UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO _____________.
------------------------------
Commission file number 1-13265
CENTERPOINT ENERGY RESOURCES CORP.
(Exact name of registrant as specified in its charter)
Delaware 76-0511406
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1111 Louisiana
Houston, Texas 77002
(Address of principal executive offices) (Zip Code)
(713) 207-1111
(Registrant's telephone number, including area code)
CENTERPOINT ENERGY RESOURCES CORP. MEETS THE CONDITIONS SET FORTH IN GENERAL
INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q
WITH THE REDUCED DISCLOSURE FORMAT.
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act). Yes __ No X
As of May 2, 2002, all 1,000 shares of CenterPoint Energy Resources Corp. common
stock were held by Utility Holding, LLC, a wholly owned subsidiary of
CenterPoint Energy, Inc.
CENTERPOINT ENERGY RESOURCES CORP.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2003
TABLE OF CONTENTS
<Table>
<Caption>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements............................................................... 1
Statements of Consolidated Income
Three Months Ended March 31, 2002 and 2003 (unaudited).............................. 1
Consolidated Balance Sheets
December 31, 2002 and March 31, 2003 (unaudited).................................... 2
Statements of Consolidated Cash Flows
Three Months Ended March 31, 2002 and 2003 (unaudited).............................. 4
Notes to Unaudited Consolidated Financial Statements................................... 5
Item 2. Management's Narrative Analysis of the Results of Operations of
CenterPoint Energy Resources Corp. and Subsidiaries.................................... 14
Item 4. Controls and Procedures............................................................ 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................................. 22
Item 5. Other Information.................................................................. 22
Item 6. Exhibits and Reports on Form 8-K................................................... 23
</Table>
i
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
STATEMENTS OF CONSOLIDATED INCOME
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED MARCH 31,
----------------------------
2002 2003
------------ ------------
REVENUES ........................................... $ 1,242,279 $ 2,094,020
------------ ------------
EXPENSES:
Natural gas and fuel ............................. 861,579 1,655,120
Operation and maintenance ........................ 164,713 177,666
Depreciation and amortization .................... 40,271 43,910
Taxes other than income taxes .................... 32,520 45,176
------------ ------------
Total ........................................ 1,099,083 1,921,872
------------ ------------
OPERATING INCOME ................................... 143,196 172,148
------------ ------------
OTHER INCOME (EXPENSE):
Interest expense ................................. (35,577) (35,820)
Distribution on trust preferred securities ....... (6) (6)
Other, net ....................................... 2,256 1,060
------------ ------------
Total ........................................ (33,327) (34,766)
------------ ------------
INCOME BEFORE INCOME TAXES ......................... 109,869 137,382
Income Tax Expense .............................. 40,700 49,210
------------ ------------
NET INCOME ......................................... $ 69,169 $ 88,172
============ ============
</Table>
See Notes to the Company's Interim Financial Statements
1
CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
ASSETS
<Table>
<Caption>
DECEMBER 31, MARCH 31,
2002 2003
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents ................................................ $ 9,237 $ 83,248
Accounts and notes receivable, principally customers, (net of allowance
for doubtful accounts of $19,568 and $25,057, respectively) ........... 384,772 639,605
Accrued unbilled revenue ................................................. 284,112 277,082
Materials and supplies ................................................... 32,264 31,946
Natural gas inventory .................................................... 103,443 30,970
Non-trading derivative assets ............................................ 27,275 21,071
Prepaid expenses and other current assets ................................ 50,765 31,086
------------ ------------
Total current assets ................................................... 891,868 1,115,008
------------ ------------
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment ............................................ 3,885,820 3,938,476
Less accumulated depreciation ............................................ (650,148) (693,733)
------------ ------------
Property, plant and equipment, net ..................................... 3,235,672 3,244,743
------------ ------------
OTHER ASSETS:
Goodwill ................................................................. 1,740,510 1,740,510
Other intangibles, net ................................................... 19,878 20,053
Non-trading derivative assets ............................................ 3,866 5,376
Notes receivable - affiliated companies, net ............................. 39,097 38,171
Other .................................................................... 55,571 104,053
------------ ------------
Total other assets ..................................................... 1,858,922 1,908,163
------------ ------------
TOTAL ASSETS ............................................................... $ 5,986,462 $ 6,267,914
============ ============
</Table>
See Notes to the Company's Interim Financial Statements
2
CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
(THOUSANDS OF DOLLARS)
(UNAUDITED)
LIABILITIES AND STOCKHOLDER'S EQUITY
<Table>
<Caption>
DECEMBER 31, MARCH 31,
2002 2003
------------ ------------
CURRENT LIABILITIES:
Short-term borrowings .......................................................... $ 347,000 $ --
Current portion of long-term debt .............................................. 517,616 250,917
Accounts payable, principally trade ............................................ 465,694 681,003
Accounts and notes payable - affiliated companies, net ......................... 101,231 15,979
Interest accrued ............................................................... 49,084 29,933
Taxes accrued .................................................................. -- 23,462
Customer deposits .............................................................. 54,081 56,725
Non-trading derivative liabilities ............................................. 9,973 4,865
Other .......................................................................... 102,510 70,477
------------ ------------
Total current liabilities ................................................ 1,647,189 1,133,361
------------ ------------
OTHER LIABILITIES:
Accumulated deferred income taxes, net ......................................... 595,889 619,452
Benefit obligations ............................................................ 132,434 130,321
Non-trading derivative liabilities ............................................. 873 485
Other .......................................................................... 125,876 162,678
------------ ------------
Total other liabilities .................................................... 855,072 912,936
------------ ------------
LONG-TERM DEBT ................................................................... 1,441,264 2,090,918
------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTES 1 AND 9)
COMPANY OBLIGATED MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES OF THE
COMPANY ....................................................................... 508 508
------------ ------------
STOCKHOLDER'S EQUITY:
Common stock ................................................................... 1 1
Paid-in capital ................................................................ 1,986,364 1,986,364
Retained earnings .............................................................. 44,804 132,976
Accumulated other comprehensive income ......................................... 11,260 10,850
------------ ------------
Total stockholder's equity ................................................. 2,042,429 2,130,191
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY .................................... $ 5,986,462 $ 6,267,914
============ ============
</Table>
See Notes to the Company's Interim Financial Statements
3
CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
STATEMENTS OF CONSOLIDATED CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED MARCH 31,
----------------------------
2002 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................................ $ 69,169 $ 88,172
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ....................................... 40,271 43,910
Deferred income taxes ............................................... (44,997) 23,598
Changes in other assets and liabilities:
Accounts and notes receivable, net ................................ 100,084 (252,259)
Accounts receivable/payable, affiliates ........................... (25,872) (113,887)
Inventory ......................................................... 81,819 72,791
Accounts payable .................................................. (11,004) 215,309
Fuel cost recovery ................................................ 40,438 7,056
Interest and taxes accrued ........................................ 86,255 8,767
Net non-trading derivative assets and liabilities ................. (2,232) (1,362)
Other current assets .............................................. (3,600) 19,678
Other current liabilities ......................................... (44,570) (29,388)
Other assets ...................................................... (6,287) (4,596)
Other liabilities ................................................. (24,859) 34,804
------------ ------------
Net cash provided by operating activities ....................... 254,615 112,593
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures .................................................. (48,655) (50,732)
Other, net ............................................................ 847 (1,568)
------------ ------------
Net cash used in investing activities ........................... (47,808) (52,300)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt ............................................ (6,633) (260,008)
Proceeds from long-term debt .......................................... -- 650,000
Debt issuance costs ................................................... -- (51,798)
Decrease in short-term borrowings, net ................................ (195,527) (347,000)
Increase in notes with affiliates, net ................................ 10,224 29,561
Other, net ............................................................ (626) (7,037)
------------ ------------
Net cash provided by (used in) financing activities ............. (192,562) 13,718
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS ................................ 14,245 74,011
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD ..................... 16,425 9,237
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD ........................... $ 30,670 $ 83,248
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Payments:
Interest .............................................................. $ 49,209 $ 54,930
Income taxes .......................................................... 166 793
</Table>
See Notes to the Company's Interim Financial Statements
4
CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
Included in this Quarterly Report on Form 10-Q (Form 10-Q) of CenterPoint
Energy Resources Corp. (CERC Corp.), formerly Reliant Energy Resources Corp.
(RERC Corp.), together with its subsidiaries (the Company), are the CERC Corp.'s
consolidated interim financial statements and notes (Interim Financial
Statements) including its wholly owned and majority owned subsidiaries. The
Interim Financial Statements are unaudited, omit certain financial statement
disclosures and should be read with the Annual Report on Form 10-K of CERC Corp.
(CERC Corp. Form 10-K) for the year ended December 31, 2002, which was filed
with the Securities and Exchange Commission (SEC) on March 12, 2003.
The Company is a wholly owned subsidiary of CenterPoint Energy, Inc.
(CenterPoint Energy), a public utility holding company created on August 31,
2002, as part of a corporate restructuring (Restructuring) of Reliant Energy,
Incorporated (Reliant Energy).
