UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
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(Mark
One)
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R
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QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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FOR
THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2009
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OR
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£
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
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FOR
THE TRANSITION PERIOD FROM TO
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______________________________
Commission
file number 1-3187
CENTERPOINT
ENERGY HOUSTON ELECTRIC, LLC
(Exact
name of registrant as specified in its charter)
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Texas
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22-3865106
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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1111
Louisiana
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Houston,
Texas 77002
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(713)
207-1111
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(Address
and zip code of principal executive offices)
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(Registrant’s
telephone number, including area
code)
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______________________________
CenterPoint
Energy Houston Electric, LLC meets the conditions set forth in General
Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q
with the reduced disclosure format.
Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes R No £
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes £ 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):
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Large accelerated filer o
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Accelerated
filer o
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Non-accelerated
filer þ
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Smaller
reporting company o
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(Do
not check if a smaller reporting company)
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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
October 19, 2009, all 1,000 common shares of CenterPoint Energy Houston
Electric, LLC were held by Utility Holding, LLC, a wholly owned subsidiary of
CenterPoint Energy, Inc.
CENTERPOINT
ENERGY HOUSTON ELECTRIC, LLC
QUARTERLY
REPORT ON FORM 10-Q
FOR
THE QUARTER ENDED SEPTEMBER 30, 2009
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PART
I.
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FINANCIAL
INFORMATION
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Item
1.
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1
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Three
and Nine Months Ended September 30, 2008 and 2009
(unaudited)
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1
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December 31,
2008 and September 30, 2009 (unaudited)
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2
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Nine
Months Ended September 30, 2008 and 2009 (unaudited)
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4
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5
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Item
2.
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16
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Item
4T.
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23
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PART
II.
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OTHER
INFORMATION
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Item
1.
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23
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Item
1A.
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23
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Item
5.
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30
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Item
6.
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31
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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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•
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the
resolution of the true-up proceedings, including, in particular, the
results of appeals to the Texas Supreme Court regarding rulings obtained
to date;
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•
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state
and federal legislative and regulatory actions or developments, including
deregulation, re-regulation, environmental regulations, including
regulations related to global climate change and health care reform, and
changes in or application of laws or regulations applicable to the various
aspects of our business;
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•
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timely
and appropriate regulatory actions allowing securitization or other
recovery of costs associated with any future hurricanes or natural
disasters;
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•
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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;
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•
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the
ability of RRI Energy, Inc. (RRI) (formerly known as Reliant Energy, Inc.
and Reliant Resources, Inc.) and its subsidiaries to satisfy their
obligations in respect of RRI’s indemnity obligations to
us;
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•
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the
ability of NRG Retail, LLC, the successor to RRI’s retail electric
provider and our largest customer, to satisfy its obligations to us and
our subsidiaries;
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•
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the
outcome of litigation brought by or against
us;
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•
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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
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cannot
assure will be completed or will have the anticipated benefits to
us;
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•
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acquisition
and merger activities involving our parent or our competitors;
and
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•
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other
factors we discuss in "Risk Factors" in Item 1A of Part II of this
Quarterly Report on Form 10-Q and other reports we file from time to time
with the Securities and Exchange
Commission.
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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
(AN
INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
CONDENSED
STATEMENTS OF CONSOLIDATED INCOME
(Millions
of Dollars)
(Unaudited)
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Three
Months Ended
September 30,
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Nine
Months Ended
September 30,
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|||||||||||||||
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2008
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2009
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2008
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2009
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|||||||||||||
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Revenues
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$ | 552 | $ | 608 | $ | 1,471 | $ | 1,541 | ||||||||
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Expenses:
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||||||||||||||||
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Operation
and maintenance
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169 | 196 | 507 | 568 | ||||||||||||
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Depreciation
and amortization
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133 | 142 | 354 | 365 | ||||||||||||
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Taxes
other than income taxes
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48 | 52 | 153 | 158 | ||||||||||||
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Total
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350 | 390 | 1,014 | 1,091 | ||||||||||||
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Operating
Income
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202 | 218 | 457 | 450 | ||||||||||||
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Other
Income (Expense):
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Interest
and other finance charges
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(27 | ) | (39 | ) | (80 | ) | (118 | ) | ||||||||
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Interest
on transition bonds
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(34 | ) | (32 | ) | (102 | ) | (98 | ) | ||||||||
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Other,
net
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11 | 14 | 34 | 41 | ||||||||||||
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Total
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(50 | ) | (57 | ) | (148 | ) | (175 | ) | ||||||||
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Income
Before Income Taxes
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152 | 161 | 309 | 275 | ||||||||||||
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Income
tax expense
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(54 | ) | (43 | ) | (113 | ) | (88 | ) | ||||||||
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Net
Income
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$ | 98 | $ | 118 | $ | 196 | $ | 187 | ||||||||
See Notes
to the Interim Condensed Consolidated Financial Statements
(AN
INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Millions
of Dollars)
(Unaudited)
ASSETS
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December 31,
2008
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September 30,
2009
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|||||||
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Current
Assets:
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||||||||
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Cash
and cash equivalents
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$ | 166 | $ | 60 | ||||
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Accounts
and notes receivable, net
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227 | 284 | ||||||
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Accounts
and notes receivable – affiliated companies
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30 | 228 | ||||||
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Accrued
unbilled revenues
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60 | 62 | ||||||
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Inventory
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74 | 70 | ||||||
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Taxes
receivable
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8 | — | ||||||
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Deferred
tax asset, net
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1 | 1 | ||||||
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Other
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82 | 74 | ||||||
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Total
current assets
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648 | 779 | ||||||
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Property,
Plant and Equipment:
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||||||||
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Property,
plant and equipment
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7,256 | 7,274 | ||||||
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Less
accumulated depreciation and amortization
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2,652 | 2,709 | ||||||
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Property,
plant and equipment, net
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4,604 | 4,565 | ||||||
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Other
Assets:
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||||||||
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Regulatory
assets
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2,832 | 2,891 | ||||||
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Notes
receivable — affiliated companies
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750 | 750 | ||||||
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Other
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48 | 33 | ||||||
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Total
other assets
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3,630 | 3,674 | ||||||
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Total
Assets
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$ | 8,882 | $ | 9,018 | ||||
See Notes
to the 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
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December 31,
2008
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September 30,
2009
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|||||||
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Current
Liabilities:
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||||||||
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Current
portion of transition bond long-term debt
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$ | 208 | $ | 221 | ||||
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Accounts
payable
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150 | 62 | ||||||
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Accounts
and notes payable — affiliated companies
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36 | 25 | ||||||
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Taxes
accrued
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87 | 84 | ||||||
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Interest
accrued
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100 | 32 | ||||||
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Other
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89 | 97 | ||||||
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Total
current liabilities
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670 | 521 | ||||||
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Other
Liabilities:
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||||||||
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Accumulated
deferred income taxes, net
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1,506 | 1,485 | ||||||
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Unamortized
investment tax credits
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21 | 16 | ||||||
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Benefit
obligations
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187 | 187 | ||||||
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Regulatory
liabilities
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313 | 383 | ||||||
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Notes
payable — affiliated companies
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151 | 151 | ||||||
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Other
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170 | 196 | ||||||
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Total
other liabilities
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2,348 | 2,418 | ||||||
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Long-term
Debt:
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Transition
bonds
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2,381 | 2,160 | ||||||
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Other
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1,843 | 2,092 | ||||||
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Total
long-term debt
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4,224 | 4,252 | ||||||
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Commitments
and Contingencies (Note 8)
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Member’s
Equity:
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||||||||
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Common
stock
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— | — | ||||||
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Paid-in
capital
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1,230 | 1,230 | ||||||
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Retained
earnings
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410 | 597 | ||||||
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Total
member’s equity
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1,640 | 1,827 | ||||||
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Total
Liabilities and Member’s Equity
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$ | 8,882 | $ | 9,018 | ||||
See Notes
to the Interim Condensed Consolidated Financial Statements
(AN
INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
CONDENSED
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Millions
of Dollars)
(Unaudited)
|
Nine
Months Ended September 30,
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||||||||
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2008
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2009
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|||||||
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Cash
Flows from Operating Activities:
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Net
income
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$ | 196 | $ | 187 | ||||
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Adjustments
to reconcile net income to net cash provided by operating
activities:
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||||||||
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Depreciation
and amortization
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354 | 365 | ||||||
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Amortization
of deferred financing costs
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9 | 18 | ||||||
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Deferred
income taxes
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373 | 15 | ||||||
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Changes
in other assets and liabilities:
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||||||||
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Accounts
and notes receivable, net
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(30 | ) | (39 | ) | ||||
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Accounts
receivable/payable, affiliates
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18 | 14 | ||||||
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Inventory
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(10 | ) | 4 | |||||
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Accounts
payable
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(2 | ) | (70 | ) | ||||
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Taxes
receivable
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(370 | ) | 8 | |||||
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Interest
and taxes accrued
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(42 | ) | (71 | ) | ||||
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Net
regulatory assets and liabilities
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(55 | ) | (35 | ) | ||||
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Other
current assets
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14 | 5 | ||||||
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Other
current liabilities
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27 | 8 | ||||||
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Other
assets
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(3 | ) | — | |||||
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Other
liabilities
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(4 | ) | (15 | ) | ||||
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Other,
net
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(10 | ) | — | |||||
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Net
cash provided by operating activities
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465 | 394 | ||||||
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Cash
Flows from Investing Activities:
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||||||||
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Capital
expenditures
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(257 | ) | (332 | ) | ||||
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Increase
in notes receivable from affiliates, net
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— | (215 | ) | |||||
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Decrease
(increase) in restricted cash of transition bond companies
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(8 | ) | 3 | |||||
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Other,
net
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(2 | ) | 15 | |||||
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Net
cash used in investing activities
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(267 | ) | (529 | ) | ||||
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Cash
Flows from Financing Activities:
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||||||||
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Long-term
revolving credit facility, net
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121 | (251 | ) | |||||
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Proceeds
from long-term debt
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488 | 500 | ||||||
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Payments
of long-term debt
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(159 | ) | (208 | ) | ||||
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Debt
issuance costs
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(6 | ) | (4 | ) | ||||
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Decrease
in short-term notes with affiliates, net
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(47 | ) | (8 | ) | ||||
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Dividend
to parent
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(640 | ) | — | |||||
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Net
cash provided by (used in) financing activities
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(243 | ) | 29 | |||||
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Net
Decrease in Cash and Cash Equivalents
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(45 | ) | (106 | ) | ||||
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Cash
and Cash Equivalents at Beginning of Period
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128 | 166 | ||||||
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Cash
and Cash Equivalents at End of Period
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$ | 83 | $ | 60 | ||||
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Supplemental
Disclosure of Cash Flow Information:
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||||||||
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Cash
Payments:
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||||||||
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Interest,
net of capitalized interest
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$ | 214 | $ | 283 | ||||
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Income
taxes (refunds), net
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98 | 57 | ||||||
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Non-cash
transactions:
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||||||||
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Accounts
payable related to capital expenditures
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163 | 24 | ||||||
See Notes
to the 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). 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, 2008
(CenterPoint Houston Form 10-K).
