UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO _______________.
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Commission file number 1-3187
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC
(Exact name of registrant as specified in its charter)
TEXAS 22-3865106
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1111 LOUISIANA
HOUSTON, TEXAS 77002 (713) 207-1111
(Address and zip code of (Registrant's telephone number,
principal executive offices) including area code)
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CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC MEETS THE CONDITIONS SET FORTH IN
GENERAL INSTRUCTION H(1)(A) AND (B) OF FORM 10-Q AND IS THEREFORE FILING THIS
FORM 10-Q WITH THE REDUCED DISCLOSURE FORMAT.
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of October 31, 2006, all 1,000 common shares of CenterPoint Energy
Houston Electric, LLC were held by Utility Holding, LLC, a wholly owned
subsidiary of CenterPoint Energy, Inc.
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2006
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements...................................... 1
Condensed Statements of Consolidated Income
Three Months and Nine Months Ended September 30,
2005 and 2006 (unaudited)........................... 1
Condensed Consolidated Balance Sheets
December 31, 2005 and September 30, 2006
(unaudited)......................................... 2
Condensed Statements of Consolidated Cash Flows
Nine Months Ended September 30, 2005 and 2006
(unaudited)........................................ 4
Notes to Unaudited Condensed Consolidated Financial
Statements.......................................... 5
Item 2. Management's Narrative Analysis of the Results of
Operations............................................. 13
Item 4. Controls and Procedures................................... 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................... 20
Item 1A. Risk Factors........................................... 20
Item 5. Other Information...................................... 21
Item 6. Exhibits............................................... 21
i
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
From time to time we make statements concerning our expectations, beliefs,
plans, objectives, goals, strategies, future events or performance and
underlying assumptions and other statements that are not historical facts. These
statements are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Actual results may differ materially
from those expressed or implied by these statements. You can generally identify
our forward-looking statements by the words "anticipate," "believe," "continue,"
"could," "estimate," "expect," "forecast," "goal," "intend," "may," "objective,"
"plan," "potential," "predict," "projection," "should," "will," or other similar
words.
We have based our forward-looking statements on our management's beliefs
and assumptions based on information available to our management at the time the
statements are made. We caution you that assumptions, beliefs, expectations,
intentions and projections about future events may and often do vary materially
from actual results. Therefore, we cannot assure you that actual results will
not differ materially from those expressed or implied by our forward-looking
statements.
The following are some of the factors that could cause actual results to
differ materially from those expressed or implied in forward-looking statements:
- the timing and amount of our recovery of the true-up components,
including, in particular, the results of appeals to the courts of
determinations on rulings obtained to date;
- state and federal legislative and regulatory actions or developments,
including deregulation, re-regulation, changes in or application of
laws or regulations applicable to other aspects of our business;
- timely and appropriate rate actions and increases, allowing recovery
of costs and a reasonable return on investment;
- industrial, commercial and residential growth in our service territory
and changes in market demand and demographic patterns;
- 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, and the results of our financing
and refinancing efforts, including availability of funds in the debt
capital markets;
- actions by rating agencies;
- non-payment for our services due to financial distress of our
customers, including Reliant Energy, Inc. (formerly named Reliant
Resources, Inc.) (RRI);
- the ability of RRI and its subsidiaries to satisfy their obligations
to us, including indemnity obligations;
- the outcome of litigation brought by or against us;
- our ability to control costs;
- the investment performance of CenterPoint Energy, Inc.'s employee
benefit plans;
- our potential business strategies, including acquisitions or
dispositions of assets or businesses, which cannot be assured to be
completed or to have the anticipated benefits to us; and
- other factors we discuss in "Risk Factors" in Item 1A of Part I of our
Annual Report on Form 10-K for the year ended December 31, 2005, which
is incorporated herein by reference.
ii
You should not place undue reliance on forward-looking statements. Each
forward-looking statement speaks only as of the date of the particular
statement.
iii
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(MILLIONS OF DOLLARS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2005 2006 2005 2006
---- ---- ------ ------
REVENUES ........................................... $484 $533 $1,243 $1,374
---- ---- ------ ------
EXPENSES:
Operation and maintenance ....................... 156 157 448 439
Depreciation and amortization ................... 90 104 247 287
Taxes other than income taxes ................... 55 53 163 168
---- ---- ------ ------
Total ........................................ 301 314 858 894
---- ---- ------ ------
OPERATING INCOME ................................... 183 219 385 480
---- ---- ------ ------
OTHER INCOME (EXPENSE):
Interest and other finance charges .............. (78) (27) (230) (83)
Interest on transition bonds .................... (9) (32) (27) (98)
Return on true-up balance ....................... 35 -- 104 --
Other, net ...................................... 13 16 36 48
---- ---- ------ ------
Total ........................................ (39) (43) (117) (133)
---- ---- ------ ------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM .. 144 176 268 347
Income tax expense .............................. (49) (57) (90) (114)
---- ---- ------ ------
INCOME BEFORE EXTRAORDINARY ITEM ................... 95 119 178 233
Extraordinary item, net of tax .................. -- -- 30 --
---- ---- ------ ------
NET INCOME ......................................... $ 95 $119 $ 208 $ 233
==== ==== ====== ======
See Notes to the Company's Interim Condensed Financial Statements
1
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
CONDENSED CONSOLIDATED BALANCE SHEETS
(MILLIONS OF DOLLARS)
(UNAUDITED)
ASSETS
DECEMBER 31, SEPTEMBER 30,
2005 2006
------------ -------------
CURRENT ASSETS:
Cash and cash equivalents ........................ $ 40 $ 51
Accounts and notes receivable, net ............... 150 188
Accounts receivable - affiliated companies ....... -- 8
Accrued unbilled revenues ........................ 108 122
Materials and supplies ........................... 60 59
Deferred tax asset ............................... 1 --
Other ............................................ 34 46
------- -------
Total current assets .......................... 393 474
------- -------
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment .................... 6,463 6,681
Less accumulated depreciation and amortization ... (2,386) (2,517)
------- -------
Property, plant and equipment, net ............ 4,077 4,164
------- -------
OTHER ASSETS:
Other intangibles, net ........................... 38 37
Regulatory assets ................................ 2,902 2,788
Notes receivable -- affiliated companies ......... 750 750
Other ............................................ 67 34
------- -------
Total other assets ............................ 3,757 3,609
------- -------
TOTAL ASSETS ............................... $ 8,227 $ 8,247
======= =======
See Notes to the Company's Interim Condensed Financial Statements
2
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
CONDENSED CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
(MILLIONS OF DOLLARS)
(UNAUDITED)
LIABILITIES AND MEMBER'S EQUITY
DECEMBER 31, SEPTEMBER 30,
2005 2006
------------ -------------
CURRENT LIABILITIES:
Current portion of transition bond long-term debt ... $ 73 $ 147
Accounts payable .................................... 57 37
Accounts and notes payable -- affiliated companies .. 79 35
Taxes accrued ....................................... 139 95
Interest accrued .................................... 50 28
Other ............................................... 43 57
------ ------
Total current liabilities ........................ 441 399
------ ------
OTHER LIABILITIES:
Accumulated deferred income taxes, net .............. 1,400 1,335
Unamortized investment tax credits .................. 42 37
Benefit obligations ................................. 139 138
Regulatory liabilities .............................. 294 336
Notes payable -- affiliated companies ............... 151 151
Other ............................................... 44 48
------ ------
Total other liabilities .......................... 2,070 2,045
------ ------
LONG-TERM DEBT:
Transition bonds .................................... 2,407 2,260
Other ............................................... 1,591 1,591
------ ------
Total long-term debt ............................. 3,998 3,851
------ ------
COMMITMENTS AND CONTINGENCIES (NOTE 6)
MEMBER'S EQUITY:
Common stock ........................................ -- --
Paid-in capital ..................................... 1,719 1,720
Retained earnings (deficit) ......................... (1) 232
------ ------
Total member's equity ............................ 1,718 1,952
------ ------
TOTAL LIABILITIES AND MEMBER'S EQUITY ......... $8,227 $8,247
====== ======
See Notes to the Company's Interim Condensed Financial Statements
3
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(MILLIONS OF DOLLARS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
2005 2006
----- -----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .......................................................... $ 208 $ 233
Extraordinary item, net of tax ...................................... (30) --
----- -----
Income before extraordinary item .................................... 178 233
Adjustments to reconcile income before extraordinary item to net cash
provided by operating activities:
Depreciation and amortization .................................... 247 287
Amortization of deferred financing costs ......................... 23 9
Deferred income taxes ............................................ 96 (66)
Investment tax credits ........................................... (5) (5)
Changes in other assets and liabilities:
Accounts and notes receivable, net ............................ (80) (36)
Accounts receivable/payable, affiliates ....................... 20 (2)
Inventory ..................................................... (3) 1
Accounts payable .............................................. (9) (10)
Taxes receivable .............................................. 28 --
Interest and taxes accrued .................................... (54) (5)
Net regulatory assets ......................................... (152) 56
Other current assets .......................................... (6) (6)
Other current liabilities ..................................... (13) 6
Other assets .................................................. (27) 10
Other liabilities ............................................. (6) 4
Other, net ....................................................... -- 1
----- -----
Net cash provided by operating activities ..................... 237 477
----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ................................................ (196) (288)
Increase in notes receivable from affiliates ........................ (3) --
Increase in restricted cash of transition bond companies ............ -- (5)
Other, net .......................................................... -- 11
----- -----
Net cash used in investing activities ......................... (199) (282)
----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt .......................................... (48) (74)
Decrease in notes payable to affiliates ............................. -- (50)
Debt issuance costs ................................................. (2) --
Dividend to parent .................................................. -- (61)
Other, net .......................................................... 1 1
----- -----
Net cash used in financing activities ............................ (49) (184)
----- -----
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................... (11) 11
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ....................... 25 40
----- -----
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............................. $ 14 $ 51
===== =====
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Payments:
Interest, net of capitalized interest ............................... $ 263 $ 194
Income taxes ........................................................ 93 210
See Notes to the Company's Interim Condensed Financial Statements
4
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) BACKGROUND AND BASIS OF PRESENTATION
General. Included in this Quarterly Report on Form 10-Q (Form 10-Q) of
CenterPoint Energy Houston Electric, LLC are the condensed consolidated interim
financial statements and notes (Interim Condensed Financial Statements) of
CenterPoint Energy Houston Electric, LLC and its subsidiaries (collectively,
CenterPoint Houston or the Company). The Interim Condensed Financial Statements
are unaudited, omit certain financial statement disclosures and should be read
with the Annual Report on Form 10-K of CenterPoint Houston for the year ended
December 31, 2005 (CenterPoint Houston Form 10-K).
