UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
þ QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE
QUARTERLY PERIOD ENDED JUNE 30, 2008
OR
o TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE
TRANSITION PERIOD FROM ____________ TO _______________.
______________________________
Commission
file number 1-3187
CENTERPOINT
ENERGY HOUSTON ELECTRIC, LLC
(Exact
name of registrant as specified in its charter)
|
Texas
|
22-3865106
|
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
|
1111
Louisiana
|
|
|
Houston,
Texas 77002
|
(713)
207-1111
|
|
(Address
and zip code of principal executive offices)
|
(Registrant’s
telephone number, including area
code)
|
______________________________
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 R No
£
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
|
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer þ
|
Smaller
reporting company o
|
|
(Do
not check if a smaller reporting company)
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes £ No R
As of
July 31, 2008, 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 JUNE 30, 2008
|
PART
I.
|
FINANCIAL
INFORMATION
|
|||
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Item
1.
|
1
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|||
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Three
and Six Months Ended June 30, 2007 and 2008 (unaudited)
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1
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|||
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December
31, 2007 and June 30, 2008 (unaudited)
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2
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|||
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Six
Months Ended June 30, 2007 and 2008 (unaudited)
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4
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|||
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5
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||||
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Item
2.
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13
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|||
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Item 4T.
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18
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|||
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PART
II.
|
OTHER
INFORMATION
|
|||
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Item
1.
|
18
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|||
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Item
1A.
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18
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|||
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Item
5.
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19
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|||
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Item
6.
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19
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CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING INFORMATION
From time
to time we make statements concerning our expectations, beliefs, plans,
objectives, goals, strategies, future events or performance and underlying
assumptions and other statements that are not historical facts. These statements
are “forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995. Actual results may differ materially from those
expressed or implied by these statements. You can generally identify our
forward-looking statements by the words “anticipate,” “believe,” “continue,”
“could,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “may,” “objective,”
“plan,” “potential,” “predict,” “projection,” “should,” “will,” or other similar
words.
We have
based our forward-looking statements on our management’s beliefs and assumptions
based on information available to our management at the time the statements are
made. We caution you that assumptions, beliefs, expectations, intentions and
projections about future events may and often do vary materially from actual
results. Therefore, we cannot assure you that actual results will not differ
materially from those expressed or implied by our forward-looking
statements.
The
following are some of the factors that could cause actual results to differ
materially from those expressed or implied in forward-looking
statements:
|
·
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the
resolution of the true-up proceedings, including, in particular, the
results of appeals to the courts regarding rulings obtained to
date;
|
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·
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state
and federal legislative and regulatory actions or developments, including
deregulation or re-regulation of our business, environmental regulations,
including regulations related to global climate change, and changes in or
application of laws or regulations applicable to the various aspects of
our business;
|
|
·
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timely
and appropriate rate actions and increases, allowing recovery of costs and
a reasonable return on investment;
|
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·
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industrial,
commercial and residential growth in our service territory and changes in
market demand and demographic
patterns;
|
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·
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weather
variations and other natural
phenomena;
|
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·
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changes
in interest rates or rates of
inflation;
|
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·
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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;
|
|
·
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actions
by rating agencies;
|
|
·
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non-payment
for our services due to financial distress of our customers, including
Reliant Energy, Inc. (RRI);
|
|
·
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the
ability of RRI and its subsidiaries to satisfy their other obligations to
us, including indemnity
obligations;
|
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·
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the
outcome of litigation brought by or against
us;
|
|
·
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our
ability to control costs;
|
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·
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the
investment performance of CenterPoint Energy Inc.’s employee benefit
plans;
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·
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our
potential business strategies, including acquisitions or dispositions of
assets or businesses, which we cannot assure will be completed or will
have the anticipated benefits to
us;
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·
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acquisitions
and merger activities involving our parent or our competitors;
and
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|
·
|
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, 2007, which is
incorporated herein by reference, and other reports we file from time to
time with the Securities and Exchange
Commission.
|
You
should not place undue reliance on forward-looking statements. Each
forward-looking statement speaks only as of the date of the particular
statement.
PART
I. FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
(AN
INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
CONDENSED
STATEMENTS OF CONSOLIDATED INCOME
(Millions
of Dollars)
(Unaudited)
|
Three
Months Ended
June
30,
|
Six
Months Ended
June
30,
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|||||||||||||||
|
2007
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2008
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2007
|
2008
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|||||||||||||
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Revenues
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$ | 465 | $ | 510 | $ | 871 | $ | 919 | ||||||||
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Expenses:
|
||||||||||||||||
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Operation and
maintenance
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150 | 169 | 305 | 338 | ||||||||||||
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Depreciation and
amortization
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102 | 125 | 192 | 221 | ||||||||||||
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Taxes other than income
taxes
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56 | 52 | 113 | 105 | ||||||||||||
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Total
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308 | 346 | 610 | 664 | ||||||||||||
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Operating
Income
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157 | 164 | 261 | 255 | ||||||||||||
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Other
Income (Expense):
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||||||||||||||||
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Interest and other finance
charges
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(26 | ) | (26 | ) | (54 | ) | (53 | ) | ||||||||
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Interest on transition
bonds
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(32 | ) | (35 | ) | (63 | ) | (68 | ) | ||||||||
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Other, net
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17 | 10 | 34 | 23 | ||||||||||||
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Total
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(41 | ) | (51 | ) | (83 | ) | (98 | ) | ||||||||
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Income
Before Income Taxes
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116 | 113 | 178 | 157 | ||||||||||||
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Income tax
expense
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(39 | ) | (41 | ) | (60 | ) | (59 | ) | ||||||||
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Net
Income
|
$ | 77 | $ | 72 | $ | 118 | $ | 98 | ||||||||
See Notes
to the Company’s Interim Condensed Consolidated Financial
Statements
(AN
INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Millions
of Dollars)
(Unaudited)
ASSETS
|
December
31,
2007
|
June
30,
2008
|
|||||||
|
Current
Assets:
|
||||||||
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Cash and cash
equivalents
|
$ | 128 | $ | 126 | ||||
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Accounts and notes receivable,
net
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172 | 206 | ||||||
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Accounts and notes receivable –
affiliated companies
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25 | 44 | ||||||
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Accrued unbilled
revenues
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102 | 125 | ||||||
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Materials and
supplies
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60 | 61 | ||||||
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Taxes
receivable
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3 | — | ||||||
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Other
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70 | 62 | ||||||
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Total current
assets
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560 | 624 | ||||||
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Property,