Contemporaneous with the Restructuring, CenterPoint Energy registered and
became subject, with its subsidiaries, to regulation as a registered holding
company system under the Public Utility Holding Company Act of 1935 (1935 Act).
The 1935 Act directs the Securities and Exchange Commission (SEC) to regulate,
among other things, transactions among affiliates, sales or acquisitions of
assets, issuances of securities, distributions and permitted lines of business.
Prior to the Restructuring, CenterPoint Energy and Reliant Energy obtained an
order from the SEC that authorized the Restructuring transactions, including the
distribution to CenterPoint Energy's shareholders of the shares of common stock
of Reliant Resources, Inc. that it owned, and granted CenterPoint Energy certain
authority with respect to financing for CenterPoint Energy and its subsidiaries,
dividends and other matters. The financing authority granted by that order will
expire on June 30, 2003. CenterPoint Energy must obtain a further order from the
SEC under the 1935 Act, related to, among other things, the financing activities
of CenterPoint Energy and its subsidiaries subsequent to June 30, 2003.
In connection with CenterPoint Energy's registration as a public utility
holding company under the 1935 Act, the SEC has limited the aggregate amount of
the Company's external borrowings to $2.7 billion. The Company's ability to pay
dividends is restricted by the SEC's requirement that common equity as a
percentage of total capitalization must be at least 30% after the payment of any
dividend. In addition, the order restricts the Company's ability to pay
dividends out of capital accounts to the extent current or retained earnings are
insufficient for the payment of dividends. Under these restrictions, the Company
is permitted to pay dividends in excess of the respective current or retained
earnings in an amount up to $100 million.
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States of America (GAAP) requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
The Company's Interim Financial Statements reflect all normal recurring
adjustments that are, in the opinion of management, necessary to present fairly
the financial position and results of operations for the respective periods.
Amounts reported in the Company's Statements of Consolidated Operations are not
necessarily indicative of amounts expected for a full year period due to the
effects of, among other things, (a) seasonal variations in energy consumption,
(b) timing of maintenance and other expenditures and (c) acquisitions and
dispositions of assets and other interests. In addition, certain amounts from
the prior year have been reclassified to conform to the Company's presentation
of financial statements in the current year. These reclassifications do not
affect earnings of the Company.
The following notes to the consolidated financial statements in the CERC
Corp. Form 10-K (CERC Corp. 10-K Notes) relate to certain contingencies. These
notes, as updated herein, are incorporated herein by reference:
5
Notes to Consolidated Financial Statements: Note 3(e) (Regulatory Matters),
Note 5 (Derivative Instruments) and Note 10 (Commitments and
Contingencies).
For information regarding environmental matters and legal proceedings, see
Note 9.
(2) NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2003, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement
Obligations" (SFAS No. 143). SFAS No. 143 requires the fair value of an asset
retirement obligation to be recognized as a liability is incurred and
capitalized as part of the cost of the related tangible long-lived assets. Over
time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related asset.
Retirement obligations associated with long-lived assets included within the
scope of SFAS No. 143 are those for which a legal obligation exists under
enacted laws, statutes and written or oral contracts, including obligations
arising under the doctrine of promissory estoppel. SFAS No. 143 is effective for
fiscal years beginning after June 15, 2002. SFAS No. 143 requires entities to
record a cumulative effect of change in accounting principle in the income
statement in the period of adoption.
The Company has identified no asset retirement obligations. The Company's
rate-regulated businesses have previously recognized removal costs as a
component of depreciation expense in accordance with regulatory treatment. As of
March 31, 2003, these previously recognized removal costs of $385 million do not
represent SFAS No. 143 asset retirement obligations, but rather embedded
regulatory liabilities.
In April 2002, the Financial Accounting Standards Board (FASB) issued SFAS
No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections" (SFAS No. 145). SFAS No. 145
eliminates the current requirement that gains and losses on debt extinguishment
must be classified as extraordinary items in the income statement. Instead, such
gains and losses will be classified as extraordinary items only if they are
deemed to be unusual and infrequent. SFAS No. 145 also requires that capital
leases that are modified so that the resulting lease agreement is classified as
an operating lease be accounted for as a sale-leaseback transaction. The changes
related to debt extinguishment are effective for fiscal years beginning after
May 15, 2002, and the changes related to lease accounting are effective for
transactions occurring after May 15, 2002. The Company has applied this guidance
prospectively.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (SFAS No. 146). SFAS No. 146
nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)" (EITF No. 94-3). The principal difference
between SFAS No. 146 and EITF No. 94-3 relates to the requirements for
recognition of a liability for costs associated with an exit or disposal
activity. SFAS No. 146 requires that a liability be recognized for a cost
associated with an exit or disposal activity when it is incurred. A liability is
incurred when a transaction or event occurs that leaves an entity little or no
discretion to avoid the future transfer or use of assets to settle the
liability. Under EITF No. 94-3, a liability for an exit cost was recognized at
the date of an entity's commitment to an exit plan. In addition, SFAS No. 146
also requires that a liability for a cost associated with an exit or disposal
activity be recognized at its fair value when it is incurred. SFAS No. 146 is
effective for exit or disposal activities that are initiated after December 31,
2002. The Company will apply the provisions of SFAS No. 146 to all exit or
disposal activities initiated after December 31, 2002.
In June 2002, the Emerging Issues Task Force ("EITF") reached a consensus
that all mark-to-market gains and losses on energy trading contracts should be
shown net in the statement of consolidated income whether or not settled
physically. In October 2002, the EITF issued a consensus that superceded the
June 2002 consensus. The October 2002 consensus required, among other things,
that energy derivatives held for trading purposes be shown net in the statement
of consolidated income. This new consensus, EITF 02-3 "Issues Involved in
Accounting for Derivative Contracts Held for Trading Purposes and Contracts
Involved in Energy Trading and Risk Management Activities," is effective for
fiscal periods beginning after December 15, 2002.
In November 2002, the FASB issued FASB Interpretation No. (FIN) 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" (FIN 45). FIN 45 requires that a
liability be recorded in the guarantor's balance sheet upon issuance of certain
guarantees. In addition, FIN 45 requires disclosures about the guarantees that
an entity has issued. The provision for initial recognition and
6
measurement of the liability will be applied on a prospective basis to
guarantees issued or modified after December 31, 2002. The disclosure provisions
of FIN 45 are effective for financial statements of interim or annual periods
ending after December 15, 2002. The adoption of FIN 45 is not expected to
materially affect the Company's consolidated financial statements. The Company
has adopted the additional disclosure provisions of FIN 45 in its consolidated
financial statements as of December 31, 2002.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities, an Interpretation of Accounting Research Bulletin No. 51" (FIN 46).
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual period beginning after June 15, 2003. The Company does not expect the
adoption of FIN 46 to have a material impact on its results of operations or
financial condition.
(3) DERIVATIVE INSTRUMENTS
The Company is exposed to various market risks. These risks arise from
transactions entered into in the normal course of business. The Company utilizes
derivative financial instruments such as physical forward contracts, swaps and
options (Energy Derivatives) to mitigate the impact of changes and cash flows of
its natural gas businesses on its operating results and cash flows.
Cash Flow Hedges. During the three months ended March 31, 2003, there was
no hedge ineffectiveness recognized in earnings from derivatives that are
designated and qualify as cash flow hedges. No component of the derivative
instruments' gain or loss was excluded from the assessment of effectiveness.
During the three months ended March 31, 2003, there was no effect on earnings as
a result of the discontinuance of cash flow hedges. As of March 31, 2003, the
Company expects $16 million in accumulated other comprehensive income to be
reclassified into net income during the next twelve months.
For additional information regarding the Company's use of derivatives, see
Note 5 to the CERC Corp. 10-K Notes, which is incorporated herein by reference.
(4) GOODWILL AND INTANGIBLES
The components of the Company's other intangible assets consist of the
following:
<Table>
<Caption>
DECEMBER 31, 2002 MARCH 31, 2003
------------------------------- -------------------------------
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
-------------- -------------- -------------- --------------
(IN MILLIONS)
Land use rights .... $ 7 $ (2) $ 7 $ (2)
Other .............. 18 (3) 18 (3)
-------------- -------------- -------------- --------------
Total .............. $ 25 $ (5) $ 25 $ (5)
============== ============== ============== ==============
</Table>
The Company recognizes specifically identifiable intangibles when specific
rights and contracts are acquired. The Company amortizes other acquired
intangibles on a straight-line basis over the lesser of their contractual or
estimated useful lives. The Company has no intangible assets with indefinite
lives recorded as of March 31, 2003. The Company amortizes other acquired
intangibles on a straight-line basis over the lesser of their contractual or
estimated useful lives that range from 47 to 75 years for land use rights and 4
to 25 years for other intangibles.
Amortization expense for other intangibles for the three months ended March
31, 2002 and 2003 was $0.3 million and $0.3 million, respectively. Estimated
amortization expense for the remainder of 2003 is approximately $1.1 million and
is approximately $2.1 million per year for the five succeeding fiscal years.