Background. The Company engages in the electric transmission and
distribution business in a 5,000-square mile area of the Texas Gulf Coast that
includes Houston. The Company is an indirect wholly owned subsidiary of
CenterPoint Energy, Inc. (CenterPoint Energy), a public utility holding company
created on August 31, 2002 as part of a corporate restructuring of Reliant
Energy, Incorporated (Reliant Energy) that implemented certain requirements of
the Texas Electric Choice Plan (Texas electric restructuring law).
CenterPoint Energy was a registered public utility holding company under
the Public Utility Holding Company Act of 1935, as amended (1935 Act). The
Energy Policy Act of 2005 (Energy Act) repealed the 1935 Act effective February
8, 2006, and since that date CenterPoint Energy and its subsidiaries have no
longer been subject to restrictions imposed under the 1935 Act. The Energy Act
includes a new Public Utility Holding Company Act of 2005 (PUHCA 2005) which
grants to the Federal Energy Regulatory Commission (FERC) authority to require
holding companies and their subsidiaries to maintain certain books and records
and make them available for review by the FERC and state regulatory authorities
in certain circumstances. On December 8, 2005, the FERC issued rules
implementing PUHCA 2005. Pursuant to those rules, on June 14, 2006, CenterPoint
Energy filed with the FERC the required notification of its status as a public
utility holding company. On October 19, 2006, the FERC adopted additional rules
regarding maintenance of books and records by utility holding companies and
additional reporting and accounting requirements for centralized service
companies that make allocations to public utilities regulated by the FERC under
the Federal Power Act. Although CenterPoint Energy provides services to its
subsidiaries through a service company, its service company is not subject to
the service company rules.
Basis of Presentation. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
The Company's Interim Condensed Financial Statements reflect all normal
recurring adjustments that are, in the opinion of management, necessary to
present fairly the financial position, results of operations and cash flows for
the respective periods. Amounts reported in the Company's Condensed Statements
of Consolidated Income are not necessarily indicative of amounts expected for a
full-year period due to the effects of, among other things, (a) seasonal
fluctuations in demand for energy, (b) timing of maintenance and other
expenditures and (c) acquisitions and dispositions of businesses, assets and
other interests.
(2) NEW ACCOUNTING PRONOUNCEMENTS
In September 2006, the Financial Accounting Standards Board (FASB) issued
SFAS No. 157, "Fair Value Measurements" (SFAS No. 157). SFAS No. 157 establishes
a framework for measuring fair value and requires expanded disclosure about the
information used to measure fair value. The statement applies whenever other
statements require, or permit, assets or liabilities to be measured at fair
value. The statement does not expand the use of fair value accounting in any new
circumstances and is effective for the Company for the year ended December 31,
2008 and for interim periods included in that year, with early adoption
encouraged. The Company does not expect the adoption of this statement to have a
material impact on its financial condition or results of operations.
5
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans - An Amendment of FASB
Statements No. 87, 88, 106 and 132(R)" (SFAS No. 158). SFAS No. 158 requires the
Company, as the sponsor of a single employer defined benefit plan, to (a)
recognize on its Balance Sheets as an asset a plan's over-funded status or as a
liability such plan's under-funded status, (b) measure a plan's assets and
obligations that determine its funded status as of the end of the Company's
fiscal year and (c) recognize changes in the funded status of a plan in the year
in which the changes occur through adjustments to other comprehensive income.
SFAS No. 158 is effective for the Company for the year ended December 31, 2006.
SFAS No. 158 is expected to require a non-cash charge to the Company's
equity to recognize previously unrecognized costs related to its postretirement
plan. The amount of the charge is unknown at this time due to possible changes
in discount rates and investment returns through year-end. However, if SFAS No.
158 had been adopted as of December 31, 2005, the charge to comprehensive income
would have been approximately $44 million (net of tax). The adoption of SFAS No.
158 will not impact the Company's compliance with debt covenants.
In July 2006, the FASB issued FASB Interpretation (FIN) No. 48, "Accounting
for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109"
(FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements in accordance with FASB
Statement No. 109, "Accounting for Income Taxes." FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition. The provisions of FIN 48 are effective for fiscal years beginning
after December 15, 2006. The Company expects to adopt FIN 48 in the first
quarter of 2007 and is currently evaluating the impact the adoption will have on
the Company's financial position.
(3) REGULATORY MATTERS
(a) Recovery of True-Up Balance.
In March 2004, the Company filed its true-up application with the Public
Utility Commission of Texas (Texas Utility Commission), requesting recovery of
$3.7 billion, excluding interest, as allowed under the Texas electric
restructuring law. In December 2004, the Texas Utility Commission issued its
final order (True-Up Order) allowing the Company to recover a true-up balance of
approximately $2.3 billion, which included interest through August 31, 2004, and
providing for adjustment of the amount to be recovered to include interest on
the balance until recovery, the principal portion of additional excess
mitigation credits returned to customers after August 31, 2004 and certain other
matters. The Company and other parties filed appeals of the True-Up Order to a
district court in Travis County, Texas. In August 2005, the court issued its
final judgment on the various appeals. In its judgment, the court affirmed most
aspects of the True-Up Order, but reversed two of the Texas Utility Commission's
rulings. The judgment would have the effect of restoring approximately $650
million, plus interest, of the $1.7 billion the Texas Utility Commission had
disallowed from the Company's initial request. The Company and other parties
appealed the district court's judgment. Oral argument to the 3rd Court of
Appeals in Austin is not expected to occur before late November 2006. No amounts
related to the district court's judgment have been recorded in the consolidated
financial statements.
Among the issues raised in the Company's appeal of the True-Up Order is the
Texas Utility Commission's reduction of the Company's stranded cost recovery by
approximately $146 million for the present value of certain deferred tax
benefits associated with its former electric generation assets. Such reduction
was considered in the Company's recording of an after-tax extraordinary loss of
$977 million in the last half of 2004. The Company believes that the Texas
Utility Commission based its order on proposed regulations issued by the
Internal Revenue Service (IRS) in March 2003 related to those tax benefits.
Those proposed regulations would have allowed utilities owning assets that were
deregulated before March 4, 2003 to make a retroactive election to pass the
benefits of Accumulated Deferred Investment Tax Credits (ADITC) and Excess
Deferred Federal Income Taxes (EDFIT) back to customers. However, in December
2005, the IRS withdrew those proposed normalization regulations and issued new
proposed regulations that do not include the provision allowing a retroactive
election to pass the tax benefits back to customers. In a recent Private Letter
Ruling (PLR) issued to a Texas utility on facts similar to the Company's, the
IRS, without referencing its proposed regulations, ruled that a normalization
violation would occur
6
if ADITC and EDFIT were required to be returned to customers. The Company
intends to seek a PLR asking the IRS whether the Texas Utility Commission's
order reducing the Company's stranded cost recovery by $146 million for ADITC
and EDFIT would cause a normalization violation. If the Company's PLR determines
that such reduction would cause a normalization violation with respect to the
ADITC and the Texas Utility Commission's order relating to such reduction is not
reversed or otherwise modified, the IRS could require the Company to pay an
amount equal to the Company's unamortized ADITC balance as of the date that the
normalization violation is deemed to have occurred. In addition, if a
normalization violation with respect to EDFIT is deemed to have occurred and the
Texas Utility Commission's order relating to such reduction is not reversed or
otherwise modified, the IRS could deny the Company the ability to elect
accelerated tax depreciation benefits beginning in the taxable year that the
normalization violation is deemed to have occurred. If a normalization violation
should ultimately be found to exist, it could have an adverse impact on the
Company's results of operations, financial condition and cash flows. However,
the Company is vigorously pursuing the appeal of this issue and will seek other
relief from the Texas Utility Commission to avoid a normalization violation. The
Texas Utility Commission has not previously required a company subject to its
jurisdiction to take action that would result in a normalization violation.
There are two ways for the Company to recover the true-up balance: by
issuing transition bonds to securitize the amounts due and/or by implementing a
competition transition charge (CTC). Pursuant to a financing order issued by the
Texas Utility Commission in March 2005 and affirmed in August 2005 by the Travis
County District Court, in December 2005, a subsidiary of the Company issued
$1.85 billion in transition bonds with interest rates ranging from 4.84 percent
to 5.30 percent and final maturity dates ranging from February 2011 to August
2020. Through issuance of the transition bonds, the Company recovered
approximately $1.7 billion of the true-up balance determined in the True-Up
Order plus interest through the date on which the bonds were issued.
In July 2005, the Company received an order from the Texas Utility
Commission allowing it to implement a CTC designed to collect approximately $596
million over 14 years plus interest at an annual rate of 11.075 percent (CTC
Order). The CTC Order authorizes the Company to impose a charge on retail
electric providers (REPs) to recover the portion of the true-up balance not
covered by the financing order. The CTC Order also allows the Company to collect
approximately $24 million of rate case expenses over three years without a
return through a separate tariff rider (Rider RCE). The Company implemented the
CTC and Rider RCE effective September 13, 2005 and began recovering
approximately $620 million. Effective September 13, 2005, the return on the CTC
portion of the true-up balance is included in the Company's tariff-based
revenues. During the three and nine months ended September 30, 2006, the Company
recognized approximately $14 million and $44 million, respectively, in operating
income from the CTC. Additionally, during the three and nine months ended
September 30, 2006, the Company recognized approximately $4 million and $10
million, respectively, of the allowed equity return not previously recorded. As
of September 30, 2006, the Company had not recorded an allowed equity return of
$237 million on its true-up balance because such return is being recognized as
it is recovered in the future.