Plant and Equipment:
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||||||||
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Property, plant and
equipment
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6,993 | 7,057 | ||||||
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Less accumulated depreciation
and amortization
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2,602 | 2,623 | ||||||
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Property, plant and equipment,
net
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4,391 | 4,434 | ||||||
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Other
Assets:
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||||||||
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Regulatory
assets
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2,621 | 2,480 | ||||||
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Notes receivable — affiliated
companies
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750 | 750 | ||||||
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Other
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36 | 50 | ||||||
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Total other
assets
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3,407 | 3,280 | ||||||
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Total Assets
|
$ | 8,358 | $ | 8,338 | ||||
See Notes
to the Company’s Interim Condensed Consolidated Financial
Statements
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,
2007
|
June
30,
2008
|
|||||||
|
Current
Liabilities:
|
||||||||
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Current portion of transition
bond long-term debt
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$ | 159 | $ | 186 | ||||
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Accounts
payable
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47 | 45 | ||||||
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Accounts and notes payable — affiliated
companies
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75 | 40 | ||||||
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Taxes
accrued
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87 | 80 | ||||||
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Interest
accrued
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83 | 99 | ||||||
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Other
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74 | 80 | ||||||
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Total current
liabilities
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525 | 530 | ||||||
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Other
Liabilities:
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||||||||
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Accumulated deferred income
taxes, net
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1,189 | 1,146 | ||||||
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Unamortized investment tax
credits
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28 | 24 | ||||||
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Benefit
obligations
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176 | 175 | ||||||
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Regulatory
liabilities
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354 | 312 | ||||||
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Notes payable — affiliated
companies
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151 | 151 | ||||||
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Other
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134 | 147 | ||||||
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Total other
liabilities
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2,032 | 1,955 | ||||||
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Long-term
Debt:
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||||||||
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Transition bonds
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2,101 | 2,485 | ||||||
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Other
|
1,642 | 1,694 | ||||||
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Total long-term
debt
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3,743 | 4,179 | ||||||
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Commitments
and Contingencies (Note 7)
|
||||||||
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Member’s
Equity:
|
||||||||
|
Common
stock
|
— | — | ||||||
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Paid-in
capital
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1,712 | 1,230 | ||||||
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Retained
earnings
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346 | 444 | ||||||
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Total member’s
equity
|
2,058 | 1,674 | ||||||
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Total Liabilities and Member’s
Equity
|
$ | 8,358 | $ | 8,338 | ||||
See Notes
to the Company’s Interim Condensed Consolidated Financial
Statements
(AN
INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
CONDENSED
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Millions
of Dollars)
(Unaudited)
|
Six
Months Ended June 30,
|
||||||||
|
2007
|
2008
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|||||||
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Cash
Flows from Operating Activities:
|
||||||||
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Net income
|
$ | 118 | $ | 98 | ||||
|
Adjustments to reconcile net
income to net cash provided by operating activities:
|
||||||||
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Depreciation and
amortization
|
192 | 221 | ||||||
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Amortization of deferred
financing costs
|
6 | 6 | ||||||
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Deferred income
taxes
|
(8 | ) | (31 | ) | ||||
|
Changes in other assets and
liabilities:
|
||||||||
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Accounts and notes receivable,
net
|
(46 | ) | (57 | ) | ||||
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Accounts receivable/payable,
affiliates
|
(11 | ) | (11 | ) | ||||
|
Inventory
|
4 | (1 | ) | |||||
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Accounts
payable
|
(23 | ) | 6 | |||||
|
Taxes
receivable
|
14 | 3 | ||||||
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Interest and taxes
accrued
|
(37 | ) | 9 | |||||
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Net regulatory assets and
liabilities
|
15 | 5 | ||||||
|
Other current
assets
|
2 | 15 | ||||||
|
Other current
liabilities
|
(1 | ) | 6 | |||||
|
Other assets
|
(1 | ) | — | |||||
|
Other
liabilities
|
3 | (4 | ) | |||||
|
Other, net
|
1 | (9 | ) | |||||
|
Net cash provided by operating
activities
|
228 | 256 | ||||||
|
Cash
Flows from Investing Activities:
|
||||||||
|
Capital
expenditures
|
(226 | ) | (184 | ) | ||||
|
Decrease (increase) in
restricted cash of transition bond companies
|
1 | (7 | ) | |||||
| Other, net | 1 | 1 | ||||||
|
Net cash used in investing
activities
|
(224 | ) | (190 | ) | ||||
|
Cash
Flows from Financing Activities:
|
||||||||
|
Long-term revolving credit
facility, net
|
— | 52 | ||||||
|
Proceeds from long-term
debt
|
— | 488 | ||||||
|
Payments of long-term
debt
|
(72 | ) | (77 | ) | ||||
|
Debt issuance
costs
|
— | (6 | ) | |||||
|
Increase (decrease) in
short-term notes with affiliates, net
|
54 | (43 | ) | |||||
|
Dividend to
parent
|
— | (483 | ) | |||||
|
Other, net
|
— | 1 | ||||||
|
Net cash used in financing
activities
|
(18 | ) | (68 | ) | ||||
|
Net
Decrease in Cash and Cash Equivalents
|
(14 | ) | (2 | ) | ||||
|
Cash
and Cash Equivalents at Beginning of Period
|
122 | 128 | ||||||
|
Cash
and Cash Equivalents at End of Period
|
$ | 108 | $ | 126 | ||||
|
Supplemental
Disclosure of Cash Flow Information:
|
||||||||
|
Cash
Payments:
|
||||||||
|
Interest, net of capitalized
interest
|
$ | 117 | $ | 108 | ||||
|
Income taxes (refunds),
net
|
52 | 44 | ||||||
See
Notes to the Company’s Interim Condensed Consolidated Financial
Statements
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, 2007
(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. At June 30, 2008, the Company
had three subsidiaries, CenterPoint Energy Transition Bond Company, LLC,
CenterPoint Energy Transition Bond Company II, LLC and CenterPoint Energy
Transition Bond Company III, LLC (collectively, the transition bond companies).
Each is a special purpose Delaware limited liability company formed for the
principal purpose of purchasing and owning transition property, issuing
transition bonds and performing activities incidental thereto. For further
discussion of the transition bond companies, see Note 4.
Basis of Presentation. The
preparation of financial statements in conformity with generally accepted
accounting principles (GAAP) 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
February 2007, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 159, “The Fair Value
Option for Financial Assets and Financial Liabilities, including an amendment of
FASB Statement No. 115” (SFAS No. 159). SFAS No. 159
permits the Company to choose, at specified election dates, to measure eligible
items at fair value (the “fair value option”). The Company would report
unrealized gains and losses on items for which the fair value option has been
elected in earnings at each subsequent reporting period. This accounting
standard is effective as of the beginning of the first fiscal year that begins
after November 15, 2007 but is not required to be applied. The Company
currently has no plans to apply SFAS No. 159.
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business Combinations”
(SFAS No. 141R). SFAS
No. 141R will significantly change the accounting for business combinations.
Under SFAS No. 141R, an acquiring entity will be required to recognize all the
assets acquired and liabilities assumed in a transaction at the acquisition date
fair value with limited exceptions. SFAS No. 141R also includes a substantial
number of new disclosure requirements and applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. As the
provisions of SFAS No. 141R are applied prospectively, the impact to the Company
cannot be determined until applicable transactions occur.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements - An Amendment of ARB No. 51” (SFAS No. 160).
SFAS No. 160 establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. This
accounting
standard is effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008. The Company will adopt SFAS No.
160 as of January 1, 2009. The Company expects that the adoption of SFAS No. 160
will not have a material impact on its financial position, results of operations
or cash flows.
Effective
January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements”
(SFAS No. 157), which requires additional disclosures about the Company’s
financial assets and liabilities that are measured at fair value. FASB
Staff Position No. FAS 157-2 delays the effective date for SFAS No. 157 for
nonfinancial assets and liabilities, except for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis, to
fiscal years, and interim periods within those fiscal years, beginning after
November 15, 2008. Beginning in January 2008, assets and liabilities recorded at
fair value in the Condensed Consolidated Balance Sheet are categorized based
upon the level of judgment associated with the inputs used to measure their
value. Hierarchical levels, as defined in SFAS No. 157 and directly related to
the amount of subjectivity associated with the inputs to fair valuations of
these assets and liabilities, are as follows:
Level 1:
Inputs are unadjusted quoted prices in active markets for identical assets or
liabilities at the measurement date. The types of assets carried at Level 1
fair value are investments. At June 30, 2008, the Company held Level
1 investments of $41 million.
