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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-3187
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC
(Exact name of registrant as specified in its charter)
TEXAS 22-3865106
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
1111 LOUISIANA (713) 207-1111
HOUSTON, TEXAS 77002 (Registrant's telephone number, including area code)
(Address and zip code of principal executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ------------------------------------- -----------------------------------------
9.15% First Mortgage Bonds due 2021 New York Stock Exchange
6.95% General Mortgage Bonds due 2033 New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC MEETS THE CONDITIONS SET FORTH IN
GENERAL INSTRUCTION I(1)(a) AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS
FORM 10-K WITH THE REDUCED DISCLOSURE FORMAT.
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the common equity held by non-affiliates as
of June 30, 2003: None
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TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................................. 1
Item 2. Properties................................................................ 16
Item 3. Legal Proceedings......................................................... 16
Item 4. Submission of Matters to a Vote of Security Holders....................... 16
PART II
Item 5. Market for Common Stock and Related Security Holder Matters............... 16
Item 6. Selected Financial Data................................................... 16
Item 7. Management's Narrative Analysis of Results of Operations.................. 17
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................ 27
Item 8. Financial Statements and Supplementary Data............................... 28
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.............................................................. 55
Item 9A. Controls and Procedures................................................... 55
PART III
Item 10. Directors and Executive Officers.......................................... 55
Item 11. Executive Compensation.................................................... 55
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Security Holder Matters......................................... 55
Item 13. Certain Relationships and Related Transactions............................ 55
Item 14. Principal Accountant Fees and Services.................................... 55
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......... 56
i
We meet the conditions specified in General Instruction I (1)(a) and (b) to
Form 10-K and are thereby permitted to use the reduced disclosure format for
wholly owned subsidiaries of reporting companies specified therein. Accordingly,
we have omitted from this report the information called for by Item 4
(Submission of Matters to a Vote of Security Holders), Item 10 (Directors and
Executive Officers of the Registrant), Item 11 (Executive Compensation), Item 12
(Security Ownership of Certain Beneficial Owners and Management and Related
Security Holder Matters) and Item 13 (Certain Relationships and Related Party
Transactions) of Form 10-K. In lieu of the information called for by Item 6
(Selected Financial Data) and Item 7 (Management's Discussion and Analysis of
Financial Condition and Results of Operations) of Form 10-K, we have included,
under Item 7, "Management's Narrative Analysis of Results of Operations" to
explain material changes in the amount of revenue and expense items between
2001, 2002 and 2003.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
From time to time we make statements concerning our expectations, beliefs,
plans, objectives, goals, strategies, future events or performance and
underlying assumptions and other statements that are not historical facts. These
statements are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Actual results may differ materially
from those expressed or implied by these statements. You can generally identify
our forward-looking statements by the words "anticipate," "believe," "continue,"
"could," "estimate," "expect," "forecast," "goal," "intend," "may," "objective,"
"plan," "potential," "predict," "projection," "should," "will," or other similar
words.
We have based our forward-looking statements on our management's beliefs
and assumptions based on information available to our management at the time the
statements are made. We caution you that assumptions, beliefs, expectations,
intentions and projections about future events may and often do vary materially
from actual results. Therefore, we cannot assure you that actual results will
not differ materially from those expressed or implied by our forward-looking
statements.
Some of the factors that could cause actual results to differ from those
expressed or implied by our forward-looking statements are described under "Risk
Factors" beginning on page 11 in Item 1 of this report.
You should not place undue reliance on forward-looking statements. Each
forward-looking statement speaks only as of the date of the particular
statement, and we undertake no obligation to publicly update or revise any
forward-looking statements.
ii
PART I
ITEM 1. BUSINESS
OUR BUSINESS
OVERVIEW
We are a regulated utility engaged in the transmission and distribution of
electric energy in a 5,000-square mile area located along the Texas Gulf Coast,
including the City of Houston. In this report, unless the content indicates
otherwise, references to "CenterPoint Houston," "we," "us" or similar terms mean
CenterPoint Energy Houston Electric, LLC and its subsidiaries. We are an
indirect wholly owned subsidiary of CenterPoint Energy, Inc., a public utility
holding company (CenterPoint Energy) created on August 31, 2002 as part of the
corporate restructuring of Reliant Energy, Incorporated (Reliant Energy).
CenterPoint Energy is a registered public utility holding company under the
Public Utility Holding Company Act of 1935, as amended (1935 Act). The 1935 Act
and related rules and regulations impose a number of restrictions on the
activities of CenterPoint Energy and its subsidiaries, other than Texas Genco
Holdings, Inc. (Texas Genco). The 1935 Act, among other things, limits the
ability of CenterPoint Energy and its regulated subsidiaries to issue debt and
equity securities without prior authorization, restricts the source of dividend
payments to current and retained earnings without prior authorization, regulates
sales and acquisitions of certain assets and businesses and governs affiliate
transactions.
Our principal executive offices are located at 1111 Louisiana, Houston,
Texas 77002 (telephone number: 713-207-1111).
For additional information regarding the corporate restructuring of Reliant
Energy, please read Note 1 to our consolidated financial statements.
SIGNIFICANT EVENTS
The final reconciliation of the true-up components by the Public Utility
Commission of Texas (the Texas Utility Commission) is the most significant event
facing us in 2004. Pursuant to the Texas Electric Choice Plan (the Texas
electric restructuring law), we are permitted to recover the true-up components
to the extent established in a Texas Utility Commission proceeding. Such amounts
are expected to be substantial. We plan to use amounts received to repay our
indebtedness and to make distributions to CenterPoint Energy through either the
payment of dividends or the settlement of intercompany payables.
One of the true-up components which we are permitted to recover under the
Texas electric restructuring law is an amount designed to true-up the difference
between the Texas Utility Commission's projected market prices for generation
during 2002 and 2003 and the actual market prices for generation as determined
in the state-mandated capacity auctions during that period. We recorded non-cash
revenue for this capacity true-up or "ECOM revenue" of $697 million in 2002 and
$661 million in 2003. In 2004, we will no longer be permitted under the Texas
electric restructuring law to record non-cash ECOM revenue.
For more information on these and other matters currently affecting us,
please see"---Electric Transmission and Distribution --True-Up Components and
Securitization" and "Management's Narrative Analysis of Results of Operations
- -- Executive Summary -- Significant Events in 2004."
1
ELECTRIC TRANSMISSION & DISTRIBUTION
Service Area
Our service area consists of a 5,000-square-mile area located along the
Texas Gulf Coast, with a population of approximately 4.7 million people.
Electric transmission and distribution service is provided to approximately 1.8
million metered customers in this area, which includes the City of Houston and
surrounding cities such as Galveston, Pasadena, Baytown, Bellaire, Freeport,
Humble, Katy and Sugar Land. With the exception of Texas City, we serve nearly
all of the Houston/Galveston metropolitan area. Effective January 2002, all
electricity customers in Texas whose service was previously regulated became
free to choose to purchase their electricity from retail electric providers who
compete for their business. The competing retail electric providers in our
service areas are our primary customers. See " -- Customers" below.
Electric Transmission
We transport electricity from power plants to substations and from one
substation to another and to retail electric customers taking power above 69
kilovolts (kV) in locations throughout the control area managed by the Electric
Reliability Council of Texas (ERCOT) on behalf of retail electric providers. We
provide transmission services under tariffs approved by the Texas Utility
Commission of Texas.
Electric Distribution
In Texas, end users purchase their electricity from the certificated
"retail electric providers." We distribute electricity for retail electric
providers in our certificated service area by carrying lower-voltage power from
the substation to the retail electric customer. Our distribution network
receives electricity from the transmission grid through power distribution
substations and distributes electricity to end users through distribution
feeders. Our operations include construction and maintenance of electric
transmission and distribution facilities, metering services, outage response
services and call center operations. We provide distribution services under
tariffs approved by the Texas Utility Commission. Texas Utility Commission rules
and market protocols govern the commercial retail operations of distribution
companies and other market participants.
ERCOT Market Framework
We are a member of ERCOT. ERCOT is a network of retail customers, investor
and municipally owned electric utilities, rural electric co-operatives, river
authorities, independent generators, power marketers and retail electric
providers, which serves as the regional reliability coordinating council for
member electric power systems in Texas. The ERCOT market includes much of the
State of Texas, other than a portion of the panhandle, a portion of the eastern
part of the state bordering on Louisiana and the area in and around El Paso. The
ERCOT market represents approximately 85% of the demand for power in Texas and
is one of the nation's largest power markets. The ERCOT market includes an
aggregate net generating capacity of approximately 78,000 megawatts (MW),
approximately 14,000 MW of which are owned by our affiliate, Texas Genco. There
are only limited direct current interconnections between the ERCOT market and
other power markets in the United States.
The ERCOT market operates under the reliability standards set by the North
American Electric Reliability Council. The Texas Utility Commission has primary
jurisdiction over the ERCOT market to ensure the adequacy and reliability of
electricity supply across the state's main interconnected power transmission
grid. The ERCOT independent system operator (ERCOT ISO) is responsible for
maintaining reliable operations of the bulk electric power supply system in the
ERCOT market. Its responsibilities include ensuring that electricity production
and delivery are accurately accounted for among the generation resources and
wholesale buyers and sellers. Unlike certain other regional power markets, the
ERCOT market is not a centrally dispatched power pool, and the ERCOT ISO does
not procure energy on behalf of its members other than to maintain the reliable
operations of the transmission system. Members are responsible for contracting
sales and purchases of power bilaterally. The ERCOT ISO also serves as agent for
procuring ancillary services for those who elect not to provide their own
ancillary services.
Our electric transmission business supports the operation of the ERCOT ISO
and all ERCOT members. The
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transmission business has planning, design, construction, operation and
maintenance responsibility for the portion of the transmission grid and for the
load-serving substations it owns, primarily within its certificated area. The
transmission business is participating with the ERCOT ISO and other ERCOT
utilities to plan, design, obtain regulatory approval for and construct new
transmission lines necessary to increase bulk power transfer capability and to
remove existing constraints on the ERCOT transmission grid.
True-Up Components and Securitization
The Texas Electric Restructuring Law. In June 1999, the Texas legislature
adopted the Texas electric restructuring law, which substantially amended the
regulatory structure governing electric utilities in order to allow and
encourage retail competition which began in January 2002. The Texas electric
restructuring law required the separation of the generation, transmission and
distribution and retail sales functions of electric utilities into three
different units. Under the law, neither the generation function nor the retail
function is subject to traditional cost of service regulation, and the
generation function and the retail function are each operated on a competitive
basis. Through a restructuring in the third quarter of 2002 in response to this
law, CenterPoint Energy became the parent of Reliant Energy, Incorporated
(Reliant Energy) (now CenterPoint Houston). Subsequent to the restructuring,
CenterPoint Energy's interest in Reliant Resources, Inc. (Reliant Resources),
which conducts non-utility wholesale and retail energy operations, including our
former retail sales, was divested.
The transmission and distribution function that we perform remains subject
to traditional utility rate regulation. We recover the cost of our service
through an energy delivery charge approved by the Texas Utility Commission. As a
result of these changes, there are no meaningful comparisons for our results of
operations prior to January 2002, when retail sales became fully competitive.
Under the Texas electric restructuring law, transmission and distribution
utilities in Texas, such as us, whose generation assets were "unbundled" may
recover, following a regulatory proceeding to be held in 2004 (the 2004 True-Up
Proceeding) as further discussed below in "-- 2004 True-Up Proceeding":
- "stranded costs," which consist of the positive excess of the
regulatory net book value of generation assets, as defined, over the
market value of the assets;
- the difference between the Texas Utility Commission's projected
market prices for generation during 2002 and 2003 and the actual
market prices for generation as determined in the state-mandated
capacity auctions during that period;
- the Texas jurisdictional amount reported by the previously vertically
integrated electric utilities as generation-related regulatory assets
and liabilities (offset and adjusted by specified amounts) in their
audited financial statements for 1998;
- final fuel over- or under-recovery; less
- "price to beat" clawback components.
The Texas electric restructuring law permits transmission and distribution
utilities to recover the true-up components through transition charges on retail
electric customers' bills, to the extent that such components are established in
certain regulatory proceedings. These transition charges are non-bypassable,
meaning that they must be paid by essentially all customers and cannot, except
in limited circumstances, be avoided by switching to self-generation. The law
also authorizes the Texas Utility Commission to permit those utilities to issue
transition bonds based on the securitization of revenues associated with the
transition charges. We recovered a portion of our regulatory assets in 2001
through the issuance of transition bonds. For a further discussion of these
matters, see "--Securitization" below.
The Texas electric restructuring law also provides specific regulatory
remedies to reduce or mitigate a utility's stranded cost exposure. During a base
rate freeze period from 1999 through 2001, earnings above the utility's
authorized rate of return formula were required to be applied in a manner to
accelerate depreciation of generation-related plant assets for regulatory
purposes if the utility was expected to have stranded costs. In addition,
depreciation expense for
3
transmission and distribution- related assets could be redirected to generation
assets for regulatory purposes during that period if the utility was expected to
have stranded costs. We undertook both of these remedies provided in the
Texas electric restructuring law, but in a rate order issued in October 2001,
the Texas Utility Commission required us to reverse those actions. See " --
Mitigation" below.
2004 True-Up Proceeding. In January 2004, the Texas Utility Commission
began conducting true-up proceedings for investor-owned utilities. The purpose
of the true-up proceeding is to quantify and reconcile the amount of the true-up
components. The true-up proceeding will result in either additional charges
being assessed on, or credits being issued to, retail electric customers. We
expect to make the filing to initiate our true-up proceeding on March 31, 2004.
The Texas electric restructuring law requires a final order to be issued by the
Texas Utility Commission not more than 150 days after a proper filing is made by
the regulated utility, although under its rules the Texas Utility Commission can
extend the 150-day deadline for good cause. Any delay in the final order date
will result in a delay in the securitization of our true-up components and the
implementation of the non-bypassable charges described above, and could delay
the recovery of carrying costs on the true-up components determined by the Texas
Utility Commission.
We will be required to establish and support the amounts we seek to recover
in the 2004 True-Up Proceeding. We expect these amounts to be substantial. Third
parties will have the opportunity and are expected to challenge our calculation
of these amounts. To the extent recovery of a portion of these amounts is denied
or if we agree to forego recovery of a portion of the request under a settlement
agreement, we would be unable to recover those amounts in the future.
Following adoption of the true-up rule by the Texas Utility Commission in
2001, we appealed the provisions of the rule that permitted interest to be to be
recovered on stranded costs only from the date of the Texas Utility Commission's
final order in the 2004 True-Up Proceeding, instead of from January 1, 2002 as
we contend is required by law. On January 30, 2004, the Texas Supreme Court
granted our petition for review of this matter. Oral arguments were heard on
February 18, 2004. The decision by the Court is pending. We have not accrued
interest income on stranded costs in our consolidated financial statements, but
estimate such interest income would be material to our consolidated financial
statements.
Stranded Cost Component. We will be entitled to recover stranded costs
through a transition charge to our customers if the regulatory net book value of
generating plant assets exceeds the market value of those assets. The regulatory
net book value of generating plant assets is the balance as of December 31, 2001
plus certain costs incurred for reductions in emissions of oxides of nitrogen
(NOx), any above-market purchased power contracts and certain other amounts. The
market value will be equal to the average daily closing price on The New York
Stock Exchange for publicly held shares of Texas Genco common stock for 30
consecutive trading days chosen by the Texas Utility Commission out of the last
120 trading days immediately preceding the true-up filing, plus a control
premium, up to a maximum of 10%, to the extent included in the valuation
determination made by the Texas Utility Commission. If Texas Genco is sold to a
third party at a lower price than the market value used by the Texas Utility
Commission, we would be unable to recover the difference.
ECOM True-Up Component. The Texas Utility Commission used a computer model
or projection, called an excess cost over market (ECOM) model, to estimate
stranded costs related to generation plant assets. Accordingly, the Texas
Utility Commission estimated the market power prices that would be received in
the generation capacity auctions mandated by the Texas electric restructuring
law during 2002 and 2003. Any difference between the Texas Utility Commission's
projected market prices for generation during 2002 and 2003 and the actual
market prices for generation as determined in the state-mandated capacity
auctions during that period will be a component of the 2004 True-Up Proceeding.
In 2003, some parties sought modifications to the true-up rules. Although
the Texas Utility Commission denied that request, we expect that issues could be
raised in the 2004 True-Up Proceeding regarding our compliance with the Texas
Utility Commission's rules regarding the ECOM true-up, including whether Texas
Genco has auctioned all capacity it is required to auction in view of the fact
that some capacity has failed to sell in the state-mandated auctions. We believe
Texas Genco has complied with the requirements under the applicable rules,
including re-offering the unsold capacity in subsequent auctions. If events were
to occur during the 2004 True-Up Proceeding that made the recovery of the ECOM
true-up regulatory asset no longer probable, we would write off the
unrecoverable balance of that asset as a charge against earnings.
4
Fuel Over/Under Recovery Component. We and Texas Genco filed our joint
application to reconcile fuel revenues and expenses with the Texas Utility
Commission in July 2002. This final fuel reconciliation filing covered
reconcilable fuel expense and interest of approximately $8.5 billion incurred
from August 1, 1997 through January 30, 2002. In January 2003, a settlement
agreement was reached, as a result of which certain items totaling $24 million
were written off during the fourth quarter of 2002 and items totaling $203
million were carried forward for later resolution by the Texas Utility
Commission. In late 2003, a hearing was concluded on those remaining issues. On
March 4, 2004, an Administrative Law Judge (ALJ) recommended that we not be
allowed to recover $87 million in fuel expenses incurred during the
reconciliation period. We will contest this recommendation when the Texas
Utility Commission considers the ALJ's conclusions on April 15, 2004. However,
since the recovery of this portion of the regulatory asset is no longer
probable, we reserved $117 million, including interest, in the fourth quarter of
2003. The ALJ also recommended that $46 million be recovered in the 2004 True-Up
Proceeding rather than in the fuel proceeding. The results of the Texas Utility
Commission's decision will be a component of the 2004 True-Up Proceeding.
"Price to Beat" Clawback Component. In connection with the implementation
of the Texas electric restructuring law, the Texas Utility Commission has set a
"price to beat" that retail electric providers affiliated or formerly affiliated
with a former integrated utility must charge residential and small commercial
customers within their affiliated electric utility's service area. The true-up
provides for a clawback of the "price to beat" in excess of the market price of
electricity if 40% of the "price to beat" load is not served by other retail
electric providers by January 1, 2004. Pursuant to the Texas electric
restructuring law and the master separation agreement entered into in connection
with the September 30, 2002 spin-off of CenterPoint Energy's interest in Reliant
Resources to its shareholders, Reliant Resources is obligated to pay us the
clawback component of the true-up. Based on an order issued on February 13, 2004
by the Texas Utility Commission, the clawback will equal $150 times the number
of residential customers served by Reliant Resources in our service territory,
less the number of residential customers served by Reliant Resources outside our
service territory, on January 1, 2004. As reported in Reliant Resources' Annual
Report on Form 10-K for the year ended December 31, 2003, Reliant Resources
expects that the clawback payment will be $175 million. The clawback will reduce
the amount of recoverable costs to be determined in the 2004 True-Up Proceeding.
Securitization. The Texas electric restructuring law provides for the use
of special purpose entities to issue transition bonds for the economic value of
generation-related regulatory assets and stranded costs. These transition bonds
will be amortized over a period not to exceed 15 years through non-bypassable
transition charges. In October 2001, our special purpose subsidiary issued $749
million of transition bonds to securitize generation-related regulatory assets.
These transition bonds have a final maturity date of September 15, 2015 and are
non-recourse to us and our subsidiaries other than to the special purpose
issuer. Payments on the transition bonds are made out of funds from
non-bypassable transition charges.
We expect that upon completion of the 2004 True-Up Proceeding, we will seek
to securitize the amounts established for the true-up components. Before we can
securitize these amounts, the Texas Utility Commission must conduct a proceeding
and issue a financing order authorizing us to do so. Under the Texas electric
restructuring law, we are entitled to recover any portion of the true-up balance
not securitized by transition bonds through a non-bypassable competition
transition charge.
Mitigation. In an order issued in October 2001, the Texas Utility
Commission established the transmission and distribution rates that became
effective in January 2002. The Texas Utility Commission determined that we had
over-mitigated our stranded costs by redirecting transmission and distribution
depreciation and by accelerating depreciation of generation assets as provided
under our transition plan and the Texas electric restructuring law. In this
final order, we were required to reverse the amount of redirected depreciation
and accelerated depreciation taken for regulatory purposes as allowed under the
transition plan and the Texas electric restructuring law. In accordance with the
order, we recorded a regulatory liability to reflect the prospective refund of
the accelerated depreciation, and in January 2002 we began refunding excess
mitigation credits, which are to be refunded over a seven-year period. The
annual refund of excess mitigation credits is approximately $238 million. In the
event that the excess mitigation credits prove to have been unnecessary and we
are determined to have stranded costs, the excess mitigation credits will be
included in the stranded costs to be recovered. In June 2003, we sought
authority from the Texas Utility Commission to terminate these credits based on
then current estimates of what that final determination
5
would be. The Texas Utility Commission denied the request in January 2004.
Customers
Our customers consist of municipalities, electric cooperatives, other
distribution companies and approximately 43 retail electric providers in our
certificated service area. We serve nearly all of the Houston/Galveston
metropolitan area. Each retail electric provider is licensed by, and must meet
creditworthiness criteria established by, the Texas Utility Commission. Two of
these retail electric providers are subsidiaries of Reliant Resources. Sales to
subsidiaries of Reliant Resources represented approximately 83% and 78% of our
transmission and distribution revenues in 2002 and 2003, respectively. Our
billed receivables balance from retail electric providers as of December 31,
2003 was $83 million. Approximately 70% of this amount was owed by subsidiaries
of Reliant Resources. We do not have long-term contracts with any of our
customers. We operate on a continuous billing cycle, with meter readings being
conducted and invoices being distributed to retail electric providers each
business day.
Credit Standards for Retail Electric Providers
The Texas Utility Commission has set forth minimum creditworthiness
criteria that all retail electric providers serving retail electric customers
must meet. The retail electric provider must satisfy one of the following
criteria:
- a long-term, unsecured credit rating of not less than "BBB-" and
"Baa3" (or the equivalent) from Standard & Poor's Rating Services
(S&P) and Moody's Investors Services, Inc. (Moody's), respectively, or
provide a guarantee, surety bond or letter of credit from an affiliate
or another company that meets the requisite ratings;
- assets in excess of liabilities of $50 million, as reflected on its
most recent quarterly and annual independently audited financial
statements; or
- unused cash resources commensurate with the level of business it has
been certified by the Texas Utility Commission to conduct. The level
of unused cash resources must be $100,000 for the retail electric
provider to conduct business of up to $250,000 in total monthly
billings (excluding transition charges described above under "--
True-Up Components and Securitization -- Securitization") by
transmission and distribution utilities and an additional $10,000 of
unused cash resources for every $25,000 of incremental business above
the $250,000 level.