Certain parties appealed the CTC Order to the 98th District Court in Travis
County. In May 2006, the district court issued a judgment reversing the CTC
Order in three respects. First, the court ruled that the Texas Utility
Commission had improperly relied on provisions of its rule dealing with the
interest rate applicable to CTC amounts. The district court reached that
conclusion on the grounds that the Texas Supreme Court had previously
invalidated that entire section of the rule. Second, the district court reversed
the Texas Utility Commission's ruling that allows the Company to recover through
the CTC the costs (approximately $5 million) for a panel appointed by the Texas
Utility Commission in connection with the valuation of the Company's electric
generation assets. Finally, the district court accepted the contention of one
party that the CTC should not be allocated to retail customers who have switched
to new on-site generation. The Company and CenterPoint Energy disagree with the
district court's conclusions and in May 2006 appealed the judgment to the court
of appeals and, if required, plan to seek further review from the Texas Supreme
Court. All briefs in the appeal have been filed. The Company has requested oral
argument, but no date has been set. Pending completion of judicial review and
any action required by the Texas Utility Commission following a remand from the
courts, the CTC remains in effect. The 11.075 percent interest rate in question
was applicable from the implementation of the CTC Order on September 13, 2005
until August 1, 2006, the effective date of the implementation of a new CTC in
compliance with the new rule discussed below. The ultimate outcome of this
matter cannot be predicted at this time. However, the Company does not expect
the disposition of this matter to have a material adverse effect on the
Company's or CenterPoint Energy's financial condition, results of operations or
cash flows.
7
In June 2006, the Texas Utility Commission adopted the revised rule
governing the carrying charges on unrecovered true-up balances as recommended by
its staff (Staff). The rule, which applies to the Company, reduces carrying
costs on the unrecovered CTC balance prospectively from 11.075 percent to a
weighted average cost of capital of 8.06 percent. The annualized impact on
operating income is approximately $18 million per year for the first year with
lesser impacts in subsequent years. On July 17, 2006, the Company made a
compliance filing necessary to implement the rule changes effective August 1,
2006 per the settlement agreement discussed in Note 3(d) below.
(b) Final Fuel Reconciliation.
The results of the Texas Utility Commission's final decision related to the
Company's final fuel reconciliation are a component of the True-Up Order. The
Company has appealed certain portions of the True-Up Order involving a
disallowance of approximately $67 million relating to the final fuel
reconciliation in 2003 plus interest of $10 million. The Company has fully
reserved for the disallowance and related interest accrual. A judgment was
entered by a Travis County court in May 2005 affirming the Texas Utility
Commission's decision. The Company filed an appeal to the 3rd Court of Appeals
in Austin in June 2005, and in April 2006, the 3rd Court of Appeals issued a
judgment affirming the Texas Utility Commission's decision. The Company filed an
appeal with the Texas Supreme Court in August 2006, and in October 2006, the
Texas Supreme Court requested that the Texas Utility Commission and the City of
Houston file written responses to the Company's petition for review. The Texas
Supreme Court may grant or deny the petition for review. If the petition is
denied, the Court of Appeals' judgment would become final. If the petition is
granted, the Texas Supreme Court would address the merits of the Company's
appeal. There is no deadline for the Texas Supreme Court's decisions.
(c) Remand of 2001 Unbundled Cost of Service (UCOS) Order.
The 3rd Court of Appeals in Austin remanded to the Texas Utility Commission
an issue that was decided by the Texas Utility Commission in the Company's 2001
UCOS proceeding. In its remand order, the court ruled that the Texas Utility
Commission had failed to adequately explain its basis for its determination of
certain projected transmission capital expenditures. The Court of Appeals
ordered the Texas Utility Commission to reconsider that determination on the
basis of the record that existed at the time of the Texas Utility Commission's
original order. In April 2006, the Texas Utility Commission opined orally that
the rate base should be reduced by $57 million and instructed its Staff to
quantify the effect on the Company's rates. In the settlement of the Company's
rate proceeding described in Note 3(d) below, the parties to the remand
proceeding agreed to settle all issues that could be raised in the remand. Under
the terms of that settlement, the Company implemented riders to its tariff rates
under which it will provide rate credits to retail and wholesale customers for a
total of approximately $8 million per year until a total of $32 million has been
credited to customers under those tariff riders. Those riders became effective
October 10, 2006. The Company reduced revenues and established a corresponding
regulatory liability for $32 million in the second quarter of 2006 to reflect
this obligation.
(d) Rate Case.
In October 2005, the Texas Utility Commission Staff filed a memorandum
summarizing its review of the Earnings Reports filed by electric utilities for
the calendar year ended December 31, 2004. Based on its review, the Staff
concluded that continuation of the Company's rates could result in excess retail
transmission and distribution revenues and excess wholesale transmission
revenues and recommended that the Texas Utility Commission initiate a review of
the reasonableness of existing rates.
In December 2005, the Texas Utility Commission agreed to order a rate
proceeding concerning the reasonableness of the Company's existing rates for
transmission and distribution service and required the Company to make a filing
by April 15, 2006 to justify or change those rates. In April 2006, the Company
filed cost data and other information that supported the current rates.
In July, 2006, the Company entered into a settlement agreement with the
parties to the proceeding that resolved the issues raised in this matter. The
Company filed a Stipulation and Agreement (the Agreement) with the Texas Utility
Commission in August 2006 to seek approval of that settlement agreement. On
September 5, 2006, the Texas Utility Commission issued its final order approving
the Agreement. Revised base rates and other revised tariffs became effective as
of October 10, 2006.
8
Under the terms of the Agreement, the Company's base rate revenues will be
reduced by a net of approximately $58 million per year. Also, the Company will
increase its energy efficiency expenditures by an additional $10 million per
year over the $13 million included in existing rates. The expenditures will be
made to benefit both residential and commercial customers. The Company also will
fund $10 million per year for programs providing financial assistance to
qualified low-income customers in its service territory.
The Agreement provides for a rate freeze until June 30, 2010 under which
the Company will not seek to increase its base rates and the other parties will
not petition to decrease those rates. The rate freeze is subject to adjustments
for changes related to certain transmission costs, implementation of the Texas
Utility Commission's recently-adopted change to its CTC rule and certain other
changes. The rate freeze does not apply to changes required to reflect the
result of currently pending appeals of the True-Up Order, the pending appeal of
the Texas Utility Commission's order regarding the Company's final fuel
reconciliation, the appeal of the order implementing the Company's CTC or the
implementation of transition charges associated with current and future
securitizations. In addition, the Company is not required to file annual
earnings reports for the calendar years 2006 through 2008, but is required to
file an earnings report for 2009 no later than March 1, 2010. The Company must
make a new base rate filing not later than June 30, 2010, based on a test year
ended December 31, 2009, unless the Texas Utility Commission staff and certain
cities with original jurisdiction notify the Company that such a filing is
unnecessary.
The Agreement will permit the Company to amortize its expenditures of
approximately $28 million related to Hurricane Rita over a seven-year period and
to amortize regulatory expenses of approximately $7 million over a four-year
period, both beginning in October 2006. Pursuant to the Agreement, the Texas
Utility Commission determined that franchise fees payable by the Company under
new franchise agreements with the City of Houston and certain other
municipalities in the Company's service area are deemed reasonable and
necessary, along with the revised base rates.
The Agreement also resolves all issues that could be raised in the Texas
Utility Commission's proceeding to review its decision in the Company's 2001
UCOS case. See Note 3(c) above.
(4) LONG-TERM DEBT
In March 2006, the Company replaced its $200 million five-year revolving
credit facility with a $300 million five-year revolving credit facility. The
facility has a first drawn cost of London Interbank Offered Rate (LIBOR) plus 45
basis points based on the Company's current credit ratings, as compared to LIBOR
plus 75 basis points for borrowings under the facility it replaced. The facility
contains covenants, including a debt (excluding transition bonds) to total
capitalization covenant of 65%.
Under the credit facility, an additional utilization fee of 10 basis points
applies to borrowings any time more than 50% of the facility is utilized, and
the spread to LIBOR fluctuates based on the Company's credit rating. Borrowings
under the facility are subject to customary terms and conditions. However, there
is no requirement that the Company make representations prior to borrowings as
to the absence of material adverse changes or litigation that could be expected
to have a material adverse effect. Borrowings under the credit facility are
subject to acceleration upon the occurrence of events of default that the
Company considers customary.
As of September 30, 2006, the Company had no borrowings and approximately
$4 million of outstanding letters of credit under its $300 million credit
facility. The Company was in compliance with all covenants as of September 30,
2006.
The Company has $151 million of first mortgage bonds and $527 million of
general mortgage bonds that it has issued as collateral for long-term debt of
CenterPoint Energy. These bonds are not reflected in the consolidated financial
statements because of the contingent nature of the obligations.
(5) RELATED PARTY TRANSACTIONS AND MAJOR CUSTOMERS
Related Party Transactions. The Company participates in a money pool
through which it can borrow or invest on a short-term basis. Funding needs are
aggregated and external borrowing or investing is based on the net cash
position. The net funding requirements of the money pool are expected to be met
with borrowings under CenterPoint
9
Energy's revolving credit facility or the sale of commercial paper. As of
December 31, 2005 and September 30, 2006, the Company had borrowings from the
money pool of $68 million and $18 million, respectively.
For the three months ended September 30, 2005 and 2006, the Company had net
interest income related to affiliate borrowings of $11 million and $13 million,
respectively, and $29 million and $36 million for the nine months ended
September 30, 2005 and 2006, respectively.
CenterPoint Energy provides some corporate services to the Company. The
costs of services have been charged directly to the Company using methods that
management believes are reasonable. These methods include negotiated usage
rates, dedicated asset assignment and proportionate corporate formulas based on
assets, operating 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 $30 million
and $26 million for the three-month periods ended September 30, 2005 and 2006,
respectively, and $84 million for each of the nine-month periods ended September
30, 2005 and 2006, and are included primarily in operation and maintenance
expenses.
Major Customers. During the three months ended September 30, 2005 and 2006,
revenues derived from energy delivery charges provided by the Company to
subsidiaries of Reliant Energy, Inc. (formerly Reliant Resources, Inc.) (RRI)
totaled $249 million and $225 million, respectively, and $615 million and $569
million during the nine months ended September 30, 2005 and 2006, respectively.
(6) COMMITMENTS AND CONTINGENCIES
LEGAL MATTERS
RRI Indemnified Litigation
The Company, CenterPoint Energy or their predecessor, Reliant Energy, and
certain of their former subsidiaries are named as defendants in several lawsuits
described below. Under a master separation agreement between CenterPoint Energy
and RRI, CenterPoint Energy and its subsidiaries, including the Company, are
entitled to be indemnified by RRI for any losses, including attorneys' fees and
other costs, arising out of the lawsuits described below under Electricity and
Gas Market Manipulation Cases and Other Class Action Lawsuits. Pursuant to the
indemnification obligation, RRI is defending CenterPoint Energy and its
subsidiaries to the extent named in these lawsuits. The ultimate outcome of
these matters cannot be predicted at this time.