Background. CenterPoint
Houston engages in the electric transmission and distribution business in a
5,000-square mile area of the Texas Gulf Coast that includes Houston.
CenterPoint Houston is an indirect wholly owned subsidiary of CenterPoint
Energy, Inc. (CenterPoint Energy), a public utility holding company. At
September 30, 2009, CenterPoint Houston had four 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) and CenterPoint Energy Restoration
Bond Company, LLC. Each is a special purpose Delaware limited liability company
formed for the principal purpose of purchasing and owning transition property,
issuing transition or system restoration bonds and performing activities
incidental thereto. For further discussion of the transition and system
restoration 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,
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.
CenterPoint
Houston’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 CenterPoint Houston’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
December 2008, the Financial Accounting Standards Board (FASB) issued new
accounting guidance on employers' disclosures about postretirement benefit plan
assets which expands the disclosures about employers’ plan assets to include
more detailed disclosures about the employers’ investment strategies, major
categories of plan assets, concentrations of risk within plan assets and
valuation techniques used to measure the fair value of plan assets. This new
accounting guidance is effective for fiscal years ending after December 15,
2009. CenterPoint Houston expects that the adoption of this new guidance will
not have a material impact on its financial position, results of operations or
cash flows.
In April
2009, the FASB issued new accounting guidance on interim disclosures about fair
value of financial instruments which expands the fair value disclosures required
for all financial instruments to interim periods. This new guidance also
requires entities to disclose in interim periods the methods and significant
assumptions used to estimate the fair value of financial instruments. This new
accounting guidance is effective for interim reporting periods ending after June
15, 2009. CenterPoint Houston’s adoption of this new guidance did not have a
material impact on its financial position, results of operations or cash
flows. See Note 10 for the required disclosures.
In May
2009, the FASB issued new accounting guidance on subsequent events that
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued. This new accounting guidance is effective for
interim or annual periods ending
5
after June 15, 2009. CenterPoint Houston’s adoption of this new guidance
did not have a material impact on its financial position, results of operations
or cash flows. See Note 11 for the subsequent event related
disclosures.
In June
2009, the FASB issued new accounting guidance on consolidation of variable
interest entities (VIEs) that changes how a reporting entity determines a
primary beneficiary that would consolidate the VIE from a quantitative risk and
rewards approach to a qualitative approach based on which variable interest
holder has the power to direct the economic performance related activities of
the VIE as well as the obligation to absorb losses or right to receive benefits
that could potentially be significant to the VIE. This new guidance requires the
primary beneficiary assessment to be performed on an ongoing basis and also
requires enhanced disclosures that will provide more transparency about a
company’s involvement in a VIE. This new guidance is effective for a reporting
entity’s first annual reporting period that begins after November 15,
2009. CenterPoint Houston expects that the adoption of this new guidance
will not have a material impact on its financial position, results of operations
or cash flows.
In June
2009, the FASB issued new accounting guidance on the FASB Accounting Standards
Codification (Codification) and the hierarchy of generally accepted accounting
principles. This new accounting guidance establishes the Codification as the
source of authoritative U.S. generally accepted accounting principles recognized
by the FASB to be applied by nongovernmental entities. Rules and
interpretive releases of the Securities and Exchange Commission (SEC) under
authority of federal securities laws are also sources of authoritative GAAP for
SEC registrants. This new accounting guidance is effective for financial
statements issued for interim and annual periods ending after September 15,
2009. CenterPoint Houston’s adoption of this new guidance did not have any
impact on its financial position, results of operations or cash
flows.
Management
believes the impact of other recently issued standards, which are not yet
effective, will not have a material impact on CenterPoint Houston’s consolidated
financial position, results of operations or cash flows upon
adoption.
(3) Employee
Benefit Plans
CenterPoint
Houston’s employees participate in CenterPoint Energy’s postretirement benefit
plan. CenterPoint Houston’s net periodic cost includes the following components
relating to postretirement benefits:
|
Three
Months Ended
September 30,
|
Nine
Months Ended
September 30,
|
|||||||||||||||
|
2008
|
2009
|
2008
|
2009
|
|||||||||||||
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(in
millions)
|
||||||||||||||||
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Service
cost
|
$ | 1 | $ | — | $ | 1 | $ | — | ||||||||
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Interest
cost
|
4 | 5 | 13 | 14 | ||||||||||||
|
Expected
return on plan assets
|
(2 | ) | (2 | ) | (8 | ) | (6 | ) | ||||||||
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Amortization
of transition obligation
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1 | 1 | 4 | 4 | ||||||||||||
|
Net
periodic cost
|
$ | 4 | $ | 4 | $ | 10 | $ | 12 | ||||||||
CenterPoint
Houston expects to contribute approximately $9 million to CenterPoint
Energy’s postretirement benefit plan in 2009, of which $2 million and
$7 million, respectively, have been contributed during the three and nine
months ended September 30, 2009.
(4) Regulatory
Matters
(a)
Hurricane Ike
CenterPoint
Houston’s electric delivery system suffered substantial damage as a result of
Hurricane Ike, which struck the upper Texas coast in
September 2008.
As is
common with electric utilities serving coastal regions, the poles, towers,
wires, street lights and pole mounted equipment that comprise CenterPoint
Houston’s transmission and distribution system are not covered by property
insurance, but office buildings and warehouses and their contents and
substations are covered by insurance that provides for a maximum deductible of
$10 million. Current estimates are that total losses to property covered by
this insurance were approximately $28 million.
6
CenterPoint Houston deferred the
uninsured system restoration costs as management believed it was probable that
such costs would be recovered through the regulatory process. As a result,
system restoration costs did not affect CenterPoint Houston’s reported operating
income for 2008 or the first nine months of 2009. In April 2009, CenterPoint
Houston filed with the Public Utility Commission of Texas (Texas Utility
Commission) an application for review and approval for recovery of approximately
$608 million in system restoration costs identified as of the end of
February 2009, plus $2 million in regulatory expenses, $13 million in
certain debt issuance costs and $55 million in incurred and projected
carrying costs, pursuant to the legislation described below.
In April
2009, the Texas Legislature enacted legislation that authorized the Texas
Utility Commission to conduct proceedings to determine the amount of system
restoration costs and related costs associated with hurricanes or other major
storms that utilities are entitled to recover, and to issue financing orders
that would permit a utility like CenterPoint Houston to recover the distribution
portion of those costs and related carrying costs through the issuance of
non-recourse system restoration bonds similar to the securitization bonds issued
previously. The legislation also allowed such a utility to recover,
or defer for future recovery, the transmission portion of its system restoration
costs through the existing mechanisms established to recover transmission level
costs. The legislation required the Texas Utility Commission to make
its determination of recoverable system restoration costs within 150 days of the
filing of a utility’s application and to rule on a utility’s application for a
financing order for the issuance of system restoration bonds within 90 days of
the filing of that application. Alternatively, if securitization is
not the least-cost option for rate payers, the legislation authorized the Texas
Utility Commission to allow a utility to recover those costs through a customer
surcharge mechanism.