Additional creditworthiness standards are required of the retail electric
providers with regard to the billing and collection of the transition charges
described above under "-- True-Up Components and Securitization --
Securitization."
Remedies Upon Default by Retail Electric Provider
If a retail electric provider defaults on its payments to us or on its
obligation to maintain the required security described above under "-- Credit
Standards for Retail Electric Providers," we may, pursuant to the tariff
relating to our services approved by the Texas Utility Commission:
- apply to delinquent balances the retail electric provider's cash
deposit, if any, and any accrued interest, or seek recourse against
any letter of credit or surety bond for the amount of delinquent
charges due to us, including any penalties or interest;
- avail ourselves of any legal remedies that may be appropriate to
recover unpaid amounts and associated penalties or interest;
- implement other mutually suitable and agreeable arrangements with the
retail electric provider, as long as such arrangements are available
to all retail electric providers on a nondiscriminatory basis;
- notify the Texas Utility Commission that the retail electric provider
is in default and request suspension or revocation of the retail
electric provider's certification; and
6
- require the retail electric provider to do one of the following:
(1) transfer the billing and collection responsibility for all
charges to the provider of last resort. Amounts collected by the
provider of last resort are applied first to amounts due to us,
including any late fees and penalties, and the remaining amount
is released to the retail electric provider;
(2) immediately arrange for all future remittances from the retail
electric provider's customers to be paid into a lockbox
controlled by us. Amounts collected in the lockbox are applied
first to amounts due to us, including any late fees and
penalties, and the remaining amount is released to the retail
electric provider. The retail electric provider bears all the
costs of the lockbox mechanism; or
(3) immediately arrange for the retail electric provider's customers
to be served by another qualified retail electric provider or the
provider of last resort.
The defaulting retail electric provider must choose which of these three
options it will implement, but if it fails to implement immediately one of these
three options, we will immediately implement the first option.
Additional remedies are available to us upon a retail electric provider's
default in the remittance to us, as the servicer, of billed transition charges
described above under "-- True-Up Components and Securitization --
Securitization".
Competition
There are no other transmission and distribution utilities in our service
area. In order for another provider of transmission and distribution services to
provide such services in our territory, it would be required to obtain a
certificate of convenience and necessity in proceedings before the Texas Utility
Commission and, depending on the location of the facilities, may also be
required to obtain franchises from one or more municipalities. We know of no
other party intending to enter this business in our service area at this time.
Properties
All of our properties are located in Texas. Our transmission system carries
electricity from power plants to substations and from one substation to another.
These substations serve to connect power plants, the high voltage transmission
lines and the lower voltage distribution lines. Unlike the transmission system,
which carries high voltage electricity over long distances, distribution lines
carry lower voltage power from the substation to the retail electric customers.
The distribution system consists primarily of distribution lines, transformers,
secondary distribution lines and service wires and meters. Most of our
transmission and distribution lines have been constructed over lands of others
pursuant to easements or along public highways and streets as permitted by law.
All of our real and tangible properties, subject to certain exclusions, are
currently subject to:
- the lien of a Mortgage and Deed of Trust (the Mortgage) dated November
1, 1944, as supplemented; and
- the lien of a General Mortgage (the General Mortgage) dated October
10, 2002, as supplemented, which is junior to the lien of the
Mortgage.
As of March 1, 2004, we had outstanding approximately $382 million
aggregate principal amount of first mortgage bonds under the Mortgage, including
approximately $280 million held in trust to secure certain pollution control
bonds for which CenterPoint Energy is obligated. Additionally, under the General
Mortgage, we had outstanding approximately $3.2 billion aggregate principal
amount of general mortgage bonds, including approximately $527 million held in
trust to secure certain additional pollution control bonds for which CenterPoint
Energy is obligated, approximately $100 million held in trust to secure
pollution control bonds for which we are obligated and approximately $1.3
billion aggregate principal amount of general mortgage bonds to secure the
borrowings under a collateralized term loan due in 2005.
7
Electric Lines -- Overhead. As of December 31, 2003, we owned 26,505 pole
miles of overhead distribution lines and 3,606 circuit miles of overhead
transmission lines, including 446 circuit miles operated at 69,000 volts, 2,083
circuit miles operated at 138,000 volts and 1,077 circuit miles operated at
345,000 volts.
Electric Lines -- Underground. As of December 31, 2003, we owned 14,917
circuit miles of underground distribution lines and 16.6 circuit miles of
underground transmission lines, including 4.5 circuit miles operated at 69,000
volts and 12.1 circuit miles operated at 138,000 volts.
Substations. As of December 31, 2003, we owned 224 major substation sites
having total installed rated transformer capacity of 44,964 megavolt amperes.
Service Centers. We operate 15 regional service centers located on a total
of 395 acres of land. These service centers consist of office buildings,
warehouses and repair facilities that are used in the business of transmitting
and distributing electricity.
Franchises. We have franchise contracts with 90 of the 91 cities in our
service area. The remaining city has enacted an ordinance that governs the
placement of utility facilities in its streets. These franchises and this
ordinance, typically having a term of 40 years, give us the right to construct,
operate and maintain our transmission and distribution system within the streets
and public ways of these municipalities for the purpose of delivering electric
service to the municipality, its residents and businesses in exchange for
payment of a fee. The franchise for the City of Houston is scheduled to expire
in 2007.
DISCONTINUED OPERATIONS
Effective August 31, 2002, Reliant Energy consummated a restructuring
transaction (Restructuring) in which it, among other things, (1) conveyed its
Texas electric generation assets to Texas Genco, (2) became an indirect, wholly
owned subsidiary of a new utility holding company, CenterPoint Energy, (3) was
converted into a Texas limited liability company named CenterPoint Energy
Houston Electric, LLC and (4) distributed the capital stock of its operating
subsidiaries, including Texas Genco, to CenterPoint Energy. As part of the
Restructuring, each share of Reliant Energy common stock was converted into one
share of CenterPoint Energy common stock.
The consolidated financial statements present operations of Reliant Energy
that were distributed to CenterPoint Energy in the Restructuring as discontinued
operations in accordance with Statement of Financial Accounting Standards (SFAS)
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS
No. 144). Accordingly, the consolidated financial statements reflect these
operations as discontinued operations for the year ended December 31, 2001 and
for the eight months ended August 31, 2002.
Total revenues included in discontinued operations were $14 billion and $10
billion for the year ended December 31, 2001 and the eight months ended August
31, 2002, respectively. Total revenues included in discontinued operations have
been restated to reflect Reliant Resources' adoption of Emerging Issues Task
Force (EITF) Issue No. 02-3, "Issues Related to Accounting for Contracts
Involved in Energy Trading and Risk Management Activities." Income from
discontinued operations for the year ended December 31, 2001 and the eight
months ended August 31, 2002 is reported net of income tax expense of $297
million and $254 million, respectively.
REGULATION
We are subject to regulation by various federal, state and local
governmental agencies, including the regulations described below.
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
As a subsidiary of a registered public utility holding company, we are
subject to a comprehensive regulatory scheme imposed by the Securities and
Exchange Commission (SEC) in order to protect customers, investors and the
public interest. Although the SEC does not regulate rates and charges under the
1935 Act, it does regulate the structure, financing, lines of business and
internal transactions of public utility holding companies and their system
companies. In order to obtain financing, acquire additional public utility
assets or stock, or engage in other significant transactions, we are required to
obtain approval from the SEC under the 1935 Act.
8
CenterPoint Energy received an order from the SEC under the 1935 Act on
June 30, 2003 and supplemental orders thereafter relating to its financing
activities and those of its regulated subsidiaries, including us, as well as
other matters. The orders are effective until June 30, 2005. As of December 31,
2003, the orders generally permitted CenterPoint Energy and its subsidiaries,
including us, to issue securities to refinance indebtedness outstanding at June
30, 2003, and authorized CenterPoint Energy and its subsidiaries, including us,
to issue certain incremental external debt securities and common and preferred
stock through June 30, 2005, without prior authorization from the SEC. The
orders also contain certain requirements regarding ratings of CenterPoint
Energy's securities, interest rates, maturities, issuance expenses and use of
proceeds. The orders require that we maintain a ratio of common equity to total
capitalization of at least 30%.
FEDERAL ENERGY REGULATORY COMMISSION
We are not a "public utility" under the Federal Power Act and therefore are
not generally regulated by the Federal Energy Regulatory Commission, although
certain of our transactions are subject to limited FERC jurisdiction.
STATE AND LOCAL REGULATION
We conduct operations pursuant to a certificate of convenience and
necessity issued by the Texas Utility Commission that covers our present service
area and facilities. In addition, we hold non-exclusive franchises, typically
having a term of forty years, from the incorporated municipalities in our
service territory. These franchises give us the right to construct, operate and
maintain our transmission and distribution system within the streets and public
ways of these municipalities for the purpose of delivering electric service to
the municipality, its residents and businesses in exchange for payment of a fee.
The franchise for the City of Houston is scheduled to expire in 2007.
All retail electric providers in our service area pay the same rates and
other charges for transmission and distribution services.
Our distribution rates charged to retail electric providers for residential
customers are based on amounts of energy delivered whereas distribution rates
for a majority of commercial and industrial customers are based on peak demand.
Transmission rates charged to other distribution companies are based on amounts
of energy transmitted under "postage stamp" rates that do not vary with the
distance the energy is being transmitted. All distribution companies in ERCOT
pay us the same rates and other charges for transmission services. Our current
transmission and distribution rates have been in effect since January 1, 2002,
when electric competition began. This regulated delivery charge includes the
transmission and distribution rate (which includes costs for nuclear
decommissioning and municipal franchise fees), a system benefit fund fee imposed
by the Texas electric restructuring law, a transition charge associated with
securitization of regulatory assets and an excess mitigation credit imposed by
the Texas Utility Commission.
ENVIRONMENTAL MATTERS
We are subject to a number of federal, state and local laws and regulations
relating to the protection of the environment and the safety and health of
company personnel and the public. These requirements relate to a broad range of
our activities, including:
- the discharge of pollutants into the air, water and soil;
- the identification, generation, storage, handling, transportation,
disposal, record keeping, labeling and reporting of, and the emergency
response in connection with, hazardous and toxic materials and wastes,
including asbestos, associated with our operations;
- noise emissions from our facilities; and
- safety and health standards, practices and procedures that apply to
the workplace and the operation of our facilities.
9
In order to comply with these requirements, we may need to spend
substantial amounts and devote other resources from time to time to:
- construct or acquire new equipment; and
- modify or replace existing and proposed equipment.
If we do not comply with environmental requirements that apply to our
operations, regulatory agencies could seek to impose on us civil, administrative
and/or criminal liabilities as well as seek to curtail our operations. Under
some statutes, private parties could also seek to impose upon us civil fines or
liabilities for property damage, personal injury and possibly other costs.
Under the federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980 (CERCLA), owners and operators of facilities from which
there has been a release or threatened release of hazardous substances, together
with those who have transported or arranged for the disposal of those
substances, are liable for:
- the costs of responding to that release or threatened release; and
- the restoration of natural resources damaged by any such release.
LIABILITY FOR PREEXISTING CONDITIONS AND REMEDIATION
Asbestos and Other. As a result of their age, many of our facilities contain
significant amounts of asbestos insulation, other asbestos-containing materials
and lead-based paint. Existing state and federal rules require the proper
management and disposal of these potentially toxic materials. We have planned
for the proper management, abatement and disposal of asbestos and lead-based
paint at our facilities.
We have been named, along with numerous others, as a defendant in a large
number of lawsuits filed by a number of individuals who claim injury due to
exposure to asbestos while working at sites along the Texas Gulf Coast. We
anticipate that additional claims like those received may be asserted in the
future, and we intend to continue our practice of vigorously contesting claims
that we do not consider to have merit.
EMPLOYEES
As of December 31, 2003, we had 3,008 full-time employees, including 1,322
employees covered by collective bargaining agreements.
10
RISK FACTORS
PRINCIPAL RISK FACTORS ASSOCIATED WITH OUR BUSINESS
WE MAY NOT BE SUCCESSFUL IN RECOVERING THE FULL VALUE OF OUR TRUE-UP
COMPONENTS.
We expect to make a filing on March 31, 2004 in a true-up proceeding
provided for by the Texas electric restructuring law. The purpose of this
proceeding will be to quantify and reconcile the following costs or true-up
components:
- "stranded costs," which consist of the positive excess of the
regulatory net book value of generation assets, as defined, over the
market value of the assets;
- the difference between the Texas Utility Commission's projected market
prices for generation during 2002 and 2003 and the actual market
prices for generation as determined in the state-mandated capacity
auctions during that period;
- the Texas jurisdictional amount reported by the previously vertically
integrated electric utilities as generation-related regulatory assets
and liabilities (offset and adjusted by specified amounts) in their
audited financial statements for 1998;
- final fuel over- or under-recovery; less
- "price to beat" clawback components.
We will be required to establish and support the amounts we seek to recover
in the 2004 True-Up Proceeding. We expect these amounts to be substantial. Third
parties will have the opportunity and are expected to challenge our calculation
of these amounts. To the extent recovery of a portion of these amounts is denied
or if we agree to forego recovery of a portion of the request under a settlement
agreement, we would be unable to recover these costs in the future.
Additionally, in October 2003, a group of intervenors filed a petition asking
the Texas Utility Commission to open a rulemaking proceeding and reconsider
certain aspects of its true-up rules. In November 2003, the Texas Utility
Commission voted to deny the petition. Despite the denial of the petition, we
expect that issues could be raised in the 2004 True-Up Proceeding regarding our
compliance with the Texas Utility Commission's rules regarding ECOM recovery,
including whether Texas Genco has auctioned all capacity it is required to
auction in view of the fact that some capacity has failed to sell in the
state-mandated auctions. We believe Texas Genco has complied with the
requirements under the applicable rules, including re-offering the unsold
capacity in subsequent auctions. If events were to occur during the 2004 True-Up
Proceeding that made the recovery of the ECOM true-up regulatory asset no longer
probable, we would write off the unrecoverable balance of such asset as a charge
against earnings.
In the event we have not begun to recover the amounts established in the
2004 True-Up Proceeding prior to our $1.3 billion term loan maturity date in
November 2005, our ability to repay or refinance this term loan may be adversely
affected.
The Texas Utility Commission's ruling that the 2004 True-Up Proceeding
filing will be made on March 31, 2004 means that the calculation of the market
value of a share of Texas Genco common stock for purposes of the Texas Utility
Commission's stranded cost determination will be based on market prices during
the 120 trading days ending on March 30, 2004 plus a control premium, if any, up
to a maximum of 10%. If Texas Genco is sold to a third party at a lower price
than the market value used by the Texas Utility Commission, we would be unable
to recover the difference.
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OUR RECEIVABLES ARE CONCENTRATED IN A SMALL NUMBER OF RETAIL ELECTRIC
PROVIDERS.
Our receivables from the distribution of electricity are collected from
retail electric providers that supply the electricity we distribute to their
customers. Currently, we do business with approximately 43 retail electric
providers. Adverse economic conditions, structural problems in the new ERCOT
market or financial difficulties of one or more retail electric providers could
impair the ability of these retail providers to pay for our services or could
cause them to delay such payments. We depend on these retail electric providers
to remit payments on a timely basis. Any delay or default in payment could
adversely affect our cash flows, financial condition and results of operations.
Reliant Resources, through its subsidiaries, is our largest customer.
Approximately 70% of our $83 million in billed receivables from retail electric
providers at December 31, 2003 was owed by subsidiaries of Reliant Resources.
Pursuant to the Texas electric restructuring law, Reliant Resources will be
obligated to make a "price to beat" clawback payment to us in 2004 which is
currently estimated by Reliant Resources to be $175 million. Our financial
condition may be adversely affected if Reliant Resources is unable to meet these
obligations.
RATE REGULATION OF OUR BUSINESS MAY DELAY OR DENY OUR FULL RECOVERY OF OUR
COSTS.
Our rates are regulated by certain municipalities and the Texas Utility
Commission based on an analysis of our invested capital and expenses incurred in
a test year. Thus, the rates that we are allowed to charge may not match our
expenses at any given time. While rate regulation in Texas is premised on
providing a reasonable opportunity to recover reasonable and necessary operating
expenses and to earn a reasonable return on our invested capital, there can be
no assurance that the Texas Utility Commission will judge all of our costs to be
reasonable or necessary or that the regulatory process in which rates are
determined will always result in rates that will produce full recovery of our
costs.
DISRUPTIONS AT POWER GENERATION FACILITIES OWNED BY THIRD PARTIES COULD
INTERRUPT OUR SALES OF TRANSMISSION AND DISTRIBUTION SERVICES.
We depend on power generation facilities owned by third parties to provide
retail electric providers with electric power which we transmit and distribute
to customers of the retail electric providers. We do not own or operate any
power generation facilities. If power generation is disrupted or if power
generation capacity is inadequate, our services may be interrupted, and our
results of operations, financial condition and cash flows may be adversely
affected.
OUR REVENUES AND RESULTS OF OPERATIONS ARE SEASONAL.
A portion of our revenues is derived from rates that we collect from each
retail electric provider based on the amount of electricity we distribute on
behalf of each retail electric provider. Thus, our revenues and results of
operations are subject to seasonality, weather conditions and other changes in
electricity usage, with revenues being higher during the warmer months.
RISK FACTORS ASSOCIATED WITH OUR CONSOLIDATED FINANCIAL CONDITION
IF WE ARE UNABLE TO ARRANGE FUTURE FINANCINGS ON ACCEPTABLE TERMS, OUR
ABILITY TO FUND FUTURE CAPITAL EXPENDITURES AND REFINANCE EXISTING
INDEBTEDNESS COULD BE LIMITED.
As of December 31, 2003, we had $3.9 billion of outstanding indebtedness on
a consolidated basis, including a $1.3 billion collateralized term loan due in
2005. In addition, the capital constraints and other factors currently impacting
our business may require our future indebtedness to include terms that are more
restrictive or burdensome than those of our current indebtedness. These terms
may negatively impact our ability to operate our business or adversely affect
our financial condition and results of operations. The success of our future
financing efforts may depend, at least in part, on:
- our ability to recover the true-up components;
- general economic and capital market conditions;
12
- credit availability from financial institutions and other lenders;
- investor confidence in us and the market in which we operate;
- maintenance of acceptable credit ratings by us and by CenterPoint
Energy;
- market expectations regarding our future earnings and probable cash
flows;
- market perceptions of our ability to access capital markets on
reasonable terms;
- our exposure to Reliant Resources as our customer and in connection
with Reliant Resources' indemnification obligations arising in
connection with its separation from CenterPoint Energy;
- provisions of relevant tax and securities laws; and
- our ability to obtain specific approval of specific financing
transactions under the 1935 Act.
Our capital structure and liquidity will be significantly impacted in the
2004/2005 period by our ability to recover the true-up components through the
regulatory process beginning in March 2004. To the extent our recovery is denied
or materially reduced, our liquidity and financial condition will be materially
adversely affected.
As of March 1, 2004, we have $3.2 billion principal amount of general
mortgage bonds outstanding and $382 million of first mortgage bonds outstanding.
We may issue additional general mortgage bonds on the basis of retired bonds,
70% of property additions or cash deposited with the trustee. Although
approximately $400 million of additional first mortgage and general mortgage
bonds could be issued on the basis of retired bonds and 70% of property
additions as of December 31, 2003, we have agreed under the $1.3 billion
collateralized term loan maturing in 2005 to not issue, subject to certain
exceptions, more than $200 million of incremental secured or unsecured debt. In
addition, we are contractually prohibited, subject to certain exceptions, from
issuing additional first mortgage bonds.
Our current credit ratings are discussed in our "Management's Narrative
Analysis of Results of Operations--Liquidity--Impact on Liquidity of a Downgrade
in Credit Ratings" in Item 7 of Part II of this report. We cannot assure you
that these credit ratings will remain in effect for any given period of time or
that one or more of these ratings will not be lowered or withdrawn entirely by a
rating agency. We note that these credit ratings are not recommendations to buy,
sell or hold our securities. Each rating should be evaluated independently of
any other rating. Any future reduction or withdrawal of one or more of our
credit ratings could have a material adverse impact on our ability to access
capital on acceptable terms.
AN INCREASE IN SHORT-TERM INTEREST RATES COULD ADVERSELY AFFECT OUR CASH
FLOWS.
As of December 31, 2003, we had $1.3 billion of outstanding floating-rate
debt owed to third parties. The interest rate spreads on such debt are
substantially above our historical interest rate spreads. In addition, any
floating-rate debt issued by us in the future could be at interest rates
substantially above our historical borrowing rates. While we may seek to use
interest rate swaps in order to hedge portions of our floating-rate debt, we may
not be successful in obtaining hedges on acceptable terms. An increase in
short-term interest rates could result in higher interest costs and could
adversely affect our results of operations, financial condition and cash flows.
THE FINANCIAL CONDITION AND LIQUIDITY OF OUR PARENT COMPANY COULD AFFECT OUR
ACCESS TO CAPITAL, OUR CREDIT STANDING AND OUR FINANCIAL CONDITION.
Our ratings and credit may be impacted by CenterPoint Energy's credit
standing. CenterPoint Energy and its subsidiaries other than us have
approximately $2.2 billion principal amount of debt required to be paid through
2006. This amount excludes amounts related to capital leases, securitization
debt and indexed debt securities obligations. We cannot assure you that
CenterPoint Energy and its other subsidiaries will be able to pay or refinance
these amounts. If CenterPoint Energy were to experience a
13
deterioration in its credit standing or liquidity difficulties, our access to
credit and our ratings could be adversely affected and the repayment of notes
receivable from CenterPoint Energy in the amount of $815 million as of December
31, 2003 could be adversely affected.
WE ARE A WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY. CENTERPOINT ENERGY
CAN EXERCISE SUBSTANTIAL CONTROL OVER OUR BUSINESS AND OPERATIONS AND COULD
DO SO IN A MANNER THAT IS ADVERSE TO OUR INTERESTS.
We are managed by officers and employees of CenterPoint Energy. Our
management will make determinations with respect to the following:
- our payment of dividends;
- decisions on our financings and our capital raising activities;
- mergers or other business combinations; and
- our acquisition or disposition of assets.
There are no contractual restrictions on our ability to pay dividends to
CenterPoint Energy. Our management could decide to increase our dividends to
CenterPoint Energy to support its cash needs. This could adversely affect our
liquidity. Under the 1935 Act, our ability to pay dividends is restricted by the
SEC's requirement that common equity as a percentage of total capitalization
must be at least 30% after the payment of any dividend.
OTHER RISKS
WE COULD INCUR LIABILITIES ASSOCIATED WITH BUSINESSES AND ASSETS WE HAVE
TRANSFERRED TO OTHERS.