Electricity and Gas Market Manipulation Cases. A large number of lawsuits
have been filed against numerous market participants and remain pending in
federal court in California, Colorado and Nevada and in state court 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. CenterPoint Energy's former subsidiary, RRI, was
a participant in the California markets, owning generating plants in the state
and participating in both electricity and natural gas trading in that state and
in western power markets generally.
CenterPoint Energy and/or Reliant Energy have been named in approximately
30 of these lawsuits, which were instituted between 2001 and 2006 and are
pending in California state court in San Diego County, in Nevada state court in
Clark County, in federal district court in Colorado, Nevada and the Northern
District of California and before the Ninth Circuit Court of Appeals. However,
the Company, CenterPoint Energy and Reliant Energy were not participants in the
electricity or natural gas markets in California. CenterPoint Energy and Reliant
Energy have been dismissed from certain of the lawsuits, either voluntarily by
the plaintiffs or by order of the court, and CenterPoint Energy believes it is
not a proper defendant in the remaining cases and will continue to seek
dismissal from such remaining cases.
10
To date, several of the electricity complaints have been dismissed, and
several of the dismissals have been affirmed by appellate courts. Others have
been resolved by the settlement described in the following paragraph. Four of
the gas complaints have also been dismissed based on defendants' claims of
federal preemption and the filed rate doctrine, and these dismissals have been
appealed. In June 2005, a San Diego state court refused to dismiss other gas
complaints on the same basis. The other gas cases remain in the early procedural
stages.
On August 12, 2005, RRI reached a settlement with the FERC enforcement
staff, the states of California, Washington and Oregon, California's three
largest investor-owned utilities, classes of consumers from California and other
western states, and a number of California city and county government entities
that resolves their claims against RRI related to the operation of the
electricity markets in California and certain other western states in 2000-2001.
The settlement also resolves the claims of the three states and the
investor-owned utilities related to the 2000-2001 natural gas markets. The
settlement has been approved by the FERC, by the California Public Utilities
Commission, and by the courts in which the electricity class action cases are
pending. Two parties have appealed the courts' approval of the settlement to the
California Court of Appeals. A party in the FERC proceedings filed a motion for
rehearing of the FERC's order approving the settlement, which the FERC denied on
May 30, 2006. That party has filed for review of the FERC's orders in the Ninth
Circuit Court of Appeals. CenterPoint Energy is not a party to the settlement,
but may rely on the settlement as a defense to any claims brought against it
related to the time when CenterPoint Energy was an affiliate of RRI. The terms
of the settlement do not require payment by CenterPoint Energy.
Other Class Action Lawsuits. In May 2002, three class action lawsuits were
filed in federal district court in Houston on behalf of participants in various
employee benefits plans sponsored by CenterPoint Energy. Two of the lawsuits
were dismissed without prejudice. In the remaining lawsuit, CenterPoint Energy
and certain current and former members of its benefits committee are defendants.
That lawsuit alleged that the defendants breached their fiduciary duties to
various employee benefits plans, directly or indirectly sponsored by CenterPoint
Energy, in violation of the Employee Retirement Income Security Act of 1974 by
permitting the plans to purchase or hold securities issued by CenterPoint Energy
when it was imprudent to do so, including after the prices for such securities
became artificially inflated because of alleged securities fraud engaged in by
the defendants. The complaint sought monetary damages for losses suffered on
behalf of the plans and a putative class of plan participants whose accounts
held CenterPoint Energy or RRI securities, as well as restitution. In January
2006, the federal district judge granted a motion for summary judgment filed by
CenterPoint Energy and the individual defendants. The plaintiffs appealed the
ruling to the Fifth Circuit Court of Appeals. CenterPoint Energy believes that
this lawsuit is without merit and will continue to vigorously defend the case.
However, the ultimate outcome of this matter cannot be predicted at this time.
ENVIRONMENTAL MATTERS
Asbestos. Some facilities owned by CenterPoint Energy contain or have
contained asbestos insulation and other asbestos-containing materials.
CenterPoint Energy or its subsidiaries, including the Company, have been named,
along with numerous others, as a defendant in lawsuits filed by a number of
individuals who claim injury due to exposure to asbestos. Some of the claimants
have worked at locations owned by CenterPoint Energy, but most existing claims
relate to facilities previously owned by CenterPoint Energy or its subsidiaries.
CenterPoint Energy anticipates that additional claims like those received may be
asserted in the future. In 2004, CenterPoint Energy sold its generating
business, to which most of these claims relate, to Texas Genco LLC, which is now
known as NRG Texas LP (NRG). Under the terms of the arrangements regarding
separation of the generating business from CenterPoint Energy and its sale to
Texas Genco LLC, ultimate financial responsibility for uninsured losses from
claims relating to the generating business has been assumed by Texas Genco LLC
and its successor, but CenterPoint Energy has agreed to continue to defend such
claims to the extent they are covered by insurance maintained by CenterPoint
Energy, subject to reimbursement of the costs of such defense from the
purchaser. Although their ultimate outcome cannot be predicted at this time,
CenterPoint Energy intends to continue vigorously contesting claims that it does
not consider to have merit and does not expect, based on its experience to date,
these matters, either individually or in the aggregate, to have a material
adverse effect on CenterPoint Energy's financial condition, results of
operations or cash flows.
Other Environmental. From time to time the Company has received notices
from regulatory authorities or others regarding its status as a potentially
responsible party in connection with sites found to require remediation due to
the
11
presence of environmental contaminants. In addition, the Company has been named
from time to time as a defendant in litigation related to such sites. Although
the ultimate outcome of such matters cannot be predicted at this time, the
Company does not expect, based on its experience to date, these matters, either
individually or in the aggregate, to have a material adverse effect on the
Company's financial condition, results of operations or cash flows.
OTHER PROCEEDINGS
The Company is involved in other legal, environmental, tax and regulatory
proceedings before various courts, regulatory commissions and governmental
agencies regarding matters arising in the ordinary course of business. Some of
these proceedings involve substantial amounts. The Company regularly analyzes
current information and, as necessary, provides accruals for probable
liabilities on the eventual disposition of these matters. The Company does not
expect the disposition of these matters to have a material adverse effect on the
Company's financial condition, results of operations or cash flows.
NUCLEAR DECOMMISSIONING FUND COLLECTIONS
Pursuant to regulatory requirements and its tariff, the Company, as
collection agent, collects from its transmission and distribution customers the
nuclear decommissioning charge assessed with respect to the 30.8% ownership
interest in the South Texas Project which it owned when it was part of an
integrated electric utility. Amounts collected are transferred to nuclear
decommissioning trusts maintained by the current owner of that interest in the
South Texas Project. During 2003 and 2004, $2.9 million was transferred each
year and $3.2 million was transferred in 2005. There are various investment
restrictions imposed on owners of nuclear generating stations by the Texas
Utility Commission and the Nuclear Regulatory Commission relating to nuclear
decommissioning trusts. Pursuant to the provisions of both a separation
agreement and a final order of the Texas Utility Commission relating to the 2005
transfer of ownership to Texas Genco LLC, now NRG, the Company and a subsidiary
of NRG were, until July 1, 2006, jointly administering the decommissioning funds
through the Nuclear Decommissioning Trust Investment Committee. On June 9, 2006,
the Texas Utility Commission approved an application by the Company and an NRG
subsidiary to name the NRG subsidiary as the sole fund administrator. As a
result, the Company is no longer responsible for administration of
decommissioning funds it collects as collection agent.
TAX CONTINGENCIES
The Company has established reserves for certain tax items, primarily
certain items related to employee benefits. The total amount reserved for these
tax items was approximately $12 million and $13 million as of December 31, 2005
and September 30, 2006, respectively.
(7) EMPLOYEE BENEFIT PLANS
The Company's employees participate in CenterPoint Energy's postretirement
benefits plan. The Company's net periodic cost includes the following components
relating to postretirement benefits:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ----------------
2005 2006 2005 2006
---- ---- ---- ----
(IN MILLIONS)
Service cost ........................... $-- $-- $-- $ 1
Interest cost .......................... 4 4 13 12
Expected return on plan assets ......... (3) (2) (8) (8)
Amortization of transition obligation .. 2 1 5 4
--- --- --- ---
Net periodic cost ................... $ 3 $ 3 $10 $ 9
=== === === ===
The Company expects to contribute approximately $10 million to CenterPoint
Energy's postretirement benefits plan in 2006, of which $7 million had been
contributed as of September 30, 2006.
12
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS
The following narrative analysis should be read in combination with our
Interim Condensed Financial Statements contained in this Form 10-Q.
We meet the conditions specified in General Instruction H(1)(a) and (b) to
Form 10-Q and are therefore permitted to use the reduced disclosure format for
wholly owned subsidiaries of reporting companies. Accordingly, we have omitted
from this report the information called for by Item 2 (Management's Discussion
and Analysis of Financial Condition and Results of Operations) and Item 3
(Quantitative and Qualitative Disclosures About Market Risk) of Part I and the
following Part II items of Form 10-Q: Item 2 (Unregistered Sales of Equity
Securities and Use of Proceeds), Item 3 (Defaults Upon Senior Securities) and
Item 4 (Submission of Matters to a Vote of Security Holders). The following
discussion explains material changes in our results of operations between the
three and nine months ended September 30, 2005 and the three and nine months
ended September 30, 2006. Reference is made to "Management's Narrative Analysis
of Results of Operations" in Item 7 of our Annual Report on Form 10-K for the
year ended December 31, 2005 (CenterPoint Houston Form 10-K).
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 governmental authorities having
jurisdiction over rates we charge, debt service costs, income tax expense, our
ability to collect receivables from retail electric providers and our ability to
recover our stranded costs and regulatory assets. For more information regarding
factors that may affect the future results of operations of our business, please
read "Risk Factors" in Item 1A of Part I of the CenterPoint Houston Form 10-K.
13
The following table sets forth our consolidated results of operations for
the three and nine months ended September 30, 2005 and 2006, followed by a
discussion of our consolidated results of operations based on operating income.
