File No. 070-9895
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM U-1/A
POST-EFFECTIVE AMENDMENT NO. 3 TO
APPLICATION/DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
CenterPoint Energy, Inc.
1111 Louisiana
Houston, Texas 77002
Utility Holding, LLC
200 West Ninth Street Plaza
Suite 411
Wilmington, Delaware 19801
(Name of companies filing this statement and address of
principal executive offices)
CenterPoint Energy, Inc.
1111 Louisiana
Houston, Texas 77002
(Name of top registered holding company parent of each applicant or declarant)
Rufus S. Scott
Vice President, Deputy General Counsel and Assistant Corporate Secretary
CenterPoint Energy, Inc.
1111 Louisiana
Houston, Texas 77002
(713) 207-7451
(Names and addresses of agents for service)
The Commission is also requested to send copies
of any communications in connection with this matter to:
James R. Doty, Esq. Margo S. Scholin, Esq.
Joanne C. Rutkowski, Esq. Baker Botts L.L.P.
Baker Botts L.L.P. 3000 One Shell Plaza
The Warner Houston, Texas 77002-4995
1299 Pennsylvania Avenue, N.W. (713) 229-1234
Washington, D.C. 20004-2400
(202) 639-7700
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, within the meaning of Rule 103A under
the Public Utility Holding Company Act of 1935 or other provisions of the
securities laws. Actual results may differ materially from those expressed or
implied by these statements. The reader can generally identify our
forward-looking statements by the words "anticipate," "believe," "continue,"
"could," "estimate," "expect," "intend," "may," "plan," "potential," "predict,"
"should," "will," "forecast," "goal," "objective," "projection," 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 the reader that assumptions, beliefs,
expectations, intentions and projections about future events may and often do
vary materially from actual results. Therefore, we cannot assure the reader that
actual results will not differ materially from those expressed or implied by our
forward-looking statements.
The following list identifies some of the factors that could cause
actual results to differ materially from those expressed or implied by our
forward-looking statements:
o state, federal and international legislative and regulatory actions or
developments, including deregulation, re-regulation and restructuring
of the electric utility industry; constraints placed on our activities
or business by the Public Utility Holding Company Act of 1935; changes
in or application of environmental, siting and other laws or
regulations to which we are subject; other aspects of our business and
actions with respect to:
o approval of stranded costs;
o allowed rates of return;
o rate structures;
o recovery of investments; and
o operation and construction of facilities;
o the effects of competition;
o industrial, commercial and residential growth in our service
territories and changes in market demand and demographic patterns;
o changes in business strategy or development plans;
o state, federal and other rate regulations in the United States;
o non-payment for our services due to financial distress of our
customers, including Reliant Resources, Inc;
o the successful and timely completion of our capital projects;
o the timing and extent of changes in commodity prices, particularly
natural gas;
o changes in interest rates or rates of inflation; unanticipated changes
in operating expenses and capital expenditures;
o weather variations and other natural phenomena;
o commercial bank and financial market conditions, our access to capital,
the cost of such capital, receipt of certain approvals under the Public
Utility Holding Company Act of 1935, and the results of our financing
and refinancing efforts, including availability of funds in the debt
capital markets;
o actions by rating agencies;
o legal and administrative proceedings and settlements;
o changes in tax laws;
o inability of various counterparties to meet their obligations with
respect to our financial instruments;
o any lack of effectiveness of our disclosure controls and procedures;
o changes in technology;
o significant changes in our relationship with our employees, including
the availability of qualified personnel and the potential adverse
effects if labor disputes or grievances were to occur;
o significant changes in critical accounting policies material to us;
o acts of terrorism or war, including any direct or indirect effect on
our business resulting from terrorist attacks such as occurred on
September 11, 2001 or any similar incidents or responses to those
incidents;
o the availability and price of insurance;
o the outcome of the pending securities lawsuits against us and Reliant
Energy, Incorporated;
o the outcome of the SEC investigation relating to the treatment in our
consolidated financial statements of certain activities of Reliant
Resources, Inc;
o the ability of Reliant Resources, Inc. to satisfy its indemnity
obligations to us;
o the reliability of the systems, procedures and other infrastructure
territory, including the systems owned and operated by the independent
system operator in the Electric Reliability Council of Texas, Inc.;
o political, legal, regulatory and economic conditions and developments
in the United States and in foreign countries in which we operate; and
Page iii
o other factors we discuss in the Reliant Energy, Incorporated's Annual
Report on Form 10-K/A for the year ending December 31, 2001 (File No.
1-03187) CenterPoint Energy, Inc.'s Quarterly Report on Form 10-Q for
the period ending September 30, 2002 (File No. 1-31447), including
those outlined in "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Certain Factors Affecting Our
Future Earnings" and in this Form U-1/A.
The reader should not place undue reliance on forward-looking
statements. Each forward-looking statement speaks only as of the date of the
particular statement, and we undertake no obligation to publicly update or
revise any forward-looking statements.
Page iv
CenterPoint Energy, Inc. ("CenterPoint" or the "Company") and Utility
Holding, LLC are seeking a modification of the Commission's order dated July 5,
2002 (HCAR No. 27548) (the "July Order") to permit CenterPoint to pledge the
stock of Texas Genco Holdings, Inc. ("Texas Genco") in connection with
refinancing of approximately $3.85 billion in CenterPoint debt.(1) CenterPoint
also seeks authority to issue warrants or other stock purchase rights, subject
to the terms and conditions of the July Order.
This Post-Effective Amendment No. 3 to the Application-Declaration
restates Post-Effective Amendment No. 2 to the Application-Declaration in its
entirety.
ITEM 1. DESCRIPTION OF PROPOSED TRANSACTION
A. Requested Authorization
The July Order authorized the formation of CenterPoint as a registered
holding company and approved various financing proposals. Among other things,
the July Order authorized CenterPoint to issue up to $5 billion in long-term
debt and $6 billion in short-term debt, subject to an overall limit of no more
than $6 billion in financings at any one time outstanding (the "Financing
Limit") through June 30, 2003 (the "Authorization Period"). In the July Order,
CenterPoint committed that debt issued by it pursuant to such authorization
would be unsecured.
In reliance on the authority granted in the July Order, on October 10,
2002, CenterPoint entered into a $3.85 billion, 364-day credit facility (the
"CenterPoint Facility") to replace a similar facility that had expired. The
CenterPoint Facility requires, among other things, two mandatory commitment
reductions of $600 million, one by February 28, 2003, and the other by June 30,
2003.
CenterPoint is facing significant financial pressures. The management
and Board of Directors of CenterPoint are working diligently to preserve and
enhance the value of CenterPoint and its subsidiary companies (together, the
"System"). The recent credit crisis in the energy sector has highlighted the
importance of maintaining maximum flexibility to raise capital from any source.
Among other things, CenterPoint is negotiating with its lenders to extend the
maturity date of the CenterPoint Facility into 2005, by which time CenterPoint
expects to have sold its generation assets and recovered its stranded costs as
provided by Texas law. Deteriorating market conditions, however, have made it
difficult to refinance CenterPoint's debt on reasonable terms without providing
some security. CenterPoint's lenders have indicated that in the absence of
flexibility to provide collateral to secure borrowings, CenterPoint may find it
difficult to obtain the necessary financing. It is CenterPoint's belief that,
with the ability to provide collateral, an adequate financing arrangement could
be implemented. Accordingly, CenterPoint is seeking authorization pursuant to
Sections 6 and 7 of the Act to issue and sell
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1 Utility Holding, LLC is a Delaware limited liability company and an
intermediate holding company that is registered under the Act. Utility Holding,
LLC, which directly holds approximately 80% of the outstanding common stock of
Texas Genco, is a necessary party to this filing. Utility Holding, LLC is
otherwise a conduit entity formed solely to minimize tax liability.
Page 1
during the Authorization Period up to $4 billion of long-term debt that is
partially secured by the stock of Texas Genco.(2)
Texas Genco is an exempt holding company that indirectly owns the Texas
generation assets formerly owned by CenterPoint's integrated utility predecessor
(the "Texas Genco Assets"). Although the Commission has traditionally
discouraged the issuance of secured debt by a registered holding company,
CenterPoint believes that there are unique circumstances in this matter that
support the grant of the requested relief.
In the first instance, while Texas Genco, LP (the entity that directly
owns the Texas Genco Assets) is technically an "electric-utility company" within
the meaning of the Act, it has none of the indices of a traditional regulated
entity. Texas Genco, LP is solely an unregulated generating company under Texas
law. Its sales are not subject to traditional cost-based rate regulation. It has
no franchise or "obligation to serve" and has no captive customers. Further,
CenterPoint is in the process of obtaining the necessary state approvals to
allow Texas Genco to qualify as an exempt wholesale generator, which is a
nonutility company for purposes of the Act.
Second, it has always been CenterPoint's stated intention to monetize
the Texas Genco Assets (approximately $2.8 billion equity capitalization as of
September 30, 2002) as part of the Business Separation Plan approved in December
2000 by the Public Utility Commission of Texas (the "Texas Commission") pursuant
to the Texas electric restructuring law. Indeed, in the July Order, the
Commission noted that "the sale of Texas Genco, LP and securitization of any
stranded investment in 2004 and 2005, as contemplated by Texas law" are an
integral part of CenterPoint's plan to achieve a more traditional capital
structure.
Third, CenterPoint does not expect to maintain secured debt at the
holding company level as a permanent part of its capital structure. At the time
it sells its stock in Texas Genco to Reliant Resources, Inc. ("Reliant
Resources") or a third party, it would need to redeem the pledge so that the
stock would be transferable. At that point it is contemplated that any remaining
debt at the parent level would cease to be secured.(3)
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2 Any borrowings under the proposed financing would be subject to and
included in the Financing Limit.
3 As explained more fully herein, Reliant Resources has an option that may
be exercised in January 2004 to acquire all of the shares of Texas Genco common
stock then owned by CenterPoint and Utility Holding, LLC. CenterPoint is
contractually obligated to deliver unencumbered shares of Texas Genco stock. The
documentation for any secured financing, therefore, would have to provide for a
release of all liens on the Texas Genco stock in connection with the sale of
that stock. As a result, any remaining debt under the contemplated bank facility
would cease to be secured.
In the event that Reliant Resources does not exercise its option and CenterPoint
is otherwise unable to sell its interest in Texas Genco (which would similarly
involve a release of the liens),
Page 2
As part of this approach, CenterPoint may be required to issue debt
securities convertible into common stock or debt securities with warrants or
other stock purchase rights. Again, the proceeds of such financing will be used
to refinance the existing indebtedness of CenterPoint. The July Order grants
CenterPoint the authority to issue convertible debt securities. CenterPoint is
seeking authority herein to issue options, warrants to purchase the common stock
of the Company or other stock purchase rights consistent with Commission
precedent and the terms and conditions of the July Order.(4)
The proposed financings will otherwise be subject to the terms and
conditions as set forth in the July Order and as may be modified by the
Commission in this matter.(5)
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the proposed secured facility would expire, and the associated liens would be
released in June 2005.
4 As discussed infra, if CenterPoint were to offer warrants or other stock
purchase rights to lenders, it is contemplated that the documentation would
provide that, upon exercise of such rights, (i) no one lender would own,
control, or hold with power to vote five percent or more of the outstanding
common stock of CenterPoint, and (ii) the lenders would not act as an organized
group of persons with respect to such voting stock or otherwise seek to exercise
an impermissible controlling influence over the management and operations of
CenterPoint.
5 The specific terms and conditions of the financing will be determined in
the course of negotiations with the lenders but will in any event comply with
the terms and conditions of the July Order except as expressly authorized in
this matter.
The July Order provides that the effective cost of money on debt financings will
not exceed the greater of 500 basis points over the comparable term London
Interbank Offered Rate or "market rates available at the issuance to similarly
situated companies with comparable credit ratings for debt with similar
maturities and terms." The effective cost of money in this matter is less than
that approved by the Commission during this period for a subsidiary of Allegheny
Energy, Inc., another registered holding company. See Allegheny Energy, Inc.,
Holding Co. Act Release No. 27259 (Oct. 17, 2002) ("the effective cost of
capital on any security will not exceed competitive market rates available at
the time of issuance for securities having the same or reasonably similar terms
and conditions issued by similar companies of reasonably comparable credit
quality, provided that in no event will the interest rate on any such secured
debt exceed an interest rate per annum equal to the sum of 12% plus the prime
rate as announced by a nationally recognized money center bank").
It is currently expected that the negotiations will result in two facilities,
one a $1.5 billion revolving credit facility and the other a $2.35 billion term
loan, both with a term through June, 2005.
Although the terms and conditions of the new facilities will be based on those
of the existing $3.85 million facility, CenterPoint is seeking greater
flexibility for future financings for itself and the Utility Subsidiaries, in
view of the longer term of the proposed facilities.
Page 3
The Company believes that the proposed transactions would clearly place
it in a stronger financial position than it is currently and so the requested
relief is consistent with the public interest and the interest of investors and
consumers. Compare Northeast Utilities, Holding Co. Act Release No. 25273 (March
15, 1991) (while cautioning that it "cannot guarantee the success of PSNH," the
Commission nonetheless concluded that the proposed transaction would place the
company in a stronger financial position than it would otherwise be).