Goodwill as of December 31, 2002 and March 31, 2003 by reportable business
segment is as follows (in millions):
7
<Table>
<Caption>
Natural Gas Distribution ... $ 1,085
Pipelines and Gathering .... 601
Other Operations ........... 55
--------
Total .................... $ 1,741
========
</Table>
(5) SHORT-TERM BORROWINGS, LONG-TERM DEBT AND RECEIVABLES FACILITY
(a) Short-Term Borrowings
Credit Facilities. As of March 31, 2003, the Company had a revolving credit
facility that provided for an aggregate of $200 million in committed credit that
is classified as short-term. The revolving credit facility terminates on March
23, 2004. Rates for borrowings under this facility, including the facility fee,
are LIBOR plus 250 basis points based on current credit ratings and the
applicable pricing grid. As of March 31, 2003, such credit facility was not
utilized.
The revolving credit facility contains various business and financial
covenants. The borrower is currently in compliance with the covenants.
(b) Long-Term Debt
On March 25 and April 14, 2003, the Company issued $650 million and $112
million, respectively, aggregate principal amount of 7.875% senior unsecured
notes due in 2013. A portion of the proceeds was used to refinance $360 million
aggregate principal amount of the Company's 6 3/8% Term Enhanced ReMarketable
Securities (TERM Notes) and to pay costs associated with the refinancing.
Proceeds were also used to repay borrowings under the Company's $350 million
revolving credit facility prior to its expiration on March 31, 2003. The
remaining $140 million aggregate principal amount of TERM Notes are due to be
refinanced or remarketed in November 2003.
(c) Receivables Facility
In connection with the Company's November 2002 amendment and extension of
its $150 million receivables facility, CERC Corp. formed a bankruptcy remote
subsidiary for the sole purpose of buying and selling receivables created by
CERC. This transaction is accounted for as a sale of receivables under the
provisions of SFAS No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities," and, as a result, the related
receivables are excluded from the Consolidated Balance Sheets. The receivables
facility terminates on November 14, 2003. As of December 31, 2002 and March 31,
2003, CERC had utilized $107 million and $150 million of its receivables
facility, respectively.
(6) TRUST PREFERRED SECURITIES
A statutory business trust created by CERC Corp. has issued convertible
preferred securities. The convertible preferred securities are mandatorily
redeemable upon the repayment of the convertible junior subordinated debentures
at their stated maturity or earlier redemption. Effective January 7, 2003, the
convertible preferred securities are convertible at the option of the holder
into $33.62 of cash and 2.34 shares of CenterPoint Energy common stock for each
$50 of liquidation value. As of December 31, 2002 and March 31, 2003, $0.4
million liquidation amount of convertible preferred securities were outstanding.
The securities, and their underlying convertible junior subordinated debentures,
bear interest at 6.25% and mature in June 2026.
The sole asset of the trust consists of convertible junior subordinated
debentures of CERC Corp. having an interest rate and maturity date that
correspond to the distribution rate and mandatory redemption date of the
convertible preferred securities, and a principal amount corresponding to the
common and convertible preferred securities issued by the trust. For additional
information regarding the convertible preferred securities, see Note 7 to the
CERC Corp. 10-K Notes, which is incorporated herein by reference.
8
(7) COMPREHENSIVE INCOME
The following table summarizes the components of total comprehensive
income:
<Table>
<Caption>
FOR THE THREE MONTHS
ENDED MARCH 31,
-----------------------
2002 2003
---------- ----------
(IN MILLIONS)
Net income ................................................... $ 69 $ 88
---------- ----------
Other comprehensive income:
Net deferred gain (loss) from cash flow hedges ............. 46 (1)
Reclassification of deferred loss from cash flow hedges
realized in net income .................................... 4 1
---------- ----------
Other comprehensive income ................................... 50 --
---------- ----------
Comprehensive income ......................................... $ 119 $ 88
========== ==========
</Table>
(8) RELATED PARTY TRANSACTIONS
From time to time, CERC has advanced money to, or borrowed money from,
CenterPoint Energy or its subsidiaries. As of December 31, 2002, CERC had net
short-term borrowings, included in accounts and notes payable-affiliated
companies, of $74 million and net accounts payable of $27 million. As of March
31, 2003, CERC had net accounts payable of $16 million included in accounts and
notes payable-affiliated companies. As of December 31, 2002 and March 31, 2003,
CERC had net long-term receivables, included in notes receivable-affiliated
companies, totaling $39 million and $38 million, respectively. For each of the
three months ended March 31, 2002 and 2003, the Company had net interest expense
related to affiliate borrowings of $0.1 million.
In 2002, the Company supplied natural gas to Reliant Energy Services, Inc.
(Reliant Energy Services), a subsidiary of Reliant Resources, which was an
affiliate through September 30, 2002. For the three months ended March 31, 2002,
the sales and services by the Company to Reliant Resources and its subsidiaries
totaled $14 million. For the three months ended March 31, 2003, the sales and
services by the Company to CenterPoint Energy and its affiliates totaled $5
million. Purchases of natural gas by the Company from Reliant Resources and its
subsidiaries were $107 million for the three months ended March 31, 2002.
CenterPoint Energy provides some corporate services to the Company. The
costs of services have been directly charged to the Company using methods that
management believes are reasonable. These methods include negotiated usage
rates, dedicated asset assignment, and proportionate corporate formulas based on
assets, operating expenses and employees. These charges are not necessarily
indicative of what would have been incurred had the Company not been an
affiliate. Amounts charged to the Company for these services were $13 million
and $31 million for the three months ended March 31, 2002 and 2003,
respectively, and are included primarily in operation and maintenance expenses.
The 1935 Act generally prohibits borrowings by CenterPoint Energy from its
subsidiaries, including the Company.
(9) ENVIRONMENTAL MATTERS AND LEGAL PROCEEDINGS
(a) Environmental Matters.
Hydrocarbon Contamination. On August 24, 2001, 37 plaintiffs filed suit
against Reliant Energy Gas Transmission Company (REGT), Reliant Energy Pipeline
Services, Inc., RERC Corp., Reliant Energy Services, Inc., other Reliant Energy
entities and third parties, in the 1st Judicial District Court, Caddo Parish,
Louisiana. The petition has now been supplemented seven times. As of May 1,
2003, there were 572 plaintiffs, a majority of whom are Louisiana residents. In
addition to the Reliant Energy entities, the plaintiffs have sued the State of
Louisiana through its Department of Environmental Quality, several individuals,
some of whom are present employees of the State of Louisiana, the Bayou South
Gas Gathering Company, L.L.C., Martin Timber Company, Inc., and several trusts.
Additionally on April 4, 2002, two plaintiffs filed a separate suit with
identical allegations against the same parties in the same court. On January 6,
2003, two other plaintiffs filed a third suit of substantially similar
allegations against CenterPoint Energy, as well as other defendants, in Bossier
Parish (26th Judicial District Court).
9
The suits allege that, at some unspecified date prior to 1985, the
defendants allowed or caused hydrocarbon or chemical contamination of the Wilcox
Aquifer, which lies beneath property owned or leased by certain of the
defendants and which is the sole or primary drinking water aquifer in the area.
The primary source of the contamination is alleged by the plaintiffs to be a gas
processing facility in Haughton, Bossier Parish, Louisiana known as the "Sligo
Facility." This facility was purportedly used for gathering natural gas from
surrounding wells, separating gasoline and hydrocarbons from the natural gas for
marketing, and transmission of natural gas for distribution. This site was
originally leased and operated by predecessors of REGT in the late 1940s and was
operated until Arkansas Louisiana Gas Company ceased operations of the plant in
the late 1970s.
Beginning about 1985, the predecessors of certain Reliant Energy defendants
engaged in a voluntary remediation of any subsurface contamination of the
groundwater below the property they own or lease. This work has been done in
conjunction with and under the direction of the Louisiana Department of
Environmental Quality. The plaintiffs seek monetary damages for alleged damage
to the aquifer underlying their property, unspecified alleged personal injuries,
alleged fear of cancer, alleged property damage or diminution of value of their
property, and, in addition, seek damages for trespass, punitive, and exemplary
damages. The quantity of monetary damages sought is unspecified. As of March 31,
2003, the Company is unable to estimate the monetary damages, if any, that the
plaintiffs may be awarded in these matters.
Manufactured Gas Plant Sites. The Company and its predecessors operated
manufactured gas plants (MGP) in the past. In Minnesota, remediation has been
completed on two sites, other than ongoing monitoring and water treatment. There
are five remaining sites in our Minnesota service territory, two of which the
Company believes were neither owned nor operated by the Company, and for which
it believes it has no liability.
At March 31, 2003, the Company had accrued $19 million for remediation of
the Minnesota sites. At March 31, 2003, the estimated range of possible
remediation costs was $8 million to $44 million based on remediation continuing
for 30 to 50 years. The cost estimates are based on studies of a site or
industry average costs for remediation of sites of similar size. The actual
remediation costs will be dependent upon the number of sites to be remediated,
the participation of other potentially responsible parties (PRP), if any, and
the remediation methods used. The Company has utilized an environmental expense
tracker mechanism in its rates in Minnesota to recover estimated costs in excess
of insurance recovery. The Company has collected $12.2 million at March 31, 2003
to be used for future environmental remediation.