Under some circumstances, we could incur liabilities associated with assets
and businesses we no longer own. These assets and businesses were previously
owned by Reliant Energy directly or through subsidiaries and include:
- those transferred to Reliant Resources or its subsidiaries in
connection with the organization and capitalization of Reliant
Resources prior to its initial public offering in 2001;
- those transferred to Texas Genco in connection with its organization
and capitalization; and
- those transferred to CenterPoint Energy and us in connection with the
August 2002 restructuring of Reliant Energy.
In connection with the organization and capitalization of Reliant
Resources, Reliant Resources and its subsidiaries assumed liabilities associated
with various assets and businesses Reliant Energy transferred to them. Reliant
Resources also agreed to indemnify, and cause the applicable transferee
subsidiaries to indemnify, CenterPoint Energy and its subsidiaries, including
us, with respect to liabilities associated with the transferred assets and
businesses. The indemnity provisions were intended to place sole financial
responsibility on Reliant Resources and its subsidiaries for all liabilities
associated with the current and historical businesses and operations of Reliant
Resources, regardless of the time those liabilities arose. If Reliant Resources
is unable to satisfy a liability that has been so assumed in circumstances in
which Reliant Energy has not been released from the liability in connection with
the transfer, CenterPoint Energy or us could be responsible for satisfying the
liability.
Reliant Resources reported in its Annual Report on Form 10-K for the year
ended December 31, 2003 that as of December 31, 2003 it had $6.1 billion of
total debt and its unsecured debt ratings are currently below investment grade.
If Reliant Resources were unable to meet its obligations, it would need to
consider, among various options, restructuring under the bankruptcy laws, in
which event Reliant Resources might not honor its indemnification obligations
and claims by Reliant Resources' creditors might be made against us as its
former owner.
Reliant Energy and Reliant Resources are named as defendants in a number of
lawsuits arising out of power sales in California and other West Coast markets
and financial reporting matters. Although these matters relate to
14
the business and operations of Reliant Resources, claims against Reliant Energy
have been made on grounds that include the effect of Reliant Resources'
financial results on Reliant Energy's historical financial statements and
liability of Reliant Energy as a controlling shareholder of Reliant Resources.
We could incur liability if claims in one or more of these lawsuits were
successfully asserted against us and indemnification from Reliant Resources were
determined to be unavailable or if Reliant Resources were unable to satisfy
indemnification obligations owed to us with respect to those claims.
In connection with the organization and capitalization of Texas Genco,
Texas Genco assumed liabilities associated with the electric generation assets
Reliant Energy transferred to it. Texas Genco also agreed to indemnify, and
cause the applicable transferee subsidiaries to indemnify, CenterPoint Energy
and its subsidiaries, including us, with respect to liabilities associated with
the transferred assets and businesses. In many cases the liabilities assumed
were held by us and we were not released by third parties from these
liabilities. The indemnity provisions were intended generally to place sole
financial responsibility on Texas Genco and its subsidiaries for all liabilities
associated with the current and historical businesses and operations of Texas
Genco, regardless of the time those liabilities arose. If Texas Genco were
unable to satisfy a liability that had been so assumed or indemnified against,
and provided Reliant Energy had not been released from the liability in
connection with the transfer, we could be responsible for satisfying the
liability.
WE, AS A SUBSIDIARY OF CENTERPOINT ENERGY, A HOLDING COMPANY, ARE SUBJECT TO
REGULATION UNDER THE 1935 ACT. THE 1935 ACT AND RELATED RULES AND REGULATIONS
IMPOSE A NUMBER OF RESTRICTIONS ON OUR ACTIVITIES.
CenterPoint Energy and its subsidiaries, including us but excluding Texas
Genco, are subject to regulation by the SEC under the 1935 Act. The 1935 Act,
among other things, limits the ability of a holding company and its regulated
subsidiaries to issue debt and equity securities without prior authorization,
restricts the source of dividend payments to current and retained earnings
without prior authorization, regulates sales and acquisitions of certain assets
and businesses and governs affiliate transactions.
CenterPoint Energy and its subsidiaries, including us, received an order
from the SEC under the 1935 Act on June 30, 2003 relating to financing
activities, which is effective until June 30, 2005. We must seek a new order
before the expiration date. Although authorized levels of financing, together
with current levels of liquidity, are believed to be adequate during the period
the order is effective, unforeseen events could result in capital needs in
excess of authorized amounts, necessitating further authorization from the SEC.
Approval of filings under the 1935 Act can take extended periods.
The United States Congress is currently considering legislation that has a
provision that would repeal the 1935 Act. We cannot predict at this time whether
this legislation or any variation thereof will be adopted or, if adopted, the
effect of any such law on our business.
WE DO NOT MAINTAIN INSURANCE COVERAGE ON OUR TRANSMISSION AND DISTRIBUTION
SYSTEM. INSUFFICIENT INSURANCE COVERAGE AND INCREASED INSURANCE COSTS COULD
ADVERSELY IMPACT OUR RESULTS OF OPERATIONS, FINANCIAL CONDITION AND CASH
FLOWS.
In common with other companies in our line of business that serve coastal
regions, we do not have insurance covering our transmission and distribution
system because we believe it to be cost prohibitive. If we were to sustain any
loss of or damage to our transmission and distribution properties, we would be
entitled to seek to recover such loss or damage through a change in our
regulated rates, although there is no assurance that we would ultimately obtain
any such rate recovery or that any such rate recovery would be timely granted.
Therefore, we cannot assure you that we will be able to restore any loss of or
damage to any of our transmission and distribution properties without negative
impact on our results of operations, financial condition and cash flows.
15
ITEM 2. PROPERTIES
CHARACTER OF OWNERSHIP
We own or lease our principal properties in fee, including our corporate
office. Most of our electric lines are located, pursuant to easements and other
rights, on public roads or on land owned by others. For information regarding
our properties, please read "Our Business -- Electric Transmission &
Distribution Properties" in Item 1 of this report, which information is
incorporated herein by reference.
ITEM 3. LEGAL PROCEEDINGS
For a brief description of certain legal and regulatory proceedings
affecting us, please read "Regulation" and "Environmental Matters" in Item 1 of
this report and Notes 4 and 9(b) to our consolidated financial statements, which
information is incorporated herein by reference.
In addition to the matters incorporated herein by reference, the following
matter that we previously reported has been resolved:
In August and October 2003, class action lawsuits were filed against
CenterPoint Houston and Reliant Energy Services in federal court in New York on
behalf of purchasers of natural gas futures contracts on the New York Mercantile
Exchange. A third, similar class action was filed in the same court in November
2003. The complaints alleged that the defendants manipulated the price of
natural gas through their gas trading activities and price reporting practices
in violation of the Commodity Exchange Act during the period January 1, 2000
through December 31, 2002. The plaintiffs sought damages based on the effect of
such alleged manipulation on the value of the gas futures contracts they bought
or sold. In January 2004, the plaintiffs voluntarily dismissed CenterPoint
Houston from these lawsuits.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The information called for by Item 4 is omitted pursuant to Instruction I(2)
to Form 10-K (Omission of Information by Certain Wholly Owned Subsidiaries).
PART II
ITEM 5. MARKET FOR COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
All of our 1,000 outstanding common shares are held by Utility Holding, LLC,
a wholly owned subsidiary of CenterPoint Energy.
Our ability to pay dividends is restricted by the SEC's requirement that
common equity as a percentage of total capitalization must be at least 30% after
the payment of any dividend. In addition, the SEC restricts our ability to pay
dividends out of capital accounts to the extent current or retained earnings are
insufficient for those dividends.
In 2002 and 2003, we paid dividends on our common stock of $223 million and
$-0-, respectively.
ITEM 6. SELECTED FINANCIAL DATA
The information called for by Item 6 is omitted pursuant to Instruction I(2)
to Form 10-K (Omission of Information by Certain Wholly Owned Subsidiaries).
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ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS
OVERVIEW
The following narrative analysis should be read in combination with our
consolidated financial statements and notes contained in Item 8 of this report.
We are an indirect wholly owned subsidiary of CenterPoint Energy, Inc.
(CenterPoint Energy), a public utility holding company created on August 31,
2002, as part of a corporate restructuring (Restructuring) of Reliant Energy,
Incorporated (Reliant Energy). CenterPoint Energy is a registered public utility
holding company under the Public Utility Holding Company Act of 1935, as amended
(1935 Act). For information about the 1935 Act, please read " -- Liquidity --
Certain Contractual and Regulatory Limits on Ability to Issue Securities and Pay
Dividends."
We are a regulated utility engaged in the transmission and distribution of
electric energy to approximately 1.8 million metered customers in a 5,000-square
mile area of the Texas Gulf Coast that has a population of approximately 4.7
million people and includes Houston.
We transport electricity from power plants to substations and from one
substation to another and to retail electric customers in locations throughout
the control area managed by the Electric Reliability Council of Texas, Inc.
(ERCOT) on behalf of retail electric providers. ERCOT is an intrastate network
which serves as the regional reliability coordinating council for member
electric power systems in Texas. The ERCOT market represents approximately 85%
of the demand for power in Texas and is one of the nation's largest power
markets. Transmission services are provided under tariffs approved by the Public
Utility Commission of Texas (the Texas Utility Commission).
Operations include construction and maintenance of electric transmission
and distribution facilities, metering services, outage response services and
call center operations. Distribution services are provided under tariffs
approved by the Texas Utility Commission.
EXECUTIVE SUMMARY
2003 HIGHLIGHTS
Our operating performance and cash flow for 2003 compared to 2002 were
affected by:
- continued customer growth with the addition of nearly 47,000 metered
electric customers since December 2002, or an annualized 3% growth;
- an increase of $76 million in interest expense;
- an increase of $28 million in pension, employee benefit and insurance
costs;
- an increase of $69 million in operation and maintenance expense
related to our final fuel reconciliation; and
- a reduction of $36 million in non-cash ECOM revenues as result of
higher operating margins at Texas Genco Holdings, Inc. (Texas Genco)
that were realized from the state-mandated capacity auctions.
In 2003, we accessed the capital markets to raise approximately $1.3
billion. We used these proceeds to refinance higher coupon debt, to repay
intercompany payables to CenterPoint Energy and enhance our liquidity.
CenterPoint Energy distributed approximately 19% of the 80 million
outstanding shares of common stock of Texas Genco to its shareholders on January
6, 2003 (Texas Genco Distribution). As a result of the Texas Genco Distribution,
CenterPoint Energy recorded an impairment charge of $399 million,
17
which is reflected as a regulatory asset representing stranded costs on our
Consolidated Balance Sheet as of December 31, 2003. This impairment charge
represents the excess of the carrying value of CenterPoint Energy's net
investment in Texas Genco over the market value of the Texas Genco common stock
that was distributed. The financial impact of this impairment was offset by
recording a $399 million regulatory asset reflecting our expectation of stranded
cost recovery of such impairment. Since this amount is expected to be recovered
in the 2004 True-Up Proceeding, we have recorded a regulatory asset, reflecting
our right to recover this amount, and an associated payable to CenterPoint
Energy. Any additional impairment or loss that CenterPoint Energy incurs on its
Texas Genco investment that we expect to recover as stranded investment will be
recorded in the same manner.
SIGNIFICANT EVENTS IN 2004
During 2004, we expect to complete additional steps in a process that began
when Texas adopted legislation designed to deregulate and restructure the
electric utility industry in the state. That legislation (Texas electric
restructuring law) required integrated electric utilities to separate their
generating, transmission and distribution and retail sales functions pursuant to
plans approved by the Texas Utility Commission.
The Texas electric restructuring law contains provisions that allow us to
recover the amount by which the market value of CenterPoint Energy's generating
assets, as determined by the Texas Utility Commission under a formula prescribed
in the law, is below the regulatory book value for those assets as of the end of
2001. It also allows us to recover certain other transition costs, such as a
final fuel reconciliation balance, regulatory assets and the difference between
the Texas Utility Commission's projected market prices for generation during
2002 and 2003 and the actual market prices for generation as determined in the
state-mandated capacity auctions during that period (called the ECOM true-up).
Those amounts, and certain other adjustments, are to be determined by the Texas
Utility Commission in a proceeding that will begin on March 31, 2004 (2004
True-Up Proceeding). The law requires a final order to be issued by the Texas
Utility Commission not more than 150 days after a proper filing is made by the
regulated utility, although, under its rules the Texas Utility Commission can
extend the 150 day deadline for good cause. After the Texas Utility Commission
determines the amount of the true-up components (the true-up balance) that we
may recover, we will recover those amounts through a transition charge added to
our transmission and distribution rates. Assuming receipt of a timely final
order from the Texas Utility Commission, we expect to begin earning a non-cash
rate of return on the true-up balance in the third quarter of 2004. We intend to
seek authority from the Texas Utility Commission to securitize all or a portion
of the true-up balance as early as the fourth quarter of 2004 through the
issuance of transition bonds and to be in a position to issue those bonds by
early 2005. Transition bonds would be issued through our subsidiary that is a
special purpose entity, but they would be non-recourse to us. Any portion of the
true-up balance not securitized by transition bonds will be recovered through a
non-bypassable competition transition charge. We will distribute recovery of the
true-up components not used to repay indebtedness to CenterPoint Energy through
either the payment of dividends or the settlement of intercompany payables.
CenterPoint Energy can then move funds back to us, either through equity or
intercompany debt, in order to maintain our capital structure at the appropriate
levels.
As discussed above, in accordance with the Texas electric restructuring
law, we expect to seek recovery of substantial amounts for the true-up
components. Determination of the amounts actually recovered will be made by the
Texas Utility Commission in a proceeding in which we expect that various parties
will challenge our claims, potentially resulting in an award of less than the
full amount to which we believe we are entitled. An ultimate determination or a
settlement at an amount less than that recorded in our financial statements
could lead to a charge that would materially adversely affect our results of
operations, financial condition and cash flows.
The Texas Utility Commission issued a final order in October 2001 (October
2001 Order) that established the
18
transmission and distribution utility rates that became effective in January
2002. In this Order, the Texas Utility Commission found that we had
over-mitigated our stranded costs by redirecting transmission and distribution
depreciation and by accelerating depreciation of generation assets as provided
under the transition plan and Texas electric restructuring law. As a result of
the October 2001 Order, we were required to refund $1.1 billion through excess
mitigation credits to certain retail electric customers during a seven-year
period which began in January 2002, and which amount to approximately $238
million per year. Amounts refunded will be considered in the 2004 True-Up
Proceeding, and we expect that such refunds will be discontinued as a result of
the 2004 True-Up Proceeding.
In connection with the implementation of the Texas electric restructuring
law, the Texas Utility Commission has set a "price to beat" that retail electric
providers affiliated or formerly affiliated with a former integrated utility
must charge residential and small commercial customers within their affiliated
electric utility's service area. The 2004 True-Up Proceeding provides for a
clawback of the "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 Texas electric
restructuring law and the master separation agreement entered into in connection
with the September 30, 2002 spin-off of CenterPoint Energy's interest in Reliant
Resources to its shareholders, Reliant Resources is obligated to pay us for the
clawback component of the 2004 True-Up Proceeding. Based on an order issued on
February 13, 2004 by the Texas Utility Commission, the clawback will equal $150
times the number of residential customers served by Reliant Resources in our
service territory, less the number of residential customers served by Reliant
Resources outside our service territory, on January 1, 2004. As reported in
Reliant Resources' Annual Report on Form 10-K for the year ended December 31,
2003, Reliant Resources expects that the clawback payment will be $175 million.
We expect that before, or upon, issuance of a final order in the 2004 True-Up
Proceeding we will receive the clawback payment from Reliant Resources, which
will reduce the amount of recoverable costs to be determined in the 2004 True-Up
Proceeding.
The 2004 True-Up Proceeding will include the balance from the final fuel
reconciliation proceeding for the fuel component of electric rates. Prior to the
beginning of competition, fuel costs were a component of electric rates and
those costs were reviewed and reconciled periodically by the Texas Utility
Commission. Although the final fuel reconciliation is a separate proceeding that
is currently underway, the final fuel over- or under- recovery balance will be
included in the 2004 True-Up Proceeding, either as a reduction to or increase in
the amount to be recovered.
Following adoption of the true-up rule by the Texas Utility Commission in
2001, we appealed the provisions of the rule, that permitted interest to be
recovered on stranded costs only from the date of the Texas Utility Commission's
final order in the 2004 True-Up Proceeding, instead of from January 1, 2002 as
we contend is required by law. On January 30, 2004, the Texas Supreme Court
granted our petition for review of the true-up rule. Oral arguments were heard
on February 18, 2004. The decision by the Court is pending. We have not accrued
interest income on stranded costs in our consolidated financial statements, but
estimate such interest income would be material to our consolidated financial
statements.
We recorded non-cash ECOM revenue of $697 million in 2002 and $661 million
in 2003. We are no longer permitted under the Texas electric restructuring law
to record non-cash ECOM revenue in 2004. The reduction in interest costs that
should result from the use of proceeds of securitization to reduce debt, to the
extent received in 2004, should help offset the resulting reductions in
earnings, but both the amount and timing of this securitization effort is a
function of the regulatory process described above.
CERTAIN FACTORS AFFECTING FUTURE EARNINGS
Our past earnings are not necessarily indicative of our future earnings and
results of operations. The magnitude of our future earnings and results of our
operations will depend on or be affected by numerous factors including:
- the timing and outcome of the regulatory process leading to the
determination and recovery of the true-up components and the
securitization of these amounts;
- state and federal 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 1935 Act, changes in or application of laws or
regulations applicable to other aspects of our business and actions
19
with respect to:
- allowed rates of return;
- rate structures;
- recovery of investments; and
- operation and construction of facilities;
- termination of accruals of ECOM true-up after 2003;
- industrial, commercial and residential growth in our service territory
and changes in market demand and demographic patterns;
- changes in interest rates or rates of inflation;
- weather variations and other natural phenomena;
- commercial bank and financial market conditions, our access to
capital, the cost of such capital, receipt of certain approvals under
the 1935 Act, and the results of our financing and refinancing
efforts, including availability of funds in the debt capital markets;
- actions by rating agencies;
- non-payment for our services due to financial distress of our
customers, including Reliant Resources;
- the outcome of the pending securities lawsuits against us, Reliant
Energy and Reliant Resources;
- the ability of Reliant Resources to satisfy its obligations to us
including indemnity obligations and obligations to pay the "price to
beat" clawback; and
- other factors discussed in Item 1 of this report under "Risk Factors."
20
CONSOLIDATED RESULTS OF OPERATIONS
Our results of operations are affected by seasonal fluctuations in the
demand for electricity. Our results of operations are also affected by, among
other things, the actions of various federal and state governmental authorities
having jurisdiction over rates we charge, competition in our various business
operations, debt service costs and income tax expense.
The following table sets forth selected financial data for the years ended
December 31, 2001, 2002 and 2003, followed by a discussion of our consolidated
results of operations based on operating income. We have provided a
reconciliation of consolidated operating income to net income below.
YEAR ENDED DECEMBER 31,
------------------------------------
2001 2002 2003
---------- ---------- ----------
(IN MILLIONS)
Revenues:
Electric revenues ...................................................... $ 2,100 $ 1,525 $ 1,463
ECOM revenues (1) ...................................................... -- 697 661
---------- ---------- ----------
Total Revenues ..................................................... 2,100 2,222 2,124
Expenses:
Operation and maintenance .............................................. 650 642 636
Depreciation and amortization .......................................... 299 271 270
Taxes other than income taxes .......................................... 288 213 198
---------- ---------- ----------
Total Expenses ..................................................... 1,237 1,126 1,104
---------- ---------- ----------
Operating Income .......................................................... 863 1,096 1,020
Interest Expense and Distribution on Trust Preferred Securities ........... (233) (285) (361)
Other Income, net ......................................................... 44 22 3
---------- ---------- ----------
Income from Continuing Operations Before Income Taxes and Preferred
Dividends .............................................................. 674 833 662
Income Tax Expense ........................................................ (228) (286) (230)
---------- ---------- ----------
Income from Continuing Operations Before Preferred Dividends .............. 446 547 432
Income from Discontinued Operations, net of tax ........................... 535 132 --
Preferred Dividends ....................................................... (1) -- --
---------- ---------- ----------
Net Income ................................................................ $ 980 $ 679 $ 432
========== ========== ==========
Residential throughput (in GWh) ......................................... 21,371 23,025 23,687
Total throughput (in GWh) (2) ........................................... 71,325 69,587 70,815
- ----------
(1) In 2004, we will no longer be permitted under the Texas electric
restructuring law to record non-cash ECOM revenue.
(2) Usage volumes for commercial and industrial customers are included in
total throughput; however, the majority of these customers are billed
on a peak demand (KW) basis and, as a result, revenues do not vary
based on consumption.
2003 Compared to 2002. We reported a decrease in operating income of $76
million for 2003 compared to 2002. Increased revenues from customer growth ($40
million) were more than offset by transition period revenues that only occurred
in 2002 ($90 million) and decreased industrial demand, resulting in an overall
decrease in electric revenues from the regulated electric transmission and
distribution business of $62 million. Additionally, non-cash ECOM revenue
decreased $36 million as a result of higher operating margins at Texas Genco
based on its state-mandated capacity auctions. Operation and maintenance
expenses decreased in 2003 compared to 2002 primarily due to the absence of
purchased power costs that occurred in 2002 during the transition period to
deregulation ($48 million), a decrease in labor costs as a result of work force
reductions in 2002 ($13 million), non-recurring contract services expense
primarily related to transition to deregulation in 2002 ($10 million) and lower
bad debt expense related to transition revenues in 2002 ($10 million). These
decreases were partially offset by an increase
21
in expenses related to our final fuel reconciliation ($69 million) and an
increase in benefits expense primarily due to increased pension costs ($18
million). Taxes other than income taxes decreased $15 million primarily due to
the absence of gross receipts tax associated with transition period revenue in
the first quarter of 2002 ($9 million). Other income, net decreased in 2003
compared to 2002 primarily due to the reversal of interest income related to our
final fuel reconciliation ($30 million). Interest expense increased in 2003
compared to 2002, as a result of higher borrowing costs and increased debt
levels.
2002 Compared to 2001. We reported an increase in operating income of $233
million for 2002 as compared to 2001, of which $697 million related to non-cash
ECOM revenue associated with costs recorded pursuant to the Texas electric
restructuring law. Electric revenues from the regulated electric transmission
and distribution business decreased $575 million primarily as a result of the
transition to a deregulated ERCOT market in 2002. Throughput declined 2% during
2002 as compared to 2001. The decrease was primarily due to reduced energy
delivery in the industrial sector resulting from self-generation by several
major customers, partially offset by increased residential usage primarily due
to non-weather related factors. Additionally, despite a slowing economy, total
metered customers continued to grow at an annual rate of approximately 2% during
the year. Operation and maintenance expenses decreased in 2002 as compared to
2001 primarily due to a decrease in factoring expense as a result of the
termination of an agreement under which we had sold our customer accounts
receivable ($77 million) and decreased transmission line losses in 2002 as this
became a cost of retail electric providers in 2002 ($16 million), partially
offset by purchased power costs related to the operation of the regulated
utility during the transition period to deregulation ($48 million), an increase
in benefits expense ($25 million) which included severance costs in connection
with a reduction in work force in 2002 and expenses related to our final fuel
reconciliation ($18 million). Depreciation and amortization decreased in 2002 as
compared to 2001 primarily as a result of decreased amortization relating to
certain regulatory assets ($64 million) partially offset by increased
amortization related to transition property associated with the transition bonds
issued in November 2001 ($35 million). Other income, net decreased in 2002
compared to 2001 primarily due to a $37 million decrease in interest income from
under-recovery of fuel in 2002 compared to 2001, partially offset by a $19
million increase in interest income from affiliated parties. Interest expense
increased in 2002 compared to 2001, as a result of higher borrowing costs,
including costs related to the early extinguishment of debt.
