EXHIBIT 99(b)
MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS
CERTAIN FACTORS AFFECTING FUTURE EARNINGS
Our past earnings and results of operations are not necessarily indicative
of our future earnings and results of operations. The magnitude of our future
earnings and results of our operations will depend on numerous factors
including:
- 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;
- timely rate increases including recovery of costs;
- the successful and timely completion of our capital projects;
- industrial, commercial and residential growth in our service territory
and changes in market demand and demographic patterns;
- our pursuit of potential business strategies, including acquisitions or
dispositions of assets;
- changes in business strategy or development plans;
- the timing and extent of changes in commodity prices, particularly
natural gas;
- changes in interest rates or rates of inflation;
- unanticipated changes in operating expenses and capital expenditures;
- weather variations and other natural phenomena;
- the timing and extent of changes in the supply of natural gas;
- 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;
- actions by rating agencies;
- legal and administrative proceedings and settlements;
- changes in tax laws;
- inability of various counterparties to meet their obligations with
respect to our financial instruments;
- any lack of effectiveness of our disclosure controls and procedures;
- changes in technology;
- significant changes in our relationship with our employees, including the
availability of qualified personnel and the potential adverse effects if
labor disputes or grievances were to occur;
- significant changes in critical accounting policies;
- 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;
- the availability and price of insurance;
- political, legal, regulatory and economic conditions and developments in
the United States; and
- other factors discussed in Item 1 of this report under "Risk Factors."
1
CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(e) REGULATORY MATTERS
CERC applies the accounting policies established in SFAS No. 71,
"Accounting for the Effects of Certain Types of Regulation" (SFAS No. 71) to the
accounts of the utility operations of Natural Gas Distribution and MRT. As of
December 31, 2001 and 2002, CERC had recorded $6 million and $12 million,
respectively, of net regulatory assets.
If, as a result of changes in regulation or competition, CERC's ability to
recover these assets and liabilities would not be probable, CERC would be
required to write off or write down these regulatory assets and liabilities. In
addition, CERC would be required to determine any impairment of the carrying
costs of plant and inventory assets.
Arkansas Rate Case
In November 2001, Arkla filed a rate request in Arkansas seeking rates to
yield approximately $47 million in additional annual gross revenue. In August
2002, a settlement was approved by the Arkansas Public Service Commission (APSC)
that is expected to result in an increase in base rates of approximately $32
million annually. In addition, the APSC approved a gas main replacement
surcharge that is expected to provide $2 million of additional gross revenue in
2003 and additional amounts in subsequent years. The new rates included in the
final settlement were effective with all bills rendered on and after September
21, 2002.
Oklahoma Rate Case
In May 2002, Arkla filed a request in Oklahoma to increase its base rates
by $13.7 million annually. In December 2002, a settlement was approved by the
Oklahoma Corporation Commission that is expected to result in an increase in
base rates of approximately $7.3 million annually. The new rates included in the
final settlement were effective with all bills rendered on and after December
29, 2002.
2
5. DERIVATIVE INSTRUMENTS
Effective January 1, 2001, CERC adopted SFAS No. 133, which establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
This statement requires that derivatives be recognized at fair value in the
balance sheet and that changes in fair value be recognized either currently in
earnings or deferred as a component of other comprehensive income, depending on
the intended use of the derivative instrument as hedging (a) the exposure to
changes in the fair value of an asset or liability (Fair Value Hedge), (b) the
exposure to variability in expected future cash flows (Cash Flow Hedge), or (c)
the foreign currency exposure of a net investment in a foreign operation. For a
derivative not designated as a hedging instrument, the gain or loss is
recognized in earnings in the period it occurs.
Adoption of SFAS No. 133 on January 1, 2001 resulted in a cumulative
after-tax increase in accumulated other comprehensive income of $38 million. The
adoption also increased current assets, long-term assets, current liabilities
and long-term liabilities by approximately $88 million, $5 million, $53 million
and $2 million, respectively, in CERC's Consolidated Balance Sheet.
CERC is exposed to various market risks. These risks arise from
transactions entered into in the normal course of business. CERC 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.