B. Background
1. Generally
In the July Order, the Commission authorized the formation of a new
registered holding company, CenterPoint, and the distribution ("Distribution")
to shareholders of the remaining stock of Reliant Resources, Inc. ("Reliant
Resources"). The Distribution, which was made on September 30, 2002, completed
the separation from CenterPoint of the merchant power generation and energy
trading and marketing business of Reliant Resources.(6)
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6 As a result of the spin-off of Reliant Resources, CenterPoint recorded a
non-cash loss on the disposal of discontinued operations of $4.3 billion in the
third quarter of 2002. This loss represents the excess of the carrying value of
CenterPoint's net investment in Reliant Resources over the market value of
Reliant Resources stock. To account for the Distribution, CenterPoint reduced
its retained earnings to reflect the impairment in the value of its investment
in Reliant Resources (i.e., the difference between book and market value of the
stock) and then reduced its additional paid-in capital by the net book value of
its investment (following the adjustment) in Reliant Resources. The impairment
adjustment was made in accordance with Accounting Principles Board Opinion No.
29, "Accounting for Nonmonetary Transactions" and Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets."
The impairment adjustment resulted in negative retained earnings for
CenterPoint. Subject to certain conditions, including a revaluation of all
assets and liabilities, generally accepted accounting principles ("GAAP") would
permit but do not require an accounting or quasi-reorganization to eliminate
deficits in retained earnings. See Financial Reporting Release 210.
Page 4
CenterPoint's public-utility subsidiary companies own and operate
electric generation plants, electric transmission and distribution facilities,
natural gas distribution facilities and natural gas pipelines:
o CenterPoint Energy Houston Electric, LLC (the "T&D Utility") engages in
the electric transmission and distribution business in a 5,000-square
mile area of the Texas Gulf Coast that includes Houston.
o Texas Genco (discussed below) owns and operates the Texas generating
plants formerly belonging to the integrated electric utility that was a
part of Reliant Energy, Incorporated.
o CenterPoint Energy Resources Corp. ("GasCo") owns gas distribution
systems that together form one of the United States' largest natural
gas distribution operations in terms of customers served. Through
unincorporated divisions, GasCo provides natural gas distributions
services in Louisiana, Mississippi and Texas (Entex Division),
Arkansas, Louisiana, Oklahoma and Texas (Arkla Division) and Minnesota
(Minnegasco Division). Through wholly owned subsidiaries, GasCo owns
two interstate natural gas pipelines and gas gathering systems and
provides various ancillary services.
For the nine months ended September 30, 2002, CenterPoint had revenues of $5.8
billion, and operating income of $1.1 billion. As of September 30, 2002,
CenterPoint had assets totaling $19.0 billion.
2. The Texas Electric Restructuring Law
In June 1999, the Texas legislature enacted a law that substantially
amended the regulatory structure governing electric utilities in Texas. Under
this law, the power generation and retail sales functions of integrated
utilities in Texas ceased to be subject to traditional cost-based regulation and
utilities were required to separate their generation, retail and transmission
and distribution functions into separate units. Since January 1, 2002, Texas
Genco has been selling generation capacity, energy and ancillary services to
wholesale purchasers at prices determined by the market. The transmission and
distribution services provided by the T&D Utility remain subject to rate
regulation.
Since January 1, 2002, the former retail customers of most
investor-owned electric utilities in Texas have been entitled to purchase their
electricity from any of several "retail electric providers" that have been
certified by the Texas Commission. Retail electric providers cannot own
generation assets in Texas. Neither CenterPoint nor any of its subsidiary
companies is a retail electric provider or engages in retail electric sales.
Texas transmission and distribution utilities such as the T&D Utility
whose generation assets were "unbundled" pursuant to the Texas electric
restructuring law, may in 2004 recover generation-related (i) "regulatory
assets," and (ii) "stranded costs," which consist of the positive excess of the
net regulatory book value of generation assets over the market value of the
assets, taking specified factors into account.
Page 5
As discussed herein, the Texas electric restructuring law permits
utilities to recover regulatory assets and stranded costs through non-bypassable
charges authorized by the Texas Commission, to the extent that such assets and
costs are established in certain regulatory proceedings. The law also authorizes
the Texas Commission to permit utilities to issue securitization bonds based on
the securitization of the revenue associated with that charge.
3. Texas Genco
Texas Genco, LP is one of the largest wholesale electric power
generating companies in the United States. As of September 30, 2002, Texas
Genco, LP owned and operated 11 power generating stations (60 generating units)
and had a 30.8% interest in the South Texas Project Electric Generating Station
("South Texas Project"), for a total net generating capacity of 14,175 MW. The
South Texas Project is a nuclear generating station with two 1,250 MW nuclear
generating units. The following table contains information regarding the
electric generating assets:
NET GENERATING CAPACITY
AS OF
SEPTEMBER 30, 2002 (IN MW)
GENERATION FACILITIES
W. A. Parish 3,661
Limestone 1,612
South Texas Project 770
San Jacinto 162
Cedar Bayou 2,260
P. H. Robinson 2,213
T. H. Wharton 1,254
S. R. Bertron 844
Greens Bayou 760
Webster 387
Deepwater 174
H. O. Clarke 78
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Total 14,175
======
Texas Genco, LP sells electric generation capacity, energy and ancillary
services in the Electric Reliability Council of Texas, Inc. ("ERCOT") market,
which is the largest power market in the State of Texas. Since January 1, 2002,
Texas Genco, LP's generation business has been operated as an independent power
producer, with output sold at market prices to a variety of purchasers. As
authorized by this Commission under the July Order, on January 6, 2003,
CenterPoint distributed to its shareholders approximately 19% of the common
stock of Texas Genco. The stock of Texas Genco is traded on the New York Stock
Exchange under the symbol "TGN".
Page 6
Reliant Resources has an option that may be exercised between January
10, 2004 and January 24, 2004 to purchase all of the shares of Texas Genco
common stock then owned by CenterPoint. The exercise price under the option will
equal:
o the average daily closing price per share of Texas Genco common stock on
The New York Stock Exchange for the 30 consecutive trading days with the
highest average closing price for any 30-day trading period during the 120
trading days immediately preceding January 10, 2004, multiplied by the
number of shares of Texas Genco common stock then owned by CenterPoint,
plus
o a control premium, up to a maximum of 10%, to the extent a control premium
is included in the valuation determination made by the Texas Commission
relating to the market value of Texas Genco's common stock equity.
The exercise price formula is based upon the generation asset valuation
methodology in the Texas electric restructuring law that CenterPoint will use to
calculate the market value of Texas Genco. The exercise price is also subject to
adjustment based on the difference between the per share dividends Texas Genco
paid to CenterPoint during the period from the distribution date through the
option closing date and Texas Genco's actual per share earnings during that
period. To the extent Texas Genco's per share dividends are less than its actual
per share earnings during that period, the per share option price will be
increased. To the extent its per share dividends exceed its actual per share
earnings, the per share option price will be reduced.
Reliant Resources has agreed that if it exercises its option, Reliant
Resources will purchase from CenterPoint all notes and other payables owed by
Texas Genco to CenterPoint as of the option closing date, at their principal
amount plus accrued interest. Similarly, if there are notes or payables owed to
Texas Genco by CenterPoint as of the option closing date, Reliant Resources will
assume those obligations in exchange for a payment from CenterPoint of an amount
equal to the principal plus accrued interest.
If Reliant Resources does not exercise the option, CenterPoint
currently plans to sell or otherwise monetize its interest in Texas Genco.(7)
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7 Among other things, CenterPoint could conduct an auction of its remaining
interest in Texas Genco.
Texas Genco and its subsidiary companies could issue additional debt subject to
certain conditions: (i) under the 1935 Act, Texas Genco must maintain a minimum
of 30% common equity capitalization, and (ii) in connection with the proposed
financing, the lenders are limiting to $250 million the amount of borrowing by
Texas Genco or its subsidiary companies, at any one time outstanding.
Texas Genco is currently in the process of obtaining financing at the Texas
Genco level. The proceeds of the financing, which would be secured by a pledge
of the assets of Texas Genco, will be used to repay existing intrasystem
indebtedness and to provide working capital for Texas Genco. Such financing
would be in compliance with the terms and conditions of the July Order,
Page 7
4. Stranded Costs and Regulatory Assets Recovery
The Texas electric restructuring law provides CenterPoint an
opportunity to recover its "regulatory assets" and "stranded costs" resulting
from the unbundling of the transmission and distribution utility from the
generation facilities and the related onset of retail electric competition. The
Texas electric restructuring law allows alternative methods of third party
valuation of the fair market value of generation assets, including outright
sale, full and partial stock valuation and asset exchanges. CenterPoint has
committed in the business separation plan approved by the Texas Commission that
the fair market value of the Texas Genco Assets will be determined using the
partial stock valuation method. Under this methodology, the publicly traded
common stock of Texas Genco will be used to determine the market value of the
Texas Genco Assets.
Beginning in January 2004, the Texas Commission will conduct true-up
proceedings for each investor-owned utility. The purpose of the true-up
proceeding is to quantify and reconcile the amount of stranded costs, the
capacity auction true-up, unreconciled fuel costs and other regulatory assets
associated with the generating assets that were not previously securitized. The
true-up proceeding will result in either additional charges or credits being
assessed on certain retail electric providers.
The regulatory net book value of generating assets will be compared to
the market value based on the partial stock valuation method. The resulting
difference, if positive, is stranded cost that will be recovered through a
transition charge, which is a non-bypassable charge assessed to customers taking
delivery service from the T&D Utility, that may be securitized as discussed
below. If the difference is negative, the amount of over-mitigation not returned
to customers by that time (redirected depreciation and excess earnings directed
to depreciation) will be returned to customers through lower transmission and
distribution charges.
The publicly traded common stock of Texas Genco will be used to
determine the market value of the Texas Genco Assets. The market value will be
equal to the average daily closing price on a national exchange for publicly
held shares of common stock in Texas Genco for the 30 consecutive trading days
chosen by the Texas Commission out of the 120 trading days immediately preceding
the true-up filing, plus a control premium, up to a maximum of 10%. The
regulatory net book value is the balance as of December 31, 2001 plus certain
costs incurred for reductions in emissions of oxides of nitrogen and any
above-market purchase power costs. The regulatory net book value will also
include any mitigation returned to ratepayers through return of "excess earnings
depreciation" or reversal of redirected depreciation.
The Texas Commission used a computer model or projection, called an
excess-cost-over-market model or "ECOM model," to estimate stranded costs
related to generation plant
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which authorizes Texas Genco to issue secured and unsecured debt in an amount up
to $500 million at any one time outstanding during the Authorization Period.
While the specific amount of the proposed financing has not yet been determined,
Texas Genco undertakes that it will not issue debt in excess of $250 million
without additional Commission approval.
Page 8
assets. In connection with using the ECOM model to calculate the stranded cost
estimate, the Texas Commission estimated the market power prices that will be
received in the generation capacity auctions mandated by the Texas electric
restructuring law during the period January 1, 2002 through December 31, 2003.
Any difference between the actual market power prices received in those auctions
and the Texas Commission's earlier estimates of those market prices will be a
component of the 2004 true-up to which the T&D Utility will be a party.
The fuel component will be determined in a final fuel reconciliation.
In that proceeding, the amount of any over- or under-recovery of fuel costs from
the period August 1, 1997 through January 31, 2002 will be determined. Any over-
or under-recovery, plus interest thereon, will either be returned to or
recovered from our customers, as appropriate, as a component of the 2004
true-up.
In connection with the implementation of the Texas electric
restructuring law, the Texas Commission has set a "price to beat" for retail
electric providers affiliated with a formerly integrated utility that serve
residential and small commercial customers within the utility's service
territory. The true-up provides for a clawback of "price to beat" in excess of
the market price of electricity if 40% of the "price to beat" load is not served
by a non-affiliated retail electric provider by January 1, 2004. Pursuant to the
master separation agreement between Reliant Energy, Incorporated and Reliant
Resources, Reliant Resources is obligated to reimburse the T&D Utility for the
clawback component of the true-up. The clawback will not exceed $150 times the
number of customers served by the affiliated retail electric provider in the
transmission and distribution utility's service territory less the number of
customers served by the affiliated retail electric provider outside the
transmission and distribution utility's service territory on January 1, 2004.
The Texas electric restructuring law provides for the use of special
purpose entities to issue securitization bonds for the economic value of
generation-related regulatory assets and stranded costs. These bonds will be
amortized through non-bypassable charges to the T&D Utility's customers that are
authorized by the Texas Commission. Any stranded costs not recovered through the
securitization bonds will be recovered through a non-bypassable charge assessed
to customers taking delivery service from the T&D Utility.
In October 2001, a special-purpose subsidiary of the T&D Utility issued
$749 million of transition bonds to securitize generation-related regulatory
assets. The bonds have a final maturity date of September 15, 2015 and are
non-recourse to CenterPoint or its subsidiaries other than to the special
purpose issuer of the transition bonds. The T&D Utility has no payment
obligations with respect to the transition bonds except to remit collections of
transition charges as set forth in a servicing agreement between the T&D Utility
and the transition bond company and in an intercreditor agreement among the T&D
Utility, its transition bond subsidiary and other parties.
It is anticipated that another special-purpose subsidiary of the T&D
Utility will similarly issue securitization bonds in 2004 or 2005 to monetize
and recover the balance of stranded costs relating to previously owned electric
generation assets and other qualified costs as determined in the 2004 true-up
proceeding. The issuance will be done pursuant to a financing
Page 9
order issued by the Texas Commission. As with the debt of its existing
transition bond company, the holders of the securitization bonds would not have
recourse to any assets or revenues of the CenterPoint System (other than those
of the special purpose transition bond company), nor would the System's
creditors have recourse to any assets or revenues of the entity issuing the
securitization bonds (again other than those of the special purpose transition
bond company),. All or a portion of the proceeds from the issuance of bonds
would be used to repay debt of CenterPoint and its subsidiary companies.(8)
5. Financial Condition
a. CenterPoint now projects that it will achieve 30% common equity
capitalization (net of securitization debt) in 2006.