Level
2: Inputs, other than quoted prices included in Level 1, are observable
for the asset or liability, either directly or indirectly. Level 2 inputs
include quoted prices for similar instruments in active markets, and inputs
other than quoted prices that are observable for the asset or
liability. The Company had no Level 2 assets and liabilities at June 30,
2008.
Level
3: Inputs are unobservable for the asset or liability, and include
situations where there is little, if any, market activity for the asset or
liability. In certain cases, the inputs used to measure fair value may fall into
different levels of the fair value hierarchy. In such cases, the level in the
fair value hierarchy within which the fair value measurement in its entirety
falls has been determined based on the lowest level input that is significant to
the fair value measurement in its entirety. The Company’s assessment of the
significance of a particular input to the fair value measurement in its entirety
requires judgment, and considers factors specific to the asset. The Company
had no Level 3 assets and liabilities at June 30, 2008.
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (SFAS No. 162), which identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements that are presented in conformity with
GAAP. The Company plans to adopt SFAS No. 162 when it becomes effective. The
adoption of SFAS No. 162 will not have an impact on the Company’s consolidated
financial position or results of operations.
(3) Employee
Benefit Plans
The
Company’s employees participate in CenterPoint Energy’s postretirement benefit
plan. The Company’s net periodic cost includes the following components relating
to postretirement benefits:
|
Three
Months Ended
June
30,
|
Six
Months Ended
June
30,
|
|||||||||||||||
|
2007
|
2008
|
2007
|
2008
|
|||||||||||||
|
(in
millions)
|
||||||||||||||||
|
Interest
cost
|
$ | 4 | $ | 5 | $ | 8 | $ | 9 | ||||||||
|
Expected
return on plan assets
|
(3 | ) | (3 | ) | (6 | ) | (6 | ) | ||||||||
|
Amortization
of transition obligation
|
2 | 1 | 4 | 3 | ||||||||||||
|
Net periodic
cost
|
$ | 3 | $ | 3 | $ | 6 | $ | 6 | ||||||||
The
Company expects to contribute approximately $7 million to its
postretirement benefits plan in 2008, of which $3 million and
$5 million, respectively, was contributed during the three and six months
ended June 30, 2008.
(4) Regulatory
Matters
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
Choice Plan (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 provided for adjustment of the amount
to be recovered to include interest on the balance until recovery, along with
the principal portion of additional excess mitigation credits (EMCs) returned to
customers after August 31, 2004 and certain other adjustments.
The
Company and other parties filed appeals of the True-Up Order to a district court
in Travis County, Texas. In August 2005, that court issued its judgment on the
various appeals. In its judgment, the district court:
|
·
|
reversed
the Texas Utility Commission’s ruling that had denied recovery of a
portion of the capacity auction true-up
amounts;
|
|
·
|
reversed
the Texas Utility Commission’s ruling that precluded the Company from
recovering the interest component of the EMCs paid to retail electric
providers (REPs); and
|
|
·
|
affirmed
the True-Up Order in all other
respects.
|
The
district court’s decision would have had 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 to the Texas
Third Court of Appeals, which issued its decision in December 2007. In its
decision, the court of appeals:
|
·
|
reversed
the district court’s judgment to the extent it restored the capacity
auction true-up amounts;
|
|
·
|
reversed
the district court’s judgment to the extent it upheld the Texas Utility
Commission’s decision to allow the Company to recover EMCs paid to Reliant
Energy, Inc. (RRI);
|
|
·
|
ordered
that the tax normalization issue described below be remanded to the Texas
Utility Commission as requested by the Texas Utility Commission;
and
|
|
·
|
affirmed
the district court’s judgment in all other
respects.
|
In April
2008, the court of appeals denied all motions for rehearing and reissued
substantially the same opinion as it had rendered in December
2007.
In June
2008, the Company petitioned the Texas Supreme Court for review of the court of
appeals decision. In its petition, the Company seeks reversal of the parts of
the court of appeals decision that (i) denied recovery of EMCs paid to RRI, (ii)
denied recovery of the capacity auction true up amounts allowed by the district
court, (iii) affirmed the Texas Utility Commission’s rulings that denied
recovery of approximately $378 million related to depreciation and (iv)
affirmed the Texas Utility Commission’s refusal to permit the Company to utilize
the partial stock valuation methodology for determining the market value of its
former generation assets. Two other petitions for review were filed with the
Texas Supreme Court by other parties to the appeal. In those petitions parties
contend (i) that the Texas Utility Commission was without authority to fashion
the methodology it used for valuing the former generation assets after it had
determined that the Company could not use the partial stock valuation method,
(ii) that in fashioning the method it used for valuing the former generating
assets, the Texas Utility Commission deprived parties of their due process
rights and an opportunity to be heard, (iii) that the net book value of the
generating assets should have been adjusted downward due to the impact of a
purchase option that had been granted to RRI, (iv) that the Company should not
have been permitted to recover construction work in progress balances without
proving those amounts in the manner required by law and (v) that the Texas
Utility Commission was without authority to award interest on the capacity
auction true up award.
Review by
the Texas Supreme Court of the court of appeals decision is at the discretion of
the court. There is no prescribed time in which the Texas Supreme Court must
determine whether to grant review or, if review is granted, for a decision by
that court. Although the Company believes that its true-up request is consistent
with applicable statutes and regulations and, accordingly, that it is reasonably
possible that it will be successful in its appeal to the Texas Supreme Court,
the Company can provide no assurance as to the ultimate court rulings on the
issues to be considered in the appeal or with respect to the ultimate decision
by the Texas Utility Commission on the tax normalization issue described
below.
To
reflect the impact of the True-Up Order, in 2004 and 2005, the Company recorded
a net after-tax extraordinary loss of $947 million. No amounts related to
the district court’s judgment or the decision of the court of appeals have been
recorded in the Company’s consolidated financial statements. However, if the
court of appeals decision is not reversed or modified as a result of further
review by the Texas Supreme Court, the Company anticipates that it would be
required to record an additional loss to reflect the court of appeals decision.
The amount of that loss would depend on several factors, including ultimate
resolution of the tax normalization issue described below and the calculation of
interest on any amounts the Company ultimately is authorized to recover or is
required to refund beyond the amounts recorded based on the True-up Order, but
could range from $130 million to $350 million (pre-tax) plus interest
subsequent to December 31, 2007.
In the
True-Up Order, the Texas Utility Commission reduced the Company’s stranded cost
recovery by approximately $146 million, which was included in the
extraordinary loss discussed above, for the present value of certain deferred
tax benefits associated with its former electric generation assets. The Company
believes that the Texas Utility Commission based its order on proposed
regulations issued by the Internal Revenue Service (IRS) in March 2003 which
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, the IRS subsequently withdrew
those proposed normalization regulations and in March 2008 adopted final
regulations that would not permit utilities like the Company to pass the tax
benefits back to customers without creating normalization violations. In
addition, CenterPoint Energy received a Private Letter Ruling (PLR) from the IRS
in August 2007, prior to adoption of the final regulations, that confirmed that
the Texas Utility Commission’s order reducing the Company’s stranded cost
recovery by $146 million for ADITC and EDFIT would cause normalization
violations with respect to the ADITC and EDFIT.
