rated "Not Prime" by Moody's, "A-3" by S&P
and "F3" by Fitch, Inc. (Fitch) and, as a result, we do not expect to be able to
rely on the sale of commercial paper to fund all of our short-term borrowing
requirements. We cannot assure you that these ratings, or the credit ratings set
forth below in "-- Impact on Liquidity of a Downgrade in Credit 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
49
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.
During the fourth quarter of 2005, CenterPoint Houston retired at maturity
its $1.31 billion term loan, which bore interest at LIBOR plus 975 basis points,
subject to a minimum LIBOR rate of 3 percent. It used its $1.31 billion credit
facility bearing interest at LIBOR plus 75 basis points to retire the term loan.
All amounts borrowed under the credit facility were repaid with a portion of the
proceeds of the $1.85 billion transition bonds referred to above.
Securities Registered with the SEC. At December 31, 2005, 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 $500 million principal amount of debt
securities.
Temporary Investments. On December 31, 2005, we had no temporary
investments.
Money Pool. We have a "money pool" 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. The net funding requirements of the money pool are expected to be met
with borrowings under CenterPoint Energy's revolving credit facility or the sale
of commercial paper.
Impact on Liquidity of a Downgrade in Credit Ratings. As of February 28,
2006, Moody's, S&P, and 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............................. Ba1 Stable BBB- Stable BBB- Stable
CenterPoint Houston Senior Secured
Debt (First Mortgage Bonds)...... Baa2 Stable BBB Stable A- Stable
CERC Corp. Senior Debt............. Baa3 Stable BBB Stable BBB Stable
- ---------------
(1) A "stable" outlook from Moody's indicates that Moody's does not expect to
put the rating on review for an upgrade or downgrade within 18 months from
when the outlook was assigned or last affirmed.
(2) An S&P rating outlook assesses the potential direction of a long-term credit
rating over the intermediate to longer term.
(3) A "stable" outlook from Fitch encompasses a one-to-two-year horizon as to
the likely ratings direction.
A decline in credit ratings could increase borrowing costs under our $1
billion credit facility, CenterPoint Houston's $200 million credit facility and
CERC's $400 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 could negatively impact our ability to complete capital market
transactions. Additionally, a decline in credit ratings could increase cash
collateral requirements and reduce margins of our Natural Gas Distribution and
Competitive Natural Gas Sales and Services business segments.
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. CenterPoint Houston's $200
million credit facility and CERC Corp.'s $400 million credit facility do not
contain material adverse change clauses with respect to borrowings.
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 note holders
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
50
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.
CES, a wholly owned subsidiary of CERC Corp. operating in our Competitive
Natural Gas Sales and Services business segment, provides comprehensive natural
gas sales and services primarily to commercial and industrial customers and
electric and gas utilities throughout the central and eastern United States. In
order to hedge its exposure to natural gas prices, CES uses financial
derivatives 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. We estimate
that as of December 31, 2005, unsecured credit limits extended to CES by
counterparties aggregate $128 million; however, utilized credit capacity is
significantly lower. In addition, CERC and its subsidiaries purchase natural gas
under supply agreements that contain an aggregate credit threshold of $100
million based on CERC's S&P Senior Unsecured Long-Term Debt rating of BBB.
Upgrades and downgrades from this BBB rating will increase and decrease the
aggregate credit threshold accordingly.
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, 2006, we had issued six 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 and Competitive Natural Gas
Sales and Services business segments, particularly given gas price levels
and volatility;
- 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;
- increases in interest expense in connection with debt refinancings and
borrowings under credit facilities;
- various regulatory actions;
- the ability of RRI and its subsidiaries to satisfy their obligations as
the principal customers of CenterPoint Houston and in respect of RRI's
indemnity obligations to us and our subsidiaries;
- slower customer payments and increased write-offs of receivables due to
higher gas prices;
- cash payments in connection with the exercise of contingent conversion
rights of holders of convertible debt;
- contributions to benefit plans;
- restoration costs and revenue losses resulting from natural disasters
such as hurricanes; and
- various other risks identified in "Risk Factors" in Item 1A of this
report.
Certain Contractual Limits on Our Ability to Issue Securities, Borrow Money
and Pay Dividends on Our Common Stock. CenterPoint Houston's credit facility
limits CenterPoint Houston's debt, excluding transi-
51
tion bonds, as a percentage of its total capitalization to 68 percent.
CenterPoint Houston's $200 million credit facility also contains an EBITDA to
interest covenant. CERC Corp.'s bank facility and its receivables facility limit
CERC's debt as a percentage of its total capitalization to 65 percent and
contain an EBITDA to interest covenant. Our $1 billion credit facility contains
a debt to EBITDA covenant and an EBITDA to interest covenant. Additionally, in
connection with the issuance of a certain series of general mortgage bonds,
CenterPoint Houston agreed not to issue, subject to certain exceptions,
additional first mortgage bonds.
We were a registered public utility holding company under the 1935 Act. The
1935 Act and related rules and regulations imposed a number of restrictions on
our activities and those of our subsidiaries. The Energy Act repealed the 1935
Act effective February 8, 2006, and since that date we and our subsidiaries have
no longer been subject to restrictions imposed under the 1935 Act. The Energy
Act includes PUHCA 2005 which grants to the FERC authority to require holding
companies and their subsidiaries to maintain certain books and records and make
them available for review by the FERC and state regulatory authorities in
certain circumstances. On December 8, 2005, the FERC issued rules implementing
PUHCA 2005 that will require us to notify the FERC of our status as a holding
company and to maintain certain books and records and make these available to
the FERC. The FERC continues to consider motions for rehearing or clarification
of these rules.
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 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 $332 million of recoverable electric generation-related
52
regulatory assets as of December 31, 2005. These costs are recoverable under the
provisions of the Texas electric restructuring law. Based on our analysis of the
True-Up Order, we recorded an after-tax charge to earnings in 2004 of
approximately $977 million to write-down our electric generation-related
regulatory assets to their realizable value, which was reflected as an
extraordinary loss. Based on subsequent orders received from the Texas Utility
Commission, we recorded an extraordinary gain of $30 million after-tax in the
second quarter of 2005 related to the regulatory asset. Additionally, a district
court in Travis County, Texas issued a judgment that would have the effect of
restoring approximately $650 million, plus interest, of disallowed costs.
Appeals of the district court's judgment are still pending. No amounts related
to the court's judgment have been recorded in our consolidated financial
statements.
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 at least annually
for goodwill as required by SFAS No. 142, "Goodwill and Other Intangible Assets"
(SFAS No. 142). 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 perform our goodwill impairment test at least annually and evaluate
goodwill when events or changes in circumstances indicate that the carrying
value of these assets may not be recoverable. Upon adoption of SFAS No. 142, we
initially selected January 1 as our annual goodwill impairment testing date.
Since the time we selected the January 1 date, our year-end closing and
reporting process has been truncated in order to meet the accelerated periodic
reporting requirements of the SEC, resulting in significant constraints on our
human resources at year-end and during our first fiscal quarter. Accordingly, in
order to meet the accelerated reporting deadlines and to provide adequate time
to complete the analysis each year, beginning in the third quarter of 2005, we
changed the date on which we perform our annual goodwill impairment test from
January 1 to July 1. We believe the July 1 alternative date will alleviate the
resource constraints that exist during the first quarter and allow us to utilize
additional resources in conducting the annual impairment evaluation of goodwill.
We performed the test at July 1, 2005, and determined that no impairment charge
for goodwill was required. The change is not intended to delay, accelerate or
avoid an impairment charge. We believe that this accounting change is an
alternative accounting principle that is preferable under the circumstances.
ASSET RETIREMENT OBLIGATIONS
We account for our long-lived assets under SFAS No. 143, "Accounting for
Asset Retirement Obligations" (SFAS No. 143), and Financial Accounting Standards
Board Interpretation No. 47, "Accounting for Conditional Asset Retirement
Obligations -- An Interpretation of SFAS No. 143" (FIN 47). SFAS No. 143 and FIN
47 require that an asset retirement obligation be recorded at fair value in the
period in which it is incurred if a reasonable estimate of fair value can be
made. In the same period, the associated asset retirement costs are capitalized
as part of the carrying amount of the related long-lived asset. Rate-regulated
entities may recognize regulatory assets or liabilities as a result of timing
differences between the recognition of costs as recorded in accordance with SFAS
No. 143 and FIN 47, and costs recovered through the ratemaking process.
53
We estimate the fair value of asset retirement obligations by calculating
the discounted cash flows that are dependent upon the following components:
- Inflation adjustment -- The estimated cash flows are adjusted for
inflation estimates for labor, equipment, materials, and other disposal
costs;
- Discount rate -- The estimated cash flows include contingency factors
that were used as a proxy for the market risk premium; and
- Third party markup adjustments -- Internal labor costs included in the
cash flow calculation were adjusted for costs that a third party would
incur in performing the tasks necessary to retire the asset.
Changes in these factors could materially affect the obligation recorded to
reflect the ultimate cost associated with retiring the assets under SFAS No. 143
and FIN 47. For example, if the inflation adjustment increased 25 basis points,
this would increase the balance for asset retirement obligations by
approximately 3.0%. Similarly, an increase in the discount rate by 25 basis
points would decrease asset retirement obligations by approximately the same
percentage. At December 31, 2005, our estimated cost of retiring these assets is
approximately $76 million.
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. 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 Plan" for further
discussion.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 2(n) to the consolidated financial statements for a discussion of
new accounting pronouncements that affect us.
OTHER SIGNIFICANT MATTERS
Pension Plan. As discussed in Note 2(o) 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, 2005, the projected benefit obligation exceeded
the market value of plan assets by $20 million;
54
however, the market value of the plan assets exceeded the accumulated benefit
obligation by $41 million. Changes in interest rates and the market values of
the securities held by the plan during 2006 could materially, positively or
negatively, change our funded status and affect the level of pension expense and
required contributions in 2007 and beyond.
Although we have not been required to make contributions to our pension
plan in 2004 or 2005, we have made voluntary contributions of $476 million and
$75 million in 2004 and 2005, 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 $90 million, $80 million and $30 million for 2003, 2004
and 2005, respectively. In addition, included in the costs for 2003, 2004 and
2005 are $17 million, $11 million and less than $1 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 $8 million, $6 million and $6 million in 2003, 2004
and 2005, respectively.
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, 2005, the expected long-term rate of return on plan
assets was 8.5%, which is unchanged from the rate assumed as of December 31,
2004. 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, 2005, the projected benefit obligation was calculated
assuming a discount rate of 5.70%, which is a 0.05% decline from the 5.75%
discount rate assumed in 2004. 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.
Pension expense for 2006, including the benefit restoration plan, is
estimated to be $38 million based on an expected return on plan assets of 8.5%
and a discount rate of 5.70% as of December 31, 2005. If the expected return
assumption were lowered by 0.5% (from 8.5% to 8.0%), 2006 pension expense would
increase by approximately $8 million.
Currently, pension plan assets (excluding the unfunded benefit restoration
plan) exceed the accumulated benefit obligation by $41 million. However, if the
discount rate were lowered by 0.5% (from 5.70% to 5.20%), the assumption change
would increase our projected benefit obligation, accumulated benefit obligation
and 2006 pension expense by approximately $131 million, $120 million and $11
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, 2005 of $655 million to a pension liability of $79 million
and would result in a charge to comprehensive income in 2005 of $477 million,
net of tax.
55
For the benefit restoration plan, if the discount rate were lowered by 0.5%
(from 5.70% to 5.20%), the assumption change would increase our projected
benefit obligation, accumulated benefit obligation and 2006 pension expense by
approximately $4 million, $4 million, and less than $1 million, respectively. In
addition, the assumption change would result in a charge to comprehensive income
of approximately $3 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
IMPACT OF CHANGES IN INTEREST RATES AND ENERGY COMMODITY PRICES
We are exposed to various market risks. These risks arise from transactions
entered into in the normal course of business and are inherent in our
consolidated financial statements. Most of the revenues and income from our
business activities are impacted by market risks. Categories of market risk
include exposure to commodity prices through non-trading activities, interest
rates and equity prices. A description of each market risk is set forth below:
- Commodity price risk results from exposures to changes in spot prices,
forward prices and price volatilities of commodities, such as natural gas
and other energy commodities risk.
- Interest rate risk primarily results from exposures to changes in the
level of borrowings and changes in interest rates.
- Equity price risk results from exposures to changes in prices of
individual equity securities.
Management has established comprehensive risk management policies to
monitor and manage these market risks. We manage these risk exposures through
the implementation of our risk management policies and framework. We manage our
exposures through the use of derivative financial instruments and derivative
commodity instrument contracts. During the normal course of business, we review
our hedging strategies and determine the hedging approach we deem appropriate
based upon the circumstances of each situation.
Derivative instruments such as futures, forward contracts, swaps and
options derive their value from underlying assets, indices, reference rates or a
combination of these factors. These derivative instruments include negotiated
contracts, which are referred to as over-the-counter derivatives, and
instruments that are listed and traded on an exchange.
Derivative transactions are entered into in our non-trading operations to
manage and hedge certain exposures, such as exposure to changes in natural gas
prices. We believe that the associated market risk of these instruments can best
be understood relative to the underlying assets or risk being hedged.
INTEREST RATE RISK
We have outstanding long-term debt, bank loans, mandatory redeemable
preferred securities of a subsidiary trust holding solely our junior
subordinated debentures (trust preferred securities), some lease obligations and
our obligations under our 2.0% Zero-Premium Exchangeable Subordinated Notes due
2029 (ZENS) that subject us to the risk of loss associated with movements in
market interest rates. In 2003, we had interest rate swaps in place in order to
hedge portions of our floating-rate debt.
Our floating-rate obligations aggregated $1.5 billion and $3 million at
December 31, 2004 and 2005, respectively. If the floating interest rates were to
increase by 10% from December 31, 2005 rates, our combined interest expense
would not materially change.
At December 31, 2004 and 2005, we had outstanding fixed-rate debt
(excluding indexed debt securities) and trust preferred securities aggregating
$7.4 billion and $8.8 billion, respectively, in principal amount and having a
fair value of $8.1 billion and $9.3 billion, respectively. These instruments are
fixed-rate and, therefore, do not expose us to the risk of loss in earnings due
to changes in market interest rates (please read Note 8 to our consolidated
financial statements). However, the fair value of these instruments would
increase
56
by approximately $400 million if interest rates were to decline by 10% from
their levels at December 31, 2005. In general, such an increase in fair value
would impact earnings and cash flows only if we were to reacquire all or a
portion of these instruments in the open market prior to their maturity.
As discussed in Note 6 to our consolidated financial statements, upon
adoption of SFAS No. 133 effective January 1, 2001, the ZENS obligation was
bifurcated into a debt component and a derivative component. The debt component
of $109 million at December 31, 2005 is a fixed-rate obligation and, therefore,
does not expose us to the risk of loss in earnings due to changes in market
interest rates. However, the fair value of the debt component would increase by
approximately $17 million if interest rates were to decline by 10% from levels
at December 31, 2005. Changes in the fair value of the derivative component, a
$292 million recorded liability at December 31, 2005, are recorded in our
Statements of Consolidated Operations and, therefore, we are exposed to changes
in the fair value of the derivative component as a result of changes in the
underlying risk-free interest rate. If the risk-free interest rate were to
increase by 10% from December 31, 2005 levels, the fair value of the derivative
component liability would increase by approximately $5 million, which would be
recorded as an unrealized loss in our Statements of Consolidated Operations.
EQUITY MARKET VALUE RISK
We are exposed to equity market value risk through our ownership of 21.6
million shares of TW Common, which we hold to facilitate our ability to meet our
obligations under the ZENS. Please read Note 6 to our consolidated financial
statements for a discussion of the effect of adoption of SFAS No. 133 on our
ZENS obligation and our historical accounting treatment of our ZENS obligation.
A decrease of 10% from the December 31, 2005 market value of TW Common would
result in a net loss of approximately $4 million, which would be recorded as an
unrealized loss in our Statements of Consolidated Operations.
COMMODITY PRICE RISK FROM NON-TRADING ACTIVITIES
To reduce our commodity price risk from market fluctuations in the revenues
derived from the sale of natural gas and related transportation, we enter into
forward contracts, swaps and options (Non-Trading Energy Derivatives) in order
to hedge some expected purchases of natural gas and sales of natural gas (a
portion of which are firm commitments at the inception of the hedge).
Non-Trading Energy Derivatives are also utilized to fix the price of future
operational gas requirements.
We use derivative instruments as economic hedges to offset the commodity
exposure inherent in our businesses. The stand-alone commodity risk created by
these instruments, without regard to the offsetting effect of the underlying
exposure these instruments are intended to hedge, is described below. We measure
the commodity risk of our Non-Trading Energy Derivatives using a sensitivity
analysis. The sensitivity analysis performed on our Non-Trading Energy
Derivatives measures the potential loss in earnings based on a hypothetical 10%
movement in energy prices. A decrease of 10% in the market prices of energy
commodities from their December 31, 2004 levels would have decreased the fair
value of our Non-Trading Energy Derivatives by $46 million. At December 31,
2005, the recorded fair value of our Non-Trading Energy Derivatives was a net
asset of $157 million. A decrease of 10% in the market prices of energy
commodities from their December 31, 2005 levels would have decreased the fair
value of our Non-Trading Energy Derivatives by $85 million.
The above analysis of the Non-Trading Energy Derivatives utilized for
hedging purposes does not include the favorable impact that the same
hypothetical price movement would have on our physical purchases and sales of
natural gas to which the hedges relate. Furthermore, the Non-Trading Energy
Derivative portfolio is managed to complement the physical transaction
portfolio, reducing overall risks within limits. Therefore, the adverse impact
to the fair value of the portfolio of Non-Trading Energy Derivatives held for
hedging purposes
57
associated with the hypothetical changes in commodity prices referenced above
would be offset by a favorable impact on the underlying hedged physical
transactions, assuming:
- the Non-Trading Energy Derivatives are not closed out in advance of their
expected term;
- the Non-Trading Energy Derivatives continue to function effectively as
hedges of the underlying risk; and
- as applicable, anticipated underlying transactions settle as expected.
If any of the above-mentioned assumptions ceases to be true, a loss on the
derivative instruments may occur, or the options might be worthless as
determined by the prevailing market value on their termination or maturity date,
whichever comes first. Non-Trading Energy Derivatives designated and effective
as hedges, may still have some percentage which is not effective. The change in
value of the Non-Trading Energy Derivatives that represents the ineffective
component of the hedges is recorded in our results of operations.
We have established a Risk Oversight Committee composed of corporate and
business segment officers, that oversees our commodity price and credit risk
activities, including our trading, marketing, risk management services and
hedging activities. The committee's duties are to establish commodity risk
policies, allocate risk capital within limits established by our board of
directors, approve trading of new products and commodities, monitor risk
positions and ensure compliance with our risk management policies and procedures
and trading limits established by our board of directors.
Our 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.
58
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, 2004 and 2005,
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, 2005. 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, 2004 and 2005, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2005 in conformity with accounting principles generally accepted in the
United States of America.
As discussed in Note 2 to the consolidated financial statements, the
Company adopted Financial Accounting Standards Board Interpretation No. 47,
"Accounting for Conditional Asset Retirement Obligations," effective December
31, 2005.
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, 2005,
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, 2006 expressed an unqualified opinion on
management's assessment of the effectiveness of the Company's internal control
over financial reporting and an unqualified opinion on the effectiveness of the
Company's internal control over financial reporting.
DELOITTE & TOUCHE LLP
Houston, Texas
March 15, 2006
59
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
YEAR ENDED DECEMBER 31,
---------------------------
2003 2004 2005
------- ------- -------
(IN MILLIONS,
EXCEPT PER SHARE AMOUNTS)
REVENUES.................................................... $7,790 $7,999 $9,722
------ ------ ------
EXPENSES:
Natural gas............................................... 4,298 5,013 6,509
Operation and maintenance................................. 1,334 1,277 1,358
Depreciation and amortization............................. 466 490 541
Taxes other than income taxes............................. 337 355 375
------ ------ ------
Total.................................................. 6,435 7,135 8,783
------ ------ ------
OPERATING INCOME............................................ 1,355 864 939
------ ------ ------
OTHER INCOME (EXPENSE):
Gain (loss) on Time Warner investment..................... 106 31 (44)
Gain (loss) on indexed debt securities.................... (96) (20) 49
Interest and other finance charges........................ (741) (777) (710)
Return on true-up balance................................. -- 226 121
Other, net................................................ (10) 20 23
------ ------ ------
Total.................................................. (741) (520) (561)
------ ------ ------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM........................................ 614 344 378
Income Tax Expense.......................................... (205) (139) (153)
------ ------ ------
INCOME FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY
ITEM...................................................... 409 205 225
DISCONTINUED OPERATIONS:
Income from Texas Genco, net of tax....................... 139 294 11
Minority interest on income from Texas Genco.............. (48) (61) --
Loss on disposal of Texas Genco, net of tax............... -- (366) (14)
Loss from Other Operations, net of tax.................... (3) -- --
Loss on disposal of Other Operations, net of tax.......... (13) -- --
------ ------ ------
Total.................................................. 75 (133) (3)
------ ------ ------
INCOME BEFORE EXTRAORDINARY ITEM............................ 484 72 222
Extraordinary Item, net of tax.............................. -- (977) 30
------ ------ ------
NET INCOME (LOSS)........................................... $ 484 $ (905) $ 252
====== ====== ======
BASIC EARNINGS (LOSS) PER SHARE:
Income From Continuing Operations Before Extraordinary
Item...................................................... $ 1.35 $ 0.67 $ 0.72
Discontinued Operations, net of tax......................... 0.24 (0.43) (0.01)
Extraordinary Item, net of tax.............................. -- (3.18) 0.10
------ ------ ------
Net Income (Loss)......................................... $ 1.59 $(2.94) $ 0.81
====== ====== ======
DILUTED EARNINGS (LOSS) PER SHARE:
Income From Continuing Operations Before Extraordinary
Item...................................................... $ 1.24 $ 0.61 $ 0.67
Discontinued Operations, net of tax......................... 0.22 (0.37) (0.01)
Extraordinary Item, net of tax.............................. -- (2.72) 0.09
------ ------ ------
Net Income (Loss)......................................... $ 1.46 $(2.48) $ 0.75
====== ====== ======
See Notes to the Company's Consolidated Financial Statements
60
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31,
-------------------------
2003 2004 2005
------ ------- ------
(IN MILLIONS)
Net income (loss)........................................... $484 $(905) $252
---- ----- ----
Other comprehensive income, net of tax:
Minimum pension liability adjustment (net of tax of $25,
$197 and ($5))......................................... 47 367 (9)
Net deferred gain from cash flow hedges (net of tax of
$15, $31 and $9)....................................... 22 59 17
Reclassification of deferred loss (gain) from cash flow
hedges realized in net income (net of tax of $4, ($3)
and $6)................................................ 9 (7) 11
Reclassification of deferred gain from de-designation of
cash flow hedges to over/under recovery of gas cost
(net of tax of ($37)).................................. -- (68) --
Other comprehensive income (loss) from discontinued
operations (net of tax of $-0-, ($2) and $2)........... 1 (4) 3
---- ----- ----
Other comprehensive income.................................. 79 347 22
---- ----- ----
Comprehensive income (loss)................................. $563 $(558) $274
==== ===== ====
See Notes to the Company's Consolidated Financial Statements
61
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
2004 2005
------------ ------------
(IN MILLIONS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 165 $ 74
Investment in Time Warner common stock.................... 421 377
Accounts receivable, net.................................. 674 1,098
Accrued unbilled revenues................................. 576 608
Inventory................................................. 254 382
Non-trading derivative assets............................. 50 131
Taxes receivable.......................................... -- 53
Current assets of discontinued operations................. 514 --
Prepaid expense and other current assets.................. 117 168
------- -------
Total current assets................................... 2,771 2,891
------- -------
PROPERTY, PLANT AND EQUIPMENT, NET.......................... 8,186 8,492
------- -------
OTHER ASSETS:
Goodwill.................................................. 1,741 1,709
Other intangibles, net.................................... 58 56
Regulatory assets......................................... 3,350 2,955
Non-trading derivative assets............................. 18 104
Non-current assets of discontinued operations............. 1,051 --
Other..................................................... 921 909
------- -------
Total other assets..................................... 7,139 5,733
------- -------
TOTAL ASSETS......................................... $18,096 $17,116
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt......................... $ 1,836 $ 339
Indexed debt securities derivative........................ 342 292
Accounts payable.......................................... 802 1,161
Taxes accrued............................................. 609 167
Interest accrued.......................................... 151 122
Non-trading derivative liabilities........................ 26 43
Regulatory liabilities.................................... 225 --
Accumulated deferred income taxes, net.................... 261 385
Current liabilities of discontinued operations............ 449 --
Other..................................................... 420 505
------- -------
Total current liabilities.............................. 5,121 3,014
------- -------
OTHER LIABILITIES:
Accumulated deferred income taxes, net.................... 2,415 2,474
Unamortized investment tax credits........................ 54 46
Non-trading derivative liabilities........................ 6 35
Benefit obligations....................................... 440 475
Regulatory liabilities.................................... 1,082 728
Non-current liabilities of discontinued operations........ 420 --
Other..................................................... 259 480
------- -------
Total other liabilities................................ 4,676 4,238
------- -------
LONG-TERM DEBT.............................................. 7,193 8,568
------- -------
COMMITMENTS AND CONTINGENCIES (NOTE 10)
SHAREHOLDERS' EQUITY........................................ 1,106 1,296
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............. $18,096 $17,116
======= =======
See Notes to the Company's Consolidated Financial Statements
62
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
YEAR ENDED DECEMBER 31,
---------------------------
2003 2004 2005
------- ------- -------
(IN MILLIONS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 484 $ (905) $ 252
Discontinued operations, net of tax....................... (75) 133 3
Extraordinary item, net of tax............................ -- 977 (30)
------- ------- -------
Income from continuing operations......................... 409 205 225
Adjustments to reconcile income from continuing operations
to net cash provided by operating activities:
Depreciation and amortization........................... 466 490 541
Deferred income taxes................................... 509 265 232
Amortization of deferred financing costs................ 141 92 77
Investment tax credit................................... (7) (7) (8)
Unrealized loss (gain) on Time Warner investment........ (106) (32) 44
Unrealized loss (gain) on indexed debt securities....... 96 20 (49)
Changes in other assets and liabilities:
Accounts receivable and unbilled revenues, net........ (110) (202) (456)
Inventory............................................. (47) (10) (115)
Taxes receivable...................................... (161) 35 (53)
Accounts payable...................................... 77 218 321
Fuel cost over (under) recovery/surcharge............. 25 25 (129)
Interest and taxes accrued............................ 37 81 (471)
Net regulatory assets and liabilities................. (773) (520) (192)
Clawback payment from RRI............................. -- 177 --
Non-trading derivatives, net.......................... 3 (40) (12)
Pension contribution.................................. (23) (476) (75)
Other current assets.................................. (37) (18) (40)
Other current liabilities............................. (24) (26) 146
Other assets.......................................... 29 80 30
Other liabilities..................................... 107 4 67
Other, net.............................................. 39 20 18
------- ------- -------
Net cash provided by operating activities of
continuing operations............................... 650 381 101
Net cash provided by (used in) operating activities
of discontinued operations.......................... 244 355 (38)
------- ------- -------
Net cash provided by operating activities........... 894 736 63
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (659) (604) (693)
Proceeds from sale of Texas Genco, including cash
retained................................................ -- 2,947 700
Purchase of minority interest of Texas Genco.............. -- (326) (383)
Decrease (increase) in restricted cash for purchase of
minority interest of Texas Genco........................ -- (390) 383
Funds held for purchase of additional shares in South
Texas Project........................................... -- (191) --
Increase in cash of Texas Genco........................... -- -- 24
Other, net................................................ (2) 30 (14)
------- ------- -------
Net cash provided by (used in) investing
activities.......................................... (661) 1,466 17
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term borrowings, net......... (284) (63) 75
Long-term revolving credit facility, net.................. (2,400) (1,206) (236)
Proceeds from long-term debt.............................. 3,797 229 3,161
Payments of long-term debt................................ (1,211) (943) (3,045)
Debt issuance costs....................................... (241) (15) (21)
Payment of common stock dividends......................... (122) (123) (124)
Payment of common stock dividends by subsidiary........... (15) (15) --
Proceeds from issuance of common stock, net............... 9 12 17
Other, net................................................ 17 -- 2
------- ------- -------
Net cash used in financing activities............... (450) (2,124) (171)
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (217) 78 (91)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. 304 87 165
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 87 $ 165 $ 74
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Payments:
Interest, net of capitalized interest................... $ 763 $ 759 $ 667
Income taxes (refunds), net............................. (198) (124) 351
Non-cash transactions:
Increase in accounts payable related to capital
expenditures........................................... -- -- 35
See Notes to the Company's Consolidated Financial Statements
63
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
2003 2004 2005
---------------- ---------------- ----------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------- ------ ------- ------ -------
(IN MILLIONS 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.................... 305 3 306 3 308 3
Issuances related to benefit and investment
plans...................................... 1 -- 2 -- 2 --
--- ------- --- ------- --- -------
Balance, end of year.......................... 306 3 308 3 310 3
--- ------- --- ------- --- -------
ADDITIONAL PAID-IN-CAPITAL
Balance, beginning of year.................... -- 3,046 -- 2,868 -- 2,891
Issuances related to benefit and investment
plans...................................... -- (32) -- 23 -- 40
Distribution of Texas Genco................... -- (146) -- -- -- --
--- ------- --- ------- --- -------
Balance, end of year.......................... -- 2,868 -- 2,891 -- 2,931
--- ------- --- ------- --- -------
UNEARNED ESOP STOCK
Balance, beginning of year.................... (5) (78) (1) (3) -- --
Issuances related to benefit plan............. 4 75 1 3 -- --
--- ------- --- ------- --- -------
Balance, end of year.......................... (1) (3) -- -- -- --
--- ------- --- ------- --- -------
ACCUMULATED DEFICIT
Balance, beginning of year.................... (1,062) (700) (1,728)
Net income (loss)............................. 484 (905) 252
Common stock dividends -- $0.40 per share in
2003, 2004 and 2005........................ (122) (123) (124)
------- ------- -------
Balance, end of year.......................... (700) (1,728) (1,600)
------- ------- -------
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance, end of year:
Minimum pension liability adjustment.......... (373) (6) (15)
Net deferred loss from cash flow hedges....... (35) (51) (23)
Other comprehensive loss from discontinued
operations................................. -- (3) --
------- ------- -------
Total accumulated other comprehensive loss,
end of year................................ (408) (60) (38)
------- ------- -------
Total Shareholders' Equity................. $ 1,760 $ 1,106 $ 1,296
======= ======= =======
See Notes to the Company's Consolidated Financial Statements
64
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BACKGROUND AND BASIS OF PRESENTATION
(a) BACKGROUND
CenterPoint Energy, Inc. 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 Texas
Electric Choice Plan (Texas electric restructuring law).
CenterPoint Energy was a registered public utility holding company under
the Public Utility Holding Company Act of 1935, as amended (the 1935 Act). The
1935 Act and related rules and regulations imposed a number of restrictions on
the activities of the Company and its subsidiaries. The Energy Policy Act of
2005 (Energy Act) repealed the 1935 Act effective February 8, 2006, and since
that date the Company and its subsidiaries have no longer been subject to
restrictions imposed under the 1935 Act. The Energy Act includes a new Public
Utility Holding Company Act of 2005 (PUHCA 2005), which grants to the Federal
Energy Regulatory Commission (FERC) authority to require holding companies and
their subsidiaries to maintain certain books and records and make them available
for review by the FERC and state regulatory authorities in certain
circumstances. On December 8, 2005, the FERC issued rules implementing PUHCA
2005 that will require the Company to notify the FERC of its status as a holding
company and to maintain certain books and records and make these available to
the FERC. The FERC continues to consider motions for rehearing or clarification
of these rules.
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. As of
December 31, 2005, 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 two
unincorporated divisions: Minnesota Gas and Southern Gas Operations.
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
primarily to commercial and industrial customers and electric and gas
utilities.
(b) BASIS OF PRESENTATION
In 2003, the Company sold all of its remaining Latin America operations.
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 Company sold the fossil generation assets of Texas Genco Holdings, Inc.
(Texas Genco) in December 2004 and completed the sale of Texas Genco, which had
continued to own an interest in a nuclear generating facility, in April 2005.
The consolidated financial statements report the businesses described above
as discontinued operations for all periods presented in accordance with
Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS No. 144).
For a description of the Company's reportable business segments, see Note
14.
65
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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 2005 presentation of
financial statements. These reclassifications relate to a new reportable
business segment discussed in Note 14 and 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. Such investments were $13 million and $15
million as of December 31, 2004 and 2005, respectively. 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
Field Services business segment records revenues as transportation services are
provided.
66
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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:
WEIGHTED AVERAGE DECEMBER 31,
USEFUL LIVES -----------------
(YEARS) 2004 2005
---------------- ------- -------
(IN MILLIONS)
Electric transmission & distribution.............. 27 $ 6,245 $ 6,463
Natural gas distribution.......................... 30 2,475 2,740
Competitive natural gas sales and services........ 38 19 27
Pipelines and field services...................... 52 1,767 1,887
Other property.................................... 29 457 441
------- -------
Total........................................ 10,963 11,558
------- -------
Accumulated depreciation and amortization:
Electric transmission & distribution............ (2,204) (2,386)
Natural gas distribution........................ (285) (391)
Competitive natural gas sales and services...... (6) (5)
Pipelines and field services.................... (157) (167)
Other property.................................. (125) (117)
------- -------
Total accumulated depreciation and
amortization............................... (2,777) (3,066)
------- -------
Property, plant and equipment, net......... $ 8,186 $ 8,492
======= =======
The components of the Company's other intangible assets consist of the
following:
DECEMBER 31, 2004 DECEMBER 31, 2005
----------------------- -----------------------
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
-------- ------------ -------- ------------
(IN MILLIONS)
Land Use Rights............................ $55 $(12) $55 $(14)
Other...................................... 21 (6) 22 (7)
--- ---- --- ----
Total.................................... $76 $(18) $77 $(21)
=== ==== === ====
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, 2005 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 27 to 75 years for land
rights and 10 to 56 years for other intangibles.
67
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Amortization expense for other intangibles for 2003, 2004 and 2005 was $2
million in each year. Estimated amortization expense for the five succeeding
fiscal years is as follows (in millions):
2006........................................................ $ 3
2007........................................................ 3
2008........................................................ 3
2009........................................................ 2
2010........................................................ 2
---
Total..................................................... $13
===
Goodwill by reportable business segment is as follows (in millions):
COMPETITIVE
NATURAL GAS PIPELINES
NATURAL GAS SALES AND AND FIELD OTHER
DISTRIBUTION SERVICES SERVICES OPERATIONS TOTAL
------------ ----------- --------- ---------- ------
Balance as of December 31, 2004.......... $746 $339 $601 $ 55 $1,741
Goodwill acquired during year............ -- -- 3 -- 3
Adjustment(1)............................ -- -- -- (35) (35)
---- ---- ---- ---- ------
Balance as of December 31, 2005.......... $746 $339 $604 $ 20 $1,709
==== ==== ==== ==== ======
- ---------------
(1) In December 2005, the Company determined that $35 million of deferred tax
liabilities originally established in connection with an acquisition were no
longer required. In accordance with Emerging Issues Task Force (EITF) Issue
No. 93-7, "Uncertainties Related to Income Taxes in a Purchase Business
Combination," the adjustment was applied to decrease the remaining goodwill
attributable to that acquisition.
The Company performs its goodwill impairment test at least annually and
evaluates goodwill when events or changes in circumstances indicate that the
carrying value of these assets may not be recoverable. The impairment evaluation
for goodwill is performed by using a two-step process. In the first step, the
fair value of each reporting unit is compared with the carrying amount of the
reporting unit, including goodwill. The estimated fair value of the reporting
unit is generally determined on the basis of discounted future cash flows. If
the estimated fair value of the reporting unit is less than the carrying amount
of the reporting unit, then a second step must be completed in order to
determine the amount of the goodwill impairment that should be recorded. In the
second step, the implied fair value of the reporting unit's goodwill is
determined by allocating the reporting unit's fair value to all of its assets
and liabilities other than goodwill (including any unrecognized intangible
assets) in a manner similar to a purchase price allocation. The resulting
implied fair value of the goodwill that results from the application of this
second step is then compared to the carrying amount of the goodwill and an
impairment charge is recorded for the difference.
Upon adoption of SFAS No. 142, "Goodwill and Other Intangible Assets," the
Company initially selected January 1 as its annual goodwill impairment testing
date. Since the time the Company selected the January 1 date, the Company's
year-end closing and reporting process has been truncated in order to meet the
accelerated reporting requirements of the Securities and Exchange Commission
(SEC), resulting in significant constraints on the Company's human resources at
year-end and during its first fiscal quarter. Accordingly, in order to meet the
accelerated reporting deadlines and to provide adequate time to complete the
analysis each year, beginning in the third quarter of 2005, the Company changed
the date on which it performs its annual goodwill impairment test from January 1
to July 1. The Company believes the July 1 alternative date will alleviate the
resource constraints that exist during the first quarter and allow it to utilize
additional resources in conducting the annual impairment evaluation of goodwill.
The Company performed the
68
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
test at July 1, 2005, and determined that no impairment charge for goodwill was
required. The change is not intended to delay, accelerate or avoid an impairment
charge. The Company believes that this accounting change is an alternative
accounting principle that is preferable under the circumstances.
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.
(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 Natural Gas Distribution business segment and to some of the accounts of the
Pipelines and Field Services business segment.
The following is a list of regulatory assets/liabilities reflected on the
Company's Consolidated Balance Sheets as of December 31, 2004 and 2005:
DECEMBER 31,
---------------
2004 2005
------ ------
(IN MILLIONS)
Recoverable electric generation-related regulatory
assets(1)................................................. $1,946 $ 332
Securitized regulatory asset................................ 647 2,420
Unamortized loss on reacquired debt......................... 80 91
Other long-term regulatory assets/liabilities............... 47 46
------ ------
Subtotal.................................................. 2,720 2,889
Estimated removal costs..................................... (677) (662)
------ ------
Total..................................................... $2,043 $2,227
====== ======
- ---------------
(1) Excludes $147 million and $248 million of allowed equity return on the
true-up balance as of December 31, 2004 and 2005, respectively. See Note
4(a).
Pursuant to a financing order issued by the Texas Utility Commission in
March 2005 and affirmed in all respects in August 2005 by the same Travis County
District Court considering the appeal of the True-Up Order, in December 2005 a
subsidiary of CenterPoint Houston issued $1.85 billion in transition bonds with
interest rates ranging from 4.84 percent to 5.30 percent and final maturity
dates ranging from February 2011 to August 2020. Through issuance of the
transition bonds, CenterPoint Houston recovered approximately $1.7 billion of
the true-up balance determined in the True-Up Order plus interest through the
date on which the bonds were issued.
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 ($977 million after-tax) as an
extraordinary loss in response to the Texas Utility Commission's order on
CenterPoint Houston's final true-up application. Based on subsequent orders
received from the Texas Utility Commission, the Company recorded an
extraordinary gain of $47 million ($30 million after-tax) in the second quarter
of 2005 related to these regulatory assets. For further discussion of regulatory
assets, see Note 4.
69
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's rate-regulated businesses recognize removal costs as a
component of depreciation expense in accordance with regulatory treatment. As of
December 31, 2004 and 2005, these removal costs of $677 million and $662
million, respectively, are classified as regulatory liabilities in the
Consolidated Balance Sheets. A portion of the amount of removal costs that
relate to asset retirement obligations have been reclassified from a regulatory
liability to an asset retirement liability, which is included in other
liabilities in the Consolidated Balance Sheets, in connection with the Company's
adoption of Financial Accounting Standards Board (FASB) Interpretation No. (FIN)
47, "Accounting for Conditional Asset Retirement Obligations" (FIN 47) as
further discussed in Note 2(n).
(f) DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation is computed using the straight-line method based on economic
lives or a regulatory-mandated recovery period. 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 amortization expense for
2003, 2004 and 2005 (in millions):
2003 2004 2005
---- ---- ----
Depreciation expense........................................ $403 $415 $432
Amortization expense........................................ 63 75 109
---- ---- ----
Total depreciation and amortization expense............... $466 $490 $541
==== ==== ====
(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 2003, 2004 and 2005, the Company capitalized interest and
AFUDC of $4 million each year.
(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 significant income tax temporary differences in accordance
with SFAS No. 109, "Accounting for Income Taxes." Investment tax credits were
deferred and are being amortized over the estimated lives of the related
property. Management evaluates uncertain tax positions and accrues for those
which management believes are probable of an unfavorable outcome. For additional
information regarding income taxes, see Note 9.
(i) ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Accounts receivable are net of an allowance for doubtful accounts of $30
million and $43 million at December 31, 2004 and 2005, respectively. The
provision for doubtful accounts in the Company's Statements of Consolidated
Operations for 2003, 2004 and 2005 was $24 million, $27 million and $40 million,
respectively.
70
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 2004 and 2005, CERC had $181 million and $141 million of
advances, respectively, under its 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. These
transactions were 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. The
subordinated notes owned by CERC are pledged to a gas supplier to secure
obligations incurred in connection with the purchase of gas by CERC and totaled
approximately $433 million as of December 31, 2005.
In January 2006, CERC's $250 million receivables facility, which was
temporarily increased to $375 million for the period from January 2006 to June
2006 to provide additional liquidity to CERC during the peak heating season of
2006, was extended to January 2007.
Advances under the receivables facility averaged $100 million, $190 million
and $166 million in 2003, 2004 and 2005, respectively. Sales of receivables were
approximately $1.2 billion, $2.4 billion and $2.0 billion in 2003, 2004 and
2005, respectively.
(j) INVENTORY
Inventory consists principally of materials and supplies and natural gas.
Materials and supplies are valued at the lower of average cost or market.
Inventories used in the retail natural gas distribution operations are also
primarily valued at the lower of average cost or market.
DECEMBER 31,
-------------
2004 2005
----- -----
(IN MILLIONS)
Materials and supplies...................................... $ 78 $ 88
Natural gas................................................. 176 294
---- ----
Total inventory........................................... $254 $382
==== ====
(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, 2004, Texas Genco held debt and equity securities in its
nuclear decommissioning trust, which was reported at its fair value of $216
million in the Company's Consolidated Balance Sheets in non-current assets of
discontinued operations. Any unrealized losses or gains were 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, 2004 and 2005, 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.
71
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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 and December 2005, the Company was required to
establish restricted cash accounts to collateralize the bonds that were issued
in these financing transactions. 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 December 2005 securitization financing, see Notes 4(a) and 8(a).
(n) NEW ACCOUNTING PRONOUNCEMENTS
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3" (SFAS
No. 154). SFAS No. 154 provides guidance on the accounting for and reporting of
accounting changes and error corrections. It establishes, unless impracticable,
retrospective application as the required method for reporting a change in
accounting principle in the absence of explicit transition requirements specific
to the newly adopted accounting principle. The correction of an error in
previously issued financial statements is not an accounting change and must be
reported as a prior-period adjustment by restating previously issued financial
statements. SFAS No. 154 was effective for accounting changes and corrections of
errors made in fiscal years beginning after December 15, 2005.
In March 2005, the FASB issued FIN 47. FIN 47 clarifies that an entity must
record a liability for a "conditional" asset retirement obligation if the fair
value of the obligation can be reasonably estimated. The Company has identified
conditional asset retirement obligations in the natural gas distribution segment
that exist due to requirements of the U.S. Department of Transportation to cap
and purge certain mains upon retirement. Also, the Company identified
conditional asset retirement obligations for treated utility poles and for
transformers contaminated by polychlorinated biphenyls. The fair value of these
obligations is recorded as a liability on a discounted basis with a
corresponding increase to the related asset. Over time, the liabilities are
accreted for the change in the present value and the initial capitalized costs
are depreciated over the useful lives of the related assets. The adoption of FIN
47, effective December 31, 2005, resulted in the recognition of an asset
retirement obligation liability of $76 million, an increase in net property,
plant and equipment of $37 million and a $39 million increase in net regulatory
assets. The Company's rate-regulated businesses have previously recognized
removal costs as a component of depreciation expense in accordance with
regulatory treatment, and these costs have been classified as a regulatory
liability. Upon adoption of FIN 47, the portion of the removal costs that
relates to this asset retirement obligation has been reclassified from a
regulatory liability to an asset retirement liability, which is included in
other liabilities in the Consolidated Balance Sheets.
The pro forma effect of applying this guidance in the prior periods would
have resulted in an asset retirement obligation of approximately $67 million and
$72 million as of January 1, 2004 and December 31, 2004, respectively.
72
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain
Hybrid Financial Instruments" (SFAS No. 155). SFAS No. 155 amends SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," and SFAS No.
140. SFAS No. 155 includes provisions that permit fair value remeasurement for
any hybrid financial instrument that contains an embedded derivative and that
otherwise would require bifurcation. It also establishes a requirement to
evaluate interests in securitized financial assets to identify interests that
are free-standing or that are hybrid financial instruments that contain an
embedded derivative requiring bifurcation. SFAS No. 155 is effective for all
financial instruments acquired or issued after the beginning of the Company's
first fiscal year that begins after September 15, 2006. The fair value election
in SFAS No. 155 may also be applied upon adoption for hybrid instruments that
have been bifurcated under SFAS No. 133 prior to the adoption of this statement.
The Company is evaluating the effect of adoption of this new standard on its
financial position, results of operations and cash flows and does not expect the
standard to have a material impact.
(o) STOCK-BASED INCENTIVE COMPENSATION PLANS AND EMPLOYEE BENEFIT PLANS
STOCK-BASED 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 36 million shares of
CenterPoint Energy common stock is authorized to 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 are distributed based upon the performance of the Company over a
three-year cycle. 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 participants along with the value of common dividends declared during the
vesting period. The restricted shares granted in 2005 are subject to the
performance condition that common dividends declared during the vesting period
must be at least $1.20 per share.
Option awards are generally granted with an exercise price equal to the
average of the high and low sales price of the Company's stock at the date of
grant. These option awards generally become exercisable in one-third increments
on each of the first through third anniversaries of the grant date and have
10-year contractual terms. No options were granted during 2005.
Effective January 1, 2005, the Company adopted SFAS No. 123 (Revised 2004),
"Share-Based Payment" (SFAS 123(R)), using the modified prospective transition
method. Under this method, the Company records compensation expense at fair
value for all awards it grants after the date it adopted the standard. In
addition, the Company records compensation expense at fair value (as previous
awards continue to vest) for the unvested portion of previously granted stock
option awards that were outstanding as of the date of adoption. Pre-adoption
awards of time-based restricted stock and performance-based restricted stock
will continue to be expensed using the guidance contained in Accounting
Principles Board Opinion No. 25. The adoption of SFAS 123(R) did not have a
material impact on the Company's results of operations, financial condition or
cash flows.
The Company recorded LICP compensation expense of $9 million, $8 million
and $13 million in 2003, 2004 and 2005, respectively.
The total income tax benefit recognized related to such arrangements was $4
million, $3 million and $5 million in 2003, 2004 and 2005, respectively. No
compensation cost related to such arrangements was capitalized as a part of
inventory or fixed assets in 2003, 2004 or 2005.
73
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pro forma information for 2003 and 2004 is provided to show the effect of
amortizing 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
(in millions, except per share amounts):
YEAR ENDED
DECEMBER 31,
--------------
2003 2004
----- ------
Net income (loss) as reported............................... $ 484 $ (905)
Add: Total stock-based employee compensation expense as
recorded, net of related tax effects...................... 6 5
Less: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects................................ (16) (9)
----- ------
Pro-forma net income (loss)................................. $ 474 $ (909)
===== ======
Basic Earnings (Loss) Per Share:
As reported............................................... $1.59 $(2.94)
Pro-forma................................................. $1.56 $(2.95)
Diluted Earnings (Loss) Per Share:
As reported............................................... $1.46 $(2.48)
Pro-forma................................................. $1.43 $(2.49)
The following tables summarize the methods used to measure compensation
cost for the various types of awards granted under the LICPs:
FOR AWARDS GRANTED BEFORE JANUARY 1, 2005
AWARD TYPE METHOD USED TO DETERMINE COMPENSATION COST
- ---------- ------------------------------------------
Performance shares........................ Initially measured using fair value and expected
achievement levels on the date of grant. Compensation
cost is then periodically adjusted to reflect changes in
market prices and achievement through the settlement
date.
Performance units......................... Initially measured using the award's target unit value
of $100 that reflects expected achievement levels on the
date of grant. Compensation cost is then periodically
adjusted to reflect changes in achievement through the
settlement date.
Time-based restricted stock............... Measured using fair value on the grant date.
Stock options............................. Estimated using the Black-Scholes option valuation
method.
In 2003 and 2004, the fair values of stock options were estimated using the
Black-Scholes option valuation model with the following assumptions:
2003 2004
----- -----
Expected life in years...................................... 5 5
Interest rate............................................... 2.62% 3.02%
Volatility.................................................. 52.60% 27.23%
Expected common stock dividend.............................. $0.40 $0.40
74
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR AWARDS GRANTED AS OF AND AFTER JANUARY 1, 2005
AWARD TYPE METHOD USED TO DETERMINE COMPENSATION COST
- ---------- ------------------------------------------
Performance shares........................ Measured using fair value and expected achievement
levels on the grant date.
Time-based restricted stock............... Measured using fair value on the grant date.
For awards granted before January 1, 2005, forfeitures of awards were
measured upon their occurrence. For awards granted as of and after January 1,
2005, forfeitures are estimated on the date of grant and are adjusted as
required through the remaining vesting period.
The following tables summarize the Company's LICP activity for 2005:
STOCK OPTIONS
OUTSTANDING OPTIONS
YEAR ENDED DECEMBER 31, 2005
------------------------------------------------------------------------
REMAINING AVERAGE
SHARES WEIGHTED-AVERAGE CONTRACTUAL LIFE AGGREGATE INTRINSIC
(THOUSANDS) EXERCISE PRICE (YEARS) VALUE (MILLIONS)
----------- ---------------- ----------------- -------------------
Outstanding at December 31,
2004........................... 16,159 $15.42
Forfeited or expired........... (1,248) 16.96
Exercised...................... (1,244) 7.00
------
Outstanding at December 31,
2005........................... 13,667 16.05 4.2 $25
======
Exercisable at December 31,
2005........................... 11,808 17.13 3.6 18
======
NON-VESTED OPTIONS
YEAR ENDED DECEMBER 31, 2005
------------------------------
WEIGHTED-AVERAGE
SHARES GRANT DATE
(THOUSANDS) FAIR VALUE
----------- ----------------
Outstanding at December 31, 2004......................... 4,072 $1.70
Vested................................................. (2,166) 1.62
Forfeited or expired................................... (47) 1.95
------
Outstanding at December 31, 2005......................... 1,859 1.79
======
PERFORMANCE SHARES
OUTSTANDING SHARES
YEAR ENDED DECEMBER 31, 2005
-----------------------------------------------------
REMAINING AVERAGE
SHARES CONTRACTUAL LIFE AGGREGATE INTRINSIC
(THOUSANDS) (YEARS) VALUE (MILLIONS)
----------- ----------------- -------------------
Outstanding at December 31, 2004........ 1,169
Granted............................... 945
Forfeited............................. (181)
Vested and released to participants... (373)
-----
Outstanding at December 31, 2005........ 1,560 1.1 $16
=====
75
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NON-VESTED SHARES
YEAR ENDED DECEMBER 31, 2005
------------------------------
WEIGHTED-AVERAGE
SHARES GRANT DATE
(THOUSANDS) FAIR VALUE
----------- ----------------
Outstanding at December 31, 2004......................... 756 $ 5.70
Granted................................................ 945 12.13
Forfeited.............................................. (121) 9.17
Vested and released to participants.................... (20) 5.64
-----
Outstanding at December 31, 2005......................... 1,560 9.33
=====
The non-vested and outstanding shares displayed in the above tables assume
that shares are issued at the maximum performance level (150%). The aggregate
intrinsic value reflects the impacts of current expectations of achievement and
stock price.
PERFORMANCE-BASED UNITS
OUTSTANDING AND NON-VESTED UNITS
YEAR ENDED DECEMBER 31, 2005
------------------------------------------------------------------------
WEIGHTED-AVERAGE REMAINING AVERAGE
UNITS GRANT DATE CONTRACTUAL LIFE AGGREGATE INTRINSIC
(THOUSANDS) FAIR VALUE (YEARS) VALUE (MILLIONS)
----------- ---------------- ----------------- -------------------
Outstanding at December 31,
2004........................... 37 $100.00
Forfeited...................... (2) 100.00
Vested and released to
participants................ (1) 100.00
--
Outstanding at December 31,
2005........................... 34 100.00 1.0 $3
==
The aggregate intrinsic value reflects the value of the performance units
given current expectations of performance through the end of the cycle.
TIME-BASED RESTRICTED STOCK
OUTSTANDING AND NON-VESTED SHARES
YEAR ENDED DECEMBER 31, 2005
------------------------------------------------------------------------
WEIGHTED-AVERAGE REMAINING AVERAGE
SHARES GRANT DATE CONTRACTUAL LIFE AGGREGATE INTRINSIC
(THOUSANDS) FAIR VALUE (YEARS) VALUE (MILLIONS)
----------- ---------------- ----------------- -------------------
Outstanding at December 31,
2004........................... 769 $ 7.49
Granted........................ 307 12.25
Forfeited...................... (70) 8.79
Vested and released to
participants................ (37) 8.11
---
Outstanding at December 31,
2005........................... 969 8.88 1.0 $12
===
The weighted-average grant-date fair values of awards granted were as
follows for 2003, 2004 and 2005:
YEAR ENDED DECEMBER 31,
------------------------
2003 2004 2005
----- ------- ------
Options.................................................... $1.66 $ 1.86 $ --
Performance units.......................................... -- 100.00 --
Performance shares......................................... 5.70 -- 12.13
Time-based restricted stock................................ 5.83 10.95 12.25
76
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The total intrinsic value of awards received by participants were as
follows for 2003, 2004 and 2005:
YEAR ENDED DECEMBER 31,
-----------------------
2003 2004 2005
----- ----- -----
(IN MILLIONS)
Options exercised........................................... $-- $ 3 $ 8
Performance shares.......................................... -- 7 5
Time-based restricted stock................................. 5 -- --
As of December 31, 2005, there was $13 million of total unrecognized
compensation cost related to non-vested LICP arrangements. That cost is expected
to be recognized over a weighted-average period of 1.7 years.
Cash received from LICPs was $1 million, $4 million and $9 million for
2003, 2004 and 2005, respectively.
The actual tax benefit realized for tax deductions related to LICPs totaled
$2 million, $4 million and $5 million, for 2003, 2004 and 2005, respectively.
The Company has a policy of issuing new shares in order to satisfy
share-based payments related to LICPs.
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. Certain employees participating in
the plan as of December 31, 1998 automatically receive the greater of the
accrued benefit calculated under the prior plan formula 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.
In January 2005, the Department of Health and Human Services' Centers for
Medicare and Medicaid Services released final regulations governing the Medicare
prescription drug benefit and other key elements of the Medicare Modernization
Act. Under the final regulations, a greater portion of benefits offered under
the Company's plans meets the definition of actuarial equivalence and therefore
qualifies for federal subsidies equal to 28% of allowable drug costs. As a
result, the Company has remeasured its obligations and costs to take into
account the new regulations. The Medicare subsidy reduced 2005's net periodic
postretirement benefit costs by approximately $8 million, including $3 million
of amortization of the actuarial loss, $2 million of reduced service cost and $3
million of reduced interest cost on the accumulated postretirement benefit
obligation.
77
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's net periodic cost includes the following components relating
to pension and postretirement benefits:
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
2003 2004 2005
------------------------- ------------------------- -------------------------
PENSION POSTRETIREMENT PENSION POSTRETIREMENT PENSION POSTRETIREMENT
BENEFITS BENEFITS BENEFITS BENEFITS BENEFITS BENEFITS
-------- -------------- -------- -------------- -------- --------------
(IN MILLIONS)
Service cost....................... $ 37 $ 4 $ 40 $ 4 $ 34 $ 2
Interest cost...................... 102 31 102 31 95 27
Expected return on plan assets..... (92) (11) (103) (13) (137) (12)
Net amortization................... 43 13 37 13 38 9
Curtailment........................ -- -- -- 17 -- --
Benefit enhancement................ -- -- 4 2 -- --
Other.............................. -- -- -- -- -- 1
---- ---- ----- ---- ----- ----
Net periodic cost.................. $ 90 $ 37 $ 80 $ 54 $ 30 $ 27
==== ==== ===== ==== ===== ====
Above amounts include the following
net periodic cost related to
discontinued operations.......... $ 17 $ 4 $ 11 $ 20 $ -- $ --
==== ==== ===== ==== ===== ====
The Company used the following assumptions to determine net periodic cost
relating to pension and postretirement benefits:
DECEMBER 31,
---------------------------------------------------------------------------------
2003 2004 2005
------------------------- ------------------------- -------------------------
PENSION POSTRETIREMENT PENSION POSTRETIREMENT PENSION POSTRETIREMENT
BENEFITS BENEFITS BENEFITS BENEFITS BENEFITS BENEFITS
-------- -------------- -------- -------------- -------- --------------
Discount rate...................... 6.75% 6.75% 6.25% 6.25% 5.75% 5.75%
Expected return on plan assets..... 9.00 9.00 9.00 8.50 8.50 8.00
Rate of increase in compensation
levels........................... 4.10 -- 4.10 -- 4.60 --
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.
78
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 2004 and 2005 for the Company's pension and
postretirement benefit plans:
DECEMBER 31,
-----------------------------------------------------
2004 2005
------------------------- -------------------------
PENSION POSTRETIREMENT PENSION POSTRETIREMENT
BENEFITS BENEFITS BENEFITS BENEFITS
-------- -------------- -------- --------------
(IN MILLIONS)
CHANGE IN BENEFIT OBLIGATION
Benefit obligation, beginning of year............ $1,692 $ 518 $1,710 $ 535
Service cost..................................... 40 4 34 2
Interest cost.................................... 102 31 95 27
Participant contributions........................ -- 6 -- 5
Benefits paid.................................... (124) (42) (106) (38)
Plan amendments.................................. -- (20) -- --
Divestitures..................................... (165) -- -- --
Actuarial loss (gain)............................ 161 36 16 (65)
Curtailment, benefit enhancement and
settlement..................................... 4 2 -- 1
------ ----- ------ -----
Benefit obligation, end of year.................. $1,710 $ 535 $1,749 $ 467
====== ===== ====== =====
CHANGE IN PLAN ASSETS
Plan assets, beginning of year................... $1,194 $ 150 $1,657 $ 156
Employer contributions........................... 476 27 75 24
Participant contributions........................ -- 6 -- 5
Benefits paid.................................... (124) (42) (106) (38)
Divestitures..................................... (40) -- -- --
Actual investment return......................... 151 15 103 7
------ ----- ------ -----
Plan assets, end of year......................... $1,657 $ 156 $1,729 $ 154
====== ===== ====== =====
RECONCILIATION OF FUNDED STATUS
Funded status.................................... $ (53) $(379) $ (20) $(313)
Unrecognized actuarial loss...................... 714 96 719 36
Unrecognized prior service cost.................. (51) 14 (44) 12
Unrecognized transition obligation............... -- 65 -- 58
------ ----- ------ -----
Net amount recognized in balance sheets.......... $ 610 $(204) $ 655 $(207)
====== ===== ====== =====
ACTUARIAL ASSUMPTIONS
Discount rate.................................... 5.75% 5.75% 5.70% 5.70%
Expected return on plan assets................... 8.50 8.00 8.50 8.00
Rate of increase in compensation levels.......... 4.60 -- 4.60 --
Healthcare cost trend rate assumed for the next
year........................................... -- 9.75 -- 9.00
Rate to which the cost trend rate is assumed to
decline (the ultimate trend rate).............. -- 5.50 -- 5.50
Year that the rate reaches the ultimate trend
rate........................................... -- 2011 -- 2011
79
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31,
-------------------------------------------------------------
2004 2005
----------------------------- -----------------------------
PENSION POSTRETIREMENT PENSION POSTRETIREMENT
BENEFITS BENEFITS BENEFITS BENEFITS
------------ -------------- ------------ --------------
(IN MILLIONS)
ADDITIONAL INFORMATION
Accumulated benefit obligation........ $1,635 $535 $1,688 $467
Change in minimum liability included
in other comprehensive income....... (559) -- -- --
Measurement date used to determine
plan obligations and assets......... December 31, December 31, December 31, December 31,
2004 2004 2005 2005
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................ $ 1 $ (1)
Effect on the postretirement benefit obligation............. 19 (16)
The following table displays the weighted-average asset allocations as of
December 31, 2004 and 2005 for the Company's pension and postretirement benefit
plans:
DECEMBER 31,
-----------------------------------------------------
2004 2005
------------------------- -------------------------
PENSION POSTRETIREMENT PENSION POSTRETIREMENT
BENEFITS BENEFITS BENEFITS BENEFITS
-------- -------------- -------- --------------
Domestic equity securities............... 57% 34% 48% 27%
Global equity securities................. -- -- 10 --
International equity securities.......... 15 11 11 9
Debt securities.......................... 26 54 30 64
Real estate.............................. 2 -- 1 --
Cash..................................... -- 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.
80
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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% 22-32%
Global equity securities.................................... 7-13% --
International equity securities............................. 7-13% 4-14%
Debt securities............................................. 24-34% 60-70%
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.
The pension plan did not include any holdings of CenterPoint Energy common
stock as of December 31, 2004 or 2005.
Although funding for the Company's pension and postretirement plans was not
required during 2005, the Company contributed $75 million and $24 million to its
pension plan and postretirement benefits plan in 2005, respectively.
Contributions to the pension plan are not required in 2006; however, the
Company expects to make a contribution. The Company expects to contribute
approximately $26 million to its postretirement benefits plan in 2006.
The following benefit payments are expected to be paid by the pension and
postretirement benefit plans (in millions):
POSTRETIREMENT BENEFIT PLAN
---------------------------
MEDICARE
PENSION BENEFIT SUBSIDY
BENEFITS PAYMENTS RECEIPTS
-------- ---------- ----------
2006....................................... $104 $31 $ (4)
2007....................................... 108 32 (5)
2008....................................... 113 33 (5)
2009....................................... 118 35 (5)
2010....................................... 122 36 (5)
2011-2015.................................. 646 200 (31)
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 $8 million, $6 million and $6 million in 2003, 2004 and
2005, respectively. The accrued benefit liability for the non-qualified pension
plan was $69 million and $79 million at December 31, 2004 and 2005,
respectively. In addition, these accrued benefit liabilities include the
recognition of minimum liability adjustments of $10 million as of December 31,
2004 and $14 million as of December 31, 2005, which are reported as a component
of other comprehensive income, net of income tax effects.
81
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table displays the Company's plans that have or have had
accumulated benefit obligations in excess of plan assets:
DECEMBER 31,
---------------------------------------------------------------------------------
2004 2005
--------------------------------------- ---------------------------------------
PENSION RESTORATION POSTRETIREMENT PENSION RESTORATION POSTRETIREMENT
BENEFITS BENEFITS BENEFITS BENEFITS BENEFITS BENEFITS
-------- ----------- -------------- -------- ----------- --------------
(IN MILLIONS)
Accumulated benefit
obligation................ $1,635 $69 $535 $1,688 $79 $467
Projected benefit
obligation................ 1,710 81 535 1,749 81 467
Plan assets................. 1,657 -- 156 1,729 -- 154
On January 5, 2006, the Company offered a Voluntary Early Retirement
Program (VERP) to approximately 200 employees who were age 55 or older with at
least five years of service as of February 28, 2006. The election period was
from January 5, 2006 through February 28, 2006. For those electing to accept the
VERP, three years of age and service will be added to their qualified pension
plan benefit and three years of service will be added to their postretirement
benefit. The one-time additional pension and postretirement expense of
approximately $9 million will be reflected in the first quarter of 2006.
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.
The savings plan has significant holdings of CenterPoint Energy common
stock. As of December 31, 2005, an aggregate of 27,720,006 shares of CenterPoint
Energy's common stock were held by the savings plan, which represented 28% 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 $38 million, $40 million and
$35 million in 2003, 2004 and 2005, respectively. Included in these amounts is
$7 million, $6 million and less than $1 million of savings plan benefit expense
for 2003, 2004 and 2005, respectively, related to Texas Genco participants.
Amounts for Texas Genco's participants are reflected as discontinued operations
in the Statements of Consolidated Operations.
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 $10 million, $8 million and $8 million in 2003,
2004 and 2005, respectively.
82
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Included in "Benefit Obligations" in the accompanying consolidated Balance
Sheets at December 31, 2004 and 2005 was $38 million and $42 million,
respectively, relating to postemployment obligations.
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 2003, 2004 and 2005, the Company recorded benefit expense relating to
these programs of $13 million, $9 million and $8 million, respectively. Included
in "Benefit Obligations" in the accompanying Consolidated Balance Sheets at
December 31, 2004 and 2005 was $121 million and $113 million, respectively,
relating to deferred compensation plans. Included in "Non-Current Liabilities of
Discontinued Operations" in the accompanying Consolidated Balance Sheets at
December 31, 2004 was $3 million relating to deferred compensation plans for
Texas Genco participants.
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, 2005, approximately 30% of the Company's employees are
subject to collective bargaining agreements. Two of these agreements, covering
approximately 19% of the Company's employees, have expired or will expire in
2006. Minnesota Gas, a division of our natural gas distribution business, has
466 bargaining unit employees that are covered by a collective bargaining unit
agreement with the United Association of Journeymen and Apprentices of Plumbing
and Pipe Fitting Industry of US and Canada Local 340 that expires in April 2006.