We have provided a reconciliation of consolidated operating income to net income
below.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2005 2006 2005 2006
---------- ---------- ---------- ----------
(IN MILLIONS, EXCEPT CUSTOMER DATA)
Revenues:
Electric transmission and distribution utility .. $ 453 $ 453 $ 1,164 $ 1,170
Transition bond companies ....................... 31 80 79 204
---------- ---------- ---------- ----------
Total revenues ............................... 484 533 1,243 1,374
---------- ---------- ---------- ----------
Expenses:
Operation and maintenance ....................... 155 155 446 436
Depreciation and amortization ................... 69 58 197 182
Taxes other than income taxes ................... 55 53 163 168
Transition bond companies ....................... 22 48 52 108
---------- ---------- ---------- ----------
Total expenses ............................... 301 314 858 894
---------- ---------- ---------- ----------
Operating income ................................... 183 219 385 480
---------- ---------- ---------- ----------
Interest and other finance charges ................. (87) (59) (257) (181)
Return on true-up balance .......................... 35 -- 104 --
Other income, net .................................. 13 16 36 48
---------- ---------- ---------- ----------
Income before income taxes and extraordinary item .. 144 176 268 347
Income tax expense ................................. (49) (57) (90) (114)
---------- ---------- ---------- ----------
Income before extraordinary item ................... 95 119 178 233
Extraordinary item, net of tax ..................... -- -- 30 --
---------- ---------- ---------- ----------
Net income ......................................... $ 95 $ 119 $ 208 $ 233
========== ========== ========== ==========
Actual gigawatt-hours (GWh) delivered:
Residential ..................................... 8,871 8,523 19,607 19,317
Total ........................................... 22,351 22,830 57,134 59,239
Average number of metered customers:
Residential ..................................... 1,690,819 1,740,079 1,675,904 1,729,348
Total ........................................... 1,921,594 1,976,559 1,904,235 1,964,189
THREE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2005
We reported operating income of $219 million for the three months ended
September 30, 2006, consisting of $187 million for the regulated electric
transmission and distribution utility (TDU) (including $14 million for the CTC)
and $32 million related to the transition bonds. For the three months ended
September 30, 2005, operating income totaled $183 million, consisting of $174
million for the TDU (including $2 million for the CTC) and $9 million related to
the transition bonds. Revenues for the TDU continue to benefit from solid
customer growth, with nearly 49,000 metered customers added since September 2005
($10 million), higher transmission cost recovery ($3 million) and recovery of
our 2004 true-up balance ($2 million). Houston experienced normal weather during
the third quarter of 2006, which created an unfavorable weather variance ($14
million) when compared to the abnormally warm weather in 2005, that
substantially offset the increases in revenues discussed above. Operation and
maintenance expense remained flat primarily due to higher tree trimming expenses
($3 million) and higher transmission costs ($3 million) offset by lower employee
benefit expenses ($4 million) and decreased corporate support services ($4
million). Depreciation and amortization expense decreased ($11 million)
primarily as a result of amortization of regulatory liabilities related to the
2004 true-up balance ($13 million), partially offset by an increase in
depreciation expense due to higher plant balances ($3 million).
NINE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2005
We reported operating income of $480 million for the nine months ended
September 30, 2006, consisting of $384 million for the TDU (including $44
million for the CTC) and $96 million related to the transition bonds. For
14
the nine months ended September 30, 2005, operating income totaled $385 million,
consisting of $358 million for the TDU (including $2 million for the CTC) and
$27 million related to the transition bonds. Revenues for the TDU increased due
to continued customer growth, with nearly 49,000 metered customers added since
September 2005 ($28 million), recovery of our 2004 true-up balance ($28 million)
and higher transmission recovery ($8 million), partially offset by the
unfavorable weather discussed above and decreased usage ($28 million) and the
impact related to the resolution of the 2001 UCOS order ($32 million). Operation
and maintenance expense decreased primarily due to a gain on the sale of land in
2006 ($14 million) and lower employee benefit and payroll-related expenses ($6
million), which was partially offset by higher transmission costs ($8 million)
and severance costs associated with staff reductions ($4 million). Depreciation
and amortization expense decreased ($15 million) primarily as a result of
amortization of regulatory liabilities related to the 2004 true-up balance ($26
million), partially offset by an increase in depreciation expense due to higher
plant balances ($8 million). Additionally, taxes other than income taxes
increased primarily due to higher franchise fees ($13 million) partially offset
by decreased property and state franchise tax ($6 million).
OTHER INCOME (EXPENSE)
Interest expense, excluding transition bond-related interest expense,
decreased $51 million and $147 million for the three months and nine months
ended September 30, 2006, respectively, due to reduced borrowing costs and
borrowing levels. Additionally, other income related to the return on the
true-up balance decreased $35 million and $104 million for the three months and
nine months ended September 30, 2006, respectively, as the return on the true-up
balance was discontinued in September 2005 and December 2005 due to the
implementation of the CTC and the sale of transition bonds, respectively.
EXTRAORDINARY ITEM
Net income for the nine months ended September 30, 2005 included an
after-tax extraordinary gain of $30 million reflecting an adjustment to the
extraordinary loss recorded in the last half of 2004 to write-down
generation-related regulatory assets as a result of the final orders issued by
the Texas Utility Commission.
CERTAIN FACTORS AFFECTING FUTURE EARNINGS
For information on other developments, factors and trends that may have an
impact on our future earnings, please read Note 3(d) to the Interim Condensed
Financial Statements for a discussion of CenterPoint Houston's rate case
settlement, "Risk Factors" in Item 1A of Part I and "Management's Narrative
Analysis of Results of Operations -- Certain Factors Affecting Future Earnings"
in Item 7 of Part II of the CenterPoint Houston Form 10-K.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity and capital requirements are affected primarily by our
results of operations, capital expenditures, debt service requirements, working
capital needs, various regulatory actions and appeals relating to such
regulatory actions. Our principal cash requirements for the remaining three
months of 2006 include approximately $90 million of capital expenditures.
We expect that borrowings under our credit facility, anticipated cash flows
from operations and intercompany borrowings will be sufficient to meet our cash
needs for the next twelve months.
Off-Balance Sheet Arrangements. Other than operating leases and first
mortgage bonds and general mortgage bonds issued as collateral for long-term
debt of CenterPoint Energy, Inc. (CenterPoint Energy) as discussed below, we
have no off-balance sheet arrangements.
Credit Facilities. In March 2006, we replaced our $200 million five-year
revolving credit facility with a $300 million five-year revolving credit
facility. The facility has a first drawn cost of London Interbank Offered Rate
(LIBOR) plus 45 basis points based on our current credit ratings, as compared to
LIBOR plus 75 basis points for borrowings under the facility it replaced. The
facility contains covenants, including a debt (excluding transition bonds) to
total capitalization covenant of 65%.
Under the credit facility, an additional utilization fee of 10 basis points
applies to borrowings any time more than 50% of the facility is utilized, and
the spread to LIBOR fluctuates based on our credit rating. Borrowings under the
facility are subject to customary terms and conditions. However, there is no
requirement that we make representations prior to borrowings as to the absence
of material adverse changes or litigation that could be expected to have a
material adverse effect. Borrowings under the credit facility are subject to
acceleration upon the occurrence of events of default that we consider
customary. We are currently in compliance with the various business and
financial covenants contained in our credit facility. As of October 31, 2006, we
had no borrowings and approximately $4 million of outstanding letters of credit
under the credit facility.
15
Temporary Investments. As of October 31, 2006, we had external temporary
investments of $50 million.
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 net funding requirements of the money pool are expected to be met
with borrowings under CenterPoint Energy's revolving credit facility or the sale
of commercial paper. At October 31, 2006, we had no borrowings from the money
pool. The money pool may not provide sufficient funds to meet our cash needs.
Long-term Debt. Our long-term debt consists of our obligations and the
obligations of our subsidiaries, including transition bonds issued by wholly
owned subsidiaries. The following table shows future maturity dates of long-term
debt issued by us to third parties and affiliates and scheduled future payment
dates of transition bonds issued by our subsidiaries, CenterPoint Energy
Transition Bond Company, LLC (Bond Company) and CenterPoint Energy Transition
Bond Company II, LLC (Bond Company II), as of October 31, 2006. Amounts are
expressed in millions.
TRANSITION
YEAR THIRD-PARTY AFFILIATE SUB-TOTAL BONDS TOTAL
- ---- ----------- --------- --------- ---------- ------
2007 ... $ -- $ -- $ -- $ 147 $ 147
2008 ... -- -- -- 159 159
2009 ... -- -- -- 175 175
2010 ... -- -- -- 190 190
2011 ... -- -- -- 207 207
2012 ... 46 -- 46 227 273
2013 ... 450 -- 450 245 695
2014 ... 300 -- 300 147 447
2015 ... -- 151 151 158 309
2016 ... -- -- -- 169 169
2017 ... 127 -- 127 181 308
2018 ... -- -- -- 194 194
2019 ... -- -- -- 208 208
2021 ... 102 -- 102 -- 102
2023 ... 200 -- 200 -- 200
2027 ... 56 -- 56 -- 56
2033 ... 312 -- 312 -- 312
------ ---- ------ ------ ------
Total .. $1,593 $151 $1,744 $2,407 $4,151
====== ==== ====== ====== ======
As of October 31, 2006, outstanding first mortgage bonds and general
mortgage bonds aggregated approximately $2.3 billion as shown in the following
table. Amounts are expressed in millions.
ISSUED AS ISSUED AS COLLATERAL
ISSUED DIRECTLY COLLATERAL FOR THE FOR CENTERPOINT
TO THIRD PARTIES COMPANY'S DEBT ENERGY'S DEBT TOTAL
---------------- ------------------ -------------------- ------
First Mortgage Bonds .... $ 102 $ -- $151 $ 253
General Mortgage Bonds .. 1,262 229 527 2,018
------ ---- ---- ------
Total ................ $1,364 $229 $678 $2,271
====== ==== ==== ======
The lien of the general mortgage indenture is junior to that of the
mortgage, pursuant to which the first mortgage bonds are issued. We may issue
additional general mortgage bonds on the basis of retired bonds, 70% of property
additions or cash deposited with the trustee. Approximately $2.1 billion of
additional first mortgage bonds and general mortgage bonds could be issued on
the basis of retired bonds and 70% of property additions as of September 30,
2006. However, we are contractually prohibited, subject to certain exceptions,
from issuing additional first mortgage bonds.
16
The following table shows the maturity dates of the $678 million of first
mortgage bonds and general mortgage bonds that we have issued as collateral for
long-term debt of CenterPoint Energy. These bonds are not reflected in our
consolidated financial statements because of the contingent nature of the
obligations. Amounts are expressed in millions.