(a) Non-Trading Activities
Cash Flow Hedges. To reduce the risk from market fluctuations associated
with purchased gas costs, CERC enters into energy derivatives in order to hedge
certain expected purchases and sales of natural gas. CERC applies hedge
accounting for its non-trading energy derivatives utilized in non-trading
activities only if there is a high correlation between price movements in the
derivative and the item designated as being hedged. CERC analyzes its physical
transaction portfolio to determine its net exposure by delivery location and
delivery period. Because CERC's physical transactions with similar delivery
locations and periods are highly correlated and share similar risk exposures,
CERC facilitates hedging for customers by aggregating physical transactions and
subsequently entering into non-trading energy derivatives to mitigate exposures
created by the physical positions.
During 2002, no hedge ineffectiveness was 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. If it becomes probable that an anticipated transaction will not
occur, CERC realizes in net income the deferred gains and losses recognized in
accumulated other comprehensive income. During the year ended December 31, 2002,
there was a $0.9 million deferred loss recognized in earnings as a result of the
discontinuance of cash flow hedges because it was no longer probable that the
forecasted
3
transaction would occur. Once the anticipated transaction occurs, the
accumulated deferred gain or loss recognized in accumulated other comprehensive
income is reclassified and included in CERC's Statements of Consolidated Income
under the caption "Natural Gas and Purchased Power." Cash flows resulting from
these transactions in non-trading energy derivatives are included in the
Statements of Consolidated Cash Flows in the same category as the item being
hedged. As of December 31, 2002, CERC expects $17 million in accumulated other
comprehensive income to be reclassified into net income during the next twelve
months.
The maximum length of time CERC is hedging its exposure to the variability
in future cash flows for forecasted transactions on existing financial
instruments is primarily two years with a limited amount of exposure up to three
years. CERC's policy is not to exceed five years in hedging its exposure.
(b) CREDIT RISKS
In addition to the risk associated with price movements, credit risk is
also inherent in CERC's non-trading derivative activities. Credit risk relates
to the risk of loss resulting from non-performance of contractual obligations by
a counterparty. The following table shows the composition of the non-trading
derivative assets of CERC as of December 31, 2001 and 2002:
<Table>
<Caption>
DECEMBER 31, 2001 DECEMBER 31, 2002
------------------- ----------------------
INVESTMENT INVESTMENT
NON-TRADING DERIVATIVE ASSETS GRADE(1)(2) TOTAL GRADE(1)(2) TOTAL(3)
- ----------------------------- ----------- ----- ----------- --------
(IN MILLIONS)
Energy marketers............................. $ 9 $ 9 $ 7 $22
Financial institutions....................... -- -- 9 9
----- ----- --- ---
Total...................................... $ 9 $ 9 $16 $31
===== ===== === ===
</Table>
- ---------------
(1) "Investment Grade" is primarily determined using publicly available credit
ratings along with the consideration of credit support (such as parent
company guarantees) and collateral, which encompasses cash and standby
letters of credit.
(2) For unrated counterparties, the Company performs financial statement
analysis, considering contractual rights and restrictions and collateral, to
create a synthetic credit rating.
(3) The $22 million non-trading derivative asset includes a $15 million asset
due to trades with Reliant Energy Services, an affiliate until the date of
the Distribution. As of December 31, 2002, Reliant Energy Services did not
have an Investment Grade rating.
(c) GENERAL POLICY
CenterPoint Energy has established a Risk Oversight Committee comprised of
corporate and business segment officers that oversees all commodity price and
credit risk activities, including CenterPoint Energy's trading, marketing, risk
management services and hedging activities. The committee's duties are to
establish CenterPoint Energy's commodity risk policies, allocate risk capital
within limits established by CenterPoint Energy's board of directors, approve
trading of new products and commodities, monitor risk positions and ensure
compliance with CenterPoint Energy's risk management policies and procedures and
trading limits established by CenterPoint Energy's board of directors.
CenterPoint Energy's policies prohibit the use of leveraged financial
instruments. A leveraged financial instrument, for this purpose, is a
transaction involving a derivative whose financial impact will be based on an
amount other than the notional amount or volume of the instrument.