The Company has received notices from the United States Environmental
Protection Agency and others regarding its status as a PRP for sites in other
states. Recently, the Company was informed that it has been named as a defendant
in a third party complaint in the U.S. District Court for Maine under which
contribution is sought for the cost to remediate a former MGP site in Bangor,
Maine. The claim is based on the previous ownership of the site by a former
affiliate of one of the Company's divisions. The Company has not been served
with the complaint and presently is not aware of details regarding the site, the
extent of any legal obligation to contribute to site remediation or the
estimated cost of remediation. Based on current information, the Company has not
been able to quantify a range of environmental expenditures for potential
remediation expenditures with respect to other MGP sites.
Mercury Contamination. The Company's pipeline and distribution operations
have in the past employed elemental mercury in measuring and regulating
equipment. It is possible that small amounts of mercury may have been spilled in
the course of normal maintenance and replacement operations and that these
spills may have contaminated the immediate area with elemental mercury. This
type of contamination has been found by the Company at some sites in the past,
and the Company has conducted remediation at these sites. It is possible that
other contaminated sites may exist and that remediation costs may be incurred
for these sites. Although the total amount of these costs cannot be known at
this time, based on experience by the Company and that of others in the natural
gas industry to date and on the current regulations regarding remediation of
these sites, the Company believes that the costs of any remediation of these
sites will not be material to the Company's financial condition, results of
operations or cash flows.
Other Environmental. From time to time the Company has received notices from
regulatory authorities or others regarding its status as a PRP in connection
with sites found to require remediation due to the presence of environmental
contaminants. Considering the information currently known about such sites and
the involvement of
10
the Company in activities at these sites, the Company does not believe that
these matters will have a material adverse effect on its financial position,
results of operations or cash flows.
(b) Department of Transportation
In December 2002, Congress enacted the Pipeline Safety Improvement Act of
2002. This legislation applies to the Company's interstate pipelines as well as
its intra-state pipelines and local distribution companies. The legislation
imposes several requirements related to ensuring pipeline safety and integrity.
It requires companies to assess the integrity of their pipeline transmission and
distribution facilities in areas of high population concentration and further
requires companies to perform remediation activities, in accordance with the
requirements of the legislation, over a 10-year period.
In January 2003, the U.S. Department of Transportation published a notice of
proposed rulemaking to implement provisions of the legislation. The Department
of Transportation is expected to issue final rules by the end of 2003.
While the Company anticipates that increased capital and operating expenses
will be required to comply with the requirements of the legislation, it will not
be able to quantify the level of spending required until the Department of
Transportation's final rules are issued.
(c) Legal Matters.
Natural Gas Measurement Lawsuits. In 1997, a suit was filed under the
Federal False Claims Act against RERC Corp. (now CERC Corp.) and certain of its
subsidiaries alleging mismeasurement of natural gas produced from federal and
Indian lands. The suit seeks undisclosed damages, along with statutory
penalties, interest, costs, and fees. The complaint is part of a larger series
of complaints filed against 77 natural gas pipelines and their subsidiaries and
affiliates. An earlier single action making substantially similar allegations
against the pipelines was dismissed by the federal district court for the
District of Columbia on grounds of improper joinder and lack of jurisdiction. As
a result, the various individual complaints were filed in numerous courts
throughout the country. This case has been consolidated, together with the other
similar False Claims Act cases, in the federal district court in Cheyenne,
Wyoming.
In addition, CERC Corp., CenterPoint Energy Gas Transmission Company,
CenterPoint Energy Field Services, Inc. and CenterPoint Energy-Mississippi River
Transmission Corporation are defendants in a class action filed in May 1999
against approximately 245 pipeline companies and their affiliates. The
plaintiffs in the case purport to represent a class of natural gas producers and
fee royalty owners who allege that they have been subject to systematic gas
mismeasurement by the defendants for more than 25 years. The plaintiffs seek
compensatory damages, along with statutory penalties, treble damages, interest,
costs and fees. On April 10, 2003, the judge denied the plaintiffs' motion to
certify the requested class. Plaintiffs have requested and secured 30 days to
amend their petition and may seek to redefine the class to comply with the
judge's findings. The action is currently pending in state court in Stevens
County, Kansas.
City of Tyler, Texas, Gas Costs Review. By letter to CenterPoint Energy
Entex (Entex) dated July 31, 2002, the City of Tyler, Texas, forwarded various
computations of what it believes to be excessive costs ranging from $2.8 million
to $39.2 million for gas purchased by Entex for resale to residential and small
commercial customers in that city under supply agreements in effect since 1992.
Entex's gas costs for its Tyler system are recovered from customers pursuant to
tariffs approved by the city and filed with both the city and the Railroad
Commission of Texas (the Railroad Commission). Pursuant to an agreement, on
January 29, 2003, Entex and the city filed a Joint Petition for Review of
Charges for Gas Sales (Joint Petition) with the Railroad Commission. The Joint
Petition requests that the Railroad Commission determine whether Entex has
properly and lawfully charged and collected for gas service to its residential
and commercial customers in its Tyler distribution system for the period
beginning November 1, 1992, and ending October 31, 2002. The Company believes
that all costs for Entex's Tyler distribution system have been properly included
and recovered from customers pursuant to Entex's filed tariffs and that the city
has no legal or factual support for the statements made in its letter.
Gas Cost Recovery Suits. In October 2002, a suit was filed in state district
court in Wharton County, Texas, against CenterPoint Energy, the Company, Entex
Gas Marketing Company, and others alleging fraud, violations of the Texas
Deceptive Trade Practices Act, violations of the Texas Utility Code, civil
conspiracy and violations of the
11
Texas Free Enterprise and Antitrust Act. The plaintiffs seek class
certification, but no class has been certified. The plaintiffs allege that
defendants inflated the prices charged to certain consumers of natural gas.
In February 2003, a similar suit was filed against the Company in state court in
Caddo Parish, Louisiana purportedly on behalf of a class of residential and
business customers in Louisiana who allegedly have been overcharged for gas or
gas service provided by the Company. The plaintiffs in both cases seek
restitution for alleged overcharges, exemplary damages and penalties. The
Company denies that it has overcharged any of its customers for natural gas and
believes that the amounts recovered for purchased gas have been in accordance
with what is permitted by state regulatory authorities.
Other Proceedings. The Company is involved in other proceedings before
various courts, regulatory commissions and governmental agencies regarding
matters arising in the ordinary course of business. Management currently
believes that the disposition of these matters will not have a material adverse
effect on the Company's financial position, results of operations or cash flows.
(10) REPORTABLE BUSINESS SEGMENTS
Because CERC Corp. is an indirect wholly owned subsidiary of CenterPoint
Energy, the Company's determination of reportable segments considers the
strategic operating units under which CenterPoint Energy manages sales,
allocates resources and assesses performance of various products and services to
wholesale or retail customers in differing regulatory environments.
The Company's reportable business segments include the following: Natural
Gas Distribution, Pipelines and Gathering and Other Operations. For descriptions
of the reportable business segments, see Note 13 to the CERC Corp. 10-K Notes,
which is incorporated herein by reference.
The Company evaluates performance on an earnings (loss) before interest
expense, distribution on trust preferred securities and income taxes (EBIT)
basis. EBIT, as defined, is shown because it is a measure the Company uses to
evaluate the performance of its business segments, and the Company believes it
is a measure of financial performance that may be used as a means to analyze and
compare companies on the basis of operating performance. The Company expects
that some analysts and investors will want to review EBIT when evaluating the
Company. EBIT is not defined under accounting principles generally accepted in
the United States (GAAP), should not be considered in isolation or as a
substitute for a measure of performance prepared in accordance with GAAP and is
not indicative of operating income from operations as determined under GAAP.
Additionally, the Company's computation of EBIT may not be comparable to other
similarly titled measures computed by other companies, because all companies do
not calculate it in the same fashion.
The following table summarizes financial data for the reportable business
segments:
<Table>
<Caption>
AS OF
DECEMBER 31,
FOR THE THREE MONTHS ENDED MARCH 31, 2002 2002
------------------------------------------------- ------------
NET
REVENUES FROM INTERSEGMENT
THIRD PARTIES (1) REVENUES EBIT TOTAL ASSETS
---------------- -------------- ------------ ------------
(IN MILLIONS)
Natural Gas Distribution ... $ 1,180 $ -- $ 110 $ 4,051
Pipelines and Gathering .... 62 30 38 2,481
Other Operations ........... -- -- 1 206
Eliminations ............... -- (30) (3) (752)
---------------- -------------- ------------ ------------
Consolidated ............... $ 1,242 $ -- $ 146 $ 5,986
================ ============== ============ ============
</Table>
(1) Included in revenues from third parties are revenues from sales to Reliant
Resources, a former affiliate, of $14 million for the three months ended
March 31, 2002.
