SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): AUGUST 31, 2002
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CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC
(FORMERLY RELIANT ENERGY, INCORPORATED)
(Exact name of registrant as specified in its charter)
TEXAS 1-3187 22-3865106
(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
1111 LOUISIANA
HOUSTON, TEXAS 77002
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 207-3000
ITEM 5. OTHER EVENTS.
Effective August 31, 2002, Reliant Energy, Incorporated (Reliant Energy)
consummated a restructuring transaction in which it, among other things, (1)
conveyed its Texas electric generation assets to an affiliated company, Texas
Genco Holdings, Inc. (Texas Genco), (2) became an indirect, wholly owned
subsidiary of a new utility holding company, CenterPoint Energy, Inc.
(CenterPoint Energy), (3) was converted into a Texas limited liability company
named CenterPoint Energy Houston Electric, LLC, and (4) distributed the capital
stock of its operating subsidiaries to CenterPoint Energy. As part of the
restructuring, each share of Reliant Energy common stock was converted into one
share of CenterPoint Energy common stock and CenterPoint Energy assumed, and
Reliant Energy was released from, approximately $3.2 billion in principal amount
of outstanding indebtedness. Additionally, CenterPoint Energy assumed a $2.5
billion Senior A Credit Agreement, dated as of July 13, 2001 among Houston
Industries FinanceCo LP, Reliant Energy and the lender parties thereto, and a
$1.8 billion Senior B Credit Agreement, dated as of July 13, 2001 among Houston
Industries FinanceCo LP, Reliant Energy and the lender parties thereto. For
additional information regarding the restructuring, see CenterPoint Energy's
Current Report on Form 8-K dated August 31, 2002, filed with the SEC on
September 3, 2002 (file number 333-69502).
Set forth below is a description of CenterPoint Energy Houston Electric,
LLC, which is referred to as "we", "our" or "CenterPoint Houston," as the
successor to Reliant Energy's electric transmission and distribution business.
Also described are certain risk factors associated with CenterPoint Houston and
its business.
BUSINESS
OVERVIEW
We are a regulated utility engaged in the transmission and distribution of
electric energy in a 5,000 square mile area located along the Texas Gulf Coast,
including the City of Houston and surrounding cities such as Galveston,
Pasadena, Baytown, Freeport and Sugar Land. Our principal operations are:
o ELECTRIC TRANSMISSION: Our electric transmission business transports
electric energy from power plants to substations and from one
substation to another.
o ELECTRIC DISTRIBUTION: Our electric distribution business distributes
electricity for retail electric providers in our certificated service
area by carrying lower-voltage power from the substation to the
customer.
Our customers consist of municipalities, electric cooperatives, other
distribution companies and approximately 27 retail electric providers in our
certificated service area. Two of these retail electric providers are
subsidiaries of Reliant Resources, Inc. (Reliant Resources), an indirect 83%
owned subsidiary of CenterPoint Energy. We anticipate that more than half of our
revenues from retail electric providers for 2002 will come from subsidiaries of
Reliant Resources.
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Our operations do not include the generation or sale of electricity, the
procurement, supply or delivery of fuel for the generation of electricity or the
solicitation or billing of retail electric customers, except as described below
under "--Our Business."
We do not receive any funding support, credit support or guarantees from
CenterPoint Energy or any of its affiliates for our debt obligations.
THE TEXAS ELECTRIC RESTRUCTURING LAW
In 1999, Texas enacted an electric restructuring law, which substantially
amended the regulatory structure governing electric utilities in Texas in order
to allow retail competition for all customers beginning in January 2002. The
Texas electric restructuring law required the separation of the generation,
transmission and distribution, and retail sales functions of electric utilities
into three different units. It also required each electric utility to file a
business separation plan detailing its plan to comply with the Texas electric
restructuring law. Under the law, neither the generation function nor the retail
function are subject to traditional cost of service regulation, and the retail
function has been opened to competition. The transmission and distribution
function we perform remains subject to traditional utility rate regulation.
Under the Texas electric restructuring law, transmission and distribution
utilities in Texas whose generation assets were "unbundled" pursuant to the
Texas electric restructuring law, including us, may recover generation-related:
o "regulatory assets," which consist of the Texas jurisdictional amount
reported by the previously vertically integrated electric utilities as
regulatory assets and liabilities (offset by specified amounts) in
their audited financial statements for 1998; and
o "stranded costs," which consist of the positive excess of the net
regulatory book value of generation assets over the market value of
the assets, taking specified factors into account.
We may also recover certain other items in connection with the stranded
costs and regulatory assets recovery. For more information on stranded costs and
regulatory assets recovery, see "--Stranded Costs and Regulatory Assets
Recovery" and "Regulation."
Additionally, the transmission and distribution affiliate of the electric
utility that was serving an area before competition began continues to provide
metering services for residential retail electric customers until the later of
September 1, 2005, or the date when 40% of those retail electric customers are
taking service from unaffiliated retail electric providers. For other retail
electric customers, metering services will become competitive on January 1,
2004.
Reliant Energy's business separation plan, as approved by the Public
Utility Commission of Texas (the Texas Utility Commission), provided for the
separation of its generation, transmission and distribution, and retail
operations into three different companies and for the separation of its
regulated and unregulated businesses into two publicly traded companies. Since
January 1, 2002, the generation, transmission and distribution, and retail
electric sales operations of Reliant Energy, which were previously conducted
through Reliant Energy HL&P, have been
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functionally separated, with the retail sales operations being conducted by
subsidiaries of Reliant Resources.
Below is a description of the significant transactions through which we
were formed:
o Texas Genco Transfers. In connection with the holding company
formation, Reliant Energy transferred its Texas electric generation
assets and the associated liabilities to Texas Genco, which, in turn,
transferred those assets and liabilities to Texas Genco, LP, a Texas
limited partnership. Both the general partner and the sole limited
partner of Texas Genco, LP are wholly owned subsidiaries of Texas
Genco. Texas Genco, LP now operates Reliant Energy's formerly
regulated generating assets as a power generation company selling
generation capacity, energy and ancillary services at market prices to
Reliant Resources and other power purchasers.
o Reliant Energy Conversion. In connection with the holding company
formation, Reliant Energy became an indirect wholly owned subsidiary
of CenterPoint Energy and converted from a Texas corporation into
CenterPoint Houston, a Texas limited liability company. Immediately
after the conversion, we distributed the shares of all of our
subsidiaries (other than Reliant Energy Transition Bond Company LLC
(Bondco), Reliant Energy FinanceCo II LP and certain other financing
subsidiaries) to CenterPoint Energy. Those transfers resulted in our
holding only the transmission and distribution assets previously held
by Reliant Energy and operating those assets subject to regulation by
the Texas Utility Commission. Under the Texas electric restructuring
law, we, as a transmission and distribution company, will not be
subject to commodity risk since we will not be buying or selling
electric energy, have provider of last resort responsibility and will
not have the obligation to build new power plants to serve load in our
traditional service territory.
OUR BUSINESS
Service Area. Our service area consists of a 5,000-square-mile area located
along the Texas Gulf Coast, with a population in the year 2000 of approximately
4,670,000 people. Electric service is provided to approximately 1.7 million
customers in this area, which includes the City of Houston and surrounding
cities such as Galveston, Pasadena, Baytown, Bellaire, Freeport and Sugar Land.
With the exception of Texas City, we serve nearly all of the Houston/Galveston
consolidated metropolitan statistical area. Effective January 2002, all former
electricity customers of Reliant Energy whose service was regulated became free
to choose from retail electric providers who compete for their business. The
competing retail electric providers are now our primary customers. See
"--Customers" below.
Electric Transmission. Our electric transmission business transports
electricity from power plants to substations and from one substation to another.
Transmission services are provided under tariffs approved by the Texas Utility
Commission. Transmission service offers the use of the transmission system for
delivery of power over facilities operating at 69 kV and above. Other services
offered by the transmission business include system impact studies, facilities
studies and maintenance of substations and transmission lines owned by other
parties.
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Electric distribution. Our electric distribution business distributes
electricity for retail electric providers in its certificated service area. Our
distribution network consists of primary distribution lines, transformers,
secondary distribution lines and service wires. Operations include metering
services, outage response services and other call center operations. As part of
the restructuring of the Texas electric utility market, metering services will
be provided on a competitive basis for commercial and industrial electric
customers beginning in January 2004 and for residential retail electric
customers on the later of September 1, 2005, or the date when 40% of those
residential retail electric customers are taking service from unaffiliated
retail electric providers.
Our distribution network receives electricity from the transmission grid
through power distribution substations and distributes electricity to end users
and wholesale customers through our distribution feeders.