At the time the Commission issued the July Order, it was contemplated
that, by the end of 2005, the consolidated equity capitalization (net of
securitization debt) of the CenterPoint System would meet or exceed the 30%
minimum generally required by the Commission for registered holding companies
(the "June 2002 projections"). It has been and remains the Company's goal to
achieve the 30% common equity capitalization as soon as practicable. As a result
of the external events described below, the Company's most recent projections
now indicate that the 30% goal will indeed be achieved but over a slightly
longer period of time. Specifically, on the basis of current projections, it is
CenterPoint's intention that the System will achieve equity capitalization net
of securitization debt of 31.8% in 2006 (17.8%
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8 A portion of the proceeds will be used to repay an existing $1.31 billion
loan at the T&D Utility and retire the associated General Mortgage Bonds. Other
third-party indebtedness then outstanding at the T&D Utility, such as a series
of First Mortgage Bonds coming due at the time of the sale, will also be repaid.
It is contemplated that all or a portion of the proceeds would be transferred to
CenterPoint by means of a combination of dividends and repayment of intercompany
debt from the T&D Utility to Utility Holding, LLC and from Utility Holding, LLC
to CenterPoint. While the specific means of transferring the monies will be
determined based on the then-existing facts and circumstances, it is currently
projected that the T&D Utility will have sufficient capacity to accomplish the
desired transfer.
As a limited liability company organized under Texas law, the T&D Utility may
make distributions unless its liabilities would exceed the fair value of its
assets following the distribution. CenterPoint currently estimates that a
distribution of approximately $2.6 billion may be made from the T&D Utility to
CenterPoint in 2005. The proceeds transferred to CenterPoint will be used to pay
down the bank facilities that are currently being negotiated and other parent
company debt. At the time the transfer is made, CenterPoint projects that the
T&D Utility will have equity of over 53%, excluding securitization debt.
Applicants will seek such additional authority as may be required in connection
with the transfer of proceeds.
Page 10
if securitization debt is included) and continue to increase the equity
component thereafter (the "January 2003 projections").(9)
The difference between the June 2002 projections and the January 2003
projections is largely a result of two factors: (i) increased interest expense
and (ii) anticipated charges to Other Comprehensive Income related to declines
in the market value of the CenterPoint pension plan's assets and the settlement
of certain long-term interest rate swaps.(10)
Interest Expense
At the time the Commission issued the July Order, CenterPoint and the
T&D Utility were facing the imminent maturity of $4.7 billion in bank
facilities. Those facilities had been put in place in July 2001 as interim
facilities for a one-year term. At that time, it was contemplated that that the
Company would complete its restructuring by the end of 2001. Both the Company
and its financial advisors believed that the Company should wait until it had
completed its restructuring and the Distribution of its unregulated businesses
before seeking to refinance its short term debt in the capital markets. It was
thought that CenterPoint as a "pure" regulated business would be able to attract
lower cost capital and more favorable terms than it could if it were financing
as a combination of regulated and more volatile unregulated businesses.
Largely as a result of external events, including issues involving
Reliant Resources, the Company was not able to complete the separation of its
regulated and unregulated businesses and access the capital markets before the
$4.7 billion interim bank facilities expired in July 2002. Following the
collapse of Enron in late 2001, the financial markets had deteriorated for
utilities in general and for CenterPoint in particular, due to its association
with Reliant Resources and the uncertainty surrounding that company. Thus when
the bank facilities were
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9 This change affects only CenterPoint. As reflected in the July Order,
the common equity percentage of each of Texas Genco LP, the T&D Utility and
GasCo will remain in excess of 30% through the Authorization Period. As of
September 30, 2002, the T&D Utility had 52.8% common equity (63.6% net of
securitization debt), Texas Genco had 97.4% common equity, GasCo had 49.1% and
CenterPoint had consolidated equity capitalization of 15.3% (16.0% net of
securitization debt). See Exhibit G-20.
If securitization debt is included for purposes of the equity calculation, the
Company's consolidated equity ratio would be approximately 18% (if the
pension-related charge to Other Comprehensive Income is included) at the end of
2006. The question of when the consolidated equity capitalization (inclusive of
securitization debt) reaches 30% is dependent on a number of factors, including
the rate of amortization of the securitization debt. For purposes of this
discussion, it appears that the 30% level (inclusive of securitization debt)
could be achieved around 2013.
10 In its Form 10-Q for the period ending September 30, 2002, CenterPoint
stated that: "increased borrowing costs and increased pension expense are
expected to negatively impact our earnings in 2003."
Page 11
being renewed in July 2002, the bankers were willing to grant only a 90-day
extension to October 2002. During that 90-day period, CenterPoint completed its
restructuring but was again thwarted in efforts to issue public debt by the
discovery of yet another accounting problem at Reliant Resources. As explained
in the Company's Quarterly Report on Form 10-Q, in September 2002, Reliant
Resources had identified four natural gas financial transactions that should not
have been reflected in its financial statements. Although it was ultimately
concluded that no restatement of financial statements was required, the pendency
of this issue made it impossible for CenterPoint and its subsidiary companies to
issue public debt during this period.
As a result, when the extension expired in October 2002, CenterPoint
and the T&D Utility had no real alternatives to extending the bank debt. In the
interim, from July to October 2002, conditions in the financial markets had
further deteriorated. The terms and conditions on which debt could be obtained
had grown more onerous and lenders were increasingly insistent on receiving
security for the funds they advanced.
On October 11, 2002, CenterPoint announced that it had successfully
negotiated new, one-year credit facilities totaling $4.7 billion with its
existing syndicate of 30 banks. The $4.7 billion agreement was composed of two
separate credit facilities. The first is the $3.85 billion, 364-day bank credit
facility at CenterPoint. Pricing under the CenterPoint Facility is based on
LIBOR rates under a pricing grid tied to the company's credit rating. Interest
rates for the term loans at CenterPoint's current ratings are the LIBOR rate
plus 450 basis points, an increase of 150 basis points over the prior facility
agreement.(11)
The second facility, at the T&D Utility, was an $850 million, 364-day
bank credit facility. Interest rates for a term loan under that facility were
LIBOR plus 300 basis points for $400 million and 350 basis points for the next
$450 million, an increase of 50 and 100 basis points, respectively. Loans under
the facility were secured by General Mortgage Bonds.
As part of these agreements, CenterPoint agreed to pay a one percent
fee upon closing, an additional one percent on November 15, 2002, $50 million at
the end of February 2003, and $25 million at the end of June 2003. In addition,
the banks insisted on mandatory commitment reductions of the principal. On the
CenterPoint Facility, the banks required two $600 million prepayments, one by
February 28, 2003, and the second by June 30, 2003. A $450
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11 The facility contains various business and financial covenants.
CenterPoint is currently in compliance with the covenants under the applicable
credit agreements.
Under the CenterPoint Facility, if any capital stock or indebtedness is issued
other than to refinance maturing indebtedness, proceeds are to be applied
(subject to a $100 million basket, and other limited exceptions) to repay bank
loans and reduce bank commitments. If CenterPoint receives cash proceeds from a
sale of assets of more than $30 million or, if less, a group of sales
aggregating more than $100 million, then such proceeds are to be applied to
prepay bank loans and to reduce bank commitments, except that proceeds of up to
$120 million (including the $100 million basket discussed above) can be
reinvested in CenterPoint's businesses.
Page 12
million prepayment was to have been required in March on the $850 million bank
facility at the T&D Utility. And perhaps most significantly, the banks insisted
that CenterPoint and/or the T&D Utility obtain $400 million in new borrowing by
November 15, 2002, to pay other indebtedness, the majority of which would come
due on that date. Failure to obtain this additional borrowing would have enabled
the banks to terminate their commitments as of November 15.
On November 12, 2002, the T&D Utility entered into a new $1.310 billion
senior secured credit facility (the "T&D Term Loan"), which removed the
immediate acceleration requirement contained in the October $4.7 billion bank
credit facilities. The proceeds were used to repay all amounts outstanding under
the T&D Utility's existing $850 million bank credit facility dated October 10,
2002, to repay $400 million of debt, which included $300 million of senior
debentures of CenterPoint Energy FinanceCo II LLP due to mature on November 15,
2002, and $100 million of debt of CenterPoint, and to pay fees and related
expenses. The T&D Term Loan has a three-year term, and carries an interest rate
of LIBOR plus 9.75 percent, subject to a minimum LIBOR rate of 3 percent.(12)
The T&D Utility Term Loan is secured by General Mortgage Bonds, which replaced
the $850 million in General Mortgage Bonds that the banks had held.
Other Comprehensive Income
Pension Plan Funding. CenterPoint makes contributions to achieve
adequate funding of company sponsored pension and postretirement benefits in
accordance with applicable regulations and rate orders. Due to the decline in
current market value of the pension plan's assets, the value of the plan's
assets is less than the Company's accumulated pension benefit obligation. In its
Form 10-Q for the period ending September 30, 2002, CenterPoint explained that
it might be required to record a non-cash minimum pension liability adjustment
to other comprehensive income during the fourth quarter of 2002, which could be
material. Recording a minimum liability adjustment will not affect CenterPoint's
results of operations during 2002 or its ability to meet any existing financial
covenants related to its debt facilities. Additionally, the Company is not
required to make any pension contribution in 2002 and 2003.
Interest Rate Swaps. During the three months ended September 30, 2002,
the Company settled its forward-starting interest rate swaps having an aggregate
notional amount of $1.5 billion at a cost of $156 million, which was recorded in
other comprehensive income and will be amortized into interest expense in the
same period during which the forecasted interest payments affect earnings.
Should the forecasted interest
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12 Although significantly higher than previous rates, the interest rates
under the T&D Facility are comparable to those approved by the Commission during
this period for a subsidiary of Allegheny Energy, Inc., another registered
holding company. See Allegheny Energy, Inc., Holding Co. Act Release No. 27259
(Oct. 17, 2002) ("the effective cost of capital on any security will not exceed
competitive market rates available at the time of issuance for securities having
the same or reasonably similar terms and conditions issued by similar companies
of reasonably comparable credit quality, provided that in no event will the
interest rate on any such secured debt exceed an interest rate per annum equal
to the sum of 12% plus the prime rate as announced by a nationally recognized
money center bank").
Page 13
payments no longer be probable, any remaining deferred amount will be recognized
immediately as an expense.
b. The Company is engaged in ongoing efforts to improve its credit
profile, strengthen its balance sheet and position the System for
improved long-term financial performance.
Like other companies in the industry, CenterPoint is undertaking
various initiatives to strengthen its financial profile in an effort to deliver
long-term sustainable value for its shareholders.
In connection with the Distribution of Reliant Resources, CenterPoint
effectively exited from nonregulated businesses and the risks associated
therewith. As discussed in connection with the July Order, the Company is
strictly limiting its capital expenditures in the next three years to those
necessary to maintain the integrity of the physical plant and ensure the
continued provision of quality service to its customers. The CenterPoint
System's liquidity and capital requirements are affected primarily by results of
operations, capital expenditures, debt service requirements, and working capital
needs. The largest component of estimated construction expenditures are
additions to the System's electric distribution network arising from estimated
load growth comprising approximately $125 million per year over the next five
years.
CenterPoint also reduced its dividend in connection with the
Distribution to a level commensurate with the size of the remaining regulated
company. Further, as discussed in connection with the July Order, CenterPoint
continues to centralize many of the activities and administrative functions of
the gas and electric utility operations. CenterPoint continues to reduce costs
in its various business units, by reducing inventory and consolidating
functions. Recently, the Company established a Process Improvement Office to
focus on streamlining and standardizing processes throughout the System. It is
anticipated that effort will eventually produce cost-savings of $45 million per
year. CenterPoint is also undergoing a series of work force reductions. In 2002,
94 employees of Texas Genco accepted an early retirement offer. A restructuring
of work and reduction of 198 positions at the T&D Utility is projected to
produce annual savings of $5.4 million in capital costs and $5.7 million in
operation and maintenance costs. The reduction of 68 positions in our
information technology organization is expected to produce annual savings of
approximately $5.8 million.
In addition to these ongoing measures, in October 2002, Texas Genco
announced a plan to temporarily remove from service, or "mothball,"
approximately 3,400 MW of gas-fired generating units through at least May 2003.
The Company decided to mothball these units because of unfavorable market
conditions in the ERCOT market, including a surplus of generating capacity and a
lack of bids for the output of these units in previous capacity auctions. In so
doing, the Company minimized the operating and maintenance expenses associated
with these units representing approximately one third of Texas Genco's total
gas-fired generating capacity. Given the results of recent capacity auctions,
the Company expect to return some or all of the mothballed facilities to service
during the summer.
Page 14
The most important consideration in this regard - and the way in which
CenterPoint differs from other systems - is the regulatory assurance provided by
the Texas restructuring law. While the measures described above are both
necessary and appropriate, it is the sale of Texas Genco and securitization of
stranded investment in 2004 and 2005 that will ultimately help CenterPoint to
achieve a more traditional capital structure.(13)
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13 For example, if the market value determined by the Texas Commission in
2004 through this mechanism were $100 and the total of the regulatory book value
of the Texas Genco assets, plus the other elements to be recovered in the 2004
true up proceeding (e.g., ECOM true up, final fuel reconciliation amounts,
approved environmental expenditures, etc.) were $200, the T&D Utility would be
entitled to recover the difference of $100 over time through the addition of a
competitive transition charge to its delivery rates. Under the securitization
provisions of the Texas restructuring law, the T&D Utility would be entitled to
recover the entire difference of 100 in 2005 by selling its right to the
competitive transition charge to a special purpose entity that would issue
transition bonds secured by the revenues produced by that charge. See
Exhibit G-21.