12
<Table>
<Caption>
AS OF
MARCH 31,
FOR THE THREE MONTHS ENDED MARCH 31, 2003 2003
--------------------------------------------- ------------
REVENUES FROM NET
THIRD PARTIES INTERSEGMENT
AND AFFILIATES REVENUES EBIT TOTAL ASSETS
---------------- -------------- -------- ------------
(IN MILLIONS)
Natural Gas Distribution ... $ 2,028 $ 17 $ 134 $ 4,406
Pipelines and Gathering .... 61 48 45 2,477
Other Operations ........... -- 2 -- 376
Sales to Affiliates ........ 5 -- -- --
Eliminations ............... -- (67) (6) (991)
---------------- -------------- -------- ------------
Consolidated ............... $ 2,094 $ -- $ 173 $ 6,268
================ ============== ======== ============
</Table>
Reconciliation of Operating Income to EBIT and EBIT to Net Income:
<Table>
<Caption>
FOR THE THREE MONTHS ENDED
MARCH 31,
----------------------------
2002 2003
------------ ------------
(IN MILLIONS)
Operating Income ............. $ 143 $ 172
Other Income, net ............ 3 1
------------ ------------
EBIT ......................... 146 173
Interest Expense ............. (36) (36)
------------ ------------
Income Before Income Taxes ... 110 137
Income Tax Expense ........... (41) (49)
------------ ------------
Net Income ................... $ 69 $ 88
============ ============
</Table>
13
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS OF
CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
The following narrative analysis should be read in combination with our
interim financial statements and notes contained in Item 1 of this report.
Reliant Energy, Incorporated (Reliant Energy) completed the separation of
the generation, transmission and distribution, and retail sales functions of
Reliant Energy's Texas electric operations pursuant to the following steps,
which occurred on August 31, 2002 (the Restructuring):
o CenterPoint Energy, Inc. (CenterPoint Energy) became the holding
company for the Reliant Energy group of companies;
o Reliant Energy and its subsidiaries, including CenterPoint Energy
Resources Corp. and its subsidiaries (CERC), became subsidiaries of
CenterPoint Energy; and
o each share of Reliant Energy common stock was converted into one share
of CenterPoint Energy common stock.
After the Restructuring, CenterPoint Energy distributed to its shareholders
the shares of common stock of Reliant Resources, Inc. (Reliant Resources) that
it owned (the Distribution) in a tax-free transaction.
Contemporaneous with the Restructuring, CenterPoint Energy registered and
became subject, with its subsidiaries, to regulation as a registered holding
company system under the Public Utility Holding Company Act of 1935 (1935 Act).
The 1935 Act directs the Securities and Exchange Commission (SEC) to regulate,
among other things, transactions among affiliates, sales or acquisitions of
assets, issuances of securities, distributions and permitted lines of business.
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 3 (Quantitative and
Qualitative Disclosures About Market Risk) of Part I and the following Part II
items of Form 10-Q: Item 2 (Changes in 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 the
amount of revenue and expense items of CERC between the three months ended March
31, 2003 and the three months ended March 31, 2002. Reference is made to
"Management's Narrative Analysis of the Results of Operations of CenterPoint
Energy Resources Corp. and its Consolidated Subsidiaries" in Item 7 of the
Annual Report on Form 10-K of CERC Corp. (CERC Corp. Form 10-K), which is
incorporated by reference herein.
CONSOLIDATED RESULTS OF OPERATIONS
Our results of operations are affected by seasonal fluctuations in the
demand for natural gas and price movements of energy commodities. Our results of
operations are also affected by, among other things, the actions of various
federal, state and municipal governmental authorities having jurisdiction over
rates we charge, competition in our various business operations, debt service
costs and income tax expense. For more information regarding factors that may
affect the future results of operations of our business, please read "Business
- -- Risk Factors" in Item 1 of the CERC Corp. Form 10-K and "Management's
Narrative Analysis of the Results of Operations of CenterPoint Energy Resources
Corp. and its Consolidated Subsidiaries -- Certain Factors Affecting Future
Earnings" in Item 7 of the CERC Corp. Form 10-K, which is incorporated herein by
reference.
The following table sets forth our consolidated results of operations for
the three months ended March 31, 2002 and 2003, followed by a discussion of our
consolidated results of operations based on earnings from continuing operations
before interest expense, distribution on trust preferred securities and income
taxes (EBIT). EBIT, as defined, is shown because it is a financial measure we
use to evaluate the performance of our business segments and we believe it is a
measure of financial performance that may be used as a means to analyze and
compare companies on the basis of operating performance. We expect that some
analysts and investors will want to review EBIT when evaluating our company.
EBIT is not defined under accounting principles generally accepted in the United
States
14
(GAAP), should not be considered in isolation or as a substitute for a measure
of performance prepared in accordance with GAAP and is not indicative of
operating income from operations as determined under GAAP. Additionally, our
computation of EBIT may not be comparable to other similarly titled measures
computed by other companies, because all companies do not calculate it in the
same fashion. We consider operating income to be a comparable measure under
GAAP. We believe the difference between operating income and EBIT on both a
consolidated and business segment basis is not material. We have provided a
reconciliation of consolidated operating income to EBIT and EBIT to net income
below.
<Table>
<Caption>
THREE MONTHS ENDED MARCH 31,
----------------------------
2002 2003
------------ ------------
Operating Revenues ............................................... $ 1,242 $ 2,094
------------ ------------
Operating Expenses:
Natural gas and fuel .......................................... 862 1,655
Operation and maintenance ..................................... 165 178
Depreciation and amortization ................................. 40 44
Taxes other than income taxes ................................. 32 45
------------ ------------
Total Operating Expenses ............................... 1,099 1,922
------------ ------------
Operating Income ................................................. 143 172
Other Income, net ................................................ 3 1
------------ ------------
EBIT ............................................................. 146 173
Interest Expense and Distribution on Trust Preferred Securities .. (36) (36)
------------ ------------
Income Before Income Taxes ....................................... 110 137
Income Tax Expense ............................................... (41) (49)
------------ ------------
Net Income ..................................................... $ 69 $ 88
============ ============
</Table>
For the three months ended March 31, 2003, EBIT increased $27 million as
compared to the same period in 2002. Operating margins (revenues less fuel
costs) for the three months ended March 31, 2003 were $59 million higher than in
the same period in 2002 primarily because of:
o continued customer growth ($4 million);
o higher revenues from rate increases late in 2002 ($11 million);
o colder weather ($7 million);
o improved margins from our unregulated commercial and industrial sales
($9 million);
o increased margins resulting from higher gas and liquid commodity
prices ($9 million) which were partially offset by reduced project
related revenues ($5 million); and
o franchise fees billed to customers ($11 million).
These increases were partially offset by increased operating expenses as
discussed below.
Operations and maintenance expense increased $13 million for the three
months ended March 31, 2003 as compared to the same period in 2002. The increase
in operations and maintenance expense was primarily due to:
o certain costs being included in operating expense subsequent to the
amendment of a receivables facility in November 2002 as compared with
being included in interest expense in the prior year ($4 million);
o increased bad debt expense primarily due to colder weather and higher
gas prices ($4 million); and
o higher employee benefit expenses primarily due to increased pension
costs ($5 million).
The increases in operations and maintenance expense were partially offset
by a decrease in project related costs ($5 million).
15
Depreciation and amortization expense increased $4 million for the three
months ended March 31, 2003 as compared to the same period in 2002 primarily as
a result of increases in plant in service.
Taxes other than income taxes increased $13 million for the three months
ended March 31, 2003 as compared to the same period in 2002, primarily due to
increased franchise fees resulting from higher revenues ($11 million).
Other Income, net decreased $2 million for the three months ended March 31,
2003 as compared to the same period in 2002 due to a decrease in interest income
and other non-operating income.
Our effective tax rate for the three months ended March 31, 2003 was 35.8%
compared to 37.0% for the same period in 2002. The decrease in the effective
rate for the first quarter of 2003 compared to 2002 was primarily the result of
an increase in pre-tax income which diluted the impact of the permanent items on
our effective tax rate, offset by an increase in state tax expense.
LIQUIDITY
Long-Term Debt and Trust Preferred Securities. Of the $2.3 billion of
long-term debt and trust preferred securities outstanding at March 31, 2003,
approximately $2.2 billion aggregate principal amount is senior and unsecured,
and approximately $79.4 million aggregate principal amount with a final maturity
of 2012 is subordinated. In addition, the debentures relating to $0.4 million of
trust preferred securities issued by our statutory business-trust subsidiary are
subordinated.
The issuance of secured debt by us is limited under the terms of various
debt instruments aggregating $907 million and having a final maturity of 2013
which provide for equal and ratable security for such debt in the event debt
secured by "principal property" (as defined in the debt instruments) is issued.
Additionally, our $200 million credit agreement expiring in March 2004 prohibits
the issuance of debt secured by "principal property." The definition is similar
to that contained in the debt instruments described above. Finally, our ability
to issue secured debt is limited under the terms of agreements entered into by
CenterPoint Energy. The assets that may be pledged as security for our debt is
subject to SEC approval because our parent is a registered holding company.