In its
application filed in April 2009, CenterPoint Houston sought approval for
recovery of a total of approximately $678 million, including the
$608 million in system restoration costs described above plus related
regulatory expenses, certain debt issuance costs and carrying costs calculated
through August 2009. In July 2009, CenterPoint Houston announced that it
had reached a settlement agreement with the parties to the
proceeding. Under the terms of that settlement agreement, CenterPoint
Houston would be entitled to recover a total of $663 million in costs
relating to Hurricane Ike, along with carrying costs from September 1,
2009 until system restoration bonds were issued. The Texas Utility Commission
issued an order in August 2009 approving CenterPoint Houston’s application and
the settlement agreement and authorizing recovery of a total of
$663 million, of which $643 million is attributable to distribution
service and eligible for securitization and the remaining $20 million is
attributable to transmission service and eligible for recovery through the
existing mechanisms established to recover transmission costs.
In July
2009, CenterPoint Houston filed with the Texas Utility Commission its
application for a financing order to recover the portion of approved costs
related to distribution service through the issuance of system restoration
bonds. As discussed above, in August 2009, the Texas Utility
Commission issued a financing order allowing CenterPoint Houston to securitize
$643 million in distribution service costs plus carrying charges from
September 1, 2009 through the date the system restoration bonds are issued, as
well as certain up-front qualified costs capped at approximately
$6 million. In accordance with the financing order, CenterPoint
Houston is to place into effect a separate customer credit related to
accumulated deferred federal income taxes (ADFIT) associated with the storm
restoration costs to be recovered. This separate credit (ADFIT Credit) is to be
applied to customers’ bills to reflect the benefit of those deferred taxes at a
carrying charge of 11.075%. The beginning balance of the ADFIT related to storm
costs is approximately $207 million and will decline over the life of the
system restoration bonds as taxes are paid on the system restoration tariffs.
The ADFIT Credit will become effective on the same date as the tariff for the
system restoration charges and will reduce operating income in 2010 by
approximately $24 million. CenterPoint Houston expects its subsidiary,
CenterPoint Energy Restoration Bond Company, LLC, to issue the system
restoration bonds in the fourth quarter of 2009. Assuming system restoration
bonds are issued, CenterPoint Houston will recover the distribution portion of
approved system restoration costs out of the bond proceeds, with the bonds being
repaid over time through a charge imposed on customers. CenterPoint
Houston expects to recover the remaining approximately $20 million of
Hurricane Ike costs related to transmission service through the existing
mechanisms established to recover transmission costs.
In
accordance with the orders discussed above, as of September 30, 2009,
CenterPoint Houston has recorded a net regulatory asset of $642 million
associated with distribution-related storm restoration costs and
$20 million associated with transmission-related storm restoration
costs. These amounts reflect carrying costs of $50 million
related to distribution and $2 million related to transmission through
September 30, 2009, based on the 11.075% cost of capital approved by
the Texas Utility Commission. The carrying costs have been bifurcated into
two
7
components:
(i) return of borrowing costs and (ii) an allowance for earnings on
shareholders’ investment. During the three months and nine months ended
September 30, 2009, the component representing a return of borrowing costs
of $6 million and $20 million, respectively, has been recognized and
is included in other income in CenterPoint Houston’s Condensed Statements of
Consolidated Income. That component will continue to be recognized as
earned until the associated system restoration costs are recovered. The
component representing an allowance for earnings on shareholders’ investment of
$32 million is being deferred and will be recognized as it is collected
through rates.
|
|
(b)
Recovery of True-Up Balance
|
In March
2004, CenterPoint Houston filed its true-up application with the 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 CenterPoint Houston 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.
CenterPoint
Houston 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 CenterPoint Houston
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 CenterPoint Houston’s initial
request.
CenterPoint
Houston 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 CenterPoint Houston to recover EMCs paid to
RRI Energy, Inc. (RRI) (formerly known as Reliant Energy, Inc. and Reliant
Resources, Inc.);
|
|
|
•
|
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, CenterPoint Houston petitioned the Texas Supreme Court for review of the
court of appeals decision. In its petition, CenterPoint Houston 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
CenterPoint Houston 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 that (i) the Texas Utility
Commission was without authority to fashion the
8
methodology
it used for valuing the former generation assets after it had determined that
CenterPoint Houston could not use the partial stock valuation method, (ii) 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) 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) CenterPoint Houston should not have been permitted
to recover construction work in progress balances without proving those amounts
in the manner required by law and (v) the Texas Utility Commission was without
authority to award interest on the capacity auction true up
award.
In June
2009, the Texas Supreme Court granted the petitions for review of the court of
appeals decision. Oral argument before the court was held in October
2009. Although CenterPoint Houston 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, CenterPoint Houston 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, CenterPoint Houston
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 CenterPoint Houston'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, CenterPoint Houston
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 CenterPoint Houston
ultimately is authorized to recover or is required to refund beyond the amounts
recorded based on the True-up Order, but could range from $170 million to
$385 million (pre-tax) plus interest subsequent to December 31,
2008.
In the
True-Up Order, the Texas Utility Commission reduced CenterPoint Houston’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.
CenterPoint Energy believes that the Texas Utility Commission based its order on
proposed regulations issued by the Internal Revenue Service (IRS) in March 2003
that 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 CenterPoint Houston 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 CenterPoint Houston’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 CenterPoint
Houston’s unamortized ADITC balance as of the date that the normalization
violation is deemed to have occurred. In addition, the IRS could deny
CenterPoint Houston 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 CenterPoint Houston'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 or briefs filed with the Texas Supreme Court,
has challenged that order by the court of appeals although the Texas Supreme
Court has the authority to consider all aspects of the rulings above, not just
those challenged specifically by the appellants. CenterPoint Energy and
CenterPoint Houston will continue to pursue a favorable resolution of this issue
through the appellate and 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 CenterPoint Houston in
the Texas Utility Commission’s True-Up Order to be recovered either through
securitization or through implementation of a
9
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 CenterPoint Houston 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, CenterPoint Houston recovered
approximately $1.7 billion of the true-up balance determined in the True-Up
Order plus interest through the date on which the bonds were
issued.
In July
2005, CenterPoint Houston received an order from the Texas Utility Commission
allowing it to implement a CTC 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 CenterPoint Houston
to impose a charge on REPs to recover the portion of the true-up balance not
recovered through a financing order. The CTC Order also allowed CenterPoint
Houston to collect approximately $24 million of rate case expenses over
three years without a return through a separate tariff rider (Rider RCE).
CenterPoint Houston implemented the CTC and Rider RCE effective
September 13, 2005 and began recovering approximately $620 million.
The return on the CTC portion of the true-up balance was included in CenterPoint
Houston’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. Recovery of rate case expenses under Rider RCE
was completed in September 2008.
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 CenterPoint Houston
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
CenterPoint Houston 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. Two of the appellants have requested further review from the
Texas Supreme Court. In June 2009, the Texas Supreme Court agreed to
hear those appeals and oral argument before the court was held in October 2009.
The ultimate outcome of this matter cannot be predicted at this time. However,
CenterPoint Houston 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 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, CenterPoint Houston 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. CenterPoint Houston 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 CenterPoint Houston 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. During the nine months ended
September 30, 2008, CenterPoint Houston recognized approximately
$5 million in operating income from the CTC.
As of
September 30, 2009, CenterPoint Houston had not recognized an allowed
equity return of $196 million on CenterPoint Houston’s true-up balance
because such return will be recognized as it is recovered in rates. During the
three months ended September 30, 2008 and 2009, CenterPoint Houston
recognized approximately $4 million and $5 million, respectively, of
the allowed equity return not previously recognized. During the nine
months ended September 30, 2008 and 2009, CenterPoint Houston recognized
approximately $10 million and $11 million, respectively, of the
allowed equity return not previously recognized.
(c)
Rate Proceedings
In
May 2009, CenterPoint Houston filed an application at the Texas Utility
Commission seeking approval of certain energy efficiency program costs, an
energy efficiency performance bonus for 2008 programs and carrying costs
totaling approximately $10 million. The application sought to recover these
costs through a surcharge effective July 1, 2010. In October 2009, the
Texas Utility Commission approved the application in part and authorized
CenterPoint Houston to recover approximately $8 million through an Energy
Efficiency Cost Recovery Factor that is to go into effect July 1, 2010.
The Texas Utility Commission disallowed $2 million of CenterPoint Houston’s
requested $4.85 million energy efficiency performance bonus reasoning that the
CenterPoint Houston cannot receive a performance bonus on energy-efficiency
programs that arose from the settlement of its 2006 rate proceeding.
Motions for Rehearing can be filed by mid-November 2009.
(d)
Regulatory Accounting
CenterPoint
Houston’s actuarially determined pension expense for 2009 in excess of the 2007
base year amount is being deferred for rate making purposes until its next
general rate case pursuant to Texas law. CenterPoint Houston deferred
as a regulatory asset $8 million and $21 million in pension expense
during the three and nine months ended September 30, 2009,
respectively.