DISCONTINUED OPERATIONS
Effective August 31, 2002, Reliant Energy completed the Restructuring in
which it, among other things, (1) conveyed its Texas electric generation assets
to Texas Genco, (2) became an indirect, wholly owned subsidiary of a new utility
holding company, CenterPoint Energy, (3) was converted into a Texas limited
liability company named CenterPoint Energy Houston Electric, LLC and (4)
distributed the capital stock of its operating subsidiaries, including Texas
Genco, to CenterPoint Energy. As part of the Restructuring, each share of
Reliant Energy common stock was converted into one share of CenterPoint Energy
common stock.
The consolidated financial statements present operations of Reliant Energy
that were distributed to CenterPoint Energy in the Restructuring as discontinued
operations in accordance with Statement of Financial Accounting Standards (SFAS)
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS
No. 144). Accordingly, the consolidated financial statements reflect these
operations as discontinued operations for the year ended December 31, 2001 and
for the eight months ended August 31, 2002.
LIQUIDITY
Capital Requirements. We anticipate investing up to an aggregate $1.3
billion in capital expenditures in the years 2004 through 2008, including
approximately $282 million and $245 million in 2004 and 2005, respectively.
22
The following table sets forth estimates of our contractual obligations to
make future payments for 2004 through 2008 and thereafter (in millions):
2009 AND
CONTRACTUAL OBLIGATIONS TOTAL 2004 2005 2006 2007 2008 THEREAFTER
----------------------- -------- ------- ------- ------- ------- ------- ----------
Long-term debt, including current
portion............................... $ 3,388 $ 41 $ 1,357 $ 54 $ 60 $ 66 $ 1,810
Capital leases.......................... 1 -- -- -- -- -- 1
Operating leases (1).................... 27 6 6 6 6 3 --
-------- ------- ------- ------- ------- ------- -------
Total contractual cash obligations.... $ 3,416 $ 47 $ 1,363 $ 60 $ 66 $ 69 $ 1,811
======== ======= ======= ======= ======= ======= =======
- ----------
(1) For a discussion of operating leases, please read Note 9(a) to our
consolidated financial statements.
Texas Genco is the beneficiary of decommissioning trusts that have been
established to provide funding for decontamination and decommissioning of the
South Texas Project in which Texas Genco owns a 30.8% interest. We collect
through rates or other authorized charges to our electric utility customers
amounts designated for funding the decommissioning trusts, and deposit these
amounts into the decommissioning trusts. The beneficial ownership of the nuclear
decommissioning trusts is held by Texas Genco, as a licensee of the facility.
Upon decommissioning of the facility, in the event funds from the trusts are
inadequate, we or our successor will be required to collect through rates or
other authorized charges to customers as contemplated by the Texas Utilities
Code all additional amounts required to fund Texas Genco's obligations relating
to the decommissioning of the facility. Following the completion of the
decommissioning, if surplus funds remain in the decommissioning trusts, the
excess will be refunded to our ratepayers or those of our successor. We
currently fund $2.9 million a year to trusts established to fund Texas Genco's
share of the decommissioning costs for the South Texas Project.
In October 2001, we were required by the Texas Utility Commission to
reverse the amount of redirected depreciation and accelerated depreciation taken
for regulatory purposes as allowed under the transition plan and the Texas
electric restructuring law. We recorded a regulatory liability to reflect the
prospective refund of the accelerated depreciation and in January 2002 we began
refunding excess mitigation credits, which are to be refunded over a seven-year
period. The annual refund of excess mitigation credits is approximately $238
million. Under the Texas electric restructuring law, a final determination of
these stranded costs will occur in the 2004 True-Up Proceeding.
Off-Balance Sheet Arrangements. Other than operating leases, we have no
off-balance sheet arrangements.
Long-term and Short-term Debt. Our long-term debt consists of our
obligations and the obligations of our subsidiaries, including transition bonds
issued by an indirect wholly owned subsidiary (transition bonds).
In 2003 and February 2004 we completed several capital market transactions
which resulted in more favorable interest rates on our fixed rate debt. The
proceeds of the debt transactions in 2003 were primarily used to refinance
higher cost debt, repay intercompany payables to CenterPoint Energy and pay
related debt issuance costs. Our 2003 capital market transactions included the
following:
ISSUANCE PRINCIPAL INTEREST MATURITY
DATE BORROWER SECURITY AMOUNT RATE DATE
- -------------- ------------------- ---------------------- ------------- -------- --------------
(IN THOUSANDS)
March 2003 CenterPoint Houston General Mortgage Bonds $ 762,275 5.700- March 2013 and
6.950% 2033
May 2003 CenterPoint Houston General Mortgage Bonds 200,000 5.600% July 2023
September 2003 CenterPoint Houston General Mortgage Bonds 300,000 5.750% January 2014
Additionally, in February 2004, $56 million aggregate principal amount of
collateralized 5.60% pollution control bonds due 2027 and $44 million aggregate
principal amount of 4.25% collateralized insurance-backed pollution control
bonds due 2017 were issued on our behalf. The pollution control bonds are
collateralized by our general mortgage bonds with principal amounts, interest
rates and maturities that match the pollution control bonds.
23
The proceeds were used to redeem two series of 6.7% collateralized pollution
control bonds with an aggregate principal amount of $100 million issued on
behalf of CenterPoint Energy. Our 6.7% first mortgage bonds which collateralized
CenterPoint Energy's payment obligations under the refunded pollution control
bonds were retired in connection with the March 2004 redemption of the refunded
pollution control bonds. Our 6.7% notes payable to CenterPoint Energy were
extinguished upon the redemption of the refunded pollution control bonds.
Cash Requirements in 2004. Our liquidity and capital requirements are
affected primarily by our results of operations, capital expenditures, debt
service requirements, and working capital needs. Our principal cash requirements
during 2004 include the following:
- approximately $282 million of capital expenditures;
- an estimated $238 million in refunds of excess mitigation credits; and
- $41 million of maturing transition bonds.
We expect that anticipated cash flows from operations and intercompany
borrowings will be sufficient to meet our cash needs for 2004.
We will distribute recovery of the true-up components not used to repay
indebtedness to CenterPoint Energy through either the payment of dividends or
the settlement of intercompany payables. CenterPoint Energy can then move funds
back to us, either through equity or intercompany debt, in order to maintain our
capital structure at the appropriate levels. Under the orders described under
"--Certain Contractual and Regulatory Limits on Ability to Issue Securities and
Pay Dividends," our member's equity as a percentage of total capitalization must
be at least 30%, although the SEC has permitted the percentage to be below this
level for other companies taking into account non-recourse securitization debt
as a component of capitalization.
Impact on Liquidity of a Downgrade in Credit Ratings. As of March 1, 2004,
Moody's Investors Service, Inc. (Moody's), Standard & Poor's Ratings Services, a
division of The McGraw Hill Companies (S&P), and Fitch, Inc. (Fitch) had
assigned the following credit ratings to our senior debt.
MOODY'S S&P FITCH
---------------------------- --------------------- ---------------------
COMPANY/INSTRUMENT RATING OUTLOOK (1) RATING OUTLOOK (2) RATING OUTLOOK (3)
------------------ ------ ------------------ ------ ----------- ------ -----------
CenterPoint Houston Senior Secured
Debt (First Mortgage Bonds).......... Baa2 Negative BBB Negative BBB+ Negative
- ----------
(1) A "negative" outlook from Moody's reflects concerns over the next 12 to 18
months which will either lead to a review for a potential downgrade or a
return to a stable outlook.
(2) An S&P rating outlook assesses the potential direction of a long-term
credit rating over the intermediate to longer term.
(2) A "negative" outlook from Fitch encompasses a one-to-two year horizon as to
the likely ratings direction.
We cannot assure you that these ratings will remain in effect for any given
period of time or that one or more of these ratings will not be lowered or
withdrawn entirely by a rating agency. We note that these credit ratings are not
recommendations to buy, sell or hold our securities and may be revised or
withdrawn at any time by the rating agency. Each rating should be evaluated
independently of any other rating. Any future reduction or withdrawal of one or
more of our credit ratings could have a material adverse impact on our ability
to obtain short- and long-term financing, the cost of such financings and the
execution of our commercial strategies.
Cross Defaults. The terms of our debt instruments generally provide that a
default on obligations by CenterPoint Energy does not cause a default under our
debt instruments. A payment default on debt for borrowed money and
24
certain other specified types of obligations by us exceeding $50 million will
cause a default under our $1.3 billion loan maturing in 2005. A payment default
on, or a non-payment default that permits acceleration of, any of our
indebtedness exceeding $50 million will caused a default under CenterPoint
Energy's $2.3 billion credit facility entered into on October 7, 2003. A payment
default by us in respect of, or an acceleration of, borrowed money and certain
other specified types of obligations, in the aggregate principal amount of $50
million, will cause a default on senior debt of CenterPoint Energy aggregating
$1.4 billion.
Pension Plan. As discussed in Note 7 to the consolidated financial
statements, we participate in CenterPoint Energy's qualified non-contributory
pension plan covering substantially all employees. Pension expense for 2004 is
estimated to be $23 million based on an expected return on plan assets of 9.0%
and a discount rate of 6.25% as of December 31, 2003. Pension expense for the
year ended December 31, 2003 was $26 million. Future changes in plan asset
returns, assumed discount rates and various other factors related to the pension
will impact our future pension expense and liabilities. We cannot predict with
certainty what these factors will be in the future.
Other Factors that Could Affect Cash Requirements. In addition to the above
factors, our liquidity and capital resources could be affected by:
- increases in interest expense in connection with debt refinancings;
- various regulatory actions; and
- the ability of Reliant Resources and its subsidiaries to satisfy their
obligations as our principal customer and in respect of its indemnity
obligations to us.
Money Pool. We participate in a "money pool" through which we and certain
of our affiliates can borrow or invest on a short-term basis. Funding needs are
aggregated and external borrowing or investing is based on the net cash
position. The money pool's net funding requirements are generally met by
borrowings of CenterPoint Energy. The terms of the money pool are in accordance
with requirements applicable to registered public utility holding companies
under the 1935 Act and under an order from the SEC relating to our financing
activities on June 30, 2003 (June 2003 Financing Order). Our money pool
borrowing limit under such financing orders is $600 million. At December 31,
2003, we had borrowings from the money pool of $113 million. The money pool may
not provide sufficient funds to meet our cash needs.
Certain Contractual and Regulatory Limits on Ability to Issue Securities
and Pay Dividends. Factors affecting our ability to issue securities, pay
dividends on our common stock or to take other actions to adjust our
capitalization include:
- - covenants and other provisions in our borrowing agreements; and
- - limitations imposed on us under the 1935 Act.
Our collateralized term loan limits our debt, excluding transition bonds,
as a percentage of total capitalization to 68%.
Our parent, CenterPoint Energy, is a registered public utility holding
company under the 1935 Act. The 1935 Act and related rules and regulations
impose a number of restrictions on our parent's activities and those of its
subsidiaries other than Texas Genco, including us. The 1935 Act, among other
things, limits our parent's ability and the ability of its regulated
subsidiaries, including us, to issue debt and equity securities without prior
authorization, restricts the source of dividend payments to current and retained
earnings without prior authorization, regulates sales and acquisitions of
certain assets and businesses and governs affiliate transactions.
The June 2003 Financing Order is effective until June 30, 2005.
Additionally, CenterPoint Energy has received several subsequent orders which
provide additional financing authority. These orders establish limits on the
amount of external debt and equity securities that can be issued by CenterPoint
Energy and its regulated subsidiaries, including us, without additional
authorization but generally permit CenterPoint Energy and its regulated
subsidiaries, including us, to refinance our existing obligations. We are in
compliance with the authorized limits. As
25
of March 1, 2004 we are authorized to issue an additional aggregate $161 million
of debt and an aggregate $250 million of preferred stock and preferred
securities.
The SEC has reserved jurisdiction over, and must take further action to
permit the issuance of $250 million of additional debt by us.
The orders require that if CenterPoint Energy or any of its regulated
subsidiaries, including us, issue any securities that are rated by a nationally
recognized statistical rating organization (NRSRO), the security to be issued
must obtain an investment grade rating from at least one NRSRO and, as a
condition to such issuance, all outstanding rated securities of the issuer and
of CenterPoint Energy must be rated investment grade by at least one NRSRO. The
orders also contain certain requirements for interest rates, maturities,
issuance expenses and use of proceeds.
The 1935 Act limits the payment of dividends to payment from current and
retained earnings unless specific authorization is obtained to pay dividends
from other sources. We expect to pay dividends out of current earnings. The June
2003 Financing Order requires that we maintain a ratio of common equity to total
capitalization of at least 30%.
Relationship with CenterPoint Energy. We are an indirect wholly owned
subsidiary of CenterPoint Energy. As a result of this relationship, the
financial condition and liquidity of our parent company could affect our access
to capital, our credit standing and our financial condition.
CRITICAL ACCOUNTING POLICIES
A critical accounting policy is one that is both important to the
presentation of our financial condition and results of operations and requires
management to make difficult, subjective or complex accounting estimates. An
accounting estimate is an approximation made by management of a financial
statement element, item or account in the financial statements. Accounting
estimates in our historical consolidated financial statements measure the
effects of past business transactions or events, or the present status of an
asset or liability. The accounting estimates described below require us to make
assumptions about matters that are highly uncertain at the time the estimate is
made. Additionally, different estimates that we could have used or changes in an
accounting estimate that are reasonably likely to occur could have a material
impact on the presentation of our financial condition or results of operations.
The circumstances that make these judgments difficult, subjective and/or complex
have to do with the need to make estimates about the effect of matters that are
inherently uncertain. Estimates and assumptions about future events and their
effects cannot be predicted with certainty. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances, the results of which form the basis for making
judgments. These estimates may change as new events occur, as more experience is
acquired, as additional information is obtained and as our operating environment
changes. Our significant accounting policies are discussed in Note 2 to our
consolidated financial statements. We believe the following accounting policies
involve the application of critical accounting estimates. Accordingly, these
accounting estimates have been reviewed and discussed with the audit committee
of the board of directors of CenterPoint Energy.
ACCOUNTING FOR RATE REGULATION
SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation"
(SFAS No. 71), provides that rate-regulated entities account for and report
assets and liabilities consistent with the recovery of those incurred costs in
rates if the rates established are designed to recover the costs of providing
the regulated service and if the competitive environment makes it probable that
such rates can be charged and collected. We apply SFAS No. 71, which results in
our accounting for the regulatory effects of recovery of stranded costs and
other regulatory assets resulting from the unbundling of the transmission and
distribution business from our electric generation operations in our
consolidated financial statements. Certain expenses and revenues subject to
utility regulation or rate determination normally reflected in income are
deferred on the balance sheet and are recognized in income as the related
amounts are included in service rates and recovered from or refunded to
customers. Significant accounting estimates embedded within the application of
SFAS No. 71 relate to $2.1 billion of recoverable electric generation plant
mitigation assets (stranded costs) and $1.4 billion of ECOM true-up as of
December 31, 2003. The stranded costs include $1.1 billion of previously
recorded accelerated depreciation and $841 million of previously redirected
26
depreciation as well as $399 million related to the Texas Genco distribution.
These stranded costs are recoverable under the provisions of the Texas electric
restructuring law. The ultimate amount of stranded cost recovery is subject to a
final determination, which will occur in 2004, and is contingent upon the market
value of Texas Genco. Any significant changes in our accounting estimate of
stranded costs as a result of current market conditions or changes in the
regulatory recovery mechanism currently in place could result in a material
write-down of these regulatory assets.
IMPAIRMENT OF LONG-LIVED ASSETS AND INTANGIBLES
We review the carrying value of our long-lived assets, including
identifiable intangibles, whenever events or changes in circumstances indicate
that such carrying values may not be recoverable. Unforeseen events and changes
in circumstances and market condition and material differences in the value of
long-lived assets and intangibles due to changes in estimates of future cash
flows, regulatory matters and operating costs could negatively affect the fair
value of our assets and result in an impairment charge.
Fair value is the amount at which the asset could be bought or sold in a
current transaction between willing parties and may be estimated using a number
of techniques, including quoted market prices or valuations by third parties,
present value techniques based on estimates of cash flows, or multiples of
earnings or revenue performance measures. The fair value of the asset could be
different using different estimates and assumptions in these valuation
techniques.
UNBILLED REVENUES
Revenues related to the sale and/or delivery of electricity are generally
recorded when electricity is delivered to customers. However, the determination
of energy sales to individual customers is based on the reading of their meters,
which is performed on a systematic basis throughout the month. At the end of
each month, amounts of electricity delivered to customers since the date of the
last meter reading are estimated and the corresponding unbilled revenue is
estimated. Unbilled electric delivery revenue is estimated each month based on
daily supply volumes, applicable rates and analyses reflecting significant
historical trends and experience. As additional information becomes available,
or actual amounts are determinable, the recorded estimates are revised.
Consequently, operating results can be affected by revisions to prior accounting
estimates.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 2(l) to the consolidated financial statements for a discussion of
new accounting pronouncements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have outstanding long-term debt, which subjects us to the risk of loss
associated with movements in market interest rates.
At December 31, 2002 and 2003, we had outstanding fixed-rate debt
aggregating $2.4 billion and $2.5 billion in principal amount and having a fair
value of $2.5 billion and $ 2.6 billion, respectively. This fixed-rate debt does
not expose us to the risk of loss in earnings due to changes in market interest
rates. However, the fair value of this debt would increase by approximately $128
million if interest rates were to decline by 10% from their levels at December
31, 2003. In general, such an increase in fair value would impact earnings and
cash flows only if we were to reacquire all or a portion of this debt in the
open market prior to its maturity.
Our floating-rate obligations aggregated $1.3 billion at both December 31,
2002 and 2003. These floating-rate obligations expose us to the risk of
increased interest expense in the event of increases in short-term interest
rates. If the floating interest rates were to increase by 10% from December 31,
2002 rates, our combined interest expense would increase by a total of $1.4
million each month in which such increase continued. For more information
regarding our floating rate obligations, please read Note 6 to our consolidated
financial statements.