Distribution services are provided under tariffs approved by the Texas
Utility Commission. New Texas Utility Commission rules and market protocols
govern the commercial retail operations of distribution companies and other
market participants.
Most of our transmission and distribution lines have been constructed over
lands of others pursuant to easements or along public highways and streets as
permitted by law. The transmission and distribution networks are currently
subject to the liens of a Mortgage and Deed of Trust, as supplemented, that
secure our obligations under $1,161,217,000 aggregate principal amount of
outstanding first mortgage bonds (including $546,500,000 aggregate principal
amount issued as collateral to secure certain long-term debt obligations of
CenterPoint Energy).
Electricity Reliability Council of Texas. We are a member of the
Electricity Reliability Council of Texas (ERCOT), an intrastate network of
retail customers, investor and municipally owned electric utilities, rural
electric co-operatives, river authorities, independent generators, power
marketers and retail electric providers that serves as the regional reliability
coordinating council for member electric power systems in Texas. ERCOT's control
area consists of the State of Texas other than a portion of the panhandle and a
portion of the eastern part of the state bordering Louisiana. The ERCOT
independent system operator is responsible for maintaining reliable operations
of the bulk electric power supply system in the ERCOT market. Its
responsibilities include ensuring that information relating to a customer's
choice of retail electric provider is conveyed in a timely manner to anyone
needing the information. It is also responsible for ensuring that electricity
production and delivery are accurately accounted for among the generation
resources and wholesale buyers and sellers in the ERCOT market. Unlike
independent systems operators in other regions of the country, ERCOT is not a
centrally dispatched power pool, and the ERCOT independent system operator does
not procure energy on behalf of its members other than to maintain the reliable
operations of the transmission system. Members are responsible for contracting
their energy requirements bilaterally. ERCOT also serves as agent for procuring
ancillary services for those who elect not to provide their own ancillary
service requirement.
The ERCOT market operates under the reliability standards set by the North
American Electric Reliability Council. The Texas Utility Commission has primary
jurisdiction over the ERCOT market to ensure the adequacy and reliability of
electricity across the state's main interconnected power grid.
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Our electric transmission business supports the operation of the ERCOT
independent system operator and all ERCOT members. The transmission business has
planning, design, construction, operation and maintenance responsibility for the
transmission grid and for the load serving substations. The transmission
business is participating with the ERCOT independent system operator and other
ERCOT utilities to plan, design, obtain regulatory approval for and construct
new transmission lines necessary to increase bulk power transfer capability and
to remove existing limitations on the ERCOT transmission grid.
Customers. Our customers consist of municipalities, electric cooperatives,
other distribution companies and approximately 27 retail electric providers in
our certificated service area. Two of these retail electric providers are
subsidiaries of Reliant Resources. We anticipate that more than half of our
revenues from retail electric providers for 2002 will come from subsidiaries of
Reliant Resources. Each retail electric provider is licensed by the Texas
Utility Commission and must meet creditworthiness criteria established by the
Texas Utility Commission. We operate on a continuous billing cycle, with meter
readings being conducted and invoices being distributed to the retail electric
providers each business day.
Competition. In order for another provider of transmission and distribution
services to provide such services in our territory, it would be required to
obtain a certificate of convenience and necessity in proceedings before the
Texas Utility Commission.
STRANDED COSTS AND REGULATORY ASSETS RECOVERY
The Texas electric restructuring law provides us an opportunity to recover
our "regulatory assets" and "stranded costs" resulting from the unbundling of
the transmission and distribution utility from the generation facilities and the
related onset of retail electric competition. "Stranded costs" include the
positive excess of the regulatory net book value of generation assets over the
market value of the assets. The Texas electric restructuring law allows
alternative methods of third party valuation of the fair market value of
generation assets, including outright sale, full and partial stock valuation and
asset exchanges. CenterPoint Energy has agreed in the business separation plan
approved by the Texas Utility Commission that the fair market value of its
generating assets will be determined using the partial stock valuation method.
We expect that CenterPoint Energy will distribute to its shareholders
approximately 19% of the common stock of Texas Genco in late 2002 or early 2003.
The publicly traded common stock will then be used to determine the market value
of Texas Genco. The Texas electric restructuring law also provides specific
regulatory remedies to reduce or mitigate a utility's stranded cost exposure.
For example, during a base rate freeze period from 1999 through 2001, earnings
above the utility's
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authorized rate of return formula were required to be applied in a manner to
accelerate depreciation of generation-related plant assets for regulatory
purposes if the utility was expected to have stranded costs. In addition,
depreciation expense for transmission and distribution related assets could be
redirected to generation assets for regulatory purposes during that period if
the utility was expected to have stranded costs. Reliant Energy undertook both
of these remedies provided in the Texas electric restructuring law.
"Regulatory assets" consist of the Texas jurisdictional amount reported by
an electric utility as regulatory assets and liabilities (offset by specified
amounts) in their audited financial statements for 1998. The Texas electric
restructuring law permits utilities to recover regulatory assets through
non-bypassable transition charges on retail electric customers' bills, to the
extent that such assets and costs are established in certain regulatory
proceedings.
The Texas electric restructuring law also permits us, or a special purpose
entity, to issue securitization bonds for the recovery of generation-related
regulatory assets and stranded costs. See "--Securitization Financing" below for
a more complete discussion of the issuance of securitization bonds. Any stranded
costs not recovered through the sale of securitization bonds may be recovered
through a separate non-bypassable charge to transmission and distribution
customers.
Mitigation. In the Wires Case described below under "Regulation," the Texas
Utility Commission found that Reliant Energy had overmitigated its stranded
costs by redirecting transmission and distribution depreciation and by
accelerating depreciation of generation assets as provided under its transition
plan and the Texas electric restructuring law. In December 2001, Reliant Energy
recorded a regulatory liability of $1.1 billion to reflect the prospective
refund of accelerated depreciation, removed its previously recorded embedded
regulatory asset of $841 million that had resulted from redirected depreciation
and recorded a regulatory asset of $2.0 billion based upon then current
projections of market value of Reliant Energy's Texas generation assets to be
covered by the 2004 true-up proceeding described below. Recovery of this asset
dependent upon action by the Texas Utility Commission. Reliant Energy began
refunding the excess mitigation credits in January 2002 and we will continue to
do so over a seven year period. If events occur that make the recovery of all or
a portion of the regulatory assets no longer probable, we will write off the
corresponding balance of these assets as a charge against earnings.
Final True-Up. Beginning in January 2004, the Texas Utility Commission will
conduct true-up proceedings for each investor-owned utility. The purpose of the
true-up proceeding is to quantify and reconcile the amount of stranded costs,
the capacity auction true-up, unreconciled fuel costs and other regulatory
assets associated with the generating assets that were not previously
securitized as described below under "--Securitization Financing." The true-up
proceeding will result in either additional charges or credits being assessed on
certain retail electric providers.
STRANDED COST COMPONENT. The regulatory net book value of generating assets
will be compared to the market value based on the partial stock valuation
method. The resulting difference, if positive, is stranded cost that will be
recovered through a transition charge, which is a non-bypassable charge assessed
to customers taking delivery service from us, or through
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securitization of the transition charge. If the difference is negative, the
amount of over-mitigation not at that time returned to customers (redirected
depreciation and excess earnings directed to depreciation) will be returned to
customers through lower transmission and distribution charges.
The publicly traded common stock of Texas Genco will be used to determine
the value of the generating assets of Texas Genco pursuant to the partial stock
valuation method for determining stranded costs. The value will be equal to the
average daily closing price on a national exchange for publicly held shares of
common stock in Texas Genco for the 30 consecutive trading days chosen by the
Texas Utility Commission out of the 120 trading days immediately preceding the
true-up filing, plus a control premium, up to a maximum of 10%, to the extent
included in the valuation determination made by the Texas Utility Commission.
The regulatory net book value is the balance as of December 31, 2001 plus
certain costs incurred for reductions in emissions of oxides of nitrogen and any
above-market purchase power costs. The regulatory net book value will also
include any mitigation returned to ratepayers through return of "excess earnings
depreciation" or reversal of redirected depreciation.
ECOM TRUE-UP COMPONENT. The Texas Utility Commission used a computer model
or projection, called an ECOM model, to estimate stranded costs related to
generation plant assets. In connection with using the ECOM model to calculate
the stranded cost estimate, the Texas Utility Commission estimated the market
power prices that will be received in the generation capacity auctions mandated
by the Texas electric restructuring law during the period January 1, 2002
through December 31, 2003. Any difference between the actual market power prices
received in those auctions and the Texas Utility Commission's earlier estimates
of those market prices will be a component of the 2004 true-up to which we will
be a party.