Page 15
c. The Company must surmount the immediate challenges.
As a result of the November financing, the System successfully met the
first deadline under the October facilities and so avoided an immediate
liquidity crisis. CenterPoint, however, is now faced with the need to raise $600
million by February 28, 2003 and an additional $600 million by June 30 to
satisfy the prepayment obligations under the $3.85 billion CenterPoint Facility
unless it is able to renegotiate the terms of that facility.
The Company's heavy reliance on bank financing has created a recurring
need to extend short-term maturities. The process is time-consuming and costly.
The unanimous consent of the thirty banks in the current consortium is required
for any extension or significant modification of the CenterPoint Facility.
Notwithstanding the long-term viability of the Company, problems in the sector
generally are reflected in more onerous terms and conditions for CenterPoint.
Indeed, the cost and difficulty of obtaining the October 2002 extension have
caused CenterPoint to pursue the instant financing transactions as a means of
avoiding the repeated need for bank extensions.
Moody's Investors Service, Inc. ("Moody's") has rated the senior
unsecured debt of CenterPoint Ba1 with a negative outlook.(14) Standard &
Poor's, a division of The McGraw Hill Companies ("S&P") and Fitch, Inc.
("Fitch") have each assigned it a rating of BBB- with a negative CreditWatch or
outlook.(15)
Concerns about short-term liquidity prompted Moody's on November 4,
2002 to lower from Baa2 to Ba1 the senior unsecured ratings assigned to
CenterPoint:
The downgrades reflect the limited financial flexibility experienced by
the holding company given delays in spinning-off its 80% owned
subsidiary, Reliant Resources, Inc. (RRI, Ba3) which it finally
accomplished September 30th. RRI related challenges have constrained
CenterPoint Energy's access to capital markets and as a result, the
company implemented new credit facilities on October 10 which Moody's
believes contain onerous terms.
* * *
The negative outlook at CenterPoint Energy reflects near term liquidity
challenges in the mandatory commitment reductions required in the bank
financing. . . . A return to stable outlooks . . .
- ---------------
14 A "negative" outlook from Moody's reflects concerns over the next 12 to
18 months which will either lead to a review for a potential downgrade or a
return to a stable outlook.
15 S&P's CreditWatch "negative" indicates a potential for a downgrade
within a relatively short period of time usually related to a specific event. A
"negative" outlook from Fitch encompasses a one- to two-year horizon as to the
likely rating direction.
Page 16
will depend on the company's ability to resolve its near term liquidity
challenges.
Press release issued November 4, 2002.
S&P, in contrast, has focused on CenterPoint's creditworthiness beyond
the current period and therefore has maintained investment grade ratings for
CenterPoint, notwithstanding the Company's near-term challenges. In an article
dated December 4, 2002, S&P cites what it characterizes as the "virtual
certainty" that the legal path contemplated by the Texas restructuring law will
be followed to enable CenterPoint to recover the stranded costs associated with
its generation:
Page 17
On a consolidated basis, CenterPoint Energy, Inc. (CenterPoint;
BBB/Watch Neg/A-2) has a substantial amount of debt; debt leverage was
about 83% at Sept. 30, 2002 (excluding transition bonds). However,
investors should recognize that this capital structure is by design,
and temporary. In accordance with the Texas Electric Restructuring Law,
which deregulated the state's electricity system, CenterPoint will sell
its wholly owned Texas Genco subsidiary, and use the proceeds to pay
down debt. In addition, regulatory assets accrued from mid-1998 through
January 2004 will be factored into the calculation of recoverable costs
related to generation (stranded costs). CenterPoint expects to receive
in excess of $5 billion, which will be applied to the paydown of debt
during 2004 and 2005. Thus, by 2006, debt is expected to account for
between 55% and 60% of total capital.
CenterPoint's `BBB' rating reflects Standard & Poor's extended view of
the company's creditworthiness beyond this current period of weak
financials, given the virtual certainty the legal path will be followed
to this outcome. Standard & Poor's believes the potential for a change
in legislation to be highly unlikely, and furthermore, believes that
the legislation provides specific guidance as to how CenterPoint will
be compensated for its generation investment.
"CenterPoint Energy Sees Light at the End of the Tunnel," Standard & Poor's
Utilities and Perspective for the week of December 2, 2002.(16)
While acknowledging the significant hurdles faced by CenterPoint in the next
twelve months -- "CenterPoint will need to either secure additional financing or
renegotiate the terms of its current bank facility as a prerequisite for
financial health" -- the S&P article concludes that "CenterPoint will emerge as
a low-risk electricity and gas distribution company, with solid financial
parameters."
d. The banks have insisted the Company issue warrants in refinancing.
The lenders are requiring, as a condition of the proposed refinancing,
that CenterPoint provide both security in the form of a pledge of the Texas
Genco stock and additional compensation in the form of warrants to purchase
CenterPoint common stock. Although the precise terms of these warrants are still
being negotiated, it is contemplated that CenterPoint will be required to offer
warrants to its lenders in an amount equal to 10% of its outstanding stock, on a
diluted basis, as of the date of the closing of the proposed financing.(17) As
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16 A copy is attached as Exhibit G-22.
17 As explained more fully in Exhibit G-23, the exercise of the warrants
would have a neutral or positive impact on the projected equity capitalization
of the CenterPoint System.
Page 18
currently envisaged: (i) the warrants would be issued for a term of four years
and one day, but would not be exercisable during the first year; (ii) with
certain exceptions, the exercise price would be 110% of the volume weighted
average daily closing price of CenterPoint stock on the NYSE on the five
consecutive trading days following closing of the transaction; and (iii) all or
a portion of the warrants would be canceled to the extent CenterPoint repays
specified amounts of indebtedness. The terms and conditions of the warrants are
designed so that the lenders may rely on Rule 144A under the Securities Act of
1933 with respect to transfer of the warrants.
If CenterPoint does, in fact, offer warrants or other stock purchase
rights to lenders, it is contemplated that the documentation will provide that,
upon exercise of such rights, (i) no one lender will own, control, or hold with
power to vote five percent or more of the outstanding common stock of
CenterPoint, and (ii) the lenders will not act as an organized group of persons
with respect to such voting stock or otherwise seek to exercise an impermissible
controlling influence over the management and operations of CenterPoint.
e. If the requested relief is granted, the Company will be able to meet
its cash requirements through 2005.
Other than the financings discussed herein, the CenterPoint System's
liquidity and cash requirements for 2003 include the following:
o $167 of maturing long-term debt;
o approximately $680 million of capital expenditures;
o an estimated $240 million which the T&D Utility is obligated to return to
customers as a result of the Texas Commission's findings of over-mitigation
of stranded costs;(18)
o remarketing or refinancing of $500 million in GasCo debt;
o expected dividend payments.
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18 As of September 30, 2002, in contemplation of the 2004 true-up
proceeding, the T&D Utility had recorded a regulatory asset of $2.0 billion
representing the estimated future recovery of previously incurred stranded
costs, which includes $1.1 billion of previously recorded accelerated
depreciation (an amount equal to earnings above a stated overall annual rate of
return on invested capital that was used to recover the investment in generation
assets) plus redirected depreciation, both reversed in 2001. Offsetting this
regulatory asset is a $1.0 billion regulatory liability to refund the excess
mitigation to ratepayers. This estimated recovery is based upon current
projections of the market value of the generation assets to be covered by the
2004 true-up proceeding calculations. The regulatory liability reflects a
current refund obligation arising from prior mitigation of stranded costs deemed
excessive by the Texas Commission. The T&D Utility began refunding excess
mitigation credits with January 2002 bills. These credits are to be refunded
over a seven-year period.
Page 19
CenterPoint and its subsidiary companies expect to meet their capital
requirements through cash flows from operations, bank borrowings and proceeds
from debt and/or equity offerings. They believe that the System's current
liquidity, along with anticipated cash flows from operations and proceeds from
borrowings, including proposed extension of existing bank facilities, and
anticipated sales of securities in the capital markets will be sufficient to
meet cash needs. Indeed, in each year from 2003 through 2007, the Company
projects that its internally generated cash will be more than sufficient to
cover its anticipated capital expenditures and other internal operating cash
needs of the CenterPoint system.
CenterPoint expects to sell Texas Genco in 2004, either to Reliant
Resources or to others if the option is not exercised. Proceeds from such sale,
plus proceeds from the securitization in 2004 or 2005 of stranded costs related
to generating assets of Texas Genco and generation-related regulatory assets are
expected to aggregate in excess of $5 billion.
As the Company has argued throughout the restructuring process, the
CenterPoint System is a fundamentally sound utility system without many of the
risks associated with unregulated generation and trading businesses. Indeed, as
restructured, it no longer has the generation supply obligations and risks
traditionally associated with electric utilities. At the same time, the
restructuring process dictated by the Texas electric restructuring law and the
transition to competition impose constraints and delay in the determination and
recovery of stranded costs. That process significantly complicates the Company's
current financial condition and limits its flexibility in addressing certain
issues until 2004 and 2005. Overlaying those complications is the difficult
financial market now and the particular concerns in the market about the energy
sector. These factors combine to place unique pressures on the Company's
financing and restrict its options. Yet it is important to keep in mind that
CenterPoint is a company with a clear path to achieving a financial condition
more in keeping with that traditionally associated with public utility holding
companies. With the refinancing of its bank debt, the Company expects to have
greater certainty in meeting its financing needs through the completion of
stranded cost recovery in 2005. That greater certainty should open up better
access to the capital markets that will further enhance the Company's financial
health.
f. If the refinancing cannot be completed, the Company faces
undesirable consequences.
If CenterPoint is unable to complete negotiations with the banks in the
manner outlined here, a number of adverse consequences may result for the
Company. Failure to make any of the upcoming mandatory prepayments would
constitute an event of default with no cure period. Under the agreement
governing the CenterPoint Facility, banks having a majority of the loans
outstanding under the facility could then accelerate $3.85 billion of
indebtedness. In addition, the existence of a default could have possible
adverse affects on the Company's ability to obtain acceptable terms from its
various suppliers, including adverse affects on GasCo and the T&D Utility, even
though they and their outstanding indebtedness would not be directly affected by
a default at the holding company level.
CenterPoint has explored the idea of an extension of the
February 28th deadline but it does not appear that one is needed from the
lenders' perspective. More importantly, the
Page 20
Company has reason to believe that any extension might well result in the loss
of investment grade rating from S&P. Because Moody's has already downgraded the
parent senior unsecured debt to "junk" status, a downgrade by S&P would have
disastrous consequences for CenterPoint in accessing the capital markets.(19)
ITEM 2. FEES, COMMISSIONS AND EXPENSES
The fees, commissions and expenses to be paid or incurred, directly or
indirectly, in connection with the Application are estimated to be $120,000.
ITEM 3. APPLICABLE STATUTORY PROVISIONS
Sections 6(a), 7, 32 and 33 of the Act and Rules 44, 53 and 54 are
considered applicable to the proposed transactions. To the extent that the
proposed transaction is considered by the Commission to require authorization,
exemption or approval under any section of the Act or the rules and regulations
other than those set forth above, request for such authorization, exemption or
approval is hereby made.
A. GENERALLY
CenterPoint is requesting authority to issue secured debt upon the
terms described herein. The Company is also seeking approval to issue options,
warrants to purchase the common stock of the Company or other stock purchase
rights consistent with Commission precedent.(20) The Company believes that such
authorization would help to provide access to the capital markets on acceptable
terms and assure the liquidity that is needed to enable CenterPoint to satisfy
its ongoing obligations.
B. THE PROPOSED FINANCING SATISFIES THE STANDARDS OF THE ACT.
Section 6(a) of the Act, in pertinent part, provides that: "Except in
accordance with a declaration effective under section 7 and with the order
permitting such declaration to
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19 While it may seem counterintuitive that the mere fact of an extension
could result in a downgrade, CenterPoint notes that, on February 20, 2003, S&P
downgraded Reliant Resources solely as a result of the extension granted in that
company's financing -- even though, as S&P notes in its press release, which
is attached as Exhibit G-24, Reliant Resources "faces no new uncertainties
regarding the refinancing of its bank maturities."
20 See National Fuel Gas Co., Holding Co. Act Release No. 27600 (Nov. 12,
2002) (authorizing the issuance of options and warrants exercisable for common
stock): Pepco Holdings, Inc., Holding Co. Act Release No. 27557 (July 31, 2002)
(options, warrants or stock purchase rights exercisable for common stock); E.ON
AG, Holding Co. Act Release No. 27359 (June 14, 2002) (options, warrants or
stock purchase rights); Allegheny Energy, Inc., Holding Co. Act Release No.
27521 (April 17, 2002) (options, warrants, stock purchase rights or contracts to
purchase common stock).
Page 21
become effective, it shall be unlawful for any registered holding company . . .
(i) to issue or sell any security of such company; or (2) to exercise any
privilege or right to alter the priorities, preferences, voting power, or other
rights of the holders of an outstanding security of such company."
The financing, including both the pledge of Texas Genco stock and the
issuance of warrants, is permissible under Section 7(c)(2)(A) of the Act because
it will be "solely for the purposes of refunding, extending, exchanging, or
discharging" the existing outstanding CenterPoint Facility.
No State commission has jurisdiction over the proposed transaction. The
standards of Section 7(g) are met.