FIRST GENERAL
YEAR MORTGAGE BONDS MORTGAGE BONDS TOTAL
- ----------- -------------- -------------- -----
2011 ...... $ -- $ 19 $ 19
2015 ...... 151 -- 151
2018 ...... -- 50 50
2019 ...... -- 200 200
2020 ...... -- 90 90
2026 ...... -- 100 100
2028 ...... -- 68 68
---- ---- ----
Total .. $151 $527 $678
==== ==== ====
At October 31, 2006, Bond Company had $575 million aggregate principal
amount of outstanding transition bonds that were issued in 2001 in accordance
with the 1999 Texas Electric Choice Plan (Texas electric restructuring law). At
October 31, 2006, Bond Company II had $1.83 billion aggregate principal amount
of outstanding transition bonds that were issued in 2005 in accordance with the
Texas electric restructuring law. The transition bonds are secured by
"transition property," as defined in the Texas electric restructuring law, which
includes the irrevocable right to recover, through non-bypassable transition
charges payable by retail electric customers, qualified costs provided in the
Texas electric restructuring law. The transition bonds are reported as our
long-term debt, although the holders of the transition bonds have no recourse to
any of our assets or revenues, and our creditors have no recourse to any assets
or revenues (including, without limitation, the transition charges) of the bond
companies. We have no payment obligations with respect to the transition bonds
except to remit collections of transition charges as set forth in a servicing
agreement between us and the bond companies and, in an intercreditor agreement
among us, the bond companies and other parties.
Impact on Liquidity of a Downgrade in Credit Ratings. As of October 31,
2006, 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
------------------- -------------------- --------------------
INSTRUMENT RATING OUTLOOK(1) RATING OUTLOOK (2) RATING OUTLOOK (3)
- -------------------------- ------ ---------- ------ ----------- ------ -----------
Senior Secured Debt (First
Mortgage Bonds)........ Baa2 Stable BBB Stable A- Stable
- ----------
(1) A "stable" outlook from Moody's indicates that Moody's does not expect to
put the rating on review for an upgrade or downgrade within 18 months from
when the outlook was assigned or last affirmed.
(2) An S&P rating outlook assesses the potential direction of a long-term
credit rating over the intermediate to longer term.
(3) A "stable" outlook from Fitch encompasses a one-to-two year horizon as to
the likely ratings direction.
We cannot assure you that these ratings will remain in effect for any given
period of time or that one or more of these ratings will not be lowered or
withdrawn entirely by a rating agency. We note that these credit ratings are not
recommendations to buy, sell or hold our securities and may be revised or
withdrawn at any time by the rating agency. Each rating should be evaluated
independently of any other rating. Any future reduction or withdrawal of one or
more of our credit ratings could have a material adverse impact on our ability
to obtain short- and long-term financing, the cost of such financings and the
execution of our commercial strategies.
A decline in credit ratings could increase borrowing costs under our $300
million credit facility. A decline in credit ratings would also increase the
interest rate on long-term debt to be issued in the capital markets and could
negatively impact our ability to complete capital market transactions.
17
Cross Defaults. Under CenterPoint Energy's revolving credit facility, a
payment default on, or a non-payment default that permits acceleration of, any
indebtedness exceeding $50 million by us will cause a default. Pursuant to the
indenture governing CenterPoint Energy's senior notes, a payment default by us,
in respect of, or an acceleration of, borrowed money and certain other specified
types of obligations, in the aggregate principal amount of $50 million will
cause a default. As of October 31, 2006, CenterPoint Energy had issued six
series of senior notes aggregating $1.4 billion in principal amount under this
indenture. A default by CenterPoint Energy would not trigger a default under our
debt instruments or bank credit facilities.
Other Factors that Could Affect Cash Requirements. In addition to the above
factors, our liquidity and capital resources could be affected by:
- increases in interest expense in connection with debt refinancings and
borrowings under our credit facility;
- various regulatory actions;
- the ability of RRI and its subsidiaries to satisfy their obligations
as our principal customers and in respect of RRI's indemnity
obligations to us;
- the outcome of litigation brought by and against us;
- restoration costs and revenue losses resulting from natural disasters
such as hurricanes; and
- various other risks identified in "Risk Factors" in Item 1A of Part I
of the CenterPoint Houston Form 10-K.
Certain Contractual Limits on Ability to Issue Securities and Pay
Dividends. Our credit facility limits our debt (excluding transition bonds) as a
percentage of our total capitalization to 65 percent. Additionally, in
connection with the issuance of a certain series of general mortgage bonds, we
agreed not to issue, subject to certain exceptions, additional first mortgage
bonds.
Relationship with CenterPoint Energy. We are an indirect wholly owned
subsidiary of CenterPoint Energy. As a result of this relationship, the
financial condition and liquidity of our parent company could affect our access
to capital, our credit standing and our financial condition.
CRITICAL ACCOUNTING POLICIES
A critical accounting policy is one that is both important to the
presentation of our financial condition and results of operations and requires
management to make difficult, subjective or complex accounting estimates. An
accounting estimate is an approximation made by management of a financial
statement element, item or account in the financial statements. Accounting
estimates in our historical consolidated financial statements measure the
effects of past business transactions or events, or the present status of an
asset or liability. The accounting estimates described below require us to make
assumptions about matters that are highly uncertain at the time the estimate is
made. Additionally, different estimates that we could have used or changes in an
accounting estimate that are reasonably likely to occur could have a material
impact on the presentation of our financial condition or results of operations.
The circumstances that make these judgments difficult, subjective and/or complex
have to do with the need to make estimates about the effect of matters that are
inherently uncertain. Estimates and assumptions about future events and their
effects cannot be predicted with certainty. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances, the results of which form the basis for making
judgments. These estimates may change as new events occur, as more experience is
acquired, as additional information is obtained and as our operating environment
changes. Our significant accounting policies are discussed in Note 2 to the
consolidated financial statements in the CenterPoint Houston Form 10-K. 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.
18
ACCOUNTING FOR RATE REGULATION
Statement of Financial Accounting Standards (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 former 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 $308 million of
recoverable electric generation-related regulatory assets as of September 30,
2006. These costs are recoverable under the provisions of the Texas electric
restructuring law. Based on our analysis of the final order issued by the Texas
Utility Commission, we recorded an after-tax charge to earnings in 2004 of
approximately $977 million to write-down our electric generation-related
regulatory assets to their realizable value, which is reflected as an
extraordinary loss in the Condensed Statements of Consolidated Income. Based on
subsequent orders received from the Texas Utility Commission, we recorded an
extraordinary gain of $30 million after-tax in the second quarter of 2005
related to the regulatory asset. Additionally, a district court in Travis
County, Texas issued a judgment that would have the effect of restoring
approximately $650 million, plus interest, of disallowed costs. The Company and
other parties appealed the district court's judgment. Oral argument to the 3rd
Court of Appeals in Austin is not expected to occur before late November 2006.
No amounts related to the district court's judgment have been recorded in the
consolidated financial statements. For additional information relating to
regulatory proceedings, see Note 3 to our Interim Condensed Financial
Statements.
IMPAIRMENT OF LONG-LIVED ASSETS AND INTANGIBLES
We review the carrying value of our long-lived assets, including
identifiable intangibles, whenever events or changes in circumstances indicate
that such carrying values may not be recoverable. Unforeseen events and changes
in circumstances and market conditions and material differences in the value of
long-lived assets and intangibles due to changes in estimates of future cash
flows, regulatory matters and operating costs could negatively affect the fair
value of our assets and result in an impairment charge.
Fair value is the amount at which the asset could be bought or sold in a
current transaction between willing parties and may be estimated using a number
of techniques, including quoted market prices or valuations by third parties,
present value techniques based on estimates of cash flows, or multiples of
earnings or revenue performance measures. The fair value of the asset could be
different using different estimates and assumptions in these valuation
techniques.
ASSET RETIREMENT OBLIGATIONS
We account for our long-lived assets under SFAS No. 143, "Accounting for
Asset Retirement Obligations" (SFAS No. 143), and Financial Accounting Standards
Board Interpretation No. 47, "Accounting for Conditional Asset Retirement
Obligations - An Interpretation of SFAS No. 143" (FIN 47). SFAS No. 143 and FIN
47 require that an asset retirement obligation be recorded at fair value in the
period in which it is incurred if a reasonable estimate of fair value can be
made. In the same period, the associated asset retirement costs are capitalized
as part of the carrying amount of the related long-lived asset. Rate-regulated
entities may recognize regulatory assets or liabilities as a result of timing
differences between the recognition of costs as recorded in accordance with SFAS
No. 143 and FIN 47, and costs recovered through the ratemaking process.
We estimate the fair value of asset retirement obligations by calculating
the discounted cash flows that are dependent upon the following components:
- Inflation adjustment - The estimated cash flows are adjusted for
inflation estimates for labor, equipment, materials, and other
disposal costs;
- Discount rate - The estimated cash flows include contingency factors
that were used as a proxy for the
19
market risk premium; and
- Third party markup adjustments - Internal labor costs included in the
cash flow calculation were adjusted for costs that a third party would
incur in performing the tasks necessary to retire the asset.
Changes in these factors could materially affect the obligation recorded to
reflect the ultimate cost associated with retiring the assets under SFAS No. 143
and FIN 47. For example, if the inflation adjustment increased 25 basis points,
this would increase the balance for asset retirement obligations by
approximately 2%. Similarly, an increase in the discount rate by 25 basis points
would decrease asset retirement obligations by approximately the same
percentage. At September 30, 2006, our estimated cost of retiring these assets
was approximately $13 million.
UNBILLED ENERGY REVENUES
Revenues related to the delivery of electricity are generally recorded when
electricity is delivered to customers. However, the determination of electricity
deliveries to individual customers is based on the reading of their meters,
which is performed on a systematic basis throughout the month. At the end of
each month, amounts of electricity delivered to customers since the date of the
last meter reading are estimated and the corresponding unbilled revenue is
estimated. Unbilled electricity delivery revenue is estimated each month based
on daily supply volumes, applicable rates and analyses reflecting significant
historical trends and experience. As additional information becomes available,
or actual amounts are determinable, the recorded estimates are revised.
Consequently, operating results can be affected by revisions to prior accounting
estimates.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 2 to the Interim Condensed Financial Statements for a discussion
of new accounting pronouncements that affect us.
ITEM 4. CONTROLS AND PROCEDURES
In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an
evaluation, under the supervision and with the participation of management,
including our principal executive officer and principal financial officer, of
the effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report. Based on that evaluation, our principal executive
officer and principal financial officer concluded that our disclosure controls
and procedures were effective as of September 30, 2006 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
and such information is accumulated and communicated to our management,
including our principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding disclosure.