CenterPoint Houston has 1225 bargaining unit employees that are covered by a
collective bargaining unit agreement with the International Brotherhood of
Electrical Workers Local 66, which expires in May 2006. The Company has a good
relationship with these bargaining units and expects to renegotiate new
agreements in 2006.
(3) DISCONTINUED OPERATIONS
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.
Revenues related to the Company's Latin America operations included in
discontinued operations for the year ended December 31, 2003 were $2 million.
Income from these discontinued operations for the year ended December 31, 2003
is reported net of income tax expense of $2 million.
CenterPoint Energy Management Services, Inc. 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
83
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
record the impairment of the CEMS long-lived assets based on the impending sale
and to record one-time employee termination benefits.
Revenues related to CEMS included in discontinued operations for the year
ended December 31, 2003 were $10 million. Loss from these discontinued
operations for the year ended December 31, 2003 is reported net of income tax
benefit of $2 million.
Texas Genco. 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. Following the sale, Texas Genco's
principal remaining asset was 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, was completed on April 13, 2005.
The following table summarizes the components of the income (loss) from
discontinued operations of Texas Genco for each of the years ended December 31,
2003, 2004 and 2005:
YEAR ENDED DECEMBER 31,
-------------------------
2003 2004 2005
------ ------- ------
(IN MILLIONS)
Texas Genco net income (loss) as reported................... $250 $ (99) $10
Adjustment for Texas Genco loss on sale of fossil assets,
net of tax(1)............................................. -- 426 --
---- ----- ---
Texas Genco net income as adjusted for loss on sale of
fossil assets............................................. 250 327 10
Adjustment for general corporate overhead reclassification,
net of tax(2)............................................. 18 13 1
Adjustment for interest expense reclassification, net of
tax(3).................................................... (129) (46) --
---- ----- ---
Adjusted income from discontinued operations of Texas Genco,
net of tax................................................ 139 294 11
Minority interest in discontinued operations of Texas
Genco..................................................... (48) (61) --
---- ----- ---
Income from discontinued operations of Texas Genco, net of
tax and minority interest................................. 91 233 11
---- ----- ---
Loss on sale of Texas Genco, net of tax..................... -- (214) (4)
Loss offsetting Texas Genco's earnings, net of tax.......... -- (152) (10)
---- ----- ---
Loss on disposal of Texas Genco, net of tax................. -- (366) (14)
---- ----- ---
Total Discontinued Operations of Texas Genco.............. $ 91 $(133) $(3)
==== ===== ===
- ---------------
(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 was 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.
84
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenues related to Texas Genco included in discontinued operations for the
years ended December 31, 2003, 2004 and 2005 were $2.0 billion, $2.1 billion and
$62 million, respectively. Income from these discontinued operations for the
years ended December 31, 2003, 2004 and 2005 is reported net of income tax
expense of $71 million, $166 million and $4 million, respectively.
Summarized balance sheet information as of December 31, 2004 related to
discontinued operations of Texas Genco is as follows:
DECEMBER 31,
2004
-------------
(IN MILLIONS)
CURRENT ASSETS:
Cash and cash equivalents................................. $ 43
Restricted cash........................................... 390
Accounts receivable, principally trade.................... 28
Other current assets...................................... 53
------
Total current assets................................... 514
------
NON-CURRENT ASSETS:
Funds held for purchase of additional interest in South
Texas Project.......................................... 191
Other non-current assets.................................. 860
------
Total non-current assets............................... 1,051
------
TOTAL ASSETS........................................... 1,565
------
CURRENT LIABILITIES:
Accounts payable, principally trade....................... 17
Payable to minority shareholders.......................... 390
Other current liabilities................................. 42
------
Total current liabilities.............................. 449
OTHER LONG-TERM LIABILITIES(1).............................. 420
------
TOTAL LIABILITIES...................................... 869
MINORITY INTEREST........................................... --
------
NET ASSETS OF DISCONTINUED OPERATIONS....................... $ 696
======
- ---------------
(1) Taxes payable resulting from the sale were paid by the Company, and were
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 as of December
31, 2004 was $390 million of restricted cash designated to buy back the
remaining shares of Texas Genco's common stock which had not yet been tendered
by Texas Genco's former minority shareholders.
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CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 2004, Texas Genco owned a 30.8% interest in the South
Texas Project, which consists of two 1,250 megawatt nuclear generating units and
bore a corresponding 30.8% share of capital and operating costs associated with
the project. As of December 31, 2004, the South Texas Project was 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 was 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 was
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 was included in
discontinued operations in the Statements of Consolidated Operations. As of
December 31, 2004, Texas Genco's total utility plant for the South Texas Project
was $436 million (net of $2.3 billion accumulated depreciation, which includes
an impairment loss recorded in 1999 of $745 million). As of December 31, 2004,
Texas Genco's investment in nuclear fuel was $34 million (net of $334 million
amortization). These assets were included in non-current assets of discontinued
operations in the Consolidated Balance Sheets.
(4) REGULATORY MATTERS
(a) RECOVERY OF TRUE-UP BALANCE
The Texas Electric Choice Plan (Texas electric restructuring law), which
became effective in September 1999, substantially amended the regulatory
structure governing electric utilities in order to allow retail competition for
electric customers beginning in January 2002. The Texas electric restructuring
law requires the Texas Utility Commission to conduct a "true-up" proceeding to
determine CenterPoint Houston's stranded costs and certain other costs resulting
from the transition to a competitive retail electric market and to provide for
its recovery of those costs. In March 2004, CenterPoint Houston filed its
true-up application with the Texas Utility Commission, requesting recovery of
$3.7 billion, excluding interest. In December 2004, the Texas Utility Commission
issued its final order (True-Up Order) allowing CenterPoint Houston to recover a
true-up balance of approximately $2.3 billion, which included interest through
August 31, 2004, and providing for adjustment of the amount to be recovered to
include interest on the balance until recovery, the principal portion of
additional excess mitigation credits returned to customers after August 31, 2004
and certain other matters. CenterPoint Houston and other parties filed appeals
of the True-Up Order to a district court in Travis County, Texas. In August
2005, the court issued its final judgment on the various appeals. In its
judgment, the court affirmed most aspects of the True-Up Order, but reversed two
of the Texas Utility Commission's rulings. The judgment would have the effect of
restoring approximately $650 million, plus interest, of the $1.7 billion the
Texas Utility Commission had disallowed from CenterPoint Houston's initial
request. First, the court reversed the Texas Utility Commission's decision to
prohibit CenterPoint Houston from recovering $180 million in credits through
August 2004 that CenterPoint Houston was ordered to provide to retail electric
providers as a result of an inaccurate stranded cost estimate made by the Texas
Utility Commission in 2000. Additional credits of approximately $30 million were
paid after August 2004. Second, the court reversed the Texas Utility
Commission's disallowance of $440 million in transition costs which are
recoverable under the Texas Utility Commission's regulations. CenterPoint
Houston and other parties appealed the district court decisions. Briefs have
been filed with the 3rd Court of Appeals in Austin but oral argument has not yet
been scheduled. No amounts related to the court's judgment have been recorded in
the consolidated financial statements.
Among the issues raised in CenterPoint Houston's appeal of the True-Up
Order is the Texas Utility Commission's reduction of CenterPoint Houston's
stranded cost recovery by approximately $146 million for the present value of
certain deferred tax benefits associated with its former Texas Genco assets.
Such reduction was considered in the Company's recording of an after-tax
extraordinary loss of $977 million in the last half of 2004. The Company
believes that the Texas Utility Commission based its order on proposed
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CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
regulations issued by the Internal Revenue Service (IRS) in March 2003 related
to those tax benefits. Those proposed regulations would have allowed utilities
which were deregulated before March 4, 2003 to make a retroactive election to
pass the benefits of Accumulated Deferred Investment Tax Credits (ADITC) and
Excess Deferred Federal Income Taxes back to customers. However, in December
2005, the IRS withdrew those proposed normalization regulations and issued new
proposed regulations that do not include the provision allowing a retroactive
election to pass the tax benefits back to customers. If the December 2005
proposed regulations become effective and if the Texas Utility Commission's
order on this issue is not reversed on appeal or the amount of the tax benefits
is not otherwise restored by the Texas Utility Commission, the IRS is likely to
consider that a "normalization violation" has occurred. If so, the IRS could
require the Company to pay an amount equal to CenterPoint Houston's unamortized
ADITC balance as of the date that the normalization violation was deemed to have
occurred. In addition, if a normalization violation is deemed to have occurred,
the IRS could also deny CenterPoint Houston the ability to elect accelerated
depreciation benefits. If a normalization violation should ultimately be found
to exist, it could have an adverse impact on the Company's results of
operations, financial condition and cash flows. However, the Company and
CenterPoint Houston are vigorously pursuing the appeal of this issue and will
seek other relief from the Texas Utility Commission to avoid a normalization
violation. The Texas Utility Commission has not previously required a company
subject to its jurisdiction to take action that would result in a normalization
violation.
There are two ways for CenterPoint Houston to recover the true-up balance:
by issuing transition bonds to securitize the amounts due and/or by implementing
a competition transition charge (CTC). Pursuant to a financing order issued by
the Texas Utility Commission in March 2005 and affirmed in all respects in
August 2005 by the same Travis County District Court considering the appeal of
the True-Up Order, in December 2005 a subsidiary of CenterPoint Houston issued
$1.85 billion in transition bonds with interest rates ranging from 4.84 percent
to 5.30 percent and final maturity dates ranging from February 2011 to August
2020. Through issuance of the transition bonds, CenterPoint Houston recovered
approximately $1.7 billion of the true-up balance determined in the True-Up
Order plus interest through the date on which the bonds were issued.
In July 2005, CenterPoint Houston received an order from the Texas Utility
Commission allowing it to implement a CTC which will collect approximately $596
million over 14 years plus interest at an annual rate of 11.075 percent (CTC
Order). The CTC Order authorizes CenterPoint Houston to impose a charge on
retail electric providers to recover the portion of the true-up balance not
covered by the financing order. The CTC Order also allows CenterPoint Houston to
collect approximately $24 million of rate case expenses over three years without
a return through a separate tariff rider (Rider RCE). CenterPoint Houston
implemented the CTC and Rider RCE effective September 13, 2005 and began
recovering approximately $620 million. During the period from September 13,
2005, the date of implementation of the CTC Order, through December 31, 2005,
CenterPoint Houston recognized approximately $21 million in CTC operating
income. Certain parties appealed the CTC Order to the Travis County Court in
September 2005.
Under the True-Up Order, CenterPoint Houston is allowed to recover carrying
charges at 11.075 percent until the true-up balance is recovered. 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, which is derived
from CenterPoint Houston's cost to finance assets (debt return) and an allowance
for earnings on shareholders' investment (equity return). Consequently, in
accordance with SFAS No. 92, "Regulated Enterprises -- Accounting for Phase-in
Plans," the rate of return has been bifurcated into a debt return component and
an equity return component. CenterPoint Houston was allowed a return on the
true-up balance of $222 million in 2005. Effective September 13, 2005, the date
of implementation of the CTC Order, the return on the CTC portion of the true-up
balance is included in CenterPoint Houston's tariff-based revenues. The debt
return of $121 million recorded in 2005 was accrued and included in other income
in the Company's Statements of Consolidated Operations. The equity return of
$101 million recorded in 2005 will be recognized in income as it is recovered in
the future. As of December 31, 2005, the Company has recorded a regulatory asset
of
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CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$347 million related to the debt return on its true-up balance and has not
recorded an allowed equity return of $248 million on its true-up balance because
such return will be recognized as it is recovered in the future.
In January 2006, the Texas Utility Commission staff (Staff) proposed that
the Texas Utility Commission adopt new rules governing the carrying charges on
unrecovered true-up balances. If the Texas Utility Commission adopts the rule as
the Staff proposed it and the rule is deemed to apply to CenterPoint Houston,
the rule would reduce carrying costs on the unrecovered CTC balance
prospectively from 11.075 percent to the utility's cost of debt.
Net income for 2005 included an after-tax extraordinary gain of $30 million
($0.09 per diluted share) recorded in the second quarter reflecting an
adjustment to the after-tax extraordinary loss of $977 million ($2.72 per
diluted share) recorded in the last half of 2004 to write down
generation-related regulatory assets as a result of the final orders issued by
the Texas Utility Commission.
(b) FINAL FUEL RECONCILIATION
The results of the Texas Utility Commission's final decision related to
CenterPoint Houston's final fuel reconciliation are a component of the True-Up
Order. CenterPoint Houston has appealed certain portions of the True-Up Order
involving a disallowance of approximately $67 million relating to the final fuel
reconciliation in 2003 plus interest of $10 million. A judgment was entered by a
Travis County court in May 2005 affirming the Texas Utility Commission's
decision. CenterPoint Houston filed an appeal to the court of appeals in June
2005. The parties have filed briefs on the issues with the court and are
awaiting a decision from the court of appeals.
(c) REMAND OF 2001 UNBUNDLED COST OF SERVICE ORDER
The 3rd Court of Appeals in Austin has remanded to the Texas Utility
Commission an issue that was decided by the Texas Utility Commission in
CenterPoint Houston's 2001 unbundled cost of service proceeding. In its remand
order, the court ruled that the Texas Utility Commission had failed to
adequately explain its basis for its determination of certain projected costs
associated with interconnection of a new merchant generating plant. The 3rd
Court of Appeals in Austin ordered the Texas Utility Commission to reconsider
that determination on the basis of the record that existed at the time of the
Commission's original order. The Company and CenterPoint Houston believe that
record is sufficient to support a determination by the Texas Utility Commission
that is consistent with its original determination. However, no prediction can
be made at this time as to the ultimate outcome of this matter on remand.
(d) RATE CASES
NATURAL GAS DISTRIBUTION
SOUTHERN GAS OPERATIONS
In November 2004, Southern Gas Operations filed an application for a $34
million base rate increase, which was subsequently adjusted downward to $28
million, with the Arkansas Public Service Commission (APSC). In September 2005,
an $11 million rate reduction (which included a $10 million reduction relating
to depreciation rates) ordered by the APSC went into effect. The reduced
depreciation rates were implemented effective October 2005. This base rate
reduction and corresponding reduction in depreciation expense represent an
annualized operating income reduction of $1 million.
In April 2005, the Railroad Commission established new gas tariffs that
increased Southern Gas Operations' base rate and service revenues by a combined
$2 million in the unincorporated environs of its
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CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Beaumont/East Texas and South Texas Divisions. In June and August 2005, Southern
Gas Operations filed requests to implement these same rates within 169
incorporated cities located in the two divisions. The proposed rates were
approved or became effective by operation of law in 164 of these cities. Five
municipalities denied the rate change requests within their respective
jurisdictions. Southern Gas Operations has appealed the actions of these five
cities to the Railroad Commission. In February 2006, Southern Gas Operations
notified the Railroad Commission that it had reached a settlement with four of
the five cities. If approved, the settlement will affect rates in a total of 60
cities in the South Texas Division. In addition, 19 cities where rates have
already gone into effect have challenged the jurisdictional and statutory basis
for implementation of the new rates within their respective jurisdictions.
Southern Gas Operations has petitioned the Railroad Commission for an order
declaring that the new rates have been properly established within these 19
cities. If the settlement is approved and assuming all other rate change
proposals become effective, revenues from Southern Gas Operations' base rates
and miscellaneous service charges would increase by an additional $17 million
annually. Currently, approximately $15 million of this expected annual increase
is in effect in the incorporated areas of Southern Gas Operations' Beaumont/East
Texas and South Texas Divisions.
In October 2005, Southern Gas Operations filed requests with the Louisiana
Public Service Commission (LPSC) for approximately $2 million in base rate
increases for its South Louisiana service territory and approximately $2 million
in base rate reductions for its North Louisiana service territory in accordance
with the Rate Stabilization Plans in its tariffs. These base rate changes became
effective on January 2, 2006 in accordance with the tariffs and are subject to
review and possible adjustment by the staff of the LPSC. Southern Gas Operations
is unable to predict when the LPSC staff may conclude its review or what
adjustments, if any, the staff may recommend.
In December 2005, Southern Gas Operations filed a request with the
Mississippi Public Service Commission (MPSC) for approximately $1 million in
miscellaneous service charges (e.g., charges to connect service, charges for
returned checks, etc.) in its Mississippi service territory. This request was
approved in the first quarter of 2006.
In addition, in January and February 2006, Southern Gas Operations filed
requests with the MPSC for approximately $3 million in base rate increases in
its Mississippi service territory in accordance with the Automatic Rate
Adjustment Mechanism provisions in its tariffs and an additional $2 million in
surcharges to recover system restoration expenses incurred following hurricane
Katrina. Both requests are being reviewed by the MPSC staff with a decision
expected in the first quarter of 2006.
MINNESOTA GAS
In June 2005, the Minnesota Public Utilities Commission (MPUC) approved a
settlement which increased Minnesota Gas' base rates by approximately $9 million
annually. An interim rate increase of approximately $17 million had been
implemented in October 2004. Substantially all of the excess amounts collected
in interim rates over those approved in the final settlement were refunded to
customers in the third quarter of 2005.
In November 2005, Minnesota Gas filed a request with the MPUC to increase
annual rates by approximately $41 million. In December 2005, the MPUC approved
an interim rate increase of approximately $35 million that was implemented
January 1, 2006. Any excess of amounts collected under the interim rates over
the amounts approved in final rates is subject to refund to customers. A
decision by the MPUC is expected in the third quarter of 2006.
In December 2004, the MPUC opened an investigation to determine whether
Minnesota Gas' practices regarding restoring natural gas service during the
period between October 15 and April 15 (Cold Weather Period) are in compliance
with the MPUC's Cold Weather Rule (CWR), which governs disconnection and
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CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
reconnection of customers during the Cold Weather Period. The Minnesota Office
of the Attorney General (OAG) issued its report alleging Minnesota Gas has
violated the CWR and recommended a $5 million penalty. Minnesota Gas and the OAG
have reached an agreement on procedures to be followed for the current Cold
Weather Period which began on October 15, 2005. In addition, in June 2005, CERC
was named in a suit filed in the United States District Court, District of
Minnesota on behalf of a purported class of customers who allege that Minnesota
Gas' conduct under the CWR was in violation of the law. Minnesota Gas is in
settlement discussions regarding both the OAG's action and the action on behalf
of the purported class.
ELECTRIC TRANSMISSION & DISTRIBUTION
The Texas Utility Commission requires each electric utility to file an
annual Earnings Report providing certain information to enable the Texas Utility
Commission to monitor the electric utilities' earnings and financial condition
within the state. In May 2005, CenterPoint Houston filed its Earnings Report for
the calendar year ended December 31, 2004. CenterPoint Houston's Earnings Report
shows that it earned less than its authorized rate of return on equity in 2004.
In October 2005, the Staff filed a memorandum summarizing its review of the
Earnings Reports filed by electric utilities. Based on its review, the Staff
concluded that continuation of CenterPoint Houston's rates could result in
excess retail transmission and distribution revenues of as much as $105 million
and excess wholesale transmission revenues of as much as $31 million annually
and recommended that the Texas Utility Commission initiate a review of the
reasonableness of existing rates. The Staff's analysis was based on a 9.60
percent cost of equity, which is 165 basis points lower than the approved return
on equity from CenterPoint Houston's last rate proceeding, the elimination of
interest on debt that matured in November 2005 and certain other adjustments to
CenterPoint Houston's reported information. Additionally, a hypothetical capital
structure of 60 percent debt and 40 percent equity was used which varies
materially from the actual capital structure of CenterPoint Houston as of
December 31, 2005 of approximately 50 percent debt and 50 percent equity.
In December 2005, the Texas Utility Commission considered the Staff report
and agreed to initiate a rate proceeding concerning the reasonableness of
CenterPoint Houston's existing rates for transmission and distribution service
and to require CenterPoint Houston to make a filing by April 15, 2006 to justify
or change those rates.
(e) 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
was 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. In May 2005,
the Railroad Commission issued a final order finding that the Company had
complied with its tariffs, acted prudently in entering into its gas supply
contracts, and prudently managed those contracts. In August 2005, the City of
Tyler appealed this order to the Court of Appeals.
(f) CITY OF HOUSTON FRANCHISE
CenterPoint Houston holds non-exclusive franchises from the incorporated
municipalities in its service territory. In exchange for payment of fees, these
franchises give CenterPoint Houston the right to use the streets and public
rights-of-way of these municipalities to construct, operate and maintain its
transmission and distribution system and to use that system to conduct its
electric delivery business and for other purposes that
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CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the franchises permit. The terms of the franchises, with various expiration
dates, typically range from 5 to 50 years.
In June 2005, CenterPoint Houston accepted an ordinance granting it a new
30-year franchise to use the public rights-of-way to conduct its business in the
City of Houston (New Franchise Ordinance). The New Franchise Ordinance took
effect on July 1, 2005, and replaced the prior electricity franchise ordinance,
which had been in effect since 1957. The New Franchise Ordinance clarifies
certain operational obligations of CenterPoint Houston and the City of Houston
and provides for streamlined payment and audit procedures and a two-year statute
of limitations on claims for underpayment or overpayment under the ordinance.
Under the prior electricity franchise ordinance, CenterPoint Houston paid annual
franchise fees of $76.6 million to the City of Houston for the year ended
December 31, 2004. For the twelve-month period beginning July 1, 2005, the
annual franchise fee (Annual Franchise Fee) under the New Franchise Ordinance
will include a base amount of $88.1 million (Base Amount) and an additional
payment of $8.5 million (Additional Amount). The Base Amount and the Additional
Amount will be adjusted annually based on the increase, if any, in kWh delivered
by CenterPoint Houston within the City of Houston.
CenterPoint Houston began paying the new annual franchise fees on July 1,
2005. Pursuant to the New Franchise Ordinance, the Annual Franchise Fee will be
reduced prospectively to reflect any portion of the Annual Franchise Fee that is
not included in CenterPoint Houston's base rates in any subsequent rate case.
(g) SETTLEMENT OF FERC AUDIT
In June 2005, CenterPoint Energy Gas Transmission Company (CEGT), a
subsidiary of CERC Corp., received an Order from the FERC accepting the terms of
a settlement agreed upon by CEGT with the Staff of the FERC's Office of Market
Oversight and Investigations (OMOI). The settlement brought to a conclusion an
investigation of CEGT initiated by OMOI in August 2003. Among other things, the
investigation involved a comprehensive review of CEGT's relationship with its
marketing affiliates and compliance with various FERC record-keeping and
reporting requirements covering the period from January 1, 2001 through
September 22, 2004.
OMOI Staff took the position that some of CEGT's actions resulted in a
limited number of violations of the FERC's affiliate regulations or were in
violation of certain record-keeping and administrative requirements. OMOI did
not find any systematic violations of its rules governing communications or
other relationships among affiliates.
The settlement included two remedies: a payment of a $270,000 civil penalty
and the execution of a compliance plan, applicable to both CEGT and CenterPoint
Energy-Mississippi River Transmission Corporation (MRT). The compliance plan
consists of a detailed set of Implementation Procedures that will facilitate
compliance with the FERC's Order No. 2004, the Standards of Conduct, which
regulate behavior between regulated entities and their affiliates. The Company
does not believe the compliance plan will have any material effect on CEGT's or
MRT's ability to conduct their business.
(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. During 2005, hedge ineffectiveness was a loss of $2
million from derivatives that qualify for and are designated as cash flow
hedges. No component of the derivative instruments' gain or loss
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CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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,
2005, the Company expects $10 million in accumulated other comprehensive income
to be reclassified as a decrease in Natural Gas expense during the next twelve
months.
The maximum length of time the Company is hedging its exposure to the
variability in future cash flows on existing financial instruments is primarily
two years with a limited amount of exposure up to ten years. The Company's
policy is not to exceed ten years in hedging its exposure.
Other Derivative Financial Instruments. The Company also has natural gas
contracts that are derivatives which are not hedged and are accounted for on a
mark-to-market basis with changes in fair value reported through earnings. Load
following services that the Company offers its natural gas customers create an
inherent tendency for the Company 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 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 2005, the Company recognized
net gains related to unhedged positions amounting to $8 million. As of December
31, 2004 and 2005, the Company had recorded short-term risk management assets of
$4 million and $28 million, respectively, and short-term risk management
liabilities of $5 million and $25 million, respectively, included in other
current assets and other current liabilities, respectively.
A portion of CenterPoint Energy Services, Inc.'s (CES) activities include
entering into transactions for the physical purchase, transportation and sale of
natural gas at different locations (physical contracts). CES attempts to
mitigate basis risk associated with these activities by entering into financial
derivative contracts (financial contracts or financial basis swaps) to address
market price volatility between the purchase and sale delivery points that can
occur over the term of the physical contracts. The underlying physical contracts
are accounted for on an accrual basis with all associated earnings not
recognized until the time of actual physical delivery. The timing of the
earnings impacts for the financial contracts differs from the physical contracts
because the financial contracts meet the definition of a derivative under SFAS
No. 133 and are recorded at fair value as of each reporting balance sheet date
with changes in value reported through earnings. Changes in prices between the
delivery points (basis spreads) can and do vary daily resulting in changes to
the fair value of the financial contracts. However, the economic intent of the
financial contracts is to fix the actual net difference in the natural gas
pricing at the different locations for the associated physical purchase and sale
contracts throughout the life of the physical contracts and thus, when combined
with the physical contracts' terms, provide an expected fixed gross margin on
the physical contracts that will ultimately be recognized in earnings at the
time of actual delivery of the natural gas. As of December 31, 2005, the
mark-to-market value of the financial contracts described above reflected an
unrealized loss of $1 million; however, the underlying expected fixed gross
margin associated with delivery under the physical contracts combined with the
price risk management provided through the financial contracts is expected to
offset the unrealized loss. As described above, over the term of these financial
contracts, the quarterly reported mark-to-market changes in value may vary
significantly and the associated unrealized gains and losses will be reflected
in CES' earnings.
CES also sells physical gas and basis to its end-use customers who desire
to lock in a future spread between a specific location and Henry Hub (NYMEX). As
a result, CES incurs exposure to commodity basis risk related to these
transactions, which it attempts to mitigate by buying offsetting financial basis
swaps.
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CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under SFAS No. 133, CES records at fair value and marks-to-market the financial
basis swaps as of each reporting balance sheet date with changes in value
reported through earnings. However, the associated physical sales contracts are
accounted for using the accrual basis, whereby earnings impacts are not
recognized until the time of actual physical delivery. Although the timing of
earnings recognition for the financial basis swaps differs from the physical
contracts, the economic intent of the financial basis swaps is to fix the basis
spread over the life of the physical contracts to an amount substantially the
same as the portion of the basis spread pricing included in the physical
contracts. In so doing, over the period that the financial basis swaps and
related physical contracts are outstanding, actual cumulative earnings impacts
for changes in the basis spread should be minimal, even though from a timing
perspective there could be fluctuations in unrealized gains or losses associated
with the changes in fair value recorded for the financial basis swaps. The
cumulative earnings impact from the financial basis swaps recognized each
reporting period is expected to be offset by the value realized when the related
physical sales occur. As of December 31, 2005, the mark-to-market value of the
financial basis swaps reflected an unrealized loss of $3 million.
Interest Rate Swaps. 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 loss and is
being amortized into interest expense over the five-year life of the designated
fixed-rate debt. Amortization of amounts deferred in accumulated other
comprehensive loss for 2003, 2004 and 2005, was $12 million, $25 million and $31
million, respectively.
Embedded Derivative. The Company's 3.75% and 2.875% convertible senior
notes 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, 2005.
(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, 2004 and 2005
(in millions):
DECEMBER 31, 2004 DECEMBER 31, 2005
------------------- -------------------
INVESTMENT INVESTMENT
GRADE(1)(2) TOTAL GRADE(1)(2) TOTAL
----------- ----- ----------- -----
Energy marketers............................... $10 $17 $ 24 $ 25
Financial institutions......................... 50 50 208 208
Other.......................................... 1 1 -- 2
--- --- ---- ----
Total........................................ $61 $68 $232 $235
=== === ==== ====
- ---------------
(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.
(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,
93
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 TW 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 or decreased to the extent that the
annual yield from interest and cash dividends on the reference shares of TW
Common is less than or more than 2.309%. At December 31, 2005, 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, 2005, the market
value of such shares was approximately $377 million, which would provide an
exchange amount of $427 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
94
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $913 million
assuming no dividends are paid on the TW Common subsequent to 2005) 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 2003,
2004 and 2005, the Company recorded a gain (loss) of $106 million, $31 million
and $(44) million, respectively, on the Company's investment in TW Common.
During 2003, 2004 and 2005, the Company recorded a gain (loss) of $(96) million,
$(20) million and $49 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 common and the Company's ZENS obligation (in
millions):
DEBT DERIVATIVE
TW COMPONENT COMPONENT
INVESTMENT OF ZENS OF ZENS
---------- --------- ----------
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
Accretion of debt component of ZENS.................. -- 2 --
Gain on indexed debt securities...................... -- -- (49)
Loss on TW Common.................................... (44) -- --
---- ---- ----
Balance at December 31, 2005......................... $377 $109 $292
==== ==== ====
(7) EQUITY
(a) CAPITAL STOCK
CenterPoint Energy has 1,020,000,000 authorized shares of capital stock,
comprised 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.
(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
95
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
(8) LONG-TERM DEBT AND RECEIVABLES FACILITY
DECEMBER 31, 2004 DECEMBER 31, 2005
---------------------- ----------------------
LONG-TERM CURRENT(1) LONG-TERM CURRENT(1)
--------- ---------- --------- ----------
(IN MILLIONS)
Long-term debt:
CenterPoint Energy:
ZENS(2)......................................... $ -- $ 107 $ -- $109
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)................................... 151 -- 151 --
Pollution control bonds 4.70% to 8.00% due 2011
to 2030(4)................................... 1,046 -- 1,046 --
Bank loans and commercial paper due 2006 to
2010(5)...................................... 239 -- 3 --
Junior subordinated debentures payable to
affiliate 8.257% due 2037(6)................. 103 -- 103 --
CenterPoint Houston:
First mortgage bonds 9.15% due 2021............. 102 -- 102 --
Term loan, LIBOR plus 9.75%(7).................. -- 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 -- 229 --
Series 2001-1 Transition Bonds 3.84% to 5.63%
due 2006 to 2013............................. 629 47 575 54
Series A Transition Bonds 4.84% to 5.30% due
2006 to 2019................................. -- -- 1,832 19
CERC Corp.:
Convertible subordinated debentures 6.00% due
2012......................................... 69 6 63 6
Senior notes 5.95% to 8.90% due 2006 to 2014.... 1,923 325 1,772 148
Junior subordinated debentures payable to
affiliate 6.25% due 2026(6).................. 6 -- -- --
Other............................................. 5 41 2 3
Unamortized discount and premium(9)............... (1) -- (2) --
------ ------ ------ ----
Total long-term debt......................... $7,193 $1,836 $8,568 $339
====== ====== ====== ====
96
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- ---------------
(1) Includes amounts due, exchangeable or scheduled to be paid 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 the termination dates of the facilities
under which the funds were borrowed are more than one year from the date
noted.
(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.
(7) London inter-bank offered rate (LIBOR) had a minimum rate of 3% under the
terms of this debt. This term loan was 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
$5 million at both December 31, 2004 and 2005, which is being amortized over
the respective remaining term of the related long-term debt.
(a) LONG-TERM DEBT
Revolving Credit 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 87.5 basis
points based on current credit ratings. An additional utilization fee of 12.5
basis points applies to borrowings whenever more than 50% of the facility is
utilized. Changes in credit ratings could lower or raise the increment to LIBOR
depending on whether ratings improved or were lowered. As of December 31, 2005,
borrowings of $3 million in commercial paper were backstopped by the revolving
credit facility and $27 million in letters of credit were outstanding under the
revolving credit facility.
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
ratings. An additional utilization fee of 12.5 basis points applies to
borrowings whenever more than 50% of the facility is utilized. Changes in credit
ratings could lower or raise the increment to LIBOR depending on whether ratings
improved or were lowered. As of December 31, 2005, there were $4 million in
letters of credit outstanding under the revolving credit facility.
In June 2005, CERC Corp. replaced its $250 million three-year revolving
credit facility with a $400 million five-year revolving credit facility.
Borrowings under this facility may be made at LIBOR plus 55 basis points,
including the facility fee, based on current credit ratings. An additional
utilization fee of 10 basis points applies to borrowings whenever more than 50%
of the facility is utilized. Changes in credit ratings could lower or raise the
increment to LIBOR depending on whether ratings improved or were lowered. As of
December 31, 2005, such credit facility was not utilized.
The bank facilities contain various business and financial covenants with
which the borrowers were in compliance as of December 31, 2005. CenterPoint
Houston's credit facility limits CenterPoint Houston's debt, excluding
transition bonds, as a percentage of its total capitalization to 68 percent.
CERC Corp.'s bank facility and its receivables facility limit CERC's debt as a
percentage of its total capitalization to 65 percent.
97
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Transition Bonds. Pursuant to a financing order issued by the Texas
Utility Commission in March 2005 and affirmed in all respects in August 2005 by
the same Travis County District Court considering the appeal of the True-Up
Order, in December 2005 a subsidiary of CenterPoint Houston issued $1.85 billion
in transition bonds with interest rates ranging from 4.84 percent to 5.30
percent and final maturity dates ranging from February 2011 to August 2020.
Scheduled payment dates range from August 2006 to August 2019. Through issuance
of the transition bonds, CenterPoint Houston recovered approximately $1.7
billion of the true-up balance determined in the True-Up Order plus interest
through the date on which the bonds were issued. The proceeds received from the
issuance of the transition bonds were used to repay CenterPoint Houston's $1.3
billion credit facility, which was utilized in November 2005 to repay
CenterPoint Houston's $1.3 billion term loan upon its maturity.
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. Holders have the right to require the Company to purchase all
or any portion of the notes for cash on May 15, 2008, May 15, 2013 and May 15,
2018 for a purchase price equal to 100% of the principal amount of the notes.
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 August 2005, the Company accepted for exchange approximately $572
million aggregate principal amount of its 3.75% convertible senior notes due
2023 (Old Notes) for an equal amount of its new 3.75% convertible senior notes
due 2023 (New Notes). Old Notes of approximately $3 million remain outstanding.
The Company commenced the exchange offer in response to the guidance set forth
in 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). Under that guidance, because settlement of the principal portion of
the New Notes will be made in cash rather than stock, the exchange of 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
12 for the impact on diluted earnings per share related to these securities. The
Company determined that the New Notes did not have substantially different terms
than the Old Notes, and thus, in accordance with EITF Issue No. 96-19 "Debtor's
Accounting for a Modification or Exchange of Debt Instruments", the exchange
98
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
transaction was accounted for as a modification of the original instrument and
not as an extinguishment of debt. Accordingly, a new effective interest rate was
determined based on the carrying amount of the original debt instrument and the
revised cash flows, and the recorded discount will be amortized as an adjustment
to interest expense in future periods.
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. Holders
have the right to require the Company to purchase all or any portion of the
notes for cash on January 15, 2007, January 15, 2012 and January 15, 2017 for a
purchase price equal to 100% of the principal amount of the notes. 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.
Junior Subordinated Debentures (Trust Preferred Securities). In February
1997, a Delaware statutory business trust created by CenterPoint Energy (HL&P
Capital Trust II) issued to the public $100 million aggregate amount of capital
securities. The trust used the proceeds of the offering to purchase junior
subordinated debentures issued by CenterPoint Energy having an interest rate and
maturity date that correspond to the distribution rate and the mandatory
redemption date of the capital securities. The amount of outstanding junior
subordinated debentures discussed above was included in long-term debt as of
December 31, 2004 and 2005.
The junior subordinated debentures are the trust's 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 the
capital securities, taken together, to constitute a full and unconditional
guarantee by CenterPoint Energy of the trust's obligations with respect to the
capital securities.
The 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.
99
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During any deferral or event of default, CenterPoint Energy may not pay
dividends on its capital stock. As of December 31, 2005, no interest payments on
the junior subordinated debentures had been deferred.
The outstanding aggregate liquidation amount, distribution rate and
mandatory redemption date of the capital securities of the trust described above
and the identity and similar terms of the related series of junior subordinated
debentures are as follows:
AGGREGATE
LIQUIDATION
AMOUNTS AS OF DISTRIBUTION MANDATORY
DECEMBER 31, RATE/ REDEMPTION
------------- INTEREST DATE/
TRUST 2004 2005 RATE MATURITY DATE JUNIOR SUBORDINATED DEBENTURES
- ----- ----- ----- ------------ ------------- ------------------------------
(IN MILLIONS)
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 represented CERC Trust's sole asset
and its entire operations. The $6 million of outstanding junior subordinated
debentures was included in long-term debt as of December 31, 2004. The
convertible preferred securities and the related convertible junior subordinated
debentures were redeemed on August 1, 2005.
Maturities. The Company's maturities of long-term debt (including
scheduled payments on transition bonds), capital leases and sinking fund
requirements, excluding the ZENS obligation, are $230 million in 2006, $153
million in 2007, $666 million in 2008, $181 million in 2009 and $400 million in
2010.
Liens. As of December 31, 2005, 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 2003, 2004 and 2005 have been satisfied by
certification of property additions. The replacement fund requirement to be
satisfied in 2006 is approximately $151 million, and the sinking fund
requirement to be satisfied in 2006 is approximately $3 million. The Company
expects CenterPoint Houston to meet these 2006 obligations by certification of
property additions. As of December 31, 2005, CenterPoint Houston's assets were
also subject to liens securing approximately $2.0 billion of general mortgage
bonds which are junior to the liens of the first mortgage bonds.
(b) RECEIVABLES FACILITY
In January 2006, CERC's $250 million receivables facility, which was
temporarily increased to $375 million for the period from January 2006 to June
2006 to provide additional liquidity to CERC during the peak heating season of
2006, was extended to January 2007. As of December 31, 2005, CERC had $141
million of advances under its receivables facility.
Advances under the receivables facility averaged $100 million, $190 million
and $166 million in 2003, 2004 and 2005, respectively. Sales of receivables were
approximately $1.2 billion, $2.4 billion and $2.0 billion in 2003, 2004 and
2005, respectively.
100
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) INCOME TAXES
The Company's current and deferred components of income tax expense
(benefit) were as follows:
YEAR ENDED DECEMBER 31,
-----------------------
2003 2004 2005
------ ------ -----
(IN MILLIONS)
Current:
Federal................................................... $(301) $(130) $(74)
State..................................................... 5 11 2
----- ----- ----
Total current.......................................... (296) (119) (72)
----- ----- ----
Deferred:
Federal................................................... 487 264 208
State..................................................... 14 (6) 17
----- ----- ----
Total deferred......................................... 501 258 225
----- ----- ----
Income tax expense.......................................... $ 205 $ 139 $153
===== ===== ====
A reconciliation of the federal statutory income tax rate to the effective
income tax rate is as follows:
YEAR ENDED DECEMBER 31,
------------------------
2003 2004 2005
------ ------ ------
(IN MILLIONS)
Income from continuing operations before income taxes and
extraordinary item........................................ $614 $344 $378
Federal statutory rate...................................... 35% 35% 35%
---- ---- ----
Income taxes at statutory rate.............................. 215 120 132
---- ---- ----
Net addition (reduction) in taxes resulting from:
State income taxes, net of valuation allowances and
federal income tax benefit............................. 12 3 13
Amortization of investment tax credit..................... (8) (8) (8)
Excess deferred taxes..................................... (4) (4) (3)
Deferred tax asset write-off.............................. -- 19 --
Increase in tax reserve................................... -- 7 32
Other, net................................................ (10) 2 (13)
---- ---- ----
Total.................................................. (10) 19 21
---- ---- ----
Income tax expense.......................................... $205 $139 $153
==== ==== ====
Effective rate.............................................. 33.4% 40.4% 40.6%
101
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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,
---------------
2004 2005
------ ------
(IN MILLIONS)
Deferred tax assets:
Current:
Allowance for doubtful accounts........................ $ 13 $ 20
Regulatory liabilities................................. 79 --
Non-trading derivative assets, net..................... 28 16
------ ------
Total current deferred tax assets.................... 120 36
------ ------
Non-current:
Loss carryforwards..................................... 30 26
Deferred gas costs..................................... 69 59
Other.................................................. 98 102
------ ------
Total non-current deferred tax assets before
valuation allowance................................. 197 187
------ ------
Valuation allowance.................................... (20) (21)
------ ------
Total non-current deferred tax assets................ 177 166
------ ------
Total deferred tax assets, net....................... 297 202
------ ------
Deferred tax liabilities:
Current:
Unrealized gain on indexed debt securities............. 287 348
Unrealized gain on Time Warner investments............. 94 73
------ ------
Total current deferred tax liabilities............... 381 421
------ ------
Non-current:
Depreciation........................................... 1,709 1,432
Regulatory assets, net................................. 748 1,076
Employee benefits...................................... 38 52
Other.................................................. 97 80
------ ------
Total non-current deferred tax liabilities........... 2,592 2,640
------ ------
Total deferred tax liabilities....................... 2,973 3,061
------ ------
Accumulated deferred income taxes, net............ $2,676 $2,859
====== ======
Tax Attribute Carryforwards. Based on returns filed the Company has $239
million of state net operating loss carryforwards. The losses are available to
offset future state taxable income through the year 2024. Substantially all of
the state loss carryforwards will expire between 2012 and 2020. A valuation
allowance has been established against approximately 58% of the state net
operating loss carryforwards.
The valuation allowance reflects a net decrease of $53 million in 2004 and
an increase of $1 million in 2005. The net changes resulted from a reassessment
of the Company's ability to use federal capital loss and state net operating
loss carryforwards in 2004 and state net operating loss carryforwards, in 2005.
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CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Tax Refunds. In 2004, the Company received a refund from the IRS of $163
million, related to the carryback of the federal tax net operating loss
generated in 2003.
Tax Contingencies. CenterPoint Energy's consolidated federal income tax
returns have been audited and settled through the 1996 tax year.
In the audits of the 1997 through 2003 tax years, the IRS disallowed all
deductions for original issue discount (OID) and interest paid relating to the
Company's 2.0% ZENS, due 2029, and the 7% Automatic Common Exchange Securities
(ACES), redeemed in 1999. 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 Internal Revenue Code of
1986, as amended and (2) the indebtedness underlying those instruments was
incurred to carry the TW Common. If the IRS prevails on both of those positions,
none of the OID and interest paid on the ZENS and ACES would be currently
deductible but would instead be added to the Company's basis in the TW Common it
holds. The capitalization of OID and interest 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 disallowance of the ZENS and ACES
OID and interest paid, reserves have been established for the tax and interest
on this issue totaling $79 million and $121 million as of December 31, 2004 and
2005, respectively. The Company has also established reserves for other
significant tax items including issues relating to prior acquisitions and
dispositions of business operations and certain positions taken with respect to
state tax filings. The total amount reserved for the other tax items is
approximately $74 million and $60 million as of December 31, 2004 and 2005,
respectively.
(10) COMMITMENTS AND CONTINGENCIES
(a) FUEL COMMITMENTS
Fuel commitments include natural gas contracts related to the Company's
natural gas distribution and competitive natural gas sales and services
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, 2005 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 $858 million in 2006, $375 million in
2007, $53 million in 2008, $4 million in 2009, $3 million in 2010 and $23
million in 2011 and thereafter.
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CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(b) LEASE COMMITMENTS
The following table sets forth information concerning the Company's
obligations under non-cancelable long-term operating leases at December 31,
2005, which primarily consist of rental agreements for building space, data
processing equipment and vehicles (in millions):
2006........................................................ $20
2007........................................................ 18
2008........................................................ 14
2009........................................................ 7
2010........................................................ 4
2011 and beyond............................................. 22
---
Total..................................................... $85
===
Total lease expense for all operating leases was $35 million, $32 million
and $37 million during 2003, 2004 and 2005, respectively.
(c) CAPITAL COMMITMENTS
In October 2005, CEGT signed a firm transportation agreement with XTO
Energy to transport 600 million cubic feet (MMcf) per day of natural gas from
Carthage, Texas to CEGT's Perryville hub in Northeast Louisiana. To accommodate
this transaction, CEGT is in the process of filing applications for certificates
with the FERC to build a 172 mile, 42-inch diameter pipeline, and related
compression facilities at an estimated cost of $400 million. The final capacity
of the pipeline will be between 960 MMcf per day and 1.24 billion cubic feet per
day. CEGT expects to have firm contracts for the full capacity of the pipeline
prior to its expected in service date in early 2007. During the four year period
subsequent to the in service date of the pipeline, XTO can request, and subject
to mutual negotiations that meet specific financial parameters, CEGT would
construct a 67 mile extension from CEGT's Perryville hub to an interconnect with
Texas Eastern Gas Transmission at Union Church, Mississippi.
(d) 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.
Electricity and Gas Market Manipulation Cases. A large number of lawsuits
have been filed against numerous market participants and remain pending in
federal court in California, Nevada and Kansas and in California state court 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
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CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. 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.
The Company or its predecessor, Reliant Energy, has been named in
approximately 30 of these lawsuits, which were instituted between 2001 and 2005
and are pending in California state court in San Diego County and in federal
district courts in San Francisco, San Diego, Los Angeles, Fresno, Sacramento,
San Jose, Kansas 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.
To date, several of the electricity complaints have been dismissed, and
several of the dismissals have been affirmed by appellate courts. Others have
been resolved by the settlement described in the following paragraph. Four of
the gas complaints have also been dismissed based on defendants' claims of
federal preemption and the filed rate doctrine, and these dismissals have been
appealed. In June 2005, a San Diego state court refused to dismiss other gas
complaints on the same basis. The other gas cases remain in the early procedural
stages.
On August 12, 2005, RRI reached a settlement with the states of California,
Washington and Oregon, California's three largest investor-owned utilities,
classes of consumers from California and other western states, and a number of
California city and county government entities that resolves their claims
against RRI related to the operation of the electricity markets in California
and certain other western states in 2000-2001. The settlement also resolves the
claims of the states and the investor-owned utilities related to the 2000-2001
natural gas markets. The settlement has been approved by the FERC and by the
California Public Utilities Commission, and now must be approved by the courts
in which the class action cases are pending. This approval is expected in the
second quarter of 2006. The Company is not a party to the settlement, but may
rely on the settlement as a defense to any claims brought against it related to
the time when the Company was an affiliate of RRI. The terms of the settlement
do not require payment by the Company.
Other Class Action Lawsuits. A number of class action lawsuits filed in
2002 on behalf of purchasers of securities of RRI and/or Reliant Energy were
consolidated in federal district court in Houston. The consolidated complaint
named RRI, certain of its current and former executive officers, 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 complaint sought monetary relief 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 could be traced
to the RRI Offering. The plaintiffs alleged, among other things, that the
defendants misrepresented 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 July 2005, the parties announced that they had reached agreement on a
settlement of this matter, and in January 2006, following a hearing, the trial
judge approved that settlement and dismissed this matter. The terms of the
settlement do not require payment by the Company.
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 the Company. Two of the lawsuits were dismissed
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CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
without prejudice. In the remaining lawsuit, the Company and certain current and
former members of its benefits committee are defendants. That lawsuit alleged
that the defendants breached their fiduciary duties to various employee benefits
plans, directly or indirectly sponsored by the Company, in violation of the
Employee Retirement Income Security Act of 1974 by permitting the plans to
purchase or hold securities issued by the Company when it was imprudent to do
so, including after the prices for such securities became artificially inflated
because of alleged securities fraud engaged in by the defendants. The complaint
sought monetary damages for losses suffered on behalf of the plans and a
putative class of plan participants whose accounts held CenterPoint Energy or
RRI securities, as well as restitution. In January 2006, the federal district
judge granted a motion for summary judgment filed by the Company and the
individual defendants. The plaintiffs have filed an appeal of the ruling to the
Fifth Circuit Court of Appeals. The Company believes that this lawsuit is
without merit and will continue to vigorously defend the case. However, the
ultimate outcome of this matter cannot be predicted at this time.
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 the
plaintiff appealed to the U.S. Fifth Circuit Court of Appeals, which affirmed
the dismissal. The plaintiff then sought review by the U.S. Supreme Court in a
petition for certiorari which was denied. Thus, this matter has now been finally
resolved in favor of the defendants.
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 in 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. In December 2005, the district court judge granted the
defendants' motion to dismiss the complaint. Subsequently, a settlement was
reached under which the CenterPoint Energy entities have been fully released
from all claims without the payment of any settlement amount by the Company.
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. After a jury trial involving the Three Cities' claims (but not
the class of cities), and a subsequent appeal, a state court of appeals in
Houston rendered an opinion that the Three Cities should take nothing by their
claims. The Texas Supreme Court declined further review. Thus, the Three Cities'
claims have been finally resolved in the Company's favor. Individual claims of
the remaining 45 cities were filed in the state district court and remain
pending before that same court. Other than the City of Houston nonsuiting its
claim in February 2006, there has been no activity on these claims since the
Texas Supreme Court declined further review of the Three Cities' claims. The
Company does not expect the
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CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
outcome of the remaining claims to have a material impact on its financial
condition, results of operations or cash flows.
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 the ultimate outcome to
have a material impact on the financial condition, results of operations or cash
flows 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., all of which are subsidiaries of the Company. The plaintiffs
alleged 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 Louisiana Public Service Commission (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
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CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 February 2005, the Wharton County case was removed to federal
district court in Houston, Texas, and in March 2005, the plaintiffs voluntarily
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 allegations in these cases are
similar to those asserted in the City of Tyler proceeding described in Note
4(e). The Company and CERC do not expect the outcome of these matters to have a
material impact on the financial condition, results of operations or cash flows
of either the Company or CERC.
Pipeline Safety Compliance. Pursuant to an order from the Minnesota Office
of Pipeline Safety, CERC substantially completed removal of certain
non-code-compliant components from a portion of its distribution system by
December 2, 2005. The components were installed by a predecessor company, which
was not affiliated with CERC during the period in which the components were
installed. In November 2005, Minnesota Gas filed a request with the MPUC to
recover the capitalized expenditures (approximately $39 million) and related
expenses, together with a return on and of the capitalized portion through
rates.
Minnesota Cold Weather Rule. In December 2004, the MPUC opened an
investigation to determine whether Minnesota Gas' practices regarding restoring
natural gas service during the period between October 15 and April 15 (Cold
Weather Period) are in compliance with the MPUC's Cold Weather Rule (CWR), which
governs disconnection and reconnection of customers during the Cold Weather
Period. The Minnesota Office of the Attorney General (OAG) issued its report
alleging Minnesota Gas has violated the CWR and recommended a $5 million
penalty. Minnesota Gas and the OAG have reached an agreement on procedures to be
followed for the current Cold Weather Period which began on October 15, 2005. In
addition, in June 2005, CERC was named in a suit filed in the United States
District Court, District of Minnesota on behalf of a purported class of
customers who allege that Minnesota Gas' conduct under the CWR was in violation
of the law. Minnesota Gas is in settlement discussions regarding both the OAG's
action and the action on behalf of the purported class. The Company and CERC do
not expect the outcome of this matter to have a material impact on the financial
condition, results of operations or cash flows of either the Company or CERC.
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 liquid 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
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CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
diminution of value of their property, and, in addition, seek damages for
trespass, punitive, and exemplary damages. The Company does not expect the
ultimate cost associated with resolving this matter to have a material impact on
the financial condition, results of operations or cash flows 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, 2005, CERC had accrued $14 million for remediation of these
Minnesota sites. At December 31, 2005, the estimated range of possible
remediation costs for these sites was $4 million to $35 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, 2005, CERC has collected $13
million from insurance companies and rate payers 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 been named as a defendant in two lawsuits filed in United
States District Court, District of Maine and Middle District of Florida,
Jacksonville Division under which contribution is sought by private parties for
the cost to remediate former MGP sites based on the previous ownership of such
sites by former affiliates of CERC or its divisions. CERC has also been
identified as a PRP by the State of Maine for a site that is the subject of one
of the lawsuits. In March 2005, the court considering the other suit for
contribution granted CERC's motion to dismiss on the grounds that CERC was not
an "operator" of the site as had been alleged. The plaintiff in that case has
filed an appeal of the court's dismissal of CERC. 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 and its designation as a PRP.
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. The
Company has found this type of contamination 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 the Company's experience 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. Facilities owned by the Company contain or have contained
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's
subsidiaries but currently owned by Texas Genco LLC. The Company anticipates
that additional claims like those received may be asserted in
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CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the future. Under the terms of the separation agreement between the Company and
Texas Genco, ultimate financial responsibility for uninsured losses from claims
relating to facilities transferred to Texas Genco 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 expect,
based on its experience to date, these matters, either individually or in the
aggregate, to have a material adverse effect on the Company's financial
condition, results of operations or cash flows.
Other 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
expect, based on its experience to date, these matters, either individually or
in the aggregate, to have a material adverse effect on the Company's financial
condition, results of operations or cash flows.
OTHER PROCEEDINGS
The Company is involved in other legal, environmental, tax and regulatory
proceedings before various courts, regulatory commissions and governmental
agencies regarding matters arising in the ordinary course of business. Some of
these proceedings involve substantial amounts. The Company's management
regularly analyzes current information and, as necessary, provides accruals for
probable liabilities on the eventual disposition of these matters. The Company's
management does not expect the disposition of these matters to have a material
adverse effect on the Company's financial condition, results of operations or
cash flows.
GUARANTEES
Prior to CenterPoint Energy's distribution of its ownership in RRI to its
shareholders, CERC had guaranteed certain contractual obligations of what became
RRI's trading subsidiary. Under the terms of the separation agreement between
the companies, RRI agreed to extinguish all such guarantee obligations prior to
separation, but when separation occurred in September 2002, RRI had been unable
to extinguish all obligations. To secure CenterPoint Energy and CERC against
obligations under the remaining guarantees, RRI agreed to provide cash or
letters of credit for the benefit of CERC and CenterPoint Energy, and undertook
to use commercially reasonable efforts to extinguish the remaining guarantees.
The Company's current exposure under the remaining guarantees relates to CERC's
guarantee of the payment by RRI of demand charges related to transportation
contracts with one counterparty. The demand charges are approximately $53
million per year in 2006 through 2015, $49 million in 2016, $38 million in 2017
and $13 million in 2018. As a result of changes in market conditions,
CenterPoint Energy's potential exposure under that guarantee currently exceeds
the security provided by RRI. CenterPoint Energy has requested RRI to increase
the amount of its existing letters of credit or, in the alternative, to obtain a
release of CERC's obligations under the guarantee, and CenterPoint Energy and
RRI are pursuing alternatives. RRI continues to meet its obligations under the
transportation contracts.
TEXAS GENCO MATTERS
CenterPoint Houston, as collection agent for the nuclear decommissioning
charge assessed on its transmission and distribution customers, transferred $2.9
million in 2003 and 2004 and $3.2 million in 2005 to trusts established to fund
Texas Genco's share of the decommissioning costs for the South Texas Project.
There are various investment restrictions imposed upon Texas Genco by the Texas
Utility Commission and
110
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Nuclear Regulatory Commission relating to Texas Genco's nuclear
decommissioning trusts. Pursuant to the provisions of both a separation
agreement and the Texas Utility Commission's final order, CenterPoint Houston
and Texas Genco are presently jointly administering the decommissioning funds
through the Nuclear Decommissioning Trust Investment Committee. 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. As
administrators of the decommissioning funds, CenterPoint Houston and Texas Genco
are jointly responsible for assuring that the funds are prudently invested in a
manner consistent with the rules of the Texas Utility Commission. On February 2,
2006, CenterPoint Houston and Texas Genco filed a request with the Texas Utility
Commission to name Texas Genco as the sole fund administrator. 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.
(11) 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, 2004
and 2005 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, 2004 DECEMBER 31, 2005
----------------- -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------ -------- ------
(IN MILLIONS)
Financial liabilities:
Long-term debt.................................. $8,913 $9,601 $8,794 $9,277
111
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(12) EARNINGS PER SHARE
The following table reconciles numerators and denominators of the Company's
basic and diluted earnings (loss) per share calculations:
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------
2003 2004 2005
--------------- --------------- ---------------
(IN MILLIONS, EXCEPT PER SHARE AND SHARE AMOUNTS)
Basic earnings (loss) per share calculation:
Income from continuing operations before
extraordinary item............................ $ 409 $ 205 $ 225
Income (loss) from discontinued operations, net
of tax........................................ 75 (133) (3)
Extraordinary item, net of tax................... -- (977) 30
------------ ------------ ------------
Net income (loss)................................ $ 484 $ (905) $ 252
============ ============ ============
Weighted average shares outstanding................ 303,867,000 307,185,000 309,349,000
Basic earnings (loss) per share:
Income from continuing operations before
extraordinary item............................ $ 1.35 $ 0.67 $ 0.72
Income (loss) from discontinued operations, net
of tax........................................ 0.24 (0.43) (0.01)
Extraordinary item, net of tax................... -- (3.18) 0.10
------------ ------------ ------------
Net income (loss)................................ $ 1.59 $ (2.94) $ 0.81
============ ============ ============
Diluted earnings (loss) per share calculation:
Net income (loss)................................ $ 484 $ (905) $ 252
Plus: Income impact of assumed conversions:
Interest on 3.75% contingently convertible
senior notes................................ 9 14 9
Interest on 6.25% convertible trust preferred
securities.................................. -- -- --
------------ ------------ ------------
Total earnings effect assuming dilution.......... $ 493 $ (891) $ 261
============ ============ ============
Weighted average shares outstanding................ 303,867,000 307,185,000 309,349,000
Plus: Incremental shares from assumed
conversions:
Stock options(1).............................. 851,000 1,203,000 1,241,000
Restricted stock.............................. 1,484,000 1,447,000 1,851,000
3.75% contingently convertible senior notes... 30,745,000 49,655,000 33,587,000
6.25% convertible trust preferred
securities.................................. 18,000 16,000 --
------------ ------------ ------------
Weighted average shares assuming dilution........ 336,965,000 359,506,000 346,028,000
============ ============ ============
Diluted earnings (loss) per share:
Income from continuing operations before
extraordinary item............................ $ 1.24 $ 0.61 $ 0.67
Income (loss) from discontinued operations, net
of tax........................................ 0.22 (0.37) (0.01)
Extraordinary item, net of tax................... -- (2.72) 0.09
------------ ------------ ------------
Net income (loss)................................ $ 1.46 $ (2.48) $ 0.75
============ ============ ============
112
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- ---------------
(1) Options to purchase 10,106,673, 11,892,508 and 8,677,660 shares were
outstanding for the years ended December 31, 2003, 2004 and 2005,
respectively, but were not included in the computation of diluted earnings
(loss) per share because the options' exercise price was greater than the
average market price of the common shares for the respective years.
In accordance with EITF 04-8, because all of the 2.875% contingently
convertible senior notes and approximately $572 million of the 3.75%
contingently convertible senior notes (subsequent to the August 2005 exchange
discussed in Note 8) provide for settlement of the principal portion in cash
rather than stock, the Company excludes the portion of the conversion value of
these notes attributable to their principal amount from its computation of
diluted earnings per share from continuing operations. The Company includes the
conversion spread in the calculation of diluted earnings per share when the
average market price of the Company's common stock in the respective reporting
period exceeds the conversion price. The conversion prices for the 2.875% and
the 3.75% contingently convertible senior notes are $12.81 and $11.58,
respectively.
(13) UNAUDITED QUARTERLY INFORMATION
The consolidated financial statements for 2004 and 2005 have been prepared
to reflect the sale of Texas Genco as described in Note 3. Accordingly, the
consolidated financial statements present the Texas Genco business as
discontinued operations, in accordance with SFAS No. 144.
Summarized quarterly financial data is as follows:
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 item, 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 item, 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 item, net of tax.................. -- -- (2.88) (0.23)
------ ------ ------- ------
Net income (loss)............................... $ 0.22 $ 0.19 $ (3.66) $ 0.29
====== ====== ======= ======
113
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31, 2005
-----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Revenues........................................... $2,595 $1,842 $2,073 $3,212
Operating income................................... 276 186 225 252
Income from continuing operations.................. 67 27 50 81
Discontinued operations, net of tax................ -- (3) -- --
Extraordinary item, net of tax..................... -- 30 -- --
------ ------ ------ ------
Net income......................................... $ 67 $ 54 $ 50 $ 81
====== ====== ====== ======
Basic earnings (loss) per share:(1)
Income from continuing operations................ $ 0.22 $ 0.09 $ 0.16 $ 0.26
Discontinued operations, net of tax.............. -- (0.01) -- --
Extraordinary item, net of tax................... -- 0.10 -- --
------ ------ ------ ------
Net income....................................... $ 0.22 $ 0.18 $ 0.16 $ 0.26
====== ====== ====== ======
Diluted earnings (loss) per share:(1)
Income from continuing operations................ $ 0.20 $ 0.09 $ 0.15 $ 0.25
Discontinued operations, net of tax.............. -- (0.01) -- --
Extraordinary item, net of tax................... -- 0.08 -- --
------ ------ ------ ------
Net income....................................... $ 0.20 $ 0.16 $ 0.15 $ 0.25
====== ====== ====== ======
- ---------------
(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 3.75% 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 3.75% contingently convertible notes are included in the calculation of
diluted earnings per share for the fourth quarter of 2004, and the first and
second quarters of 2005, as they are dilutive. In the third quarter of 2005,
the Company modified approximately $572 million of the 3.75% contingently
convertible senior notes to provide for settlement of the principal portion
in cash rather than stock. Accordingly, the Company excludes the portion of
the conversion value of these notes and the 2.875% contingently convertible
notes attributable to their principal amount from its computation of diluted
earnings per share from continuing operations. The Company includes the
conversion spread in the calculation of diluted earnings per share when the
average market price of the Company's common stock in the respective
reporting period exceeds the conversion price.
(14) 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 uses operating income as
the measure of profit or loss for its business segments.
The Company's reportable business segments include the following: Electric
Transmission & Distribution, Natural Gas Distribution, Competitive Natural Gas
Sales and Services, Pipelines and Field Services
114
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(formerly 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. The Company reorganized the oversight of its Natural Gas Distribution
business segment and, as a result, beginning in the fourth quarter of 2005, the
Company established a new reportable business segment, Competitive Natural Gas
Sales and Services. Competitive Natural Gas Sales and Services represents the
Company's non-rate regulated gas sales and services operations, which consist of
three operational functions: wholesale, retail and intrastate pipelines.
Pipelines and Field Services 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 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. All prior period segment information has been
reclassified to conform to the 2005 presentation.
Long-lived assets include net property, plant and equipment, net goodwill
and other intangibles and equity investments in unconsolidated subsidiaries.
Intersegment sales are eliminated in consolidation.
Financial data for business segments and products and services are as
follows (in millions):
ELECTRIC COMPETITIVE PIPELINES
TRANSMISSION NATURAL NATURAL GAS AND
& GAS SALES AND FIELD OTHER DISCONTINUED RECONCILING
DISTRIBUTION DISTRIBUTION SERVICES SERVICES OPERATIONS OPERATIONS ELIMINATIONS CONSOLIDATED
------------ ------------ ----------- --------- ---------- ------------ ------------ ------------
AS OF AND FOR THE
YEAR ENDED
DECEMBER 31,
2003:
Revenues from
external
customers(1).... $ 2,124(2) $3,389 $2,017(3) $ 244(4) $ 16 $ -- $ -- $ 7,790
Intersegment
revenues........ -- -- 215 163 12 -- (390) --
Depreciation and
amortization.... 270 135 1 40 20 -- -- 466
Operating income
(loss).......... 1,020 157 45 158 (25) -- -- 1,355
Total assets...... 10,387 4,031 825 2,519 1,746 4,244 (2,291) 21,461
Expenditures for
long-lived
assets.......... 218 198 1 66 14 162 -- 659
AS OF AND FOR THE
YEAR ENDED
DECEMBER 31,
2004:
Revenues from
external
customers....... $ 1,521(2) $3,577 $2,593(3) $ 306(4) $ 2 $ -- $ -- $ 7,999
Intersegment
revenues........ -- 2 255 145 6 -- (408) --
Depreciation and
amortization.... 284 141 2 44 19 -- -- 490
Operating income
(loss).......... 494 178 44 180 (32) -- -- 864
Extraordinary
item, net of
tax............. 977 -- -- -- -- -- -- 977
Total assets...... 8,783 4,083 964 2,637 2,794(5) 1,565 (2,730) 18,096
Expenditures for
long-lived
assets.......... 235 196 1 73 25 74 -- 604
115
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ELECTRIC COMPETITIVE PIPELINES
TRANSMISSION NATURAL NATURAL GAS AND
& GAS SALES AND FIELD OTHER DISCONTINUED RECONCILING
DISTRIBUTION DISTRIBUTION SERVICES SERVICES OPERATIONS OPERATIONS ELIMINATIONS CONSOLIDATED
------------ ------------ ----------- --------- ---------- ------------ ------------ ------------
AS OF AND FOR THE
YEAR ENDED
DECEMBER 31,
2005:
Revenues from
external
customers....... $ 1,644(2) $3,837 $3,884 $ 346 $ 11 $ -- $ -- $ 9,722
Intersegment
revenues........ -- 9 245 147 8 -- (409) --
Depreciation and
amortization.... 322 152 2 45 20 -- -- 541
Operating income
(loss).......... 487 175 60 235 (18) -- -- 939
Extraordinary
item, net of
tax............. (30) -- -- -- -- -- -- (30)
Total assets...... 8,227 4,612 1,849 2,968 2,202(5) -- (2,742) 17,116
Expenditures for
long-lived
assets.......... 281 249 12 156 21 9 -- 728
- ---------------
(1) Revenues from external customers for the Electric Transmission &
Distribution business segment include ECOM revenues of $661 million for
2003.
(2) Sales to subsidiaries of RRI in 2003, 2004 and 2005 represented
approximately $948 million, $882 million and $812 million, respectively, of
CenterPoint Houston's transmission and distribution revenues.