If the standards of Sections 7(c) and 7(g) are satisfied, the
Commission "shall" permit a declaration regarding the issue or sale of a
security to become effective unless the Commission makes certain findings
described in Section 7(d). None of these problems exists in connection with the
proposed financing transaction:
(1) NO ADVERSE FINDING IS REQUIRED UNDER SECTION 7(D)(1) BECAUSE THE
PROPOSED FINANCING TRANSACTION, INCLUDING THE PLEDGE OF THE TEXAS GENCO STOCK
AND THE ISSUANCE OF WARRANTS, IS REASONABLY ADAPTED TO THE SECURITY STRUCTURE OF
CENTERPOINT AND OTHER COMPANIES IN THE CENTERPOINT SYSTEM.
Any borrowings secured by Texas Genco stock would have a priority over
CenterPoint's unsecured creditors to the extent of those assets.(21) Applicants
believe that the value of the security together with that of CenterPoint's other
unencumbered assets exceed the amount of CenterPoint's total indebtedness and
other liabilities and that the granting of a security interest in the Texas
Genco stock to certain creditors would not prevent the full payment of other
CenterPoint creditors.(22) All such creditors would have to be paid in full
before value is made available to shareholders in any bankruptcy or liquidation
of CenterPoint.
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21 Attached as Exhibit G-25 is a description of existing system debt and a
discussion of priorities with respect to same.
22 Filed under separate cover with a request for confidential treatment
as Exhibit G-26 is an opinion dated December 4, 2002, from Houlihan Smith &
Company, Inc. to CenterPoint Energy, Inc. confirming that, upon completion of
the January 2003 distribution to shareholders of approximately 19% of the
outstanding common stock of Texas Genco: (i) on a pro forma basis, the fair
value and present fair saleable value of CenterPoint's assets would exceed (x)
CenterPoint's stated liabilities and identified contingent liabilities
(discounted by the percentage of probability that they would occur) plus (y)
$3,050,000, the amount of CenterPoint's stated capital, (ii) CenterPoint should
be able to pay its debts as they become due in the ordinary course of its
business, and (iii) the capital remaining in CenterPoint after the Texas Genco
distribution would not be unreasonably small for the business in which
CenterPoint is engaged.
Page 22
This relief requested is similar to but narrower than that granted in a
series of orders involving General Public Utilities Corporation ("GPU") in the
aftermath of Three Mile Island. As a result of a major accident at Three Mile
Island nuclear generating plant, the members of the GPU system were purchasing
large amounts of electric energy to supply the needs of their customers. In
General Public Utilities Corporation, Holding Co. Act Release No. 21107 (June
19, 1979), the Commission authorized GPU and its three electric utility
subsidiaries to enter into two loan agreements -- one revolving credit agreement
with respect to which all four applicants were borrowers and a term loan
agreement pursuant to which GPU was the sole borrower. Pursuant to the revolving
credit agreement, GPU, the parent, was authorized to borrow up to $150 million.
GPU's term loan, in the amount of $39 million outstanding at such time, had
initially been borrowed on an unsecured basis, in order to redeem certain of its
debentures then outstanding.(23) GPU sought to amend its term loan, which
continued to be a separate obligation of GPU, to conform to the terms of the
revolving credit agreement. The Commission authorized GPU to secure its
obligations under the revolving credit agreement, under the term loan and in
respect of certain guarantees of loans to GPU Service Corporation, by a pledge
of the common stock of its electric utility subsidiaries and its service company
subsidiary. The electric utilities also secured their obligations under the
revolving credit agreement with certain of their respective assets, including
first mortgage bonds. The Commission found the proposed borrowings to be "for
urgent and necessary cash requirements of applicants' operations as public
utility companies, or, in the case of GPU, as the parent". This financing
structure, with secured bank facilities at GPU, as well as its electric utility
companies, continued for many years. The Commission authorized amendments,
extensions, renewals and replacements of such secured bank facilities through
1983.(24)
The facts of this matter are similar to those of GPU to the extent that
the requested financing authority is for the urgent and necessary cash
requirements of the Applicants' regulated operations. The request in the instant
matter is narrower than that of GPU because Applicants are asking only to pledge
the stock of Texas Genco, an entity that has no captive retail customers. Cf.
Allegheny Energy, Inc., Holding Co. Act Release No. 27579 (Oct. 17, 2002)
(authorizing Allegheny Energy Supply Company, LLC to issue debt secured by,
among other things, the stock of its generating company subsidiaries). In
Allegheny, as in the instant matter, the subject public-utility subsidiary
companies were engaged in the generation and sale of electricity at wholesale.
There were, and are, no captive retail customers. While it is true that the
definition of "electric-utility company" does not distinguish between
traditional vertically-
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As of September 30, 2002, CenterPoint had assets totaling $18,988,062,
liabilities of $17,081,458 and shareholders' equity of $1,906,604.
23 General Public Utilities Corp., Holding Co. Act Release No. 19778 (Dec.
1, 1976) and Holding Co. Act Release No. 20965 (March 21, 1979).
24 General Public Utilities Corp., Holding Co. Act Release No. 21276 (Oct.
30, 1979), Holding Co. Act Release No. 21410 (Jan. 28, 1980), Holding Co. Act
Release No. 22211 (Sept. 30, 1981), Holding Co. Act Release No. 22790 (Dec. 21,
1982), Holding Co. Act Release No. 23072 (Sept. 26, 1983) and Holding Co. Act
Release No. 23079 (Sept. 30, 1983).
Page 23
integrated utilities and the generation-only subsidiaries at issue in this
matter and in Allegheny, we believe there is a significant difference between
the two in terms of potential detriment to the interests of consumers, a
protected interest under the Act.
In addition to the GPU orders, there is a long line of orders from 1944
through 1979, in which the Commission authorized The Potomac Edison Company
("Potomac Edison"), at the time a registered holding company and electric
utility subsidiary company, to issue collateral trust bonds pursuant to a
collateral trust indenture.(25) The collateral trust bonds were secured by a
first lien on all of the properties and franchises of Potomac Edison, with minor
exceptions provided for in the indenture, as well as a pledge of all the
securities owned by Potomac Edison of its four electric utility subsidiaries.
As Potomac Edison made additional investments in its subsidiaries by
purchasing additional shares of such subsidiaries, such shares were pledged to
secure Potomac Edison's obligations on the collateral trust bonds, whether or
not such investment was financed with proceeds of an issuance of collateral
trust bonds.(26) Proceeds of the collateral trust bonds generally were to be
used to finance the construction program of Potomac Edison and its subsidiaries
and to repay indebtedness to its parent and to others. Yet, in Holding Co. Act
Release No. 17761 (Nov. 14, 1972), the Commission authorized the issuance of
$12,000,000 principal amount of collateral trust bonds, the net proceeds of
which were to be used to prepay short-term bank debt, pay at maturity commercial
paper, reimburse for expenditures for its construction program and working
capital and for other lawful purposes.
More recently, in Public Service Company of New Hampshire, Holding Co.
Act Release No. 26046 (May 5, 1994), the Commission authorized the extension by
Public Service Company of New Hampshire ("PSNH") of a revolving credit agreement
entered into in connection with PSNH's reorganization from bankruptcy on May 16,
1991, prior to its
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25 The Potomac Edison Company, Holding Co. Act Release No. 5362 (Oct. 20,
1944), Holding Co. Act Release No. 8683 (Nov. 29, 1948), Holding Co. Act Release
No. 10467 (March 26, 1951), Holding Co. Act Release No. 13458 (April 30, 1957),
Holding Co. Act Release No. 15018 (Feb. 26, 1964), Holding Co. Act Release No.
15442 (April 13, 1966), Holding Co. Act Release No. 16345 (April 15, 1969),
Holding Co. Act Release No. 17105 (April 19, 1971), Holding Co. Act Release No.
17761 (Nov. 14, 1972), Holding Co. Act Release No. 18184 (Nov. 26, 1973),
Holding Co. Act Release No. 18398 (April 29, 1974) and Holding Co. Act Release
No. 21212 (Sept. 10, 1979).
26 See, for example, Holding Co. Act Release No. 9271 (Aug. 12, 1949),
Holding Co. Act Release No. 10467 (March 26, 1951), Holding Co. Act Release No.
10697 (July 26, 1951), Holding Co. Act Release No. 12837 (April 4, 1955),
Holding Co. Act Release No. 13143 (March 29, 1956), Holding Co. Act Release No.
13487 (May 29, 1957), Holding Co. Act Release No. 13759 (May 16, 1958), Holding
Co. Act Release No. 14214 (April 19, 1960), Holding Co. Act Release No. 15074
(May 15, 1964), Holding Co. Act Release No. 15480 (May 19, 1966), Holding Co.
Act Release No. 15962 (February 8, 1968), Holding Co. Act Release No. 16894
(Nov. 9, 1970), Holding Co. Act Release No. 17133 (May 19, 1971), and Holding
Co. Act Release No. 17568 (May 8, 1972).
Page 24
acquisition by Northeast Utilities on June 5, 1992. PSNH's obligations under the
revolving credit agreement would continue to be secured by a second mortgage on
certain of PSNH's assets. PSNH represented in that matter that it had explored
various options to replace the facility, but that the terms of such revolving
credit agreement were as favorable to PSNH as any terms PSNH could expect to
receive in a new revolving credit facility. It should be noted that the order
was issued at a time when PSNH's first mortgage bonds had recently been
downgraded to below investment grade and its common equity to total
capitalization was 28.3%. In this matter, the Commission concluded that the
applicable provisions of the Act were satisfied and that no adverse findings
were necessary.
(2) THE FINANCING IS REASONABLY ADAPTED TO THE EARNING POWER OF
CENTERPOINT, AS REQUIRED BY SECTION 7(D)(2).
As the Company has argued throughout the restructuring process, the
CenterPoint System is a fundamentally sound utility system without many of the
risks associated with unregulated generation and trading businesses. Indeed, as
restructured, it no longer has the generation supply obligations and risks
traditionally associated with electric utilities. At the same time, the
restructuring process dictated by the Texas electric restructuring law and the
transition to competition impose constraints and delay in the determination and
recovery of stranded costs. That process significantly complicates the Company's
current financial condition and limits its flexibility in addressing certain
issues until 2004 and 2005. Overlaying those complications is the difficult
financial market now and the particular concerns in the market about the energy
sector. These factors combine to place unique pressures on the Company's
financing and restrict its options. Yet it is important to keep in mind that
CenterPoint is a company with a clear path to achieving a financial condition
more in keeping with that traditionally associated with public utility holding
companies. With the refinancing of its bank debt, the Company expects to have
greater certainty in meeting its financing needs through the completion of
stranded cost recovery in 2005. That greater certainty should open up better
access to the capital markets that will further enhance the Company's financial
health.
Although the Distribution of Reliant Resources stock has temporarily
reduced the CenterPoint System's common equity, the Distribution was both
necessary and appropriate under the standards of the Act because it had the
effect of reducing the business risk profile of the regulated business. Further,
CenterPoint's capital structure will be improved significantly with the sale of
Texas Genco and securitization of any stranded investment that is anticipated to
occur in 2004. Net of securitization debt, CenterPoint's projected equity
capitalization will be 30% or greater in 2006, and the growth of equity as a
percentage of capitalization is anticipated to continue in subsequent years.(27)
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27 In connection with the July Order, Applicants projected that CenterPoint
would have 35% equity capitalization in 2005. As explained more fully supra, the
difference between the June 2002 projections and the January 2003 projections is
largely a result of two factors: (i) increased interest expense and (ii)
anticipated charges to Other Comprehensive Income related to declines in the
market value of the CenterPoint pension plan's assets and the settlement of
certain long-term interest rate swaps.
Page 25
Indeed, in connection with the July Order, the Commission focused on
the long-term financial health of the new registered system. There are a number
of other underlying indicators of financial stability, including:
(i) a growing, stable customer rate base, which the CenterPoint
utilities have served for many years;
(ii) a state regulatory regime which has avoided the mistakes of other
deregulation plans by allowing for a market adjustment of retail
rates;
(iii) positive and substantial cash flow from operations; and
(iv) the ability, under the Texas Commission orders, to securitize
stranded costs and regulatory assets and to repay obligations to
holders of securitization bonds through non-bypassable transition
charges which are creatures of state law.
CenterPoint also has a "business risk profile" that is consistent with other
"pure" companies. Where S&P had assigned Reliant Energy, Incorporated a business
risk profile of 5 prior to the announcement regarding the proposed spin-off of
Reliant Resources, it has assigned CenterPoint a business risk profile of 3
(indicating a lower overall business risk).
CenterPoint is almost in its entirety a regulated business: (i) it is
no longer be responsible for making retail electric sales to customers, as that
role is the responsibility of Reliant Resources' retail segment; (ii) the T&D
Utility is precluded by the Texas Act from selling electricity at retail; and
(iii) unlike the regulated entity under most other deregulation schemes, the T&D
Utility has no obligation to serve as a provider of last resort and only
provides the wires and service to deliver the electricity from the generating
company to the retail provider's customers. Nor does the T&D Utility retain the
utility power sourcing obligation, which has traditionally been the origin of
most risk for electric utilities. Generation is the obligation of separate power
generation companies, which incur the risks associated with obtaining fuel,
constructing new generating capacity and selling power to the retail providers.
Although CenterPoint does temporarily retain the Texas Genco business as a
separate subsidiary, it does not have an obligation to construct additional
generation capacity, nor is it responsible for sourcing power for retail
customers.
Under the Texas restructuring law, a regulated utility may recover any
difference between market prices received during 2002 and 2003 through the
state-mandated auction process and the Texas Public Utility Commission's earlier
estimates of those market prices.
Given the unique circumstances of this matter, including the specific
protections afforded by Texas law, Applicants believe that the financing is
reasonably adapted to the earning power of CenterPoint, as required by Section
7(d)(2).