On February 28, 2003, CenterPoint Energy reached agreement with a syndicate
of banks on a second amendment to its $3.85 billion bank facility. The amendment
provides that proceeds from capital stock or indebtedness issued or incurred by
us must be applied (subject to a $200 million basket for us and another $250
million basket for borrowings by CenterPoint Energy and other limited
exceptions) to repay bank loans and reduce the bank facility. Cash proceeds from
issuances of indebtedness to refinance indebtedness existing on October 10, 2002
are not subject to this limitation.
On March 25 and April 14, 2003, we issued $650 million and $112 million,
respectively, aggregate principal amount of 7.875% senior unsecured notes due in
2013. A portion of the proceeds were used to refinance $360 million aggregate
principal amount of our 6 3/8% Term Enhanced ReMarketable Securities (TERM
Notes) and to pay costs associated with the refinancing. Proceeds were also used
to repay borrowings under the Company's $350 million revolving credit facility
prior to its expiration on March 31, 2003. The remaining $140 million aggregate
principal amount of TERM Notes is due to be refinanced or remarketed in November
2003.
Short-Term Debt and Receivables Facility. Our revolver and receivables
facility are scheduled to terminate on the dates indicated below.
<Table>
<Caption>
TOTAL AMOUNT
COMMITTED OUTSTANDING AS OF
TYPE OF FACILITY TERMINATION DATE CREDIT MARCH 31, 2003
- ---------------- ------------------ -------------- -----------------
(IN MILLIONS)
Receivables November 14, 2003 $ 150 $ 150
Revolver March 23, 2004 200 --
-------------- -----------------
Total $ 350 $ 150
============== =================
</Table>
On March 25, 2003, we obtained a $200 million revolving credit facility
that terminates on March 23, 2004. Rates for borrowings under this facility,
including the facility fee, are LIBOR plus 250 basis points based on current
credit ratings and the applicable pricing grid.
16
On March 31, we had approximately $48 million in 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 money pool's net funding requirements are generally met by
borrowings of CenterPoint Energy. The terms of the money pool are in accordance
with requirements applicable to registered public utility holding companies
under the 1935 Act. The money pool may not provide sufficient funds to meet our
cash needs. At March 31, 2003, we had not borrowed from or invested in the money
pool.
Capital Requirements. We anticipate investing up to an aggregate $1.3
billion in capital expenditures in the years 2003 through 2007, including
approximately $264 million and $279 million in 2003 and 2004, respectively.
Cash Requirements in 2003. Our liquidity and capital requirements are
affected primarily by our results of operations, capital expenditures, debt
service requirements, and working capital needs. On April 30, 2003 we had
unutilized capacity under our bank facility of $200 million and money pool
investments of $30 million. Our principal remaining cash requirements during
2003 include the following:
o approximately $213 million of capital expenditures; and
o remarketing or refinancing of $140 million of TERM Notes, plus the
possible payment of option termination costs, which will be determined
at the time of remarketing or refinancing (estimated to be $18.2
million as of March 31, 2003).
We expect to meet our capital requirements with cash flows from operations,
short-term borrowings and proceeds from debt offerings planned in 2003. We
believe that our current liquidity, along with anticipated cash flows from
operations and proceeds from short-term borrowings, including the renewal,
extension or replacement of existing bank facilities, and anticipated sales of
securities in the capital markets will be sufficient to meet our cash needs.
However, disruptions in our ability to access the capital markets on a timely
basis could adversely affect our liquidity. In addition, the cost of our debt
issuances may be high. Please read "Business -- Risk Factors -- Risk Factors
Associated with Financial Condition and 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" in
Item 1 of the CERC 10-K, which is incorporated herein by reference.
Prior to the Restructuring, Reliant Energy obtained an order from the SEC
that granted Reliant Energy certain authority with respect to financing,
dividends and other matters. The financing authority granted by that order will
expire on June 30, 2003, and CenterPoint Energy must obtain a further order from
the SEC under the 1935 Act in order for it and its subsidiaries, including us,
to engage in financing activities subsequent to that date.
At March 31, 2003, we had a shelf registration statement covering $50
million of debt securities. The amount of any debt security or any security
having equity characteristics that we can issue, whether registered or
unregistered, or whether debt is secured or unsecured, is expected to be
affected by the market's perception of our creditworthiness, general market
conditions and factors affecting our industry. Proceeds from the sales of
securities are expected to be used primarily to refinance debt.
Impact on Liquidity of a Downgrade in Credit Ratings. As of May 1, 2003,
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 senior unsecured debt of CERC Corp.:
<Table>
<Caption>
MOODY'S S&P FITCH
- -------------------- ------------------ ------------------
RATING OUTLOOK(1) RATING OUTLOOK(2) RATING OUTLOOK(3)
- ------ ---------- ------ ---------- ------ ----------
Ba1 Negative BBB Stable BBB Stable
</Table>
- ----------
(1) A "negative" outlook from Moody's reflects concerns over the next 12 to 18
months which will either lead to a review for a potential downgrade or a
return to a stable outlook.
(2) A "stable" outlook from S&P indicates that the rating is not likely to
change over the intermediate to longer term.
17
(3) A "stable" outlook from Fitch indicates the direction a rating is likely to
move over a one- to two-year period.
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, the
willingness of suppliers to extend credit lines to us on an unsecured basis and
the execution of our commercial strategies.
A decline in credit ratings would increase facility fees and borrowing costs
under our existing revolving credit facility. A decline in credit ratings would
also increase the interest rate on long-term debt to be issued in the capital
markets and would negatively impact our ability to complete capital market
transactions.
Our bank facility contains a "material adverse change" clause that could
impact our ability to borrow under this facility. The "material adverse change"
clause in our revolving credit facility applies to new borrowings under the
facility, other than borrowings being used to repay commercial paper, and
relates to changes since December 31, 2002 in our business, condition (financial
or otherwise), operations, performance or properties.
Our $150 million receivables facility requires the maintenance of credit
ratings of at least BB from S&P and Ba2 from Moody's. Receivables would cease to
be sold in the event a credit rating fell below the threshold.
CenterPoint Energy Gas Resources Corp., a wholly owned subsidiary, provides
comprehensive natural gas sales and services to industrial and commercial
customers that are primarily located within or near the territories served by
our pipelines and distribution subsidiaries. In order to hedge its exposure to
natural gas prices, CenterPoint Energy Gas Resources Corp. has agreements with
provisions standard for the industry that establish credit thresholds and then
require a party to provide additional collateral on two business days' notice
when that party's credit rating or the rating of a credit support provider for
that party (CERC Corp. in this case) falls below those levels. As of May 1,
2003, the senior unsecured debt of CERC Corp. was rated BBB by S&P and Ba1 by
Moody's. Based on these ratings, we estimate that unsecured credit limits
extended to CenterPoint Energy Gas Resources Corp. by counterparties could
aggregate $39 million; however, utilized credit capacity is significantly lower.
Cross Defaults. Our debentures and borrowings generally provide that a
default on obligations by CenterPoint Energy does not cause a default under our
debentures, revolving credit facility or receivables facility. A payment default
on any indebtedness at CERC Corp. exceeding $50 million will cause a default
under CenterPoint Energy's $3.85 billion bank facility entered into on February
28, 2003.
Pension Plan. As discussed in Note 8(a) of the notes to the consolidated
financial statements in the CERC 10-K (CERC Corp. 10-K Notes), which is
incorporated herein by reference, we participate in CenterPoint Energy's
qualified non-contributory pension plan covering substantially all employees.
Pension expense for 2003 is estimated to be $36 million based on an expected
return on plan assets of 9.0% and a discount rate of 6.75% as of December 31,
2002. Pension expense for the year ended December 31, 2002 was $13 million.
Future changes in plan asset returns, assumed discount rates and various other
factors related to the pension will impact our future pension expense. We cannot
predict with certainty what these factors will be in the future.
Other Factors that Could Affect Cash Requirements. In addition to the above
factors, our liquidity and capital resources could be affected by:
o the need to provide cash collateral in connection with certain
contracts;
o acceleration of payment dates on certain gas supply contracts under
certain circumstances, as a result of increased gas prices and
concentration of suppliers;
o increased costs related to the acquisition of gas for storage;
18
o increases in interest expense in connection with debt refinancings;
and
o various regulatory actions.
Capitalization. Factors affecting our capitalization include:
o covenants and other provisions in our bank facility, receivables
facility and other borrowing agreements; and
o limitations imposed on us because our parent is a registered holding
company.
Our bank facility and our receivables facility limit our debt as a
percentage of our total capitalization to 60% and contain an earnings before
interest, taxes, depreciation and amortization (EBITDA) to interest covenant.
Our bank facility contains a provision that could, under certain circumstances,
limit the amount of dividends that could be paid by CERC Corp.
In connection with our parent company's registration as a public utility
holding company under the 1935 Act, the SEC has limited the aggregate amount of
our external borrowings to $2.7 billion. Our ability to pay dividends is
restricted by the SEC's requirement that common equity as a percentage of total
capitalization must be at least 30% after the payment of any dividend. In
addition, the order restricts our ability to pay dividends out of capital
accounts to the extent current or retained earnings are insufficient for those
dividends. Under these restrictions, we are permitted to pay dividends in excess
of the respective current or retained earnings in an amount up to $100 million.