FUEL OVER/UNDER RECOVERY COMPONENT. The fuel component will be determined
in a final fuel reconciliation. In that proceeding, the amount of any over- or
under-recovery of fuel costs from the period August 1, 1997 through January 30,
2002 will be determined. Reliant Energy's filing related to this proceeding
covers $8.6 billion in fuel expense and interest incurred during that period.
Current substantive rules require that the Texas Utility Commission rule on this
case by March 2003. A procedural schedule has been set with a hearing scheduled
to begin November 19, 2002. Any over- or under-recovery, plus interest thereon,
will either be returned to or recovered from our customers, as appropriate, as a
component of the 2004 true-up.
"PRICE TO BEAT" CLAWBACK COMPONENT. In connection with the implementation
of the Texas electric restructuring law, the Texas Utility Commission has set a
"price to beat" that retail electric providers affiliated with a former
integrated utility charge residential and small commercial customers within
their affiliated electric utility's service area. The true-up provides for a
clawback of "price to beat" in excess of the market price of electricity if 40%
of the "price to beat" load is not served by a non-affiliated retail electric
provider by January 1, 2004. Pursuant to the master separation agreement between
Reliant Energy and Reliant Resources, Reliant Resources is obligated to
reimburse us for the clawback component of the true-up. The clawback will not
exceed $150 times the number of customers served by the affiliated retail
electric provider in the transmission and distribution utility's service
territory less the number of customers served outside the transmission and
distribution utility's service territory on January 1, 2004.
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Securitization Financing. The Texas electric restructuring law provides for
the use of special purpose entities to issue securitization bonds for the
economic value of generation-related regulatory assets and stranded costs. These
bonds will be amortized through non-bypassable charges to our customers. Any
stranded costs not recovered through the securitization bonds will be recovered
through a non-bypassable charge assessed to customers taking delivery service
from us.
In October 2001, our subsidiary Bondco issued $749 million of transition
bonds to securitize generation-related regulatory assets. The bonds have a final
maturity date of September 15, 2015. Payments on the securitization bonds are
made out of funds from non-bypassable transition charges assessed to customers
taking delivery service from us.
We expect that we will seek to securitize the true-up balance upon
completion of the 2004 True-up Proceeding. The bonds may have a maximum maturity
of 15 years. Payments on these securitization bonds would also be made out of
funds from non-bypassable transition charges assessed to customers taking
delivery service from us.
REGULATION
Our parent company, CenterPoint Energy, operates as a public utility
holding company subject to regulation by the SEC under the Public Utility
Holding Company Act of 1935. The Public Utility Holding Company Act of 1935
directs the SEC to regulate, among other things, issuances of securities, sales
or acquisitions of assets, intra-corporate transactions and permitted lines of
business.
We are subject to regulation by various federal, state and local
governmental agencies. Except with respect to minor elements of our business
associated with the operation of high voltage DC lines, we are not regulated by
the Federal Energy Regulatory Commission (FERC). Our rates and services are
regulated by the Texas Utility Commission. We conduct our operations pursuant to
a certificate of convenience and necessity issued by the Texas Utility
Commission that covers our present service area and facilities. We hold
non-exclusive franchises from the incorporated municipalities in our service
territory. These franchises give us the right to operate our transmission and
distribution system within the streets and public ways of these municipalities
for the purpose of delivering electric service to the municipality and its
residents and businesses. None of these franchises expires before 2007.
Historically, Reliant Energy paid the incorporated municipalities in its
service territory a franchise fee based on a formula that was usually a
percentage of revenues received from electricity sales for consumption within
each municipality. Since January 1, 2002, we have become responsible for Reliant
Energy's obligations under these franchise arrangements. We expect the franchise
fees payable to remain consistent with the fees paid by Reliant Energy; however,
the new fees could be higher if electricity sales increase. We would be able to
adjust our rates to recover such an increase only through a general rate case in
which all of our expenses and revenues would be subject to review by the Texas
Utility Commission.
Rates. All retail electric providers in our service area pay the same rates
and other charges for distribution services. Our distribution rates are based on
amounts of energy demanded. All other
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distribution companies in ERCOT pay us the same rates and other charges for
transmission services. Transmission rates are based on amounts of energy
transmitted under "postage stamp" rates that do not vary with the distance the
energy is being transmitted.
The transmission and distribution rates that are in effect as of January 1,
2002 for us are based on an order issued by the Texas Utility Commission (Docket
No. 22355). The order resulted from a March 31, 2000 filing (the Wires Case)
with the Texas Utility Commission required by the Texas electric restructuring
law. The Wires Case set the regulated rates for us to be effective when electric
competition began. This regulated delivery charge includes the transmission and
distribution charge, a system benefit fund fee, a nuclear decommissioning fund
charge, a municipal franchise fee and a transition charge associated with
securitization of regulatory assets. In Reliant Energy's appeal of certain
aspects of the Wires Case, the Travis County District Court generally upheld the
Texas Utility Commission's order. CenterPoint Energy may appeal the district
court's decision to the Texas Court of Appeals but has not yet filed an appeal.
Decommissioning Trust. The South Texas Project Nuclear Generating Station
(the South Texas Project) is a nuclear power generation facility, 30.8% of which
is owned by Texas Genco. The South Texas Project must undergo decommissioning at
the end of its licensed life. We have been authorized by the Texas electric
restructuring law and the Texas Utility Commission to collect $2.9 million per
year from customers using our transmission and distribution services and to
deposit the amount collected into an external trust created to fund Texas
Genco's share of the decommissioning costs for the South Texas Project. At June
30, 2002, the securities held by the trusts had an estimated fair value of $169
million.
In the event that funds from the trust are inadequate to decommission the
facilities, we will be required to collect through rates or other authorized
charges all additional amounts required to fund Texas Genco's obligations
relating to the decommissioning of the South Texas Project. Pursuant to the
Texas electric restructuring law, costs associated with nuclear decommissioning
that have not been recovered as of January 1, 2002 will continue to be subject
to cost-of-service rate regulation and will be included in a charge to
transmission and distribution customers. We are also contractually obligated to
indemnify Texas Genco from and against any obligations relating to the
decommissioning not otherwise satisfied through collections from customers.
Following the completion of the decommissioning, if surplus funds remain in the
decommissioning trust, the excess will be refunded to our customers through
reductions in the rates applicable to transmission and distribution services.
Environmental. We are subject to various federal, state and local
requirements relating to the protection of the environment and the safety and
health of personnel and the public. These requirements relate to a broad range
of our activities, including the discharge of pollutants into air, water, and
soil, the proper handling of solid, hazardous, and toxic materials and waste,
noise, and safety and health standards applicable to the workplace.
If we do not comply with environmental requirements that apply to our
operations, regulatory agencies could seek to impose on us civil, administrative
and/or criminal liabilities as well as seek to curtail our operations. Under
some statutes, private parties could also seek to impose upon us civil fines or
liabilities for property damage, personal injury and possibly other costs.
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Under the federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980 (CERCLA), owners and operators of facilities from which
there has been a release or threatened release of hazardous substances, together
with those who have transported or arranged for the disposal of those
substances, are liable for:
o the costs of responding to that release or threatened release; and
o the restoration of natural resources damaged by any such release.
We are not aware of any liabilities under CERCLA that would have a material
adverse effect on us, our financial position, results of operations or cash
flows.
LEGAL PROCEEDINGS
Our predecessor, Reliant Energy, and certain of its former subsidiaries
have been named as defendants in several lawsuits and as parties in regulatory
proceedings. Additional information about these matters is set forth below.
Under a master separation agreement between Reliant Energy and Reliant
Resources, we and our parent CenterPoint Energy are entitled to be indemnified
by Reliant Resources for any losses arising out of the described lawsuits,
including attorneys' fees and other costs, other than the municipal franchise
fee lawsuits described below.
Reliant Energy Municipal Franchise Fee Lawsuits. In February 1996, the
cities of Wharton, Galveston and Pasadena filed suit, for themselves and a
proposed class of all similarly situated cities in Reliant Energy service area,
against Reliant Energy and Houston Industries Finance, Inc. (formerly a wholly
owned subsidiary of Reliant Energy) alleging underpayment of municipal franchise
fees. Plaintiffs claim that they are entitled to 4% of all receipts of any kind
for business conducted within these cities over the previous four decades.
Because the franchise ordinances at issue affecting Reliant Energy expressly
impose fees only on its own receipts and only from sales of electricity for
consumption within a city, we regard all of plaintiffs' allegations as spurious
and are vigorously contesting the case. The plaintiffs' pleadings asserted that
their damages exceeded $250 million. The 269th Judicial District Court for
Harris County granted partial summary judgment in favor of Reliant Energy
dismissing all claims for franchise fees based on sales tax collections. Other
motions for partial summary judgment were denied. A six-week jury trial of the
original claimant cities (but not the class of cities) ended on April 4, 2000
(the Three Cities case). Although the jury found for Reliant Energy on many
issues, they found in favor of the original claimant cities on three issues, and
assessed a total of $4 million in actual and $30 million in punitive damages.