If the
Texas Utility Commission’s order relating to the ADITC reduction is not reversed
or otherwise modified on remand so as to eliminate the normalization violation,
the IRS could require CenterPoint Energy 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, 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. Such treatment, if
required by the IRS, could have a material adverse impact on the Company’s
results of operations, financial condition and cash flows in addition to any
potential loss resulting from final resolution of the True-Up Order. In its
opinion, the court of appeals ordered that this issue be remanded to the Texas
Utility Commission, as that commission requested. No party, in the petitions for
review filed with the Texas Supreme Court, has challenged that order by the
court of appeals, though the Texas Supreme Court, if it grants review, will have
authority to consider all aspects of the rulings above, not just those
challenged specifically by the appellants. The Company and CenterPoint Energy
will continue to pursue a favorable resolution of this issue through the
appellate or administrative process. Although the Texas Utility Commission has
not previously required a company subject to its jurisdiction to take action
that would result in a normalization violation, no prediction can be made as to
the ultimate action the Texas Utility Commission may take on this issue on
remand.
The Texas
electric restructuring law allowed the amounts awarded to the Company in the
Texas Utility Commission’s True-Up Order to be recovered either through the
issuance of transition bonds or through implementation of a competition
transition charge (CTC) or both. Pursuant to a financing order issued by the
Texas Utility Commission in March 2005 and affirmed by a 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% to 5.30% 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 the remaining $596 million from
the True-Up Order over 14 years plus interest at an annual rate of 11.075%
(CTC Order). The CTC Order authorized the Company to impose a charge on retail
electric providers to recover the portion of the true-up balance not recovered
through a financing order. The CTC Order also allowed 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. The return on the CTC portion of the true-up
balance was included in the Company’s tariff-based revenues beginning
September 13, 2005. Effective August 1, 2006, the interest rate on the
unrecovered balance of the CTC was reduced from 11.075% to 8.06% pursuant to a
revised rule adopted by the Texas Utility Commission in June 2006.
Certain
parties appealed the CTC Order to a 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 based on
its belief that the Texas Supreme Court had previously invalidated that entire
section of the rule. The 11.075% 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 revised rule discussed above. Second, the district court
reversed the Texas Utility Commission’s ruling that allows the Company to
recover through the Rider RCE the costs (approximately $5 million) for a
panel appointed by the Texas Utility Commission in connection with the valuation
of electric generation assets. Finally, the district court accepted the
contention of one party that the CTC should not be allocated to retail customers
that have switched to new on-site generation. The Texas Utility Commission and
the Company appealed the district court’s judgment to the Texas Third Court
of Appeals, and in July 2008, the court of appeals reversed the district court’s
judgment in all respects and affirmed the Texas Utility Commission’s order. The
appellants may seek rehearing from the court of appeals and further review from
the Texas Supreme Court. 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 its financial condition, results of
operations or cash flows.
During
the three months ended June 30, 2007 and 2008, the Company recognized
approximately $10 million and $-0-, respectively, in operating income from
the CTC, which was terminated in February 2008 when the transition bonds
described below were issued. Additionally, during the three months ended
June 30, 2007 and 2008, the Company recognized approximately
$3 million and $2 million, respectively, of the allowed equity return
not previously recorded.
During
the six months ended June 30, 2007 and 2008, the Company recognized
approximately $21 million and $5 million, respectively, in operating
income from the CTC, which was terminated in February 2008 when the transition
bonds described below were issued. Additionally, during the six months ended
June 30, 2007 and 2008, the Company recognized approximately
$6 million and $4 million, respectively, of the allowed equity return
not previously recorded.
During
the 2007 legislative session, the Texas legislature amended statutes prescribing
the types of true-up balances that can be securitized by utilities and
authorized the issuance of transition bonds to recover the balance of the CTC.
In June 2007, the Company filed a request with the Texas Utility Commission for
a financing order that would allow the securitization of the remaining balance
of the CTC, adjusted to refund certain unspent environmental retrofit costs and
to recover the amount of the final fuel reconciliation settlement. The Company
reached substantial agreement with other parties to this proceeding, and a
financing order was approved by the Texas Utility Commission in September 2007.
In February 2008, pursuant to the financing order, a new special purpose
subsidiary of the Company issued approximately $488 million of transition
bonds in two tranches with interest rates of 4.192% and 5.234% and final
maturity dates of February 2020 and February 2023, respectively.
Contemporaneously with the issuance of those bonds, the CTC was terminated and a
transition charge was implemented.
As of
June 30, 2008, the Company had not recorded an allowed equity return of
$214 million on the Company’s true-up balance because such return will be
recognized as it is recovered in rates.
(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 by
CenterPoint Energy under its revolving credit facility or the sale by
CenterPoint Energy of its commercial paper. The Company had borrowings from the
money pool of $47 million and $4 million at December 31, 2007 and
June 30, 2008, respectively.
At
December 31, 2007 and June 30, 2008, the Company had a $750 million
note receivable from its parent.
For the
three months ended June 30, 2007 and 2008, the Company had net interest
income related to affiliate borrowings of $11 million and $7 million,
respectively, and $23 million and $17 million, respectively, for the
six months ended June 30, 2007 and 2008.
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 operating expenses,
assets, gross margin, employees and a composite of assets, gross margin 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 $22 million and $29 million for the three
months ended June 30, 2007 and 2008, respectively, and $50 million and
$58 million for the six months ended June 30, 2007 and 2008,
respectively, and are included primarily in operation and maintenance
expenses.
Major Customers. Revenues
derived from energy delivery charges provided by the Company to subsidiaries of
RRI totaled $151 million for each of the three months ended June 30,
2007 and 2008 and $300 and $293 million during the six months ended
June 30, 2007 and 2008, respectively.
(6) Long-Term
Debt
Revolving Credit Facility. As
of December 31, 2007 and June 30, 2008, the Company had $50 million and
$102 million of borrowings, respectively, under its $300 million
credit facility. As of both December 31, 2007 and June 30, 2008, the Company had
approximately $4 million of outstanding letters of credit under its credit
facility. The Company was in compliance with all debt covenants as of
June 30, 2008.
Other. At both December 31,
2007 and June 30, 2008, the Company had issued $151 million of first
mortgage bonds and $527 million of general mortgage bonds 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.
(7) Commitments
and Contingencies
Legal
Matters
RRI
Indemnified Litigation
The
Company, CenterPoint Energy or their predecessor, Reliant Energy, Incorporated
(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 Reliant Energy, Inc. (formerly Reliant
Resources, Inc.) (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 “Gas Market Manipulation Cases,” “Electricity 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. Although the ultimate outcome of these matters
cannot be predicted at this time, CenterPoint Energy has not considered it
necessary to establish reserves related to this litigation.
Gas Market Manipulation
Cases. A large number of lawsuits were filed against numerous gas market
participants in a number of federal and western state courts in connection with
the operation of the natural gas
markets
in 2000-2001. CenterPoint Energy’s former affiliate, RRI, was a participant in
gas trading in the California and Western markets. These lawsuits, many of which
have been filed as class actions, allege violations of state and federal
antitrust laws. Plaintiffs in these lawsuits 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, full consideration damages,
punitive damages, injunctive relief, interest due, civil penalties and fines,
costs of suit and attorneys’ fees. CenterPoint Energy and/or Reliant
Energy were named in approximately 30 of these lawsuits, which were instituted
between 2003 and 2007. In October 2006, RRI reached a settlement of 11 class
action natural gas cases pending in state court in California. The court
approved this settlement in June 2007. In the other gas cases consolidated in
state court in California, the Court of Appeals found that CenterPoint Energy
was not a successor to the liabilities of a subsidiary of RRI, and CenterPoint
Energy was dismissed from these suits in April 2008. In the Nevada federal
litigation, three of the complaints were dismissed based on defendants’ filed
rate doctrine defense, but the Ninth Circuit Court of Appeals reversed those
dismissals and remanded the cases back to the district court for further
proceedings. In July and August 2008, the plaintiffs in nine of
the federal court cases agreed to dismiss CenterPoint Energy from those cases.