27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA OF THE COMPANY
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
STATEMENTS OF CONSOLIDATED INCOME
YEAR ENDED DECEMBER 31,
--------------------------------------
2001 2002 2003
------------ ------------ ------------
(IN THOUSANDS)
REVENUES .................................................................. $ 2,099,872 $ 2,221,618 $ 2,124,237
------------ ------------ ------------
EXPENSES:
Operation and maintenance ............................................... 649,995 641,589 636,621
Depreciation and amortization ........................................... 299,204 270,799 270,035
Taxes other than income taxes ........................................... 287,318 212,988 197,989
------------ ------------ ------------
Total ................................................................ 1,236,517 1,125,376 1,104,645
------------ ------------ ------------
OPERATING INCOME .......................................................... 863,355 1,096,242 1,019,592
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense and distribution on trust preferred securities ......... (233,344) (284,898) (361,312)
Other, net .............................................................. 43,755 21,988 3,893
------------ ------------ ------------
Total ................................................................ (189,589) (262,910) (357,419)
------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES AND PREFERRED DIVIDENDS ........................................... 673,766 833,332 662,173
Income Tax Expense ...................................................... 227,811 285,882 230,401
------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS BEFORE
PREFERRED DIVIDENDS ...................................................... 445,955 547,450 431,772
Income from Discontinued Operations, net of tax ......................... 534,604 131,949 --
------------ ------------ ------------
INCOME BEFORE PREFERRED DIVIDENDS ......................................... 980,559 679,399 431,772
PREFERRED DIVIDENDS ....................................................... 858 -- --
------------ ------------ ------------
NET INCOME ................................................................ $ 979,701 $ 679,399 $ 431,772
============ ============ ============
See Notes to the Company's Consolidated Financial Statements
28
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31,
--------------------------------------
2001 2002 2003
------------ ------------ ------------
(IN THOUSANDS)
Net income ................................................................ $ 979,701 $ 679,399 $ 431,772
------------ ------------ ------------
Other comprehensive income (loss), net of tax:
Minimum non-qualified pension liability
adjustment (net of tax of $346 and $1,015) ........................... 642 1,885 --
Comprehensive income (loss) from discontinued operations,
(net of tax of $97,709 and $108,844) ................................. (181,459) 202,138 --
------------ ------------ ------------
Other comprehensive income (loss) ......................................... (180,817) 204,023 --
------------ ------------ ------------
Comprehensive income ...................................................... $ 798,884 $ 883,422 $ 431,772
============ ============ ============
See Notes to the Company's Consolidated Financial Statements
29
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-----------------------------
2002 2003
------------- -------------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................................................... $ 70,866 $ 30,720
Accounts and notes receivable, net.............................................. 99,304 91,332
Accounts receivable--affiliated companies, net.................................. -- 3,897
Accrued unbilled revenues....................................................... 70,385 71,507
Inventory....................................................................... 59,941 56,008
Taxes receivable................................................................ 40,997 184,634
Other........................................................................... 11,838 14,209
------------- -------------
Total current assets......................................................... 353,331 452,307
------------- -------------
PROPERTY, PLANT AND EQUIPMENT, NET................................................ 4,077,672 4,044,283
------------- -------------
OTHER ASSETS:
Other intangibles, net.......................................................... 39,912 39,010
Regulatory assets............................................................... 3,970,007 4,896,439
Notes receivable--affiliated companies.......................................... 814,513 814,513
Other........................................................................... 66,049 79,770
------------- -------------
Total other assets........................................................... 4,890,481 5,829,732
------------- -------------
TOTAL ASSETS................................................................. $ 9,321,484 $ 10,326,322
============= =============
LIABILITIES AND MEMBER'S EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt............................................... $ 18,758 $ 41,229
Accounts payable................................................................ 32,362 35,771
Accounts payable--affiliated companies, net..................................... 43,662 --
Notes payable--affiliated companies, net........................................ 214,976 113,179
Taxes accrued................................................................... 85,205 82,650
Interest accrued................................................................ 78,355 64,769
Regulatory liabilities.......................................................... 168,173 185,812
Franchise fees accrued.......................................................... 33,837 33,677
Other........................................................................... 23,895 28,368
------------- -------------
Total current liabilities.................................................... 699,223 585,455
------------- -------------
OTHER LIABILITIES:
Accumulated deferred income taxes, net.......................................... 1,419,301 1,799,926
Unamortized investment tax credits.............................................. 53,581 55,845
Benefit obligations............................................................. 61,671 83,236
Regulatory liabilities.......................................................... 940,615 923,038
Notes payable--affiliated companies............................................. 916,400 379,900
Accounts payable--affiliated companies.......................................... -- 398,984
Other........................................................................... 265,426 11,424
------------- -------------
Total other liabilities...................................................... 3,656,994 3,652,353
------------- -------------
LONG-TERM DEBT.................................................................... 2,641,281 3,347,684
------------- -------------
COMMITMENTS AND CONTINGENCIES (NOTE 9)
MEMBER'S EQUITY................................................................... 2,323,986 2,740,830
------------- -------------
TOTAL LIABILITIES AND MEMBER'S EQUITY........................................ $ 9,321,484 $ 10,326,322
============= =============
See Notes to the Company's Consolidated Financial Statements
30
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
STATEMENTS OF CONSOLIDATED CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------------------
2001 2002 2003
------------ ------------ ------------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .............................................................. $ 979,701 $ 679,399 $ 431,772
Less: Income from discontinued operations .............................. 534,604 131,949 --
------------ ------------ ------------
Income from continuing operations, less preferred dividends ............. 445,097 547,450 431,772
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization ........................................ 299,204 270,799 270,035
Deferred income taxes ................................................ (127,442) 352,421 388,934
Amortization of deferred financing costs ............................. 7,407 34,140 31,291
Investment tax credit ................................................ (4,712) (4,689) (6,895)
Changes in other assets and liabilities:
Accounts and notes receivable, net ................................. 779 (275,089) 6,850
Accounts receivable/payable, affiliates ............................ 56,215 3,470 (47,559)
Taxes receivable ................................................... 79,888 11,758 (143,637)
Inventory .......................................................... 22,982 20,978 3,933
Accounts payable ................................................... 52,570 (7,727) 3,409
Fuel cost recovery ................................................. 357,139 216,368 --
Interest and taxes accrued ......................................... 24,422 (52,607) (1,141)
Net regulatory assets and liabilities .............................. 705 (1,025,836) (770,648)
Other current assets ............................................... (3,037) (4,006) (2,371)
Other current liabilities .......................................... (70,224) (66,727) 4,313
Other assets ....................................................... (78,220) 74,070 (23,915)
Other liabilities .................................................. 35,873 (18,464) (15,586)
Other, net ........................................................... -- -- 2,144
------------ ------------ ------------
Net cash provided by operating activities ....................... 1,098,646 76,309 130,929
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures and other .......................................... (525,729) (344,750) (224,345)
------------ ------------ ------------
Net cash used in investing activities ........................... (525,729) (344,750) (224,345)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt ................................ 748,572 1,310,000 1,257,762
Decrease in short-term borrowings, net .................................. (105,665) (163,731) --
Increase (decrease) in short-term notes with affiliates, net ............ 215,220 (223,310) 64,803
Payments of long-term debt .............................................. (226,547) (313,414) (531,032)
Decrease in long-term notes payable, affiliates ......................... -- (550,000) (703,100)
Debt issuance costs ..................................................... (10,375) (59,574) (35,216)
Payment of common stock dividends ....................................... (433,918) (222,538) --
Redemption of preferred stock ........................................... (10,227) -- --
Other, net .............................................................. 111,465 (46) 53
------------ ------------ ------------
Net cash provided by (used in) financing activities ............. 288,525 (222,613) 53,270
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) DISCONTINUED OPERATIONS .................... (859,095) 558,492 --
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ...................... 2,347 67,438 (40,146)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR ........................ 1,081 3,428 70,866
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF THE YEAR .............................. $ 3,428 $ 70,866 $ 30,720
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Payments:
Interest ............................................................. $ 221,940 $ 214,882 $ 317,304
Income taxes (refunds) ............................................... 266,092 (11,037) (104,206)
See Notes to the Company's Consolidated Financial Statements
31
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
STATEMENTS OF CONSOLIDATED STOCKHOLDER'S AND MEMBER'S EQUITY
2001 2002 2003
-------------------- --------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------- ----------- -------- ----------- -------- ------------
(THOUSANDS OF DOLLARS AND SHARES)
PREFERENCE STOCK, NONE
OUTSTANDING....................... -- $ -- -- $ -- -- $ --
CUMULATIVE PREFERRED STOCK, $0.01
PAR VALUE; AUTHORIZED 20,000,000
SHARES
Balance, beginning of year........ 97 9,740 -- -- -- --
Redemption of preferred stock..... (97) (9,740) -- -- -- --
------- ----------- -------- ----------- -------- ------------
Balance, end of year........... -- -- -- -- -- --
------- ----------- -------- ----------- -------- ------------
COMMON STOCK, $0.01 PAR VALUE;
AUTHORIZED 1,000,000,000 SHARES
Balance, beginning of year........ 299,914 2,999 302,944 3,029 1 1
Issuances related to benefit and
investment plans................ 3,030 30 -- -- -- --
Restructuring..................... -- -- (302,943) (3,028) -- --
------- ----------- -------- ----------- -------- ------------
Balance, end of year.............. 302,944 3,029 1 1 1 1
------- ----------- -------- ----------- -------- ------------
ADDITIONAL PAID-IN-CAPITAL
Balance, beginning of year........ -- 3,254,191 -- 3,894,272 -- 2,205,039
Issuances related to benefit and
investment plans................ -- 130,630 -- -- -- --
Unrealized gain on sale of
subsidiaries' stock............. -- 509,499 -- -- -- --
Other............................. -- (48) -- -- -- (14,928)
Restructuring..................... -- -- -- (1,689,233) -- --
------- ----------- -------- ----------- -------- ------------
Balance, end of year.............. -- 3,894,272 -- 2,205,039 -- 2,190,111
------- ----------- -------- ----------- -------- ------------
TREASURY STOCK
Balance, beginning of year........ (4,811) (120,856) -- -- -- --
Shares acquired................... -- -- -- -- -- --
Contribution to pension plan...... 4,512 113,336 -- -- -- --
Other............................. 299 7,520 -- -- -- --
------- ----------- -------- ----------- -------- ------------
Balance, end of year.............. -- -- -- -- -- --
------- ----------- -------- ----------- -------- ------------
UNEARNED ESOP STOCK
Balance, beginning of year........ (8,639) (161,158) (7,070) (131,888) -- --
Issuances related to benefit
plan............................ 1,569 29,270 -- -- -- --
Restructuring..................... -- -- 7,070 131,888 -- --
------- ----------- -------- ----------- -------- ------------
Balance, end of year.............. (7,070) (131,888) -- -- -- --
------- ----------- -------- ----------- -------- ------------
RETAINED EARNINGS
Balance, beginning of year........ 2,520,350 3,176,533 118,946
Net income........................ 979,701 679,399 431,772
Common stock dividends--$1.125
per share in 2001 and $0.91
per share in 2002............... (323,518) (271,292) --
Restructuring..................... -- (3,465,694) --
----------- ----------- ------------
Balance, end of year.............. 3,176,533 118,946 550,718
----------- ----------- ------------
ACCUMULATED OTHER COMPREHENSIVE
LOSS
Balance, beginning of year........ (23,206) (204,023) --
----------- ----------- ------------
Other comprehensive income (loss),
net of tax:
Minimum pension
liability adjustment.......... 642 1,885 --
Other comprehensive income
(loss) from discontinued
operations.................... (181,459) 202,138 --
----------- ----------- ------------
Other comprehensive income (loss) (180,817) 204,023 --
----------- ----------- ------------
Balance, end of year.............. (204,023) -- --
----------- ----------- ------------
Total Stockholder's and
Member's Equity............ $ 6,737,923 $ 2,323,986 $ 2,740,830
=========== =========== ============
See Notes to the Company's Consolidated Financial Statements
32
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BACKGROUND AND BASIS OF PRESENTATION
BACKGROUND
CenterPoint Energy Houston Electric, LLC (CenterPoint Houston or the
Company) is a regulated utility engaged in the transmission and distribution of
electric energy in a 5,000 square mile area located along the Texas Gulf Coast,
including the City of Houston.
The Company's electric distribution business distributes electricity for
retail electric providers in its certificated service area by carrying power
from the substation to the retail electric customer. The Company's transmission
business transports electricity from power plants to substations and from one
substation to another in locations in the control area managed by the Electric
Reliability Council of Texas, Inc. (ERCOT).
The Company's business also includes the stranded costs and regulatory
asset recovery associated with the Company's historical generating operations.
The Company operates its business as a single segment. In addition to the
electric transmission and distribution business, the consolidated financial
statements include the operations of one financing subsidiary.
The Company's business does not include:
- the generation or sale of electricity;
- the procurement, supply or delivery of fuel for the generation of
electricity; or
- the marketing to or billing of retail electric customers.
Effective August 31, 2002, Reliant Energy, Incorporated (Reliant Energy)
consummated a restructuring transaction (Restructuring) in which it, among other
things, (1) conveyed its Texas electric generation assets to Texas Genco
Holdings, Inc. (Texas Genco), (2) became an indirect, wholly owned subsidiary of
a new utility holding company, CenterPoint Energy, Inc. (CenterPoint Energy),
(3) was converted into a Texas limited liability company named CenterPoint
Energy Houston Electric, LLC and (4) distributed the capital stock of its
operating subsidiaries, including Texas Genco, to CenterPoint Energy. As part of
the Restructuring, each share of Reliant Energy common stock was converted into
one share of CenterPoint Energy common stock.
The Company is an indirect wholly owned subsidiary of CenterPoint Energy.
CenterPoint Energy is a registered public utility holding company under the
Public Utility Holding Company Act of 1935, as amended (1935 Act). The 1935 Act
and related rules and regulations impose a number of restrictions on the
activities of CenterPoint Energy and those of its regulated subsidiaries. The
1935 Act, among other things, limits the ability of CenterPoint Energy and its
regulated subsidiaries to issue debt and equity securities without prior
authorization, restricts the source of dividend payments to current and retained
earnings without prior authorization, regulates sales and acquisitions of
certain assets and businesses and governs affiliate transactions.
BASIS OF PRESENTATION
In accordance with Statement of Financial Accounting Standards (SFAS) No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS No.
144), the Company's operating subsidiaries which were distributed in connection
with the Restructuring are presented as discontinued operations in the
consolidated financial statements for 2001 and 2002.
33
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) RECLASSIFICATIONS AND USE OF ESTIMATES
In addition to the items discussed in Note 3, some amounts from the
previous years have been reclassified to conform to the 2003 presentation of
financial statements. These reclassifications do not affect net income.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(b) PRINCIPLES OF CONSOLIDATION
The accounts of the Company and its wholly owned subsidiary are included in
the Company's consolidated financial statements. All significant intercompany
transactions and balances are eliminated in consolidation.
(c) REVENUES
The Company records revenue for electricity under the accrual method and
these revenues are generally recognized upon delivery. However, the
determination of the deliveries to individual customers is based on the reading
of their meters which is performed on a systematic basis throughout the month.
As a result of the implementation of the Texas Electric Choice Plan (Texas
electric restructuring law), the Company's regulated transmission and
distribution business recovers the cost of its service through an energy
delivery charge, and not as a component of the prior bundled rate, which
included energy and delivery charges. The design of the new energy delivery rate
differs from the prior bundled rate. The winter/summer rate differential for
residential customers has been eliminated and the energy component of the rate
structure has been removed, which will tend to lessen some of the pronounced
seasonal variation in revenues which has been experienced in prior periods. At
the end of each month, amounts of electricity delivered to customers since the
date of the last meter reading are estimated and the corresponding unbilled
revenue is estimated.
(d) LONG-LIVED ASSETS AND INTANGIBLES
The Company records property, plant and equipment at historical cost. The
Company expenses repair and maintenance costs as incurred. The cost of utility
plant and equipment retirements is charged to accumulated depreciation.
Property, plant and equipment includes the following:
DECEMBER 31,
ESTIMATED USEFUL -----------------------
LIVES (YEARS) 2002 2003
---------------- ---------- ----------
(IN MILLIONS)
Transmission............................ 28- 75 $ 1,259 $ 1,277
Distribution............................ 18- 55 4,012 4,136
Other................................... 5-50 689 672
---------- ----------
Total......................... 5,960 6,085
Accumulated depreciation................ (1,882) (2,041)
---------- ----------
Property, plant and equipment, net.... $ 4,078 $ 4,044
========== ==========
For further information regarding removal costs previously recorded as a
component of accumulated depreciation, see Note 2(l).
The Company periodically evaluates long-lived assets, including property,
plant and equipment and specifically identifiable intangibles, when events or
changes in circumstances indicate that the carrying value of these assets may
not be recoverable. The determination of whether an impairment has occurred is
based on an estimate of undiscounted cash flows attributable to the assets, as
compared to the carrying value of the assets. To date, no impairment has been
indicated. The Company adopted the provisions of Statement of Financial
Accounting Standards No. 142 "Goodwill and Other Intangible Assets" (SFAS No.
142) on January 1, 2002. The Company had
34
specific intangibles related to land rights at December 31, 2002 and 2003 of $40
million (net of $8 million accumulated amortization) and $39 million (net of $9
million accumulated amortization), respectively. The Company amortizes these
acquired intangibles on a straight-line basis over the lesser of their
contractual or estimated useful lives that range between 50 and 75 years.
(e) REGULATORY ASSETS AND LIABILITIES
The Company applies the accounting policies established in SFAS No. 71,
"Accounting for the Effects of Certain Types of Regulation" (SFAS No. 71). The
following is a list of regulatory assets/liabilities reflected on the Company's
Consolidated Balance Sheets as of December 31, 2002 and 2003:
DECEMBER 31,
--------------------
2002 2003
-------- --------
(IN MILLIONS)
Recoverable Electric Generation-Related Regulatory Assets, net:
Recoverable electric generation plant mitigation .................. 2,051 2,116
Excess mitigation liability ....................................... (969) (778)
-------- --------
Net electric generation plant mitigation asset ................ 1,082 1,338
Excess cost over market (ECOM/capacity auction) true-up ........... 697 1,357
Texas Genco distribution/impairment ............................... -- 399
Regulatory tax asset .............................................. 175 119
Final fuel under/(over) recovery balance .......................... 64 (98)
Other 2004 True-Up Proceeding items ............................... 53 119
-------- --------
Total 2004 Recoverable Electric Generation-Related Regulatory
Assets............................................................ 2,071 3,234
Securitized regulatory asset ......................................... 706 682
Unamortized loss on reacquired debt .................................. 58 80
Estimated removal costs .............................................. -- (232)
Other long-term regulatory assets/liabilities ........................ 26 24
-------- --------
Total .............................................................. $ 2,861 $ 3,788
======== ========
If events were to occur that would make the recovery of these assets and
liabilities no longer probable, the Company would be required to write off or
write down these regulatory assets and liabilities. In addition, the Company
would be required to determine any impairment of the carrying costs of plant and
inventory assets. Because estimates of the fair value of Texas Genco are
required, the financial impacts of the Texas electric restructuring law with
respect to the final determination of stranded costs are subject to material
changes. Factors affecting such changes may include estimation risk, uncertainty
of future energy and commodity prices and the economic lives of the plants. See
Note 4(a) for additional discussion of regulatory assets.
(f) DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation is computed using the straight-line method based on economic
lives or a regulatory mandated method. During 2001, depreciation expense was
redirected to generation assets as discussed in Note 4(a). Other amortization
expense includes amortization of regulatory assets and other intangibles. See
Notes 2(d) and 4(a) for additional discussion of these items.
The following table presents depreciation and amortization expense for
2001, 2002 and 2003.
YEAR ENDED DECEMBER 31,
----------------------------
2001 2002 2003
------- ------- -------
(IN MILLIONS)
Depreciation expense.................... $ -- $ 217 $ 228
Amortization expense.................... 299 54 42
------- ------- -------
Total depreciation and amortization... $ 299 $ 271 $ 270
======= ======= =======
35
(g) ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION
Allowance for funds used during construction (AFUDC) represents the
approximate net composite interest cost of borrowed funds and a reasonable
return on the equity funds used for construction. Although AFUDC increases both
utility plant and earnings, it is realized in cash through depreciation
provisions included in rates. AFUDC is capitalized as a component of projects
under construction and will be amortized over the assets' estimated useful
lives. During 2001, 2002 and 2003, the Company capitalized AFUDC of $5 million,
$4 million and $3 million, respectively.
(h) INCOME TAXES
The Company is included in the consolidated income tax returns of
CenterPoint Energy. The Company calculates its income tax provision on a
separate return basis under a tax sharing agreement with CenterPoint Energy. The
Company uses the liability method of accounting for deferred income taxes and
measures deferred income taxes for all significant income tax temporary
differences. Investment tax credits were deferred and are being amortized over
the estimated lives of the related property. Current federal and certain state
income taxes are payable to or receivable from CenterPoint Energy. For
additional information regarding income taxes, see Note 8.
(i) ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Accounts and notes receivable, net, are net of an allowance for doubtful
accounts of $5 million and $3 million at December 31, 2002 and 2003,
respectively. The provision for doubtful accounts in the Company's Statements of
Consolidated Income for 2001, 2002 and 2003 was $13 million, $10 million and
$-0- million, respectively.
(j) INVENTORY
Inventory consists principally of materials and supplies and is valued at
average cost.
(k) STATEMENTS OF CONSOLIDATED CASH FLOWS
For purposes of reporting cash flows, the Company considers cash
equivalents to be short-term, highly liquid investments with maturities of three
months or less from the date of purchase. In connection with the issuance of
transition bonds in October 2001, the Company was required to establish
restricted cash accounts to collateralize the bonds that were issued in this
financing transaction. These restricted cash accounts are not available for
withdrawal until the maturity of the bonds. Cash and cash equivalents does not
include restricted cash. For additional information regarding the securitization
financing, see Note 4(a).
(l) NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2003, the Company adopted SFAS No. 143, "Accounting
for Asset Retirement Obligations" (SFAS No. 143). SFAS No. 143 requires the fair
value of an asset retirement obligation to be recognized as a liability is
incurred and capitalized as part of the cost of the related tangible long-lived
assets. Over time, the liability is accreted to its present value each period,
and the capitalized cost is depreciated over the useful life of the related
asset. Retirement obligations associated with long-lived assets included within
the scope of SFAS No. 143 are those for which a legal obligation exists under
enacted laws, statutes and written or oral contracts, including obligations
arising under the doctrine of promissory estoppel.
The Company recognizes removal costs as a component of depreciation expense
in accordance with regulatory treatment. As of December 31, 2002 and 2003, these
removal costs of $240 million and $232 million, respectively, have been
reclassified from accumulated depreciation to other long-term liabilities and
regulatory liabilities, respectively, in the Consolidated Balance Sheets.
In April 2002, the Financial Accounting Standards Board (FASB) issued SFAS
No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections" (SFAS No. 145). SFAS No. 145
eliminates the current requirement that gains and losses on debt extinguishment
must be classified as extraordinary items in the income statement. Instead, such
gains and losses will be classified as extraordinary items
36
only if they are deemed to be unusual and infrequent. SFAS No. 145 also requires
that capital leases that are modified so that the resulting lease agreement is
classified as an operating lease be accounted for as a sale-leaseback
transaction. The changes related to debt extinguishment are effective for fiscal
years beginning after May 15, 2002, and the changes related to lease accounting
are effective for transactions occurring after May 15, 2002. The Company has
applied this guidance as it relates to lease accounting and the accounting
provision related to debt extinguishment. Upon adoption of SFAS No. 145, any
gain or loss on extinguishment of debt that was classified as an extraordinary
item in prior periods is required to be reclassified. The Company has
reclassified the $25 million loss on debt extinguishment related to the fourth
quarter of 2002 from an extraordinary item to interest expense.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities, an Interpretation of Accounting Research Bulletin No. 51"
(FIN 46). FIN 46 requires certain variable interest entities to be consolidated
by the primary beneficiary of the entity if the equity investors in the entity
do not have the characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003, subject to the following additional releases by the FASB. On
October 9, 2003, the FASB deferred the application for FIN 46 until the end of
the first interim period or annual period ending after December 15, 2003 if the
variable interest was created before February 1, 2003 and a public entity had
not issued financial statements reporting the variable interest entity in
accordance with FIN 46. On December 24, 2003, the FASB issued a revision to FIN
46 (FIN 46-R). The effective dates and impact of FIN 46 and FIN 46R are as
follows: (a) for special-purpose entities (SPE's) created before February 1,
2003, the Company must apply the provisions of FIN 46 or FIN 46-R at the end of
the first interim or annual reporting period ending after December 15, 2003, (b)
for variable interest entities created before February 1, 2003 which do not meet
the definition of an SPE provided by FIN 46-R, the Company is required to adopt
FIN 46-R at the end of the first interim or annual period ending after March 15,
2004 and (c) for all entities, regardless of whether an SPE, that were created
subsequent to December 31, 2003, the Company is required to apply the provisions
of FIN 46-R immediately. The Company is currently evaluating the impact of
adopting FIN 46-R applicable to non-SPE's created prior to February 1, 2003 but
does not expect a material impact.
On December 23, 2003, the FASB issued SFAS No. 132 (Revised 2003),
"Employer's Disclosures about Pensions and Other Postretirement Benefits" (SFAS
No. 132(R)) which increases the existing disclosure requirements by requiring
more details about pension plan assets, benefit obligations, cash flows, benefit
costs and related information. Companies will be required to segregate plan
assets by category, such as debt, equity and real estate, and to provide certain
expected rates of return and other informational disclosures. SFAS No. 132(R)
also requires companies to disclose various elements of pension and
postretirement benefit costs in interim-period financial statements for quarters
beginning after December 15, 2003. The Company has adopted the disclosure
requirements of SFAS No. 132(R) in Note 7 to these consolidated financial
statements.
In December 2003, Congress passed the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the Act) which will become effective
in 2006. The Act contains incentives for the Company, if it continues to provide
prescription drug benefits for its retirees, through the provision of a
non-taxable reimbursement to the Company of specified costs. The Company has
many different alternatives available under the Act, and, until clarifying
regulations are issued with respect to the Act, the Company is unable to
determine the financial impact. On January 12, 2004, the FASB issued FASB Staff
Position (FSP) FAS 106-1, "Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003" (FAS
106-1). In accordance with FSP FAS 106-1, the Company's postretirement benefits
obligations and net periodic postretirement benefit cost in the financial
statements and accompanying notes do not reflect the effects of the legislation.
Specific authoritative guidance on the accounting for the legislation is pending
and that guidance, when issued, may require the Company to change previously
reported information.
(3) DISCONTINUED OPERATIONS
The consolidated financial statements have been prepared to reflect the
effect of the Restructuring as described above as it relates to the Company, and
have been prepared based upon Reliant Energy's historical consolidated financial
statements.
The consolidated financial statements present operations of Reliant Energy
that were distributed to CenterPoint
37
Energy in the Restructuring as discontinued operations, in accordance with SFAS
No. 144. Accordingly, the consolidated financial statements of the Company
reflect these operations as discontinued operations for the year ended December
31, 2001 and for the eight months ended August 31, 2002.