(3) Sales to Texas Genco in 2003 and 2004 represented approximately $28 million
and $20 million, respectively, of the Competitive Natural Gas Sales and
Services 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 2003 and 2004 represented approximately $3 million
and $2 million, respectively, of the Pipelines and Field Services business
segment's revenues from external customers. Texas Genco has been presented
as discontinued operations in these consolidated financial statements.
(5) Included in total assets of Other Operations as of December 31, 2004 and
2005 is a pension asset of $610 million and $654 million, respectively. See
Note 2(o) for further discussion.
YEAR ENDED DECEMBER 31,
------------------------
2003 2004 2005
------ ------ ------
(IN MILLIONS)
Revenues by Products and Services:
Electric delivery sales.................................... $1,463 $1,521 $1,644
ECOM revenue............................................... 661 -- --
Retail gas sales........................................... 3,954 4,239 4,871
Wholesale gas sales........................................ 1,064 1,526 2,410
Gas transport.............................................. 537 613 684
Energy products and services............................... 111 100 113
------ ------ ------
Total.................................................... $7,790 $7,999 $9,722
====== ====== ======
(15) SUBSEQUENT EVENT
On January 26, 2006, the Company's board of directors declared a regular
quarterly cash dividend of $0.15 per share of common stock payable on March 10,
2006, to shareholders of record as of the close of business on February 16,
2006.
116
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an
evaluation, under the supervision and with the participation of management,
including our principal executive officer and principal financial officer, of
the effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report. Based on that evaluation, our principal executive
officer and principal financial officer concluded that our disclosure controls
and procedures were effective as of December 31, 2005 to provide assurance that
information required to be disclosed in our reports filed or submitted under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms.
"Management's Annual Report on Internal Control over Financial Reporting"
appears on page 118 of this annual report on Form 10-K. In December 2005, the
Company determined that, during 2004 and 2005, certain transactions involving
purchases and sales of natural gas among divisions within its Natural Gas
Distribution and Competitive Natural Gas Sales and Services segments were not
properly eliminated in the consolidated financial statements. Consequently,
revenues and natural gas expenses during the year ended December 31, 2004 were
each overstated by approximately $511 million and during the nine months ended
September 30, 2005 were each overstated by approximately $402 million.
Management concluded that a restatement of the 2004 consolidated financial
statements and the 2005 interim consolidated financial statements was necessary
to correct this error. In connection with the discovery of the error described
above and the conclusion that the Company had a material weakness in its
internal control over financial reporting related to ineffective controls over
the process of eliminating certain interdivision purchases and sales of natural
gas within its Natural Gas Distribution and Competitive Natural Gas Sales and
Services segments in the consolidation process, the Company improved procedures
related to the recording and reporting of purchases and sales of natural gas
during the three months ended December 31, 2005, including increased review and
approval controls by senior financial personnel over the personnel that prepare
the accruals and enhanced analysis of the recorded activity, including ensuring
that intercompany activity is properly eliminated in consolidation. Management
believes these changes remediated the material weakness in internal control over
financial reporting referenced above as of December 31, 2005.
117
MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
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.
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal Control -- Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on our evaluation under the framework in Internal
Control -- Integrated Framework, our management has concluded that our internal
control over financial reporting was effective as of December 31, 2005.
Deloitte & Touche LLP, the Company's independent registered public
accounting firm, has issued an attestation report on our management's assessment
of the effectiveness of our internal control over financial reporting as of
December 31, 2005 which is included herein on page 119.
118
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, that
CenterPoint Energy, Inc. and subsidiaries (the "Company") maintained effective
internal control over financial reporting as of December 31, 2005, 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 opinion, management's assessment that the Company maintained
effective internal control over financial reporting as of December 31, 2005, 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, the Company
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2005, based on the criteria established in Internal
Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
119
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated financial
statements as of and for the year ended December 31, 2005 of the Company and our
report dated March 15, 2006 expressed an unqualified opinion on those financial
statements and included an explanatory paragraph regarding the Company's
adoption of a new accounting standard related to conditional asset retirement
obligations.
DELOITTE & TOUCHE LLP
Houston, Texas
March 15, 2006
ITEM 9B. OTHER INFORMATION
None.
120
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information called for by Item 10, to the extent not set forth in
"Executive Officers" in Item 1, is or will be set forth in the definitive proxy
statement relating to CenterPoint Energy's 2006 annual meeting of shareholders
pursuant to SEC Regulation 14A. Such definitive proxy statement relates to a
meeting of shareholders involving the election of directors and the portions
thereof called for by Item 10 are incorporated herein by reference pursuant to
Instruction G to Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 11 is or will be set forth in the
definitive proxy statement relating to CenterPoint Energy's 2006 annual meeting
of shareholders pursuant to SEC Regulation 14A. Such definitive proxy statement
relates to a meeting of shareholders involving the election of directors and the
portions thereof called for by Item 11 are incorporated herein by reference
pursuant to Instruction G to Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information called for by Item 12 is or will be set forth in the
definitive proxy statement relating to CenterPoint Energy's 2006 annual meeting
of shareholders pursuant to SEC Regulation 14A. Such definitive proxy statement
relates to a meeting of shareholders involving the election of directors and the
portions thereof called for by Item 12 are incorporated herein by reference
pursuant to Instruction G to Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Item 13 is or will be set forth in the
definitive proxy statement relating to CenterPoint Energy's 2006 annual meeting
of shareholders pursuant to SEC Regulation 14A. Such definitive proxy statement
relates to a meeting of shareholders involving the election of directors and the
portions thereof called for by Item 13 are incorporated herein by reference
pursuant to Instruction G to Form 10-K.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information called for by Item 14 is or will be set forth in the
definitive proxy statement relating to CenterPoint Energy's 2006 annual meeting
of shareholders pursuant to SEC Regulation 14A. Such definitive proxy statement
relates to a meeting of shareholders involving the election of directors and the
portions thereof called for by Item 14 are incorporated herein by reference
pursuant to Instruction G to Form 10-K.
121
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements.
Report of Independent Registered Public Accounting Firm... 59
Statements of Consolidated Operations for the Three Years
Ended December 31, 2005................................ 60
Statements of Consolidated Comprehensive Income for the
Three Years Ended December 31, 2005.................... 61
Consolidated Balance Sheets at December 31, 2004 and
2005................................................... 62
Statements of Consolidated Cash Flows for the Three Years
Ended December 31, 2005................................ 63
Statements of Consolidated Shareholders' Equity for the
Three Years Ended December 31, 2005.................... 64
Notes to Consolidated Financial Statements................ 65
(a)(2) Financial Statement Schedules for the Three Years Ended December
31, 2005.
Report of Independent Registered Public Accounting Firm... 123
I -- Condensed Financial Information of CenterPoint
Energy, Inc. (Parent Company).......................... 124
II -- Qualifying Valuation Accounts....................... 130
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.
(a)(3) Exhibits.
See Index of Exhibits beginning on page 133, which index also includes the
management contracts or compensatory plans or arrangements required to be filed
as exhibits to this Form 10-K by Item 601(b)(10)(iii) of Regulation S-K.
122
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
CenterPoint Energy, Inc.
Houston, Texas
We have audited the consolidated financial statements of CenterPoint
Energy, Inc. and subsidiaries (the "Company") as of December 31, 2005 and 2004,
and for each of the three years in the period ended December 31, 2005, and have
issued our report thereon dated March 15, 2006 (which report expresses an
unqualified opinion and includes an explanatory paragraph relating to the
Company's adoption of a new accounting standard for conditional asset retirement
obligations). We have also audited management's assessment of the effectiveness
of the Company's internal control over financial reporting as of December 31,
2005 and the effectiveness of the Company's internal control over financial
reporting as of December 31, 2005, and have issued our report thereon dated
March 15, 2006; such reports are included elsewhere in this Form 10-K. 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, 2006
123
CENTERPOINT ENERGY, INC.
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF
CENTERPOINT ENERGY, INC. (PARENT COMPANY)
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2003 2004 2005
------ ------- ------
(IN MILLIONS)
Equity Income of Subsidiaries............................... $851 $ 707 $425
Interest Income from Subsidiaries........................... 63 21 15
Loss on Disposal of Subsidiary.............................. -- (366) (14)
Gain (Loss) on Indexed Debt Securities...................... (96) (20) 49
Operation and Maintenance Expenses.......................... (13) (21) (29)
Depreciation and Amortization............................... (14) -- --
Taxes Other than Income..................................... (5) -- --
Interest Expense to Subsidiaries............................ (93) (80) (61)
Interest Expense............................................ (394) (303) (204)
Income Tax Benefit.......................................... 185 134 41
Extraordinary Item, net of tax.............................. -- (977) 30
---- ----- ----
Net Income (Loss)........................................... $484 $(905) $252
==== ===== ====
See CenterPoint Energy, Inc. and Subsidiaries Notes to Consolidated Financial
Statements in Part II, Item 8
124
CENTERPOINT ENERGY, INC.
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF
CENTERPOINT ENERGY, INC. (PARENT COMPANY)
BALANCE SHEETS
DECEMBER 31,
---------------
2004 2005
------ ------
(IN MILLIONS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ -- $ 1
Notes receivable -- subsidiaries.......................... 126 460
Accounts receivable -- subsidiaries....................... 30 22
Other assets.............................................. 2 3
------ ------
Total current assets................................... 158 486
------ ------
PROPERTY, PLANT AND EQUIPMENT, NET.......................... 6 --
------ ------
OTHER ASSETS:
Investment in subsidiaries................................ 6,032 5,225
Notes receivable -- subsidiaries.......................... 321 172
Other assets.............................................. 675 714
------ ------
Total other assets..................................... 7,028 6,111
------ ------
TOTAL ASSETS......................................... $7,192 $6,597
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable -- subsidiaries............................. $ 127 $ 5
Current portion of long-term debt......................... 107 109
Indexed debt securities derivative........................ 342 292
Accounts payable:
Subsidiaries........................................... 37 30
Other.................................................. 5 4
Taxes accrued............................................. 811 698
Interest accrued.......................................... 26 26
Other..................................................... 14 22
------ ------
Total current liabilities.............................. 1,469 1,186
------ ------
OTHER LIABILITIES:
Accumulated deferred tax liabilities...................... 433 328
Benefit obligations....................................... 54 78
Notes payable -- subsidiaries............................. 1,167 923
Other..................................................... 98 157
------ ------
Total non-current liabilities.......................... 1,752 1,486
------ ------
LONG-TERM DEBT.............................................. 2,865 2,629
------ ------
SHAREHOLDERS' EQUITY:
Common stock.............................................. 3 3
Additional paid-in capital................................ 2,891 2,931
Accumulated deficit....................................... (1,728) (1,600)
Accumulated other comprehensive loss...................... (60) (38)
------ ------
Total shareholders' equity............................. 1,106 1,296
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........... $7,192 $6,597
====== ======
See CenterPoint Energy, Inc. and Subsidiaries Notes to Consolidated Financial
Statements in Part II, Item 8
125
CENTERPOINT ENERGY, INC.
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF
CENTERPOINT ENERGY, INC. (PARENT COMPANY)
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED
DECEMBER 31,
-------------------------
2003 2004 2005
------- ------- -----
(IN MILLIONS)
OPERATING ACTIVITIES:
Net income (loss)......................................... $ 484 $ (905) $ 252
Loss on disposal of subsidiary............................ -- 366 14
Extraordinary item, net of tax............................ -- 977 (30)
------- ------- -----
Adjusted income........................................... 484 438 236
Non-cash items included in net income (loss):
Equity income of subsidiaries........................... (850) (707) (425)
Deferred income tax expense............................. 66 155 106
Depreciation and amortization........................... 14 -- --
Amortization of debt issuance costs..................... 112 70 37
Loss (gain) on indexed debt securities.................. 96 20 (49)
Changes in working capital:
Accounts receivable/(payable) from subsidiaries, net.... 89 (6) 1
Accounts payable........................................ 4 (1) (1)
Other current assets.................................... (3) (5) (1)
Other current liabilities............................... (43) (290) (73)
Common stock dividends received from subsidiaries......... 122 177 508
Pension contribution...................................... (23) (476) (75)
Other..................................................... 95 54 77
------- ------- -----
Net cash provided by (used in) operating activities......... 163 (571) 341
------- ------- -----
INVESTING ACTIVITIES:
Proceeds from sale of Texas Genco......................... -- 2,231 700
Distributions from (investments in) subsidiaries.......... 33 19 (144)
Short-term notes receivable from subsidiaries............. 290 76 (335)
Long-term notes receivable from subsidiaries.............. 541 192 154
Capital expenditures, net................................. (6) (6) --
------- ------- -----
Net cash provided by investing activities................... 858 2,512 375
------- ------- -----
FINANCING ACTIVITIES:
Long-term revolving credit facility, net.................. (2,400) (1,206) (236)
Payments on long-term debt................................ (159) (888) --
Proceeds from long-term debt.............................. 1,610 -- --
Debt issuance costs....................................... (118) (1) (5)
Common stock dividends paid............................... (122) (123) (124)
Proceeds from issuance of common stock, net............... -- -- 17
Short-term notes payable to subsidiaries.................. (31) 121 (122)
Long-term notes payable to subsidiaries................... (2) 134 (245)
------- ------- -----
Net cash used in financing activities....................... (1,222) (1,963) (715)
------- ------- -----
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (201) (22) 1
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. 223 22 --
------- ------- -----
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 22 $ -- $ 1
======= ======= =====
See CenterPoint Energy, Inc. and Subsidiaries Notes to Consolidated Financial
Statements in Part II, Item 8
126
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. Bank facilities at CenterPoint Energy Houston
Electric, LLC and CenterPoint Energy Resources Corp., indirect wholly owned
subsidiaries of the Company, limit debt, excluding transition bonds, as a
percentage of their total capitalization to 68 percent and 65 percent,
respectively. These covenants could restrict the ability of these subsidiaries
to distribute dividends to the Company.
(2) CenterPoint Energy was a registered public utility holding company
under the Public Utility Holding Company Act of 1935, as amended (the 1935 Act).
The 1935 Act and related rules and regulations imposed a number of restrictions
on the activities of the Company and its subsidiaries. The Energy Policy Act of
2005 (Energy Act) repealed the 1935 Act effective February 8, 2006, and since
that date the Company and its subsidiaries have no longer been subject to
restrictions imposed under the 1935 Act. The Energy Act includes a new Public
Utility Holding Company Act of 2005 (PUHCA 2005), which grants to the Federal
Energy Regulatory Commission (FERC) authority to require holding companies and
their subsidiaries to maintain certain books and records and make them available
for review by the FERC and state regulatory authorities in certain
circumstances. On December 8, 2005, the FERC issued rules implementing PUHCA
2005 that will require the Company to notify the FERC of its status as a holding
company and to maintain certain books and records and make these available to
the FERC. The FERC continues to consider motions for rehearing or clarification
of these rules.
(3) 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 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.
(4) 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 was 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, was
completed on April 13, 2005. The Company recorded after tax losses of $366
million and $14 million in 2004 and 2005, respectively, related to the sale of
Texas Genco.
(5) 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 the London interbank offered rate (LIBOR) plus
87.5 basis points based on current credit ratings. An additional utilization fee
of 12.5 basis points applies to borrowings whenever more than 50% of the
facility is utilized. Changes in credit ratings could lower or raise the
increment to LIBOR depending on whether ratings improved or were lowered. As of
December 31, 2005, borrowings of $3 million in commercial paper were backstopped
by the revolving credit facility and $27 million in letters of credit were
outstanding under the revolving credit facility.
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
127
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. Holders have the right to
require the Company to purchase all or any portion of the notes for cash on May
15, 2008, May 15, 2013 and May 15, 2018 for a purchase price equal to 100% of
the principal amount of the notes. 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 August 2005, the Company accepted for exchange approximately $572
million aggregate principal amount of its 3.75% convertible senior notes due
2023 (Old Notes) for an equal amount of its new 3.75% convertible senior notes
due 2023 (New Notes). Old Notes of approximately $3 million remain outstanding.
The Company commenced the exchange offer in response to the guidance set forth
in Emerging Issues Task Force (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). Under that guidance, because settlement of the
principal portion of the New Notes will be made in cash rather than stock, the
exchange of 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 12 for the impact on diluted earnings per share related to
these securities. The Company determined that the New Notes did not have
substantially different terms than the Old Notes, and thus, in accordance with
EITF Issue No. 96-19 "Debtor's Accounting for a Modification or Exchange of Debt
Instruments", the exchange transaction was accounted for as a modification of
the original instrument and not as an extinguishment of debt. Accordingly, a new
effective interest rate was determined based on the carrying amount of the
original debt instrument and the revised cash flows, and the recorded discount
will be amortized as an adjustment to interest expense in future periods.
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
128
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. Holders have the right to require the Company to purchase all
or any portion of the notes for cash on January 15, 2007, January 15, 2012 and
January 15, 2017 for a purchase price equal to 100% of the principal amount of
the notes. 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) CenterPoint Energy Intrastate Pipelines, Inc., CenterPoint Energy
Services, Inc. and other wholly owned subsidiaries of CERC Corp. provide
comprehensive natural gas sales and services to industrial and commercial
customers which are primarily located within or near the territories served by
the Company's pipelines and distribution subsidiaries. In order to hedge their
exposure to natural gas prices, these CERC Corp. subsidiaries have entered
standard purchase and sale agreements with various counterparties. CenterPoint
Energy has guaranteed the payment obligations of these subsidiaries under
certain of these agreements, typically for one-year terms. As of December 31,
2005, CenterPoint Energy had guaranteed $182 million under these agreements.
129
CENTERPOINT ENERGY, INC.
SCHEDULE II -- QUALIFYING VALUATION ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 2005
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------------------------- ---------- ----------------------- ----------- ----------
ADDITIONS
-----------------------
BALANCE AT CHARGED TO DEDUCTIONS BALANCE AT
BEGINNING CHARGED OTHER FROM END OF
DESCRIPTION OF PERIOD TO INCOME ACCOUNTS(1) RESERVES(2) PERIOD
- ----------- ---------- --------- ----------- ----------- ----------
(IN MILLIONS)
Year Ended December 31, 2005:
Accumulated provisions:
Uncollectible accounts receivable..... $30 $ 40 $-- $27 $43
Deferred tax asset valuation
allowance........................... 20 1 -- -- 21
Year Ended December 31, 2004:
Accumulated provisions:
Uncollectible accounts receivable..... $31 $ 27 $-- $28 $30
Deferred tax asset valuation
allowance........................... 73 (67) 14 -- 20
Year Ended December 31, 2003:
Accumulated provisions:
Uncollectible accounts receivable..... $24 $ 24 $-- $17 $31
Deferred tax asset valuation
allowance........................... 83 (10) -- -- 73
- ---------------
(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.
130
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 15th day of March, 2006.
CENTERPOINT ENERGY, INC.
(Registrant)
By: /s/ DAVID M. MCCLANAHAN
------------------------------------
David M. McClanahan,
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 15, 2006.
SIGNATURE TITLE
--------- -----
/s/ DAVID M. MCCLANAHAN President, Chief Executive Officer and Director
- ------------------------------------------------ (Principal Executive Officer and Director)
David M. McClanahan
/s/ GARY L. WHITLOCK Executive Vice President and Chief Financial
- ------------------------------------------------ Officer (Principal Financial Officer)
Gary L. Whitlock
/s/ JAMES S. BRIAN Senior Vice President and Chief Accounting Officer
- ------------------------------------------------ (Principal Accounting Officer)
James S. Brian
/s/ MILTON CARROLL Chairman of the Board of Directors
- ------------------------------------------------
Milton Carroll
/s/ JOHN T. CATER Director
- ------------------------------------------------
John T. Cater
/s/ DERRILL CODY Director
- ------------------------------------------------
Derrill Cody
/s/ O. HOLCOMBE CROSSWELL Director
- ------------------------------------------------
O. Holcombe Crosswell
/s/ JANIECE M. LONGORIA Director
- ------------------------------------------------
Janiece M. Longoria
/s/ THOMAS F. MADISON Director
- ------------------------------------------------
Thomas F. Madison
/s/ ROBERT T. O'CONNELL Director
- ------------------------------------------------
Robert T. O'Connell
131
SIGNATURE TITLE
--------- -----
/s/ MICHAEL E. SHANNON Director
- ------------------------------------------------
Michael E. Shannon
/s/ PETER WAREING Director
- ------------------------------------------------
Peter Wareing
/s/ DONALD R. CAMPBELL Director
- ------------------------------------------------
Donald R. Campbell
132
CENTERPOINT ENERGY, INC.
EXHIBITS TO THE ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 2005
INDEX OF EXHIBITS
Exhibits included with this report are designated by a cross (+); 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 by Item 601(b)(10)(iii) of Regulation S-K. CenterPoint Energy
has not filed the exhibits and schedules to Exhibit 2. CenterPoint Energy hereby
agrees to furnish supplementally a copy of any schedule omitted from Exhibit 2
to the SEC upon request.
SEC FILE OR
EXHIBIT REGISTRATION EXHIBIT
NUMBER DESCRIPTION REPORT OR REGISTRATION STATEMENT NUMBER REFERENCE
- ------------ ------------------------ -------------------------------- ------------ ---------
2 -- Transaction Agreement CenterPoint Energy's Form 8-K 1-31447 10.1
dated July 21, 2004 dated July 21, 2004
among CenterPoint
Energy, Utility 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 CenterPoint Energy's 3-69502 3.1
Articles of Registration Statement on Form
Incorporation of S-4
CenterPoint Energy
3(a)(2) -- Articles of Amendment to CenterPoint Energy's Form 10-K 1-31447 3.1.1
Amended and Restated for the year ended December 31,
Articles of 2001
Incorporation of
CenterPoint Energy
3(b) -- Amended and Restated CenterPoint Energy's Form 10-K 1-31447 3.2
Bylaws of CenterPoint for the year ended December 31,
Energy 2001
3(c) -- Statement of Resolution CenterPoint Energy's Form 10-K 1-31447 3.3
Establishing Series of for the year ended December 31,
Shares designated Series 2001
A Preferred Stock of
CenterPoint Energy
4(a) -- Form of CenterPoint CenterPoint Energy's 3-69502 4.1
Energy Stock Certificate Registration Statement on Form
S-4
4(b) -- Rights Agreement dated CenterPoint Energy's Form 10-K 1-31447 4.2
January 1, 2002, between for the year ended December 31,
CenterPoint Energy and 2001
JPMorgan Chase Bank, as
Rights Agent
133
SEC FILE OR
EXHIBIT REGISTRATION EXHIBIT
NUMBER DESCRIPTION REPORT OR REGISTRATION STATEMENT NUMBER REFERENCE
- ------------ ------------------------ -------------------------------- ------------ ---------
4(c) -- Contribution and CenterPoint Energy's Form 10-K 1-31447 4.3
Registration Agreement for the year ended December 31,
dated December 18, 2001 2001
among Reliant Energy,
CenterPoint Energy and
the Northern Trust
Company, trustee under
the Reliant Energy,
Incorporated Master
Retirement Trust
4(d)(1) -- Mortgage and Deed of HL&P's Form S-7 filed on August 2-59748 2(b)
Trust, dated November 1, 25, 1977
1944 between Houston
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 HL&P's Form 10-K for the year 1-3187 4(a)(2)
Fiftieth Supplemental ended December 31, 1989
Indentures to Exhibit
4(d)(1)
4(d)(3) -- Fifty-First Supplemental HL&P's Form 10-Q for the quarter 1-3187 4(a)
Indenture to Exhibit ended June 30, 1991
4(d)(1) dated as of
March 25, 1991
4(d)(4) -- Fifty-Second through HL&P's Form 10-Q for the quarter 1-3187 4
Fifty-Fifth Supplemental ended March 31, 1992
Indentures to Exhibit
4(d)(1) each dated as of
March 1, 1992
4(d)(5) -- Fifty-Sixth and Fifty- HL&P's Form 10-Q for the quarter 1-3187 4
Seventh Supplemental ended September 30, 1992
Indentures to Exhibit
4(d)(1) each dated as of
October 1, 1992
4(d)(6) -- Fifty-Eighth and Fifty- HL&P's Form 10-Q for the quarter 1-3187 4
Ninth Supplemental ended March 31, 1993
Indentures to Exhibit
4(d)(1) each dated as of
March 1, 1993
4(d)(7) -- Sixtieth Supplemental HL&P's Form 10-Q for the quarter 1-3187 4
Indenture to Exhibit ended June 30, 1993
4(d)(1) dated as of July
1, 1993
134
SEC FILE OR
EXHIBIT REGISTRATION EXHIBIT
NUMBER DESCRIPTION REPORT OR REGISTRATION STATEMENT NUMBER REFERENCE
- ------------ ------------------------ -------------------------------- ------------ ---------
4(d)(8) -- Sixty-First through HL&P's Form 10-K for the year 1-3187 4(a)(8)
Sixty-Third Supplemental ended December 31, 1993
Indentures to Exhibit
4(d)(1) each dated as of
December 1, 1993
4(d)(9) -- Sixty-Fourth and Sixty- HL&P's Form 10-K for the year 1-3187 4(a)(9)
Fifth Supplemental ended December 31, 1995
Indentures to Exhibit
4(d)(1) each dated as of
July 1, 1995
4(e)(1) -- General Mortgage CenterPoint Houston's Form 10-Q 1-3187 4(j)(1)
Indenture, dated as of for the quarter ended September
October 10, 2002, 30, 2002
between CenterPoint
Energy Houston Electric,
LLC and JPMorgan Chase
Bank, as Trustee
4(e)(2) -- Second Supplemental CenterPoint Houston's Form 10- Q 1-3187 4(j)(3)
Indenture to Exhibit for the quarter ended September
4(e)(1), dated as of 30, 2002
October 10, 2002
4(e)(3) -- Third Supplemental CenterPoint Houston's Form 10-Q 1-3187 4(j)(4)
Indenture to Exhibit for the quarter ended September
4(e)(1), dated as of 30, 2002
October 10, 2002
4(e)(4) -- Fourth Supplemental CenterPoint Houston's Form 10-Q 1-3187 4(j)(5)
Indenture to Exhibit for the quarter ended September
4(e)(1), dated as of 30, 2002
October 10, 2002
4(e)(5) -- Fifth Supplemental CenterPoint Houston's Form 10-Q 1-3187 4(j)(6)
Indenture to Exhibit for the quarter ended September
4(e)(1), dated as of 30, 2002
October 10, 2002
4(e)(6) -- Sixth Supplemental CenterPoint Houston's Form 10-Q 1-3187 4(j)(7)
Indenture to Exhibit for the quarter ended September
4(e)(1), dated as of 30, 2002
October 10, 2002
4(e)(7) -- Seventh Supplemental CenterPoint Houston's Form 10-Q 1-3187 4(j)(8)
Indenture to Exhibit for the quarter ended September
4(e)(1), dated as of 30, 2002
October 10, 2002
4(e)(8) -- Eighth Supplemental CenterPoint Houston's Form 10-Q 1-3187 4(j)(9)
Indenture to Exhibit for the quarter ended September
4(e)(1), dated as of 30, 2002
October 10, 2002
4(e)(9) -- Officer's Certificates CenterPoint Energy's Form 10-K 1-31447 4(e)(10)
dated October 10, 2002 for the year ended December 31,
setting forth the form, 2003
terms and provisions of
the First through Eighth
Series of General
Mortgage Bonds
135
SEC FILE OR
EXHIBIT REGISTRATION EXHIBIT
NUMBER DESCRIPTION REPORT OR REGISTRATION STATEMENT NUMBER REFERENCE
- ------------ ------------------------ -------------------------------- ------------ ---------
4(e)(10) -- Tenth Supplemental CenterPoint Energy's Form 8-K 1-31447 4.1
Indenture to Exhibit dated March 13, 2003
4(e)(1), dated as of
March 18, 2003
4(e)(11) -- Officer's Certificate CenterPoint Energy's Form 8-K 1-31447 4.2
dated March 18, 2003 dated March 13, 2003
setting forth the form,
terms and provisions of
the Tenth Series and
Eleventh Series of
General Mortgage Bonds
4(e)(12) -- Eleventh Supplemental CenterPoint Energy's Form 8-K 1-31447 4.1
Indenture to Exhibit dated May 16, 2003
4(e)(1), dated as of May
23, 2003
4(e)(13) -- Officer's Certificate CenterPoint Energy's Form 8-K 1-31447 4.2
dated May 23, 2003 dated May 16, 2003
setting forth the form,
terms and provisions of
the Twelfth Series of
General Mortgage Bonds
4(e)(14) -- Twelfth Supplemental CenterPoint Energy's Form 8-K 1-31447 4.2
Indenture to Exhibit dated September 9, 2003
4(e)(1), dated as of
September 9, 2003
4(e)(15) -- Officer's Certificate CenterPoint Energy's Form 8-K 1-31447 4.3
dated September 9, 2003 dated September 9, 2003
setting forth the form,
terms and provisions of
the Thirteenth Series of
General Mortgage Bonds
+4(e)(16) Thirteenth Supplemental
Indenture to Exhibit
4(e)(1), dated as of
February 6, 2004
+4(e)(17) Officer's Certificate
dated February 6, 2004
setting forth the form,
terms and provisions of
the Fourteenth Series of
General Mortgage Bonds
+4(e)(18) Fourteenth Supplemental
Indenture to Exhibit
4(e)(1), dated as of
February 11, 2004
+4(e)(19) Officer's Certificate
dated February 11, 2004
setting forth the form,
terms and provisions of
the Fifteenth Series of
General Mortgage Bonds
136
SEC FILE OR
EXHIBIT REGISTRATION EXHIBIT
NUMBER DESCRIPTION REPORT OR REGISTRATION STATEMENT NUMBER REFERENCE
- ------------ ------------------------ -------------------------------- ------------ ---------
+4(e)(20) Fifteenth Supplemental
Indenture to Exhibit
4(e)(1), dated as of
March 31, 2004
+4(e)(21) Officer's Certificate
dated March 31, 2004
setting forth the form,
terms and provisions of
the Sixteenth Series of
General Mortgage Bonds
+4(e)(22) Sixteenth Supplemental
Indenture to Exhibit
4(e)(1), dated as of
March 31, 2004
+4(e)(23) Officer's Certificate
dated March 31, 2004
setting forth the form,
terms and provisions of
the Seventeenth Series
of General Mortgage
Bonds
+4(e)(24) Seventeenth Supplemental
Indenture to Exhibit
4(e)(1), dated as of
March 31, 2004
+4(e)(25) Officer's Certificate
dated March 31, 2004
setting forth the form,
terms and provisions of
the Eighteenth Series of
General Mortgage Bonds
4(f)(1) -- Indenture, dated as of CERC Corp.'s Form 8-K dated 1-13265 4.1
February 1, 1998, February 5, 1998
between Reliant Energy
Resources Corp. ("RERC
Corp.") and Chase Bank
of Texas, National
Association, as Trustee
4(f)(2) -- Supplemental Indenture CERC Corp.'s Form 8-K dated 1-13265 4.2
No. 1 to Exhibit November 9, 1998
4(f)(1), dated as of
February 1, 1998,
providing for the
issuance of RERC Corp.'s
6 1/2% Debentures due
February 1, 2008
4(f)(3) -- Supplemental Indenture CERC Corp.'s Form 8-K dated 1-13265 4.1
No. 2 to Exhibit November 9, 1998
4(f)(1), dated as of
November 1, 1998,
providing for the
issuance of RERC Corp.'s
6 3/8% Term Enhanced
ReMarketable Securities
137
SEC FILE OR
EXHIBIT REGISTRATION EXHIBIT
NUMBER DESCRIPTION REPORT OR REGISTRATION STATEMENT NUMBER REFERENCE
- ------------ ------------------------ -------------------------------- ------------ ---------
4(f)(4) -- Supplemental Indenture CERC Corp.'s Registration 333-49162 4.2
No. 3 to Exhibit Statement on Form S-4
4(f)(1), dated as of
July 1, 2000, providing
for the issuance of RERC
Corp.'s 8.125% Notes due
2005
4(f)(5) -- Supplemental Indenture CERC Corp.'s Form 8-K dated 1-13265 4.1
No. 4 to Exhibit February 21, 2001
4(f)(1), dated as of
February 15, 2001,
providing for the
issuance of RERC Corp.'s
7.75% Notes due 2011
4(f)(6) -- Supplemental Indenture CenterPoint Energy's Form 8-K 1-31447 4.1
No. 5 to Exhibit dated March 18, 2003
4(f)(1), dated as of
March 25, 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 CenterPoint Energy's Form 8-K 1-31447 4.2
No. 6 to Exhibit dated April 7, 2003
4(f)(1), dated as of
April 14, 2003,
providing for the
issuance of CERC Corp.'s
7.875% Senior Notes due
2013
4(f)(8) -- Supplemental Indenture CenterPoint Energy's Form 8-K 1-31447 4.2
No. 7 to Exhibit dated October 29, 2003
4(f)(1), dated as of
November 3, 2003,
providing for the
issuance of CERC Corp.'s
5.95% Senior Notes due
2014
+4(f)(9) -- Supplemental Indenture
No. 8 to Exhibit
4(f)(1), dated as of
December 28, 2005,
providing for a
modification of CERC
Corp.'s 6 1/2%
Debentures due 2008
4(g)(1) -- Indenture, dated as of CenterPoint Energy's Form 8-K 1-31447 4.1
May 19, 2003, between dated May 19, 2003
CenterPoint Energy and
JPMorgan Chase Bank, as
Trustee
4(g)(2) -- Supplemental Indenture CenterPoint Energy's Form 8-K 1-31447 4.2
No. 1 to Exhibit dated May 19, 2003
4(g)(1), dated as of May
19, 2003, providing for
the issuance of
CenterPoint Energy's
3.75% Convertible Senior
Notes due 2023
138
SEC FILE OR
EXHIBIT REGISTRATION EXHIBIT
NUMBER DESCRIPTION REPORT OR REGISTRATION STATEMENT NUMBER REFERENCE
- ------------ ------------------------ -------------------------------- ------------ ---------
4(g)(3) -- Supplemental Indenture CenterPoint Energy's Form 8-K 1-31447 4.3
No. 2 to Exhibit dated May 19, 2003
4(g)(1), dated as of May
27, 2003, providing for
the issuance of
CenterPoint Energy's
5.875% Senior Notes due
2008 and 6.85% Senior
Notes due 2015
4(g)(4) -- Supplemental Indenture CenterPoint Energy's Form 8-K 1-31447 4.2
No. 3 to Exhibit dated September 9, 2003
4(g)(1), dated as of
September 9, 2003,
providing for the
issuance of CenterPoint
Energy's 7.25% Senior
Notes due 2010
4(g)(5) -- Supplemental Indenture CenterPoint Energy's Form 8-K 1-31447 4.2
No. 4 to Exhibit dated December 10, 2003
4(g)(1), dated as of
December 17, 2003,
providing for the
issuance of CenterPoint
Energy's 2.875%
Convertible Senior Notes
due 2024
4(g)(6) -- Supplemental Indenture CenterPoint Energy's Form 8-K 1-31447 4.1
No. 5 to Exhibit dated December 9, 2004
4(g)(1), dated as of
December 13, 2004, as
supplemented by Exhibit
4(g)(5), relating to the
issuance of CenterPoint
Energy's 2.875%
Convertible Senior Notes
dues 2024
+4(g)(7) -- Supplemental Indenture
No. 6 to Exhibit
4(g)(1), dated as of
August 23, 2005,
providing for the
issuance of CenterPoint
Energy's 3.75%
Convertible Senior
Notes, Series B Due 2023
4(h)(1) Subordinated Indenture Reliant Energy's Form 8-K dated 1-3187 4.1
dated as of September 1, September 15, 1999
1999
139
SEC FILE OR
EXHIBIT REGISTRATION EXHIBIT
NUMBER DESCRIPTION REPORT OR REGISTRATION STATEMENT NUMBER REFERENCE
- ------------ ------------------------ -------------------------------- ------------ ---------
4(h)(2) Supplemental Indenture Reliant Energy's Form 8-K dated 1-3187 4.2
No. 1 dated as of September 15, 1999
September 1, 1999,
between Reliant Energy
and Chase Bank of Texas
(supplementing Exhibit
4(h)(1) and providing
for the issuance Reliant
Energy's 2% Zero-
Premium Exchangeable
Subordinated Notes Due
2029)
4(h)(3) -- Supplemental Indenture CenterPoint Energy's Form 8-K12B 1-31447 4(e)
No. 2 dated as of August dated August 31, 2002
31, 2002, between
CenterPoint Energy,
Reliant Energy and
JPMorgan Chase Bank
(supplementing Exhibit
4(h)(1))
+4(h)(4) -- Supplemental Indenture
No. 3 dated as of
December 28, 2005,
between CenterPoint
Energy, Reliant Energy
and JPMorgan Chase Bank
(supplementing Exhibit
4(h)(1))
4(i) -- Supplemental Indenture CenterPoint Energy's Form 8-K12B 1-31447 4(g)
No. 3 dated as of August dated August 31, 2002
31, 2002 among
CenterPoint Energy, 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)
140
SEC FILE OR
EXHIBIT REGISTRATION EXHIBIT
NUMBER DESCRIPTION REPORT OR REGISTRATION STATEMENT NUMBER REFERENCE
- ------------ ------------------------ -------------------------------- ------------ ---------
4(j) -- Assignment and CenterPoint Energy's Form 8-K12B 1-31447 4(j)
Assumption Agreement for dated August 31, 2002
the Guarantee Agreements
dated as of 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(k) -- Assignment and CenterPoint Energy's Form 8-K12B 1-31447 4(l)
Assumption Agreement for dated August 31, 2002
the Expense and
Liability Agreements and
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 Trust II's
Amended and Restated
Trust Agreement dated
February 4, 1997)
4(l) -- $1,000,000,000 Credit CenterPoint Energy's Form 8-K 1-31447 4.1
Agreement dated as of dated March 7, 2005
March 7, 2005 among
CenterPoint Energy and
the banks named therein
4(m) -- $200,000,000 Credit CenterPoint Energy's Form 8-K 1-31447 4.2
Agreement dated as of dated March 7, 2005
March 7, 2005 among
CenterPoint Houston and
the banks named therein
4(n) -- $400,000,000 Credit CenterPoint Energy's Form 8-K 1-31447 4.1
Agreement dated as of dated June 29, 2005
June 30, 2005 among CERC
Corp., as Borrower, and
the Initial Lenders
named therein, as
Initial Lenders
Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, CenterPoint Energy
has not filed as exhibits to this Form 10-K certain long-term debt instruments,
including indentures, under which the total amount of
141
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 HI's Form 10-Q for the quarter 1-7629 10(a)(1),
Houston Industries ended March 31, 1987 10(a)(2),
Incorporated ("HI") and First and
and Second Amendments thereto 10(a)(3)
effective as of June 1, 1982,
July 1, 1984, and May 7,
1986, respectively
*10(a)(2) -- Third Amendment dated Reliant Energy's Form 10-K for 1-3187 10(a)(2)
September 17, 1999 to Exhibit the year ended December 31, 2000
10(a)(1)
*10(a)(3) -- CenterPoint Energy Executive CenterPoint Energy's Form 10-Q 1-31447 10.4
Benefits Plan, as amended and for the quarter ended September
restated effective June 18, 30, 2003
2003
*10(b)(1) -- Executive Incentive HI's Form 10-K for the year 1-7629 10(b)
Compensation Plan of HI ended December 31, 1991
effective as of January 1,
1982
*10(b)(2) -- First Amendment to Exhibit HI's Form 10-Q for the quarter 1-7629 10(a)
10(b)(1) effective as of ended March 31, 1992
March 30, 1992
*10(b)(3) -- Second Amendment to Exhibit HI's Form 10-K for the year 1-7629 10(b)
10(b)(1) effective as of ended December 31, 1992
November 4, 1992
*10(b)(4) -- Third Amendment to Exhibit HI's Form 10-K for the year 1-7629 10(b)(4)
10(b)(1) effective as of ended December 31, 1994
September 7, 1994
*10(b)(5) -- Fourth Amendment to Exhibit HI's Form 10-K for the year 1-3187 10(b)(5)
10(b)(1) effective as of ended December 31, 1997
August 6, 1997
*10(c)(1) -- Executive Incentive HI's Form 10-Q for the quarter 1-7629 10(b)(1)
Compensation Plan of HI ended March 31, 1987
effective as of January 1,
1985
*10(c)(2) -- First Amendment to Exhibit HI's Form 10-K for the year 1-7629 10(b)(3)
10(c)(1) effective as of ended December 31, 1988
January 1, 1985
*10(c)(3) -- Second Amendment to Exhibit HI's Form 10-K for the year 1-7629 10(c)(3)
10(c)(1) effective as of ended December 31, 1991
January 1, 1985
*10(c)(4) -- Third Amendment to Exhibit HI's Form 10-Q for the quarter 1-7629 10(b)
10(c)(1) effective as of ended March 31, 1992
March 30, 1992
*10(c)(5) -- Fourth Amendment to Exhibit HI's Form 10-K for the year 1-7629 10(c)(5)
10(c)(1) effective as of ended December 31, 1992
November 4, 1992
*10(c)(6) -- Fifth Amendment to Exhibit HI's Form 10-K for the year 1-7629 10(c)(6)
10(c)(1) effective as of ended December 31, 1994
September 7, 1994
*10(c)(7) -- Sixth Amendment to Exhibit HI's Form 10-K for the year 1-3187 10(c)(7)
10(c)(1) effective as of ended December 31, 1997
August 6, 1997
142
SEC FILE OR
EXHIBIT REGISTRATION EXHIBIT
NUMBER DESCRIPTION REPORT OR REGISTRATION STATEMENT NUMBER REFERENCE
------- ----------- -------------------------------- ------------ ---------
*10(d) -- Executive Incentive HI's Form 10-Q for the quarter 1-7629 10(b)(2)
Compensation Plan of HL&P ended March 31, 1987
effective as of January 1,
1985
*10(e)(1) -- Executive Incentive HI's Form 10-Q for the quarter 1-7629 10(b)
Compensation Plan of HI as ended June 30, 1989
amended and restated on
January 1, 1989
*10(e)(2) -- First Amendment to Exhibit HI's Form 10-K for the year 1-7629 10(e)(2)
10(e)(1) effective as of ended December 31, 1991
January 1, 1989
*10(e)(3) -- Second Amendment to Exhibit HI's Form 10-Q for the quarter 1-7629 10(c)
10(e)(1) effective as of ended March 31, 1992
March 30, 1992
*10(e)(4) -- Third Amendment to Exhibit HI's Form 10-K for the year 1-7629 10(c)(4)
10(e)(1) effective as of ended December 31, 1992
November 4, 1992
*10(e)(5) -- Fourth Amendment to Exhibit HI's Form 10-K for the year 1-7629 10(e)(5)
10(e)(1) effective as of ended December 31, 1994
September 7, 1994
*10(f)(1) -- Executive Incentive HI's Form 10-K for the year 1-7629 10(b)
Compensation Plan of HI as ended December 31, 1990
amended and restated on
January 1, 1991
*10(f)(2) -- First Amendment to Exhibit HI's Form 10-K for the year 1-7629 10(f)(2)
10(f)(1) effective as of ended December 31, 1991
January 1, 1991
*10(f)(3) -- Second Amendment to Exhibit HI's Form 10-Q for the quarter 1-7629 10(d)
10(f)(1) effective as of ended March 31, 1992
March 30, 1992
*10(f)(4) -- Third Amendment to Exhibit HI's Form 10-K for the year 1-7629 10(f)(4)
10(f)(1) effective as of ended December 31, 1992
November 4, 1992
*10(f)(5) -- Fourth Amendment to Exhibit HI's Form 10-K for the year 1-7629 10(f)(5)
10(f)(1) effective as of ended December 31, 1992
January 1, 1993
*10(f)(6) -- Fifth Amendment to Exhibit HI's Form 10-K for the year 1-7629 10(f)(6)
10(f)(1) effective in part, ended December 31, 1994
January 1, 1995, and in part,
September 7, 1994
*10(f)(7) -- Sixth Amendment to Exhibit HI's Form 10-Q for the quarter 1-7629 10(a)
10(f)(1) effective as of ended June 30, 1995
August 1, 1995
*10(f)(8) -- Seventh Amendment to Exhibit HI's Form 10-Q for the quarter 1-7629 10(a)
10(f)(1) effective as of ended June 30, 1996
January 1, 1996
*10(f)(9) -- Eighth Amendment to Exhibit HI's Form 10-Q for the quarter 1-7629 10(a)
10(f)(1) effective as of ended June 30, 1997
January 1, 1997
*10(f)(10) -- Ninth Amendment to Exhibit HI's Form 10-K for the year 1-3187 10(f)(10)
10(f)(1) effective in part, ended December 31, 1997
January 1, 1997, and in part,
January 1, 1998
143
SEC FILE OR
EXHIBIT REGISTRATION EXHIBIT
NUMBER DESCRIPTION REPORT OR REGISTRATION STATEMENT NUMBER REFERENCE
------- ----------- -------------------------------- ------------ ---------
*10(g) -- Benefit Restoration Plan of HI's Form 10-Q for the quarter 1-7629 10(c)
HI effective as of June 1, ended March 31, 1987
1985
*10(h) -- Benefit Restoration Plan of HI's Form 10-K for the year 1-7629 10(g)(2)
HI as amended and restated ended December 31, 1991
effective as of January 1,
1988
*10(i)(1) -- Benefit Restoration Plan of HI's Form 10-K for the year 1-7629 10(g)(3)
HI, as amended and restated ended December 31, 1991
effective as of July 1, 1991
*10(i)(2) -- First Amendment to Exhibit HI's Form 10-K for the year 1-3187 10(i)(2)
10(i)(1) effective in part, ended December 31, 1997
August 6, 1997, in part,
September 3, 1997, and in
part, October 1, 1997
*10(j)(1) -- Deferred Compensation Plan of HI's Form 10-Q for the quarter 1-7629 10(d)
HI effective as of September ended March 31, 1987
1, 1985
*10(j)(2) -- First Amendment to Exhibit HI's Form 10-K for the year 1-7629 10(d)(2)
10(j)(1) effective as of ended December 31, 1990
September 1, 1985
*10(j)(3) -- Second Amendment to Exhibit HI's Form 10-Q for the quarter 1-7629 10(e)
10(j)(1) effective as of ended March 31, 1992
March 30, 1992
*10(j)(4) -- Third Amendment to Exhibit HI's Form 10-K for the year 1-7629 10(h)(4)
10(j)(1) effective as of June ended December 31, 1993
2, 1993
*10(j)(5) -- Fourth Amendment to Exhibit HI's Form 10-K for the year 1-7629 10(h)(5)
10(j)(1) effective as of ended December 31, 1994
September 7, 1994
*10(j)(6) -- Fifth Amendment to Exhibit HI's Form 10-Q for the quarter 1-7629 10(d)
10(j)(1) effective as of ended June 30, 1995
August 1, 1995
*10(j)(7) -- Sixth Amendment to Exhibit HI's Form 10-Q for the quarter 1-7629 10(b)
10(j)(1) effective as of ended June 30, 1995
December 1, 1995
*10(j)(8) -- Seventh Amendment to Exhibit HI's Form 10-Q for the quarter 1-7629 10(b)
10(j)(1) effective as of ended June 30, 1997
January 1, 1997
*10(j)(9) -- Eighth Amendment to Exhibit HI's Form 10-K for the year 1-3187 10(j)(9)
10(j)(1) effective as of ended December 31, 1997
October 1, 1997
*10(j)(10) -- Ninth Amendment to Exhibit HI's Form 10-K for the year 1-3187 10(j)(10)
10(j)(1) effective as of ended December 31, 1997
September 3, 1997
*10(j)(11) -- Tenth Amendment to Exhibit CenterPoint Energy's Form 10-K 1-31447 10(j)(11)
10(j)(1) effective as of for the year ended December 31,
January 1, 2001 2002
*10(j)(12) -- Eleventh Amendment to Exhibit CenterPoint Energy's Form 10-K 1-31447 10(j)(12)
10(j)(1) effective as of for the year ended December 31,
August 31, 2002 2002
*10(j)(13) -- CenterPoint Energy 1985 CenterPoint Energy's Form 10-Q 1-31447 10.1
Deferred Compensation Plan, for the quarter ended September
as amended and restated 30, 2003
effective January 1, 2003
144
SEC FILE OR
EXHIBIT REGISTRATION EXHIBIT
NUMBER DESCRIPTION REPORT OR REGISTRATION STATEMENT NUMBER REFERENCE
------- ----------- -------------------------------- ------------ ---------
*10(k)(1) -- Deferred Compensation Plan of HI's Form 10-Q for the quarter 1-7629 10(a)
HI effective as of January 1, ended June 30, 1989
1989
*10(k)(2) -- First Amendment to Exhibit HI's Form 10-K for the year 1-7629 10(e)(3)
10(k)(1) effective as of ended December 31, 1989
January 1, 1989
*10(k)(3) -- Second Amendment to Exhibit HI's Form 10-Q for the quarter 1-7629 10(f)
10(k)(1) effective as of ended March 31, 1992
March 30, 1992
*10(k)(4) -- Third Amendment to Exhibit HI's Form 10-K for the year 1-7629 10(i)(4)
10(k)(1) effective as of June ended December 31, 1993
2, 1993
*10(k)(5) -- Fourth Amendment to Exhibit HI's Form 10-K for the year 1-7629 10(i)(5)
10(k)(1) effective as of ended December 31, 1994
September 7, 1994
*10(k)(6) -- Fifth Amendment to Exhibit HI's Form 10-Q for the quarter 1-7629 10(c)
10(k)(1) effective as of ended June 30, 1995
August 1, 1995
*10(k)(7) -- Sixth Amendment to Exhibit HI's Form 10-Q for the quarter 1-7629 10(c)
10(k)(1) effective December ended June 30, 1995
1, 1995
*10(k)(8) -- Seventh Amendment to Exhibit HI's Form 10-Q for the quarter 1-7629 10(c)
10(k)(1) effective as of ended June 30, 1997
January 1, 1997
*10(k)(9) -- Eighth Amendment to Exhibit HI's Form 10-K for the year 1-3187 10(k)(9)
10(k)(1) effective in part ended December 31, 1997
October 1, 1997 and in part
January 1, 1998
*10(k)(10) -- Ninth Amendment to Exhibit HI's Form 10-K for the year 1-3187 10(k)(10)
10(k)(1) effective as of ended December 31, 1997
September 3, 1997
*10(k)(11) -- Tenth Amendment to Exhibit CenterPoint Energy's Form 10-K 1-31447 10(k)(11)
10(k)(1) effective as of for the year ended December 31,
January 1, 2001 2002
*10(k)(12) -- Eleventh Amendment to Exhibit CenterPoint Energy's Form 10-K 1-31447 10(k)(12)
10(k)(1) effective as of for the year ended December 31,
August 31, 2002 2002
*10(l)(1) -- Deferred Compensation Plan of HI's Form 10-K for the year 1-7629 10(d)(3)
HI effective as of January 1, ended December 31, 1990
1991
*10(l)(2) -- First Amendment to Exhibit HI's Form 10-K for the year 1-7629 10(j)(2)
10(l)(1) effective as of ended December 31, 1991
January 1, 1991
*10(l)(3) -- Second Amendment to Exhibit HI's Form 10-Q for the quarter 1-7629 10(g)
10(l)(1) effective as of ended March 31, 1992
March 30, 1992
*10(l)(4) -- Third Amendment to Exhibit HI's Form 10-K for the year 1-7629 10(j)(4)
10(l)(1) effective as of June ended December 31, 1993
2, 1993
*10(l)(5) -- Fourth Amendment to Exhibit HI's Form 10-K for the year 1-7629 10(j)(5)
10(l)(1) effective as of ended December 31, 1993
December 1, 1993
145
SEC FILE OR
EXHIBIT REGISTRATION EXHIBIT
NUMBER DESCRIPTION REPORT OR REGISTRATION STATEMENT NUMBER REFERENCE
------- ----------- -------------------------------- ------------ ---------
*10(l)(6) -- Fifth Amendment to Exhibit HI's Form 10-K for the year 1-7629 10(j)(6)
10(l)(1) effective as of ended December 31, 1994
September 7, 1994
*10(l)(7) -- Sixth Amendment to Exhibit HI's Form 10-Q for the quarter 1-7629 10(b)
10(l)(1) effective as of ended June 30, 1995
August 1, 1995
*10(l)(8) -- Seventh Amendment to Exhibit HI's Form 10-Q for the quarter 1-7629 10(d)
10(l)(1) effective as of ended June 30, 1996
December 1, 1995
*10(l)(9) -- Eighth Amendment to Exhibit HI's Form 10-Q for the quarter 1-7629 10(d)
10(l)(1) effective as of ended June 30, 1997
January 1, 1997
*10(l)(10) -- Ninth Amendment to Exhibit HI's Form 10-K for the year 1-3187 10(l)(10)
10(l)(1) effective in part ended December 31, 1997
August 6, 1997, in part
October 1, 1997, and in part
January 1, 1998
*10(l)(11) -- Tenth Amendment to Exhibit HI's Form 10-K for the year 1-3187 10(i)(11)
10(l)(1) effective as of ended December 31, 1997
September 3, 1997
*10(l)(12) -- Eleventh Amendment to Exhibit CenterPoint Energy's Form 10-K 1-31447 10(l)(12)
10(l)(1) effective as of for the year ended December 31,
January 1, 2001 2002
*10(l)(13) -- Twelfth Amendment to Exhibit CenterPoint Energy's Form 10-K 1-31447 10(l)(13)
10(l)(1) effective as of for the year ended December 31,
August 31, 2002 2002
*10(m)(1) -- Long-Term Incentive HI's Form 10-Q for the quarter 1-7629 10(c)
Compensation Plan of HI ended June 30, 1989
effective as of January 1,
1989
*10(m)(2) -- First Amendment to Exhibit HI's Form 10-K for the year 1-7629 10(f)(2)
10(m)(1) effective as of ended December 31, 1989
January 1, 1990
*10(m)(3) -- Second Amendment to Exhibit HI's Form 10-K for the year 1-7629 10(k)(3)
10(m)(1) effective as of ended December 31, 1992
December 22, 1992
*10(m)(4) -- Third Amendment to Exhibit HI's Form 10-K for the year 1-3187 10(m)(4)
10(m)(1) effective as of ended December 31, 1997
August 6, 1997
*10(m)(5) -- Fourth Amendment to Exhibit Reliant Energy's Form 10-Q for 1-3187 10.4
10(m)(1) effective as of the quarter ended June 30, 2002
January 1, 2001
*10(n)(1) -- Form of stock option HI's Form 10-Q for the quarter 1-7629 10(h)
agreement for non-qualified ended March 31, 1992
stock options granted under
Exhibit 10(m)(1)
*10(n)(2) -- Forms of restricted stock HI's Form 10-Q for the quarter 1-7629 10(i)
agreement for restricted ended March 31, 1992
stock granted under Exhibit
10(m)(1)
*10(o)(1) -- 1994 Long-Term Incentive HI's Form 10-K for the year 1-7629 10(n)(1)
Compensation Plan of HI ended December 31, 1993
effective as of January 1,
1994
*10(o)(2) -- Form of stock option HI's Form 10-K for the year 1-7629 10(n)(2)
agreement for non-qualified ended December 31, 1993
stock options granted under
Exhibit 10(o)(1)
146
SEC FILE OR
EXHIBIT REGISTRATION EXHIBIT
NUMBER DESCRIPTION REPORT OR REGISTRATION STATEMENT NUMBER REFERENCE
------- ----------- -------------------------------- ------------ ---------
*10(o)(3) -- First Amendment to Exhibit HI's Form 10-Q for the quarter 1-7629 10(e)
10(o)(1) effective as of May ended June 30, 1997
9, 1997
*10(o)(4) -- Second Amendment to Exhibit HI's Form 10-K for the year 1-3187 10(p)(4)
10(o)(1) effective as of ended December 31, 1997
August 6, 1997
*10(o)(5) -- Third Amendment to Exhibit HI's Form 10-K for the year 1-3187 10(p)(5)
10(o)(1) effective as of ended December 31, 1998
January 1, 1998
*10(o)(6) -- Reliant Energy 1994 Long-Term Reliant Energy's Form 10-Q for 1-3187 10.6
Incentive Compensation Plan, the quarter ended June 30, 2002
as amended and restated
effective January 1, 2001
*10(o)(7) -- First Amendment to Exhibit CenterPoint Energy's Form 10-K 1-31447 10(p)(7)
10(o)(6), effective December for the year ended December 31,
1, 2003 2003
*10(o)(8) -- Form of Non-Qualified Stock CenterPoint Energy's Form 8-K 1-31447 10.6
Option Award Notice under dated January 25, 2005
Exhibit 10(o)(6)
*10(p)(1) -- Savings Restoration Plan of HI's Form 10-K for the year 1-7629 10(f)
HI effective as of January 1, ended December 31, 1990
1991
*10(p)(2) -- First Amendment to Exhibit HI's Form 10-K for the year 1-7629 10(l)(2)
10(p)(1) effective as of ended December 31, 1991
January 1, 1992
*10(p)(3) -- Second Amendment to Exhibit HI's Form 10-K for the year 1-3187 10(q)(3)
10(p)(1) effective in part, ended December 31, 1997
August 6, 1997, and in part,
October 1, 1997
*10(q)(1) -- Director Benefits Plan HI's Form 10-K for the year 1-7629 10(m)
effective as of January 1, ended December 31, 1991
1992
*10(q)(2) -- First Amendment to Exhibit HI's Form 10-K for the year 1-7629 10(m)(1)
10(q)(1) effective as of ended December 31, 1998
August 6, 1997
*10(q)(3) -- CenterPoint Energy Outside CenterPoint Energy's Form 10-Q 1-31447 10.6
Director Benefits Plan, as for the quarter ended September
amended and restated 30, 2003
effective June 18, 2003
*10(q)(4) -- First Amendment to Exhibit CenterPoint Energy's Form 10-Q 1-31447 10.6
10(q)(3) effective as of for the quarter ended June 30,
January 1, 2004 2004
*10(r)(1) -- Executive Life Insurance Plan HI's Form 10-K for the year 1-7629 10(q)
of HI effective as of January ended December 31, 1993
1, 1994
*10(r)(2) -- First Amendment to Exhibit HI's Form 10-Q for the quarter 1-7629 10
10(r)(1) effective as of ended June 30, 1995
January 1, 1994
*10(r)(3) -- Second Amendment to Exhibit HI's Form 10-K for the year 1-3187 10(s)(3)
10(r)(1) effective as of ended December 31, 1997
August 6, 1997
*10(r)(4) -- CenterPoint Energy Executive CenterPoint Energy's Form 10-Q 1-31447 10.5
Life Insurance Plan, as for the quarter ended September
amended and restated 30, 2003
effective June 18, 2003
147
SEC FILE OR
EXHIBIT REGISTRATION EXHIBIT
NUMBER DESCRIPTION REPORT OR REGISTRATION STATEMENT NUMBER REFERENCE
------- ----------- -------------------------------- ------------ ---------
*10(s) -- Employment and Supplemental HI's Form 10-Q for the quarter 1-7629 10(f)
Benefits Agreement between ended March 31, 1987
HL&P and Hugh Rice Kelly
*10(t)(1) -- CenterPoint Energy Savings CenterPoint Energy's Form 10-Q 1-31447 99.2
Plan, as amended and restated for the quarter ended September
effective January 1, 2005 30, 2005
*10(t)(2) -- Reliant Energy Savings Trust CenterPoint Energy's Form 10-K 1-31447 10(u)(7)
between Reliant Energy and for the year ended December 31,
The Northern Trust Company, 2002
as Trustee, as amended and
restated effective April 1,
1999
*10(t)(3) -- First Amendment to Exhibit CenterPoint Energy's Form 10-K 1-31447 10(u)(8)
10(t)(2) effective September for the year ended December 31,
30, 2002 2002
*10(t)(4) -- Second Amendment to Exhibit CenterPoint Energy's Form 10-K 1-31447 10(u)(9)
10(t)(2) effective January 6, for the year ended December 31,
2003 2003
*10(t)(5) -- Third Amendment to Exhibit CenterPoint Energy's Form 10-Q 1-31447 99.1
10(t)(2) effective October 7, for the quarter ended September
2004, 30, 2005
*10(t)(6) -- Reliant Energy Retirement CenterPoint Energy's Form 10-K 1-31447 10(u)(10)
Plan, as amended and restated for the year ended December 31,
effective January 1, 1999 2002
*10(t)(7) -- First Amendment to Exhibit CenterPoint Energy's Form 10-K 1-31447 10(u)(11)
10(t)(6) effective as of for the year ended December 31,
January 1, 1995 2002
*10(t)(8) -- Second Amendment to Exhibit CenterPoint Energy's Form 10-K 1-31447 10(u)(12)
10(t)(6) effective as of for the year ended December 31,
January 1, 1995 2002
*10(t)(9) -- Third Amendment to Exhibit CenterPoint Energy's Form 10-K 1-31447 10(u)(13)
10(t)(6) effective as of for the year ended December 31,
January 1, 2001 2002
*10(t)(10) -- Fourth Amendment to Exhibit CenterPoint Energy's Form 10-K 1-31447 10(u)(14)
10(t)(6) effective as of for the year ended December 31,
January 1, 2001 2002
*10(t)(11) -- Fifth Amendment to Exhibit CenterPoint Energy's Form 10-K 1-31447 10(u)(15)
10(t)(6) effective as of for the year ended December 31,
November 15, 2002, and as 2002
renamed effective October 2,
2002
*10(t)(12) -- Sixth Amendment to Exhibit CenterPoint Energy's Form 10-K 1-31447 10(u)(16)
10(t)(6) effective as of for the year ended December 31,
January 1, 2002 2002
*10(t)(13) -- Seventh Amendment to Exhibit CenterPoint Energy's Form 10-K 1-31447 10(u)(18)
10(t)(6) effective December for the year ended December 31,
1, 2003 2003
*10(t)(14) -- Eighth Amendment to Exhibit CenterPoint Energy's Form 10-Q 1-31447 10.7
10(t)(6) effective as of for the quarter ended June 30,
January 1, 2004 2004
*10(t)(15) -- Ninth Amendment to Exhibit CenterPoint Energy's Form 10-K 1-31447 10(t)(20)
10(t)(6) effective as of for the year ended December 31,
October 27, 2004 2004
148
SEC FILE OR
EXHIBIT REGISTRATION EXHIBIT
NUMBER DESCRIPTION REPORT OR REGISTRATION STATEMENT NUMBER REFERENCE
------- ----------- -------------------------------- ------------ ---------
*10(t)(16) -- Tenth Amendment to Exhibit CenterPoint Energy's Form 10-K 1-31447 10(t)(21)
10(t)(6) effective as of for the year ended December 31,
January 1, 2005 2004
*10(t)(17) -- Eleventh Amendment to Exhibit CenterPoint Energy's Form 10-Q 1-31447 99.1
10(t)(6) effective as of May for the quarter ended June 30,
1, 2005 2005
*10(t)(18) -- Twelfth Amendment to Exhibit CenterPoint Energy's Form 10-Q 1-31447 99.2
10(t)(6) effective as of June for the quarter ended June 30,
1, 2005 2005
+*10(t)(19) -- Thirteenth Amendment to
Exhibit 10(t)(6) effective as
of January 1, 2006
*10(t)(20) -- Reliant Energy, Incorporated Reliant Energy's Form 10-K for 1-3187 10(u)(3)
Master Retirement Trust (as the year ended December 31, 1999
amended and restated
effective January 1, 1999 and
renamed effective May 5,
1999)
10(t)(21) -- Contribution and Registration Reliant Energy's Form 10-K for 1-3187 10(u)(4)
Agreement dated December 18, the year ended December 31, 2001
2001 among Reliant Energy,
CenterPoint Energy and the
Northern Trust Company,
trustee under the Reliant
Energy, Incorporated Master
Retirement Trust
10(u)(1) -- Stockholder's Agreement dated Schedule 13-D dated July 6, 1995 5-19351 2
as of July 6, 1995 between
Houston Industries
Incorporated and Time Warner
Inc.
10(u)(2) -- Amendment to Exhibit 10(u)(1) HI's Form 10-K for the year 1-7629 10(x)(4)
dated November 18, 1996 ended December 31, 1996
*10(v)(1) -- Houston Industries HI's Form 10-K for the year 1-7629 10(7)
Incorporated Executive ended December 31, 1995
Deferred Compensation Trust
effective as of December 19,
1995
*10(v)(2) -- First Amendment to Exhibit HI's Form 10-Q for the quarter 1-3187 10
10(v)(1) effective as of ended June 30, 1998
August 6, 1997
*10(w) -- Letter Agreement dated CenterPoint Energy's Form 8-K 1-31447 10.1
December 9, 2004 between dated December 9, 2004
CenterPoint Energy and Milton
Carroll
*10(x)(1) -- Reliant Energy, Incorporated Reliant Energy's Form 10-K for 1-3187 10(y)
and Subsidiaries Common Stock the year ended December 31, 2000
Participation Plan for
Designated New Employees and
Non-Officer Employees
effective as of March 4, 1998
149
SEC FILE OR
EXHIBIT REGISTRATION EXHIBIT
NUMBER DESCRIPTION REPORT OR REGISTRATION STATEMENT NUMBER REFERENCE
------- ----------- -------------------------------- ------------ ---------
*10(x)(2) -- Reliant Energy, Incorporated CenterPoint Energy's Form 10-K 1-31447 10(y)(2)
and Subsidiaries Common Stock for the year ended December 31,
Participation Plan for 2002
Designated New Employees and
Non-Officer Employees, as
amended and restated
effective January 1, 2001
*10(y) -- Reliant Energy, Incorporated Reliant Energy's Definitive 1-3187 Exhibit A
Annual Incentive Compensation Proxy Statement for 2000 Annual
Plan, as amended and restated Meeting of Shareholders
effective January 1, 1999
*10(z)(1) -- Long-Term Incentive Plan of Reliant Energy's Registration 333-60260 4.6
Reliant Energy, Incorporated Statement on Form S-8 dated May
effective as of January 1, 4, 2001
2001
*10(z)(2) -- First Amendment to Exhibit Reliant Energy's Registration 333-60260 4.7
10(z)(1) effective as of Statement on Form S-8 dated May
January 1, 2001 4, 2001
*10(z)(3) -- Second Amendment to Exhibit CenterPoint Energy's Form 10-K 1-31447 10(aa)(3)
10(z)(1) effective November for the year ended December 31,
5, 2003 2003
*10(z)(4) -- Long-Term Incentive Plan of CenterPoint Energy's Form 10-Q 1-31447 10.5
CenterPoint Energy, Inc. for the quarter ended June 30,
(amended and restated 2004
effective as of May 1, 2004)
*10(z)(5) -- Form of Performance Share CenterPoint Energy's Form 8-K 1-31447 10.2
Award Agreement for the dated February 22, 2006
20XX-20XX Performance Cycle
under Exhibit 10(z)(4)
*10(z)(6) -- Form of Stock Award Agreement CenterPoint Energy's Form 8-K 1-31447 10.3
(with Performance Goals) dated February 22, 2006
under Exhibit 10(z)(4)
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 Reliant Energy's Form 10-Q for 1-3187 10.6
into 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.