CenterPoint remains a defendant in one suit pending in Nevada state court in
Clark County. CenterPoint Energy Services, Inc. (CES), an indirect subsidiary of
CenterPoint Energy, is a defendant in another suit consolidated under
multidistrict litigation rules in federal district court in Nevada.
CenterPoint Energy believes neither it nor CES is a proper defendant in the
remaining cases and will continue to seek dismissal from those
cases.
Electricity Market Manipulation
Cases. A large number of lawsuits were filed against numerous market
participants in connection with the operation of the California electricity
markets in 2000-2001. CenterPoint Energy’s former affiliate, 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 was a defendant in
approximately five of these suits. These lawsuits, many of which were filed as
class actions, were 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. In August 2005, RRI reached a settlement with the
Federal Energy Regulatory Commission (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 has
been approved by the FERC, by the California Public Utilities Commission and by
the courts in which the electricity class action cases were pending. Two parties
appealed the courts’ approval of the settlement to the California Court of
Appeals, but that appeal was denied and the deadline to appeal to the California
Supreme Court has passed. A party in the FERC proceedings filed a motion for
rehearing of the FERC’s order approving the settlement, which the FERC denied in
May 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.
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 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 the Company and the
individual defendants. The plaintiffs appealed the ruling to the Fifth Circuit
Court of Appeals (Fifth Circuit). In April 2008, the Fifth Circuit affirmed the
district court’s ruling, and that ruling is not subject to further
review.
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 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 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 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.
(8) Income
Taxes
During
the three months and six months ended June 30, 2007, the effective tax rate
was 33% and 34%, respectively. During the three months and six months ended
June 30, 2008, the effective tax rate was 36% and 38%, respectively. The
most significant item affecting the comparability of the effective tax rate is
the 2008 classification of approximately $3 million and $7 million for
the three months and six months ended June 30, 2008, respectively, of Texas
margin tax as an income tax.
The
following table summarizes the Company’s liability for uncertain tax positions
in accordance with FASB Interpretation No. (FIN) 48, “Accounting for Uncertainty
in Income Taxes — an Interpretation of FASB Statement No. 109,” at December 31,
2007 and June 30, 2008 (in millions):
|
December
31,
2007
|
June
30,
2008
|
|||||||
|
Liability
for uncertain tax
positions
|
$ | 92 | $ | 106 | ||||
|
Portion
of liability for uncertain tax positions that, if recognized, would reduce
the effective income tax rate
|
8 | 10 | ||||||
|
Interest
accrued on uncertain tax
positions
|
7 | 11 | ||||||
The
following narrative analysis should be read in combination with our Interim
Condensed Financial Statements contained in this Form 10-Q and our Annual Report
on Form 10-K for the year ended December 31, 2007 (2007 Form 10-K).
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), 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 six months
ended June 30, 2007 and the three and six months ended June 30, 2008.
Reference is made to “Management’s Narrative Analysis of Results of Operations”
in Item 7 of our 2007 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 our 2007 Form 10-K.
The
following table sets forth our consolidated results of operations for the three
and six months ended June 30, 2007 and 2008, followed by a discussion of
our consolidated results of operations based on operating income.
|
Three
Months Ended
June
30,
|
Six
Months Ended
June
30,
|
|||||||||||||||
|
2007
|
2008
|
2007
|
2008
|
|||||||||||||
|
(in
millions, except customer data)
|
||||||||||||||||
|
Revenues:
|
||||||||||||||||
|
Electric
transmission and distribution utility
|
$ | 395 | $ | 419 | $ | 742 | $ | 765 | ||||||||
|
Transition
bond companies
|
70 | 91 | 129 | 154 | ||||||||||||
|
Total
revenues
|
465 | 510 | 871 | 919 | ||||||||||||
|
Expenses:
|
||||||||||||||||
|
Operation
and maintenance, excluding transition bond companies
|
150 | 167 | 304 | 335 | ||||||||||||
|
Depreciation
and amortization, excluding transition bond companies
|
61 | 71 | 124 | 137 | ||||||||||||
|
Taxes
other than income taxes
|
56 | 52 | 113 | 105 | ||||||||||||
|
Transition
bond companies
|
41 | 56 | 69 | 87 | ||||||||||||
|
Total
expenses
|
308 | 346 | 610 | 664 | ||||||||||||
|
Operating
income
|
157 | 164 | 261 | 255 | ||||||||||||
|
Interest
and other finance charges
|
(26 | ) | (26 | ) | (54 | ) | (53 | ) | ||||||||
|
Interest
on transition bonds
|
(32 | ) | (35 | ) | (63 | ) | (68 | ) | ||||||||
|
Other
income, net
|
17 | 10 | 34 | 23 | ||||||||||||
|
Income
before income taxes
|
116 | 113 | 178 | 157 | ||||||||||||
|
Income
tax expense
|
(39 | ) | (41 | ) | (60 | ) | (59 | ) | ||||||||
|
Net
income
|
$ | 77 | $ | 72 | $ | 118 | $ | 98 | ||||||||
|
Three
Months Ended
June
30,
|
Six
Months Ended
June
30,
|
|||||||||||||||
|
2007
|
2008
|
2007
|
2008
|
|||||||||||||
|
(in
millions, except customer data)
|
||||||||||||||||
|
Throughput
(in gigawatt-hours (GWh)):
|
||||||||||||||||
|
Residential
|
6,021 | 6,774 | 10,679 | 11,177 | ||||||||||||
|
Total
|
19,175 | 20,360 | 35,835 | 36,929 | ||||||||||||
|
Average
number of metered customers:
|
||||||||||||||||
|
Residential
|
1,767,749 | 1,814,840 | 1,760,006 | 1,808,056 | ||||||||||||
|
Total
|
2,006,840 | 2,058,171 | 1,998,291 | 2,050,316 | ||||||||||||
Three
months ended June 30, 2008 compared to three months ended June 30,
2007
We
reported operating income of $164 million for the three months ended
June 30, 2008, consisting of $129 million from the regulated electric
transmission and distribution utility (TDU) and $35 million related to
transition bond companies. For the three months ended June 30, 2007,
operating income totaled $157 million, consisting of $118 million from
the TDU, exclusive of an additional $10 million from the competition
transition charge (CTC), and $29 million related to transition bond
companies. Revenues for the TDU increased due to increased usage caused by
warmer weather in 2008 compared to 2007 ($16 million), continued customer
growth ($6 million), with almost 52,000 metered customers added since
June 30, 2007, increased transmission related revenues ($4 million)
and increased ancillary services ($3 million), partially offset by the
settlement of the final fuel reconciliation in 2007 ($4 million). Operation
and maintenance expense increased primarily due to higher transmission costs
($9 million), the settlement of the final fuel reconciliation in 2007
($13 million) and increased support services ($3 million), partially
offset by a gain on sale of land ($9 million). Depreciation and
amortization increased $10 million primarily due to amounts related to the
CTC which are offset by similar amounts in revenues in 2007 ($8 million).
Taxes other than income taxes declined $4 million primarily as a result of
Texas margin taxes being classified as an income tax for financial reporting
purposes in 2008.