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.
OFF BALANCE SHEET FINANCING
In connection with the November 2002 amendment and extension of our $150
million receivables facility, we formed a bankruptcy remote subsidiary for the
sole purpose of buying and selling receivables created by us. This transaction
described above is accounted for as a sale of receivables under the provisions
of SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," and, as a result, the related receivables are
excluded from our Consolidated Balance Sheets. For additional information
regarding this transaction, please read Note 3(i) to the CERC Corp. 10-K Notes,
which is incorporated herein by reference.
CRITICAL ACCOUNTING POLICIES
A critical accounting policy is one that is both important to the
presentation of our financial condition and results of operations and requires
management to make difficult, subjective or complex accounting estimates. An
accounting estimate is an approximation made by management of a financial
statement element, item or account in the financial statements. Accounting
estimates in our historical consolidated financial statements measure the
effects of past business transactions or events, or the present status of an
asset or liability. The accounting estimates described below require us to make
assumptions about matters that are highly uncertain at the time the estimate is
made. Additionally, different estimates that we could have used or changes in an
accounting estimate that are reasonably likely to occur could have a material
impact on the presentation of our financial condition or results of operations.
The circumstances that make these judgments difficult, subjective and/or complex
have to do with the need to make estimates about the effect of matters that are
inherently uncertain. Estimates and assumptions about future events and their
effects cannot be predicted with certainty. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances, the results of which form the basis for making
judgments. These estimates may change as new events occur, as more experience is
acquired, as additional information is obtained and as our operating environment
changes. We believe the following accounting policies involve the application of
critical accounting estimates.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets recorded in our Consolidated Balance Sheets primarily
consist of property, plant and equipment (PP&E). Net PP&E comprises $3.2 billion
or 52% of our total assets as of March 31, 2003. We make judgments and estimates
in conjunction with the carrying value of these assets, including amounts to be
capitalized,
19
depreciation and amortization methods and useful lives. We evaluate our PP&E for
impairment whenever indicators of impairment exist. During 2002, no such
indicators of impairment existed. Accounting standards require that if the sum
of the undiscounted expected future cash flows from a company's asset is less
than the carrying value of the asset, an asset impairment must be recognized in
the financial statements. The amount of impairment recognized is calculated by
subtracting the fair value of the asset from the carrying value of the asset.
IMPAIRMENT OF GOODWILL AND INDEFINITE-LIVED INTANGIBLE ASSETS
We evaluate our goodwill and other indefinite-lived intangible assets for
impairment at least annually and more frequently when indicators of impairment
exist. Accounting standards require that if the fair value of a reporting unit
is less than its carrying value, including goodwill, a charge for impairment of
goodwill must be recognized. To measure the amount of the impairment loss, we
compare the implied fair value of the reporting unit's goodwill with its
carrying value.
We recorded goodwill associated with the acquisition of our Natural Gas
Distribution and Pipelines and Gathering operations in 1997. We reviewed our
goodwill for impairment as of January 1, 2003. We computed the fair value of the
Natural Gas Distribution and the Pipelines and Gathering operations as the sum
of the discounted estimated net future cash flows applicable to each of these
operations. We determined that the fair value for each of the Natural Gas
Distribution operations and the Pipelines and Gathering operations exceeded
their corresponding carrying value, including unallocated goodwill. We also
concluded that no interim impairment indicators existed subsequent to this
initial evaluation. As of March 31, 2003, we had recorded $1.7 billion of
goodwill. Future evaluations of the carrying value of goodwill could be
significantly impacted by our estimates of cash flows associated with our
Natural Gas Distribution and Pipelines and Gathering operations, regulatory
matters, and estimated operating costs.
UNBILLED REVENUES
Revenues related to the sale and/or delivery of natural gas are generally
recorded when natural gas is delivered to customers. However, the determination
of sales to individual customers is based on the reading of their meters, which
is performed on a systematic basis throughout the month. At the end of each
month, amounts of natural gas delivered to customers since the date of the last
meter reading are estimated and the corresponding unbilled revenue is estimated.
Unbilled natural gas sales are estimated based on estimated purchased gas
volumes, estimated lost and unaccounted for gas and tariffed rates in effect.
Accrued unbilled revenues recorded in the Consolidated Balance Sheets as of
December 31, 2002 and March 31, 2003 were $284 million and $277 million,
respectively, related to our Natural Gas Distribution business segment.
NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2003, we adopted Statement of Financial Accounting
Standards (SFAS) No. 143, "Accounting for Asset Retirement Obligations" (SFAS
No. 143). SFAS No. 143 requires the fair value of an asset retirement obligation
to be recognized as a liability is incurred and capitalized as part of the cost
of the related tangible long-lived assets. Over time, the liability is accreted
to its present value each period, and the capitalized cost is depreciated over
the useful life of the related asset. Retirement obligations associated with
long-lived assets included within the scope of SFAS No. 143 are those for which
a legal obligation exists under enacted laws, statutes and written or oral
contracts, including obligations arising under the doctrine of promissory
estoppel. SFAS No. 143 is effective for fiscal years beginning after June 15,
2002. SFAS No. 143 requires entities to record a cumulative effect of change in
accounting principle in the income statement in the period of adoption.
We have identified no asset retirement obligations. Our rate-regulated
businesses have previously recognized removal costs as a component of
depreciation expense in accordance with regulatory treatment. As of March 31,
2003, these previously recognized removal costs of $385 million do not represent
SFAS No. 143 asset retirement obligations, but rather embedded regulatory
liabilities.
In April 2002, the Financial Accounting Standards Board (FASB) issued SFAS
No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections" (SFAS No. 145). SFAS No. 145
eliminates the current requirement that gains and losses on debt extinguishment
must be classified as extraordinary items in the income statement. Instead, such
gains and losses will be classified as extraordinary items
20
only if they are deemed to be unusual and infrequent. SFAS No. 145 also
requires that capital leases that are modified so that the resulting lease
agreement is classified as an operating lease be accounted for as a
sale-leaseback transaction. The changes related to debt extinguishment are
effective for fiscal years beginning after May 15, 2002, and the changes related
to lease accounting are effective for transactions occurring after May 15, 2002.
We have applied this guidance prospectively.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" (SFAS No. 146). SFAS No. 146 nullifies EITF
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)" (EITF No. 94-3). The principal difference between SFAS No. 146
and EITF No. 94-3 relates to the requirements for recognition of a liability for
costs associated with an exit or disposal activity. SFAS No. 146 requires that a
liability be recognized for a cost associated with an exit or disposal activity
when it is incurred. A liability is incurred when a transaction or event occurs
that leaves an entity little or no discretion to avoid the future transfer or
use of assets to settle the liability. Under EITF No. 94-3, a liability for an
exit cost was recognized at the date of an entity's commitment to an exit plan.
In addition, SFAS No. 146 also requires that a liability for a cost associated
with an exit or disposal activity be recognized at its fair value when it is
incurred. SFAS No. 146 is effective for exit or disposal activities that are
initiated after December 31, 2002. We will apply the provisions of SFAS No. 146
to all exit or disposal activities initiated after December 31, 2002.
In June 2002, the Emerging Issues Task Force ("EITF") reached a consensus
that all mark-to-market gains and losses on energy trading contracts should be
shown net in the statement of consolidated income whether or not settled
physically. In October 2002, the EITF issued a consensus that superceded the
June 2002 consensus. The October 2002 consensus required, among other things,
that energy derivatives held for trading purposes be shown net in the statement
of consolidated income. This new consensus, EITF 02-3 "Issues Involved in
Accounting for Derivative Contracts Held for Trading Purposes and Contracts
Involved in Energy Trading and Risk Management Activities," is effective for
fiscal periods beginning after December 15, 2002.
In November 2002, the FASB issued FASB Interpretation No. (FIN) 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" (FIN 45). FIN 45 requires that a
liability be recorded in the guarantor's balance sheet upon issuance of certain
guarantees. In addition, FIN 45 requires disclosures about the guarantees that
an entity has issued. The provision for initial recognition and measurement of
the liability will be applied on a prospective basis to guarantees issued or
modified after December 31, 2002. The disclosure provisions of FIN 45 are
effective for financial statements of interim or annual periods ending after
December 15, 2002. The adoption of FIN 45 is not expected to materially affect
our consolidated financial statements. We have adopted the additional disclosure
provisions of FIN 45 in our consolidated financial statements as of December 31,
2002.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities, an Interpretation of Accounting Research Bulletin No. 51" (FIN 46).
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual period beginning after June 15, 2003. We do not expect the adoption of
FIN 46 to have a material impact on its results of operations or financial
condition.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. Based
on that evaluation, the Chief Executive Officer and the Chief Financial Officer
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information relating to us (including our consolidated
subsidiaries) required to be included in our periodic SEC filings. Subsequent to
the date of their evaluation, there were no significant changes in our internal
controls or in other factors that could significantly affect the internal
controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.