150
SEC FILE OR
EXHIBIT REGISTRATION EXHIBIT
NUMBER DESCRIPTION REPORT OR REGISTRATION STATEMENT NUMBER REFERENCE
------- ----------- -------------------------------- ------------ ---------
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 2002
and Texas Genco
10(bb)(2) -- Transition Services CenterPoint Energy's Form 10-K 1-31447 10(cc)(2)
Agreement, dated as of August for the year ended December 31,
31, 2002, between CenterPoint 2002
Energy and 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 2002
and Texas Genco
*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, 2002
Inc. effective as of August
1, 1983
*10(gg)(1) -- Deferred Compensation Plan CenterPoint Energy's Form 10-K 1-31447 10(hh)(1)
for 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
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 2003
January 1, 2003
*10(jj)(1) -- CenterPoint Energy Short Term CenterPoint Energy's Form 10-Q 1-31447 10.3
Incentive Plan, as amended for the quarter ended September
and restated effective 30, 2003
January 1, 2003
*10(jj)(2) -- Summary of 2006 Performance CenterPoint Energy's Form 8-K 1-31447 10.1
Goals and Objectives under dated February 22, 2006
Exhibit 10(jj)(1)
151
SEC FILE OR
EXHIBIT REGISTRATION EXHIBIT
NUMBER DESCRIPTION REPORT OR REGISTRATION STATEMENT NUMBER REFERENCE
------- ----------- -------------------------------- ------------ ---------
*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 2003
effective May 7, 2003
10(ll) -- City of Houston Franchise CenterPoint Energy's Form 10-Q 1-31447 10.1
Ordinance for the quarter ended June 30,
2005
+10(mm) -- Summary of non-employee
director compensation
+10(nn) -- 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
152
EXHIBIT 4(e)(16)
CenterPoint Energy Houston Electric, LLC
1111 Louisiana
Houston, TX 77002
================================================================================
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC
TO
JPMORGAN CHASE BANK
Trustee
----------
THIRTEENTH SUPPLEMENTAL INDENTURE
Dated as of February 6, 2004
----------
Supplementing the General Mortgage Indenture
Dated as of October 10, 2002
THIS INSTRUMENT GRANTS A SECURITY INTEREST BY A PUBLIC UTILITY
THIS INSTRUMENT CONTAINS AFTER-ACQUIRED PROPERTY PROVISIONS
This instrument is being filed pursuant to Chapter 35 of the Texas
Business and Commerce Code
================================================================================
THIRTEENTH SUPPLEMENTAL INDENTURE, dated as of February 6, 2004, between
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC, a limited liability company organized
and existing under the laws of the State of Texas (herein called the "Company"),
having its principal office at 1111 Louisiana, Houston, Texas 77002, and
JPMORGAN CHASE BANK, a banking corporation duly organized and existing under the
laws of the State of New York, as Trustee (herein called the "Trustee"), the
office of the Trustee at which on the date hereof its corporate trust business
is administered being 600 Travis Street, Suite 1150, Houston, Texas 77002.
RECITALS OF THE COMPANY
WHEREAS, the Company has heretofore executed and delivered to the Trustee a
General Mortgage Indenture dated as of October 10, 2002 (the "Indenture")
providing for the issuance by the Company from time to time of its bonds, notes
or other evidence of indebtedness to be issued in one or more series (in the
Indenture and herein called the "Securities") and to provide security for the
payment of the principal of and premium, if any, and interest, if any, on the
Securities; and
WHEREAS, the Company, in the exercise of the power and authority conferred upon
and reserved to it under the provisions of the Indenture and pursuant to
appropriate resolutions of the Manager, has duly determined to make, execute and
deliver to the Trustee this Thirteenth Supplemental Indenture to the Indenture
as permitted by Sections 201, 301, 403(2) and 1401 of the Indenture in order to
establish the form or terms of, and to provide for the creation and issuance of,
a fourteenth series of Securities under the Indenture in an aggregate principal
amount of $56,095,000 (such fourteenth series being hereinafter referred to as
the "Fourteenth Series"); and
WHEREAS, all things necessary to make the Securities of the Fourteenth Series,
when executed by the Company and authenticated and delivered by the Trustee or
any Authenticating Agent and issued upon the terms and subject to the conditions
hereinafter and in the Indenture set forth against payment therefor the valid,
binding and legal obligations of the Company and to make this Thirteenth
Supplemental Indenture a valid, binding and legal agreement of the Company, have
been done;
NOW, THEREFORE, THIS THIRTEENTH SUPPLEMENTAL INDENTURE WITNESSETH that, in order
to establish the terms of a series of Securities, and for and in consideration
of the premises and of the covenants contained in the Indenture and in this
Thirteenth Supplemental Indenture and for other good and valuable consideration
the receipt and sufficiency of which are hereby acknowledged, it is mutually
covenanted and agreed as follows:
ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS
OF GENERAL APPLICATION
Section 101. Definitions. Each capitalized term that is used herein and is
defined in the Indenture shall have the meaning specified in the Indenture
unless such term is otherwise defined herein.
ARTICLE TWO
TITLE, FORM AND TERMS OF THE BONDS
Section 201. Title of the Bonds. This Thirteenth Supplemental Indenture
hereby creates a series of Securities designated as the "General Mortgage Bonds,
Series N, due March 1, 2027" of the Company (collectively referred to herein as
the "Bonds"). For purposes of the Indenture, the Bonds shall constitute a single
series of Securities and, subject to the provisions, including, but not limited
to Article Four of the Indenture, the Bonds shall be issued in an aggregate
principal amount of $56,095,000.
Section 202. Form and Terms of the Bonds. The form and terms of the Bonds
will be set forth in an Officer's Certificate delivered by the Company to the
Trustee pursuant to the authority granted by this Thirteenth Supplemental
Indenture in accordance with Sections 201 and 301 of the Indenture.
Section 203. Treatment of Proceeds of Title Insurance Policy. Any moneys
received by the Trustee as proceeds of any title insurance policy on Mortgaged
Property of the Company shall be subject to and treated in accordance with the
provisions of Section 607(2) of the Indenture (other than the last paragraph
thereof).
ARTICLE THREE
MISCELLANEOUS PROVISIONS
The Trustee makes no undertaking or representations in respect of, and shall not
be responsible in any manner whatsoever for and in respect of, the validity or
sufficiency of this Thirteenth Supplemental Indenture or the proper
authorization or the due execution hereof by the Company or for or in respect of
the recitals and statements contained herein, all of which recitals and
statements are made solely by the Company.
Except as expressly amended and supplemented hereby, the Indenture shall
continue in full force and effect in accordance with the provisions thereof and
the Indenture is in all respects hereby ratified and confirmed. This Thirteenth
Supplemental Indenture and all of its provisions shall be deemed a part of the
Indenture in the manner and to the extent herein and therein provided.
This Thirteenth Supplemental Indenture shall be governed by, and construed in
accordance with, the law of the State of New York.
This Thirteenth Supplemental Indenture may be executed in any number of
counterparts, each of which so executed shall be deemed to be an original, but
all such counterparts shall together constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Thirteenth
Supplemental Indenture to be duly executed as of the day and year first above
written.
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC
By: /s/ Linda Geiger
------------------------------------
Name: Linda Geiger
Title: Assistant Treasurer
JPMORGAN CHASE BANK, as Trustee
By: /s/ Carol Logan
------------------------------------
Name: Carol Logan
Title: Vice President and Trust Officer
ACKNOWLEDGMENT
STATE OF TEXAS )
) ss
COUNTY OF HARRIS )
On the 4th day of February, 2004, before me personally came Linda
Geiger, to me known, who, being by me duly sworn, did depose and say that he
resides in Houston, Texas; that he is the Assistant Treasurer of CenterPoint
Energy Houston Electric, LLC, a Texas limited liability company, the limited
liability company described in and which executed the foregoing instrument; and
that he signed his name thereto by authority of the sole manager of said limited
liability company.
/s/ Lena Arleen Williams
----------------------------------------
Notary Public
ACKNOWLEDGMENT
STATE OF TEXAS )
) ss
COUNTY OF HARRIS )
On the 4th day of February, 2004, before me personally came Carol
Logan, to me known, who, being by me duly sworn, did depose and say that she
resides in Houston, Texas; that she is a Vice President of JPMorgan Chase Bank,
a banking corporation organized under the State of New York, the corporation
described in and which executed the foregoing instrument; and that she signed
her name thereto by authority of the board of directors of said corporation.
/s/ Jeanette C. Dunn
----------------------------------------
Notary Public
EXHIBIT 4(e)(17)
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC
OFFICER'S CERTIFICATE
February 6, 2004
I, the undersigned officer of CenterPoint Energy Houston Electric, LLC, a Texas
limited liability company (the "Company"), do hereby certify that I am an
Authorized Officer of the Company as such term is defined in the Indenture (as
defined herein). I am delivering this certificate pursuant to the authority
granted in the Resolutions adopted by written consents of the Manager of the
Company dated June 3, 2003 and January 31, 2004, and Sections 105, 201, 301,
401(1), 401(5), 403(2)(A), 403(2)(B) and 1403 of the General Mortgage Indenture
dated as of October 10, 2002, as heretofore supplemented to the date hereof (as
heretofore supplemented, the "Indenture"), between the Company and JPMorgan
Chase Bank, as Trustee (the "Trustee"). Terms used herein and not otherwise
defined herein shall have the meanings assigned to them in the Indenture unless
the context clearly requires otherwise. Based upon the foregoing, I hereby
certify on behalf of the Company as follows:
1. The terms and conditions of the Securities of the series described in this
Officer's Certificate are as follows (the numbered subdivisions set forth in
this Paragraph 1 corresponding to the numbered subdivisions of Section 301 of
the Indenture):
(1) The Securities of the fourteenth series to be issued under the
Indenture shall be designated "General Mortgage Bonds, Series N, due March
1, 2027" (the "Series N Bonds").
(2) The Series N Bonds shall be authenticated and delivered in the
aggregate principal amount of $56,095,000.
(3) Not applicable.
(4) The Series N Bonds shall mature and the principal thereof shall be due
and payable together with all accrued and unpaid interest thereon on March
1, 2027. Principal and premium, if any, are payable on the Series N Bonds
on such date or dates (subject to the terms of subsection 8(b) hereof), and
in such amounts, as principal and premium, if any, are payable (whether at
maturity, redemption or otherwise) on the Series 2004 Matagorda Bonds (as
defined below). The obligation of the Company to make any payment of
principal on the Series N Bonds shall be fully or partially, as the case
may be, deemed to have been paid or otherwise satisfied and discharged to
the extent that the Company has paid or caused to be paid to the Matagorda
Trustee (as defined below) the Installment Payment (as defined below) in
respect of the principal then due and payable on the Bonds, as such term is
defined in the Trust Indenture dated as of February 1, 2004 (as amended and
supplemented, the "Matagorda Indenture") between Matagorda County
Navigation District Number One (the "Issuer") and JPMorgan Chase Bank, a
New York banking organization, as trustee (the "Matagorda Trustee"). The
Bonds (as defined in the Matagorda Indenture) shall hereinafter be referred
to as the "Series 2004 Matagorda Bonds".
1
(5) The Series N Bonds shall bear interest from the date on which the
Series 2004 Matagorda Bonds commence to bear interest at such rate or rates
per annum as shall cause the amount of interest payable on each Interest
Payment Date (as defined below) on the Series N Bonds to equal the amount
of interest payable on such Interest Payment Date in respect of the Series
2004 Matagorda Bonds under the Matagorda Indenture. Such interest on the
Series N Bonds shall be payable on the same dates as interest is payable
from time to time in respect of the Series 2004 Matagorda Bonds pursuant to
the Matagorda Indenture (each such date herein called an "Interest Payment
Date"), until the maturity of the Series N Bonds, or, in the case of any
default by the Company in the payment of the principal due on the Series N
Bonds, until the Company's obligation with respect to the payment of such
principal shall be discharged as provided in the Indenture. The amount of
interest payable from time to time in respect of the Series 2004 Matagorda
Bonds under the Matagorda Indenture, the basis on which such interest is
computed and the dates on which such interest is payable are set forth in
the Matagorda Indenture. The obligation of the Company to make any payment
of interest on the Series N Bonds shall be fully or partially, as the case
may be, deemed to have been paid or otherwise satisfied and discharged to
the extent that the Company has paid or caused to be paid to the Matagorda
Trustee the Installment Payment (as defined below) in respect of the
interest then due and payable on the Series 2004 Matagorda Bonds. The
Regular Record Date and Special Record Date provisions of the Indenture
shall not apply to the Series N Bonds.
(6) The Corporate Trust Office of the Trustee in Dallas, Texas shall be the
place at which (i) the principal of, premium, if any, and interest on, the
Series N Bonds shall be payable, and (ii) registration of transfer of the
Series N Bonds may be effected; and the Corporate Trust Office of the
Trustee in Houston, Texas shall be the place at which notices and demands
to or upon the Company in respect of the Series N Bonds and the Indenture
may be served; and the Trustee shall be the Security Registrar for the
Series N Bonds; provided, however, that the Company reserves the right to
change, by one or more Officer's Certificates, any such place or the
Security Registrar; and provided, further, that the Company reserves the
right to designate, by one or more Officer's Certificates, its principal
office in Houston, Texas as any such place or itself as the Security
Registrar; provided, however, that there shall be only a single Security
Registrar for the Series N Bonds.
(7) Not applicable.
(8) The Series N bonds will not be redeemable at the option of the Company
or otherwise pursuant to the requirements of the Mortgage Indenture,
provided however that (a) in the event that the redemption of Series 2004
Matagorda Bonds is required under the Matagorda Indenture due to the
occurrence of a Determination of Taxability, as such term is defined in
subsection (e) of Section 8 of the Form of Series 2004 Matagorda Bonds set
forth in Exhibit A to the Matagorda Indenture, the Company will redeem
Series N Bonds equal in principal amount to the Series 2004 Matagorda Bonds
to be redeemed at a redemption price equal to 100% of the principal amount
thereof, plus accrued interest to such date fixed for redemption, and (b)
upon receipt by the Trustee of a written demand from the Matagorda Trustee
stating that the principal amount of all Series 2004
2
Matagorda Bonds then outstanding under the Matagorda Indenture has been
declared immediately due and payable, the Company, subject to the terms and
provisions of the Series N Bonds, will redeem the Series N Bonds not more
than 180 days after receipt by the Trustee of such written demand, the
notice provisions of Article Five of the Indenture not being applicable
under the foregoing circumstances.
(9) The Series N Bonds are issuable only in denominations of $56,095,000.
(10) Not applicable.
(11) Not applicable.
(12) Not applicable.
(13) Not applicable.
(14) Not applicable.
(15) Not applicable.
(16) Not applicable.
(17) The Series N Bonds shall be evidenced by a single registered Series N
Bond in the principal amount and denomination of $56,095,000. The Series N
Bonds shall be executed by the Company and delivered to the Trustee for
authentication and delivery.
The single Series N Bond shall be identified by the number N-1 and shall
upon issuance be delivered by the Company to, and registered in the name
of, the Trustee, and shall be transferable only as required to effect an
assignment thereof to a successor or an assign of the Trustee under the
Indenture. The Series N Bonds are to be issued by the Company to the
Matagorda Trustee in order that the Matagorda Trustee shall have the
benefit as a holder of the Series N Bonds of the lien of the Indenture in
the event of the non-payment by the Company of the Installment Payments
(the "Installment Payments"), as defined in, and pursuant to the
Installment Payment and Bond Amortization Agreement (the "Installment
Payment Agreement"), dated as of February 1, 2004, by and between the
Issuer and the Company.
Series N Bonds issued upon transfer shall be numbered consecutively from
N-2 upwards and issued in the authorized denominations set forth in
subsection (9) above. See also subsection (19) below.
(18) Not applicable.
(19) The holder of the Series N Bonds by acceptance of the Series N Bonds
agrees to restrictions on transfer and to waivers of certain rights of
exchange as set forth herein. The Series N Bonds have not been registered
under the Securities Act of 1933 and may not be offered, sold or otherwise
transferred in the absence of such registration or an
3
applicable exemption therefrom. No service charge shall be made for the
registration of transfer or exchange of the Series N Bonds.
(20) For purposes of the Series N Bonds, "Business Day" means any day other
than (i) a Saturday or Sunday, (ii) a day on which commercial banks in New
York, New York, Houston, Texas, or the city in which the principal
corporate trust office of the Indenture Trustee is located, are authorized
by law to close or (iii) a day on which the New York Stock Exchange is
closed.
(21) Not applicable.
(22) The Trustee may conclusively presume that the obligation of the
Company to pay the principal of, premium, if any, and interest on the
Series N Bonds shall have been fully satisfied and discharged unless and
until it shall have received a written notice from the Matagorda Trustee,
signed by an authorized officer of the Matagorda Trustee and attested by
the Secretary or an Assistant Secretary of the Matagorda Trustee, stating
that the payment of principal of, premium, if any, or interest on the
Series N Bonds has not been fully paid when due and specifying the amount
of funds required to make such payment.
The obligation of the Company to make any payment of the principal of,
premium, if any, or interest on the Series N Bonds, whether at maturity,
upon redemption (including any redemption due to the occurrence of a
Determination of Taxability, as such term is defined in subsection (e) of
Section 8 of the Form of the Series 2004 Matagorda Bonds set forth in
Exhibit A of the Matagorda Indenture) or otherwise, shall be fully or
partially, as the case may be, deemed to have been paid or otherwise
satisfied and discharged to the extent that at the time any such payment
shall be due, the then due principal of, premium, if any, or interest on
the Series 2004 Matagorda Bonds which corresponds to such amounts under the
Series N Bonds shall have been fully or partially paid, deemed to have been
paid or otherwise satisfied and discharged. In addition, such obligation to
make any payment of the principal of, premium, if any, or interest on the
Series N Bonds at any time shall be deemed to have been satisfied and
discharged to the extent that the amount of the Company's obligation to
make any payment of the principal of, premium, if any, or interest on the
Series N Bonds exceeds the obligation of the Company at that time to make
any Installment Payment.
The Series N Bonds shall have such other terms and provisions as are
provided in the form thereof attached hereto as Exhibit A, and shall be
issued in substantially such form.
2. The undersigned has read all of the covenants and conditions contained in the
Indenture, and the definitions in the Indenture relating thereto, relating to
the issuance of the Series N Bonds and the execution of the Thirteenth
Supplemental Indenture to the Indenture in respect of compliance with which this
certificate is made.
3. The statements contained in this certificate are based upon the familiarity
of the undersigned with the Indenture, the documents accompanying this
certificate, and upon discussions by the undersigned with officers and employees
of the Company familiar with the matters set forth herein.
4
4. In the opinion of the undersigned, he has made such examination or
investigation as is necessary to enable him to express an informed opinion as to
whether or not such covenants and conditions have been complied with.
In the opinion of the undersigned, such conditions and covenants have been
complied with.
5. To the knowledge of the undersigned, no Event of Default has occurred and is
continuing.
6. The execution of the Thirteenth Supplemental Indenture, dated as of the date
hereof, between the Company and the Trustee is authorized or permitted by the
Indenture.
7. First Mortgage Bonds, 7 3/4% Series due March 15, 2023, having an aggregate
principal amount of $56,095,000 (collectively, the "First Mortgage Bonds"), have
heretofore been authenticated and delivered. The First Mortgage Bonds have been
returned to and cancelled by the trustee under the First Mortgage prior to the
date hereof, constitute Retired Securities and are the basis for the
authentication and delivery of the Series N Bonds. The maximum Stated Interest
Rate on the First Mortgage Bonds at the time of their authentication and
delivery was not less than the maximum Stated Interest Rate on the Series N
Bonds to be in effect upon the initial authentication and delivery thereof.
5
IN WITNESS WHEREOF, the undersigned has executed this Officer's
Certificate as of the date first above written.
By: /s/ Marc Kilbride
------------------------------------
Name: Marc Kilbride
Title: Vice President and Treasurer
Acknowledged and Received on
February 6, 2004
JPMORGAN CHASE BANK,
as Trustee
By: /s/ Carol Logan
---------------------------------
Name: Carol Logan
Title: Vice President and Trust
Officer
6
EXHIBIT A
FORM OF SERIES N BOND
7
NOTE: THE HOLDER OF THIS BOND BY ACCEPTANCE HEREOF AGREES TO RESTRICTIONS ON
TRANSFER AND TO INDEMNIFICATION PROVISIONS AS SET FORTH BELOW. IN ADDITION, THE
BOND REPRESENTED BY THIS CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 AND SUCH BOND MAY NOT BE TRANSFERRED WITHOUT COMPLIANCE
WITH APPLICABLE SECURITIES LAWS.
THIS BOND IS NOT TRANSFERABLE EXCEPT, AS FURTHER PROVIDED HEREIN, TO A SUCCESSOR
OR ASSIGN OF THE TRUSTEE UNDER THE TRUST INDENTURE REFERRED TO HEREIN BETWEEN
THE ISSUER AND SUCH TRUSTEE.
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC
General Mortgage Bonds, Series N, due March 1, 2027
Original Interest Accrual Date: February 6, 2004
Stated Maturity: March 1, 2027
Interest Rate: See below
Interest Payment Dates: See below
Regular Record Dates: N/A
Redeemable by Company: Yes X No
--- ---
Redemption Date: See below
Redemption Price: See below
This Security is not an Original Discount
Security within the meaning of the
within-mentioned Indenture.
Principal Amount
$56,095,000 No. N-1
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC, a corporation duly organized and
existing under the laws of the State of Texas (herein called the "Company,"
which term includes any successor under the Indenture referred to below), for
value received, hereby promises to pay to JPMORGAN CHASE BANK, a New York
banking organization, as Trustee under the Matagorda Indenture (as herein
defined) or its registered assigns (the "Matagorda Trustee"), the principal sum
of FIFTY-SIX MILLION NINETY-FIVE THOUSAND DOLLARS, in whole or in installments
on such date or dates (subject to the tenth paragraph hereof) and in such
amounts, and to pay to the Matagorda Trustee premium, if any, in whole or in
installments on such date or dates and in such amounts, as the Issuer (as
defined herein) has any obligations under the Trust Indenture (as amended and
supplemented, the "Matagorda Indenture"), dated as of February 1, 2004, between
the Matagorda County Navigation District Number One (the "Issuer") and the
Matagorda Trustee to repay any principal or to pay premium, if any, in respect
of the Bonds (as such term is defined in the Matagorda Indenture, and
hereinafter referred to as the "Series 2004 Matagorda Bonds"), but not later
than the Stated Maturity specified above. The obligation of the Company to make
any payment of principal or premium, if any, on this Bond, whether at maturity
or otherwise, shall be fully or partially, as the case may be, deemed to have
been paid or otherwise satisfied and discharged to the extent that the Company
has paid or caused to be paid to the Matagorda Trustee the Installment Payment
(as defined below) in respect of the principal or premium, if any, then due and
payable on the Series 2004 Matagorda Bonds.
Interest shall be payable on this Bond on the same dates as interest is payable
from time to time in respect of the Series 2004 Matagorda Bonds pursuant to the
Matagorda Indenture (each such date herein called an "Interest Payment Date"),
at such rate or rates per annum as shall cause the amount of interest payable on
such Interest Payment Date on this Bond to equal the amount of interest payable
on such Interest Payment Date in respect of the Series 2004 Matagorda Bonds
under the Matagorda Indenture. Such interest shall be payable until the maturity
of this Bond, or, if the Company shall default in the payment of the principal
due on this Bond, until the Company's obligation with respect to the payment of
such principal shall be discharged as provided in the Indenture. The
1
amount of interest payable from time to time in respect of the Series 2004
Matagorda Bonds under the Matagorda Indenture, the basis on which such interest
is computed and the dates on which such interest is payable are set forth in the
Matagorda Indenture. This Bond shall bear interest from the Original Interest
Accrual Date listed on the first page of this Bond. The obligation of the
Company to make any payment of interest on this Bond shall be fully or
partially, as the case may be, deemed to have been paid or otherwise satisfied
and discharged to the extent that the Company has paid or caused to be paid to
the Matagorda Trustee the Installment Payment (as defined below) in respect of
the interest then due and payable on the Series 2004 Matagorda Bonds.
This Bond is issued to the Matagorda Trustee in order that the Matagorda Trustee
shall have the benefit as a holder of this Bond of the lien of the Indenture (as
defined below) in the event of the non-payment by the Company of the Installment
Payments (the "Installment Payments"), as defined in and pursuant to the
Installment Payment and Bond Amortization Agreement (as amended and
supplemented, the "Installment Payment Agreement"), dated as of February 1,
2004, between the Issuer and the Company. Any capitalized terms used herein and
not defined herein shall have the meanings specified in the Indenture (as
defined below), unless otherwise noted.
THIS BOND SHALL NOT BE TRANSFERABLE EXCEPT AS REQUIRED TO EFFECT AN ASSIGNMENT
HEREOF TO A SUCCESSOR OR AN ASSIGN OF THE MATAGORDA TRUSTEE UNDER THE MATAGORDA
INDENTURE.
The Matagorda Trustee shall surrender this Bond to the Matagorda Trustee (as
defined below) in accordance with Section 5.07(d) of the Installment Payment
Agreement.
Payments of the principal of, premium, if any, and interest on this Bond shall
be made at the Corporate Trust Administration of JPMorgan Chase Bank, as
Trustee, located at 2001 Bryan Street, 9th Floor, Dallas, Texas 75201, or at
such other office or agency as may be designated for such purpose by the Company
from time to time. Payment of the principal of, premium, if any, and interest on
this Bond, as aforesaid, shall be made in such coin or currency of the United
States of America as at the time of payment shall be legal tender for the
payment of public and private debts.
This Bond is one of a duly authorized issue of securities of the Company (herein
called the "Securities"), issued and issuable in one or more series under and
equally secured by a General Mortgage Indenture, dated as of October 10, 2002
(such Indenture as originally executed and delivered and as supplemented or
amended from time to time thereafter, together with any constituent instruments
establishing the terms of particular Securities, being herein called the
"Indenture"), between the Company and JPMorgan Chase Bank, as trustee (herein
called the "Trustee," which term includes any successor trustee under the
Indenture), to which Indenture reference is hereby made for a description of the
property mortgaged, pledged and held in trust, the nature and extent of the
security and the respective rights, limitations of rights, duties and immunities
of the Company, the Trustee and the Holders of the Securities thereunder and of
the terms and conditions upon which the Securities are, and are to be,
authenticated and delivered and secured. The acceptance of this Bond shall be
deemed to constitute the consent and agreement by the Holder hereof to all of
the terms and provisions of the Indenture. This Bond is one of the series
designated above.
The Bonds of this series will not be entitled to the benefit of any sinking fund
or voluntary redemption provisions.
If an Event of Default, as defined in the Indenture, shall occur and be
continuing, the principal of this Bond may be declared due and payable in the
manner and with the effect provided in the Indenture.
This Bond will not be redeemable at the option of the Company or otherwise
pursuant to the requirements of the Indenture, provided however that (a) in the
event of the required redemption of Series 2004 Matagorda Bonds due to the
occurrence of a Determination of Taxability, as such term is defined in
subsection (e) of Section 8 of the Form of Series 2004 Matagorda Bonds set forth
in Exhibit A to the Matagorda Indenture, the Company will redeem Bonds equal in
principal amount to the Series 2004 Matagorda Bonds to be redeemed at a
redemption price equal to 100% of the principal amount thereof, plus accrued
interest to the date fixed for redemption, and (b) upon receipt by the Trustee
of a written demand from the Matagorda Trustee stating that the principal amount
of all Series 2004 Matagorda Bonds then outstanding under the Matagorda
Indenture has been declared immediately due and payable, the Company, subject to
the terms and provisions of the Bonds, will redeem the Bonds not more than 180
days after receipt by the Trustee of such written demand.
2
The Indenture permits, with certain exceptions as therein provided, the Trustee
to enter into one or more supplemental indentures for the purpose of adding any
provisions to, or changing in any manner or eliminating any of the provisions
of, the Indenture with the consent of the Holders of not less than a majority in
aggregate principal amount of the Securities of all series then Outstanding
under the Indenture, considered as one class; PROVIDED, HOWEVER, that if there
shall be Securities of more than one series Outstanding under the Indenture and
if a proposed supplemental indenture shall directly affect the rights of the
Holders of Securities of one or more, but less than all, of such series, then
the consent only of the Holders of a majority in aggregate principal amount of
the Outstanding Securities of all series so directly affected, considered as one
class, shall be required; and PROVIDED, FURTHER, that if the Securities of any
series shall have been issued in more than one Tranche and if the proposed
supplemental indenture shall directly affect the rights of the Holders of
Securities of one or more, but less than all, of such Tranches, then the consent
only of the Holders of a majority in aggregate principal amount of the
Outstanding Securities of all Tranches so directly affected, considered as one
class, shall be required; and PROVIDED, FURTHER, that the Indenture permits the
Trustee to enter into one or more supplemental indentures for limited purposes
without the consent of any Holders of Securities. The Indenture also contains
provisions permitting the Holders of a majority in principal amount of the
Securities then Outstanding, on behalf of the Holders of all Securities, to
waive compliance by the Company with certain provisions of the Mortgage
Indenture and certain past defaults under the Indenture and their consequences.
Any such consent or waiver by the Holder of this Bond shall be conclusive and
binding upon such Holder and upon all future Holders of this Bond and of any
Security issued upon the registration of transfer hereof or in exchange therefor
or in lieu hereof, whether or not notation of such consent or waiver is made
upon this Bond.
As provided in the Indenture and subject to certain limitations therein and
herein set forth, the transfer of this Bond is registrable in the Security
Register, upon surrender of this Bond for registration of transfer at the
Corporate Trust Office of JPMorgan Chase Bank in Houston, Texas or such other
office or agency as may be designated by the Company from time to time, duly
endorsed by, or accompanied by a written instrument of transfer in form
satisfactory to the Company and the Security Registrar duly executed by, the
Holder hereof or his attorney duly authorized in writing, and thereupon one or
more new Bonds of this series of authorized denominations and of like tenor and
aggregate principal amount, will be issued to the designated transferee or
transferees.
The Company, the Trustee and any agent of the Company or the Trustee may deem
and treat the person in whose name this Bond shall be registered upon the
Security Register for the Bonds of this series as the absolute owner of such
Bond for the purpose of receiving payment of or on account of the principal of
and interest on this Bond and for all other purposes, whether or not this Bond
be overdue, and neither the Company nor the Trustee shall be affected by any
notice to the contrary; and all such payments so made to such registered owner
or upon his order shall be valid and effectual to satisfy and discharge the
liability upon this Bond to the extent of the sum or sums paid.
The Trustee may conclusively presume that the obligation of the Company to pay
the principal of, premium, if any, and interest on this Bond shall have been
fully satisfied and discharged unless and until it shall have received a written
notice from the Matagorda Trustee, signed by an authorized officer of the
Matagorda Trustee and attested by the Secretary or an Assistant Secretary of the
Matagorda Trustee, stating that the payment of principal of, premium, if any, or
interest on this Bond has not been fully paid when due and specifying the amount
of funds required to make such payment.
The obligation of the Company to make any payment of the principal of, premium,
if any, or interest on this Bond, whether at maturity, upon redemption
(including any redemption due to the occurrence of a Determination of
Taxability, as such term is defined in subsection (e) of Section 8 of the Form
of the Series 2004 Matagorda Bonds set forth in Exhibit A of the Matagorda
Indenture) or otherwise, shall be fully or partially, as the case may be, deemed
to have been paid or otherwise satisfied and discharged to the extent that at
the time any such payment shall be due, the then due principal, premium, if any,
or interest on the Series 2004 Matagorda Bonds which corresponds to such amounts
under this Bond shall have been fully or partially paid, deemed to have been
paid or otherwise satisfied and discharged. In addition, such obligation to make
any payment of the principal of, premium, if any, or interest on this Bond at
any time shall be deemed to have been satisfied and discharged to the extent
that the amount of the Company's obligation to make any payment of the principal
of, premium, if any, or interest on this Bond exceeds the obligation of the
Company at that time to make any Installment Payment.
3
No recourse under or upon any obligation, covenant or agreement contained in the
Indenture or in any indenture supplemental thereto, or in any Bond or coupon
thereby secured, or because of any indebtedness thereby secured, shall be had
against any incorporator, member, manager, stockholder, officer, director or
employee, as such, past, present or future, of the Company or any predecessor or
successor corporation or company, either directly or through the Company or any
predecessor or successor corporation or company, whether by virtue of any
constitution, statute or rule of law, or by the enforcement of any assessment or
penalty or otherwise; it being expressly agreed and understood that the
Indenture, any indenture supplemental thereto and the obligations thereby
secured, are solely corporate obligations of the Company, and that no personal
liability whatsoever shall attach to, or be incurred by, such incorporators,
members, managers, stockholders, officers, directors or employees, as such, of
the Company or of any predecessor or successor corporation or company, or any of
them, because of the creation of the indebtedness thereby authorized, or under
or by reason of any of the obligations, covenants or agreements contained in the
Indenture or in any indenture supplemental thereto or in any of the Bonds or
coupons thereby secured, or implied therefrom.
The holder of this Bond by acceptance of this Bond agrees to restrictions on
transfer and to waivers of certain rights of exchange as set forth herein. THIS
BOND HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE
OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN
APPLICABLE EXEMPTION THEREFROM. No service charge shall be made for the
registration of transfer or exchange of this Bond.
This Bond shall be governed by and construed in accordance with the law of the
State of New York except as provided in the Indenture.
Unless the certificate of authentication hereon has been executed by the Trustee
or an Authenticating Agent by manual signature, this Bond shall not be entitled
to any benefit under the Indenture or be valid or obligatory for any purpose.
[The remainder of this page is intentionally left blank.]
4
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed.
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
CERTIFICATE OF AUTHENTICATION
This is one of the Securities of the series designated therein referred to
in the within-mentioned Indenture.
Date of Authentication:
February 6, 2004
JPMORGAN CHASE BANK,
Trustee
By:
------------------------------------
Authorized Signatory
5
EXHIBIT 4(e)(18)
CenterPoint Energy Houston Electric, LLC
1111 Louisiana
Houston, TX 77002
================================================================================
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC
TO
JPMORGAN CHASE BANK
Trustee
----------
FOURTEENTH SUPPLEMENTAL INDENTURE
Dated as of February 11, 2004
----------
Supplementing the General Mortgage Indenture
Dated as of October 10, 2002
THIS INSTRUMENT GRANTS A SECURITY INTEREST BY A PUBLIC UTILITY
THIS INSTRUMENT CONTAINS AFTER-ACQUIRED PROPERTY PROVISIONS
This instrument is being filed pursuant to Chapter 35 of the Texas Business and
Commerce Code
================================================================================
FOURTEENTH SUPPLEMENTAL INDENTURE, dated as of February 11, 2004, between
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC, a limited liability company organized
and existing under the laws of the State of Texas (herein called the "Company"),
having its principal office at 1111 Louisiana, Houston, Texas 77002, and
JPMORGAN CHASE BANK, a banking corporation duly organized and existing under the
laws of the State of New York, as Trustee (herein called the "Trustee"), the
office of the Trustee at which on the date hereof its corporate trust business
is administered being 600 Travis Street, Suite 1150, Houston, Texas 77002.
RECITALS OF THE COMPANY
WHEREAS, the Company has heretofore executed and delivered to the Trustee a
General Mortgage Indenture dated as of October 10, 2002 (the "Indenture")
providing for the issuance by the Company from time to time of its bonds, notes
or other evidence of indebtedness to be issued in one or more series (in the
Indenture and herein called the "Securities") and to provide security for the
payment of the principal of and premium, if any, and interest, if any, on the
Securities; and
WHEREAS, the Company, in the exercise of the power and authority conferred upon
and reserved to it under the provisions of the Indenture and pursuant to
appropriate resolutions of the Manager, has duly determined to make, execute and
deliver to the Trustee this Fourteenth Supplemental Indenture to the Indenture
as permitted by Sections 201, 301, 403(2) and 1401 of the Indenture in order to
establish the form or terms of, and to provide for the creation and issuance of,
a fifteenth series of Securities under the Indenture in an aggregate principal
amount of $43,820,000 (such fifteenth series being hereinafter referred to as
the "Fifteenth Series"); and
WHEREAS, all things necessary to make the Securities of the Fifteenth Series,
when executed by the Company and authenticated and delivered by the Trustee or
any Authenticating Agent and issued upon the terms and subject to the conditions
hereinafter and in the Indenture set forth against payment therefor the valid,
binding and legal obligations of the Company and to make this Fourteenth
Supplemental Indenture a valid, binding and legal agreement of the Company, have
been done;
NOW, THEREFORE, THIS FOURTEENTH SUPPLEMENTAL INDENTURE WITNESSETH that, in order
to establish the terms of a series of Securities, and for and in consideration
of the premises and of the covenants contained in the Indenture and in this
Fourteenth Supplemental Indenture and for other good and valuable consideration
the receipt and sufficiency of which are hereby acknowledged, it is mutually
covenanted and agreed as follows:
ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS
OF GENERAL APPLICATION
Section 101. Definitions. Each capitalized term that is used herein and is
defined in the Indenture shall have the meaning specified in the Indenture
unless such term is otherwise defined herein.
ARTICLE TWO
TITLE, FORM AND TERMS OF THE BONDS
Section 201. Title of the Bonds. This Fourteenth Supplemental Indenture
hereby creates a series of Securities designated as the "General Mortgage Bonds,
Series O, due March 1, 2017" of the Company (collectively referred to herein as
the "Bonds"). For purposes of the Indenture, the Bonds shall constitute a single
series of Securities and, subject to the provisions, including, but not limited
to Article Four of the Indenture, the Bonds shall be issued in an aggregate
principal amount of $43,820,000.
Section 202. Form and Terms of the Bonds. The form and terms of the Bonds
will be set forth in an Officer's Certificate delivered by the Company to the
Trustee pursuant to the authority granted by this Fourteenth Supplemental
Indenture in accordance with Sections 201 and 301 of the Indenture.
Section 203. Treatment of Proceeds of Title Insurance Policy. Any moneys
received by the Trustee as proceeds of any title insurance policy on Mortgaged
Property of the Company shall be subject to and treated in accordance with the
provisions of Section 607(2) of the Indenture (other than the last paragraph
thereof).
ARTICLE THREE
MISCELLANEOUS PROVISIONS
The Trustee makes no undertaking or representations in respect of, and shall not
be responsible in any manner whatsoever for and in respect of, the validity or
sufficiency of this Fourteenth Supplemental Indenture or the proper
authorization or the due execution hereof by the Company or for or in respect of
the recitals and statements contained herein, all of which recitals and
statements are made solely by the Company.
Except as expressly amended and supplemented hereby, the Indenture shall
continue in full force and effect in accordance with the provisions thereof and
the Indenture is in all respects hereby ratified and confirmed. This Fourteenth
Supplemental Indenture and all of its provisions shall be deemed a part of the
Indenture in the manner and to the extent herein and therein provided.
This Fourteenth Supplemental Indenture shall be governed by, and construed in
accordance with, the law of the State of New York.
This Fourteenth Supplemental Indenture may be executed in any number of
counterparts, each of which so executed shall be deemed to be an original, but
all such counterparts shall together constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Fourteenth
Supplemental Indenture to be duly executed as of the day and year first above
written.
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC
By: /s/ Marc Kilbride
------------------------------------
Name: Marc Kilbride
Title: Vice President and Treasurer
JPMORGAN CHASE BANK, as Trustee
By: /s/ Carol Logan
------------------------------------
Name: Carol Logan
Title: Vice President
ACKNOWLEDGMENT
STATE OF TEXAS )
) ss
COUNTY OF HARRIS )
On the 9th day of February, 2004, before me personally came Marc
Kilbride, to me known, who, being by me duly sworn, did depose and say that he
resides in Houston, Texas; that he is the Vice President & Treasurer of
CenterPoint Energy Houston Electric, LLC, a Texas limited liability company, the
limited liability company described in and which executed the foregoing
instrument; and that he signed his name thereto by authority of the sole manager
of said limited liability company.
/s/ Lena Arleen Williams
----------------------------------------
Notary Public
ACKNOWLEDGMENT
STATE OF TEXAS )
) ss
COUNTY OF HARRIS )
On the 9th day of February, 2004, before me personally came Carol
Logan, to me known, who, being by me duly sworn, did depose and say that she
resides in Houston, Texas; that she is Vice President of JPMorgan Chase Bank, a
banking corporation organized under the State of New York, the corporation
described in and which executed the foregoing instrument; and that she signed
her name thereto by authority of the board of directors of said corporation.
/s/ Carolyn A. Frazier
----------------------------------------
Notary Public
EXHIBIT 4(e)(19)
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC
OFFICER'S CERTIFICATE
February 11, 2004
I, the undersigned officer of CenterPoint Energy Houston Electric, LLC, a Texas
limited liability company (the "Company"), do hereby certify that I am an
Authorized Officer of the Company as such term is defined in the Indenture (as
defined herein). I am delivering this certificate pursuant to the authority
granted in the Resolutions adopted by written consent of the Manager of the
Company dated January 31, 2004, and Sections 105, 201, 301, 401(1), 401(5),
403(2)(A), 403(2)(B) and 1403 of the General Mortgage Indenture dated as of
October 10, 2002, as heretofore supplemented to the date hereof (as heretofore
supplemented, the "Indenture"), between the Company and JPMorgan Chase Bank, as
Trustee (the "Trustee"). Terms used herein and not otherwise defined herein
shall have the meanings assigned to them in the Indenture unless the context
clearly requires otherwise. Based upon the foregoing, I hereby certify on behalf
of the Company as follows:
1. The terms and conditions of the Securities of the series described in this
Officer's Certificate are as follows (the numbered subdivisions set forth in
this Paragraph 1 corresponding to the numbered subdivisions of Section 301 of
the Indenture):
(1) The Securities of the fifteenth series to be issued under the Indenture
shall be designated "General Mortgage Bonds, Series O, due March 1, 2017"
(the "Series O Bonds").
(2) The Series O Bonds shall be authenticated and delivered in the
aggregate principal amount of $43,820,000.
(3) Not applicable.
(4) The Series O Bonds shall mature and the principal thereof shall be due
and payable together with all accrued and unpaid interest thereon on March
1, 2017. Principal and premium, if any, are payable on the Series O Bonds
on such date or dates (subject to the terms of subsection 8(b) hereof), and
in such amounts, as principal and premium, if any, are payable (whether at
maturity, redemption or otherwise) on the Series 2004 Brazos River Bonds
(as defined below). The obligation of the Company to make any payment of
principal on the Series O Bonds shall be fully or partially, as the case
may be, deemed to have been paid or otherwise satisfied and discharged to
the extent that the Company has paid or caused to be paid to the Brazos
River Trustee (as defined below) the Installment Payment (as defined below)
in respect of the principal then due and payable on the Bonds, as such term
is defined in the Trust Indenture dated as of February 1, 2004 (as amended
and supplemented, the "Brazos River Indenture") between the Brazos River
Authority (the "Issuer") and JPMorgan Chase Bank, a New York banking
organization, as trustee (the "Brazos River Trustee"). The Bonds (as
defined in the Brazos River Indenture) shall hereinafter be referred to as
the "Series 2004 Brazos River Bonds".
1
(5) The Series O Bonds shall bear interest from the date on which the
Series 2004 Brazos River Bonds commence to bear interest at such rate or
rates per annum as shall cause the amount of interest payable on each
Interest Payment Date (as defined below) on the Series O Bonds to equal the
amount of interest payable on such Interest Payment Date in respect of the
Series 2004 Brazos River Bonds under the Brazos River Indenture. Such
interest on the Series O Bonds shall be payable on the same dates as
interest is payable from time to time in respect of the Series 2004 Brazos
River Bonds pursuant to the Brazos River Indenture (each such date herein
called an "Interest Payment Date"), until the maturity of the Series O
Bonds, or, in the case of any default by the Company in the payment of the
principal due on the Series O Bonds, until the Company's obligation with
respect to the payment of such principal shall be discharged as provided in
the Indenture. The amount of interest payable from time to time in respect
of the Series 2004 Brazos River Bonds under the Brazos River Indenture, the
basis on which such interest is computed and the dates on which such
interest is payable are set forth in the Brazos River Indenture. The
obligation of the Company to make any payment of interest on the Series O
Bonds shall be fully or partially, as the case may be, deemed to have been
paid or otherwise satisfied and discharged to the extent that the Company
has paid or caused to be paid to the Brazos River Trustee the Installment
Payment (as defined below) in respect of the interest then due and payable
on the Series 2004 Brazos River Bonds. The Regular Record Date and Special
Record Date provisions of the Indenture shall not apply to the Series O
Bonds.
(6) The Corporate Trust Office of the Trustee in Dallas, Texas shall be the
place at which (i) the principal of, premium, if any, and interest on, the
Series O Bonds shall be payable, and (ii) registration of transfer of the
Series O Bonds may be effected; and the Corporate Trust Office of the
Trustee in Houston, Texas shall be the place at which notices and demands
to or upon the Company in respect of the Series O Bonds and the Indenture
may be served; and the Trustee shall be the Security Registrar for the
Series O Bonds; provided, however, that the Company reserves the right to
change, by one or more Officer's Certificates, any such place or the
Security Registrar; and provided, further, that the Company reserves the
right to designate, by one or more Officer's Certificates, its principal
office in Houston, Texas as any such place or itself as the Security
Registrar; provided, however, that there shall be only a single Security
Registrar for the Series O Bonds.
(7) Not applicable.
(8) The Series O bonds will not be redeemable at the option of the Company
or otherwise pursuant to the requirements of the Mortgage Indenture,
provided however that (a) in the event that the redemption of Series 2004
Brazos River Bonds is required under the Brazos River Indenture due to the
occurrence of a Determination of Taxability, as such term is defined in
subsection (e) of Section 8 of the Form of Series 2004 Brazos River Bonds
set forth in Exhibit A to the Brazos River Indenture, the Company will
redeem Series O Bonds equal in principal amount to the Series 2004 Brazos
River Bonds to be redeemed at a redemption price equal to 100% of the
principal amount thereof, plus accrued interest to such date fixed for
redemption, and (b) upon receipt by the Trustee of a written demand from
the Brazos River Trustee stating that the principal amount of all
2
Series 2004 Brazos River Bonds then outstanding under the Brazos River
Indenture has been declared immediately due and payable, the Company,
subject to the terms and provisions of the Series O Bonds, will redeem the
Series O Bonds not more than 180 days after receipt by the Trustee of such
written demand, the notice provisions of Article Five of the Indenture not
being applicable under the foregoing circumstances.
(9) The Series O Bonds are issuable only in denominations of $43,820,000.
(10) Not applicable.
(11) Not applicable.
(12) Not applicable.
(13) Not applicable.
(14) Not applicable.
(15) Not applicable.
(16) Not applicable.
(17) The Series O Bonds shall be evidenced by a single registered Series O
Bond in the principal amount and denomination of $43,820,000. The Series O
Bonds shall be executed by the Company and delivered to the Trustee for
authentication and delivery.
The single Series O Bond shall be identified by the number N-1 and shall
upon issuance be delivered by the Company to, and registered in the name
of, the Trustee, and shall be transferable only as required to effect an
assignment thereof to a successor or an assign of the Trustee under the
Indenture. The Series O Bonds are to be issued by the Company to the Brazos
River Trustee in order that the Brazos River Trustee shall have the benefit
as a holder of the Series O Bonds of the lien of the Indenture in the event
of the non-payment by the Company of the Installment Payments (the
"Installment Payments"), as defined in, and pursuant to the Installment
Payment and Bond Amortization Agreement (the "Installment Payment
Agreement"), dated as of February 1, 2004, by and between the Issuer and
the Company.
Series O Bonds issued upon transfer shall be numbered consecutively from
N-2 upwards and issued in the authorized denominations set forth in
subsection (9) above. See also subsection (19) below.
(18) Not applicable.
(19) The holder of the Series O Bonds by acceptance of the Series O Bonds
agrees to restrictions on transfer and to waivers of certain rights of
exchange as set forth herein. The Series O Bonds have not been registered
under the Securities Act of 1933 and may not be offered, sold or otherwise
transferred in the absence of such registration or an
3
applicable exemption therefrom. No service charge shall be made for the
registration of transfer or exchange of the Series O Bonds.
(20) For purposes of the Series O Bonds, "Business Day" means any day other
than (i) a Saturday or Sunday, (ii) a day on which commercial banks in New
York, New York, Houston, Texas, or the city in which the principal
corporate trust office of the Indenture Trustee is located, are authorized
by law to close or (iii) a day on which the New York Stock Exchange is
closed.
(21) Not applicable.
(22) The Trustee may conclusively presume that the obligation of the
Company to pay the principal of, premium, if any, and interest on the
Series O Bonds shall have been fully satisfied and discharged unless and
until it shall have received a written notice from the Brazos River
Trustee, signed by an authorized officer of the Brazos River Trustee and
attested by the Secretary or an Assistant Secretary of the Brazos River
Trustee, stating that the payment of principal of, premium, if any, or
interest on the Series O Bonds has not been fully paid when due and
specifying the amount of funds required to make such payment.
The obligation of the Company to make any payment of the principal of,
premium, if any, or interest on the Series O Bonds, whether at maturity,
upon redemption (including any redemption due to the occurrence of a
Determination of Taxability, as such term is defined in subsection (e) of
Section 8 of the Form of the Series 2004 Brazos River Bonds set forth in
Exhibit A of the Brazos River Indenture) or otherwise, shall be fully or
partially, as the case may be, deemed to have been paid or otherwise
satisfied and discharged to the extent that at the time any such payment
shall be due, the then due principal of, premium, if any, or interest on
the Series 2004 Brazos River Bonds which corresponds to such amounts under
the Series O Bonds shall have been fully or partially paid, deemed to have
been paid or otherwise satisfied and discharged. In addition, such
obligation to make any payment of the principal of, premium, if any, or
interest on the Series O Bonds at any time shall be deemed to have been
satisfied and discharged to the extent that the amount of the Company's
obligation to make any payment of the principal of, premium, if any, or
interest on the Series O Bonds exceeds the obligation of the Company at
that time to make any Installment Payment.
The Series O Bonds shall have such other terms and provisions as are
provided in the form thereof attached hereto as Exhibit A, and shall be
issued in substantially such form.
2. The undersigned has read all of the covenants and conditions contained in the
Indenture, and the definitions in the Indenture relating thereto, relating to
the issuance of the Series O Bonds and the execution of the Fourteenth
Supplemental Indenture to the Indenture in respect of compliance with which this
certificate is made.
3. The statements contained in this certificate are based upon the familiarity
of the undersigned with the Indenture, the documents accompanying this
certificate, and upon
4
discussions by the undersigned with officers and employees of the Company
familiar with the matters set forth herein.
4. In the opinion of the undersigned, he has made such examination or
investigation as is necessary to enable him to express an informed opinion as to
whether or not such covenants and conditions have been complied with.
In the opinion of the undersigned, such conditions and covenants have been
complied with.
5. To the knowledge of the undersigned, no Event of Default has occurred and is
continuing.
6. The execution of the Fourteenth Supplemental Indenture, dated as of the date
hereof, between the Company and the Trustee is authorized or permitted by the
Indenture.
7. First Mortgage Bonds, 7 3/4% Series due March 15, 2023, having an aggregate
principal amount of $43,820,000 (collectively, the "First Mortgage Bonds"), have
heretofore been authenticated and delivered. The First Mortgage Bonds have been
returned to and cancelled by the trustee under the First Mortgage prior to the
date hereof, constitute Retired Securities and are the basis for the
authentication and delivery of the Series O Bonds. The maximum Stated Interest
Rate on the First Mortgage Bonds at the time of their authentication and
delivery was not less than the maximum Stated Interest Rate on the Series O
Bonds to be in effect upon the initial authentication and delivery thereof.
5
IN WITNESS WHEREOF, the undersigned has executed this Officer's
Certificate as of the date first above written.
By: /s/ Marc Kilbride
------------------------------------
Name: Marc Kilbride
Title: Vice President and Treasurer
Acknowledged and Received on
February 11, 2004
JPMORGAN CHASE BANK,
as Trustee
By: /s/ Carol Logan
---------------------------------
Name: Carol Logan
Title: Vice President
6
EXHIBIT A
FORM OF SERIES O BOND
7
NOTE: THE HOLDER OF THIS BOND BY ACCEPTANCE HEREOF AGREES TO RESTRICTIONS ON
TRANSFER AND TO INDEMNIFICATION PROVISIONS AS SET FORTH BELOW. IN ADDITION, THE
BOND REPRESENTED BY THIS CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 AND SUCH BOND MAY NOT BE TRANSFERRED WITHOUT COMPLIANCE
WITH APPLICABLE SECURITIES LAWS.
THIS BOND IS NOT TRANSFERABLE EXCEPT, AS FURTHER PROVIDED HEREIN, TO A SUCCESSOR
OR ASSIGN OF THE TRUSTEE UNDER THE TRUST INDENTURE REFERRED TO HEREIN BETWEEN
THE ISSUER AND SUCH TRUSTEE.
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC
General Mortgage Bonds, Series O, due March 1, 2017
Original Interest Accrual Date: February 11, 2004
Stated Maturity: March 1, 2017
Interest Rate: See below
Interest Payment Dates: See below
Regular Record Dates: N/A
Redeemable by Company: Yes X No
--- ---
Redemption Date: See below
Redemption Price: See below
This Security is not an Original Discount
Security within the meaning of the
within-mentioned Indenture.
Principal Amount
$43,820,000 No. O-1
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC, a corporation duly organized and
existing under the laws of the State of Texas (herein called the "Company,"
which term includes any successor under the Indenture referred to below), for
value received, hereby promises to pay to JPMORGAN CHASE BANK, a New York
banking organization, as Trustee under the Brazos River Indenture (as herein
defined) or its registered assigns (the "Brazos River Trustee"), the principal
sum of FORTY-THREE MILLION EIGHT HUNDRED TWENTY THOUSAND DOLLARS, in whole or in
installments on such date or dates (subject to the tenth paragraph hereof) and
in such amounts, and to pay to the Brazos River Trustee premium, if any, in
whole or in installments on such date or dates and in such amounts, as the
Issuer (as defined herein) has any obligations under the Trust Indenture (as
amended and supplemented, the "Brazos River Indenture"), dated as of February 1,
2004, between the Brazos River Authority (the "Issuer") and the Brazos River
Trustee to repay any principal or to pay premium, if any, in respect of the
Bonds (as such term is defined in the Brazos River Indenture, and hereinafter
referred to as the "Series 2004 Brazos River Bonds"), but not later than the
Stated Maturity specified above. The obligation of the Company to make any
payment of principal or premium, if any, on this Bond, whether at maturity or
otherwise, shall be fully or partially, as the case may be, deemed to have been
paid or otherwise satisfied and discharged to the extent that the Company has
paid or caused to be paid to the Brazos River Trustee the Installment Payment
(as defined below) in respect of the principal or premium, if any, then due and
payable on the Series 2004 Brazos River Bonds.
Interest shall be payable on this Bond on the same dates as interest is payable
from time to time in respect of the Series 2004 Brazos River Bonds pursuant to
the Brazos River Indenture (each such date herein called an "Interest Payment
Date"), at such rate or rates per annum as shall cause the amount of interest
payable on such Interest Payment Date on this Bond to equal the amount of
interest payable on such Interest Payment Date in respect of the Series 2004
Brazos River Bonds under the Brazos River Indenture. Such interest shall be
payable until the maturity of this Bond, or, if the Company shall default in the
payment of the principal due on this Bond, until the Company's obligation with
respect to the payment of such principal shall be discharged as provided in the
Indenture. The
1
amount of interest payable from time to time in respect of the Series 2004
Brazos River Bonds under the Brazos River Indenture, the basis on which such
interest is computed and the dates on which such interest is payable are set
forth in the Brazos River Indenture. This Bond shall bear interest from the
Original Interest Accrual Date listed on the first page of this Bond. The
obligation of the Company to make any payment of interest on this Bond shall be
fully or partially, as the case may be, deemed to have been paid or otherwise
satisfied and discharged to the extent that the Company has paid or caused to be
paid to the Brazos River Trustee the Installment Payment (as defined below) in
respect of the interest then due and payable on the Series 2004 Brazos River
Bonds.
This Bond is issued to the Brazos River Trustee in order that the Brazos River
Trustee shall have the benefit as a holder of this Bond of the lien of the
Indenture (as defined below) in the event of the non-payment by the Company of
the Installment Payments (the "Installment Payments"), as defined in and
pursuant to the Installment Payment and Bond Amortization Agreement (as amended
and supplemented, the "Installment Payment Agreement"), dated as of February 1,
2004, between the Issuer and the Company. Any capitalized terms used herein and
not defined herein shall have the meanings specified in the Indenture (as
defined below), unless otherwise noted.
THIS BOND SHALL NOT BE TRANSFERABLE EXCEPT AS REQUIRED TO EFFECT AN ASSIGNMENT
HEREOF TO A SUCCESSOR OR AN ASSIGN OF THE BRAZOS RIVER TRUSTEE UNDER THE BRAZOS
RIVER INDENTURE.
The Brazos River Trustee shall surrender this Bond to the Brazos River Trustee
(as defined below) in accordance with Section 5.07(d) of the Installment Payment
Agreement.
Payments of the principal of, premium, if any, and interest on this Bond shall
be made at the Corporate Trust Administration of JPMorgan Chase Bank, as
Trustee, located at 2001 Bryan Street, 9th Floor, Dallas, Texas 75201, or at
such other office or agency as may be designated for such purpose by the Company
from time to time. Payment of the principal of, premium, if any, and interest on
this Bond, as aforesaid, shall be made in such coin or currency of the United
States of America as at the time of payment shall be legal tender for the
payment of public and private debts.
This Bond is one of a duly authorized issue of securities of the Company (herein
called the "Securities"), issued and issuable in one or more series under and
equally secured by a General Mortgage Indenture, dated as of October 10, 2002
(such Indenture as originally executed and delivered and as supplemented or
amended from time to time thereafter, together with any constituent instruments
establishing the terms of particular Securities, being herein called the
"Indenture"), between the Company and JPMorgan Chase Bank, as trustee (herein
called the "Trustee," which term includes any successor trustee under the
Indenture), to which Indenture reference is hereby made for a description of the
property mortgaged, pledged and held in trust, the nature and extent of the
security and the respective rights, limitations of rights, duties and immunities
of the Company, the Trustee and the Holders of the Securities thereunder and of
the terms and conditions upon which the Securities are, and are to be,
authenticated and delivered and secured. The acceptance of this Bond shall be
deemed to constitute the consent and agreement by the Holder hereof to all of
the terms and provisions of the Indenture. This Bond is one of the series
designated above.
The Bonds of this series will not be entitled to the benefit of any sinking fund
or voluntary redemption provisions.
If an Event of Default, as defined in the Indenture, shall occur and be
continuing, the principal of this Bond may be declared due and payable in the
manner and with the effect provided in the Indenture.
This Bond will not be redeemable at the option of the Company or otherwise
pursuant to the requirements of the Indenture, provided however that (a) in the
event of the required redemption of Series 2004 Brazos River Bonds due to the
occurrence of a Determination of Taxability, as such term is defined in
subsection (e) of Section 8 of the Form of Series 2004 Brazos River Bonds set
forth in Exhibit A to the Brazos River Indenture, the Company will redeem Bonds
equal in principal amount to the Series 2004 Brazos River Bonds to be redeemed
at a redemption price equal to 100% of the principal amount thereof, plus
accrued interest to the date fixed for redemption, and (b) upon receipt by the
Trustee of a written demand from the Brazos River Trustee stating that the
principal amount of all Series 2004 Brazos River Bonds then outstanding under
the Brazos River Indenture has been declared immediately due and payable, the
Company, subject to the terms and provisions of the Bonds, will redeem the Bonds
not more than 180 days after receipt by the Trustee of such written demand.
2
The Indenture permits, with certain exceptions as therein provided, the Trustee
to enter into one or more supplemental indentures for the purpose of adding any
provisions to, or changing in any manner or eliminating any of the provisions
of, the Indenture with the consent of the Holders of not less than a majority in
aggregate principal amount of the Securities of all series then Outstanding
under the Indenture, considered as one class; PROVIDED, HOWEVER, that if there
shall be Securities of more than one series Outstanding under the Indenture and
if a proposed supplemental indenture shall directly affect the rights of the
Holders of Securities of one or more, but less than all, of such series, then
the consent only of the Holders of a majority in aggregate principal amount of
the Outstanding Securities of all series so directly affected, considered as one
class, shall be required; and PROVIDED, FURTHER, that if the Securities of any
series shall have been issued in more than one Tranche and if the proposed
supplemental indenture shall directly affect the rights of the Holders of
Securities of one or more, but less than all, of such Tranches, then the consent
only of the Holders of a majority in aggregate principal amount of the
Outstanding Securities of all Tranches so directly affected, considered as one
class, shall be required; and PROVIDED, FURTHER, that the Indenture permits the
Trustee to enter into one or more supplemental indentures for limited purposes
without the consent of any Holders of Securities. The Indenture also contains
provisions permitting the Holders of a majority in principal amount of the
Securities then Outstanding, on behalf of the Holders of all Securities, to
waive compliance by the Company with certain provisions of the Mortgage
Indenture and certain past defaults under the Indenture and their consequences.
Any such consent or waiver by the Holder of this Bond shall be conclusive and
binding upon such Holder and upon all future Holders of this Bond and of any
Security issued upon the registration of transfer hereof or in exchange therefor
or in lieu hereof, whether or not notation of such consent or waiver is made
upon this Bond.
As provided in the Indenture and subject to certain limitations therein and
herein set forth, the transfer of this Bond is registrable in the Security
Register, upon surrender of this Bond for registration of transfer at the
Corporate Trust Office of JPMorgan Chase Bank in Houston, Texas or such other
office or agency as may be designated by the Company from time to time, duly
endorsed by, or accompanied by a written instrument of transfer in form
satisfactory to the Company and the Security Registrar duly executed by, the
Holder hereof or his attorney duly authorized in writing, and thereupon one or
more new Bonds of this series of authorized denominations and of like tenor and
aggregate principal amount, will be issued to the designated transferee or
transferees.
The Company, the Trustee and any agent of the Company or the Trustee may deem
and treat the person in whose name this Bond shall be registered upon the
Security Register for the Bonds of this series as the absolute owner of such
Bond for the purpose of receiving payment of or on account of the principal of
and interest on this Bond and for all other purposes, whether or not this Bond
be overdue, and neither the Company nor the Trustee shall be affected by any
notice to the contrary; and all such payments so made to such registered owner
or upon his order shall be valid and effectual to satisfy and discharge the
liability upon this Bond to the extent of the sum or sums paid.
The Trustee may conclusively presume that the obligation of the Company to pay
the principal of, premium, if any, and interest on this Bond shall have been
fully satisfied and discharged unless and until it shall have received a written
notice from the Brazos River Trustee, signed by an authorized officer of the
Brazos River Trustee and attested by the Secretary or an Assistant Secretary of
the Brazos River Trustee, stating that the payment of principal of, premium, if
any, or interest on this Bond has not been fully paid when due and specifying
the amount of funds required to make such payment.
The obligation of the Company to make any payment of the principal of, premium,
if any, or interest on this Bond, whether at maturity, upon redemption
(including any redemption due to the occurrence of a Determination of
Taxability, as such term is defined in subsection (e) of Section 8 of the Form
of the Series 2004 Brazos River Bonds set forth in Exhibit A of the Brazos River
Indenture) or otherwise, shall be fully or partially, as the case may be, deemed
to have been paid or otherwise satisfied and discharged to the extent that at
the time any such payment shall be due, the then due principal, premium, if any,
or interest on the Series 2004 Brazos River Bonds which corresponds to such
amounts under this Bond shall have been fully or partially paid, deemed to have
been paid or otherwise satisfied and discharged. In addition, such obligation to
make any payment of the principal of, premium, if any, or interest on this Bond
at any time shall be deemed to have been satisfied and discharged to the extent
that the amount of the Company's obligation to make any payment of the principal
of, premium, if any, or interest on this Bond exceeds the obligation of the
Company at that time to make any Installment Payment.