(5) Fair Value Measurements
Effective
January 1, 2008, CenterPoint Houston adopted new accounting guidance on
fair value measurements which requires additional disclosures about CenterPoint
Houston’s financial assets and liabilities that are measured at fair
value. Effective January 1, 2009, CenterPoint Houston adopted this new
guidance for nonfinancial assets and liabilities, which adoption had no impact
on CenterPoint Houston’s financial position, results of operations or cash
flows. Beginning in January 2008, assets and liabilities recorded at
fair value in the Condensed Consolidated Balance Sheets are categorized based
upon the level of judgment associated with the inputs used to measure their
value. Hierarchical levels, as defined in this guidance 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 listed in active markets. At
September 30, 2009, CenterPoint Houston held Level 1 investments of
$56 million, which were primarily money market funds.
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. CenterPoint Houston had no Level 2 assets or liabilities at
September 30, 2009.
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. Unobservable inputs reflect CenterPoint Houston’s
judgments about the assumptions market participants would use in pricing the
asset or liability since limited market data exists. CenterPoint Houston
develops these inputs based on the best information available, including
CenterPoint Houston’s own data. CenterPoint Houston had no Level 3
assets or liabilities at September 30, 2009.
(6) Related
Party Transactions and Major Customers
Related Party Transactions.
CenterPoint Houston 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. CenterPoint Houston had borrowings
from the money pool of $8 million at December 31, 2008 and investments
in the money pool of $215 million at September 30, 2009.
At
December 31, 2008 and September 30, 2009, CenterPoint Houston had a
$750 million note receivable from its parent.
For the
three months ended September 30, 2008 and 2009, CenterPoint Houston had net
interest income related to affiliate borrowings of $8 million and
$5 million, respectively, and $25 million and $15 million,
respectively, for the nine months ended September 30, 2008 and
2009.
CenterPoint
Energy provides some corporate services to CenterPoint Houston. The costs of
services have been charged directly to CenterPoint Houston 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 CenterPoint Houston not been an affiliate. Amounts
charged to CenterPoint Houston for these services were $27 million and
$31 million for the three months ended September 30, 2008 and 2009,
respectively, and $85 million and $93 million for the nine months
ended September 30, 2008 and 2009, respectively, and are included primarily
in operation and maintenance expenses.
Major Customers. Revenues
derived from energy delivery charges to CenterPoint Houston’s largest customer,
a REP that was formerly a subsidiary of RRI and is currently a subsidiary of NRG
Energy, Inc., totaled $199 million and $200 million for the three
months ended September 30, 2008 and 2009, respectively, and
$492 million and $493 million for the nine months ended
September 30, 2008 and 2009, respectively. In May 2009, RRI
completed the previously announced sale of its Texas retail business to NRG
Retail LLC, a subsidiary of NRG Energy, Inc.
(7) Short-term
Borrowings and Long-term Debt
(a)
Short-term Borrowings
Revolving Credit Facility. On
October 6, 2009 CenterPoint Houston terminated its $600 million 364-day
credit facility which was secured by a pledge of $600 million of
CenterPoint Houston’s general mortgage bonds. From inception through its
termination, there had been no borrowings under the credit
facility.
(b)
Long-term Debt
General Mortgage Bonds. In
January 2009, CenterPoint Houston issued $500 million aggregate principal
amount of general mortgage bonds, due in March 2014 with an interest rate of
7.00%. The proceeds from the sale of the bonds were used for general
corporate purposes, including the repayment of outstanding borrowings under its
revolving credit facility and the money pool, capital expenditures and storm
restoration costs associated with Hurricane Ike.
Revolving Credit Facility.
CenterPoint Houston’s $289 million credit facility contains a debt
(excluding transition and other securitization bonds) to total capitalization
covenant. The facility’s first drawn cost is LIBOR plus 45 basis
points based on CenterPoint Houston’s current credit ratings.
As of
December 31, 2008 and September 30, 2009, CenterPoint Houston had
$251 million and $-0- of borrowings, respectively, under its
$289 million credit facility. In addition, CenterPoint Houston had
approximately $4 million of outstanding letters of credit under its
$289 million credit facility as of both December 31, 2008 and
September 30, 2009. CenterPoint Houston was in compliance with all debt
covenants as of September 30, 2009.
Other. At both
December 31, 2008 and September 30, 2009, CenterPoint Houston 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.
12
(8) Commitments
and Contingencies
Legal
Matters
Gas Market Manipulation
Cases. CenterPoint Energy, CenterPoint Houston 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 RRI, CenterPoint
Energy and its subsidiaries are entitled to be indemnified by RRI for any
losses, including attorneys’ fees and other costs, arising out of these
lawsuits. Pursuant to the indemnification obligation, RRI is
defending CenterPoint Energy and its subsidiaries to the extent named in these
lawsuits. 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 2000-2002.
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, among others, recovery of compensatory damages (in some cases in
excess of $1 billion), a trebling of compensatory damages, full
consideration damages and attorneys’ fees. CenterPoint Energy and/or Reliant
Energy were named in approximately 30 of these lawsuits, which were instituted
between 2003 and 2009. CenterPoint Energy and its affiliates have been released
or dismissed from all but two of such cases. CenterPoint Energy Services, Inc.
(CES), an indirect subsidiary of CenterPoint Energy, is a defendant in a case
now pending in federal court in Nevada alleging a conspiracy to inflate
Wisconsin natural gas prices in 2000-2002. Additionally, CenterPoint
Energy was a defendant in a lawsuit filed in state court in Nevada that was
dismissed in 2007, but the plaintiffs have indicated that they will appeal the
dismissal. CenterPoint Energy believes that neither it nor CES is a proper
defendant in these remaining cases and will continue to pursue dismissal from
those cases. CenterPoint Houston does not expect the ultimate outcome
of these remaining matters to have a material impact on its financial condition,
results of operations or cash flows.
On
May 1, 2009, RRI completed the previously announced sale of its Texas
retail business to NRG Retail LLC, a subsidiary of NRG Energy,
Inc. In connection with the sale, RRI changed its name to RRI Energy,
Inc. and no longer provides service as a REP in CenterPoint Houston’s service
territory. The sale does not alter RRI’s contractual obligations to
indemnify CenterPoint Energy and its subsidiaries, including CenterPoint
Houston, for certain liabilities, including their indemnification regarding
certain litigation, nor does it affect the terms of existing guaranty
arrangements for certain RRI gas transportation contracts.
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 CenterPoint Houston, 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 or CenterPoint Houston, but most existing claims relate to
facilities previously owned by CenterPoint Energy or CenterPoint Houston.
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. Under the terms of the arrangements regarding separation
of the generating business from CenterPoint Energy and its sale to NRG Texas LP,
ultimate financial responsibility for uninsured losses from claims relating to
the generating business has been assumed by NRG Texas LP, 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 NRG Texas LP. 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 CenterPoint
Houston does not expect, based on its experience to date, these matters, either
individually or in the aggregate, to have a material adverse effect on its
financial condition, results of operations or cash flows.
Other
Environmental. From time to time CenterPoint Houston 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,
CenterPoint Houston 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, CenterPoint Houston does not expect, based on its experience to date,
these matters, either individually or in the aggregate, to have a material
adverse effect on its financial condition, results of operations or cash flows.
Other
Proceedings
CenterPoint
Houston 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. CenterPoint Houston regularly
analyzes current information and, as necessary, provides accruals for probable
liabilities on the eventual disposition of these matters. CenterPoint Houston
does not expect the disposition of these matters to have a material adverse
effect on CenterPoint Houston’s financial condition, results of operations or
cash flows.
(9) Income
Taxes
During
the three months and nine months ended September 30, 2008, the effective
tax rate was 36% and 37%, respectively. During the three months and nine
months ended September 30, 2009, the effective tax rate was 27% and 32%,
respectively. CenterPoint Energy’s settlement of its federal income
tax returns for tax years 2004 and 2005 affected the comparability of the
effective tax rate. As a result of the settlement, CenterPoint
Houston recognized a reduction in the liability for uncertain tax positions of
approximately $40 million, which included approximately $3 million of
uncertain tax positions existing as of December 31, 2008 which reduced
income tax expense. Additionally, CenterPoint Houston recognized
approximately $8 million as a reduction in accrued interest.