There has been no change in our internal controls over financial reporting
that occurred during the three months ended September 30, 2006 that has
materially affected, or is reasonably likely to materially affect, our internal
controls over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For a discussion of material legal and regulatory proceedings affecting us,
please read Notes 3 and 6 to our Interim Condensed Financial Statements, each of
which is incorporated herein by reference. See also "Business -- Regulation" and
"-- Environmental Matters" in Item 1 and "Legal Proceedings" in Item 3 of the
CenterPoint Houston Form 10-K.
ITEM 1A. RISK FACTORS
There have been no material changes from the risk factors disclosed in the
CenterPoint Houston Form 10-K.
20
ITEM 5. OTHER INFORMATION
Our ratio of earnings to fixed charges for the nine months ended September
30, 2005 and 2006 was 2.14 and 2.85, respectively. We do not believe that the
ratios for these nine-month periods are necessarily indicators of the ratios for
the twelve-month periods due to the seasonal nature of our business. The ratios
were calculated pursuant to applicable rules of the Securities and Exchange
Commission.
ITEM 6. EXHIBITS
The following exhibits are filed herewith:
Exhibits not incorporated by reference to a prior filing are designated by
a cross (+); all exhibits not so designated are incorporated by reference to a
prior filing of CenterPoint Houston or CenterPoint Energy as indicated.
Report or Registration SEC File or
Exhibit Number Description Statement Registration Number Exhibit References
- -------------- ------------------- ---------------------- ------------------- ------------------
3.1 Articles of CenterPoint 1-3187 3(b)
Organization of Houston's Form 8-K
CenterPoint Energy dated August 31,
Houston Electric 2002 filed with
the SEC on
September 3, 2002
3.2 Limited Liability CenterPoint 1-3187 3(c)
Company Regulations Houston's Form 8-K
of CenterPoint dated August 31,
Energy Houston 2002 filed with
Electric the SEC on
September 3, 2002
4.1 $300,000,000 Credit CenterPoint 1-3187 4.2
Agreement dated as Houston's Form 8-K
of March 31, 2006 dated March 31,
among CenterPoint 2006
Houston, as
Borrower, and the
Initial Lenders
named therein, as
Initial Lenders
+12 Computation of
Ratios 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
+99.1 Items incorporated
by reference from
the CenterPoint
Houston Form 10-K.
Item 1A "--Risk
Factors."
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC
By: /s/ James S. Brian
------------------------------------
James S. Brian
Senior Vice President and Chief
Accounting Officer
Date: November 7, 2006
22
Index to Exhibits
Exhibits not incorporated by reference to a prior filing are designated by
a cross (+); all exhibits not so designated are incorporated by reference to a
prior filing of CenterPoint Houston or CenterPoint Energy as indicated.
Report or Registration SEC File or
Exhibit Number Description Statement Registration Number Exhibit References
- -------------- ------------------- ---------------------- ------------------- ------------------
3.1 Articles of CenterPoint 1-3187 3(b)
Organization of Houston's Form 8-K
CenterPoint Energy dated August 31,
Houston Electric 2002 filed with
the SEC on
September 3, 2002
3.2 Limited Liability CenterPoint 1-3187 3(c)
Company Regulations Houston's Form 8-K
of CenterPoint dated August 31,
Energy Houston 2002 filed with
Electric the SEC on
September 3, 2002
4.1 $300,000,000 Credit CenterPoint 1-3187 4.2
Agreement dated as Houston's Form 8-K
of March 31, 2006 dated March 31,
among CenterPoint 2006
Houston, as
Borrower, and the
Initial Lenders
named therein, as
Initial Lenders
+12 Computation of
Ratios 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
+99.1 Items incorporated
by reference from
the CenterPoint
Houston Form 10-K.
Item 1A "--Risk
Factors."
Exhibit 12
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(MILLIONS OF DOLLARS)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2005 2006
------------ ------------
Net Income ............................................................. $ 208 $ 233
Income taxes .......................................................... 90 114
Capitalized interest ................................................... (2) (3)
----------- -----------
296 344
----------- -----------
Fixed charges, as defined:
Interest ............................................................ 257 181
Capitalized interest ................................................ 2 3
Interest component of rentals charged to operating income ........... 1 1
----------- -----------
Total fixed charges ................................................. 260 185
----------- -----------
Earnings, as defined ................................................... $ 556 $ 529
=========== ===========
Ratio of earnings to fixed charges ..................................... 2.14 2.85
=========== ===========
Exhibit 31.1
CERTIFICATIONS
I, David M. McClanahan, certify that:
1. I have reviewed this quarterly report on Form 10-Q 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 officer(s) 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 officer(s) 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: November 7, 2006
/s/ David M. McClanahan
----------------------------------------
David M. McClanahan
Chairman (Principal Executive Officer)
Exhibit 31.2
CERTIFICATIONS
I, Gary L. Whitlock, certify that:
1. I have reviewed this quarterly report on Form 10-Q 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 officer(s) 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 officer(s) 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: November 7, 2006
/s/ Gary L. Whitlock
----------------------------------------
Gary L. Whitlock
Executive Vice President and
Chief Financial Officer
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of CenterPoint Energy Houston
Electric, LLC (the "Company") on Form 10-Q for the period ended September 30,
2006 (the "Report"), as filed with the Securities and Exchange Commission on the
date hereof, I, David M. McClanahan, Chairman (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
Chairman (Principal Executive Officer)
November 7, 2006
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 Quarterly Report of CenterPoint Energy Houston
Electric, LLC (the "Company") on Form 10-Q for the period ended September 30,
2006 (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
November 7, 2006
EXHIBIT 99.1
ITEM 1A. RISK FACTORS
RISK FACTORS AFFECTING OUR BUSINESS
WE MAY NOT BE SUCCESSFUL IN ULTIMATELY RECOVERING THE FULL VALUE OF OUR TRUE-UP
COMPONENTS, WHICH COULD RESULT IN THE ELIMINATION OF CERTAIN TAX BENEFITS AND
COULD HAVE AN ADVERSE IMPACT ON OUR RESULTS OF OPERATIONS, FINANCIAL CONDITION
AND CASH FLOWS.
In March 2004, we filed our true-up application with the Texas Utility
Commission, requesting recovery of $3.7 billion, excluding interest. In December
2004, the Texas Utility Commission issued its final order (True-Up Order)
allowing us to recover a true-up balance of approximately $2.3 billion, which
included interest through August 31, 2004, and providing for adjustment of the
amount to be recovered to include interest on the balance until recovery, the
principal portion of additional excess mitigation credits returned to customers
after August 31, 2004 and certain other matters. We and other parties filed
appeals of the True-Up Order to a district court in Travis County, Texas. In
August 2005, the court issued its final judgment on the various appeals. In its
judgment, the court affirmed most aspects of the True-Up Order, but reversed two
of the Texas Utility Commission's rulings. The judgment would have the effect of
restoring approximately $650 million, plus interest, of the $1.7 billion the
Texas Utility Commission had disallowed from our initial request. First, the
court reversed the Texas Utility Commission's decision to prohibit us from
recovering $180 million in credits through August 2004 that we were ordered to
provide to retail electric providers as a result of an inaccurate stranded cost
estimate made by the Texas Utility Commission in 2000. Additional credits of
approximately $30 million were paid after August 2004.
Second, the court reversed the Texas Utility Commission's disallowance
of $440 million in transition costs which are recoverable under the Texas
Utility Commission's regulations. We and other parties appealed the district
court decisions. Briefs have been filed with the 3rd Court of Appeals in Austin
but oral argument has not yet been scheduled. No prediction can be made as to
the ultimate outcome or timing of such appeals. Additionally, if the amount of
the true-up balance is reduced on appeal to below the amount recovered through
the issuance of transition bonds and under the CTC, while the amount of
transition bonds outstanding would not be reduced, we would be required to
refund the over recovery to our customers.
Among the issues raised in our appeal of the True-Up Order is the Texas
Utility Commission's reduction of our stranded cost recovery by approximately
$146 million for the present value of certain deferred tax benefits associated
with our former Texas Genco assets. Such reduction was considered in our
recording of an after-tax extraordinary loss of $977 million in the last half of
2004. We believe that the Texas Utility Commission based its order on proposed
regulations issued by the IRS in March 2003 related to those tax benefits. Those
proposed regulations would have allowed utilities which were deregulated before
March 4, 2003 to make a retroactive election to pass the benefits of ADITC and
EDFIT back to customers. However, in December 2005, the IRS withdrew those
proposed normalization regulations and issued new proposed regulations that do
not include the provision allowing a retroactive election to pass the tax
benefits back to customers. If the December 2005 proposed regulations become
effective and if the Texas Utility Commission's order on this issue is not
reversed on appeal or the amount of the tax benefits is not otherwise restored
by the Texas Utility Commission, the IRS is likely to consider that a
"normalization violation" has occurred. If so, the IRS could require us to pay
an amount equal to our unamortized ADITC balance as of the date that the
normalization violation was deemed to have occurred. In addition, if a
normalization violation is deemed to have occurred, the IRS could also deny us
the ability to elect accelerated depreciation benefits. If a normalization
violation should ultimately be found to exist, it could have an adverse impact
on our results of operations, financial condition and cash flows. The Texas
Utility Commission has not previously required a company subject to its
jurisdiction to take action that would result in a normalization violation.
OUR RECEIVABLES ARE CONCENTRATED IN A SMALL NUMBER OF RETAIL ELECTRIC PROVIDERS,
AND ANY DELAY OR DEFAULT IN PAYMENT COULD ADVERSELY AFFECT OUR CASH FLOWS,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
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 66 retail electric providers. Adverse
economic conditions, structural problems in the market served by the Electric
Reliability Council of Texas, Inc. (ERCOT) or financial difficulties of one or
more retail electric providers could impair the ability of these retail
providers to pay for our services or could cause them to delay such payments. We
depend on these retail electric providers to remit payments on a timely basis.
Applicable regulatory provisions require that customers be shifted to a provider
of last resort if a retail electric provider cannot make timely payments.
Reliant Energy, Inc. (RRI), through its subsidiaries, is our largest customer.
Approximately 56% of our $127 million in billed receivables from retail electric
providers at December 31, 2005 was owed by subsidiaries of RRI. Any delay or
default in payment could adversely affect our cash flows, financial condition
and results of operations.
RATE REGULATION OF OUR BUSINESS MAY DELAY OR DENY OUR ABILITY TO EARN A
REASONABLE RETURN AND FULLY RECOVER OUR COSTS.