Page 26
(3) NO ADVERSE FINDING IS REQUIRED UNDER SECTION 7(D)(3) BECAUSE THE
PROPOSED FINANCING IS BOTH NECESSARY AND APPROPRIATE, INDEED, CRITICAL TO THE
ECONOMICAL AND EFFICIENT OPERATIONS OF THE SYSTEM'S LAWFUL BUSINESSES.
If CenterPoint is unable to complete the proposed financing transaction
in a timely manner, a number of adverse consequences may result for the Company.
Failure to make the $600 million mandatory prepayment on February 28, 2003 would
constitute an event of default with no cure period. Under the agreement
governing the CenterPoint Facility, banks having a majority of the loans
outstanding under the facility could then accelerate $3.85 billion of
indebtedness. In addition, the existence of a default could have possible
adverse affects on the Company's ability to obtain acceptable terms from its
various suppliers, including adverse affects on GasCo and the T&D Utility, even
though they and their outstanding indebtedness would not be directly affected by
a default at the holding company level.
CenterPoint has considered the idea of an extension of the February
28th deadline but it does not appear that one is needed from the lenders'
perspective. More importantly, the Company has reason to believe that any
extension might well result in the loss of investment grade rating from S&P.
Because Moody's has already downgraded the parent senior unsecured debt to
"junk" status, a downgrade by S&P would have disastrous consequences for
CenterPoint in accessing the capital markets.(28)
(4) THE FEES AND OTHER REMUNERATION, INCLUDING THE WARRANTS, IN
CONNECTION WITH THE PROPOSED FINANCING TRANSACTION ARE REASONABLE UNDER THE
STANDARDS OF SECTION 7(D)(4).
The lenders are requiring, as a condition of the proposed refinancing,
that CenterPoint provide additional compensation in the form of warrants to
purchase CenterPoint common stock. These warrants can be viewed as a fee in lieu
of: (i) the $1.2 billion in mandatory commitment reductions, i.e., repayments,
the banks would otherwise receive in the first half of 2003, and (ii) the fees
they would otherwise have received in connection with the renewal or extension
of the CenterPoint Facility in October 2003. There is also a timing
consideration. By issuing warrants, CenterPoint is able to provide the banks an
opportunity to receive that increased compensation without burdening
CenterPoint's existing cash or requiring additional borrowings to pay the fees.
To the extent the banks or their successors purchase the underlying stock, the
Company will receive additional equity capital. And, perhaps most importantly,
the Company can extinguish the warrants and thus avoid their dilutive impact by
repaying defined amounts of bank debt by milestone dates in 2003. This latter
feature is a particular benefit for both the banks and the Company. To the
extent the uncertainty surrounding repayment of the bank debt is precluding
CenterPoint currently from adequate access to the capital markets, the
refinanced facility should eliminate that uncertainty, and the Company
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28 While it may seem counterintuitive that the mere fact of an extension
could result in a downgrade, CenterPoint notes that, on February 20, 2003, S&P
downgraded Reliant Resources solely as a result of the extension granted in that
company's financing -- even though, as S&P notes in its press release, which is
attached as an exhibit hereto, Reliant Resources "faces no new uncertainties
regarding the refinancing of its bank maturities."
Page 27
should gain greater access to the capital markets. With that access, the Company
can repay a significant portion of the bank debt, which is attractive to the
banks, and at the same time, the Company can reduce--or perhaps eliminate--the
burden created by the warrants.
As discussed in the Application, the issuance of warrants equivalent to
10% of CenterPoint's outstanding common stock does raise a question concerning
the status of the lenders upon the exercise of the warrants.(29) It is important
to remember, first, that the holders have no voting power until the warrants are
exercised. Second, the warrants will be fairly widely held. There are 27 banks
in CenterPoint's bank facility. The five largest participants each hold less
than 10% of the commitments under the facility. The remaining participants hold
smaller commitments. Third, as a practical matter, it seems unlikely that the
banks will actually seek a long-term ownership position. Their additional
compensation will only be realized if they sell either the warrants or the
underlying stock and obtain the difference between the sales price and their
underlying purchase price. Thus the issuance of warrants, even if the Company is
unable to extinguish all of them before they vest, should not create a
concentration of ownership that could adversely impact the ultimate control of
the holding company or its subsidiaries.
Finally, the documentation will provide that, upon exercise of such
rights, (i) no one lender will own, control, or hold with power to vote five
percent or more of the outstanding common stock of CenterPoint, and (ii) the
lenders will not act as an organized group of persons with respect to such
voting stock or otherwise seek to exercise an impermissible controlling
influence over the management and operations of CenterPoint.(30)
(5) THE TERMS AND CONDITIONS OF THE PROPOSED FINANCING ARE CONSISTENT
WITH THE PUBLIC INTEREST AND THE INTEREST OF INVESTORS AND CONSUMERS.
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29 Although the precise terms of these warrants are still being negotiated,
it is contemplated that CenterPoint will be required to offer warrants to its
lenders in an amount equal to 10% of its outstanding stock, on a diluted basis,
as of the date of the closing of the proposed financing. As currently envisaged:
(i) the warrants would be issued for a term of four years and one day, but would
not be exercisable during the first year; (ii) with certain exceptions, the
exercise price would be 110% of the volume weighted average daily closing price
of CenterPoint stock on the NYSE on the five consecutive trading days following
closing of the transaction; and (iii) all or a portion of the warrants would be
canceled to the extent CenterPoint repays specified amounts of indebtedness. The
terms and conditions of the warrants will be designed so that the lenders can
rely on Rule 144A under the Securities Act of 1933 with respect to transfer of
the warrants.
30 While the banks will continue to act in concert through the
administrative agents in their activities under the bank facility (which
requires the banks to act by prescribed voting majorities on matters such as
waivers, amendments, defaults, etc.) and perhaps will have to act together in
exercising certain rights related to the warrants (such as the timing for
requiring registration of the underlying stock), they will not act in concert in
their ownership of the underlying stock or in voting the stock.
Page 28
It is appropriate and necessary under the circumstances that
CenterPoint issue debt secured by a pledge of the Texas Genco stock.(31)
CenterPoint proposes to issue secured debt, as described herein, to meet the
urgent and necessary cash requirements of the CenterPoint System. The proposed
secured financing is an appropriate financing source for CenterPoint to finance
its capital expenditures and operating expenses. CenterPoint has explored
various options available to provide the funding required by the System and
believes that, given current market conditions, the proposed transactions are
the most viable and efficient approach for meeting CenterPoint's refinancing
obligations.
Market conditions have foreclosed certain other options. For example,
it was originally intended that by year-end 2002 CenterPoint would conduct an
initial public offering of approximately 20% of the common stock of Texas Genco,
as a means of establishing market value for purposes of determining stranded
costs. CenterPoint's financial advisors advised the Company that it would not be
feasible to proceed with the planned offering under current market conditions,
and so the Company instead distributed about 19% of the stock of Texas Genco to
its shareholders as a means of establishing the value of its generating assets
for purposes of determining stranded costs. Unlike a public offering, however,
the distribution did not result in proceeds that could be used to pay down debt.
Market conditions have also largely foreclosed the ability of
CenterPoint to issue additional unsecured debt on reasonable terms. CenterPoint
has explored various options available to provide the necessary funding and has
been advised by its financial advisors and by prospective lenders that, given
current market conditions, the Company will be required to provide collateral to
secure the debt in order to obtain such funds on reasonable terms. The proposed
financings are the most economical and efficient manner to finance the immediate
liquidity needs of CenterPoint and its subsidiary companies.
Furthermore, as reflected in the financial information provided in this
record, the proposed refinancing financings do not impose an unreasonable
financial burden on CenterPoint. The transactions represent a reasonable course
of action for the operation of CenterPoint's business, and are appropriate for
the protection of investors and consumers. CenterPoint further submits that the
applicable provisions of the Act are satisfied and that no adverse findings are
required.
C. RULE 54 ANALYSIS
Rule 54 provides that in determining whether to approve certain
transactions other than those involving "exempt wholesale generators", as
defined in Section 32 of the Act ("EWGs"), and "foreign utility companies", as
defined in Section 33 of the Act ("FUCOs"), the Commission will not consider the
effect of the capitalization or earnings of any subsidiary which is an EWG or
FUCO if Rule 53(a), (b) and (c) are satisfied.
- ----------------
31 The debt will not be secured by any securities or utility assets of the
T&D Utility or GasCo.
Page 29
As a result of the Restructuring authorized in the July Order (as such
term is defined in the July Order), CenterPoint had negative retained earnings
as of September 30, 2002. Thus, although CenterPoint's aggregate investment (as
defined in Rule 53(a)(1)(i)), in EWGs and FUCOs as of September 30, 2002 was
approximately $8 million, the Company is not currently in compliance with the
requirements of Rule 53(a)(1). As previously explained, CenterPoint is
attempting to dispose of its remaining interests in EWGs and FUCOs.
CenterPoint complies with, and will continue to comply with, the
record-keeping requirements of Rule 53(a)(2), the limitation under Rule 53(a)(3)
on the use of domestic public-utility company personnel to render services to
EWGs and FUCOs, and the requirements of Rule 53(a)(4) concerning the submission
of copies of certain filings under the Act to retail regulatory commissions.
Further, none of the circumstances described in Rule 53(b) has occurred or is
continuing. Rule 53(c) is by its terms inapplicable to the transactions proposed
herein that do not involve the issue and sale of securities (including
guarantees) to finance an acquisition of an EWG or FUCO.
D. RULE 24 REPORTS
As approved in the July Order, with respect to CenterPoint, the
reporting systems of the Securities Exchange Act of 1934, as amended (the "1934
Act") and the Securities Act of 1933, as amended (the "1933 Act") are integrated
with the reporting system under the 1935 Act. To effect such integration, the
portion of the 1933 Act and 1934 Act reports containing or reflecting
disclosures of transactions occurring pursuant to the authorizations granted in
this proceeding are incorporated by reference into this proceeding through Rule
24 certificates of notification. The certificates contain all other information
required by Rule 24, including the certification that each transaction being
reported had been carried out in accordance with the terms and conditions of and
for the purposes represented in this Application. Such certificates of
notification are to be filed within 60 days after the end of the first three
calendar quarters and within 90 days after the end of the last calendar quarter
in which transactions occur.
A copy of relevant documents (e.g., underwriting agreements,
indentures, bank agreements) for the relevant quarter are filed with, or
incorporated by reference from 1933 Act or 1934 Act filings in such Rule 24
certificates.
The Rule 24 certificates will contain the following information as of
the end of the applicable quarter (unless otherwise stated below):
(i) The sales of any common stock or preferred securities by
CenterPoint or a Financing Subsidiary and the purchase price per
share and the market price per share at the date of the agreement
of sale;
(ii) The total number of shares of CenterPoint common stock issued or
issuable pursuant to options granted during the quarter under
employee benefit plans and dividend reinvestment plans, including
any employee benefit plans or dividend reinvestment plans
hereafter adopted;
(iii) If CenterPoint common stock has been transferred to a seller of
securities of a company being acquired, the number of shares so
issued, the value
Page 30
per share and whether the shares are restricted in the hands of
the acquirer;
(iv) If a guarantee is issued during the quarter, the name of the
guarantor, the name of the beneficiary of the guarantee and the
amount, terms and purpose of the guarantee;
(v) The amount and terms of any long-term debt issued by CenterPoint
during the quarter, and the aggregate amount of short-term debt
outstanding as of the end of the quarter, as well as the weighted
average interest rate for such short-term debt as of such date;
(vi) The amount and terms of any long-term debt issued by any Utility
Subsidiary during the quarter, and the aggregate amount of
short-term debt outstanding as of the end of the quarter, as well
as the weighted average interest rate for such short-term debt as
of such date;
(vii) The amount and terms of any financings consummated by any
Non-Utility Subsidiary that are not exempt under Rule 52;
(viii) The notional amount and principal terms of any Hedge
Instruments or Anticipatory Hedges entered into during the
quarter and the identity of the other parties thereto;
(ix) The name, parent company and amount of equity in any intermediate
subsidiary during the quarter and the amount and terms of any
securities issued by such subsidiaries during the quarter;
(x) The information required by a Certificate of Notification on Form
U-6B-2;(32)
(xi) Consolidated balance sheets for CenterPoint and/or a Utility
Subsidiary as of the end of the quarter and separate balance
sheets as of the end of the quarter for each company that has
engaged in jurisdictional financing transactions during the
quarter;
(xii) A table showing, as of the end of the quarter, the dollar and
percentage components of the capital structure of CenterPoint on
a consolidated basis and of each Utility Subsidiary;
(xiii) A retained earnings analysis of CenterPoint on a consolidated
basis and of each Utility Subsidiary detailing gross earnings,
dividends paid out of each capital account and the resulting
capital account balances at the end of the quarter;
(xiv) A table showing, as of the end of the quarter, the Money Pool
participants and amount of outstanding borrowings for each;
(xv) As to each financing subsidiary, (a) the name of the subsidiary;
(b) the value of CenterPoint's investment account in such
subsidiary; (c) the balance sheet account where the investment
and the cost of the investment are booked; (d) the amount
invested in the subsidiary by CenterPoint; (e) the type of
corporate entity; (f) the percentage owned by CenterPoint; (g)
the identification of other owners if not 100% owned by
- ---------------
32 Under the July Order, Applicants are exempt from the requirement to file
Forms U-6B-2 because the information contained therein will be set forth in
their quarterly Rule 24 Certificates.
Page 31
CenterPoint; (h) the purpose of the investment in the subsidiary;
and (i) the amounts and types of securities to be issued by the
subsidiary.