3
No recourse under or upon any obligation, covenant or agreement contained in the
Indenture or in any indenture supplemental thereto, or in any Bond or coupon
thereby secured, or because of any indebtedness thereby secured, shall be had
against any incorporator, member, manager, stockholder, officer, director or
employee, as such, past, present or future, of the Company or any predecessor or
successor corporation or company, either directly or through the Company or any
predecessor or successor corporation or company, whether by virtue of any
constitution, statute or rule of law, or by the enforcement of any assessment or
penalty or otherwise; it being expressly agreed and understood that the
Indenture, any indenture supplemental thereto and the obligations thereby
secured, are solely corporate obligations of the Company, and that no personal
liability whatsoever shall attach to, or be incurred by, such incorporators,
members, managers, stockholders, officers, directors or employees, as such, of
the Company or of any predecessor or successor corporation or company, or any of
them, because of the creation of the indebtedness thereby authorized, or under
or by reason of any of the obligations, covenants or agreements contained in the
Indenture or in any indenture supplemental thereto or in any of the Bonds or
coupons thereby secured, or implied therefrom.
The holder of this Bond by acceptance of this Bond agrees to restrictions on
transfer and to waivers of certain rights of exchange as set forth herein. THIS
BOND HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE
OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN
APPLICABLE EXEMPTION THEREFROM. No service charge shall be made for the
registration of transfer or exchange of this Bond.
This Bond shall be governed by and construed in accordance with the law of the
State of New York except as provided in the Indenture.
Unless the certificate of authentication hereon has been executed by the Trustee
or an Authenticating Agent by manual signature, this Bond shall not be entitled
to any benefit under the Indenture or be valid or obligatory for any purpose.
[The remainder of this page is intentionally left blank.]
4
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed.
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
CERTIFICATE OF AUTHENTICATION
This is one of the Securities of the series designated therein referred to
in the within-mentioned Indenture.
Date of Authentication:
February 11, 2004
JPMORGAN CHASE BANK,
Trustee
By:
------------------------------------
Authorized Signatory
5
EXHIBIT 4(e)(20)
CenterPoint Energy Houston Electric, LLC
1111 Louisiana
Houston, TX 77002
================================================================================
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC
TO
JPMORGAN CHASE BANK
Trustee
----------
FIFTEENTH SUPPLEMENTAL INDENTURE
Dated as of March 31, 2004
----------
Supplementing the General Mortgage Indenture
Dated as of October 10, 2002
THIS INSTRUMENT GRANTS A SECURITY INTEREST BY A PUBLIC UTILITY
THIS INSTRUMENT CONTAINS AFTER-ACQUIRED PROPERTY PROVISIONS
This instrument is being filed pursuant to Chapter 35 of the Texas Business and
Commerce Code
================================================================================
FIFTEENTH SUPPLEMENTAL INDENTURE, dated as of March 31, 2004, between
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC, a limited liability company organized
and existing under the laws of the State of Texas (herein called the "Company"),
having its principal office at 1111 Louisiana, Houston, Texas 77002, and
JPMORGAN CHASE BANK, a banking corporation duly organized and existing under the
laws of the State of New York, as Trustee (herein called the "Trustee"), the
office of the Trustee at which on the date hereof its corporate trust business
is administered being 600 Travis Street, Suite 1150, Houston, Texas 77002.
RECITALS OF THE COMPANY
WHEREAS, the Company has heretofore executed and delivered to the Trustee a
General Mortgage Indenture dated as of October 10, 2002 (the "Indenture")
providing for the issuance by the Company from time to time of its bonds, notes
or other evidence of indebtedness to be issued in one or more series (in the
Indenture and herein called the "Securities") and to provide security for the
payment of the principal of and premium, if any, and interest, if any, on the
Securities; and
WHEREAS, the Company, in the exercise of the power and authority conferred upon
and reserved to it under the provisions of the Indenture and pursuant to
appropriate resolutions of the Manager, has duly determined to make, execute and
deliver to the Trustee this Fifteenth Supplemental Indenture to the Indenture as
permitted by Sections 201, 301, 403(2) and 1401 of the Indenture in order to
establish the form or terms of, and to provide for the creation and issuance of,
a sixteenth series of Securities under the Indenture in an aggregate principal
amount of $33,470,000 (such sixteenth series being hereinafter referred to as
the "Sixteenth Series"); and
WHEREAS, all things necessary to make the Securities of the Sixteenth Series,
when executed by the Company and authenticated and delivered by the Trustee or
any Authenticating Agent and issued upon the terms and subject to the conditions
hereinafter and in the Indenture set forth against payment therefor the valid,
binding and legal obligations of the Company and to make this Fifteenth
Supplemental Indenture a valid, binding and legal agreement of the Company, have
been done;
NOW, THEREFORE, THIS FIFTEENTH SUPPLEMENTAL INDENTURE WITNESSETH that, in order
to establish the terms of a series of Securities, and for and in consideration
of the premises and of the covenants contained in the Indenture and in this
Fifteenth Supplemental Indenture and for other good and valuable consideration
the receipt and sufficiency of which are hereby acknowledged, it is mutually
covenanted and agreed as follows:
ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS
OF GENERAL APPLICATION
Section 101. Definitions. Each capitalized term that is used herein and is
defined in the Indenture shall have the meaning specified in the Indenture
unless such term is otherwise defined herein.
ARTICLE TWO
TITLE, FORM AND TERMS OF THE BONDS
Section 201. Title of the Bonds. This Fifteenth Supplemental Indenture
hereby creates a series of Securities designated as the "General Mortgage Bonds,
Series P, due April 1, 2012" of the Company (collectively referred to herein as
the "Bonds"). For purposes of the Indenture, the Bonds shall constitute a single
series of Securities and, subject to the provisions, including, but not limited
to Article Four of the Indenture, the Bonds shall be issued in an aggregate
principal amount of $33,470,000.
Section 202. Form and Terms of the Bonds. The form and terms of the Bonds
will be set forth in an Officer's Certificate delivered by the Company to the
Trustee pursuant to the authority granted by this Fifteenth Supplemental
Indenture in accordance with Sections 201 and 301 of the Indenture.
Section 203. Treatment of Proceeds of Title Insurance Policy. Any moneys
received by the Trustee as proceeds of any title insurance policy on Mortgaged
Property of the Company shall be subject to and treated in accordance with the
provisions of Section 607(2) of the Indenture (other than the last paragraph
thereof).
ARTICLE THREE
MISCELLANEOUS PROVISIONS
The Trustee makes no undertaking or representations in respect of, and shall not
be responsible in any manner whatsoever for and in respect of, the validity or
sufficiency of this Fifteenth Supplemental Indenture or the proper authorization
or the due execution hereof by the Company or for or in respect of the recitals
and statements contained herein, all of which recitals and statements are made
solely by the Company.
Except as expressly amended and supplemented hereby, the Indenture shall
continue in full force and effect in accordance with the provisions thereof and
the Indenture is in all respects hereby ratified and confirmed. This Fifteenth
Supplemental Indenture and all of its provisions shall be deemed a part of the
Indenture in the manner and to the extent herein and therein provided.
This Fifteenth Supplemental Indenture shall be governed by, and construed in
accordance with, the law of the State of New York.
This Fifteenth Supplemental Indenture may be executed in any number of
counterparts, each of which so executed shall be deemed to be an original, but
all such counterparts shall together constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Fifteenth
Supplemental Indenture to be duly executed as of the day and year first above
written.
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC
By: /s/ Marc Kilbride
------------------------------------
Name: Marc Kilbride
Title: Vice President and Treasurer
JPMORGAN CHASE BANK, as Trustee
By: /s/ Carol Logan
------------------------------------
Name: Carol Logan
Title: Vice President
ACKNOWLEDGMENT
STATE OF TEXAS )
) ss
COUNTY OF HARRIS )
On the 29th day of March, 2004, before me personally came Marc
Kilbride, to me known, who, being by me duly sworn, did depose and say that he
resides in Houston, Texas; that he is the Vice President and Treasurer of
CenterPoint Energy Houston Electric, LLC, a Texas limited liability company, the
limited liability company described in and which executed the foregoing
instrument; and that he signed his name thereto by authority of the sole manager
of said limited liability company.
/s/ Lena Arleen Williams
----------------------------------------
Notary Public
ACKNOWLEDGMENT
STATE OF TEXAS )
) ss
COUNTY OF HARRIS )
On the 29th day of March, 2004, before me personally came Carol Logan,
to me known, who, being by me duly sworn, did depose and say that she resides in
Houston, Texas; that she is Vice President of JPMorgan Chase Bank, a banking
corporation organized under the State of New York, the corporation described in
and which executed the foregoing instrument; and that she signed her name
thereto by authority of the board of directors of said corporation.
/s/ Jeanette C. Dunn
----------------------------------------
Notary Public
EXHIBIT 4(e)(21)
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC
OFFICER'S CERTIFICATE
March 31, 2004
I, the undersigned officer of CenterPoint Energy Houston Electric, LLC, a Texas
limited liability company (the "Company"), do hereby certify that I am an
Authorized Officer of the Company as such term is defined in the Indenture (as
defined herein). I am delivering this certificate pursuant to the authority
granted in the Resolutions adopted by written consent of the Manager of the
Company dated March 29, 2004, and Sections 105, 201, 301, 401(1), 401(5),
403(2)(A), 403(2)(B) and 1403 of the General Mortgage Indenture dated as of
October 10, 2002, as heretofore supplemented to the date hereof (as heretofore
supplemented, the "Indenture"), between the Company and JPMorgan Chase Bank, as
Trustee (the "Trustee"). Terms used herein and not otherwise defined herein
shall have the meanings assigned to them in the Indenture unless the context
clearly requires otherwise. Based upon the foregoing, I hereby certify on behalf
of the Company as follows:
1. The terms and conditions of the Securities of the series described in this
Officer's Certificate are as follows (the numbered subdivisions set forth in
this Paragraph 1 corresponding to the numbered subdivisions of Section 301 of
the Indenture):
(1) The Securities of the sixteenth series to be issued under the Indenture
shall be designated "General Mortgage Bonds, Series P, due April 1, 2012"
(the "Series P Bonds").
(2) The Series P Bonds shall be authenticated and delivered in the
aggregate principal amount of $33,470,000.
(3) Not applicable.
(4) The Series P Bonds shall mature and the principal thereof shall be due
and payable together with all accrued and unpaid interest thereon on April
1, 2012. Principal and premium, if any, are payable on the Series P Bonds
on such date or dates (subject to the terms of subsection 8(b) hereof), and
in such amounts, as principal and premium, if any, are payable (whether at
maturity, redemption or otherwise) on the Series 2004A Brazos River Bonds
(as defined below). The obligation of the Company to make any payment of
principal on the Series P Bonds shall be fully or partially, as the case
may be, deemed to have been paid or otherwise satisfied and discharged to
the extent that the Company has paid or caused to be paid to the Brazos
River Trustee (as defined below) the Installment Payment (as defined below)
in respect of the principal then due and payable on the Collateralized
Revenue Refunding Bonds (CenterPoint Energy Houston Electric, LLC Project)
Series 2004A (the "Series 2004A Brazos River Bonds") issued under that
certain Trust Indenture dated as of March 1, 2004 (as amended and
supplemented, the "Brazos River Indenture") between the Brazos River
Authority (the "Issuer") and JPMorgan Chase Bank, a New York banking
organization, as trustee (the "Brazos River Trustee").
1
(5) The Series P Bonds shall bear interest from the date on which the
Series 2004A Brazos River Bonds commence to bear interest at such rate or
rates per annum as shall cause the amount of interest payable on each
Interest Payment Date (as defined below) on the Series P Bonds to equal the
amount of interest payable on such Interest Payment Date in respect of the
Series 2004A Brazos River Bonds under the Brazos River Indenture. Such
interest on the Series P Bonds shall be payable on the same dates as
interest is payable from time to time in respect of the Series 2004A Brazos
River Bonds pursuant to the Brazos River Indenture (each such date herein
called an "Interest Payment Date"), until the maturity of the Series P
Bonds, or, in the case of any default by the Company in the payment of the
principal due on the Series P Bonds, until the Company's obligation with
respect to the payment of such principal shall be discharged as provided in
the Indenture. The amount of interest payable from time to time in respect
of the Series 2004A Brazos River Bonds under the Brazos River Indenture,
the basis on which such interest is computed and the dates on which such
interest is payable are set forth in the Brazos River Indenture. The
obligation of the Company to make any payment of interest on the Series P
Bonds shall be fully or partially, as the case may be, deemed to have been
paid or otherwise satisfied and discharged to the extent that the Company
has paid or caused to be paid to the Brazos River Trustee the Installment
Payment (as defined below) in respect of the interest then due and payable
on the Series 2004A Brazos River Bonds. The Regular Record Date and Special
Record Date provisions of the Indenture shall not apply to the Series P
Bonds.
(6) The Corporate Trust Office of the Trustee in Dallas, Texas shall be the
place at which (i) the principal of, premium, if any, and interest on, the
Series P Bonds shall be payable, and (ii) registration of transfer of the
Series P Bonds may be effected; and the Corporate Trust Office of the
Trustee in Houston, Texas shall be the place at which notices and demands
to or upon the Company in respect of the Series P Bonds and the Indenture
may be served; and the Trustee shall be the Security Registrar for the
Series P Bonds; provided, however, that the Company reserves the right to
change, by one or more Officer's Certificates, any such place or the
Security Registrar; and provided, further, that the Company reserves the
right to designate, by one or more Officer's Certificates, its principal
office in Houston, Texas as any such place or itself as the Security
Registrar; provided, however, that there shall be only a single Security
Registrar for the Series P Bonds.
(7) Not applicable.
(8) The Series P bonds will not be redeemable at the option of the Company
or otherwise pursuant to the requirements of the Indenture, provided
however that (a) in the event that the redemption of Series 2004A Brazos
River Bonds is required under the Brazos River Indenture due to the
occurrence of a Determination of Taxability, as such term is defined in
subsection (d) of Section 8 of the Form of Series 2004A Brazos River Bonds
set forth in Exhibit A to the Brazos River Indenture, the Company will
redeem Series P Bonds equal in principal amount to the Series 2004A Brazos
River Bonds to be redeemed at a redemption price equal to 100% of the
principal amount thereof, plus accrued interest to such date fixed for
redemption, and (b) upon receipt by the Trustee of a written demand from
the Brazos River Trustee stating that the principal amount of all
2
Series 2004A Brazos River Bonds then outstanding under the Brazos River
Indenture has been declared immediately due and payable, the Company,
subject to the terms and provisions of the Series P Bonds, will redeem the
Series P Bonds not more than 180 days after receipt by the Trustee of such
written demand, the notice provisions of Article Five of the Indenture not
being applicable under the foregoing circumstances.
(9) The Series P Bonds are issuable only in denominations of $33,470,000.
(10) Not applicable.
(11) Not applicable.
(12) Not applicable.
(13) Not applicable.
(14) Not applicable.
(15) Not applicable.
(16) Not applicable.
(17) The Series P Bonds shall be evidenced by a single registered Series P
Bond in the principal amount and denomination of $33,470,000. The Series P
Bonds shall be executed by the Company and delivered to the Trustee for
authentication and delivery.
The single Series P Bond shall be identified by the number P-1 and shall
upon issuance be delivered by the Company to, and registered in the name
of, the Trustee, and shall be transferable only as required to effect an
assignment thereof to a successor or an assign of the Trustee under the
Indenture. The Series P Bonds are to be issued by the Company to the Brazos
River Trustee in order that the Brazos River Trustee shall have the benefit
as a holder of the Series P Bonds of the lien of the Indenture in the event
of the non-payment by the Company of the Installment Payments (the
"Installment Payments"), as defined in, and pursuant to the Installment
Payment and Bond Amortization Agreement (the "Installment Payment
Agreement"), dated as of March 1, 2004, by and between the Issuer and the
Company entered into with respect to the Series 2004A Brazos River Bonds.
Series P Bonds issued upon transfer shall be numbered consecutively from
P-2 upwards and issued in the authorized denominations set forth in
subsection (9) above. See also subsection (19) below.
(18) Not applicable.
(19) The holder of the Series P Bonds by acceptance of the Series P Bonds
agrees to restrictions on transfer and to waivers of certain rights of
exchange as set forth herein. The Series P Bonds have not been registered
under the Securities Act of 1933 and may not be offered, sold or otherwise
transferred in the absence of such registration or an
3
applicable exemption therefrom. No service charge shall be made for the
registration of transfer or exchange of the Series P Bonds.
(20) For purposes of the Series P Bonds, "Business Day" means any day other
than (i) a Saturday or Sunday, (ii) a day on which commercial banks in New
York, New York, Houston, Texas, or the city in which the principal
corporate trust office of the Indenture Trustee is located, are authorized
by law to close or (iii) a day on which the New York Stock Exchange is
closed.
(21) Not applicable.
(22) The Trustee may conclusively presume that the obligation of the
Company to pay the principal of, premium, if any, and interest on the
Series P Bonds shall have been fully satisfied and discharged unless and
until it shall have received a written notice from the Brazos River
Trustee, signed by an authorized officer of the Brazos River Trustee and
attested by the Secretary or an Assistant Secretary of the Brazos River
Trustee, stating that the payment of principal of, premium, if any, or
interest on the Series P Bonds has not been fully paid when due and
specifying the amount of funds required to make such payment.
The obligation of the Company to make any payment of the principal of,
premium, if any, or interest on the Series P Bonds, whether at maturity,
upon redemption (including any redemption due to the occurrence of a
Determination of Taxability, as such term is defined in subsection (d) of
Section 8 of the Form of the Series 2004A Brazos River Bonds set forth in
Exhibit A of the Brazos River Indenture) or otherwise, shall be fully or
partially, as the case may be, deemed to have been paid or otherwise
satisfied and discharged to the extent that at the time any such payment
shall be due, the then due principal of, premium, if any, or interest on
the Series 2004A Brazos River Bonds which corresponds to such amounts under
the Series P Bonds shall have been fully or partially paid, deemed to have
been paid or otherwise satisfied and discharged. In addition, such
obligation to make any payment of the principal of, premium, if any, or
interest on the Series P Bonds at any time shall be deemed to have been
satisfied and discharged to the extent that the amount of the Company's
obligation to make any payment of the principal of, premium, if any, or
interest on the Series P Bonds exceeds the obligation of the Company at
that time to make any Installment Payment.
In the event the Company is required under Section 6.05 of the Installment
Payment Agreement to, and does, issue First Mortgage Securities to secure
its obligations under the Installment Payment Agreement, as provided in
Section 6.05 of the Installment Payment Agreement, the Company shall no
longer be required to maintain outstanding, and the Brazos River Trustee
shall surrender to the Trustee, the Series P Bonds in accordance with
Section 5.03 of the Brazos River Indenture.
4
The Series P Bonds shall have such other terms and provisions as are
provided in the form thereof attached hereto as Exhibit A, and shall be
issued in substantially such form.
2. The undersigned has read all of the covenants and conditions contained in the
Indenture, and the definitions in the Indenture relating thereto, relating to
the issuance of the Series P Bonds and the execution of the Fifteenth
Supplemental Indenture to the Indenture in respect of compliance with which this
certificate is made.
3. The statements contained in this certificate are based upon the familiarity
of the undersigned with the Indenture, the documents accompanying this
certificate, and upon discussions by the undersigned with officers and employees
of the Company familiar with the matters set forth herein.
4. In the opinion of the undersigned, he has made such examination or
investigation as is necessary to enable him to express an informed opinion as to
whether or not such covenants and conditions have been complied with.
In the opinion of the undersigned, such conditions and covenants have been
complied with.
5. To the knowledge of the undersigned, no Event of Default has occurred and is
continuing.
6. The execution of the Fifteenth Supplemental Indenture, dated as of the date
hereof, between the Company and the Trustee is authorized or permitted by the
Indenture.
7. First Mortgage Bonds, Pollution Control 6.70% Series due March 1, 2017,
having an aggregate principal amount of $33,470,000 (collectively, the "First
Mortgage Bonds"), have heretofore been authenticated and delivered. The First
Mortgage Bonds have been returned to and cancelled by the trustee under the
First Mortgage prior to the date hereof, constitute Retired Securities and are
the basis for the authentication and delivery of the Series P Bonds. The maximum
Stated Interest Rate on the First Mortgage Bonds at the time of their
authentication and delivery was not less than the maximum Stated Interest Rate
on the Series P Bonds to be in effect upon the initial authentication and
delivery thereof.
5
IN WITNESS WHEREOF, the undersigned has executed this Officer's
Certificate as of the date first above written.
By: /s/ Marc Kilbride
------------------------------------
Name: Marc Kilbride
Title: Vice President and Treasurer
Acknowledged and Received on
March 31, 2004
JPMORGAN CHASE BANK,
as Trustee
By: /s/ Carol Logan
---------------------------------
Name: Carol Logan
Title: Vice President
6
EXHIBIT A
FORM OF SERIES P BOND
NOTE: THE HOLDER OF THIS BOND BY ACCEPTANCE HEREOF AGREES TO RESTRICTIONS ON
TRANSFER AND TO INDEMNIFICATION PROVISIONS AS SET FORTH BELOW. IN ADDITION, THE
BOND REPRESENTED BY THIS CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 AND SUCH BOND MAY NOT BE TRANSFERRED WITHOUT COMPLIANCE
WITH APPLICABLE SECURITIES LAWS.
THIS BOND IS NOT TRANSFERABLE EXCEPT, AS FURTHER PROVIDED HEREIN, TO A SUCCESSOR
OR ASSIGN OF THE TRUSTEE UNDER THE TRUST INDENTURE REFERRED TO HEREIN BETWEEN
THE ISSUER AND SUCH TRUSTEE.
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC
General Mortgage Bonds, Series P, due April 1, 2012
Original Interest Accrual Date: March 31, 2004
Stated Maturity: April 1, 2012
Interest Rate: See below
Interest Payment Dates: See below
Regular Record Dates: N/A
Redeemable by Company: Yes X No
--- ---
Redemption Date: See below
Redemption Price: See below
This Security is not an Original Discount Security
within the meaning of the within-mentioned Indenture.
Principal Amount
$33,470,000 No. P-1
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC, a corporation duly organized and
existing under the laws of the State of Texas (herein called the "Company,"
which term includes any successor under the Indenture referred to below), for
value received, hereby promises to pay to JPMORGAN CHASE BANK, a New York
banking organization, as Trustee under the Brazos River Indenture (as herein
defined) or its registered assigns (the "Brazos River Trustee"), the principal
sum of THIRTY-THREE MILLION FOUR HUNDRED SEVENTY THOUSAND DOLLARS, in whole or
in installments on such date or dates (subject to the tenth paragraph hereof)
and in such amounts, and to pay to the Brazos River Trustee premium, if any, in
whole or in installments on such date or dates and in such amounts, as the
Issuer (as defined herein) has any obligations under the Trust Indenture (as
amended and supplemented, the "Brazos River Indenture"), dated as of March 1,
2004, between the Brazos River Authority (the "Issuer") and the Brazos River
Trustee to repay any principal or to pay premium, if any, in respect of the
Collateralized Revenue Refunding Bonds (CenterPoint Energy Houston Electric, LLC
Project) Series 2004A issued under the Brazos River Indenture (hereinafter
referred to as the "Series 2004A Brazos River Bonds"), but not later than the
Stated Maturity specified above. The obligation of the Company to make any
payment of principal or premium, if any, on this Bond, whether at maturity or
otherwise, shall be fully or partially, as the case may be, deemed to have been
paid or otherwise satisfied and discharged to the extent that the
Company has paid or caused to be paid to the Brazos River Trustee the
Installment Payment (as defined below) in respect of the principal or premium,
if any, then due and payable on the Series 2004A Brazos River Bonds.
Interest shall be payable on this Bond on the same dates as interest is payable
from time to time in respect of the Series 2004A Brazos River Bonds pursuant to
the Brazos River Indenture (each such date herein called an "Interest Payment
Date"), at such rate or rates per annum as shall cause the amount of interest
payable on such Interest Payment Date on this Bond to equal the amount of
interest payable on such Interest Payment Date in respect of the Series 2004A
Brazos River Bonds under the Brazos River Indenture. Such interest shall be
payable until the maturity of this Bond, or, if the Company shall default in the
payment of the principal due on this Bond, until the Company's obligation with
respect to the payment of such principal shall be discharged as provided in the
Indenture. The amount of interest payable from time to time in respect of the
Series 2004A Brazos River Bonds under the Brazos River Indenture, the basis on
which such interest is computed and the dates on which such interest is payable
are set forth in the Brazos River Indenture. This Bond shall bear interest from
the Original Interest Accrual Date listed on the first page of this Bond. The
obligation of the Company to make any payment of interest on this Bond shall be
fully or partially, as the case may be, deemed to have been paid or otherwise
satisfied and discharged to the extent that the Company has paid or caused to be
paid to the Brazos River Trustee the Installment Payment (as defined below) in
respect of the interest then due and payable on the Series 2004A Brazos River
Bonds.
This Bond is issued to the Brazos River Trustee in order that the Brazos River
Trustee shall have the benefit as a holder of this Bond of the lien of the
Indenture (as defined below) in the event of the non-payment by the Company of
the Installment Payments (the "Installment Payments"), as defined in and
pursuant to the Installment Payment and Bond Amortization Agreement (as amended
and supplemented, the "Installment Payment Agreement"), dated as of March 1,
2004, between the Issuer and the Company entered into with respect to the Series
2004A Brazos River Bonds. Any capitalized terms used herein and not defined
herein shall have the meanings specified in the Indenture (as defined below),
unless otherwise noted.
THIS BOND SHALL NOT BE TRANSFERABLE EXCEPT AS REQUIRED TO EFFECT AN ASSIGNMENT
HEREOF TO A SUCCESSOR OR AN ASSIGN OF THE BRAZOS RIVER TRUSTEE UNDER THE BRAZOS
RIVER INDENTURE.
The Brazos River Trustee shall surrender this Bond to the Trustee (as defined
below) in accordance with Section 5.07(d) of the Installment Payment Agreement.
Payments of the principal of, premium, if any, and interest on this Bond shall
be made at the Corporate Trust Administration of JPMorgan Chase Bank, as
Trustee, located at 2001 Bryan Street, 9th Floor, Dallas, Texas 75201, or at
such other office or agency as may be designated for such purpose by the Company
from time to time. Payment of the principal of, premium, if any, and interest on
this Bond, as aforesaid, shall be made in such coin or currency of the United
States of America as at the time of payment shall be legal tender for the
payment of public and private debts.
This Bond is one of a duly authorized issue of securities of the Company (herein
called the "Securities"), issued and issuable in one or more series under and
equally secured by a General Mortgage Indenture, dated as of October 10, 2002
(such Indenture as originally executed and delivered and as supplemented or
amended from time to time thereafter, together with any constituent instruments
establishing the terms of particular Securities, being herein called the
"Indenture"), between the Company and JPMorgan Chase Bank, as trustee (herein
called the "Trustee," which term includes any successor trustee under the
Indenture), to which Indenture reference is hereby made for a description of the
property mortgaged, pledged and held in trust, the nature and extent of the
security and the respective rights, limitations of rights, duties and immunities
of the Company, the Trustee and the Holders of the Securities thereunder and of
the terms and conditions upon which the Securities are, and are to be,
authenticated and delivered and secured. The acceptance of this Bond shall be
deemed to constitute the consent and agreement by the Holder hereof to all of
the terms and provisions of the Indenture. This Bond is one of the series
designated above.
The Bonds of this series will not be entitled to the benefit of any sinking fund
or voluntary redemption provisions.
If an Event of Default, as defined in the Indenture, shall occur and be
continuing, the principal of this Bond may be declared due and payable in the
manner and with the effect provided in the Indenture.
This Bond will not be redeemable at the option of the Company or otherwise
pursuant to the requirements of the Indenture, provided however that (a) in the
event of the required redemption of Series 2004A Brazos River Bonds due to the
occurrence of a Determination of Taxability, as such term is defined in
subsection (d) of Section 8 of the Form of Series 2004A Brazos River Bonds set
forth in Exhibit A to the Brazos River Indenture, the Company will redeem Bonds
equal in principal amount to the Series 2004A Brazos River Bonds to be redeemed
at a redemption price equal to 100% of the principal amount thereof, plus
accrued interest to the date fixed for redemption, and (b) upon receipt by the
Trustee of a written demand from the Brazos River Trustee stating that the
principal amount of
all Series 2004A Brazos River Bonds then outstanding under the Brazos River
Indenture has been declared immediately due and payable, the Company, subject to
the terms and provisions of the Bonds, will redeem the Bonds not more than 180
days after receipt by the Trustee of such written demand.
The Indenture permits, with certain exceptions as therein provided, the Trustee
to enter into one or more supplemental indentures for the purpose of adding any
provisions to, or changing in any manner or eliminating any of the provisions
of, the Indenture with the consent of the Holders of not less than a majority in
aggregate principal amount of the Securities of all series then Outstanding
under the Indenture, considered as one class; PROVIDED, HOWEVER, that if there
shall be Securities of more than one series Outstanding under the Indenture and
if a proposed supplemental indenture shall directly affect the rights of the
Holders of Securities of one or more, but less than all, of such series, then
the consent only of the Holders of a majority in aggregate principal amount of
the Outstanding Securities of all series so directly affected, considered as one
class, shall be required; and PROVIDED, FURTHER, that if the Securities of any
series shall have been issued in more than one Tranche and if the proposed
supplemental indenture shall directly affect the rights of the Holders of
Securities of one or more, but less than all, of such Tranches, then the consent
only of the Holders of a majority in aggregate principal amount of the
Outstanding Securities of all Tranches so directly affected, considered as one
class, shall be required; and PROVIDED, FURTHER, that the Indenture permits the
Trustee to enter into one or more supplemental indentures for limited purposes
without the consent of any Holders of Securities. The Indenture also contains
provisions permitting the Holders of a majority in principal amount of the
Securities then Outstanding, on behalf of the Holders of all Securities, to
waive compliance by the Company with certain provisions of the Indenture and
certain past defaults under the Indenture and their consequences. Any such
consent or waiver by the Holder of this Bond shall be conclusive and binding
upon such Holder and upon all future Holders of this Bond and of any Security
issued upon the registration of transfer hereof or in exchange therefor or in
lieu hereof, whether or not notation of such consent or waiver is made upon this
Bond.
As provided in the Indenture and subject to certain limitations therein and
herein set forth, the transfer of this Bond is registrable in the Security
Register, upon surrender of this Bond for registration of transfer at the
Corporate Trust Office of JPMorgan Chase Bank in Houston, Texas or such other
office or agency as may be designated by the Company from time to time, duly
endorsed by, or accompanied by a written instrument of transfer in form
satisfactory to the Company and the Security Registrar duly executed by, the
Holder hereof or his attorney duly authorized in writing, and thereupon one or
more new Bonds of this series of authorized denominations and of like tenor and
aggregate principal amount, will be issued to the designated transferee or
transferees.
The Company, the Trustee and any agent of the Company or the Trustee may deem
and treat the person in whose name this Bond shall be registered upon the
Security Register for the Bonds of this series as the absolute owner of such
Bond for the purpose of receiving payment of or on account of the principal of
and interest on this Bond and for all other purposes, whether or not this Bond
be overdue, and neither the Company nor the Trustee shall be affected by any
notice to the contrary; and all such payments so made to such registered owner
or upon his order shall be valid and effectual to satisfy and discharge the
liability upon this Bond to the extent of the sum or sums paid.
The Trustee may conclusively presume that the obligation of the Company to pay
the principal of, premium, if any, and interest on this Bond shall have been
fully satisfied and discharged unless and until it shall have received a written
notice from the Brazos River Trustee, signed by an authorized officer of the
Brazos River Trustee and attested by the Secretary or an Assistant Secretary of
the Brazos River Trustee, stating that the payment of principal of, premium, if
any, or interest on this Bond has not been fully paid when due and specifying
the amount of funds required to make such payment.
The obligation of the Company to make any payment of the principal of, premium,
if any, or interest on this Bond, whether at maturity, upon redemption
(including any redemption due to the occurrence of a Determination of
Taxability, as such term is defined in subsection (d) of Section 8 of the Form
of the Series 2004A Brazos River Bonds set forth in Exhibit A of the Brazos
River Indenture) or otherwise, shall be fully or partially, as the case may be,
deemed to have been paid or otherwise satisfied and discharged to the extent
that at the time any such payment shall be due, the then due principal, premium,
if any, or interest on the Series 2004A Brazos River Bonds which corresponds to
such amounts under this Bond shall have been fully or partially paid, deemed to
have been paid or otherwise satisfied and discharged. In addition, such
obligation to make any payment of the principal of, premium,
if any, or interest on this Bond at any time shall be deemed to have been
satisfied and discharged to the extent that the amount of the Company's
obligation to make any payment of the principal of, premium, if any, or interest
on this Bond exceeds the obligation of the Company at that time to make any
Installment Payment.
No recourse under or upon any obligation, covenant or agreement contained in the
Indenture or in any indenture supplemental thereto, or in any Bond or coupon
thereby secured, or because of any indebtedness thereby secured, shall be had
against any incorporator, member, manager, stockholder, officer, director or
employee, as such, past, present or future, of the Company or any predecessor or
successor corporation or company, either directly or through the Company or any
predecessor or successor corporation or company, whether by virtue of any
constitution, statute or rule of law, or by the enforcement of any assessment or
penalty or otherwise; it being expressly agreed and understood that the
Indenture, any indenture supplemental thereto and the obligations thereby
secured, are solely corporate obligations of the Company, and that no personal
liability whatsoever shall attach to, or be incurred by, such incorporators,
members, managers, stockholders, officers, directors or employees, as such, of
the Company or of any predecessor or successor corporation or company, or any of
them, because of the creation of the indebtedness thereby authorized, or under
or by reason of any of the obligations, covenants or agreements contained in the
Indenture or in any indenture supplemental thereto or in any of the Bonds or
coupons thereby secured, or implied therefrom.
The holder of this Bond by acceptance of this Bond agrees to restrictions on
transfer and to waivers of certain rights of exchange as set forth herein. THIS
BOND HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE
OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN
APPLICABLE EXEMPTION THEREFROM. No service charge shall be made for the
registration of transfer or exchange of this Bond.
This Bond shall be governed by and construed in accordance with the law of the
State of New York except as provided in the Indenture.
Unless the certificate of authentication hereon has been executed by the Trustee
or an Authenticating Agent by manual signature, this Bond shall not be entitled
to any benefit under the Indenture or be valid or obligatory for any purpose.
[The remainder of this page is intentionally left blank.]
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed.
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
Attest:
- -------------------------------------
Name:
-------------------------------
Title:
------------------------------
CERTIFICATE OF AUTHENTICATION
This is one of the Securities of the series designated therein referred to
in the within-mentioned Indenture.
Date of Authentication: March 31, 2004
JPMORGAN CHASE BANK,
Trustee
By:
------------------------------------
Authorized Signatory
EXHIBIT 4(e)(22)
CenterPoint Energy Houston Electric, LLC
1111 Louisiana
Houston, TX 77002
================================================================================
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC
TO
JPMORGAN CHASE BANK
Trustee
----------
SIXTEENTH SUPPLEMENTAL INDENTURE
Dated as of March 31, 2004
----------
Supplementing the General Mortgage Indenture
Dated as of October 10, 2002
THIS INSTRUMENT GRANTS A SECURITY INTEREST BY A PUBLIC UTILITY
THIS INSTRUMENT CONTAINS AFTER-ACQUIRED PROPERTY PROVISIONS
This instrument is being filed pursuant to Chapter 35
of the Texas Business and Commerce Code
================================================================================
SIXTEENTH SUPPLEMENTAL INDENTURE, dated as of March 31, 2004, between
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC, a limited liability company organized
and existing under the laws of the State of Texas (herein called the "Company"),
having its principal office at 1111 Louisiana, Houston, Texas 77002, and
JPMORGAN CHASE BANK, a banking corporation duly organized and existing under the
laws of the State of New York, as Trustee (herein called the "Trustee"), the
office of the Trustee at which on the date hereof its corporate trust business
is administered being 600 Travis Street, Suite 1150, Houston, Texas 77002.
RECITALS OF THE COMPANY
WHEREAS, the Company has heretofore executed and delivered to the Trustee a
General Mortgage Indenture dated as of October 10, 2002 (the "Indenture")
providing for the issuance by the Company from time to time of its bonds, notes
or other evidence of indebtedness to be issued in one or more series (in the
Indenture and herein called the "Securities") and to provide security for the
payment of the principal of and premium, if any, and interest, if any, on the
Securities; and
WHEREAS, the Company, in the exercise of the power and authority conferred upon
and reserved to it under the provisions of the Indenture and pursuant to
appropriate resolutions of the Manager, has duly determined to make, execute and
deliver to the Trustee this Sixteenth Supplemental Indenture to the Indenture as
permitted by Sections 201, 301, 403(2) and 1401 of the Indenture in order to
establish the form or terms of, and to provide for the creation and issuance of,
a seventeenth series of Securities under the Indenture in an aggregate principal
amount of $83,565,000 (such seventeenth series being hereinafter referred to as
the "Seventeenth Series"); and
WHEREAS, all things necessary to make the Securities of the Seventeenth Series,
when executed by the Company and authenticated and delivered by the Trustee or
any Authenticating Agent and issued upon the terms and subject to the conditions
hereinafter and in the Indenture set forth against payment therefor the valid,
binding and legal obligations of the Company and to make this Sixteenth
Supplemental Indenture a valid, binding and legal agreement of the Company, have
been done;
NOW, THEREFORE, THIS SIXTEENTH SUPPLEMENTAL INDENTURE WITNESSETH that, in order
to establish the terms of a series of Securities, and for and in consideration
of the premises and of the covenants contained in the Indenture and in this
Sixteenth Supplemental Indenture and for other good and valuable consideration
the receipt and sufficiency of which are hereby acknowledged, it is mutually
covenanted and agreed as follows:
ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS
OF GENERAL APPLICATION
Section 101. Definitions. Each capitalized term that is used herein and is
defined in the Indenture shall have the meaning specified in the Indenture
unless such term is otherwise defined herein.
ARTICLE TWO
TITLE, FORM AND TERMS OF THE BONDS
Section 201. Title of the Bonds. This Sixteenth Supplemental Indenture
hereby creates a series of Securities designated as the "General Mortgage Bonds,
Series Q, due December 1, 2017" of the Company (collectively referred to herein
as the "Bonds"). For purposes of the Indenture, the Bonds shall constitute a
single series of Securities and, subject to the provisions, including, but not
limited to Article Four of the Indenture, the Bonds shall be issued in an
aggregate principal amount of $83,565,000.
Section 202. Form and Terms of the Bonds. The form and terms of the Bonds
will be set forth in an Officer's Certificate delivered by the Company to the
Trustee pursuant to the authority granted by this Sixteenth Supplemental
Indenture in accordance with Sections 201 and 301 of the Indenture.
Section 203. Treatment of Proceeds of Title Insurance Policy. Any moneys
received by the Trustee as proceeds of any title insurance policy on Mortgaged
Property of the Company shall be subject to and treated in accordance with the
provisions of Section 607(2) of the Indenture (other than the last paragraph
thereof).
ARTICLE THREE
MISCELLANEOUS PROVISIONS
The Trustee makes no undertaking or representations in respect of, and shall not
be responsible in any manner whatsoever for and in respect of, the validity or
sufficiency of this Sixteenth Supplemental Indenture or the proper authorization
or the due execution hereof by the Company or for or in respect of the recitals
and statements contained herein, all of which recitals and statements are made
solely by the Company.
Except as expressly amended and supplemented hereby, the Indenture shall
continue in full force and effect in accordance with the provisions thereof and
the Indenture is in all respects hereby ratified and confirmed. This Sixteenth
Supplemental Indenture and all of its provisions shall be deemed a part of the
Indenture in the manner and to the extent herein and therein provided.
This Sixteenth Supplemental Indenture shall be governed by, and construed in
accordance with, the law of the State of New York.
This Sixteenth Supplemental Indenture may be executed in any number of
counterparts, each of which so executed shall be deemed to be an original, but
all such counterparts shall together constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Sixteenth
Supplemental Indenture to be duly executed as of the day and year first above
written.
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC
By: /s/ Marc Kilbride
------------------------------------
Name: Marc Kilbride
Title: Vice President and Treasurer
JPMORGAN CHASE BANK, as Trustee
By: /s/ Carol Logan
------------------------------------
Name: Carol Logan
Title: Vice President
ACKNOWLEDGMENT
STATE OF TEXAS )
) ss
COUNTY OF HARRIS )
On the 29th day of March, 2004, before me personally came Marc
Kilbride, to me known, who, being by me duly sworn, did depose and say that he
resides in Houston, Texas; that he is the Vice President and Treasurer of
CenterPoint Energy Houston Electric, LLC, a Texas limited liability company, the
limited liability company described in and which executed the foregoing
instrument; and that he signed his name thereto by authority of the sole manager
of said limited liability company.
/s/ Lena Arleen Williams
----------------------------------------
Notary Public
ACKNOWLEDGMENT
STATE OF TEXAS )
) ss
COUNTY OF HARRIS )
On the 29th day of March, 2004, before me personally came Carol Logan,
to me known, who, being by me duly sworn, did depose and say that she resides in
Houston, Texas; that she is Vice President of JPMorgan Chase Bank, a banking
corporation organized under the State of New York, the corporation described in
and which executed the foregoing instrument; and that she signed her name
thereto by authority of the board of directors of said corporation.
/s/ Jeanette C. Dunn
----------------------------------------
Notary Public
EXHIBIT 4(e)(23)
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC
OFFICER'S CERTIFICATE
March 31, 2004
I, the undersigned officer of CenterPoint Energy Houston Electric, LLC, a Texas
limited liability company (the "Company"), do hereby certify that I am an
Authorized Officer of the Company as such term is defined in the Indenture (as
defined herein). I am delivering this certificate pursuant to the authority
granted in the Resolutions adopted by written consent of the Manager of the
Company dated March 29, 2004, and Sections 105, 201, 301, 401(1), 401(5),
403(2)(A), 403(2)(B) and 1403 of the General Mortgage Indenture dated as of
October 10, 2002, as heretofore supplemented to the date hereof (as heretofore
supplemented, the "Indenture"), between the Company and JPMorgan Chase Bank, as
Trustee (the "Trustee"). Terms used herein and not otherwise defined herein
shall have the meanings assigned to them in the Indenture unless the context
clearly requires otherwise. Based upon the foregoing, I hereby certify on behalf
of the Company as follows:
1. The terms and conditions of the Securities of the series described in this
Officer's Certificate are as follows (the numbered subdivisions set forth in
this Paragraph 1 corresponding to the numbered subdivisions of Section 301 of
the Indenture):
(1) The Securities of the seventeenth series to be issued under the
Indenture shall be designated "General Mortgage Bonds, Series Q, due
December 1, 2017" (the "Series Q Bonds").
(2) The Series Q Bonds shall be authenticated and delivered in the
aggregate principal amount of $83,565,000.
(3) Not applicable.
(4) The Series Q Bonds shall mature and the principal thereof shall be due
and payable together with all accrued and unpaid interest thereon on
December 1, 2017. Principal and premium, if any, are payable on the Series
Q Bonds on such date or dates (subject to the terms of subsection 8(b)
hereof), and in such amounts, as principal and premium, if any, are payable
(whether at maturity, redemption or otherwise) on the Series 2004B Brazos
River Bonds (as defined below). The obligation of the Company to make any
payment of principal on the Series Q Bonds shall be fully or partially, as
the case may be, deemed to have been paid or otherwise satisfied and
discharged to the extent that the Company has paid or caused to be paid to
the Brazos River Trustee (as defined below) the Installment Payment (as
defined below) in respect of the principal then due and payable on the
Collateralized Revenue Refunding Bonds (CenterPoint Energy Houston
Electric, LLC Project) Series 2004B (the "Series 2004B Brazos River Bonds")
issued under that certain Trust Indenture dated as of March 1, 2004 (as
amended and supplemented, the "Brazos River Indenture") between the Brazos
River Authority (the "Issuer") and JPMorgan Chase Bank, a New York banking
organization, as trustee (the "Brazos River Trustee").
1
(5) The Series Q Bonds shall bear interest from the date on which the
Series 2004B Brazos River Bonds commence to bear interest at such rate or
rates per annum as shall cause the amount of interest payable on each
Interest Payment Date (as defined below) on the Series Q Bonds to equal the
amount of interest payable on such Interest Payment Date in respect of the
Series 2004B Brazos River Bonds under the Brazos River Indenture. Such
interest on the Series Q Bonds shall be payable on the same dates as
interest is payable from time to time in respect of the Series 2004B Brazos
River Bonds pursuant to the Brazos River Indenture (each such date herein
called an "Interest Payment Date"), until the maturity of the Series Q
Bonds, or, in the case of any default by the Company in the payment of the
principal due on the Series Q Bonds, until the Company's obligation with
respect to the payment of such principal shall be discharged as provided in
the Indenture. The amount of interest payable from time to time in respect
of the Series 2004B Brazos River Bonds under the Brazos River Indenture,
the basis on which such interest is computed and the dates on which such
interest is payable are set forth in the Brazos River Indenture. The
obligation of the Company to make any payment of interest on the Series Q
Bonds shall be fully or partially, as the case may be, deemed to have been
paid or otherwise satisfied and discharged to the extent that the Company
has paid or caused to be paid to the Brazos River Trustee the Installment
Payment (as defined below) in respect of the interest then due and payable
on the Series 2004B Brazos River Bonds. The Regular Record Date and Special
Record Date provisions of the Indenture shall not apply to the Series Q
Bonds.
(6) The Corporate Trust Office of the Trustee in Dallas, Texas shall be the
place at which (i) the principal of, premium, if any, and interest on, the
Series Q Bonds shall be payable, and (ii) registration of transfer of the
Series Q Bonds may be effected; and the Corporate Trust Office of the
Trustee in Houston, Texas shall be the place at which notices and demands
to or upon the Company in respect of the Series Q Bonds and the Indenture
may be served; and the Trustee shall be the Security Registrar for the
Series Q Bonds; provided, however, that the Company reserves the right to
change, by one or more Officer's Certificates, any such place or the
Security Registrar; and provided, further, that the Company reserves the
right to designate, by one or more Officer's Certificates, its principal
office in Houston, Texas as any such place or itself as the Security
Registrar; provided, however, that there shall be only a single Security
Registrar for the Series Q Bonds.
(7) Not applicable.
(8) The Series Q bonds will not be redeemable at the option of the Company
or otherwise pursuant to the requirements of the Indenture, provided
however that (a) in the event that the redemption of Series 2004B Brazos
River Bonds is required under the Brazos River Indenture due to the
occurrence of a Determination of Taxability, as such term is defined in
subsection (e) of Section 8 of the Form of Series 2004B Brazos River Bonds
set forth in Exhibit A to the Brazos River Indenture, the Company will
redeem Series Q Bonds equal in principal amount to the Series 2004B Brazos
River Bonds to be redeemed at a redemption price equal to 100% of the
principal amount thereof, plus accrued interest to such date fixed for
redemption, and (b) upon receipt by the Trustee of a written demand from
the Brazos River Trustee stating that the principal amount of all
2
Series 2004B Brazos River Bonds then outstanding under the Brazos River
Indenture has been declared immediately due and payable, the Company,
subject to the terms and provisions of the Series Q Bonds, will redeem the
Series Q Bonds not more than 180 days after receipt by the Trustee of such
written demand, the notice provisions of Article Five of the Indenture not
being applicable under the foregoing circumstances.
(9) The Series Q Bonds are issuable only in denominations of $83,565,000.
(10) Not applicable.
(11) Not applicable.
(12) Not applicable.
(13) Not applicable.
(14) Not applicable.
(15) Not applicable.
(16) Not applicable.
(17) The Series Q Bonds shall be evidenced by a single registered Series Q
Bond in the principal amount and denomination of $83,565,000. The Series Q
Bonds shall be executed by the Company and delivered to the Trustee for
authentication and delivery.
The single Series Q Bond shall be identified by the number Q-1 and shall
upon issuance be delivered by the Company to, and registered in the name
of, the Trustee, and shall be transferable only as required to effect an
assignment thereof to a successor or an assign of the Trustee under the
Indenture. The Series Q Bonds are to be issued by the Company to the Brazos
River Trustee in order that the Brazos River Trustee shall have the benefit
as a holder of the Series Q Bonds of the lien of the Indenture in the event
of the non-payment by the Company of the Installment Payments (the
"Installment Payments"), as defined in, and pursuant to the Installment
Payment and Bond Amortization Agreement (the "Installment Payment
Agreement"), dated as of March 1, 2004, by and between the Issuer and the
Company entered into with respect to the Series 2004B Brazos River Bonds.
Series Q Bonds issued upon transfer shall be numbered consecutively from
Q-2 upwards and issued in the authorized denominations set forth in
subsection (9) above. See also subsection (19) below.
(18) Not applicable.
(19) The holder of the Series Q Bonds by acceptance of the Series Q Bonds
agrees to restrictions on transfer and to waivers of certain rights of
exchange as set forth herein. The Series Q Bonds have not been registered
under the Securities Act of 1933 and may not be offered, sold or otherwise
transferred in the absence of such registration or an
3
applicable exemption therefrom. No service charge shall be made for the
registration of transfer or exchange of the Series Q Bonds.
(20) For purposes of the Series Q Bonds, "Business Day" means any day other
than (i) a Saturday or Sunday, (ii) a day on which commercial banks in New
York, New York, Houston, Texas, or the city in which the principal
corporate trust office of the Indenture Trustee is located, are authorized
by law to close or (iii) a day on which the New York Stock Exchange is
closed.
(21) Not applicable.
(22) The Trustee may conclusively presume that the obligation of the
Company to pay the principal of, premium, if any, and interest on the
Series Q Bonds shall have been fully satisfied and discharged unless and
until it shall have received a written notice from the Brazos River
Trustee, signed by an authorized officer of the Brazos River Trustee and
attested by the Secretary or an Assistant Secretary of the Brazos River
Trustee, stating that the payment of principal of, premium, if any, or
interest on the Series Q Bonds has not been fully paid when due and
specifying the amount of funds required to make such payment.
The obligation of the Company to make any payment of the principal of,
premium, if any, or interest on the Series Q Bonds, whether at maturity,
upon redemption (including any redemption due to the occurrence of a
Determination of Taxability, as such term is defined in subsection (e) of
Section 8 of the Form of the Series 2004B Brazos River Bonds set forth in
Exhibit A of the Brazos River Indenture) or otherwise, shall be fully or
partially, as the case may be, deemed to have been paid or otherwise
satisfied and discharged to the extent that at the time any such payment
shall be due, the then due principal of, premium, if any, or interest on
the Series 2004B Brazos River Bonds which corresponds to such amounts under
the Series Q Bonds shall have been fully or partially paid, deemed to have
been paid or otherwise satisfied and discharged. In addition, such
obligation to make any payment of the principal of, premium, if any, or
interest on the Series Q Bonds at any time shall be deemed to have been
satisfied and discharged to the extent that the amount of the Company's
obligation to make any payment of the principal of, premium, if any, or
interest on the Series Q Bonds exceeds the obligation of the Company at
that time to make any Installment Payment.
In the event the Company is required under Section 6.05 of the Installment
Payment Agreement to, and does, issue First Mortgage Securities to secure
its obligations under the Installment Payment Agreement, as provided in
Section 6.05 of the Installment Payment Agreement, the Company shall no
longer be required to maintain outstanding, and the Brazos River Trustee
shall surrender to the Trustee, the Series Q Bonds in accordance with
Section 5.03 of the Brazos River Indenture.
4
The Series Q Bonds shall have such other terms and provisions as are
provided in the form thereof attached hereto as Exhibit A, and shall be
issued in substantially such form.
2. The undersigned has read all of the covenants and conditions contained in the
Indenture, and the definitions in the Indenture relating thereto, relating to
the issuance of the Series Q Bonds and the execution of the Sixteenth
Supplemental Indenture to the Indenture in respect of compliance with which this
certificate is made.
3. The statements contained in this certificate are based upon the familiarity
of the undersigned with the Indenture, the documents accompanying this
certificate, and upon discussions by the undersigned with officers and employees
of the Company familiar with the matters set forth herein.
4. In the opinion of the undersigned, he has made such examination or
investigation as is necessary to enable him to express an informed opinion as to
whether or not such covenants and conditions have been complied with.
In the opinion of the undersigned, such conditions and covenants have been
complied with.
5. To the knowledge of the undersigned, no Event of Default has occurred and is
continuing.
6. The execution of the Sixteenth Supplemental Indenture, dated as of the date
hereof, between the Company and the Trustee is authorized or permitted by the
Indenture.
7. First Mortgage Bonds, Pollution Control 6.70% Series due March 1, 2017 having
an aggregate principal amount of $10,350,000, First Mortgage Bonds, Pollution
Control 6.70% Series due March 1, 2027 having an aggregate principal amount of
$56,095,000, and First Mortgage Bonds, 7.75% Series due March 15, 2023 having an
aggregate principal amount of $17,120,000, and collectively having an aggregate
principal amount of $83,565,000 (collectively, the "First Mortgage Bonds"), have
heretofore been authenticated and delivered. The First Mortgage Bonds have been
returned to and cancelled by the trustee under the First Mortgage prior to the
date hereof, constitute Retired Securities and are the basis for the
authentication and delivery of the Series Q Bonds. The maximum Stated Interest
Rate on the First Mortgage Bonds of each series included in the First Mortgage
Bonds (as herein defined) at the time of their authentication and delivery was
not less than the maximum Stated Interest Rate on the Series Q Bonds to be in
effect upon the initial authentication and delivery thereof.
5
IN WITNESS WHEREOF, the undersigned has executed this Officer's
Certificate as of the date first above written.
By: /s/ Marc Kilbride
------------------------------------
Name: Marc Kilbride
Title: Vice President and Treasurer
Acknowledged and Received on
March 31, 2004
JPMORGAN CHASE BANK,
as Trustee
By: /s/ Carol Logan
---------------------------------
Name: Carol Logan
Title: Vice President
6
EXHIBIT A
FORM OF SERIES Q BOND
NOTE: THE HOLDER OF THIS BOND BY ACCEPTANCE HEREOF AGREES TO RESTRICTIONS ON
TRANSFER AND TO INDEMNIFICATION PROVISIONS AS SET FORTH BELOW. IN ADDITION, THE
BOND REPRESENTED BY THIS CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 AND SUCH BOND MAY NOT BE TRANSFERRED WITHOUT COMPLIANCE
WITH APPLICABLE SECURITIES LAWS.
THIS BOND IS NOT TRANSFERABLE EXCEPT, AS FURTHER PROVIDED HEREIN, TO A SUCCESSOR
OR ASSIGN OF THE TRUSTEE UNDER THE TRUST INDENTURE REFERRED TO HEREIN BETWEEN
THE ISSUER AND SUCH TRUSTEE.
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC
General Mortgage Bonds, Series Q, due December 1, 2017
Original Interest Accrual Date: March 31, 2004
Stated Maturity: December 1, 2017
Interest Rate: See below
Interest Payment Dates: See below
Regular Record Dates: N/A
Redeemable by Company: Yes X No
--- ---
Redemption Date: See below
Redemption Price: See below
This Security is not an Original Discount
Security within the meaning of the within-mentioned Indenture.
Principal Amount
$83,565,000 No. Q-1
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC, a corporation duly organized and
existing under the laws of the State of Texas (herein called the "Company,"
which term includes any successor under the Indenture referred to below), for
value received, hereby promises to pay to JPMORGAN CHASE BANK, a New York
banking organization, as Trustee under the Brazos River Indenture (as herein
defined) or its registered assigns (the "Brazos River Trustee"), the principal
sum of EIGHTY-THREE MILLION FIVE HUNDRED SIXTY-FIVE THOUSAND DOLLARS, in whole
or in installments on such date or dates (subject to the tenth paragraph hereof)
and in such amounts, and to pay to the Brazos River Trustee premium, if any, in
whole or in installments on such date or dates and in such amounts, as the
Issuer (as defined herein) has any obligations under the Trust Indenture (as
amended and supplemented, the "Brazos River Indenture"), dated as of March 1,
2004, between the Brazos River Authority (the "Issuer") and the Brazos River
Trustee to repay any principal or to pay premium, if any, in respect of the
Collateralized Revenue Refunding Bonds (CenterPoint Energy Houston Electric, LLC
Project) Series 2004B issued under the Brazos River Indenture (hereinafter
referred to as the "Series 2004B Brazos River Bonds"), but not later than the
Stated Maturity specified above. The obligation of the Company to make any
payment of principal or premium, if any, on this Bond, whether at maturity or
otherwise, shall be fully or partially, as the case may be, deemed to have been
paid or otherwise satisfied and discharged to the extent that the
Company has paid or caused to be paid to the Brazos River Trustee the
Installment Payment (as defined below) in respect of the principal or premium,
if any, then due and payable on the Series 2004B Brazos River Bonds.
Interest shall be payable on this Bond on the same dates as interest is payable
from time to time in respect of the Series 2004B Brazos River Bonds pursuant to
the Brazos River Indenture (each such date herein called an "Interest Payment
Date"), at such rate or rates per annum as shall cause the amount of interest
payable on such Interest Payment Date on this Bond to equal the amount of
interest payable on such Interest Payment Date in respect of the Series 2004B
Brazos River Bonds under the Brazos River Indenture. Such interest shall be
payable until the maturity of this Bond, or, if the Company shall default in the
payment of the principal due on this Bond, until the Company's obligation with
respect to the payment of such principal shall be discharged as provided in the
Indenture. The amount of interest payable from time to time in respect of the
Series 2004B Brazos River Bonds under the Brazos River Indenture, the basis on
which such interest is computed and the dates on which such interest is payable
are set forth in the Brazos River Indenture. This Bond shall bear interest from
the Original Interest Accrual Date listed on the first page of this Bond. The
obligation of the Company to make any payment of interest on this Bond shall be
fully or partially, as the case may be, deemed to have been paid or otherwise
satisfied and discharged to the extent that the Company has paid or caused to be
paid to the Brazos River Trustee the Installment Payment (as defined below) in
respect of the interest then due and payable on the Series 2004B Brazos River
Bonds.
This Bond is issued to the Brazos River Trustee in order that the Brazos River
Trustee shall have the benefit as a holder of this Bond of the lien of the
Indenture (as defined below) in the event of the non-payment by the Company of
the Installment Payments (the "Installment Payments"), as defined in and
pursuant to the Installment Payment and Bond Amortization Agreement (as amended
and supplemented, the "Installment Payment Agreement"), dated as of March 1,
2004, between the Issuer and the Company entered into with respect to the Series
2004B Brazos River Bonds. Any capitalized terms used herein and not defined
herein shall have the meanings specified in the Indenture (as defined below),
unless otherwise noted.
THIS BOND SHALL NOT BE TRANSFERABLE EXCEPT AS REQUIRED TO EFFECT AN ASSIGNMENT
HEREOF TO A SUCCESSOR OR AN ASSIGN OF THE BRAZOS RIVER TRUSTEE UNDER THE BRAZOS
RIVER INDENTURE.
The Brazos River Trustee shall surrender this Bond to the Trustee (as defined
below) in accordance with Section 5.07(d) of the Installment Payment Agreement.
Payments of the principal of, premium, if any, and interest on this Bond shall
be made at the Corporate Trust Administration of JPMorgan Chase Bank, as
Trustee, located at 2001 Bryan Street, 9th Floor, Dallas, Texas 75201, or at
such other office or agency as may be designated for such purpose by the Company
from time to time. Payment of the principal of, premium, if any, and interest on
this Bond, as aforesaid, shall be made in such coin or currency of the United
States of America as at the time of payment shall be legal tender for the
payment of public and private debts.
This Bond is one of a duly authorized issue of securities of the Company (herein
called the "Securities"), issued and issuable in one or more series under and
equally secured by a General Mortgage Indenture, dated as of October 10, 2002
(such Indenture as originally executed and delivered and as supplemented or
amended from time to time thereafter, together with any constituent instruments
establishing the terms of particular Securities, being herein called the
"Indenture"), between the Company and JPMorgan Chase Bank, as trustee (herein
called the "Trustee," which term includes any successor trustee under the
Indenture), to which Indenture reference is hereby made for a description of the
property mortgaged, pledged and held in trust, the nature and extent of the
security and the respective rights, limitations of rights, duties and immunities
of the Company, the Trustee and the Holders of the Securities thereunder and of
the terms and conditions upon which the Securities are, and are to be,
authenticated and delivered and secured. The acceptance of this Bond shall be
deemed to constitute the consent and agreement by the Holder hereof to all of
the terms and provisions of the Indenture. This Bond is one of the series
designated above.
The Bonds of this series will not be entitled to the benefit of any sinking fund
or voluntary redemption provisions.
If an Event of Default, as defined in the Indenture, shall occur and be
continuing, the principal of this Bond may be declared due and payable in the
manner and with the effect provided in the Indenture.
This Bond will not be redeemable at the option of the Company or otherwise
pursuant to the requirements of the Indenture, provided however that (a) in the
event of the required redemption of Series 2004B Brazos River Bonds due to the
occurrence of a Determination of Taxability, as such term is defined in
subsection (e) of Section 8 of the Form of Series 2004B Brazos River Bonds set
forth in Exhibit A to the Brazos River Indenture, the Company will redeem Bonds
equal in principal amount to the Series 2004B Brazos River Bonds to be redeemed
at a redemption price equal to 100% of the principal amount thereof, plus
accrued interest to the date fixed for redemption, and (b) upon receipt by the
Trustee of a written demand from the Brazos River Trustee stating that the
principal amount of
all Series 2004B Brazos River Bonds then outstanding under the Brazos River
Indenture has been declared immediately due and payable, the Company, subject to
the terms and provisions of the Bonds, will redeem the Bonds not more than 180
days after receipt by the Trustee of such written demand.
The Indenture permits, with certain exceptions as therein provided, the Trustee
to enter into one or more supplemental indentures for the purpose of adding any
provisions to, or changing in any manner or eliminating any of the provisions
of, the Indenture with the consent of the Holders of not less than a majority in
aggregate principal amount of the Securities of all series then Outstanding
under the Indenture, considered as one class; PROVIDED, HOWEVER, that if there
shall be Securities of more than one series Outstanding under the Indenture and
if a proposed supplemental indenture shall directly affect the rights of the
Holders of Securities of one or more, but less than all, of such series, then
the consent only of the Holders of a majority in aggregate principal amount of
the Outstanding Securities of all series so directly affected, considered as one
class, shall be required; and PROVIDED, FURTHER, that if the Securities of any
series shall have been issued in more than one Tranche and if the proposed
supplemental indenture shall directly affect the rights of the Holders of
Securities of one or more, but less than all, of such Tranches, then the consent
only of the Holders of a majority in aggregate principal amount of the
Outstanding Securities of all Tranches so directly affected, considered as one
class, shall be required; and PROVIDED, FURTHER, that the Indenture permits the
Trustee to enter into one or more supplemental indentures for limited purposes
without the consent of any Holders of Securities. The Indenture also contains
provisions permitting the Holders of a majority in principal amount of the
Securities then Outstanding, on behalf of the Holders of all Securities, to
waive compliance by the Company with certain provisions of the Indenture and
certain past defaults under the Indenture and their consequences. Any such
consent or waiver by the Holder of this Bond shall be conclusive and binding
upon such Holder and upon all future Holders of this Bond and of any Security
issued upon the registration of transfer hereof or in exchange therefor or in
lieu hereof, whether or not notation of such consent or waiver is made upon this
Bond.
As provided in the Indenture and subject to certain limitations therein and
herein set forth, the transfer of this Bond is registrable in the Security
Register, upon surrender of this Bond for registration of transfer at the
Corporate Trust Office of JPMorgan Chase Bank in Houston, Texas or such other
office or agency as may be designated by the Company from time to time, duly
endorsed by, or accompanied by a written instrument of transfer in form
satisfactory to the Company and the Security Registrar duly executed by, the
Holder hereof or his attorney duly authorized in writing, and thereupon one or
more new Bonds of this series of authorized denominations and of like tenor and
aggregate principal amount, will be issued to the designated transferee or
transferees.
The Company, the Trustee and any agent of the Company or the Trustee may deem
and treat the person in whose name this Bond shall be registered upon the
Security Register for the Bonds of this series as the absolute owner of such
Bond for the purpose of receiving payment of or on account of the principal of
and interest on this Bond and for all other purposes, whether or not this Bond
be overdue, and neither the Company nor the Trustee shall be affected by any
notice to the contrary; and all such payments so made to such registered owner
or upon his order shall be valid and effectual to satisfy and discharge the
liability upon this Bond to the extent of the sum or sums paid.
The Trustee may conclusively presume that the obligation of the Company to pay
the principal of, premium, if any, and interest on this Bond shall have been
fully satisfied and discharged unless and until it shall have received a written
notice from the Brazos River Trustee, signed by an authorized officer of the
Brazos River Trustee and attested by the Secretary or an Assistant Secretary of
the Brazos River Trustee, stating that the payment of principal of, premium, if
any, or interest on this Bond has not been fully paid when due and specifying
the amount of funds required to make such payment.
The obligation of the Company to make any payment of the principal of, premium,
if any, or interest on this Bond, whether at maturity, upon redemption
(including any redemption due to the occurrence of a Determination of
Taxability, as such term is defined in subsection (e) of Section 8 of the Form
of the Series 2004B Brazos River Bonds set forth in Exhibit A of the Brazos
River Indenture) or otherwise, shall be fully or partially, as the case may be,
deemed to have been paid or otherwise satisfied and discharged to the extent
that at the time any such payment shall be due, the then due principal, premium,
if any, or interest on the Series 2004B Brazos River Bonds which corresponds to
such amounts under this Bond shall have been fully or partially paid, deemed to
have been paid or otherwise satisfied and discharged. In addition, such
obligation to make any payment of the principal of, premium,
if any, or interest on this Bond at any time shall be deemed to have been
satisfied and discharged to the extent that the amount of the Company's
obligation to make any payment of the principal of, premium, if any, or interest
on this Bond exceeds the obligation of the Company at that time to make any
Installment Payment.