4
7. TRUST PREFERRED SECURITIES
In June 1996, a Delaware statutory business trust created by CERC Corp.
(CERC Trust) issued $173 million aggregate amount of convertible preferred
securities to the public. CERC Corp. accounts for CERC Trust as a wholly owned
consolidated subsidiary. CERC Trust used the proceeds of the offering to
purchase convertible junior subordinated debentures issued by CERC Corp. having
an interest rate and maturity date that correspond to the distribution rate and
mandatory redemption date of the convertible preferred securities. The
convertible junior subordinated debentures represent CERC Trust's sole asset and
its entire operations. CERC Corp. considers its obligation under the Amended and
Restated Declaration of Trust, Indenture and Guaranty Agreement relating to the
convertible preferred securities, taken together, to constitute a full and
unconditional guarantee by CERC Corp. of CERC Trust's obligations with respect
to the 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, 2001 and 2002, $0.4 million liquidation
amount of convertible preferred securities were outstanding. The securities, and
their
5
underlying convertible junior subordinated debentures, bear interest at 6.25%
and mature in June 2026. Subject to some limitations, CERC Corp. has the option
of deferring payments of interest on the convertible junior subordinated
debentures. During any deferral or event of default, CERC Corp. may not pay
dividends on its common stock to CenterPoint Energy. As of December 31, 2002, no
interest payments on the convertible junior subordinated debentures had been
deferred.
8. EMPLOYEE BENEFIT PLANS
(a) PENSION PLANS
Substantially all of CERC's employees participate in CenterPoint Energy's
qualified non-contributory pension plan. Under the cash balance formula,
participants accumulate a retirement benefit based upon 4% of eligible earnings
and accrued interest. Prior to 1999, the pension plan accrued benefits based on
years of service, final average pay and covered compensation. As a result,
certain employees participating in the plan as of December 31, 1998 are eligible
to receive the greater of the accrued benefit calculated under the prior plan
through 2008 or the cash balance formula.
CenterPoint Energy's funding policy is to review amounts annually in
accordance with applicable regulations in order to achieve adequate funding of
projected benefit obligations. Pension expense is allocated to CERC based on
covered employees. This calculation is intended to allocate pension costs in the
same manner as a separate employer plan. Assets of the plan are not segregated
or restricted by CenterPoint Energy's participating subsidiaries. Pension
benefit was $21 million for the year ended December 31, 2000. CERC recognized
pension expense of $1 million and $13 million for the years ended December 31,
2001 and 2002, respectively.
In addition to the Plan, CERC participates in CenterPoint Energy's
non-qualified pension plan, which allows participants to retain the benefits to
which they would have been entitled under the qualified pension plan except for
federally mandated limits on these benefits or on the level of salary on which
these benefits may be calculated. The expense associated with the non-qualified
pension plan was $13 million, $5 million and $2 million for the years ended
December 31, 2000, 2001 and 2002, respectively.
As of December 31, 2001, CenterPoint Energy allocated $94 million of
pension assets, $40 million of non-qualified pension liabilities and $2 million
minimum pension liabilities to CERC. As of December 31, 2002, CenterPoint Energy
has not allocated such pension assets or liabilities to CERC. This change in
method of allocation had no impact on pension expense recorded for the year
ended December 31, 2002.
6
10. COMMITMENTS AND CONTINGENCIES
(a) ENVIRONMENTAL CAPITAL COMMITMENTS
CERC has various commitments for capital and environmental expenditures.
CERC anticipates no significant capital and other special project expenditures
between 2003 and 2007 for environmental compliance.
(b) Lease Commitments
The following table sets forth information concerning CERC's obligations
under non-cancelable long-term operating leases, principally consisting of
rental agreements for building space, data processing equipment and vehicles,
including major work equipment (in millions):
<Table>
2003........................................................ $ 15
2004........................................................ 12
2005........................................................ 10
2006........................................................ 8
2007........................................................ 7
2008 and beyond............................................. 74
----
Total............................................. $126
====
</Table>
Total rental expense for all operating leases was $33 million, $31 million
and $27 million in 2000, 2001 and 2002, respectively.