The Applicants also will report service transactions among CenterPoint (or any
other system service provider) and the Utility Subsidiaries. The report will
contain the following information: (i) a narrative description of the services
rendered; (ii) disclosure of the dollar amount of services rendered in (i) above
according to category or department; (iii) identification of companies rendering
services described in (i) above and recipient companies, including disclosure of
the allocation of services costs; and (iv) disclosure of the number of
CenterPoint system employees engaged in rendering services to other CenterPoint
system companies on an annual basis, stated as an absolute and as a percentage
of total employees.
Applicants shall file a report with the Commission within two business days
after the occurrence of any of the following: (i) a 10% or greater decline in
common stock equity for U.S. GAAP purposes since the end of the last reporting
period for CenterPoint or any of the Utility Subsidiaries; (ii) CenterPoint or
either of the Utility Subsidiaries defaults on any debt obligation in principal
amount equal to or exceeding $10 million if the default permits the holder of
the debt obligation to demand payment; (iii) an NRSRO has downgraded the senior
debt ratings of CenterPoint or either of the Utility Subsidiaries; or (iv) any
event that would have a material adverse effect on the ability of CenterPoint or
any of its subsidiaries to comply with any condition or requirement in this
order on an ongoing basis. The report shall describe all material circumstances
giving rise to the event.
ITEM 4. REGULATORY APPROVALS
No state or federal commission other than the Commission has jurisdiction
with respect to any of the proposed transactions described in this
Post-Effective Amendment No. 2 to Application-Declaration.
ITEM 5. PROCEDURE
The Applicants respectfully request that the Commission issue its Order as
quickly as possible but in any event before March 28, 2003.
The Applicants hereby waive a recommended decision by a hearing officer of
the Commission and agree that the Division of Investment Management may assist
in the preparation of the decision of the Commission.
EXHIBITS AND FINANCIAL STATEMENTS
Exhibits
Exhibit H-1 Draft Notice (previously filed with the Commission
and incorporated herein by reference).
Exhibit G-20 Chart presenting equity percentages of CenterPoint,
GasCo, the T&D Utility and Texas Genco (as of
September 30, 2002).
Exhibit G-21 Sale and True-Up Analysis (to be filed in connection
herewith under separate cover with a request for
confidential treatment).
Exhibit G-22 "CenterPoint Energy Sees Light at the End of the
Tunnel," Standard & Poor's Utilities and Perspective
for the week of December 2, 2002.
Exhibit G-23 Description of the effects on equity by warrants to
purchase CenterPoint common stock (to be filed).
Exhibit G-24 Press release from Standard and Poor's Ratings
Services, February 19, 2003.
Exhibit G-25 Description of existing system debt and a discussion
of priorities with respect to same.
Exhibit G-26 Opinion from Houlihan Smith & Company, Inc. to
CenterPoint, dated December 4, 2002 (filed with the
Commission under separate cover with a request for
confidential treatment).
Financial Statements
Page 32
FS-6 Statements of Consolidated Operations for Three and Nine
Months Ended September 30, 2001 and 2002 (unaudited) for
CenterPoint Energy, Inc. and Subsidiaries (incorporated by
reference to CenterPoint's Form 10-Q for the quarterly period
ended September 30, 2002, File No. 1-31447)
FS-7 Consolidated Balance Sheets for Nine Months Ended September
30, 2001 and 2002 (unaudited) for CenterPoint Energy, Inc. and
Subsidiaries (incorporated by reference to CenterPoint's Form
10-Q for the quarterly period ended September 30, 2002, File
No. 1-31447)
INFORMATION AS TO ENVIRONMENTAL EFFECTS
The proposed financing transaction neither involves a "major federal
action" nor "significantly affects the quality of the human environment," as
those terms are used in Section 102(2)(c) of the National Environmental Policy
Act. Consummation of the proposed transaction will not result in changes in the
operations of the parties that would have any impact on the environment. No
federal agency is preparing an Environmental Impact Statement with respect to
this matter.
SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act of
1935, as amended, the Applicants have duly caused this Application/Declaration
to be signed on their behalf by the undersigned thereunto duly authorized.
Date: March 4, 2003
CENTERPOINT ENERGY, INC.
and its subsidiary companies as named on the title page
By: /s/ Rufus S. Scott
---------------------------------
Rufus S. Scott
Vice President, Deputy General Counsel and Assistant
Corporate Secretary CenterPoint Energy, Inc.
Page 33
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
H-1 Draft Notice (previously filed with the Commission and incorporated
herein by reference).
G-20 Chart presenting equity percentages of CenterPoint, GasCo, the T&D
Utility and Texas Genco (as of September 30, 2002).
G-21 Sale and True-Up Analysis (to be filed in connection herewith under
separate cover with a request for confidential treatment).
G-22 "CenterPoint Energy Sees Light at the End of the Tunnel," Standard &
Poor's Utilities and Perspective for the week of December 2, 2002.
G-23 Description of the effects on equity by warrants to purchase
CenterPoint common stock (to be filed).
G-24 Press release from Standard and Poor's Ratings Services, February
19, 2003.
G-25 Description of existing system debt and a discussion of priorities
with respect to same.
G-26 Opinion from Houlihan Smith & Company, Inc. to CenterPoint, dated
December 4, 2002 (filed with the Commission under separate cover
with a request for confidential treatment).
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Exhibit G-20
Centerpoint Energy
Equity Percentages
September 30, 2002
T&D TEXAS
(Millions) CONSOLIDATED GASCO UTILITY GENCO
------------ ----- ------- -----
METHOD 1
- --------
Capitalization:
Common Equity $ 1,906.6 $ 1,982.5 $ 2,276.7 $ 2,799.6
Trust Preferred 706.0 -- -- --
Debt 10,057.2 2,057.1 2,037.0 74.3
Minority Interest -- -- -- --
---------- --------- --------- ---------
Total Capitalization 12,669.8 4,039.7 4,313.6 2,873.9
Less: Securitized Debt (736.0) -- (736.0) --
---------- --------- --------- ---------
Adjusted Capitalization $ 11,933.8 $ 4,039.7 $ 3,577.6 $ 2,873.9
========== ========= ========= =========
TOTAL COMMON EQUITY/CAPITAL 16.0% 49.1% 63.6% 97.4%
METHOD 2
- --------
Capitalization:
Common Equity $ 1,906.6 $ 1,982.5 $ 2,276.7 $ 2,799.6
Trust Preferred 706.0 -- -- --
Debt 10,057.2 2,057.1 2,037.0 74.3
Minority Interest -- -- -- --
---------- --------- --------- ---------
Total Capitalization $ 12,669.8 $ 4,039.7 $ 4,313.6 $ 2,873.9
========== ========= ========= =========
TOTAL COMMON EQUITY/CAPITAL 15.0% 49.1% 52.8% 97.4%
EXHIBIT G-22
CENTERPOINT ENERGY SEES LIGHT AT THE END OF THE TUNNEL
On a consolidated basis, CenterPoint Energy Inc. (CenterPoint; BBB/Watch
Neg/A-2) has a substantial amount of debt; debt leverage was about 83% at
Sept. 30, 2002 (excluding transition bonds). However, investors should recognize
that this capital structure is by design, and temporary. In accordance with the
Texas Electric Restructuring Law, which deregulated the state's electricity
system, CenterPoint will sell its wholly owned Texas Genco subsidiary, and use
the proceeds to pay down debt. In addition, regulatory assets accrued from
mid-1998 through January 2004 will be factored into the calculation of
recoverable costs related to generation (stranded costs). CenterPoint expects to
receive in excess of $5 billion, which will be applied to the paydown of debt
during 2004 and 2005. Thus, by 2006, debt is expected to account for between 55%
and 60% of total capital.
CenterPoint's `BBB' rating reflects Standard & Poor's extended view of the
company's creditworthiness beyond this current period of weak financials, given
the virtual certainty the legal path will be followed to this outcome. Standard
& Poor's believes the potential for a change in legislation to be highly
unlikely, and furthermore, believes that the legislation provides specific
guidance as to how CenterPoint will be compensated for its generation
investment.
It is important to note that CenterPoint does face significant hurdles
before it reaches that light at the end of the tunnel. A series of events that
precluded CenterPoint from refinancing large bank facilities in the capital
markets has resulted in high interest rates and a series of mandatory
prepayments that heighten the near-term risk to the company. CenterPoint will
need to either secure additional financing or renegotiate the terms of its
current bank facility as a prerequisite for financial health; this risk is
reflected by the CreditWatch listing. This article will hold the issue of
refinancing risk aside, and focus on the logistics of recovering costs and
paying down debt.
CenterPoint is the newly created holding company of CenterPoint Energy
Houston Electric LLC (CEHE; BBB/Watch Neg), an electricity distributor, and
CenterPoint Resources Corp., a gas distributor, with pipeline and gathering
operations as well as the Texas Genco subsidiary.
Texas restructuring legislation became effective Sept. 1, 1999, but actual
restructuring of the industry began on Jan. 1, 2002. At that time, CEHE froze
its distribution tariffs, segregated its generation assets (Texas Genco), and
included its retail supply business in Reliant Resources Inc. (B+/Watch Dev/--),
which was spun off from CenterPoint in September 2002.
The legislation envisioned the evolution of a competitive power market over
a two-year period, after which CenterPoint's generation assets would have an
established market value. A "true-up" provision was created to ensure that
neither the customers nor CenterPoint would be disadvantaged economically as a
result of the two-year transition period. Thus, CenterPoint records a noncash
revenue through the Excess of Cost Over Market (ECOM) element of the true-up
proceeding, which represents a regulatory return on generation assets. The
actual amount of the ECOM element is determined by comparing the price of power
assumed by the Texas Public Utilities Commission (PUC) in its early estimate of
stranded costs (roughly $43 per megawatt-hour (MWh)) to the cash proceeds
received from power sales of Texas Genco, as determined at auctions of Texas
Genco's power output (currently about $25 per MWh). By law, CenterPoint must
sell 15% of capacity in a state-mandated auction, and can sell the remainder in
contractually mandated auctions. Noncash ECOM revenues are estimated to
represent 35% of 2002 EBITDA, and are recorded as a regulatory asset on the
balance sheet.
To reduce exposure to stranded costs related to generation assets,
CenterPoint redirected a portion of depreciation expense from distribution
assets to generation assets as set forth in the restructuring legislation.
Furthermore, depreciation expense was accelerated to reduce the book value of
generation assets in an amount equal to the earnings in excess of the allowed
return from 1998 to 2002. In October 2001, the PUC determined that CenterPoint
had overmitigated its stranded costs, and required the company to reverse a
portion of the accrued regulatory asset. As a result of the requirement to
refund previously collected mitigation, the company is now allowed to recreate a
regulatory asset in an amount equal to the dollars refunded, which will be
recovered in the 2004 true-up. In addition, the previously redirected
depreciation has become an additional asset to be recovered in that proceeding.
CenterPoint plans to distribute just about 19% of its ownership in Texas
Genco stock before Jan. 10, 2003. This timing positions CenterPoint to file for
a true-up of its stranded cost on the earliest date permissible (Jan 10, 2004)
after which point the PUC has, by statute, 150 days to render a judgment. The
PUC will apply a partial stock valuation to determine a market price for Texas
Genco. Importantly, the valuation has negligible effect on the funds ultimately
received by CenterPoint; any shortfall between book value and sale price will be
recovered from customers. Various other regulatory accounts factor into the
true-up of stranded costs, including the ECOM asset, pollution-control
expenditures, assets and liabilities related to modifications of depreciation
expense, fuel underrecovery or overrecovery, and above or below market
purchased-power costs. This balance will be slightly offset by the "retail
clawback" -- a
payment that Reliant Resources must make to CenterPoint (estimated to be less
than $200 million) if at the end of the transition period, Reliant Resources has
retained more than 40% of the supply customers that it purchased from
CenterPoint.
CenterPoint hopes to receive proceeds from the sale of Texas Genco in early
2004; Reliant Resources has the right of first refusal to purchase CenterPoint's
remaining ownership (81%) in Texas Genco. If Reliant Resources does not choose
to exercise its option, CenterPoint has stated its intent to sell the remaining
stock in Genco or to sell the assets of Texas Genco in the same general time
frame. The proceeds will be applied to debt pay-down. The remaining balance of
stranded costs and regulatory assets will be recovered by CEHE, given that it is
the utility that has the right to recover stranded costs. The utility must
obtain a financing order to issue securitization bonds. Proceeds from the
securitization bonds are expected to be received in mid-2005. The financing
order creates a property right to collect a nonbypassable transition charge from
customers via a surcharge to monthly bills, which will service the transition
bond debt. The increase to customer tariffs is expected to be around 10%.
In October 2001, under the same securitization provisions of the Texas
Restructuring Law, CenterPoint (previously Reliant Energy Inc.) issued $749
million of transition bonds, rated `AAA' by Standard & Poor's, related to
certain regulatory assets. At that time, no parties appealed Reliant Energy's
financing order. However, several parties appealed the financing orders for the
transition bonds issued to two other Texas utilities. In one of those cases, the
Texas Supreme Court unanimously rejected a challenge to the securitization
provisions based on provisions of the Texas Constitution. Although this debt
remains on CEHE's balance sheet, it is not CEHE's obligation. Thus, Standard &
Poor's backs out the debt and surcharge cash flows from reported financial
statements when calculating CenterPoint's financial ratios.
When the transition bond proceeds are received, CEHE must offer to apply
the proceeds to prepay a $1.3 billion loan, per the terms of that financing. In
the event that the lenders decline, and no bonds are maturing at the utility,
CEHE may distribute the cash to CenterPoint, which would go toward extinguishing
debt at the holding company. This can be accomplished by various means such as
repayment of intercompany debt, dividend distributions, or return of capital. It
is not anticipated that regulatory restrictions would impede this action.