Six
months ended June 30, 2008 compared to six months ended June 30,
2007
We
reported operating income of $255 million for the six months ended
June 30, 2008, consisting of $183 million from the TDU, exclusive of
an additional $5 million from the CTC, and $67 million related to
transition bond companies. For the six months ended June 30, 2007,
operating income totaled $261 million, consisting of $180 million from
the TDU, exclusive of an additional $21 million from the CTC, and
$60 million related to transition bond companies. Revenues for the TDU
increased due to customer growth, with almost 52,000 metered customers added
since June 30, 2007 ($12 million), increased usage ($6 million)
caused by warmer weather experienced during the second quarter of 2008 reduced
by conservation, increased transmission related revenues ($9 million) and
increased ancillary services ($6 million), partially offset by the
settlement of the final fuel reconciliation in 2007 ($4 million). Operation
and maintenance expense increased primarily due to higher transmission costs
($17 million), the settlement of the final fuel reconciliation in 2007
($13 million) and increased support services ($7 million), partially
offset by a gain on sale of land ($9 million). Depreciation and
amortization increased $13 million primarily due to amounts related to the
CTC which are offset by similar amounts in revenues in 2007 ($10 million).
Taxes other than income taxes declined $8 million primarily as a result of
the Texas margin tax being classified as an income tax for financial reporting
purposes in 2008.
Income
Tax Expense
During
the three months and six months ended June 30, 2007, the effective tax rate was
33% and 34%, respectively. During the three months and six months ended June 30,
2008, the effective tax rate was 36% and 38%, respectively. The most significant
item affecting the comparability of the effective tax rate is the 2008
classification of approximately $3 million and $7 million for the
three months and six months ended June 30, 2008, respectively, of Texas margin
tax as an income tax.
CERTAIN
FACTORS AFFECTING FUTURE EARNINGS
For
information on other developments, factors and trends that may have an impact on
our future earnings, please read “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 our 2007 Form 10-K and
“Cautionary Statement Regarding Forward-Looking Information.”
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 six months of 2008
include approximately $205 million of capital expenditures and
$82 million of scheduled payments on transition bonds.
We expect
that borrowings under our credit facility, the proceeds from the February 2008
issuance of $488 million of transition bonds and anticipated cash flows
from operations will be sufficient to meet our cash needs for the remaining six
months of 2008. Cash needs or discretionary financing or refinancing may also
result in the issuance of debt securities in the capital markets.
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 as discussed below, we have no off-balance sheet
arrangements.
Credit Facility. As of
July 31, 2008, we had $35 million of borrowings and approximately
$4 million of outstanding letters of credit under our $300 million
credit facility. Our $300 million credit facility’s first drawn cost is the
London Interbank Offered Rate (LIBOR) plus 45 basis points based on our current
credit rating. Under our credit facility, an additional utilization fee of 5
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.
Temporary Investments. As of
June 30, 2008, we had no external temporary investments.
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 CenterPoint Energy’s commercial paper.
At June 30, 2008, we had borrowings from the money pool aggregating
$4 million. 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 transition bonds issued by wholly owned
subsidiaries. At June 30, 2008, CenterPoint Energy Transition Bond Company,
LLC (TBC) had $492 million aggregate principal amount of outstanding
transition bonds that were issued in 2001, CenterPoint Energy Transition Bond
Company II, LLC (TBC II) had $1.69 billion aggregate principal amount of
outstanding transition bonds that were issued in 2005 and CenterPoint Energy
Transition Bond Company III, LLC (TBC III) had $488 million aggregate
principal amount of outstanding transition bonds that were issued in February
2008. All the transition bonds were issued in accordance with the Texas Electric
Choice Plan (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.
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, TBC, TBC II and TBC III, as of June 30,
2008. Amounts are expressed in millions.
|
Year
|
Third-Party
|
Affiliate
|
Sub-Total
|
Transition
Bonds
|
Total
|
|||||||||||||||
|
2008
|
$ | — | $ | — | $ | — | $ | 82 | $ | 82 | ||||||||||
|
2009
|
— | — | — | 208 | 208 | |||||||||||||||
|
2010
|
— | — | — | 221 | 221 | |||||||||||||||
|
2011
|
— | — | — | 240 | 240 | |||||||||||||||
|
2012
|
148 | — | 148 | 263 | 411 | |||||||||||||||
|
2013
|
450 | — | 450 | 284 | 734 | |||||||||||||||
|
2014
|
300 | — | 300 | 188 | 488 | |||||||||||||||
|
2015
|
— | 151 | 151 | 201 | 352 | |||||||||||||||
|
2016
|
— | — | — | 215 | 215 | |||||||||||||||
|
2017
|
127 | — | 127 | 230 | 357 | |||||||||||||||
|
2018
|
— | — | — | 247 | 247 | |||||||||||||||
|
2019
|
— | — | — | 264 | 264 | |||||||||||||||
|
2021
|
102 | — | 102 | 29 | 131 | |||||||||||||||
|
2023
|
200 | — | 200 | — | 200 | |||||||||||||||
|
2027
|
56 | — | 56 | — | 56 | |||||||||||||||
|
2033
|
312 | — | 312 | — | 312 | |||||||||||||||
|
Total
|
$ | 1,695 | $ | 151 | $ | 1,846 | $ | 2,672 | $ | 4,518 | ||||||||||
As of
June 30, 2008, 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
Directly
to
Third Parties
|
Issued
as
Collateral
for the Company’s Debt
|
Issued
as
Collateral
for CenterPoint
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 $2.4 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 June 30, 2008. However,
we have contractually agreed not to issue additional first mortgage bonds,
subject to certain exceptions.
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.
|
Year
|
First
Mortgage
Bonds
|
General
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 | ||||||
Impact on Liquidity of a Downgrade
in Credit Ratings. As of July 31, 2008, 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.
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 June 30, 2008, CenterPoint Energy had four series of senior notes
outstanding aggregating $950 million in principal amount under this indenture. A
default by CenterPoint Energy would not trigger a default under our debt
instruments or bank credit facility.
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 our 2007
Form 10-K.
|
Certain Contractual Limits on Our
Ability to Issue Securities and Borrow Money. Our credit facility limits
our debt (excluding transition bonds) as a percentage of our total
capitalization to 65 percent. Additionally, we have contractually agreed not to
issue additional first mortgage bonds, subject to certain
exceptions.
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.
NEW
ACCOUNTING PRONOUNCEMENTS
See Note
2 to our Interim Condensed Financial Statements for a discussion of new
accounting pronouncements that affect us.
Item
4T. 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 June 30, 2008 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 June 30, 2008 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 4 and 7 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 our 2007
Form 10-K.
Item
1A. RISK FACTORS
There
have been no material changes from the risk factors disclosed in our 2007 Form
10-K.
Item
5. OTHER INFORMATION
Our ratio
of earnings to fixed charges for the six months ended June 30, 2007 and
2008 was 2.41 and 2.22, respectively. We do not believe that the ratios for
these six-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.
|
Exhibit
Number
|
Description
|
Report
or Registration Statement
|
SEC
File or Registration Number
|
Exhibit
References
|
|||||
|
3.1
|
– |
Articles
of Organization of CenterPoint Energy Houston Electric
|
CenterPoint
Houston’s Form 8-K dated August 31, 2002 filed with the SEC on September
3, 2002
|
1-3187
|
3(b)
|
||||
|
3.2
|
– |
Limited
Liability Company Regulations of CenterPoint Energy Houston
Electric
|
CenterPoint
Houston’s Form 8-K dated August 31, 2002 filed with the SEC on September
3, 2002
|
1-3187
|
3(c)
|
||||
|
4.1
|
– |
$300,000,000
Second Amended and Restated Credit Agreement, dated as of June 29, 2007,
among CenterPoint Houston, as Borrower, and the banks named
therein
|
CenterPoint
Houston’s Form 10-Q for the quarter ended June 30,
2007
|
1-3187
|
4.1
|
||||
|
+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.”
|
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/ Walter L.