No recourse under or upon any obligation, covenant or agreement contained in the
Indenture or in any indenture supplemental thereto, or in any Bond or coupon
thereby secured, or because of any indebtedness thereby secured, shall be had
against any incorporator, member, manager, stockholder, officer, director or
employee, as such, past, present or future, of the Company or any predecessor or
successor corporation or company, either directly or through the Company or any
predecessor or successor corporation or company, whether by virtue of any
constitution, statute or rule of law, or by the enforcement of any assessment or
penalty or otherwise; it being expressly agreed and understood that the
Indenture, any indenture supplemental thereto and the obligations thereby
secured, are solely corporate obligations of the Company, and that no personal
liability whatsoever shall attach to, or be incurred by, such incorporators,
members, managers, stockholders, officers, directors or employees, as such, of
the Company or of any predecessor or successor corporation or company, or any of
them, because of the creation of the indebtedness thereby authorized, or under
or by reason of any of the obligations, covenants or agreements contained in the
Indenture or in any indenture supplemental thereto or in any of the Bonds or
coupons thereby secured, or implied therefrom.
The holder of this Bond by acceptance of this Bond agrees to restrictions on
transfer and to waivers of certain rights of exchange as set forth herein. THIS
BOND HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE
OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN
APPLICABLE EXEMPTION THEREFROM. No service charge shall be made for the
registration of transfer or exchange of this Bond.
This Bond shall be governed by and construed in accordance with the law of the
State of New York except as provided in the Indenture.
Unless the certificate of authentication hereon has been executed by the Trustee
or an Authenticating Agent by manual signature, this Bond shall not be entitled
to any benefit under the Indenture or be valid or obligatory for any purpose.
[The remainder of this page is intentionally left blank.]
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed.
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
Attest:
- -------------------------------------
Name:
-------------------------------
Title:
------------------------------
CERTIFICATE OF AUTHENTICATION
This is one of the Securities of the series designated therein referred to
in the within-mentioned Indenture.
Date of Authentication: March 31, 2004
JPMORGAN CHASE BANK,
Trustee
By:
------------------------------------
Authorized Signatory
EXHIBIT 4(e)(24)
CenterPoint Energy Houston Electric, LLC
1111 Louisiana
Houston, TX 77002
================================================================================
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC
TO
JPMORGAN CHASE BANK
Trustee
----------
SEVENTEENTH SUPPLEMENTAL INDENTURE
Dated as of March 31, 2004
----------
Supplementing the General Mortgage Indenture
Dated as of October 10, 2002
THIS INSTRUMENT GRANTS A SECURITY INTEREST BY A PUBLIC UTILITY
THIS INSTRUMENT CONTAINS AFTER-ACQUIRED PROPERTY PROVISIONS
This instrument is being filed pursuant to Chapter 35 of the Texas Business and
Commerce Code
================================================================================
SEVENTEENTH SUPPLEMENTAL INDENTURE, dated as of March 31, 2004, between
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC, a limited liability company organized
and existing under the laws of the State of Texas (herein called the "Company"),
having its principal office at 1111 Louisiana, Houston, Texas 77002, and
JPMORGAN CHASE BANK, a banking corporation duly organized and existing under the
laws of the State of New York, as Trustee (herein called the "Trustee"), the
office of the Trustee at which on the date hereof its corporate trust business
is administered being 600 Travis Street, Suite 1150, Houston, Texas 77002.
RECITALS OF THE COMPANY
WHEREAS, the Company has heretofore executed and delivered to the Trustee a
General Mortgage Indenture dated as of October 10, 2002 (the "Indenture")
providing for the issuance by the Company from time to time of its bonds, notes
or other evidence of indebtedness to be issued in one or more series (in the
Indenture and herein called the "Securities") and to provide security for the
payment of the principal of and premium, if any, and interest, if any, on the
Securities; and
WHEREAS, the Company, in the exercise of the power and authority conferred upon
and reserved to it under the provisions of the Indenture and pursuant to
appropriate resolutions of the Manager, has duly determined to make, execute and
deliver to the Trustee this Seventeenth Supplemental Indenture to the Indenture
as permitted by Sections 201, 301, 403(2) and 1401 of the Indenture in order to
establish the form or terms of, and to provide for the creation and issuance of,
a eighteenth series of Securities under the Indenture in an aggregate principal
amount of $12,100,000 (such eighteenth series being hereinafter referred to as
the "Eighteenth Series"); and
WHEREAS, all things necessary to make the Securities of the Eighteenth Series,
when executed by the Company and authenticated and delivered by the Trustee or
any Authenticating Agent and issued upon the terms and subject to the conditions
hereinafter and in the Indenture set forth against payment therefor the valid,
binding and legal obligations of the Company and to make this Seventeenth
Supplemental Indenture a valid, binding and legal agreement of the Company, have
been done;
NOW, THEREFORE, THIS SEVENTEENTH SUPPLEMENTAL INDENTURE WITNESSETH that, in
order to establish the terms of a series of Securities, and for and in
consideration of the premises and of the covenants contained in the Indenture
and in this Seventeenth Supplemental Indenture and for other good and valuable
consideration the receipt and sufficiency of which are hereby acknowledged, it
is mutually covenanted and agreed as follows:
ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS
OF GENERAL APPLICATION
Section 101. Definitions. Each capitalized term that is used herein and is
defined in the Indenture shall have the meaning specified in the Indenture
unless such term is otherwise defined herein.
ARTICLE TWO
TITLE, FORM AND TERMS OF THE BONDS
Section 201. Title of the Bonds. This Seventeenth Supplemental Indenture
hereby creates a series of Securities designated as the "General Mortgage Bonds,
Series R, due April 1, 2012" of the Company (collectively referred to herein as
the "Bonds"). For purposes of the Indenture, the Bonds shall constitute a single
series of Securities and, subject to the provisions, including, but not limited
to Article Four of the Indenture, the Bonds shall be issued in an aggregate
principal amount of $12,100,000.
Section 202. Form and Terms of the Bonds. The form and terms of the Bonds
will be set forth in an Officer's Certificate delivered by the Company to the
Trustee pursuant to the authority granted by this Seventeenth Supplemental
Indenture in accordance with Sections 201 and 301 of the Indenture.
Section 203. Treatment of Proceeds of Title Insurance Policy. Any moneys
received by the Trustee as proceeds of any title insurance policy on Mortgaged
Property of the Company shall be subject to and treated in accordance with the
provisions of Section 607(2) of the Indenture (other than the last paragraph
thereof).
ARTICLE THREE
MISCELLANEOUS PROVISIONS
The Trustee makes no undertaking or representations in respect of, and shall not
be responsible in any manner whatsoever for and in respect of, the validity or
sufficiency of this Seventeenth Supplemental Indenture or the proper
authorization or the due execution hereof by the Company or for or in respect of
the recitals and statements contained herein, all of which recitals and
statements are made solely by the Company.
Except as expressly amended and supplemented hereby, the Indenture shall
continue in full force and effect in accordance with the provisions thereof and
the Indenture is in all respects hereby ratified and confirmed. This Seventeenth
Supplemental Indenture and all of its provisions shall be deemed a part of the
Indenture in the manner and to the extent herein and therein provided.
This Seventeenth Supplemental Indenture shall be governed by, and construed in
accordance with, the law of the State of New York.
This Seventeenth Supplemental Indenture may be executed in any number of
counterparts, each of which so executed shall be deemed to be an original, but
all such counterparts shall together constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Seventeenth
Supplemental Indenture to be duly executed as of the day and year first above
written.
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC
By: /s/ Marc Kilbride
------------------------------------
Name: Marc Kilbride
Title: Vice President and Treasurer
JPMORGAN CHASE BANK, as Trustee
By: /s/ Carol Logan
------------------------------------
Name: Carol Logan
Title: Vice President
ACKNOWLEDGMENT
STATE OF TEXAS )
) ss
COUNTY OF HARRIS )
On the 29th day of March, 2004, before me personally came Marc
Kilbride, to me known, who, being by me duly sworn, did depose and say that he
resides in Houston, Texas; that he is the Vice President and Treasurer of
CenterPoint Energy Houston Electric, LLC, a Texas limited liability company, the
limited liability company described in and which executed the foregoing
instrument; and that he signed his name thereto by authority of the sole manager
of said limited liability company.
/s/ Lena Arleen Williams
----------------------------------------
Notary Public
ACKNOWLEDGMENT
STATE OF TEXAS )
) ss
COUNTY OF HARRIS )
On the 29th day of March, 2004, before me personally came Carol Logan,
to me known, who, being by me duly sworn, did depose and say that she resides in
Houston, Texas; that she is Vice President of JPMorgan Chase Bank, a banking
corporation organized under the State of New York, the corporation described in
and which executed the foregoing instrument; and that she signed her name
thereto by authority of the board of directors of said corporation.
/s/ Jeanette C. Dunn
----------------------------------------
Notary Public
EXHIBIT 4(e)(25)
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC
OFFICER'S CERTIFICATE
March 31, 2004
I, the undersigned officer of CenterPoint Energy Houston Electric, LLC, a Texas
limited liability company (the "Company"), do hereby certify that I am an
Authorized Officer of the Company as such term is defined in the Indenture (as
defined herein). I am delivering this certificate pursuant to the authority
granted in the Resolutions adopted by written consent of the Manager of the
Company dated March 29, 2004, and Sections 105, 201, 301, 401(1), 401(5),
403(2)(A), 403(2)(B) and 1403 of the General Mortgage Indenture dated as of
October 10, 2002, as heretofore supplemented to the date hereof (as heretofore
supplemented, the "Indenture"), between the Company and JPMorgan Chase Bank, as
Trustee (the "Trustee"). Terms used herein and not otherwise defined herein
shall have the meanings assigned to them in the Indenture unless the context
clearly requires otherwise. Based upon the foregoing, I hereby certify on behalf
of the Company as follows:
1. The terms and conditions of the Securities of the series described in this
Officer's Certificate are as follows (the numbered subdivisions set forth in
this Paragraph 1 corresponding to the numbered subdivisions of Section 301 of
the Indenture):
(1) The Securities of the eighteenth series to be issued under the
Indenture shall be designated "General Mortgage Bonds, Series R, due April
1, 2012" (the "Series R Bonds").
(2) The Series R Bonds shall be authenticated and delivered in the
aggregate principal amount of $12,100,000.
(3) Not applicable.
(4) The Series R Bonds shall mature and the principal thereof shall be due
and payable together with all accrued and unpaid interest thereon on April
1, 2012. Principal and premium, if any, are payable on the Series R Bonds
on such date or dates (subject to the terms of subsection 8(b) hereof), and
in such amounts, as principal and premium, if any, are payable (whether at
maturity, redemption or otherwise) on the Series 2004 Gulf Coast Bonds (as
defined below). The obligation of the Company to make any payment of
principal on the Series R Bonds shall be fully or partially, as the case
may be, deemed to have been paid or otherwise satisfied and discharged to
the extent that the Company has paid or caused to be paid to the Gulf Coast
Trustee (as defined below) the Installment Payment (as defined below) in
respect of the principal then due and payable on the Collateralized Revenue
Refunding Bonds (CenterPoint Energy Houston Electric, LLC Project) Series
2004 (the "Series 2004 Gulf Coast Bonds") issued under that certain Trust
Indenture dated as of March 1, 2004 (as amended and supplemented, the "Gulf
Coast Indenture") between the Gulf Coast Waste Disposal Authority (the
"Issuer") and JPMorgan Chase Bank, a New York banking organization, as
trustee (the "Gulf Coast Trustee").
1
(5) The Series R Bonds shall bear interest from the date on which the
Series 2004 Gulf Coast Bonds commence to bear interest at such rate or
rates per annum as shall cause the amount of interest payable on each
Interest Payment Date (as defined below) on the Series R Bonds to equal the
amount of interest payable on such Interest Payment Date in respect of the
Series 2004 Gulf Coast Bonds under the Gulf Coast Indenture. Such interest
on the Series R Bonds shall be payable on the same dates as interest is
payable from time to time in respect of the Series 2004 Gulf Coast Bonds
pursuant to the Gulf Coast Indenture (each such date herein called an
"Interest Payment Date"), until the maturity of the Series R Bonds, or, in
the case of any default by the Company in the payment of the principal due
on the Series R Bonds, until the Company's obligation with respect to the
payment of such principal shall be discharged as provided in the Indenture.
The amount of interest payable from time to time in respect of the Series
2004 Gulf Coast Bonds under the Gulf Coast Indenture, the basis on which
such interest is computed and the dates on which such interest is payable
are set forth in the Gulf Coast Indenture. The obligation of the Company to
make any payment of interest on the Series R Bonds shall be fully or
partially, as the case may be, deemed to have been paid or otherwise
satisfied and discharged to the extent that the Company has paid or caused
to be paid to the Gulf Coast Trustee the Installment Payment (as defined
below) in respect of the interest then due and payable on the Series 2004
Gulf Coast Bonds. The Regular Record Date and Special Record Date
provisions of the Indenture shall not apply to the Series R Bonds.
(6) The Corporate Trust Office of the Trustee in Dallas, Texas shall be the
place at which (i) the principal of, premium, if any, and interest on, the
Series R Bonds shall be payable, and (ii) registration of transfer of the
Series R Bonds may be effected; and the Corporate Trust Office of the
Trustee in Houston, Texas shall be the place at which notices and demands
to or upon the Company in respect of the Series R Bonds and the Indenture
may be served; and the Trustee shall be the Security Registrar for the
Series R Bonds; provided, however, that the Company reserves the right to
change, by one or more Officer's Certificates, any such place or the
Security Registrar; and provided, further, that the Company reserves the
right to designate, by one or more Officer's Certificates, its principal
office in Houston, Texas as any such place or itself as the Security
Registrar; provided, however, that there shall be only a single Security
Registrar for the Series R Bonds.
(7) Not applicable.
(8) The Series R bonds will not be redeemable at the option of the Company
or otherwise pursuant to the requirements of the Indenture, provided
however that (a) in the event that the redemption of Series 2004 Gulf Coast
Bonds is required under the Gulf Coast Indenture due to the occurrence of a
Determination of Taxability, as such term is defined in subsection (d) of
Section 8 of the Form of Series 2004 Gulf Coast Bonds set forth in Exhibit
A to the Gulf Coast Indenture, the Company will redeem Series R Bonds equal
in principal amount to the Series 2004 Gulf Coast Bonds to be redeemed at a
redemption price equal to 100% of the principal amount thereof, plus
accrued interest to such date fixed for redemption, and (b) upon receipt by
the Trustee of a written demand from the Gulf Coast Trustee stating that
the principal amount of all Series 2004 Gulf Coast Bonds then outstanding
under the Gulf Coast Indenture has been declared
2
immediately due and payable, the Company, subject to the terms and
provisions of the Series R Bonds, will redeem the Series R Bonds not more
than 180 days after receipt by the Trustee of such written demand, the
notice provisions of Article Five of the Indenture not being applicable
under the foregoing circumstances.
(9) The Series R Bonds are issuable only in denominations of $12,100,000.
(10) Not applicable.
(11) Not applicable.
(12) Not applicable.
(13) Not applicable.
(14) Not applicable.
(15) Not applicable.
(16) Not applicable.
(17) The Series R Bonds shall be evidenced by a single registered Series R
Bond in the principal amount and denomination of $12,100,000. The Series R
Bonds shall be executed by the Company and delivered to the Trustee for
authentication and delivery.
The single Series R Bond shall be identified by the number R-1 and shall
upon issuance be delivered by the Company to, and registered in the name
of, the Trustee, and shall be transferable only as required to effect an
assignment thereof to a successor or an assign of the Trustee under the
Indenture. The Series R Bonds are to be issued by the Company to the Gulf
Coast Trustee in order that the Gulf Coast Trustee shall have the benefit
as a holder of the Series R Bonds of the lien of the Indenture in the event
of the non-payment by the Company of the Installment Payments (the
"Installment Payments"), as defined in, and pursuant to the Installment
Payment and Bond Amortization Agreement (the "Installment Payment
Agreement"), dated as of March 1, 2004, by and between the Issuer and the
Company entered into with respect to the Series 2004 Gulf Coast Bonds.
Series R Bonds issued upon transfer shall be numbered consecutively from
R-2 upwards and issued in the authorized denominations set forth in
subsection (9) above. See also subsection (19) below.
(18) Not applicable.
(19) The holder of the Series R Bonds by acceptance of the Series R Bonds
agrees to restrictions on transfer and to waivers of certain rights of
exchange as set forth herein. The Series R Bonds have not been registered
under the Securities Act of 1933 and may not be offered, sold or otherwise
transferred in the absence of such registration or an applicable exemption
therefrom. No service charge shall be made for the registration of transfer
or exchange of the Series R Bonds.
3
(20) For purposes of the Series R Bonds, "Business Day" means any day other
than (i) a Saturday or Sunday, (ii) a day on which commercial banks in New
York, New York, Houston, Texas, or the city in which the principal
corporate trust office of the Indenture Trustee is located, are authorized
by law to close or (iii) a day on which the New York Stock Exchange is
closed.
(21) Not applicable.
(22) The Trustee may conclusively presume that the obligation of the
Company to pay the principal of, premium, if any, and interest on the
Series R Bonds shall have been fully satisfied and discharged unless and
until it shall have received a written notice from the Gulf Coast Trustee,
signed by an authorized officer of the Gulf Coast Trustee and attested by
the Secretary or an Assistant Secretary of the Gulf Coast Trustee, stating
that the payment of principal of, premium, if any, or interest on the
Series R Bonds has not been fully paid when due and specifying the amount
of funds required to make such payment.
The obligation of the Company to make any payment of the principal of,
premium, if any, or interest on the Series R Bonds, whether at maturity,
upon redemption (including any redemption due to the occurrence of a
Determination of Taxability, as such term is defined in subsection (d) of
Section 8 of the Form of the Series 2004 Gulf Coast Bonds set forth in
Exhibit A of the Gulf Coast Indenture) or otherwise, shall be fully or
partially, as the case may be, deemed to have been paid or otherwise
satisfied and discharged to the extent that at the time any such payment
shall be due, the then due principal of, premium, if any, or interest on
the Series 2004 Gulf Coast Bonds which corresponds to such amounts under
the Series R Bonds shall have been fully or partially paid, deemed to have
been paid or otherwise satisfied and discharged. In addition, such
obligation to make any payment of the principal of, premium, if any, or
interest on the Series R Bonds at any time shall be deemed to have been
satisfied and discharged to the extent that the amount of the Company's
obligation to make any payment of the principal of, premium, if any, or
interest on the Series R Bonds exceeds the obligation of the Company at
that time to make any Installment Payment.
In the event the Company is required under Section 6.05 of the Installment
Payment Agreement to, and does, issue First Mortgage Securities to secure
its obligations under the Installment Payment Agreement, as provided in
Section 6.05 of the Installment Payment Agreement, the Company shall no
longer be required to maintain outstanding, and the Gulf Coast Trustee
shall surrender to the Trustee, the Series R Bonds in accordance with
Section 5.03 of the Gulf Coast Indenture.
The Series R Bonds shall have such other terms and provisions as are
provided in the form thereof attached hereto as Exhibit A, and shall be
issued in substantially such form.
4
2. The undersigned has read all of the covenants and conditions contained in the
Indenture, and the definitions in the Indenture relating thereto, relating to
the issuance of the Series R Bonds and the execution of the Seventeenth
Supplemental Indenture to the Indenture in respect of compliance with which this
certificate is made.
3. The statements contained in this certificate are based upon the familiarity
of the undersigned with the Indenture, the documents accompanying this
certificate, and upon discussions by the undersigned with officers and employees
of the Company familiar with the matters set forth herein.
4. In the opinion of the undersigned, he has made such examination or
investigation as is necessary to enable him to express an informed opinion as to
whether or not such covenants and conditions have been complied with.
In the opinion of the undersigned, such conditions and covenants have been
complied with.
5. To the knowledge of the undersigned, no Event of Default has occurred and is
continuing.
6. The execution of the Seventeenth Supplemental Indenture, dated as of the date
hereof, between the Company and the Trustee is authorized or permitted by the
Indenture.
7. First Mortgage Bonds, 7.75% Series due March 15, 2023, having an aggregate
principal amount of $12,100,000 (collectively, the "First Mortgage Bonds"), have
heretofore been authenticated and delivered. The First Mortgage Bonds have been
returned to and cancelled by the trustee under the First Mortgage prior to the
date hereof, constitute Retired Securities and are the basis for the
authentication and delivery of the Series R Bonds. The maximum Stated Interest
Rate on the First Mortgage Bonds at the time of their authentication and
delivery was not less than the maximum Stated Interest Rate on the Series R
Bonds to be in effect upon the initial authentication and delivery thereof.
5
IN WITNESS WHEREOF, the undersigned has executed this Officer's
Certificate as of the date first above written.
By: /s/ Marc Kilbride
------------------------------------
Name: Marc Kilbride
Title: Vice President and Treasurer
Acknowledged and Received on
March 31, 2004
JPMORGAN CHASE BANK,
as Trustee
By: /s/ Carol Logan
---------------------------------
Name: Carol Logan
Title: Vice President
6
EXHIBIT A
FORM OF SERIES R BOND
NOTE: THE HOLDER OF THIS BOND BY ACCEPTANCE HEREOF AGREES TO RESTRICTIONS ON
TRANSFER AND TO INDEMNIFICATION PROVISIONS AS SET FORTH BELOW. IN ADDITION, THE
BOND REPRESENTED BY THIS CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 AND SUCH BOND MAY NOT BE TRANSFERRED WITHOUT COMPLIANCE
WITH APPLICABLE SECURITIES LAWS.
THIS BOND IS NOT TRANSFERABLE EXCEPT, AS FURTHER PROVIDED HEREIN, TO A SUCCESSOR
OR ASSIGN OF THE TRUSTEE UNDER THE TRUST INDENTURE REFERRED TO HEREIN BETWEEN
THE ISSUER AND SUCH TRUSTEE.
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC
General Mortgage Bonds, Series R, due April 1, 2012
Original Interest Accrual Date: March 31, 2004
Stated Maturity: April 1, 2012
Interest Rate: See below
Interest Payment Dates: See below
Regular Record Dates: N/A
Redeemable by Company: Yes X No
--- ---
Redemption Date: See below
Redemption Price: See below
This Security is not an Original Discount
Security within the meaning of the
within-mentioned Indenture.
Principal Amount
$12,100,000 No. R-1
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC, a corporation duly organized and
existing under the laws of the State of Texas (herein called the "Company,"
which term includes any successor under the Indenture referred to below), for
value received, hereby promises to pay to JPMORGAN CHASE BANK, a New York
banking organization, as Trustee under the Gulf Coast Indenture (as herein
defined) or its registered assigns (the "Gulf Coast Trustee"), the principal sum
of TWELVE MILLION ONE HUNDRED THOUSAND DOLLARS, in whole or in installments on
such date or dates (subject to the tenth paragraph hereof) and in such amounts,
and to pay to the Gulf Coast Trustee premium, if any, in whole or in
installments on such date or dates and in such amounts, as the Issuer (as
defined herein) has any obligations under the Trust Indenture (as amended and
supplemented, the "Gulf Coast Indenture"), dated as of March 1, 2004, between
the Gulf Coast Waste Disposal Authority (the "Issuer") and the Gulf Coast
Trustee to repay any principal or to pay premium, if any, in respect of the
Collateralized Revenue Refunding Bonds (CenterPoint Energy Houston Electric, LLC
Project) Series 2004 issued under the Gulf Coast Indenture (hereinafter referred
to as the "Series 2004 Gulf Coast Bonds"), but not later than the Stated
Maturity specified above. The obligation of the Company to make any payment of
principal or premium, if any, on this Bond, whether at maturity or otherwise,
shall be fully or partially, as the case may be, deemed to have been paid or
otherwise satisfied and discharged to the extent that the Company has paid
or caused to be paid to the Gulf Coast Trustee the Installment Payment (as
defined below) in respect of the principal or premium, if any, then due and
payable on the Series 2004 Gulf Coast Bonds.
Interest shall be payable on this Bond on the same dates as interest is payable
from time to time in respect of the Series 2004 Gulf Coast Bonds pursuant to the
Gulf Coast Indenture (each such date herein called an "Interest Payment Date"),
at such rate or rates per annum as shall cause the amount of interest payable on
such Interest Payment Date on this Bond to equal the amount of interest payable
on such Interest Payment Date in respect of the Series 2004 Gulf Coast Bonds
under the Gulf Coast Indenture. Such interest shall be payable until the
maturity of this Bond, or, if the Company shall default in the payment of the
principal due on this Bond, until the Company's obligation with respect to the
payment of such principal shall be discharged as provided in the Indenture. The
amount of interest payable from time to time in respect of the Series 2004 Gulf
Coast Bonds under the Gulf Coast Indenture, the basis on which such interest is
computed and the dates on which such interest is payable are set forth in the
Gulf Coast Indenture. This Bond shall bear interest from the Original Interest
Accrual Date listed on the first page of this Bond. The obligation of the
Company to make any payment of interest on this Bond shall be fully or
partially, as the case may be, deemed to have been paid or otherwise satisfied
and discharged to the extent that the Company has paid or caused to be paid to
the Gulf Coast Trustee the Installment Payment (as defined below) in respect of
the interest then due and payable on the Series 2004 Gulf Coast Bonds.
This Bond is issued to the Gulf Coast Trustee in order that the Gulf Coast
Trustee shall have the benefit as a holder of this Bond of the lien of the
Indenture (as defined below) in the event of the non-payment by the Company of
the Installment Payments (the "Installment Payments"), as defined in and
pursuant to the Installment Payment and Bond Amortization Agreement (as amended
and supplemented, the "Installment Payment Agreement"), dated as of March 1,
2004, between the Issuer and the Company entered into with respect to the Series
2004 Gulf Coast Bonds. Any capitalized terms used herein and not defined herein
shall have the meanings specified in the Indenture (as defined below), unless
otherwise noted.
THIS BOND SHALL NOT BE TRANSFERABLE EXCEPT AS REQUIRED TO EFFECT AN ASSIGNMENT
HEREOF TO A SUCCESSOR OR AN ASSIGN OF THE GULF COAST TRUSTEE UNDER THE GULF
COAST INDENTURE.
The Gulf Coast Trustee shall surrender this Bond to the Trustee (as defined
below) in accordance with Section 5.07(d) of the Installment Payment Agreement.
Payments of the principal of, premium, if any, and interest on this Bond shall
be made at the Corporate Trust Administration of JPMorgan Chase Bank, as
Trustee, located at 2001 Bryan Street, 9th Floor, Dallas, Texas 75201, or at
such other office or agency as may be designated for such purpose by the Company
from time to time. Payment of the principal of, premium, if any, and interest on
this Bond, as aforesaid, shall be made in such coin or currency of the United
States of America as at the time of payment shall be legal tender for the
payment of public and private debts.
This Bond is one of a duly authorized issue of securities of the Company (herein
called the "Securities"), issued and issuable in one or more series under and
equally secured by a General Mortgage Indenture, dated as of October 10, 2002
(such Indenture as originally executed and delivered and as supplemented or
amended from time to time thereafter, together with any constituent instruments
establishing the terms of particular Securities, being herein called the
"Indenture"), between the Company and JPMorgan Chase Bank, as trustee (herein
called the "Trustee," which term includes any successor trustee under the
Indenture), to which Indenture reference is hereby made for a description of the
property mortgaged, pledged and held in trust, the nature and extent of the
security and the respective rights, limitations of rights, duties and immunities
of the Company, the Trustee and the Holders of the Securities thereunder and of
the terms and conditions upon which the Securities are, and are to be,
authenticated and delivered and secured. The acceptance of this Bond shall be
deemed to constitute the consent and agreement by the Holder hereof to all of
the terms and provisions of the Indenture. This Bond is one of the series
designated above.
The Bonds of this series will not be entitled to the benefit of any sinking fund
or voluntary redemption provisions.
If an Event of Default, as defined in the Indenture, shall occur and be
continuing, the principal of this Bond may be declared due and payable in the
manner and with the effect provided in the Indenture.
This Bond will not be redeemable at the option of the Company or otherwise
pursuant to the requirements of the Indenture, provided however that (a) in the
event of the required redemption of Series 2004 Gulf Coast Bonds due to the
occurrence of a Determination of Taxability, as such term is defined in
subsection (d) of Section 8 of the Form of Series 2004 Gulf Coast Bonds set
forth in Exhibit A to the Gulf Coast Indenture, the Company will redeem Bonds
equal in principal amount to the Series 2004 Gulf Coast Bonds to be redeemed at
a redemption price equal to 100% of the principal amount thereof, plus accrued
interest to the date fixed for redemption, and (b) upon receipt by the Trustee
of a written demand from the Gulf Coast Trustee stating that the principal
amount of all Series 2004 Gulf Coast Bonds then outstanding under the Gulf Coast
Indenture has been declared immediately due and payable, the Company, subject to
the terms and provisions of the Bonds, will redeem the Bonds not more than 180
days after receipt by the Trustee of such written demand.
The Indenture permits, with certain exceptions as therein provided, the Trustee
to enter into one or more supplemental indentures for the purpose of adding any
provisions to, or changing in any manner or eliminating any of the provisions
of, the Indenture with the consent of the Holders of not less than a majority in
aggregate principal amount of the Securities of all series then Outstanding
under the Indenture, considered as one class; PROVIDED, HOWEVER, that if there
shall be Securities of more than one series Outstanding under the Indenture and
if a proposed supplemental indenture shall directly affect the rights of the
Holders of Securities of one or more, but less than all, of such series, then
the consent only of the Holders of a majority in aggregate principal amount of
the Outstanding Securities of all series so directly affected, considered as one
class, shall be required; and PROVIDED, FURTHER, that if the Securities of any
series shall have been issued in more than one Tranche and if the proposed
supplemental indenture shall directly affect the rights of the Holders of
Securities of one or more, but less than all, of such Tranches, then the consent
only of the Holders of a majority in aggregate principal amount of the
Outstanding Securities of all Tranches so directly affected, considered as one
class, shall be required; and PROVIDED, FURTHER, that the Indenture permits the
Trustee to enter into one or more supplemental indentures for limited purposes
without the consent of any Holders of Securities. The Indenture also contains
provisions permitting the Holders of a majority in principal amount of the
Securities then Outstanding, on behalf of the Holders of all Securities, to
waive compliance by the Company with certain provisions of the Indenture and
certain past defaults under the Indenture and their consequences. Any such
consent or waiver by the Holder of this Bond shall be conclusive and binding
upon such Holder and upon all future Holders of this Bond and of any Security
issued upon the registration of transfer hereof or in exchange therefor or in
lieu hereof, whether or not notation of such consent or waiver is made upon this
Bond.
As provided in the Indenture and subject to certain limitations therein and
herein set forth, the transfer of this Bond is registrable in the Security
Register, upon surrender of this Bond for registration of transfer at the
Corporate Trust Office of JPMorgan Chase Bank in Houston, Texas or such other
office or agency as may be designated by the Company from time to time, duly
endorsed by, or accompanied by a written instrument of transfer in form
satisfactory to the Company and the Security Registrar duly executed by, the
Holder hereof or his attorney duly authorized in writing, and thereupon one or
more new Bonds of this series of authorized denominations and of like tenor and
aggregate principal amount, will be issued to the designated transferee or
transferees.
The Company, the Trustee and any agent of the Company or the Trustee may deem
and treat the person in whose name this Bond shall be registered upon the
Security Register for the Bonds of this series as the absolute owner of such
Bond for the purpose of receiving payment of or on account of the principal of
and interest on this Bond and for all other purposes, whether or not this Bond
be overdue, and neither the Company nor the Trustee shall be affected by any
notice to the contrary; and all such payments so made to such registered owner
or upon his order shall be valid and effectual to satisfy and discharge the
liability upon this Bond to the extent of the sum or sums paid.
The Trustee may conclusively presume that the obligation of the Company to pay
the principal of, premium, if any, and interest on this Bond shall have been
fully satisfied and discharged unless and until it shall have received a written
notice from the Gulf Coast Trustee, signed by an authorized officer of the Gulf
Coast Trustee and attested by the Secretary or an Assistant Secretary of the
Gulf Coast Trustee, stating that the payment of principal of, premium, if any,
or interest on this Bond has not been fully paid when due and specifying the
amount of funds required to
make such payment.
The obligation of the Company to make any payment of the principal of, premium,
if any, or interest on this Bond, whether at maturity, upon redemption
(including any redemption due to the occurrence of a Determination of
Taxability, as such term is defined in subsection (d) of Section 8 of the Form
of the Series 2004 Gulf Coast Bonds set forth in Exhibit A of the Gulf Coast
Indenture) or otherwise, shall be fully or partially, as the case may be, deemed
to have been paid or otherwise satisfied and discharged to the extent that at
the time any such payment shall be due, the then due principal, premium, if any,
or interest on the Series 2004 Gulf Coast Bonds which corresponds to such
amounts under this Bond shall have been fully or partially paid, deemed to have
been paid or otherwise satisfied and discharged. In addition, such obligation to
make any payment of the principal of, premium, if any, or interest on this Bond
at any time shall be deemed to have been satisfied and discharged to the extent
that the amount of the Company's obligation to make any payment of the principal
of, premium, if any, or interest on this Bond exceeds the obligation of the
Company at that time to make any Installment Payment.
No recourse under or upon any obligation, covenant or agreement contained in the
Indenture or in any indenture supplemental thereto, or in any Bond or coupon
thereby secured, or because of any indebtedness thereby secured, shall be had
against any incorporator, member, manager, stockholder, officer, director or
employee, as such, past, present or future, of the Company or any predecessor or
successor corporation or company, either directly or through the Company or any
predecessor or successor corporation or company, whether by virtue of any
constitution, statute or rule of law, or by the enforcement of any assessment or
penalty or otherwise; it being expressly agreed and understood that the
Indenture, any indenture supplemental thereto and the obligations thereby
secured, are solely corporate obligations of the Company, and that no personal
liability whatsoever shall attach to, or be incurred by, such incorporators,
members, managers, stockholders, officers, directors or employees, as such, of
the Company or of any predecessor or successor corporation or company, or any of
them, because of the creation of the indebtedness thereby authorized, or under
or by reason of any of the obligations, covenants or agreements contained in the
Indenture or in any indenture supplemental thereto or in any of the Bonds or
coupons thereby secured, or implied therefrom.
The holder of this Bond by acceptance of this Bond agrees to restrictions on
transfer and to waivers of certain rights of exchange as set forth herein. THIS
BOND HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE
OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN
APPLICABLE EXEMPTION THEREFROM. No service charge shall be made for the
registration of transfer or exchange of this Bond.
This Bond shall be governed by and construed in accordance with the law of the
State of New York except as provided in the Indenture.
Unless the certificate of authentication hereon has been executed by the Trustee
or an Authenticating Agent by manual signature, this Bond shall not be entitled
to any benefit under the Indenture or be valid or obligatory for any purpose.
[The remainder of this page is intentionally left blank.]
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed.
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
Attest:
- -------------------------------------
Name:
-------------------------------
Title:
------------------------------
CERTIFICATE OF AUTHENTICATION
This is one of the Securities of the series designated therein referred to
in the within-mentioned Indenture.
Date of Authentication: March 31, 2004
JPMORGAN CHASE BANK,
Trustee
By:
------------------------------------
Authorized Signatory
EXHIBIT 4(f)(9)
CENTERPOINT ENERGY RESOURCES CORP.
(Successor to NorAm Energy Corp.)
To
JPMORGAN CHASE BANK, NATIONAL ASSOCIATION
(Successor to Chase Bank of Texas, National Association)
Trustee
----------
SUPPLEMENTAL INDENTURE No. 8
Dated as of December 28, 2005
----------
6 1/2% Debentures due February 1, 2008
CENTERPOINT ENERGY RESOURCES CORP.
SUPPLEMENTAL INDENTURE NO. 8
6 1/2% Debentures due February 1, 2008
SUPPLEMENTAL INDENTURE No. 8, dated as of December 28, 2005, between
CENTERPOINT ENERGY RESOURCES CORP. (successor to NorAm Energy Corp.), a Delaware
corporation (the "Company"), and JPMORGAN CHASE BANK, NATIONAL ASSOCIATION
(successor to Chase Bank of Texas, National Association), a national banking
association, as Trustee (the "Trustee").
RECITALS
The Company has heretofore executed and delivered to the Trustee an
Indenture, dated as of February 1, 1998 (the "Original Indenture" and, as
previously and hereby supplemented and amended, the "Indenture"), providing for
the issuance from time to time of one or more series of the Company's
Securities.
Pursuant to the terms of the Indenture, the Company provided for the
establishment of a series of Securities designated as the "6 1/2% Debentures due
February 1, 2008" (the "Debentures"), the form and substance of the Debentures
and the terms, provisions and conditions thereof in Supplemental Indenture No.
1, dated as of February 1, 1998, between the Company and the Trustee.
Section 307 of the Indenture provides that the Company may at any time
designate additional Paying Agents or rescind the designation of any Paying
Agent.
Subparagraph (5) of Section 901 of the Indenture provides that the Company
and the Trustee may enter into an indenture supplemental to the Indenture to add
to, change or eliminate any of the provisions of the Indenture if such action
does not adversely affect the interests of any Holders.
For and in consideration of the premises and the issuance of the series of
Securities provided for herein, it is mutually covenanted and agreed, for the
equal and proportionate benefit of the Holders of the Securities of such series,
as follows:
ARTICLE ONE
Relation to the Indenture
Section 101. Relation to the Indenture. This Supplemental Indenture No. 8
constitutes an integral part of the Indenture.
ARTICLE TWO
Designation of Paying Agent
Section 201. Designation of Paying Agent. JPMorgan Chase Bank, National
Association is hereby designated as the Paying Agent on the Debentures. The
designation of CenterPoint Energy, Inc. as the Paying Agent on the Debentures is
hereby rescinded.
ARTICLE THREE
Miscellaneous Provisions
Section 301. The Indenture, as supplemented and amended by this
Supplemental Indenture No. 8, is in all respects hereby adopted, ratified and
confirmed.
Section 302. This Supplemental Indenture No. 8 may be executed in any
number of counterparts, each of which shall be an original, but such
counterparts shall together constitute but one and the same instrument. This
Supplemental Indenture No. 8 shall be deemed part of the Indenture in the manner
and to the extent herein and therein provided.
Section 303. THIS SUPPLEMENTAL INDENTURE NO. 8 AND EACH DEBENTURE SHALL BE
DEEMED TO BE A CONTRACT MADE UNDER THE LAWS OF THE STATE OF NEW YORK AND SHALL
BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW
YORK WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES THEREOF.
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental
Indenture No. 8 to be duly executed, as of the day and year first written above.
CENTERPOINT ENERGY RESOURCES CORP.
By: /s/ Marc Kilbride
------------------------------------
Name: Marc Kilbride
Title: Vice President and Treasurer
Attest: /s/ Richard B. Dauphin
-----------------------------
Name: Richard B. Dauphin
Title: Assistant Secretary
(SEAL)
JPMORGAN CHASE BANK, NATIONAL
ASSOCIATION, as Trustee
By: /s/ Mary Jane Henson
------------------------------------
Name: Mary Jane Henson
Title: Authorized Signature
(SEAL)
EXHIBIT 4(g)(7)
CENTERPOINT ENERGY, INC.
To
JPMORGAN CHASE BANK,
NATIONAL ASSOCIATION
Trustee
----------
SUPPLEMENTAL INDENTURE NO. 6
Dated as of August 23, 2005
----------
3.75% Convertible Senior Notes, Series B due 2023
CENTERPOINT ENERGY, INC.
SUPPLEMENTAL INDENTURE NO. 6
3.75% Convertible Senior Notes, Series B due 2023
SUPPLEMENTAL INDENTURE No. 6 dated as of August 23, 2005, between
CENTERPOINT ENERGY, INC., a Texas corporation (the "Company"), and JPMORGAN
CHASE BANK, NATIONAL ASSOCIATION (formerly named JPMorgan Chase Bank), as
Trustee (the "Trustee").
RECITALS
The Company has heretofore executed and delivered to the Trustee an
Indenture, dated as of May 19, 2003, as amended and supplemented by the
Supplemental Indenture No. 1 dated as of May 19, 2003, the Supplemental
Indenture No. 2 dated as of May 27, 2003, the Supplemental Indenture No. 3 dated
as of September 9, 2003, the Supplemental Indenture No. 4 dated as of December
17, 2003 and the Supplemental Indenture No. 5 dated as of December 13, 2004 (the
"Original Indenture" and, as hereby supplemented and amended, the "Indenture"),
providing for the issuance from time to time of one or more series of the
Company's Securities.
Pursuant to the terms of the Indenture, the Company desires to provide for
the establishment of one new series of Securities to be designated as the "3.75%
Convertible Senior Notes, Series B due 2023 (the "Notes"), the form and
substance of such Notes and the terms, provisions and conditions thereof to be
set forth as provided in the Original Indenture and this Supplemental Indenture
No. 6.
Section 301 of the Original Indenture provides that various matters with
respect to any series of Securities issued under the Indenture may be
established in an indenture supplemental to the Indenture.
Subparagraph (7) of Section 901 of the Original Indenture provides that the
Company and the Trustee may enter into an indenture supplemental to the
Indenture to establish the form or terms of Securities of any series as
permitted by Sections 201 and 301 of the Original Indenture.
For and in consideration of the premises and the issuance of the series of
Securities provided for herein, it is mutually covenanted and agreed, for the
equal and proportionate benefit of the Holders of the Securities of such series,
as follows:
ARTICLE I
Relation to Indenture; Additional Definitions
Section 101 Relation to Indenture. This Supplemental Indenture No. 6
constitutes an integral part of the Indenture.
-1-
Section 102 Additional Definitions. For all purposes of this Supplemental
Indenture No. 6:
Capitalized terms used herein shall have the meaning specified herein
or in the Original Indenture, as the case may be;
"Affiliate" of, or a Person "affiliated" with, a specific Person means
a Person that directly, or indirectly through one or more intermediaries,
controls, or is controlled by, or is under common control with, the Person
specified. For purposes of this definition, "control" (including the terms
"controlled by" and "under common control with") means the possession,
direct or indirect, of the power to direct or cause the direction of the
management and policies of a Person, whether through the ownership of
voting shares, by contract, or otherwise;
"Beneficial Owner" or "Beneficial Ownership" shall be determined in
accordance with Rule 13d-3 promulgated by the Commission under the Exchange
Act;
"Bid Solicitation Agent" has the meaning set forth in Section 212
hereof;
"Business Day" means, with respect to any Note, any day other than a
Saturday, a Sunday or a day on which banking institutions in The City of
New York are authorized or required by law, regulation or executive order
to close. If any Interest Payment Date, Maturity Date, Redemption Date,
Purchase Date or Fundamental Change Purchase Date of a Note falls on a day
that is not a Business Day, the required payment will be made on the next
succeeding Business Day with the same force and effect as if made on the
relevant date that the payment was due and no interest will accrue on such
payment for the period from and after the Interest Payment Date, Maturity
Date, Redemption Date, Purchase Date or Fundamental Change Purchase Date,
as the case may be, to the date of that payment on the next succeeding
Business Day. The definition of "Business Day" in this Supplemental
Indenture and the provisions described in the preceding sentence shall
supersede the definition of Business Day in the Original Indenture and
Section 113 of the Original Indenture;
"Capital Lease" means a lease that, in accordance with accounting
principles generally accepted in the United States of America, would be
recorded as a capital lease on the balance sheet of the lessee;
"Cash" or "cash" means U.S. legal tender;
"CenterPoint Houston" means CenterPoint Energy Houston Electric, LLC,
a Texas limited liability company;
"CERC" means CenterPoint Energy Resources Corp., a Delaware
corporation;
"Common Equity" of any Person means capital stock of such Person that
is generally entitled to (1) vote in the election of directors of such
Person or (2) if such Person is not a corporation, vote or otherwise
participate in the selection of the governing
-2-
body, partners, managers or others that will control the management or
policies of such Person;
"Common Stock" means the common stock, par value $.01 per share, of
the Company;
"Company Notice" has the meaning provided in Section 701 hereof;
"Company Notice Date" has the meaning provided in Section 701 hereof;
"Contingent Interest" has the meaning provided in Section 204(a)
hereof;
"Continuing Director" means a director who either was a member of the
Board of Directors on May 13, 2003 or who becomes a member of the Board of
Directors subsequent to that date and whose appointment, election or
nomination for election by the Company's shareholders is duly approved by a
majority of the Continuing Directors on the Board of Directors at the time
of such approval, either by a specific vote or by approval of the proxy
statement issued by the Company on behalf of the Board of Directors in
which such individual is named as nominee for director;
"Conversion Agent" means the office or agency designated by the
Company where Notes may be presented for conversion;
"Conversion Date" has the meaning provided in Section 802 hereof;
"Conversion Price" means $1,000 divided by the Conversion Rate;
"Conversion Rate" has the meaning provided in Section 801(a) hereof;
"Conversion Value" has the meaning specified in Section 801(b) hereof;
"CPDI Regulations" has the meaning provided in Section 213 hereof;
"Determination Date" has the meaning provided in Section 801(e)
hereof;
"Distributed Assets or Securities" has the meaning provided in Section
806(c) hereof;
"Effective Date" has the meaning provided in Section 501(b);
"Equity Interests" means any capital stock, partnership, joint
venture, member or limited liability or unlimited liability company
interest, beneficial interest in a trust or similar entity or other equity
interest or investment of whatever nature;
"ex-date" has the meaning provided in the definition of Spin-off
Market Price;
"Exchange Property" has the meaning provided in Section 812 hereof;
-3-
"Exchange Property Average Price" has the meaning provided in Section
812 hereof;
"Exchange Property Value" has the meaning provided in Section 812
hereof;
"Fair Market Value" means the amount which a willing buyer would pay a
willing seller in an arm's length transaction;
A "Fundamental Change" shall be deemed to have occurred at such time
after the original issuance of the Notes as any of the following occurs:
(a) the Common Stock or other common stock into which the Notes are
convertible is neither listed for trading on a United States national
securities exchange nor approved for trading on the Nasdaq National Market
or another established automated over-the-counter trading market in the
United States; (b) a "person" or "group" within the meaning of Section
13(d) of the Exchange Act, other than the Company, any Subsidiary of the
Company or any employee benefit plan of the Company or any such Subsidiary,
files a Schedule TO (or any other schedule, form or report under the
Exchange Act) disclosing that such person or group has become the direct or
indirect ultimate Beneficial Owner of Common Equity of the Company
representing more than 50% of the voting power of the Company's Common
Equity; (c) consummation of any share exchange, consolidation or merger of
the Company pursuant to which the Common Stock will be converted into Cash,
securities or other property or any sale, lease or other transfer (in one
transaction or a series of transactions) of all or substantially all of the
consolidated assets of the Company and its Subsidiaries, taken as a whole,
to any Person (other than the Company or one or more of the Company's
Subsidiaries); provided, however, that a transaction where the holders of
the Company's Common Equity immediately prior to such transaction own,
directly or indirectly, more than 50% of the aggregate voting power of all
classes of Common Equity of the continuing or surviving corporation or
transferee immediately after such event shall not be a Fundamental Change;
or (d) Continuing Directors cease to constitute at least a majority of the
Board of Directors; provided, however, that a Fundamental Change shall not
be deemed to have occurred in respect of any of the foregoing if either (i)
the Last Reported Sale Price of Common Stock for any five Trading Days
within the period of ten consecutive Trading Days ending immediately before
the later of the Fundamental Change or the public announcement thereof
shall equal or exceed 105% of the Conversion Price of the Notes in effect
immediately before the Fundamental Change or the public announcement
thereof (the "105% Trading Exception"); or (ii) at least 90% of the
consideration (excluding cash payments for fractional shares) in the
transaction or transactions constituting the Fundamental Change consists of
shares of Capital Stock traded on a national securities exchange or quoted
on the Nasdaq National Market (or which shall be so traded or quoted when
issued or exchanged in connection with such Fundamental Change) (such
securities being referred to as "Publicly Traded Securities") and as a
result of such transaction or transactions the Notes become convertible
into such Publicly Traded Securities (excluding cash payments for
fractional shares). For purposes of the foregoing the term "Capital Stock"
of any Person means any and all shares (including ordinary shares or
American Depositary Shares), interests, participations or other equivalents
however designated of corporate stock or other equity participations,
including partnership interests, whether general or limited, of such Person
and any rights
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(other than debt securities convertible or exchangeable into an equity
interest), warrants or options to acquire an equity interest in such
Person;
"Fundamental Change Purchase Date" has the meaning provided in Section
501 hereof;
"Fundamental Change Purchase Notice" has the meaning provided in
Section 503 hereof;
"Fundamental Change Purchase Price" has the meaning provided in
Section 501 hereof;
"Global Notes" has the meaning set forth in Section 208(a) hereof;
The term "Indebtedness" as applied to any Person, means bonds,
debentures, notes and other instruments or arrangements representing
obligations created or assumed by any such Person, in respect of: (i)
obligations for money borrowed (other than unamortized debt discount or
premium); (ii) obligations evidenced by a note or similar instrument given
in connection with the acquisition of any business, properties or assets of
any kind; (iii) obligations as lessee under a Capital Lease; and (iv) any
amendments, renewals, extensions, modifications and refundings of any such
indebtedness or obligations listed in clause (i), (ii) or (iii) above. All
indebtedness of such type secured by a lien upon property owned by such
Person, although such Person has not assumed or become liable for the
payment of such indebtedness, shall also for all purposes hereof be deemed
to be indebtedness of such Person. All indebtedness for borrowed money
incurred by any other Persons which is directly guaranteed as to payment of
principal by such Person shall for all purposes hereof be deemed to be
indebtedness of any such Person, but no other contingent obligation of such
Person in respect of indebtedness incurred by any other Persons shall for
any purpose be deemed to be indebtedness of such Person;
"Interest Payment Date" has the meaning set forth in Section 204(a)
hereof;
"Last Reported Sale Price" means, with respect to Common Stock or any
other Equity Interest, on any date, the closing sale price per share or
other applicable unit (or, if no closing sale price is reported, the
average of the bid and ask prices or, if more than one in either case, the
average of the average bid and the average ask prices) on that date as
reported in composite transactions for the principal U.S. securities
exchange on which the Common Stock or such Equity Interest is traded or, if
the Common Stock or such Equity Interest is not listed on a U.S. national
or regional securities exchange, as reported by the Nasdaq National Market.
If the Common Stock or such Equity Interest is not listed for trading on a
U.S. national or regional securities exchange and not reported by the
Nasdaq National Market on the relevant date, the "Last Reported Sale Price"
with respect thereto shall be the last quoted bid price for Common Stock or
such Equity Interest in the over-the-counter market on the relevant date as
reported by the National Quotation Bureau or similar organization. If the
Common Stock or such Equity Interest is not so quoted, the "Last Reported
Sale Price" with respect thereto will be the average of the mid-point of
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the last bid and ask prices for the Common Stock or such Equity Interest on
the relevant date from each of at least three nationally recognized
independent investment banking firms selected by the Company for this
purpose;
"Make-Whole Premium" has the meaning provided in Section 501(b);
"Market Price per share of Common Stock" means the average of the Last
Reported Sale Prices of Common Stock for the 20 Trading Day period ending
on the applicable date of determination (if the applicable date of
determination is a Trading Day or, if not, then on the last Trading Day
prior to such applicable date of determination), appropriately adjusted to
take into account the occurrence, during the period commencing on the first
of the Trading Days during such 20 Trading Day period and ending on the
applicable date of determination, of any event that would result in an
adjustment of the Conversion Rate under this Supplemental Indenture;
"Maturity Date" has the meaning set forth in Section 203 hereof;
"Maximum Conversion Rate" has the meaning set forth in Section 806(h)
hereof;
"Net Exchange Property Amount" has the meaning provided in Section
812(d)(ii) hereof;
"Net Share Amount" has the meaning provided in Section 801(c) hereof;
"Net Shares" has the meaning provided in Section 801(c) hereof;
"Non-Electing Share" has the meaning provided in Section 812(b)
hereof;
"Notes" has the meaning set forth in the second paragraph of the
Recitals hereof;
"105% Trading Exception" has the meaning provided in the definition of
a Fundamental Change;
"Original Indenture" has the meaning set forth in the first paragraph
of the Recitals hereof;
"Original Issue Date" means the first date on which any Notes are
issued under this Supplemental Indenture;
"Principal Return" has the meaning provided in Section 801(c) hereof;
"Prior Notes" means the 3.75% Convertible Senior Subordinated Notes
due 2023 issued by the Company pursuant to the Original Indenture;
"Public Acquirer Change of Control" has the meaning provided in
Section 501(c);
"Public Acquirer Common Stock" has the meaning provided in Section
501(c);
"Purchase Date" has the meaning provided in Section 601(a) hereof;
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"Purchase Notice" has the meaning provided in Section 601(a)(i)
hereof;
"Purchase Price" has the meaning provided in paragraph 8 of the Notes;
"Redemption Price" has the meaning set forth in paragraph 6 of the
Notes;
"Regular Record Date" has the meaning set forth in Section 204(a)
hereof;
"Rights Plan" means that certain Rights Agreement dated January 1,
2002, between the Company and JPMorgan Chase Bank, National Association
(formerly JPMorgan Chase Bank) as rights agent, as amended from time to
time;
"Significant Subsidiary" means CERC and CenterPoint Houston, and any
other Subsidiary which, at the time of the creation of a pledge, mortgage,
security interest or other lien upon any Equity Interests of such
Subsidiary, has consolidated gross assets (having regard to the Company's
beneficial interest in the shares, or the like, of that Subsidiary) that
represents at least 25% of the Company's consolidated gross assets
appearing in the Company's most recent audited consolidated financial
statements;
"Spin-off Market Price" per share of Common Stock or per share or
other applicable unit of Equity Interests in a subsidiary or other business
unit of the Company on any day means the average of the Last Reported Sale
Price with respect thereto for each of the ten consecutive Trading Days
commencing on and including the fifth Trading Day after the "ex date" with
respect to the issuance or distribution requiring such computations. As
used herein, the term "ex date," when used with respect to any issuance or
distribution, shall mean the first date on which the security trades
regular way on the New York Stock Exchange or such other national regional
exchange or market in which the security trades without the right to
receive such issuance or distribution;
"Stock Price" has the meaning provided in Section 501(b);
"Subsidiary" of any entity means any corporation, partnership, joint
venture, limited liability company, trust or estate of which (or in which)
more than 50% of (i) the issued and outstanding Equity Interests having
ordinary voting power to elect a majority of the Board of Directors or
comparable governing body of such corporation or entity (irrespective of
whether at the time capital stock of any other class or classes of such
corporation or other entity shall or might have voting power upon the
occurrence of any contingency), (ii) the interest in the capital or profits
of such limited liability company, partnership, joint venture or other
entity, or (iii) the beneficial interest in such trust or estate is at the
time directly or indirectly owned or controlled by such entity, by such
entity and one or more of its other Subsidiaries, or by one or more of such
entity's other Subsidiaries;
"Ten-Day Average Price" has the meaning provided in Section 801(b);
"Trading Day" means (a) if the applicable security is listed, admitted
for trading or quoted on the New York Stock Exchange, the Nasdaq National
Market or another national security exchange, a day on which the New York
Stock Exchange, the Nasdaq
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National Market or another national security exchange is open for business
or (b) if the applicable security is not so listed, admitted for trading or
quoted, any day other than a Saturday or Sunday or a day on which banking
institutions in the State of New York are authorized or obligated by law,
regulation or executive order to close;
"Trading Price" of the Notes on any date of determination means the
average of the secondary market bid quotations per $1,000 principal amount
of Notes obtained by the Bid Solicitation Agent for $10 million principal
amount of Notes at approximately 4:00 p.m., New York City time, on such
determination date from three unaffiliated, nationally recognized
securities dealers the Company selects, provided that if: (i) at least
three such bids are not obtained by the Bid Solicitation Agent, or (ii) in
the Company's reasonable judgment, the bid quotations are not indicative of
the secondary market value of the Notes, then the Trading Price of the
Notes will equal (a) the then applicable Conversion Rate of the Notes
multiplied by (b) the average of the Last Reported Sale Price of Common
Stock for each of the five Trading Days ending on such determination date,
appropriately adjusted to take into account the occurrence, during the
period commencing on the first of such Trading Days during such five
Trading Day period and ending on such determination date, of any event
described in Section 806 of this Supplemental Indenture;
All references herein to Articles and Sections, unless otherwise
specified, refer to the corresponding Articles and Sections of this
Supplemental Indenture; and
The terms "herein," "hereof," "hereunder" and other words of similar
import refer to this Supplemental Indenture.
ARTICLE II
The Series of Securities
Section 201 Title of the Securities. The Notes shall be designated as the
"3.75% Convertible Senior Notes, Series B due 2023." The Notes shall be treated
for all purposes under the Indenture as a single class or series of Securities.
Section 202 Limitation on Aggregate Principal Amount. The Trustee shall
authenticate and deliver Notes for original issue on the Original Issue Date up
to the aggregate principal amount of $575,000,000 upon a Company Order for the
authentication and delivery thereof and satisfaction of Sections 301 and 303 of
the Original Indenture. Such order shall specify the amount of the Notes to be
authenticated, the date on which the original issue of Notes is to be
authenticated and the name or names of the initial Holder or Holders. Additional
notes may be issued by the Company within 13 days after the Original Issue Date
without the consent of the existing Holders of the Notes and shall be part of
the same series as the Notes, but the aggregate principal amount of Notes that
may be outstanding shall not exceed $575,000,000.
Section 203 Stated Maturity. The Stated Maturity of the Notes shall be May
15, 2023 (the "Maturity Date"). The principal amount of the Notes shall be
payable on the Maturity Date
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unless the Notes are earlier redeemed, purchased or converted in accordance with
the terms of the Indenture.
Section 204 Interest and Interest Rates.
(a) The Notes shall bear interest at a rate of 3.75% per year, from May 15,
2005 or from the most recent Interest Payment Date (as defined below) to which
payment has been made or duly provided for, payable semiannually in arrears on
May 15 and November 15 of each year (each an "Interest Payment Date"), beginning
November 15, 2005, to the persons in whose names the Notes are registered at the
close of business on May 1 and November 1 (each a "Regular Record Date")
(whether or not a Business Day), as the case may be, immediately preceding such
Interest Payment Date. The Notes shall also provide for payment of contingent
interest ("Contingent Interest") in certain circumstances as specified in
paragraph 5 of the Notes.
(b) Holders of Notes at the close of business on a Regular Record Date will
receive payment of interest, including Contingent Interest, if any, payable on
the corresponding Interest Payment Date notwithstanding the conversion of such
Notes at any time after the close of business on such Regular Record Date. Notes
surrendered for conversion by a Holder during the period from the close of
business on any Regular Record Date to the opening of business on the
immediately following Interest Payment Date must be accompanied by payment of an
amount equal to the interest, including Contingent Interest, if any, that the
Holder is to receive on the Notes; provided, however, that no such payment need
be made if (1) the Company has specified a Redemption Date that is after a
Regular Record Date and on or prior to the immediately following Interest
Payment Date, (2) the Company has specified a Purchase Date following a
Fundamental Change that is during such period or (3) any overdue interest
(including overdue Contingent Interest, if any) exists at the time of conversion
with respect to such Notes to the extent of such overdue interest.
(c) Any such interest not so punctually paid or duly provided for shall
forthwith cease to be payable to the Holder on such Regular Record Date and
shall either (i) be paid to the Person in whose name such Note (or one or more
Predecessor Securities) is registered at the close of business on the Special
Record Date for the payment of such Defaulted Interest to be fixed by the
Trustee, notice whereof shall be given to Holders of the Notes not less than ten
days prior to such Special Record Date, or (ii) be paid at any time in any other
lawful manner not inconsistent with the requirements of any securities exchange
or automated quotation system on which the Notes may be listed or traded, and
upon such notice as may be required by such exchange or automated quotation
system, all as more fully provided in the Indenture.
(d) The amount of interest, including Contingent Interest, if any, payable
for any period shall be computed on the basis of a 360-day year of twelve 30-day
months. The amount of interest, including Contingent Interest, if any, payable
for any partial period shall be computed on the basis of a 360-day year of
twelve 30-day months and the days elapsed in any partial month. In the event
that any date on which interest is payable on a Note is not a Business Day, then
a payment of the interest, including Contingent Interest, if any, payable on
such date will be made on the next succeeding day which is a Business Day (and
without any interest or other payment in respect of any such delay) with the
same force and effect as if made on the date the payment was originally payable.
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(e) If any principal of the Notes or any portion of such principal is not
paid when due (whether upon acceleration, upon the date set for payment of the
Redemption Price pursuant to paragraph 6 of the Notes, upon the date set for
payment of a Purchase Price or Fundamental Change Purchase Price pursuant to
paragraph 8 of the Notes or upon the Stated Maturity) or if interest (including
Contingent Interest, if any) due hereon or any portion of such interest is not
paid when due in accordance with paragraph 1 or paragraph 5 or 11 of the Note,
then in each such case the overdue amount shall bear interest at the rate of
3.75% per annum, compounded semiannually (to the extent that the payment of such
interest shall be legally enforceable), which interest shall accrue from the
date such overdue amount was due to the date payment of such amount, including
interest thereon, has been made or duly provided for. All such interest shall be
payable on demand.
Section 205 Paying Agent and Conversion Agent; Place of Payment. The
Trustee shall initially serve as the Paying Agent and Conversion Agent for the
Notes. The Company may appoint and change any Paying Agent or Conversion Agent
or approve a change in the office through which any Paying Agent acts without
notice, other than notice to the Trustee. The Company or any of its Subsidiaries
or any of their Affiliates may act as Paying Agent or Conversion Agent. The
Place of Payment where the Notes may be presented or surrendered for payment
shall be the Corporate Trust Office of the Trustee.
Section 206 Place of Registration or Exchange; Notices and Demands With
Respect to the Notes. The place where the Holders of the Notes may present the
Notes for registration of transfer or exchange and may make notices and demands
to or upon the Company in respect of the Notes shall be the Corporate Trust
Office of the Trustee.
Section 207 Percentage of Principal Amount. The Notes shall be initially
issued at 100% of their principal amount plus an amount equal to the accrued and
unpaid interest, if any, from May 15, 2005.
Section 208 Global Notes.
(a) The Notes shall be issued initially in the form of one or more
permanent Global Securities in definitive, fully registered, book-entry form,
without interest coupons (collectively, the "Global Notes").
(b) Each of the Global Notes shall represent such of the Notes as shall be
specified therein and shall each provide that it shall represent the aggregate
principal amount of Notes from time to time endorsed thereon and that the
aggregate principal amount of Notes represented thereby may from time to time be
reduced or increased, as appropriate, to reflect exchanges, redemptions,
purchases or conversions. Any endorsement of a Global Note to reflect the
amount, or any increase or decrease in the aggregate principal amount, of Notes
represented thereby shall be reflected by the Trustee on Schedule A attached to
the Note and made by the Trustee in accordance with written instructions or such
other written form of instructions as is customary for the Depositary, from the
Depositary or its nominee on behalf of any Person having a beneficial interest
in the Global Note.
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(c) The Depository Trust Company shall initially serve as Depositary with
respect to the Global Notes. Such Global Notes shall bear the legends set forth
in the form of Note attached as Exhibit A hereto.
Section 209 Form of Securities. The Global Notes shall be substantially in
the form attached as Exhibit A hereto.
Section 210 Securities Registrar. The Trustee shall initially serve as the
Security Registrar for the Notes.
Section 211 Sinking Fund Obligations. The Company shall have no obligation
to redeem or purchase any Notes pursuant to any sinking fund or analogous
requirement.
Section 212 Bid Solicitation Agent. The Trustee shall initially serve as
the bid solicitation agent (the "Bid Solicitation Agent") for purposes of
obtaining secondary market bid quotations for determining Trading Prices. The
Company may change the Bid Solicitation Agent at any time; provided, however,
the Bid Solicitation Agent shall not be an Affiliate of the Company. The Bid
Solicitation Agent shall solicit bids from nationally recognized securities
dealers that are believed by the Company to be willing to bid for the Notes.
Section 213 Tax Treatment of Notes The Company agrees, and by purchasing a
beneficial ownership interest in the Notes each Holder, and any person
(including an entity) that acquires a direct or indirect beneficial interest in
the Notes, will be deemed to have agreed, unless otherwise required by
applicable law, (i) for United States federal income tax purposes to treat the
Notes as Indebtedness of the Company that is subject to the Contingent Payment
Debt Instrument regulations under Treas. Reg. Sec. 1.1275-4 (the "CPDI
Regulations"), (ii) for all tax purposes to treat the Notes as Indebtedness of
the Company, (iii) for purposes of the CPDI Regulations, to treat the fair
market value of any stock beneficially received by a beneficial holder upon any
conversion of the Notes as a contingent payment, (iv) to be bound by the
Company's determination that the Notes are contingent payment debt instruments
subject to the "noncontingent bond method" of accruing original issue discount
within the meaning of the CPDI Regulations with respect to the Notes, (v) to
accrue original issue discount at the comparable yield as determined by the
Company, and (vi) to be bound by the Company's projected payment schedule with
respect to the Notes. In addition, unless otherwise required by applicable law,
the Company will treat the exchange of Prior Notes for Notes as not constituting
a significant modification for United States federal income tax purposes. The
provisions of this Supplemental Indenture shall be interpreted to further this
intention and agreement of the parties. The comparable yield and the schedule of
projected payments are not determined for any purpose other than for the
determination of interest accruals and adjustment thereof in respect of the
Notes for United States federal income tax purposes. Consistent with the
Company's treatment of the exchange of Prior Notes for Notes, as described
above, the comparable yield and schedule of projected payments governing the
Notes is identical to the comparable yield and schedule of projected payments
that governed the Prior Notes. The comparable yield and the schedule of
projected payments do not constitute a projection or representation regarding
the future stock price or the amounts payable on the Notes. For purposes of the
foregoing, the Company's determination of the "comparable yield" is 5.81% per
annum, compounded semiannually. A Holder of Notes may obtain the amount of
original issue discount, issue date,
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comparable yield and projected payment schedule (which schedule is attached as
Exhibit F) by telephoning the Company's Treasury Department at (713) 207-7019 or
submitting a written request for such information to: CenterPoint Energy, Inc.,
1111 Louisiana, Houston, Texas 77002, Attention: Treasury Department.
Section 214 Defeasance and Discharge; Covenant Defeasance.