21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
For a description of certain legal and regulatory proceedings affecting us,
please review Note 9 to our interim financial statements, "Business --
Regulation" and "Business -- Environmental Matters" in Item 1 of the CERC Corp.
10-K, Item 3 of the CERC Corp. Form 10-K and Notes 10(c) and (d) to the CERC
Corp. 10-K Notes, all of which are incorporated herein by reference.
ITEM 5. OTHER INFORMATION.
Forward-Looking Statements. 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," "intend," "may," "plan,"
"potential," "predict," "should," "will," "forecast," "goal," "objective,"
"projection," 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:
o state and federal legislative and regulatory actions or developments,
constraints placed on our activities or business by the 1935 Act,
changes in or application of laws or regulations applicable to other
aspects of our business and actions;
o timely rate increases, including recovery of costs;
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 our pursuit of potential business strategies, including acquisitions or
dispositions of assets;
o changes in business strategy or development plans;
o the timing and extent of changes in commodity prices, particularly
natural gas;
o changes in interest rates or rates of inflation;
o unanticipated changes in operating expenses and capital expenditures;
o weather variations and other natural phenomena;
o the timing and extent of changes in the supply of natural gas;
o commercial bank and financial market conditions, our access to capital,
the costs of such capital and the results of our financing and
refinancing efforts, including availability of funds in the debt capital
markets;
o actions by rating agencies;
22
o legal and administrative proceedings and settlements;
o changes in tax laws;
o inability of various counterparties to meet their obligations with
respect to our financial instruments;
o any lack of effectiveness of our disclosure controls and procedures;
o changes in technology;
o significant changes in our relationship with our employees, including
the availability of qualified personnel and potential adverse effects if
labor disputes or grievances were to occur;
o significant changes in critical accounting policies;
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 political, legal, regulatory and economic conditions and developments in
the United States; and
o other factors we discuss in the CERC Corp. Form 10-K, including those
outlined in "Management's Narrative Analysis of Results of Operations of
CenterPoint Energy Resources Corp. and its Consolidated Subsidiaries --
Certain Factors Affecting Our Future Earnings."
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 CERC Corp. undertakes no obligation to publicly update or revise
any forward-looking statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
The following exhibits are filed herewith:
Exhibits not incorporated by reference to a prior filing are designated
by a cross (+); all exhibits not so designated are incorporated by
reference to a prior filing as indicated.
<Table>
<Caption>
REPORT OR SEC FILE OR
EXHIBIT REGISTRATION REGISTRATION EXHIBIT
NUMBER DESCRIPTION STATEMENT NUMBER REFERENCE
- --------- --------------------------------------- ------------------------------ ------------- -------------
3(a)(1) - Certificate of Incorporation of Form 10-K for the year ended 1-3187 3(a)(1)
RERC Corp. December 31, 1997
3(a)(2) - Certificate of Merger merging Form 10-K for the year ended 1-3187 3(a)(2)
former NorAm Energy Corp. with and December 31, 1997
into HI Merger, Inc. dated August
6, 1997
3(a)(3) - Certificate of Amendment changing Form 10-K for the year ended 1-3187 3(a)(3)
the name to Reliant Energy December 31, 1998
Resources Corp.
3(b) - Bylaws of RERC Corp. Form 10-K for the year ended 1-3187 3(b)
December 31, 1997
</Table>
23
<Table>
<Caption>
REPORT OR SEC FILE OR
EXHIBIT REGISTRATION REGISTRATION EXHIBIT
NUMBER DESCRIPTION STATEMENT NUMBER REFERENCE
- --------- --------------------------------------- ---------------------------- ------------- -------------
+4(a) - $200,000,000 Credit Agreement,
dated as of March 25, 2003, among
CERC Corp., as Borrower, and the
Initial Lenders named therein, as
Initial Lenders
-
4(b) - Supplemental Indenture No. 5, dated Form 8-K dated March 18, 2003 1-3187 4.1
as of March 25, 2003, to Indenture,
dated as of February 1, 1998,
between CERC Corp. and JPMorgan
Chase, as Trustee
-
4(c) - Supplemental Indenture No. 6, dated Form 8-K dated April 7, 2003 1-3187 4.2
as of April 14, 2003, to Indenture,
dated as of February 1, 1998,
between CERC Corp. and JPMorgan
Chase, as Trustee
-
+99(a) - Section 906 Certification of David
M. McClanahan
-
+99(b) - Section 906 Certification of Gary
L. Whitlock
-
+99(c) - Items incorporated by reference
from the CERC Corp. Form 10-K.
Item 1 "Business -- Regulation,"
"Business -- Environmental
Matters," and "Business -- Risk
Factors," Item 3 "Legal
Proceedings" and Item 7
"Management's Narrative Analysis of
the Results of Operations of
CenterPoint Energy Resources Corp.
and its Consolidated Subsidiaries"
and Notes 3(e) (Regulatory
Matters), 3(i) (Accounts Receivable
and Allowance for Doubtful
Accounts), 5 (Derivative
Instruments), 7 (Trust Preferred
Securities), 8(a) (Pension Plans),
10(c) (Environmental Matters),
10(d) (Other Legal Matters) and 13
(Reportable Segments).
</Table>
(b) Reports on Form 8-K.
On March 27, 2003, we filed a Current Report on Form 8-K dated March 18,
2003, announcing the pricing and closing of $650 million of senior notes in a
private placement with institutions pursuant to Rule 144A under the Securities
Act of 1933, as amended.
On May 1, 2003, we filed a Current Report on Form 8-K dated April 7, 2003,
announcing the pricing and closing of $112 million of senior notes which will be
added to and form a single series with its prior existing 7.875% senior notes
due on April 1, 2013, in a private placement with institutions pursuant to Rule
144A under the Securities Act of 1933, as amended.
24
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 RESOURCES CORP.
By: /s/ James S. Brian
-----------------------------------------------
James S. Brian
Senior Vice President and Chief Accounting Officer
Date: May 13, 2003
25
CERTIFICATIONS
I, David M. McClanahan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CenterPoint Energy
Resources Corp.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures 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 quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 13, 2003
By: /s/ David M. McClanahan
--------------------------------------------
David M. McClanahan
President and Chief Executive Officer
26
CERTIFICATIONS
I, Gary L. Whitlock, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CenterPoint Energy
Resources Corp.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures 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 quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 13, 2003
By: /s/ Gary L. Whitlock
------------------------------------------------------------
Gary L. Whitlock
Executive Vice President and Chief Financial Officer
27
EXHIBIT INDEX
Exhibits not incorporated by reference to a prior filing are designated
by a cross (+); all exhibits not so designated are incorporated by
reference to a prior filing as indicated.
<Table>
<Caption>
REPORT OR SEC FILE OR
EXHIBIT REGISTRATION REGISTRATION EXHIBIT
NUMBER DESCRIPTION STATEMENT NUMBER REFERENCE
- --------- --------------------------------------- ------------------------------ ------------- -------------
3(a)(1) - Certificate of Incorporation of Form 10-K for the year ended 1-3187 3(a)(1)
RERC Corp. December 31, 1997
3(a)(2) - Certificate of Merger merging Form 10-K for the year ended 1-3187 3(a)(2)
former NorAm Energy Corp. with and December 31, 1997
into HI Merger, Inc. dated August
6, 1997
3(a)(3) - Certificate of Amendment changing Form 10-K for the year ended 1-3187 3(a)(3)
the name to Reliant Energy December 31, 1998
Resources Corp.
3(b) - Bylaws of RERC Corp. Form 10-K for the year ended 1-3187 3(b)
December 31, 1997
+4(a) - $200,000,000 Credit Agreement,
dated as of March 25, 2003, among
CERC Corp., as Borrower, and the
Initial Lenders named therein, as
Initial Lenders
-
4(b) - Supplemental Indenture No. 5, dated Form 8-K dated March 18, 2003 1-3187 4.1
as of March 25, 2003, to Indenture,
dated as of February 1, 1998,
between CERC Corp. and JPMorgan
Chase, as Trustee
-
4(c) - Supplemental Indenture No. 6, dated Form 8-K dated April 7, 2003 1-3187 4.2
as of April 14, 2003, to Indenture,
dated as of February 1, 1998,
between CERC Corp. and JPMorgan
Chase, as Trustee
-
+99(a) - Section 906 Certification of David
M. McClanahan
-
+99(b) - Section 906 Certification of Gary
L. Whitlock
-
+99(c) - Items incorporated by reference
from the CERC Corp. Form 10-K.
Item 1 "Business -- Regulation,"
"Business -- Environmental
Matters," and "Business -- Risk
Factors," Item 3 "Legal
Proceedings" and Item 7
"Management's Narrative Analysis of
the Results of Operations of
CenterPoint Energy Resources Corp.
and its Consolidated Subsidiaries"
and Notes 3(e) (Regulatory
Matters), 3(i) (Accounts Receivable
and Allowance for Doubtful
Accounts), 5 (Derivative
Instruments), 7 (Trust Preferred
Securities), 8(a) (Pension Plans),
10(c) (Environmental Matters),
10(d) (Other Legal Matters) and 13
(Reportable Segments).
</Table>
28