Fitzgerald
|
|
|
Walter
L. Fitzgerald
|
|
|
Senior
Vice President and Chief Accounting Officer
|
|
Date: August
13, 2008
Index to
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
as indicated.
|
Exhibit
Number
|
Description
|
Report
or Registration Statement
|
SEC
File or Registration Number
|
Exhibit
References
|
|||||
|
3.1
|
– |
Articles
of Organization of CenterPoint Energy Houston Electric
|
CenterPoint
Houston’s Form 8-K dated August 31, 2002 filed with the SEC on September
3, 2002
|
1-3187
|
3(b)
|
||||
|
3.2
|
– |
Limited
Liability Company Regulations of CenterPoint Energy Houston
Electric
|
CenterPoint
Houston’s Form 8-K dated August 31, 2002 filed with the SEC on September
3, 2002
|
1-3187
|
3(c)
|
||||
|
4.1
|
– |
$300,000,000
Second Amended and Restated Credit Agreement, dated as of June 29, 2007,
among CenterPoint Houston, as Borrower, and the banks named
therein
|
CenterPoint
Houston’s Form 10-Q for the quarter ended June 30,
2007
|
1-3187
|
4.1
|
||||
|
+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
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)
|
Six
Months Ended
June
30,
|
||||||||
|
2007
|
2008
|
|||||||
|
Net
Income
|
$ | 118 | $ | 98 | ||||
|
Income
taxes
|
60 | 59 | ||||||
|
Capitalized
interest
|
(5 | ) | (4 | ) | ||||
| 173 | 153 | |||||||
|
Fixed
charges, as defined:
|
||||||||
|
Interest
|
117 | 121 | ||||||
|
Capitalized
interest
|
5 | 4 | ||||||
|
Interest component of rentals
charged to operating income
|
1 |
─
|
||||||
|
Total fixed
charges
|
123 | 125 | ||||||
|
Earnings,
as defined
|
$ | 296 | $ | 278 | ||||
|
Ratio
of earnings to fixed charges
|
2.41 | 2.22 | ||||||
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)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
|
|
(a)
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
|
|
|
(b)
|
Designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
|
|
|
(c)
|
Evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation;
and
|
|
|
(d)
|
Disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial
reporting; and
|
5. The
registrant’s other certifying officer(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: August
13, 2008
|
/s/
David M. McClanahan
|
|
|
David
M. McClanahan
|
|
|
President
and Chief Executive Officer
|
Exhibit
31.2
CERTIFICATIONS
I, Gary
L. Whitlock, certify that:
1. I
have reviewed this 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)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
|
|
(a)
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
|
|
|
(b)
|
Designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
|
|
|
(c)
|
Evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation;
and
|
|
|
(d)
|
Disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial
reporting; and
|
5. The
registrant’s other certifying officer(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
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(b)
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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.
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Date: August
13, 2008
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/s/
Gary L. Whitlock
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Gary
L. Whitlock
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Executive
Vice President and Chief Financial
Officer
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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 quarter ended June 30, 2008 (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.
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/s/
David M. McClanahan
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David
M. McClanahan
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President
and Chief Executive Officer
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August
13, 2008
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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 quarter ended June 30, 2008 (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.
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/s/
Gary L. Whitlock
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Gary
L. Whitlock
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Executive
Vice President and Chief Financial Officer
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August
13, 2008
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Exhibit
99.1
Item 1A. Risk
Factors
The
following, along with any additional legal proceedings identified or
incorporated by reference in Item 3 of this report, summarizes the
principal risk factors associated with our business.
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, as
allowed under the Texas electric restructuring law. In December 2004, the
Texas Utility Commission issued the True-Up Order allowing us to recover a
true-up balance of approximately $2.3 billion, which included interest
through August 31, 2004, and provided for adjustment of the amount to be
recovered to include interest on the balance until recovery, along with the
principal portion of additional EMCs returned to customers after August 31,
2004 and in certain other respects.
We and
other parties filed appeals of the True-Up Order to a district court in Travis
County, Texas. In August 2005, that court issued its judgment on the
various appeals. In its judgment, the district court:
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reversed
the Texas Utility Commission’s ruling that had denied recovery of a
portion of the capacity auction true-up amounts;
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reversed
the Texas Utility Commission’s ruling that precluded us from recovering
the interest component of the EMCs paid to REPs; and
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affirmed
the True-Up Order in all other
respects.
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The district court’s decision would
have had the effect of restoring approximately $650 million, plus interest,
of the $1.7 billion the Texas Utility Commission had disallowed from our
initial request.
We and other parties appealed the
district court’s judgment to the Texas Third Court of Appeals, which issued
its decision in December 2007. In its decision, the court of
appeals:
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reversed
the district court’s judgment to the extent it restored the capacity
auction true-up amounts;
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reversed
the district court’s judgment to the extent it upheld the Texas Utility
Commission’s decision to allow us to recover EMCs paid to
RRI;
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ordered
that the tax normalization issue described below be remanded to the Texas
Utility Commission; and
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affirmed
the district court’s judgment in all other
respects.
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We and two other parties filed motions
for rehearing with the court of appeals. In the event that the motions for
rehearing are not resolved in a manner favorable to us, we intend to seek
further review by the Texas Supreme Court. Although we believe that our true-up
request is consistent with applicable statutes and regulations and accordingly
that it is reasonably possible that we will be successful in our further
appeals, we can provide no assurance as to the ultimate rulings by the courts on
the issues to be considered in the various appeals or with respect to the
ultimate decision by the Texas Utility Commission on the tax normalization issue
described below.
To reflect the impact of the True-Up
Order, in 2004 and 2005 we recorded a net after-tax extraordinary loss of
$947 million. No amounts related to the district court’s judgment or the
decision of the court of appeals have been recorded in our consolidated
financial statements. However, if the court of appeals decision is not reversed
or modified as a result of the pending motions for rehearing or on further
review by the Texas Supreme Court, we
anticipate
that we would be required to record an additional loss to reflect the court of
appeals decision. The amount of that loss would depend on several factors,
including ultimate resolution of the tax normalization issue described below and
the calculation of interest on any amounts we ultimately are authorized to
recover or are required to refund beyond the amounts recorded based on the
True-up Order, but could range from $130 million to $350 million, plus
interest subsequent to December 31, 2007.
In the True-Up Order the Texas
Utility Commission reduced our stranded cost recovery by approximately
$146 million, which was included in the extraordinary loss discussed above,
for the present value of certain deferred tax benefits associated with our
former electric generation assets. We believe that the Texas Utility Commission
based its order on proposed regulations issued by the Internal Revenue Service
(IRS) in March 2003 which 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. CenterPoint Energy subsequently requested a Private Letter
Ruling (PLR) asking the IRS whether the Texas Utility Commission’s order
reducing our stranded cost recovery by $146 million for ADITC and EDFIT
would cause normalization violations. In that ruling, which was received in
August 2007, the IRS concluded that such reductions would cause
normalization violations with respect to the ADITC and EDFIT. As in a
similar PLR issued in May 2006 to another Texas utility, the IRS did not
reference its proposed regulations.