Standard & Poor's analyzes CenterPoint's financial profile on a consolidated
basis; the issuer credit ratings of `BBB' on both CenterPoint and CEHE indicate
that both entities have the same default risk. The important credit event is
that debt be reduced, no matter where it is paid down. Standard & Poor's
recognizes that the path to the tunnel's end may not be perfectly
straight--there could be delays in the Texas Genco sale, and CenterPoint might
not be able to pay down certain securities immediately upon receipt of cash
and/or pay down the highest-cost securities first. However, Standard & Poor's
does not expect these potential deviations to lead CenterPoint far off course.
Importantly, CenterPoint will emerge as a low-risk electricity and gas
distribution company, with solid financial parameters.
CHERYL E. RICHER
New York (1) 212-438-2084
From Standard & Poor's "Utilities & Perspectives" for the week of December 2,
2002.
EXHIBIT G-24
Reuters
S&P cuts Reliant Resources corp credit rtg
Wednesday February 19, 2:56 pm ET
(The following statement was released by the ratings agency)
NEW YORK, Feb 19 - STANDARD & POOR'S RATINGS SERVICES TODAY LOWERED ITS
CORPORATE CREDIT RATINGS on electricity provider Reliant Resources Inc. (RRI)
and three of RRI's subsidiaries, Reliant Energy Mid-Atlantic Power Holdings LLC
(REMA), Orion Power Holdings Inc., and Reliant Energy Capital (Europe) Inc., to
'B-' from 'B+', PENDING THE REFINANCING OF VARIOUS CREDIT FACILITIES AMOUNTING
TO $5.9 BILLION. The ratings on each of these companies remain on CreditWatch
with developing implications.
In addition, Orion Power's senior unsecured rating was lowered to 'CCC' from
'B-'.
At the same time, Standard & Poor's affirmed its 'B+' rating on Reliant Energy
Power Generation Benelux B.V. (REPGB). While REPGB does not benefit from legal
ring-fencing, the perceived economic disincentives for either RRI or its
creditors to file this subsidiary into bankruptcy along with jurisdictional and
geographic differences between RRI and REPGB allow Standard & Poor's to maintain
a differential in the ratings at this time. REPGB's ratings remain on
CreditWatch with developing implications.
Houston, Texas based RRI's outstanding debt totaled $7.5 billion, including off
balance sheet debt equivalents of $1.8 billion, as of Sept. 30, 2002.
THE RATING ACTION REFLECTS THE TIME FRAME THAT RRI HAS TO REACH AN AGREEMENT
WITH ITS LENDERS. Standard & Poor's believes that the possibility of a default
and a bankruptcy filing within the next 12 months, and particularly within 60
days, is not consistent with a default rating of 'B+'.
RRI FACES NO NEW UNCERTAINTIES REGARDING THE REFINANCING OF ITS BANK MATURITIES.
THE COMPANY HAS OBTAINED AN EXTENSION FROM ITS BANKS EXTENDING THE DUE DATE
UNTIL MARCH 28, 2003. However, should less than 100% of the bank lenders agree
to commit to the terms of a renegotiated deal representing a long-term solution,
a default could occur. RRI CURRENTLY HAS NO ACCESS TO THE CAPITAL MARKETS AND
LACKS ADEQUATE LIQUID FUNDS TO FULLY REPAY THE $2.9 BILLION MATURITY ON MARCH
28. IF RRI IS UNABLE TO OBTAIN COMMITMENTS FROM ALL OF ITS BANK LENDERS, IT MAY
RESOLVE ITS CREDIT SITUATION IN A BANKRUPTCY FILING.
The CreditWatch Developing designation means that ratings could go either up or
down depending on the outcome of the refinancing negotiations. RRI expects to
pay a higher rate, provide collateral, and be required to meet greater cash
restrictions under renewed credit facilities.
Complete ratings information is available to subscribers of RatingsDirect,
Standard & Poor's Web-based credit analysis system, at www.ratingsdirect.com.
All ratings affected by this rating action can be found on Standard & Poor's
public Web site at www.standardandpoors.com; under Fixed Income in the left
navigation bar, select Credit Ratings Actions.
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EXHIBIT G-25
OBLIGATION AMOUNT MATURITY PRIORITY*
CENTERPOINT ENERGY, INC.**
$3.85 billion bank facility $3.85 billion October 9, 2003. Currently same as other senior
Following consummation debt of Parent. FOLLOWING
of current CONSUMMATION OF CURRENT
refinancing, June 2005. REFINANCING, SENIOR TO THE
UNSECURED DEBT OF PARENT TO
THE EXTENT OF THE
COLLATERAL.**** DEBT IN
EXCESS OF THE VALUE OF THE
COLLATERAL WILL CONTINUE TO
BE SENIOR UNSECURED DEBT OF
PARENT.
ZENS $840 million September 15, 2029 Junior in right of payment to
all senior indebtedness.
Collateralized Medium Term Notes $150 million April 2003 Senior secured debt of Parent.
OBLIGATION SECURITY
CENTERPOINT ENERGY, INC.**
$3.85 billion bank facility Unsecured. FOLLOWING CONSUMMATION OF CURRENT
REFINANCING, SECURED TO THE EXTENT OF THE VALUE OF
TEXAS GENCO STOCK.***
ZENS Unsecured.
Collateralized Medium Term Notes Secured debt was incurred by the T&D Utility prior
to the formation of CenterPoint, but became an
obligation of the holding company under the terms
of the indenture. Debt at the parent level is
collateralized by First Mortgage Bonds of the T&D
Utility. In the event that that the parent fails
to pay, the lenders can look to the First Mortgage
Bonds which are secured by property of the T&D
Utility.
OBLIGATION AMOUNT MATURITY PRIORITY*
Collateralized Pollution Control Bonds $924 million Various Senior secured debt of Parent.
Uncollateralized Pollution Control Bonds $519 million Various Senior unsecured debt of
Parent.
Trust Preferred Securities**** $725 million Various The obligations of the Parent
on the debentures issued to
the trust are subordinated and
junior in right of payment to
all senior indebtedness of the
Parent, and pari passu with
obligations to other general
unsecured creditors. The
Parent has the right in
certain circumstances to defer
payment of interest on the
debentures from time to time.
OBLIGATION SECURITY
Collateralized Pollution Control Bonds Debt at the parent level is collateralized by First
Mortgage Bonds or General Mortgage Bonds of the T&D
Utility, which are obligations of T&D Utility and
secured by the property of the T&D Utility. Debt
collateralized by First Mortgage Bonds was incurred
by the T&D Utility prior to the formation of
CenterPoint, but became an obligation of the
holding company under the terms of the underlying
installment payment agreements.
General Mortgage Bonds were first issued by the T&D
Utility in October 2002 in connection with the
refinancing of bank debt. Under "equal and ratable"
security clauses, the T&D Utility was required to
issue General Mortgage Bonds to secure some series
of Pollution Control Bonds that originally were
unsecured.
Uncollateralized Pollution Control Bonds Unsecured. Debt was incurred by the T&D Utility
prior to the formation of CenterPoint, but became
an obligation of the holding company under the
terms of the underlying installment payment
agreements.
Trust Preferred Securities**** Unsecured. Trust Preferred Securities issued by
subsidiary trusts prior to the formation of
CenterPoint, but trusts became indirect
subsidiaries of CenterPoint at the time of the
restructuring. In each case, the parent company
issued subordinated debentures to the trusts, the
debt service on which is the only source of funds
available to the trusts to pay distributions on the
trust preferred securities. Those subordinated
debentures are now the obligations of CenterPoint.
OBLIGATION AMOUNT MATURITY PRIORITY*
T&D UTILITY
First Mortgage Bonds $615 million Various Senior.
Collateralized Term Loan $1.310 billion November 11, 2005 Senior.
OBLIGATION SECURITY
T&D UTILITY
First Mortgage Bonds Secured by a lien on most assets of the T&D
Utility. Issued by utility beginning in 1944 to
secure indebtedness of an integrated electric
utility. First Mortgage Bonds have not been issued
since 1995.
Collateralized Term Loan Secured by a lien on most assets of the T&D Utility
that is junior to the lien of the First Mortgage
Bonds. The General Mortgage Bonds were issued by
T&D Utility November 12, 2002 in connection with a
term loan the proceeds of which were used to
replace the T&D Utility's bank debt and to repay
other existing debt.
* Priority against primary obligor.
** All obligations of Parent are structurally subordinated to obligations of
the subsidiaries.
*** Security will be released when Genco assets divested.
**** The Parent has provided a guarantee on a subordinated basis of certain
payments, but only to the extent that the trust has funds available for
such payments.
TRANSITION BOND COMPANY
Transition Bonds $736 million Various Senior
TRANSITION BOND COMPANY
Transition Bonds
Issued by subsidiary of T&D Utility in 2001
pursuant to Texas Electric Restructuring Law.
Bonds are non-recourse to the T&D Utility. Secured
by Transition Charge approved by the Texas Utility
Commission.
OBLIGATION AMOUNT MATURITY PRIORITY*
Synthetic Put Bonds (TERMS) $500 million November 1, 2003 Same as other senior unsecured
(must be remarketed or debt of GasCo.
refinanced)
Debentures/Notes $1.320 billion Various Same as other senior unsecured
debt of GasCo.
Bank Facility $347 million March 31, 2003 Same as other senior unsecured
debt of GasCo.
Convertible Subordinated Debentures $79 million March 15, 2012 Subordinated to senior
unsecured debt of GasCo.
Trust Preferred Securities**** $0.4 million 2026 The obligations of the Parent
on the subordinated debentures
**** GasCo has provided a guarantee, on a issued to the trust are
subordinated basis, of certain payments, but subordinate and junior in
only to the extent that the trust has funds right of payment to all senior
available for such payments. indebtedness and pari passu
with obligations to or rights
of GasCo's other unsecured
creditors. The Parent has the
right in certain circumstances
to defer payment of interest
on the debentures from time to
time.
CenterPoint Energy Gas Receivables , LLC
Receivables Facility $150 million November 14, 2003 Senior
OBLIGATION SECURITY
Synthetic Put Bonds (TERMS) Unsecured.
Debentures/Notes Unsecured.
Bank Facility Unsecured. Debt will be refinanced with bank debt
or capital market debt.
Convertible Subordinated Debentures Unsecured.
Trust Preferred Securities**** Unsecured. The trust preferred securities were
issued by a financing subsidiary of NorAm Energy
**** GasCo has provided a guarantee, on a Corp. before its acquisition by CenterPoint's
subordinated basis, of certain payments, but predecessor. NorAm issued convertible junior
only to the extent that the trust has funds subordinated debentures to the trust, the interest
available for such payments. payments on which are utilized to pay the
distributions on the trust preferred securities.
The trust preferred securities are convertible into
CenterPoint common stock.
CenterPoint Energy Gas Receivables , LLC
Receivables Facility Ownership of the receivables.
PRIORITY OF PAYMENT OBLIGATIONS PRE-FINANCING
PRIORITY OF CENTERPOINT (CORPORATE) PAYMENT OBLIGATIONS
1. Senior debt, including bank loans, collateralized medium-term notes,
collateralized pollution control bonds, uncollateralized pollution
control bonds, trade payables and other unsecured liabilities
2. ZENS (junior right of payment to all senior indebtedness)
3. Debentures issued to trusts issuing trust preferred (subordinate and
junior in right of payment to all senior indebtedness and pari passu
with obligations to or rights of CenterPoint's other general unsecured
creditors)
4. Common stock
PRIORITY OF T&D UTILITY PAYMENT OBLIGATIONS
1. First mortgage bonds to the extent of the collateral.
2. Term loan collateralized by general mortgage bonds to the extent of the
collateral.
3. LLC membership interests.
PRIORITY OF GASCO PAYMENT OBLIGATIONS
1. Senior Unsecured Debt, including bank lines of credit, trade payables
and other unsecured liabilities
2. Convertible Subordinated Debentures (subordinate to all senior
indebtedness including leases)
3. Debentures issued to trust issuing Convertible Trust Preferred Stock
(subordinate and junior in right of payment to all senior indebtedness
and pari passu with obligations to or rights of GasCo's other general
unsecured creditors)
4. Common Stock
PRIORITY OF PAYMENT OBLIGATIONS POST-FINANCING
PRIORITY OF CENTERPOINT (CORPORATE) PAYMENT OBLIGATIONS
1. Senior secured debt to the extent of the collateral.
2. Senior unsecured debt, including bank loans, collateralized medium-term
notes, collateralized pollution control bonds, uncollateralized
pollution control bonds, trade payables and other unsecured
liabilities.
3. ZENS (junior right of payment to all senior indebtedness)
4. Debentures issued to trusts issuing trust preferred (subordinate and
junior in right of payment to all senior indebtedness and pari passu
with obligations to or rights of CenterPoint's other general unsecured
creditors)
5. Common stock
PRIORITY OF T&D UTILITY PAYMENT OBLIGATIONS
1. First mortgage bonds to the extent of the collateral.
2. Term loan collateralized by general mortgage bonds to the extent of the
collateral.
3. LLC membership interests.
PRIORITY OF GASCO PAYMENT OBLIGATIONS
1. Senior Unsecured Debt, including bank lines of credit, trade payables
and other unsecured liabilities
2. Convertible Subordinated Debentures (subordinate to all senior
indebtedness including leases)
3. Debentures issued to trust issuing Convertible Trust Preferred Stock
(subordinate and junior in right of payment to all senior indebtedness
and pari passu with obligations to or rights of GasCo's other general
unsecured creditors)
4. Common Stock