(c) 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., RES, 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 November 21, 2002, there
were 695 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. More recently,
on January 6, 2003, two other plaintiffs filed a third suit of similar
allegations against CenterPoint Energy, as well as other defendants, in Bossier
Parish (26th Judicial District Court).
7
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 December
31, 2002, CERC is unable to estimate the monetary damages, if any, that the
plaintiffs may be awarded in these matters.
Manufactured Gas Plant Sites. CERC 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 CERC
believes were neither owned nor operated by CERC, and for which CERC believes it
has no liability.
At December 31, 2001 and 2002, CERC had accrued $23 million and $19
million, respectively, for remediation of the Minnesota sites. At December 31,
2002, 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. CERC has an
environmental expense tracker mechanism in its rates in Minnesota. CERC has
collected $12 million at December 31, 2002 to be used for future environmental
remediation.
CERC has received notices from the United States Environmental Protection
Agency and others regarding its status as a PRP for sites in other states. Based
on current information, CERC has not been able to quantify a range of
environmental expenditures for potential remediation expenditures with respect
to other MGP sites.
Mercury Contamination. CERC'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 CERC at some sites in the past, and CERC 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 CERC and that of others in the natural gas industry to date and on
the current regulations regarding remediation of these sites, CERC believes that
the costs of any remediation of these sites will not be material to CERC's
financial condition, results of operations or cash flows.
8
Other Environmental. From time to time CERC 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 CERC in activities at these sites, CERC does not believe that
these matters will have a material adverse effect on CERC's financial position,
results of operations or cash flows.
Department of Transportation
In December 2002, Congress enacted the Pipeline Safety Improvement Act of
2002. This legislation applies to CERC'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 CERC 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.
(d) OTHER 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. The action is currently pending in state court in Stevens
County, Kansas. Motions to dismiss and class certification issues have been
briefed and argued.
City of Tyler, Texas, Gas Costs Review. By letter to 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
9
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 Recovery Suits. In October 2002, a suit was filed in state district
court in Wharton County, Texas, against CenterPoint Energy, CERC, 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 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 residential and small commercial
consumers of natural gas. In February 2003, a similar suit was filed against
CERC in state court in Caddo Parish, Louisiana purportedly on behalf of a class
of residential or business customers in Louisiana who allegedly have been
overcharged for gas or gas service provided by CERC. The plaintiffs in both
cases seek restitution for alleged overcharges, exemplary damages and penalties.
CERC 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. CERC 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
CERC's financial position, results of operations or cash flows.
10
13. REPORTABLE SEGMENTS
Because CERC Corp. is a wholly owned subsidiary of CenterPoint Energy,
CERC'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 accounting policies of the
segments are the same as those described in the summary of significant
accounting policies except that some executive benefit costs have not been
allocated to segments. Reportable business segments from previous years have
been restated to conform to the 2002 presentation. CERC accounts for
intersegment sales as if the sales were to third parties, that is, at current
market prices.
Beginning in the first quarter of 2002, CERC began to evaluate performance
on an earnings (loss) before interest expense, distribution on trust preferred
securities and income taxes (EBIT) basis. Prior to 2002, CERC evaluated
performance on the basis of operating income. EBIT, as defined, is shown because
it is a measure CERC uses to evaluate the performance of its business segments
and CERC 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.
CERC expects that some analysts and investors will want to review EBIT when
evaluating CERC. 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, CERC'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.
CERC's reportable business segments include the following: Natural Gas
Distribution, Pipelines and Gathering, Wholesale Energy and Other Operations.
Natural Gas Distribution consists of intrastate natural gas sales to, and
natural gas transportation for, residential, commercial and industrial
customers, and some non-rate regulated retail gas marketing operations.
Pipelines and Gathering includes the interstate natural gas pipeline operations
and natural gas gathering and pipeline services. Reliant Energy Services was
previously reported within the Wholesale Energy segment. Other Operations
includes unallocated general corporate expenses and non-operating investments.