However, the jury also found in favor of Reliant Energy on the affirmative
defense of laches, a defense similar to a statute of limitations defense, due to
the original claimant cities having unreasonably delayed bringing their claims
during the 43 years since the alleged wrongs began.
The trial court in the Three Cities case granted most of Reliant Energy's
motions to disregard the jury's findings. The trial court's rulings reduced the
judgment to $1.7 million, including interest, plus an award of $13.7 million in
legal fees. In addition, the trial court granted Reliant Energy's motion to
decertify the class and vacated its prior orders certifying a class. Following
this ruling, 45 cities filed individual suits against Reliant Energy in the
District Court of Harris County.
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The Three Cities case has been appealed. We believe that the $1.7 million
damage award resulted from serious errors of law and that it will be set aside
by the Texas appellate courts. In addition, we believe that because of an
agreement between the parties limiting fees to a percentage of the damages,
reversal of the award of $13.7 million in attorneys' fees in the Three Cities
case is probable.
The extent to which issues in the Three Cities case may affect the claims
of the other cities served by Reliant Energy cannot be assessed until judgments
are final and no longer subject to appeal. However, the trial court's rulings
disregarding most of the jury's findings are consistent with Texas Supreme Court
opinions over the past decade. We estimate the range of possible outcomes for
the plaintiffs in the Three Cities case to be between zero and $18 million
inclusive of interest and attorneys' fees.
California Litigation. Reliant Energy has been named as a defendant in
class action lawsuits and other lawsuits filed against subsidiaries of Reliant
Resources and other companies that own generation plants in California and other
sellers of electricity in California markets. Three of these lawsuits were filed
in the Superior Court of the State of California, San Diego County; two were
filed in the Superior Court in San Francisco County; and one was filed in the
Superior Court of Los Angeles County. While the plaintiffs allege various
violations by the defendants of state antitrust laws and state laws against
unfair and unlawful business practices, each of the lawsuits is grounded on the
central allegation that defendants conspired to drive up the wholesale price of
electricity. In addition to injunctive relief, the plaintiffs in these lawsuits
seek treble the amount of damages alleged, restitution of alleged overpayments,
disgorgement of alleged unlawful profits for sales of electricity, costs of suit
and attorneys' fees. Plaintiffs have voluntarily dismissed Reliant Energy from
two of the three class actions in which it was named as a defendant.
The cases were initially removed to federal court and were then assigned to
Judge Robert H. Whaley, United States District Judge, pursuant to the federal
procedures for multi-district litigation. In July 2000, Judge Whaley remanded
the cases to state court. Upon remand to state court, the cases were assigned to
Superior Court Judge Janis L. Sammartino pursuant to the California state
coordination procedures. In March 2002, Judge Sammartino adopted a schedule
proposed by the parties that would result in a trial beginning on March 1, 2004.
Thereafter, the plaintiffs filed a single, consolidated complaint that restated
the allegations described above and alleged that damages against all defendants
could be as much as $1 billion. In April 2002, Reliant Resources and Duke Energy
filed cross complaints in the coordinated proceedings seeking, in an alternative
pleading, relief against other market participants in California, the
surrounding states, Canada and Mexico including Powerex Corp., the Los Angeles
Department of Water and Power and the Bonneville Power Administration. Powerex
Corp. and Bonneville Power Administration removed the case once again to federal
court where it was reassigned to Judge Whaley. In July 2002, a motion to dismiss
was filed in coordinated proceedings seeking dismissal of the complaints on the
basis of the filed rate doctrine and federal preemption.
In March 2002, the California Attorney General filed a civil lawsuit in San
Francisco Superior Court naming Reliant Energy, Reliant Resources and several
subsidiaries of Reliant Resources as defendants. The Attorney General alleges
various violations by the defendants of state laws against unfair and unlawful
business practices arising out of transactions in the
11
markets for ancillary services run by the California Independent System
Operator. In addition to injunctive relief, the Attorney General seeks
restitution and disgorgement of alleged unlawful profits for sales of
electricity, and civil penalties. Reliant Resources removed this lawsuit to
federal court in April 2002, where it has been assigned to Judge Vaughn Walker
in the Northern District of California.
In April 2002, the California Attorney General filed a lawsuit in San
Francisco County Superior Court against Reliant Energy, Reliant Resources and
several subsidiaries of Reliant Resources alleging that Reliant Resources
consistently charged unjust and unreasonable prices for electricity, and that
each instance of overcharge violated California law. The lawsuit seeks fines of
up to $2,500 for each alleged violation, and "other equitable relief as
appropriate." Reliant Resources has removed this case to federal court, where it
too has been assigned to Judge Vaughn Walker.
Also in April 2002, the California Attorney General and the California
Department of Water Resources filed a complaint in the United States District
Court for the Northern District of California against Reliant Energy, Reliant
Resources and a number of its subsidiaries. In this lawsuit, the Attorney
General alleges that Reliant Resources' acquisition of electric generating
facilities from Southern California Edison in 1998 violated Section 7 of the
Clayton Act, which prohibits mergers or acquisitions that substantially lessen
competition. The lawsuit claims that the acquisitions gave Reliant Resources
market power which it then exercised to overcharge California consumers for
electricity. The lawsuit seeks injunctive relief against alleged unfair
competition, divestiture of Reliant Resources' California facilities,
disgorgement of alleged illegal profits, damages, and civil penalties for each
alleged exercise of market power. This lawsuit also has been assigned to Judge
Vaughn Walker. Judge Walker has denied the California Attorney General's motion
to remand the removed above-mentioned cases to state court and it is anticipated
that he will rule in the near future in Reliant Resources' motion to dismiss all
three cases.
After the filing of the Attorney General cases, seven new class action
cases were filed in state courts in Northern California. Each of these purports
to represent the same class of California ratepayers, assert the same claims as
asserted in the Southern California class action cases, and in some instances
repeat as well the allegations in the Attorney General cases. All of these cases
have been removed to federal court and have been conditionally assigned to Judge
Whaley by the Panel on Multi-District Litigation. The plaintiffs in the Southern
California class actions have opposed this transfer and it is likely that there
will be a hearing before the Panel in September 2002. An additional class action
lawsuit was filed in federal court in Los Angeles on behalf of electric power
customers in the State of Washington.
Trading and Marketing Activities. Reliant Energy has been named as a party
in several lawsuits and regulatory proceedings relating to the trading and
marketing activities of its former subsidiary Reliant Resources. Their ultimate
outcome and their effect on us cannot be predicted at this time. Additional
information regarding certain of these matters is set forth below.
In June 2002, the SEC advised Reliant Resources that it had issued a formal
order in connection with its investigation of Reliant Resources' financial
reporting, internal controls and related matters. We understand that the
investigation is focused on its same-day commodity
12
trading transactions involving purchases and sales with the same counterparty
for the same volume at substantially the same price ("round trip trades") and
structured transactions. These matters were previously the subject of an
informal inquiry by the SEC. The SEC's formal order is also addressed to Reliant
Energy. Reliant Resources and we, as Reliant Energy's corporate successor, are
cooperating with the SEC staff.
In connection with the Texas Utility Commission's industry-wide
investigation into potential manipulation of the ERCOT market on and after July
31, 2001, Reliant Energy and Reliant Resources have provided information to the
Texas Utility Commission concerning their scheduling and trading activities.
In May, June and July 2002, eleven class action lawsuits were filed on
behalf of purchasers of securities of Reliant Resources and/or Reliant Energy.
Reliant Resources and several of its executive officers are named as defendants.
Reliant Energy is also named as a defendant in three of the lawsuits. Two of the
lawsuits also name as defendants the underwriters of the Reliant Resources
initial public offering. One of those two lawsuits also names Reliant Resources'
and Reliant Energy's independent auditors as a defendant.
The complaints allege that the defendants overstated the revenues of
Reliant Energy by including transactions involving the purchase and sale of
commodities with the same counterparty at the same price and that Reliant Energy
improperly accounted for certain other transactions, among other things. The
complaints seek monetary damages and, in one of the lawsuits rescission, on
behalf of a supposed class. In eight of the lawsuits, the supposed class is
composed of persons who purchased or otherwise acquired Reliant Resources and/or
Reliant Energy securities during specified class periods. The three lawsuits
that include Reliant Energy as a named defendant were also filed on behalf of
purchasers of securities of Reliant Resources and/or Reliant Energy during
specified class periods.