The
following table summarizes CenterPoint Houston’s uncertain tax positions at
December 31, 2008 and September 30, 2009:
|
December 31,
2008
|
September 30,
2009
|
|||||||
|
(in
millions)
|
||||||||
|
Liability
for uncertain tax
positions
|
$ | 123 | $ | 156 | ||||
|
Portion
of liability for uncertain tax positions that, if
recognized, would reduce the effective income tax rate |
11 | 8 | ||||||
|
Interest
accrued on uncertain tax
positions
|
14 | 8 | ||||||
(10) Estimated
Fair Value of Financial Instruments
The fair
values of cash and cash equivalents, short-term borrowings and the
$750 million notes receivable from CenterPoint Houston’s parent are
estimated to be equivalent to carrying amounts and have been excluded from the
table below. The fair value of each debt instrument is determined by
multiplying the principal amount of each debt instrument by the market
price.
|
December 31,
2008
|
September 30,
2009
|
|||||||||||||||
|
Carrying
Amount
|
Fair
Value
|
Carrying
Amount
|
Fair
Value
|
|||||||||||||
|
(in
millions)
|
||||||||||||||||
|
Financial
liabilities:
|
||||||||||||||||
|
Long-term
debt (including $151 million of long-term notes payable to parent and
excluding capital leases)
|
$ | 4,582 | $ | 4,424 | $ | 4,624 | $ | 4,975 | ||||||||
(11) Subsequent
Events
On
October 27, 2009, the U.S. Department of Energy (DOE) notified CenterPoint
Houston that it had been selected for a $200 million grant for its advanced
metering system and intelligent grid projects. The award is contingent on
successful completion of negotiations with the DOE, which are expected to begin
in November 2009. CenterPoint Houston applied for the grant in August 2009 to
obtain $150 million in funding to accelerate completion of CenterPoint Houston’s
current deployment of advanced meters by 2012, instead of 2014. In
addition, the grant request included $50 million to begin building the
intelligent grid. At this time, CenterPoint Houston cannot predict the
schedule for completion of negotiations with the DOE or the final terms of any
grant it ultimately receives.
CenterPoint
Houston has evaluated all subsequent events through the date these Interim
Condensed Financial Statements were issued, which was November 9,
2009.
ITEM 2. MANAGEMENT’S
NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS
The
following narrative analysis should be read in combination with our Interim
Condensed Financial Statements contained in this Form 10-Q and our Annual Report
on Form 10-K for the year ended December 31, 2008 (2008 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 nine months ended September 30, 2008 and the three
and nine months ended September 30, 2009. Reference is made to
“Management’s Narrative Analysis of Results of Operations” in Item 7 of our 2008
Form 10-K.
Recent
Events
Hurricane
Ike
Our
electric delivery system suffered substantial damage as a result of Hurricane
Ike, which struck the upper Texas coast in September 2008.
As is
common with electric utilities serving coastal regions, the poles, towers,
wires, street lights and pole mounted equipment that comprise our transmission
and distribution system are not covered by property insurance, but office
buildings and warehouses and their contents and substations are covered by
insurance that provides for a maximum deductible of $10 million. Current
estimates are that total losses to property covered by this insurance were
approximately $28 million.
We
deferred the uninsured system restoration costs as management believed it was
probable that such costs would be recovered through the regulatory process. As a
result, system restoration costs did not affect our reported operating income
for 2008 or the first nine months of 2009. In April 2009, we filed with the
Public Utility Commission of Texas (Texas Utility Commission) an application for
review and approval for recovery of approximately $608 million in system
restoration costs identified as of the end of February 2009, plus
$2 million in regulatory expenses, $13 million in certain debt
issuance costs and $55 million in incurred and projected carrying costs,
pursuant to the legislation described below.
In April
2009, the Texas Legislature enacted legislation that authorized the Texas
Utility Commission to conduct proceedings to determine the amount of system
restoration costs and related costs associated with hurricanes or other major
storms that utilities are entitled to recover, and to issue financing orders
that would permit a utility like us to recover the distribution portion of those
costs and related carrying costs through the issuance of non-recourse system
restoration bonds similar to the securitization bonds issued
previously. The legislation also allowed such a utility to recover,
or defer for future recovery, the transmission portion of its system restoration
costs through the existing mechanisms established to recover transmission level
costs. The legislation required the Texas Utility Commission to make
its determination of recoverable system restoration costs within 150 days of the
filing of a utility’s application and to rule on a utility’s application for a
financing order for the issuance of system restoration bonds within 90 days of
the filing of that application. Alternatively, if securitization is
not the least-cost option for rate payers, the legislation authorized the Texas
Utility Commission to allow a utility to recover those costs through a customer
surcharge mechanism.
In the
application we filed in April 2009, we sought approval for recovery of a total
of approximately $678 million, including the $608 million in system
restoration costs described above plus related regulatory expenses, certain debt
issuance costs and carrying costs calculated through August 2009. In
July 2009, we announced that we had reached a settlement agreement with the
parties to the proceeding. Under the terms of that settlement
agreement, we would be entitled to recover a total of $663 million in costs
relating to Hurricane Ike, along with carrying costs from September 1,
2009 until system restoration bonds were issued. The Texas Utility Commission
issued an order in August 2009 approving our application and the settlement
agreement and authorizing
16
recovery
of a total of $663 million, of which $643 million is attributable to
distribution service and eligible for securitization and the remaining
$20 million is attributable to transmission service and eligible for
recovery through the existing mechanisms established to recover transmission
costs.
In July
2009, we filed with the Texas Utility Commission our application for a financing
order to recover the portion of approved costs related to distribution service
through the issuance of system restoration bonds. As discussed above,
in August 2009, the Texas Utility Commission issued a financing order allowing
us to securitize $643 million in distribution service costs plus carrying
charges from September 1, 2009 through the date the system restoration bonds are
issued, as well as certain up-front qualified costs capped at approximately
$6 million. In accordance with the financing order, we are to
place into effect a separate customer credit related to accumulated deferred
federal income taxes (ADFIT) associated with the storm restoration costs to be
recovered. This separate credit (ADFIT Credit) is to be applied to customers’
bills to reflect the benefit of those deferred taxes at a carrying charge of
11.075%. The beginning balance of the ADFIT related to storm costs is
approximately $207 million and will decline over the life of the system
restoration bonds as taxes are paid on the system restoration tariffs. The ADFIT
Credit will become effective on the same date as the tariff for the system
restoration charges and will reduce operating income in 2010 by approximately
$24 million. We expect our subsidiary, CenterPoint Energy Restoration
Bond Company, LLC, to issue the system restoration bonds in the fourth
quarter of 2009. Assuming system restoration bonds are issued, we will recover
the distribution portion of approved system restoration costs out of the bond
proceeds, with the bonds being repaid over time through a charge imposed on
customers. We expect to recover the remaining approximately
$20 million of Hurricane Ike costs related to transmission service through
the existing mechanisms established to recover transmission costs.
In
accordance with the orders discussed above, as of September 30, 2009, we
have recorded a net regulatory asset of $642 million associated with
distribution-related storm restoration costs and $20 million associated
with transmission-related storm restoration costs. These amounts
reflect carrying costs of $50 million related to distribution and
$2 million related to transmission through September 30,
2009, based on the 11.075% cost of capital approved by the Texas Utility
Commission. The carrying costs have been bifurcated into two components:
(i) return of borrowing costs and (ii) an allowance for earnings on
shareholders’ investment. During the three months and nine months ended
September 30, 2009, the component representing a return of borrowing costs
of $6 million and $20 million, respectively, has been recognized and
is included in other income in our Condensed Statements of Consolidated
Income. That component will continue to be recognized as earned until the
associated system restoration costs are recovered. The component
representing an allowance for earnings on shareholders’ investment of
$32 million is being deferred and will be recognized as it is collected
through rates.
Debt
Transaction
On
October 6, 2009, we terminated our $600 million 364-day secured credit
facility which had been arranged in November 2008 following Hurricane
Ike.
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 (REPs) 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 II of this Form 10-Q.
The
following table sets forth our consolidated results of operations for the three
and nine months ended September 30, 2008 and 2009, followed by a discussion
of our consolidated results of operations based on operating
income.