Our rates are regulated by certain municipalities and the Texas Utility
Commission based on an analysis of our invested capital and our expenses in a
test year. Thus, the rates that we are allowed to charge may not match our
expenses at any given time. The regulatory process by which rates are determined
may not always result in rates that will produce full recovery of our costs and
enable us to earn a reasonable return on our invested capital.
DISRUPTIONS AT POWER GENERATION FACILITIES OWNED BY THIRD PARTIES COULD
INTERRUPT OUR SALES OF TRANSMISSION AND DISTRIBUTION SERVICES.
We transmit and distribute to customers of retail electric providers
electric power that the retail electric providers obtain from power generation
facilities owned by third parties. We do not own or operate any power generation
facilities. If power generation is disrupted or if power generation capacity is
inadequate, our sales of transmission and distribution services may be
diminished or interrupted, and our results of operations, financial condition
and cash flows may be adversely affected.
OUR REVENUES AND RESULTS OF OPERATIONS ARE SEASONAL.
A significant portion of our revenues are derived from rates that we
collect from each retail electric provider based on the amount of electricity we
distribute on behalf of such 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 REFINANCE EXISTING INDEBTEDNESS COULD BE LIMITED.
As of December 31, 2005, we had $4.1 billion of outstanding
indebtedness on a consolidated basis, which includes $2.5 billion of
non-recourse transition bonds. Our future financing activities may depend, at
least in part, on:
o the timing and amount of our recovery of the true-up components,
including, in particular, the results of appeals to the courts of
determination on rulings obtained to date;
o general economic and capital market conditions;
o credit availability from financial institutions and other lenders;
o investor confidence in us and the market in which we operate;
o maintenance of acceptable credit ratings by us and CenterPoint Energy;
o market expectations regarding our future earnings and probable cash
flows;
o market perceptions of our ability to access capital markets on
reasonable terms;
o our exposure to RRI as our customer and in connection with its
indemnification obligations arising in connection with its separation
from CenterPoint Energy; and
o provisions of relevant tax and securities laws.
As of December 31, 2005, we had outstanding $2.0 billion aggregate
principal amount of general mortgage bonds under the General Mortgage, including
approximately $527 million held in trust to secure pollution control bonds for
which CenterPoint Energy is obligated and approximately $229 million held in
trust to secure pollution control bonds for which we are obligated.
Additionally, we had outstanding approximately $253 million aggregate principal
amount of first mortgage bonds under the Mortgage, including approximately $151
million held in trust to secure certain pollution control bonds for which
CenterPoint Energy is obligated. We may issue additional general mortgage bonds
on the basis of retired bonds, 70% of property additions or cash deposited with
the trustee. Approximately $2.0 billion of additional first mortgage bonds and
general mortgage bonds could be issued on the basis of retired bonds and 70% of
property additions as of December 31, 2005. However, we are contractually
prohibited, subject to certain exceptions, from issuing additional first
mortgage bonds.
Our current credit ratings are discussed in "Management's Narrative
Analysis of Results of Operations -- Liquidity -- Impact on Liquidity of a
Downgrade in Credit Ratings" in Item 7 of this report. These credit ratings may
not remain in effect for any given period of time and one or more of these
ratings may be lowered or withdrawn entirely by a rating agency. We note that
these credit ratings are not recommendations to buy, sell or hold our
securities. Each rating should be evaluated independently of any other rating.
Any future reduction 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.
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. As of December 31, 2005, CenterPoint Energy and its subsidiaries other
than us have approximately $665 million principal amount of debt required to be
paid through 2008. This amount excludes amounts related to capital leases,
securitization debt and indexed debt securities obligations. In addition,
CenterPoint Energy has $830 million of outstanding convertible notes on which
holders could exercise their "put" rights during this period. CenterPoint Energy
and its other subsidiaries may not be able to pay or refinance these amounts. If
CenterPoint Energy were to experience a 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 $750 million as of December 31, 2005 could be adversely affected.
RISKS COMMON TO OUR BUSINESS AND OTHER RISKS
WE ARE SUBJECT TO OPERATIONAL AND FINANCIAL RISKS AND LIABILITIES ARISING FROM
ENVIRONMENTAL LAWS AND REGULATIONS.
Our operations are subject to stringent and complex laws and
regulations pertaining to health, safety and the environment. As an owner or
operator of electric transmission and distribution systems, we must comply with
these laws and regulations at the federal, state and local levels. These laws
and regulations can restrict or impact our business activities in many ways,
such as:
o restricting the way we can handle or dispose of our wastes;
o limiting or prohibiting construction activities in sensitive areas such
as wetlands, coastal regions, or areas inhabited by endangered species;
o requiring remedial action to mitigate pollution conditions caused by
our operations, or attributable to former operations; and
o enjoining the operations of facilities deemed in non-compliance with
permits issued pursuant to such environmental laws and regulations.
In order to comply with these requirements, we may need to spend
substantial amounts and devote other resources from time to time to:
o construct or acquire new equipment;
o acquire permits for facility operations; and
o modify or replace existing and proposed equipment.
Failure to comply with these laws and regulations may trigger a variety
of administrative, civil and criminal enforcement measures, including the
assessment of monetary penalties, the imposition of remedial actions, and the
issuance of orders enjoining future operations. Certain environmental statutes
impose strict, joint and several liability for costs required to clean up and
restore sites where hazardous substances have been disposed or otherwise
released. Moreover, it is not uncommon for neighboring landowners and other
third parties to file claims for personal injury and property damage allegedly
caused by the release of hazardous substances or other waste products into the
environment.
OUR INSURANCE COVERAGE MAY NOT BE SUFFICIENT. INSUFFICIENT INSURANCE COVERAGE
AND INCREASED INSURANCE COSTS COULD ADVERSELY IMPACT OUR RESULTS OF OPERATIONS,
FINANCIAL CONDITION AND CASH FLOWS.
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. Additionally,
we do not have business interruption coverage. If we were to sustain any loss
of, or damage to, our transmission and distribution properties, we may not be
able to recover such loss or damage through a change in our regulated rates, and
any such recovery may not be timely granted. Therefore, we may not 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.
WE AND CENTERPOINT ENERGY COULD INCUR LIABILITIES ASSOCIATED WITH BUSINESSES AND
ASSETS THAT WE HAVE TRANSFERRED TO OTHERS.
Under some circumstances, we and CenterPoint Energy could incur
liabilities associated with assets and businesses we and CenterPoint Energy no
longer own. These assets and businesses were previously owned by Reliant Energy,
Incorporated (Reliant Energy), our predecessor, directly or through subsidiaries
and include:
o those transferred to RRI or its subsidiaries in connection with the
organization and capitalization of RRI prior to its initial public
offering in 2001; and
o those transferred to Texas Genco in connection with its organization
and capitalization.
In connection with the organization and capitalization of RRI, RRI and
its subsidiaries assumed liabilities associated with various assets and
businesses Reliant Energy transferred to them. RRI also agreed to indemnify, and
cause the applicable transferee subsidiaries to indemnify, 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 RRI and its subsidiaries for all
liabilities associated with the current and historical businesses and operations
of RRI, regardless of the time those liabilities arose. If RRI is unable to
satisfy a liability that has been so assumed in circumstances in which
Reliant Energy has not been released from the liability in connection with the
transfer, we and CenterPoint Energy could be responsible for satisfying the
liability.
RRI's unsecured debt ratings are currently below investment grade. If
RRI were unable to meet its obligations, it would need to consider, among
various options, restructuring under the bankruptcy laws, in which event RRI
might not honor its indemnification obligations and claims by RRI's creditors
might be made against us as its former owner.
Reliant Energy and RRI are named as defendants in a number of lawsuits
arising out of power sales in California and other West Coast markets and
financial reporting matters. Although these matters relate to the business and
operations of RRI, claims against Reliant Energy have been made on grounds that
include the effect of RRI's financial results on Reliant Energy's historical
financial statements and liability of Reliant Energy as a controlling
shareholder of RRI. We could incur liability if claims in one or more of these
lawsuits were successfully asserted against us and indemnification from RRI were
determined to be unavailable or if RRI were unable to satisfy indemnification
obligations owed with respect to those claims.
In connection with the organization and capitalization of Texas Genco,
Texas Genco assumed liabilities associated with the electric generation assets
Reliant Energy transferred to it. Texas Genco also agreed to indemnify, and
cause the applicable transferee subsidiaries to indemnify, CenterPoint Energy
and it subsidiaries, including us, with respect to liabilities associated with
the transferred assets and businesses. In many cases the liabilities assumed
were our obligations 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. In connection with the
sale of Texas Genco's fossil generation assets (coal, lignite and gas-fired
plants) to Texas Genco LLC, the separation agreement CenterPoint Energy entered
into with Texas Genco in connection with the organization and capitalization of
Texas Genco was amended to provide that all of Texas Genco's rights and
obligations under the separation agreement relating to its fossil generation
assets, including Texas Genco's obligation to indemnify CenterPoint Energy and
its subsidiaries, including us, with respect to liabilities associated with the
fossil generation assets and related business, were assigned to and assumed by
Texas Genco LLC. In addition, under the amended separation agreement, Texas
Genco is no longer liable for, and CenterPoint Energy has assumed and agreed to
indemnify Texas Genco LLC against, liabilities that Texas Genco originally
assumed in connection with its organization to the extent, and only to the
extent, that such liabilities are covered by certain insurance policies or other
similar agreements held by CenterPoint Energy. If Texas Genco or Texas Genco LLC
were unable to satisfy a liability that had been so assumed or indemnified
against, and provided Reliant Energy had not been released from the liability in
connection with the transfer, we could be responsible for satisfying the
liability.
CenterPoint Energy or it subsidiaries have been named, along with
numerous others, as a defendant in lawsuits filed by a large number of
individuals who claim injury due to exposure to asbestos. Most claimants in such
litigation have been workers who participated in construction of various
industrial facilities, including power plants. Some of the claimants have worked
at
locations CenterPoint Energy owns, but most existing claims relate to
facilities previously owned by CenterPoint Energy but currently owned by Texas
Genco LLC. We anticipate that additional claims like those received may be
asserted in the future. Under the terms of the separation agreement between
CenterPoint Energy and Texas Genco, ultimate financial responsibility for
uninsured losses from claims relating to facilities transferred to Texas Genco
has been assumed by Texas Genco, but under the terms of CenterPoint Energy's
agreement to sell Texas Genco to Texas Genco LLC, CenterPoint Energy has agreed
to continue to defend such claims to the extent they are covered by insurance
CenterPoint Energy maintains, subject to reimbursement of the costs of such
defense from Texas Genco LLC.