(a) Article Fourteen of the Original Indenture, including without
limitation, Sections 1402 and 1403 (as modified by Section 214(b) hereof)
thereof, shall apply to the Notes.
(b) Notwithstanding Section 214(a), (i) the Company shall not be released
from its obligations under Article VIII hereof, which obligations shall survive
any defeasance and discharge under Section 1402 of the Original Indenture or
covenant defeasance under Section 1403 of the Original Indenture, and (ii) the
occurrence of any event specified in Section 501(4) of the Original Indenture
with respect to Article VIII hereof shall be deemed to be or result in an Event
of Default in accordance with the terms of Article Five of the Original
Indenture.
(c) Notwithstanding Section 1403 of the Original Indenture, the occurrence
of any event specified in Section 1001(d)(i) hereof shall be deemed not to be or
result in an Event of Default with respect to the Notes on and after the date
the conditions set forth in Section 1404 of the Original Indenture with respect
to such Notes are satisfied and such covenant defeasance remains in full force
and effect pursuant to Article Fourteen of the Original Indenture.
ARTICLE III
Additional Covenant
Section 301 Limitations on Liens. The Company shall not pledge, mortgage,
hypothecate, or grant a security interest in, or permit any such mortgage,
pledge, security interest or other lien upon any Equity Interests now or
hereafter owned by the Company in any Significant Subsidiary to secure any
Indebtedness, without making effective provisions whereby the outstanding Notes
shall be equally and ratably secured with or prior to any and all such
Indebtedness and any other Indebtedness similarly entitled to be equally and
ratably secured; provided, however, that this provision shall not apply to or
prevent the creation or existence of:
(a) [Reserved];
(b) any mortgage, pledge, security interest, lien or encumbrance upon the
Equity Interests of CenterPoint Energy Transition Bond Company, LLC or any
other special purpose Subsidiary created on or after the date of this
Supplemental Indenture by the Company in connection with the issuance of
securitization bonds for the economic value of generation-related
regulatory assets and stranded costs;
(c) any mortgage, pledge, security interest, lien or encumbrance upon any
Equity Interests in a Person which was not affiliated with the Company
prior to one year before the grant of such mortgage, pledge, security
interest, lien or encumbrance (or the Equity Interests of a holding company
formed to acquire or hold such Equity Interests) created at the time of the
Company's acquisition of the Equity Interests or within one year after such
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time to secure all or a portion of the purchase price for such Equity
Interests; provided that the principal amount of any Indebtedness secured
by such mortgage, pledge, security interest, lien or encumbrance does not
exceed 100% of such purchase price and the fees, expenses and costs
incurred in connection with such acquisition and acquisition financing;
(d) any mortgage, pledge, security interest, lien or encumbrance existing
upon Equity Interests in a Person which was not affiliated with the Company
prior to one year before the grant of such mortgage, pledge, security
interest, lien or encumbrance at the time of the Company's acquisition of
such Equity Interests (whether or not the obligations secured thereby are
assumed by the Company or such Subsidiary becomes a Significant
Subsidiary); provided that (i) such mortgage, pledge, security interest,
lien or encumbrance existed at the time such Person became a Significant
Subsidiary and was not created in anticipation of the acquisition, and (ii)
any such mortgage, pledge, security interest, lien or encumbrance does not
by its terms secure any Indebtedness other than Indebtedness existing or
committed immediately prior to the time such Person becomes a Significant
Subsidiary;
(e) liens for taxes, assessments or governmental charges or levies to the
extent not past due or which are being contested in good faith by
appropriate proceedings diligently conducted and for which the Company has
provided adequate reserves for the payment thereof in accordance with
generally accepted accounting principles;
(f) pledges or deposits in the ordinary course of business to secure
obligations under workers' compensation laws or similar legislation;
(g) materialmen's, mechanics', carriers', workers' and repairmen's liens
imposed by law and other similar liens arising in the ordinary course of
business for sums not yet due or currently being contested in good faith by
appropriate proceedings diligently conducted;
(h) attachment, judgment or other similar liens, which have not been
effectively stayed, arising in connection with court proceedings; provided
that such liens, in the aggregate, shall not secure judgments which exceed
$50,000,000 aggregate principal amount at any one time outstanding;
provided further that the execution or enforcement of each such lien is
effectively stayed within 30 days after entry of the corresponding judgment
(or the corresponding judgment has been discharged within such 30 day
period) and the claims secured thereby are being contested in good faith by
appropriate proceedings timely commenced and diligently prosecuted;
(i) other liens not otherwise referred to in paragraphs (a) through (h)
above, provided that the Indebtedness secured by such liens in the
aggregate, shall not exceed 1% of the Company's consolidated gross assets
appearing in the Company's most recent audited consolidated financial
statements at any one time outstanding;
(j) any mortgage, pledge, security interest, lien or encumbrance on the
Equity Interests of any Subsidiary that was otherwise permitted under this
Section 301 if such Subsidiary subsequently becomes a Significant
Subsidiary; or
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(k) any extension, renewal or refunding of Indebtedness secured by any
mortgage, pledge, security interest, lien or encumbrance described in
paragraphs (a) through (j) above; provided that the principal amount of any
such Indebtedness is not increased by an amount greater than the fees,
expenses and costs incurred in connection with such extension, renewal or
refunding.
ARTICLE IV
Optional Redemption of the Notes
Section 401 Right to Redeem; Notice to Trustee, Paying Agent and Holders.
On or after May 15, 2008, the Company may, at its option, redeem the Notes in
whole, or in part, at any time in accordance with the provisions of paragraph 6
of the Notes. If the Company elects to redeem Notes pursuant to paragraph 6 of
the Notes, it shall notify in writing the Trustee, the Paying Agent and each
Holder of Notes to be redeemed, as provided in Section 1104 of the Indenture and
Section 404 hereof.
Section 402 Fewer Than All Outstanding Notes to Be Redeemed. If fewer than
all of the outstanding Notes are to be redeemed, the Trustee shall select the
Notes to be redeemed in principal amounts of $1,000 or integral multiples
thereof. In the case that the Trustee shall select the Notes to be redeemed, the
Trustee may effectuate such selection by lot, pro rata, or by any other method
that the Trustee considers fair and appropriate. The Trustee will make such
selection promptly following receipt of the notice of redemption from the
Company provided pursuant to Section 404 hereof.
Section 403 Selection of Notes to Be Redeemed. If any Notes selected for
partial redemption are thereafter surrendered for conversion in part before
termination of the conversion right with respect to the portion of the Notes so
selected, the converted portion of such Notes shall be deemed (so far as may
be), solely for purposes of determining the aggregate principal amount of Notes
to be redeemed by the Company, to be the portion selected for redemption. Notes
which have been converted during a selection of Notes to be redeemed may be
treated by the Trustee as outstanding for the purpose of such selection. Nothing
in this Section 403 shall affect the right of any Holder to convert any Notes
pursuant to Article VIII hereof before the termination of the conversion right
with respect thereto.
Section 404 Notice of Redemption. In addition to those matters set forth in
Section 1104 of the Indenture, a notice of redemption sent to Holders of Notes
shall state:
(a) the then current Conversion Rate;
(b) the name and address of the Paying Agent and the Conversion Agent;
(c) that the Notes called for redemption may be converted at any time
before the close of business on the Business Day immediately preceding the
Redemption Date; and
(d) that Holders who wish to convert Notes must comply with the procedures
in paragraph 10 of the Notes.
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Section 405 Effect of Notice of Redemption. Once notice of redemption is
mailed, Notes called for redemption become due and payable on the Redemption
Date and at the Redemption Price, except for Notes that are converted in
accordance with the provisions of Article VIII hereof and paragraph 10 of the
Notes. Upon presentation and surrender to the Paying Agent, Notes called for
redemption shall be paid at the Redemption Price as defined in paragraph 6 of
the Notes.
Section 406 Deposit of Redemption Price. On or before 10:00 a.m. (New York
City time) on the Redemption Date, the Company shall deposit with the Paying
Agent (or if the Company or an Affiliate of the Company is acting as the Paying
Agent, shall segregate and hold in trust) an amount of money sufficient to pay
the aggregate Redemption Price of all the Notes to be redeemed on that date
other than the Notes or portions thereof called for redemption which on or prior
thereto have been delivered by the Company to the Security Registrar for
cancellation or have been converted. The Trustee and Paying Agent shall, as
promptly as practicable, return to the Company any money not required for that
purpose because of conversion of the Notes in accordance with the provisions of
Article VIII hereof. If such money is then held by the Company or a Subsidiary
in trust and is not required for such purpose, it shall be discharged from such
trust.
ARTICLE V
Purchase and Adjustments to Conversion Rate Upon a Fundamental Change
Section 501 Purchase at the Option of the Holder Upon a Fundamental Change.
(a) If a Fundamental Change shall occur at any time prior to May 15, 2008,
each Holder shall have the right, at such Holder's option, to require the
Company to purchase any or all of such Holder's Notes for cash on the date
selected by the Company that is no later than 35 days after the date of the
Company Notice of the occurrence of such Fundamental Change (subject to
extension to comply with applicable law, as provided in Section 704) (the
"Fundamental Change Purchase Date"). The Notes shall be repurchased in integral
multiples of $1,000 of the principal amount. The Company shall purchase such
Notes at a price (the "Fundamental Change Purchase Price") equal to 100% of the
principal amount of the Notes to be purchased plus accrued and unpaid interest,
including Contingent Interest, if any, to the Fundamental Change Purchase Date.
No Notes may be purchased at the option of the Holders upon a Fundamental Change
if there has occurred and is continuing an Event of Default (other than an Event
of Default that is cured by the payment of the Fundamental Change Purchase Price
of the Notes).
(b) Subject to Section 501(c), if a Holder elects to convert such Holder's
Notes in connection with a Fundamental Change pursuant to clause (c) of the
definition thereof set forth in Section 102 (or in connection with a transaction
that would have been a Fundamental Change under such clause (c) but for the
existence of the 105% Trading Price Exception), that occurs on or prior to May
15, 2008 pursuant to which 10% or more of the consideration for the Common Stock
(other than cash payments for fractional shares) in such Fundamental Change
transaction consists of cash or securities (or other property) that are not
traded or scheduled to be traded
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immediately following such transaction on a U.S. national securities exchange or
the Nasdaq National Market, the Company will increase the Conversion Rate by the
Make-Whole Premium.
The "Make-Whole Premium" will be determined by reference to the table below
and is based on the date on which the Fundamental Change becomes effective (the
"Effective Date") and the price (the "Stock Price") paid per share of Common
Stock in the transaction constituting the Fundamental Change. If the holders of
Common Stock receive only cash in the transaction, the Stock Price shall be the
cash amount paid per share of Common Stock. Otherwise, the Stock Price shall be
equal to the average of the Last Reported Sale Price of Common Stock for each of
the five Trading Days ending on the Trading Day immediately preceding the
Effective Date.
The following table shows what the Make-Whole Premium would be for each
hypothetical Stock Price and Effective Date set forth below, expressed as the
number of additional shares to be issuable per $1,000 of the principal amount of
the Notes.
STOCK PRICE
EFFECTIVE $ 7.72 $ 8.25 $ 9.00 $10.00 $12.50 $15.00 $17.50 $20.00 $22.50 $25.00 $27.50 $30.00 $32.50 $35.00 $37.50 $40.00
DATE
November 43.18 35.00 26.51 19.44 9.38 4.72 2.50 1.40 0.88 0.58 0.39 0.27 0.18 0.12 0.07 0.00
15, 2005
May
15, 2006 43.18 34.98 26.37 18.97 8.66 4.12 2.04 1.08 0.66 0.43 0.29 0.20 0.13 0.08 0.00 0.00
November 43.18 34.95 26.27 18.18 7.24 2.81 0.98 0.80 0.40 0.19 0.11 0.08 0.01 0.00 0.00 0.00
15, 2006
May
15, 2007 43.18 34.93 26.03 17.64 6.72 2.53 0.65 0.20 0.22 0.13 0.07 0.02 0.00 0.00 0.00 0.00
November 43.18 34.90 25.57 17.13 5.36 1.48 0.36 0.14 0.09 0.05 0.03 0.01 0.00 0.00 0.00 0.00
15, 2007
May
15, 2008 43.18 34.88 25.31 16.40 3.25 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
The Make-Whole Premiums set forth above are based upon a Stock Price of
$7.72 at the time of the initial offer of the Prior Notes on May 15, 2003 and an
initial Conversion Rate of 86.3558.
The actual Stock Price and Effective Date may not be set forth on the
table, in which case:
(i) If the actual Stock Price on the Effective Date is between two
Stock Prices on the table or the actual Effective Date is between two
Effective Dates on the table, the Make-Whole Premium will be determined by
a straight-line interpolation between the
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Make-Whole Premiums set forth for the two Stock Prices and the two
Effective Dates on the table based on a 365-day year, as applicable;
(ii) If the Stock Price on the Effective Date exceeds $40.00 per share
(subject to adjustment described below), no Make-Whole Premium will be
paid; and
(iii) If the Stock Price on the Effective Date is less than or equal
to $7.72 per share (subject to adjustment described below), no Make-Whole
Premium will be paid.
Notwithstanding the foregoing, in no event will the Conversion Rate exceed
the Maximum Conversion Rate, subject to adjustments in the same manner as set
forth in Section 806.
The Stock Prices set forth in the first row of the table above will be
adjusted as of any date on which the Conversion Rate is adjusted. The adjusted
Stock Prices will equal the Stock Prices applicable immediately prior to such
adjustment multiplied by a fraction, the numerator of which is the Conversion
Rate immediately prior to the adjustment giving rise to the Stock Price
adjustment and the denominator of which is the Conversion Rate so adjusted. The
Make-Whole Premium will be correspondingly adjusted in the same manner as the
adjustments described in Section 806.
(c) Notwithstanding the foregoing, in the case of a Public Acquirer Change
of Control (as defined below), the Company may, in lieu of paying a Make-Whole
Premium as described in Section 501(b), elect to adjust the Conversion Rate and
the related conversion obligation such that from and after the effective date of
such Public Acquirer Change of Control, Holders of the Notes will be entitled to
convert the Notes into a number of shares of Public Acquirer Common Stock (as
defined below) by multiplying the Conversion Rate in effect immediately before
the Public Acquirer Change of Control by a fraction:
(i) the numerator of which will be (i) in the case of a share
exchange, consolidation or merger, pursuant to which the Common Stock is
converted into cash, securities or other property, the average value of all
cash and any other consideration (as determined by the Board of Directors)
paid or payable per share of Common Stock or (ii) in the case of any other
Public Acquirer Change of Control, the average of the Last Reported Sale
Price of the Common Stock for the five Trading Days prior to but excluding
the effective date of such Public Acquirer Change of Control, and
(ii) the denominator of which will be the average Last Reported Sale
Price of the Public Acquirer Common Stock for the five Trading Days
commencing on the Trading Day next succeeding the effective date of such
Public Acquirer Change of Control.
A "Public Acquirer Change of Control" means any event that would otherwise
obligate the Company to pay a Make-Whole Premium as described in Section 501(b)
and the acquirer (or any entity that directly or indirectly has Beneficial
Ownership of more than 50% of the voting power of all shares of the acquirer's
capital stock that are entitled to vote generally in the election of directors
or that is a direct or indirect wholly-owned subsidiary of the acquirer) has a
class of common stock traded on a national securities exchange or quoted on the
Nasdaq
-17-
National Market or which will be so traded or quoted when issued or exchanged in
connection with such event (the "Public Acquirer Common Stock").
After the adjustment of the Conversion Rate in connection with a Public
Acquirer Change of Control, the Conversion Rate will be subject to further
similar adjustments in the event that any of the events described in Section 806
occur thereafter.
Upon a Public Acquirer Change of Control, if the Company so elects, Holders
may convert the Notes at the adjusted Conversion Rate described in the third
preceding paragraph but will not be entitled to the Make-Whole Premium described
under Section 501(b). The Company is required to notify Holders of its election
in writing. In addition, the Holder can also, subject to this Section 501,
require the Company to repurchase all or a portion of the Notes as described
under Section 501(a).
Section 502 Notice of Fundamental Change. The Company, or at its request
(which must be received by the Paying Agent at least five Business Days (or such
lesser period as agreed to by the Paying Agent) prior to the date the Paying
Agent is requested to give such notice as described below), the Paying Agent in
the name of and at the expense of the Company, shall mail to all Holders and the
Trustee and the Paying Agent a Company Notice of the occurrence of a Fundamental
Change and of the purchase right arising as a result thereof, including the
information required by Section 701 hereof, on or before the 30th day after the
occurrence of such Fundamental Change.
Section 503 Exercise of Option. For a Note to be so purchased at the option
of the Holder, the Paying Agent must receive such Note duly endorsed for
transfer, together with a written notice of purchase (a "Fundamental Change
Purchase Notice") in the form entitled "Form of Fundamental Change Purchase
Notice" on the reverse thereof duly completed, on or before the 35th day after
the date of the Company Notice of the occurrence of such Fundamental Change,
subject to extension to comply with applicable law. The Fundamental Change
Purchase Notice shall state:
(a) if certificated, the certificate numbers of the Notes which the Holder
shall deliver to be purchased, or, if not certificated, the Fundamental
Change Purchase Notice must comply with appropriate Depositary procedures;
(b) the portion of the principal amount of the Notes which the Holder shall
deliver to be purchased, which portion must be $1,000 in principal amount
or an integral multiple thereof; and
(c) that such Notes shall be purchased as of the Fundamental Change
Purchase Date pursuant to the terms and conditions specified in paragraph 8
of the Notes and in this Supplemental Indenture.
Section 504 Procedures. The Company shall purchase from a Holder, pursuant
to Article V hereof, Notes if the principal amount of such Notes is $1,000 or an
integral multiple of $1,000 if so requested by such Holder.
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Any purchase by the Company contemplated pursuant to the provisions of
Article V hereof shall be consummated by the delivery of the Fundamental Change
Purchase Price to be received by the Holder promptly following the later of the
Fundamental Change Purchase Date or the time of book-entry transfer or delivery
of the Notes.
Notwithstanding anything herein to the contrary, any Holder delivering to
the Paying Agent the Fundamental Change Purchase Notice contemplated by Section
503 shall have the right at any time prior to the close of business on the
Business Day prior to the Fundamental Change Purchase Date to withdraw such
Fundamental Change Purchase Notice (in whole or in part) by delivery of a
written notice of withdrawal to the Paying Agent in accordance with Section 702.
The Paying Agent shall promptly notify the Company of the receipt by it of
any Fundamental Change Purchase Notice or written notice of withdrawal thereof.
On or before 10:00 a.m. (New York City time) on the Fundamental Change
Purchase Date, the Company shall deposit with the Paying Agent (or if the
Company or an Affiliate of the Company is acting as the Paying Agent, shall
segregate and hold in trust) money sufficient to pay the aggregate Fundamental
Change Purchase Price of the Notes to be purchased pursuant to Article V hereof.
Payment by the Paying Agent of the Fundamental Change Purchase Price for such
Notes shall be made promptly following the later of the Fundamental Change
Purchase Date or the time of book-entry transfer or delivery of such Notes. If
the Paying Agent holds, in accordance with the terms of the Indenture, money
sufficient to pay the Fundamental Change Purchase Price of such Notes on the
Business Day following the Fundamental Change Purchase Date, then, on and after
such Fundamental Change Purchase Date, such Notes shall cease to be outstanding
and interest (including Contingent Interest, if any) on such Notes shall cease
to accrue, whether or not book-entry transfer of such Notes is made or such
Notes are delivered to the Paying Agent, and all other rights of the Holder
shall terminate (other than the right to receive the Fundamental Change Purchase
Price upon delivery or transfer of the Notes). Nothing herein shall preclude any
withholding tax required by law.
The Company shall require each Paying Agent (other than the Trustee) to
agree in writing that the Paying Agent shall hold in trust for the benefit of
Holders or the Trustee all money held by the Paying Agent for the payment of the
Fundamental Change Purchase Price and shall notify the Trustee of any default by
the Company in making any such payment. If the Company or an Affiliate of the
Company acts as Paying Agent, it shall segregate the money held by it as Paying
Agent and hold it as a separate trust fund. The Company at any time may require
a Paying Agent to deliver all money held by it to the Trustee and to account for
any funds disbursed by the Paying Agent. Upon doing so, the Paying Agent shall
have no further liability for the cash delivered to the Trustee.
All questions as to the validity, eligibility (including time of receipt)
and acceptance of any Notes for redemption shall be determined by the Company,
whose determination shall be final and binding.
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ARTICLE VI
Optional Purchase
Section 601 Purchase of Notes by the Company at the Option of the Holder.
(a) On each of May 15, 2008, May 15, 2013 and May 15, 2018 (each, a
"Purchase Date"), Holders shall have the option to require the Company to
purchase any Notes at the Purchase Price specified in paragraph 8 of the Notes,
upon:
(i) delivery to the Paying Agent by the Holder of a written notice of
purchase (a "Purchase Notice") at any time from the opening of business on
the date that is 20 Business Days prior to a Purchase Date until the close
of business on the fifth Business Day prior to such Purchase Date, stating:
(1) if certificated, the certificate numbers of the Notes which
the Holder will deliver to be purchased, or, if not certificated, the
Purchase Notice must comply with appropriate Depositary procedures;
(2) the portion of the principal amount of the Notes which the
Holder will deliver to be purchased, which portion must be $1,000 in
principal amount or an integral multiple thereof; and
(3) that such Notes shall be purchased as of the Purchase Date
pursuant to the terms and conditions specified in paragraph 8 of the
Notes and in this Supplemental Indenture; and
(ii) delivery or book-entry transfer of such Notes to the Paying Agent
prior to, on or after the Purchase Date (together with all necessary
endorsements) at the offices of the Paying Agent, such delivery or transfer
being a condition to receipt by the Holder of the Purchase Price therefor;
provided, however, that such Purchase Price shall be so paid pursuant to
this Section 601 only if the Notes so delivered or transferred to the
Paying Agent shall conform in all respects to the description thereof in
the related Purchase Notice.
(b) The Company shall purchase from a Holder, pursuant to the terms of this
Section 601, Notes if the principal amount of such Notes is $1,000 or an
integral multiple of $1,000 if so requested by such Holder.
(c) Any purchase by the Company contemplated pursuant to the provisions of
this Section 601 shall be consummated by the delivery of the Purchase Price to
be received by the Holder promptly following the later of the Purchase Date or
the time of book-entry transfer or delivery of the Notes.
(d) Notwithstanding anything herein to the contrary, any Holder delivering
to the Paying Agent the Purchase Notice contemplated by this Section 601 shall
have the right at any time prior to the close of business on the Business Day
prior to the Purchase Date to withdraw
-20-
such Purchase Notice (in whole or in part) by delivery of a written notice of
withdrawal to the Paying Agent in accordance with Section 702.
(e) The Paying Agent shall promptly notify the Company of the receipt by it
of any Purchase Notice or written notice of withdrawal thereof.
(f) On or before 10:00 a.m. (New York City time) on the Purchase Date, the
Company shall deposit with the Paying Agent (or if the Company or an Affiliate
of the Company is acting as the Paying Agent, shall segregate and hold in trust)
money sufficient to pay the aggregate Purchase Price of the Notes to be
purchased pursuant to this Section 601. Payment by the Paying Agent of the
Purchase Price for such Notes shall be made promptly following the later of the
Purchase Date or the time of book-entry transfer or delivery of such Notes. If
the Paying Agent holds, in accordance with the terms of the Indenture, money
sufficient to pay the Purchase Price of such Notes on the Business Day following
the Purchase Date, then, on and after such Purchase Date, such Notes shall cease
to be outstanding and interest (including Contingent Interest, if any) on such
Notes shall cease to accrue, whether or not book-entry transfer of such Notes is
made or such Notes are delivered to the Paying Agent, and all other rights of
the Holder shall terminate (other than the right to receive the Purchase Price
upon delivery or transfer of the Notes).
(g) The Company shall require each Paying Agent (other than the Trustee) to
agree in writing that the Paying Agent shall hold in trust for the benefit of
Holders or the Trustee all money held by the Paying Agent for the payment of the
Purchase Price and shall notify the Trustee of any default by the Company in
making any such payment. If the Company or an Affiliate of the Company acts as
Paying Agent, it shall segregate the money held by it as Paying Agent and hold
it as a separate trust fund. The Company at any time may require a Paying Agent
to deliver all money held by it to the Trustee and to account for any funds
disbursed by the Paying Agent. Upon doing so, the Paying Agent shall have no
further liability for the cash delivered to the Trustee.
ARTICLE VII
Conditions and Procedures for Purchases at Option of Holders
Section 701 Notice of Purchase Date or Fundamental Change. The Company
shall send notices (each, a "Company Notice") to the Holders (and to beneficial
owners as required by applicable law) at their addresses shown in the Security
Register maintained by the Security Registrar, and delivered to the Trustee and
Paying Agent, not less than 20 Business Days prior to each Purchase Date, or on
or before the 30th day after the occurrence of the Fundamental Change, as the
case may be (each such date of delivery, a "Company Notice Date"). Each Company
Notice shall include a form of Purchase Notice or Fundamental Change Purchase
Notice to be completed by a Holder and shall state:
(a) the applicable Purchase Price or Fundamental Change Purchase Price,
excluding accrued and unpaid interest, Conversion Rate at the time of such
notice (and any adjustments to the Conversion Rate) and, to the extent
known at the time of such notice, the amount of interest (including
Contingent Interest, if any), if any, that will be payable
-21-
with respect to the Notes on the applicable Purchase Date or Fundamental
Change Purchase Date;
(b) if the notice relates to a Fundamental Change, the events causing the
Fundamental Change and the date of the Fundamental Change;
(c) the Purchase Date or Fundamental Change Purchase Date;
(d) the last date on which a Holder may exercise its purchase right;
(e) the name and address of the Paying Agent and the Conversion Agent;
(f) that Notes must be surrendered to the Paying Agent to collect payment
of the Purchase Price or Fundamental Change Purchase Price;
(g) that Notes as to which a Purchase Notice or Fundamental Change Purchase
Notice has been given may be converted only if the applicable Purchase
Notice or Fundamental Change Purchase Notice has been withdrawn in
accordance with the terms of this Supplemental Indenture;
(h) that the Purchase Price or Fundamental Change Purchase Price for any
Notes as to which a Purchase Notice or a Fundamental Change Purchase
Notice, as applicable, has been given and not withdrawn shall be paid by
the Paying Agent promptly following the later of the Purchase Date or
Fundamental Change Purchase Date, as applicable, or the time of book-entry
transfer or delivery of such Notes;
(i) the procedures the Holder must follow under Article V or VI hereof, as
applicable, and Article VII hereof;
(j) briefly, the conversion rights of the Notes;
(k) that, unless the Company defaults in making payment of such Purchase
Price or Fundamental Change Purchase Price on Notes covered by any Purchase
Notice or Fundamental Change Purchase Notice, as applicable, interest
(including Contingent Interest, if any) will cease to accrue on and after
the Purchase Date or Fundamental Change Purchase Date, as applicable;
(l) the CUSIP or ISIN number of the Notes; and
(m) the procedures for withdrawing a Purchase Notice or Fundamental Change
Purchase Notice.
In connection with providing such Company Notice, the Company will issue a
press release and publish a notice containing the information in such Company
Notice in a newspaper of general circulation in The City of New York or publish
such information on the Company's then existing Web site or through such other
public medium as the Company may use at the time.
-22-
At the Company's request, made at least five Business Days prior to the
date upon which such notice is to be mailed (or such lesser period as agreed to
by the Paying Agent), and at the Company's expense, the Paying Agent shall give
the Company Notice in the Company's name; provided, however, that, in all cases,
the text of the Company Notice shall be prepared by the Company.
Section 702 Effect of Purchase Notice or Fundamental Change Purchase
Notice; Effect of Event of Default. Upon receipt by the Company of the Purchase
Notice or Fundamental Change Purchase Notice specified in Section 601 or Section
503, as applicable, the Holder of the Notes in respect of which such Purchase
Notice or Fundamental Change Purchase Notice, as the case may be, was given
shall (unless such Purchase Notice or Fundamental Change Purchase Notice is
withdrawn as specified in the following two paragraphs) thereafter be entitled
to receive solely the Purchase Price or Fundamental Change Purchase Price with
respect to such Notes. Such Purchase Price or Fundamental Change Purchase Price
shall be paid by the Paying Agent to such Holder promptly following the later of
(x) the Purchase Date or the Fundamental Change Purchase Date, as the case may
be, with respect to such Notes (provided the conditions in Section 601 or
Section 503, as applicable, have been satisfied) and (y) the time of delivery or
book-entry transfer of such Notes to the Paying Agent by the Holder thereof in
the manner required by Section 601 or Section 503, as applicable. Notes in
respect of which a Purchase Notice or Fundamental Change Purchase Notice, as the
case may be, has been given by the Holder thereof may not be converted for
shares of Common Stock on or after the date of the delivery of such Purchase
Notice or Fundamental Change Purchase Notice, as the case may be, unless such
Purchase Notice or Fundamental Change Purchase Notice, as the case may be, has
first been validly withdrawn as specified in the following two paragraphs.
A Purchase Notice or Fundamental Change Purchase Notice, as the case may
be, may be withdrawn by means of a written notice of withdrawal delivered to the
office of the Paying Agent at any time prior to 5:00 p.m. New York City time on
the Business Day prior to the Purchase Date or the Fundamental Change Purchase
Date, as the case may be, to which it relates specifying:
(a) if certificated, the certificate number of the Notes in respect of
which such notice of withdrawal is being submitted, or, if not
certificated, the written notice of withdrawal must comply with appropriate
Depositary procedures;
(b) the principal amount of the Notes with respect to which such notice of
withdrawal is being submitted; and
(c) the principal amount, if any, of such Notes which remains subject to
the original Purchase Notice or Fundamental Change Purchase Notice, as the
case may be, and which has been or shall be delivered for purchase by the
Company.
There shall be no purchase of any Notes pursuant to Article V or Article VI
hereof if an Event of Default has occurred and is continuing (other than a
default that is cured by the payment of the Purchase Price or Fundamental Change
Purchase Price, as the case may be). The Paying Agent shall promptly return to
the respective Holders thereof any Notes (x) with respect to which a Purchase
Notice or Fundamental Change Purchase Notice, as the case may be, has
-23-
been withdrawn in compliance with this Supplemental Indenture, or (y) held by it
during the continuance of an Event of Default (other than a default that is
cured by the payment of the Purchase Price or Fundamental Change Purchase Price,
as the case may be) in which case, upon such return, the Purchase Notice or
Fundamental Change Purchase Notice with respect thereto shall be deemed to have
been withdrawn.
Section 703 Notes Purchased in Part. Any Notes that are to be purchased
only in part shall be surrendered at the office of the Paying Agent (with, if
the Company or the Trustee so requires, due endorsement by, or a written
instrument of transfer in form satisfactory to the Company and the Trustee duly
executed by, the Holder thereof or such Holder's attorney duly authorized in
writing) and the Company shall execute and the Trustee or the Authenticating
Agent shall authenticate and deliver to the Holder of such Notes, without
service charge, a new Note or Notes, of any authorized denomination as requested
by such Holder in aggregate principal amount equal to, and in exchange for, the
portion of the principal amount of the Notes so surrendered which is not
purchased or redeemed.
Section 704 Covenant to Comply with Securities Laws Upon Purchase of Notes.
In connection with any offer to purchase Notes under Article V or Article VI
hereof, the Company shall, to the extent applicable, (a) comply with Rules 13e-4
and 14e-1 (and any successor provisions thereto) under the Exchange Act, if
applicable; (b) file the related Schedule TO (or any successor schedule, form or
report) under the Exchange Act, if applicable; and (c) otherwise comply with all
applicable federal and state securities laws so as to permit the rights and
obligations under Article V or Article VI hereof to be exercised in the time and
in the manner specified in Article V or Article VI hereof.
Section 705 Repayment to the Company. The Trustee and the Paying Agent
shall return to the Company any cash or property that remains unclaimed as
provided in paragraph 14 of the Notes, together with interest that the Trustee
or Paying Agent, as the case may be, has agreed to pay, if any, held by them for
the payment of a Purchase Price or Fundamental Change Purchase Price, as the
case may be; provided, however, that to the extent that the aggregate amount of
cash or property deposited by the Company pursuant to Section 601(f) or 504, as
applicable, exceeds the aggregate Purchase Price or Fundamental Change Purchase
Price, as the case may be, of the Notes or portions thereof which the Company is
obligated to purchase as of the Purchase Date or Fundamental Change Purchase
Date, as the case may be, then promptly on and after the Business Day following
the Purchase Date or Fundamental Change Purchase Date, as the case may be, the
Trustee and the Paying Agent shall return any such excess to the Company
together with interest that the Trustee or Paying Agent, as the case may be, has
agreed to pay, if any.
Section 706 Officers' Certificate. At least five Business Days before the
Company Notice Date, the Company shall deliver an Officers' Certificate to the
Trustee (provided, that at the Company's option, the matters to be addressed in
such Officers' Certificate may be divided among two such certificates)
specifying:
(a) the manner of payment selected by the Company; and
(b) whether the Company desires the Trustee to give the Company Notice
required by Section 701 herein.
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ARTICLE VIII
Conversion of Notes
Section 801 Right to Convert; Conversion Value; Method of Payment.
(a) Subject to and in accordance with the provisions of the Indenture, a
Holder may convert its Notes at any time during which any condition stated in
paragraph 10 of the Notes is met into Cash and, if applicable, shares of Common
Stock at a rate per $1,000 principal amount of Notes equivalent to 86.3558
shares of Common Stock, subject to adjustment as herein set forth (the
"Conversion Rate"). A Holder may convert a portion of the principal amount of
Notes if the portion is $1,000 or an integral multiple of $1,000.
(b) Once Notes are tendered for conversion, subject to this Section 801 and
to Section 806, Holders tendering the Notes will be entitled to receive, per
$1,000 principal amount of Notes, Cash and, if applicable, shares of Common
Stock, the aggregate value of which per $1,000 principal amount of Notes (the
"Conversion Value") will be equal to the product of (i) the Conversion Rate in
effect on the Conversion Date, and (ii) the average of the Last Reported Sale
Price of Common Stock for each of the ten consecutive Trading Days
(appropriately adjusted to take into account the occurrence during such period
of stock splits and similar events) beginning on the second Trading Day
immediately following the day the Notes are tendered for conversion (the
"Ten-Day Average Price").
(c) The Company will deliver the Conversion Value of the Notes surrendered
for conversion to a converting Holder as follows:
(i) an amount in Cash (in the case of each such conversion, the
"Principal Return") equal to the lesser of (A) the aggregate Conversion
Value of those Notes and (B) the aggregate principal amount of those Notes;
(ii) if the aggregate Conversion Value of those Notes is greater than
the Principal Return, a number of shares of Common Stock (in the case of
each such conversion, the "Net Shares"), determined as set forth in clause
(d) below, having a value equal to such aggregate Conversion Value less the
Principal Return (in the case of each such conversion, the "Net Share
Amount"); provided, however, that the Company may, at its option, deliver
Cash or a combination of Cash and shares of Common Stock equal in value to
the Net Share Amount. If and to the extent the Company makes such an
election, references herein to "Net Shares" and "Net Share Amount" shall be
deemed to be references to such amount in Cash or a combination of Cash and
shares of Common Stock, as applicable.
(d) The Cash payment and the number of Net Shares to be issued, if any,
will be determined by dividing the Net Share Amount by the Ten-Day Average
Price.
(e) The Conversion Value, Principal Return, Net Share Amount and the number
of Net Shares with respect to any Notes tendered by a Holder for conversion will
be determined by the Company at the end of the ten consecutive Trading Day
period beginning on the second Trading Day immediately following the day such
Notes are tendered for conversion (in the case
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of each such conversion, the "Determination Date"). The Company will pay the
Cash and deliver the Net Shares, if any, with respect to such Notes as
contemplated by Section 802.
Section 802 Conversion Procedures. To convert Notes, a Holder must satisfy
the requirements in this Section 802 and in paragraph 10 of the Notes. The later
of (a) the date on which the Holder satisfies all those requirements with
respect to any Notes held by such Holder and (b) the Determination Date with
respect to such conversion is herein referred to as the "Conversion Date". As
soon as practicable, but in no event later than the fifth Business Day following
the Conversion Date, the Company shall deliver to such Holder, through the
Conversion Agent, the Principal Return, a certificate for (or book-entry
transfer through the Depositary of) the number of Net Shares issuable upon the
conversion and cash in lieu of any fractional Net Shares determined pursuant to
Section 803. The Person in whose name any such shares of Common Stock are
registered shall be treated as a stockholder of record on and after the
Conversion Date; provided, however, that no surrender of Notes on any date when
the stock transfer books of the Company shall be closed shall be effective to
constitute the Person or Persons entitled to receive any shares of Common Stock
upon such conversion as the record holder or holders of such shares of Common
Stock on such date, but such surrender shall be effective to constitute the
Person or Persons entitled to receive such shares of Common Stock as the record
holder or holders thereof for all purposes at the close of business on the next
succeeding day on which such stock transfer books are open; such conversion
shall be at the Conversion Rate in effect on the Conversion Date, as if the
stock transfer books of the Company had not been closed. Upon conversion of
Notes by a Holder, such Person shall no longer be a Holder of such Notes.
No payment or adjustment shall be made for dividends on, or other
distributions with respect to, any Common Stock, except as provided in Section
806 or as otherwise provided in this Indenture.
On conversion of Notes, that portion of accrued interest including accrued
Contingent Interest, if any, with respect to the converted Notes shall not be
canceled, extinguished or forfeited, but rather shall be deemed to be paid in
full to the Holder thereof through delivery of the Principal Return and the Net
Shares, if any (together with the cash payment, if any, in lieu of any
fractional Net Shares), with respect to such Notes in exchange for the Notes
being converted pursuant to the provisions hereof, and the Fair Market Value of
any Net Shares (together with any such cash payment in lieu of any fractional
Net Shares) shall be treated as issued, to the extent thereof, first in exchange
for interest accrued and unpaid through the Conversion Date and accrued and
unpaid Contingent Interest, and the balance, if any, of such Fair Market Value
of such Net Shares (and any such cash payment) shall be treated as issued in
exchange for the principal amount of the Notes being converted pursuant to the
provisions hereof.
If a Holder converts more than one Note at the same time, the Principal
Return and the number of Net Shares issuable upon the conversion shall be based
on the total principal amount of the Notes converted.
Upon surrender of a Note that is converted in part, the Company shall
execute, and the Trustee or the Authenticating Agent shall authenticate and
deliver to the Holder, a new Note in
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an authorized denomination equal in principal amount to the unconverted portion
of the Note surrendered.
If the last day on which Notes may be converted is a legal holiday in a
place where a Conversion Agent is located, the Notes may be surrendered to that
Conversion Agent on the next succeeding day that it is not a legal holiday.
Section 803 Cash Payments in Lieu of Fractional Shares. The Company shall
not issue a fractional share of Common Stock upon conversion of Notes. Instead
the Company shall deliver Cash for the current market value of the fractional
share. The current market value of a fractional share shall be determined to the
nearest 1/10,000th of a share by multiplying the Ten-Day Average Price of a full
share of Common Stock by the fractional amount and rounding the product to the
nearest whole cent.
Section 804 Taxes on Conversion. If a Holder converts Notes, the Company
shall pay any documentary, stamp or similar issue or transfer tax due on the
issue of shares of Common Stock upon the conversion. However, the Holder shall
pay any such tax which is due because the Holder requests the shares to be
issued in a name other than the Holder's name. The Conversion Agent may refuse
to deliver the certificates representing (or to effect a book-entry transfer of)
any Shares of Common Stock being issued in a name other than the Holder's name
until the Conversion Agent receives a sum sufficient to pay any tax which shall
be due because the shares are to be issued in a name other than the Holder's
name. Nothing herein shall preclude any withholding tax required by law.
Section 805 Covenants of the Company. The Company shall, prior to issuance
of any Notes hereunder, and from time to time as may be necessary, reserve out
of its authorized but unissued Common Stock a sufficient number of shares of
Common Stock to permit the conversion of the Notes.
All shares of Common Stock delivered upon conversion of the Notes shall be
newly issued shares or treasury shares, shall be duly and validly issued and
fully paid and nonassessable and shall be free from preemptive rights and free
of any lien or adverse claim.
The Company shall endeavor promptly to comply with all federal and state
securities laws regulating the order and delivery of shares of Common Stock upon
the conversion of Notes, if any, and shall cause to have listed or quoted all
such shares of Common Stock on each United States national securities exchange
or over-the-counter or other domestic market on which the Common Stock is then
listed or quoted.
Section 806 Adjustments to Conversion Rate. The Conversion Rate shall be
adjusted from time to time, without duplication, as follows:
(a) In case the Company shall (i) pay a dividend, or make a distribution
exclusively in shares of its capital stock, on the Common Stock; (ii) subdivide
its outstanding Common Stock into a greater number of shares; (iii) combine its
outstanding Common Stock into a smaller number of shares; or (iv) reclassify its
Common Stock, the Conversion Rate in effect immediately prior to the record date
or effective date, as the case may be, for the adjustment pursuant to this
Section 806(a) as described below, shall be adjusted so that the Holder of any
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Notes thereafter surrendered for conversion shall be entitled to receive the
number of shares of Common Stock of the Company which such Holder would have
owned or have been entitled to receive after the happening of any of the events
described above had such Notes been converted immediately prior to such record
date or effective time, as the case may be.
An adjustment made pursuant to this Section 806(a) shall become effective
immediately after the open of business on the day immediately following the
applicable record date, in the case of any such dividend or distribution, or
immediately after the applicable effective date of any such subdivision,
combination or reclassification of Common Stock. If any dividend or distribution
of the type described in clause (i) of the first sentence of this Section 806(a)
is not so paid or made, the Conversion Rate shall again be adjusted to the
Conversion Rate which would then be in effect if such dividend or distribution
had not been declared.
(b) In case the Company shall issue rights or warrants to all holders of
the Common Stock entitling them (for a period expiring within 60 days after the
date of issuance of such rights or warrants) to subscribe for or purchase Common
Stock at a price per share less than the Market Price per share of Common Stock
on the record date fixed for determination of shareholders entitled to receive
such rights or warrants, the Conversion Rate shall be adjusted so that the same
shall equal the rate determined by multiplying the Conversion Rate in effect
immediately prior to the open of business on the day immediately following such
record date by a fraction of which (i) the numerator shall be the number of
shares of Common Stock outstanding at the close of business on such record date
plus the number of additional shares of Common Stock offered for subscription or
purchase, and (ii) the denominator shall be the number of shares of Common Stock
outstanding on such record date plus the number of shares which the aggregate
offering price of the total number of shares so offered would purchase at the
Market Price per share of Common Stock on the earlier of such record date or the
Trading Day immediately preceding the ex date for such issuance of rights or
warrants. Such adjustment shall be made successively whenever any such rights or
warrants are issued, and shall become effective immediately after the opening of
business on the day immediately following the record date for the determination
of shareholders entitled to receive such rights or warrants. To the extent that
shares of Common Stock are not delivered after the expiration of such rights or
warrants, the Conversion Rate shall be readjusted to the Conversion Rate which
would then be in effect had the adjustments made upon the issuance of such
rights or warrants been made on the basis of delivery of only the number of
shares of Common Stock actually delivered. If such rights or warrants are not so
issued, the Conversion Rate shall again be adjusted to be the Conversion Rate
which would then be in effect if such record date for the determination of
shareholders entitled to receive such rights or warrants had not been fixed. In
determining whether any rights or warrants entitle the holders to subscribe for
or purchase shares of Common Stock at less than such Market Price, and in
determining the aggregate offering price of such shares of Common Stock, there
shall be taken into account any consideration received by the Company for such
rights or warrants, the value of such consideration, if other than cash, to be
determined by the Board of Directors.
(c) In case the Company shall, by dividend or otherwise, distribute to all
holders of Common Stock any assets, debt securities or rights or warrants to
purchase any of its securities (excluding (i) any dividend, distribution or
issuance covered by those referred to in Section 806(a) or 806(b) hereof and
(ii) any dividend or distribution paid exclusively in cash) (any of the
foregoing hereinafter in this Section 806(c) called the "Distributed Assets or
Securities") in an
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aggregate amount per share of Common Stock that, combined together with the
aggregate amount per share of Common Stock of any other such distributions to
all holders of its Common Stock made within the 12 months preceding the date of
payment of such distribution, and in respect of which no adjustment pursuant to
this Section 806(c) has been made, exceeds 15% of the Market Price per share of
Common Stock on the Trading Day immediately preceding the declaration of such
distribution, then, the Conversion Rate shall be adjusted so that the same shall
equal the rate determined by multiplying the Conversion Rate in effect
immediately prior to the open of business on the date immediately following the
record date mentioned below by a fraction of which (A) the numerator shall be
the Market Price per share of the Common Stock on the earlier of such record
date or the Trading Day immediately preceding the ex date for such dividend or
distribution, and (B) the denominator shall be (1) the Market Price per share of
Common Stock on the earlier of such record date or the Trading Day immediately
preceding the ex date for such dividend or distribution less (2) the Fair Market
Value on the earlier of such record date or the Trading Day immediately
preceding the ex date for such dividend or distribution (as determined by the
Board of Directors, whose determination shall be conclusive, and described in a
certificate filed with the Trustee and the Paying Agent) of the Distributed
Assets or Securities so distributed applicable to one share of Common Stock.
Such adjustment shall become effective immediately after the open of business on
the day immediately following the record date for the determination of
shareholders entitled to receive such dividend or distribution; provided,
however, that, if (i) the Fair Market Value of the portion of the Distributed
Assets or Securities so distributed applicable to one share of Common Stock is
equal to or greater than the Market Price per share of Common Stock on the
record date for the determination of shareholders entitled to receive such
distribution or (ii) the Market Price per share of Common Stock on the record
date for the determination of shareholders entitled to receive such distribution
is greater than the Fair Market Value per share of such Distributed Assets or
Securities by less than $1.00, then, in lieu of the foregoing adjustment,
adequate provision shall be made so that each Holder shall have the right to
receive upon conversion, in addition to Cash, and, if applicable, shares of
Common Stock, the kind and amount of assets, debt securities, or rights or
warrants comprising the Distributed Assets or Securities the Holder would have
received had such Holder converted such Notes immediately prior to the record
date for the determination of stockholders entitled to receive such
distribution. In the event that such dividend or distribution is not so paid or
made, the Conversion Rate shall again be adjusted to the Conversion Rate which
would then be in effect if such dividend or distribution had not been declared.
(d) In case the Company shall make any distributions, by dividend or
otherwise, during any quarterly fiscal periods consisting exclusively of cash to
all holders of outstanding shares of Common Stock in an aggregate amount that,
together with (i) other all-cash distributions made to all holders of
outstanding shares of Common Stock during such quarterly fiscal period, and (ii)
any cash and the Fair Market Value, as of the expiration of any tender or
exchange offer (other than consideration payable in respect of any odd-lot
tender offer) of consideration payable in respect of any tender or exchange
offer by the Company or any of the Company's Subsidiaries for all or any portion
of shares of Common Stock concluded during such quarterly fiscal period, exceed
the product of $0.10 (appropriately adjusted from time to time for any stock
dividends on or subdivisions or combinations of the Common Stock) multiplied by
the number of shares of Common Stock outstanding on the record date for such
distribution, then, and in each such case, the Conversion Rate shall be adjusted
so that the same
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shall equal the rate determined by multiplying the Conversion Rate in effect
immediately prior to the open of business on the day immediately following the
record date fixed for the determination of holders of Common Stock entitled to
receive such dividend or distribution by a fraction of which (A) the numerator
shall be the Market Price per share of Common Stock on the earlier of such
record date or the Trading Day immediately preceding the ex date for such
dividend or distribution and (B) the denominator shall be (1) the Market Price
per share of Common Stock on the earlier of such record date or the Trading Day
immediately preceding the ex date for such dividend or distribution plus (2)
$0.10 (appropriately adjusted from time to time for any stock dividends on or
subdivisions or combination of Common Stock) less (3) an amount equal to the
quotient of (x) the combined amount distributed or payable in the transactions
described in clauses (i), (ii) and (iii) above during such quarterly fiscal
period and (y) the number of shares of Common Stock outstanding on such record
date, such adjustment to become effective immediately after the open of business
on the day immediately following the record date for the determination of
shareholders entitled to receive such dividend or distribution.
(e) With respect to Section 806(c) above, in the event that the Company
makes any distribution to all holders of Common Stock consisting of Equity
Interests in a Subsidiary or other business unit of the Company, then,
notwithstanding the provisions of Section 806(c), the Conversion Rate shall be
adjusted so that the same shall equal the rate determined by multiplying the
Conversion Rate in effect immediately prior to the open of business on the day
immediately following the record date fixed for the determination of holders of
Common Stock entitled to receive such distribution by a fraction of which (i)
the numerator shall be (x) the Spin-off Market Price per share of Common Stock
on such record date plus (y) the Spin-off Market Price per share or other
applicable unit of Equity Interest of the Subsidiary or other business unit of
the Company on such record date and (ii) the denominator shall be the Spin-off
Market Price per share of the Common Stock on such record date, such adjustment
to become effective Ten Trading Days after the effective date of such
distribution of Equity Interests in a Subsidiary or other business unit of the
Company.
(f) Upon conversion of the Notes, the Holders shall receive, with respect
to any shares of Common Stock issuable upon such conversion, the associated
rights issued under the Rights Plan or under any future shareholder rights plan
the Company implements (notwithstanding the occurrence of an event causing such
rights to separate from the Common Stock at or prior to the time of conversion)
unless, prior to conversion, the rights have expired, terminated or been
redeemed or exchanged in accordance with the Rights Plan. If, and only if, the
Holders of Notes receive rights under such shareholder rights plans as described
in the preceding sentence upon conversion of their Notes, then no other
adjustment pursuant to this Section 806 shall be made in connection with such
shareholder rights plans.
(g) For purposes of this Section 806, the number of shares of Common Stock
at any time outstanding shall not include shares held in the treasury of the
Company but shall include shares issuable in respect of scrip certificates
issued in lieu of fractions of shares of Common Stock. The Company shall not pay
any dividend or make any distribution on shares of Common Stock held in the
treasury of the Company.
(h) Notwithstanding the foregoing, in no event shall the Conversion Rate
exceed the maximum conversion rate specified under this Section 806(h) (the
"Maximum Conversion
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Rate") as a result of an adjustment pursuant to Section 501(b), Section 806(c)
and Section 806(d) hereof. The Maximum Conversion Rate shall initially be
129.5337 and shall be appropriately adjusted from time to time for any stock
dividends on or subdivisions or combinations of the Common Stock. The Maximum
Conversion Rate shall not apply to any adjustments made pursuant to any of the
events in Section 806(a) or Section 806(b) hereof.
Section 807 Calculation Methodology. (a) No adjustment in the Conversion
Price need be made unless the adjustment would require an increase or decrease
of at least 1% in the Conversion Price then in effect, provided that any
adjustment that would otherwise be required to be made shall be carried forward
and taken into account in any subsequent adjustment. Except as stated in this
Article VIII, the Conversion Rate will not be adjusted for the issuance of
Common Stock or any securities convertible into or exchangeable for Common Stock
or carrying the right to purchase any of the foregoing. Any adjustments that are
made shall be carried forward and taken into account in any subsequent
adjustment. All calculations under Article VII, Section 806 and this Section 807
shall be made to the nearest cent or to the nearest 1/10,000th of a share, as
the case may be.
(b) Any adjustment to the Conversion Price shall take into account the
adjustment provided under Section 806(d) based on the payment of an aggregate
amount of $0.20 per share of Common Stock in dividends during the first fiscal
quarter of 2005. For purposes of calculating this adjustment, "the Conversion
Rate in effect immediately prior to the open of business on the day immediately
following the record date fixed for the determination of holders of Common Stock
entitled to receive such dividend or distribution" shall be 86.3558.
Section 808 When No Adjustment Required. No adjustment to the Conversion
Rate need be made:
(a) upon the issuance of any shares of Common Stock pursuant to any present
or future plan providing for the reinvestment of dividends or interest
payable on securities of the Company and the investment of additional
optional amounts in shares of Common Stock under any plan;
(b) upon the issuance of any shares of Common Stock or options or rights to
purchase those shares pursuant to any present or future employee, director
or consultant benefit plan or program of or assumed by the Company or any
of its Subsidiaries;
(c) upon the issuance of any shares of Common Stock pursuant to any option,
warrant, right, or exercisable, exchangeable or convertible security not
described in paragraph (b) above and outstanding as of the date of this
Supplemental Indenture;
(d) [Reserved];
(e) for a change in the par value or no par value of the Common Stock; or
(f) for accrued and unpaid interest (including Contingent Interest, if
any).
Section 809 Notice of Adjustment. Whenever the Conversion Rate is adjusted
(including any adjustment that the Company may elect pursuant to Section
501(c)), the Company shall
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promptly mail to Holders a notice of the adjustment. The Company shall file with
the Trustee and the Conversion Agent such notice. The notice shall, absent
manifest error, be conclusive evidence that the adjustment is correct. Neither
the Trustee nor any Conversion Agent shall be under any duty or responsibility
with respect to any such notice except to exhibit the same to any Holder
desiring inspection thereof.
Section 810 Voluntary Increase. The Company may make such increases in the
Conversion Rate, in addition to those required by Section 806, as the Board of
Directors considers to be advisable to avoid or diminish any income tax to
holders of Common Stock or rights to purchase Common Stock resulting from any
dividend or distribution of stock (or rights to acquire stock) or from any event
treated as such for income tax purposes. To the extent permitted by applicable
law, the Company may from time to time increase the Conversion Rate by any
amount for any period of time if the period is at least 20 days, the increase is
irrevocable during the period and the Board of Directors shall have made a
determination that such increase would be in the best interests of the Company,
which determination shall be conclusive. Whenever the Conversion Rate is so
increased, the Company shall mail to Holders and file with the Trustee and the
Conversion Agent a notice of such increase. Neither the Trustee nor any
Conversion Agent shall be under any duty or responsibility with respect to any
such notice except to exhibit the same to any Holder desiring inspection
thereof. The Company shall mail the notice at least 15 days before the date the
increased Conversion Rate takes effect. The notice shall state the increased
Conversion Rate and the period it shall be in effect.
Section 811 Notice to Holders Prior to Certain Actions. In case:
(a) the Company shall declare a dividend (or any other distribution) on its
Common Stock that would require an adjustment in the Conversion Rate pursuant to
Section 806;
(b) the Company shall authorize the granting to all or substantially all
the holders of its Common Stock of rights or warrants to subscribe for or
purchase any share of any class or any other rights or warrants;
(c) of any reclassification or reorganization of the Common Stock of the
Company (other than a subdivision or combination of its outstanding Common
Stock, or a change in par value, or from par value to no par value, or from no
par value to par value), or of any consolidation or merger to which the Company
is a party and for which approval of any shareholders of the Company is
required, or of the sale or transfer of all or substantially all of the assets
of the Company; or
(d) of the voluntary or involuntary dissolution, liquidation or winding-up
of the Company;
the Company shall cause to be filed with the Trustee and to be mailed to each
Holder at its address appearing on the Security Register, as promptly as
possible but in any event at least 15 days prior to the applicable date
hereinafter specified, a notice stating (x) the date on which a record is to be
taken for the purpose of such dividend, distribution or rights or warrants, or,
if a record is not to be taken, the date as of which the holders of Common Stock
of record to be entitled to such dividend, distribution, or rights or warrants
are to be determined or (y) the date
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on which such reclassification, reorganization, consolidation, merger, sale,
transfer, dissolution, liquidation or winding-up is expected to become effective
or occur, and the date as of which it is expected that holders of Common Stock
of record shall be entitled to exchange their Common Stock for securities or
other property deliverable upon such reclassification, reorganization,
consolidation, merger, sale, transfer, dissolution, liquidation or winding-up.
Failure to give such notice, or any defect therein, shall not affect the
legality or validity of such dividend, distribution, reclassification,
reorganization, consolidation, merger, sale, transfer, dissolution, liquidation
or winding-up.
Section 812 Effect of Reclassification, Consolidation, Merger, Binding
Share Exchange or Sale.
(a) If any of the following events occur, namely (i) any reclassification
or change of outstanding shares of Common Stock (other than a change in par
value, or from par value to no par value, or from no par value to par value, or
as a result of a reclassification, subdivision or combination); (ii) any
consolidation, merger, combination or binding share exchange of the Company with
another corporation as a result of which holders of Common Stock shall be
entitled to receive stock, securities or other property or assets (including
cash) with respect to or in exchange for such Common Stock; or (iii) any sale or
conveyance of the properties and assets of the Company as, or substantially as,
an entirety to any other corporation as a result of which holders of Common
Stock shall be entitled to receive stock, securities or other property or assets
(including cash) with respect to or in exchange for such Common Stock, then the
Company or the successor or purchasing corporation, as the case may be, shall
execute with the Trustee a supplemental indenture, providing for the conversion
and settlement of the Notes as set forth in this Indenture. Such supplemental
indenture shall provide for adjustments which shall be as nearly equivalent as
may be practicable to the adjustments provided for in this Article VIII. If, in
the case of any such reclassification, change, consolidation, merger,
combination, binding share exchange, sale or conveyance, the Exchange Property
includes shares of stock, other securities, property or assets of a Person other
than the successor or purchasing Person, as the case may be, in such
reclassification, change, consolidation, merger, combination, binding share
exchange, sale or conveyance, then such supplemental indenture shall also be
executed by such other Person and shall contain such additional provisions to
protect the interests of the Holders of the Notes as the Board of Directors
shall reasonably consider necessary by reason of the foregoing. The Company
shall cause notice of the execution of such supplemental indenture to be mailed
to each Holder, at its address appearing on the Security Register, within 20
days after execution thereof. Failure to deliver such notice shall not affect
the legality or validity of such supplemental indenture.
(b) Subject to the provisions of Section 801(b), the Conversion Value with
respect to each $1,000 principal amount of Notes converted following the
effective date of any such transaction referred to in Section 812(a) shall be
calculated (as provided in clause (c) below) based on the kind and amount of
stock, securities, other property, assets or cash received upon such
reclassification, change, consolidation, merger, binding share exchange, sale or
conveyance by a holder of Common Stock holding, immediately prior to the
transaction, a number of shares of Common Stock equal to the Conversion Rate
immediately prior to such transaction (the "Exchange Property"), assuming such
holder of Common Stock did not exercise any rights of election, if any, as to
the kind or amount of stock, securities, other property, assets or cash
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receivable upon such consolidation, merger, binding share exchange, sale or
conveyance (provided that, if the kind or amount of stock, securities, other
property, assets or cash receivable upon such consolidation, merger, binding
share exchange, sale or conveyance is not the same for each share of Common
Stock in respect of which such rights of election shall not have been exercised
("Non-Electing Share"), then for the purposes of this Section 812 the kind and
amount of stock, securities, other property, assets or cash receivable upon such
consolidation, merger, binding share exchange, sale or conveyance for each
non-electing share shall be deemed to be the kind and amount so receivable per
share by a plurality of the Non-Electing Shares).
(c) The Conversion Value in respect of any Notes converted following the
effective date of any such transaction shall be equal to the average of the
daily values of the Exchange Property pertaining to such Notes as determined in
the next sentence (the "Exchange Property Value") for each of the ten
consecutive Trading Days (appropriately adjusted to take into account the
occurrence during such period of stock splits and similar events) beginning on
the later of (i) the second Trading Day immediately following the day the Notes
are tendered for conversion and (ii) the effective date of such transaction (the
"Exchange Property Average Price"). For the purpose of determining the value of
any Exchange Property:
(i) any shares of common stock of the successor or purchasing Person
or any other Person that are included in the Exchange Property shall be
valued as set forth in Section 801(b) as if such shares were "Common Stock"
using the procedures set forth in the definition of "Last Reported Sale
Price" in Section 102; and
(ii) any other securities, property or assets (other than cash)
included in the Exchange Property shall be valued in good faith by the
Board of Directors or by a New York Stock Exchange member firm selected by
the Board of Directors.
(d) The Company shall deliver such Conversion Value to holders of Notes so
converted as follows:
(i) an amount in Cash equal to the Principal Return with respect to
those Notes, determined as set forth in Section 801(c)(i); and
(ii) if the Conversion Value of those Notes is greater than the
Principal Return, an amount of Exchange Property, determined as set forth
below, equal to such aggregate Conversion Value less the Principal Return
(the "Net Exchange Property Amount"); provided, however, that the Company
may, at its option, deliver cash or a combination of cash and Exchange
Property equal to the Net Exchange Property Amount.
The amount of Exchange Property to be delivered shall be determined by dividing
the Net Exchange Property Amount by the Exchange Property Average Price. If the
Exchange Property includes more than one kind of property, the amount of
Exchange Property of each kind to be delivered shall be in the proportion that
the Exchange Property Value of such kind of Exchange Property bears to the
Exchange Property Value of all the Exchange Property. If the foregoing
calculations would require the Company to deliver a fractional share or unit of
Exchange Property to a holder of Notes being converted, the Company shall
deliver cash in lieu of such fractional share or unit based on its Exchange
Property Average Price.
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(e) Notwithstanding clauses (b), (c) and (d) above, if the Notes are
tendered for conversion prior to the effective date of any such transaction
pursuant to this Section 812 above, and the amount in cash and number of shares
of Common Stock, if any, that a Holder will receive upon conversion have been
determined as of the effective date of such transaction, then the Company shall
(i) pay the amount in cash as set forth in Section 801 and (ii) instead of
delivering shares of Common Stock as set forth in Section 801, if applicable,
deliver an amount of Exchange Property that a holder of Common Stock, holding,
immediately prior to the transaction, a number of shares of Common Stock equal
to the number of shares of Common Stock as set forth in Section 801, would
receive, assuming such holder of Common Stock did not exercise his rights of
election, if any, as to the kind or amount of stock, securities, other property,
assets or cash receivable upon such consolidation, merger, binding share
exchange, sale or conveyance (provided that, if the kind or amount of stock,
securities, other property, assets or cash receivable upon such consolidation,
merger, binding share exchange, sale or conveyance is not the same for each
Non-Electing Share, then for the purposes of this Section 812 the kind and
amount of stock, securities, other property, assets or cash receivable upon such
consolidation, merger, binding share exchange, sale or conveyance for each
Non-Electing Share shall be deemed to be the kind and amount so receivable per
share by a plurality of the Non-Electing Shares). If the foregoing calculations
would require the Company to deliver a fractional share or unit of Exchange
Property to a holder of Notes being converted, the Company shall deliver cash in
lieu of such fractional share or unit based on the Exchange Property Value (as
so determined).
The above provisions of this Section 812 shall similarly apply to
successive reclassifications, changes, consolidations, mergers, combinations,
binding share exchanges, sales and conveyances.
If this Section 812 applies to any event or occurrence, Section 806 shall
not apply. Notwithstanding this Section 812, if a Public Acquirer Change of
Control occurs and the Company elects to adjust the Conversion Rate and its
conversion obligation pursuant to Section 501(c), the provisions of Section
501(c) shall apply to the conversion instead of this Section 812.
Section 813 Responsibility of Trustee. The Trustee and any other Conversion
Agent shall not at any time be under any duty or responsibility to any Holder to
either calculate the Conversion Rate or determine whether any facts exist which
may require any adjustment of the Conversion Rate, or with respect to the nature
or extent or calculation of any such adjustment when made, or with respect to
the method employed, or herein or in any supplemental indenture provided to be
employed, in making the same and shall be protected in relying upon an Officers'
Certificate with respect to the same. The Trustee and any other Conversion Agent
shall not be accountable with respect to the validity or value (or the kind or
amount) of any shares of Common Stock, or of any other securities or property,
which may at any time be issued or delivered upon the conversion of any Notes
and the Trustee and any other Conversion Agent make no representations with
respect thereto. Subject to the provisions of Article Five of the Original
Indenture, neither the Trustee nor any Conversion Agent shall be responsible for
any failure of the Company to issue, transfer or deliver any Cash or shares of
Common Stock or stock certificates or other securities or property upon the
surrender of any Notes for the purpose of conversion or to comply with any of
the duties, responsibilities or covenants of the Company contained in this
Section. Without limiting the generality of the foregoing, neither the Trustee
nor any Conversion Agent shall be under any responsibility to determine the
correctness of any
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provisions contained in any Supplemental Indenture entered into pursuant to
Article VIII hereof relating either to the kind or amount of shares of stock or
securities or property (including cash) receivable by Holders upon the
conversion of their Notes after any event referred to in such Section 812 or to
any adjustment to be made with respect thereto, but, subject to the provisions
of Article Five of the Original Indenture, may accept as conclusive evidence of
the correctness of any such provisions, and shall be protected in relying upon,
the Officers' Certificate (which the Company shall be obligated to file with the
Trustee prior to the execution of any such supplemental indenture) with respect
thereto.
Section 814 Simultaneous Adjustments. In the event that Section 806
requires adjustments to the Conversion Rate under more than one of Sections
806(a), (b), (c) or (d), and the Record Dates for the distributions giving rise
to such adjustments shall occur on the same date, then such adjustments shall be
made by applying, first, the provisions of Section 806(c), second, the
provisions of Section 806(a) and third, the provisions of Section 806(b);
provided, however, that nothing in this Section 814 shall be done to evade the
principle set forth in Section 806(h) hereof that the Maximum Conversion Rate
shall not apply to any adjustments made with respect to any of the events in
Section 806(a) or Section 806(b) hereof.