Additionally, in May and June 2002, four class action lawsuits were filed
on behalf of purchasers of securities of Reliant Energy. Reliant Energy and
several of its executive officers are named as defendants. The dates of filing
of the four lawsuits are as follows: one on May 16, 2002; one on May 21, 2002;
one on June 13, 2002; and one on June 17, 2002. The lawsuits were filed in the
United States District Court, Southern District of Texas, Houston Division. The
complaints allege that the defendants violated federal securities laws by
issuing false and misleading statements to the public. The plaintiffs allege
that the defendants made false and misleading statements as part of an alleged
scheme to artificially inflate trading volumes and revenues by including
transactions involving the purchase and sale of commodities with the same
counterparty at the same price, to spin-off Reliant Resources to avoid exposure
to Reliant Resources' liabilities and to cause the price of Reliant Resources'
stock to rise artificially, among other things. The complaints seek monetary
damages on behalf of persons who purchased Reliant Energy securities during
specified class periods.
In May 2002, three class action lawsuits were filed on behalf of
participants in various employee benefits plans sponsored by Reliant Energy.
Reliant Energy and its directors are named as defendants in all of the lawsuits.
Reliant Resources is named as a defendant in two of the lawsuits. The lawsuits
were filed on May 29, 2002, May 30, 2002, and May 31, 2002. All of the lawsuits
were filed in the United States District Court, Southern District of Texas,
Houston
13
Division. By order dated June 20, 2002, the Court granted the motion for
voluntary dismissal filed by the plaintiffs in one of the cases and dismissed
that case without prejudice.
The two remaining complaints allege that the defendants breached their
fiduciary duties to various employee benefits plans sponsored by Reliant Energy,
in violation of the Employee Retirement Income Security Act. The plaintiffs
allege that the defendants permitted the plans to purchase or hold securities
issued by Reliant Energy when it was imprudent to do so, including after the
prices for such securities became artificially inflated because of alleged
securities fraud engaged in by the defendants. The complaints seek monetary
damages for losses suffered by a putative class of plan participants whose
accounts held Reliant Energy or Reliant Resources securities, as well as
equitable relief in the form of restitution.
We are involved in other proceedings before various courts, regulatory
commissions and governmental agencies regarding matters arising in the ordinary
course of business. Our management currently believes that the disposition of
these matters will not have a material adverse effect on our financial
condition, results of operations or cash flows.
PROPERTIES
All of our properties are located in the State of Texas. Our transmission
system carries electricity from power plants to substations and from one
substation to another. These substations serve to connect power plants, the high
voltage transmission lines and the lower voltage distribution lines. Unlike the
transmission system, which carries high voltage electricity over long distances,
distribution lines carry lower voltage power from the substation to the retail
electric customers. The distribution system consists primarily of distribution
lines, transformers, secondary distribution lines and service wires.
Electric Lines--Overhead. As of December 31, 2001, we owned 25,998 pole
miles of overhead distribution lines and 3,606 circuit miles of overhead
transmission lines, including 452 circuit miles operated at 69,000 volts, 2,095
miles operated at 138,000 volts and 1,059 circuit miles operated at 345,000
volts.
Electric Lines--Underground. As of December 31, 2001, we owned 12,701
circuit miles of underground distribution lines and 15.6 circuit miles of
underground transmission lines, including 4.5 circuit miles operated at 69,000
volts and 11.1 circuit miles operated at 138,000 volts.
Substations. As of December 31, 2001, we owned 223 major substation sites
(252 substations) having total installed rated transformer capacity of 64,783
megavolt amperes.
14
MANAGEMENT
MANAGER AND EXECUTIVE OFFICERS
(AS OF AUGUST 31, 2002)
<Table>
<Caption>
NAME TITLE
---- -----
David M. McClanahan..................... Manager
Thomas R. Standish...................... President and Chief Operating Officer
Gary L. Whitlock........................ Executive Vice President and Chief Financial Officer
Scott E. Rozzell........................ Executive Vice President, General Counsel and Corporate
Secretary
James A. Brian.......................... Senior Vice President and Chief Accounting Officer
Marc Kilbride........................... Vice President and Treasurer
</Table>
DAVID M. MCCLANAHAN is the sole Manager of CenterPoint Houston and
President and Chief Executive Officer of CenterPoint Energy. Before the
restructuring, he served as Vice Chairman of Reliant Energy and President and
Chief Operating Officer of the Reliant Energy Delivery Group, which was
responsible for regulated electric and gas operations. Prior to being named
President of the Delivery Group, Mr. McClanahan served as President of the
electric utility division of Reliant Energy. Since 1972, Mr. McClanahan has held
a variety of positions at Reliant Energy and its predecessors and subsidiaries
including positions in information systems, accounting, and finance.
THOMAS R. STANDISH is President and Chief Operating Officer of CenterPoint
Houston. He previously served as President and Chief Operating Officer for both
electricity and natural gas in Reliant Energy's Texas service areas. He began
his career in 1983 with Houston Lighting & Power Company, where he served in
various positions in the marketing, rates & research, regulatory relations and
engineering departments and more recently, as Senior Vice President of
Distribution Customer Service.
GARY L. WHITLOCK is Executive Vice President and Chief Financial Officer of
CenterPoint Energy and of CenterPoint Houston. From July 2001 until the time of
the restructuring, he served as Executive Vice President and Chief Financial
Officer of the Delivery Group of Reliant Energy. Prior to July 2001, Mr.
Whitlock was Vice President, Finance and Chief Financial Officer of Dow
AgroSciences, a subsidiary of The Dow Chemical Company. He started his career
with Dow in 1972, where he held a number of financial positions.
SCOTT E. ROZZELL is Executive Vice President and General Counsel of
CenterPoint Energy and of CenterPoint Houston. He previously served as Executive
Vice President and General Counsel of the Delivery Group of Reliant Energy.
Before joining Reliant Energy in 2001, Mr. Rozzell served as chair of the Energy
Department of the Houston office of Baker Botts L.L.P.
JAMES A. BRIAN is Senior Vice President and Chief Accounting Officer of
CenterPoint Energy and of CenterPoint Houston. He served from August 2002 until
the restructuring as Senior Vice President and Chief Accounting Officer of
Reliant Energy. Mr. Brian has served in various finance, accounting and treasury
positions with Reliant Energy, its predecessors and subsidiaries since 1977.
MARC KILBRIDE is Vice President and Treasurer of CenterPoint Energy and of
CenterPoint Houston, having previously served as Treasurer of Reliant Energy.
Mr. Kilbride has served in various finance, risk management and treasury
capacities with Reliant Energy, its predecessors and subsidiaries since 1977.
15
RISK FACTORS
Investors in our securities should consider carefully the risks described
below as well as the other risks described in this Current Report on Form 8-K.
There may be risks that others view in a different way than we do, and we may
omit a risk that we consider immaterial but that others would consider
important. If any of the following risks occurs, our business, financial
condition or results of operations could be materially harmed.
RISKS RELATED TO OUR TRANSMISSION AND DISTRIBUTION BUSINESSES
WE ARE OPERATING IN A NEW MARKET ENVIRONMENT IN WHICH WE AND OTHERS HAVE LITTLE
OPERATING EXPERIENCE.
The competitive electric market in Texas is new. Neither we nor any of the
Texas Utility Commission, ERCOT or other market participants has any significant
operating history under the market framework created by the Texas electric
restructuring law. Some operational difficulties were encountered in the pilot
program conducted last year and are being experienced now. These difficulties
include delays in the switching of some customers from one retail electric
provider to another. These difficulties create uncertainty as to the amount of
transmission and distribution charges owed by each retail electric provider,
which may cause payment of those amounts to be delayed. While to date these
difficulties have not been material, these operating difficulties could become
material or structural changes adopted to address these difficulties could
materially adversely affect our revenues and results of operations.
COLLECTION OF OUR REVENUES IS CONCENTRATED IN A SMALL NUMBER OF RETAIL ELECTRIC
PROVIDERS.
Our revenues from the distribution of electricity are collected from retail
electric providers that supply the electricity we distribute to their customers.
Currently, we do business with approximately 27 retail electric providers.
Adverse economic conditions or structural problems in the new Texas market could
impair the ability of these retail providers to pay for our services or could
cause them to delay such payments. We depend on these retail electric providers
to timely remit payments to us. Any delay or default in payment could adversely
affect our cash flows. We anticipate that more than half of our revenues from
retail electric providers for 2002 will come from subsidiaries of Reliant
Resources. See "Business--Our Business--Customers."