|
Three
Months Ended
September 30,
|
Nine
Months Ended
September 30,
|
|||||||||||||||
|
2008
|
2009
|
2008
|
2009
|
|||||||||||||
|
(in
millions, except customer data)
|
||||||||||||||||
|
Revenues:
|
||||||||||||||||
|
Electric
transmission and distribution utility
|
$ | 455 | $ | 503 | $ | 1,220 | $ | 1,281 | ||||||||
|
Transition
bond companies
|
97 | 105 | 251 | 260 | ||||||||||||
|
Total
revenues
|
552 | 608 | 1,471 | 1,541 | ||||||||||||
|
Expenses:
|
||||||||||||||||
|
Operation
and maintenance, excluding transition bond
companies |
167 | 194 | 502 | 563 | ||||||||||||
|
Depreciation
and amortization, excluding transition
bond companies |
71 | 70 | 208 | 207 | ||||||||||||
|
Taxes
other than income taxes
|
48 | 52 | 153 | 158 | ||||||||||||
|
Transition
bond companies
|
64 | 74 | 151 | 163 | ||||||||||||
|
Total
expenses
|
350 | 390 | 1,014 | 1,091 | ||||||||||||
|
Operating
income
|
202 | 218 | 457 | 450 | ||||||||||||
|
Interest
and other finance charges
|
(27 | ) | (39 | ) | (80 | ) | (118 | ) | ||||||||
|
Interest
on transition bonds
|
(34 | ) | (32 | ) | (102 | ) | (98 | ) | ||||||||
|
Other
income, net
|
11 | 14 | 34 | 41 | ||||||||||||
|
Income
before income taxes
|
152 | 161 | 309 | 275 | ||||||||||||
|
Income
tax expense
|
(54 | ) | (43 | ) | (113 | ) | (88 | ) | ||||||||
|
Net
income
|
$ | 98 | $ | 118 | $ | 196 | $ | 187 | ||||||||
|
Throughput
(in gigawatt-hours (GWh)):
|
||||||||||||||||
|
Residential
|
8,446 | 9,243 | 19,623 | 20,041 | ||||||||||||
|
Total
|
21,594 | 22,963 | 58,523 | 57,947 | ||||||||||||
|
Number
of metered customers at period end:
|
||||||||||||||||
|
Residential
|
1,824,238 | 1,849,158 | 1,824,238 | 1,849,158 | ||||||||||||
|
Total
|
2,068,568 | 2,094,847 | 2,068,568 | 2,094,847 | ||||||||||||
Three
months ended September 30, 2009 compared to three months ended
September 30, 2008
We
reported operating income of $218 million for the three months ended
September 30, 2009, consisting of $187 million from the regulated
electric transmission and distribution utility (TDU) and $31 million
related to transition bond companies. For the three months ended
September 30, 2008, operating income totaled $202 million, consisting
of $169 million from the TDU and $33 million related to transition
bond companies. TDU revenues increased $48 million primarily due to higher
transmission-related revenues ($16 million), in part reflecting the impact
of a transmission rate increase implemented in November 2008, the impact of
Hurricane Ike in 2008 ($17 million), revenues from implementation of the
advanced metering system (AMS) ($9 million), higher revenues due to
increased usage ($5 million) primarily as a result of warmer weather and
higher revenues due to customer growth ($5 million) from the addition of
over 26,000 new customers, partially offset by lower other revenues
($4 million). Operation and maintenance expenses increased
$27 million primarily due to higher transmission costs billed by
transmission providers ($9 million), increased operating and maintenance
expenses that were postponed in 2008 as a result of Hurricane Ike restoration
efforts ($5 million), increased labor and benefit costs ($4 million),
expenses related to AMS ($3 million) and increases in other expenses
($6 million). Taxes other than income taxes increased
$4 million as a result of a refund in 2008 of prior year state franchise
taxes ($5 million).
Nine
months ended September 30, 2009 compared to nine months ended
September 30, 2008
We
reported operating income of $450 million for the nine months ended
September 30, 2009, consisting of $353 million from the TDU and
$97 million related to transition bond companies. For the nine months
ended
18
September 30,
2008, operating income totaled $457 million, consisting of
$352 million from the TDU, exclusive of an additional $5 million from
the CTC, and $100 million related to transition bond companies. TDU
revenues increased $61 million primarily due to higher transmission-related
revenues ($43 million), in part reflecting the impact of a transmission
rate increase implemented in November 2008, the impact of Hurricane Ike in 2008
($17 million), revenues from implementation of AMS ($17 million) and
higher revenues due to customer growth ($11 million) from the addition of
over 26,000 new customers, which were partially offset by declines in use
($18 million) primarily occurring in the first quarter and lower other
revenues ($3 million). Operation and maintenance expenses increased
$61 million primarily due to higher transmission costs billed by
transmission providers ($24 million), increased operating and maintenance
expenses that were postponed in 2008 as a result of Hurricane Ike restoration
efforts ($5 million), higher pension and other employee benefit costs
($10 million), increased support services ($5 million), expenses
related to AMS ($8 million) and a gain on a land sale in 2008
($9 million). Taxes other than income taxes increased $5 million as a
result of a refund in 2008 of prior year state franchise taxes
($5 million). Changes in pension expense over our 2007 base year amount are
being deferred until our next general rate case pursuant to Texas
law.
Interest
and Other Finance Charges
Interest
and other finance charges increased for the three months and nine months ended
September 30, 2009 by $12 million and $38 million, respectively,
due to increased borrowing levels in 2009 compared to the same periods in
2008.
Income
Tax Expense
During
the three months and nine months ended September 30, 2008, the effective
tax rate was 36% and 37%, respectively. During the three months and nine
months ended September 30, 2009, the effective tax rate was 27% and 32%,
respectively. CenterPoint Energy’s settlement of its federal income
tax returns for tax years 2004 and 2005 affected the comparability of the
effective tax rate. As a result of the settlement, we recognized a
reduction in the liability for uncertain tax positions of approximately
$40 million, which included approximately $3 million of uncertain tax
positions existing as of December 31, 2008 which reduced income tax
expense. Additionally, we recognized approximately $8 million as
a reduction in accrued interest.
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 II of this
Form 10-Q and “Management’s Narrative Analysis of Results of Operations —
Certain Factors Affecting Future Earnings” in Item 7 of Part II of our 2008 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, tax payments,
working capital needs, various regulatory actions and appeals relating to such
regulatory actions. Our principal cash requirements for the remaining three
months of 2009 include approximately $153 million of capital
expenditures.
We expect
that borrowings under our credit facilities, anticipated cash flows from
operations and intercompany borrowings will be sufficient to meet our
anticipated cash needs for the remaining three months of 2009. Cash needs or
discretionary financing or refinancing may result in the issuance of debt
securities in the capital markets or the arrangement of additional credit
facilities. Issuances of debt in the capital markets and additional
credit facilities may not, however, be available to us on acceptable
terms.
Off-Balance Sheet
Arrangements. Other than operating leases and first mortgage bonds and
general mortgage bonds issued as collateral for our long-term debt and that of
CenterPoint Energy as discussed below, we have no off-balance sheet
arrangements.
Credit Facilities. On October
6, 2009, we terminated our $600 million 364-day secured credit facility
which had been arranged in November 2008 following Hurricane Ike.
As of
October 19, 2009, we had the following facility (in millions):
|
Date
Executed
|
Type
of Facility
|
Size
of
Facility
|
Amount
Utilized
at
October
19,
2009
|
Termination
Date
|
|||||||
|
June
29, 2007
|
Revolver
|
$ | 289 | $ | 4 | (1) |
June
29, 2012
|
||||
|
|
________
|
|
|
(1)
|
Represents
outstanding letters of credit.
|
Our
$289 million credit facility contains a debt (excluding transition and
other securitization bonds) to total capitalization covenant. The facility’s
first drawn cost is London Interbank Offered Rate (LIBOR) plus 45 basis points
based on our current credit rating. An additional utilization fee of
5 basis points applies to borrowings any time more than 50% of the facility is
utilized. The spread to LIBOR and the utilization fee fluctuate based on our
credit rating.
Borrowings
under the credit 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 the credit facility as disclosed above.
Securities Registered with the
SEC. In October 2008, we registered an indeterminate principal amount of
our general mortgage bonds under a joint registration statement with CenterPoint
Energy.
Temporary Investments. As of
October 19, 2009, 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 October 19, 2009, we had investments in the money pool aggregating
$245 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 our wholly
owned subsidiaries. At September 30, 2009, CenterPoint Energy Transition
Bond Company, LLC (TBC) had $376 million aggregate principal amount of
outstanding transition bonds that were issued in 2001, CenterPoint Energy
Transition Bond Company II, LLC (TBC II) had $1.55 billion aggregate
principal amount of outstanding transition bonds that were issued in 2005 and
CenterPoint Energy Transition Bond Company III, LLC (TBC III) had
$455 million aggregate principal amount of outstanding transition bonds
that were issued in February 2008. All of 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 the servicing agreements 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
September 30, 2009. Amounts are expressed in millions.
|
Year
|
Third-Party
|
Affiliate
|
Sub-Total
|
Transition
Bonds
|
Total
|
|||||||||||||||
|
2009
|
$ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
|
2010
|
— | — | — | 221 | 221 | |||||||||||||||
|
2011
|
— | — | — | 240 | 240 | |||||||||||||||
|
2012
|
46 | — | 46 | 262 | 308 | |||||||||||||||
|
2013
|
450 | — | 450 | 283 | 733 | |||||||||||||||
|
2014
|
800 | — | 800 | 188 | 988 | |||||||||||||||
|
2015
|
— | 151 | 151 | 201 | 352 | |||||||||||||||
|
2016
|
— | — | — | 215 | 215 | |||||||||||||||
|
2017
|
127 | — | 127 | 231 | 358 | |||||||||||||||
|
2018
|
— | — | — | 247 | 247 | |||||||||||||||
|
2019
|
— | — | — | 264 | 264 | |||||||||||||||
|
2020
|
— | — | — | 29 | 29 | |||||||||||||||
|
2021
|
102 | — | 102 | — | 102 | |||||||||||||||
|
2023
|
200 | — | 200 | — | 200 | |||||||||||||||
|
2027
|
56 | — | 56 | — | 56 | |||||||||||||||
|
2033
|
312 | — | 312 | — | 312 | |||||||||||||||
|
Total
|
$ | 2,093 | $ | 151 | $ | 2,244 | $ | 2,381 | $ | 4,625 | ||||||||||
As of
September 30, 2009, outstanding first mortgage bonds and general mortgage
bonds aggregated approximately $3.4 billion as shown in the following
table, including $600 million of general mortgage bonds securing a credit
facility that was terminated in October 2009. Amounts are expressed
in millions.
|
Issued
Directly
to
Third Parties
|
Issued
as
Collateral
for
CenterPoint
Houston’s Debt
|
Issued
as
Collateral
for
CenterPoint
Energy’s
Debt
|
Total
|
|||||||||||||
|
First
Mortgage Bonds
|
$ | 102 | $ | — | $ | 151 | $ | 253 | ||||||||
|
General
Mortgage Bonds
|
1,762 | 829 | 527 | 3,118 | ||||||||||||
|
Total
|
$ | 1,864 | $ | 829 | $ | 678 | $ | 3,371 | ||||||||
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 $1.5 billion of additional first
mortgage bonds and general mortgage bonds could be issued on the basis of
retired bonds and 70% of property additions as of September 30, 2009.