Section 815 Successive Adjustments. After an adjustment to the Conversion
Rate under Section 806, any subsequent event requiring an adjustment under
Section 806 shall cause an adjustment to the Conversion Rate as so adjusted.
Section 816 General Considerations. Whenever successive adjustments to the
Conversion Rate are called for pursuant to this Article VIII, such adjustments
shall be made to the Market Price per share of Common Stock as may be necessary
or appropriate to effectuate the intent of this Article VIII and to avoid unjust
or inequitable results as determined in good faith by the Board of Directors.
ARTICLE IX
Transfer and Exchange
Section 901 Transfer and Exchange of the Notes.
The transfer and exchange of Global Notes or beneficial interests therein
shall be effected through the Depositary, in accordance with Section 305 of the
Original Indenture and this Article IX (including the restrictions on transfer
set forth therein and herein) and the rules and procedures of the Depositary
therefor, which shall include restrictions on transfer comparable to those set
forth therein and herein to the extent required by the Securities Act. The
transfer and exchange of Global Notes or beneficial interests therein for
certificated notes (or vice versa) shall be effected through the Trustee and the
Depositary, as the case may be, in accordance with Section 305 of the Original
Indenture and this Article IX.
Section 902 Legends.
(a) Each certificate evidencing the Global Notes or certificated notes in
definitive form (and all Notes issued in exchange therefor or substitution
thereof) shall bear a legend in substantially the following form:
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THE HOLDER OF THE COMMON STOCK ISSUABLE UPON CONVERSION OF THIS
SECURITY IS SUBJECT TO, AND ENTITLED TO THE BENEFITS OF, A RIGHTS
AGREEMENT, DATED AS OF JANUARY 1, 2002, BETWEEN THE COMPANY AND
JPMORGAN CHASE BANK, NATIONAL ASSOCIATION, AS RIGHTS AGENT.
Each certificate evidencing the Global Notes also shall bear the legend
specified for Global Notes in the form of Note attached hereto as Exhibit A.
ARTICLE X
Remedies; Modification and Waiver
Section 1001 Additional Events of Default; Acceleration of Maturity.
(a) Solely with respect to the Notes issued hereby, Section 501(1) of the
Original Indenture is hereby deleted in its entirety, and the following is
substituted in lieu thereof as an Event of Default in addition to the other
events set forth in Section 501 of the Original Indenture:
"(1) default in the payment of any interest upon any Security of that
series, including Contingent Interest, if any, when it becomes due and
payable, and continuance of such default for a period of 30 days;"
(b) Solely with respect of the Notes issued hereby, Section 501(5) of the
Original Indenture is hereby deleted in its entirety, and the following is
substituted in lieu thereof as an Event of Default in addition to the other
events set forth in Section 501 of the Original Indenture:
"(5) the entry by a court having jurisdiction in the premises of
(A) a decree or order for relief in respect of the Company, CERC or
CenterPoint Houston in an involuntary case or proceeding under any
applicable federal or state bankruptcy, insolvency, reorganization or
other similar law or (B) a decree or order adjudging the Company, CERC
or CenterPoint Houston a bankrupt or insolvent, or approving as
properly filed a petition seeking reorganization, arrangement,
adjustment or composition of or in respect of the Company, CERC or
CenterPoint Houston under any applicable federal or state law, or
appointing a custodian, receiver, liquidator, assignee, trustee,
sequestrator or other similar official of the Company, CERC or
CenterPoint Houston or of any substantial part of its respective
property, or ordering the winding up or liquidation of its respective
affairs, and the continuance of any such decree or order for relief or
any such other decree or order unstayed and in effect for a period of
90 consecutive days; provided that any specified event in (A) or (B)
involving CERC or CenterPoint Houston shall not constitute an Event of
Default if, at the time such event occurs, CERC or
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CenterPoint Houston, as the case may be, shall no longer be an
Affiliate of the Company; or"
(c) Solely with respect to the Notes issued hereby, Section 501(6) of the
Original Indenture is hereby deleted in its entirety, and the following is
substituted in lieu thereof as an Event of Default in addition to the other
events set forth in Section 501 of the Original Indenture:
"(6) the commencement by the Company, CERC or CenterPoint Houston
of a voluntary case or proceeding under any applicable federal or
state bankruptcy, insolvency, reorganization or other similar law or
of any other case or proceeding to be adjudicated a bankrupt or
insolvent, or the consent by any of them to the entry of a decree or
order for relief in respect of the Company, CERC or CenterPoint
Houston in an involuntary case or proceeding under any applicable
federal or state bankruptcy, insolvency, reorganization or other
similar law or to the commencement of any bankruptcy or insolvency
case or proceeding against any of them, or the filing by any of them
of a petition or answer or consent seeking reorganization or relief
under any applicable federal or state law, or the consent by any of
them to the filing of such petition or to the appointment of or taking
possession by a custodian, receiver, liquidator, assignee, trustee,
sequestrator or other similar official of the Company, CERC or
CenterPoint Houston or of any substantial part of their respective
property, or the making by any of them of an assignment of a
substantial part of their respective property for the benefit of
creditors, or the admission by any of them in writing of the inability
of any of the Company, CERC or CenterPoint Houston to pay their
respective debts generally as they become due, or the taking of
corporate action by the Company, CERC or CenterPoint Houston in
furtherance of any such action; provided that any such specified event
involving CERC or CenterPoint Houston shall not constitute an Event of
Default if, at the time such event occurs, CERC or CenterPoint
Houston, as the case may be shall no longer be an Affiliate of the
Company; or"
(d) Solely with respect to the Notes issued hereby, and pursuant to Section
501(7) of the Original Indenture, the following shall each constitute an "Event
of Default" in addition to the other events set forth in Section 501 of the
Original Indenture:
"(i) The default by the Company, CERC or CenterPoint Houston in a
scheduled payment at maturity, upon redemption or otherwise, in the
aggregate principal amount of $50 million or more, after the
expiration of any applicable grace period, of any Indebtedness or the
acceleration of any Indebtedness of the Company, CERC or CenterPoint
Houston in such aggregate principal amount, so that it becomes due and
payable prior to the
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date on which it would otherwise have become due and payable and such
payment default is not cured or such acceleration is not rescinded
within 30 days after notice to the Company in accordance with the
terms of the Indebtedness; provided that such payment default or
acceleration of CERC or CenterPoint Houston shall not to be an Event
of Default if, at the time such event occurs, CERC or CenterPoint
Houston, as the case may be, shall not be an Affiliate of the Company;
(ii) The Company defaults in its obligation to redeem the Notes
after exercising its redemption option pursuant to Article IV hereof;
(iii) The Company defaults in its obligation to convert the Notes
upon exercise of a Holder's conversion right in accordance with the
terms of the Notes and Article VIII hereof; and
(iv) The Company defaults in its obligation to purchase Notes
upon the occurrence of a Fundamental Change or the exercise by a
Holder of its option to require the Company to repurchase such
Holder's Notes in accordance with the terms of Article V or Article VI
hereof, as applicable."
Section 1002 Modification and Waiver. In addition to those matters set
forth in Section 902 of the Original Indenture (including the terms and
conditions of the Notes set forth herein), with respect to the Notes, no
amendment or Supplemental Indenture shall without the consent of the Holder of
each Note affected thereby:
(a) Reduce the Redemption Price, Purchase Price or Fundamental Change
Purchase Price of the Notes;
(b) Change the terms applicable to redemption or purchase of the Notes in a
manner adverse to the Holder; or
(c) Alter the manner of calculation or rate of Contingent Interest payable
on any Note or extend the time for payment of any such amount.
In addition, with respect to the Notes, notwithstanding Sections 513 and 1006 of
the Original Indenture, approval of the Holders of each outstanding Note shall
be required to:
(a) Waive any default by the Company in any payment of the Redemption
Price, Purchase Price or Fundamental Change Purchase Price with respect to
any Notes; or
(b) Waive any default which constitutes a failure to convert any Note in
accordance with its terms and the terms of Article VIII hereof.
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The reference to "interest" in Section 513(1) of the Original Indenture shall
include Contingent Interest, if any.
ARTICLE XI
Miscellaneous Provisions
Section 1101 The Indenture, as supplemented and amended by this
Supplemental Indenture No. 6, is in all respects hereby adopted, ratified and
confirmed.
Section 1102 This Supplemental Indenture No. 6 may be executed in any
number of counterparts, each of which shall be an original, but such
counterparts shall together constitute but one and the same instrument.
Section 1103 THIS SUPPLEMENTAL INDENTURE NO. 6 AND EACH NOTE SHALL BE
DEEMED TO BE A CONTRACT MADE UNDER THE LAWS OF THE STATE OF NEW YORK AND SHALL
BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW
YORK WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES THEREOF.
Section 1104 If any provision in this Supplemental Indenture No. 6 limits,
qualifies or conflicts with another provision hereof which is required to be
included herein by any provisions of the Trust Indenture Act, such required
provision shall control.
Section 1105 In case any provision in this Supplemental Indenture No. 6 or
the Notes shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
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IN WITNESS WHEREOF, the parties hereto have caused this Supplemental
Indenture No. 6 to be duly executed, as of the day and year first written above.
CENTERPOINT ENERGY, INC.
By: /s/ Gary L. Whitlock
------------------------------------
Name: Gary L. Whitlock
Title: Executive Vice President and
Chief Financial Officer
Attest:
/s/ Richard B. Dauphin
- -------------------------------------
Name: Richard B. Dauphin
Title: Assistant Corporate Secretary
(SEAL)
JPMORGAN CHASE BANK,
NATIONAL ASSOCIATION, AS TRUSTEE
By: /s/ Carol Logan
------------------------------------
Name: Carol Logan
Title: Vice President and Trust Officer
(SEAL)
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Exhibit A
[FORM OF FACE OF NOTE]
[Global Note]
[Certificated Note]
[IF THIS SECURITY IS TO BE A GLOBAL NOTE -] THIS SECURITY IS A GLOBAL SECURITY
WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN
THE NAME OF A DEPOSITARY OR A NOMINEE OF A DEPOSITARY. THIS SECURITY IS
EXCHANGEABLE FOR SECURITIES REGISTERED IN THE NAME OF A PERSON OTHER THAN THE
DEPOSITARY OR ITS NOMINEE ONLY IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE
INDENTURE AND MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY TO A
NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR
ANOTHER NOMINEE OF THE DEPOSITARY.
[For as long as this Global Security is deposited with or on behalf of The
Depository Trust Company it shall bear the following legend.] Unless this
certificate is presented by an authorized representative of The Depository Trust
Company, a New York corporation ("DTC"), to CenterPoint Energy, Inc. or its
agent for registration of transfer, exchange, or payment, and any certificate
issued is registered in the name of Cede & Co. or in such other name as is
requested by an authorized representative of DTC (and any payment is made to
Cede & Co. or to such other entity as is requested by an authorized
representative of DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner
hereof, Cede & Co., has an interest herein.
CENTERPOINT ENERGY, INC.
3.75% Convertible Senior Notes, Series B due 2023
No. __________ $__________ *
CUSIP No. ________
CENTERPOINT ENERGY, INC., a corporation duly organized and existing under
the laws of the State of Texas (herein called the "Company", which term includes
any successor Person under the Indenture hereinafter referred to), for value
received, hereby promises to pay to _______________, or registered assigns, the
principal sum of ____________________ Dollars on May 15, 2023. This Note shall
bear interest as specified on the other side of this Note. This
- ----------
* REFERENCE IS MADE TO SCHEDULE A ATTACHED HERETO WITH RESPECT TO DECREASES
AND INCREASES IN THE AGGREGATE PRINCIPAL AMOUNT OF NOTES EVIDENCED BY THIS
CERTIFICATE.
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Note is convertible and is subject to redemption at the option of the Company
and to purchase by the Company at the option of the Holder as specified on the
other side of this Note.
Reference is hereby made to the further provisions of this Note set forth
on the reverse hereof, which further provisions shall for all purposes have the
same effect as if set forth at this place.
THE HOLDER OF THE COMMON STOCK ISSUABLE UPON CONVERSION OF THIS
SECURITY IS SUBJECT TO, AND ENTITLED TO THE BENEFITS OF, A RIGHTS
AGREEMENT, DATED AS OF JANUARY 1, 2002, BETWEEN THE COMPANY AND
JPMORGAN CHASE BANK, NATIONAL ASSOCIATION, AS RIGHTS AGENT.
FOR PURPOSES OF SECTIONS 1273 AND 1275 OF THE INTERNAL REVENUE CODE,
THIS SECURITY IS A CONTINGENT PAYMENT DEBT INSTRUMENT AND WILL ACCRUE
ORIGINAL ISSUE DISCOUNT AT THE ISSUER'S "COMPARABLE YIELD" FOR UNITED
STATES FEDERAL INCOME TAX PURPOSES. PURSUANT TO SECTION 213 OF THE
SUPPLEMENTAL INDENTURE, THE COMPANY AGREES, AND BY ACCEPTANCE OF A
BENEFICIAL OWNERSHIP INTEREST IN THE SECURITY, EACH BENEFICIAL HOLDER
OF THE SECURITIES WILL BE DEEMED TO HAVE AGREED, FOR UNITED STATES
FEDERAL INCOME TAX PURPOSES, (i) TO TREAT THE SECURITIES AS
INDEBTEDNESS THAT IS SUBJECT TO THE CONTINGENT PAYMENT DEBT INSTRUMENT
REGULATIONS UNDER SECTION 1.1275-4 OF THE UNITED STATES TREASURY
REGULATIONS (THE "CPDI REGULATIONS"), AND, FOR PURPOSES OF THE CPDI
REGULATIONS, TO TREAT THE FAIR MARKET VALUE OF COMMON STOCK RECEIVED
BY A BENEFICIAL HOLDER UPON ANY CONVERSION OF THE NOTES AS A
CONTINGENT PAYMENT AND (ii) TO BE BOUND BY THE COMPANY'S DETERMINATION
OF THE "COMPARABLE YIELD" AND "PROJECTED PAYMENT SCHEDULE," WITHIN THE
MEANING OF THE CPDI REGULATIONS, WITH RESPECT TO THE NOTES AND TO
ACCRUE ORIGINAL ISSUE DISCOUNT AT THE COMPARABLE YIELD AS DETERMINED
BY THE COMPANY. THE COMPANY'S DETERMINATION OF THE "COMPARABLE YIELD"
IS 5.81% PER ANNUM, COMPOUNDED SEMIANNUALLY. THE PROJECTED PAYMENT
SCHEDULE, DETERMINED BY THE COMPANY, IS ATTACHED TO THE SUPPLEMENTAL
INDENTURE AS EXHIBIT F. YOU MAY OBTAIN THE AMOUNT OF ORIGINAL ISSUE
DISCOUNT, ISSUE DATE, COMPARABLE YIELD AND PROJECTED PAYMENT SCHEDULE
FOR THE SECURITY BY TELEPHONING THE COMPANY'S TREASURY
A-2
DEPARTMENT AT (713) 207-7019 OR SUBMITTING A WRITTEN REQUEST FOR SUCH
INFORMATION TO: CENTERPOINT ENERGY, INC., 1111 LOUISIANA, HOUSTON,
TEXAS 77002, ATTENTION: TREASURER.
Unless the certificate of authentication hereon has been executed by the
Trustee referred to on the reverse hereof by manual signature, this Note shall
not be entitled to any benefit under the Indenture or be valid or obligatory for
any purpose.
A-3
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed under its corporate seal.
Dated: CENTERPOINT ENERGY, INC.
------------------------------
By:
------------------------------------
Name:
----------------------------------
(SEAL) Title:
---------------------------------
Attest:
- -------------------------------------
Name:
-------------------------------
Title:
------------------------------
This is one of the Securities of the series designated therein referred to
in the within-mentioned Indenture.
JPMORGAN CHASE BANK,
NATIONAL ASSOCIATION
As Trustee
Date of Authentication:
-------------
By:
------------------------------------
Authorized Signatory
A-4
[FORM OF REVERSE SIDE OF NOTE]
CENTERPOINT ENERGY, INC.
3.75% CONVERTIBLE SENIOR NOTES, SERIES B DUE 2023
1. INTEREST
This Note shall bear interest at a rate of 3.75% per year on the principal
hereof, from May 15, 2005 or from the most recent Interest Payment Date (as
defined below) to which payment has been made or duly provided for, payable
semiannually in arrears on May 15 and November 15 of each year (each an
"Interest Payment Date"), beginning November 15, 2005 to the persons in whose
names the Notes are registered at the close of business on May 1 and November 1
(each a "Regular Record Date") (whether or not a Business Day), as the case may
be, immediately preceding such Interest Payment Date. This Note shall also bear
Contingent Interest in certain circumstances as specified in paragraph 5 below.
The amount of interest payable for any period shall be computed on the basis of
a 360-day year of twelve 30-day months. The amount of interest payable for any
partial period shall be computed on the basis of a 360-day year of twelve 30-day
months and the days elapsed in any partial month.
Holders of Notes at the close of business on a Regular Record Date will
receive payment of interest, including Contingent Interest, if any, payable on
the corresponding Interest Payment Date notwithstanding the conversion of such
Notes at any time after the close of business on such Regular Record Date. Notes
surrendered for conversion by a Holder during the period from the close of
business on any Regular Record Date to the opening of business on the
immediately following Interest Payment Date must be accompanied by payment of an
amount equal to the interest, including Contingent Interest, if any, that the
Holder is to receive on the Notes; provided, however, that no such payment need
be made if (1) the Company has specified a Redemption Date that is after a
Regular Record Date and on or prior to the immediately following Interest
Payment Date, (2) the Company has specified a Purchase Date following a
Fundamental Change that is during such period or (3) any overdue interest
(including overdue Contingent Interest, if any) exists at the time of conversion
with respect to such Notes to the extent of such overdue interest.
If the principal hereof or any portion of such principal is not paid when
due (whether upon acceleration, upon the date set for payment of the Redemption
Price pursuant to paragraph 6 hereof, upon the date set for payment of a
Purchase Price or Fundamental Change Purchase Price pursuant to paragraph 8
hereof or upon the Stated Maturity of this Note) or if interest (including
Contingent Interest, if any) due hereon or any portion of such interest is not
paid when due in accordance with this paragraph or paragraph 5 or 11 hereof,
then in each such case the overdue amount shall bear interest at the rate of
3.75% per annum, compounded semiannually (to the extent that the payment of such
interest shall be legally enforceable), which interest shall accrue from the
date such overdue amount was due to the date payment of such amount, including
interest thereon, has been made or duly provided for. All such interest shall be
payable on demand.
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2. METHOD OF PAYMENT
Payment of the principal of (and premium, if any) and any such interest on
this Note will be made at the Corporate Trust Office of the Trustee, in such
coin or currency of the United States of America as at the time of payment is
legal tender for payment of public and private debts; provided, however, that at
the option of the Company payment of interest may be made (i) by check mailed to
the address of the Person entitled thereto as such address shall appear in the
Security Register or (ii) by wire transfer in immediately available funds at
such place and to such account as may be designated in writing by the Person
entitled thereto as specified in the Security Register.
3. PAYING AGENT, CONVERSION AGENT AND SECURITY REGISTRAR
Initially, the Trustee, shall act as Paying Agent, Conversion Agent and
Security Registrar. The Company may appoint and change any Paying Agent,
Conversion Agent, Security Registrar or co-registrar or approve a change in the
office through which any Paying Agent acts without notice, other than notice to
the Trustee. The Company or any of its Subsidiaries or any of their Affiliates
may act as Paying Agent, Conversion Agent, Security Registrar or co-registrar.
4. INDENTURE
This Note is one of a duly authorized issue of securities of the Company,
issued and to be issued in one or more series under an Indenture, dated as of
May 19, 2003 (the "Original Indenture"), as amended and supplemented by the
Supplemental Indenture No. 1 thereto, dated as of May 19, 2003, the Supplemental
Indenture No. 2 thereto, dated as of May 27, 2003, the Supplemental Indenture
No. 3 thereto, dated as of September 9, 2003, the Supplemental Indenture No. 4
thereto, dated as of December 17, 2003, the Supplemental Indenture No. 5
thereto, dated as of December 13, 2004, and the Supplemental Indenture No. 6
thereto, dated as of August 23, 2005 (the Original Indenture as so amended and
supplemented, the "Indenture"), between the Company and the Trustee. Capitalized
terms used herein and not defined herein have the meanings ascribed thereto in
the Indenture. Reference is hereby made to the Indenture for a statement of the
respective rights thereunder of the Company, the Trustee and the Holders and the
terms upon which the Notes are to be authenticated and delivered. The terms,
conditions and provisions of the Notes are those stated in the Indenture, those
made part of the Indenture by reference to the Trust Indenture Act of 1939, as
amended, and those set forth in the Notes.
The Notes are general unsecured obligations of the Company limited to
$575,000,000 aggregate principal amount.
5. CONTINGENT INTEREST
The Company will pay Contingent Interest to the Holders of the Notes in
respect of any six-month interest period from May 15 to November 14 or November
15 to May 14 commencing on or after May 15, 2008 for which the average Trading
Price of a Note for the applicable five Trading Day reference period equals or
exceeds 120% of $1,000 per $1,000 principal amount of Notes as of the day
immediately preceding the first day of the applicable six-month interest period.
The "five Trading Day reference period" means the five Trading Days ending on
the second Trading Day immediately preceding the relevant six-month interest
period. For any six-
A-6
month interest period in respect of which Contingent Interest is payable, the
Contingent Interest payable on each $1,000 principal amount of Notes shall equal
0.25% of the average Trading Price per $1,000 principal amount of Notes during
the applicable five Trading Day reference period.
The record dates and payment dates for Contingent Interest, if any, will be
the same as the Regular Record Date and Interest Payment Dates for the
semi-annual interest payments on the Notes.
Upon determination that Holders will be entitled to receive Contingent
Interest which may become payable, the Company shall notify the Holders. In
connection with providing such notice, the Company will issue a press release
and publish a notice containing information regarding the Contingent Interest
determination in a newspaper of general circulation in The City of New York or
publish such information on the Company's then existing Web site or through such
other public medium as the Company shall determine.
6. REDEMPTION AT THE OPTION OF THE COMPANY
No sinking fund is provided for the Notes. The Notes are redeemable for
cash in whole, or in part, at any time on or after May 15, 2008 at the option of
the Company at a redemption price ("Redemption Price") equal to 100% of the
principal amount of the Notes to be redeemed plus any accrued and unpaid
interest (including Contingent Interest, if any) to the Redemption Date.
7. NOTICE OF REDEMPTION AT THE OPTION OF THE COMPANY
Notice of redemption at the option of the Company shall be mailed at least
30 days but not more than 60 days before a Redemption Date to the Trustee, the
Paying Agent and each Holder of Notes to be redeemed at the Holder's registered
address. If money sufficient to pay the Redemption Price of all Notes (or
portions thereof) to be redeemed on the Redemption Date is deposited with the
Paying Agent prior to or on the Redemption Date, on and after the Redemption
Date interest (including Contingent Interest, if any), if any, shall cease to
accrue on such Notes or portions thereof. Notes in denominations larger than
$1,000 principal amount may be redeemed in part but only in integral multiples
of $1,000 principal amount.
8. PURCHASE BY THE COMPANY AT THE OPTION OF THE HOLDER; PURCHASE AT THE OPTION
OF THE HOLDER UPON A FUNDAMENTAL CHANGE
(a) Subject to the terms and conditions of the Indenture, a Holder shall
have the option to require the Company to purchase the Notes held by such Holder
on May 15, 2008, May 15, 2013 and May 15, 2018 (each, a "Purchase Date") at a
purchase price (the "Purchase Price") equal to 100% of the principal amount of
the Notes to be purchased plus any accrued and unpaid interest (including
Contingent Interest, if any) to such Purchase Date, upon delivery of a Purchase
Notice containing the information set forth in the Indenture, from the opening
of business on the date that is 20 Business Days prior to such Purchase Date
until the close of business on the fifth Business Day prior to such Purchase
Date and upon delivery of the Notes to the Paying Agent by the Holder as set
forth in the Indenture. The Company will pay the Purchase Price in cash.
A-7
Notes in denominations larger than $1,000 principal amount may be purchased
in part, but only in integral multiples of $1,000 principal amount.
(b) If a Fundamental Change shall occur at any time prior to May 15, 2008,
each Holder shall have the right, at such Holder's option and subject to the
terms and conditions of the Indenture, to require the Company to purchase any or
all of such Holder's Notes or any portion of the principal amount thereof that
is equal to $1,000 or an integral multiple of $1,000 on the date selected by the
Company that is no later than 35 days after the date of the Company Notice of
the occurrence of the Fundamental Change (subject to extension to comply with
applicable law) for a Fundamental Change Purchase Price equal to 100% of the
principal amount of Notes purchased plus accrued and unpaid interest (including
Contingent Interest, if any) to the Fundamental Change Purchase Date, which
Fundamental Change Purchase Price shall be paid by the Company in cash, as set
forth in the Indenture.
(c) Holders have the right to withdraw any Purchase Notice or Fundamental
Change Purchase Notice, as the case may be, by delivery to the Paying Agent of a
written notice of withdrawal in accordance with the provisions of the Indenture.
(d) If cash sufficient to pay a Fundamental Change Purchase Price or
Purchase Price, as the case may be, of all Notes or portions thereof to be
purchased as of the Purchase Date or the Fundamental Change Purchase Date, as
the case may be, is deposited with the Paying Agent on the Business Day
following the Purchase Date or the Fundamental Change Purchase Date, as the case
may be, interest (including Contingent Interest, if any) shall cease to accrue
on such Notes (or portions thereof) on and after such Purchase Date or
Fundamental Change Purchase Date, and the Holder thereof shall have no other
rights as such (other than the right to receive the Purchase Price or
Fundamental Change Purchase Price, as the case may be, upon surrender of such
Note).
9. RANKING
The Notes shall be unsecured and shall rank equally in right of payment
with all of the Company's other existing and future unsecured and unsubordinated
Indebtedness.
10. CONVERSION
Subject to the procedures set forth in the Indenture, a Holder may convert
Notes into Cash and, if applicable, shares of Common Stock (in accordance with
the provisions of the Indenture) on or before the close of business on May 15,
2023 during the periods and upon satisfaction of at least one of the conditions
set forth below:
(a) in any calendar quarter (and only during such calendar quarter) if the
Last Reported Sale Price for 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 Common Stock on such last
Trading Day;
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(b) during any period in which both (A) the credit rating assigned to the
Notes by Moody's Investors Service, Inc. is lower than Ba2 and (B) the credit
rating assigned to the Notes by Standard & Poor's Rating Services is lower than
BB;
(c) during any period in which the Notes no longer are assigned credit
ratings by at least one of Moody's Investors Services, Inc. and Standard &
Poor's Ratings Services or their successors;
(d) in the event that the Company calls the Notes for redemption, at any
time prior to the close of business on the second Business Day immediately
preceding the Redemption Date; or
(e) the Company becomes a party to a consolidation, merger or binding share
exchange pursuant to which the Common Stock would be converted into cash or
property (other than securities), or if a transaction described in clause (c) of
the definition of Fundamental Change set forth in Section 102 of the Indenture
(or in connection with a transaction that would have been a Fundamental Change
under such clause (c) but for the existence of the 105% Trading Price Exception)
that occurs on or prior to May 15, 2008 and results in an increase in the
Conversion Rate, in which case a Holder may surrender Notes for conversion at
any time from and after the date which is 15 days prior to the anticipated
effective date for the transaction until and including the date which is 15 days
after the actual effective date of such transaction (or if such transaction also
results in Holders having the right to require the Company to repurchase their
Notes, until the Fundamental Change Purchase Date); or
(f) the Company elects to (i) distribute to all holders of Common Stock
assets, debt securities or rights to purchase securities of the Company, which
distribution has a per share value as determined by the Board of Directors
exceeding 15% of the Last Reported Sale Price of a share of Common Stock on the
Trading Day immediately preceding the declaration date for such distribution, or
(ii) distribute to all holders of Common Stock rights entitling them to
purchase, for a period expiring within 60 days after the date of such
distribution, shares of Common Stock at less than the Last Reported Sale Price
of Common Stock on the Trading Day immediately preceding the declaration date of
the distribution. In the case of the foregoing clauses (i) and (ii), the Company
must notify the Holders at least 20 Business Days immediately prior to the ex
date for such distribution. Once the Company has given such notice, Holders may
surrender their Notes for conversion at any time thereafter until the earlier of
the close of business on the Business Day immediately prior to the ex date or
the Company's announcement that such distribution will not take place; provided,
however, that a Holder may not exercise this right to convert if the Holder may
participate in the distribution without conversion. As used herein, the term "ex
date," when used with respect to any issuance or distribution, shall mean the
first date on which the Common Stock trades regular way on such exchange or in
such market without the right to receive such issuance or distribution.
If a Holder elects to convert such Holder's Notes in connection with a
Fundamental Change pursuant to clause (c) of the definition thereof set forth in
Section 102 of the Indenture (or in connection with a transaction that would
have been a Fundamental Change under such clause (c) but for the existence of
the 105% Trading Price Exception) that occurs on or prior to May 15, 2008
pursuant to which 10% or more of the consideration for the Common Stock (other
A-9
than cash payments for fractional shares) in such Fundamental Change transaction
consists of cash or securities (or other property) that are not traded or
scheduled to be traded immediately following such transaction on a U.S. national
securities exchange or the Nasdaq National Market, the Company will increase the
Conversion Rate by the Make-Whole Premium as described under Section 501(b) of
Supplemental Indenture No. 6 or, in lieu thereof, the Company may in certain
circumstances elect to adjust the Conversion Rate and the related conversion
obligation so that the Notes are convertible into shares of the acquiring or
surviving entity as described under Section 501(c) of Supplemental Indenture No.
6.
Notes in respect of which a Holder has delivered a notice of exercise of
the option to require the Company to purchase such Notes pursuant to Articles V
or VI of the Indenture may be converted only if the notice of exercise is
withdrawn in accordance with the terms of the Indenture.
The initial Conversion Rate is 86.3558. The Conversion Rate is subject to
adjustment in certain events described in the Indenture.
Holders of Notes at the close of business on a Regular Record Date will
receive payment of interest, including Contingent Interest, if any, payable on
the corresponding Interest Payment Date notwithstanding the conversion of such
Notes at any time after the close of business on such Regular Record Date. Notes
surrendered for conversion by a Holder during the period from the close of
business on any Regular Record Date to the opening of business on the
immediately following Interest Payment Date must be accompanied by payment of an
amount equal to the interest, including Contingent Interest, if any, that the
Holder is to receive on the Notes; provided, however, that no such payment need
be made if (1) the Company has specified a Redemption Date that is after a
Regular Record Date and on or prior to the immediately following Interest
Payment Date, (2) the Company has specified a Purchase Date following a
Fundamental Change that is during such period, or (3) any overdue interest
(including overdue Contingent Interest, if any) exists at the time of conversion
with respect to such Notes to the extent of such overdue interest.
To convert the Notes a Holder must (1) complete and manually sign the
irrevocable conversion notice on the back of the Notes (or complete and manually
sign a facsimile of such notice) and deliver such notice to the Conversion Agent
at the office maintained by the Conversion Agent for such purpose, (2) surrender
the Notes to the Conversion Agent, (3) furnish appropriate endorsements and
transfer documents if required by the Conversion Agent, the Company or the
Trustee and (4) pay any transfer or similar tax, if required.
A Holder may convert a portion of the Notes only if the principal amount of
such portion is $1,000 or a multiple of $1,000. No payment or adjustment shall
be made for dividends on the Common Stock except as provided in the Indenture.
On conversion of the Notes, that portion of accrued and unpaid interest
attributable to any period prior to and including the Conversion Date and
accrued and unpaid Contingent Interest with respect to the converted portion of
the Notes shall not be canceled, extinguished or forfeited, but rather shall be
deemed to be paid in full to the Holder thereof through the delivery of the Cash
and, if applicable, shares of Common Stock deliverable upon conversion in
exchange for the portion of the Notes being converted pursuant to the terms
hereof; and the Fair Market Value of any such shares of Common Stock (together
with
A-10
any such cash payment in lieu of fractional shares) shall be treated as issued,
to the extent thereof, first in exchange for interest accrued and unpaid through
the Conversion Date and accrued and unpaid Contingent Interest, and the balance,
if any, of such Fair Market Value of such Common Stock (and any such cash
payment) shall be treated as issued in exchange for the principal amount of the
Notes being converted pursuant to the provisions hereof.
If the Company engages in certain reclassifications of the Common Stock or
if the Company is a party to a consolidation, merger, binding share exchange or
a transfer of all or substantially all if its assets, in each case pursuant to
which shares of Common Stock are converted into cash, securities or other
property, then at the effective time of the transaction the Conversion Value and
the Net Share Amount will be based on the applicable Conversion Rate and the
kind and amount of cash, securities or other property which a Holder of one
share of Common Stock would have received in such transaction. In addition, if
the Holder converts its Notes following the effective time of the transaction,
the Net Share Amount will be paid, at the Company's option, in cash, in such
Exchange Property rather than Shares of Common Stock or in a combination of cash
and Exchange Property. Notwithstanding the first sentence of this paragraph, if
the Company elects to adjust the Conversion Rate and the Company's conversion
obligation as described in Section 501(c) of Supplemental Indenture No. 6, the
provisions described in that section will apply instead of the provisions
described in the first sentence of this paragraph.
11. DEFAULTED INTEREST
Except as otherwise specified with respect to the Notes, any Defaulted
Interest on any Note shall forthwith cease to be payable to the registered
Holder thereof on the relevant Regular Record Date or accrual date, as the case
may be, by virtue of having been such Holder, and such Defaulted Interest may be
paid by the Company as provided for in Section 204 of the Supplemental
Indenture.
12. DENOMINATIONS; TRANSFER; EXCHANGE
The Notes are in registered form, without coupons, in denominations of
$1,000 principal amount and integral multiples of $1,000. A Holder may transfer
or convert Notes in accordance with the Indenture. The Security Registrar may
require a Holder, among other things, to furnish appropriate endorsements and
transfer documents and to pay any taxes and fees required by law or permitted by
the Indenture. In the event of any redemption or purchase in part, the Security
Registrar need not register the transfer of or exchange any Notes selected for
redemption (except, in the case of a Note to be redeemed in part, the portion of
the Note not to be redeemed) or any Notes in respect of which a Purchase Notice
or Fundamental Change Purchase Notice has been given and not withdrawn (except,
in the case of a Note to be purchased in part, the portion of the Note not to be
purchased) for a period of 15 days before the mailing of a Redemption Notice,
Purchase Notice or Fundamental Change Purchase Notice.
13. PERSONS DEEMED OWNERS
The registered Holder of this Note may be treated as the owner of this Note
for all purposes.
A-11
14. UNCLAIMED MONEY OR PROPERTY
The Trustee and the Paying Agent shall return to the Company upon written
request any money or property held by them for the payment of any amount with
respect to the Notes that remains unclaimed for two years, provided, however,
that the Trustee or such Paying Agent, before being required to make any such
return, shall at the expense of the Company cause to be published once in a
newspaper of general circulation in The City of New York or mail to each such
Holder notice that such money or property remains unclaimed and that, after a
date specified therein, which shall not be less than 30 days from the date of
such publication or mailing, any unclaimed money or property then remaining
shall be returned to the Company. After return to the Company, Holders entitled
to the money or property must look to the Company for payment as general
creditors unless an applicable abandoned property law designates another Person.
15. AMENDMENT; WAIVER
Subject to certain exceptions set forth in the Indenture, (i) the Indenture
or the Notes may be amended with the written consent of the Holders of at least
a majority in aggregate principal amount of the Notes at the time Outstanding
and (ii) certain defaults or noncompliance with certain provisions may be waived
with the written consent of the Holders of a majority in aggregate principal
amount of the Notes at the time Outstanding. The Indenture or the Notes may be
amended without the consent of any Holders under circumstances set forth in
Section 901 of the Original Indenture. Any such consent or waiver by the Holder
of this Note shall be conclusive and binding upon such Holder and upon all
future Holders of this Note and of any Note issued upon the registration of
transfer hereof or in exchange herefor or in lieu hereof, whether or not
notation of such consent or waiver is made upon this Note.
16. DEFAULTS AND REMEDIES
If an Event of Default occurs and is continuing, the Trustee, or the
Holders of at least 25% in aggregate principal amount of the Notes at the time
outstanding, may declare the principal amount and any accrued and unpaid
interest (including Contingent Interest, if any), of all the Notes to be due and
payable immediately. Certain events of bankruptcy or insolvency are Events of
Default which shall result in the Notes being declared due and payable
immediately upon the occurrence of such Events of Default.
Events of Default in respect of the Notes are set forth in Section 1001 of
the Supplemental Indenture and Section 501 of the Original Indenture. Holders
may not enforce the Indenture or the Notes except as provided in the Indenture.
The Trustee may refuse to enforce the Indenture or the Notes unless it receives
reasonable indemnity or security. Subject to certain limitations, conditions and
exceptions, Holders of a majority in aggregate principal amount of the Notes at
the time Outstanding may direct the Trustee in its exercise of any trust or
power, including the annulment of a declaration of acceleration. The Trustee may
withhold from Holders notice of any continuing default (except a default in
payment on any Notes) if it determines that withholding notice is in their
interests.
17. CONSOLIDATION, MERGER, AND SALE OF ASSETS
A-12
In the event of a consolidation, merger, or a conveyance, transfer or lease
of all or substantially all of Company's property or assets as described in
Article VIII of the Original Indenture, the successor corporation to the Company
shall succeed to and be substituted for the Company, and may exercise the
Company's rights and powers under this Indenture, and thereafter, except in the
case of a lease, the Company shall be relieved of all obligations and covenants
under the Indenture and the Notes.
18. TRUSTEE AND AGENT DEALINGS WITH THE COMPANY
The Trustee, Paying Agent, Conversion Agent and Security Registrar under
the Indenture, each in its individual or any other capacity, may become the
owner or pledgee of Notes and may otherwise deal with and collect obligations
owed to it by the Company or its Affiliates and may otherwise deal with the
Company or its Affiliates with the same rights it would have if it were not
Trustee, Paying Agent, Conversion Agent or Security Registrar.
19. CALCULATIONS IN RESPECT OF THE NOTES
The Company will be responsible for making all calculations called for
under the Notes. These calculations include, but are not limited to,
determination of the market prices for the Common Stock, accrued interest
payable on the Notes and Conversion Price of the Notes. The Company will make
these calculations in good faith and, absent manifest error, these calculations
will be final and binding on the Holders. The Company will provide to each of
the Trustee and the Conversion Agent a schedule of its calculations and each of
the Trustee and the Conversion Agent is entitled to rely upon the accuracy of
such calculations without independent verification. The Trustee will forward the
Company's calculations to any Holder upon the request of such Holder.
20. NO RECOURSE AGAINST OTHERS
A director, officer or employee, as such, of the Company or any Subsidiary
of the Company or any stockholder as such, of the Company shall not have any
liability for any obligations of the Company under the Notes or the Indenture or
for any claim based on, in respect of or by reason of such obligations or their
creation. By accepting a Note, each Holder waives and releases all such
liability. The waiver and release are part of the consideration for the issue of
the Notes.
21. AUTHENTICATION
This Note shall not be valid until an authorized officer of the Trustee or
Authenticating Agent manually signs the Trustee's Certificate of Authentication
on the other side of this Note.
22. ABBREVIATIONS
Customary abbreviations may be used in the name of a Holder or an assignee,
such as TEN COM (=tenants in common), TENANT (=tenants by the entireties), JT
TEN (=joint tenants with right of survivorship and not as tenants in common),
CUST (=custodian), and U/G/M/A (=Uniform Gift to Minors Act).
A-13
23. GOVERNING LAW
The Indenture and this Note shall be governed by and construed in
accordance with the laws of the State of New York without regard to the
conflicts of law rules of said state.
A-14
SCHEDULE A
SCHEDULE OF ADJUSTMENTS
The initial aggregate principal amount of Securities evidenced by the
Certificate to which this Schedule is attached is _______________. The notations
on the following table evidence decreases and increases in the aggregate
principal amount of Securities evidenced by such Certificate.
Aggregate Principal
Decrease in Aggregate Increase in Aggregate Amount of Securities Notation by
Date of Principal Amount of Principal Amount of Remaining After Such Security
Adjustment Securities Securities Decrease or Increase Registrar
- ---------- --------------------- --------------------- -------------------- -----------
S-1
Exhibit B
FORM OF CONVERSION NOTICE
To: CenterPoint Energy, Inc.
The undersigned registered holder of this Note hereby exercises the option
to convert this Note, or portion hereof (which is $1,000 principal amount or an
integral multiple thereof) designated below, for cash and shares, if any, of
Common Stock of CenterPoint Energy, Inc. in accordance with the terms of the
Indenture referred to in this Note, and directs that the shares, if any,
issuable and deliverable upon such conversion, together with any check for cash
deliverable upon such conversion, and any Notes representing any unconverted
principal amount hereof, be issued and delivered to the registered holder hereof
unless a different name has been indicated below. If shares or any portion of
this Note not converted are to be issued in the name of a Person other than the
undersigned, the undersigned shall pay all transfer taxes payable with respect
thereto.
This notice shall be deemed to be an irrevocable exercise of the option to
convert this Note.
Dated:
------------------
----------------------------------------
Signature(s)
Signature(s) must be guaranteed by a
commercial bank or trust company or a
member firm of a major stock exchange if
shares of Common Stock are to be issued,
or Notes to be delivered, other than to
or in the name of the registered holder.
----------------------------------------
Signature Guarantee
B-1
Fill in for registration of shares if
to be delivered, and Notes if to be
issued other than to and in the name
of registered holder:
- ------------------------------------- Principal Amount to be purchased
(Name) (if less than all):
- ------------------------------------- $___________,000
(Street Address)
- ------------------------------------- Social Security or Other Taxpayer Number
(City, state and zip code)
Please print name and address
B-2
Exhibit C
FORM OF FUNDAMENTAL CHANGE PURCHASE NOTICE
To: CenterPoint Energy, Inc.
The undersigned registered holder of this Note hereby acknowledges receipt
of a notice from CenterPoint Energy, Inc. (the "Company") as to the occurrence
of a Fundamental Change with respect to the Company and requests and instructs
the Company to repurchase this Note, or the portion hereof (which is $1,000
principal amount or an integral multiple thereof) designated below, in
accordance with the terms of the Supplemental Indenture referred to in this Note
and directs that the check of the Company, in payment for this Note or the
portion thereof and any Notes representing any unrepurchased principal amount
hereof, be issued and delivered to the registered holder hereof unless a
different name has been indicated below. If any portion of this Note not
repurchased is to be issued in the name of a Person other than the undersigned,
the undersigned shall pay all transfer taxes payable with respect thereto.
Dated:
----------------------
----------------------------------------
Signature(s)
Signature(s) must be guaranteed by a
commercial bank or trust company or a
member firm of a major stock exchange if
Notes are to be delivered, other than to
or in the name of the registered holder.
----------------------------------------
Signature Guarantee
Fill in for registration of Notes if to be issued other than to and in the name
of registered holder:
- -------------------------------------
(Name)
- -------------------------------------
(Street Address)
- -------------------------------------
(City, state and zip code)
Please print name and address
Principal Amount to be purchased (if
less than all): $__________,000
Social Security or Other Taxpayer Number
C-1
Exhibit D
FORM OF PURCHASE NOTICE
To: CenterPoint Energy, Inc.
The undersigned registered holder of this Note hereby acknowledges receipt
of a notice from CenterPoint Energy, Inc. (the "Company") as to the holder's
option to require the Company to repurchase this Note and requests and instructs
the Company to repurchase this Note, or the portion hereof (which is $1,000
principal amount or an integral multiple thereof) designated below, in
accordance with the terms of the Supplemental Indenture referred to in this Note
and directs that the check of the Company in payment for this Note or the
portion thereof and any Notes representing any unrepurchased principal amount
hereof, be issued and delivered to the registered holder hereof unless a
different name has been indicated below. If any portion of this Note not
repurchased is to be issued in the name of a Person other than the undersigned,
the undersigned shall pay all transfer taxes payable with respect thereto.
Dated:
----------------------
----------------------------------------
Signature(s)
Signature(s) must be guaranteed by a
commercial bank or trust company or a
member firm of a major stock exchange if
Notes are to be delivered, other than to
or in the name of the registered holder.
----------------------------------------
Signature Guarantee
Fill in for registration of Notes if to be issued other than to and in the name
of registered holder:
- -------------------------------------
(Name)
- -------------------------------------
(Street Address)
- -------------------------------------
(City, state and zip code)
Please print name and address
Principal Amount to be purchased (if
less than all): $__________,000
Social Security or Other Taxpayer Number
D-1
Exhibit E
ASSIGNMENT FORM
For value received ___________________________ hereby sell(s), assign(s)
and transfer(s) unto _____________________ (Please insert social security or
other Taxpayer Identification Number of assignee) the within Note, and hereby
irrevocably constitutes and appoints __________ attorney to transfer the said
Note on the books of the Company, with full power of substitution in the
premises.
Dated:
-----------------------
----------------------------------------
Signature(s)
Signature(s) must be guaranteed by a
commercial bank or trust company or a
member firm of a major stock exchange if
shares of Common Stock are to be issued,
or Notes to be delivered, other than to
or in the name of the registered holder.
----------------------------------------
Signature Guarantee
NOTICE: The above signatures of the holder(s) hereof must correspond with the
name as written upon the face of the Note in every particular without alteration
or enlargement or any change whatever.
E-1
EXHIBIT 4(h)(4)
CENTERPOINT ENERGY, INC.
(Successor to Reliant Energy, Incorporated)
To
JPMORGAN CHASE BANK, NATIONAL ASSOCIATION
(Successor to Chase Bank of Texas, National Association)
Trustee
----------
SUPPLEMENTAL INDENTURE No. 3
Dated as of December 28, 2005
----------
2.0% Zero-Premium Exchangeable Subordinated Notes due 2029 (ZENS(SM))
- --------
(SM) Service Mark of Goldman, Sachs & Co.
CENTERPOINT ENERGY, INC.
SUPPLEMENTAL INDENTURE NO. 3
2.0% Zero-Premium Exchangeable Subordinated Notes due 2029 (ZENS(SM))
SUPPLEMENTAL INDENTURE No. 3, dated as of December 28, 2005, between
CENTERPOINT ENERGY, INC. (successor to Reliant Energy, Incorporated), a Texas
corporation (the "Company"), and JPMORGAN CHASE BANK, NATIONAL ASSOCIATION
(successor to Chase Bank of Texas, National Association), a national banking
association, as Trustee (the "Trustee").
RECITALS
The Company has heretofore executed and delivered to the Trustee a
Subordinated Indenture, dated as of September 1, 1999 (the "Original Indenture"
and, as previously and hereby supplemented and amended, the "Indenture"),
providing for the issuance from time to time of one or more series of the
Company's Securities.
Pursuant to the terms of the Indenture, the Company provided for the
establishment of a series of Securities designated as the "2% Zero-Premium
Exchangeable Subordinated Notes due 2029" (the "ZENS"), the form and substance
of the ZENS and the terms, provisions and conditions thereof in Supplemental
Indenture No. 1, dated as of September 1, 1999, between the Company and the
Trustee.
Section 307 of the Indenture provides that the Company may at any time
designate additional Paying Agents or rescind the designation of any Paying
Agent.
Subparagraph (5) of Section 901 of the Indenture provides that the Company
and the Trustee may enter into an indenture supplemental to the Indenture to add
to, change or eliminate any of the provisions of the Indenture if such action
does not adversely affect the interests of any Holders.
For and in consideration of the premises and the issuance of the series of
Securities provided for herein, it is mutually covenanted and agreed, for the
equal and proportionate benefit of the Holders of the Securities of such series,
as follows:
ARTICLE ONE
Relation to the Indenture
Section 101. Relation to the Indenture. This Supplemental Indenture No. 3
constitutes an integral part of the Indenture.
ARTICLE TWO
Designation of Paying Agent
Section 201. Designation of Paying Agent. JPMorgan Chase Bank, National
Association is hereby designated as the Paying Agent on the ZENS. The
designation of CenterPoint Energy, Inc. as the Paying Agent on the ZENS is
hereby rescinded.
ARTICLE THREE
Miscellaneous Provisions
Section 301. The Indenture, as supplemented and amended by this
Supplemental Indenture No. 3, is in all respects hereby adopted, ratified and
confirmed.
Section 302. This Supplemental Indenture No. 3 may be executed in any
number of counterparts, each of which shall be an original, but such
counterparts shall together constitute but one and the same instrument. This
Supplemental Indenture No. 3 shall be deemed part of the Indenture in the manner
and to the extent herein and therein provided.
Section 303. THIS SUPPLEMENTAL INDENTURE NO. 3 AND EACH ZENS SHALL BE
DEEMED TO BE A CONTRACT MADE UNDER THE LAWS OF THE STATE OF NEW YORK AND SHALL
BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW
YORK WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES THEREOF.
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental
Indenture No. 3 to be duly executed, as of the day and year first written above.
CENTERPOINT ENERGY, INC.
By: /s/ Marc Kilbride
------------------------------------
Name: Marc Kilbride
Title: Vice President and Treasurer
Attest: /s/ Richard B. Dauphin
-----------------------------
Name: Richard B. Dauphin
Title: Assistant Corporate Secretary
(SEAL)
JPMORGAN CHASE BANK, NATIONAL
ASSOCIATION, as Trustee
By: /s/ Carol Logan
------------------------------------
Name: Carol Logan
Title: Vice President
(SEAL)
Exhibit 10(t)(19)
CENTERPOINT ENERGY, INC. RETIREMENT PLAN
(As Amended and Restated Effective January 1, 1999)
Thirteenth Amendment
CenterPoint Energy, Inc., a Texas corporation, having reserved the
right under Section 15.1 of the CenterPoint Energy, Inc. Retirement Plan, as
amended and restated effective as of January 1, 1999, and as thereafter amended
(the "Plan"), under Section 15.1 of the Plan, does hereby amend the Plan,
effective as of January 1, 2006, as follows:
1. Article VIII of the Plan is hereby amended to add the following new
Section 8.9 thereto:
"8.9 2006 Southern Gas Involuntary Separation Benefit: A Member who
(i) is an Eligible Southern Gas Employee (as defined below), (ii) has
attained at least age 55 and completed at least 5 years of Service as of
his Termination Date (as defined below), and (iii) qualifies for a benefit
under a Company involuntary severance benefits plan (a 'Southern Gas
Severance Plan'), which provides for this benefit for an Eligible Southern
Gas Employee who is involuntarily terminated during the Severance Period
(as defined below), and who satisfies all requirements for this benefit
under the applicable Southern Gas Severance Plan, shall be eligible,
subject to his timely execution and delivery without subsequent revocation
of the waiver and release, and his timely execution and delivery of any
election or other documents, required under the applicable Southern Gas
Severance Program, to receive a Pension commencing on or after his
Termination Date equal to the normal or early retirement Pension for which
the Member is eligible (or, in the case of an Eligible Southern Gas
Employee who is on Disability Leave of Absence, would have been eligible
had his employment continued through the period of disability and
terminated, and his benefit accruals under the Plan shall cease, on his
Termination Date), calculated as set forth in Section 8.1 or 8.2, but
adding three (3) deemed years to the Member's age and three (3) deemed
years to the Member's Service as applicable to the specific benefit
formulas under the Plan (including for purposes of the Grandfathered
Benefit under Section 7.6), except with respect to the Actuarial Equivalent
calculations under Article XI.
For purposes of this Section 8.9,
(a) An 'Eligible Southern Gas Employee' means a Member (i) who
was a nonexempt Employee of CenterPoint Energy Southern Gas
Operations, a division of CenterPoint Energy Resources Corp., a wholly
1
owned subsidiary of the Company, and any successor to CenterPoint
Energy Southern Gas Operations ('Southern Gas'), (ii) whose employment
with Southern Gas was involuntary terminated during the Severance
Period, and (iii) who is not subsequently employed by the Employer or
any Affiliate prior to his Termination Date.
(b) The 'Severance Period' means the period prescribed in the
Southern Gas Severance Plan; provided, however, that such period shall
not commence prior to January 1, 2006, and shall not extend beyond
December 31, 2006.
(c) The 'Termination Date' means an Eligible Southern Gas
Employee's involuntary termination of Service date.
(d) To the extent applicable, a Member's Compensation, as
provided in Section 1.16, in effect on his Termination Date shall be
deemed to continue unchanged during his deemed three (3) years of
Service.
The foregoing notwithstanding, the enhanced benefits provided under
this Section are subject to compliance with the non-discrimination
requirements under Section 401(a)(4) of the Code and, to the extent the
Committee determines in its sole discretion is necessary to satisfy such
requirements, such benefit may be reduced or otherwise adjusted."
2. Article VIII of the Plan is hereby amended to add the following new
Section 8.10 thereto:
"8.10 2006 Voluntary Early Retirement Program: A Member who is an
Eligible VERP Employee (as defined below) and who has attained at least age
55 and completed at least 5 years of Service as of February 28, 2006, may
elect to participate in the Company's 2006 Voluntary Early Retirement
Programs for Southern Gas Operations Employees, CenterPoint Energy Service
Information Technology Employees and Finance and Regulatory, Regulated
Operations Employees (collectively, the '2006 Program'). Any election to
participate in the 2006 Program shall be made in writing between January 5,
2006 and February 28, 2006 (or within 50 days of receipt of the 2006
Program materials, including the related form of waiver and release, if
later), in the form and manner prescribed by the Committee, including
subsequent execution of such waiver and release, as a condition of
eligibility for the 2006 Program. Except as provided below, any Eligible
VERP Employee who elects to participate in the 2006 Program shall
voluntarily terminate his Service on February 28, 2006, or such earlier
date after January 5, 2006, but prior to February 28, 2006, as agreed to by
the Company and the Eligible VERP Employee (as applicable, his 'Termination
Date'), and shall be eligible to elect to receive the 'Voluntary Early
Pension' (as described below) in
2
lieu of any other pension hereunder, which shall be payable in accordance
with the provisions of Article XI (including the optional forms of
payment), effective as of the Termination Date. Any Eligible VERP Employee
who elects to participate in the 2006 Program and who, at the request of
his Employer, elects to extend his Service beyond the Termination Date to a
later termination date based on a specific business need of his Employer,
shall receive the Voluntary Early Pension commencing no earlier than the
first day of the month coincident with or next following his actual
termination of Service and payable in accordance with the provisions of
Article XI in effect as of such later date (with such later date, his
Termination Date).
An Eligible VERP Employee who has elected to participate in the 2006
Program, subject to his execution and delivery without subsequent
revocation of the waiver and release required under the 2006 Program, shall
be eligible to receive a Voluntary Early Pension commencing on his
Termination Date equal to the normal or early retirement Pension for which
the Member is eligible (or, in the case of an Eligible VERP Employee who is
on Disability Leave of Absence, would have been eligible had his employment
continued through the period of disability and terminated, and his benefit
accruals under the Plan shall cease, on the Termination Date), calculated
as set forth in Section 8.1 or 8.2, but adding three (3) deemed years to
the Member's age and three (3) deemed years to the Member's Service for all
purposes under the Plan (including for purposes of the Grandfathered
Benefit under Section 7.6), other than Actuarial Equivalent calculations
under Article XI.
For purposes of this Section 8.10,
(a) An 'Eligible VERP Employee' is a Member who
(i) on January 5, 2006, is an (1) active, exempt Employee of
CenterPoint Energy Southern Gas Operations, a division of
CenterPoint Energy Resources Corp., a wholly owned subsidiary of
the Company, (2) active information technology employee of
CenterPoint Energy Service Company, LLC, a wholly owned
subsidiary of the Company, or (3) active finance and regulatory,
regulated operations employee of the Company or any Affiliate;
(ii) is not an officer of the Company or any Affiliate at
the vice president level or above; and
(iii) is not subsequently employed by the Employer or any
Affiliate prior to his Termination Date.
(b) To the extent applicable, a Member's Compensation, as
provided in Section 1.16, in effect on his Termination Date shall be
3
deemed to continue unchanged during his deemed three (3) years of
Service.
The foregoing notwithstanding, the enhanced benefits provided under
this Section are subject to compliance with the non-discrimination
requirements under Section 401(a)(4) of the Code and, to the extent the
Committee determines in its sole discretion is necessary to satisfy such
requirements, such benefit may be reduced or otherwise adjusted."
IN WITNESS WHEREOF, CenterPoint Energy, Inc. has caused these presents
to be executed by its duly authorized officer in a number of copies, all of
which shall constitute one and the same instrument, which may be sufficiently
evidenced by any executed copy hereof, on this 6th day of February, 2006, but
effective as of the January 1, 2006.
CENTERPOINT ENERGY, INC.
By /s/ David McClanahan
-------------------------------------
David McClanahan
President and Chief Executive Officer
ATTEST:
/s/ Richard Dauphin
- -------------------------------------
Richard Dauphin
Assistant Secretary
4
EXHIBIT 10(mm)
CENTERPOINT ENERGY, INC.
SUMMARY OF NON-EMPLOYEE DIRECTOR COMPENSATION
The following is a summary of compensation paid to the non-employee
directors of CenterPoint Energy, Inc. (the "Company") effective June 2, 2005.
For additional information regarding the compensation of the non-employee
directors, please read the definitive proxy statement relating to the Company's
2006 annual meeting of shareholders to be filed pursuant to Regulation 14A.
o Annual retainer fee of $50,000 for Board membership;
o Fee of $1,500 for each Board meeting attended;
o Fee of $2,000 for each Audit Committee meeting attended;
o Fee of $1,500 for each meeting of any other Board committee attended;
o Supplemental annual retainer of $10,000 for serving as a chairman of
the Audit Committee; and
o Supplemental annual retainer of $5,000 for serving as a chairman of any
other Board committee.
The Chairman receives the compensation payable to other non-employee
directors plus supplemental compensation pursuant to a letter agreement with the
Company incorporated by reference to Exhibit 10(w) to the Company's Annual
Report on Form 10-K for the year ended December 31, 2005.
Stock Grants. Each non-employee director also receives an annual grant of
up to 5,000 shares of CenterPoint Energy common stock which vest in one-third
increments on the first, second and third anniversaries of the grant date. Upon
the initial nomination to the Board, in addition to the annual grant, a
non-employee director may be granted a one-time grant of up to but not exceeding
5,000 shares of CenterPoint Energy common stock.
Deferred Compensation Plan. Directors may elect each year to defer all or
part of their annual retainer fees and meeting fees. Directors participating in
these plans may elect to receive distributions of their deferred compensation
and interest in three ways: (i) an early distribution of either 50% or 100% of
their account balance in any year that is at least four years from the year of
deferral up to the year in which they reach age 70, (ii) a lump sum distribution
payable in the year after they reach age 70 or upon leaving the Board of
Directors, whichever is later, or (iii) 15 annual installments beginning on the
first of the month coincident with or next following age 70 or upon leaving the
Board of Directors, whichever is later.
Director Benefits Plan. Non-employee directors elected to the Board before
2004 participate in a director benefits plan under which a director who serves
at least one full year will receive an annual cash amount equal to the annual
retainer (excluding any supplemental retainer) in effect when the director
terminates service. Benefits under this plan begin the January following the
later of the director's termination of service or attainment of age 65, for a
period equal to the number of full years of service of the director.
Executive Life Insurance Plan. Non-employee directors who were elected to
the Board before 2001 participate in CenterPoint Energy's executive life
insurance plan. This plan provides endorsement split-dollar life insurance with
a death benefit equal to six times the director's annual retainer, excluding any
supplemental retainer, with coverage continuing after the director's termination
of service at age 65 or later. Directors elected to the Board after 2000 may not
participate in this plan.
EXHIBIT 10(nn)
CENTERPOINT ENERGY, INC.
SUMMARY OF NAMED EXECUTIVE OFFICER COMPENSATION
The following is a summary of compensation paid to the named executive
officers of CenterPoint Energy, Inc. (the "Company"). For additional information
regarding the compensation of the named executive officers, please read the
definitive proxy statement relating to the Company's 2006 annual meeting of
shareholders to be filed pursuant to Regulation 14A and the Company's Current
Report on Form 8-K referenced below.
Base Salary. The following table sets forth the annual base salary of
the Company's named executive officers effective April 1, 2006:
NAME AND POSITION 2006 BASE SALARY
----------------- ----------------
David M. McClanahan $980,000
President and Chief Executive Officer
Gary L. Whitlock $445,000
Executive Vice President and Chief
Financial Officer
Scott E. Rozzell $425,000
Executive Vice President, General
Counsel and Corporate Secretary
Thomas R. Standish $405,000
Senior Vice President and Group
President - Regulated Operations
Byron R. Kelley $313,000
Senior Vice President and Group
President and Chief Operating Officer,
CenterPoint Energy Pipelines and
Field Services
Short-Term Incentive Compensation Plan. Annual bonuses are paid to the
Company's named executive officers pursuant to the Company's short-term
incentive compensation plan, which provides for cash bonuses based on the
achievement of certain performance objectives approved in accordance with the
terms of the plan at the commencement of the year. Information regarding
performance goals for the named executive officers for 2006 is contained in the
Company's Current Report on Form 8-K dated February 22, 2006.
Long-Term Incentive Compensation. Under the Company's long-term
incentive plan, the Company's named executive officers may receive grants of (i)
stock option awards, (ii) performance share awards, (iii) performance unit
awards and/or (iv) stock awards. Information regarding the terms of certain
grants pursuant to the Company's long-term incentive plan is contained in the
Company's Current Report on Form 8-K dated February 22, 2006.
.
.
.
EXHIBIT 12
CENTERPOINT ENERGY, INCORPORATED AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
YEAR ENDED DECEMBER 31,
------------------------------------------
2001 2002 2003 2004 2005
------ ------ ------ ------ ------
(MILLIONS OF DOLLARS)
Income from continuing operations................. $ 357 $ 482 $ 409 $ 205 $ 225
Income taxes for continuing operations............ 201 272 205 139 153
Capitalized interest.............................. (5) (5) (4) (4) (4)
Preference security dividend requirements of
subsidiary...................................... (1) -- -- -- --
------ ------ ------ ------ ------
552 749 610 340 374
------ ------ ------ ------ ------
Fixed charges, as defined:
Interest........................................ 497 656 713 777 710
Capitalized interest............................ 5 5 4 4 4
Distribution on trust preferred securities...... 45 56 28 -- --
Preference security dividend requirements of
subsidiary................................... 1 -- -- -- --
Interest component of rentals charged to
operating expense............................ 12 12 11 11 12
------ ------ ------ ------ ------
Total fixed charges............................. 560 729 756 792 726
------ ------ ------ ------ ------
Earnings, as defined.............................. $1,112 $1,478 $1,366 $1,132 $1,100
====== ====== ====== ====== ======
Ratio of earnings to fixed charges................ 1.99 2.03 1.81 1.43 1.51
====== ====== ====== ====== ======
EXHIBIT 21
SIGNIFICANT SUBSIDIARIES OF CENTERPOINT ENERGY, INC.
The following subsidiaries are deemed "significant subsidiaries" pursuant to
Item 601(b) (21) of Regulation S-K:
Utility Holdings, LLC, a Texas limited liability company and a direct wholly
owned subsidiary of CenterPoint Energy, Inc.
CNP Investment Management, Inc., a Delaware corporation and a direct wholly
owned subsidiary of CenterPoint Energy, Inc.
CenterPoint Energy Resources Corp., a Delaware corporation and an indirect
wholly owned subsidiary of CenterPoint Energy, Inc.
CenterPoint Energy Houston Electric, LLC, a Texas limited liability company and
an indirect wholly owned subsidiary of CenterPoint Energy, Inc.
(1) Pursuant to Item 601(b) (21) of Regulation S-K, registrant has omitted the
names of subsidiaries, which considered in the aggregate as a single subsidiary,
would not constitute a "significant subsidiary" (as defined under Rule 1-02(w)
of Regulation S-X) as of December 31, 2005.
(2) CenterPoint Energy Resources Corp. also conducts business under the names of
its two unincorporated divisions: Southern Gas Operations and Minnesota Gas.
EXHIBIT 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos.
333-120306, 333-116246 and 333-114543 on Form S-3; Registration Statement Nos.
333-115976 and 333-105773 on Form S-8; Post-Effective Amendment No. 1 to
Registration Statement Nos. 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, 2006 (which report expresses an
unqualified opinion and includes an explanatory paragraph regarding the
Company's adoption of a new accounting standard related to conditional asset
retirement obligations), ii) the consolidated financial statement schedules
dated March 15, 2006, and iii) management's report on the effectiveness of
internal control over financial reporting dated March 15, 2006, appearing in
this Annual Report on Form 10-K of CenterPoint Energy, Inc. for the year ended
December 31, 2005.
DELOITTE & TOUCHE LLP
Houston, Texas
March 15, 2006
EXHIBIT 31.1
CERTIFICATIONS
I, David M. McClanahan, certify that:
1. I have reviewed this Annual Report on Form 10-K 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: March 15, 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 Annual Report on Form 10-K 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: March 15, 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 Annual Report of CenterPoint Energy, Inc. (the
"Company") on Form 10-K for the Year ended December 31, 2005 (the "Report"), as
filed with the Securities and Exchange Commission on the date hereof, I, David
M. McClanahan, 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: March 15, 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 Annual Report of CenterPoint Energy, Inc. (the
"Company") on Form 10-K for the Year ended December 31, 2005 (the "Report"), as
filed with the Securities and Exchange Commission on the date hereof, I, Gary L.
Whitlock, 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: March 15, 2006
/s/ Gary L. Whitlock
-----------------------------------
Gary L. Whitlock
Executive Vice President and
Chief Financial Officer