PROBLEMS WITH METERING THE ELECTRICITY WE DISTRIBUTE MAY MATERIALLY AFFECT OUR
REVENUES AND RESULTS OF OPERATIONS.
Currently, we provide all metering services to retail electric providers
for customers in our service territory. Pursuant to the Texas electric
restructuring law, metering services will be provided on a competitive basis
beginning in January 2004 for commercial and industrial customers and by at
least September 2005 for residential customers. After January 2004, third
parties will be permitted to perform metering services and provide metering data
to us. The Texas Utility Commission has not yet established certification or
performance standards for third party metering entities. Because third parties
will not have previously performed metering services in our service territory,
there may be unforeseen problems in converting to the third party's metering
system, in taking accurate meter readings and in collecting and processing
accurate metering data following the conversion to competitive metering. Any
failure by us or
16
these third parties to meter accurately the electricity sold by the retail
electric providers could adversely impact the revenues we receive from retail
electric providers.
RATE REGULATION OF OUR BUSINESS MAY DELAY OR DENY OUR FULL RECOVERY OF OUR
COSTS.
Our rates are regulated by the Texas Utility Commission based on an
analysis of our expenses incurred in a test year. Thus, the rates we are allowed
to charge may or may not match our expenses at any given time. While rate
regulation in Texas is premised on providing a reasonable opportunity to earn a
reasonable rate of return on invested capital, there can be no assurance that
the Texas Utility Commission will judge all of our costs to have been prudently
incurred or that the regulatory process in which rates are determined will
always result in rates that will produce full recovery of our costs.
WE MAY NOT BE SUCCESSFUL IN RECOVERING THE FULL VALUE OF OUR STRANDED COSTS AND
REGULATORY ASSETS RELATED TO GENERATION.
Pursuant to the Texas electric restructuring law, we will be entitled to
recover our stranded costs (i.e., the excess of regulatory net book value of
generation assets, as defined by the Texas electric restructuring law, over the
market value of those assets) and our regulatory assets related to generation.
We will make a filing in January 2004 in a true-up proceeding provided for by
the Texas electric restructuring law. The purpose of this proceeding will be to
quantify and reconcile: the amount of stranded costs; differences in the prices
achieved in the auctions of Texas Genco's generation capacity and Texas Utility
Commission estimates; unreconciled fuel costs; and other regulatory assets
associated with our Texas generation business for which we were not previously
reimbursed through the issuance of "securitization" bonds by a subsidiary. We
will be required to establish and support the amounts of these costs in order to
recover them. We cannot assure you that we will be able to successfully
establish and support our estimates of the value of these costs. For more
information about the true-up proceeding, please read "Business--Stranded Costs
and Regulatory Assets Recovery."
DISRUPTIONS IN POWER GENERATION FACILITIES OWNED BY THIRD PARTIES COULD
INTERRUPT OUR SALES OF DISTRIBUTION AND TRANSMISSION SERVICES.
We depend on power generation facilities owned by third parties to provide
retail electric providers with electric power which we transmit and distribute
to their customers. We do not own or operate any power generation facilities. If
power generation is disrupted or if power generation capacity is inadequate, our
transmission and distribution services may be interrupted adversely affecting
our revenues.
OUR REVENUES AND RESULTS OF OPERATIONS ARE SEASONAL.
A portion of our revenues is derived from rates that we collect from each
retail electric provider based on the amount of electricity we distribute on
behalf of each retail electric provider. Thus, our revenues and results of
operation are subject to seasonality, weather conditions and other changes in
electricity usage.
17
OUR REVENUES AND RESULTS OF OPERATIONS ARE SUBJECT TO RISKS THAT ARE BEYOND OUR
CONTROL.
The cost of repairing damage to our facilities due to storms, natural
disasters, wars, terrorist acts and other catastrophic events, in excess of
reserves established for such repairs, may adversely impact our revenues,
operating and capital expenses and results of operations.
TECHNOLOGICAL CHANGE MAY MAKE ALTERNATIVE ENERGY SOURCES MORE ATTRACTIVE AND MAY
ADVERSELY AFFECT OUR REVENUES AND RESULTS OF OPERATIONS.
The continuous process of technological development may result in the
introduction to retail customers of economically attractive alternatives to
purchasing electricity through our distribution facilities. Manufacturers of
self-generation facilities continue to develop smaller-scale,
more-fuel-efficient generating units that can be cost-effective options for
retail customers with smaller electric energy requirements. Any reduction in the
amount of electric energy we distribute as a result of these technologies may
have an adverse impact on our revenues and results of operations in the future.
OUR RESULTS OF OPERATIONS, OUR ABILITY TO ACCESS CAPITAL AND INSURANCE AND OUR
FUTURE GROWTH PROSPECTS COULD BE ADVERSELY AFFECTED BY THE OCCURRENCE OR RISK OF
OCCURRENCE OF FUTURE TERRORIST ATTACKS OR RELATED ACTS OF WAR.
We are currently unable to measure the ultimate impact of the terrorist
attacks of September 11, 2001 on our industry and the United States economy as a
whole. The uncertainty associated with the retaliatory military response of the
United States and other nations and the risk of future terrorist activity may
impact our results of operations and financial condition in unpredictable ways.
These actions could result in adverse changes in the insurance markets and
disruptions of power and fuel markets. In addition, our transmission and
distribution facilities could be directly or indirectly harmed by future
terrorist activity. The occurrence or risk of occurrence of future terrorist
attacks or related acts of war could also adversely affect the United States
economy. A lower level of economic activity could result in a decline in energy
consumption, which could adversely affect our revenues and margins and limit our
future growth prospects. The occurrence or risk of occurrence could also
increase pressure to regulate or otherwise limit the prices charged for
electricity. Also, these risks could cause instability in the financial markets
and adversely affect our ability to access capital.
OTHER RISKS
IF WE ARE UNABLE TO ARRANGE FUTURE FINANCINGS ON ACCEPTABLE TERMS, OUR ABILITY
TO FUND FUTURE CAPITAL EXPENDITURES AND REFINANCE EXISTING INDEBTEDNESS COULD BE
LIMITED.
As a result of several recent events, including the September 11, 2001
terrorist attacks, the bankruptcy of Enron Corp., the downgrading of the credit
ratings of several energy companies and the unusual volatility in the U.S.
financial markets, the availability and cost of capital for our business have
been adversely affected. If we are unable to obtain external financing to meet
our future capital requirements on terms that are acceptable to us, our
financial condition and future results of operations could be materially
adversely affected. As of August 31, 2002, we had $400 million of outstanding
indebtedness under our $400 million credit facility that will expire during
October 2002. To the extent that we continue to need access to this amount of
committed credit,
18
we expect to extend or replace this facility. If we are unable to maintain
appropriately sized credit facilities on terms that are acceptable to us, our
financial condition could be materially adversely affected. In addition, the
capital constraints currently impacting our industry may require our future
indebtedness to include terms that are more restrictive or burdensome than those
of our current indebtedness. These terms may negatively impact our ability to
operate our business or severely restrict or prohibit distributions from our
subsidiaries. The success of our future financing efforts may depend, at least
in part, on:
o general economic and capital market conditions;
o credit availability from banks and other financial institutions;
o investor confidence in us and the market in which we operate;
o maintenance of acceptable credit ratings;
o market expectations regarding our future earnings and probable cash
flows;
o market perceptions of our ability to access capital markets on
reasonable terms;
o our exposure to Reliant Resources as a customer and in connection with
its indemnification obligations arising in connection with its
separation from CenterPoint Energy; and
o provisions of relevant tax and securities laws.
WE COULD INCUR LIABILITIES ASSOCIATED WITH BUSINESSES AND ASSETS WE HAVE
TRANSFERRED TO OTHERS.
Under some circumstances, we could incur liabilities associated with assets
and businesses we no longer own. These assets and businesses include
o those transferred to Reliant Resources or its subsidiaries in
connection with the organization and capitalization of Reliant
Resources prior to its initial public offering in 2001;
o those transferred to Texas Genco in connection with its organization
and capitalization; and
o those transferred to CenterPoint Energy in connection with the holding
company restructuring.
In connection with the organization and capitalization of Reliant
Resources, Reliant Resources and its subsidiaries assumed liabilities associated
with various assets and businesses Reliant Energy transferred to them. Reliant
Resources also agreed to indemnify, and cause the applicable transferee
subsidiaries to indemnify, Reliant Energy with respect to liabilities associated
with the transferred assets and businesses. The indemnity provisions were
intended to place sole financial responsibility on Reliant Resources and its
subsidiaries for all liabilities
19
associated with the current and historical business and operations Reliant
Resources conducts, regardless of the time those liabilities arise. If Reliant
Resources is unable to satisfy a liability that has been so assumed and in
circumstances in which Reliant Energy has not been released from the liability
in connection with the transfer, we, as successor to Reliant Energy, could be
responsible for satisfying the liability.