Total revenues included in discontinued operations for the year ended
December 31, 2001 and the eight months ended August 31, 2002 were $14 billion
and $10 billion, respectively. Total revenues included in discontinued
operations have been restated to reflect Reliant Resources' adoption of Emerging
Issues Task Force (EITF) Issue No. 02-3, "Issues Related to Accounting for
Contracts Involved in Energy Trading and Risk Management Activities." Income
from discontinued operations for the year ended December 31, 2001 and the eight
months ended August 31, 2002 is reported net of income tax expense of $297
million and $254 million, respectively.
(4) REGULATORY MATTERS
(a) TRUE-UP COMPONENTS AND SECURITIZATION
The Texas Electric Restructuring Law. In June 1999, the Texas legislature
adopted the Texas Electric Choice Plan (the Texas electric restructuring law),
which substantially amended the regulatory structure governing electric
utilities in order to allow and encourage retail competition which began in
January 2002. The Texas electric restructuring law required the separation of
the generation, transmission and distribution, and retail sales functions of
electric utilities into three different units. Under the law, neither the
generation function nor the retail function is subject to traditional cost of
service regulation, and the generation and the retail function are each operated
on a competitive basis. The transmission and distribution function that the
Company performs remains subject to traditional utility rate regulation. The
Company recovers the cost of its service through an energy delivery charge
approved by the Texas Utility Commission.
Under the Texas electric restructuring law, transmission and distribution
utilities in Texas, such as the Company, whose generation assets were
"unbundled" may recover, following a regulatory proceeding to be held in 2004
(2004 True-Up Proceeding) as further discussed below in "--2004 True-Up
Proceeding":
- "stranded costs," which consist of the positive excess of the net
regulatory book value of generation assets, as defined, over the
market value of the assets, taking specified factors into account;
- the difference between the Texas Utility Commission's projected market
prices for generation during 2002 and 2003 and the actual market
prices for generation as determined in the state-mandated capacity
auctions during that period;
- the Texas jurisdictional amount reported by the previously vertically
integrated electric utilities as generation-related regulatory assets
and liabilities (offset and adjusted by specified amounts) in their
audited financial statements for 1998;
- final fuel over- or under-recovery; less
- "price to beat" clawback components.
The Texas electric restructuring law permits transmission and distribution
utilities to recover the true-up components through transition charges on retail
electric customers' bills, to the extent that such components are established in
certain regulatory proceedings. These transition charges are non-bypassable,
meaning that they must be paid by essentially all customers and cannot, except
in limited circumstances, be avoided by switching to self-generation. The law
also authorizes the Texas Utility Commission to permit those utilities to issue
transition bonds based on the securitization of revenues associated with the
transition charges. The Company recovered a portion of its regulatory assets in
2001 through the issuance of transition bonds. For a further discussion of these
matters, see "--Securitization" below.
The Texas electric restructuring law also provides specific regulatory
remedies to reduce or mitigate a utility's stranded cost exposure. During a base
rate freeze period from 1999 through 2001, earnings above the utility's
authorized rate of return formula were required to be applied in a manner to
accelerate depreciation of generation-related plant assets for regulatory
purposes if the utility was expected to have stranded costs. In addition,
depreciation expense for transmission and distribution-related assets could be
redirected to generation assets for regulatory purposes during that period if
the utility was expected to have stranded costs. The Company undertook both of
these remedies provided in the Texas electric restructuring law, but in a rate
order issued in October 2001,
38
the Texas Utility Commission required the Company to reverse those actions. For
a further discussion of these matters, see "--Mitigation" below.
2004 True-Up Proceeding. In 2004, the Texas Utility Commission will conduct
true-up proceedings for investor-owned utilities. The purpose of the true-up
proceeding is to quantify and reconcile the amount of the true-up components.
The true-up proceeding will result in either additional charges being assessed
on, or credits being issued to, retail electric customers. The Company expects
to make the filing to initiate its final true-up proceeding on March 31, 2004.
The Texas electric restructuring law requires a final order to be issued by the
Texas Utility Commission not more than 150 days after a proper filing is made by
the regulated utility, although under its rules the Texas Utility Commission can
extend the 150-day deadline for good cause. Any delay in the final order date
will result in a delay in the securitization of the Company's true-up components
and the implementation of the non-bypassable charges to described above, and
could delay the recovery of carrying costs on the true-up components determined
by the Texas Utility Commission.
The Company will be required to establish and support the amounts it seeks
to recover in the 2004 True-Up Proceeding. Third parties will have the
opportunity and are expected to challenge the Company's calculation of these
amounts. To the extent recovery of a portion of these amounts is denied or if
the Company agrees to forego recovery of a portion of the request under a
settlement agreement, the Company would be unable to recover those amounts in
the future.
Following adoption of the true-up rule by the Texas Utility Commission in
2001, the Company appealed certain provisions of the rule that permitted
interest to be recovered on stranded costs only from the date of the Texas
Utility Commission's final order in the 2004 True-Up Proceeding, instead of from
January 1, 2002 as the Company contends is required by law. On January 30, 2004,
the Texas Supreme Court granted the Company's petition for review of the true-up
rule. Oral arguments were heard on February 18, 2004. The decision by the Court
is pending. The Company has not accrued interest income on stranded costs in its
consolidated financial statements, but estimates such interest income would be
material to the Company's consolidated financial statements.
Stranded Cost Component. The Company will be entitled to recover stranded
costs through a transition charge to its customers if the regulatory net book
value of generating plant assets exceeds the market value of those assets. The
regulatory net book value of generating plant assets is the balance as of
December 31, 2001 plus certain costs incurred for reductions in emissions of
oxides of nitrogen (NOx), any above-market purchased power contracts and certain
other amounts. The market value will be equal to the average daily closing price
on The New York Stock Exchange for publicly held shares of Texas Genco common
stock for 30 consecutive trading days chosen by the Texas Utility Commission out
of the last 120 trading days immediately preceding the true-up filing, plus a
control premium, up to a maximum of 10%, to the extent included in the valuation
determination made by the Texas Utility Commission. If Texas Genco is sold to a
third party at a lower price than the market value used by the Texas Utility
Commission, the Company would be unable to recover the difference.
ECOM True-Up Component. The Texas Utility Commission used a computer model
or projection, called an excess cost over market (ECOM) model, to estimate
stranded costs related to generation plant assets. Accordingly, the Texas
Utility Commission estimated the market power prices that would be received in
the generation capacity auctions mandated by the Texas electric restructuring
law during 2002 and 2003. Any difference between the Texas Utility Commission's
projected market prices for generation during 2002 and 2003 and the actual
market prices for generation as determined in the state-mandated capacity
auctions during that period will be a component of the 2004 True-Up Proceeding.
In accordance with the Texas Utility Commission's rules regarding the ECOM
True-Up, for the years ended December 31, 2002 and 2003, the Company recorded
approximately $697 million and $661 million, respectively, in non-cash ECOM
True-Up revenue. ECOM True-Up revenue is recorded as a regulatory asset and
totaled $1.4 billion as of December 31, 2003.
In 2003, some parties sought modifications to the true-up rules. Although
the Texas Utility Commission denied that request, the Company expects that
issues could be raised in the 2004 True-Up Proceeding regarding its compliance
with the Texas Utility Commission's rules regarding the ECOM true-up, including
whether Texas Genco has auctioned all capacity it is required to auction in view
of the fact that some capacity has failed to sell in the state-mandated
auctions. The Company believes Texas Genco has complied with the requirements
under the applicable rules, including re-offering the unsold capacity in
subsequent auctions. If events were to occur during the
39
2004 True-Up Proceeding that made the recovery of the ECOM true-up regulatory
asset no longer probable, the Company would write off the unrecoverable balance
of that asset as a charge against earnings.
Fuel Over/Under Recovery Component. The Company and Texas Genco filed
their joint application to reconcile fuel revenues and expenses with the Texas
Utility Commission in July 2002. This final fuel reconciliation filing covered
reconcilable fuel expense and interest of approximately $8.5 billion incurred
from August 1, 1997 through January 30, 2002. In January 2003, a settlement
agreement was reached, as a result of which certain items totaling $24 million
were written off during the fourth quarter of 2002 and items totaling $203
million were carried forward for later resolution by the Texas Utility
Commission. In late 2003, a hearing was concluded on those remaining issues. On
March 4, 2004, an Administrative Law Judge (ALJ) recommended that CenterPoint
Houston not be allowed to recover $87 million in fuel expenses incurred during
the reconciliation period. CenterPoint Houston will contest this recommendation
when the Texas Utility Commission considers the ALJ's conclusions on April 15,
2004. However, since the recovery of this portion of the regulatory asset is no
longer probable, CenterPoint Houston reserved $117 million, including interest,
in the fourth quarter of 2003. The ALJ also recommended that $46 million be
recovered in the 2004 True-Up Proceeding rather than in the fuel proceeding. The
results of the Texas Utility Commission's decision will be a component of the
2004 True-Up Proceeding.
"Price to Beat" Clawback Component. In connection with the implementation
of the Texas electric restructuring law, the Texas Utility Commission has set a
"price to beat" that retail electric providers affiliated or formerly affiliated
with a former integrated utility must charge residential and small commercial
customers within their affiliated electric utility's service area. The true-up
provides for a clawback of the "price to beat" in excess of the market price of
electricity if 40% of the "price to beat" load is not served by a other retail
electric providers by January 1, 2004. Pursuant to the Texas electric
restructuring law and a master separation agreement entered into in connection
with the September 30, 2002 spin-off of the CenterPoint Energy's interest in
Reliant Resources, Inc. (Reliant Resources) to its shareholders, Reliant
Resources is obligated to pay the Company for the clawback component of the
true-up. Based on an order issued on February 13, 2004 by the Texas Utility
Commission, the clawback will equal $150 times the number of residential
customers served by Reliant Resources in the Company's service territory, less
the number of residential customers served by Reliant Resources outside the
Company's service territory, on January 1, 2004. As reported in Reliant
Resources' Annual Report on Form 10-K for the year ended December 31, 2003,
Reliant Resources expects that the clawback payment will be $175 million. The
clawback will reduce the amount of recoverable costs to be determined in the
2004 True-Up Proceeding.
Securitization. The Texas electric restructuring law provides for the use
of special purpose entities to issue transition bonds for the economic value of
generation-related regulatory assets and stranded costs. These transition bonds
will be amortized over a period not to exceed 15 years through non-bypassable
transition charges. In October 2001, a special purpose subsidiary of the Company
issued $749 million of transition bonds to securitize certain generation-related
regulatory assets. These transition bonds have a final maturity date of
September 15, 2015 and are non-recourse to the Company and its subsidiaries
other than to the special purpose issuer. Payments on the transition bonds are
made out of funds from non-bypassable transition charges.
The Company expects that upon completion of the 2004 True-Up Proceeding, it
will seek to securitize the amounts established for the true-up components.
Before the Company can securitize these amounts, the Texas Utility Commission
must conduct a proceeding and issue a financing order authorizing the Company to
do so. Under the Texas electric restructuring law, the Company is entitled to
recover any portion of the true-up balance not securitized by transition bonds
through a non-bypassable competition transition charge.
Mitigation. In an order issued in October 2001, the Texas Utility
Commission established the transmission and distribution rates that became
effective in January 2002. The Texas Utility Commission determined that the
Company has overmitigated its stranded costs by redirecting transmission and
distribution depreciation and by accelerating depreciation of generation assets
as provided under its transition plan and the Texas electric restructuring law.
In this final order, the Company was required to reverse the amount of
redirected depreciation ($841 million) and accelerated depreciation ($1.1
billion) taken for regulatory purposes as allowed under the transition plan and
the Texas electric restructuring law. In accordance with the order, the Company
recorded a regulatory liability of $1.1 billion to reflect the prospective
refund of the accelerated depreciation, and in January
40
2002 the Company began refunding excess mitigation credits, which are to be
refunded over a seven-year period. The annual refund of excess mitigation
credits is approximately $238 million. As of December 31, 2002 and 2003, the
Company had recorded net electric plant mitigation regulatory assets of $1.1
billion and $1.3 billion, respectively, based on the Company's expectation that
these amounts will be recovered in the 2004 True-Up Proceeding as stranded
costs. In the event that the excess mitigation credits prove to have been
unnecessary and the Company is determined to have stranded costs, excess
mitigation credits will be included in the stranded costs to be recovered. In
June 2003, the Company sought authority from the Texas Utility Commission to
terminate these credits based on then current estimates of what that final
determination would be. The Texas Utility Commission denied the request in
January 2004.
(b) AGREEMENTS RELATED TO TEXAS GENERATING ASSETS
Texas Genco is the beneficiary of decommissioning trusts that have been
established to provide funding for decontamination and decommissioning of the
South Texas Project in which Texas Genco owns a 30.8% interest. The Company
collects through rates or other authorized charges to its electric utility
customers amounts designated for funding the decommissioning trusts, and
deposits these amounts into the decommissioning trusts. Upon decommissioning of
the facility, in the event funds from the trusts are inadequate, the Company or
its successor will be required to collect through rates or other authorized
charges to customers as contemplated by the Texas Utilities Code all additional
amounts required to fund Texas Genco's obligations relating to the
decommissioning of the facility. Following the completion of the
decommissioning, if surplus funds remain in the decommissioning trusts, the
excess will be refunded to the ratepayers of the Company or its successor. The
Company currently funds $2.9 million a year to trusts established to fund Texas
Genco's share of the decommissioning costs for the South Texas Project.
(5) RELATED PARTY TRANSACTIONS AND MAJOR CUSTOMERS
From time to time, the Company has receivables from, or payables to,
CenterPoint Energy or its subsidiaries.
DECEMBER 31,
-----------------------
2002 2003
--------- ---------
(IN MILLIONS)
Accounts receivable from affiliates................................... $ 58 $ 50
Accounts payable to affiliates........................................ (102) (46)
--------- ---------
Accounts receivable/(payable)-- affiliated companies, net.......... $ (44) $ 4
========= =========
Notes receivable-- affiliated companies (1)........................... $ 815 $ 815
========= =========
Current portion of long-term notes payable-- affiliated companies (2). $ (167) $ --
Money pool borrowings................................................. (48) (113)
--------- ---------
Current notes payable-- affiliated companies....................... $ (215) $ (113)
========= =========
Long-term notes payable-- affiliated companies (2).................... $ (916) $ (380)
========= =========
Long-term accounts payable-- affiliated companies (3)................. $ -- $ (399)
========= =========
- -----------
41
(1) Included in the $815 million notes receivable -- affiliated companies
is a $750 million note receivable from CenterPoint Energy payable on
demand and bearing interest at the prime rate that originated when the
Company converted its money fund investment at the time of the
Restructuring. Since August 31, 2002, the Company has been a
participant in the CenterPoint Energy money pool. The $750 million
note receivable is included in long-term notes receivable from
affiliate in the Consolidated Balance Sheets because the Company does
not plan to demand repayment of the note within the next twelve
months.
(2) For more information on the long-term notes payable to affiliate, see
Note 6.
(3) In 2003, CenterPoint Energy recorded a $399 million impairment related
to the partial distribution of its investment in Texas Genco. Since
this amount is expected to be recovered in the 2004 True-Up
Proceeding, the Company has recorded a regulatory asset reflecting its
right to recover this amount and an associated payable to CenterPoint
Energy. For more information on the 2004 True-Up Proceeding, see Note
4(a).
For the years ended December 31, 2001, 2002 and 2003, the Company had net
interest expense related to affiliate borrowings of $30 million, $72 million and
$19 million, respectively.
Revenues derived from energy delivery charges provided by the Company to a
subsidiary of Reliant Resources, a former affiliate, totaled $820 million and
$948 million in 2002 and 2003, respectively.
Although the former retail sales business is no longer conducted by the
Company, retail customers remained regulated customers of the Company through
the date of their first meter reading in January 2002. During this transition
period, the Company purchased $48 million of power from Texas Genco.
In 2001, a subsidiary of Reliant Resources, a former affiliate, provided
certain support services to the Company totaling $53 million.
CenterPoint Energy provides some corporate services to the Company. The
costs of services have been directly charged to the Company using methods that
management believes are reasonable. These methods include negotiated usage
rates, dedicated asset assignment, and proportionate corporate formulas based on
assets, operating expenses and employees. These charges are not necessarily
indicative of what would have been incurred had the Company not been an
affiliate. Amounts charged to the Company for these services were $116 million
in both 2002 and 2003, and are included primarily in operation and maintenance
expenses.
(6) LONG-TERM DEBT AND SHORT-TERM BORROWINGS
DECEMBER 31, 2002 DECEMBER 31, 2003
---------------------- ---------------------
LONG-TERM CURRENT(1) LONG-TERM CURRENT(1)
--------- -------- --------- --------
(IN MILLIONS)
Long-term debt:
First mortgage bonds 7.50% to 9.15% due 2021 to 2023(2)...... $ 615 $ -- $ 102 $ --
General mortgage bonds 5.60% to 6.95% due 2013 to 2033(2).... -- -- 1,262 --
Term loan, LIBOR plus 9.75%, due 2005(3)..................... 1,310 -- 1,310 --
Series 2001-1 Transition Bonds 3.84% to 5.63% due 2004 to
2013(4)................................................... 717 19 676 41
Other........................................................ (1) -- (2) --
--------- -------- --------- --------
Long-term debt to third parties.............................. 2,641 19 3,348 41
Notes payable to affiliate 4.90% to 6.70%(5)................. 916 167 380 --
Short-term borrowings from affiliates.......................... -- 48 -- 113
--------- -------- --------- --------
Total borrowings.......................................... $ 3,557 $ 234 $ 3,728 $ 154
========= ======== ========= ========
- ----------
(1) Includes amounts due within one year of the date noted.
(2) Excludes $380 million of first mortgage bonds and $527 million of general
mortgage bonds that the Company
42
has issued as collateral for long-term debt of CenterPoint Energy and $1.3
billion of general mortgage bonds that the Company has issued as collateral
for its $1.3 billion term loan. Debt issued as collateral is excluded from
the financial statements because of the contingent nature of the
obligation.
(3) Under the term loan, the London interbank offered rate (LIBOR) rate is
subject to a floor of 3%. This collateralized term loan is secured by the
Company's general mortgage bonds.
(4) The Series 2001-1 Transition Bonds were issued by one of the Company's
subsidiaries, and are non-recourse to the Company. For further discussion
of the securitization financing, see Note 4(a).
(5) Notes payable to affiliate at December 31, 2003 have the same principal
amounts and interest rates as pollution control bond obligations of
CenterPoint Energy that are secured by first mortgage bonds of the Company.
Assumption and Release of Certain Debt
In connection with the Restructuring, Reliant Energy transferred assets and
subsidiaries to CenterPoint Energy or its subsidiaries and became a subsidiary
of CenterPoint Energy. As part of the Restructuring, each share of Reliant
Energy common stock was converted into one share of CenterPoint Energy common
stock. The Company's operating subsidiaries which were distributed in connection
with the Restructuring and are presented as discontinued operations included
$2.1 billion of indebtedness. An additional $1.9 billion of indebtedness was
assumed by CenterPoint Energy at the time of the Restructuring, consisting of
$1.6 billion of debt and $0.3 billion of trust preferred securities that were
reflected in continuing operations in the Company's Consolidated Balance Sheet
as of December 31, 2001. Additionally, at Restructuring the Company issued a
$1.6 billion note payable to CenterPoint Energy. CenterPoint Energy also assumed
a $2.5 billion Senior A Credit Agreement, dated as of July 13, 2001 among
Houston Industries FinanceCo LP (a subsidiary of Reliant Energy), Reliant Energy
and the lender parties thereto, and a $1.8 billion Senior B Credit Agreement,
dated as of July 13, 2001 among Houston Industries FinanceCo LP, Reliant Energy
and the lender parties thereto.
Money Pool Borrowings
As of December 31, 2002 and December 31, 2003, the Company had borrowed
approximately $48 million and $113 million, respectively from its affiliates,
which had a weighted average interest rate of 6.2% and 5.0%, respectively. The
Company participates in a "money pool" through which it can borrow or invest on
a short-term basis. The Company is authorized to borrow up to a limit of $600
million from the money pool. Funding needs are aggregated and external borrowing
or investing is based on the net cash position. The money pool's net funding
requirements are generally met with borrowings of CenterPoint Energy. The terms
of the money pool are in accordance with requirements applicable to registered
public utility holding company systems under the Public Utility Holding Company
Act of 1935 (1935 Act) and with the orders we have received pursuant to the 1935
Act.
Long-Term Debt
On March 18, 2003, the Company issued $762 million aggregate principal
amount of general mortgage bonds composed of $450 million aggregate principal
amount of 10-year bonds with an interest rate of 5.7% and $312 million aggregate
principal amount of 30-year bonds with an interest rate of 6.95%. Proceeds were
used to redeem approximately $312 million aggregate principal amount of the
Company's first mortgage bonds and to repay $429 million of intercompany notes
payable to CenterPoint Energy. Proceeds from the note repayment were ultimately
used by CenterPoint Energy to repay $150 million aggregate principal amount of
medium-term notes maturing on April 21, 2003 and to repay borrowings under
CenterPoint Energy's prior facility, including $50 million of term loan
repayments.
On May 23, 2003, the Company issued $200 million aggregate principal amount
of 20-year general mortgage bonds with an interest rate of 5.6%. Proceeds were
used to redeem, on July 1, 2003, $200 million aggregate principal amount of the
Company's 7.5% first mortgage bonds due 2023 at 103.51% of their principal
amount.
On September 2, 2003, the Company and the lender parties thereto amended
the $1.3 billion term loan to, among other things, allow the Company to issue an
additional $500 million of debt secured by its general mortgage
43
bonds without requiring that the net proceeds be applied to prepay the loans
outstanding under that term loan.
On September 9, 2003, the Company issued $300 million aggregate principal
amount of general mortgage bonds with an interest rate of 5.75% and a maturity
date of January 15, 2014. This issuance utilized $300 million of the Company's
additional debt capacity described in the preceding paragraph. Proceeds were
used to repay approximately $258 million of intercompany notes payable to
CenterPoint Energy and to repay approximately $40 million of money pool
borrowings. Proceeds in the amount of approximately $292 million from the note
and money pool repayments were ultimately used by CenterPoint Energy to repay a
portion of the term loan under its prior facility.
In February 2004, $56 million aggregate principal amount of collateralized
5.6% pollution control bonds due 2027 and $44 million aggregate principal amount
of 4.25% collateralized insurance-backed pollution control bonds due 2017 were
issued on behalf of the Company. The pollution control bonds are collateralized
by general mortgage bonds of the Company with principal amounts, interest rates
and maturities that match the pollution control bonds. The proceeds were used to
redeem two series of 6.7% collateralized pollution control bonds with an
aggregate principal amount of $100 million issued on behalf of CenterPoint
Energy. CenterPoint Houston's 6.7% first mortgage bonds which collateralized
CenterPoint Energy's payment obligations under the refunded pollution control
bonds were retired in connection with the March 2004 redemption of the refunded
pollution control bonds. The Company's 6.7% notes payable to CenterPoint Energy
were also extinguished upon the redemption of the refunded pollution control
bonds.