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 October 19, 2009, 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
|
Baa1
|
Positive
|
BBB+
|
Negative
|
A-
|
Stable
|
||||||
__________
|
|
(1)
|
A
Moody’s rating outlook is an opinion regarding the likely direction of a
rating over the medium term.
|
|
|
(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 credit facility. If
our credit ratings had been downgraded one notch by each of the three principal
credit rating agencies from the ratings that existed at September 30, 2009, the
impact on the borrowing costs under our bank credit facility would have been
immaterial. 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 $1.2 billion 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. In addition, four
outstanding series of CenterPoint Energy’s senior notes, aggregating
$950 million in principal amount as of September 30, 2009, provide
that 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. A default by
CenterPoint Energy would not trigger a default under our debt instruments or
bank credit facilities.
Other Factors that Could Adversely
Affect Cash Requirements. In addition to the above factors, our liquidity
and capital resources could be adversely affected by:
|
|
•
|
increases
in interest expense in connection with debt refinancings and borrowings
under credit facilities;
|
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various
regulatory actions;
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the
ability of RRI Energy, Inc. (RRI) (formerly known as Reliant Energy, Inc.
and Reliant Resources, Inc.) and its subsidiaries to satisfy their
obligations in respect of RRI’s indemnity obligations to
us;
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the
ability of NRG Retail, LLC, the successor to RRI’s REP and our largest
customer, to satisfy its obligations to us and our
subsidiaries;
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the
outcome of litigation brought by and against
us;
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restoration
costs and revenue losses resulting from natural disasters such as
hurricanes and the timing of recovery of such restoration costs;
and
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various
other risks identified in “Risk Factors” in Item 1A of this Form
10-Q.
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Certain Contractual Limits on Our
Ability to Issue Securities and Borrow Money. Our credit facility limits
our debt (excluding transition and other securitization bonds) as a percentage
of our total capitalization to 65%. Additionally, we have contractually agreed
that we will not 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 September 30, 2009 to provide assurance
that information required to be disclosed in our reports filed or submitted
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission’s rules and
forms and such information is accumulated and communicated to our management,
including our principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding disclosure.
There has
been no change in our internal controls over financial reporting that occurred
during the three months ended September 30, 2009 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 8 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 2008
Form 10-K.
Item
1A. RISK
FACTORS
The
following risk factors are provided to supplement and update the risk factors
contained in the reports we file with the SEC, including the risk factors
contained in Item 1A of Part I of our 2008 Form 10-K.
The
following information about risks, along with any additional legal proceedings
identified or referenced in Part II, Item 1 “Legal Proceedings” of this Form
10-Q and in “Legal Proceedings” in Item 3 of our 2008 Form 10-K, summarize the
principal risk factors associated with our businesses.
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 Choice Plan (Texas electric restructuring law). In December
2004, the Texas Utility Commission issued its final order (True-Up Order)
allowing us to recover a true-up balance of approximately $2.3 billion,
which included interest through August 31, 2004, and provided
for
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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.
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 retail electric providers
(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 Energy, Inc.
(RRI) (formerly known as Reliant Energy, Inc. and Reliant Resources,
Inc.);
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ordered
that the tax normalization issue described below be remanded to the Texas
Utility Commission as requested by the Texas Utility Commission;
and
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affirmed
the district court’s judgment in all other
respects.
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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, we petitioned the Texas Supreme Court for review of the court of appeals
decision. In our petition, we seek 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 us 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 that (i) the
Texas Utility Commission was without authority to fashion the methodology it
used for valuing the former generation assets after it had determined that we
could not use the partial stock valuation method, (ii) 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) 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) we should not have been permitted to recover construction work in progress
balances without proving those amounts in the manner required by law and (v) the
Texas Utility Commission was without authority to award interest on the capacity
auction true up award.
In June
2009, the Texas Supreme Court granted the petitions for review of the court of
appeals decision. Oral argument before the court was held in October
2009. 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 appeal to the Texas Supreme Court, we
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, 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 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
$170 million to $385 million (pre-tax) plus interest subsequent to
December 31, 2008.
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. CenterPoint Energy
believes that the Texas Utility Commission based its order on proposed
regulations issued by the Internal Revenue Service (IRS) in March 2003 that
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 us 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 our 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 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. 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 or briefs filed with
the Texas Supreme Court, has challenged that order by the court of appeals
although the Texas Supreme Court has the authority to consider all aspects of
the rulings above, not just those challenged specifically by the appellants. We
and CenterPoint Energy will continue to pursue a favorable resolution of this
issue through the appellate and 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 us in the Texas
Utility Commission’s True-Up Order to be recovered either through securitization
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 one of our
subsidiaries 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, we 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.
Our
receivables are concentrated in a small number of retail electric providers, and
any delay or default in payment could adversely affect our cash flows, financial
condition and results of operations.
Our
receivables from the distribution of electricity are collected from REPs that
supply the electricity we distribute to their customers. As of
September 30, 2009, we did business with 80 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 REPs to pay
for our services or could cause them to delay such payments. In 2008, seven REPs
selling power within our service territory ceased to operate, and their
customers were transferred to the provider of last resort or to other REPs. 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
REP cannot make timely payments. Applicable Texas Utility Commission regulations
significantly limit the extent to which we can apply
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normal
commercial terms or otherwise seek credit protection from firms desiring to
provide retail electric service in our service territory, and thus we remain at
risk for payments not made prior to the shift to the provider of last resort.
Although the Texas Utility Commission revised its regulations in 2009 to (i)
increase the financial qualifications of REPs that began selling power after
January 1, 2009, and (ii) authorize utilities to defer bad debts resulting from
defaults by REPs for recovery in a future rate case, significant bad debts may
be realized and unpaid amounts may not be timely recovered. A subsidiary of NRG
Energy, Inc. is the successor to the retail electric sales business of RRI and
has become the largest REP in our service territory. Approximately 43% of our
$196 million in billed receivables from REPs at September 30, 2009 was
owed by the NRG Energy, Inc. subsidiary. Any delay or default in payment by REPs
such as the NRG Energy, Inc. subsidiary could adversely affect our cash flows,
financial condition and results of operations. If any of these REPs were unable
to meet its obligations, it could consider, among various options, restructuring
under the bankruptcy laws, in which event any such REP might seek to avoid
honoring its obligations and claims might be made by creditors involving
payments we have received from such REP.
Rate
regulation of our business may delay or deny our ability to earn a reasonable
return and fully recover its costs.
Our rates
are regulated by certain municipalities and the Texas Utility Commission based
on an analysis of our invested capital and our expenses in a test year. Thus,
the rates that we are allowed to charge may not match our expenses at any given
time. The regulatory process by which rates are determined may not always result
in rates that will produce full recovery of our costs and enable us to earn a
reasonable return on our invested capital.
In this
regard, pursuant to the Stipulation and Settlement Agreement approved by the
Texas Utility Commission in September 2006, until June 30, 2010 we are limited
in our ability to request retail rate relief. For more information on the
Stipulation and Settlement Agreement, please read “Business — Regulation — State
and Local Regulation — Rate Agreement” in Item 1 of the 2008 Form
10-K.
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 could 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 deliver 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
September 30, 2009, we had $4.5 billion of outstanding indebtedness on
a consolidated basis, which includes $2.4 billion of non-recourse
transition bonds. Our future financing activities may be significantly affected
by, among other things:
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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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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 rating 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
September 30, 2009, we had outstanding approximately $3.1 billion
aggregate principal amount of general mortgage bonds, including approximately
$527 million held in trust to secure pollution control bonds for which
CenterPoint Energy is obligated, $600 million securing borrowings under a
credit facility which was retired following the October 2009 termination of the
facility and approximately $229 million held in trust to secure pollution
control bonds for which CenterPoint Energy is obligated. Additionally, we had
outstanding approximately $253 million aggregate principal amount of first
mortgage bonds, including approximately $151 million held in trust to
secure certain pollution control bonds for which we are 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 $1.5 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 September 30, 2009. 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 2 of Part I of this Form 10-Q. 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
creditworthiness and liquidity of our parent company and our affiliates could
affect our creditworthiness and liquidity.