As described in "Legal Proceedings," Reliant Energy and Reliant Resources
have been named as defendants in a number of lawsuits arising out of financial
reporting matters. Although most of the alleged violations of financial
reporting requirements relate to the business and operations of Reliant
Resources, claims against Reliant Energy have been made on grounds that include
the effect of our subsidiary's financial results on our own financial statements
and liability as a controlling shareholder. As Reliant Energy's successor, we
could incur liability if claims in one or more of these lawsuits were
successfully asserted against us and indemnification from Reliant Resources were
determined to be unavailable or if Reliant Resources were unable to satisfy
indemnification obligations owed to us with respect to those claims.
In connection with the organization and capitalization of Texas Genco,
Texas Genco assumed liabilities associated with the electric generation assets
and business Reliant Energy transferred to it. In case Texas Genco were unable
to satisfy a liability that had been so assumed or indemnified against, and
provided Reliant Energy had not been released from the liability in connection
with the transfer, we could be responsible for satisfying the liability.
Examples of liabilities for which we could be responsible in these circumstances
include environmental liabilities associated with the generation facilities and
obligations respecting the decommissioning of the South Texas Project.
OUR HISTORICAL FINANCIAL RESULTS AS THE UNINCORPORATED ELECTRIC TRANSMISSION AND
DISTRIBUTION DIVISION OF RELIANT ENERGY ARE NOT REPRESENTATIVE OF OUR EXPECTED
FUTURE RESULTS AS CENTERPOINT HOUSTON.
We have limited experience operating as a transmission and distribution
utility in a deregulated electricity market in which we are subject to rate
regulation. The pro forma financial information we have included in this Current
Report on Form 8-K does not necessarily reflect what our financial position,
results of operations and cash flows would have been had we been a separate
transmission and distribution subsidiary during the periods presented. Although
our transmission and distribution operations had a significant operating history
at the time of the restructuring of Reliant Energy, the pro forma financial
information relating to these operations reflects the transmission and
distribution of electricity as part of an integrated utility in a regulated
electricity market. We currently transmit and distribute electricity at rates
regulated by the Texas Utility Commission, and our revenues will depend in large
part on the transmission and distribution of electricity at those rates.
Our historical costs and expenses reflect charges from Reliant Energy for
centralized corporate services and infrastructure costs. These allocations have
been determined based on what we and Reliant Energy considered to be reasonable
reflections of the utilization of services provided to us or for the benefits
received by us. This pro forma financial information is not necessarily
indicative of what our results of operations, financial position and cash flows
will be in the future. We may experience significant changes in our cost
structure, funding and
20
operations as a result of the restructuring of Reliant Energy, including
increased costs associated with reduced economies of scale.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(b) Pro Forma Financial Information.
99.1 Unaudited Pro Forma Condensed Consolidated Financial
Statements
(c) 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 herein by
reference to a filing of CenterPoint Energy, Inc. as indicated.
<Table>
<Caption>
Report or SEC File or
Exhibit Registration Registration Exhibit
Number Description Statement Number References
- ------ ----------- ------------ ------------ ----------
2(a)(1) Agreement and Plan of Merger among Reliant Joint Proxy 333-69502 Annex A
Energy, Incorporated ("REI"), CenterPoint Statement/
Energy, Inc. ("CNP") and Reliant Energy Prospectus of REI
MergerCo, Inc. dated as of October 19, 2001 contained in
Registration
Statement on Form
S-4
+3(a) Articles of Conversion of REI
+3(b) Articles of Organization of CenterPoint Energy
Houston Electric, LLC
+3(c) Limited Liability Company Regulations of
CenterPoint Energy Houston Electric, LLC
</Table>
21
<Table>
<Caption>
Report or SEC File or
Exhibit Registration Registration Exhibit
Number Description Statement Number References
- ------ ----------- ------------ ------------ ----------
4(a) Fifth Supplemental Indenture dated as of August Form 8-K of CNP 333-69502 4(d)
31, 2002, among CNP, REI and JPMorgan Chase dated August 31,
Bank (supplementing the Collateral Trust 2002 and filed with
Indenture dated as of September 1, 1988 pursuant the SEC on
to which REI's Series C Medium Term Notes were September 3, 2002
issued)
4(b) Supplemental Indenture No. 2 dated as of August Form 8-K of CNP 333-69502 4(e)
31, 2002, among CNP, REI and JPMorgan Chase Bank dated August 31,
(supplementing the Subordinated Indenture dated 2002 and filed with
as of September 1, 1999 under which REI's 2% the SEC on
Zero-Premium Exchangeable Subordinated Notes Due September 3, 2002
2029 were issued)
4(c) Supplemental Indenture No. 2 dated as of August Form 8-K of CNP 333-69502 4(f)
31, 2002, among CNP, REI and The Bank of New dated August 31,
York (supplementing the Junior Subordinated 2002 and filed with
Indenture dated as of February 15, 1999 under the SEC on
which REI's Junior Subordinated Debentures September 3, 2002
related to REI Trust I's 7.20% trust originated
preferred securities were issued)
4(d) Supplemental Indenture No. 3 dated as of August Form 8-K of CNP 333-69502 4(g)
31, 2002 among CNP, REI and The Bank of New York dated August 31,
(supplementing the Junior Subordinated Indenture 2002 and filed with
dated as of February 1, 1997 under which REI's the SEC on
Junior Subordinated Debentures related to 8.125% September 3, 2002
trust preferred securities issued by HL&P
Capital Trust I and 8.257% capital securities
issued by HL&P Capital Trust II were issued)
4(e) Third Supplemental Indenture dated as of August Form 8-K of CNP 333-69502 4(h)
31, 2002 among CNP, REI, Reliant Energy dated August 31,
Resources Corp. ("RERC") and The Bank of New 2002 and filed with
York (supplementing the Indenture dated as of the SEC on
June 15, 1996 under which RERC's 6.25% September 3, 2002
Convertible Junior Subordinated Debentures were
issued)
</Table>
22
<Table>
<Caption>
Report or SEC File or
Exhibit Registration Registration Exhibit
Number Description Statement Number References
- ------ ----------- ------------ ------------ ----------
4(f) Second Supplemental Indenture dated as of August Form 8-K of CNP 333-69502 4(i)
31, 2002 among CNP, REI, RERC and JPMorgan Chase dated August 31,
Bank (supplementing the Indenture dated as of 2002 and filed with
March 1, 1987 under which RERC's 6% Convertible the SEC on
Subordinated Debentures due 2012 were issued) September 3, 2002
4(g) Assignment and Assumption Agreement for the Form 8-K of CNP 333-69502 4(j)
Guarantee Agreements dated as of August 31, 2002 dated August 31,
between CNP and REI (relating to (i) the 2002 and filed with
Guarantee Agreement dated as of February 4, 1997 the SEC on
between REI and The Bank of New York providing September 3, 2002
for the guaranty of certain amounts relating to
the 8.125% trust preferred securities issued by
Trust I and (ii) the Guarantee Agreement dated
as of February 4, 1997 between REI and The Bank
of New York providing for the guaranty of
certain amounts relating to the 8.257% capital
securities issued by Trust II)
4(h) Assignment and Assumption Agreement for the Form 8-K of CNP 333-69502 4(k)
Guarantee Agreement dated as of August 31, 2002 dated August 31,
between CNP and REI (relating to the Guarantee 2002 and filed with
Agreement dated as of February 26, 1999 between the SEC on
REI and The Bank of New York providing for the September 3, 2002
guaranty of certain amounts relating to the
7.20% Trust Originated Preferred Securities
issued by REI Trust I)
4(i) Assignment and Assumption Agreement for the Form 8-K of CNP 333-69502 4(l)
Expense and Liability Agreements and the Trust dated August 31,
Agreements dated as of August 31, 2002 between 2002 and filed with
CNP and REI (relating to the (i) Agreement as to the SEC on
Expenses and Liabilities dated as of June 4, September 3, 2002
1997 between REI and Trust I, (ii) Agreement as
to Expenses and Liabilities dated as of February
4, 1997 between REI and Trust II, (iii) Trust
I's Amended and Restated Trust Agreement dated
February 4, 1997 and (iv) Trust II's Amended and
Restated Trust Agreement dated February 4, 1997)
+99.1 Unaudited Pro Forma Condensed Consolidated
Financial Statements
</Table>
23
FORWARD-LOOKING STATEMENTS
Some of the statements in this report and the exhibits hereto 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. In some cases, you can identify our
forward-looking statements by the words "anticipates," "believes," "continue,"
"could," "estimates," "expects," "forecast," "goal," "intends," "may,"
"objective," "plans," "potential," "predicts," "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 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, actual results may differ materially from those expressed or
implied by our forward-looking statements. You should not place undue reliance
on forward-looking statements. Each forward-looking statement speaks only as of
the date of the particular statement, and we undertake no obligation to update
or revise publicly any forward-looking statements.