At December 31, 2003, first mortgage bonds and general mortgage bonds in
aggregate principal amounts of $102 million and $1.3 billion, respectively, have
been issued directly to third parties. External debt of $1.3 billion maturing in
2005 is senior and secured by general mortgage bonds. The affiliate debt is
senior and unsecured.
The amounts, maturities and interest rates of the intercompany debt payable
to CenterPoint Energy of $380 million at December 31, 2003, effectively match
the amounts, maturities and interest rates of certain pollution control bond
obligations of CenterPoint Energy that are secured by the Company's first
mortgage bonds.
The aggregate amount of additional general mortgage bonds and first
mortgage bonds that could be issued is approximately $400 million based on
estimates of the value of the Company's property encumbered by the general
mortgage, the cost of such property, the amount of retired bonds that could be
used as the basis for issuing new bonds and the 70% bonding ratio contained in
the general mortgage. However, contractual limitations on the Company under its
term loan limit the incremental aggregate amount of first mortgage bonds and
general mortgage bonds that may be issued to $200 million. In addition, we are
contractually prohibited, subject to certain exceptions, from issuing additional
mortgage bonds.
As of December 31, 2003, outstanding first mortgage bonds and general
mortgage bonds aggregated approximately $3.6 billion as shown in the following
table. Amounts are expressed in millions.
ISSUED AS ISSUED AS COLLATERAL
ISSUED DIRECTLY TO COLLATERAL FOR THE FOR CENTERPOINT
THIRD PARTIES COMPANY'S DEBT ENERGY'S DEBT TOTAL
------------------ ------------------ -------------------- -------
First Mortgage Bonds...... $ 102 $ -- $ 380 $ 482
General Mortgage Bonds.... 1,262 1,310 527 3,099
------------- ---------- ------- -------
Total.............. $ 1,364 $ 1,310 $ 907 $ 3,581
============= ========== ======= =======
Securitization. The Company's financing subsidiary has $717 million
aggregate principal amount of outstanding transition bonds. Classes of the
transition bonds have final maturity dates of September 15, 2007, September 15,
2009, September 15, 2011 and September 15, 2015 and bear interest at rates of
3.84%, 4.76%, 5.16% and 5.63%, respectively. The transition bonds are secured by
"transition property," as defined in the Texas electric restructuring law, which
includes the irrevocable right to recover, through non-bypassable transition
charges payable by retail electric customers, qualified costs provided in the
Texas electric restructuring law. The transition bonds are reported as the
Company's long-term debt, although the holders of the transition bonds have no
recourse to any of CenterPoint Houston's assets or revenues, and the Company's
creditors have no recourse to any assets or revenues (including, without
limitation, the transition charges) of the Company's financing subsidiary. The
Company has no payment obligations with respect to the transition
44
bonds except to remit collections of transition charges as set forth in a
servicing agreement between the Company and its financing subsidiary and in an
intercreditor agreement among the Company, its financing subsidiary and other
parties.
Maturities. The Company's consolidated maturities of long-term debt are $41
million in 2004, $1,357 million in 2005, $54 million in 2006, $60 million in
2007 and $66 million in 2008.
Liens. As of December 31, 2003, the Company's assets were subject to liens
securing approximately $482 million of first mortgage bonds. Sinking or
improvement fund and replacement fund requirements on the first mortgage bonds
may be satisfied by certification of property additions. Sinking or improvement
fund and replacement fund requirements for 2001, 2002 and 2003 have been
satisfied by certification of property additions. The replacement fund
requirement satisfied in 2004 is approximately $142 million, and the sinking or
improvement fund requirement satisfied in 2004 is approximately $4 million. The
Company expects to meet these 2004 obligations by certification of property
additions. As of December 31, 2003, the Company's assets were also subject to
liens securing approximately $3.1 billion of general mortgage bonds, which are
junior to the liens of the first mortgage bonds.
(7) EMPLOYEE BENEFIT PLANS
(a) PENSION PLANS
Substantially all of the Company's employees participate in CenterPoint
Energy's qualified non-contributory pension plan. Under the cash balance
formula, participants accumulate a retirement benefit based upon 4% of eligible
earnings and accrued interest. Prior to 1999, the pension plan accrued benefits
based on years of service, final average pay and covered compensation. As a
result, certain employees participating in the plan as of December 31, 1998 are
eligible to receive the greater of the accrued benefit calculated under the
prior plan through 2008 or the cash balance formula.
CenterPoint Energy's funding policy is to review amounts annually in
accordance with applicable regulations in order to achieve adequate funding of
projected benefit obligations. Pension expense is allocated to the Company based
on covered employees. This calculation is intended to allocate pension costs in
the same manner as a separate employer plan. Assets of the plan are not
segregated or restricted by CenterPoint Energy's participating subsidiaries.
Pension benefit was $6 million for the year ended December 31, 2001. The Company
recognized pension expense of $7 million and $26 million for the years ended
December 31, 2002 and 2003, respectively.
In addition to the plan, the Company participates in CenterPoint Energy's
non-qualified benefit restoration plan, which allows participants to retain the
benefits to which they would have been entitled under the non-contributory
pension plan except for federally mandated limits on these benefits or on the
level of compensation on which these benefits may be calculated. The expense
associated with the non-qualified pension plan was less than $1 million for the
years ended December 31, 2001, 2002 and 2003, respectively.
(b) SAVINGS PLAN
The Company participates in CenterPoint Energy's qualified savings plan,
which includes a cash or deferred arrangement under Section 401(k) of the
Internal Revenue Code of 1986, as amended (the Code) and an Employee Stock
Ownership Plan (ESOP) under Section 4975(e)(7) of the Code. Under the plan,
participating employees may contribute a portion of their compensation, on a
pre-tax or after-tax basis, generally up to a maximum of 16% of compensation.
CenterPoint Energy matches 75% of the first 6% of each employee's compensation
contributed. CenterPoint Energy may contribute an additional discretionary match
of up to 50% of the first 6% of each employee's compensation contributed. These
matching contributions are fully vested at all times. A substantial portion of
the matching contribution is initially invested in CenterPoint Energy common
stock through the ESOP. CenterPoint Energy allocates to the Company the savings
plan benefit expense related to the Company's employees.
Savings plan benefit expense was $10 million, $14 million and $11 million
for the years ended December 31,
45
2001, 2002 and 2003, respectively.
(c) POSTRETIREMENT BENEFITS
The Company's employees participate in CenterPoint Energy's plans which
provide certain health care and life insurance benefits for retired employees on
a contributory and non-contributory basis. Employees become eligible for these
benefits if they have met certain age and service requirements at retirement, as
defined in the plans. Under plan amendments effective in early 1999, health care
benefits for future retirees were changed to limit employer contributions for
medical coverage. Such benefit costs are accrued over the active service period
of employees.
The Company is required to fund a portion of its obligations in accordance
with rate orders. All other obligations are funded on a pay-as-you-go basis.
On January 12, 2004, the FASB issued FSP FAS 106-1. In accordance with FSP
FAS 106-1, the Company's postretirement benefits obligations and net periodic
postretirement benefit cost in the financial statements and accompanying notes
do not reflect the effects of the legislation. Specific authoritative guidance
on the accounting for the legislation is pending and that guidance, when issued,
may require the Company to change previously reported information.
The net postretirement benefit cost includes the following components:
YEAR ENDED DECEMBER 31,
----- ----- -----
2001 2002 2003
----- ----- -----
(IN MILLIONS)
Service cost-- benefits earned during the period..... $ 1 $ 1 $ 1
Interest cost on projected benefit obligation........ 11 13 16
Expected return on plan assets....................... (6) (7) (9)
Net amortization..................................... 7 6 8
----- ----- -----
Net postretirement benefit cost...................... $ 13 $ 13 $ 16
===== ===== =====
The Company used the following assumptions to determine net postretirement
benefit costs:
YEAR ENDED
DECEMBER 31,
---------------------
2001 2002 2003
---- ---- ----
Discount rate........................................ 7.50% 7.25% 6.75%
Expected return on plan assets....................... 10.0% 9.5% 9.0%
In determining net periodic benefits cost, the Company uses fair value, as
of the beginning of the year, as its basis for determining expected return on
plan assets.
46
Following are reconciliations of the Company's beginning and ending balances
of its postretirement benefit plans benefit obligation, plan assets and funded
status for 2002 and 2003.
YEAR ENDED
DECEMBER 31,
--------------------
2002 2003
-------- --------
(IN MILLIONS)
CHANGE IN BENEFIT OBLIGATION
Accumulated benefit obligation, beginning of year ............... $ 173 $ 176
Service cost .................................................... 1 1
Interest cost ................................................... 13 16
Benefits paid ................................................... (4) (13)
Participant contributions ....................................... 2 1
Transfer from affiliate ......................................... -- 62
Plan amendments ................................................. -- (1)
Actuarial (gain) loss ........................................... (9) 30
-------- --------
Accumulated benefit obligation, end of year ..................... $ 176 $ 272
======== ========
CHANGE IN PLAN ASSETS
Plan assets, beginning of year .................................. $ 72 $ 74
Benefits paid ................................................... (4) (13)
Employer contributions .......................................... 10 10
Participant contributions ....................................... 2 1
Transfer from affiliate ......................................... -- 23
Actual investment return ........................................ (6) 16
-------- --------
Plan assets, end of year ........................................ $ 74 $ 111
======== ========
RECONCILIATION OF FUNDED STATUS
Funded status ................................................... $ (102) $ (161)
Unrecognized transition obligation .............................. 48 62
Unrecognized prior service cost ................................. 22 18
Unrecognized actuarial loss ..................................... 4 31
-------- --------
Net amount recognized ........................................... $ (28) $ (50)
======== ========
AMOUNTS RECOGNIZED IN BALANCE SHEETS
Benefit obligations ............................................. $ (28) $ (50)
-------- --------
Net amount recognized at end of year ............................ $ (28) $ (50)
======== ========
ACTUARIAL ASSUMPTIONS
Discount rate ................................................... 6.75% 6.25%
Expected long-term return on assets ............................. 9.0% 8.5%
Healthcare cost trend rate assumed for the next year ............ 11.25% 10.50%
Rate to which the cost trend rate is assumed to decline
(ultimate trend rate) ......................................... 5.5% 5.5%
Year that the rate reaches the ultimate trend rate .............. 2011 2011
Measurement date used to determine plan obligations and December December
assets ........................................................ 31, 2002 31, 2003
Assumed health care cost trend rates have a significant effect on the
reported amounts for the Company's postretirement benefit plans. A 1% change in
the assumed healthcare cost trend rate would have the following effects:
1% 1%
INCREASE DECREASE
-------- --------
(IN MILLIONS)
Effect on total of service and interest cost...... $ 1 $ 1
Effect on the postretirement benefit obligation... 19 16
47
The following table displays the weighted average asset allocations as of
December 31, 2002 and 2003 for the Company's postretirement benefit plans:
DECEMBER 31,
------------
2002 2003
---- ----
Domestic equity securities............. 35% 41%
International equity securities........ 8 9
Debt securities........................ 54 48
Cash................................... 3 2
--- ---
Total.............................. 100% 100%
=== ===
In managing the investments associated with the postretirement benefit
plan, the Company's objective is to preserve and enhance the value of plan
assets while maintaining an acceptable level of volatility. These objectives are
expected to be achieved through an investment strategy, which manages liquidity
requirements while maintaining a long-term horizon in making investment
decisions and efficient and effective management of plan assets.
As part of the investment strategy discussed above, the Company has adopted
and maintains the following asset allocation targets for its postretirement
benefit plans:
Domestic equity securities............... 27-37%
International equity securities.......... 5-15%
Debt securities.......................... 53-63%
Cash..................................... 0- 2%
The expected rate of return assumption was developed by reviewing the
targeted asset allocations and historical index performance of the applicable
asset classes over a 15-year period, adjusted for investment fees and
diversification effects.
The Company expects to contribute $11 million to its postretirement
benefits plan in 2004.
(d) POSTEMPLOYMENT BENEFITS
The Company participates in CenterPoint Energy's plan which provides
postemployment benefits for former or inactive employees, their beneficiaries
and covered dependents, after employment but before retirement (primarily health
care and life insurance benefits for participants in the long-term disability
plan). Postemployment benefits costs were $3 million, $6 million and $3 million
in 2001, 2002 and 2003, respectively.
(e) OTHER NON-QUALIFIED PLANS
The Company participates in CenterPoint Energy's deferred compensation
plans that provide benefits payable to directors, officers and certain key
employees or their designated beneficiaries at specified future dates, upon
termination, retirement or death. Benefit payments are made from the general
assets of the Company. During 2001, 2002 and 2003, the Company recorded benefit
expense relating to these programs of $2 million each year. Included in "Benefit
Obligations" in the accompanying Consolidated Balance Sheets at December 31,
2002 and 2003 was $19 million and $18 million, respectively, relating to
deferred compensation plans.
(f) OTHER EMPLOYEE MATTERS
As of December 31, 2003, the Company employed 3,008 people. Of these
employees, 43.9% are covered by collective bargaining agreements.
48
(8) INCOME TAXES
The Company's current and deferred components of income tax expense are as
follows:
YEAR ENDED DECEMBER 31,
-----------------------------
2001 2002 2003
-------- ------- -------
(IN MILLIONS)
Federal
Total current....... $ 360 $ (62) $ (152)
Total deferred...... (132) 348 382
-------- ------- -------
Income tax expense.... $ 228 $ 286 $ 230
======== ======= =======
A reconciliation of the federal statutory income tax rate to the effective
income tax rate is as follows:
YEAR ENDED DECEMBER 31,
-------------------------------
2001 2002 2003
------- ------- -------
(IN MILLIONS)
Income from continuing operations before income taxes....... $ 674 $ 833 $ 662
Federal statutory rate.................................... 35% 35% 35%
------- ------- -------
Income tax expense at statutory rate........................ 236 292 232
------- ------- -------
Increase (decrease) in tax resulting from:
Amortization of investment tax credit..................... (5) (5) (7)
Excess deferred taxes..................................... -- (2) (4)
AFUDC Equity.............................................. (2) -- --
Other, net................................................ (1) 1 9
------- ------- -------
Total.................................................. (8) (6) (2)
------- ------- -------
Income tax expense.......................................... $ 228 $ 286 $ 230
======= ======= =======
Effective Rate.............................................. 33.8% 34.3% 34.8%
Following are the Company's tax effects of temporary differences between
the carrying amounts of assets and liabilities in the financial statements and
their respective tax bases:
DECEMBER 31,
--------------------
2002 2003
--------- ---------
(IN MILLIONS)
Deferred tax assets:
Non-current:
Employee benefits.............................. $ 49 $ 35
Other.......................................... 2 2
--------- ---------
Total deferred tax assets................. 51 37
--------- ---------
Deferred tax liabilities:
Non-current:
Depreciation................................... 832 897
Regulatory assets, net......................... 621 925
Other.......................................... 17 15
--------- ---------
Total deferred tax liabilities............ 1,470 1,837
--------- ---------
Accumulated deferred income taxes, net.... $ 1,419 $ 1,800
========= =========
The Company is included in the consolidated income tax returns of
CenterPoint Energy. Centerpoint Energy's consolidated federal income tax returns
have been audited and settled through the 1996 tax year. The 1997 through 2000
consolidated federal income tax returns are currently under audit.
49
(9) COMMITMENTS AND CONTINGENCIES
(a) LEASE COMMITMENTS
The following table sets forth information concerning the Company's
obligations under non-cancelable long-term operating leases at December 31,
2003, which primarily consist of rental agreements for building space, data
processing equipment and vehicles, including major work equipment (in millions).
2004.......................... $ 6
2005.......................... 6
2006.......................... 6
2007.......................... 6
2008.......................... 3
------
Total $ 27
======
Total lease expense for all operating leases was approximately $5 million
during each of the years ended December 31, 2001, 2002 and 2003, respectively.
(b) LEGAL MATTERS
Legal Matters
Reliant Resources Indemnified Litigation.
The Company, CenterPoint Energy or their predecessor, Reliant Energy, and
certain of their former subsidiaries are named as defendants in several lawsuits
described below. Under a master separation agreement between Reliant Energy and
Reliant Resources, CenterPoint Energy and its subsidiaries are entitled to be
indemnified by Reliant Resources for any losses, including attorneys' fees and
other costs, arising out of the lawsuits described below under Electricity and
Gas Market Manipulation Cases and Other Class Action Lawsuits. Pursuant to the
indemnification obligation, Reliant Resources is defending CenterPoint Energy
and its subsidiaries to the extent named in these lawsuits. The ultimate outcome
of these matters cannot be predicted at this time.
Electricity and Gas Market Manipulation Cases. A large number of lawsuits
have been filed against numerous market participants and remain pending in both
federal and state courts in California and Nevada in connection with the
operation of the electricity and natural gas markets in California and certain
other western states in 2000-2001, a time of power shortages and significant
increases in prices. These lawsuits, many of which have been filed as class
actions, are based on a number of legal theories including violation of state
and federal antitrust laws, laws against unfair and unlawful business practices,
the federal Racketeer Influenced Corrupt Organization Act, false claims statutes
and similar theories and breaches of contracts to supply power to governmental
entities. Plaintiffs in these lawsuits, which include state officials and
governmental entities as well as private litigants, are seeking a variety of
forms of relief, including recovery of compensatory damages (in some cases in
excess of $1 billion), a trebling of compensatory damages and punitive damages,
injunctive relief, restitution, interest due, disgorgement, civil penalties and
fines, costs of suit, attorneys' fees and divestiture of assets. To date, some
of these complaints have been dismissed by the trial court and are on appeal,
but most of the lawsuits remain in early procedural stages. CenterPoint Energy's
former subsidiary, Reliant Resources, was a participant in the California
markets, owning generating plants in the state and participating in both
electricity and natural gas trading in that state and in western power markets
generally. Reliant Resources, some of its subsidiaries and in some cases,
corporate officers of some of those companies, have been named as defendants in
these suits. The Company, CenterPoint Energy or their predecessor, Reliant
Energy, have also been named in approximately 25 of these lawsuits, which were
instituted in 2002 and 2003 and are pending in state courts in San Diego, San
Francisco and Los Angeles Counties and in federal district courts in San
Francisco, San Diego, Los Angeles and Nevada. However, neither CenterPoint
Energy nor Reliant Energy was a participant in the electricity or natural gas in
California. The Company and Reliant Energy have been dismissed from certain of
the lawsuits, either voluntarily by the plaintiffs or by order of the court and
the Company believes it is not a proper defendant in the remaining cases and
will continue to seek dismissal from the remaining cases.
Other Class Action Lawsuits. Fifteen class action lawsuits filed in May,
June and July 2002 on behalf of purchasers of securities of Reliant Resources
and/or Reliant Energy have been consolidated in federal district court
50
in Houston. Reliant Resources and certain of its former and current executive
officers are named as defendants. Reliant Energy is also named as a defendant in
seven of the lawsuits. Two of the lawsuits also name as defendants the
underwriters of the initial public offering of Reliant Resources common stock in
May 2001 (Reliant Resources Offering). One lawsuit names Reliant Resources' and
Reliant Energy's independent auditors as a defendant. The consolidated amended
complaint seeks monetary relief purportedly on behalf of purchasers of common
stock of Reliant Energy or Reliant Resources during certain time periods ranging
from February 2000 to May 2002, including purchasers of common stock that can be
traced to the Reliant Resources Offering. The plaintiffs allege, among other
things, that the defendants misrepresented their revenues and trading volumes by
engaging in round-trip trades and improperly accounted for certain structured
transactions as cash-flow hedges, which resulted in earnings from these
transactions being accounted for as future earnings rather than being accounted
for as earnings in fiscal year 2001. In January 2004 the trial judge dismissed
the plaintiffs' allegations that the defendants had engaged in fraud but claims
based on alleged misrepresentations in the registration statement issued in the
Reliant Resources Offering remain.
In February 2003, a lawsuit was filed by three individuals in federal
district court in Chicago against CenterPoint Energy and certain former and
current officers of Reliant Resources for alleged violations of federal
securities laws. The plaintiffs in this lawsuit allege that the defendants
violated federal securities laws by issuing false and misleading statements to
the public, and that the defendants made false and misleading statements as part
of an alleged scheme to inflate artificially trading volumes and revenues. In
addition, the plaintiffs assert claims of fraudulent and negligent
misrepresentation and violations of Illinois consumer law. In January 2004 the
trial judge ordered dismissal of plaintiffs' claims on the ground that they did
not set forth a claim, but granted the plaintiffs leave to amend their
complaint.
In May 2002, three class action lawsuits were filed in federal district
court in Houston on behalf of participants in various employee benefits plans
sponsored by Reliant Energy. Reliant Energy and its directors are named as
defendants in all of the lawsuits. Two of the lawsuits have been dismissed
without prejudice. The remaining lawsuit alleges that the defendants breached
their fiduciary duties to various employee benefits plans, directly or
indirectly sponsored by Reliant Energy, in violation of the Employee Retirement
Income Security Act. The plaintiffs allege that the defendants permitted the
plans to purchase or hold securities issued by Reliant Energy when it was
imprudent to do so, including after the prices for such securities became
artificially inflated because of alleged securities fraud engaged in by the
defendants. The complaints seek monetary damages for losses suffered on behalf
of the plans and a putative class of plan participants whose accounts held
Reliant Energy or Reliant Resources securities, as well as equitable relief in
the form of restitution. In January 2004 the trial judge dismissed the
complaints against a number of defendants, but allowed the case to proceed
against members of the Reliant Energy benefits committee.
In October 2002, a derivative action was filed in the federal district
court in Houston, against the directors and officers of CenterPoint Energy. The
complaint sets forth claims for breach of fiduciary duty, waste of corporate
assets, abuse of control and gross mismanagement. Specifically, the shareholder
plaintiff alleges that the defendants caused CenterPoint Energy to overstate its
revenues through so-called "round trip" transactions. The plaintiff also alleges
breach of fiduciary duty in connection with the spin-off of Reliant Resources
and the Reliant Resources Offering. The complaint seeks monetary damages on
behalf of CenterPoint Energy as well as equitable relief in the form of a
constructive trust on the compensation paid to the defendants. In March 2003,
the court dismissed this case on the grounds that the plaintiff did not make an
adequate demand on the CenterPoint Energy before filing suit. Thereafter, the
plaintiff sent another demand asserting the same claims.
CenterPoint Energy's board of directors investigated that demand and
similar allegations made in a June 28, 2002 demand letter sent on behalf of a
CenterPoint Energy shareholder. The latter letter demanded that CenterPoint
Energy take several actions in response to alleged round-trip trades occurring
in 1999, 2000, and 2001. In June 2003, the Board determined that these proposed
actions would not be in the best interests of CenterPoint Energy.