The district court affirmed the Texas
Utility Commission’s ruling on the tax normalization issue, but in response to a
request from the Texas Utility Commission, the court of appeals ordered that the
tax normalization issue be remanded for further consideration. If the Texas
Utility Commission’s order relating to the ADITC reduction is not reversed or
otherwise modified on remand so as to eliminate the normalization violation, the
IRS could require CenterPoint Energy to pay an amount equal to our unamortized
ADITC balance as of the date that the normalization violation is deemed to have
occurred. In addition, the IRS could deny us the ability to elect accelerated
tax depreciation benefits beginning in the taxable year that the normalization
violation is deemed to have occurred. Such treatment, if required by the IRS,
could have a material adverse impact on our results of operations, financial
condition and cash flows in addition to any potential loss resulting from final
resolution of the True-Up Order. However, we and CenterPoint Energy will
continue to pursue a favorable resolution of this issue through the appellate or
administrative process. Although the Texas Utility Commission has not previously
required a company subject to its jurisdiction to take action that would result
in a normalization violation, no prediction can be made as to the ultimate
action the Texas Utility Commission may take on this issue on
remand.
Our
receivables are concentrated in a small number of REPs, 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 REPs that supply the electricity we distribute
to their customers. Currently, we do business with 74 REPs. Adverse economic
conditions, structural problems in the market served by ERCOT or financial
difficulties of one or more REPs 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 REPs 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. Applicable
Texas Utility Commission regulations limit the extent to which we can demand
security from REPs for payment of our delivery charges. RRI, through its
subsidiaries, is our largest customer. Approximately 48% of our
$141 million in billed receivables from REPs at December 31, 2007 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. In this
connection, pursuant to the Settlement Agreement, discussed in “Business —
Regulation — State and Local Regulation — Rate Agreement” in
Item 1 of this report, until June 30, 2010 we are
limited
in our ability to request rate relief. 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 REPs electric power that the REPs 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
is derived from rates that we collect from each REP based on the amount of
electricity we distribute on behalf of such REP. 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, 2007, we had
$3.9 billion of outstanding indebtedness on a consolidated basis, which
includes $2.3 billion of non-recourse transition bonds. In
February 2008, we issued approximately $488 million of additional
non-recourse transition bonds. Our future financing activities may depend, at
least in part, on:
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the
resolution of the true-up components, including, in particular, the
results of appeals to the courts regarding rulings obtained to
date;
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general
economic and capital market conditions;
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credit
availability from financial institutions and other
lenders;
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investor
confidence in us and the markets in which we operate;
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maintenance
of acceptable credit ratings by us and CenterPoint
Energy;
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market
expectations regarding our future earnings and cash
flows;
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market
perceptions of our and CenterPoint Energy’s ability to access capital
markets on reasonable terms;
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our
exposure to RRI as our customer and in connection with its indemnification
obligations arising in connection with its separation from CenterPoint
Energy; and
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provisions
of relevant tax and securities
laws.
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As of December 31, 2007, 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 $2.3 billion of additional first mortgage bonds and general
mortgage bonds in the aggregate could be
issued on
the basis of retired bonds and 70% of property additions as of December 31,
2007. However, we have contractually agreed that we will not issue additional
first mortgage bonds, subject to certain exceptions.
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, 2007,
CenterPoint Energy and its subsidiaries other than us have approximately $842
million principal amount of debt required to be paid through 2010. This amount
excludes amounts related to capital leases, transition bonds and indexed debt
securities obligations, but includes $123 million of 3.75% convertible
notes converted by holders in January and February 2008. In addition,
CenterPoint Energy has cash settlement obligations with respect to
$412 million of outstanding 3.75% convertible notes on which holders could
exercise their conversion rights during the first quarter of 2008 and in
subsequent quarters in which CenterPoint Energy’s common stock price causes such
notes to be convertible. 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, 2007 could be adversely affected.
We
are an indirect wholly owned subsidiary of CenterPoint Energy. CenterPoint
Energy can exercise substantial control over our dividend policy and business
and operations and could do so in a manner that is adverse to our
interests.
We are managed by officers and
employees of CenterPoint Energy. Our management will make determinations with
respect to the following:
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our
payment of dividends;
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decisions
on our financings and our capital raising activities;
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mergers
or other business combinations; and
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our
acquisition or disposition of
assets.
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There are no contractual restrictions
on our ability to pay dividends to CenterPoint Energy. Our management could
decide to increase our dividends to CenterPoint Energy to support its cash
needs. This could adversely affect our liquidity. However, under our credit
facility, our ability to pay dividends is restricted by a covenant that debt,
excluding transition bonds, as a percentage of total capitalization may not
exceed 65%.
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 discussed in “Business — Environmental Matters” in Item 1 of
this report. 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:
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restricting
the way we can handle or dispose of wastes;
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limiting
or prohibiting construction activities in sensitive areas such as
wetlands, coastal regions, or areas inhabited by endangered
species;
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requiring
remedial action to mitigate pollution conditions caused by our operations,
or attributable to former operations; and
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enjoining
the operations of facilities deemed in non-compliance with permits issued
pursuant to such environmental laws and
regulations.
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In order to comply with these
requirements, we may need to spend substantial amounts and devote other
resources from time to time to:
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construct
or acquire new equipment;
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acquire
permits for facility operations;
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modify
or replace existing and proposed equipment; and
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clean
up or decommission waste disposal areas, fuel storage and management
facilities and other locations and
facilities.
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Failure to comply with these laws and
regulations may trigger a variety of administrative, civil and criminal
enforcement measures, including the assessment of monetary penalties, the
imposition of remedial actions, and the issuance of orders enjoining future
operations. Certain environmental statutes impose strict, joint and several
liability for costs required to clean up and restore sites where hazardous
substances have been disposed or otherwise released. Moreover, it is not
uncommon for neighboring landowners and other third parties to file claims for
personal injury and property damage allegedly caused by the release of hazardous
substances or other waste products into the environment.
Our
insurance coverage may not be sufficient. Insufficient insurance coverage and
increased insurance costs could adversely impact our results of operations,
financial condition and cash flows.
We currently have general liability and
property insurance in place to cover certain of our facilities in amounts that
we consider appropriate. Such policies are subject to certain limits and
deductibles and do not include business interruption coverage. Insurance
coverage may not be available in the future at current costs or on commercially
reasonable terms, and the insurance proceeds received for any loss of, or any
damage to, any of our facilities may not be sufficient to restore the loss or
damage without negative impact on our results of operations, financial condition
and cash flows.
In common with other companies in our
line of business that serve coastal regions, we do not have insurance covering
our transmission and distribution system because we believe it to be cost
prohibitive. If we were to sustain any loss of, or damage to, our transmission
and distribution properties, we 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:
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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
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those
transferred to Texas Genco in connection with its organization and
capitalization.
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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. These
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 energy sales in California and
other markets and financial reporting matters. Although these matters relate to
the business and operations of RRI, claims against Reliant Energy have been made
on grounds that include the effect of RRI’s financial results on Reliant
Energy’s historical financial statements and liability of Reliant Energy as a
controlling shareholder of RRI. We or CenterPoint Energy could incur liability
if claims in one or more of these lawsuits were successfully asserted against us
or CenterPoint Energy 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 its 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 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 CenterPoint Energy had not been released
from the liability in connection with the transfer, we could be responsible for
satisfying the liability.
CenterPoint Energy or its subsidiaries
have been named, along with numerous others, as a defendant in lawsuits filed by
a large number of individuals who claim injury due to exposure to asbestos. Most
claimants in such litigation have been workers who participated in construction
of various industrial facilities, including power plants. Some of the claimants
have worked at locations CenterPoint Energy owns, but most existing claims
relate to facilities previously owned by its subsidiaries but currently owned by
Texas Genco LLC, which is now known as NRG Texas LP. We anticipate that
additional claims like those received may be asserted in the future. 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 by Texas Genco LLC.