In addition to the matters described in this report and the exhibits
hereto, the following list identifies some of the factors that could cause
actual results to differ from those expressed or implied by our forward-looking
statements:
o state, federal and international legislative and regulatory actions or
developments, including deregulation, re-regulation and restructuring
of the electric utility industry, changes in or application of laws or
regulations applicable to other aspects of our business and actions
with respect to:
o approval of stranded costs;
o allowed rates of return;
o rate structures;
o recovery of investments; and
24
o operation and construction of facilities;
o non-payment for our services due to financial distress of our
customers, including our largest customer, Reliant Resources, Inc.;
o the successful and timely completion of our capital projects;
o industrial, commercial and residential growth in our service territory
and changes in market demand and demographic patterns;
o changes in business strategy or development plans;
o unanticipated changes in interest rates or rates of inflation;
o unanticipated changes in operating expenses and capital expenditures;
o weather variations and other natural phenomena, which can affect the
demand for power over our transmission and distribution systems;
o commercial bank and financial market conditions, our access to capital
and the results of our financing and refinancing efforts, including
availability of funds in the debt capital markets for transmission and
distribution companies;
o actions by rating agencies;
o legal and administrative proceedings and settlements;
o changes in tax laws;
o significant changes in our relationship with our employees, including
the availability of qualified personnel and the potential adverse
effects if labor disputes or grievances were to occur;
o significant changes in critical accounting policies material to us;
o acts of terrorism or war, including any direct or indirect effect on
our business resulting from terrorist attacks such as occurred on
September 11, 2001 or any similar incidents or responses to those
incidents;
o the availability and price of insurance;
o the outcome of the pending securities lawsuits against Reliant Energy,
Incorporated and Reliant Resources, Inc.;
o the outcome of the SEC investigation relating to the treatment in our
consolidated financial statements of certain activities of Reliant
Resources, Inc.;
25
o the reliability of the systems, procedures and other infrastructure
necessary to operate the retail electric business in our service
territory, including the systems owned and operated by the independent
system operator in the Electric Reliability Council of Texas, Inc.;
and
o political, legal, regulatory and economic conditions and developments
in the United States.
26
SIGNATURE
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 hereunto duly authorized.
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC
Date: September 3, 2002 By /s/ James S. Brian
-------------------------------------
James S. Brian
Senior Vice President and
Chief Accounting Officer
EXHIBIT INDEX
Exhibits not incorporated by reference to a prior filing are designated
by a cross (+); all exhibits not so designated are incorporated herein by
reference to a filing of CenterPoint Energy, Inc. as indicated.
<Table>
<Caption>
REPORT OR SEC FILE OR
EXHIBIT REGISTRATION REGISTRATION EXHIBIT
NUMBER DESCRIPTION STATEMENT NUMBER REFERENCES
- ------ ----------- --------- ------ ----------
2(a)(1) Agreement and Plan of Merger among Reliant Joint Proxy 333-69502 Annex A
Energy, Incorporated ("REI"), CenterPoint Statement/
Energy, Inc. ("CNP") and Reliant Energy Prospectus of REI
MergerCo, Inc. dated as of October 19, 2001 contained in
Registration
Statement on Form
S-4
+3(a) Articles of Conversion of Reliant Energy,
Incorporated
+3(b) Articles of Organization of CenterPoint Energy
Houston Electric, LLC
+3(c) Limited Liability Company Regulations of
CenterPoint Energy Houston Electric, LLC
4(a) Fifth Supplemental Indenture dated as of August Form 8-K of CNP 333-69502 4(d)
31, 2002, among CNP, Reliant Energy, dated August 31,
Incorporated ("REI") and JPMorgan Chase Bank 2002 and filed with
(supplementing the Collateral Trust Indenture the SEC on
dated as of September 1, 1988 pursuant to which September 3, 2002
REI's Series C Medium Term Notes were issued)
4(b) Supplemental Indenture No. 2 dated as of August Form 8-K of CNP 333-69502 4(e)
31, 2002, among CNP, REI and JPMorgan Chase Bank dated August 31,
(supplementing the Subordinated Indenture dated 2002 and filed with
as of September 1, 1999 under which REI's 2% the SEC on
Zero-Premium Exchangeable Subordinated Notes Due September 3, 2002
2029 were issued)
</Table>
<Table>
<Caption>
REPORT OR SEC FILE OR
EXHIBIT REGISTRATION REGISTRATION EXHIBIT
NUMBER DESCRIPTION STATEMENT NUMBER REFERENCES
- ------ ----------- --------- ------ ----------
4(c) Supplemental Indenture No. 2 dated as of August Form 8-K of CNP 333-69502 4(f)
31, 2002, among CNP, REI and The Bank of New dated August 31,
York (supplementing the Junior Subordinated 2002 and filed with
Indenture dated as of February 15, 1999 under the SEC on
which REI's Junior Subordinated Debentures September 3, 2002
related to REI Trust I's 7.20% trust originated
preferred securities were issued)
4(d) Supplemental Indenture No. 3 dated as of August Form 8-K of CNP 333-69502 4(g)
31, 2002 among CNP, REI and The Bank of New York dated August 31,
(supplementing the Junior Subordinated Indenture 2002 and filed with
dated as of February 1, 1997 under which REI's the SEC on
Junior Subordinated Debentures related to 8.125% September 3, 2002
trust preferred securities issued by HL&P
Capital Trust I and 8.257% capital securities
issued by HL&P Capital Trust II were issued)
4(e) Third Supplemental Indenture dated as of August Form 8-K of CNP 333-69502 4(h)
31, 2002 among CNP, REI, Reliant Energy dated August 31,
Resources Corp. ("RERC") and The Bank of New 2002 and filed with
York (supplementing the Indenture dated as of the SEC on
June 15, 1996 under which RERC's 6.25% September 3, 2002
Convertible Junior Subordinated Debentures were
issued)
4(f) Second Supplemental Indenture dated as of August Form 8-K of CNP 333-69502 4(i)
31, 2002 among CNP, REI, RERC and JPMorgan Chase dated August 31,
Bank (supplementing the Indenture dated as of 2002 and filed with
March 1, 1987 under which RERC's 6% Convertible the SEC on
Subordinated Debentures due 2012 were issued) September 3, 2002
</Table>
<Table>
<Caption>
REPORT OR SEC FILE OR
EXHIBIT REGISTRATION REGISTRATION EXHIBIT
NUMBER DESCRIPTION STATEMENT NUMBER REFERENCES
- ------ ----------- --------- ------ ----------
4(g) Assignment and Assumption Agreement for the Form 8-K of CNP 333-69502 4(j)
Guarantee Agreements dated as of August 31, 2002 dated August 31,
between CNP and REI (relating to (i) the 2002 and filed with
Guarantee Agreement dated as of February 4, 1997 the SEC on
between REI and The Bank of New York providing September 3, 2002
for the guaranty of certain amounts relating to
the 8.125% trust preferred securities issued by
Trust I and (ii) the Guarantee Agreement dated
as of February 4, 1997 between REI and The Bank
of New York providing for the guaranty of
certain amounts relating to the 8.257% capital
securities issued by Trust II)
4(h) Assignment and Assumption Agreement for the Form 8-K of CNP 333-69502 4(k)
Guarantee Agreement dated as of August 31, 2002 dated August 31,
between CNP and REI (relating to the Guarantee 2002 and filed with
Agreement dated as of February 26, 1999 between the SEC on
REI and The Bank of New York providing for the September 3, 2002
guaranty of certain amounts relating to the
7.20% Trust Originated Preferred Securities
issued by REI Trust I)
4(i) Assignment and Assumption Agreement for the Form 8-K of CNP 333-69502 4(l)
Expense and Liability Agreements and the Trust dated August 31,
Agreements dated as of August 31, 2002 between 2002 and filed with
CNP and REI (relating to the (i) Agreement as to the SEC on
Expenses and Liabilities dated as of June 4, September 3, 2002
1997 between REI and Trust I, (ii) Agreement as
to Expenses and Liabilities dated as of February
4, 1997 between REI and Trust II, (iii) Trust
I's Amended and Restated Trust Agreement dated
February 4, 1997 and (iv) Trust II's Amended and
Restated Trust Agreement dated February 4, 1997)
+99.1 Unaudited Pro Forma Condensed Consolidated
Financial Statements
</Table>