CenterPoint Energy believes that none of the lawsuits described under
"Other Class Action Lawsuits" has merit because, among other reasons, the
alleged misstatements and omissions were not material and did not result in any
damages to any of the plaintiffs.
51
Other Legal Matters
Texas Antitrust Action. In July 2003, Texas Commercial Energy filed a
lawsuit against Reliant Energy, Reliant Resources, Reliant Electric Solutions,
LLC, several other Reliant Resources subsidiaries and several other participants
in the ERCOT power market in federal court in Corpus Christi, Texas. The
plaintiff, a retail electricity provider in the Texas market served by ERCOT,
alleges that the defendants conspired to illegally fix and artificially increase
the price of electricity in violation of state and federal antitrust laws and
committed fraud and negligent misrepresentation. The lawsuit seeks damages in
excess of $500 million, exemplary damages, treble damages, interest, costs of
suit and attorneys' fees. In February 2004, this complaint was amended to add
the Company and CenterPoint Energy, as successors to Reliant Energy, and Texas
Genco, LP as defendants. The plaintiff's principal allegations have previously
been investigated by the Texas Utility Commission and found to be without merit.
The Company also believes the plaintiff's allegations are without merit and will
seek their dismissal.
Municipal Franchise Fee Lawsuits. In February 1996, the cities of Wharton,
Galveston and Pasadena (Three Cities) filed suit, for themselves and a proposed
class of all similarly situated cities in Reliant Energy's electric service
area, against Reliant Energy and Houston Industries Finance, Inc. (formerly a
wholly owned subsidiary of the Company's predecessor, Reliant Energy) alleging
underpayment of municipal franchise fees. The plaintiffs claimed that they were
entitled to 4% of all receipts of any kind for business conducted within these
cities over the previous four decades. After a jury trial of the original
claimant cities (but not the class of cities), the trial court decertified the
class and reduced the damages awarded by the jury to $1.7 million, including
interest, plus an award of $13.7 million in legal fees. Despite other jury
findings for the plaintiffs, the trail court's judgment was based on the jury's
finding in favor of Reliant Energy on the affirmative defense of laches, a
defense similar to a statute of limitations defense, due to the original
claimant cities having unreasonably delayed bringing their claims during the 43
years since the alleged wrongs began. Following this ruling, 45 cities filed
individual suits against Reliant Energy in the District Court of Harris County.
On February 27, 2003, a state court of appeals in Houston rendered an
opinion reversing the judgment against the CenterPoint Energy and rendering
judgment that the Three Cities take nothing by their claims. The court of
appeals found that the jury's finding of laches barred all of the Three Cities'
claims and that the Three Cities were not entitled to recovery of any attorneys'
fees. The Three Cities filed a petition for review at the Texas Supreme Court
which declined to hear the case, although the time period for the Three Cities
to file a motion for rehearing has not yet expired. The extent to which issues
in the Three Cities case may affect the claims of the other cities served by the
Company cannot be assessed until judgments are final and no longer subject to
appeal.
Other Proceedings
The Company is involved in other legal, environmental, tax and regulatory
proceedings before various courts, regulatory commissions and governmental
agencies regarding matters arising in the ordinary course of business. Some of
these proceedings involve substantial amounts. The Company's management
regularly analyzes current information and, as necessary, provides accruals for
probable liabilities on the eventual disposition of these matters. The Company's
management believes that the disposition of these matters will not have a
material adverse effect on the Company's financial condition, results of
operations or cash flows.
(10) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of cash and cash equivalents and short-term borrowings are
estimated to be equivalent to carrying amounts and have been excluded from the
table below.
DECEMBER 31, 2002 DECEMBER 31, 2003
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
(IN MILLIONS)
Financial liabilities:
Long-term debt (excluding capital leases).... $ 3,742 $ 3,828 $ 3,768 $ 3,908
52
(11) UNAUDITED QUARTERLY INFORMATION
Summarized quarterly financial data is as follows:
YEAR ENDED DECEMBER 31, 2002
--------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- ------- ------- -------
(IN MILLIONS)
Revenues................................................... $ 568 $ 528 $ 660 $ 466
Operating income........................................... 254 275 399 168
Income from continuing operations.......................... 132 139 228 48
Income (loss) from discontinued operations, net of tax..... (100) 97 135 --
Net income................................................. 32 236 363 48
YEAR ENDED DECEMBER 31, 2003
--------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- ------- ------- -------
(IN MILLIONS)
Revenues................................................... $ 447 $ 482 $ 653 $ 542
Operating income........................................... 206 235 383 196
Net income................................................. 80 99 194 59
53
INDEPENDENT AUDITORS' REPORT
To the Member of CenterPoint Energy Houston Electric, LLC and subsidiaries:
We have audited the accompanying consolidated balance sheets of CenterPoint
Energy Houston Electric, LLC (formerly Reliant Energy, Incorporated) and its
subsidiaries (CenterPoint Houston) as of December 31, 2002 and 2003, and the
related consolidated statements of income, comprehensive income, stockholder's
and member's equity and cash flows for each of the three years in the period
ended December 31, 2003. Our audits also included CenterPoint Houston's
financial statement schedule listed in Item 15(a)(2). These financial statements
and the financial statement schedule are the responsibility of CenterPoint
Houston's management. Our responsibility is to express an opinion on these
financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of CenterPoint Houston at December
31, 2002 and 2003, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 2003 in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the
Company distributed its ownership interest in subsidiaries on August 31, 2002.
The results of operations of these subsidiaries for periods prior to the
distribution are included in discontinued operations in the accompanying
consolidated financial statements.
DELOITTE & TOUCHE LLP
Houston, Texas
March 12, 2004
54
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an
evaluation, under the supervision and with the participation of management,
including our principal executive officer and principal financial officer, of
the effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report. Based on that evaluation, our principal executive
officer and principal financial officer concluded that our disclosure controls
and procedures were effective as of December 31, 2003 to provide assurance that
information required to be disclosed in our reports filed or submitted under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms.
There has been no change in our internal controls over financial reporting
that occurred during the three months ended December 31, 2003 that has
materially affected, or is reasonably likely to materially affect, our internal
controls over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information called for by Item 10 is omitted pursuant to Instruction
I(2) to Form 10-K (Omission of Information by Certain Wholly Owned
Subsidiaries).
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 11 is omitted pursuant to Instruction
I(2) to Form 10-K (Omission of Information by Certain Wholly Owned
Subsidiaries).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED SECURITY HOLDER MATTERS
The information called for by Item 12 is omitted pursuant to Instruction
I(2) to Form 10-K (Omission of Information by Certain Wholly Owned
Subsidiaries).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Item 13 is omitted pursuant to Instruction
I(2) to Form 10-K (Omission of Information by Certain Wholly Owned
Subsidiaries).
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Aggregate fees billed to the Company during the fiscal years ending
December 31, 2002 and 2003 by its principal accounting firm, Deloitte & Touche
LLP, are set forth below. These fees do not include certain fees related to
general corporate matters, financial reporting, tax and other fees which have
not been allocated to the Company by CenterPoint Energy.
YEAR ENDED DECEMBER 31,
---------------------------
2002 2003
------------ ------------
Audit fees.................................. $205,000 $395,900
Audit-related fees(1)....................... 32,600 20,000
-------- --------
Total audit and audit-related fees..... 237,600 415,900
Tax fees.................................... -- --
All other fees.............................. -- --
-------- --------
Total fees............................. $237,600 $415,900
======== ========
- ------------
(1) Agreed upon procedures with respect to securitization financing.
The Company is not required to and does not have an audit committee.
55
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements.
Statements of Consolidated Income for the Three Years Ended December 31, 2003....... 28
Statements of Consolidated Comprehensive Income for the Three Years Ended December
31, 2003........................................................................... 29
Consolidated Balance Sheets at December 31, 2003 and 2002........................... 30
Statements of Consolidated Cash Flows for the Three Years Ended December 31, 2003... 31
Statements of Consolidated Stockholder's and Member's Equity for the Three Years
Ended December 31, 2003............................................................ 32
Notes to Consolidated Financial Statements.......................................... 33
Independent Auditors' Report........................................................ 54
(a)(2) Financial Statement Schedules for the Three Years Ended December 31, 2003.
II-- Qualifying Valuation Accounts.................................................. 57
The following schedules are omitted because of the absence of the
conditions under which they are required or because the required information is
included in the financial statements:
I, III, IV and V.
(a)(3) Exhibits
See Index of Exhibits on page 59.
(b) Reports on Form 8-K.
On March 3, 2004, we filed a Current Report on Form 8-K dated March 3, 2004
to furnish under Item 9 of that form a slide presentation we expect will be
presented to various members of the financial and investment community from time
to time.
On March 10, 2004, we filed a Current Report on Form 8-K dated March 4,
2004 to report the administrative law judge's recommendation regarding our final
fuel reconciliation proceeding and its effect on our previously reported 2003
earnings.
56
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
SCHEDULE II -- QUALIFYING VALUATION ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 2003
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ---------------------------------------------- ---------- ------------ ----------- ----------
ADDITIONS
------------
BALANCE AT DEDUCTIONS BALANCE AT
BEGINNING CHARGED FROM END OF
DESCRIPTION OF PERIOD TO INCOME RESERVES(1) PERIOD
- ---------------------------------------------- ---------- ------------ ----------- ----------
Year Ended December 31, 2003:
Accumulated provisions:
Uncollectible accounts receivable........ $ 4,726 $ 324 $ 2,225 $ 2,825
Year Ended December 31, 2002:
Accumulated provisions:
Uncollectible accounts receivable........ 13,000 10,492 18,766 4,726
Year Ended December 31, 2001:
Accumulated provisions:
Uncollectible accounts receivable........ 5,146 13,000 5,146 13,000
- ----------
(1) Deductions from reserves represent losses or expenses for which the
respective reserves were created. In the case of the uncollectible accounts
reserve, such deductions are net of recoveries of amounts previously
written off.
57
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Houston, the State of Texas, on the 12th day of March, 2004.
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC
(Registrant)
By: /s/ DAVID M. MCCLANAHAN
---------------------------
David M. McClanahan
Manager
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 12, 2004.
SIGNATURE TITLE
- ------------------------------------------------- --------------------------------------------------------
/s/ DAVID M. MCCLANAHAN Manager
- ------------------------------------------------- (Principal Executive Officer)
(David M. McClanahan)
/s/ GARY L. WHITLOCK Executive Vice President and Chief Financial Officer
- ------------------------------------------------- (Principal Financial Officer)
(Gary L. Whitlock)
/s/ JAMES S. BRIAN Senior Vice President and Chief Accounting Officer
- ------------------------------------------------- (Principal Accounting Officer)
(James S. Brian)
58
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC
EXHIBITS TO THE ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 2003
INDEX OF EXHIBITS
Exhibits not incorporated by reference to a prior filing are designated by
a cross (+); all exhibits not so designated are incorporated herein by reference
to a prior filing as indicated.
SEC FILE OR
EXHIBIT REGISTRATION EXHIBIT
NUMBER DESCRIPTION REPORT OR REGISTRATION STATEMENT NUMBER REFERENCE
- ------------- ------------------------------- ------------------------------------ ------------ ---------
2(a) Agreement and Plan of Joint Proxy Statement/ 333-69502 Annex A
Merger among Reliant Prospectus of REI contained in
Energy, Incorporated Registration Statement on Form
("REI"), CenterPoint S-4
Energy, Inc. ("CNP") and
Reliant Energy MergerCo,
Inc. dated as of October
19, 2001
3(a) Articles of Conversion of Form 8-K dated August 31, 2002 1-3187 3(a)
REI filed with the SEC on September
3, 2002
3(b) Articles of Organization of Form 8-K dated August 31, 2002 1-3187 3(b)
CenterPoint Energy Houston filed with the SEC on September
Electric, LLC ("CenterPoint 3, 2002
Houston")
3(c) Limited Liability Company Form 8-K dated August 31, 2002 1-3187 3(c)
Regulations of CenterPoint filed with the SEC on September
Houston 3, 2002
4(a)(1) Mortgage and Deed of Trust, HL&P's Form S-7 filed on August 2-59748 2(b)
dated November 1, 1944 25, 1977
between Houston Lighting
and Power Company ("HL&P")
and Chase Bank of Texas,
National Association
(formerly, South Texas
Commercial National Bank of
Houston), as Trustee, as
amended and supplemented by
20 Supplemental Indentures
thereto
4(a)2) Twenty-First through HL&P's Form 10-K for the year 1-3187 4(a)(2)
Fiftieth Supplemental Ended December 31, 1989
Indentures to Exhibit
4(a)(1)
4(a)(3) Fifty-First Supplemental HL&P's Form 10-Q for the quarter 1-3187 4(a)
Indenture to Exhibit Ended June 30, 1991
4(a)(1) dated as of March
25, 1991
4(a)(4) Fifty-Second through Fifty- HL&P's Form 10-Q for the quarter 1-3187 4
Fifth Supplemental Ended March 31, 1992
Indentures to Exhibit
4(a)(1) each dated as of
March 1, 1992
4(a)(5) Fifty-Sixth and HL&P's Form 10-Q for the quarter 1-3187 4
Fifty-Seventh Supplemental Ended September 30, 1992
Indentures to Exhibit
4(a)(1) each dated as of
October 1, 1992
4(a)(6) Fifty-Eighth and HL&P's Form 10-Q for the quarter 1-3187 4
Fifty-Ninth Supplemental Ended March 31, 1993
Indentures to Exhibit
4(a)(1) each dated as of
March 1, 1993
4(a)(7) Sixtieth Supplemental HL&P's Form 10-Q for the quarter 1-3187 4
Indenture to Exhibit Ended June 30, 1993
4(a)(1) dated as of July 1,
1993
59
SEC FILE OR
EXHIBIT REGISTRATION EXHIBIT
NUMBER DESCRIPTION REPORT OR REGISTRATION STATEMENT NUMBER REFERENCE
- ------------- ------------------------------- ------------------------------------ ------------ ---------
4(a)(8) Sixty-First through Sixty- HL&P's Form 10-K for the year 1-3187 4(a)(8)
Third Supplemental Ended December 31, 1993
Indentures to Exhibit
4(a)(1) each dated as of
December 1, 1993
4(a)(9) Sixty-Fourth and HL&P's Form 10-K for the year 1-3187 4(a)(9)
Sixty-Fifth Supplemental Ended December 31, 1995
Indentures to Exhibit
4(a)(1) each dated as of
July 1, 1995
4(b)(1) General Mortgage Indenture, Quarterly Report on Form 10-Q 1-3187 4(j)(1)
dated as of October 10, for the quarterly period ended
2002, between CenterPoint September 30, 2002
Energy Houston Electric,
LLC and JPMorgan Chase
Bank, as Trustee
4(b)(2) First Supplemental Quarterly Report on Form 10-Q 1-3187 4(j)(2)
Indenture to Exhibit for the quarterly period ended
4(b)(1), dated as of September 30, 2002
October 10, 2002
4(b)(3) Second Supplemental Quarterly Report on Form 10-Q 1-3187 4(j)(3)
Indenture to Exhibit for the quarterly period ended
4(b)(1), dated as of September 30, 2002
October 10, 2002
4(b)(4) Third Supplemental Quarterly Report on Form 10-Q 1-3187 4(j)(4)
Indenture to Exhibit for the quarterly period ended
4(b)(1), dated as of September 30, 2002
October 10, 2002
4(b)(5) Fourth Supplemental Quarterly Report on Form 10-Q 1-3187 4(j)(5)
Indenture to Exhibit for the quarterly period ended
4(b)(1), dated as of September 30, 2002
October 10, 2002
4(b)(6) Fifth Supplemental Quarterly Report on Form 10-Q 1-3187 4(j)(6)
Indenture to Exhibit for the quarterly period ended
4(b)(1), dated as of September 30, 2002
October 10, 2002
4(b)(7) Sixth Supplemental Quarterly Report on Form 10-Q 1-3187 4(j)(7)
Indenture to Exhibit for the quarterly period ended
4(b)(1), dated as of September 30, 2002
October 10, 2002
4(b)(8) Seventh Supplemental Quarterly Report on Form 10-Q 1-3187 4(j)(8)
Indenture to Exhibit for the quarterly period ended
4(b)(1), dated as of September 30, 2002
October 10, 2002
4(b)(9) Eighth Supplemental Quarterly Report on Form 10-Q 1-3187 4(j)(9)
Indenture to Exhibit for the quarterly period ended
4(b)(1), dated as of September 30, 2002
October 10, 2002
4(b)(10) Officer's Certificates dated CNP's Form 10-K for the year ended 1-31447 4(c)(10)
October 10, 2002, setting December 31, 2003
forth the form, terms and
provisions of the First through
Eighth Series of General
Mortgage Bonds
4(b)(11) Ninth Supplemental Indenture to Annual Report on Form 10-K 1-3187 4(k)(10)
Exhibit 4(b)(1), dated as of for the year ended December 31, 2002
November 12, 2002
4(b)(12) Officer's Certificate dated CNP's Form 10-K for the year ended 1-31447 4(e)(12)
October 10, 2002, setting December 31, 2003
forth the form, terms and
provisions of the Ninth Series
of General Mortgage Bonds
4(b)(13) Tenth Supplemental Indenture to Form 8-K dated March 13, 2003 1-3187 4.1
Exhibit 4(b)(1), dated as of
March 18, 2003
4(b)(14) Officer's Certificate dated March Form 8-K dated March 13, 2003 1-3187 4.2
18, 2003 setting forth the form,
terms and provisions of the Tenth
Series and Eleventh Series of
General Mortgage Bonds
4(b)(15) Eleventh Supplemental Indenture to Form 8-K dated May 16, 2003 1-3187 4.1
Exhibit 4(b)(1), dated as of
May 23, 2003
4(b)(16) Officer's Certificate dated May Form 8-K dated May 16, 2003 1-3187 4.2
23, 2003 setting forth the form,
terms and provisions of the
Twelfth Series of General Mortgage
Bonds
4(b)(17) Twelfth Supplemental Indenture to Form 8-K dated September 9, 2003 1-3187 4.2
Exhibit 4(b)(1), dated as of
September 9, 2003
4(b)(18) Officer's Certificate dated Form 8-K dated September 9, 2003 1-3187 4.3
September 9, 2003 setting forth
the form, terms and provisions of
the Thirteenth Series of General
Mortgage Bonds
Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, CenterPoint Houston
has not filed as exhibits to this Form 10-K certain long-term debt instruments,
including indentures, under which the total amount of securities authorized does
not exceed 10% of the total assets of CenterPoint Houston and its subsidiaries
on a consolidated basis. CenterPoint Houston hereby agrees to furnish a copy of
any such instrument to the SEC upon request.
60
SEC FILE OR
EXHIBIT REGISTRATION EXHIBIT
NUMBER DESCRIPTION REPORT OR REGISTRATION STATEMENT NUMBER REFERENCE
- ------------- ------------------------------- ------------------------------------ ------------ ---------
10(a)(1) $1,310,000,000 Credit Annual Report on Form 10-K 1-3187 4(c)(1)
Agreement, dated as of for the year ended December 31, 2002
November 12, 2002, among
CenterPoint Houston and the
banks named therein
10(a)(2) First Amendment to Exhibit CNP's Form 10-Q for the quarter ended 1-31447 10.7
10(a)(1), dated as of September September 30, 2003
3, 2003
10(a)(3) Pledge Agreement, dated as Annual Report on Form 10-K 1-3187 4(c)(2)
of November 12, 2002 for the year ended December 31, 2002
executed in connection with
Exhibit 10(a)(1)
+12 Computation of Ratio of
Earnings to Fixed Charges
+31.1 Rule 13a-14(a)/15d-14(a)
Certification of David M.
McClanahan
+31.2 Rule 13a-14(a)/15d-14(a)
Certification of Gary L. Whitlock
+32.1 Section 1350 Certification of
David M. McClanahan
+32.2 Section 1350 Certification of
Gary L. Whitlock
61
EXHIBIT 12
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(THOUSANDS OF DOLLARS)
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1999 2000 2001 2002 2003
--------- --------- --------- ----------- -----------
Income from continuing operations ................... $ 277,240 $ 490,987 $ 445,955 $ 547,450 $ 431,772
Income taxes for continuing operations .............. 142,786 233,367 227,811 285,882 230,401
Capitalized interest ................................ (8,784) (7,959) (8,941) (3,672) (3,179)
Preference security dividend requirements of
subsidiary ..................................... (591) (576) (1,296) -- --
--------- --------- --------- ----------- -----------
410,651 715,819 663,529 829,660 658,994
--------- --------- --------- ----------- -----------
Fixed charges, as defined:
Interest ......................................... 196,791 230,385 233,344 284,898 361,312
Capitalized interest ............................. 8,784 7,959 8,941 3,672 3,179
Preference security dividend requirements
of subsidiary .................................. 591 576 1,296 -- --
Interest component of rentals charged to
operating expense .............................. 590 1,060 1,413 1,644 1,764
--------- --------- --------- ----------- -----------
Total fixed charges .............................. 206,756 239,980 244,994 290,214 366,255
--------- --------- --------- ----------- -----------
Earnings, as defined ................................ $ 617,407 $ 955,799 $ 908,523 $ 1,119,874 $ 1,025,249
========= ========= ========= =========== ===========
Ratio of earnings to fixed charges .................. 2.99 3.98 3.71 3.86 2.80
========= ========= ========= =========== ===========
EXHIBIT 31.1
CERTIFICATION
I, David M. McClanahan, certify that:
1. I have reviewed this annual report on Form 10-K of CenterPoint
Energy Houston Electric, LLC;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information
relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report
is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal control over financial reporting.
Date: March 12, 2004
By: /s/ David M. McClanahan
---------------------------------------
David M. McClanahan
Manager and Principal Executive Officer
EXHIBIT 31.2
CERTIFICATION
I, Gary L. Whitlock, certify that:
1. I have reviewed this annual report on Form 10-K of CenterPoint
Energy Houston Electric, LLC;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information
relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report
is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal control over financial reporting.
Date: March 12, 2004
By: /s/ Gary L. Whitlock
----------------------------------------------------
Gary L. Whitlock
Executive Vice President and Chief Financial Officer
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of CenterPoint Energy Houston
Electric, LLC (the "Company") on Form 10-K for the period ending December 31,
2003 (the "Report"), as filed with the Securities and Exchange Commission on the
date hereof, I, David M. McClanahan, Manager and Principal Executive Officer,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:
1. The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ David M. McClanahan
- ---------------------------------------
David M. McClanahan
Manager and Principal Executive Officer
March 12, 2004
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of CenterPoint Energy Houston
Electric, LLC (the "Company") on Form 10-K for the period ending December 31,
2003 (the "Report"), as filed with the Securities and Exchange Commission on the
date hereof, I, Gary L. Whitlock, Chief Financial Officer, certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, to the best of my knowledge, that:
1. The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ Gary L. Whitlock
- ----------------------------------------------------
Gary L. Whitlock
Executive Vice President and Chief Financial Officer
March 12, 2004