During 2000, Reliant Energy transferred RERC's non-rate regulated retail gas
marketing from Other Operations to Natural Gas Distribution and RERC's natural
gas gathering business from Wholesale Energy to Pipelines and Gathering. On
December 31, 2000, RERC Corp. transferred all of the outstanding stock of RESI,
Arkla Finance and RE Europe Trading, all wholly owned subsidiaries of
11
RERC Corp., to Reliant Resources. Also, on December 31, 2000, a wholly owned
subsidiary of Reliant Resources merged with and into Reliant Energy Services, a
wholly owned subsidiary of RERC Corp., with Reliant Energy Services as the
surviving corporation. As a result of the Merger, Reliant Energy Services became
a wholly owned subsidiary of Reliant Resources. Reportable segments from
previous years have been restated to conform to the 2002 presentation. All of
CERC's long-lived assets are in the United States.
Financial data for business segments and products and services are as
follows:
<Table>
<Caption>
NATURAL GAS PIPELINES AND WHOLESALE OTHER RECONCILING SALES TO
DISTRIBUTION GATHERING ENERGY OPERATIONS ELIMINATIONS AFFILIATES CONSOLIDATED
------------ ------------- --------- ---------- ------------ ---------- ------------
(IN MILLIONS)
AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 2000:
Revenues from external
customers(1)................. $4,445 $ 182 $1,729 $ 1 $ -- $-- $6,357
Intersegment revenues.......... 34 202 579 -- (815) -- --
Depreciation and
amortization................. 145 55 11 3 -- -- 214
EBIT........................... 125 137 106 (30) (4) -- 334
Total assets................... 4,518 2,358 -- 448 (748) -- 6,576
Expenditures for long-lived
assets....................... 195 61 27 8 -- -- 291
AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 2001:
Revenues from external
customers(1)................. 4,737 307 -- -- -- -- 5,044
Intersegment revenues.......... 5 108 -- -- (113) -- --
Depreciation and
amortization................. 147 58 -- 2 -- -- 207
EBIT........................... 149 138 -- 3 (10) -- 280
Total assets................... 3,732 2,361 -- 101 (202) -- 5,992
Expenditures for long-lived
assets....................... 209 54 -- -- -- -- 263
AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 2002:
Revenues from external
customers(1)................. 3,927 253 -- -- -- 28 4,208
Intersegment revenues.......... 7 119 -- -- (126) -- --
Depreciation and
amortization................. 126 41 -- -- -- -- 167
EBIT........................... 210 158 -- 6 (13) -- 361
Total assets................... 4,051 2,481 -- 206 (752) -- 5,986
Expenditures for long-lived
assets....................... 196 70 -- -- -- -- 266
</Table>
- ---------------
(1) Included in revenues from external customers are revenues from sales to
Reliant Resources, a former affiliate, of $816 million, $181 million and $42
million for the years ended December 31, 2000, 2001 and 2002, respectively.
12
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------
2000 2001 2002
------ ------ ------
(IN MILLIONS)
RECONCILIATION OF OPERATING INCOME TO EBIT AND EBIT TO NET
INCOME:
Operating income........................................... $ 332 $ 266 $ 353
Other, net................................................. 2 14 8
------ ------ ------
EBIT..................................................... 334 280 361
Interest expense and other charges......................... (143) (155) (153)
Income taxes............................................... (93) (58) (88)
Loss from discontinued operations.......................... (24) -- --
------ ------ ------
Net income............................................... $ 74 $ 67 $ 120
====== ====== ======
REVENUES BY PRODUCTS AND SERVICES:
Retail gas sales........................................... $4,358 $4,645 $3,857
Wholesale energy and energy related sales.................. 1,729 -- --
Gas transport.............................................. 182 307 255
Energy products and services............................... 88 92 96
------ ------ ------
Total.................................................... $6,357 $5,044 $4,208
====== ====== ======
REVENUES BY GEOGRAPHIC AREAS
U.S. ...................................................... $6,339 $5,044 $4,208
Canada..................................................... 18 -- --
------ ------ ------
Total.................................................... $6,357 $5,044 $4,208
====== ====== ======
</Table>
13