Our
credit ratings and liquidity may be impacted by the creditworthiness and
liquidity of our affiliates. As of September 30, 2009, CenterPoint
Energy and its subsidiaries other than us have approximately $822 million
principal amount of debt required to be paid through 2011. This
amount excludes amounts related to capital leases, transition bonds and indexed
debt securities obligations. If CenterPoint Energy were to experience a
deterioration in its creditworthiness or liquidity, our creditworthiness,
liquidity and the repayment of notes receivable from CenterPoint Energy in the
amount of $750 million as of September 30, 2009 could be adversely
affected. In addition, from time to time we and other affiliates
invest or borrow funds in the money pool maintained by CenterPoint
Energy. If CenterPoint Energy or the affiliates that borrow our
invested funds were to experience a deterioration in their creditworthiness or
liquidity, our creditworthiness, liquidity and the repayment of notes receivable
from CenterPoint Energy and our affiliates under the money pool could
be adversely impacted. As of September 30, 2009, we had invested $215
million in the CenterPoint Energy money pool.
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 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
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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. In the future, we may not be able to recover
the costs incurred in restoring our transmission and distribution properties
following hurricanes or other natural disasters through a change in our
regulated rates or otherwise, or 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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merchant
energy, energy trading and REP businesses 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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Texas
electric generating facilities transferred to Texas Genco Holdings, Inc.
(Texas Genco) in 2004 and early
2005.
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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 were unable to
satisfy a liability that has been so assumed in circumstances in which Reliant
Energy and its subsidiaries were not 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.
On May 1,
2009, RRI completed the previously announced sale of its Texas retail business
to NRG Retail LLC, a subsidiary of NRG Energy, Inc. In connection with the sale,
RRI changed its name to RRI Energy, Inc. and no longer provides service as a REP
in our service territory. The sale does not alter RRI’s contractual obligations
to indemnify CenterPoint Energy and its subsidiaries, including us, for certain
liabilities, including their indemnification regarding certain litigation, nor
does it affect the terms of existing guaranty arrangements for certain RRI gas
transportation contracts.
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,
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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 NRG Texas LP (previously named 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
NRG Texas LP. In addition, under the amended separation agreement, Texas Genco
is no longer liable for, and CenterPoint Energy has assumed and agreed to
indemnify NRG Texas LP 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 NRG Texas LP were
unable to satisfy a liability that had been so assumed or indemnified against,
and provided Reliant Energy had not been released from the liability in
connection with the transfer, we could be responsible for satisfying the
liability.
CenterPoint
Energy or its subsidiaries, including us, 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 or us, but most existing claims relate to
facilities previously owned by CenterPoint Energy or us that are currently owned
by 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 NRG Texas LP,
ultimate financial responsibility for uninsured losses from claims relating to
the generating business has been assumed by NRG Texas LP, 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 NRG Texas LP.
The
global financial crisis may have impacts on our business, liquidity and
financial condition that we currently cannot predict.
The
continued credit crisis and related turmoil in the global financial system may
have an impact on our business, liquidity and our financial condition. Our
ability to access the capital markets may be severely restricted at a time when
we would like, or need, to access those markets, which could have an impact on
our liquidity and flexibility to react to changing economic and business
conditions. In addition, the cost of debt financing and the proceeds of equity
financing may be materially adversely impacted by these market conditions.
Defaults of lenders in our credit facility should they occur could adversely
affect our liquidity. Capital market turmoil was also reflected in significant
reductions in equity market valuations in 2008, which significantly reduced the
value of assets of CenterPoint Energy's pension plan, in which we participate.
These reductions are expected to result in increased non-cash pension expense in
2009, which will impact 2009 results of operations and may impact liquidity if
contributions are made to offset reduced asset values.
In
addition to the credit and financial market issues, the national and local
recessionary conditions may impact our business in a variety of ways. These
include, among other things, reduced customer usage, increased customer default
rates and wide swings in commodity prices.
Item
5. OTHER
INFORMATION
Our ratio
of earnings to fixed charges for the nine months ended September 30, 2008
and 2009 was 2.61 and 2.24, respectively. We do not believe that the ratios for
these nine-month periods are necessarily indicative 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.
Agreements
included as exhibits are included only to provide information to investors
regarding their terms. Agreements listed below may contain representations,
warranties and other provisions that were made, among other things, to provide
the parties thereto with specified rights and obligations and to allocate risk
among them, and no such agreement should be relied upon as constituting or
providing any factual disclosures about CenterPoint Energy Houston Electric,
LLC, any other persons, any state of affairs or other matters.
|
Exhibit
Number
|
Description
|
Report
or Registration
Statement
|
SEC
File or
Registration
Number
|
Exhibit
References
|
||||
| 3.1 |
Articles
of Organization of CenterPoint Houston
|
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 Houston
|
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 | ||||
| 4.2 |
First
Amendment to Exhibit 4.1, dated as of November 18, 2008, among CenterPoint
Houston, as Borrower, and the banks named therein
|
CenterPoint
Energy’s Form 8-K dated November 18, 2008
|
1-31447 | 4.2 | ||||
| +12 |
|
|||||||
| +31.1 |
|
|||||||
| +31.2 |
|
|||||||
| +32.1 |
|
|||||||
| +32.2 |
|
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: November
9, 2009
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
of CenterPoint Houston or CenterPoint Energy as indicated.
Agreements
included as exhibits are included only to provide information to investors
regarding their terms. Agreements listed below may contain representations,
warranties and other provisions that were made, among other things, to provide
the parties thereto with specified rights and obligations and to allocate risk
among them, and no such agreement should be relied upon as constituting or
providing any factual disclosures about CenterPoint Energy Houston Electric,
LLC, any other persons, any state of affairs or other matters.
|
Exhibit
Number
|
Description
|
Report
or Registration
Statement
|
SEC
File or
Registration
Number
|
Exhibit
References
|
||||
| 3.1 |
Articles
of Organization of CenterPoint Houston
|
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 Houston
|
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 | ||||
| 4.2 |
First
Amendment to Exhibit 4.1, dated as of November 18, 2008, among CenterPoint
Houston, as Borrower, and the banks named therein
|
CenterPoint
Energy’s Form 8-K dated November 18, 2008
|
1-31447 | 4.2 | ||||
| +12 |
|
|||||||
| +31.1 |
|
|||||||
| +31.2 |
|
|||||||
| +32.1 |
|
|||||||
| +32.2 |
|
33
Exhibit
12
CENTERPOINT
ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN
INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
COMPUTATION
OF RATIOS OF EARNINGS TO FIXED CHARGES
(Millions
of Dollars)
|
Nine
Months Ended
September 30, |
||||||||
|
2008
(1)
|
2009 (1)
|
|||||||
|
Net
Income
|
$ | 196 | $ | 187 | ||||
|
Income
taxes
|
113 | 88 | ||||||
|
Capitalized
interest
|
(5 | ) | (3 | ) | ||||
| 304 | 272 | |||||||
|
Fixed
charges, as defined:
|
||||||||
|
Interest
|
182 | 216 | ||||||
|
Capitalized
interest
|
5 | 3 | ||||||
|
Interest
component of rentals charged to operating income
|
1 | — | ||||||
|
Total
fixed
charges
|
188 | 219 | ||||||
|
Earnings,
as defined
|
$ | 492 | $ | 491 | ||||
|
Ratio
of earnings to fixed charges
|
2.61 | 2.24 | ||||||
|
|
(1)
|
Excluded
from the computation of fixed charges for the nine months
ended September 30, 2008 and 2009 is interest expense of
$5 million and interest income of $1 million, respectively,
which is included in income tax
expense.
|
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: November
9, 2009
|
/s/
David M. McClanahan
|
|
|
David
M. McClanahan
|
|
|
Chairman
(Principal Executive
Officer)
|
Exhibit
31.2
CERTIFICATIONS
I, Gary
L. Whitlock, certify that:
1. I
have reviewed this quarterly report on Form 10-Q of CenterPoint Energy Houston
Electric, LLC;
2. Based
on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The
registrant’s other certifying officer(s) and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) 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: November
9, 2009
|
/s/
Gary L. Whitlock
|
|
|
Gary
L. Whitlock
|
|
|
Executive
Vice President and Chief Financial
Officer
|
Exhibit
32.1
CERTIFICATION
PURSUANT TO
18 U.S.C.
SECTION 1350,
AS
ADOPTED PURSUANT TO SECTION 906
OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report
of CenterPoint Energy Houston Electric, LLC (the “Company”) on Form 10-Q
for the quarter ended September 30, 2009 (the “Report”), as filed with the
Securities and Exchange Commission on the date hereof, I, David M. McClanahan,
Chairman (Principal Executive Officer), certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to
the best of my knowledge, that:
1. The
Report fully complies with the requirements of section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended; and
2. The
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company.
|
/s/
David M. McClanahan
|
|
|
David
M. McClanahan
|
|
|
Chairman
(Principal Executive Officer)
|
|
|
November
9, 2009
|
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 September 30, 2009 (the “Report”), as filed with the
Securities and Exchange Commission on the date hereof, I, Gary L. Whitlock,
Chief Financial Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my
knowledge, that:
1. The
Report fully complies with the requirements of section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended; and
2. The
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company.
|
/s/
Gary L. Whitlock
|
|
|
Gary
L. Whitlock
|
|
|
Executive
Vice President and Chief Financial Officer
|
|
|
November
9, 2009
|